The following interview of Gold Resource Corp.’s (GORO) CEO Jason Reid, CEO President & Director was conducted by phone and email on March 26-27. The company is unique in that it pays a monthly dividend in cash or in physical gold or sliver. The shares currently yield about 4% annually. The company has no debt and tens of millions in cash on the balance sheet, covering the current annual dividend by a ratio of 4 to 1. Mr. Reid believes that GORO is a true success story in an otherwise difficult gold & silver market. Please read this informative interview to learn more.
Can you please give readers an overview of Gold Resource Corp. (GORO)?
Gold Resource Corporation “GRC” (Ticker: GORO) is a gold & silver producer targeting projects featuring low costs and high returns on capital. The Company’s primarily focus is on cash flow, with a history of meaningful monthly dividends. The Company’s “Oaxaca Mining Unit” consists of 100% interest in 6 potential high-grade gold & silver properties in the State of Oaxaca, Mexico. The Company established its, “Nevada Mining Unit” exploration campaign in September, 2014.
GRC declared commercial production July 1, 2010 from a shallow, high-grade open pit at its El Aguila project, enabling GRC to reach production & cash flow rapidly, thereby allowing for a tight capital structure for a producer. In March of 2011, GRC announced production from its polymetallic La Arista vein system. The Arista deposit contains high-grade gold, silver, copper, lead and zinc The Arista deposit is open along strike and at depth. The Company targets extensions of this deposit and is exploring its Oaxaca and Nevada Mining Units to increase production over time.
Please describe your current capital structure.
GRC has one of the tightest capital structures of any gold producer. In an industry where 200-500 million shares outstanding is not unusual, GRC has just 54 million. Having a tight capital structure enables GRC to distribute a monthly dividend, increasingly rare in our industry. Our dividend yield, near 4%, equals or exceeds that of the Majors. Our dividend reminds investors that management has fiscal discipline, a shareholder friendly philosophy. Rest assured, management does not issue debt or shares to pay its dividend or for operations. Our capital structure is not happenstance, but a concerted effort from day one.
Let’s get this question out of the way…what would it take for GRC to raise its monthly dividend in 2015?
GRC’s current monthly dividend is $0.01 per share. When gold and silver prices were in a bull market back in 2011 and early 2012 our monthly dividend grew to $0.06 per share. As metal prices are in a bear market, our dividend has pulled back as a function of less cash flow with which to distribute. When metals prices pick back up, cash flow permitting, we want to increase the dividend. Having said that, we make no guarantees regarding the dividend.
We have a track record that has enabled us to distribute over $103 million to our shareholders since commercial production began in July, 2010. Our “IPO” in 2006 was at $1.00 per share and we have returned ~$1.95 per share. We are very proud of this achievement, let alone for a junior company in the mining space. We have taken GRC’s dividend a step beyond other companies by offering shareholders the ability to convert their cash dividend into .999 fine gold and/or .999 fine silver GRC one-ounce rounds and take physical delivery of those rounds.
In reading through transcripts of a number of Gold Resource Corp’s conference calls, there appears to be reasons other than the gold price that have hurt your share price. Things like water issues, CO2 issues, a lawsuit, a management shake-up, missing production targets and higher costs than expected. Are these issues behind the company now?
The mining industry has challenges irrespective of the recent gold and silver price collapse. There are challenges we can expect and plan for and those that we cannot. When dealing with Mother Nature one creates the best business plan one can, assembles the best team and works hard to achieve Company goals in the safest possible work environment for our employees. As an underground miner operating below the water table, we have to deal with groundwater. We have had challenges at times with excess groundwater that slowed our mine development.
Dealing with unexpected water inflows takes more time and money than one might expect, resulting in less production and missed targets. However, we have also had our share of successes along the way. I can assure you that we pay close attention to this issue and have a handle on it. Water will always be a concern at our Arista Mine and additional pump stations are an integral part of our development plans.
We have also experienced CO2 gas issues in some of our deeper development levels. CO2 gas is not out of the ordinary for an underground miner, but does require additional planning. Development slows when installation of additional ventilation, hinders development time and costs are temporarily higher. We try to plan for it, but not every level or area has CO2 gas, so we deal with it as needed. Our costs vary, but we have been in the low cost peer group over the long term. The last two years, we have focused on cost cutting and we have had success. We continue to evaluate additional opportunities to lower costs.
The Company defended itself against a securities class action lawsuit. We are optimistic that we are close to a resolution. The district court ruling was appealed to the 10th Circuit Court of Appeals, where that court upheld the original decision to dismiss the case. We await any decision by the securities class action case to further appeal the ruling. Once those appeal deadlines pass without further action, the securities class action will be terminated.
Do you have a better understanding of the risks facing Gold Resource Corp today?
Yes. That’s a key takeaway. We think we are better positioned to attack and resolve challenges as they arise. Each mine is different and has unique challenges. The shape and grade of the ore body, metallurgy, rock competency, infrastructure, water, gas and personnel. At the beginning a game plan is set to address all these issues, but as with any business that game plan evolves over time when the business plan meets the reality of operations.
For the fourth quarter of 2014, you released preliminary results that indicated Gold Resource Corp. missed production guidance. Please explain what happened.
We had a great 2014 despite a difficult third quarter with lower than targeted production and an on-site managerial change. We bounced back in the fourth quarter and GRC produced record amounts of both gold and silver. The industry, and GRC, reference a precious metal gold equivalent production total which takes the silver we produce, converts that into a dollar value based on market prices, then converts that dollar value back into gold ounces for a combined number of precious metal gold equivalent ounces. It is a quick way to calculate production using a silver to gold ratio.
The equation hurts production totals when metal market prices fall like they did during the third and fourth quarter as the aforementioned ratio worked against the gold equivalent total. That took place during 2014 as we lost several thousand gold equivalent ounces to the metal price drop. Had the metals not fallen we would have reached the low end of our annual production range even with our tough operational third quarter.
How important were the drill results that went out in your January 27th press release? Roughly how much would it cost to bring Switchback into production, and how many years might it take?
The market gives little credit to good news, while severely punishing bad news. The Switchback news is an example of good news ignored. 500 meters from our largest deposit, our producing Arista mine, we discovered multiple high-grade veins at Switchback in what is either an extension of the Arista deposit or its own significant deposit. This could be very important. We are developing a preliminary mine plan for Switchback to get a handle on costs. It’s too early to give a time frame, but we have a history of advancing projects faster than most. If warranted, we plan to advance Switchback in a similar manner. Operating cash and capital permitting, we would like to advance development at Switchback by year end.
After all drilling, exploration, development, maintenance cap-ex….everything, are you free cash flow positive at $1,200/oz gold? (including your base metal credits)
Our all-in sustaining cash cost per ounce was $1,073 for 2014. We had approximately 6,500 ounces of gold concentrate waiting to be processed into dore at year end. Had we been able to sell those ounces, our all-in sustaining costs would have been under $1,000. We remain among the low cost peer group by anyone’s measure, reflected in our profitability for the last three years during the metal prices collapse. Reporting of costs has been difficult for the industry. It has struggled for years to establish uniform cost metrics.
Every mine has unique characteristics which don’t always fit into a uniform cost metric, like the World Gold Council’s all-in sustaining cash paradigm. Cost metrics and cost are very important, but of greater importance is the question does the company make money? I was on a non-deal road show several years back when a fund manager made the following comment regarding low cost producers saying “I have met many low-cost producers that don’t make any money.” That statement stuck with me and I am pleased to be able to say that not only do we make money, but we continue to pay a monthly dividend. That speaks to our potential when metal prices rebound.
With the gold & silver price depressed, is the contribution from lead, copper and zinc more important? Do those base metals alter your thinking of how to proceed?
Yes. We are focusing primarily on margin as opposed to ounces, and that is reflected in our recent proven & probable reserve report as well as in our 2015 mine plan. We applied a $110 per tonne Net Smelter Return “NSR” break even criteria of all metals, precious and base, in the block model for the reserve report this year. Our production goals and production totals will retain a precious metal gold equivalent, while using base metals as by-product credits. What changes is that the NSR approach focuses on exploiting the Arista’s polymetallic (gold, silver, copper, lead and zinc) deposit, as opposed to our past focus where we targeted gold and silver using a precious metal cutoff grade and then processed whatever base metals happened to be present.
The former approach focusing only on mining precious metals was adequate when metal prices were much higher, but during the current declining metals market the NSR approach aims to extract the greatest dollar value of all metals from each tonne mined. During this volatile metal market we are focused primarily on margin, high-quality ounces, as opposed to chasing ounces and leaving behind valuable metals that make money. We care more about making money and less about the number of ounces we produce.
Management is excited about the prospects for Switchback. However, with the dividend at $0.01, is that a signal that there’s not enough cash flow to support efforts at Switchback and cap-ex at the existing mine?
The dividend is payed after project cap-ex, taxes and exploration. We achieved our entire 2013 mill expansion with our cash flow while still distributing a dividend. While we make no guarantees, we target a similar situation with additional development and cap-ex spending at switchback.
Would Switchback represent a second mine, i.e. distinct from your existing mine, thereby de-risking the overall company?
Switchback would most likely be developed by leveraging the existing depth of the Arista mine development. By doing so, we could potentially advance Switchback much faster and at less cost. However, it would likely leverage Arista’s advancement so it would not be entirely distinct.
If Gold Resource Corp. reached a point where additional capital was needed, would you consider utilizing a moderate amount of debt to mitigate the size of a possible equity raise? What about JV’s or Farm-Outs?
We fought tooth and nail to achieve our tight capital structure. Our goal is to continue development using cash flow from operations as we have for many years. If additional capital is warranted, we would consider equity raises or a combination of cash and equity. We are not fans of debt, hence our zero long term debt status. JV’s and farm-outs don’t excite us much. We are open minded to all options and plan to make decisions based on the best interests of our shareholders. If a deal is accretive and makes good business sense we would take a hard look at it.
Are there any misconceptions about Gold Resource Corp. that you would like to address?
There were many misconceptions around GRC going into production and being in production for years without a formal reserve report. We had internal estimates to justify our decisions, but to advance a project based on that drew staunch criticism. Looking back, by doing so we reached production sooner and diluted our shareholders far less. Though criticism and second guessing surrounded this move early on, we now have one of the tightest capital structures to show for it and we can use that to our advantage.
I think many misconceptions are driven from the that fact we are very different in the mining industry and some assume that is a bad thing. We look at mining as a business and are out to make money. We do make money. This is in contrast to peers that rely on continued equity raises and rolling over debt to stay alive. GRC has zero long term debt. What used to be misconception and criticism is turning into a meaningful positive for the Company.