GORO - Gold Resource: A Concerning Trajectory

2023-08-02 16:21:23 ET

Summary

• The gold and silver producer reported a loss per share of $0.05 on revenue of $24.81 million.
• GEO Oz produced in 2Q23 is estimated at 8,230 GEOs, and GORO sold 7,689 GEOs.
• I recommend selling GORO between $0.65 and $0.72 with higher resistance at $0.82. Conversely, buying GORO on weakness between $0.60 and $0.55 with lower support at $0.52 makes sense.

Introduction

Colorado Springs-based Gold Resource (NYSE: GORO ) released the second quarter 2023 results on July 26, 2023.

Note: This article updates my article published on June 19, 2023. I have followed GORO on Seeking Alpha since March 2014.

Note: GORO's Mexican assets are also called the Don David Gold Mine complex, or DDGM for short.

1 - Investment Thesis

Gold Resource produces from one single mine called the Don David Gold mine in Mexico, a significant risk factor you should contemplate when investing in this tiny producer. As we have experienced recently, the stock is subject to random trading manipulations impacting the stock price negatively, as we experienced in July 2023. The company issued a press release after the stock tumbled on July 6, 2023.

in response to unusual market activity, and after speaking with its officers, directors, and other relevant persons, that it is unaware of the reason behind recent stock price volatility. The Company confirms that there is no material corporate development relating to its business and affairs that has not been previously announced.

Moreover, the company acquired a highly controversial gold project in Michigan called the Back Forty for $23 million with a highly uncertain outcome. GORO spent $8.8 million already in 2022 and spent nearly $1 million this quarter alone.

This acquisition has been quite an enigma. Who initially pushed for such an acquisition, gambling away more than nearly $35 million? Utilizing precious cash that seems missing now could have been why the company stopped paying dividends, triggering another huge drop in stock price.

However, the project advances slowly, and CEO Allen Palmiere said in the conference call:

a few new developments rose relating to Back Forty, one being a ruling by the U.S. Supreme Court that limits the federal government's authority with regards to wet lands, and will likely result in not needing a dredge and fill wetland permit. The drawdown of wet lands will be regulated by Michigan State Authorities

This long string of adverse calamities, mostly self-inflicted, has seriously eroded my confidence in this company.

Note: For those interested in the Back Forty project, I recommend reading my recent article published on October 10, 2022, discussing the Back Forty and the different issues attached to this controversial project.

On a separate note, the stock may have been adversely impacted after investors realized that the DDGM was struggling more than previously expected. Gold Equivalent Production this quarter amplifies my concerns, even if the 2023 Guidance has been reaffirmed.

CEO Allen Palmiere said in the first quarter conference call:

we continue to face several challenges impacting our Don David Gold mine. Some of these challenges were unanticipated and uncontrollable, such as declining base metal prices, the appreciation of the Peso against the U.S. dollar and persistent inflation in Mexico.

Thus, I recommend cautiously investing a small amount in this company after the stock may have found a new range between $0.55 and $0.70.

Thus, I highly recommend regularly trading short-term LIFO for about 85% of your long position and keeping only a minimum for a potential rebound.

2 - Stock Performance. GORO Found a New Lower Support.

GORO significantly dropped after the news regarding the dividend suspension and lower grades in 2023. GORO is now down a whopping 64% on a one-year basis.

Gold Production For The Second Quarter Of 2023

1 - Gold Equivalent Production

Note: I repeat, the production company's presentation is confusing and should be improved. Production in GEO and Production sold in GEO are not presented clearly.

In 2Q23, GORO Produced 4,637 Au Oz and sold 4,287 Au Oz, and 289,816 Ag Oz sold 274,257 Ag Oz.

All the other metals (Lead and Zinc) are the same amount sold and produced. Hence, GEO Oz produced in 2Q23 is estimated at 8,230 GEOs , and GORO sold 7,689 GEOs.

Gold was sold at a record of $2,010 per ounce , and Silver at $24.93 per ounce . Also, Copper was sold at $8,397 per Tonne, Lead at $2,153 per Tonne, and Zinc at $2,485 per Tonne.

One of the main problems is the mining sequence for the year delivered lower metal grades and metal production. However, the guidance for 2023 remains intact.

On a positive note, CEO Allen Palmiere said in the conference call:

During the quarter, our diamond drilling program progressed as per our plan and on two fronts. While the objective of exploration drilling to identify additional inferred resources and infill drilling with the objective of upgrading defined inferred resources into the indicated category. The results to date have been very encouraging with several new areas of mineralization being identified and targeted.

The results to date have been very encouraging with several new areas of mineralization being identified and targeted.

2 - All-in sustaining costs, AISC/GEO (co-product).

The AISC per GEO in the second quarter of 2023 was at a record high of $1,990 per ounce , well above the 2Q22 of $805 per GEO.

AISC is extremely high due to the low amount of metal produced this quarter, the strengthening of the Mexican Peso, the treatment charges, and other production cost increases due to inflation, such as power and transportation. It is another concerning issue. In the conference call:

The Mexican Peso has strengthened to the U.S. dollar in 2023 with approximately 60% of our production costs originating in Pesos, this is a larger-than-expected impact on our year-to-date costs.

CFO Kimberly Perry said in the conference call:

For the quarter, DDGM's total cash cost after co-product credits was $1,333 per gold equivalent ounce sold and total on sustaining cost per gold equivalent ounce sold were $1,990 per ounce. For the year, DDGM's total GAAP cash cost after co-product credits was $9.79 per gold equivalent ounce sold and all-in sustaining costs were $15.51 per ounce.

Balance Sheet And Production History Until 2Q23. The Raw Numbers

Source: Company 10Q and from personal files.

Balance Sheet Discussion

1 - Revenues were $24.81 million in 2Q23

The gold and silver producer reported a loss per share of $0.05 on revenue of $24.81 million, compared with an income of $0.03 on revenue of $37.06 million in last year's second quarter (please look at the table above for more financial details).

The company posted a net loss of $4.58 million during the second quarter, compared to an income of $2.67 million a year ago. Low production resulted in low revenue despite gold selling at $2,010 per ounce this quarter.

After by-product credits, Don David Gold Mine's all-in-sustaining costs were $1,990 per equivalent gold ounce sold.

2 - Gold Resource's Free Cash Flow was a Loss of $3.42 Million in 2Q23

The company's free cash flow for Q2 is a loss of $3.42 million , and the trailing 12-month free cash flow was a loss of $11.3 million.

Gold Resource decided to suspend the dividend payout on February 13, 2023.

3 - Cash is Now $17.96 Million, and The Company has no Debt

Gold Resource has a decent cash position of $17.96 million in 2Q23 and no long-term debt.

However, assuming the company gets all permits for the Back Forty project and decides to proceed, it must secure financing for its completion, and the debt profile will change significantly.

4 - Lower Gold Production Expected in 2023.

Note: The chart has been adjusted for the dividend.

GORO forms a descending (falling) wedge pattern with resistance at $0.64 and support at $0.575 after a dramatic breakdown in late February following the news of dividend interruption and weak 2023 gold production guidance. The slide accelerated in July with a one-day selloff due to unknown manipulation.

The falling wedge is a bullish price pattern that represents a story about the market in which bulls are preparing for another push.

As I regularly recommend to my subscribers, I firmly suggest trading short-term LIFO for about 85% of your long-term position to take advantage of the volatility and unforeseen events. GORO should be considered a trading tool, but nothing else.

Thus, I recommend selling GORO between $0.65 and $0.72 with higher resistance at $0.82. Conversely, I recommend buying GORO between $0.60 and $0.55 with lower support at $0.52.

Watch the gold price and the Fed like a hawk.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

For further details see: