Fortitude Gold Spin-Off Will Deliver Volcanic Cash Dividends-Part 1
Summary
- The company is targeting aggressive outsized dividend payments to investors.
- Fortitude is flush with $27.7 million in cash and substantial cash flow.
- Fortitude Gold Management has an enviable track record of returning cash to shareholders.
- A share count at 24 million outstanding will remain tight to propel cash flow per share upward.
- Management articulates a brilliant plan to attract shareholders including those who may forego negative net yielding bonds.
Spin-off stocks such as Fortitude Gold (OTCQB:FTCO) are often big winners for investors. Typically the parent company delivers the offspring into the volatile economic world rich with cash and an actionable mission to succeed. Gold Resource Corporation (GORO) reinforced the new company with $10 million in cash while absorbing their mine construction-related debt incurred in the previous two years. In return, shareholders were gifted shares in this new exciting company. Fortitude Gold was cleared for trading on the OTCQB market on February 19, 2021, where it quickly headed north.
Reason for Fortitude Gold Spin-off
Fortitude CEO Jason Reid previously led Gold Resource Corporation but wished to capitalize on the promising gold resources from both historic and company drill results at the Isabella Pearl deposit in Mineral County, Nevada. Spin-offs particularly the small-cap variety, seem to evade the attention of most investors and their stock prices start out low while catapulting higher. Few investors wish to invest the long hours to read the S-1 forms required by the SEC, but this one is well worth the exercise. Reid departed the parent company and virtually the entire management team followed him to Fortitude. This signals opportunity for investors as management is in the best position to assess the most promising company. The company has stated that it wishes to deliver outsized dividends to shareholders, both gold investors and those who seek high yield investment. The company believes that high-yield dividend stocks will attract investors in the coming months as more investors buy physical gold and opportunistic investors seek high dividends. As the dividends grow, the stock price should be bid up as investors realize this company intends to heavily reward shareholders. This sounds simple but not many companies actually deliver. Many mining companies long to spend cash and issue new shares on the next great acquisition. As CEO of Gold Resource company, Reid delivered $110 million in dividends to his shareholders which reinforces my confidence in his willingness to execute his plan.
Potential Dividends Fortitude Gold
Dividend goal targeting near-term dividend initiation followed by increased dividends.
Dividend policy returning as much back to shareholders as soon as possible while balancing the capital needs of operations, reinvesting capital back into the business for organic growth and paying taxes.
Potential Dividends* with ~24M shares outstanding:
| Annual | Monthly | Cost | Probability |
| $.12 | $.01 | $2.88 Million | Likely |
| $.24 | $.02 | $5.88 Million | Likely/Possible |
| $.36 | $.03 | $8.66 Million | Possible |
| $.48 | $.04 | $11.45 Million | Possible/Aggressive |
| $.60 | $.05 | $14.44 Million | Aggressive |
(Corporate Presentation-March 24, 2021)
FTCO Gold reserves are growing significantly
The company holds proven and probable gold reserves listed at 170,000 ounces as of Dec. 31, 2020 and is targeting 40,000 ounces production per year. Total all-in sustaining costs were $952 per ounce while the company sold 29,929 ounces of gold at $1,813 average in 2020. This huge spread netted the company $10.2 million or $.48 per share (only 21 million shares outstanding through 2020).
2016-Estimated proven and probable reserves at 191,400 ounces
2018-Estimated proven and probable reserves up 11.5% to 213,600 ounces
2019-Estimated proven and probable reserves at 220,100 ounces
The mining results are exceeding reserve estimates in almost every aspect. The oxide ore at Isabella Pearl deposit is revealing higher grades than estimated, and the boundary of this ore is expanding. Oxide ore is conducive to heap leaching. Since this ore is located in shallow depths, the company can mine it and transport to the existing ADR (Absorption, Desorption, and Refining) facility for processing. There would be no immediate need to construct a new expensive facility, which saves money.
The stated geology of this Isabella Pearl deposit located in the Walker Lane district of Western Nevada that includes extensive historical and confirming drilling has proven to be accurate. The actual mining to date has produced more gold than estimated.
Fortitude Gold-WLM reserve report Nov. 2020
| 7.2.2 | Structural Geology |
"The Walker Lane zone is documented to be at least as old as 28 Ma (million years). The Walker Lane structures can be summarily described as consisting of numerous northwesterly trending strike-slip and normal faults, along with extensional oblique fractures and other faults that formed between the northwest striking faults, and dominantly pre-mineral detachment and associated listric normal faults. These structures provided both the ground preparation and the hydrothermal conduit systems necessary for economic mineralization. Several regional and deep penetrating fault zones trend northwest through the area of interest including the Soda Springs fault. An example of the general density and trend of faulting is illustrated in Figure 7.3, which covers the area in the vicinity of the Isabella deposit. Many more faults are present than shown, but at all practical surface map scales individual faults and related fractures and joints are so numerous, and commonly obscured by alteration, that only the principal ones have been mapped. The importance of faults and fault zones for ore localization, particularly at intersections of and at bends along them cannot be over-emphasized."
Walker Lane Minerals Report-Ex. 99.2-2020 Reserve Estimate Isabella Pearl Mine. (Walker Lane Minerals is a subsidiary of Fortitude Gold)
All-in cash costs will drop dramatically over 4 years
Fortitude's mine plan estimated all-in cash costs would average $645 per ounce over the original mine plan. Since 2020 came in at $952 per ounce, one can expect a dramatic drop over the next 4 plus years. The current contractor will have removed the majority of the overhanging waste within the next 6 months clearing a path to mine the shallow gold deposits below. Even the original ROM (run of mine) ore has been terminated, as the gold grades at .5 grams (on ROM only) have proven to be higher than expected. As a result, the company is crushing all the ore as recovery percentages are excellent. The average gold grade for 2020 was 2.42 grams per ton, while the low-grade stockpile came in at .52 grams. 2020 updated reserve estimate has bumped the grade (proven and probable) to 3.88 grams per ton. This estimate is using gold price at only $1,477 per ounce.
Fortitude is trading at $4.62 per share with approximately 24 million shares outstanding with $27.8 million in cash assets. Accordingly, we have $1.16 per share in cash. An investor can purchase the stock at $3.46 per share net of cash position. The stock is currently trading at a PE (price to earnings ratio) of 11. Many gold miners are trading at much higher PE levels that approach 20-25. The company holds much more gold than it can confirm at this time. In Part 2, I will describe the additional potential gold resources that have been drilled with positive results and detail the historical reserves. My reading of hundreds of pages of geological reports seems to indicate excellent potential for at least 500,000 ounces of additional gold resources. I am not a geologist however, but all signs point to a deposit much closer to 1 million ounces than the current 220,000 figure. Fortitude is on track to produce 40,000 gold ounces annually with margins exploding- since their all in cash costs dive from $945 to below $645 progressively over the next 4-5 years. Assuming the Gold price averages $1,700 per ounce in 2021 and 2022 and cash costs drop to $756 and $600; the company will realize net revenue (before taxes) of $37.8 million and $44 million during this period. My gold price estimate is exceedingly below where I believe gold is heading ($2,000). Using the $44 million revenue and backing out 15% for taxes would translate into a profit of $37 million or $1.56 per share. If we assign a PE of 15 (investors take notice)-the Fortitude stock would trade at $23.40 per share. Now one can see how the CEO envisions "outsized" dividends.
In compliance with new SEC disclosure rules on resources, the company will release their mineral resources within one fiscal year starting on January 1, 2021. Gold deposits have formed along the 10 kilometer Isabella Pearl trend that stretches northwesterly along the Walker Lane fault east of the Sierra Nevada mountain range.
(courtesy of volcanichotspot.wordpress.com)
The November 11, 2020 filing details the various disclosures and explains the difference between resources (looks good but needs more substantiation) and reserves (proven economic viable per SEC). The company has experienced a delay in metallurgical test results which has delayed their ability to release updated data. All signs point toward a prolific gold mining gem that should propel the stock price much higher while returning wonderful dividends to shareholders. (Part 2 to follow).
This article was written by
Analyst’s Disclosure: I am/we are long FTCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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