On June 5, 2019, Dynacor Gold Mines (OTCPK:DNGDF) announced another quarterly dividend payment of C$0.01 a share. At a current share price of C$1.75, it means an annual dividend yield of 2.3%. Well, it is not much but…it is better than nothing. What is important is this announcement is additional confirmation that Dynacor is going to continue its long-term dividend program, placing it among the best dividend-paying plays in the precious metals industry.
Further, on April 30, 2019 Dynacor made another investor-friendly decision to renew a share buyback program. To remind my readers, during the previous share buyback program, Dynacor had purchased 0.76 million common shares at an average price of US$1.28 a share. This time the company plans to purchase up to 3.3 million common shares over the next 12 months.
Summarizing, in my opinion, these two investor-friendly initiatives make Dynacor shares an interesting long-term buying opportunity for conservative precious metals investors. In this article, I discuss a few additional issues supporting this thesis. However, there are also a few major risk factors an investor interested in Dynacor should keep in mind (three of them are covered below).
Dynacor is a gold processing company operating in Peru, one of the world's largest producers of gold. The company's strategy is pretty simple: purchase the gold ore from artisanal miners operating not far away from the Veta Dorada plant, process it and sell it at a healthy profit. Sounds easy but…the devil is in the detail. For example, in my opinion, the results reported in 1Q 2019 were a kind of a negative surprise for me.
1Q 2019 Results - A Negative Surprise
Here are a few basic figures calculated for the first quarters of 2019 and 2018 (for better comparison I have also plotted the results reported in the fourth quarter of 2018):
Source: Simple Digressions
Let me comment on these results, starting from negatives.
To remind my readers, this year Dynacor plans to produce 82-92 thousand ounces of gold. However, in the first quarter of 2019, it delivered only 16 thousand ounces, well below my expectations. What happened? The answer is pretty simple: lower production was mainly caused by weaker ore grades reported at the Veta Dorada plant.
Well, bad things happen, but in this case, it looks like it is not a one-off event, but a long-term trend. For example, according to my own calculations (based on a simplistic assumption that gold recoveries stood at a similar level as in the past), in 1Q 2019, the average head grade (a grade reported at the processing facility) dropped by 13.5% compared to 2018 (or 25.7% compared to 2017).
Further, as the chart below shows, at the end of March 2019, Dynacor held nearly no ore at all (the red bar):
Source: Simple Digressions
According to my own calculations, the stockpiled ore was at a critically low level, securing only three days of production (below I discuss an event that could stop or even reverse this negative trend).
Finally, in 1Q 2019, Dynacor was processing 243 tons of ore per day, well below my annual target of 275 tons per day (and very far from the company's plans to increase throughput to 360 tons per day at the end of 2019). This, together with lower grades, makes me a bit skeptical about the 2019 production target of approximately 92 thousand ounces of gold.
Summarizing, in 1Q 2019, Dynacor was facing at least three serious operational problems: lower head grades, lower throughput and shrinking stockpiles of gold ore.
Now a few positives. Despite the above discussed negatives, the financial results reported in 1Q 2019 were pretty good. For example, a unit cost of ore processed decreased by 3.1% compared to 1Q 2018. As a result, despite a lower price of gold realized ($1,297 per ounce in 1Q 2019 vs. $1,320 in 1Q 2018), the company was able to increase its gross margin from $355 per ounce of gold equivalent in 1Q 2018 to $362 in 1Q 2019.
Further, cash flow from operations (excluding working capital issues) and free cash flow were comparable to 1Q and 4Q 2018.
Note: Free cash flow is defined as cash flow from operations excluding working capital issues less CAPEX.
Importantly, as of March 31, 2019, Dynacor was sitting at one of the highest cash reserves since putting the Veta Dorada processing plant in operation (2016):
Source: Simple Digressions
Note: Net cash is defined as cash reserves less debt.
Tumipampa Could be a Game Changer for Dynacor (At Last)
Apart from operating a gold processing facility, for many years, Dynacor has been involved in exploration of the Tumipampa property in Peru. For example, since 2010, the company has spent as much as $13.2M on various drilling programs conducted at this deposit. Interestingly, despite this huge effort, no updated mineral resources have been established. As a result, I am not able to say much about the quality of the deposit.
To my astonishment, on May 29, 2019, Dynacor notified its investors of "the signing of agreements to mine and purchase mineralized material from Tumipampa with a group of local artisanal miners". It means that all of a sudden the company has made a very interesting move, putting a whole new perspective on this problematic property. Let me go a bit deeper into this matter.
According to the company (the section titled: "ASM Underground Mining Program At Tumipampa"):
"A working plan was reached by both parties. The artisanal miners will be allowed to extract mineralized material from a 71-meter long raise averaging 21.109 g/t Au directly above the Manto Dorado. As part of the working plan, Dynacor will purchase the mineralized material from the artisanal miners which will then be processed at its Veta Dorada plant in Chala, in Peru."
It means that initially the ore will be mined from the Manto Dorado part of the Tumipampa property. I am not surprised because the Manto Dorado vein seems to be a high-grade, well-explored part of Tumipampa. On the other hand, a grade of 21.1 grams of gold per ton of ore is well below the ore grades processed at the Veta Dorada plant so far (very often above 30 g/t). Summarizing:
- I am positively surprised to see Tumipampa included in the company's production process.
- As a result, there is a good chance that the company's ore supply problems discussed above could be finally solved (at least partly).
- However, the Tumipampa property is quite a complicated geological structure. It consists of at least four styles of mineralization, of which the Manto Dorado vein has been the best explored deposit so far.
- What is more, gold recoveries are a big question mark. As a rule, before giving a go-ahead to the specific ore, a processing company performs a number of metallurgical tests. In the case of Tumipampa I have found the results of two metallurgical tests taken at Manto Dorado. Here is the appropriate excerpt from the technical report published in 2016 (page 101):
"The samples were processed using gravity separation followed by cyanide leaching of the gravity tailing…The extraction or recovery levels obtained were of: 94.74% for gold, 56.35% for silver and 12.83% for copper. The preliminary tests show that the metallurgical recovery method of the Manto Dorado mineralization is relatively simple and acceptable. However, follow up testing of additional samples collected from different areas of the deposit will be required to…find the ideal recovery conditions of gold."
Well, although the results are promising (at least for gold), Dynacor is well aware that additional tests are required. So, in my opinion, metallurgy is a big risk factor for Tumipampa.
In my opinion, a few days ago, Dynacor's management made a good decision to include the Tumipampa property in the company's production process. As a result, there is a good chance that the ore supply problems, discussed above, could be finally solved. Interestingly, it looks like Mr. Market has been totally ignoring this event so far.
What is more, in my opinion, two investor-friendly initiatives the company is offering now (the dividend and share buyback programs) make investment in Dynacor shares an interesting long-term proposal for conservative precious metals investors. For example, I think that the price range of US$1.28-1.30 a share (the prices at which the company was repurchasing its shares during the first buyback program) may be considered a natural floor price for Dynacor investors (using different wording, I do not think that these shares present a large downside risk).
Of course, the company is facing a few operational risks (discussed above) but, in my opinion, at the end of the day, the positives outweigh the negatives...
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Disclosure: I am/we are long CEF, GDX, SAND, DNGDF, ARREF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.