REPRINTED WITH PERMISSION

October 2013

Dynacor: Producing Profitably with Little Downside and Huge Upside

Dynacor (DNG.TO, C$1.43, 36.3M SO, 38.5M FD, C$51.9M MCap, C$10M Cash, www.dynacorgold. com) BUY FIRST TRANCHEOur basis for speculation in Dynacor is the projected growth of the companys ability to generate robust profits in almost any likely gold price environment. Theres also excellent exploration upsidemore on that in a moment.

Gold Production
The Acari gold processing plant is relatively complicated for a mill with a current max capacity of 240 tonnes per day. This is because Dynacor buys bonanza-grade gold ore from multiple sourcessome provide oxide material, some massive sulfides, some quarts with free gold, and so forth. This goes through a variety of different crushing circuits geared toward the distinct types of ores, but then get blended to provide a feed of steady composition to the ball mills. The latter is key: because the company buys ore from more than 600 vendors, it can maintain a highly consistent blended feed to its mill, which results in excellent recovery, currently averaging over 94%and with the potential to go higher. Its this combination of high grades and high recoveries that results in this still-small plant generating more than $10 million per year in free cash flow.

Dynacors Acari processing plant. Perhaps like the Millennium Falcon in Star Wars, she may not look like much, but she delivers where it counts.
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The operation is no Taj Mahal; it looks much like any of the other Peruvian operations in the region, except for the Canadian flag flying along side that of Peru. Thats probably good camouflage that reduces security concerns, but the actual reason for the lack of fresh paint is that the company has known for some time that it will be moving operations to a new plant as soon as its built, and that makes expenditures on nonessential sustaining capital a luxury. This brings us to the mainspring of value added were betting on: the new plant which has not yet been permitted. Thats the biggest Push on the horizon. Given that the final permit has been delayed, it seems likely that the added value has not been fully priced into the stock, and thats an opportunity. Could the permit be denied? Thats unlikely, with the critical environmental impact assessment having already been approved. Of course, a Latin American bureaucracy is no easy horse to handicap, but in this case, Dynacors environmentally responsible processing facilities actually help the government achieve its goals of bringing the informal miners into compliance with the law. (Remember, unlicensed mills have been and are being shut down, so these miners need Dynacor to process their ore, and Dynacor can only do that if the miners can show that they have registered with the government and submitted to regulation.) So, yes, I expect the permit to be approvedwhich brings us to the question of when. Obviously I have no crystal ball with which to predict that bit of the future, but all the work has been done, all the questions have been answered, and were just waiting on the final paper. That could literally happen tomorrow, or it may take a few weeks, but Ill be surprised if it does not arrive by the end of the year. Whenever it happens, the company already has the cash in hand to build the new plant, so the news should have a strong positive impact on share prices. One more plus I should mention about this side of the story: Dynacors business model combined with the Peruvian government shutdown of illegal mining allows it to pick and choose which suppliers to do business with. The companys reputation for transparency and tough but fair dealing has created a greater supply of exceptionally high-grade ore than it can process. Hence the plan for the new plant. This also means that it can keep raising the cutoff of the grade it will buy. Dynacor has more inventory on hand now than it really needs, and in its case, oversupply results in higher-grade throughput. Very bullish.

Gold Exploration
Our main speculation on Dynacor is as above; the companys Tumipampa exploration project has always been a bonus, in my view. Management was initially focused on elephant hunting, with both skarn-type and disseminated bulk tonnage targets in their sights. I was not terribly impressed with past results, but since the company was working on doubling production or more, the potential for a big discovery was not bad for a freebie, also in the asset portfolio. However, the companys Manto Dorado discovery is changing all of this, with recent results including 36.5 g/t gold over 4.9 meters. Those big targets are still there and will eventually see some serious exploration, but Manto Dorado appears to be a big, thick, high-grade vein that could deliver substantial high-grade tonnage in the near term.

CASEY INTERNATIONAL SPECULATOR OCTOBER 2013

Dynacor has tunneled an adit right through the vein, which outcrops on a mountainside and dips gently downward into the mountain. The tunnel starts below the outcrop, goes straight through the vein underground, and deeper into the mountain beyond, where a drill station has been excavated. This allows the company to drill back into the vein at closer to perpendicular angles, which is important for obtaining better data; it also allows for drilling deeper into the mountain, where other veins that outcrop above Manto Dorado are expected to extend. We dont know how big or consistent any of these are, but its a high-grade system, with at least 300 meters of known strike to Manto Dorado.

Dynacors Manto Dorado, as seen underground. Its already known to be exceptionally high grade and thicknow all we need to know is how big it is.

Drilling is fully funded and under way nowthis is a real test of the potential of these veins. The result currently pending will tell us a lot if the high grade discovered thus far was a flash in the pan or the tip of a big, rich iceberg. An interesting aspect of this story is that the Manto Dorado structure was actually discovered 10 years ago, when the company was bulldozing a road for its bulk tonnage exploration. However, some visible planes in the exposed mineralization led the geo in charge at the time to interpret the structure as dipping parallel to the topography (it was thought to follow the slope of the mountainside, just under the surface). The target was drilled, of course, both above and below the outcrop, and basically came up dry. The chief geo decided the structure was faulted off, and move on to other targets. Dynacors new Chief Geologist, Alonso Snchez, used to work for Peruvian miner Buenaventura on veins similar to what we see at Manto Dorado. When he saw the outcrop, he realized that the mineralized structure dipped into the mountain, not parallel to its surface at all. He asked CEO Jean Martineau for half a million dollars to test his theory, and bang: high-grade hits, including 23.8 g/t Au over 1.2 meters in 2008.

CASEY INTERNATIONAL SPECULATOR OCTOBER 2013

This reminds me of Explorers League honoree Ron Parratts reinterpretation of past work at Long Canyon, which led to his high-grade bulk tonnage discovery therewhich is now a world-class mine being built by Newmont. Alonsos discovery may not end up as large, but it doesnt have to be in order to generate a lot of cash for Dynacor.

A tale of two interpretations. This is a photo I took of a diagram showing the previous geological interpretation of Manto Dorado, complete with imaginary faults that cut off the mineralization, and Alonsos new interpretationnow confirmed by the diamond-bit truth machine.

CASEY INTERNATIONAL SPECULATOR OCTOBER 2013

Remember: the company already has a mill and is building a bigger one. If Manto Dorado averages 15 g/t gold, thats half the grade of what Dynacor processes now, but the cost of mining its own ore would be much lower than what buying high-grade ore costs the company now. Profit margins from mining its own high-grade ore could be twice or three times what it makes toll milling for others now. Eventually, if Manto Dorado is big enough, it would make sense to build a new plant on site, but it would not take much to start with to justify permitting a mining-only operation and trucking the ore to Dynacors existing mill(s). For now, while the drilling continues, the company is going to drift a tunnel along the vein for 60 meters, see if its consistent, and then tunnel upward through the mineralization to surface. This will give us a good understanding of the characteristics of the mineralization in 3D, as well as a significant bulk sample for confirming metallurgy (though, given Dyncors method of blending ores from different sources, I expect excellent recoveries). If the results are positive, they will extend the drift to 300 meters and perhaps beyond, if exploration success justifies it. What this all boils down to is that Tumipampa has a high-grade discovery of unknown size in the process of being defined right now, and still has the potential for the much larger bulk-tonnage discoveries that brought the company here in the first place. The work being done now should give us a firm thumbs up or down on Manto Dorado, and if its up, Dynacor should be able to continue exploring it, to develop it, and eventually put it into production out of free cash flow. This last point is particularly important, because though the company is about 20 years old, it has only 36.3 million shares out (without a rollback). Management has achieved what so many exploration companies dream of but fail to do: develop a modest but significant amount of cash flow to fund exploration and future growth with no dilution required of shareholders. Dynacors tight share structure is a key plus in this story; if or when the company deliverseither exploration success or increased productionthe limited availability of shares can have a magnified effect on upward price movements. That is definitely worth betting onand this story has major Push in the very near term, in the form of important drill results from Tumipampa, and more on the way regarding permitting on the processing front. Either would be great; both could be spectacular. I cant say what the market will do tomorrow, but as I remain bullish on gold in everything but the shortest term, I would want to start building a position in DNG now, if I had not already. There should be time to buy on down days for the market, but Id want to own this stock before the forthcoming news becomes history.

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CASEY INTERNATIONAL SPECULATOR OCTOBER 2013