When Will Gold Resource Start To Impress Me?

Oct.16.13 | About: Gold Resource (GORO)

Earlier this week, Gold Resource Corp (NYSEMKT:GORO) released a production update on its 100% owned gold-silver project in Mexico's Oaxaca state. There's nothing unexpected in the release, as GORO is still on track to meet its full year guidance of 80-100,000 gold-equivalent ounces, as it already produced approximately 65,000 gold-equivalent ounces in the first 9 months of this year. This production rate should increase considerably from next year on as GORO still aims to increase its mill throughput by the end of this year.

This article isn't about the operational side of Gold Resource Corp, but about the surrounding difficulties. There have been three interesting developments lately which will largely decide about the company's near term trading pattern.

1. The CEO resigned

First of all, last month GORO announced its CEO would step down and a family member would be put in control of the company. I personally don't like 'family businesses', as one can never be sure whose interests are more important for them. As such, I'm not a big fan of appointing a family member as the new CEO.

At the same moment the previous CEO stepped down, he exercised 400,000 options at a strike price of $0.25. That's right, options exercisable at just 5% of the current share price. Exercising these options costs William Reid $100,000, but will net him almost $1.8M based on the current share price. This creates an interesting overhang.

2. The CFO resigned

Another thing I don't really like in junior companies is when the CFO suddenly resigns 'for personal reasons'. GORO solved this problem by internally promoting the controller to the CFO status. Fortunately the leaving CEO will stay on for a while to make sure the transition goes smooth, but a change of CEO ànd CFO doesn't exactly create a lot of confidence. The new CEO will make $225,000 per year, which is an 80% increase from his previous job as controller.

3. The Hochschild overhang

Hochschild Mining (OTCPK:HCHDF) dumped almost 3.4 million shares in July and reported in its SEC-filing it had another 11.25M shares in GORO. As Hochschild sold approximately 25% of its position, I think it's very likely the company will continue to dump its GORO shares which will result in more pressure on the share price. The author of this blog makes the interesting remark that Hochschild might indeed sell more GORO shares to fund its acquisition of International Minerals. So I think a further dump of shares on the market is a real possibility

Conclusion

I just don't feel comfortable with Gold Resource Corp right now, as the leaving CEO has promoted a family member to be his successor and the CFO has also left the company. Add the huge share overhang of Hochschild Mining in the mix and the fact that GORO was cash flow negative in Q2, and I think there are better investment possibilities in Mexico, and I would always prefer Primero Mining (NYSE:PPP) over GORO as a gold-silver producer. I'm not a shorter, but I think a strategy by going long on Primero and short on GORO might work.

Disclosure: I am long PPP. 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.