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Denison Mines: De-Risking Continues with FS now In-Hand; ISR Coming to the Basin

DISCLAIMER: Any written content contained herein should be viewed strictly as analysis & opinion and not in any way as investment advice. No compensation was received for this report. Visitors to this site are encouraged to conduct their own due diligence.

Following 4+ years of work post Wheeler River Pre-Feasibility Study (PFS), Denison Mines (DML, DNN) released the much anticipated Phoenix ISR Feasibility Study (FS) along with a cost update for the Gryphon deposit. Though costs estimates have understandably increased since the 2018 PFS (Phoenix LOM cash costs increasing from $3.33/lb to $6.28/lb and initial capex estimates increasing by 30% from PFS to FS), given that much higher production volume is expected in the first five years of production, the net effect to our NAVPS estimate has been neutral. With the publication of the FS, two things are clear: 1) Phoenix will be a world class, profitable uranium mine and 2) the ISR production method, as first envisioned in 2018 will mark a revolutionary first in the Athabasca Basin. Congratulations to Denison's technical team for having proven that ISR amenability is possible for uranium extraction in the Basin. That said, maintaining our $70/lb LT uranium price expectation coupled with a target NAV8% on Wheeler River, we hike our NAV multiple from 1.10x to 1.15x to reflect the de-risking efforts at Phoenix and establish a new 12-month price objective of C$3.40/$2.55 (rounded) per share. This represents +116% upside from the June 26 close.

As mentioned, the largest changes for Phoenix going from PFS to FS include an 89% cash operating cost increase over 10-year LOM (now estimated at $6.28/lb), a 30% increase in initial capex (now estimated at C$419.4M) and an 80% increase in average all-in cost over LOM (now at $16.04/lb). What offsets these cost increases is the fact that for the first 5 years of production, total volume produced is now expected to total over 41M lbs (or an average of 8.4M lbs per year), representing a near +50% increase from the initially projected five year total output in the PFS. Moreover, note that when base case price assumptions increase from a PFS composite median of $29-$45/lb to the FS range between $66-$70/lb, numbers such as pre-tax IRR and pre-tax NPV8% jump out as +145% and +152% respectively. More telling is comparing the metrics to a LT reference price of $65/lb. When keeping the same production and cost figures, the more meaningful like-for-like increases to pre-tax IRR and pre-tax NPV8% now equate to a much more modest +38% and +7% respectively.

Given that the technical de-risking of Phoenix is essentially complete (recall the successfully completed leaching and neutralization phases of the Phoenix Test Facility in 2022), front end engineering design efforts to support the advancement of the operation have already significantly progressed. As for specific ISR production process, a five-phase mining sequence is envisioned encompassing 172 injection wells, 74 extraction wells and 22 monitor wells. In general, each extraction well will be surrounded by four injection wells. This formation has proven to optimize cost while also maximizing recovery. An acidic lixiviant solution will be prepared in the processing plant and transferred to an injection solution handling system for distribution in the wellfield. Overall, the processing plant flowsheet remains largely consistent with the 2018 PFS.

As for the Gryphon U/G projection estimates, the mine life has remained constant at 6.5 years. When looking at the reference $65/lb PFS to FS differentials, we see the average LOM cash costs increasing by 9% to reach $12.75/lb while initial capex increases by 18% to reach C$737.4M. The all-in cost increased by a modest 12% to reach $25.47 in the FS. All that said, the like-for-like pre-tax IRR and pre-tax NPV8% have increased by a very modest +10% and +0% respectively.

On the operational front, note that Gryphon throughput will be processed at Cameco’s (CCO, CCJ) nearby McClean Lake mill (of which Denison maintains a 22.5% ownership interest) which is licensed for 24M lbs of annual capacity. Though currently processing Cigar Lake ore (100%), it is assumed that Cigar Lake production will decline from 18M lbs to approximately 15M lbs at the time of joint production with Gryphon.

As per our estimates, we forecast the first year of meaningful ISR production from Phoenix in 2027 and lasting until 2036. We estimate Gryphon production commencing in 2031 and lasting for the aforementioned 6.5 year LOM until 2037. Taking a more conservative approach to total production, we see LOM Phoenix production at 55.3M lbs at an average cash cost of $6.28/lb. For Phoenix, we model production beginning in 2031 with a total of 50.5M lbs produced over LOM at an average cash cost of 12.75/lb. At peak production when both Phoenix and Gryphon are contributing, we see just under 12.0M lbs of production from 2032-2034. It is important to note that production from both assets are incorporating Reserves only (whether Proven or Probable). Any potential upside from further resource conversion is not being captured in the production model. For context, Phoenix alone contains an additional 70.5M lbs of contained U3O8 in the Measured & indicated category (280.2 kt grading 11.4% U3O8) while Gryphon contains an additional 61.9M lbs (1,643kt grading 1.7% U3O8) in the Measured & Indicated resource category. The potential for extending each deposit’s LOM is significant, however not captured in either FS or in our production model.

Recall that Wheeler River remains as the largest undeveloped uranium project located in the infrastructure-rich eastern portion of the Athabasca Basin. Given the publication of the FS, the project continues to de-risk while the ISR production methodology has proven to be functional and an economic known quantity. Though a financing will likely be conducted following the FS publication, we do note that Denison is well positioned to partially use the 2.5M lbs of uranium it currently has in inventory (currently valued at $142M using current spot prices) to backstop any equity or debt (likely 2:1) financing package.

Denison Mines currently trades at a 0.53x NAV discount. Our C$3.40 twelve-month price objective is underpinned by a 1.15x NAV multiple implying +116% upside from the most recent TSX close. Our NAV is derived from a sum-of-parts assessment of Wheeler River along with additional projects and financial assets/liabilities. We view Denison Mines as not only a good proxy to leverage uranium upside but also increasingly as a development play which will transition to meaningful near- term, meaningful production. We stress that apart from NexGen Energy's (NXE) Arrow project and potentially Fission Uranium's (FCU) Triple R, no other meaningful uranium project is expected in North America at the same size and scope of Wheeler River. Wheeler River will not only enter production, but it will also prove to be the Basin's first ISR uranium project.


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