Gold miner which pays good dividends A junior gold miner which pays good dividends – yes it is possible!
Gold Resource Corp. is a bit of a maverick among junior gold miners and has attracted a fair amount of mistrust because of this – but it has to be one of the only Junior miners to pay dividends – and good ones at that.
Author: Lawrence Williams
Posted: Friday , 30 Nov 2012
https://www.mineweb.com/mineweb/content/en/mineweb-junior-mining?oid=164596&sn=Detail
LONDON -
Bill Reid, Chairman and CEO of Gold Resource Corporation, is a gold miner with a difference. He believes strongly in paying out returns to shareholders as quickly as possible after profitability is achieved, and at as high a level as possible. To enable him to do this, the projects his company, co-founded by him along with his brother, David, looks for projects which have to meet some very demanding criteria – namely to be able to produce gold at a very low cost per ounce, pay back capital costs inside a year and be able to get up to a $1 a year dividend. Reid also believes in not diluting shareholder interest by maintaining a low share capital (currently around 53 million shares) without which it wouldn’t be possible to pay the $1 dividend in any case. Not for him the usual junior gold explorer route of seeking large multimillion ounce deposits and then hope for a takeout by a mining major because it is far too large a project for a junior to handle. Both options may have their merits, but the Gold Resource Corp. route is, to an extent, the way small mining companies used to operate in the distant past and should not be dismissed. Indeed shareholders who got in at the start have done extremely well from their investment in the company. As Reid will point out it has already paid out more in dividends to shareholders than its IPO price.
As a firm believer in the future of gold and silver too, Reid has also implemented a shareholder option for receiving dividends in specially minted Gold Resource Corporation “Double Eagle” one ounce .999 fine gold and/or one ounce .999 fine silver rounds.
Reid’s philosophy is not really understood by Wall Street – or any of today’s major financial institutions – who see something undermining in his principles. Horror of horrors he didn’t go to an investment bank for the IPO (it was self-underwritten) or for development capital, he bucks the trend on ore reserve assessments, inasmuch as he is able. Deep down he probably believes that NI 43-101 or JORC compliant reserve assessments are just something designed to tie a modern miner up in more and more red tape and costs. Mining is a risk business and if you believe in a company and its management the risk is probably worth taking. And he has a strong track record. His old company, U.S. Gold., launched six mines in the U.S. before he became so disenchanted with permitting delays and NGO interference he decided to pull out of the U.S.A altogether and sold the company to Rob McEwen where it now resides as a part of McEwen Mining.
The Reids thus set up Gold Resource Corporation in 2006 with an IPO price of $1 a share – its stock has since been as high as $30, although now languishing at $16 after failing to meet targets in H1 2012 due to technical problems at its flagship El Aguila mine, which has generated a spate of class-action lawsuits on the grounds of non-disclosure by management of the onset of these problems. It is also, apparently, one of the most heavily shorted stocks on the NYSE which could push some warning buttons, but this may well be because Wall Street just doesn’t understand small mining. You cannot classify a mining operation in the same way as a general industrial stock.
Gold Resource Corp.’s target for its new mines has been Mexico – and in particular the southern Mexican state of Oaxaca where it has secured a sizeable and dominant land position along a geologically important "North 70 West" structural corridor. The company is building an exciting geologic model around this corridor with numerous epithermal exploration targets including open pits and veins with skarn and/or porphyry potential. Its El Aguila mine is at one end of the 42 mile trend it controls and its exciting El Rey high grade gold prospect at the other end (which could be the company’s next mine), while there are a number of other significant targets in between. Currently negotiations are under way with the local population around El Rey before a mine can be built (with the ore to be trucked to the existing plant). Gold Resource’s relationships with the locals in the immediate vicinity of El Aguila appear to be extremely good and with Oaxaca’s high unemployment rate the prospect for these negotiations at El Rey reaching a satisfactory conclusion would look to be very positive.
But, not everyone is a fan, As we noted in August 2011: Gold Resource has always taken an innovative approach to its gold mining activities, and not one that has always met with outside approval as witness a highly critical article in Barrons in July , which the company has described as a "hatchet job". Gold Resource is a maverick amongst gold miners having brought its El Aguila mine in Mexico into production without producing an SEC-compliant reserve report prior to moving forward. This is in fact the way many gold, and other, miners would have operated before what some might consider excessively protectionist legislation on SEC compliance, which heavily increases the cost of new mine development, started to be put in place to try and protect investors from possible fraud.
We went on to note that: Gold Resource describes itself as a gold producer targeting projects that feature very low operating costs and high returns on capital. The primary focus is on cash flow, with a priority to return a meaningful dividend back to its shareholders. ... Because Gold Resource operates in this manner it does raise some suspicions amongst those who feel, in our view misguidedly, that such a totally different approach to mine development and shareholder rewards has to signify some kind of deep down malpractice and fraud. Holding part of its treasury in gold and silver and the announced aim to ultimately pay in-kind dividends is unlikely to reduce such fears from the doubters.
Since then Gold Resource has continued to pay rising monthly dividends to its shareholders – currently at a level of 6 cents a share per month – or 72 cents a share per year making the dividend yield 4.4% at the current stock price ($16.16). This is a higher yield than any major miner pays - and the company has to be one of the only junior mining sector stocks to pay any kind of dividend at all. For the record it has now paid 29 successive monthly dividends and is well on its way to getting to Reid’s target of paying out a dividend which will come to $1 a year in total. If the technical production problems at the El Aguilar underground mine can be completely dealt with, this target may not be too far off.
Currently Gold Resource Corporation generates good profits from El Aguilar – although is currently paying out more in dividends than it is actually making due to the recent mining difficulties, not a situation that can be continued indefinitely, but perhaps signifies management confidence that the problems are being overcome. Possibly because of the class action suits in New York, Reid won’t be drawn on timelines for regaining full production, reducing dilution or on the El Rey development, or of achieving an earlier 200,000 ounces per year production target. This year’s gold equivalent output looks like being towards the lower end of the stated year’s production target of between 85,000 and 100,000 ounces, reduced down from 100-120,000 ounces earlier and well below the initial 120-140,000 ounce target suggested at the end of 2011.
The production losses during the first 9 months of the year are reckoned by the company to be down to poor grade control, excessive dilution, unexpected water and carbon dioxide gas problems among others. There have been major operating management changes at the mine as a result and, from the recent Q3 figures, things appear gradually to be getting back on track.
Gold Resource Corp (ticker: GORO) remains a speculative investment – but you either believe in the Reid family’s agenda, or you don’t – and their track record suggests perhaps one should. When asked the question of whether the company should be considered one for yield or for capital appreciation at a meeting with investors in London yesterday, Reid said “Both”. If things go right he could well be correct – but in mining nothing is ever certain!