Gold Resource Corp (NYSE American: GORO) announced this morning its intent to spin off its Nevada assets to shareholders and create a new public company focussed solely on paying a material dividend from generated cash-flow. This new entity harks back to GORO’s roots where 30% of net cash-flow was paid as dividends to shareholders.
This effectively means that Gold Resource Corporation turn into two separate mining companies, one in Mexico and one in Nevada. According to Jason Reid, CEO at Gold Resource Corporation, both mining units are in a position where they can see “meaningful increases” in future free cash flow.
The transaction is expected to be structured as a pro rata distribution of 100% of the shares of the spin out company to existing shareholders of Gold Resource Corp. Approximately 20m shares in the new entity are expected to be distributed. Shareholder approval is not required, and the spin-off is expected to be tax free for shareholders from a US tax perspective.
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The company’s Oaxaca mining unit is poised to benefit from several recently completed capital projects that are expected to have a positive impact on future mining operations, cost structure, and exploration potential, the company said today.
GRC is changing tack on its Mexico operation: it has finished 10 years’ worth of commercial production, which included over $1bn in revenue and $114m in dividend distributions. This mining operation will now focus on allocating more capital back into its operations in order to grow the mine further.
We understand that this transaction had been discussed at board level for some time. Management explained to shareholders that many potential investors they met did not have interest in a material dividend and, hence, never became shareholders.
Many of the existing shareholders were focussed on receiving dividends which kept the registry relatively stable but made it difficult for Gold Resource Corporation to attract a class of investors who were more concerned with growth and a capital gain – like the majority of the publicly listed gold equites out there. This dilemma might be the reason why the company’s shares have underperformed their peer group in the recent gold bullion rally.
New management team for Gold Resource Corp
Gold Resource Corp has indicated that a new management team with a focus to grow the company via exploration, asset acquisition and potentially M&A will be recruited to run the NYSE listed company. This will include a new CEO. The Nevada assets will publicly list by a plan of arrangement onto the US OTC market and be led by Jason Reid.
“Independent companies all for far more effectiveness of these distinct business strategies,” Reid said. “We believe far greater value can be created with two independent companies compared to the value that could be achieved by keeping the mining units together.”
The plan seems to be for the Nevada company, currently referred to as ‘Spinco’, to focus on organic growth in the Isabella Pearl mine. Cash flow can still be used to return dividends to shareholders. The company would also take a closer look at the Walker Lane mineral belt for further expansion.
If both Mexico and Nevada are operating as they should and both are free to pursue separate value creation strategies (and the market continues to experience a buoyant market for gold and gold equities), then this plan may prove to be beneficial for current shareholders over the next few months.
To assist in a smooth transition, an arms-length management service agreement is being instituted between Gold Resource Corp and Spinco. A small number of current executives, managers and other employees of the company are going to continue to provide management and technology support to the Spinco operations and to assist in the transition.