GORO - Gold Resource: Slow Motion Collapse Following The Back Forty Debacle

2023-11-14 07:45:00 ET

Summary

• Gold Resource released preliminary Q3 2023 production results, facing challenges such as decreased metal prices and a stronger Mexican peso.
• The company produced 4,443 ounces of gold and 247,159 ounces of silver, and sold 3,982 ounces of gold and 208,905 ounces of silver.
• It is strongly advised that you stay away from this company unless you are a trader who knows the risks that come with investing in a company experiencing such challenges.

Introduction

Colorado Springs-based Gold Resource (GORO) released the third quarter 2023 results on November 6, 2023. The company's stock has completely disintegrated since the results were made public, hitting new weekly lows and closing last Friday at $0.265 per share, as the chart below illustrates:

On February 13, 2023, the announcement of the dividend suspension and a revision to the 2023 guidance signaled the beginning of this latest collapse.

as per our 2023 guidance, lower gold grades will result in less production in 2023 than 2022 and further significantly contribute to an increased Cash Costs and All-in Sustaining Costs.

GORO has been declining ever since, and the most recent publication of the third-quarter data represented yet another setback when the company announced:

Notwithstanding the technical successes noted above, in light of the continued challenges facing the Company, the Company's Board of Directors has decided to initiate a formal review process, with the assistance of outside financial and legal advisors, to evaluate strategic alternatives for the Company.

Note: This article is an update of my article published on August 2, 2023. I have followed GORO on Seeking Alpha since March 2014.

I am going to address the results and try to provide some explanation for such a debacle.

1: Third Quarter 2023 Production snapshot

Gold Resource produced 4,443 ounces of gold, 247,159 ounces of silver, 276 tons of copper, 1,048 tons of lead, and 3,223 tons of zinc. It is an estimated production of 7,476 GEOs based on a ratio of 81.5 between silver and gold.

However, the company sold 3,982 ounces of gold and 208,905 ounces of silver, as well as 245 tons of copper, 947 tons of lead, and 2,571 tons of zinc. It translates to 6,532 GEOs. The Don David Gold Mine in Mexico provided all of the metal used in production. To simplify, the mine is called DDGM.

Note: As I said in my previous posts, I used an 81.5:1 ratio to estimate the amount of gold equivalent. The company stated GEO sold exclusively, which is very confusing and inconsistent with what the industry generally does.

As per the company's statement, the difference between the quantity of metals reported as "metal production" and "metal sold" is because of the difference in the concentrations of metals it produces and the percentage of those concentrates that are really paid for as per the sales contracts.

1.1: Production of gold and silver chart history

1.2: Production of all metals produced per quarter.

1.3: Production in Gold Equivalent Ounces ((GEO))

The company sold 3,982 gold ounces (produced 4,443 Au ounces), 208,905 silver ounces (produced 247,159 Ag ounces), 245 tons of payable copper (produced 276 tons), 947 tons of payable lead (produced 1,048 tons), and 2,571 tons of payable zinc (produced 3,223 tons). The total production in GEO was estimated at 7,476 GEOs, and it sold 6,532 GEOs .

2: Third quarter Balance Sheet and commentary

Source: GORO press release

Balance Sheet Discussion

2.1: Revenues were $20.552 million in 3Q23

In comparison to the third quarter of last year, when it lost $0.11 on revenue of $23.87 million, the producer of gold and silver reported a loss per share of $0.08 on revenue of $20.552 million (please refer to the table above for additional financial details).

In the third quarter, the company reported a net loss of $7.341 million, down from a loss of $9.73 million in the same period last year.

The all-in-sustaining costs for Don David Gold Mine were a whopping $2,669 per equivalent gold ounce sold after by-product credits.

CEO Allen Palmiere said in the conference call:

The third quarter, as you've observed, was a difficult one for us. As previously guided, mine sequencing resulted in lower ore grades. While this was always in the plan for the latter part of this year, the unexpected strengthening of the Mexican peso hurt us, and the lower-than-forecast price of zinc adversely affected our byproduct revenues.

This quarter, AISC hit a record-breaking $2,669/oz.

2.2: Cash is down to $6.71 million, but The Company has no debt

A worrying factor is that Gold Resource's cash position is down considerably QoQ to $6.71 million in 3Q23.

In just three months, the corporation spent $11.25 million , which begs a few questions about the management's ability to run this company in the best interest of its shareholders.

Chet Holyoak said in the conference call:

the third quarter has seen a decrease in our cash balance, and we ended the quarter with $6.7 million. The decline in cash is primarily due to increased cash costs at DDGM, which we'll discuss in just a moment, and to our exploration program. Cash used in operating activities of $7 million year-to-date, and this includes $4 million spent on exploration in Mexico and over $1 million spent in Michigan related to the Back Forty studies.

Also, something to worry about in the 10-Q:

In October 2023, the Company received a notification from the Mexican Tax Administration Services ("SAT") with a sanction of 331 million pesos (approximately $18 million) as the result of a 2015 tax audit that began in 2021. The 2015 tax audit performed by SAT encompassed various tax aspects, including but not limited to intercompany transactions, mining royalty tax, and extraordinary mining tax. Management is in process of assessing this tax notification to better evaluate possible outcomes. Management believes the 2015 tax return was prepared correctly and that as of September 30, 2023, the Company has no liability for uncertain tax positions.

2.3: The Back Forty Project in Michigan, USA

The most puzzling issue is the reason behind GORO's management's decision to purchase such a contentious project from Aquila Resources Inc. on December 10, 2021, for about $24 million on an all-share basis. Even though I don't think there is any foul play here, it should be thoroughly investigated.

The business had spent a significant amount of cash, approaching $10 million in 2022-2023 combined. Although the company stated that permits would be issued in 2023, I seriously doubt this "Milestones" plan is still in effect.

Allen Palmiere, President and CEO of the company, said in the press release:

We were also very successful this quarter in completing the optimization work around the Back Forty project and filing an S-K 1300 that resulted in a more robust project with an improved project valuation and increased economic returns, while reducing environment impacts.

Note: On October 26, 2023, the company released the Technical Report Summary (S-K 1300) for the Back Forty Project after completing optimization work pertaining to the metallurgy and economic model. The study's findings point to a more environmentally friendly and financially sound project that won't be expected to negatively affect wetlands, which should make the mining permission procedure go more smoothly.

3: Conclusion

It is strongly advised that you stay away from this company unless you are a trader who knows the risks that come with investing in a company experiencing such challenges and who can remain composed under pressure.

However, on the other hand, if we listen to CEO Allen Palmiere, who said in the conference call:

Our producing mine in Mexico, which should have better operating results next year and a project having a $200-plus million NPV in Michigan are trading at what we consider to be totally unacceptable values. We aren't getting any market recognition for the intrinsic value of our assets, relatively strong balance sheet, we have no debt, and excellent technical and operating teams. The current market environment has and likely will persist for an indeterminate period of time. The Board of Directors and management have decided to be proactive and engaged the services of Cormark Securities Inc. as a financial adviser to explore and evaluate strategic alternatives to unlock value for our shareholders.

But it would be great if management could buy a significant number of shares on the open market as a show of confidence to demonstrate to shareholders that it believes in the company's future.

Ultimately, you may decide to take a chance, put in a little money, and hope for a significant increase if the company is acquired for pennies on the dollar. As of right now, the company is debt-free and faces no threat from a Chapter 11 restructuring. Your choice.

For further details see: