Curried Wealth Building
Finding an Edge

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October 2, 2010
Issue 116  -  GORO Just Got Better
 
Although I just talked about Gold Resources (my largest holding) a short time ago, circumstances are demanding that I write more.  My whole philosophy on investing, as I've written many times, is to look for edges.  Advantages or pieces of information that throw the odds in my favor.  Well this past week brought things into sharp focus and I believe it is time to move.  First this press release hit the wires:
 

SEPTEMBER 20, 2010 NYSE Amex: GORO

GOLD RESOURCE CORPORATION EXECUTES $55.6 MILLION PRIVATE

PLACEMENT TO ACCELERATE PRODUCTION PROFILE AND EXPLORATION

DENVER – September 20, 2010Gold Resource Corporation (GORO) (NYSE Amex: GORO)

is pleased to announce the execution of agreements for a $55.6 million private placement of its

common stock to increase the development of its Oaxaca Mining Unit’s production profile,

accelerate its exploration programs, initiate a formal reserve report and to capitalize on new

property acquisition opportunities. Gold Resource Corporation is a low-cost gold producer with

operations in southern Mexico.

 
Gold Resource Corporation’s private placement consists of 3.475 million shares of restricted

common stock at $16.00 per share with no warrants. Jefferies & Company, Inc. served as sole

placement agent for Gold Resource Corporation in the private placement. Closing of the

transaction is subject to customary conditions.

 
The Company intends to increase mill capacity by potentially 50% in anticipation of expansion of

its known mineralization at the La Arista vein system and thereby correspondingly increase the

Project’s production profile. The Company will accelerate exploration of the Oaxaca Mining

Unit’s portfolio of 5 potential high-grade properties. Having drilled only 1% of the Oaxaca

Mining Unit’s concessions to date, and finding three high-grade deposits, an aggressive

investment in exploration is warranted and could have a positive, near-term impact on

shareholder value. A more formal reserve report of the internally estimated mineralized material

will be undertaken. And, the Company will also be in the position to acquire additional property

opportunities located in select areas throughout Mexico and worldwide for project diversification

and Company growth.

 
Gold Resource Corporation is positioned for accelerated and aggressive growth during this

historic gold bull market. The equity raise provides immediate funding to accelerate the

Company’s production profile and to accelerate exploration of its Oaxaca Mining Unit.

Management believes the potential 50% mill capacity increase coupled with the ability to

accelerate exploration programs on a more comprehensive and immediate basis more than

offsets the 7% shareholder dilution. With only 53 million shares outstanding after the raise, the

Company is among the tightest capital structures for a producing company in the mining space.

The Shares have been offered and will be sold in private transactions and have not been registered under

the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent

registration or an applicable exemption from registration.

 
What this says is that GORO was able to raise 55 million dollars through a private placement at $16 a share.  A private placement is the opposite of a public placement, where the shares are sold on the open market.  This means it was agreed to at an earlier time.  The price at the time of the agreement may very well have been less than $16, so don't think this was a sweet heart deal.  In addition, there were no warrants or options given.  This is key as this has a VERY detrimental effect on the number of shares and ultimately, the price of the stock. 
 
The proposed use of the new funds is to accelerate production and exploration.  The production increase proposed is 50%.  This means that for a 3% dilution of the stock, we are going to get 50% production a year.  This is HUGE!  This raises any estimate of the potential share price by almost 50% (taking out the dilution).  While this news was great and encouraging, what happened this past Tuesday is the key.  In case you don't know, GORO called a hasty conference call with less than 24 hours warning.  This is very rare.  I knew it was either going to be very good news, or very bad.
 
As luck would have it, it was really good news.  It took awhile to put everything together, but upon considering everything, I now believe that GORO is going higher, and probably much higher.  The basis of the excitement is this news:
 
Goldcorp Bids $3.5 Billion for Andean, Trumps Rival
 
Sept. 3 (Bloomberg) -- Goldcorp Inc., the second-biggest Canadian gold producer, agreed to buy Andean Resources Ltd. for C$3.6 billion ($3.5 billion), exceeding a rival offer made five hours earlier to gain control of an Argentinean mine.

The bid values the Perth-based miner at C$6.50 a share, or 2.2 percent more than an offer from Eldorado Gold Corp. based on yesterday’s close in Toronto trading. Goldcorp’s bid has the approval of Andean’s board, Vancouver-based Goldcorp said in a statement.

 
This was actually the lead off bullet point of the conference call.  I found myself scratching my head at first and then it started falling into place.  The bottom line is that GORO's officers believe their value is at least as high as Andean Resources.  If Andean Resources sold for $3.5 billion and GORO is priced today at $939 million, then the price of GORO should be about $70 a share.   GORO closed last week at $19 a share, so this would mean an increase of 268%.  Oh, by the way, they think they could prove that by the middle of next year!
 
Here are my other big takeaways from the conference calls:
 
1.  Jeffries, the sponsor of the private placement, is going to initiate coverage.  There is no doubt the initial recommendation will be a buy with a much higher price target.  I wouldn't be surprised to see the target set at $30 or perhaps even higher.
 
2.  With the new funding, they will be increasing the number of drills on property from 2 to 5 or 6.  This will prove tremendously positive as the results come in, and the proven resources on the property are increased.  One of the drills is going to move to the bottom of the pit they are currently mining to see if there is a feeder vein below.  If this proves the case, they will be able to continue mining here at virtually no cost.
 
3.    There was a lot of excitement in the voice of the Bill Reid, and you got the impression there were things he couldn't say.  One of the things he did say was that the drill results that haven't been announced yet, had some "exciting" things in them.  He just sounded very animated.
 
4.  The Reid's remain committed to a dividend, and in fact announced another dividend of 3 cents a share, the day after the conference call.  This is 9 cents total.   If you multiple this by 4, the total dividend would be 36 cents which is about a 2% yield.
 
5.  Bill Reid described the ore at the property, as the "best ore I've ever seen."  This is coming from a man who has been in the business for 31 years.
 
6.  I believe that the Reids have come to grips with the option of a buy out.  Previously, I think they just wanted to run the mine and pay themselves the dividend.  However, the Andean Resources deal was at a level that hit their "price."  Everyone has a price, and I think theirs was reached.  They are now trying to get the valuation of this company as high as possible in the shortest amount of time.
 
7.  Toward that end, they are accelerating the procedure of getting all the ducks in a row for a buyout.  Now they didn't say that, but their actions speak loud.  One of the biggest things said was the description of getting to "proven" resources.  This is an accreditation of a company's resources.  It can be thought of as a third party endorsement.  There are 3 conditions to meet: 
      1.  legal right to mine.  (They already have this done)
      2.  proven reserves.  (They believe that their drill results, which haven't been reviewed by a 3rd party, already prove their worth)
       3.  feasibility study.  (This would also be done by a 3rd party.  As Bill Reid commented, if a working profitable mine doesn't prove feasibility, than what does?)
 
This shows that proving things up will be relatively easy and they thought it could be done by the middle of next year.
 
As if that wasn't enough positive news for GORO, this came out this week also:
 
Gold Resource Corp (GORO): The stock continues to do very well as it should when gold goes up everyday.  GORO announced another 3c dividend on Thursday.  It is completely mind boggling to me how none of the other junior mining companies is marketing themselves like GORO did (ie a dividend play).  You would think companies would get it but most of them don’t and that’s why 99% of them are junk.  My average price is $1.17. {UPDATE} John Doody just put GORO on his top 10 list.  He has a big following..watch GORO spike this coming week.
 
This was written by Ian Cassell, the same guy who wrote the seeking alpha story on gold a few weeks back.  The interesting part of the story, which I expect to drive price higher next week is the John Doody recommendation.  John has a newsletter (goldstockanalyst.com) which publishes the best gold and silver stock "deals."  He is not paid by any company which explains his $1000 subscription rate.  He just added GORO to his top 10 most undervalued gold and silver stocks.  He is widely followed, and because of his excellent track record, we should see a spike this week.  I would advise against chasing the stock to buy on Monday if it jumps significantly, and it may. 
 
This guy thinks GORO is still undervalued at $19.  So do I.  In fact, for the first time in about 2 years I bought more GORO this past week on margin.  I rarely use margin and highly advise against it because it can destroy you quickly, but when I find an edge this strong, I will buy on margin at a low level.  If you have questions about margin, shoot me an email.
 
 
 The GORO story just gets better and better.  Congratulations to all those who have purchased some, I think we are just getting started with a price of $70 not out of the question.
 
 
Mexus Gold
 
There was also some news from Mexus this week.  Here is a picture they released of their self designed and built cable puller:
 
 
 
 
I was really shocked how big this thing is!  Seeing that thing gives me a little more confidence in the company.  That device looks like it could go for the long haul.  This will be affixed to their barge (supposedly done by now) and will be used to pull the cable and then cut it into 20 foot pieces.  The press release said they should be pulling cable by mid-October.  They are going to take the Winter off, so if they don't get the barge pulling soon, they will miss their time table.  This will adversely affect the stock price and cable pulling will have to wait to Spring.  Not a big deal for me, because I still think this company will be printing money if they can get this contraption working anywhere near it's capacity.  I'd say Mexus is still a speculative buy up to 30 cents. 
 
As Gold and silver continue to make new highs, it is natural to be nervous, but with stories like this, I'm not worried:
 

Fed prepares quantitative easing measures - Medley

NEW YORK, Sept 28 (Reuters) - The U.S. Federal Reserve is preparing a fresh round of quantitative easing measures to battle lackluster economic performance, hedge fund advisor Medley Global Advisors said in a report on Tuesday, a market source told Reuters.

"Fed leadership has all but run out of patience with economic data it believes is not propelling the U.S. recovery sufficiently to dent the unemployment rate. The FOMC will work through the next couple of weeks to prepare additional easing measures to announce at the end of its Nov. 2-3 meeting," the source said, reading directly from the report.

The Federal Open Market Committee is the U.S. central bank's monetary policy-setting body.

Hannah Little, a spokeswoman for Medley, would neither confirm nor deny the firm had issued the report, titled "Fed: Bait and Switch", citing the firm's subscription policy.

 
This will only serve to stoke the fires while driving the price of the dollar down and the metals higher.  That is very bullish for gold.  It also means that interest rates will be kept artificially low for much longer.  Artificially?  It's not me guessing, it's them admitting:
 

Savers told to stop moaning and start spending

Savers should stop complaining about poor returns and start spending to help the economy, a senior Bank of England official warned today.

 By Robert Winnett and Myra Butterworth
Published: 10:03PM BST 27 Sep 2010

 

 

Mr Bean said low returns on savings were part of the Bank of England's strategy Photo: PA

Older households could afford to suffer because they had benefited from previous property price rises, Charles Bean, the deputy governor, suggested.

They should "not expect" to live off interest, he added, admitting that low returns were part of a strategy.

His remarks are likely to infuriate savers, who are among the biggest victims of the recession. About five million retired people are thought to rely on the interest earned by their nest-eggs. But almost all savings accounts now pay less than inflation.

The typical savings rate has fallen from more than 2.8 per cent before the financial crisis to 0.23 per cent last month.

Mr Bean said he "fully sympathised". But he continued: "Savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit."

He added: "Very often older households have actually benefited from the fact that they've seen capital gains on their houses."

In an interview with Channel Four News on Monday night, he said that savers "might be suffering" from the low Bank Rate. But they had done well from higher rates in the past and would do so again.

Mr Bean said that encouraging Britons to spend was one reason why the Bank had cut interest rates. They have been held at 0.5 per cent for 18 months, hitting rates offered on savings accounts.

The strategy had led to Mervyn King, the governor, receiving many letters of complaint.

But it was designed to return the economy to a reasonable level of activity as quickly as possible, he said. "The faster we can achieve that, the sooner interest rates will get back to more normal levels."

Ohhhhhhh......so it's a strategy?  Now I get it.  NOT!  These pukes make me sick.  The nerve of criticizing someone who saved their WHOLE lives to live off their savings, because they have the audacity of complaining about ARTIFICIALLY low interest rates!  Not only that, but to say that they "probably" benefited from rising home prices, which were CAUSED by the artificially low interest rates!  The mind boggles.  Skunks.  Hopefully, they get what's coming to them, and soon.  I'll be celebrating that day.
 
 
This week's video is about the most undervalued commodity on the planet....silver.  Have a great week!