Forward Planning Leads to Production Success,Wed, 10/21/2015 - 08:15
The evolution of Gold Resource Corporation (NYSE:GORO) is one that many mining juniors might wish to emulate. Its success in Oaxaca saw it begin as an exploration stage company before rapidly moving to the development stage and finally becoming a dividend-paying gold and silver producer. The company’s CEO, President, and Director, Jason Reid, analyses the critical factors that allowed this success. “There are a few critical factors that increase the odds of success, including operating in a mining friendly jurisdiction, high-grade potential, experienced people, the ability to raise capital, and a bit of luck in exploration drill programs. Furthermore, timing is everything and juniors today have the added pressure of falling metal prices,” he explains. GORO was very fortunate to have moved through its exploration and development cycles into production in a rising metal price environment. Furthermore, GORO’s business plan revolved around focusing on production as early as possible. Without that focus, Reid believes the company might be in the same tight spot as many juniors that are still trying to reach production against the market’s current headwinds. However, this focus on production was no headlong rush. After all, the profile investors look for in metal equities has evolved. Reid remembers a time when companies sought growth for its own’s sake while touting the largest number of ounces, even if that meant lowering the cutoff grade and without worrying whether those ounces were economic or would ever be produced. “Investors nowadays are demanding a more sustainable business plan from miners. Shareholders want to shift the focus towards profitability, shareholder value, return on capital, and dividends. We welcome these new investor demands as GORO has focused on these very aspects from day one,” says Reid.
One might expect the market to have hailed GORO’s prescience, but ironically the company sustained heavy criticism when it held its IPO in 2006 for operating outside the norm. Those critics have been quieted since GORO began production in July 2010, as it has now returned over US$101 million to its shareholders in consecutive monthly dividends. Such success was also rooted in a measured approach to financing. A swift advance to production allowed GORO to avoid shareholder dilution by reaching cashflow sooner. Reid compares this to a typical route to production, which takes far longer with much larger cash burns and capital expenditures, often leading to huge numbers of shares outstanding. “We raised almost all of our funding without bank assistance to stay in control of our capital structure and further limit shareholder dilution. The flipside of that coin is we have very little analyst coverage in the financial world as banks rarely cover companies they are not making money from. We have been able to leverage our margin with our tight capital structure to pay a dividend that stands shoulder to shoulder with many majors in the industry,” he states.
In Oaxaca, the company found a mineralized structural corridor of 55km. Drilling turned up high-grade gold and silver at each end and near the middle. “This makes GORO one of the luckiest companies in the mining space. Highgrade epithermal systems are very sought after and we feel we have just scratched the surface on our Oaxaca mining unit’s potential. We expect to be here a very long time with the goal of having numerous deposits feed ore to our strategically located mill,” explains Reid. The company currently has six properties along the trend, with Arista standing out due to its high-grade gold. While it is not uncommon in Mexico to see deposits with multiple kilos of silver with lead and zinc, it is far rarer to find the same minerals accompanied with a high-grade gold phase as found at Arista. However, Arista benefits from another characteristic, making it all the more unique. Arista is one of the youngest epithermal systems in Mexico at approximately 10-15 million years old, whereas most such systems in northern Mexico are above 40 million years old. This was important for GORO as the mineralized deposit at Arista lies about 100m below the surface of the earth. Had the system been far older, millions of years of erosion might have exposed Arista at the surface. This means it would probably have been discovered and mined by Spaniards or Mexicans long ago. “The fact that our Arista deposit is just below the surface also means we have the entire deposit as it has not been eroded away. We feel our geologic knowledge of this area means we stand a good chance of finding other deposits on our properties. Our recent discovery of the high-grade Switchback mineralization, northeast of Arista, is an example of that.” This position sees GORO confident that a substantial number of ounces can be added at Arista, while a preliminary mine plan is being developed for Switchback. In 2013, the El Aguila mill was expanded to handle a nominal 1,500 t/d. However, in the first three quarters of 2014, the mill averaged 1,040 t/d but Reid attributes this to the mine itself acting as a bottleneck, which will not impair future growth potential. “Our priority is the expansion of the Arista deposit followed by the high-grade Switchback discovery. We have also drilled high-grade mineralization at the Alta Gracia and Las Margaritas properties, and plan to drill newly defined targets at these properties in the near future. With a 55km structural fault corridor surrounded by 684km2 of land, we have a significant amount of exploration to do,” says Reid. Another interesting development for GORO came with the opening of a doré facility, which sees GORO aiming to produce approximately 35-45% of its total gold production as doré. “Generally speaking, we are subject to treatment charges of 9-10% when we produce concentrates. Doré production, on the other hand, is generally subject to treatment charges of approximately 1-2%. In addition, the net smelter return we pay for doré production is just 4% as opposed to 5% for concentrate production.” Though GORO has been pleased with its overall flotation gold recoveries prior to the installation of the doré facility, it believes the completed addition will help to increase gold recoveries and boost its bottom line.
Despite these successes, GORO has not totally been spared the pains felt by its competitors. It faced a challenging third quarter in 2014, with production levels dropping by 24% compared to the quarterly average of the first half of the year. “Our third quarter production was weaker than anticipated, as underground development advanced at a slower than expected rate. We have retooled a few key members of on-site management and are bringing our resources to bear on overcoming these challenges to return production levels back to those achieved during the first and second quarters of 2014,” states Reid. “We are currently finalizing our annual production targets for 2015, with a strong focus on remaining profitable at the current metal prices while closely watching costs. In the third quarter, base metal revenue alone was in excess of $11 million. Regardless of how you choose to apply that revenue, either as a credit applied against precious metal costs as the mining industry does, or simply as additional revenue from the deposit, we are fortunate to have a highgrade polymetallic deposit at Arista. If you mine a tonne of rock with only gold and silver, your costs come out of that revenue. We are fortunate to have copper, lead, and zinc revenues to help offset the production costs of mining the gold and silver.”
A further challenge was extended to GORO in the shape of the Fiscal Reform which has led the producer to seek to diversify outside Mexico. “Money flows where it is most appreciated and the reforms made a big statement saying exploration risk money is no longer appreciated here. Big producers have stated they will continue existing operations but plan to put less money to work in Mexico,” chides Reid. The same is true for GORO as a junior producer. Since the Fiscal Reform was passed, GORO has made three different investments in exploration plays all of which were outside of Mexico, and Reid expects this trend to continue. ”Had gold and silver been making new highs, the reforms would still be viewed as excessive but manageable. But with precious metal prices under pressure and a finite amount of capital available for exploration allocations, GORO is determined to deploy its capital in the best of the best mining venues. It is unfortunate that Mexico went from one of the friendliest mining jurisdiction to one of the more questionable overnight.”
GORO’s diversification outside the country does not mean it will withdraw from its current operations in Mexico and the exploration of its trend in Oaxaca. This southern state is far from being among Mexico’s historical mining locales, but Reid states the company’s concerns there are much like those one might find elsewhere. “One of our biggest concerns, as with any place a mining company operates, is the ability to receive necessary permits in a timely manner. Since mining is a long lead time endeavor, permit delays are very costly.” However, GORO has continued to receive the necessary permits from the proper authorities. “Oaxaca is a great place to operate and with continued cooperation between the local government and mining companies, I believe we can accomplish great things for both,” he concludes.