The company currently operates primarily in Peru where it purchases its ore from government-registered producers in various regions of the country and then processes it at its wholly owned milling facility to produce gold and silver (primarily gold), which is sold internationally at market prices.
Dynacor, with a market cap of $CAD103, has a very simple business model — profitability largely depends on two factors:
* A margin between the price of ore purchased and the market price of gold — the higher the margin the better
* Throughput (the amount of ore processed) — the higher throughput the better
A higher gold pricing environment encourages more small-scale mining which grows Dynacor’s ore supply and creates profitable growth. Fluctuations in terms of margins in the quarter can occur if the price of gold is trending up (positive for margins) or trending down (negative for margins) — but this tends to average out with the fluctuations in gold prices through a given year.
In a sector (gold) that is ripe with a high degree of variability in terms of cash flow, owing to its unique model, the company boasts 11 consecutive years of profitability. Since its dividend was introduced in 2018 the company has aggressively grown its dividend — every year more than doubling since 2019.
The payout ratio remains conservative at ~ 25% and in late December the company once again increased its dividend by 20% to $0.12 annually for a current yield of 4.5%.
The company also holds a very strong balance sheet with $31.04 million (CAD$42.17 million) or $1.09 per share (net cash is 42% of market cap) with no debt. The strong cash position should allow Dynacor to self-fund growth plans with no dilution.
Dynacor’s growth & diversification strategy includes building or acquiring at least 3 additional ore processing plants operating around the world. The company’s existing plant which was just expanded had annualized sales of ~US$200 million in 2021.
An additional plant is planned in northern Peru where higher grades are available and Dynacor presently receives little ore from this region. The news could come in this regard in the first 3 months of 2023. Management also has a joint venture in West Africa (Senegal) and in another South American country, the company has one plant in the due diligence phase.
Geopolitical risk is high and Dynacor is best suited for investors with a higher tolerance for risk. Fundamentally, the stock trades at 5.98 times EPS and ~3.50 ex-cash ($1.09 in cash per share) which should more than compensate for the risk. By applying an EPS multiple of 7 times our 2023 earnings and adding back year-end cash fair value is in the range of $4.25.