Trading opportunity: Positive news may provide short-term boost to Gold Resource Corp.

At 11am EST (4pm UTC/GMT) today, Gold Resource Corporation will provide an update to shareholders on their third quarter 2012 results and their progress on current operations. The company’s shares have been hit hard by a recent spate of bad news, however a positive announcement from the company could provide a decent opportunity for traders.

Company background

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.

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.

Read our July 2012 profile of Gold Resource Corporation.

The chart below shows GORO’s rise along with the price of gold. The company’s stock price rose from a low of $0.86 in late 2007 to an all-time high of $30.25 on 28 April 2011, a 3,417% increase.

A 7 year chart of Gold Resource Corporation (Click on the chart for a larger version)

A 7 year chart of Gold Resource Corporation (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

In 2011 GORO was the victim of an orchestrated takedown during which a website ran negative reports on the company while the site’s backers took a large short position in GORO’s stock (40,506 shares). The result was a low in GORO’s stock of $14.55 on 4 October 2011.

The company responded to the allegations by issuing a press release (see here) and by announcing that it would repurchase $20 million of its stock. Commenting on the announcement GORO’s President, Jason Reid, said “Management believes that at current price levels the Company’s stock is undervalued and represents an attractive investment opportunity for the Company in addition to an opportunity to further reduce its already tight capital structure”.

By 3 February 2012 the company’s stock had reached more than $27 a share, however in late July the stock a began series of sharp declines.

Recent selloff

The recent selloff began on 19 July 2012 when GORO unexpectedly announced lower than forecast second quarter production which forced it to lower its 2012 production outlook by around 15% to a targeted annual production range of 100,000 to 120,000 GEO (Gold Equivalent Ounces).

As the chart below shows, the market doesn’t like surprises and the stock sold off hard on the news hitting a low of $16.33 on 23 July. The stock then slowly recovered reaching $23.52 on 21 September, before beginning another move down.

On 17 October GORO reported preliminary production results of approximately 22,300 GEO for the third quarter. The number was a 64% increase over the previous quarter, indicating that some of the problems at the company’s La Arista mine have been resolved.

In a statement Jason Reid said, “We have made considerable progress regarding mine development, including ground water management, as seen by our increase in production over last quarter. Though we continued to mine some lower grade ore zones in the third quarter from splays and vein margins, our stopes between levels 7 through 10 allowed us to mine higher-grade ore zones during the quarter that we believe will further increase our production levels in future quarters. We are currently focused on reducing dilution in our long hole stoping methods, implementing cut and fill mining in certain zones to minimize dilution and working to improve overall operational efficiencies.”

The market discounts future growth, and in the same press release GORO revises its 2012 annual production outlook down to a range of 85,000 to 100,000 GEO which caused a considerable selloff in the stock.

A 6 month chart of Gold Resource Corporation (Click on the chart for a larger version)

A 6 month chart of Gold Resource Corporation (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The most recent selloff, which began last Friday, was triggered as multiple class-action lawsuits were filed against GORO on behalf of purchasers of the company’s stock. The lawsuits allege violations of the Securities Exchange Act of 1934 on behalf of purchasers of GORO common stock during the period from 30 January 2012 to 8 November 2012.

More specifically the complaint alleges that, “during the Class Period, the defendants [GORO] made materially false and misleading statements to investors in violation of the securities laws by misrepresenting and failing to disclose significant production problems at the Compay’s El Aguila mining project in Oaxaco, Mexico.

The complaint further alleges that the defendants materially overstated the Company’s reported production statistics, revenues and net income during the first and second quarters of 2012 by improperly including “sales” of product that were invoiced, but not actually delivered to the Company’s buyers.

These various law firms are trying to get a piece of any potential settlement and are advertising in search of investors that may have been misled by the company’s forecasts earlier in the year.

Production problems in mining are not uncommon and often cannot be helped, however GORO’s management team have not done a good job of keeping investors informed with up-to-the-minute details of issues.

As a result of the stock’s decline, the company now has a dividend yield of 5.68%, something which should help put a floor under the stock. GORO has also hired Barry Devlin as Vice President of Exploration, a man who has 31 years of experience working at companies such as Endeavour Silver Corporation and Hecla Mining. Mr Devlin will replace founder David Reid.

The trade

As the 6 month chart of GORO above shows, the company’s stock is now considerably oversold and therefore positive news from the company on today’s conference call could produce a decent short-term bounce in the stock. Any rally is unlikely to last long however, and a lack of bullish news is likely to precipitate a further selloff.

A 2 day 10 minute chart of Gold Resource Corporation (Click on the chart for a larger version)

A 2 day 10 minute chart of Gold Resource Corporation (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Traders looking to profit from this opportunity should look to go long GORO just prior to the 11am EST (4pm UTC/GMT) conference call with a tight stop at around $12.56 if this has not already been violated.

Sell orders could also be placed below $12.56 in order to capitalise on any further disappointing news from the company.

Any profit in either direction should be locked in quickly by tightening stops and it seems likely that any upside move will be fairly short lived given the uncertainty surrounding the lawsuits.

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