Do The Math (part 1)

Last week Dynacor Gold Mines Inc. TSX:DNG | OTC:DNGDF received its final operating permit to open the brand new Veta Dorada 300 tpd (tonnes per day) (102,000 tonnes per year) ore processing plant located in Chala, Peru. The opening of this mill significantly improves the small-scale mining service industry. Not only will the Company, its shareholders, its employees, and the government of Peru greatly benefit from this new state of the art facility, but most importantly so will the small scale miners themselves. It’s a classic win win scenario for everybody involved in the Dynacor ore processing business.

Since the announcement, the Company is receiving an influx of queries from the market on how much more profit this new mill will generate in the coming months. So let’s dive in to this exercise by breaking down the numbers and using the Company’s historical performance as a conservative guide. The advantage with Dynacor is the Company boasts 21 consecutive quarters of profit to back it all up. The Company provides a one-of-a-kind transparency tool for shareholders with its quarterly five-year performance review. The report posted on the Company’s corporate website breaks down over fifteen different valuation metrics. (see five-year performance review).

Armed with the five-year performance review as our guide we can forecast the following.

If we start at 300 tpd and use the old mill’s average gold grades (1 oz/t), recoveries (93%) and 340 days of operating as a comparable we can assume the following: Dynacor should produce in the neighborhood of 95,000 ounces per year, this is an increase of at least 40% from previous years. (see press release dated September 2, 2016).

Now here is where it becomes very interesting and indeed quite simple to forecast future profits. Over the last three years, the old mill’s gross profit margin averaged 17% together with a three-year gold price average of US $1229/oz. Given today’s gold price is above US $1300/oz and the Company is on record for stating it expects a surge in profit margins due to plant modernization and economies of scale, we can assume if we use the old mill’s numbers to forecast the new mill’s profits, this model is quite conservative.

Therefore if Dynacor produces 95,000 ounces at even the lower three year gold price average of US $1229/oz it will realize US $117 million in sales. Applying the old mill’s average gross profit margin of 17%, we find that the new mill should generate approximately US $20 million in gross profit. Given the Company’s current share count of 38.4 million we arrive at US $0.53 gross profit per share. Converting this to Canadian dollar at $1.30, it moves to CAN $0.69 per share.

The new Veta Dorada plant was designed and built to facilitate future capacity increases in a stepwise fashion to 360 tpd, 450 tpd and 600 tpd. In the next blog post, we will go a few steps further by breaking these numbers down using 360, 450 and 600 tpd assumptions.


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