It's been a while since I've written something. Part of that is because there haven't been many large changes in my portfolio recently, and it feels odd sometimes writing about something small and incremental. More recently, however, I've been in the mood, so I figured, why not?
This isn't the first time I've written about Dynacor Group (TSX: DNG / DNG.TO). It actually made an appearance back in my brief, very first blog post (prior blog).
The thesis didn't play out exactly as expected, but it worked out more often than not. Last time, I outlined how risk seemed understated by the stock price—how you were buying a cheap operating business with significant unpriced potential. In many ways, we're in the same place today, albeit for a different reason. When I first wrote about this, I think the price was in the high $1.80 something—I don't remember the exact cents off the top of my head. Today, it's closer to $6.00. The valuation is similar, but now there is a much more visible and straightforward trajectory to moving substantially higher than when I first covered it. That is why I have recently been adding to my position.
The Brief
For those who may not be familiar with the name, Dynacor is a Peru-based gold milling company. They are not a miner; they toll-mill ore for artisanal, small-scale miners. More recently, they've taken steps to enter multiple new markets, with construction and ramp-ups underway at two new plants.
One of the challenges with evaluating Dynacor is that their earnings fluctuate not only with seasonality and operational performance, but also with gold prices and the grade of ore received from customers. This means numbers can swing around quite a bit. Even if we assume flat grades and flat operational performance, the price of gold still makes a noticeable impact.
And that brings us to the first problem: I'm not particularly bullish on gold at the moment. I think there is still some speculative excess in the price of gold and neighboring precious metals like silver. Sorry guys—it's just my honest opinion! So, I am bullish on a gold processing company while being cautious on gold itself—an interesting predicament, because part of me expects gold prices to fall, though I don't know by how much.
The reason I remain bullish on the company despite my lack of bullishness on the metal is simple: I believe the company's volume and earnings growth will significantly outpace any potential decline in the commodity. (Okay, I just got a little PTSD saying that phrase out loud!)
Operational Breakdown & Pipeline
Let's get into some numbers. For context, their current operating capacity in Peru at their primary plant (Veta Dorada) is 500 tonnes per day (tpd).
Plant #2 (Pilot Plant): They have a second pilot plant currently online, though capacity is minimal. Over time, they hope to expand this into a 300+ tpd plant as demand requires. The plants are modular, and incremental Capex is very modest—especially relative to their operating cash flow. The main hurdle is establishing the ore buying pool and testing local geology in a new region. My hope is that by mid-2027, management will have seen enough data to make a formal decision to expand this into a full-scale 300 tpd operating facility.
Plant #3 (Acquisition & Retrofit): The third plant is currently being retrofitted and represents the most imminent catalyst. Dynacor purchased a permitted, fully constructed plant that they intend to operate similarly to Veta Dorada. This site is permitted for up to 1,500 tpd. Management expects to reach 300 tpd by late 2027 and 500 tpd by late 2028. That's the goal, at least.
If both timelines proceed on track, you could have a situation where the next two plants ramp up production and earnings in a cozy, orderly sequence. If work progresses on subsequent plans over the next 18 months, Dynacor could have four operating plants by 2030—though let's crawl before we walk!
Catalysts & Valuation Dynamics
Looking at shorter-term catalysts, the retrofitted plant is targeted to come online toward the end of this year. If we're being honest, I'm expecting it to be at least 3 months delayed. Still, the ramp-up timeline and the resulting boost to figures make this plant a crucial talking point for the investment outlook today.
If successful, total production could effectively double over the next 24 to 30 months. (Note: Over that window, the hope is that management also establishes the framework for further long-term expansion).
While I'm not crazy about the terms with which capital was raised to fully pay for this plant... the key takeaway is that the plant is fully paid for.
I don't believe the current share price or earnings multiple reflects any real market belief that Dynacor will succeed in doubling its capacity and earnings. That creates an interesting setup: if management proves successful here, Dynacor transitions from a "one-trick pony" to a company that has proven its model can be replicated. Once you do it twice, the market starts asking why you can't do it again and again and again—which is explicitly management's target goal.
The bull case is simple: Today, you are paying for 1x operating base. If they duplicate their model:
However, growth won't be as simple as building a plant and turning on the switch. Establishing trusted purchasing networks with local artisanal miners takes time in each new jurisdiction.
Operating Leverage
A small tidbit of the thesis that could play out (but always seems to disappoint) is operating leverage. As Dynacor expands from one plant to several, corporate listing fees and overhead operating costs are spread over a larger revenue base, potentially lifting operating margins overall. In theory, 1+1 >2.
The Numbers
A new plant generally requires around USD $25M in Capex and roughly USD $8M in working capital.
Compared to recent operating cash flow, this isn't too steep. At higher gold prices, cash-on-cash returns and Return on Invested Capital (ROIC) are strong enough that cash flow won't be the bottleneck for expansion. With Plant #3 fully funded, future free cash flow can directly fund Plants #4 and #5.
Recent Cash Flow Trend
Earnings Per Share vs. Gold Price
Gold prices obviously weigh heavily on quarterly earnings. If I were optimistic or bullish on gold, I'd suggest their single plant could generate close to CAD $1.00 in EPS annually. Being more conservative, CAD $0.80 feels like a reasonable baseline. If gold drops significantly, that estimate could look high. Either way, we are looking at an implied valuation range of 7x to 10x earnings.
Unlike traditional gold miners, Dynacor's earnings track gold prices more linearly rather than with extreme operating leverage. Their percentage margins tend to move inversely to gold prices, smoothing out what would otherwise be extreme volatility. On the other hand, continuous plant optimization over the years has improved gold recovery rates, supporting underlying margins.
Processing History (Veta Dorada)
Throughput expanded steadily over the last five years from 300 tpd to 500 tpd, though capacity utilization leveled off recently:
As throughput plateaued, the stock multiple contracted—a standard reaction for an industrial-style operator when growth maxes out. Conversely, as new capacity comes online, multiple expansion should follow.
Capital Allocation & Balance Sheet Adjustments
For the first time in several years, management chose not to raise the dividend this year due to significant growth Capex. The timing is interesting because gold prices took off over the last year, providing useful cash flow support for these initiatives. As relative Capex requirements decline as a percentage of total operational size (expanding capacity by 25%–50% per project rather than doubling it), free cash flow generation should accelerate sharply.
If management resumes its historical capital return policies, we could see meaningful dividend growth and buybacks. (This dividend potential is my excuse for dollar-cost averaging into Dynacor within my dividend account!)
Other Considerations: Risks, Governance & Hidden Value
Peruvian Tax Dispute (Negative): Dynacor is currently involved in a court dispute with the Peruvian tax authority over potential back taxes. The company holds a significant cash reserve on the balance sheet as a contingency. Resolution could easily take years.
Exploration Assets (Free Option): Dynacor holds legacy exploration properties (e.g., Tumipampa). While management has neither sold them (as they probably should) nor aggressively explored them (as they probably shouldn't), there is still potential to extract value in the future if they choose to sell. Given that they didn't sell during recent high gold prices, the exact plan remains unclear, but it remains a prospective free option.
I should mention for number addicts like myself: both items act as drains on what would otherwise be a higher Return on Equity (ROE) and Return on Invested Capital (ROIC).
Governance & Capital Allocation: Over the past few years, there has been an activist battle with management. The activist brought forward relevant points alongside other issues I'm not convinced are problems. Operationally, execution at the plant level has been solid where peers have struggled, but execution scaling beyond a single plant gets iffier. For example, they first announced the Senegal expansion in mid-2019, it disappeared for years, and now 7 years later it is finally showing up.
Additionally, investor communication has been frustratingly vague at times—updates that say very little without providing the firm multi-year forward guidance needed for a meaningful re-rate. As I hinted at earlier, I hated the capital raise used to finance the Ecuador acquisition. Dynacor had cash on the balance sheet and strong free cash flow, yet raised equity at painfully low EV/EBITDA and P/E multiples, leading to market distrust in capital allocation.
More recently, management suggested future expansions will be financed via debt and free cash flow rather than equity issuances. They still favor an overly conservative balance sheet sitting on large cash reserves rather than an operating line of credit, which could easily lift ROE.
Adjusted ROE Breakdown
Reported Baseline ROE: ~15.8%
Excluding Exploration Assets: ~18.3%
Excluding Cash Provisioning: ~21.0%
Pure Operating Core (Ex-Exploration & Ex-Cash): 25.7%
Bullish Scenario Run-Rates
Assuming $4,000+ gold prices and optimized plant operations (Essentially the most recent quarters annualized):
Part of my personal cautiousness on gold comes from seeing these ridiculously good numbers—not just for Dynacor, but for many gold miners putting up insane figures at $4,000+ gold. The key takeaway is that Dynacor doesn't actually need $4,000 gold to post strong performance.
Keep in mind, these calculations still include the balance sheet costs for plants currently under construction. Furthermore, because Dynacor operates with a net-cash balance sheet, introducing 1.0x to 1.5x turns of debt could boost ROE by an additional 200 to 450 basis points.
Conclusion
In summary, the coming 12 to 18 months mark a pivotal transition. If Dynacor proves it can build and operate multiple facilities simultaneously, the stock could experience a reflexivity moment: moving from zero growth priced into the valuation to pricing in a repeatable, multi-plant growth model.
Because the upcoming expansion represents a potential doubling of production, the risk/reward profile remains asymmetrical. I continue to add to this position as a core portfolio holding given the high torque upside potential.
Thank you for reading any or all of this! I hope you get some value out of it.
Disclaimer: At the time of writing, the author holds a long position in Dynacor Group Inc. (TSX: DNG / DNG.TO). This article represents personal opinions and analysis for informational purposes only, and should not be taken as financial or investment advice. Please conduct your own due diligence before making investment decisions.
No comments:
Post a Comment