Gold Resources (GORO): I am mostly wrong on this one

Originally, I thought that Gold Resources was a scam because they did not try to prove to investors that they had a real deposit/mine.  They have no proven and probable reserves according to SEC guidelines.  There is so much scumbaggery in the mining sector that I automatically assumed that they were lying.  But… I think that they really do have a profitable mine.  It’s likely that the management team at Gold Resources felt that it was an unnecessary use of money to put out the necessary technical reports.  Hindsight vindicates this view as the stock price is/was high, the mine was financed, etc.

I doubt that this company is some kind of bizarre and elaborate fraud.  GORO’s financial statements indicate that their mine has high margins and has strong cash flow.  When Hochschild invested in Gold Resources, they probably did their due diligence (at least, one would hope so).  Generally, experienced mining companies are far more capable than public markets at doing due diligence.  They will actually re-assay the drillcore, examine the resource model, etc. etc.

The NI43-101 technical report

Gold Resources eventually released an “independent technical report” after its mine went into production.  It does not allow them to claim proven/probable reserves according to SEC guidelines.

This report is mostly of a waste of time.  They simply relied on information given to them by Gold Resources staff and did not do any data verification of their own.  According to the technical report:

PAH has not taken independent samples from the surface or underground exposures of the mineralized areas at the El Aguila project area, as other Qualified Persons have previously sampled the mineralization as discussed in this report. Production and sales records are the most reliable proof of mineralization contained in the ore deposits under exploration at the mine.
GORO reported in a Press Release dated February 29, 2012 total production of 66,159 gold oz-eq for the year 2011. This production represented an increase of 531 percent from the previous year production according to GORO’s estimates. This production resulted from processing 214,215 tonnes of mineral resources at an average recovered grade of 3.43 g/tonne gold, 357 g/tonne silver, 0.46 percent copper, 1.28 percent lead, and 2.84 percent zinc, which were extracted from the La Arista underground mine during exploration, development, and stoping of the La Arista vein deposit and adjacent veins, and production of 2-months operation at the El Aguila open pit mine.

They state that they did not take “independent samples” and it seems that they relied on information in GORO’s press releases.  This is unlike most technical reports as most authors would actually visit the site and take some samples to re-assay.  As well, the standard practice would be for the report to be a feasibility study instead of a resource report.  A feasibility study would include a lot of detailed economic information (e.g. cash flow projections, breakdown of operating costs, capital costs, etc.).

At the end of the day, the report did not verify anything and regurgitates information from GORO staff, press releases, and presentations.  I guess GORO management didn’t feel like paying money for a proper technical report.  It’s not that terrible of a business strategy in my opinion if you don’t need to raise money from the capital markets (or if it is unnecessary in raising money)… keeping expenses down is generally a good idea.

Short interest

GORO’s short interest has been increasing to 17.6% of the float.  I have a mixed opinion about high short interest.  Usually, with heavily shorted stocks, the shorts are right about a stock being flawed.  (On re-examining the stock I’m not sure that it is that flawed.)  On the other hand, it is difficult to make money from these stocks.  It is not unusual to get bought in, short squeezed, or to pay very high interest to borrow the shares.

Bottom line

GORO’s management may be charlatans who have misled investors in other areas (e.g. most of their revenue is from silver, not gold).  But it really does look like they have a profitable mine.  As a short position, I don’t see it as that great a short because it’s unclear what the mine life will be (it is possible that they will extend the size of their deposit).  They may be overvalued… but so are many other mining stocks.  I don’t feel like shorting overvalued stocks because the overvaluation can last several years and any issuance of stock brings intrinsic value closer to the inflated share price.  Also, I have to admit that GORO’s management team has been very successful so far in making profits and in promoting the stock.  I do not want to risk betting against smart people.

Another factor to consider is that GORO’s GAAP profits are deflated.  They may be undercapitalizing their mine capex.  They are also actively exploring for new deposits.  This exploration spending will decrease GORO’s reported profits in the short run.

*Disclosure:  Covered my position today at $15.20 at a profit.

One thought on “Gold Resources (GORO): I am mostly wrong on this one

  1. Reblogged this on yourrealserious and commented:
    Nice insight and yes mining is like internet 90% wishful thinking and

    My history is varied and as much as business has it’s sharks and piranha types,mining is way up there.

    Having said that the computer we work on has lots of minerals in it so somebody somewhere is doing it. As well everything else we are accustomed to in our life.
    I am intimately involved in Mining in BC Canada and glad to be here ….not elsewhere in the world of conflict.

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