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Gold Resource Corp

Bill Reid of Gold Resource Corporation Speaks to Proactiveinvestors

by Proactiveinvestors

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Please give us a brief introduction to Gold Resource Corp, the company’s business strategy and what distinguishes Gold Resource Corps from its peers.

Gold Resource Corporation was created to maximise shareholder value with a focus on cash flow and potential dividends. This company undertook its IPO in September of 2006. We did a self-underwritten IPO because we wanted to stay in control and to focus on having the fewest number of shares outstanding. So we have no warrants outstanding today.

Our strategy is different than most; we make our decisions based on anticipated financial performance, not some arbitrary number like one million ounces in the ground or three million ounces of gold in the ground. We actually look at what is the capital expenditure to put this property into production and then how long before we get our capital paid back. So we have our own internal rate of return of one year or less – so we have to have the project pay itself back within one year or less. This keeps us focused on very profitable, high grade, low cost operations. On our present El Aguila project, our anticipated capital payback is six to seven months.

Another aspect of our company is the fact that we wanted to get into production at the earliest possible date so that we could build this company with cash flow and not go back to the equity markets every six months to sell more shares. So we have done enough drilling to justify putting this project into production and that’s what we’re doing. We want to limit shareholder dilution by getting into production and building the company with cash flow because we have as our goal, to distribute a meaningful dividend and we want to do that with the fewest number of shares outstanding.

Tell us about the capital structure of Gold Resource Corp, Bill.
Today we have approximately 41 million shares outstanding. Approximately one third are owned by management which we feel is very important – as you’ll see when we talk about our dividend policy, one third by institutions and about one third by retail.

Two of the many shareholders we’re very proud of; one being ‘Hochschild Mining’, is a mid tier gold silver producer and we have a good relationship with them, they own 15 percent of the company; another shareholder is Tocqueville Gold Fund which is one of the most well known gold funds out of New York. John Hathaway runs that fund and they own 15 percent of our company also. So we are very proud of the caliber of investor owning the 41 million shares outstanding of Gold Resource . That’s pretty much the capital structure.

Tell us about your flagship property El Aguila in Mexico, and what is the plan about getting into production at El Aguila?

Yes this is very exciting. Our flagship property, El Aguila property in the state of Oaxaca, Mexico, we anticipate being in production mid 2009. I can’t say exactly which month but it will be soon. We’re in construction at the present time and I actually I leave this afternoon to go back down there and it’s absolutely thrilling to see all the continuing work from the last time I was there. At this point in time all the concrete work is done and the structural steel and the buildings are going up and we’re starting to ship equipment to the project. So it’s very exciting. As I said, we expect to be in production this year and we’re really looking at 70,000 ounces of gold the first year of production from our El Aguila project. Building up to 177,000 ounces of gold equivalent precious metals (gold and silver) in the third year.

What is the metallurgy like at El Aguila and how will the metallurgy impact the company’s cash flows and the valuation of Gold Resource going forward?

This property has the best metallurgy that I’ve ever seen in my history. We have multiple types of ore bodies. The first type is our gold and silver open pit that we’ll be processing in the first twelve months. In a milling operation we can grind to a 150 mesh which is not that fine and in 48 hours we achieve 90 percent recovery of the silver and 94 percent recovery of the gold.

So that’s very good and as I said we’re targeting to produce 70,000 ounces of gold from the open pit. The first year we’ll use the silver as a credit so that our cost to produce the 70,000 ounces of gold will be at $100 cash cost per ounce of gold. Then in our second year we have our polymetallic vein deposit. Our polymetallic deposit is underground, it’s very high grade and in that deposit we have not only have gold and silver but we also have lead, zinc and copper. That requires a different milling process which is floatation, but in these floatation concentrates we’re recovering approximately 94 to 95 percent of each metal and this gives us the ability to say – because we have this copper, lead and zinc – the revenue we get from those base metals, we use as a credit against our costs, and actually gives us the ability to say “We have zero cost”, because those base metals will pay for the entire operation.

So our gold and silver – the gold and silver which we anticipate producing in the third year is targeted at 177,000 ounces gold equivalent, at zero cost. So, we know we have a very high grade deposit. It’s very exciting, with very low cost and we think this, of course, will help our valuation on a going forward basis.

Tell us about Gold Resource Corp’s project pipeline, Bill.
In the state of Oaxaca we actually have four properties. The first is our El Aguila property where we are building our mill at this point in time. But we have three other properties and they are all high grade. Their close proximity should give us the ability to truck that high grade to this strategically located mill so the concept is four properties feeding one mill. That’s a very advantageous situation.

Our second property, EL Rey, is high grade gold. Drill results include up to one metre of four ounces of gold and another metre of two ounces of gold. So we expect to have a small underground mine there, primarily high grade gold and we can ship that to the mill also.

We have two other properties, Las Margaritas and Solaga which are high grade silver properties which we haven’t done much work on yet but once again the focus has been to get El Aguila into production, generating the cash flow and then we’ll have cash flow to explore the balance of these properties. So we have a very good pipeline of properties ahead of us.

What experience does the Gold Resource team have in finding and developing profitable gold mining projects?

Before Gold Resource Corporation, my brother Dave and I founded our first gold company in 1977. That was US Gold Corporation and we ran that company for 28 years. More importantly than our longevity was the fact that we put six mines into production in the United States. Then in 2005 we sold controlling interest in that company to Rob McEwen of Gold Corp fame and he took that company and this allowed us to then go forward with Gold Resource Corporation and use our 30 years worth of experience to maximise value for the shareholders.

Hochschild Mining is a shareholder in Gold Resource and recently increased its stake. How is your relationship with Hochschild Mining?
Our relationship is very good. We’re very pleased to have Hochschild as our strategic alliance partner. Hochschild today is a shareholder like any other shareholder, they own 15 percent of our company through a private placement - that private placement was at $3 a share - so we received 18 million, which is the balance of the money we needed to put this project into production.

But Hochschild is an experienced company that’s well known for their underground expertise and the future of our project is certainly underground so we expect a real alliance there and the possibility of helping us with our underground situation.

Just to give you an example, Hochschild invited our geologist up to their open pit Morris mine in Mexico for several weeks of training to help our people understand more control in the pit and they came back very excited, learned a lot and this I think is just another example of how we have a very positive strategic alliance with Hochschild.

What is Gold Resource Corp’s financial situation, Bill?

Well at this point we believe we have enough money to get the project into production and start the cash flow and that’s what our focus is all about. We raised our initial production funding 23 million in December 2007 and then we did this private placement just a couple of months ago with Hochschild for 18 million. Our target is to have the project built for $25 million.

What can we expect from Gold Resource over the next 12 to 18 months?

Well I think it’s a very exciting time for this company. First of all we’re going to make the transition from an exploration company into a production company and historically when companies have made that transition the market place has rerated the company, so we’re expecting that.

We also have a very high grade deposit with a lot of potential and we will have continued exploration over the next 12 to 18 months and we think we’re going to be able to come out with some very exciting results. Nobody can really argue that we have world class grades, we do have world class grades, and then secondly we believe that we have a world class geologic setting. So the only question is “Well how big is this deposit?” Nobody knows at this point but everything indicates that we’ve got a lot more to find.

What is Gold Resource Corp’s dividend policy, Bill?

We’ve been very specific that our goal is, and there are certainly no guarantees, but our goal is to pay a meaningful dividend. What we are targeting, and if we get to that position what we will do is we want to pay one third of the cash flow of the company back to the shareholders. Essentially sometimes people ask, “Well now, a lot of the time there’s lip service to dividends. What makes us think you will actually pay those?” Well this is where the fact that management essentially are the larger shareholders in this company and so if we get into a position to pay a meaningful dividend, will we? We believe we will. This is the difference between owner management and caretaker management. We are very motivated to pay back a significant proportion of the cash flow to the shareholders.

El Aguila is part of an epithermal gold system. What do investors who are just getting interested in the world of gold, need to know about epithermal gold systems, Bill?
Essentially, epithermal gold systems are a class of deposit that really forms some of the highest grade gold deposits in the world and therefore they’re the most sought after deposits in the world. These deposits have a specific character and they can occur anywhere between the surface down to 800 metres. We have an epithermal system; we’ve traced it down 600 metres and it’s still going. So if you put the epithermal model with what we’ve got we believe we’ve got a lot more to find.

Is Mexico well understood as a place to be in the mining business by investors in North America and Europe and what would you want better understood about Mexico, Bill?
Mexico today is probably one of the best venues for mining and if you’re in the industry you understand that and you see that. To kind of give some information to investors who may not understand it; first of all Mexico has a 500 year history of mining and they are a mining oriented culture. They probably graduate more mining engineers and geologists from their schools than we do in the United States. We have all Mexican nationals down at our project and they are doing an exceptional job for us. Couple that with the history and the very competent people; Mexico is an excellent place to be today.

What do you think are the prospects for gold or the ‘anti dollar’ as you call it, in the medium and long term, Bill?

Well as far as I’m concerned, but I’m biased on the side the gold mining business, it’s a great place to be in these times. Here in the United States, we seem to be just printing trillions of more dollars and if history is any help, you can’t just continue to print money and debase your currency with out causing severe inflation.

Over time it’s pretty much been shown that as the dollar strengthened gold goes down but as the dollar goes down, gold goes up. It is the hedge against paper money.

So I have to say I’m quite bullish on the gold price both near term and certainly long term. I would certainly think every investor ought to have a certain amount of exposure to the gold industry and the gold price.