“One man’s crisis is another man’s opportunity…”
~ Chinese Proverb
Dear Member of the Board,
We commend you, as well as management, in steering us through very turbulent waters over the last few years. When precious metal prices fall, precious metal equities fall harder. The fact that Gold Resource Corp (GRC) has not only survived, but actually set itself up to thrive in the years ahead is certainly a worthy accomplishment. At Regal Point Capital, we believe that equity in GRC represents tremendous value over the long-term (as the linked research and articles should make clear). Unfortunately, today it seems long-term investors are a dying breed–but that’s not the real issue…
The real issue, is what to do with the cash that we’ve been building on our pristine balance sheet. Recent filings indicate that YTD financial results show a drastically improving situation. For example, net cash flows from operations for the period increased by over 600% (an increase of over $22MM). Moreover, net cash balances increased by over $9MM (an increase of over 65%). On top of that, as stated in the most recent earnings call, over half of potential revenues from last quarter were postponed to be realized in the current quarter. In summary, even when taking into account the recent volatility in precious metals, GRC will have plenty of cash on hand. But what really gives us comfort is the strength of our balance sheet and the lack of any meaningful long term debt. We have plenty of breathing room.
I hope we can agree that there are only four major uses for a company’s cash:
- Cash can be used to cover expenses—we’re all good there.
- Cash can be used to expand assets—we already did that.
- Cash can be used to service debt—what debt?
- Cash can be used to pay out dividends to shareholders—again, we’re good here.
So then, should the company increase the dividend rate? The short answer is: NO! At least not yet.
“…buying in common stock is almost always a preferable method of distributing cash to shareholders from both a company point of view and a safe and cheap point of view compared with paying cash dividends.”
~ Marty Whitman (The Aggressive Conservative Investor)
GRC should engage in a significant buy-back program immediately! Our confidence in management tells us that this topic is most likely already being discussed. But as fiduciaries, “most likely” is never good enough.
That said, we strongly encourage shareholders to push management to do what they’ve done in the past; maximize value for shareholders by initiating a stock buy-back program immediately.
“The time to buy is when there’s blood on the streets.”
The “perfect storm” that caused gyrations in our stock price will be ending soon. Now is the time to initiate a stock buyback plan of at least 5% of GRC’s outstanding shares. Now is the time to answer the door as opportunity is knocking loud and clear. Let’s put more of this great company in the hands of those who are in this for the long term. Let’s make the best use of our rapidly building cash reserves. Most importantly, let’s not waste any more time.
Vijay J. Marolia, MBA, CFP
Chief Investment Officer
Regal Point Capital Management