Over the past few years of writing for Seeking Alpha, I have gone from being moderately bullish on Gold Resource Corp. (NYSEMKT:GORO) to unabashedly positive, to more wary - yet still bullish. For potential new investors, it's probably worth perusing the progression of my thoughts to get a full background; but for those already following along, the only reason for my dampened enthusiasm (as of November 2015) was that mined grades were coming in below reserve estimates.
Since my last, more cautious, article there have been a number of new developments at the company, all of which potentially impact GORO's valuation. In the remainder of this piece, I review these developments and update my one-year price accordingly.
Quarterly Results and EOY 2015 Mine Reserves
In following table, I update the production vs. reserve numbers for the latest two quarters. The table shows a continued underperformance of produced grades vs. reserve grades. (The table highlights any produced grade which is 10% above the reserve in green, while any produced grade which falls at least 10% under the reserve grade is highlighted in red.) Possibly due to my criticisms, in the most recent earnings call, the company went out of its way to explain the shortfall:
During the quarter, approximately 15% of the milled throughput came from old stockpiled of lower grade open pit ore from our open pit mining of years passed. The reason to run this material through our floatation circuit now is twofold. First, it floats well and we have additional capacity in the floatation circuit as our underground mine is yet to deliver a consistent 1500 tons per day mine rate.
The second reason is a large open pit stockpile sits above the potential mineralized extension of the open pit. Processing the lower grade open pit stockpiles add to gold ounces produced but unfortunately the open pit material contains only gold with negligible silver and no base metals. So the 15% open pit mill feed dilutes the Arista mine sulfide mill feed and overall throughput grade of silver, copper, lead and zinc for the quarter bringing those grade averages down.
For example, the Arista mine's quarterly average silver grade in the sulfide ore was 151 grams per ton while the open pit stockpile average silver grade was 19 grams per ton. The open pit stockpiles decreased the overall silver throughput grade from 151 grams per ton to 131 grams per ton for the quarter or approximately 13%.
Similarly, zinc grades were decreased by 15% due to the lack of zinc in the open pit ore and it representing 15% of the throughput for the quarter. Other metal grades were impacted in the same manner. But the gold grade in the open pit ore was very close to the average of the Arista mine sulfide ore grade at 1.8 grams per ton gold and 2 grams per ton gold respectively leaving the quarterly gold average throughput grade nominally unaffected by running the old open pit or stockpiles.
We plan to continue to run the remaining lower grade open pit or stock piles for the time being but may choose to stop at any time. During any future quarter that we process some of the lower grade open pit stockpiles we expect to stockpiles to dilute the quarterly grade averages of the higher grade Arista underground mine.
Despite the company's rationale, I think it's prudent to value the company as though the mine will continue to produce grades less than given in the reserve estimate. In the following table, I've reduced the reserve grades by 12% to reflect the historic mining underperformance. I've then estimated the in-ground value using today's metal prices and the mine's average recovery rates spanning 2014 and 2015. For proven and probable reserves, I've then subtracted $100/tonne from the calculated in-ground value which is the company's reported cash processing cost per tonne. For measured and indicated reserves, I've subtracted $125/tonne to conservatively account for the additional mine infrastructure work that will be necessary to mine these areas. Finally, I've divided the sum of the net in ground values by the shares outstanding to get a base value of $5.12 per share. I haven't used any time discounting because I'm already being conservative on the other assumptions.
Potential to Add Substantially to Reserves
The $5.12 value already represents a possible 50% rise from today's share price of $3.45, yet it doesn't take into account the very positive drill results that have been reported in 2016. The Arista mine continues to find new veins, see for example the high zinc content Marena vein announced in this press release.
More importantly, the Switchback continues to produce numerous positive drill results which I've tabulated in the table below. Values which are at least 2 times the M&I grade or value per tonne are highlighted in yellow. I've also listed the value/tonne x intercept length to help emphasize longer and/or higher grade results. The data suggests that not only will there be a substantial increase to the overall grade of the Switchback, but that there are also new, high grade veins which will add significant tonnage to the deposit by the time the EOY 2016 reserve report is issued. In particular, the Soledad and Silvia veins should be upgraded relative to the previous M&I values (reprinted below).
I think these results could easily add $2 to $2.5 per share to the base $5.12 share target, and the deposit is still open on strike, depth and even above (which is the result of drilling from underground rather than from above ground).
Gold Mesa has also recently produced positive drill results, but it's very early in the property's development, so for now, in name of conservatism, I'm not yet ascribing any value to this property.
Despite not quite hitting reserve grade numbers in its actual production, GORO is substantially undervalued at today's share price. I continue to hold my full long position, with a one-year price target of $7.37, and the hopes of substantially higher values if metals prices and/or future drill results continue to cooperate.
Disclosure: I am/we are long GORO.
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 actively trade around core positions