Gold Resource Corp. (NYSEMKT:GORO) just announced that it is leasing another Walker Nevada Project - the "Goose" Property - from Nevada Eagle, which is adjacent to the company's Radar Property. The company owes a 2% NSR royalty on whatever gold it produces. It can buy the property outright for $175,000, and 1.5% of the NSR royalty for $1.4 million. It also has right of first refusal on the remaining 0.5% of the NSR royalty. The project has no known economically extractable resources, but management is confident in its geology.
This adds to the company's extensive portfolio of exploration projects, and given the minimal cost (it only has to pay up if it produces gold), the deal seems ideal.
However, I think management has to deal with its El Aguila Project - which is its flagship project and its only producer - given its recent lousy performance. The project also has rapidly dwindling resources that requires constant exploration, and this is an issue I brought up in my bearish article last year. The project has worsened, as the Q3 performance was nothing short of abysmal with production down and costs up. Gold Resource fired the mine's manager, but this isn't the first time we've seen this, and investors need to wonder where the problem lies.
So at this point, it seems to me that management is taking on too much in a tough market environment that makes any capital expenditure more costly on a relative basis, especially since the company is currently paying a 4% dividend. That isn't to say that this won't pay off, but I think the stock would jump if management were to announce a study intended to optimize the mine's performance rather than acquiring early-stage exploration properties that require millions in worth and that won't be generating any cash flow for years.
With that being said, the stock has fallen so much that it may make sense for investors to take a speculative position. After all, the El Aguila Project was able to support a $0.72/share annual dividend (~24% at today's $3 share price) at its prime. So, the risk-reward is very interesting if you believe in management.
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