Dynacor Conference Call (Part 2 of 5)

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Dynacor’s Two 300 tpd ore processing mills at Huanca and Chala, Peru

Stakeholder: Can you comment on the upcoming political change and how it will impact Dynacor?

Dynacor: It’s an election year in Peru. In the first term it was narrowed down to two contenders running for the presidency. The two contenders are Keiko Fujimori and Pedro Pablo Kuczynski. Update: The final results are to be released this week.

Both contenders have said they plan to restart the small-scale mining formalization process. At this time, there are seven steps to the formalization process. However, this process has been stalled at steps three and four. There are hundreds of thousands of miners (estimates 300-400 thousand) in Peru. When they started the formalization process about 70,000 listed. Only 39,000 of these miners made it past the 2nd & 3rd steps. This tells us there are 100’s of thousands of miners that still need to go through the formalization process. The formalization process has been designed in a way that the remaining miners can no longer enter due to the fact the entry deadline was on April 20 2012.

We are very pleased to hear that there is a strong desire from both Fujimori and Kuczynski to reopen the formalization process to the hundreds of thousand miners that didn’t make the cutoff date. We certainly cannot expect to see 100% of these miners make the grade, but consider if there are 50-60% more. It will make a major difference to our operation as a number of these newly formalized miners will make their way to Dynacor’s new Veta Dorada plant.

Current President Humala’s term ends on July 28th. Whoever is in power at this time anticipates launching a new set of formalization rules shortly thereafter. Then we could see a huge opportunity to increase our capacity to 600 then 1200 tpd in the future. This new surplus of small-scale and newly formalized miners would open up much more supply for us. Over the next two years we could see another meaningful increase in our gold production.

Even so with out this surplus of miners reentering the field, we are quite confident that we will be at 300 tpd by the end of the year. As everything we hear from our guys on the ground and in the market is that this is something we should be able to accomplish.

Stakeholder: Can Dynacor increase its capacity by 20% at both the Huanca and Chala plants without a permit?

Dynacor: Yes. Dynacor owns two milling assets with each 300 tpd permits in place. We may without the need of an additional permit increase the capacity at both mills to 360 tpd giving us a total of 720 tpd.

Stakeholder: Could you provide a scenario whereby the Metallex mill at Huanca could play a role in the future production?

Dynacor: What we will do with Huanca soley depends on how many tons we can buy. The Metallex plant at Huanca is an asset that just may surprise the market in the shorter term.   When we expand the Veta Dorada plant at Chala to 450-600 tpd, we will need another expansion permit and of course additional construction. This together with the permit will take another 1.5 years complete.

This is how the Metalex plant at Huanca fits in the shorter term; in the interim, let us say we can buy 450 tpd, we certainly won’t leave it there and just stop at 360 tpd. We will buy it all and immediately set a course to feed the Huanca mill.

Stakeholder: Will a new crew of 200 employees be hired for the Huanca mill?

Dynacor: No as we will do most of the work at the new plant. Purchasing, weighing, assessing grades and crushing ore will first be carried out at Chala. Then we will load ore onto our trucks and deliver it to the Huanca plant. A small crew of approximately 30 employees will be stationed at Huanca to process the crushed ore.

The plan this year calls for us to transfer all the original production from Huanca to Chala and feed it to the maximum capacity. The Huanca plant gives us the flexibility on the upside. We expect to see one or two mills shut down once Chala opens. At the end of the day, if there is only one ore processing company that survives in Peru it will be ours.

Stakeholder: Is there a concern about protesting by the small mills if the big new Veta Dorada plant is the culprit of the others shutting down?

Dynacor: No. The other mill operators do not employ a lot of people, as they are small operations that only run at 20-30% of their capacity. The only other significant ore processor is privately owned Laytaruma. Today, they are the largest operator in the country. However, we will take the number one position over with the opening of Veta Dorada. In other words, the day is quickly coming when Dynacor will be the largest ore processing company in Peru. This, together with our solid reputation and longevity in the business will put us in a very strong position.

We are preparing for a price war as soon as we open up Veta Dorada. We are proven veterans in this game, fought through and prevailed price wars in the past. We know what to expect. As a whole, we do not see any problems because we have a very good reputation and have all the support of our employees and suppliers.

Stakeholder: How long will the price war last?
Stay tuned for part 3 of 5…

Dynacor Conference Call (Part 1 of 5)

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Gold producer unloads ore into crusher at Dynacor’s Metalex plant in Huanca, Peru

May 26, 2016: Notes from call with Dynacor and key stakeholder who first started accumulating shares in 2009. The script from part 1 of the conference call is reprinted below with the permission of the caller.

The agenda for this call was to understand the key issues behind the timing, possible risks and future plans of growth from divisions, the production and exploration.

Stakeholder: It is understood that the Metallex ore processing plant at Huanca, Peru has a permit for 300 tonnes per day (tpd) and yet the Company has not been able to push the production much over 200 tpd. Could you please comment on this?

Dynacor: In 2014, we noticed a drop in Peru’s small-scale gold production. On the Peruvian Ministry of Energy and Mines (MEM) website (http://www.minem.gob.pe) the official numbers confirmed this by reporting a country wide 20% reduction in gold production. We like everyone else were affected by this supply decrease. However, as we will point out our reduction was not nearly as adversely affected and in fact we lead all ore processors on a year over basis.

In 2015, we saw a further 15% reduction in production from the official MEM website numbers.

We have been working through a 35% ore supply cut in the last two years. That’s a big drop. The consequence of this is the grade is higher. It is no different for a small-scale miner to a large-scale miner. When the gold price is high, the miners will mine lower grades, as it is still profitable. However, when the gold price comes down they have no choice and must move onto higher-grade material. This results in an overall production cut due to less amount of ore available.

Prior to 2013, we took in an average grade of 0.80 to 0.90 ounce per tonne (oz/t). From 2014 the average grade significantly increased to 1.0 oz/t. And still, since Oct/Nov 2015 the average grade we are receiving is even higher with an average of 1.20-1.25 oz/t. This is very unusual, but logical because of the gold price. The gold price dropped to US$ 1050 per ounce and therefore an increase in grades was followed with a decrease in volume.

At the old mill in Huanca, we saw the volume peak at the end of 2013 averaging 243 tpd. Today it is under 200 tpd due to the decrease in volume of our own producers.

We are remedying this 35% countrywide production setback by attracting new high-grade producers. On the same website, you can see a list of all the permitted ore processers including their quarterly production numbers. You will note our competition’s production came down much more than ours.

Due to this production setback, we have not been able to crank it up to 250 tpd and then from there to 300 tpd. Having said this, we have been able to somewhat mitigate the situation by bringing in higher-grade ore. As you will note, we have been able to maintain a steady yearly production rate. In the last two years our gold production has been within 1,500 ounces or roughly (2%) even while the country has experienced a (35%) gold production decrease.

Stakeholder: Is it possible to quantify the ore supply situation and how it is that the Company is convinced it can increase supply enough to feed the mill at Chala? Can you provide reassurance of the availability of ore and the quality of ore for the new mill?

Dynacor: Some of our producers sell us all of their ore and yet others sell us part of their production. The producers that do not bring us 100% of their production sell to the other mills because it is much closer to their operation and they will get paid sooner. They heavily rely on this quick payment for their internal cash flow purposes. Now these miners who are selling us part of their ore are telling us that they cannot wait to start selling us all their ore once we open up Chala. They relay to us they are eager to start selling to Dynacor, but they will never travel the distance to Huanca as it is too far from Chala. However, they assure the day we are in Chala they will sell all their ore to us. At this time, we do not have a precise number of how many additional tons, but expect it to be significant as many miners are lining up for our grand opening day. The mining community circle in Peru is tight and every producer is talking about the new Veta Dorada mill opening at Chala. One thing is for sure we are hearing is they will in the very least use our services for a portion of their production.

We are quite confident we are going to be able to substantially increase our production, but we don’t know by how many tons. Our target is to be at 300 tpd by December over that it will be difficult to forecast.

As expected the increase in the gold price to over $US 1200 is sparking interest in the small-scale mining community. Just recently we experienced a new turn of positive events in the market as miners with operations close to the Metallex plant at Huanca are asking us about what we are doing with Huanca as they are looking to restart some old mines due to the increase in the price of gold. This is making things more interesting for the Metallex plant at Huanca. We are starting to see the production increase. There are not many mills operating in this complex business. We know for certain as of today the Canadian public companies that entered the market in the last few years have reduced or stopped buying ore for one reason or another.

As miners are excited of our new Chala operation, we are starting to see some producers lobby in for their position as already in April we signed agreements with two new producer groups. This is a first for us and not common in the ore purchasing business. Due to the formalized process we are starting to see more organized producer groups of these small miners. Approximately 50-60 of these miners has organized themselves into a kind of cooperative. It makes a difference when you’re inside the community and have been serving this network for almost twenty years. We know how it and they work as one of the miners in this group started to sell to us at the beginning of April at rate of 600 ton per month. They produce as much as one of our biggest providers. We are already noticing a difference even at the little old Huanca plant.

Two more new producer group agreements are about to close. However, this group can’t go to Huanca because it is too far away, but they will begin to sell to us as soon as we open the doors at Chala. Everyone is excited about the new Veta Dorada mill at Chala. We cannot say at this time how much more ore we will be taking in, but we can say it is going to be substantial.

The conservative plan calls for less than three months after start up we will be at 300 tpd. We are confident we will be producing more than 300 tpd by the beginning of next year. Currently the old plant at Huanca is in the worst place to operate a mill in all of Peru and now with Chala we will be working in the best location. Huanca is in a remote location and it can take as much as eight hours from the paved highway with a truckload of ore. We can save our producers twenty hours by coming back and forth from their operations near Chala. The Veta Dorada mill at Chala is twenty minutes from downtown and accessible with trailer trucks immediately off the Pan American Highway.

Stakeholder: Are you receiving any other feedback that Dynacor is positioning itself to take a stronghold in the ore-processing marketplace?

Dynacor: Yes we are. We met with another key stakeholder group yesterday and not only did they assure us they are supportive of the Company and are pleased with the direction things are going, but notably they recently spoke to the owner of another mill operator in the Chala sector. They also learned exactly what we are hearing that all the others mills understand that they will soon lose producers to Dynacor. Everyone wants to come to Dynacor’s Veta Dorada plant as over the years we have built a very good and strong reputation within the mining network. We do not and will not stray from our policy of working long term with our producers.

We have thirty employees on the road networking all over the country buying ore. Everyone in the business knows each other and they have lunches/beers together and they talk…it’s a tight community. Our guys are hearing the same thing that the other mill operators don’t know what they are going to do when Dynacor opens Chala because all the ore is going to head there. These are the employees of these other mills not investors or shareholders so they speak quite openly of how they feel.

Stakeholder: Can you comment on the upcoming political change and how it may impact Dynacor’s business?                                                                                                                                            Follow us and stay tuned for part 2 of 5…

 

The Advantage of Channel Sampling

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It is widely known through exploration circles that there is an ongoing debate on whether it is best to explore underground via channel sampling or drill test from the surface. The initial cost differential is arguable when exploring underground. However, when looking at the bigger picture of future mine development, underground works can save the company time and money as it will be utilized for the foundation of the actual mine.

Drill testing is the best method used to determine vein location and structure. When it comes to assessing grade, particularly in common erratic type structures, this is often where it falls short to larger size channel samples. In confirming grades, samples that are twenty five kg/m and above are best in these cases. A surface drill core is only eight kg/m, while underground drill core are smaller nevertheless at three kg/m. Therefore in a nuggety and erratic type vein structure, channel sampling is the best grade control technique for underground vein systems.

New 15 Day Permit Rule Is Law In Peru

 

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Ministry of Energy and Mines in Lima, Peru

1) A compliance license is confirmation from the government that all buildings and structures identified on the new Veta Dorada ore-processing plant in Chala, Peru have all permits in place and met regulations.

As per the new Peruvian Energy Y Minas Normas Legales (Energy and Mines Laws) published March 6, 2015 article #3, sections 3.6,3.7 and 3.8 Simplification to Proceedings in Distribution of Permits Covered by the Regulation of Mining states the following: Upon 100% completion of a construction project, a company may immediately request for inspection of the said property. The supervisor in charge must carry out the inspection and upon meeting all regulations and building according to plan is to deliver the compliance license within fifteen (15) working days of the date on which the request was submitted.

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Ministry of Agriculture and Irrigation in Lima, Peru

2) Upon receipt of the compliance license, a company may immediately apply for a water usage permit to the Minesterio De Agricultura Y Riego (Ministry of Agriculture and Irrigation). As per the new law published on April 29, 2015, article 1 Simplification of Administrative Procedures on Water Authority states the licensing of use of surface and groundwater. A company must submit a copy of the identity of the applicant certifying the legal status and/or powers of the legal representative registered on public record. It is to make payment for inspection and processing fees. The inspector will then carry out the inspection and deliver the water usage permit within fifteen (15) working days on which the application was submitted.

3) Upon receipt of the water usage permit, a company may immediately request for its operations permit. The supervisor in charge, must according to section 3.8 of the Simplification to Proceedings in Distribution of Permits Covered by the Regulation of Mining, grant the operations permit within fifteen (15) working days of receipt of the water usage permit.

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Brand New 300 tpd (102,000 tpy) Mill…Veta Dorada in Chala, Peru

As per the stated law above, one can quickly surmise, Dynacor’s brand new 300 tonne per day (102,000 tonne per year) Veta Dorada ore processing plant located in Chala, Peru should be operating within 45 working days from applying for its compliance license. Notably the new bill was made law after we received our construction permit.

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Documents from Ministry of Energy and Mines/Ministry of Agriculture and Irrigation

Reference: Ministry of Energy and Mines; Ministry of Agriculture and Irrigation
Ministry Images: Google Maps

 

Building Shared Value And Partnerships With Local Communities

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Near the Tumipampa exploration project, Dynacor is demonstrating its ability and earnestness to meet social objectives with its two neighbouring communities, Pampallacta and Pachaconas. The Company is fully integrating these social objectives by pursuing a clear path to sustainable development and corporate responsibility.

Dynacor is making public commitments to engage with these two communities. For example, Chief elder of the Pampallacta community, Juan Fuentes Robles and Dynacor are heading a program that provides workshops centering on educating the community. The program covers the business of manufacturing and retailing of clothing such as sweaters, scarves, gloves and the like. Additionally the Company equips the elementary schools with school bags, computers as well as provides personal and professional development courses to the teachers and students of the community.

At the San Pablo Clinic located in Abancay, a town about 2 hours away from the community, Dynacor began a new campaign promoting dental health whereby 109 persons from the community have already been examined complimentary.

All in all it is good business practice to always respect the rights of the indigenous people living in the communities, but more importantly it is just and intrinsic to the role of a company that sincerely cares about the populace.

Peru’s Political Landscape 2016

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Come April 10th a first round of voting will take place in Latin America’s fastest growing country, Peru. A second round will be necessary if no one candidate is able to pass the 50% needed to claim victory. At this time, polls are signalling to prepare for a second round. After the second round, President Ollanta Humala, a left leaning leader will officially hand over the reigns of this mining powerhouse to the new president on the 28th of July. The field unlike last election is powered by the centre right, however, a left candidate from Cusco is also in the mix.

Who are the candidates running for president?

Keiko Fujimori (32%):  Is the front runner for the last two years. Fujimori, daughter of former President Alberto Fujimori (serving a prison sentence) is centre right. Mr. Fujimori is well known to Peruvians for his victory over the Shining Path guerrilla rebel organization and the hyperinflation extreme poverty period of the 90s. Keiko with a reputation as one to lead with a strong hand (something Peruvians are seeking) is the one to beat in the summer runoff.

Pedro Pablo Kuczynski (14%): Has a narrow lead for second place and if the election was today would be the top contender to take on Keiko Fujimori in the second round. A former Cabinet chief, finance minister and energy and mining minister from the 80s  with President Fernando Belaunde Terry and then again in the early 2000s under President Alejandro Toledo. He has strong ties to the United States, is independently wealthy and on record for promising to bring in $20 billion dollars of foreign investment to the mining industry over the next three years.

Alfredo Barnechea (9%): Is the moderate liberal in the race with a bias to the centre left. He comes with a background in journalism, was the host of many political TV interviews, wrote columns in magazines and a former congressman. He is challenging for second place as the one to break up the pro right duo of Fujimori and Kuczynski.

Veronica Mendoza (9%): Born and raised in Cusco, the ancestral capital of the Incan civilization. She speaks both Spanish and the native Incan language of Quechua. A strong left bias with a mandate to increase government spending by 50%, withdraw from free trade agreements and unearth the state planned economic model of the 80s. A former congresswoman of the current Humala administration who left the party in 2012 when it failed to live up to leftist campaign promises.

Alan Garcia (6%): Former President Garcia held power for two terms. It was in the second term of his administration that brought Peru to economic notability. With a far leaning right bias, Garcia with a focus to improving relations with business owners also was in the right place and time by taking advantage of a strong commodity cycle during the mid 2000s. With a poll reading of 6% he has a lot of ground to gain before April 10th.

Follow us on Twitter (twitter.com/DynacorGold) for election poll updates

References: Peru Reports: (perureports.com/2016-elections-peru/); Telesur (telesurtv.net)

 

PDAC 2016 Unleashes A Signal

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Quite possibly since inception, the Prospectors & Developers Association of Canada (PDAC) has been recognized as the mining industry’s global kingpin. It is the place for industry participants to share corporate war stories with each other, meet-and-greet with investors and generally enjoy the camaraderie amongst colleagues and friends…almost akin to when a professional sports team heads out on a road trip bolstering and bonding its relationships. It’s a long conference lasting four days…which many are calling overkill…especially given the sorry state of attendance on the fourth day.

Still, following a 2015 of catastrophic investor interest in our sector, it’s safe to say that most of us went into PDAC 2016 with bated breath. Clearly, we were not surprised by the low level of company participation (booths beside us and across the aisle were both empty) as witnessed by the core shack immediately adjacent and on the same level as the investors exchange. This is a big deal as in years past this entire section was completely full with resource companies. The good news is that the “fluff” in our industry is finally starting to fall by the wayside and clear way for the best of the best. We’d say it’s long overdue… We are also happy to report that there is definitely a hint of a changing investor sentiment towards our beloved metal…gold…we don’t want to go as far by stating today the bear has finally lost its grip, but comparing to last year’s PDAC, there are certainly telling signs that we are nearing the return of the gold bull.

Buying The Blood in the Street or Battening Down the Hatches —- It is no secret our sector is in dire straits at this time. Given that there are still more negative outlooks and financial reports from the seniors on the way (more writedowns and credit downgrades) q1 earnings season is not going to be pretty. The question many are asking, is it a time for corporate “prevent style defence” or an opportunity to go “full court press offence” and take advantage of low pricing opportunities motivated by fear? Not surprisingly most of the mining seniors at the conference are playing defence…choosing safety first… bandaging war wounds and hunkering down. The giants in our industry are taking quite a beating and planning to weather the storm in 2016. What this tells us is not to expect any major headliner deals anytime soon. For the sake of the mining market, let us hope for these debt heavy behemoths that Goldman is proven incorrect on its nasty 2016 gold price prediction.