Company Spotlight: Gold Resource Corporation

Gold Resource Corporation (GORO) is a gold production and exploration company with six gold and silver properties in the southern state of Oaxaca, Mexico. GORO is a growth stock, an income stock, and also a play on higher gold prices.

“…a growth stock, an income stock, and also a play on higher gold prices.”

The company focuses on projects with a low operating cost which generate high cash flow, which allows it to return a meaningful dividend back to the owners of the company – its shareholders, something which is a priority for the company.

A Brief History Of GORO

Unlike most precious metals companies that spend 5-7 years drilling a prospective deposit, doing a pre-feasibility study, a feasibility study and then raising capital, before finally putting a mine into production, GORO was able to commence production in just 3 years and 3 months. Commercial production at the company’s flagship El Aguila high-grade gold and silver project began on 1 July 2010.

Impressive also is the fact that this was achieved without issuing a large number of shares. In addition, the company has just completed a $20 million stock repurchase program that began in September 2011. Today GORO has just 53 million shares outstanding – significantly less than many of its competitors, many of whom have issued several hundred million shares by the time they reach commercial production. It also has no warrants and no debt.

To get into production so quickly, GORO had to build its El Aguila mine as it got its permits. It also did a self underwritten IPO and its own private placement. It was a calculated risk, but one that paid off.

All this was achievable largely thanks to the 30+ years experience of Bill and Jason Reid, GORO’s chairman and president. During their careers the two men have put six mines into production, and therefore have an excellent reputation within the industry.


All of GORO’s properties are located in the state of Oaxaca, Mexico and all are 100% owned by GORO. The state of Oaxaca, which lies approximately 300 miles south east of Mexico City, was chosen because it meets the company’s objectives of low operating costs and potential for high returns-on-capital.

The company’s flagship project, El Aguila, is a high-grade gold and silver property with significant base metal credits from copper, lead and zinc. Three high-grade deposits have been discovered to date, however exploration efforts continue and there is potential to significantly increase the project’s known reserves since the deposit remains open, meaning that they haven’t yet defined the limits of the mineralisation.

The company has been criticised in the past for the fact that its resource estimates didn’t comply with the industry standard National Instrument 43-101 mineral resource classification. However an independent 43-101 compliant resource estimate has recently been provided by the engineering firm Pincock, Allen & Holt. The estimate confirms that the La Arista vein system at El Aguila includes approximately 1.4 million indicated and inferred gold equivalent ounces (all metals) at 1 gram gold equivalent cutoff.

In a recent interview President of GORO, Jason Reid, discussed the possibility of doubling El Aguila’s current seven year mine life to fourteen years – something which is possible thanks to its favourable geology. El Aguila is a large epithermal system, some of which reach depths of 1000 meters, and as of yet the El Aguila deposit has only been drilled to a depth of 500 meters.

In addition to its El Aguila project, GORO has five other high-grade gold and silver projects clustered around the centre of Oaxaca. GORO’s properties sit on a 200 square mile land package which also provides plenty of upside potential in terms of exploration.

Investors often shy away from Mexico as a place to invest, however Mexico has a long history of mining and it’s vital to their economy. The country is also among the Frasier Institute’s top places to operate a mining company, and GORO chose Mexico specifically because it so mining friendly.

Low cost production

GORO produces its ounces of gold at an all-in cash cost of around $185 an ounce, far below the industry standard of around $600 for a company of GORO’s size. This low production cost is achievable due to the fact that the company’s ore not only contains gold and silver, but also base metals such as copper, lead and zinc (around 30%). These metals are separated and sold as by products, offsetting some of the cost of production.

Business Model

GORO’s business plan allocates one third of its cash flow to pay taxes, another third to growing the company, and a final third to paying dividends to shareholders.

Returning a large portion of its free cash flow to shareholders has been a priority for GORO from day one, and since it began paying dividends in July 2010 it has returned more than $47 million to shareholders. These dividends are also paid monthly, as appose to quarterly which is the norm.

GORO has paid consecutive monthly dividends since July 2010 and has just raised its dividend by 20% to $0.06 per common share which means the company now yields over 4%.

GORO also offers shareholders the option to convert their monthly cash dividends into physical gold and / or silver and take delivery of their precious metals.

Latest developments

On 19 July GORO issued a press release advising the market that its second quarter production was lower than expected. Production for Q2 was stated to be approximately 14,500 ounces of precious metal gold equivalent, significantly less than Q1’s record production of 30,000 ounces.

The company reported that “Several factors contributed to the decrease including Arista underground mine infrastructure needs coupled with mining of lower grade zones of the deposit.”

As a result of the decrease in second quarter production, the company lowered its 2012 production forecast by 15% to a targeted annual production range of 100,000 to 120,000 ounces. This represents a decrease from its previous 2012 target of 120,000 to 140,000.

It’s not unusual in an underground mining operation to experience this kind of problem, however the market was not prepared for the news and as a result the company’s stock sold off hard.

It’s not yet clear whether the ongoing development of the Arista mine will impact GORO’s target of 200,000 ounces in 2013 or 2014, however it’s unlikely to effect their ability to pay their monthly dividend.

GORO’s President, Jason Reid stated that the lower second quarter production “has put the Company in a more sustainable production position for the second half of 2012.”

Once GORO does reach 200,000 ounces a year of production (assuming a gold price of $1,500), the company estimates that it will be generating $300 million a year in cash flow, one third of which will be paid to shareholders. That equates to over $2.00 per share, meaning that GORO will be amongst the highest dividend paying precious metals companies.

Why Own It?

When I am evaluating a gold or silver mining company there are a number of important things I look for:

1.            A management and exploration team with a proven track record.

2.            Properties that are located in a politically safe jurisdiction.

3.            A tight capital structure, i.e. a low number of shares outstanding.

4.            A low cash cost per ounce of production.

5.            High cash flow.

6.            Exploration upside potential.

7.            Management ownership of the company.

GORO meets all seven of these criteria, and thanks to last Thursday’s announcement the company is now available at a significant discount. It’s for this reason that we will be adding more of the company’s stock to the 247Bull portfolio.

In short, GORO represents an excellent long-term prospect, one that generates impressive income, and provides the potential for excellent growth even without higher gold prices.

A 3 year chart of Gold Resource Corporation


Note: GORO plans to list on the Toronto Stock Exchange (TSX) in the coming months which will put it on the radar of more Canadian investors.

Company information

Company Name Gold Resource Corporation
Exchange / Ticker TSX: GORO
Share Price USD$17.50
1 Year Performance +36.08%
Current annualised dividend rate US$0.06
Dividend Yield 4.11%
Market Cap 925.95M
Shares Outstanding 52.91M
Earnings per Share (EPS) $1.32
P/E Ratio 13.27
Beta 1.05
52 Week Range 15.06 – 28.45

Source: Google Finance. Notes: TSE or TSX = Toronto Stock Exchange. NYSE = New York Stock Exchange. AMEX = American Stock Exchange. NASDAQ = National Association of Securities Dealers Automated Quotations, but the acronym is obsolete.

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