In in the present day’s article, I’d like to supply an extended overdue replace on Gold Resource Corp (NYSE:GORO). In explicit, I’d wish to evaluation the working efficiency and valuation metrics from the previous few years, then focus on the corporate’s latest undertaking and eventually shut with an examination of what’s perceived to be the corporate’s greatest threat, viz. its reserves.
Let’s start with the stock worth efficiency. It’s a bit difficult, as a result of on the finish of 2020 GORO spun off its Nevada belongings below a brand new listed firm, Fortitude Gold (OTCQB:FTCO), with GORO homeowners receiving one share of FTCO for each 3.5 shares of GORO that they held. But usually, in the event you divide the FTCO worth by 3.5 and add it again to the GORO worth, the total firm worth has held up fairly nicely.
Dilution and Valuation Metrics
One of probably the most telling statistics for junior miners is the speed at which they’re keen to dilute present shareholders. Believe or not, the chart beneath is definitely higher than typical for a junior miner, significantly for the reason that firm purchased a brand new asset in Michigan (which I focus on beneath). But dilution is the primary main threat to think about when evaluating an funding in GORO.
On the opposite hand, GORO has at all times sported comparatively good valuation metrics, and that continues to be the case. See as an illustration the chart beneath exhibiting historic P/E, P/B, and dividend yields.
Additionally, Seeking Alpha has a really optimistic quant ranking on the corporate in addition to usually good issue grades.
New Project – Back Forty (Michigan)
In 2021 GORO announced its plan (and rationale) to purchase Aquila Resources whose sole asset is a potential gold/zinc/copper/lead mining property situated in northern Michigan.
Here are some highlights from the NI 43-101 report detailing the property, with my emphasis. (For these new to valuable metals investing, the Ni 43-101 report was spawned as a solution to the business issues highlighted by the large Bre-X fraud within the late Nineteen Nineties. As such, when they’re out there, traders ought to at all times refer to those NI 43-101 stories moderately than simply studying press releases.)
Resource and Mining Method
Aquila’s Back Forty Deposit (“the Deposit”) is a volcanogenic huge sulphide (“VMS”) deposit situated alongside the mineral‐wealthy Penokean Volcanic Belt (“PVB”) in Michigan’s Upper Peninsula. The Project accommodates roughly 1.1 million ounces of gold and 1.2 billion kilos of zinc within the Measured and Indicated Mineral Resource classifications, with further upside potential.
A Feasibility Study on the Project was issued in September 2018 that studied open pit mining and on-site processing crops for treating oxide materials to provide gold doré and sulphide materials to provide zinc, copper, lead concentrates. The worth proposition of the Project was based mostly on mining the very best worth materials as quickly as potential and treating this materials via the method crops to maximise money movement.
The topic of this Technical Report and Preliminary Economic Assessment pertains to an growth of the open pit mining case (Phase 1) by proposing the event of an underground mine (Phase 2) related to the Project after the open pit part is full. Before the open pit has been mined out, the event of an underground mine will start to increase the lifetime of mine of the Project.
Note that a part of what drove GORO to buy the Back Forty property is that it envisions mining a smaller portion of the deposit at greater IRRs and decrease preliminary prices. We’ll have to attend for brand new feasibility research to get all the particulars, however most certainly GORO shall be focusing on lower than the complete useful resource talked about above.
Permitting and Development
The large threat with the Back Forty undertaking is allowing. GORO administration says it carefully studied the scenario and believes it might get via the allowing course of by lowering the general scope and affect of the undertaking. This dovetails with the thought of solely going after the very best IRR ore within the orebody. However, confidence is one factor, execution is one other. We’ll simply need to observe alongside to see how the allowing course of unfolds.
Personally, I’d like the corporate to sluggish play this growth, whereas it builds reserves on the Mexican properties. Interestingly, through the newest convention name, the corporate had this to say relating to growth usually, which type of gibes with my sluggish play hope:
The financial local weather has modified dramatically up to now few months. While we’re snug with the steerage for the yr, it’s making new tasks difficult. Across the business, we’re seeing tasks endure from value escalation, in addition to elevated value of capital at a time when commodity costs are declining. It is sadly an ideal storm. The period of which is unknown.
El Alguila / Don David Gold Mine
The firm’s flagship property is the El Alguila Project, which hosts the Don David Gold mine (beforehand known as the Arista and Switchback mines).
The mine is an underground vein sort deposit. It has been in manufacturing since 2011. Over the previous few years, the corporate has milled a bit over 500K tonnes per yr.
As of December 31, 2021 the corporate estimates that it has about 1,485,000 tonnes of confirmed and possible reserves and 1,560,000 tonnes of measured and indicated assets on the Arista mine.
Based on this, the corporate has three years of manufacturing forward of it, and if the M&I assets are transformed to confirmed and possible reserves, then it is extra like six years of manufacturing.
In order to understand how a deep orebody is exploited, specifically how reserves aren’t identified initially however are found as new underground drill websites turn out to be out there, I’ve tracked the corporate’s historic reserves over time. Note that on a yearly foundation the comparability is not precisely apples-to-apples as a result of reserves rely on the trailing three-year steel worth averages and a internet smelter return which relies on enter costs. Nevertheless, one can see that regardless of mining about 500,000 tonnes per yr, the corporate at all times has had 3-5 years of manufacturing forward of it. Thus, worries a couple of very restricted mine life to me are overblown.
The greater difficulty for me is that within the newest interval, the reserve grades are decrease than the historic information, suggesting that the corporate has preferentially mined excessive grade ore (which is completely logical) however hasn’t been capable of finding equal grade ore in its current drilling applications. This is a priority because it may drastically have an effect on profitability going ahead.
Note that in its most up-to-date presentation, the corporate means that new drill outcomes suggest doubtlessly greater grade veins and extra valuable metals at depth than beforehand anticipated, however till these outcomes are included into the orebody mannequin, we’ve to conservatively use the grades listed above.
Given its low valuation (P/E, P/B, and so on.), the Seeking Alpha quant ranking and in the present day’s inflationary surroundings, I proceed to carry my GORO shares and fee the stock a purchase. I’m not giving it a powerful purchase nonetheless as a result of I see two dangers: grade degradation on the Arista mine and a potential lengthy (and dear) growth cycle on the Back Forty undertaking.
If new — optimistic — drill outcomes emerge from Arista, and/or allowing at Back Forty goes extra easily than typical, then I’ll revisit my ranking and difficulty a brand new replace right here at Seeking Alpha.