Thanks for the comment Charlie. Obviously there is a camp that think investing in gold/silver producers is a poor decision given all the other options. There's another group that thinks it should make up a small portion of one's portfolio. My occasional post re GORO is primarily directed to that group.
My comment re opinion that company should be profitable soley on silver deposits rests on fact that the ore has sufficient quantities of copper, lead, and zinc to more than cover production costs and silver grading over 500gms per ton in Arista mine. In Dec I did an analysis based on the Arista mine which is currently being drilled. It's only one of 5 properties which the company has 100% rights to. The analysis is based on the 1 Dec pr which is shown.
John
I had some free time so I did some number crunching to help support my contention that GRC (GORO) should be quite profitable even entirely discounting gold. Essentially, if you ignore gold and use base metals to pay all production costs, you’re left with a silver valuation.
Before getting to the numbers I will give some reasons why this evaluation is quite conservative imo.
1. It uses only the 2,962,000 tonnes for the Arista deposit. This excludes the open pit deposits of El Aguila which w/b used for the first year of ops.
2. It ignores the “…near term mineralized material target of 3.5 mm AuEq ozs” used in the 1Dec pr (below)but rather uses 2.2 mm AuEq ozs which is derived from the 2,962,000 tonnes.
3. It doesn’t factor in the other properties where samples suggest very prospective silver and gold reserves.
4. It uses the lower metal values given in the pr compared to today’s prices.
5. It doesn’t consider that the extent of the Arista and Baja veins is undetermined though reasons exist to suggest large additional deposits.
6. It doesn’t allow for the fact that current value of base metals far exceeds production costs. Production costs for a relatively shallow mine in Mexico run between $50 to $60 per tonne maybe $80 for a deeper mine like Arista. Copper, lead, and zinc have a value of $186.33 per tonne. A 40% smelting cost would leave $106, roughly three times production costs. But that too w/b ignored.
Here are the numbers, from the 1 Dec pr.
Grading per tonne:
Gold 6.50grams/tonne
Silver 506 g/t
Copper .60%
Lead 2.24%
Zinc 6.75%
Prices used in PR:
Gold (oz) $950.00
Silver (oz) 17.00
Copper (lb) 2.70
Lead (lb) 1.00
Zinc (lb) .95
Value/tonne (divided gms by 31.1 to get oz equivalent)
Gold 6.50g/31.1 X $950 = $198.55
Silver 506g/31.1 X $17 = $276.59
Copper .60% = .006 X 2204 lbs = 13.22lbs X $2.70 = 35.70
Lead 2.24% = .0224 X 2204 lbs =44.89 lbs X $1.00 = 44.89
Zinc 6.75% = .0675 X 2204 lbs =148.77 lbsX $0.95 = 105.74
So, if we totally ignore gold and use base metals to pay for operating costs, we’re left with 2,962,000 tonnes times $276.59 (silver value per tonne) to get $819,259,000 for silver value of this one deposit (so far). There are ~46,000,000 shares outstanding and no debt. Mine life based on these Arista numbers plus the 200,000 AuEq ozs from the open pit is nine years. Dividing the $819,000,000 by 9 years you get $91,000,000 per year for silver only. To figure free cash flow w/o any gold contribution you’d have to add $186 per tonne of base metal value ($186 X 2,962,000 tons = $550,932,000) of $550,932,000 to the $819,000,000 to get $1,370,000,000. Take out $457,000,000 for government taxes and you have $1,113,000,000 free cash flow for 9 years. Business plan is to use half of that for operating costs and expansion and half for dividends. I think a pe of 20 or 25 would be very reasonable. All of this includes no value for gold which of course is unrealistic. You can add in whatever gold price you’re comfortable with.
Hope this helps.
John
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Gold Resource Corporation Updates Mineralized Material Estimate forEl Aguila Project
Dec 1, 2009 13:17:00 (ET)
DENVER, CO, Dec 01, 2009 (MARKETWIRE via COMTEX) -- Gold Resource Corporation (GRC) (GORO, Trade ) (FRANKFURT: GIH) is pleased to announce results from an internal analysis of step-out drilling at its Arista deposit. The Arista deposit's vein system is part of GRC's 100% owned El Aguila Project in Oaxaca, Mexico. Estimates of in-place mineralized material at the Arista deposit, based on the Company's modeling of the Arista and Baja veins, equals 2,962,000 tonnes grading 6.50 g/t gold (Au), 506 g/t silver (Ag), 0.60% copper (Cu), 2.24% Lead (Pb), 6.75% zinc (Zn) over a nominal 3.6 meters true width. Total metal values yield a 23.02 g/t gold equivalent (AuEq*) (0.74 oz/t AuEq*) using the metal prices given in the Mineralized Material Estimate table below. This AuEq* per tonne value multiplied by the estimated 2,962,000 tonnes equates to an estimated 2,192,000 AuEq* ounces. This Mineralized Material Estimate does not meet the United States SEC definitions of Proven and Probable Reserves. GRC targets production at its El Aguila Project in 2009.
El Aguila Project's Arista Vein System
Internal Mineralized Material Estimate
Updated: Dec. 1, 2009
Specific Gravity: 2.6
Mineralized Envelope Limit Projected: 50 meters
Mineralized True
Material Width Gold Au Silver Ag Copper Cu Lead Zinc
Meter g/t g/t % Pb % Zn % Tonnes
----- --------- ----------- ---------- ------ ------ ---------
La Arista
Vein System 3.64 6.50 506 0.60 2.24 6.75 2,962,000
----- --------- ----------- ---------- ------ ------ ---------
Metal Values
Used in $ 1.00 $ 0.95
AuEq* $ 950 /oz $ 17.00 /oz $ 2.70 /lb /lb /lb
----- --------- ----------- ---------- ------ ------ ---------
Internal Estimate: Not SEC Proven & Probable Reserves; see Risk Factors
in Company's 10K
The Arista deposit's estimated 2,192,000 AuEq* ounces is an internal estimate of in-place metal values using a simple polygonal method of calculation, uncut assay values and with a 0.30 oz/t AuEq* cutoff grade* (see Longitudinal Sections of Baja and Arista veins below). The Arista vein system remains open laterally as well as with depth. The Aguila Project's open pit deposit, from which the first 12 months of production is targeted, and the El Aire vein system deposit add an additional 200,000 gold equivalent ounces, resulting in a total internal estimate for the Aguila Project of approximately 2,392,000 AuEq* ounces.
Gold Resource Corporation's president William W. Reid stated, "We made our production decision in 2007 with just a mineralized material estimate of 300,000 AuEq ounces. We could do that because we followed our financial performance criteria of being able to pay back the project capital in one year or less. By October of 2008 we announced our mineralized material estimate of 1.6 million AuEq ounces (metal prices used at that time were different from those used in the present calculation). This allowed for an expanded production profile with mine life of 4.7 years. We are pleased that drilling over the past year, with only one drill, has allowed that estimate to now increase to approximately 2.4 million AuEq* ounces and an estimated 9 year mine life. Based on our increased understanding of this exciting, high-grade geologic system, which we believe we have only just begun to test with drilling, we have no hesitation increasing our near term mineralized material target to 3.5 million gold equivalent ounces."
Mr. Reid continued, "Our first year production target of 70,000 ounces of gold comes from the El Aguila open pit's gold and silver deposit which contains no base metals. Our second year through year nine production targets come from our Arista deposit's polymetallic veins with a breakdown of values of approximately 68% precious metals (gold and silver) and 32% base metals (copper, lead and zinc). We are fortunate that these base metal revenues, when used as byproduct credits, are anticipated to pay for the project's total cash operating costs so we are targeting our gold and silver cash costs to be 'zero' from the second year of operations. Production targets are 110,000 oz/AuEq** in the second year with a target of 180,000 to 200,000 oz/AuEq** in the third through ninth year."
The estimated mineralized material number is an in-place number without regard to recoveries, mining dilution or mining economics. These internal estimates are dependent on many assumptions that may differ from actuality when mined. This mineralized material estimate is not equivalent to U.S. SEC Proven and Probable Reserves and should not be considered as such. The geologic interpretation and modeling by the Company has suggested two veins but may actually be several en echelon veins or could be interpreted differently by different modelers.
AuEq* is a gold equivalent for aggregate in situ value of all metals. Gold Resource, like many in the industry, subscribe to the use of gold equivalent (AuEq*) as a means to present the aggregate value of polymetallic (gold, silver, copper, lead, zinc) mineralization in the ground. Gold equivalent valuation quantifies the precious metal ounces and base metal percentages of the mineralization into one gold equivalent (AuEq*) value. This calculation converts the metals quantity into its dollar value and converts that dollar value back into an equivalent gold value. Gold equivalent is a valuation calculation that places the emphasis on the total dollar value per tonne of the mineralization. The company believes this AuEq* calculation best conveys the aggregate, in-place estimate of the deposit's hypothetical value. The following mineral values were used in this gold equivalent conversion: gold at $950/ounce, silver at $17/ounce, copper at $2.70/pound, lead at $1.00/pound, and zinc at $0.95/pound. Different metal prices will result in different gold equivalent values.
AuEq** is a gold equivalent for production targets. AuEq** gold equivalent production targets are calculated using only precious metals (gold and silver) as the AuEq**gold equivalent.
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