-- Posted Monday, 2 December 2013 | | Disqus
By Tekoa Da Silva
During a time of stagnating gold prices and non-existent capital market funding for junior resource companies, Bill Reid, Chairman; and Jason Reid, CEO and President of Gold Resource Corporation, were kind enough to share comments.
Despite following gold down over the last two years in terms of share-pricing, Gold Resource Corp. has avoided most internal pains suffered by mining companies during this ongoing bear market. That may be attributed to a philosophy of a “one year payback time[or less]” on all capex development, as indicated by Chairman Bill Reid during an interview with BullMarketThinking’s Tekoa Da Silva.
Here is that conversation in its entirety:
Tekoa Da Silva: Bill, you spent most of your career in the trenches of a multi-decade bear market in natural resources. We’re seeing a bit of that today. How tough of a time was it for you to earn your education in that environment during those years?
Bill Reid: Well, the commodities business is a cyclical business and I’ve seen numerous cycles. When we’re in an up-cycle, people can never see a reason why it’s going to go down but it always does. When we’re in a down-cycle, people can never see a reason why it will go up, but it does.
So you have to understand from the beginning that this is a cyclical business. Now actually this last cycle has been a good one. It’s been basically an up-cycle for the last decade. The gold price on January 1st versus the gold price on December 31st has been up the last 11 years.
So this has been a good cycle. 2013 is the first year in a while that we’ve had a down-cycle in the gold price and of course, people are ready to bail out. We’ve had a pretty good run, [but] I don’t think it’s over yet.
I can remember back, I think it was in 2000, when gold hit $250 oz. That was a very difficult time. Once again, nobody was interested in the gold mining business and the prices were very low. But we’ve always understood that you have to be able to survive the lows in order to reap the benefit of the highs. It’s a cyclical business and that’s not going to change.
So as of today with the business in a lull or certainly out of favor in most quarters, and the prices [having] pulled back a little bit, you’re finding that a lot of juniors are probably going to go out of business. We’re fortunate that our philosophy was such that, “Hey, let’s get into production as quickly and as cheaply as we can.” We did that and it’s nice that during these tough times we’re in a position where we’re generating cash flow.
So I would say actually you really do learn more in the tough times than you do in the good times because when things are frothy, everybody can be successful. But when times are tough, not everybody can. So that’s just kind of a quick overview that the commodities business is cyclical and you better be able to handle both [sides] .
TD: Bill, you and Jason are father and son. Were there any extremely harsh and tough lessons in the business that you learned during some of those bottoming out periods of the cycle that you had the desire to bring home and share with your family, and of course teach Jason the lessons there?
BR: Well, yes. Certainly many lessons [but] let me put it this way. Jason had a very successful business on his own and in 2006, I went to him and said I would like for him to come join the company and help build Gold Resource Corporation. I presented it this way—that I can teach you I believe in three years what it took me thirty years to learn, and I could say Jason was a fast learner and he has surpassed all my expectations. He was able to get that experience in a very short period of time.
TD: Jason, if I can ask you the other end of that question. What was it like for you during those years, hearing what your father had to say, the learning curve, as well as using what you learned entrepreneurially with your own business activities coming into the mining business?
Jason Reid: As far as business goes, what I did learn firsthand, was that when you run your own business, you’re always at work even when you’re on vacation. I watched Bill and David [my uncle] struggle in the mining business which is a very tough business. It’s not for everybody. As Bill mentioned, when gold was $250 oz., it was a struggle during that time frame, when most of their associates were either run out of the business or quit the business.
So seeing that firsthand, I learned that you have to deal with the hand you’re dealt. Work hard and be persistent. As far as life goes, working hard goes hand in hand with putting yourself in the position to be lucky. As that relates to this business, anybody in this business who doesn’t acknowledge that luck is a part of this business—you need to be a bit skeptical of. But yeah, watching them struggle through a decade of low metal prices—it says a lot about their character to be here, standing here today.
TD: Bill, in some of the writings you published as CEO during 2006-2009 following the IPO of Gold Resource Corp., you were talking about a set of values and philosophies that nobody was talking about at the time. Was it experiencing those cycle bottoms that gave you the foresight to choose the hard pathway in terms of those philosophies and values?
BR: Yes, it certainly played a big role. One of the things I was always frustrated about, was that we had a decade or more where this industry was all about resource ounces in the ground. That’s all they would talk about and they never told you how economic [the deposits were] and if they were economic at all. They didn’t even like to tell you the grade because what they would do in that environment is just keep lowering the cut-off grade, which lowers the average grade and adds more ounces to your resource. But the project may not be economic and in fact, a lot of times they’re not economic.
So it was very frustrating for me because it was like a game they were playing but it was what the investor wanted, which was, “How many ounces you got in the ground? What’s the potential of your production growth, etc.?”
That timeframe was when there were a lot of bad decisions made because some of these really lower grade deposits were put into production and today—we kind of smile because the industry has come around to what we have said from the beginning.
We looked at this [business] from the beginning as “We’re here to make money and share that money with the owners of the company.” It’s that simple. I mean that’s our philosophy. We’re here to make money and share a portion of that money with the owners of the company.
Now there’s a strategy that goes along with that. I mean number one you have to be disciplined in your capital structure. I remember so many Canadian companies, every time their stock would go up, they would just sell more stock. They loved to say, “Oh, we’re topping up our bank account.” Well, that isn’t the reason why you should be in this business. The main reason is to make money and in our opinion distribute a significant portion of that (or as much as you can anyway) back to the owners of the company.
So you have to have a disciplined capital structure. We did that. We [also] had to look for high-margin properties, which generally meant higher-grade properties. You [also] had to look at the payback. So these were all parameters or metrics that we focused on which in the past the industry did not, but it has come around to that today.
TD: Bill, how did you narrow down to the concept of a one-year payback time or less? Did you see someone else that was very successful that went down that path or did you just decide to not stop looking until you found a property that met that criteria?
BR: I think maybe we were the only ones that ever had that philosophy because everybody rolls their eyes when they hear that. But let me be clear: you want to boil things down to the simplest concept, and the industry will throw out all these things; internal rate of return, net asset value, even discounted cash flow. All these different things. What does that mean to the average investor? It doesn’t mean anything.
So let me be very specific and very simple. Just ask them or look at how many years does it take to pay back the capital that you’re investing in that project. You might be surprised with the numbers that come back. That’s what I listen to when I listen to people’s presentations. I heard one the other day. Somebody was talking about a project they were going to do and they finally got around to saying it had an eight-year payback and I rolled my eyes. I mean an eight-year payback is terrible. That is not a good project. A five-year payback is probably not good especially in this business, when you don’t know what the price of metal is going to be five years from now.
So what that did was give us the discipline to not get sidetracked by a lot of these lower-grade ‘ounces in the ground’ concepts. When you look at it you should think, “We’re going to have to have a one-year payback of our capital that we’re going to put into this project.” Allocation of capital is one of the most important things a CEO and his top people do. The board of directors look at the allocation of capital and one of the reasons most of these major companies are having difficulties today in this price environment is that they really didn’t focus on that. Again, [they said] let’s just give it more ounces.
So that concept is a good one. Every investor should know about it. A two to three-year payback, that’s fine if you’ve got a significant life. We always wanted a one-year payback so we could put a project into production even if it only had a three to four-year life, because a lot of times especially in underground high-grade mines, you can’t drill it out like an open pit and say you have 15 years.
There are many underground mines that have operated that only have say four years of reserves but they operate for 20 years. It’s just the nature of the business, [because] it takes too much to drill out ahead of time.
So my point, is that that’s a very good concept [to have] to maintain the discipline… I think all investors should be aware of it and when they’re looking at a company and its new project, [always ask] “How many years of payback is involved in that allocation of capital?”
TD: We’re seeing a flush out of so many projects, companies that were assessed by the market as a billion dollar market cap back in 2011 are now for example trading at $30mm or $40mm—because of the reasons you just stated. They won’t be profitable until $1500 oz. or $2000 oz. gold because of the low grades. So things are going on sale all over the place.
Jason—is that something you could talk to in terms of things being flushed out right now, companies looking to sell themselves, or projects coming onto the auction block? What are you guys seeing there?
JR: Yeah, we’ve seen a couple companies come through our front door, looking to sell themselves. I mentioned this in the conference call and I think it’s worth repeating here that Citibank came out with an analysis, that I think 98% of gold producers are not profitable at $1320 gold. Regardless of whether those exact numbers are correct or not, the point is very valid that all mining companies are struggling right now and you might see some producers go under, let alone a decimation of the juniors which could play a major role going forward [in terms of] the supply and demand.
So are we seeing that? Absolutely. What I focus on, and Bill mentioned this, is to make sure after the dust settles, that this company is one of the ones left standing, so that we can not only add value for our shareholders but capitalize on some of these opportunities whether it be a company who wants to sell itself or a property that comes free. So I’m pretty optimistic on the future and all the opportunities that may be coming our way within the next year to two years.
TD: Bill, based on your previous cycle experience, what kind of upswing do companies, coming out of a cycle bottom experience when they’ve got cash reserves, cash flow, and producing properties that are making money?
BR: Well, I don’t think I could give an actual number but believe me, it makes a study of the creation of value and what has gone on in the mining business. Not only creation of value but the destruction of value.
When you look at the history of the mining business, you can see some very exciting examples of companies that when things turn around if you have all your ducks in a line, with the turn in the gold price, you can have a significant increase.
One of the things we focus on is our dividend and we think it’s so important that a company’s philosophy incorporates making money—and when I say making money, I’m talking about cash, not necessarily GAAP accounting, but cash. Then, distributing some of that cash back to the owners of the company and actually distributing as much as you can as often as you can.
We think that type of approach should put us [in a position] where we can maximize an upswing for our shareholders, but it’s impossible to actually give numbers. A lot of that will depend on the price of gold but I think Gold Resource is well-positioned to bring value now and in the future.
TD: Jason, I heard you make reference to dividends in the most recent (Q3 2013) conference call, in terms of each cent paid to shareholders in the form of dividends, being derived from roughly 1329 oz.’s of gold equivalent. How would you compare that to some of the majors?
JR: Right. That definitely shows a contrast between us and the rest of the industry. Like I mentioned [on the conference call], we can produce one penny of dividend for 1,300 oz.’s produced as opposed to (and I used Kinross on the opposite end of the spectrum) which is bringing in I believe 160,000 ounces. The other [major] mining companies fill in the space between those two figures.
I think it really speaks to a number of positives for Gold Resource Corp. First and foremost, we have one of the tightest capital structures and that’s very important. We can leverage our margin and our cash, and pay much more of that back to our shareholders. That’s what that statistic we highlight brings forward, is that 1300 oz.’s as opposed to 160,000 oz.’s definitely speaks to the different philosophy, different way of operating and to me, it’s very exciting.
Going forward, Bill mentioned this in his last response. When things turn around, we could potentially—there’s no guarantee—but we could potentially be one of, if not the highest dividend payer and if not, close to it. So yeah, that’s definitely a positive for Gold Resource.
TD: If I can ask you both now about gold as an asset—what are your fundamental views and where did you come to believe them?
BR: Well, gold has had value for 5,000 years, and it comes and goes with popularity but I think in today’s world where you’re talking about the difference between something that everybody will accept that has value, versus somebody’s paper, that it’s still – gold still holds the value that it has had throughout history.
So today’s countries and governments are printing as much money as possible even though it doesn’t show in inflation [right] now. At some point, you can’t do away with axiomatic things in economics and I don’t think that – if you just say to yourself, “Boy, we can create great societies by just taking paper, putting ink on it, calling it money and printing all we can.” If that were true, the world would be a much richer place, but that hasn’t happened. So I’ve seen gold – actually I remember when Nixon took us off the gold standard basically and it was $35 oz. I’ve seen it go all the way now to $1900 oz.
The way I look at it, is that it’s not gold changing its value. It’s the paper money that’s losing its value and it’s being reflected in gold. I’ve always been focused on the fact that we produce a commodity that the world needs [in order] to show basically how badly governments are running their countries. So anyway, that’s just kind of my overview.
JR: Expanding on what Bill was saying—there’s a great book called The History of Money and they go back into when the Lydians were minting their first coins all the way through [to today’s] history.
Over and over it’s repeated where governments or kings take perfectly pure gold and silver rounds and when they want to engineer their currency, they dilute the rounds whether it be with copper or some other base metal. When they dilute the currency too much, eventually the society abandons it, and that requires the government or the king to then go back and invent a new one that’s pure—effectively taking it back to the gold standard.
This has happened over and over in history. Very few people look at or look into the history of money but that’s exactly what’s happening today. You see our fiat, our paper currency, being devalued tremendously every month by $85 billion which is almost incomprehensible.
I was just in a conference where I had to speak on this concept. I was also presenting the company as well. One of the speakers before me was talking about our current currency, the coins, and how there’s really no valuable metal in our current coin. So the same thing is happening today whether it be in our coins or our fiat money. At some point, like Bill mentioned, it’s not hard to imagine inflation is going to be very difficult to handle and the big question will be, “[Will] this society return to a gold standard in some form or fashion whether it be another basket of currencies backed by percentage of gold?”
But tying this all back to where we are today—your thesis to own gold and silver two years ago, I would argue is not only as intact as it was then; but given all the additional monetary devaluation, it should be even more so.
So I feel very fortunate that we’re in a unique business. We’re in the only business where we get to produce true wealth, and as Bill mentioned, not just ink on paper but we’re talking gold and silver that have been around for thousands of years.
So we’re in a very unique business and we’re fortunate to be in this business and timing is everything. I think we’re in a great time. We’ve been having this pullback over the last two years, but prior to that, we had a 12-year bull market and…when we finally turn back around, it’s going to be very exciting.
BR: I will also mention that as far as we know, we’re possibly the only company to allow the shareholders to take their cash dividend, and convert it into gold rounds or silver rounds and we did that because we’re believers in our commodity, gold and silver.
So Jason and Greg Patterson, our vice president, figured out how to make that happen and we’re very proud of the fact that our shareholders not only can get dividends in the form of cash, but they can actually convert those [distributions] into gold and silver coins.
TD: If I can steer back a bit towards production, the company is on track to produce between 80,000 to 100,000 gold equivalent ounces here for 2013 and there is a mill expansion underway which is planned for completion going into 2014.
How do you feel that might arm the company Jason, in terms of reaching full throughput at the 1500 tons per day (tpd)? Then looking out over the next few years—how do you view the possibilities there?
JR: The ability to process, if it’s 1500 tpd, is going to be very advantageous for us, taking the mill capacity up from its previous 1200 tpd. So once that is done (and it’s on track to be done by the end of this year)…we will be in a position to leverage that additional capacity in the future, [but] I’m not going to give specifics of any kind on forecasting…[as] the pushback we get from that on a risk-reward basis is not necessary.
So is it a good thing to take [the mill] to 1500 tpd? Absolutely. The biggest thing for us and the bottleneck for most miners is pulling tons out of the underground. So we have already turned much of our focus over to developing the Arista underground with multiple working faces. We have fourteen now, working our way up from there to pull additional tons and get us up to that 1500 tpd level. When exactly that will be, I can’t give you that forecasting at this point but that should obviously help us going forward.
BR: I would like to just embellish the mill a little bit because I think it’s very significant. This year is an expansion year and so we’ve incurred higher operating costs because we have the people necessary to run 1500 tpd but we have not run the 1500 tpd through the mill [yet].
If you look at last year, we did essentially 90,000 oz.’s at a production rate of 775 tpd through the mill. So there’s potential to significantly increase our production over time with increased tonnage through the mill, and that also is affected by the grade we put through the mill.
I also might mention that this increase to 1500 tpd is with our flotation circuit only. We also have another circuit already built that’s sitting there, we’ve never used, and that’s our agitated leach circuit. The agitated leach circuit handles ore that does not have base metals with it.
Right now we’re mining ore that has base metals, but we have several indications of deposits like El Rey, that are just precious metals; either gold and/or silver. With those deposits, if at the point in time they turn into mines that we can actually mine, then there’s potential to add even more ounces of production from the agitated leach section. So we have a very solid foundation for ultimately increased production at our Oaxaca mining unit.
TD: Bill, the company recently announced that you stepped out of the CEO role and are currently maintaining Chairman of the Board position. Jason, you’ve stepped into that role as CEO. Was there significance in that decision for you Bill? Not just that it was the company you founded and put together but the fact that maybe it was your son also stepping into that role as CEO?
BR: Well, first of all, let me say I am very proud of Jason. It has been a most enjoyable journey to build this company with him side by side. Believe me, he has earned the right to run this company. Jason has had more hands-on experience in all facets of the mining business than most CEOs have. So I felt comfortable stepping aside because it’s his time to run the company and he brings a broad overall experience and accomplishment that’s hard to find out there, let alone for his age.
So to me, it is the next generation moving this company forward under the same philosophy upon which we built the company. So yes, I’m very proud of the situation and I’m also very confident in Jason’s abilities and experience.
TD: Jason, if I could ask you to also comment there. Where does your confidence come from in terms of your belief in being qualified for that position?
JR: Sure. First of all, I’m an entrepreneur. I started my first business before I graduated college. Being that it was in the construction industry, that should tell you that I’m not afraid of hard work. That may sound basic but it’s very important in any business.
Years later, I started my second successful business in a different industry which should tell you that my first business was not a one-off success, but that I was able to apply my business acumen to other industries.
Now Bill mentioned early on in the conference call, [that] he approached me in 2006 with this opportunity, back when Gold Resource was a private company. My only concern back then was “Can I have a boss after being my own boss [for] over a decade, and can that boss be my father?” I also had to take a pay cut to join Gold Resource.
Fortunately, Bill and I get along great, and it’s all about business when we’re at work. We don’t always see eye to eye but we think very much alike. Those who have been around us can attest to this, down to even the little things, like I call Bill by his first name.
For anyone who has had an apprenticeship, they will understand what I’m about to say. When the professor-student ratio is one to one, and all day everyday knowledge is being imparted, and questions are being answered on a one to one basis, the amount of learning that takes place is tremendous.
Now I’ve been fortunate to have not only been with the company, but hands on and involved as Bill mentioned [al]most every step of the way including early exploration, capital raises, deposit discovery and delineation, engineering, production capital raising, marketing, construction, mill commissioning, open pit and underground mine development, production, NYSE market listing—just to name several aspects that I’ve been hands on and involved with.
I not only learned the ropes so to speak in the mining business, but my contribution to this company along the way is in part why we successfully made it into production. We’re one of 1000 or 2000 statistically who did that.
Now many people, as Bill mentioned, would spend a decade or two in this mining business just focused on one or two aspects. But I’ve been fortunate and have been trained in various aforementioned aspects. Bill has imparted a tremendous amount of his decades of experience to me over the last eight years now under his apprenticeship. So I’m not only qualified for this position but since I helped develop the company, I’m best suited to take the reins.
TD: Alright, well Bill and Jason, before we wind down, are there any items you think we may have missed?
JR: No, but I think the biggest one we touched on early on, [is] that this market for the metals equities is in turmoil and we just need to make sure that we are one of the ones remaining standing, [but] I think the opportunity out there once the dust settles will be tremendous.
TD: Bill Reid, Chairman; Jason Reid, CEO and President of Gold Resource Corporation, thanks for sharing your comments.
JR: Thank you very much.
Disclosures: The author carries a long position in the company mentioned. Always seek the advice of a qualified investment professional before making any financial decisions.
-- Posted Monday, 2 December 2013 | Digg This Article
| Source: GoldSeek.com
