Trading update: Gold Resource Corp. jumps 7.5% on positive outlook & remains a long-term holding

Gold producer, Gold Resource Corporation, jumped 7.5% yesterday on the back of decent Q3 results providing an excellent one day trade. The company also provided an update for investors and it remains in our long-term portfolio.

In yesterdays article I said that gold producer, Gold Resource Corporation (GORO), was “considerably oversold” and that “positive news from the company on today’s conference call could produce a decent short-term bounce in the stock”, and that’s exactly what we saw.

I suggested that traders looking to profit from any potential rise in the company’s stock “should look to go long GORO just prior to the 11am EST (4pm UTC/GMT) conference call with a tight stop…” I also noted that any rally was “unlike to last long” and that any profit “should be locked in quickly by tightening stops”.

Having opened at $12.67, GORO continued its recent decline with the stock reaching a low of $12.13 round 10:00am (EST). However, the stock then reversed and rose an impressive 13% to a high of $13.71 at 11:50am (EST) before selling off to close at $12.88.

As the chart below shows, I was able to capture a good portion of that rise using the trade I outlined yesterday.

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

Company outlook

GORO is a company we hold in the 247Bull portfolio, and as discussed on Wednesday, we have put the company on probation, meaning that we are keeping a close eye on it because it has underperformed versus our expectations.

As we said in our July 2012 profile of the company, when we are evaluating a gold or silver mining company, we look for seven key things all of which GORO has. These are:

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

2.            Properties that are located in politically safe jurisdictions.

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.

Given the company’s excellent fundamentals, and the fact that it has increased its gold production by 64% from this time in 2011, its net income is up 20% and its dividend is also up 20%, the company’s stock should have performed considerably better than it has. Year-to-date the stock is down 39%.

I won’t go into the company’s problems since I covered them fairly extensively yesterday, however having listened to yesterday’s conference call I still feel that the company has a bright future.

The company announced third quarter results, the highlights of which included:

  • Gold equivalent production of 22,336 ounces
  • 18,059 GEO sold
  • A 54% increase in GEO production over Q2
  • Gross mine profit of $23.8 million
  • Pretax income of $13.1 million, or $0.26 per share
  • Net income of $7.3 million, or $0.14 per share
  • dividend distributions of $9.5 million, or $0.18 per share

The company also has $6.6 million in physical gold and silver in the treasury.

In addition to announcing its third quarter results GORO took time to address each of the issues that it has been facing.

Arista underground mine: Spiral tunnel

Water inflow is common when mining below the water table and the issues that impacted GORO’s production in Q2 have been addressed by installing additional pumping stations and by hiring SRK Consulting, a well respected natural resource focused engineering firm, to assist them going forward.

Excess CO2 gas which seeped from some of the deeper water courses also hampered GORO in Q2. However the company has expanded ventilation and has installed the first of two CFM exhaust fans, the second is due to be installed by the end of November. Additional safety procedures, including air quality monitoring, have also been implemented.

The company is now mining 16 stopes (excavated areas produced during the extraction of ore-bearing rock) although not all active at the same time. During the third quarter GORO mined stopes in Levels 7 to 10 (see company presentation pages 12-13 for more detail), and pulled 50% ore and 50% development waste from the mine. Levels 11 and 12 are being developed for future mining.

Arista underground mine: High-grade ore sample

The percentage of waste rock that was removed along with the ore, averaged 32% in Q2 and Q3. This “dilution” is unacceptably high and the company has therefore taken steps to reduce it to within an acceptable 10-20% rage. Among other things, the company has adopted new blasting techniques to minimize the waste rock, which once dislodged has to be removed with the ore.

Exploration work continues on the companies other properties (El Rey, Alta Gracia, Las Margaritas, El Chamizo and Solaga) with the primary access road at Las Margaritas now completed and a core drill now turning at the property. According to a government publication called “The Mines of Mexico” Las Margaritas was mined prior to the Mexican Revolution and it was the source of some of the highest gold and silver grades at the time. A government report (circa 1905) claims assays of more than 4,000 ounces per ton of silver.

GORO’s management also confirmed that a law suit has been filed against them but stated that, “We believe the claims are without merit and intend to vigorously defend against” them.

GORO Chairman and CEO, William Reid, continued saying, “The tragic thing is that the mere filing of these lawsuits has panicked many shareholders, I believe. All these various lawsuits, which appear to be piling on, are by law firms that make a living doing this and want to be part of it. But most likely, all these suits will be combined into one class action lawsuit, and we will then deal with it at that time.”

The bottom line

Although GORO has not yet provided the capital appreciation expected, we will continue to hold the company as a long-term investment. GORO remains an excellent company and the poor performance of the stock is somewhat tempered by the monthly dividend income which is now equivalent to 5.59% annually.

The company also offers shareholders the option to convert their monthly cash dividend into physical gold and/ or silver and take delivery of their precious metals. For more information see the company website here.

Our target for the stock (2-3 years out) is $30.

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