As part of my overall thesis that 2018 would be an up year for commodities and resource markets I have begun looking at gold mining companies as a way to take advantage of what I expect to be an increasing gold price.
Stealth Gold Bull Market
You will note that the gold price made an all-time high of $1900 per ounce back in the summer of 2011. Subsequent to that all time high the gold price has been falling as it and most other commodities were in a severe bear market.
It can be seen from the chart that the price of gold continued falling until the beginning of 2016. The gold price than moved higher during the course of 2016 and was up again last year. It is apparent from the slope of the chart, since the beginning of 2016, that gold is an uptrend.
My thesis for this year is that commodities and resource markets are going to rally as money rotates into these late cycle plays. We are seeing this across the whole commodity complex.
What I find interesting is that nobody is talking about gold or gold mining stocks. I suspect this is mostly because people’s attention, interest, and money is being diverted to bitcoin and other crypto currencies. This can be corroborated by looking at US mint sales of gold coins. In 2016 the mint sold 817,500 1 ounce American Eagles. In 2017 the number was 228,500 ounces! This after two years of increasing gold prices.
In my 2018 forecast I made the statement that I thought the crypto currency mania would burst this year. In fact, after making a high around $19,000 in December of last year the price has pulled back to under $12,000 as of the writing of this article.
My intention is not to get into a bitcoin discussion except to say that if the price continues to drop and the bubble deflates I think that is good for gold. Most the hysteria regarding crypto currencies has been in the US, Korea, Japan, and in China.
Gold demand in traditional buying countries like India, China, and Russia has continued unabated. It is my view that the central bank largesse of the last twenty years is now entering into its terminal phase.
Everthing Bubble Is Going To Pop
We are currently in the “everything bubble” where everything is going up at the same time. Nevertheless, storm clouds are gathering as the consequences of printing trillions and trillions of currency units begins to be felt.
It is because of this that I think gold has been in a silent bull market the last two years. With the stock market at all-time highs and exhibiting its own mania characteristics it is my view that positioning in gold will offer upside as it normally does well in times of turmoil and uncertainty. I believe we are in a blowoff top in the stock market and that risk will soon become a word investors will be getting acquainted with again.
A Company For All Types Of Gold Markets
It is with these thoughts that I have been slowly dipping my feet into some select gold stocks. One company that I have followed in the past and recently bought is a company called Dynacor Gold Mines (DNG.T). The company is based in Montreal and its operations are in Peru.
This company has a unique business that gives upside potential while limiting the downside in my view. Dynacor does not actually mine any gold. Instead the company owns a processing facility and purchases feedstock ore from local “artisanal miners” which it processes and sells. Here is a video that explains the operation.
The government of Peru wants to encourage the development of mining but one of the problems that occurred among these small artisanal miners was the use of mercury by these miners to separate the gold they produced from associated sands.
Because mercury is a poison and is not good for the environment if released the government mandated that artisanal miners must register with the government and use approved ore processors to sell their ore.
Dynacorp is one of the government approved processors for this type of small mining. No operational mining risk for Dynacorp just continue to do routine milling and processing. A really dull yet nice cashflow business. The company has been in business for a while but a couple of recent news items rekindled my interest in the company.
The first news item, besides the rising gold price, is the fact that the company last year opened a new ore processing facility that is in a better location and is easier for people to get to. In fact, the facility is right off the Pan American Highway. If you watch the video the old facility is up some donkey path with huge dropffs on one side. Not good or efficient.
The new facility was constructed in a way that allows for easy expansion at relatively little cost if the demand for its services increases. If the gold price continues to increase, as I expect, than it seems the company would be in a position to expand its processing facility. Below is the forecast production which Dynacor is forecasting over the next several years.
The other factor that impressed me is the fact that Dynacor recently retired all of of it’s debt.
“Dynacor is pleased to announce the Corporation is now debt free. The final payments, on its long-term senior secured credit facilities, amounting to $1.9 million were done in the last week of December 2017.
During the last five (5) months of 2017, Dynacor has made aggregate payments of $6.3 million due to the robust free cash flow generated by its gold processing operations. Cash flow generated in the third quarter ended September 30, 2017, was $0.07 per share which is equivalent to an annualized rate of $0.28 per share.
The principal on its long-term debt was only due in January of 2019. Dynacor has by paying off its debt early considerably reduced its financial burden. During the last 12 months, the Corporation paid $ 0.7 million in interest and financial fees relating to its long-term debt.
Leonard Teoli, Dynacor’s Vice President and CFO stated, “I am very pleased to be able to report that Dynacor’s cash flow is once again steadily growing and has put us in the enviable position to repay our debt well ahead of schedule. Dynacor is now debt free and has a very strong financial base to develop our company in 2018.”
I like debt free companies, especially in the resource extraction industry, as debt is the killer for these outfits. I think the reason the company did this is because it intends to begin paying a dividend this year. Instead of paying interest on debt capital will be returned to shareholders.
The only knock that I have on this company is that they continue to pour funds into their various exploration properties. I would rather have the management focus on what they are good at which is processing ore profitably. In my view they should either bring in a partner and keep a carried interest, spin them off, or sell them.
Nevertheless, the properties do represent some upside optionality and in a rising gold market could end up panning out, pun intended.
I think Dynacorp will see increasing cashflow in this rising gold market and if the price of gold increases as I expect than decent upside will also be achieved as they expand production. Expect a dividend to be initiated in 2018 and for it to grow over time as cashflow increases.
It might be boring, but boring makes money.