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June 26, 2011
Issue 153  -  GORO and Alexco
 
 
 
                                  
 
                                                                       
 
This week I attended the Gold Resources Annual Shareholders Meeting and wanted to share my thoughts about what was presented and talked about.  I also promised to give a more detailed story of Alexco Resources, which I recommended a couple weeks ago.  It has come down in price since then and is looking very attractive on a long term basis.  Let's start with the new company.
 
Alexco Resources
 
Alexco Resources is a producing silver miner in the Yukon region of Canada.  They are on track to produce nearly 3 million ounces of silver this year.  Much like GORO they have a very tight share structure of 59 million shares and they have very high grades.  Remember that grade richness of ore is THE most important aspect of any mining company.  With a given throughput, rich ore versus skimpy ore yields incredibly different profit levels.  Mining the ore is the same cost no matter the richness.  With that in mind note that Alexco is located in the Keno Hill Silver District which has average historical grades of 40 ounces per ton silver.  That's not 40 grams, it's 40 OUNCES per ton, which is amazing. 
 
They also have over $40 million in the bank and no debt.  They have an aggressive exploration program which will expand the current 23 million ounce reserve.  They hope to be producing 5 million ounces a year within 2 years and 7-10 million ounces a year within 4 years.  When silver producers move into the 5 million ounces a year range, they are given a higher price multiple than lower producing stocks.  This is probably due to them being a more appealing takeover target.  Alexco has publicly stated that this is a primary goal of theirs.
 
Alexco also has a side business which deals in environmental remediation of mining lands.  They have long term contracts with multiple companies and more importantly, with the Canadian Government. This alliance with the government gives them a key advantage when applying for mining permits.  Because they have run a successful environmental mining cleanup company, they are given a huge benefit of the doubt.  This makes their mining business more secure then most companies. 
 
One of the reasons this stock has fallen over the last couple weeks was a power grid outage that caused a stoppage in the milling of ore.  This was remedied within a week or so, but the ramifications on output are an unknown at this point and the market hates unknowns.  I can't believe that a temporary stoppage will have a great effect on results.
 
One of the nice things about this company is that they have two of the other base metals which are used to offset mining costs of the silver.  In the first quarter they had silver costs, minus base metal credits, of $8.88 an ounce.  With silver still over $30, this is a tremendous profit.  If silver goes as high as I believe it will, this company will make a tremendous profit and be a cash cow.  If they were to produce 5 million ounces at $9 an ounce and silver was $50 an ounce, they would be making $205 million dollars a year.  The current market cap is around $400 million.  That just won't be the case, in fact with a PE of 20, the price per share will be, $69.  Of course there will be other expenses and costs that will lower the profit, including having to sell Silver Wheaton 20% of their silver ounces for $4, and silver is only about $35 now, but even if these factors lower the profit 50%, the price target is still $35, which is 5 times today's price. 
 
With the tight share structure, incredibly high grades, many future exploration targets and an inside track with Canadian authorities, even with only the 3 million ounces projected to be produced, this company is an excellent investment choice.  Feel free to visit their web site and do your own due diligence before investing.  Alexco
 
GORO
 

This past week I attended the GORO annual shareholders meeting in Denver, Colorado.  I wanted to give my impressions about what I saw and heard.  First there were two press releases, the first one on a property acquisition:

 

Gold Resource Corporation Acquires Sixth Property

Press Release Source: Gold Resource Corporation On Monday June 20, 2011, 5:24 am EDT

COLORADO SPRINGS, CO--(Marketwire - 06/20/11) - Gold Resource Corporation (GORO) (AMEX:GORO - News) is pleased to announce having significantly increased its land position adding a sixth potential high-grade property to the Company's Oaxaca Mining Unit. Gold Resource Corporation is a low-cost gold producer with operations in southern Mexico.

The Company staked several new claims including El Chamizo consisting of 26,386 hectares (101 square miles) connecting the Company's Alta Gracia property to its El Rey property effectively consolidating approximately 48 kilometers (29 miles) along strike of the important north 70 west regional structural corridor. With this new acquisition, Gold Resource Corporation has 100% interest in 60,998 hectares (235 square miles) located in Oaxaca, Mexico. The combined claims represent the Company's sixth property added to its Oaxaca Mining Unit (see map), now consisting of El Aguila, El Rey, Alta Gracia, Las Margaritas, El Chamizo and Solaga. In addition, the Company staked a 2000 hectare (7 square miles) claim located on the southeast end of the corridor which adds to and increases the size of the Aguila Project.

Gold Resource Corporation's President, Mr. Jason Reid, stated, "After much work and patience, we have methodically consolidated a dominant land position now connecting five properties on what we believe will become one of the most important mineralized structural corridors in southern Mexico."

"On the southeast end of the corridor is our Aguila Project, home to our largest high-grade polymetallic deposit discovered to date, La Arista. On the corridor's northwest end is the Company's El Rey property, a high-grade gold vein system established by our limited drilling in 2008. In the middle of the corridor is the Alta Gracia property, previously mined on a small scale in the 1970s, where a recent Company drill program commenced testing many high-grade targets. The new property Chamizo, located between Alta Gracia and El Rey, is a major increase to our land holdings along what we believe is a highly mineralized corridor," stated Mr. Reid.

Mr. Reid continued, "This acquisition is in line with our long term objective of having multiple high-grade properties feeding ore to the Aguila mill. Our approach should keep capital expenditures on developing additional properties to a minimum, deliver a pipeline of projects for future growth and provide for longevity of operations."

 

This is very exciting news as they now have the rights to a large contiguous land track which is over 200 square miles.  I believe the lack of news over the last year or so was directly related to these acquisitions which will give the company many more drilling targets for future exploration.  It is also likely that the 70km trend, which GORO now covers nearly completely, will have similar deposits to La Arista.  In fact Alta Gracia, another of their formerly owned properties is displaying similar characteristics to La Arista.  Chiefly polymetalic ores.  If Alta Gracia is anything like La Arista, this company could be VERY undervalued. GORO hopes to have 8 drills on the property within a year.

There was a second release:


 

Gold Resource Corporation Advances Oaxaca Mining Unit

Press Release Source: Gold Resource Corporation On Tuesday June 21, 2011, 6:00 am EDT

COLORADO SPRINGS, CO--(Marketwire - 06/21/11) - Gold Resource Corporation (AMEX:GORO- News) today announced advancing its Oaxaca Mining Unit with two new underground exploration programs at its El Rey and Alta Gracia properties. Gold Resource Corporation is a low-cost gold producer with operations in the southern state of Oaxaca, Mexico.

Gold Resource Corporation discovered a high-grade vein system at its El Rey property during its 2008 drill program. The veins are predominantly gold with some silver (no base metals).

Highlights from previous drilling include:

  • Mineralization within 100 meters of the surface
  • Vein drill intercepts include (5 holes):
    1.0 m of 132.5 g/t Au
    1.4 m of 55.3 g/t Au
    9.0 m of 19.4 g/t Au including
    • 1 m of 66.4 g/t Au
    • 1 m of 31.8 g/t Au
    • 1 m of 30.3 g/t Au
    • 1 m of 29.1 g/t Au 1 m of 23.7 g/t Au

To better evaluate the potential of the El Rey property the following program has been initiated:

  • Refurbish and extend existing shaft to the 70 meter level below the surface
  • Drive two development drifts each 150 meters along the two gold veins encountered from the previous 2008 drill program
  • Establish underground drill stations for advanced exploratory drill program
  • Use crosscuts to explore for additional veins

We believe this program will allow development and exploration of El Rey to proceed simultaneously, leading to accelerated production if and when a positive decision is made to establish high-grade gold production at El Rey.

The explosives permit for El Rey was approved June 1, 2011 and the powder magazine construction is underway. Physical work has begun to prepare the shaft site and pump out existing water, and a hoist and headframe are being sourced and purchased along with additional equipment. In addition to exploration, this approach will allow the Company to view the character of the veins, the competency of the wallrock, and gain bulk samples for additional metallurgical testing. Previous metallurgical El Rey test work resulted in 94% gold and 75% silver recoveries.

Gold Resource Corporation's President, Mr. Jason Reid, stated, "El Rey's high-grade gold ore would be processed in the agitated leach circuit at the El Aguila mill adding to our production profile. It would also be an ideal source of gold and silver for producing Gold Resource Corporation's Double Eagle coins, which could potentially be used for future in-kind dividend distributions."

A similar program at the Company's Alta Gracia property is underway. Three high-grade polymetallic veins that outcrop on the surface have been discovered near historic workings. With site preparation underway, the Company plans to drift on these parallel veins by constructing three new adits. The purpose is to develop the veins 40-50 meters below the surface to test for mineral continuity, and to crosscut below the historic workings to test for continuation of mineralization laterally and at depth. These small scale exploration drifts could generate ore for batch scale metallurgical testing, as well as host underground drill stations for deeper exploratory drilling. This underground drilling will be in addition to the surface drilling currently underway.

Mr. Reid continued, "The district was mined historically on a small scale as recently as the 1970's and we recognize many similarities between Alta Gracia and our La Arista deposit located at the El Aguila Project. The Alta Gracia veins previously mined by others may be located higher up in the mineralized horizon. With exploration at depth we could find a situation similar to La Arista where the mineralization begins 100 meters below the surface as a function of boiling point."

"We have been very impressed with Alta Gracia's surface samples, some in excess of 4.7 grams per tonne gold and 2.5 kilograms per tonne silver, and this underground exploration program will allow us to more rapidly quantify the mineral potential of these veins. Any potential Alta Gracia ore would be trucked 16 kilometers to the Company's El Aguila Mill. This is in-line with the Company's long term objective to have multiple projects feeding ore to our strategically located mill."

 

This is another indication that the company is really gearing up for expansion.  The El Ray property is located at the top of their properties and is primarily a gold/silver deposit with insignificant base metals.  The plan is to start development of this ore body and then feed the VERY high concentration ores to the mill and feed the agitated leach circuit, which is currently not active, primarily due to personnel shortages.  GORO has so many targets and work to do that they have insufficient people to adequately man all areas of interest.  This is due to the great demand on experienced mining personnel currently being experienced in the industry.

Currently it appears that GORO is being valued ONLY on the La Arista property.  All of the ounce projections are using the La Arista Mine.  El Ray, which could supply 100-200 tons of ore a day to the mill would be directly additive to ounces produced.  Remember that El Ray is very high grade also which means this could add, assuming 20 grams a ton, 60-120 ounces a day, or 1800-3600 ounces a month (22k-44k ounces a year). If the grades were higher, which is quite possible, this would be higher.

Here are my notes/impressions from the presentation.

Jason Reid, the President, gave the presentation and was very confident and relaxed.  He commented that the mine was fully operational after the freak flood which shut the mine down.  The first stope (actual intrusion into the veins) was underway and they were mining 450-650 tons a day.  He mentioned that Q2, which could have been very negatively impacted by the flood, will provide record revenues, production and profit.  The presentation, which has been posted can be seen here. They are drilling in the mine to guide the stope development and they provided a slide with some grades.  One amazing intercept had 9 meters of nearly 9 gms/tn of gold and get this, 11,116 gm/ton of silver!  That would equate to well over $12,000 a ton value which is incredible, especially when you consider the cost of mining is well under $100 a ton.  Here are some of the drill results:
 
 
Underground development intercepts include (weighted avg. not true width):
Hole#          from    Meters  Au g/t    Ag g/t   Cu%   Pb%   Zn%
5110004    79.47    33.81  18.49      1853   1.59   1.76   5.21
5110005    60.55    11.90   5.14        546    0.48   1.47   4.50
5110006    67.89     2.91    28.01      455    0.76   3.02   7.45
5110006    73.76     7.28     6.18       496    0.76   1.38   7.79
5110007    93.93     8.42     2.97       122    0.35   2.77   3.95
5110008    60.65     2.00     6.35       685    0.63   6.16   8.34
5110008    104.6     2.00     7.50         43    0.17   0.38   1.28
5110009    64.57     5.45     3.34       646    0.53   1.54   3.60
5110012    89.11     6.19     4.71       583    0.44   0.78   0.78
5110013    27.86     4.37     5.33       466    0.68   2.53   4.11
5110014   16.04      6.44     8.95   11116    0.54   1.55   2.51
Note the two lines in red for the truly incredible results here.
 
Jason also briefed about 6 or 7 commodity funds in Toronto last week.  He was particularly surprised that not ONE of the funds had even heard of them!  This is billion dollar company paying $.48 a year dividend yet they are unheard of in the biggest precious metals market, the Toronto Venture Exchange.  This represents a large pool of potential buyers in the near future.  One of the things the company really needs to get full exposure in Canada is a 43-101.  This is a formal resource estimate done by a third party.  This is kind of a "seal of approval" for the ore claims of a company.  Jason said that if all went well, it could be completed by year's end.

During questions they reiterated their aversion to share dilution and they would take on debt in the future if another mill was required.  I get the impression they think the ore will be there to require this.  Shorting of the stock was also addressed as the they have reached 2.7 million shares.   They are not concerned as they believe if they perform, the stock will increase and force the shorts to cover.  He said that their market maker is not concerned with the level of shorting going forward.  Bill Reid mentioned that you can request that your shares not be lent and that a sell stop will a very high price (say $50 a share) would not allow the brokerage to lend your shares.  They showed the first strikes of the GORO gold and silver coins which looked nice.  They want to issue these as dividends to qualified investors.  This would also greatly hurt the shorts as a short is responsible for any dividends paid during the shorting period.  To acquire gold and silver coins would be difficult and add considerable complexity.

Drilling should pick up dramatically as they have hired a second, very high quality drill company.  The stopes are getting larger as they go down, and considering that they are still at the very top of the structure, is VERY exciting.  Bill actually used the word spectacular to describe the property.  The in drilling has been very pleasing concerning grades and widths of the veins.  In fact, they alluded to a 10 meter and a 16 meter vein.  That is huge as I have seen companies mining sub 1 meter veins.  One last very intriguing comment from Greg, investor development guy, regarding the property.  There was a very famous geologist that visited the property early on and advised them that they stake all the surrounding properties before letting any news out.  It seems they have taken his advice and I wouldn't be at all surprised to start seeing a much greater flow of news going forward.
 
I am more convinced than ever that this is a once in a generation company with a once in a generation property.  Management was competent, relaxed, confident and solid and I have no reason to doubt their trustworthiness going forward.  I expect GORO to trade markedly higher in the next 1-2 years.  Any shares purchased under $30 are a gift.
 
 
Positions
 
GORO  (closed $24.81, up $2.71, average price paid $6)
 
Mexus Gold  (closed $.205, up $.001, average price paid, $.22) 
 
According to reports on the message boards their magnetometer has arrived and operations for cable retrieval should begin shortly. 
 
Alexco Resource Corporation -  AXU  (closed $6.88, up .11, recommended at $7.90)
 
Stocks    (Current status, out, sold on March 18)
 
Still in a holding pattern as the market bounces up and down.
 
Physical Gold  (Closed $1,502,  down $38,  average price paid $395)
 
Physical Silver  (Closed $34.32,  down $1.58,  average price paid $5.31)
 
This week's video is of a very unusual phenomenon where the Amazon River empties into the Atlantic.  Here a back wave is formed during the tide change that travels up the river for miles.  This is a very dangerous but popular place for surfers as you can surf this for miles at a time.  Have a great week!