Gold Resource Corporation – zero cost per ounce!

12th Feb 2009, 12:00 am by Wendy Durham It's just over three years now since brothers Bill and David Reid handed over control of US Gold - their successful 28 year old exploration, development and mining company - and shifted focus to their privately owned exploration company Gold Resources Corporation (OTCBB: GORO)(GRC).

Founded in 1998 in Denver, Colorado to prospect for precious metals, GRC had amassed a portfolio of gold and silver projects in Oaxaco State in Mexico, led by flagship site El Aguila. US Gold was a shareholder of GRC and as part of the severance payments due to management all the shares of GRC that US Gold held were granted to management by the new CEO of US Gold, Mr. Rob McEwen. This allowed the Reids to turn their attention entirely to El Aguila which was about to enter a third round of more intensive exploration. The Reids set about raising capital, and by December 2006 they had amassed a treasury of over $9 million and GRC had been admitted to trading on the OTCBB.

"Engineered from Day One to maximize shareholder value" is what GRC say about themselves, and the company's aim is to start small at low cost with good margins, generate further growth using cash flow, and pay dividends as soon as is practical.

El Aguila is a good place to start. Located in the traditional high grade gold and silver mining district of San Jose de Gracia, it sits toward the southern end of the 8km long San Jose Corridor running between the La Tehuana Mine to the WNW and the El Aire Mine to the ESE. Geologically, the region is one of volcanogenic intrusions overlying sedimentary rock, and mineralisation, typically, is low-sulphidation epithermal in nature. Targets at El Aguila itself are hosted mainly in a quartz rich stratiform system, with gold/silver mineralisation lying in a shallow, semi-horizontal manto zone ranging from 3m to 60m in thickness. In this shallow open pittable area, gold is uniformly high grade averaging 7.45 g/t gold and 63 g/t silver. In one drill intercept, a 4 metre intersection of 55 g/t Au and 701 g/t Ag indicates the possible presence of a feeder vein into the manto system, which opens up further potential.

Just 2km to the ESE, two further deposits have been located - El Aire and La Arista, both high grade polymetallic underground vein systems, which now host the bulk of the El Aguila resource. Examples of recent high-grade intercepts at La Arista show 1.4m of 47.40 g/t Au and 1030 g/t Ag included within 8.6m of 48.54 g/t gold equivalent (AuEq) and – from one of the best cores - 1.2m of 83.10 g/t Au and 2340 g/t Ag. One of the wider intersections contained 8.6m of 13.40g/t Au, 882 g/t Ag, 1.53% copper, 9.77% lead, 23.01% zinc to give a gold equivalent value of 48.54 g/t. The most recent estimate of the total resource in this area – before the above drilling results were received – is 1,334,000 AuEq ounces. Current drilling is, however, extending the system to the south east, and to a depth so far of 500m.

The high grade vein systems have grown El Aguila's resource from 300,000 ounces of gold equivalent (AuEq) in 2007 to 1.6 million ounces of AuEq today, with a near term target of 3 million ounces AuEq from further exploration.

Exploitation of this resource will take place in two stages, with start-up planned for the second half of this year: in Year 1 a shallow open pit will extract the manto-hosted gold and silver at El Aguila, delivering 70,000 ounces of gold at a cost of $100 per ounce after silver credits. This will comfortably repay capex in well under a year. Production then moves underground in Year 2 to the La Arista vein system, where the precious metal (gold/silver) grade averages 14.6 g/t AuEq with additional significant amounts of copper, lead and zinc. In Year 2, 250,000 tonnes will be mined to deliver 110,000 ounces of precious metal (gold/silver) AuEq, ramping up by Year 3 to 400,000 tonnes and 177,000 ounces of precious metal AuEq. Production costs per precious metal AuEq ounce from La Arista will be virtually zero, by using revenue from the base metals to offset the precious metal costs.

The mill will be flexible to accommodate expansion and will process gold dore and concentrates at a maximum rate of 400,000 tpa. Metallurgy is excellent, with 94% gold and 90% silver recovery via flotation and agitated leach. Good progress is currently being made on site, with the open pit undergoing pre-stripping, and mill construction at the concrete stage. Mill equipment is mobilizing to the site, the mine village is almost complete, and the large tailings dam is underway whilst the smaller dam is complete. The infrastructure is good, with power, water and the Pan American Highway just 2km away. The majority of site permitting is now complete, with only the final mining authorisation awaited.

The mineralisation which forms the basis of the current mine plan is from just two areas of the 8km long San Jose Corridor. In the 2km stretch between El Aguila open pit and the Arista and Aire vein systems, surface samples have shown up to 35 g/t Au, and to the WNW of El Aguila, there have been excellent grades from the Cerro Colorado target - another possible manto zone - of 19 g/t Au and 417 g/t Ag. GRC have identified a number of other potential vein systems and open pit targets which will be explored to enhance the available resources.   

The Las Margaritas silver property, contiguous with El Aguila, takes in the final 4km to the WNW of the San Jose Corridor, and lies in a collapsed caldera, where bonanza grades of silver have been identified in the past. Historical records from a 1905 Mexican Government-authorized report titled The Mines of Mexico described the Las Margaritas mining district as, "...the place in which has been found some of the richest ores in Mexico, some of the ores having reached the value of 18,000 ounces to the ton, and ores are frequently found which assay 4,000 and 5,000 ounces to the ton." Las Margaritas is still in the early stages of exploration.

At El Rey, the second of GRC's properties to be drilled, initial indications are good. Whilst limited mining has taken place in the past, little is known of the deposit’s history. Drilling has found grades ranging from 1m @ 23.7 g/t Au,  9m @ 19.4 g/t, 1m @ 66 g/t and 5m @ 45.24 g/t, with one bonanza grade intersection of 132.5 g/t over one metre. Under consideration here is the development of an underground mine, which would feed the El Aguila mill, some 95km away.

In December last year, GRC entered a strategic alliance with London-listed silver miner Hochschild Mining plc via a private placing of 1.67 million shares at $3 per share, which at the time was a 19% premium. The proceeds will be used to further construction at El Aguila. Based in Lima, Peru, Hochschild also have an option to purchase another 4.3 million shares at $3 within 80 days, subject to the outcome of a joint study on the possible advantages of accelerating development of the La Arista underground vein mineralization. Should this option be taken up, Hochschild will own 15% of Gold Resource Corporation and will have the right to appoint a director to the board.

The company has recently put forward a potential valuation, which, on an operating cash flow basis once target production is reached, equates to a share price of $30. This is in sharp contrast to the current market price of $5 per share, and last Autumn’s low of $2. With just over 36 million shares in issue, the market currently values GRC at $180 million, or $122 per current resource ounce. Given that initial targets for the first 12 months of production are 70,000K ounces of gold at a cash cost of $100 per ounce, and that after Year 2, all costs of precious metals (gold and silver) could be wiped out by base metal credits from copper, lead and zinc revenues, this doesn’t appear too demanding.