Published on July 8th, 2020 by Josh Arnold
Income investors don’t necessarily think of mining companies when it comes to sources of steady income. Mining companies tend to be quite cyclical, beholden to the ups and downs of precious metals prices. In addition, mining companies tend to trade with low yields, if they pay a dividend at all.
However, Gold Resource Corporation (GORO) stands out among the crowd. Gold Resource has paid consecutive dividends to shareholders since July 2010. Not only does Gold Resource pay a dividend, but it also pays monthly dividends instead of quarterly.
Gold Resource is one of only 56 stocks with monthly dividend payments. You can download our full list of monthly dividend stocks (along with price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the link below:
While Gold Resource’s yield is only about 1%, we see the current payout as safe given the outlook for the company’s mines. And the monthly payment schedule is a bonus. But on the downside growth may be hard to come by.
This article will analyze the investment prospects of Gold Resource Corporation in greater detail.
Gold Resource is a gold and silver producer in the US and Mexico that targets low cost projects, which tend to have higher returns on capital. Some miners simply try to be as large as possible, but Gold Resource focuses on profitable growth, not growth for the sake of growth.
It produces about $150 million in annual revenue, and has a current market capitalization of ~$285 million.
Source: Investor presentation, page 8
Its primary focus is on cash flow that it can return to shareholders via monthly dividends. It has two mining units: the Oaxaca unit is a 100% interest in six gold and silver properties in the state of Oaxaca, Mexico, and the Nevada mining unit, which is a 100% interest in five gold properties in the Walker Lane Mineral Belt in Nevada.
Source: Investor relations
Gold Resource has proven and probable reserves of 554k ounces of gold equivalent, with most of that in gold and silver. The company also produces copper, lead, and zinc. At current gold prices, that is right at $1 billion in future revenue.
Source: Investor presentation, page 14
Gold Resource has posted nine consecutive years of profitability. However, we see that streak as at risk for 2020 due to mine closures in Mexico. Sales grew nicely from 2017 to 2019, but earnings didn’t move commensurately higher. With mine closures in Mexico for the first part of this year, we see 2020 as a tough year, with the prospect for continued challenges into 2021 and beyond.
We note that miners tend to be quite cyclical because they are dependent upon selling prices for the metals they mine. Gold Resource is no different, and we are therefore cautious on its prospects moving forward.
Gold Resource has three ways it can increase profitability in any given year. First, it can produce more metal. Second, it can lower its cost of production. Third, it can realize higher selling prices for the metals it mines. Unfortunately, 2020 will likely prove that the first two are unrealistic, while higher selling prices will be a tailwind temporarily.
Indeed, first quarter results showed negative gross mine profit thanks to higher production costs.
Source: Q1 results
Production costs have risen for the past few years as the company has largely taken the easiest of the metals from its properties, and therefore, current and future volumes will likely continue to see higher costs. With negative gross profit in Q1, Q2 will certainly follow suit as the company’s operations in Mexico were shut down due to an order from the Mexican government. We may see a return to some sort of normal in Q3, as Oaxaca is back open and running, but Gold Resource has a tougher road ahead.
We see the company producing a loss this year, albeit slight, followed by a rebound in profitability next year. We note that much of this depends upon realized selling prices, and with gold near all-time highs, we are cautious on further gains in selling prices.
Higher volumes should help offset some of the rising production costs the company is seeing. But we still see a tough outlook in terms of profit growth.
The dividend is of great importance to Gold Resource, and for shareholders as well. The current yield is about 1%, so it isn’t spectacular in that sense. However, the monthly payments help boost its attractiveness.
Source: Investor presentation, page 37
Gold Resource has cut its dividend on a few occasions. Metal pricing downturns have seen Gold Resource produce lower profits, and therefore, lower dividend payments to shareholders. Gold Resource paid more than $35 million in dividends in 2012, but in the past several years, that total has been below $5 million. This highlights the cyclicality of the company’s operations and why we are cautious on the company’s long-term prospects.
The current dividend of $0.0033 per share monthly equates to less than $3 million annually in cash expense for the company. We see this level as sustainable over the long-term, given the company’s earnings-per-share generation, as well as millions of dollars of operating cash flows.
Source: Investor presentation, page 39
In addition, the company has a pristine balance sheet with zero long-term debt. With net cash of $18 million, it can afford to pay its dividend for years without producing any cash from operations. Thus, we see the current payout of $0.04 cents per share annually as safe and do not believe Gold Resources will cut its distribution any time soon.
Mining companies are generally beholden to prevailing prices for the metals they sell, and Gold Resources is no different in this respect. Where it is different is in the way it pays its dividends to shareholders monthly.
We see the dividend as attractive and sustainable at the current level. Gold Resources has plenty of cash on hand to continue to pay its dividend for a long time, and is producing more operating cash flows to help fund the dividend.
However, rising operating costs could impact profitability, and therefore earnings-per-share, in the coming years. Thus, we don’t see Gold Resources as a strong candidate for capital appreciation through rapid earnings growth. But with a 1% yield and a secure dividend, it is a decent choice for income investors.