Dissecting Golden Minerals' Latest Production Update

Jul.22.12 | About: Golden Minerals (AUMN)

On July 19, Golden Minerals (NYSEMKT:AUMN) provided the production update for Q2 of 2012. The stock dropped from $4.40 to $4.10 after the news were released. I suspect it happened because Golden Minerals predicted for Q2 the same production of gold and silver as the one they had in Q1 (1700 oz of gold and 100000 oz of silver), but according to their preliminary estimates, they produced about 10% less of gold and silver in Q2 (1500 oz of gold and 90000 oz of silver). Is it important for investors with a 1-year time horizon? I don't think so, and here is why.

In their April 10 press release they said that their guidance for Q1 was 1300 oz of gold and 90000 oz of silver, while the actual production for Q2 was 1500 oz of gold and 95000 oz of silver. Then, on May 9, they reported that First quarter 2012 production from the Velardena Operations was better than the preliminary results previously reported," and in fact they produced 1700 oz of gold and 110000 oz of silver (of which 10000 was a credit from 2011). So we can conclude that their production is a random variable (which is natural, since they can't know ahead of time precisely how much gold/silver there is in each specific region of their property), and even their preliminary estimate (made on July 19) can deviate noticeably from the actual production.

The key sentences from their production update are:

Production during the first six months was negatively impacted by less than planned mine development due primarily to delays in the arrival of underground mine equipment from Argentina and by plant optimization efforts. Nearly all of the equipment from Argentina has now arrived at Velardeña or has been shipped, and the Velardeña Operations are no longer constrained by the lack of underground mining equipment. Mine development, which should permit the Company to open new stopes for mining in the fourth quarter 2012, and ramp-up of production are underway as planned.

So they are rightfully expecting a much higher production in Q4 of 2012, after they perform more underground work in Q3 of 2012. With a lot of underground work to be done in Q3 of 2012, the exact production in Q4 of 2012 has almost no correlation to the exact payable production in Q2 of 2012, and so the small drop in production they reported for Q2 (which is within the margin of random error in their previous guidances), can be totally ignored.

I have a large position in AUMN and I added a little to it at the end of the day on Thursday. Even if gold and silver do not start a large rally soon (I think such a rally is very likely, and I explained my reasons in the previous article) and instead stay flat until the end of 2012, I suspect AUMN will start moving up strongly after they report their production for Q3 in 3 months, assuming they exceed the Q1 production as planned and also mention that enough underground development has been completed to achieve their previous guidance for Q4 production, which should be large enough to make them cashflow positive from Velardena. The stock market will no longer be able to ignore the fact that a company is about to turn from cashflow negative to cashflow positive, and will then keep growing its production and thus will keep increasing its profit margin.

Disclosure: I am long AUMN.