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Dynasty Metals (DMM.to) and valuation on fundamental analysis

I have, quite rightly, had more mail in the last two weeks from subscribers on Dynasty Mining (DMM.to) than on any other company. This because 1) it has continued to underperform while 2) I continue to highlight it as a top pick. By way of example, here’s what one subscriber wrote on Friday evening:

Hi, as you know I rarely request content for the weekly report, but am curious whether you’ll be talking a lot about Dynasty.

I find the market’s current assessment of DMM.to puzzling, to say the least. And no I never just blindly rely on you are anyone else, taking my own look at the company I also don’t see why it’s valued the way it is, especially relative to other producers.

If you can give it a discussion this Sunday, would appreciate it.Best, XXXXXX

So let’s have a few lines on the company here.

• We’ve run the numbers using a more conservative cash cost level than that used by DMM in its own projections and have the company netting one loonie per share with gold at U$1,000/oz once commercial production is achieved. I know of no 100,000oz gold mine out there that runs at a PE of sub4X, so we can safely assume that the business economics are not the problem here.

• We known that the company enjoys good mineral resources, a long potential mine life and potential upside from either doubling production capacity at Zaruma (for no more than an extra $3m or so in capex) or adding production at its Jerusalem or Dynasty projects.
  

• We know that although late on the ramping timeline (mostly for reasons out of his control), CEO Washer now has a producing gold mine on his hands. There are even photos of the first pour available at the company website for those into gold porn. With the move now towards commercial production well underway it would seem there are only minor teething problems left between DMM and a fully functional mining company.

• Therefore (bar the possibilty that the market is utterly ignorant of the stock’s existence) the only thing that can be holding it back is the political risk. After all, as some of you have already said to me “If this mine were in (choose your own favourite location) the stock would be in double figures by now”. A moot point perhaps, but true enough.

So what is there to say about political risk? Well, let’s start with the fact that I think Dynasty is worth CAD$6.50 (12 month target) and the market says it’s worth CAD$3.74. This clearly means that I think there is less risk in Ecuador for DMM than the market believes. The law is now in place, the region in which Dynasty operates is not one of the “hot zones” and prone to environmental battles, the company has clear approval for its operations from the government, it is happy to comply and be a “responsible mining company” and it doesn’t have to wait for any sort of permit to be delivered by a government now entering its latest round of talks with the indigenous local communities.

In other words, I believe DMM is sorely misunderstood by a market that simply lumps all miners in Ecuador under one sort of political risk. There is no way in the world I’d recommend to you a project in one of the greenfield, virgin jungle areas of Ecuador right now, but the place where DMM.to sits at Zaruma is slap bang in the middle of a valley that is full of mines, full of miners, full of mining families (all of which, it’s worth adding, will benefit from the environmentally responsible practices brought to it by DMM instead of the normal muck and nonsense left behind by the artisanal mining practices of the region) that know what mining is all about, the good and the bad and the indifferent. If you tried make a chunk of the Florida Everglades into a potato growing region you’d have seven types of hell to pay, but set up a field in Idaho and nobody would bat an eyelid. Same thing here.

But in spite of all the evidence that includes a first pour at the plant, all permits in place and approved and, most importantly, a new mining law that is now on the statute and gives a clear rulebook for all concerned, the investment community still sees risk in DMM as an investment. It worries about a windfall tax being set when the tax cannot be set lower than the current spot price and DMM will absolutely rake in cash at current prices. It worries about the rules being changed when the whole point for going through the last two years was to create a stable law that would be recognized by everyone. It worries about an uncertain state tax burden when the government has made it crystal clear that the total burden (everything, from income tax to VAT to worker participation to royalty and all stops in between) will be around the 51% mark, leaving 49% or so for the company. It worries about indigenous protests when there are no protests whatsoever in the place where it operates.

There is little left to say that hasn’t already been said. But the final point is about how your author operates as a fundamental analyst. When I make a valuation call on a company I do not know when the market will make the same valuation discovery as I, but what I do know is that (this point repeated from a previous rant) that I would be a fool to assume that the rest of the world will discover my great discovery about a week after I personally make it. Sometimes the wider realization comes early and sometimes it arrives late. Those people that crunch numbers of mining companies for a living are sure to know that DMM offers great fundamental value right now, but what I can bring to the table (being quite frank and with no false modesty) is a better understanding of Latin America than the rest. That’s what you’re paying me for, in the end. When you fork out that U$25/month you want to get an edge on the game. And that, dear and esteemed subscriber, is exactly what I am convinced I’m offering you when recommending Dynasty as an investment right now. It may revalue next week or it may need the first quarter results in 2010 before others begin to believe. But they will and I’m staking my professional reputation on that call. Sometimes it might grate on me a little that the stock isn’t moving up on my personally preferred timescale but there’s no way in the world that I’m selling, so my day-to-day emotions are of very little consequence. DMM.to is a strong buy at this current price level and will be higher once people catch up to the fact that Ecuador will allow them to do good business. I don’t know when that moment will be, but it’s coming all right.