Published March 28, 2023
Once again, after a pandemic shutdown, the Prospectors and Developers Association of Canada convention was up and running in Toronto. This organization has been in operation for more than 90 years, and many consider the conference to be the leading gathering for the mining community in the world.
This year, Benj had lunch with Allen Palmiere and Alberto Reyes, the chief executive officer and chief operating officer of Gold Resource Corp. GORO-N (current trading price $1.06) respectively. We Contra Guys are very, very familiar with the name, perhaps too much so, as it has been a holding in both of the Contra the Heard Investment Letter portfolios.
Fortunately, the purchase has worked out okay for Ben and Contra writer Philip MacKellar, as they bought prior to Gold Resource’s spinoff of Fortitude, but Benj purchased after the split, taking it on the chin as the purchase price was US$2.66 and the stock now trades at At least until February there was a minor-league dividend along the way, but on the fateful day that it was eliminated, the stock price plunged about 37 per cent. While gold can be lovely, investing in this shiny metal company was anything but a pretty picture.
Gold Resource has been around since 1998, but changed dramatically at the end of 2020 with the Fortitude spinoff. It can easily be argued, and we have, that Fortitude got the best of the assets.
The Fortitude stock price has increased more than 30 per cent since the ejection, and that has been accompanied by a fat dividend, currently near 7.8 per cent. Meanwhile the debt load is exceedingly low and there is cash in the bank.
However, a major reason that we are sticking with Gold Resource is Mr. Palmiere, the CEO.
Besides his calming presence, he has a rich, successful history with more than 35 years in the mining trade. He has worked in numerous countries and regions, including China for 10 years, Central and South America, and Brazil. He was the CEO/chairman of Hudbay Minerals HBM-T, president/CEO of Breakwater Resources and executive chairman at Barplats Investments Ltd., among other organizations. These are all major leaguers.
Mr. Palmiere stressed that he is not a promoter in a field ripe with them. He has a chartered accountant designation and that certainly makes us more confident in the organization. Cash flow is front and centre of his thinking, and in mining often there is not enough weight given to that aspect of operations.
That has prompted him to reel in development plans for some of the company’s mining prospects, particularly the Back Forty in Michigan, where previous owners invested more than US$100-million. Longer-term that might play out, but at this point, it remains unrealistic given financial constraints, so the organization will continue to focus on the Don David Gold project in Oaxaca, Mexico.
The Mexican mine has been the company’s bread and butter, with revenue of about US$144-million last year. Infill drilling is continuing with the reasonable hope that the resource can prove to have additional gusto in the future. The mine life is projected at five to six years, which by regulation does not include any inferred resources. Gold Resource has cash in the bank of US$23.7-million and no debt. Its loss last quarter was US$6.3-million.
Mr. Palmiere is enthusiastic about his team, which he feels is the best he has worked with. In addition, 17 employees followed Mr. Reyes to Gold Resource. That kind of loyalty is not common and could bode well for the enterprise.
Though Ben’s position is relatively small, he is in no rush to add to it, even with the beleaguered stock price. Holding is just fine for the moment although perhaps later in the year he will look to sell to take a tax loss.
His take on Gold Resource might be different if he saw insiders, who own less than 1 per cent of the concern, buying shares. They are not. Mr. Palmiere explained that he has enough invested in the company as this is where his salary comes from, and he has about US$1-million in options.
While that is a bet on the future of the organization, it is different from putting more money on the table. Simply, he states that he does not want to put too much of this egg in the basket. That seems understandable, but still the cynic in us suggests that if he and his fellow management are not willing to buy more at this woebegone price, why should we?
Naturally one of our thoughts is that perhaps a suitor will come knocking at the door and a takeover at a lusty premium might occur. Certainly, the gold sector is rife with them, with Yamana Gold YRI-T currently in play. Alas, it appears that no one is kicking the tires of Gold Resource. That is normal when stocks have taken a licking as potential predators generally stay on the sidelines. Ironically, when values are inflated, they often come calling.
Ultimately Mr. Palmiere states that the key to mining is “management, geology and operations.” Our feeling is that the company has the first and third, but the future depends largely on developing further the second.
Mr. Palmiere came out of retirement to helm this company. Time will tell if this move pays off. Meanwhile, we’ll stick around with our position to see if our initial hope might ultimately transpire. In addition, odds are that next year Benj will again be walking about the aisles of the PDAC convention.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter