DNG.TO - Dynacor

[Libs]

Having sifted through the despised gold mining sector, I may have found a tiny one worth considering as a small speculative play ( far from my usual…)

 

Dynacor operates in Peru. Their raison d’etre is to use the proceeds of their mill to fund gold exploration.

Symbol DNG.TO. Price $1.50 X 38MM diluted = $57MM market cap

 

There are 200,000 small-scale miners in Peru. ( Apparently, if you lose your job in Peru, this is what you do.) DNG has had a mill there for 15 years. They buy from 50-60 of these miners on a regular basis. As one of the largest mills, and with the highest recovery rate among them, they are able to pick and choose ore from these miners. (Or so they say). Not sure if this qualifies as a moat, but I doubt the business is going away.

 

Here is what I like about DNG:

1) Management is adamant about self-funding operations and exploration; dilution has been minimal, and they have no debt.

2) Exposure to gold price swings is minimal. They buy the ore at a discount to spot, process it, and sell it. (They did have some inventory exposure in Q2 when gold plunged, not enough to worry me on an ongoing basis.)

3) Relating to #2, operating profit / oz has been $209, $239, $231, and $298 since 2009. ( It dropped to $216 last Q with the gold plunge during the quarter. I expect it to rebound this Q). Pretty steady.

4) If you go back and read their AR’s from inception in ’07, they have met or exceeded their promises ( a first in this industry).

5) They have grown gold production from 36,000 oz in 2008 to likely 70,000 this year.

6) Net income was $7.7MM in 2012, up from ~$2MM normalized in 2008.

7) If things go awry – as they did in 09/10 when they were hit with a Peruvian tax ruling – they just

Cut PP&P and exploration costs until they got through it. CEO says they will do that again if necessary.

8) ROE’s are 25% + since 2011

9) The price seems right. They are running $7-10MM annual net income right now. 6-8 times earnings.

10) They seem to be in good stead with the authorities in terms of permitting, environmental issues, etc. They are close to getting final permits to build a new mill which will bring them to 100,000 oz / year capacity by 2014/2015.

11) They may well have hit paydirt with their exploration. See the link which has info about their property in Temipampa. I am a disciple of Its A Value Trap, though – I assume it’s no going to pan put and that there’s a healthy dose of BS involved. But, it’s free, in this case.

 

Of course there is plenty to worry about:

 

1) If gold plunges, those miners will disappear along with their business.

2) They may switch course and take on debt/dilute shareholders to explore Temipama, which doesn’t pan out. But, the CEO seems to have weathered/been scarred by that approach and doesn’t want to repeat it.

3) It’s Peru, who knows?

4) Worst of all, I know NOTHING about this business. Someone could well destroy this idea with one comment..... Hoping to get some insight from the board  ;D

 

Bottom line, the upside is interesting, if they increase capacity to 100,00 oz they can make $12MM net, I think, and at 10X it’s a double, plus you get the exploration upside for free. That’s if gold stays > $1100 in my opinion.

 

If gold takes off again, well, this thing has sold for as much as 37X cash flow so that’s a nice lottery ticket.

 

The downside is a 100% loss. No reason to sugar-coat it. We’re talking a tiny gold co., operating out of Peru for God’s sake.

 

Here’s a good corporate presentation:

 

http://dynacorgold.com/userfiles/file/Dynacor_website%20June%202013.pdf

 

I also recommend watching the CEO being interviewed by an analyst in 2011, you can find it on their website. Dated 2/7/11, scroll to the bottom:

 

http://dynacorgold.com/en/webcast-en.php

 

 

[Vanshon]

I've held this for a few years and share your hopes for a brighter future, especially after their recent drill results.  It seems like a "safer" way to have exposure to gold.

 

Trapeze asset has a position and usually provides updates in their quarterly newsletters: 

 

http://www.trapezeasset.com/investment-letters

 

 

[ItsAValueTrap]

It looks like they do toll milling for small miners.  The miners are probably mining deposits that have very high grades since Dynacor's feed is somewhere around 20-30g/t (which is very, very high).  If the miners' operations had higher tonnage per day (and the deposit has a lifespan of several years), it could/would make sense for them to build their own mill.

 

Eventually Dyancor's customers will exhaust their deposits.  If they don't find new deposits, then Dynacor won't have customers anymore and it would make sense for them to shut down the mill.  Many deposits maximize their net present value if they are mined in 6-15 years.  It's hard for me to estimate Dynacor's future cash flows because I have no idea what their customers will do.

 

2- Small scale miners sometimes do things that are environmentally questionable.  There are artisinal miners who use mercury to extract gold from their ore; they often dump excess mercury into local rivers (!!!).

 

Some mining methods are environmentally destructive.  I'm not sure what Dynacor's customers are doing.  If they are using mining methods that are environmentally questionable (e.g. dredging, hydraulic mining), the government might try to shut them down.  On the other hand, if the government tries to clamp down on environmentally unfriendly ore processing, it could be a good thing for Dynacor.

 

I believe small scale mining in Peru is a mix of dredging and mining from rock.  Dredging can be very damaging to the environment so I'd expect political risk there.  Many of the small miners use mercury which will end up in the environment.  Government action against that practice will push them towards using mills such as the ones owned by Dynacor.

 

I am a disciple of Its A Value Trap, though – I assume it’s no going to pan put and that there’s a healthy dose of BS involved.

hehehehe

[ItsAValueTrap]

3- Depreciation:

 

I think that the accounting might be overstating profits because depreciation is lower than what it should be.  Buildings are depreciated (on a straight line basis) over 25-30 years.  However, the mill itself will likely only produce cash flow for less than 25-30 years.  Its 220 tpd mill will be shut down soon once the new 300tpd mill comes online.  The value of the 220tpd mill should be written down.

 

4- I'm not sure exactly why they're shutting down the 220tpd mill.  Does it not meet Peru's environmental standards?

 

5- The company spends money on directors and officers' insurance, which is an abuse of shareholder money in my opinion.

 

6- In the past, the company was borrowing money at 13% and 15%.  It's really, really hard to exceed that cost of capital with a healthy margin.  I generally don't like to see companies borrow at such high interest rates.

 

7- The company's overhead costs are very high because the market cap is so low.  The board of directors costs over $100k/year (this could be a lot lower).  The audit fees are almost $100k/year (this is defensible; brand name auditors are expensive).  The company likely spends a lot of money on stock promotion (e.g. trips to Toronto and Arizona).

 

Because this is a nanocap company, these costs take a big chunk out of profits.  I usually don't like nanocaps for this reason.  It's harder for shareholders to make money.  There is somewhere around $100k-200k/year in unavoidable expenses related to a public listing (auditor, preparation of financial statements, filing fees, listing fees, etc.).

[Libs]

3- Depreciation:

 

I think that the accounting might be overstating profits because depreciation is lower than what it should be.  Buildings are depreciated (on a straight line basis) over 25-30 years.  However, the mill itself will likely only produce cash flow for less than 25-30 years.  Its 220 tpd mill will be shut down soon once the new 300tpd mill comes online.  The value of the 220tpd mill should be written down.

 

4- I'm not sure exactly why they're shutting down the 220tpd mill.  Does it not meet Peru's environmental standards?

 

5- The company spends money on directors and officers' insurance, which is an abuse of shareholder money in my opinion.

 

6- In the past, the company was borrowing money at 13% and 15%.  It's really, really hard to exceed that cost of capital with a healthy margin.  I generally don't like to see companies borrow at such high interest rates.

 

7- The company's overhead costs are very high because the market cap is so low.  The board of directors costs over $100k/year (this could be a lot lower).  The audit fees are almost $100k/year (this is defensible; brand name auditors are expensive).  The company likely spends a lot of money on stock promotion (e.g. trips to Toronto and Arizona).

 

Because this is a nanocap company, these costs take a big chunk out of profits.  I usually don't like nanocaps for this reason.  It's harder for shareholders to make money.  There is somewhere around $100k-200k/year in unavoidable expenses related to a public listing (auditor, preparation of financial statements, filing fees, listing fees, etc.).

 

Some really good points, thanks.

[moustachio]

At first glance it looks like a pretty decent business, but the problem IMO is that they will likely plow all the cash flow into exploration and mining and shareholders aren't likely to see much benefit for a long time, if ever. On the plus side, the market seems to be valuing it based on earnings/cash flow, despite the improbability of shareholders getting any of it in a timely manner. All of this muddies the view of it quite a bit. If they announced plans to sell off their potential mining sites, focus on the milling business, and return cash to shareholders then it would be very appealing at this price. IDK, the potential value seems to be there, but shareholders are unlikely to see it. In other words, should it be valued for current operations, or for its exploration potential? I think more the latter, and don't have any clue how to value junior miners. Still, it is definitely an interesting stock. Thanks for starting the thread on it.

[Libs]

At first glance it looks like a pretty decent business, but the problem IMO is that they will likely plow all the cash flow into exploration and mining and shareholders aren't likely to see much benefit for a long time, if ever. On the plus side, the market seems to be valuing it based on earnings/cash flow, despite the improbability of shareholders getting any of it in a timely manner. All of this muddies the view of it quite a bit. If they announced plans to sell off their potential mining sites, focus on the milling business, and return cash to shareholders then it would be very appealing at this price. IDK, the potential value seems to be there, but shareholders are unlikely to see it. In other words, should it be valued for current operations, or for its exploration potential? I think more the latter, and don't have any clue how to value junior miners. Still, it is definitely an interesting stock. Thanks for starting the thread on it.

 

In my cynical view, this is just a trade, with huge upside if the sector catches on again, but less downside if it doesn't, since they are in good financial shape and can just milk the cash flow from the mill.

 

I would bet serious money against shareholders ever getting cash out...I'm looking to find a greater fool down the line.

 

I'm being a heretic with 4% of my portfolio. Lol. Why does it feel so right....

 

 

 

 

[Libs]

:o :o

 

Down 17% today.

 

MONTREAL, QUEBEC, Jan 29, 2014 (Marketwired via COMTEX) -- Dynacor Gold Mines Inc. CA:DNG -17.87% DNGDF -16.17% (Dynacor or the Corporation). Government authorities and the Customs Agency in an effort to crack down on illegal mining and illegal gold exports from Peru have reinforced the inspection process at the ports and airports that are used for the export of gold and now require much more detailed information than previously. This has created a rather confused situation which the Corporation expects will be clarified by the authorities shortly.

 

Dynacor has, consequently, temporarily and voluntarily decided to suspend gold ore purchases from its suppliers. The Huanca gold ore processing plant will however continue operating at its full capacity using stockpiled ore for the next 3 weeks.

 

Dynacor is one of the leading gold ore processing companies in Peru and only purchases gold ore from Government registered suppliers and complies with all Government regulations at all steps of its gold and silver processing operations. Dynacor's compliance department is currently working to get all the newly required information ready for the authorities.

 

As soon as the Peruvian authorities have reviewed and approved this additional information, Dynacor will resume its gold exports and ore purchases on a normal daily basis.

 

The Corporation will keep its shareholders informed and will update the market of any new developments as soon as possible. Less

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