-- Posted Tuesday, 10 July 2007 | Digg This Article

Current Price: $4.00

Initial Coverage: $1.00 (October 2006)
Share Structure: 30.5 Million Fully Diluted
Balance Sheet: No Debt/ $6 Million in Cash
Market Cap: $120 Million

Management engineered GORO from the very beginning to be a shareholder appreciation machine, and I see no reason for the current trend to stop. This write-up is meant to expand the breadth of knowledge when it comes to Low Cost Production and the infinite leverage it provides to GORO shareholders.

Highlights :

1. Management: Bill and David Reid co-founded U.S. Gold Corporation (USGL), and ran the company since its inception in 1977 until August of 2005. During the 28 years USGL operated under the Reid's management, the company built or participated in 6 producing mines.
2. Share Structure: 30.5 Million Fully Diluted with NO WARRANTS outstanding and all stock has been registered. 1/3 controlled by management, 1/3 controlled by institutions, and 1/3 owned by retail investors. Targeting 35 Million Shares Fully Diluted post mill financing.
3. Properties: 100% ownership of four high grade gold and silver properties in the southern state of Oaxaca Mexico.
4. Low Cost Production: 2004 Scoping study concluded production cash costs would be $102/oz.
5. Low Capex Project: $20 million with Capex payback of 6 months. Potential of four high grade gold/silver properties feeding one mill.
6. Near Term Production: Targeted Mid- 2008 Production with production estimated to be at least 70,000, 90,000, 100,000 oz the first three years.

The Scarcity Effect:
With only a handful of low cost producers (+/-$100/oz) of gold left in the world, GORO has attracted the attention of some of the largest gold funds who invested in the IPO. The stock market pays 3-4x more for low cost producers then average cost producers. With an already anticipated low cost of production, GORO management recently alluded to the fact that cash costs could be much lower then previously thought:

“Recent metallurgical confirmation and optimization tests have been very positive which should result in several operating cost reductions. By applying a very simple pre-aeration step, cyanide consumption (generally the largest reagent cost) may be reduced by 2/3rds from the 1.6 kg/tonne used in our Scoping Study economics to 0.5 kg/tonne and the leach time reduced from 72 hours to 60 hours. These changes have been incorporated into the detailed mill design for significant cost savings.” Press Release, June 2007

GORO is one of the lowest risk highest reward opportunities in the exploration market today. I can make just as good of an argument to own GORO whether gold is $400/oz or $800/oz, since the economies of scale are so great when you can produce at low cost. I believe that GORO’s cost reduction announcement in June, which was buried at the bottom of the press release, could bring cash costs lower then $100/oz. Once in production, increased silver and base metal prices/production (used as a credit) could push down cash costs to sub zero levels. This will have a material positive impact on cash flows, dividends, and share appreciation.

Catalysts:
Yamana, Northern Orion, and Meridian announced a proposed three way merger. All three are low cost producers of gold. I believe the industry will see further consolidation especially within the highly coveted low cost peer group. Meridian’s market cap is roughly $3 billion with annual gold production of 300,000 oz’s a year with a negative cash cost per ounce of $-35/oz (using silver as a credit). Yamana’s market cap is roughly $4.25 billion with annual gold production of 400,000 oz’s a year with a negative cash cost per ounce due to copper credits.

Agnico Eagle, a low cost producer, announced recently that it will focus most of its exploration budget in Mexico to prove up close to 18 million oz’s of gold reserves. Agnico Eagle has a $5 billion market cap with annual gold production of 240,000 oz’s a year with a negative cash cost of $-300/oz (using silver and others base metals as credits).

The recent M&A activity in the low cost peer group along with their increased focus on Mexico makes GORO a prime takeover candidate. I have also outlined the companies above to provide context to what GORO could evolve into in a relatively short period of time. Once GORO proves up a longer mine life it will garner a similar premium when compared to other gold producers.

Conclusion:

Over the next several months I expect GORO to announce more high grade gold/silver intercepts which will likely increase current production and mine life estimates.

The company’s focus will be to explore and drill along a visible 8km mineralized trend (mentioned above) where several possible open pit and vein structures have been identified. GORO has yet to explore what I believe to be one of the most exciting silver properties in Mexico, Las Margaritas, which is to the northern end of its 8km mineralized structure. Other pipeline properties such as Solaga in which grab sampling returned 15,000 gram/tonne (1.5% silver per tonne) have also yet to be explored, and all properties are within trucking distance of the proposed low cost mill.

It is my opinion that once GORO drills out a 6+ year low cost mine life, the market will really wake up to this opportunity and the ability to buy this in single digits will quickly vanish. Once GORO goes into production it will be an ATM machine on steroids, and with managements plan on paying 1/3 of cash flow out as a dividend, that in itself provides the underpinnings for a stock price many multiples higher then its current valuation. I am very confident that GORO will be a future low cost producer of gold/silver and whether they get bought out or not, the upside from current prices is phenomenal with very little risk. Currently, the stock market is paying an average $9,000-11,000 per produced oz of gold (Market Cap / Annual Gold Production) for low cost producers. With a targeted 35 million shares outstanding post mill financing, production starting in Mid-2008, and year one production of at least 70,000 oz, GORO has significant upside potential. I encourage anyone that is interested in GORO to call the company and request an investor packet.

- http://www.goldresourcecorp.com

Disclosure
The owner, editor, writer and publisher and their associates are not responsible for errors or omissions. The author of this report is not a registered financial advisor. Readers should not view this material as offering investment related advice. Authors have taken precautions to ensure accuracy of information provided. Information collected and presented are from what is perceived as reliable sources, but since the information source(s) are beyond our control, no representation or guarantee is made that it is complete or accurate. The reader accepts information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Past results are not necessarily indicative of future results. Any statements non-factual in nature constitute only current opinions, which are subject to change. The information presented in stock reports are not a specific buy or sell recommendation and is presented solely for informational purposes only. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise outside of the trading timeframe listed above. Investor Voices LLC has a 12 month investor relations contract with Gold Resource Corp of which compensational terms can be viewed at: http://www.investorvoices.com/disclaimer/  

-- Posted Tuesday, 10 July 2007 | Digg This Article

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