Curried Wealth Building
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February 22, 2009
Issue 34  -  Gold Resources Corporation

Last week I promised to give an in-depth report about my largest single investment holding.

Although I have a large percentage of my net worth in this single company, I must advise most reading this to NOT follow my lead. I am neither a registered investment advisor or an accountant so any information herein is for informational purposes only. Should you decide to invest in Gold Resources I strongly advise you to do your own due diligence which, at the very least, would have you read over the company's web site which has a very good presentation with pictures.

Gold Resources Corp is a near term junior gold producer. In the mining world there are basically three categories of companies: seniors, juniors and explorers. Seniors are the largest mining companies which have large in ground resources and several producing mines, usually in different countries. They are the "blue chip" mining companies. Juniors, are those companies that are also mining ore, but in much smaller quantities than the seniors. These companies often have only one mine. These companies are usually traded on the Canadian Venture Stock Exchange. Exploration companies have no mines or revenue. They typically have properties that they are drilling out in an attempt to find ore. The large majority of exploration companies fail.

Valuing a mining company is a tricky thing to do. The main documentation used by investors is a 43-101. This is an accredited document which shows that the drill results of the company have been analyzed by a third party. The document shows how many ounces of ore are thought to be in the ground with a high degree of probability. A lot of investors and mutual funds won't/aren't allowed to invest in any company that doesn't have a 43-101.

Gold Resources is a "near term" producer, meaning they will be starting to mine ore within a year. As you could guess, an exploration company is just looking for gold. They may or may not have found any. This is the riskiest of all mining companies. This is also the place with the highest POTENTIAL gains.

There are literally thousands of gold mining companies so how did I chose GORO? There are many reasons that I selected this company and I will now discuss the most crucial ones.

Management - This is the KEY thing to look for when buying a smaller mining company. Without trustworthy, experienced management you might as well just go to Vegas and put it all on 19. Mark Twain once remarked that a mine is a "hole in the ground with a liar standing next to it." With the high probability of failure in these companies, this is often the case. Many stocks are literally land claims and chip rock samples (rocks protruding from the ground). Gold Resources has some of the best management around. The Reid brothers have placed 6 mines into production and have zero known issues with law suits or tax problems. Management here is experienced with over twenty years in the business. With this experience, the Reids actually sold out there interests in their previous company to start this one. They wouldn't have done this unless they thought they had a very high probability of success.
Location - All mining jurisdictions are not created equally. One mistake novice mining investors make is to find a company with lots of ounces in the ground and just buy away because they are "undervalued" or "cheap". Usually, however, this company will be in a jurisdiction that is anything but safe and the reason it is "cheap" is that they have more risk. Most countries have many risks. The safest countries to own a mine in are the United States, Mexico and Brazil. They each are relatively stable politically and have long histories of mining. Companies in these countries automatically have higher relative prices for this reason. Gold Resources properties are located in Southern Mexico.
Share Structure - Most mining companies have A LOT of shares outstanding. The reason is simple. They don't have an income so must run their operations by selling additional shares on the open market. Without an operating mine, there are only expenses. Most mining companies have over 100 million shares and often many more. This leads to many problems for the share price. More shares means it's easier to short the stock and take the price down. In addition, there are nefarious brokers that will run a scam that goes like this: A company needs to raise funds. It contacts a broker to sell new shares into the market. Instead of being paid money, the broker receives shares. If the current share price is $0.50, the broker will sell the offered shares and give the money to the company. The broker's fee will maybe be 1 million shares. This is equivalent to a 10% fee. If there were 10 million shares, the company would raise $5 million.

What's wrong with that you ask? The broker is a crook. He will sell shares of the company that he doesn't have. These are above and beyond the 10 million shares being offered. This puts pressure on the price. These "naked shorts" can be covered with his "free" shares at a much lower price. This is illegal, but the SEC is not prosecuting naked short selling.

Gold Resources has less than 40 million shares outstanding. This is incredibly low in this industry and speaks well of management. They have vowed to keep the shares issued as low as practical. If they can get their mine up and running this year, they will not have to issue more shares, they can fund drilling and operations with revenue.  They don't use brokers to sell shares and only make private placements.  This is essentially a company to investor transaction with no fees paid.

Warrants - Some companies will issue warrants to help entice people to buy into the company. They might offer shares in the company at $0.50 and for each share bought the buyer will receive a warrant to buy an additional share at $.75. These warrants will have a time limit or "expiration date". If the warrants aren't exercised before the expiration, they are worthless. Obviously, the more of these warrants outstanding, the more share dilution you have. More shares issued means every other share outstanding is worth a little less. Having a lot of shares outstanding can also lead to manipulation. Gold Resources has zero warrants.
Options - Stock options are usually given to employees as a form of pay. They have vested and expiration dates plus an exercise price. The vested date is the start date and the expiration date is the end date. Typically they are issued at a price above the current level. These can create a ceiling on the share price as the employees exercise their options at a price below the current price. For example, a share price is at $1.00, there are options which are active with a price of $0.75. The employee can now buy his options and then immediately sell for a mediately sell for a $0.25.25 profit. This can put a cap on the price until the options are all exercised. Gold Resources has about 10% more shares in options, a very low number in the industry.
Ore Grade - Not all ounces of metal in the ground are equal. Novices often see a company with millions of ounces of resource and think that is just great. This is often a mistake as the ounces are low grade ounces. There are about 32 grams of gold in an ounce. There are companies that have 1-2 grams per ton of gold in the ground. This is very low and that means the company must process a lot tons per ounce. Processing rock is time consuming and expensive. The higher the grade the better as that means lower costs per ounce of ore produced. Gold Resources has some of the highest grade ore that I have ever seen. They have ore that in some cases measures 2 OUNCES of gold per ton. This will reduce production costs tremendously. In fact they are projecting that their cost of production per ounce of gold will be less than $100. This puts them at the top end of low cost producers.
Dividend - Most Senior mining companies have either no, or a very low dividend. This is just how most of the industry does things. Gold Resources has a different plan. They intend to take all the free cash flow and divide it into thirds. The first third will be for taxes. The 2nd third will fund the company operations and drilling. The last 3rd will be for dividends. This is, as far as I know, unprecedented. Free cash flow the first year of production, at $1000 an ounce gold will mean a dividend of about $0.50. The current price of the stock is about $5. Do you think the price of the stock will go up or down if they issue this type of dividend? That's right, higher. Much higher. Most gold companies with dividends have a yield of 1-3%. This would yield a share price of $16-50.
No 43-101  -  Now how would NOT having a 43-101 be a positive?  As I mentioned before, this document is highly valued by potential investors.  Without one, the price of GORO is lower than it would otherwise be, IF, the ounces are actually in the ground, the price will go much higher.  Management decided that it was too expensive and lengthy a process to get a 43-101.  By doing this they have taken a calculated risk that their reading of the core drill samples shows enough ore to be profitable.  I think this is a wise decision and will pay off handsomely.

GORO has an unheard of structure and plan. They are intending to start mining by mid-year. They do need one additional mine permit, but there is no reason to think they won't get it as they have received 4-5 previous permits.

Here are some pictures of the project.

I believe this company has a large potential and have invested a large portion of my net worth in them. I am not a registered investment advisor so do not construe this write up as a recommendation. This is just what I am doing. Please do your own due diligence by visiting the web site and looking at the presentations there.  As always, if you want to talk or ask more questions, let me know.