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2019-10-11 03:21:26

Source: Mining Journal. Image: Isabella Pearl Site in Nevada.

Investment Thesis

Gold Resource (GORO) holds a 100% interest in a significant property consisting of six distinct locations in Oaxaca, Mexico, including the producing Arista Mine and Aguila Mill at the El Aguila Project.

The Aguila mine is the flagship operation, including the Arista underground deposit - gold, silver, copper, lead, and zinc - which provided for ~90% of the production in 2018, while the open-pit mine at Aguila contributed about 6% of the total output. Gold Resource also has a second underground mine in operation in Mexico called the Mirador mine at the Alta Gracia deposit, which accounted for about 2% of the gold equivalent production.

The investment thesis remains the same as my earlier articles. Gold Resource is a gold producer that I recommend accumulating for the long term while using about 30% of your position to trade short term the volatility which has been above average owing to the company's attempt to expand in Nevada.

News Update

Gold Resource is now producing commercially at its Nevada Isabella Pearl mine. On October 7, 2019, the company announced that Isabella Pearl produced 2K Au Oz for September.

Preliminary September production of gold loaded to carbon and dore produced totaled in excess of 2,000 ounces. The Company plans to update its 2019 global gold production outlook in the upcoming third quarter preliminary production announcement to include estimated gold ounces targeted from its Isabella Pearl project for the fourth quarter. While it is still early in the project ramp up phase, 2,000 ounces of monthly gold production at Isabella Pearl is expected to continue generating positive cash flow by covering operational costs at the project assuming a gold price of $1,450 per ounce.

Shareholders were waiting impatiently for the news after some disappointment recently when Gold Resource indicated that it experienced delays with the construction of the ADR plant.

The news was received with a sigh of relief.

Mr. Jason Reid, president, and CEO of Gold Resource Corporation said in the press release:

“I am very pleased to report the Isabella Pearl mine, which broke ground and produced first dore in just ten months, has reached commercial production levels just sixteen months after breaking ground on the project in June 2018 , I am very excited that during the month of September the Isabella Pearl mine moved into a phase where mining and processing rates and ore placement are now expected to generate positive cash flow on a consistent basis.

Note: Gold Resource has not yet included its Nevada Mining Unit's Isabella Pearl production in the 2019 production outlook. The company plans to add that estimate in Q3 2019.

Future Production and Financing discussion

1 - Gold and Silver Production details for the Second Quarter of 2019 (the last quarter with Mexico production as a standalone).

Production for the 2Q'19 was solid with an estimated 14,859 Oz Au Equivalent, up 36.9% sequentially and up 18.2% compared to the same quarter a year ago. Those numbers also include 1,678 Au Oz and 972 Ag Oz from Isabella Pearl pre-commercial.

Until now, CapEx has been higher than the cash flow from operations to be able to complete the Isabella Pearl mine. However, with initial production at the Isabella Pearl mine, the company will be able to cover expenses from production and even produce some early free cash flow.

The company raised $21.8 million during H1 2019 through an ATM equity sales program with its sales agent H.C. Wainwright & Company, at 3%. Another $2.6 million have been raised after June 30. Total shares sold are now 6,625,580 see below).

The use of the ATM is hurting the stock price. The company does not seem to realize that what it saves in interest has been lost in the shareholders' pocket. However, long term, this financing makes sense, and shareholders will be able to profit from it when Isabella Pearl is fully functional. In the last 10Q 2Q'19, the company indicated:

During the first half of 2019, we sold 5,851,872 shares of common stock under the ATM Agreement for net proceeds of $21.8 million.

Subsequent to June 30, 2019, we sold 773,716 common shares under the ATM Agreement for total net proceeds of $2.6 million through August 5, 2019 to fund Isabella Pearl inventory build-up and working capital needs during production ramp up.

Jason Reid said in the press release:

I am pleased to report the Company has not used the ATM since July 30, 2019. While the Company reserves the right to further utilize the ATM, we currently do not foresee the need to do so.”

Which means that no more shares were sold.

Isabella Pearl Analysis

The third quarter of 2019 will not get the full impact of the new mine production. However, it will probably be a good quarter with an output of more than 14.5k Au Eq Oz, in my opinion.

Further, the gold price will be over $1,500 per oz compared to $1,338 per ounce in the preceding quarter.

Gold Resource indicated recently production expected for the next five years starting September.

Source: Goro Presentation

Looking at the chart above, it seems that the company expects 29.4K Au Oz from September 2019 to September 2020. It means an average monthly of about 2,400 Au Oz going to 3,400 Au Oz/monthly in the second continuing to the fourth year. We are already at 2k Au Oz, which is encouraging.

Technical analysis (short term) GORO is forming a descending triangle with line resistance at ~$3.65 and line support around $2.95-3.05. I do not agree with the interpretation given by Finviz, at least for the short term.

The line resistance should be the line from the top at the end of September and the new top early this week. The line support is the low mid-August and the low of October 1st. The line support is confirmed by the low in early July, which gives more strength to the support.

The strategy is, of course, to play the pattern by selling about 20-30% at resistance or roughly $3.60-3.65 and buy again from about $3.25 (which is intermediate support) and $2.95. Of course, it is crucial to follow the gold price like a hawk because the stock is highly correlated to the precious metal price.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the Like button below as a vote of support. Thanks!

Disclosure: I am/we are long GORO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also trade frequently short term the stock.

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