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  Sisyphus sees the top

BENJ GALLANDER and BEN STADELMANN

Friday, February 6, 2004

Analyzing stocks is supposed to be all about cool rational thought, but every once in a while a little superstition sneaks in. Such is the case with perennial laggard Denison Energy, formerly Denison Mines. Since the glory days of Elliot Lake, the company seems to have been hexed, limping from one misadventure to another, proving that the much awaited silvery sheen in a cloud sometimes is just another stick of dynamite.

CEO Peter Farmer, who has been with Denison since 1985, has suffered his share of slings and arrows during his tenure. His longevity is not only a factor of his dogged persistence, but the simple fact that in many situations he did exactly what any competent manager would do; still, this did not prevent his efforts from blowing up in his face.

We also took some shrapnel with investments in this company. First purchased in 1997, more was bought on the way down in 1998, before the plug was pulled for a 58 percent loss. More shares appeared due to a divesture at Roman Corporation; those were dumped for a pittance when Denison proposed a 20-for-1 stock consolidation.

At the time, we thought that the combination of uranium mines with oil and gas properties was a long-term winner, but experience has shown that stocks usually do poorly for at least a year after a reverse split. We got that part right. (Full disclosure: one Contra Guy still has a small holding in his RRSP, filed in the back of the "I'm nothing but a dreamer" drawer).

The current bull market in metals and minerals has been fuelled by the long period of underinvestment in exploration and mine development, which was a consequence of weak prices over two decades. One thing that happens during a sectoral boom is that investors try to "widen" the front of attack, to take in peripheral companies that have not benefited from the run.

This is happening during the present commodity renaissance, with gold, silver, nickel, zinc, copper, all taking a turn in the spotlight. Over the past few months, attention has turned to uranium, whose price has moved from $10.90 a pound last summer to the current price hovering at $15. Uranium is an extremely rare mineral, only a handful of countries are responsible for world production. It so happens that Canada is one the fortunate few, and the McLean Lake mine in Saskatchewan (Denison holds a 22.5 percent interest) is notable.

With the environment thus prepared, all it took was a spark to set a blaze. James Dines, who publishes "The Dines Letter" and has a reputation as a clever trend spotter, provided the catalyst with a "buy" recommendation on uranium producers, including Denison. Volume on Denison shares skyrocketed, with the price zooming from a low of $2.36 last November to a current price of $6.15.

Also boosting prospects is a proposed reorganization of the company, which will split off the oil and gas interests as Denison Resources, while the uranium mines and environmental services division reverts to the old Denison Mines moniker. The plan will allow shareholders to tap some of the value of the enormous tax loss pools that have been carried on the books for so long. Though the Contra portfolio will not prosper from this change in fortunes, it's a pleasure to see that Peter Farmer's dedication and patience is finally paying off.


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