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Doug Casey: International Speculator Update

Doug Casey: International Speculator Update

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A recent research update from Louis James of Doug Casey Research.
A recent research update from Louis James of Doug Casey Research.

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Published by: Dynacor Gold Mines Inc. on Nov 12, 2013
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05/19/2015

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© Copyright Casey Research LLC - Unauthorized Disclosure Prohibited. Use of content subject to terms of use stated on last page.
REPRINTED WITH PERMISSION
October 2013
Dynacor: Producing Profitably with Little Downside and Huge Upside
Dynacor (DNG.TO, C$1.43, 36.3M SO, 38.5M FD, C$51.9M MCap, C$10M Cash, www.dynacorgold.com)BUY FIRST TRANCHE
—Our basis for speculation in Dynacor is the projected growth of the company’s ability to generate robust profits in almost any likely gold price environment. Tere’s also excellent exploration upside—more on that in a moment.
Gold Production
 Te Acari gold processing plant is relatively complicated for a mill with a current max capacity of 240 tonnes per day. Tis is because Dynacor buys bonanza-grade gold ore from multiple sources—some provide oxide material, some massive sulfides, some quarts with free gold, and so forth. Tis goes through a variety of different crushing circuits geared toward the distinct types of ores, but then get blended to provide a feed of steady composition to the ball mills. Te latter is key: because the company buys ore from more than 600 vendors, it can maintain a highly consistent blended feed to its mill, which results in excellent recovery, currently averaging over 94%—and  with the potential to go higher. It’s this combination of high grades and high recoveries that results in this still-small plant generating more than $10 million per year in free cash flow.
Dynacor’s Acari processing plant. Perhaps like the
 Millennium Falcon
 in
Star Wars 
, she may not look like much, but she delivers where it counts.
 
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 Te operation is no aj Mahal; it looks much like any of the other Peruvian operations in the region, except for the Canadian flag flying along side that of Peru. Tat’s probably good camouflage that reduces security concerns, but the actual reason for the lack of fresh paint is that the company has known for some time that it will be moving operations to a new plant as soon as it’s built, and that makes expenditures on nonessential sustaining capital a luxury. Tis brings us to the mainspring of value added we’re betting on: the new plant… which has not yet been permitted. Tat’s the biggest Push on the horizon. Given that the final permit has been delayed, it seems likely that the added value has
not 
 been fully priced into the stock, and that’s an opportunity.Could the permit be denied? Tat’s unlikely, with the critical environmental impact assessment having already been approved. Of course, a Latin American bureaucracy is no easy horse to handicap, but in this case, Dynacor’s environmentally responsible processing facilities actually help the government achieve its goals of bringing the informal miners into compliance with the law. (Remember, unlicensed mills have been and are being shut down, so these miners need Dynacor to process their ore, and Dynacor can only do that if the miners can show that they have registered with the government and submitted to regulation.)So, yes, I expect the permit to be approved—which brings us to the question of when. Obviously I have no crystal ball with which to predict that bit of the future, but all the work has been done, all the questions have been answered, and we’re just waiting on the final paper. Tat could literally happen tomorrow, or it may take a few weeks, but I’ll be surprised if it does not arrive by the end of the year. Whenever it happens, the company already has the cash in hand to build the new plant, so the news should have a strong positive impact on share prices.One more plus I should mention about this side of the story: Dynacor’s business model combined with the Peruvian government shutdown of illegal mining allows it to pick and choose which suppliers to do business  with. Te company’s reputation for transparency and tough but fair dealing has created a greater supply of exceptionally high-grade ore than it can process. Hence the plan for the new plant. Tis also means that it can keep raising the cutoff of the grade it will buy. Dynacor has more inventory on hand now than it really needs, and in its case, oversupply results in higher-grade throughput. Very bullish.
Gold Exploration
Our main speculation on Dynacor is as above; the company’s umipampa exploration project has always been a bonus, in my view. Management was initially focused on elephant hunting, with both skarn-type and disseminated bulk tonnage targets in their sights. I was not terribly impressed with past results, but since the company was working on doubling production or more, the potential for a big discovery was not bad for a freebie, “also in the asset portfolio.”However, the company’s Manto Dorado discovery is changing all of this, with recent results including 36.5 g/t gold over 4.9 meters. Tose big targets are still there and will eventually see some serious exploration, but Manto Dorado appears to be a big, thick, high-grade vein that could deliver substantial high-grade tonnage in the near term.
 
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Dynacor has tunneled an adit right through the vein, which outcrops on a mountainside and dips gently downward into the mountain. Te tunnel starts below the outcrop, goes straight through the vein underground, and deeper into the mountain beyond, where a drill station has been excavated. Tis allows the company to drill back into the vein at closer to perpendicular angles, which is important for obtaining better data; it also allows for drilling deeper into the mountain, where other veins that outcrop above Manto Dorado are expected to extend. We don’t know how big or consistent any of these are, but it’s a high-grade system, with at least 300 meters of known strike to Manto Dorado.
Dynacor’s Manto Dorado, as seen underground. It’s already known to be exceptionally high grade and thick—now all we need to know is how big it is.
Drilling is fully funded and under way now—this is a real test of the potential of these veins. Te result currently pending will tell us a lot if the high grade discovered thus far was a flash in the pan or the tip of a big, rich iceberg. An interesting aspect of this story is that the Manto Dorado structure was actually discovered 10 years ago,  when the company was bulldozing a road for its bulk tonnage exploration. However, some visible planes in the exposed mineralization led the geo in charge at the time to interpret the structure as dipping parallel to the topography (it was thought to follow the slope of the mountainside, just under the surface). Te target  was drilled, of course, both above and below the outcrop, and basically came up dry. Te chief geo decided the structure was faulted off, and move on to other targets.Dynacor’s new Chief Geologist, Alonso Sánchez, used to work for Peruvian miner Buenaventura on veins similar to what we see at Manto Dorado. When he saw the outcrop, he realized that the mineralized structure dipped into the mountain, not parallel to its surface at all. He asked CEO Jean Martineau for half a million dollars to test his theory, and bang: high-grade hits, including 23.8 g/t Au over 1.2 meters in 2008.

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