Valuing Jr Producing Gold Miners, Part 9: Dynasty Metals (DMM.TO), Dealing With Political Risk

This post continues the series on Open Pit Gold miners begun here, continuing here, here, here, here, here, here and here now profiling another gold miner in which I just opened a speculative position. I have broadened the scope of the series to include underground miners.

For what its worth, of the stocks covered so far, I still hold Castle Gold Corp, Semafo, B2Gold (well, Central Sun Mining actually which will be bought by B2Gold) and Metanor Mining. I have been accumulating this piece's company, Dynasty Metals (DMM.TO).

Dynasty Metals is a near-producer gold mining company with a large amount of great rocks located in politically risky Ecuador. With the passage of the new mining legislation, the politics in Ecuador have improved substantially. This explains why I am willing to accept the political risk.

Dynasty has three projects. The Zaruma project is due to start commissioning in March 2009. Together the projects have almost 3 million measured and indicated oz and 6.46 million M&I&I oz. As such, it is bigger than most Jr producers profiled in this series. 

Zaruma is a high-grade (14 g/tonne) underground mine that is expected to produce, initially, 100K oz/year. The processing plant has the capacity to support increased production to 250K oz/year with minimal capital expense. The 100K oz/year number is used for comparison purposes. This provides a 10 year mine life using the M&I ore and a 20 year mine life using M&I&I. Inca Kola News' Otto Rock estimates as cash of of $280 /oz. I'm going with $300 / oz. Still it is a low-cost producer.

The remaining two project look very attractive also with high-grade ore. There are tonnes of exploration upside for all three these projects.

As far as political risk is concerned, the passage of the mining law opens the way for Dynasty profitably getting into production. There is still risk as there are windfall profit tax provisions whose impact on Dynasty is unclear at this time. I got lucky and jumped out of Oceana right at its near-term top.

Here's my qualitative summary of the Dynasty situation:

• Con - Ecuador political risk. Of course, this cuts both ways in that further improvement would lead to an increased valuation and takeover prospects for Dynasty.
• Pro - Very near-term production.
• Pro - Very high-grade rocks leading to low cash-cost production.
• Pro - Excellent production increase opportunities with minimal capital expense.
• Pro - Two excellent additional projects that are ready for feasibility studies. These allow for longer term growth and make Dynasty Metals a mining company that can "grow up" to mid-tier status (or be a takeover target). 
• Pro - Excellent exploration upside for the existing projects.

For now, the pros outweigh the cons, especially given that I have little other political risk in my holdings. The thing that pushed me to dump my Oceana Gold for Dynasty Metals was the cash cost. I expected, correctly, that the recent gold price weakness would impact Oceana, with its high cash cost and debt, more than other gold producers and so switched to the low-cast cost Dynasty Metals.

The table below shows that at 100K oz/year, Dynasty Metals is competitive on a price to annual oz and price to operating cash flow basis. If they expand beyond 100K oz/year in the 2010 time frame then Dynasty becomes superior as far as these metrics are concerned. Dynasty is superior as far as price / oz in the ground is concerned. It also has a low cash-cost which reduces gold price risk.

The daily chart (below) shows that Dynasty Metals has already enjoyed a five-bagger off its November lows. This is a case where having a good understanding of Latin America politics can provide a real investing edge. Just one more reason to follow Inca Kola News. I did not enjoy that jump. The chart shows that Dynasty is at the lower end of a steeply rising channel and the fibonacci numbers indicate that it is targeting the previous high of $5.71 which, if hit, will be around the middle of the rising channel. 

The weekly chart (below) shows that Dynasty has more than a double to go to reach its earlier highs and that it is consolidating around the first fibonacci number.

The next catalyst for Dynasty is the start of plant commissioning scheduled for the end of March 2009. Dynasty recently did a private placement and is cashed up to go into production. I expect I'll hold my Dynasty position until either my macro view on Gold changes or at least until the mine has had a couple of good quarters of production.

Of course, everyone should do their own due-diligence and make their own investment decisions. All of the above material comes from my own amateurish reading of the company websites and related financial documents (plus Otto Rock's No BS report, only $10). As you know, I am a software engineer, not a financial advisor.

MontyHigh, www.worldofwallstreet.us

Comments

[MontyHigh]

I decided a while back to dump my silver miners. This was for a couple of reasons:
(a) I just didn't buy the "silver is scarcer than gold and is going to the moon" arguments of silver pumpers. The fact is that a decent silver underground mine ore grade (of 300 g/tonne) is about 50 to 1 the ore grade of a decent underground gold mine (6 g/tonne).
(b) I couldn't find any silver miners that were set to flat out make a bunch of money at current silver prices. I am a value investor at heart. I want companies where all they have to do is execute with commodity prices staying stable to make a tonne of money (while I have a bullish outlook on the commodity fundamentals). I've found this with Jr gold miners, but not with silver.

I should probably turn this comment into an article.

MontyHigh

[BMinnick]

Doug, If you buy silver stocks, have you considered Minco Silver? 321gold put me on to it.
4 ounces of silver per $1.00 share coming on line in 2 years. China mine with low costs and great management with good connections. Solid finances and few outstanding shares. Wild card of just foreclosing on upgraded Sunshine Mine. Sunshine has over 200 Million ounces of silver and only needs to be dewatered further to return to producing 4-5 million ounces a year. Sunshine is in court a battle between SNS Silver and Minco. Minco seems to be in the better legal position.
Either way without Sunshine Minco seems to be a homerun.
Thanks for the tip on Dynasty Metals. I bought some today, and will continue to load up next week.

[Gold Stock Strategist]

Doug, you are doing a fantastic job analyzing junior gold producers with this series on open pit miners that is expanding to other companies. Keep up the great work! Best.