Dynacor Gold Mines: De-Risked And Strongly Undervalued


Introduction

As mentioned in my earlier articles, Dynacor (OTCPK:DNGDF) has a fairly easy technique. To start with, Peru is the world’s sixth-largest producer of gold (2017) however a giant a part of its manufacturing (21% in 2017) is attributable to the so-called artisanal and small-scale mining sector (ASM). ASM, other than being a essential supply of revenue for the miners and their households, is also answerable for environmental air pollution. To unravel this downside, the Peruvian authorities tries to “civilize” this enterprise. The proposal is easy: Go authorized and course of your gold ore at trendy services constructed by the professionals. Dynacor is such an organization.

Dynacor

In 2017 Dynacor put on-line the Veta Dorada trendy gold processing facility within the Arequipa area in Peru (the third largest gold camp on this nation). In comparison with its earlier plant, Metalex within the Huanca area, Veta Dorada has a better capability and a handy geographical location. Nonetheless, the profitability of Veta Dorada (and different processing services) strongly is dependent upon gold costs and prices of manufacturing. For instance, in 2018 Dynacor was producing its gold dore bars at an all-in sustaining price of manufacturing of $1,179 per ounce. On the common worth of gold of $1,262 per ounce, the corporate made $121 on every ounce offered to its strategic companion (a Swiss refiner referred to as PX Precinox). Properly, in comparison with basic gold miners making roughly $303 on every ounce of gold offered (Kinross in 2018), the margin reported by Dynacor was fairly skinny. So, the place’s the Dynacor’s edge over basic miners? The reply is fairly easy – Dynacor is just not susceptible to the basic mining dangers as each day mining operations, building and improvement of a mine, and so on. In different phrases, the corporate is much less dangerous than a basic gold miner.

2019 manufacturing steering

This 12 months Dynacor plans to maintain manufacturing regular at round 82 – 92 thousand ounces of gold (final 12 months it produced 81.three thousand ounces). Moreover, the ore grades are purported to be larger than in 2018 (32.5 grams of gold per ton of ore, based on my very own calculations) however decrease than in 2017 (37.eight g/t) – I roughly assume the common grade of 35.2 grams of gold per ton of ore. Utilizing these assumptions, to supply 92,000 ounces of gold the Veta Dorada plant ought to course of 275 tons of ore per day, properly under the present nominal capability of 300 tons:

Supply: Easy Digressions

Therefore, I feel that the corporate is simply too conservative. Now, for my part, Dynacor is ready to produce as many as 101.7 thousand ounce of gold this 12 months. How did I arrive at this determine? To start with, the corporate additionally assumes that this 12 months the Veta Dorada plant can be upgraded to a nominal capability of 360 tons a day. In consequence, assuming the 2019 common capability of 330 tons a day, mill availability of 95% and the unchanged ore grade (32.5 g/t) and gold restoration ratio (85.1%), the corporate can produce 101.7 thousand ounces of gold (notice that this time I am extra conservative, assuming a decrease ore grade then that assumed by the corporate):

Supply: Easy Digressions

And right here is my funding thesis:

Funding thesis

I wager that this 12 months Dynacor will produce 101.7 thousand ounces of gold. If I am appropriate, the corporate is meant to ship free money circulate of $16.7M (assuming a gold worth of $1,300 and AISC of $1,136 per ounce of gold). And this is my wager:

Supply: Easy Digressions

Now, assuming a free money circulate of $16.7M a 12 months, one share of Dynacor is price $four.56 and its flooring worth, assuming an annual dividend of $zero.03 a share, is $zero.60. Right now these shares are buying and selling at $1.26 a share so upside potential is extraordinarily excessive. Then again, a flooring worth is roughly 50% under the present worth.

Word: To calculate the share worth I’m very conservative, utilizing a excessive low cost charge of 10%. I feel that Peru deserves a decrease low cost charge (e.g. 7% – eight%) so my calculation appears to be underestimated. To calculate the ground worth, I’m utilizing a reduction issue of 5%, which appears to be acceptable for the de-risked monetary inflows as dividends.

Enterprise overview

Under I focus on the primary options of Dynacor’s enterprise.

Prices of manufacturing

As talked about above, every processing enterprise is usually a low-margin creature. It implies that low prices of manufacturing are significantly necessary to maintain it worthwhile. Within the case of Dynacor, within the second half of 2018 the corporate considerably lowered prices of manufacturing:

Supply: Easy Digressions

For instance, prices of ore processed are a significant price merchandise for Dynacor. Because the panel on the suitable exhibits, the corporate was capable of cut back this price from $964 per ounce of gold equal in 1Q 2018 to $868 in 4Q 2018 (a lower of 10.zero%).

One other instance – an all-in sustaining price of manufacturing (AISC) went all the way down to one of many lowest ranges in trendy historical past ($1,136 per ounce in 4Q 2018 – the panel on the left). By the way in which, the corporate doesn’t report a basic AISC so I needed to make a number of fundamental calculations to reach at this price.

Word: AISC is outlined as: income much less money circulate from operations (excluding working capital gadgets) plus CAPEX associated to Veta Dorada (I’ve excluded the exploration capital spending from this calculation).

Now, each charts present that prices of manufacturing are fairly unstable at Dynacor. In consequence, prices exhibit a danger issue when contemplating the funding in Dynacor shares. Nonetheless, the Veta Dorada plant has been working at full steam because the starting of 2017 so I assume that the corporate had sufficient time to study and optimize it. It means that there is a good likelihood that the prices can be stored regular and even go decrease, going ahead.

Ore provide and its high quality

Ore at all times is a danger issue. Dynacor purchases its ore from the Peruvian artisanal miners. In accordance with the corporate, there are at the moment 150,000 small-scale miners on this nation. Moreover, very quickly this quantity ought to develop by further 15,000 (at the moment within the formalization course of). It implies that the ore provide appears to be secured in the long run.

Nonetheless, the standard of ore is a matter. Usually, Dynacor has entry to high-grade ore (30 – 35 grams of gold per ton of ore) however final 12 months the common grade went down 14.1% in comparison with 2017. Sadly, ore grades are an element the corporate doesn’t management so Dynacor has two choices:

To develop its personal gold undertaking and use it as a supply of ore – properly, I hope Dynacor won’t do it. Why? Merely put, it will add a number of, huge danger elements to the present profile, making the corporate rather more sophisticated. By the way in which, Dynacor has an exploration property referred to as Tumipampa (mentioned under) however so far as I perceive the matter, this undertaking remains to be at an early stage of improvement and…to be trustworthy, I wish to see Dynacor promoting it. To extend a capability of the mill – that is precisely what Dynacor desires to do. Merely, larger capability can mitigate the ore grade downside. If the corporate is ready to considerably improve a processing charge, it may possibly produce extra gold utilizing lower-grade ore. Now, based on the corporate, this 12 months it plans to extend the Veta Dorada capability to 360 tons of ore per day (at the moment the mill is ready to course of not more than 300 tons per day).

As mentioned within the part “Funding thesis,” the second choice is the one I’m betting on.

Competitors

There are corporations working gold processing crops in Peru: Inca One (OTCPK:INCAF), Peruvian Metals (OTC:DUVNF) or Montan Mining (OTC:SAIDF). Of those three corporations, the one viable competitor is, for my part, Inca One. Equally to Dynacor, Inca processes the oxide ore bought from artisanal miners. What’s extra, Inca’s two processing crops, Chala and Kori, are also situated within the Arequipa area in Peru. Nonetheless, Inca processes the ore grading 17.7 grams of gold per ton of ore (4Q 2018), properly under the grades reported by Dynacor (31 – 35 g/t). It seems like Dynacor has a aggressive benefit over Inca One.

Threat elements

Tumipampa

To start with, Tumipampa could be a danger issue and a catalyst. To remind my readers, Tumipampa is a gold/copper undertaking situated in Peru and the one materials exploration property for the corporate. Apparently, it seems like Dynacor has a really bold plan to develop this property. For instance, since 2010 it has invested as a lot as $13.2M in exploration applications at this residue. Nonetheless, regardless of large capital spending, the corporate was not even capable of set up the mineral sources for Tumipampa. Therefore, Tumipampa appears to be a danger issue, consuming the corporate’s capital and time with no materials impact to date.

Then again, Tumipampa additionally might be a catalyst. The deposit is situated within the Apurimac district in Peru between the Las Bambas copper mine owned by MMG Ltd and Los Chancas mine operated by Southern Copper (NYSE:SCCO). Now, quite a lot of exploration applications resulted in a big database which, along with the deposit itself, represent a saleable product for any celebration keen on additional improvement of Tumipampa. Apparently, based on the 2018 annual report, the ebook worth of the property is $18.0M. Properly, I hardly imagine that Tumipampa may be offered for that worth however…you by no means know.

Liquidity

The shares of Dynacor are primarily listed on the Toronto Inventory Trade. Sadly, this 12 months’s common each day quantity stands at 26.1 thousand shares, which makes Dynacor a fairly illiquid inventory.

Capex

Dynacor has not disclosed the capex wanted to improve the Veta Dorada mill. Nonetheless, holding in thoughts that building of this facility (from scratch) had price $18.5M (the acquisition of mineral rights included), I don’t suppose that the corporate will spend greater than, say, $5M to improve it. In different phrases, the upgrading of the mill is inside the attain of Dynacor (on the finish of 2018 the corporate held money of $13.9M and virtually no debt).

Impairment

It seems like Dynacor has not carried out any impairment exams as of the tip of 2018. Therefore, it can’t be dominated out that some non-financial belongings might qualify for impairment fees going ahead (significantly the Tumipampa undertaking). Nonetheless, all my worth estimates have been finished utilizing money measures so any impairment cost would don’t have any influence on the corporate’s valuation.

Ore provide

Dynacor retains its ore shares very low:

Supply: Easy Digressions

I estimate that on the finish of 2018 Dynacor held sufficient ore to function for four.eight days. Sure, it is a fairly low determine, however historical past teaches that previously the ore shares have been by no means significantly excessive.

Catalysts

Aside from a number of catalysts mentioned above (larger capability, steady and even decrease prices of manufacturing, sale of Tumipampa and so on.) there are two investor-friendly initiatives that ought to have a optimistic influence on the corporate’s medium (share buy-back) and lengthy – time period (dividend) efficiency:

Dividend – Final 12 months Dynacor began paying an everyday dividend. In the meanwhile it is a mere C$zero.04 a share per 12 months, however I’d not be stunned to see a hike within the not so distant future Share buyback program – in April 2018 Dynacor introduced the implementation of a share buyback program. The corporate intends to repurchase as much as 1.98 million shares. As on the finish of 2018 Dynacor had bought zero.45 million shares at a mean worth of $1.25 a share. I count on the continuation of this program this 12 months.

Final however not least – because the chart under exhibits, Dynacor shares at the moment are between their long-term downward pattern line (in blue) and a robust assist degree at $1.zero – $1.1 a share (the world marked in yellow):

Supply: Stockcharts

It needs to be famous that the earlier two bottoms (August 2016 and November 2017) have been established when the corporate was setting up and creating the Veta Dorada plant. Right now Dynacor is a completely completely different firm – it has a brand new plant, delivers sturdy free money circulate, pays a dividend and plans to extend gold manufacturing. In consequence, for my part, a last worth breakout above the long-term downward pattern line is probably going.

Abstract

In 4Q and 3Q 2018 Dynacor made huge progress, slicing an all-in sustaining price of manufacturing to $1,136 per ounce of gold. Moreover, final 12 months the corporate began paying an everyday dividend and initiated a share buyback program. Lastly, this 12 months Dynacor plans to extend manufacturing to 82 – 92 thousand ounces of gold or, based on my very own estimates, to 102 thousand ounces.

Now, though prior to now I was a bit skeptical about Dynacor, these new elements put a brand new and optimistic perspective on the corporate. In consequence, for my part, Dynacor shares current a shopping for alternative now, with a goal worth of $four.56 a share.

Disclosure: I’m/we’re lengthy CEF, GDX, SAND, ARREF, KL, DNGDF. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from In search of Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

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