This article is an update to my preceding article on Gold Resource published on May 9, 2016.
Today, June 15, 2016, Gold resource announced the following:
Drill highlights from its first drill campaign at the Gold Mesa exploration property located in Mineral County, Nevada.
Gold Resource Corporation acquired an option on the Gold Mesa, Nevada property in December 2015. The Gold Mesa property covers an area of approximately 4,580 acres in south central Nevada's Walker Lane Mineral Belt in Mineral County, Nevada.
GORO Intercepts High Grade Gold at Gold Mesa, Nevada Including 15.24 Meters of 6.27 g/t Gold and 33.54 Meters of 1.89 g/t Gold.
The "Nevada property"
1 - Gold resource owns the "Gold Mesa" property since November 2015.
2 - The company lease the "Radar" property in September 2014, and the "Goose" property in November 2014.
3 - Gold Resource is also a significant shareholder in Canamex Resources Corp. (OTCQX:CNMXF), who hold an interest in the Bruner gold project, located approximately 17 miles north of the Company's Radar property in Nye county, Nevada.
Image from GORO presentation.
What means the Nevada potential for the company's future?
I would say, not very much until 2019, because GORO needs more production immediately, thereby the Nevada project is only a distraction until 2019-2020.
Basically, Gold Resource rely mainly on one unique gold and silver production site called the Arista underground mine located in the El Aguila Project in Mexico. The production started in 2009 and is still ongoing. The company indicates that currently it processes all of the Arista underground mine ore through the flotation circuit at the Company's El Aguila mill.
The recent 1Q'16 results are showing a production down pattern.
As we can see above, production is going down and gold grade is plummeting as well. Furthermore, during the 1Q'16, GORO added 200 TPD of nearly worthless stockpile and came up with a quarterly production down 25% from the preceding quarter. In the last 10-Q filing the company indicated:
First quarter 2016 production saw lower head grades that were partially offset by a 23% increase in tonnes milled compared to the same period in 2015. In addition, significantly lower head grades were seen during the quarter from the processing of 16,697 tonnes, or approximately 15% of the throughput for the quarter, of low-grade stockpiled open pit ore mined in years past. The open pit stockpiles have primarily gold, negligible silver and no base metals of copper, lead and zinc which lower the overall grades for the quarter in all metals when processed.
Initially, I thought that using the stockpile to increase throughput at the mill was a desperate move and a negative for the long term. However, we learned at the conference call that the stockpile of tailings being added to the Arista mill runs had to be moved, no matter what, in order to expand the open pit mine.
Thus, Using temporarily this ore and bland it with the higher grade started to make more economical sense. The mill has a potential capacity of 1,500 TPD and La Arista is producing under 1,300 TPD, allowing GORO to add 200 TPD of lower grade to the mill, in order to get a small bonus at a minimal cost.
However, the facts remain, the mine is showing some signs of "fatigue".
However, one possible positive element is called the Switchback prospect, which is adjacent to the Arista mine or roughly 300 to 500 meters.
The project is scheduled to be completed in 4Q'16 and could help stabilizing production. I was disappointed that the company did not use this update on the Nevada drilling, to talk about what has been done to reach the Switchback prospect and if the completion and production are still scheduled for 4Q'16?
This is an important topic because GORO is now producing significantly less and it has released a grim production guidance for 2016, down approximately 19% compared to 2015.
As we can see, the Nevada project is not going to impact production before 2019-2020, in my opinion. Meanwhile the Arista mine is producing less and have a short LOM of around 3 years or less which is another concerning point.
Thus, the most important elements to follow here:
- The Switchback prospect and how it will impact production in 2017.
- Gold price related to the next potential Brexit impact.
It is hard to comment on the Switchback project and it will be a subject that will be at the center stage of the next 2Q'16 results.
Nonetheless, one important situation that can really change the situation for GORO and the gold industry is whether or not, England will vote in favor to stay in the European Union.
If England decides to exit the European Union, the probable effect on the gold price is positive and some analysts are talking about $1,400-$1,500 /Oz.
On the other hand, if England vote to stay, then gold will probably drop to $1,100/ Oz
It is really too close to call, and the ramifications are serious for Gold Resource.
In my opinion, the UK will vote to stay in the European Union, and gold is likely to drop in the low $1,100/ Oz, and GORO may retest the $2.25-$2.50 soon.
However, if the UK proves me wrong, then GORO is about to get a significant boost.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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 trade GORO