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In the previous instalment of this article, I briefly discussed inflation and highlighted my concerns that inflation might be more persistent than Chairman of the Federal Reserve, Jerome Powell has suggested.

I also highlight the extraordinary outperformance of gold bullion versus equities during the 1970’s when inflation reached double digits. I went on to discuss a limitation of owning gold bullion, i.e. it doesn’t provide a yield. And finally, I discussed the relatively poor dividend yield offered by the gold mining sector as a whole and the often-cited reasons for this.

So, with these issues in mind, I want to discuss a company called Fortitude Gold (OTC:FTCO) that I’ve invested in and the reasons why.

Fortitude Gold is different. It just doesn’t fit the mould of a traditional mining company. To start with, it pays a 5.5% annual dividend (paid monthly), which is simply not the norm in the gold sector. And with the spectre of inflation with us, it seems likely to appeal to both mining investors and generalists alike.

So, why do I say this about Fortitude and what makes it different?

Well, to start with, Fortitude’s assets are in Nevada. A long-established, stable mining state which produces 78% of US gold production. Selecting a mining company with assets in a good jurisdiction is CRUCIAL for serious long-term investors and its importance should not be underestimated. Resource nationalisation, war, revolution, or regime change can cause swift and significant damage to share prices.

Secondly, Fortitude Gold is a well-run company, led by CEO Jason Reid, who understands capital discipline. As evidence, the company’s main Isabella Pearl asset was purchased during the bear market for precious metals in 2016, a time of low competition for these assets. (For those who haven’t read my previous article on Buffett, Inflation & Gold, I explain a common costly mistake often made by gold mining CEO’s. A smart CEO and board matters!)

Thirdly, Isabella Pearl is an ‘open-pit’ mine operated using ‘heap-leach’ technology. For non-resource investors, open-pit mines tend to be much easier to operate than underground mines and usually require significantly less capital to get them into operation and to sustain them.

Heap leach operations use relatively simple cyanide technology to recover the gold. Crushed ore is placed onto a plastic lined pad and cyanide is dripped through the ‘heap’ of ore, recovering the gold as it percolates through to the plastic liner. The ‘pregnant’ cyanide liquid collects in a pond to the side of the heap-leach and the gold is recovered from the cyanide solution by further processing. This is far simpler processing than using capital-intensive ore concentrators or roasters and often leads to more stable production and lower operating costs.


Highly profitable operation

Fortitude’s Isabella Pearl mine was put into operation for only US$32 million and in the last 6 months to June 30, Fortitude has sold 25,982 ounces of gold at US$1,799 per ounce. These gold ounces only cost US$605 per ounce (All In Sustaining Costs) to produce, making it a wonderfully profitable operation! If you do the maths, the Isabella Pearl mine has generated US$31million of profits in 6 months. Testament to the capital discipline of Fortitude’s board of directors and to the skill of the management team.

Fourthly, this profitable production means that Fortitude Gold can reward shareholders and it does so. At the time of writing this article, Fortitude Gold has an annualised dividend yield of 5.5%, with dividend payments paid monthly. A yield far ahead of most gold mining companies including Barrick (NYSE:GOLD). The company has a stated dividend policy of ‘returning as much cash to shareholders as soon as possible while balancing the needs of operations, reinvesting capital back into the business for organic growth and paying taxes.’

This is a company with no debt, and a cash balance of US$41.5 million, based on their last quarterly report (30 June 2021). The company increased its cash balance by US$13.8 million in the last quarter alone. In addition, Fortitude recently raised its 2021 production guidance to 40,000 to 45,000 ounces of gold, up from 36,000 to 40,000 ounces.

Gold exploration ventures

Finally, on exploration. As I’ve already mentioned, exploration is an unpredictable endeavour. However, Fortitude Gold appears to be making good progress exploring at their Scarlet target, which is located just a few hundred metres to the north-west of the Isabella Pearl open-pit mine. Only time will tell if Scarlet becomes a mine as well, but Fortitude has a 10 km mineralised trend at Isabella Pearl to explore, with multiple targets.

In addition to the Isabella Pearl mineralised trend, Fortitude owns the Golden Mile project and the East Camp Douglas project. Both projects are within 30km of Isabella Pearl and are an exciting part of Fortitude’s Nevada exploration work.

It’s worth noting that the largest heap leach operation in the world, Round Mountain, is located approximately 100 km to the east of Fortitude tenements. Round Mountain poured its 15 millionth ounce of gold in 2018 and is still a prolific producer today. This is an interesting area to explore for gold, particularly at a time of elevated inflation. But Fortitude Gold also rewards its shareholders with dividends while they wait!

Note: I own shares in Fortitude Gold and enjoy receiving monthly dividend cheques.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Roger Breuer

Roger Breuer

Roger Breuer currently works in finance positions with Fiske Plc and Duke Royalty Limited. He has previously worked as an Investment Analyst at a large UK-based asset management company and held the same position mostly recently at Arlington Group Asset Management, a boutique financial advisory.

He is a CFA charterholder and an ACCA-affiliate.

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