Wednesday, December 26, 2012

Gold Resource Corporation (GORO) Producing Extremely Cheap Mexican Gold

Gold Resource Corporation (GORO) has the distinction of being a junior mining company that pays a dividend.  I'd like to figure out how they became healthy enough to do that.  Management is led by two senior gold executives.  I'm extremely pleased to see that serious professionals are running this show.  

They have an NI 43-101 report for their flagship El Aguila project, although as a U.S.-listed corporation they really don't need one.  I find it interesting that the report only addresses MII resources (no 2P), yet this company is operating a producing mine at El Aguila.  They also have four other properties in development but are returning cash to shareholders as a dividend rather than holding it to fund future development.  I couldn't see the logic behind such a decision until I looked at their operating costs.  I am very intrigued by the 43-101 report's estimate that the project's operating costs are US$136/oz of Au equivalent.  That is extremely cheap gold!  No wonder the management was so confident about beginning operations before 2P was confirmed.  They can afford to return money as dividends because they save so much cash in production.

I normally consider a junior mining company's ability to stay alive, but since this one has an established operating history it's more appropriate to use the fundamental screening criteria for a mature company.  They were profitable in 2011 but not in the two years prior.  It's good that they have no long term debt and positive free cash flow.  It's bad that their five-year ROE has been negative.  That number is a legacy of the losses incurred in the years prior to production.  Producing gold at $136/oz makes their main mine profitable at any of gold's historic annual price averages in the past three decades.

Gold Resource Corporation may very well have turned a corner in 2011.  The two co-founders did so well with their previous venture, U.S. Gold Corp., that famed Canadian investor Rob McEwen put his own name on it.  I am really going to keep watching GORO to see if there's a repeat performance.

Full disclosure:  No position in GORO at this time.