Denison Mines Corp. (DNN) is a leading uranium exploration and production company based in Canada, with mining interests in several regions across the country. Shares of DNN have surged 252.2% in price over the past nine months and 30.6% over the past month to close Friday’s trading session at $1.41.

The penny stock has been gaining momentum due to rising retail trader interest as social media platforms continue to target uranium stocks to precipitate a uranium squeeze.

However, DNN’s weak fundamentals are reflected in its poor fiscal second quarter (ended June 30) results. Its net loss widened 126% year-over-year to CAD2.36 million ($1.88 million), while its net operating cash outflow increased 88.7% in the first half of 2021 to CAD12.84 million ($10.25 million). In addition, analysts expect the company’s loss per share to rise slightly in its fiscal year 2021. We think these factors combined could make DNN’s current rally unsustainable.

Here’s what could shape DNN’s performance in the near term:

Uranium Squeeze

Uranium prices hit six-year highs recently, fueled by the rising interest of retail traders, popularized by the Reddit group r/uraniumsqueeze. In addition, because governments worldwide are working toward reducing their nations’ carbon footprints, nuclear energy is expected to emerge as a primary alternative to fossil fuels. Consequently,  uranium, a key component used in nuclear reactors, is expected to be highly demanded globally.

President Biden has allocated $6 billion to nuclear power plants in his $1 trillion infrastructure deal. In addition, the U.S. Department of Energy has requested a record $1.85 billion for the Office of Nuclear Energy’s annual budget for fiscal 2022, reflecting a 23% rise versus its  2021 budget.

While the Reddit group is trying to capitalize on the expected increase in demand to fuel a squeeze, analysts do not expect a fundamental distortion in uranium prices, given the complexities of commodity trading. Many analysts are comparing the current  uranium squeeze to a failed silver squeeze attempt a few months ago.

Production Capacity Expansion

On August 3, DNN acquired a 50% stake in JCU (Canada) Exploration Company from UEX Corporation for $20.50 million. The acquisition consolidated DNN’s stake in the Wheeler River mining region to 95%. JCU’s highly valuable portfolio of assets is expected to boost DNN’s uranium production capacity, thereby improving its financials. However, it might take some time for DNN to profit from this acquisition.

Stretched Valuation

In terms of forward Price/Sales, DNN is currently trading at 92.75x, which is 7,290.5% higher than the 1.26x industry average. Its 85.77 forward EV/Sales ratio is 3,370.1% higher than the 2.47 industry average. Also, DNN’s 3.92 trailing-12-month Price/Book ratio is 164.3% higher than the 1.48 industry average.

Unfavorable POWR Ratings

DNN has an overall F rating, which equates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The stock has an F grade for Value and Quality. DNN’s negative forward P/E ratio justifies the Value grade. In addition, its negative 141.97% net income margin is in sync with the Quality grade.

Of the 40 stocks in the F-rated Miners – Diversified industry, DNN is ranked 38.

In addition to the grades I’ve highlighted, you can view DNN ratings for Momentum, Growth, Stability, and Sentiment here.

Bottom Line

The uranium industry is expected to witness stable growth over an extended period as countries worldwide heavily invest in the mineral amid clean energy initiatives. Consequently, meme traders are attempting to capitalize on this sentiment to create a uranium squeeze. However, given the complexities of nuclear energy creation and commodity trading, the current  uranium rally is expected to be short-lived, making DNN’s current valuations unsustainable. Furthermore, despite the expansion of exploration capacity, DNN has  yet to address its increasing loss margins, indicating substantial operational inefficiencies. Thus, the stock is best avoided now.

How Does Denison Mines (DNN) Stack Up Against its Peers?

While DNN has an F rating in our proprietary rating system, one might want to consider taking a look at its industry peers Nexa Resources S.A. (NEXA) and Champion Iron Limited (CHPRF), which have an A (Strong Buy) rating.

DNN shares were trading at $1.47 per share on Tuesday morning, up $0.06 (+4.26%). Year-to-date, DNN has gained 127.20%, versus a 21.44% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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