E The Investment Case For Gold Resource Corp.: A Minority Report

TM Editors' Note: This article discusses a microcap stock. Such stocks can be more easily manipulated; do your own careful due diligence.

I. Introduction

Mr. Market has recently bestowed upon the diligent investor in the resource space a grand buffet of cheap securities. Whereas many look at the price to dictate the company's value, the value investors look at the price of the equity as an entry point into purchasing value at a discount. It's no wonder many notorious value investors are starting to enter the mining sector itself. 

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” - Warren Buffet.

With such little analysis of mining equities (many analysts can't take their bubbly eyes off the high flying biotech and tech stocks; we wish them luck), it may take some brilliant writing and an intriguing persuasion as to why one would even look at this beaten, almost dead, sector. In hindsight after the construction of this article, one may have rethought the title from “the” investment case to “An” investment case. Is there even “A” single case in this sector? 

It's a minority opinion, but this author believes the case for buying mining equities is clearly obvious. And one in particular is painfully obvious.

That company is Gold Resource Corp (GORO).

II. The Case Presented

Gold Resource Corp is the absolute trifecta for mining bulls: competent and proven management, high ore grades, and cash flow positive.

The company began production in 2010 of its El Aguila project in Mexico with very attractive high grade ore. It poured gold and silver and shortly after it began producing various base metals such as zinc, copper, and lead. The mine itself is a low cost producer, being able to generate cash flow even at $1,000 dollar gold. It has successfully replaced reserves for each year of the amount it has extracted from the ground. The company paid a very attractive $0.03 cent dividend per month only just 30 days after initial production.

Gold Resource Corp has one of, if not the most, tightest share structures for a mining company: an outstanding fully diluted share structure of less than 60 million. The management owns roughly 8% of the shares outstanding. And the company to date has returned over $102,000,000  in dividends - that's over $1.90  per share returned in dividends. 

It's rare to have such a shareholder-focused metals producer that is generating growth per share, not growth of the business just for growth's sake. The only rational objective for a company is to grow its per share value. And Gold Resource Corp focuses on just this - returning real, not nominal, value.

III. The Companies Focus: Return of Capital

Warren Buffett was keen on measuring his companies on relative value they returned per share - a yard stick of measurement. As stated in the book, Buffett: The Making of an American Capitalist, Roger Lowenstein (the author) had written that Buffett was not interested in how many sales, or total profit as an isolated number a company conjured. But what counted was the profit as a percentage of capital invested. The yardstick Buffet used for measuring companies performances was return on invested capital (ROIC).

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Disclosure: I own Shares of Gold Resource Corp (GORO).

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Comments

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Adem Tumerkan 4 years ago Author's comment

An important note I forgot too make: value investors must demand a premium for the risk they are taking. Not only is GORO's share price and P/E attractive, but it offers investors a dividend yield as that premium for owning their stock in this market. Truly classic Ben Graham investing.

Peter Epstein 4 years ago Contributor's comment

Awesome story Adem. I think the company will raise it's monthly dividend by 50% to $0.015 before year end. Caveat, the price of gold needs to average above $1,200!

The amount of cash on the balance sheet and being cash flow positive is just a wonderful story.

Adem Tumerkan 4 years ago Author's comment

Agreed - and as the price of gold rises to about 1,400 the dividend should double from that point aswell.