-- Posted Tuesday, 14 November 2006 | Digg This Article
“The focus of G.R.C. is to establish profitable gold and silver production, and management believes its experience at building mines from their previous company, U.S. Gold Corporation (USGL), strengthens Gold Resource Corporation’s prospects for success.”
Gold Resource Corp.
Gold Resource Corporation [OTCBB: GORO] is not a name most gold investors have heard of, yet that is. With the IPO of Gold Resource Corp. back in mid-September at $1/share, one of the newest gold companies on the market has yet to receive the recognition it deserves. Time will change this as the company and its properties are noticed.
Gold Resource Corp. is currently an exploration company focusing on high-grade gold and silver deposits in southern Mexico and aims to be a low-cost gold and silver producer in 2007. Should the company proceed with production, Gold Resource Corp.’s high-grade gold and silver El Aguila project should see cash production costs around $100 an ounce (gold). The project is also forecasted to have less than one year payback on CapEx. Along with the targeted 100,000 ounces of high-grade gold equivalent production, Gold Resource Corp. seeks to maintain its extremely shareholder-friendly share structure and to target a 1/3 payout of potential strong cash flow in the form of dividends.
Gold Resource Corp. was founded by Bill and David Reid, who co-founded US Gold Corp. (USGL) since its inception in 1977 until late 2005, when Rob McEwen purchased 1/3 of USGL. During their time at USGL, the Reid’s “built or participated” in 6 producing mines.
After Mr. McEwen’s substantial investment into USGL, the Reid brothers departed to focus on their current venture, Gold Resource Corp. I believe that the tremendous success of USGL is a strong asset for the Reid’s resume and will bring additional confidence and interest into the already attractive projects in Gold Resource Corp. Also note the strong interest management holds with just over 1/3 ownership of the company.
Note: US Gold Corp. was a past recommendation of the Gold Forecaster newsletter, which produced a 623% return. The company saw its shares move from under $0.50 per share in 2005 to nearly $10 in early 2006.
During their time at USGL, the Reid’s “built or participated” in 6 producing mines shown above.
Gold Resource Corp. holds three projects in the Mexican state of Oaxaca. They have been identified as part of management’s objectives of “low operating costs and potential for high returns-on-capital.”
The flagship property, and the one I will focus on in this report, is the 100% owned El Aguila project, a newly discovered high-grade gold and silver system extending over a structural corridor of 8 km. Several surface samples have yielded exceptional grades including a 36 g/t gold sample and a 3,100 g/t silver sample!
A subsequent drilling program confirmed and expanded the initial mineralization and established the likelihood of additional vein mineralization at El Aire, 2 km from El Aguila along the same structural corridor. A cross-section is shown below and illustrates the exceptional high-grade gold and silver at El Aguila. Gold Resource Corp.’s management believes this “limited work on a very small portion of the property is an encouraging indicator, as there are numerous additional areas along this important structural corridor where high-grade surface samples exist.”
On October 19th the company announced the start of a targeted 6-month 10,000-meter core drilling program, currently underway, to expand and test additional targets. Initial results are expected to be released by the end of this year which will help to better define and identify the vein structure and resources/reserves. William W. Reid, Gold Resource Corp.’s president commented in the October 19th press release, "Additional drilling will focus on similar open pit targets identified by numerous high-grade, rock chip surface samples with gold as high as 35 g/t (1 ounce/ton) and silver as high as 3,170 g/t (92 ounces/ton). We also intend to follow up on our discovery of a possible high-grade vein found in our previous drilling. We are particularly excited about drilling along a specific 2km structure where at one end we intercepted four meters of 54.71 g/t (1.60 ounces/ton) gold and 701 g/t (20.45 ounces/ton) silver and the other end we intercepted four meters of 1.9 g/t (0.06 ounces/ton) gold and 755 g/t (22 ounces/ton) silver."
A scoping study was performed in 2004 with the goal to assess possible mining operation parameters based on the first round of drilling. The study indicated excellent precious metals recoveries and based on the assumptions made at the time of the study, cash costs of producing an ounce of gold would be $102 using silver revenues as a credit against costs. The payback of the capital for the project would be just 7 months (Note: The silver price used for the study was $7.00/ounce and $430/ounce for gold!)
Although the scoping study called for a 55,000 ounces per year open-pit production, the company is targeting even higher levels with a 100,000 ounces per year milling operation. El Aguila holds the potential to mine its high-grade gold and silver deposit around $100 an ounce, potential cash flow from this model would be tremendous. Assuming $600 ounce gold prices, this could translate into a $50 million per year in positive cash flow climbing to over $60 million should the gold price return to its early 2006 highs.
Assuming 100,000 oz/year gold-equivalent production and $100/oz cash cost, potential cash flow.
Should the company proceed with production, Gold Resource Corp. will require around $20-$25 million in additional funding. Therefore a secondary offering will be needed, but with the share price rising to $2 or higher, the total effect on the share structure should not exceed the company’s targeted 35 million share maximum – an absolutely terrific share structure potential for a high-grade miner with among the lowest production costs in the industry!
The story gets even better when you learn about the targeted dividend. The company would like to reward shareholders with a targeted dividend of 1/3 distribution of cash flow. Although these are currently targets and hypotheticals, should they be achieved, shareholders could see nearly $0.50 per share in payouts at a $600 an ounce gold price!
Potential per share dividend distributions using figures given above.
Even by dropping the targeted production figures by half and assuming early 2006 metal price levels, I still show around $0.30 a share in dividends and yielding some $30 million/year in positive cash flows!
The figures discussed above are quite resounding and investors are likely to concur that current market valuations do not properly reflect the potential El Aguila alone brings, but this should likely change as investors learn about this company.
Las Margaritas and El Rey are two early-staged exploration high-grade gold/silver properties. With their close proximity to El Aguila, should these properties eventually enter into production, ore could be sent for processing to the prospective El Aguila mill. These two high-grade properties add additional projects to the pipeline by bringing lucrative potential to the company’s promising future and by providing additional value to shareholders.
An extension of the El Aguila system, Las Margaritas is a high-grade silver property, which Gold Resource Corp. retains a 100% interest. Surface samples taken by the company have yielded silver mineralization as high as 1,200 grams per ton. This property remains in the early stages of exploration, yet strategically situated North-West of El Aguila.
Another early stage exploration project, El Ray is a high-grade gold property which again Gold Resource Corp. holds a 100% interest. The area was mined previously, but little is known about the property. Gold Resource Corp. took two selective samples from the dump material around the original shaft which assayed 80 and 85 grams per ton of gold, indicative of a potential high-grade gold vein.
All three properties are located in Oaxaca State in Southern Mexico. Hosting one of the friendliest mining environments in the world, Mexico has a rich 500-year mining history and ranks among one of the best places to mine. In fact, I believe that in today’s quickly changing geo-political environments, mines and properties in locations such as Mexico should carry higher premiums than we currently are seeing in the marketplace.
Share Structure – Balance Sheet:
Investors will be positively impressed by the small share structure Gold Resource Corp. currently exhibits. I continually prefer to invest in shareholder friendly companies and Gold Resource Corp. meets and exceeds this criteria. With no debt and $4 million in working capital as a result of the successful initial public offering recently, Gold Resource Corp. is in an excellent position to continue its friendly share-structure even after a secondary offering of around $20-$25 million. The company aims at keeping the total maximum outstanding shares at under 35 million.
Technical Chart - GORO:
The chart above shows a strong uptrend in progress with strong accumulation; investors are evidently eager to buy pullbacks. Although ultimately the stock price will see stronger correlation to metal prices, I see Gold Resource Corp. continuing to trend higher as investors continue to revalue it properly. The stock price is seeing strong upward momentum which could easily carry it to and over $2/share shortly, perhaps higher in the interim.
The company is run by experienced management as evidenced by their multi-decade tenure of running US Gold Corp., one of the most profitable investments during 2005-2006. Management is undergoing an aggressive schedule for El Aguila, which aims to define additional high-grade gold and silver mineralization by the end of 2006 into next year and make a production decision in early 2007. If Gold Resource Corp. feels that they can bring this mine into commercial production, they would aim to do so during 2007.
El Aguila is proving itself to be an exceptionally high-grade gold and silver project which is anticipated to mine around $100/oz cash production cost. This possibly may become one of the lowest cash-cost producing mines in the world, I find this project too compelling to ignore. The scoping study called for a 55,000 ounces a year production, but management is aiming to increase this to 100,000 ounces per year with a targeted capital cost of just $20-$25 million while maintaining a friendly share structure.
Assuming a $600 gold price, which I feel is a conservative level at this time, and assuming a 100,000 ounces per year production level, the company could be looking at around $50 million a year cash margin! This equates to upwards of $1.50 per share cash flow. Management feels if these hypotheticals are met, they would target and distribute 1/3 in the form of dividends as discussed above.
There remains a lot of work to be done and risks remain before one can even consider the possibility of profitable production. Yet, the property has yielded excellent initial results and it is unusual to come across such a high-grade property in a mining-friendly region as we find in Mexico. Also consider the 2 additional projects nearby, which also have high-grade potential. Even at lower production levels, Gold Resource Corp. will be valued multiples above the current market levels, assuming they are successful.
Even accounting for conservative projections, one can easily see a $5-10 valuation down the road if production commences, if not higher. It has been my belief that the current discount in the stock is largely attributed to the absent knowledge of Gold Resource Corp. on investors’ radars. Just recently, with Gold Resource Corp. still trading near a $1/share, I met with the management and offered my services to help tell their story to investors. As such, I have entered into an agreement to help elevate the profile of Gold Resource Corp. and have taken a position in the company.
All investors interested in Gold Resource Corp. are urged to perform their own due diligence, to discuss this with a financial advisor, and to not simply go on my opinion alone. I do believe your research and conclusions will concur with mine. I have made this one of my largest positions as I believe 2007 could bring about an excellent performance in its share price. Gold Resource Corp. could be a leader in the exploration/junior sector during the next 12-24 months, should the story continue to unfold. Stay tuned!
For further research and information:
o News Releases: http://www.goldresourcecorp.com/news-releases.php
o E-mail sign-up: http://www.goldresourcecorp.com/email-list.php
Contact the Company Directly: 303-320-7708
Reviews SEC Filings: http://www.sec.gov/cgi-bin/browse-edgar?company=Gold+Resource+Corp&CIK=&filenum=&State=&SIC=&owner=include&action=getcompany
- November 10, 2006
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-- Posted Tuesday, 14 November 2006 | Digg This Article
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Peter Spina's experience with the precious metal markets started back in the mid-1990s, which led to the creation of GoldSeek.com back in 1995. Today GoldSeek.com ranks in the top three most popular global gold websites and its sister site, SilverSeek.com ranks as the most visited silver website in the world. Back at the start of the new secular precious metals bull market, Peter established the technically-focused subscription newsletter, Gold Seeker Report, which at the start of 2005 was merged into the more comprehensive Gold Forecaster (goldforecaster.com) service. In addition to the newsletter and websites, Peter frequently appears in the media including MarketWatch, Reuters, and theStreet.com
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