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Dynacor Gold Mines Is Significantly Undervalued

Apr. 06, 2021 7:04 AM ETDynacor Group Inc. (DNGDF), DNG:CA24 Comments


  • Dynacor wants to increase throughput of its processing plant in Peru by 43%.
  • The expansion project should be completed in the first half of 2021.
  • In my opinion, the project is going to convert Dynacor into a very effective cash-generating machine.
  • I expect a dividend increase soon.
  • According to my valuation model, Dynacor shares are significantly undervalued.
  • This idea was discussed in more depth with members of my private investing community, Unorthodox Mining Investing. Learn More »

Most recently, Dynacor Gold Mines (OTCPK:DNGDF) has made a pivotal announcement – the company wants to increase throughput at its Veta Dorada processing plant in Peru by nearly 50%. In this article I discuss how this extremely important event is going to transform the company.

Introduction - how this business works

Dynacor’s business model is pretty simple – the company purchases ore from small-scale miners (artisanal miners) across Peru, processes it at the Veta Dorada mill and sells the extracted gold and silver on the market. As a result, the profitability of this business depends on two factors:

  • A margin between the price of ore purchased and the market price of gold – the higher the margin the better
  • Throughput (the amount of ore processed) - the higher throughput the better

Expansion project


Since putting Veta Dorada online the company’s main target was to process 300 tons of gold ore a day. However, due to some reasons, it was not an easy target. As the chart below indicates, after a long battle to reach this target, it was finally met in Q3 2019 (look at the blue bar below):

Source: Simple Digressions

Ore supply

Why was it difficult to operate at full capacity? The answer is pretty simple – to operate a processing facility smoothly, it has to be provided with a steady flow of gold ore. Unfortunately, it took Dynacor quite a long time to secure sufficient, long-term intake of ore for Veta Dorada. For example, to solve this problem the Tumipampa gold deposit, a property owned by Dynacor, was made available for artisanal small miners (ASM).

Note: artisanal small miners are the sole source of ore for Dynacor. There are thousands of them across Peru and their activity is regulated by law.

Another thing – in Q2

Final note

Did you like this article? If your answer is "Yes", please visit my Marketplace service, Unorthodox Mining Investing where I run a portfolio of mining picks, discuss new investment ideas, and provide subscribers with a medium-term outlook on a few financial markets (particularly the base/precious metals market).

This article was written by

Simple Digressions profile picture

An independent analyst and private investor. Professional experience comprises about 20 years in a number of financial and industrial companies. Fan of the Austrian School of Economics.

Analyst’s Disclosure: I am/we are long CEF, GOLD, SAND, SSRM, DNGDF, DPMLF. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (24)

boblangabeer profile picture
@Simple Digressions What is your opinion of the company today
Simple Digressions profile picture
It is still deeply undervalued but there is one problem - they should rise the dividend instead of repurchasing their own shares.
boblangabeer profile picture
@Simple Digressions Thank you for the rapid response
I would like them to issue a Quarterly "bonus" Dividend when things are going good
Patrick Irish profile picture
@Simple Digressions Wish granted!

And since they will never raise the dividend so much that it takes up over half of cash flow I also expect some stock buybacks sporadically throughout the year.
TopDoggie profile picture
Interesting article. Glad I read it. Might add for the dividends as I am getting closer to retirement.
Simple Digressions profile picture
Honestly, I would not recommend this stock as a retirement asset. Why? Because the precious metals sector is cyclical. It means that at some point in the future the gold will start a bear market which will have a negative impact on a dividend paying precious metals stocks. Of course this negative impact will be partly mitigated by the fact that Dynacor is not a classic mining company (it is a gold processing one).
On the other hand, if you are familiar with cyclical sectors (i.e. you know how these markets work) the investment in Dynacor makes sense.
boblangabeer profile picture
@Simple Digressions
No debt
Buying back shares
Expansion to Senegal
Tumipampa land to develop
NO DEBT....did I mention that!!!!!
what is not to like
Simple Digressions profile picture
You are correct but when gold prices go down nobody cares about debt, dividends, expansion, senegals etc. I am quite old and saw many times how the precious metals market "works" during a bear market.
With the press release today, I think Dynacor will do $170M in revenues and US$0.35 in cash flow this year versus guidance in February of $150M and $0.27 cash flow. This pullback is a buying opportunity. I was once concerned about them filling the new mill, but they have their ASM supply chain working better now. The Y0Y comp will be easy with COVID just killing production in Q2 2020. They produced 1/6th of their normal Q2 output in 2020.

I have been long since 2013. I took some profits @ $2.64 in the 2016 runup, but have since replaced all those shares and accumulated much more. I was too scared to buy below $0.80 last year. Dynacor is not my best percentage gainer among PM stocks, but a good dividend payer and a relatively safe gold investment.
Simple Digressions profile picture
I share your opinion. On the other hand, I do not think anybody cares about it. People do not need decent companies. They prefer being in the game. For such people Dynacor is a totally boring company...And let it be.
@ Author. I kind of struggle to understand this company, obviously it is not a miner. It manufactures product out of supplied materials/ore. It doesn't have a significant mineral reserve. I wonder how do you calculate value of the company, what kind of formula do you use to get the numbers you arrived to?
Simple Digressions profile picture
1 - I calculate annual free cash flow generated by the company
2 - I assume that the company will operate for many years going forward. It is the most important assumption - contrary to a classic miner that has to care about its mineral reserves (hence, its life is limited), a processing company only cares about securing the ore supply, which can be unlimited (if a company is good enough)
3 - I discount an annual cash flow using a discount rate of 8% (Peru) - as a result, I arrive at the company's business value
4 - finally, after a few accounting adjustments (look at the table above) I arrive at share value
@Simple Digressions Thank you for the answer, Best regards.
March 24th press release ----
"The plant capacity increase is both ahead of the planned schedule, and larger in scope as ASM ore deliveries are rapidly ramping up and have been doing so for quite some time. As previously reported, for the last number of years, the Veta Dorada plant has been steadily increasing its daily output. It is currently operating at its maximum level of 40-45 TPD above the plant's nameplate capacity of 300 TPD due to the optimization of various plant parameters. The construction completion date is scheduled for June 2021."
they are running at 340 to 345 TPD right now -- your article assumes they are running at 300 TPD. am i wrong ??
Patrick Irish profile picture
A wonderful article, simple to understand, for a simple company. I have a lot of DNG because it has no debt and can cash flow at double digits. Its a well run company, shareholder friendly, and pays to own over time.

Imo, they could double the dividend by the end of the year as cash will continue to build up on the balance sheet. From my understanding, major investors have asked for higher dividend over share buybacks so I think that will be their focus after their minimal spending on capex and investments overseas.

You won't get a triple from Dynacor but it will slowly make you rich imho.
Simple Digressions profile picture
@Patrick Irish
Nice and informative comment. To be honest, I would also like to see a much higher dividend, say, an increase of 100%. They are able to do it.
06 Apr. 2021
Simple Digressions, I recently sold some Dynacor shares to buy Gran Columbia GCM.T as I was short of money. It was probably a mistake on my part. On the other hand, there are a lot of similarities between Dynacor and GCM. I wonder whether you cover Gran Columbia in your portfolio?
Simple Digressions profile picture
No, I do not cover this company. But you know, it is a classic miner while Dynacor is not.
06 Apr. 2021
Simple Digressions, excellent coverage, but where have you been all this time? I personally miss your value-centric analysis of miners big time.
Simple Digressions profile picture
I am still here but...yes, I am a bit out of the mainstream...
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