Nobody Expects The Goldbug Inquisition!

Further to your author's post on Silver-With-A-Bit-Of-Gold Resource Corp (GORO) yesterday, this humble corner of cyberspace would like to express three thoughts:

1) You can stop writing me now, guys. After the first three I just started deleting without reading anyway.

2) Their chief weapons are fear, surprise, ruthless efficiency and an almost fanatical devotion to a stock that they don't understand much but it has "gold" in its corporate name and it pays a dividend.....and a nice red uniform.

3) Then there's this. Please conform

Nice a nice day.

Silver-With-A-Bit-Of-Gold Resource Corp (GORO) reports its quarter

The new name for GORO is Silver-With-A-Bit-Of-Gold Resource Corp (GORO), because what we have here is a company trying to pretend it's a goldie when in fact it's a silver miner that's being hugely overvalued for what it is. The 2q11 financials at GORO came out last night and you can access them right here. When you do you'll notice that:

• GORO returned a net profit of $3.06m (its first ever net profit)


• That's a quarterly EPS of 6c


• Compare that to its market cap, currently standing at $1.378Bn


• Yup, that's a PE of around 100X


• And not only that, you're not paying way over the odds for a gold miner, you're paying for a freakin' silver miner. Here's a quick chart that shows the breakdown of sales revenue per metal:

metal	Oz sold	avg price	$
gold	2384	1576.03	3.757
silver	460479	36.66	16.881

And if you want the paydirt in chart form, here it is.

This is a GOLD miner? Gimme a freakin' break! It's a silver miner pretending it's a gold miner, end of story. It's profitable now, which is good, but it's hugely overvalued for what it is, even for what it promises to be later. And finally, let's remind ourselves that GORO hasn't bothered to put together a 43-101 and nobody really knows whether what they say about their PM deposits is true or not. 

But what Silver-With-A-Bit-Of-Gold Resource Corp does have is a legion of fanatical goldbug loopheads as shareholders, so your author is now expecting the usual round of abuse in his mailbox whenever cold, hard truths are given out to the whackjob end of the PM sphere, the people who give gold bulls like myself a bad name. DYODD.

UPDATE: For those of you just tuning in, this update post may be for you. 

UPDATE 2: Oh this is interesting. Hey guys over at the Yahoo board, did you know that GORO management are regular readers of your posts? Hey, wouldn't it be interesting if you found out that one of the posters there was in fact part of the managerial team at GORO, too?

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Gold Resource Corp (GORO): Barron's goes the Muddy Waters route

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. 

View Full Image 
.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.

Gold Resource Corp (GORO): Lucky management

David Reid, co-founder, director VP Expl, Secretary and treasurer of Gold Resource Corp (GORO) has been cashing out.

According to the filings that the rabid GORO faithful either never read or ignore, Between May 11th and May 19th, he sold 65,701 of his shares. If we assume he got an average of U$28 for each one (some he sold in the 27s, some in the 28s) he'd have raised U$1.84m from the sales. 

Oh, and by the way, company President Jason Reid sold 24k of his shares worth around U$700k on May 18th and 19th, too. Same kind of prices, same excellent luck at market. Cue owly:

Mining market thoughts

Dorato Resources (DRI.v) saw more insider selling last week. Today somebody somewhere sold 350,000 shares at $0.57. That's a long way off the $0.80 that Bedoya sold his second lot of 35k for last week. Last one to leave turn the lights out, please.

Interesting action in Chariot Resources (CHD.to), up 10% to $0.17 on high volumes. Last week the President of Shougang Mining met with Twobreakfasts and assured him and the rest of Peru that Shougang was pressing ahead with its $1Bn expansion project. The thing is that Shougang's mine is right slap bang next door to CHD.to's Marcona project; in fact CHD.to bought the land from Shougang in the first place. So why the sudden interest in Chariot today? I dunno, but the pieces fit a larger puzzle.

Frontera Copper (FCC.to) is now the centre of a bidding war, which can only be good for those holding (e.g. reader AS) and the wider sector. Mexican group Invecture had been outbid by PCU's 65c offer on Feb 4th, but today's upped $0.75 offer for FCC.to. adds fun to the scene. Let's see if PCU comes back at them. The stock has been trading at $0.79 and $0.80 today, so the market expects more action yet. Will they get it? I dunno. If you own, hold 'em. If you don't, and you want to, be careful about your entry point.

Gold Resource Group (GORO.ob) is at $4.60 right now. All very nice for the holders, but it gives me a chance to show my own failings as an analyst. In an October NOBS report I put a target on GORO.ob of $3.92 with gold at $900/oz (and silver $14). Here we are close to that spot gold number and the stock has shot way past my target. I even mentioned it here on the blog a few weeks back when it stood at $3.78 and mused that it was getting ahead of itself and maybe it was profit-taking time.

This is a good example of one of my major weaknesses in calling stocks, something I've battled with for a long time. As a value-based investor that calls targets based on fundamental analyses I find it tough to layer on market psychology and sentiment to my targets. I still think that GORO.ob is ahead of itself here, but that is no disguise to the fact that my "take profits" call at sub $4 prices totally sucked. Just another reason why I really mean it when I write "DYODD". After all is said and done, I'm just a dude with a blog.

Gold Resource Corp. (GORO.ob) news and views

GORO.ob 12 month price chart

Time for a bit of personal promotion.

Hot on the heels of last week's announcement that bigboy PM miner Hochschild (HOC.L) is investing $5m in small-but-growing Gold Resource Corp (GORO.ob) and its Mexican gold/silver project, GORO has come out with this press release today with an eye-catching headline of....

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Gold Resource Corporation Intercepts High Grade Mineralization in Deepest Hole Drilled to Date and Extends Arista Mineralization Southeast; Intercepts Include 1.4M of 47.40 g/t Gold and 1030 g/t Silver Within 8.6 Meters of 48.54 g/t (1.56 oz/t) Gold Equivalent at El Aguila Project

continues here

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And let's be honest: 1 1/2 ounces of gold per tonne looks pretty neat for a company with a U$100m market cap. So here comes the shameless promo pump!

I recently wrote a six page NOBS fundamental analysis report on GORO.ob that goes into detail about the company, the project, the projected financials and what can be reasonably expected as a share price target. A copy of the report (which will also be updated to include analysis of the latest newsflow, so it might turn into a seven page report) can be yours for the keeping at the knockdown bargain price of U$10 (yup...ten dollars). Just PayPal my account at...

otto.rock1 (AT) gmail (DOT) com

.....and I'll send you the report by mail. Or just send me a mail and say 'hello' if you like., because that would be nice. Or do both. But if you purchase the report you'll surely know more about GORO.ob and its promising (and very close to production) gold project than 99% of the market. You also get to support your 6th or 8th favourite blog in a way that helps us both. What could possibly go wrong? Thanks in advance.

Gold Resource Corp (GORO.ob) news...interesting

Gold Resource Corp (GORO.ob), a small and tightly held junior gold in Mexico, has just had a $5m cash injection thanks to silver mining bigboy Hochschild (HOC.L) of Peru.

Interesting for a couple of reasons. Firstly Hochschild (HOC.L) has been beaten up really badly recently and it's clearly keen to get more gold production on its portfolio. Secondly because this industrious Otto recently wrote a NOBS report on GORO.ob and liked the company, too. As a quick plug, you can get your own copy of the GORO.ob report for a very reasonable $10 (yep, that says ten dollars) and find out more for yourself about the company and maybe why Hochschild thinks the same way. The PayPal is....

otto.rock1 (AT) gmail (DOT) com

....or just use it to write me a mail and ask things. Anyhow, here's the PR from GORO this morning:

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Gold Resource Corporation and Hochschild Mining plc Form Strategic Alliance; $5 Million Private Placement

Wednesday December 10, 6:00 am ET

DENVER, CO--(MARKET WIRE)--Dec 10, 2008 -- Gold Resource Corporation (GRC) (OTC BB:GORO.OB - News) (Frankfurt:GIH.F - News) is pleased to announce that it has formed a strategic alliance with Hochschild Mining plc (Hochschild) through a $5 million private placement of 1.67 million shares of GRC's restricted common stock at $3.00 per share (no warrants). Hochschild is a world leading precious metals producer listed on the London Stock Exchange. Based in Lima, Peru, Hochschild is a mid-tier gold producer and the world's 4th largest primary silver producer with mining projects in five countries in the Americas including Mexico.

Funding will be used for the continued construction and exploration of GRC's El Aguila Project in Oaxaca, Mexico. GRC is focused on yada yada continues here