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Y e ar s 1 96 8 -1 9 9 6

Energy & Tech Stocks


(Now in our 33rd Year)

Weekly Hotline Message

November 7, 2014

Stock Pick of the Week/Review:

Dynacor Gold Mines Inc.

Business: Gold production in Peru, using ore
purchasing agreements; also exploration and
development on the Tumipampa Project
Traded TSX:
Initial Recommendation: 8/13/10: US $0.32
Price 11/07/14:
Shares Outstanding:
Market Cap:
$ 49.2 million
EPS 6 Months in 2014:
Gold Resource - Tumipampa
(Historical non 43-101):
606,000 oz.
Progress Rating:
Telephone number:
(514) 393-9000
Web Site:

On Thursday, Nov. 13, Dynacor is scheduled to announce its latest quarterly financial results. Based on
my discussions with the company and observation of its past history, Im expecting them to be quite good
especially compared to the earnings reports of most other gold producers.
Dynacors unique business model is what allows this company to prosper even as the price of gold
declines. Dynacor buys ore from small mom and pop gold miners in Peru and pays them according to the
amount of gold recovered from the ore minus Dynacors milling fee. Dynacor builds in a margin of
approximately $100 per ounce when it buys ore. Helping Dynacor maintain that margin is the fact that it
has the most efficient ore processing mill in Peru, demonstrated by recovery rates in the 94% to 95%
range over many years. The demand for Dynacors services grew even more over the past year as a result
of a government crackdown on illegal milling operations thus reducing competition even more. With
small miners having few options and with the amount of ore mined being significantly greater than the
countrys toll milling capacity, Dynacor is able to not only choose higher grade ores but also ore quality
that ensures higher recovery rates.
You might think that lower gold prices might lead to a cessation of mining operations. But the 250-to-300
small mining operations are family-owned and operated businesses. Those families depend on mining for
their livelihood with the owners in many instances also mining the ore. As such, even with lower gold

PO Box 780555, Maspeth, NY 11378

(718) 457-1426

Nov. 7, 2014

prices, Dynacor doesnt have the capacity to handle all the ore that is offered to it. That is why the
company is planning to ramp up milling capacity to 600 tonnes per day from the current 300 tonnes per
day, hopefully by the end of 2015, after it gets construction permits to build its new Chala mill (see
Given the market conditions favoring Dynacor, one might think new players would come into this space to
offer some competition. Some companies have tried to compete, but none has succeeded thus far in part
because the task of establishing relationships with so many players requires a great deal of time and
patience such as that provided over many years by Dynacors CEO, Jean Martineau.
Jean Martineau, President and CEO, has done a remarkable job in every respect not the least of which
is he has under promised and over delivered although in 2014 he may actually fall short of his 70,000
oz. production guidance for the year. Jean would the last person to make an excuse, but quite frankly he
has a good one so I will make it for him. At the start of the year, Jean could not have been aware that his
Huanca mill would be shut down for most of the first quarter by a Peruvian government that shut down all
milling operations so the government could systematically examine all of the mills in the country to make
sure they were not applying environmentally harmful milling methods. During this time, the government
actually blew up mills that were using illegal and unsafe milling operations. Since Dynacor had always
used up-to-date, environmentally safe milling technology they were permitted to restart their mill toward
the end of the first quarter. But the downtime during the first quarter resulted in a mere 12,000 ounces of
production for the quarter. So there may be a slight shortfall from the yearly 70,000 ounce production
guidance made before the government crackdown program. On the other hand, I have been told it is still
possible Dynacor may still meet its 70,000 oz. guidance for the year if management is able to increase
the Huanca mill from its present 250 tons per day to 300 tons per day.
The companys balance sheet keeps getting stronger. As of June 30th the company had $19.2 million in
working capital. That number will no doubt be stronger following the announcement next Thursday of
still another profitable quarter. Not only will this cash position continue to improve, but with the
expansion from 250 to 300 tons per day at the Huanca mill, profits should expand during 2015 from this
operation and as noted above, could actually start to increase during the current quarter as a result.
The new 300-to-600-ton per day Chala mill will be funded from the companys cash resources. Dynacor
has gone through most of the steps to obtain the necessary permit to start construction of the Chala mill.
Delays have occurred because of the push by the Peruvian government to examine and inspect existing
mills and in many instances blow them up when they were violating Peruvian environmental law. In some
respects this delay is actually working out to the benefit of Dynacor not only by getting rid of
environmentally unsafe competition but also by enabling the company to build up its cash reserves so that
it can fund the entire construction from internal sources. As noted, at 6/30/14, Dynacor had working
capital of 19.2 million. Construction of the mill is expected to cost $10 million of which $2.5 million has
already been sunk into the project.
Once the Chala mill is up and running, Dynacor expects to transfer some or perhaps all future production
to this facility which provides considerable improvement in terms of access to larger trucks to haul ore
from the mines as well as better roads to a more central location. As it is typical of Martineaus operations,
he will likely start small at 300 tonnes per day but he plans to build it up to 600 tonnes per day (102,000 to
204,000 tonnes per annum). The company is awaiting final mill construction approval from the Energy
and Mines Ministry of Peru. Upon receipt of permission to build the actual mill, it will take Dynacor 7 to
PO Box 780555, Maspeth, NY 11378
(718) 457-1426

Nov. 7, 2014

9 months to complete. Permits could come at any time so if they come before the end of this year,
Dynacor could start operations at the new mill toward the end of 2015.
What might a 600-tonne-per-day mill mean in terms of production? Typical of Jean Martineau, he errors
on the conservative side so he is thinking in terms of an average grade of 0.75 oz./ton rather than the 1 oz./
per tonne he is currently processing at the Huanca mill. In that event, he is talking about production of
140,000 ounces per year. In fact, there is no reason to think a higher grade of upward to 1 oz. per tonne
isnt likely to continue, but the under-promising-over-delivering modus operandi of Jean Martineau has
served the company and shareholders well. And since the company grows its business honestly through
cash flow there is no need to hype the stock in order to pick investors pockets by selling them overvalued
Management plans to buy back 1.82 million shares or about 5% of the outstanding stock given the low
price of the shares. The company has only 36,429,487 shares outstanding now which is one reason I have
such a high regard for Jean Martineau. Unlike most Canadian mining companies, Martineau has kept the
share count low by running his company like any responsible business. He has started small and built the
company with internally-generated cash flows. And I might note that unlike many American companies
that are borrowing money to buy back shares, Martineau is doing it with internally-generated cash flow.
Of course, this is in addition to using funds to continue to grow the company, not only by constructing the
Chala mill but also in what may be the most exciting future development, namely the Tumipampa project.
The Tumipampa project should boost profits significantly in coming years. There are two very exciting
business prospects for the company on its Tumipampa project. The most immediate move is toward
establishing a significant high grade gold deposit of its own. The target from some 15 veins identified thus
far is between 2 million and 4 million ounces grading approximately 0.5 oz. gold/ton from a vein system.
There had been an historical resource for this mine which the Spanish had entered centuries ago. But
management is now in the process of drilling and exploring this underground project from existing
underground workings and a maiden 43-101 resource is anticipated by the end of 2015. Again as it is
typical of Martineaus approach, production will no doubt start small with perhaps 40,000 Tumipampa
ounces being produced through the Chala mill. And, possibly as the mining operation grows, a separate
1,000-tonne-per-day mill can be constructed at Chala exclusively for Tumipampas ore so that the ore
processing business of the company can continue on without Tumipampas ore cramping the capacity for
that business.
Of course these are forward looking ideas of management and not yet formalized plans. But this is what
management is thinking and what gives me confidence is the track record of Martineau actually doing
what he says he will do. If and when these ideas are formalized in writing, you can almost take his
promises to the bank. The future of high grade underground mining of Dynacors own ore should start to
come into focus with the maiden resource scheduled for next year.
The bottom line though is that because of the similarities of the Tumipampa Mine with the ongoing
operations at the nearby Orcopampa mine, management believes that at $1,200 gold the margins should be
in the $400/oz. range compared to around $100 from the ore processing business. Depending on the ore
grades, the per-ounce costs at Orcopampa have been in the $450-to-$850 range for their 0.4 oz./ton
underground mine material. That mine has been producing around 270,000 ounces of gold per year.


PO Box 780555, Maspeth, NY 11378
(718) 457-1426

Nov. 7, 2014

A second and potentially even bigger upside potential for Dynacor is with its surface scarn mineralization.
Although this possibility is more distant, its location in the midst of several world-class copper-gold
deposits certainly provides blue sky potential for Dynacors shareholders over the longer term.

Note the location above of the Tumipampa project. It is in the midst of some enormous lower grade bulk
tonnage copper-gold projects and there is every indication that Dynacors Tumipampa project has the
potential to host a major copper-gold deposit as well, though as noted the primary focus for management
is on the high-grade underground gold deposit because Dynacor is equipped to handle a project of that
size. If on the other hand a major bulk mineable open pit copper-gold project emerges at Tumipampa,
management will no doubt seek a major mining company to either sell the project to or engage in some
kind of joint-venture arrangement. While the prospects of a major bulk mineable project may be in the
distant future, note from the illustration above that Tumipampa is surrounded by major world-class
deposits that have been sold with price tags ranging from a low of $460 million for the Haquira and $520
million for Constancia to $6 billion for the Las Bambas sold to Chinese interests.
THE BOTTOM LINE for me when discussing Dynacor is that the company is in a growth mode and its
profit margins are largely protected no matter what the price of gold is. Most of the companies selling the
ore to Dynacor are small mom and pop mines that are used as the source of livelihood for private families.
They will continue to supply Dynacor with ore if the price of gold is as low as $800 or if it is $8,000. This
built-in margin and the ability to choose the ore it processes provides investors with a level of security that
most gold mining companies can not offer. Then, last but not least, the honest business model employed
by Jean Martineau who is himself a major shareholder bodes well for investors because he not only avoids
dilution but in fact has been buying back shares not from borrowed money but from the companys earned


PO Box 780555, Maspeth, NY 11378
(718) 457-1426

Nov. 7, 2014

cash resources. This is a beautiful company and I took advantage of its depressed price to more than
double my holdings this past week. You may want to consider doing the same at these low prices.

J Taylors Gold, Energy & Tech Stocks (JTGETS), is published monthly as a copyright publication of Taylor Hard Money Advisors, Inc. (THMA), Tel.:
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PO Box 780555, Maspeth, NY 11378
(718) 457-1426

Nov. 7, 2014