Here's the link to an article published today at Barron's on Gold Resource Corp (GORO). What you need to know:
- It's a hatchet job
- Its target, Gold Resource Corp (GORO), has plenty of reason to be the target of such a hatchet job.
- However it doesn't have every reason to be a target, so the article's biased nature and highlighting of all the negative aspects is clear to see.
So what we have is a Muddy Waters type of negative article to read, which might be enough to put this company under a long-overdue spotlight. After all, Muddy Waters didn't have to be right on everything to blow Sino Forest (TRE.to) out of the water, Carson Block & Friends just had to be right on enough things to make their point. As for GORO, not everything is wrong at the company, but there's certainly enough heterodox stuff at GORO to make it deserving of more scrutiny, the type of scrutiny that a U$1.3Bn market cap company deserves. It's probably healthy all round to see this Barron's story, because if there really is enough meat on the GORO company it will survive and thrive on the refuting of criticisms such as in this report.
So go read the piece written by Michael Santoli for Barron's yourself (here's the link again to make sure you do). By way of a primer, here's a chunk of the script:
"...across the street from the Broadmoor Hotel is a $1.7 million, 3,600-square-foot town house zoned for residential use that serves as the corporate headquarters of Gold Resource (ticker: GORO), a 13-year-old junior mining company working some properties in the southern Mexican state of Oaxaca that has soared to a $1.3 billion stock-market value, thanks to the public zeal for gold investments and management's promises of having "some of the highest-grade deposits in the world." When Gold Resource acquired the town house last summer as a workplace for its five corporate employees, it paid the equivalent of almost 700 months' worth of the rent on its prior office space.
"If this real-estate indulgence were the only worrisome element in the Gold Resource story, perhaps investors would be safe in overlooking it. But it is only one red flag among many that haven't been heeded as the company's shares have run from 4 to 24 in the past two years, bestowing enough heft in market capitalization to win Gold Resource entry into the Russell 2000 index.
"In reality, the company is run by a small group of family members who have steadily sold shares on the way up, consistently promised more production than has been delivered and not conducted formal independent drilling studies to verify their claims that they will soon be mining 200,000 ounces of gold equivalent a year at zero cash cost."
DYODD, dudettes and dudes. Thanks for the headsup on the article sent out to reader A.
UPDATE Sunday AM: The Barron's note has now gone behind a paywall thingy, so......
The Glittering Prize
Feature | SATURDAY, JULY 2, 2011
By MICHAEL SANTOLI
Gold Resources has a luxe new headquarters and a highly compensated management. Now all it needs is gold.
The Broadmoor resort in Colorado Springs has served for 93 years as an enclave of leisure and luxury in the shadow of the Rocky Mountains, centered on a five-star hotel and featuring a pro-caliber golf course. This week, it will serve as host to the U.S. Women's Open tournament.
Somewhat more improbably, across the street from the Broadmoor Hotel is a $1.7 million, 3,600-square-foot town house zoned for residential use that serves as the corporate headquarters of Gold Resource (ticker: GORO), a 13-year-old junior mining company working some properties in the southern Mexican state of Oaxaca that has soared to a $1.3 billion stock-market value, thanks to the public zeal for gold investments and management's promises of having "some of the highest-grade deposits in the world." When Gold Resource acquired the town house last summer as a workplace for its five corporate employees, it paid the equivalent of almost 700 months' worth of the rent on its prior office space.
Some neighborhood: Gold Resource has set itself up in a town house across the street from Colorado's Springs' swanky Broadmoor Hotel, above.
.If this real-estate indulgence were the only worrisome element in the Gold Resource story, perhaps investors would be safe in overlooking it. But it is only one red flag among many that haven't been heeded as the company's shares have run from 4 to 24 in the past two years, bestowing enough heft in market capitalization to win Gold Resource entry into the Russell 2000 index.In reality, the company is run by a small group of family members who have steadily sold shares on the way up, consistently promised more production than has been delivered and not conducted formal independent drilling studies to verify their claims that they will soon be mining 200,000 ounces of gold equivalent a year at zero cash cost.
GOLD RESOURCE WAS CO-FOUNDED IN 1998 by William Reid, whose career in mining included a stint as head of U.S. Gold from 1977 to 2005, when he sold control of that company to Canadian gold entrepreneur Rob McEwen at a valuation of around $12 million.
Bill Reid's brother, David, is Gold Resource's vice president of exploration and oversees drilling at the company's main El Aguila property in Mexico. Bill's son, Jason, was named president last year. Rounding out the executive ranks is Greg Patterson, head of corporate development.
The company did a self-underwritten initial stock offering in 2006 with the help of Bill Conrad, co-founder of a firm called MCM Capital Management, in Denver. Conrad has been a backer and/or a director of several public micro-cap companies since the 1990s, some of which were delisted or merged into other companies as shells. Gold Resource's former part-time chief financial officer, Frank "Monty" Jennings, left earlier this year to serve as full-time CFO of Synergy Resources, an oil-and-gas driller for which Conrad also serves as director.
Bill Reid served as interim CFO until last month, when the company signed on another part-time CFO, Paul Oberman, who works for a temporary-CFO firm and will be paid by the hour. The company's auditor, Stark Schenkein, is a local Denver firm with only a handful of small public-company clients.
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.Conrad, who owns some 400,000 shares, is on the Gold Resource board as lead director, chairing both the audit and compensation committees. In the latter capacity, he approved his own cash compensation of $260,000 last year for his service as a director in a year when the company lost $23 million on $14.8 million in revenue.
Bill Reid makes the rounds of gold investment conferences, extolling the rich vein of precious metals discovered at El Aguila, where the company built an open-pit mine and a mill and began production about a year ago. Reid claims that the company's mine, and an underground mine that was begun later, will yield enough lead and zinc byproducts to pay all of the cash costs of producing the gold and silver, leading to "zero cost" precious metals to sell, versus an industry average cost of $500 an ounce.
As far back as 2007, company news releases were promising that production would begin the next year. But the start kept being pushed out because of permitting problems and construction delays. A representative explanation came in an April news release headlined, "Anomalous Storm Impacts Gold Resource Corporation's Aguila Project." The open pit, which was targeted to yield 70,000 ounces, produced only 20,000, leading to the expensive and complicated plan to do more underground blasting.
In aggregate, over its dozen years of existence, the company has spent $95 million raised from equity investors to produce a total of $26 million in revenue, with $11.3 million of that coming in the quarter ended March 31 from the sale of "metals concentrates" to a single buyer, the closely held commodity dealer Trafigura Group, which did not respond to a request for comment. Neither Bill Reid nor Conrad responded to e-mailed questions.
INVESTORS NEED TO TAKE the Reids' word on the mineral content of its deposits and how much it will cost to get them out of the ground, because the company has not sought an engineering study that could lead to estimates of "proven and probable reserves" under Securities and Exchange Commission standards. Bill Reid has been vocal about the wisdom of this approach, saying it would have taken years to complete such a study, and it was preferable simply to get into production as quickly as possible. Apex Silver Mines, now called Golden Minerals, explored the site in the early 2000s but walked away. Canyon Resource and Heemskirk were partners in the project but passed on their rights to acquire a larger stake in the company.
Jason Reid, the president, in a series of e-mail exchanges, points to the endorsements of the company's two largest outside investors as indications of the value of the mining assets. Hochschild Mining (HOC.UK), a small Peruvian producer, took a 27% stake in the company as part of its strategy of acquiring a basket of young mining companies.
Yet Hochschild acquired the stock at an average price of less than $5 a share and chose not to participate in the private placement last year, at 16, that raised $56 million via Jefferies & Co. While Hochschild geologists have re-assayed and reviewed some of Gold Resource's drilling core, no independent party has performed its own drilling, sampling and analysis. Hochschild's Isac Burstein, who is on the Gold Resource board, declined to comment.
.The other large investor is Tocqueville Asset Management, whose top-performing Tocqueville Gold Fund (ticker: TGLDX) is managed by John Hathaway (subject of a favorable 2010 Barron's profile). Tocqueville owns more than 5% of the company. Like other bulls on the stock who discussed it with Barron's—a group that includes Michael Dudas of Jefferies, the only brokerage analyst who covers it, and John Doody of Gold Stock Analyst newsletter—Hathaway concedes that the Reids have taken an unconventional approach, but now that they are in production, the mine should bear out the promised value of the asset.
Gold Resource has hired a firm to complete what's known as a 43-101 study, a Canadian standard for estimating "indicated" and "measured" mineral resources that is far less rigorous than the SEC's "probable and proven" standard. The effort is mainly aimed at getting the stock listed in Toronto.
Hathaway says his analyst, Doug Groh, a geologist, has visited the site twice and found the samples consistent with a potential deposit of two to three million ounces of gold equivalent. Taken at face value and assuming $1,500 gold forever, that represents $3 billion to $4.5 billion in gross revenue over more than 10 years' time, before deducting for maintenance, administrative expenses or any future town-house purchases, for a company already valued at $1.3 billion.
Hathaway points out that his Gold Resource position has gotten so large "mostly by appreciation" in the stock. So, the Reids' vast promises notwithstanding, the largest holders, who have known the company the longest, have not been buying the stock at anywhere near the current price. Meanwhile, the Reids and Conrad have been consistent sellers of the stock. In the past year alone, the foursome has sold $13.7 million worth, according to InsiderScore.com.
Jason Reid says that the insider sales amount to only a small portion of management's holdings and reflect diversification of personal assets. He asked that any article wait until the second-quarter results are out, which he promised will show record production and earnings. He didn't wait for the numbers to come out to sell $700,000 in stock on May 19, a day after Barron's first e-mailed him some questions. He responds: "I may have sold more shares (representing a very small percentage of my holding) had you not contacted me, but I stopped selling as soon as I realized ALL your questions were/are slanted and I believe your article will be negative potentially driving down our stock."
It's news to nobody that small mining companies can be promotional and hyperbolic about the underground riches they have found. Yet Gold Resource goes the extra step of promoting its stock with an unusual policy, begun in July 2010, of declaring special monthly cash dividends–lately four cents a share, for an annual run rate of $25 million. This despite the fact that the company's only profitable quarter, the first quarter of this year, required a few massages in its accounting, such as capitalizing mining equipment and supplies and a collapse in exploration spending.
The Bottom Line
Gold Resource's shares have almost doubled over the past year on a seemingly too-good-to-be-true promise of a "zero-cost" mine that could yield billions. Don't bet on it.
.The company even has a tagline, "Earnings are opinion, cash is fact." They further propagate the gimmicky gold-bug idea of some day making its own gold coins to offer "dividends in kind."
WHILE GOLD RESOURCE BOASTS that it is paying the dividend out of operating cash flow, the company has never, in a single quarter, produced positive operating cash flow. In the first quarter, when in its opinion it produced positive earnings, the cash balance fell by $9.7 million. The Reids use a measure called "mine gross profit" that ignores all construction and overhead costs.
The dividends, which are categorized as "return of capital" for tax purposes, are funneling close to $4 million (in U.S. dollars mind you, not gold) a year to the Reids and Conrad in a tax-efficient way. And therein lies an interesting wrinkle. The dividends aren't taxed as income—unless the shares have been lent out to short-sellers. So there is a real incentive for investors to request that their shares not be lent out.
That hasn't stopped the short interest from doubling in the past two months to 3.4 million shares. Clearly, some investors aren't taking the Reids' word on how much gold they have, or what it will cost to get at it, or when they might do so. That's probably wise.