Dynacor Gold Mines Is Significantly Undervalued
Summary
- 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
Throughput
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 2020, due to the COVID 19 pandemic, the company had to suspend ore-processing operations.
The ore supply problem seems to be finally solved so they want to increase throughput
On February 4, 2021 Dynacor made an interesting announcement:
In the fourth quarter, 2020, Dynacor also set all-time quarterly best purchases of 34,110 tons of ASM gold ore. The fourth quarter, 2020 gold ore purchases were higher mainly due to ASMs returning to full mining pre-COVID-19 operational levels.
I think this extremely positive announcement was standing behind the company’s decision to increase throughput at Veta Dorada. Simply put, if the ore supply is secured and the company has capital to expand its business, why not to do it?
The decision
The decision was announced on March 24, 2021:
Dynacor… today announced a US$1.8 million investment through internally generated cash flow to expand its Veta Dorada ore processing plant capacity by 43% in Chala, Peru. The expansion already underway will enable Dynacor to process 430 tons per day (TPD) from its current nameplate 300 TPD capacity, a 43% increase. The Corporation has received the construction permit and signed contracts, a first contractor is on-site, and construction work began in the 2nd week of March 202...
…The significant increase in the plant’s throughput will begin immediately after completion of the construction, and therefore we expect to see a healthy rise in sales starting in the 2nd half of this year and ahead of our original forecast.
Let me go through the main points disclosed in this announcement:
- To expand the Veta Dorada processing facility the company needs $1.8M. It is not much money for Dynacor. For example, at the end of 2020 they had $11.9M in cash and practically no debt. What is more, at a price of gold of $1,870 per ounce (as in Q4 2020) the company is able to generate a strong cash flow from operations of $3M per quarter. I am confident they are able to increase throughput very easily.
- The expansion project is already underway and all the permits are in place. As a result, higher throughput is a matter of just a few months (the project should be online in Q3 2021).
The expansion project will have a positive impact on intrinsic value of Dynacor
In my opinion, higher throughput is going to have a significant, positive impact on Dynacor’s intrinsic value. Below I present a simple, discounted cash flow valuation model, comparing the current and future name plate capacity. The first table lists the technical parameters:
Source: Simple Digressions
Note: the company does not publish the gold grade and recovery figures. To fill this gap, I assume a theoretical gold head grade of 21.3 grams of gold per ton of ore processed and recovery ratio of 85.1%. I have arrived at these figures starting from the figures released in the past.
It is easy to spot that at the time the project is completed, Dynacor will be able to increase its annual gold production to 91.3 thousand ounces (from 63.7 thousand ounces now).
Now, higher production should result in stronger cash flow from operations. Here is the appropriate table (the calculations were made using the current price of gold of $1,725 per ounce):
Source: Simple Digressions
Investment thesis:
According to my model, the ongoing expansion project is supposed to increase an intrinsic value of the company from $117.3M (now) to $185.6M when the project is finished. It means that one share of Dynacor, after completion of the project, will be worth $4.78. Today these shares are trading at $1.72 a share (as at April 5, 2021) so they are strongly undervalued.
Other strengths
Dividend
Dynacor is a dividend paying company. The first dividend was paid in Q4 2018 and since then it went up from $0.0312 a share in Q4 2018 to $0.0452 in Q4 2020 (an increase of 44.9%; these figures are calculated on an annual basis).
Another thing – in February 2021 Dynacor changed its dividend payment frequency schedule to monthly (in the past the dividend was paid each quarter). I think this approach makes the dividend offered by the company even more attractive for its shareholders.
Now, I am confident that the completion of the expansion project will result in a higher dividend. Let me speculate that a raise of 43% is likely.
Share buy-back program
Apart from paying regular dividends, in Q2 2018 Dynacor had initiated a share buy-back program, another investor-friendly initiative. Here is the chart illustrating the way the company has been repurchasing its own shares:
Source: Simple Digressions
Note that, due to the COVID 19 pandemic, the company suspended the program between Q1 and Q3 2020. However, in Q4 2020 the program was renewed.
Further, since the beginning of the program, Dynacor has repurchased 1.44 million shares in total (3.6% of the total share count disclosed at the end of Q1 2018). The current program ends up in May. However, I am quite skeptical about renewing this program in June. Today Dynacor shares are trading at $1.70 a share. And, as the chart above shows, so far the company has been repurchasing its shares at an average price of $1.32 a share. Hence, I guess that a dividend program emerges as a main shareholder-friendly initiative.
Risk factors
Senegal expansion project
Last year Dynacor took a decision to start the processing business in Senegal. After setting up a joint venture with two partners (with Dynacor holding a 51% stake), they want to prepare an economic study on building a pilot processing plant in this country. In my opinion, it is a risky project (new country, new partners etc.).
Tumipampa
Apart from operating the processing plant in Peru, the company develops the Tumipampa gold deposit located in this country. To remind my readers, for many years I have been very skeptical about this project. Simply put, in my opinion, Dynacor should focus on the processing business instead of allocating capital and effort into a classic mining project. Fortunately, this year they want to spend a mere $1M on Tumipampa exploration, reducing this risk in some way.
Summary
In my opinion, the processing plant expansion project implemented by Dynacor is going to convert the company into a more effective cash machine. As the business finance theory says, higher cash flow drives up an intrinsic value of a company. In this case, I value one share of Dynacor at $4.78. Today these shares are trading at $1.72 a share so they are significantly undervalued.
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
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)
It is still deeply undervalued but there is one problem - they should rise the dividend instead of repurchasing their own shares.
I would like them to issue a Quarterly "bonus" Dividend when things are going good
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.
No debt
Buying back shares
Expansion to Senegal
Tumipampa land to develop
NO DEBT....did I mention that!!!!!
what is not to like
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.
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.
Regards.
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
Period
"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 ??
I assume 430 tpd
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.
No, I do not cover this company. But you know, it is a classic miner while Dynacor is not.