February 25, 2021 - 12:58pm EST by
2021 2022
Price: 3.03 EPS 0 0
Shares Out. (in M): 22 P/E 0 0
Market Cap (in $M): 65 P/FCF 0 0
Net Debt (in $M): -28 EBIT 0 0
TEV (in $M): 37 TEV/EBIT 0 0

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  • Spin-Off
  • Micro Cap
  • OTC
  • Gold
  • winner


I have for you today a microcap, OTC listed gold miner spin.  If any of those characteristics are a non-starter for you, you can stop reading.  I hate gold miners (you know, the Twain quote about a hole in the ground with a liar on top), and I am not an expert in mining, but based on the circumstances and incentives here I'm willing to overlook that hatred.  

Fortitude Gold (FRTT) is a recent spinoff from Gold Resources Corp (GORO).  GORO is a 250m or so jr miner spinning off an even smaller operation in Fortitude.  FRTT was spun off to shareholders of record on Christmas eve 2020 and distributed on 12/31/2020.  The spin ratio was 3.5 to 1 and they did not bother to list on an exchange, it went to OTC pink. The shares sat as an untradable CUSIP for several weeks and last week began to trade.  A good quantity are held by index funds/etfs that cannot and will not continue to own FRTT.    

The CEO and Chair are going with Fortitude and I think trying to engineer a situation to where they can make a lot of money in the shares.  The assets consist of the Nevada mining operations Isabella Pearl (an open pit, which my understanding means is cheaper to run) and a few nearby properties.  GORO sank over $65m of capex into getting Nevada going and just as it is ramping up to about 10k/oz/q the spin is happening, it also put $10m into the spin co at separation.  Breakeven for FRTT, based on the S1s filed is about 7000oz/q.  In Q4 they announced that they had lifted 12k oz and guided for 36k-40k oz in 2021.  

Q3 production put FRTT profitable for the year on 8500 oz of gold, it swung the company from a loss of 3m through q2 to a profit on the year of 0.5m with a ramp of about 2k oz of production.  Incremental margins seem pretty high.  At an average of 10oz, i think the company can make at least $7m/q of $28m of EBIT.  This is on a current market cap of about $65m.

I mentioned the $10m GORO is putting in, the company also had $6m at 9/30, per the S1.  We did not get an S1 for Q4, but GORO did file their 10k yesterday and FRTT's numbers were in there as a discontinued operation.  Two things jumped out to me.  First, they reported net income for the year of $10.5m on the disc op, that's up from about $0.500m 9m ending 9/30 in the S1, or $10m in Q4.  A lot of that profitability was also cash that went to FRTT in the spin along with the existing cash and the $10m from GORO.  In GORO's CFF it reported about $28m going out related to the spin.  I think its fair to assume that landed on FRTT's balance sheet on 12/31.  That puts today's EV at about $35m.  This is for something which at 10k oz of quarterly gold at or around today's price, i think is doing at least $28m of EBIT (it may also translate to NI due to the dep and amort tax shield, it is really hard to tell from the information we have).  

I spoke with the CEO Jason Reid, who is in what I think is a self-imposed quiet period until 3/24.  He couldn't say much beyond what's public, but the intentions with the spin are to develop some adjacent properties they seem excited about and to distribute a large amount of the cash to shareholders as something of a yield co.  He mentioned how GORO did really well and lamented the lost opportunity he had because he didn't cash some out at the top.  I think he wants to get wealthy due to FRTT.  The reality of this situation is the CEO and Chair created this situation and then picked where they wanted to go.  

As an investor with a good amount of spin experience, a lot of the reasons for doing things the way they did seem contrived to justify a situation where the stock price is low in and around the time of the spin.  The excuse they gave for not going to NYSE market or one of those was that he didn't want to get delisted, but based on whats going on they could almost immediately uplist.  There's a quiet period, despite many companies doing roadshows for their spin.  He said on a GORO call the SEC wouldn't view it as "tax free", but clearly its the IRS that opines on that stuff.  There are all kinds of little things like that.  Bottom line is I think its contrived, but he's letting GORO shareholders that can still own the shares come along so it doesn't bother me too much.  

This is interesting because of its venue, its size, the relative opacity of the true financials, and the fact it a miner.  Price seems depressed due to quiet period and index/fund etfs sellers (GDXJ is a big holder, as are the Russell Small Indices).  FWIW, it has done a good job absorbing a lot of volume which I do not think is quite done.  

I think the risks are that right now its this one operation and that the others are not as promising as FRTT management thinks, though it may not matter for the duration of this investment.  Also the standard gold price stuff.  I'm not a mining expert by any means, I barely qualify as a tourist, so things in my analysis could be wrong but I think the shares seem to be a good deal here.  The FRTT S1s, GORO 10k, and some conference call transcripts were all I worked off of.  I am following the incentives and fact pattern more than anything, if you have Q's, I may not have A's.  There's good liquidity while ETFs and index funds job it out, once they go away and the quiet period ends I am hoping to be happy I bought from them.  

I know everyone here knows the WSB thread, and hopefully I get to dine on some tendies from this one, but there's another one I enjoy called r/roastme and I will leave it here for anyone to do roasting and name calling.  

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


End of quiet period

Stand alone financials

Uplisting to exchange

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