Gold producer unloads ore into crusher at Dynacor’s Metalex plant in Huanca, Peru
May 26, 2016: Notes from call with Dynacor and key stakeholder who first started accumulating shares in 2009. The script from part 1 of the conference call is reprinted below with the permission of the caller.
The agenda for this call was to understand the key issues behind the timing, possible risks and future plans of growth from divisions, the production and exploration.
Stakeholder: It is understood that the Metallex ore processing plant at Huanca, Peru has a permit for 300 tonnes per day (tpd) and yet the Company has not been able to push the production much over 200 tpd. Could you please comment on this?
Dynacor: In 2014, we noticed a drop in Peru’s small-scale gold production. On the Peruvian Ministry of Energy and Mines (MEM) website (http://www.minem.gob.pe) the official numbers confirmed this by reporting a country wide 20% reduction in gold production. We like everyone else were affected by this supply decrease. However, as we will point out our reduction was not nearly as adversely affected and in fact we lead all ore processors on a year over basis.
In 2015, we saw a further 15% reduction in production from the official MEM website numbers.
We have been working through a 35% ore supply cut in the last two years. That’s a big drop. The consequence of this is the grade is higher. It is no different for a small-scale miner to a large-scale miner. When the gold price is high, the miners will mine lower grades, as it is still profitable. However, when the gold price comes down they have no choice and must move onto higher-grade material. This results in an overall production cut due to less amount of ore available.
Prior to 2013, we took in an average grade of 0.80 to 0.90 ounce per tonne (oz/t). From 2014 the average grade significantly increased to 1.0 oz/t. And still, since Oct/Nov 2015 the average grade we are receiving is even higher with an average of 1.20-1.25 oz/t. This is very unusual, but logical because of the gold price. The gold price dropped to US$ 1050 per ounce and therefore an increase in grades was followed with a decrease in volume.
At the old mill in Huanca, we saw the volume peak at the end of 2013 averaging 243 tpd. Today it is under 200 tpd due to the decrease in volume of our own producers.
We are remedying this 35% countrywide production setback by attracting new high-grade producers. On the same website, you can see a list of all the permitted ore processers including their quarterly production numbers. You will note our competition’s production came down much more than ours.
Due to this production setback, we have not been able to crank it up to 250 tpd and then from there to 300 tpd. Having said this, we have been able to somewhat mitigate the situation by bringing in higher-grade ore. As you will note, we have been able to maintain a steady yearly production rate. In the last two years our gold production has been within 1,500 ounces or roughly (2%) even while the country has experienced a (35%) gold production decrease.
Stakeholder: Is it possible to quantify the ore supply situation and how it is that the Company is convinced it can increase supply enough to feed the mill at Chala? Can you provide reassurance of the availability of ore and the quality of ore for the new mill?
Dynacor: Some of our producers sell us all of their ore and yet others sell us part of their production. The producers that do not bring us 100% of their production sell to the other mills because it is much closer to their operation and they will get paid sooner. They heavily rely on this quick payment for their internal cash flow purposes. Now these miners who are selling us part of their ore are telling us that they cannot wait to start selling us all their ore once we open up Chala. In addition to our own producers, other miners are informing us that they are fed up with all the other mills as they continue to cheat on grade and on price. They relay to us they are eager to start selling to Dynacor, but they will never travel the distance to Huanca as it is too far from Chala. However, they assure the day we are in Chala they will sell all their ore to us. At this time, we do not have a precise number of how many additional tons, but expect it to be significant as many miners are lining up for our grand opening day. The mining community circle in Peru is tight and every producer is talking about the new Veta Dorada mill opening at Chala. One thing is for sure we are hearing is they will in the very least use our services for a portion of their production.
We are quite confident we are going to be able to substantially increase our production, but we don’t know by how many tons. Our target is to be at 300 tpd by December over that it will be difficult to forecast.
As expected the increase in the gold price to over $US 1200 is sparking interest in the small-scale mining community. Just recently we experienced a new turn of positive events in the market as miners with operations close to the Metallex plant at Huanca are asking us about what we are doing with Huanca as they are looking to restart some old mines due to the increase in the price of gold. This is making things more interesting for the Metallex plant at Huanca. We are starting to see the production increase. There are not many mills operating in this complex business. We know for certain as of today the Canadian public companies that entered the market in the last few years have reduced or stopped buying ore for one reason or another.
As miners are excited of our new Chala operation, we are starting to see some producers lobby in for their position as already in April we signed agreements with two new producer groups. This is a first for us and not common in the ore purchasing business. Due to the formalized process we are starting to see more organized producer groups of these small miners. Approximately 50-60 of these miners has organized themselves into a kind of cooperative. It makes a difference when you’re inside the community and have been serving this network for almost twenty years. We know how it and they work as one of the miners in this group started to sell to us at the beginning of April at rate of 600 ton per month. They produce as much as one of our biggest providers. We are already noticing a difference even at the little old Huanca plant.
Two more new producer group agreements are about to close. However, this group can’t go to Huanca because it is too far away, but they will begin to sell to us as soon as we open the doors at Chala. Everyone is excited about the new Veta Dorada mill at Chala. The other small mill operators fully understand they will not be able to compete with our new larger scale and modernized mill now built in a prime location. We cannot say at this time how much more ore we will be taking in, but we can say it is going to be substantial.
The conservative plan calls for less than three months after start up we will be at 300 tpd. We are confident we will be producing more than 300 tpd by the beginning of next year. Currently the old plant at Huanca is in the worst place to operate a mill in all of Peru and now with Chala we will be working in the best location. Huanca is in a remote location and it can take as much as eight hours from the paved highway with a truckload of ore. We can save our producers twenty hours by coming back and forth from their operations near Chala. The Veta Dorada mill at Chala is twenty minutes from downtown and accessible with trailer trucks immediately off the Pan American Highway.
Stakeholder: Are you receiving any other feedback that Dynacor is positioning itself to take a stronghold in the ore-processing marketplace?
Dynacor: Yes we are. We met with another key stakeholder group yesterday and not only did they assure us they are supportive of the Company and are pleased with the direction things are going, but notably they recently spoke to the owner of another mill operator in the Chala sector. They also learned exactly what we are hearing that all the others mills understand that they will soon lose producers to Dynacor. Everyone wants to come to Dynacor’s Veta Dorada plant as over the years we have built a very good and strong reputation within the mining network. We do not and will not stray from our policy of working long term with our producers.
We have thirty employees on the road networking all over the country buying ore. Everyone in the business knows each other and they have lunches/beers together and they talk…it’s a tight community. Our guys are hearing the same thing that the other mill operators don’t know what they are going to do when Dynacor opens Chala because all the ore is going to head there. These are the employees of these other mills not investors or shareholders so they speak quite openly of how they feel. They just don’t understand how we have been able to keep the old mill operating at Huanca being it is so remote; their conclusion is that the recovery rate must be exceptionally high. This is one of the reasons of course as our recovery rate is so high it enables us to pay our producers more. Still, the other one big reason why we are successful at this business is our countrywide reputation of being consistent, fair and honest with all our miners. This as in any business nurtures loyalty and respectful relations.
Stakeholder: Can you comment on the upcoming political change and how it may impact Dynacor’s business?
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