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DNG: A Low-Risk, High-Growth Gold Processor

What you need to know:
• Dynacor is entering its next phase of growth as it continues to expand production capacity and move beyond a single asset.
• DNG has a stellar track record over the last decade, highlighting the strength of its business model, its ability to navigate tough jurisdictions, fund growth using cashflow, and returning capital to shareholders.
• DNG has a strong balance sheet with $23M in cash, $51M in working capital, and negligible debt.
• DNG is trading at 4.2x 2024E EBITDA compared to peers at 8.3x.

Dynacor Group Inc. (DNG:TSX) is a dividend-paying Canadian industrial gold ore processor with operations in Peru. The Company is engaged in gold production by processing ore purchased from the ASM (artisanal and small-scale mining) industry and has steadily grown production at a 9% CAGR and operating cashflow at a 13% CAGR over the last 12 years. We believe DNG can sustain and potentially exceed these growth rates going forward as it begins its next phase of growth. We are initiating coverage on Dynacor Group with a BUY rating and target price of C$6.50/share.

Investment Thesis Summary
Proven Track Record & Potential Growth. Dynacor has been operating in Peru for over 27 years, growing production and revenues over the long-term. DNG has grown its ore processed and gold produced at a 9% CAGR since 2011 and as a result, the share price has risen over 640% or 13% annually since listing, significantly outperforming the gold price and GDX. DNG is entering a new phase of expansion with major growth expected in the medium term.

Steady Profitability. DNG has maintained profitability over the past 13 years, evident through the consistent rise in operating income from $6.5M to $22.1M during this period. The Company’s business model emphasizes disciplined spending and prioritizing self-funded growth and as such, we expect that profitability and revenue will continue to trend upwards with substantial growth on the horizon.

Strong Balance Sheet & Capital Structure. DNG has an excellent balance sheet, with 22.5M in cash, $50.8M in working capital, and negligible debt. Its capital structure is tight with no warrants and a decreasing basic share count of just 36.5M, having not raised equity since 2015 and started buying back shares in 2018. 8% of DNG stock is held by management & directors, 13% is held by institutions, and 78% is free float.

Rewarding Shareholders through Dividends & Buybacks. DNG currently pays a 3.4% dividend and has been increasing it over time (~24% CAGR) since announcing its first dividend in 2018. Dynacor has also started buying back stock, purchasing 1.13M shares for $2.9M in 2023.

Significant Discount to Peers. DNG stock has rallied >50% over the last year, yet it only trades at 6.1/4.8x 2024E/2025E OCF and 4.2x/3.3x 2024E/2025E EBITDA. This compares to peers at 8.3x/7.9x EBITDA. We value DNG on 9.0x 2024E OCF, resulting in our $6.50/share target price.