Investment Comment Denison’s speculative charm attracts Gardiner

Investors attracted to stocks with speculative appeal might want to consider Toronto-listed Denison Mines. The company has just come out of perhaps one of its toughest years yet with a profit of $44.6 million compared with a loss of $157.9 million a year earlier.

G. Thomas Komlos, mining analyst with Gardiner Watson notes in a January research report the company has made a number of defensive steps in the past few months to put it on the right track towards establishing a solid financial footing.

These include the sale of the 53.6% equity ownership in Lake Ontario Cement at a highly favorable price of $36.25 per share for a total of close to $84 million and the disposition of a 55% interest in the Egyptian oil concessions for $136 million(US) which reduced the company’s over-all exposure to 35%. Approximately 65% to 70% of this amount will become due early this year.

Other positives to which Mr Komlos points include:

* As a result of the more than $270-million capital inflow, corporate debt is expected to decline from $240 million to less than $100 million by year-end. Furthermore, the total debt (current as well as long term plus preferred but excluding advances on concentrate sales contracts) over common equity ratio should decline from 3.2:1 as at year end 1985 to at least 1.8:1 by year- end 1987.

* Completion of all major expansion programs will result in a severe cut in capital spending requirements from a high figure of $300 million to a manageable $100 million.

* This year, Dension will be in a position of having lots of unutilized line of credit, thus the capability to seek out profitable new investment opportunities. We believe the company will take a serious look at the domestic oil and gas spheres of activity, says Mr Komlos.

* A remaining potential negative is the involvement with the troublesome $350-million potash venture (60% owned) near Sussex, N.B. Under current potash prices, the still capitalized mine is not generating any profit, in fact it may not break even on a cash basis. Should Denison be forced to abandon this undertaking, then its debt liability would amount to $75 million.

* Incorporating the effects of the asset sales and a writeoff on the oil holdings, our share asset evaluation has increased from $2.45 to $4.30, says Mr Komlos.

* At an average oil price of $18(US) per barrel, we estimate this year’s earnings per share at 90 cents compared with the loss of 35 cents per share estimated for 1986, he says. Every $1 swing in the oil price impacts on earnings per share by 8 cents . At the time of the report Denison A shares were trading at $7 with a 52-week high and low of $15.75 and $5.25, respectively. The B shares were at $6.38 with a 52-week high and low of $14.75 and $5.13, respectively.

Around press time the A and B shares were trading on the TSE at the $8.88 and the $8 level, respectively.