Wednesday, March 9, 2016

Gold Resource Corp - Problems Ahead

Today Gold Resource Corp (NYSE MKT: GORO) posted its 2015 results. In this article I am listing a few major problems  the company is / will be encountering in the future.

First of all - production costs. As the chart below shows, since 2012 the Arista mine (the only producing mine) has been reporting higher production costs:

Note: accounting costs are defined as production costs + depreciation, depletion and amortization + reclamation and remediation costs + administrative expenses + exploration and project evaluation expenses + facilities and mine construction costs + treatment and refining charges + other costs

It is totally different development than in the case of other miners, which most recently reduced their costs substantially. In my opinion, it is a major issue for GoRo - its main asset is less and less effective than it used to be.

Another thing - at the end of 2015 the company was holding mineral reserves of 258.5 thousand ounces of gold equivalent (a decrease of 27.4%, compared to the end of 2014). Although GoRo has other mineral properties, I guess that in the medium - term the company fully depends on the deteriorating Arista mine.

This deterioration is best seen on the charts below:

Since 2014 Arista has been delivering lower amounts of precious metals - in 2016 this trend, according to the company, should be continued.

Another thing. Due to lower grades reported by Arista, GoRo has to process more and more ore to deliver substantial amounts of metals. That is why the company incurs higher production costs - mining and milling more ore costs more money:

GoRo management has to increase its mineral base. Exploration is expensive and the company has less cash than it used to have (therefore GoRo had to cut its dividend). At the end of 2015 the company had $12.8 million in cash (at the end of 2014 it had $27.5 million). Fortunately GoRo has practically no debt so the company should be able to find some cash on credit or capital markets. But for the time being the company is trying to finance its operations through decreasing its working capital (inventory + receivables - payables). As a result, at the end of 2015 GoRo reported negative working capital of $2.5 million. Well, in my opinion, it is an example of some sort of financial problems (a healthy production business, mining included, shows positive working capital).

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