IKN Flash update: Covering GORO short — May 12, 2014
Gold Resource Corp (GORO): Flash update briefing
May 12th 2014
This abridged document goes into a little more detail on the call in the cover mail tonight. The
three main parts to the equation are:
• Revenues, which were around $2m higher than our model. Slightly more than
expected, but not that big a difference.
• Costs, which were much lower than expected. GORO has either put in an anomaly of a
quarter or it’s managed to make a big difference to its running cost profile in a short
period. As a shorter, it pays to give the benefit of the doubt to the company,
congratulate it on a big improvement in financial terms and assume it will continue.
• Treasury, which has risen. The rise seems slightly artificial, because working capital
didn’t move up, but even that metric was better than the continued fracturing of
liquidity we’ve seen in previous quarters and shows that as long as the company can
repeat its 1q14 performance, GORO has found a level at which it is self-sustaining for
the intermediate term at least.
The combo of these three mean that GORO will likely rebound in the days to come. I had a
feeling we’d see a better quarter from GORO in Q1 and said as much in yesterday’s weekly, but
I didn’t expect it to be this positive. I’m therefore going to cover my short early
tomorrow morning and walk away with my profit. This will also add liquidity to my
portfolio and allow me to do other things with my cash. Here come details.
First up revenues, which look like this below. Note that the main focus is on the 1q14 numbers,
with preliminary model adjustments for the rest of 2104 already in, but they may need some
fine tuning in the days and weeks to come:
GORO: Revenues
45 42.311
40 36.665 36.49 38
35 30.7 31.152 31.4 32.64
29.405
30 27.939 26.66 27.408
25
20
15
10
5
0
21q1 21q2 21q3 21q4 31q1 31q2 31q3 31q4 41q1 tse41q2 tse41q3 tse41q4
U$m
source: company filings, IKN ests
Over $31m in revenues was a good performance from the company, largely due to it booking
its silver sales at $20/oz for the quarter (our model assumed $19/oz, after charges).
Here’s the costs breakdown chart below and again, the focus of attention is on the 1q14
numbers.
GORO: Costs breakdown
36
32
28
24
20
16
12
8
4
0
11q1 11q2 11q3 11q4 21q1 21q2 21q3 21q4 31q1 31q2 31q3 31q4 41q1 tse41q2 tse41q3 tse41q4
U$m
cons+dev
exploration
G&A + stock comp
COGS
source: company data, IKN ests
We expected (see last two editions of Weekly)
to see GORO drop the construction and
development charge from its P+L due to the
now published reserves report dated
December 31st. That took around $5m from
the company costs profile, but of more
interest is how baseline COGS (in red) came in
lower than previous quarters at $14.966m,
this despite mined tonnages rising
substantially to 104,349mt (over 20k tonnes
higher than the previous quarters).
Put those two (revs and costs) together along with those tonnages and this is what comes out:
GORO: Revs/tonne vs True Cost/tonne
400
360
320
280
240
200
160
120
80
40
0
31q2 31q3 31q4 41q1 tse41q2 tse41q3 tse41q4
GORO: Tonnage mined per quarter
140000
120000
100000
80000
60000
40000
20000
0
U$/tonne
revs per tonne
true cost per tonne
source: company data, IKN calcs
The 1q14 result here is a big improvement on previous quarters. Revenues per tonne mined are
down slightly (mostly due to lower average grades) but “true costs” have dropped sharply. Most
of that is because construction and development is now capitalized, but some is the impressive
trimming of COGS noted above. The combo means GORO is a profitable mine for once.
Here’s the same data put in absolute quarterly dollar terms:
11q1 11q2 11q3 11q4 21q1 21q2 21q3 21q4 31q1 31q2 31q3 31q4 41q1 tse41q2 tse41q3 tse41q4
tonnes per qtr
source: GORO data
GORO: Revenues vs "true costs"
45 42.31
40.62
40 37.78 35.44 36.49 37 3 . 6 9 . 3 00
3 3 0 5 30.01 27.94 29.96 26.6 2 6 7.4329. 3 4 1 1 .29 27 2 .4 6 1 .77 31.15 31.4 2 0 9.50 32.6 3 4 1.00
25 20.66 20.51 22.52 22.93 21.53 19.27
20
13.94 15.91 15.27
15
11.28
9.13
10
5
0
11q1 11q2 11q3 11q4 21q1 21q2 21q3 21q4 31q1 31q2 31q3 31q4 41q1 tse41q2 tse41q3 tse41q4
U$m revenues
"true costs"
true costs = prod costs + deprec&amort+ accretion + G&A + stock based
compensation + expl expenses + construction & development
For what it’s worth, despite the higher tonnage sales of gold and silver came in only very
slightly above previous forecasts, due to a lower head grade
Here’s one of the charts that follows the revnues mix for metals and shows how silver is still the
predominate metal at GORO, covering nearly 45% of sales. Gold is responsible for a touch over
32% of sales, the rest is from the base metals by-products.
GORO: Gold and silver gross revenues, per quarter
30
25
20
15
10
5
0
21q1 21q2 21q3 21q4 31q1 31q2 31q3 31q4 41q1 tse41q2 tse41q3 tse41q4
GORO: Gold sold, per quarter
12000 11045
10000 8953 8586 8744 9205
8000 6668 7119 7287 7297 7683 7629
5774
6000
4000
2000
0
U$m
Au revs
Ag revs
Credit revs (Cu/Zn/Pb)
source: company filings, IKN ests for 4q13
Anyway, to cut a long story short, these next two charts are how revenues and profits pan out
compared to recent quarters. The first one outlines gross profits again:
21q1 21q2 21q3 21q4 31q1 31q2 31q3 31q4 41q1 tse41q2 tse41q3 tse41q4
Oz Au GORO: Silver sold, per quarter
1200000
1018650
1000000
800000
828376 863152
755746741757 686421
766535806438148875
603426599501
600000
417932
400000
200000
0
source: company filings, IKN ests for FY14
21q1 21q2 21q3 21q4 31q1 31q2 31q3 31q4 41q1 tse41q2 tse41q3 tse41q4
Oz Ag
source: company filings, IKN ests for FY14
U$m GORO: baseline mine financials
45 revenues
40 COGS
Gross profit
35
30
25
20
15
10
5
0
1q12 2q12 3q12 4q12 1q13 2q13 3q13 4q13 1q14
source: GORO data
This second one shows how cash flows through the books and to the bottom line
GORO: Evolution of profits
15
13
10
8
5
3
0
-3
-5
21q2 21q3 21q4 31q1 31q2 31q3 31q4 41q1
source: company filings
srallod
fo
snoillim
op profit
pre-tax profit
Net Income
That’s a 13c EPS for the quarter and that’s a lot better, any way to care to cut it. Even without
the cons+dev removal, GORO would have returned positive figures and with it, perhaps $5m
gets added to the bars.
Over at the balance sheet, this chart follows the treasury position which jumped ~$4.5m in the
quarter to stand at $19.457m.
GORO: Cash and ST
60
50
40
30
20
10
0
01q4 11q1 11q2 11q3 11q4 21q1 21q2 21q3 21q4 31q1 31q2 31q3 31q4 41q1 tse41q2 tse41q3 tse41q4
source: company filings, IKN ests for 4q13
It’s slightly skewed, because GORO saw other things (lower “other current”, about $1.5m added
to current liabilities) that allowed cash to take a bigger chunk of working capital than usual.
Working cap in fact dropped a sliver as seen below, but as noted in the last two editions of the
Weekly, the acid test for this comapny was to see whether it could add cold hard cash to its
structure this quarter and it’s done just that. I could easily pick at the method but the result is
undeniable, GORO has put in a good quarter.
80 GORO: Working Capital per qtr
70
60
50
40
30
20
10
0
01q4 11q1 11q2 11q3 11q4 21q1 21q2 21q3 21q4 31q1 31q2 31q3 31q4 41q1 tse41q2 tse41q3 tse41q4
source company filings, IKN ests
srallod
fo
snoillim
Conclusion
I’m still utterly unconvinced by this company and this strong 1q14 may turn out to be an
operational flash in the pan. Also, its reserves position has now shown the world that it’s a
comapny built on a thin base. However, I also know an greatly improved operating quarter
when I see one and I know that the desire to be short, at leats for the near-term, has
disappeared after reading this 10-Q. Therefore I’ll cover tomorrow morning and walk away (for
the umpteenth time, a winner after shorting this stock). As for the price at which I’ll cover, I
note that post-bell GORO is currently up in A/H trading by 5.7% and that looks fairly reasonable
to me at this time. If I can cover and walk at U$3.70 or so I’ll consider that a fair result, but
even at $4 I wouldn’t bat an eyelid about profit-taking.
Best, O