Dynacor Group Inc. (DNGDF)

[investor15]

Dynacor: An Undervalued, Profitable Niche Company With Big Upside

Sep 5 2013, 07:32
Steve Nicastro

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DNGDF.PK over the next 72 hours. (More...)

It is hard to find a stock that has gone as unnoticed or is as misunderstood as Dynacor Gold (DNGDF.PK). This company is truly a diamond in the rough. While many gold (GLD) and silver stocks (SIL) hold strong multi-bagger potential, I think Dynacor could have the best chance for at least a double or triple in price. Believe it or not, this is a micro-cap stock that has a relatively low-risk business model, plus an exploration project with tremendous potential.

Dynacor is a hybrid gold company that explores for gold in Peru, but also runs a profitable ore-processing business at the same time. This is not your average gold stock because they are not a mining company or a pure explorer. Dynacor generates a substantial amount of cash flow from its wholly owned ore processing plant in Peru. They produce gold from the processing of ore, purchased from artisan miners. Dynacor pays the miners at a discount to the spot price and based on the gold content. They then process the ore and sell it at spot price. They can selectively choose which ore to purchase, opting for the highest grade which leads to more profits.

The higher gold goes, the higher margins they should achieve. While a lower gold price hurts their margins, they still make a good amount of money, as we saw in the latest quarterly earnings report.

Before I get more into detail on the company's operations and business model, here is a financial overview of the company:

(click to enlarge)

Credit: StockCharts.com

*Overview

Symbol: DNGDF.PK, DNG on the TSX

Share Price: $1.42

Shares Outstanding: 36.3 million

Market Cap: $51.55 million

*Financials

Cash Balance: $10 million (Working capital of $15.2 million)

Debt: $0 in debt, following the reimbursement of the $1.2 million outstanding debt in the previous quarter.

Q2 2013 Results:

- "During the period ended June 30, 2013, the Company processed 18,785 dry metric tonnes (DMT) of ore (cumulative of 37,462 DMT for the six-month period) compared to 16,086 DMT in Q2-2012 (cumulative 33,644 DMT) a 16.8% increase over Q2-2012. The plant operated at its full 220 tpd capacity during Q2 2013. This 18,785 DMT ore throughput represents the largest quarterly tonnage processed in the history of the plant (News Release).

- Revenue of $25.9 million, 26 percent increase year-over-year.

- Net income of $900K or .03 EPS, compared to $1.2 million or .03 EPS in the previous year.

- Gross operating margin of $3.8 M compared to $3.0 M in Q2-2012, a 27% increase.

- Cash flow from operating activities before change in working capital items of $1.5 M ($0.04 per share) (1) in Q2-2013 compared with $1.4 M in Q2-2012($0.04 per share).

Dynacor - A Great Value

- In 2012, the company recorded full-year EPS of .22. At current price that gives them a P/E ratio of 6.36.

- So far this year, they have recorded cash flow per share of .30. This gives them a current price/cash flow ratio of just 4.6 and around 4 for the full year!

(click to enlarge)Credit: Dynacor Gold

- While a fall in the price of gold does affect their profitability, it affects them much less than it would for a mining company: "During the quarter, two sudden gold price declines affected the Company's gross operating margin (as accumulated ore inventory had been purchased at costs based on higher gold prices), however, the gross operating margin for the period amounted to $3.8 M (14.5%) compared to $ 3.0 M (14.8%) an increase of 26.7% compared to Q2-2012."

(click to enlarge)

Credit: Dynacor Gold

- The company has a current enterprise value of $41.5 million. They are trading at roughly 2 times EV/Cash flow.

The Process Plant Potential and Cost Reduction Efforts

- The company is working towards expanding their ore processing plant to as much as 600 TPD, from the current 220 TPD. This would increase yearly production to 130,000 ounces, compared to the 2013 estimate of 71,000 ounces. The company says that the construction of the new ore-processing plant is to be financed directly from auto-generated operational cash flow and debt.

- Besides the increase in production, the company is focused on reducing costs. The company anticipates profits per ounce to rise with the new mill as several measures will be taken. They include the conversion to natural power, receiving larger haul shipments, and improving operating efficiency with brand new equipment and machines.

- The company has achieved a number of important steps so far in the plant upgrade. Most notably, the Environmental Impact Assessment permit was received in December of 2012.

- Construction of phase 1 begins immediately upon receipt of the construction permit, which is expected shortly. Construction of the tailings pond will also begin at that time.

- 2014 should be a huge year for Dynacor, with the new plant expected to be commissioned and in operation by the first quarter.

Management Expertise and Experience

- The company is very well respected in the area as they've been active in Peru since 1996. They have a ton of experience and knowledge of the area.

- The President and CEO is Jean Martineau, who has 20 years experience in the industry. He is a former director of Wesdome Gold Mines from 1999 to 2007.

- The Vice President and CFO is Leonard Teoli, who has 20 years experience in accounting and as a finance executive.

- Alonso Sanchex is the Chief Geologist. He has 15 years experience as a mine and exploration geologist and is an expert of Peruvian Geology.

By the Way... Dynacor Has an Exploration Project

I haven't even mentioned a project which perhaps holds the most potential for this company: Tumipampa, a multi-mineralized gold deposit located in the Apurimac copper-gold skarn belt.

If you were a gold exploration company that could choose where you would want your project located, this would have to be the location. The company is surrounded by six senior mining companies, such as Southern Copper and Xstrata. Over $6 billion in mine development is underway in this region. Some of the deposits hold a multi-million ounce gold resource with copper and silver as the by-product.

(click to enlarge)Credit: Dynacor Gold

The belt is host to the following projects:

- Las Bambas (Xstrata Copper) ($4.2B mine development approved)

- Los Chancas (Southern Copper Corp)

- Haquira (Antares Minerals) (Received $460M from First Quantum) in 2011

- Constancia (Norsemont)

The Tumipampa project is also located in a gold-silver rich belt of epithermal veins which host the following resources:

- Orocopampa (2M Au ounce)

- Pierina (770K Au ounce)

- Ares (1.2MM Au ounce)

- Arcata (163K Au ounce)

- Caylloma (600K Au ounce)

- Shi-Paula (653K Au ounce)

- Selene-Pallancanta (300K Au ounce)

- Antapite (220K Au ounce)

- To date, the Company has completed three exploratory drilling campaigns on Tumipampa and collected 1449 surface samples.

- 15 gold veins have been discovered to date.

Here are the most recent drill results, with the company striking high-grade gold:

- Cross Cut Intercepts high grade gold mineralization over 4.85 m assaying 36.48 g/t Au, 1.49 oz/t Ag and 0.43% Cu including 0.75 m with 111.5 g/t Au, 5.14 oz/t Ag and 1.13% Cu.

- The roof sampling returned an average grade of 36.48 g/t Au, 1.49 oz/t Ag, 0.43% Cu, 0.08% Pb and 0.12% Zn over 4.85 m true width (uncut grades) with one sample returning a maximum gold value of 111.5 g/t Au with 5.14 oz/t Ag, 1.13% Cu, 0.26% Pb, and 0.23% Zn over 0.75 m true width.

- The north wall sampling returned an average grade of 15.58 g/t Au, 0.80 oz/t Ag, 0.020% Cu, 0.09% Pb, and 0.20% Zn over 7.40 m true width (uncut grades) and this includes an intersection of 4.90 m (true width) grading 22.35 g/t Au.

- The south wall sampling returned an average grade of 14.35 g/t Au, 0.37 oz/t Ag, 0.03% Cu, 0.03% Pb and 0.06% Zn over 7.40 m true width (uncut grades) and this includes an intersection of 4.75 m (true width) grading 21.26 g/t Au. (Source: July 16 News Release)

These were quite impressive drill results, to say the least.

Conclusion: This Is a Buy, Plain and Simple

- Dynacor has a profitable "niche" business that has the potential to grow profits substantially over the next few years.

- To the naked eye, Dynacor Gold may just look like another gold exploration company. I believe a big reason the company has flown under the radar and is undervalued is because of the "gold" label. The truth is that Dynacor is profitable at any gold price.

- To make things even sweeter, I believe the Tumipampa deposit holds the potential to be a 1+ million ounce gold resource.

- The company is shareholder friendly and will continue to fund exploration through cash flow, unlike most other exploration companies which must issue equity.

I think the company has a couple of different options going forward. First, they could opt to find a partner to drill Tumipampa and focus more on their ore processing business, which I believe holds a bit more potential. Or, the company could continue drilling themselves and hope they strike something big.

Either way, I believe shares of Dynacor Gold possess great value and I think the stock could easily return 200+ percent over the next few years. I am in this stock for the long-term, not quick profits, and will be looking to add shares over the next couple of days and weeks.

Additional disclosure: This article discusses a micro-cap stock.

http://seekingalpha.com/article/1674682-dynacor-an-undervalued-profitable-niche-company-with-big-upside