Stock Pick of the Week


Dynacor Gold Mines


Business: Gold production and exploration in Peru


Traded TSX: DNG


Shares Outstanding: 35,820,167

Initial Recommendation 8/13/10: $0.32

Price 10/12/12: $0.87

Market Cap: $31.2 million

Projected 2012 Op. Cash Flow: $12.6 million

Projected Gold Production 2012: 50,000 oz.

2013 68.000 oz.

2014 100,000 oz.

Progress Rating: A1

Telephone: 604-492-0099

Web Site:


Dynacor has been a favorite of mine since I picked it up in August 2010

at $0.32. The price shot up to over $2.00 in large part thanks to my

telling the story on BNN and also thanks to some excitement regarding

the exploration potential on the company's Tumipampa exploration project

in Peru. Nothing negative has transpired relating to Tumipampa other

than little news flow and, in a weak market, that's enough to result in

lower prices.


In the meantime, the company has simply gone about its business of

producing more and more gold and generating higher and higher cash

flows. There are many things to like about the management of this

company, starting with its performance. It always seems to deliver more

than it promises as it generates healthy cash flows, which it is growing

from internally generated cash flows, and to fund exploration at

Tumipampa on a pay-as-you go basis. For Jean Martineau's Dynacor, there

is no such thing as allowing Canada's brokerage firms to rape and

pillage small investors through endless cheap financings, which is no

doubt why you never see any research reports written on Dynacor by

Canadian financial firms.


But that's okay, because systematically, Dynacor Gold Mines is putting a

business together the right way. It is reinvesting its cash flow to grow

its business. At the very least, we should expect Dynacor to grow its

production to over 50,000 oz. this year, 68,000 in 2013 and over 100,000

by 2014. The reason we can be fairly confident in these projections is

because of Mr. Martineau's track record in more than achieving what he

promises, and those are the numbers he has felt comfortable in making

public for this very unique business model, which is illustrated below:


The last quarterly announcement is a good case in point. During the

month of August, the company produced 5,709 ounces of gold and 16,705

ounces of silver. During the first eight months of this year, the

company produced 36,913 ounces of gold and 100,054 ounces of silver. On

the basis of what has been achieved so far this year, the company is on

track to produce over 55,000 ounces of gold, compared to guidance of

50,000 ounces for the year. In fact, it would not surprise me if closer

to 60,000 ounces is achieved, because production growth has been taking

place as the year has progressed, due in part to some regulatory changes

in Peru.


In May of this year, production was hurt when the company shut down

operations for a few days as mining companies in competition with

Dynacor for the ore processing business had to comply with environmental

regulations. Many of Dynacor's competitors were using primitive means of

recovering precious metals and as such have subsequently been shut down.

With many of the competitors gone, Dynacor has been able to become more

selective of its acceptance of ore for processing. As a result, the average

ore grades accepted by Dynacor during the months of June, July, and

August was 0.911 oz gold/ton, compared to an average of 0.79 oz/ton

during the January through May timeframe. Since the company makes a

margin on each ounce of gold produced, higher grades bring higher profits.

Ore-processing data for January through August 2012 are summarized as





Average ore processed Gold grade Gold produced

Calendar       (t/d) (oz/t) (oz)


January        219 0.655 3,774

February       211 0.918 4,747

March          216 0.824 4,589

April          215 0.817 4,395

May            142 0.715 2,663

June           220 0.895 5,334

July           220 0.941 5,701

August         221 0.898 5,709


Since Dynacor locks in a margin on each ounce of production, higher

grades means higher profits for Dynacor. Because of the strong

reputation Dynacor has in Peru, where it has operated now for over 14

years, because of the large supply of ore from licensed small miners in

Peru, and because of the company's dominant position, management plans

to start a second milling operation by the start of the first quarter of

2013 at Chala, Peru. Management expects to be on its way toward becoming

a 100,000-oz.-year producer by 2014 and its additional mill at Chala

provides it with the potential to continue growing into the foreseeable



The new mill will have several advantages that the prior one did not

have, including a major decrease in power costs because it will be

hooked up to the national power grid. It will also provide easier access

for heavy trailers. The new mill will also have unlimited space for

tailings ponds and it is available to an area with a lot of gold ore

supplies. In addition the local area is very mine-friendly.


Given the track record of this management team, it would not surprise me

if it did not achieve more than 100,000 oz. before 2014. No promises in

that regard. I'm just saying, management has, since I stared following

this company, consistently delivered more than it promises.


Tumipampa Provides a Potential Homerun for Dynacor



While Dynacor continues to grow the company steadily with its bread and

butter business of processing high-grade gold ores from small licensed

Peruvian gold mines, one of the attractions that drove this stock to

over $2.00 per share in 2011 appears to have faded out of the minds of

speculative investors. That may provide an opportunity if

soon-to-be-released drill results point to a potential for a large-scale



Indeed, Dynacor's Tumipampa Project is smack dab in the middle of a

northwest-southeast gold and copper mineralized trend that hosts some

gigantic projects. The company's Tumipampa Property is located right in

the middle of some huge mining projects run by such notables as Southern

Copper Peru on the northwest, Meridian Gold to the south and southwest,

and BHP Billiton to the southeast. Buenaventura is located to the

northeast and two Chinese companies hold properties adjacent to

Tumipampa on the east.


Three kinds of gold mineralization have been identified at Tumipampa,

those being two skarn targets near the surface, gold veins, and

disseminated gold associated with breccias that lie between the veins.

Note from the illustration below that the skarns to the northwest favor

gold over copper and those to the southeast, near the Billiton claims,

favor copper over gold.


During the current quarter, management is spending $2.3 million on

exploration on this project, including 4,100 meters of drilling in nine

holes into the skarn where management believes it has the best chance of

outlining something big.


In terms of exploring the gold veins, plans are to excavate an

underground crosscut some 300 meters long, from where underground

drilling can take place. Management plans 2,000 meters of surface

drilling as well in holes, three of which will be drilled into the Manto

Dorado and two into the Rosa Vein.


Management also plans to map and carry out geochemical sampling on the

property as well as sampling a new gold zone discovered by the 2011

geophysical survey.


These Shares Could Pop with News


I spoke with a spokesperson from the company this past week who told me

management was going to be taking their story to a host of institutions

in Toronto. Many of the companies that this story is taken to favor cash

flow gold producers over pure exploration plays. As early as next week

some drill assays could be forthcoming form Tumipampa. Should there be

some really good results forthcoming, this stock could pop big time,

not only because of the new institutions this story is being introduced

to, but also because the float for this company's shares is already

tight. Keeping in mind that there are only 35.8 million shares

outstanding to begin with and that 55% are in the hands of institutions,

that leaves only about a 16.1-million-share float. Major shareholders of

this company are: Trapeze Asset Management (19%), Sprott Asset

Management (11%), Sprott Canadian Equity Fund (6%), Caisse de Depot

(3%), High Ground Private Investors (9%), and HSBC Wealth Management

Group (7%).




This stock has been a favorite of mine over the past couple of years.

Here are some of the reasons:


Management does more than it promises in terms of production, profits,

and cash flows.


Management displays strong moral leadership in terms of the way it

treats Peruvians as well as its own shareholders. That is exemplified by

the high regard Peruvians hold for this company as well as management's

hard work to build a business and fund the company's growth internally

rather than through cheap shares in cozy deals with Canadian investment



Direct operating cash flows are growing with production and should

improve more with efficiencies of additional milling plant starting in

2014. Gross margins are projected to be $240 per ounce of production,

with 50,000 ounces of production projected for this year. True to form

production is ahead of plan and margins are considerably better through

the first six months of this year. Due to favorable factors relating to

the new mill, margins should get better still in 2013 when 68,000 ounces

of gold are projected and in 2014 when Dynacor is expecting to produce

100,000 ounces. Given the performance of the company so far this year,

I'm anticipating an operating cash flow of at least $12.6 million or 40%

of the company's current market cap. Of course that is before taxes,

depreciation, corporate overhead, and exploration, but it provides

significant cash flow from which to grow internally and explore without

shareholder dilution. But to its credit, management keeps its overhead

quite lean.


Tumipampa holds the potential for an elephant-sized discovery. At the

very least, I expect Tumipampa will provide gold ore to the company for

its own production. This would provide ore to Dynacor that it does not

need to buy from other miners for a change. The best outcome would be

for Dynacor to make a major bulk-mineable skarn or disseminated gold

deposit that would be put into production by a major.


The major risk I see for this stock now is really one of a major stock

market decline. But as we have seen post Lehman Brothers, that is a

blessing in disguise for gold producers, because those conditions paved

the way for the real price of gold to rise significantly. It is a

difficult time for gold exploration companies that have to go to the

markets continuously to drill high-risk holes in the ground. But it is

the best of times for companies like Dynacor that can grow internally

and that have the potential for making a major discovery. I would be (in

fact I have personally been) an aggressive buyer of this stock