Gold Resource Corp (GORO) has been one of the best performing gold stocks over the past five years, outperforming the appreciation in gold bullion by around 2,000%. From a price of $1 per share in September 2006, Gold Resource rose to the $5 per share range by mid year 2007 and earlier this year hit an all time high of $31.38. GORO closed at $24.10 on Friday and may head much lower in the aftermath of a devastating article published in this week’s Barron’s.
Highlights of the disclosures and questions raised about GORO in the Barron’s article include the following:
- The company is run by the Reid family and Bill Conrad, who helped the company in its initial public stock offering in 2006. Barron’s discloses that the Reids and Conrad “have been consistent sellers of the stock” with $13.7 million of sales in the just the past year.
- Gold Resource’s primary mine in El Aguila, Mexico, has seen constant production delays despite promises since 2007 that production would soon increase. In April of this year, according to Barron’s, the mine produced only 20,000 ounces after being targeted for 70,000. The expenditure of $95 million, raised in equity offerings, has produced minimal results in terms of gold production.
- The El Aguila mine was abandoned by Apex Silver Mines after they explored the site in the early 2000s.
- Gold Resource has never conducted a study to accurately assess the “proven and probable reserves” of the El Aguila mine. According to Barron’s, investors only have the Reids’ word to rely on for estimates of gold deposits and the cost of extraction them.
- The two largest investors in Gold Resource are Hochschild Mining of Peru and the Tocqueville Gold Fund. According to Barron’s, “the largest holders, who have known the company the longest, have not been buying stock at anywhere near the current price”. Legendary gold investor John Hathaway of the Tocqueville Gold Fund told Barron’s that his geologist has visited the El Aguila mine twice and ore samples are “consistent with a potential deposit of two to three million ounces of gold equivalent”, worth up to $4.5 billion in gross revenue. Almost 4% of the Tocqueville Gold Fund is invested in Gold Resources.
- Barron’s discloses that Gold Resource President Jason Reid sold $700,000 of stock “on May 19th, a day after Barron’s first emailed him some questions”.
- Barron’s claims that Gold Resource management is “promoting the stock” with cash dividends despite the fact that “the company has never, in a single quarter, produced positive cash flow”.
- Barron’s concludes that investors shorting the stock “are probably wise” not to take management’s word on how much gold Gold Resource actually has or how much it will cost to mine.
The recent trading action in Gold Resource Corp stock raises some intriguing questions. On June 24th, GORO traded down $1.47 as trading volume exploded to 3.3 million shares, the highest volume in the stock’s history and 7.7 times the stock’s daily average trading volume. The massive surge in trading and lower stock price a mere week before the damning Barron’s article was published suggests that some investors knew in advance what was coming. Investors also have a significant short interest position in GORO of almost 11% of the stock’s float.
GORO - COURTESY YAHOO FINANCE
If Barron’s doubts about Gold Resource prove correct, the stock may be looking at a return trip to $5 per share.
Nice Information……………..
I think gold gets a bounce. Just went Long $BOM @ 10.39 . this setup has an 86% win rate and avg trade size of 7% http://ripetrade.blogspot.com/2011/03/ripe-trade-and-sharpe-idea-setups.html
Wrong again. And now we’ve seen another hit piece and the stock remains above $20. It’s easy to construct hit pieces based on mis-representations and innuendo. The reality is that GORO is sitting on some fantastic assets and is slowly but surely pulling them out of the ground. Combine that with super-investor-friendly policies and you have one of the better stocks in recent memory.
Whoever wrote this article is just spreading bias information without doing any proper homework. This is what lazy internet amateur reporters do these days. Or could this be more short seller peddling. The very first statistic, and the only one penned by the author, “GORO….outperforming the appreciation in gold bullion by around 2,000%”. During the 5 year period in question gold has risen from $600 to around $1800 which is a 3 times increase. GOR0 (from a base of $1 to it’s highest point reached $31) increased by 31 times. Therefore the maximum that GORO has outperformed bullion can only be 10 times or 1000%.
A similar mistake seems to have been made by the Short Interest holders in GORO – who are these guys with fat fingers! They have piled in to a level of 5 million shares which is more than 30% of the free float in the GORO shares. They now have in excess of 10 days (more likely 20 days) the average number shares currently traded each day. How are they ever going to exit. Remember they have to buy GORO shares back at some point in order to make a profit and many of them will be making a big big loss.
I predict GORO is more likely to reach $50 rather than become a $5 stock before then end of 2012. Then I would say that wouldn’t I since I’m a large long term investor in GORO, who put up 100% of the money to buy my shares, and have always done my homework. The shorts only put up a fraction of the costs or are naked!!!
Theoretical Aspects of Short Interest
What ist the Short Interest?
This is the number of shares currently borrowed by short sellers for sale, but not yet returned to the owner (lender). Every short seller anticipates a declining stock market. A profit is made if the stock is bought back at a lower price than when it was sold short. When a large amount of short selling activity is occurring, market participants obviously expect prices to head lower. Short sellers are potential buyers sooner or later and represent a lot of buying power when they have to scramble for cover in a sudden market turn.
Short Interest Theory
This is the theory that a large short interest is the predecessor of a rise in the price of a stock. The reasoning behind this is that the short positions must eventually be covered, which means that there will be more purchasers of the stock who in turn drive the price up. If a stock’s price begins to rise significantly, investors who have short sold the stock will quickly begin to close out their positions (by purchasing shares off the open market), creating buying pressure for the stock and driving the price up even more. If a previously lagging stock turns very bullish, the buying action of short sellers can result in extra upward momentum and increased losses for short sellers who are slow to close out their positions. The longer the days to cover, the more pronounced this effect can be.
Short Squeeze
A short squeeze occurs when short sellers are scrambling to replace their borrowed stock thereby increasing demand and decreasing supply, forcing prices up. Short squeezes tend to occur more often in smaller cap stocks, which have a very small float (supply), but large caps are certainly not immune from this situation.
Lots of unanswered serious questions on GORO if someone has the unbiased intellect to evaluate the information. The truth will be known in the fullness of time. See also Will GORO Ever Find That Pot Of Gold?