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Gold Resource Corp: Mexican gold with a high dividend yield

Gold Resource Corporation (AMEX:GORO) has issued  57.1 million shares and options for a fully diluted market capitalization of $1.3 billion. At  September 30, 2010 cash and cash equivalents were $54.8 million

Gold Resource Corporation commenced production of gold and silver from its Mexican operations on July 1st of this year, and has already declared 4 special monthly dividends for a total of 12 cents per share, up to November 24th. The company intends to pay back up to one third of its free cash flow in dividends, indicating that this may reach up to $1.11 per share in its third year of production.

The company has consolidated claims over three historic mining districts called Alta Gracia, Las Margaritas and El Aguila, covering 16 kilometers of strike for a total of 337 km², in the southern state of Oaxaca, Mexico.

 This strike line contains a large epithermal system where Gold Resource Corporation has developed a series of high grade resources and exploration targets contained within a massive 4 kilometer long “plug” encircled by 3 volcanic caldera. These resources include the El Aguila open pit, which contains an estimated 330,000 tonnes at 7.5 g/t gold and 63 g/t silver, and currently provides the feedstock for the first year of mining operations at an annualized target rate of 70,000 ounces of gold, produced in the form of concentrates via Gold Resource Corporation’s floatation circuit. Development of the pit floor shows indications of a possible high grade feeder zone plunging below the floor, where grade control in the pit floor over this discovery gave 904 g/t gold and 9720 g/t silver, and 2.5 meters, with 55 g/t gold and 701 g/t silver over 4 meters.

Gold Resource Corporation is also developing the La Arista polymetallic underground vein system that is located 2 kilometers to the southeast of the El Aguila open pit. Two predominant veins called Baja and Arista have been drilled along a 500 meter strike line and down to a depth of 500 meters for a current mineralized material estimate of   2,962,000 tonnes at 23.20 g/t gold equivalent for an estimated 2,192,000 gold equivalent ounces. The composition of the mineralized estimate contains 6.50 g/t gold, 506 g/t silver, 0.60% copper, 2.24% lead and 6.75% zinc.  Both systems are open along strike and at depth. GORO stresses that this is not an SEC approved estimate of resources, but is backed by substantial funding from Hochschild (LSE:HOC) to bring the resource into production.
 
A spiral decline is now into the top of the Baja system, where the first cross cut into the vein revealed a solid mineralized structure 6 meters wide, exceeding expectations. The decline is now advancing on the Arista vein located 30 meters away. The development will initially consist of 4 working faces, and develop both laterally and at depth. Ore will be hauled to the surface and stockpiled.  The Company is targeting   processing Arista oreby July of 2011, after the El Aguila open pit ore has been exhausted. The La Arista  deposit is estimated to supply sufficient ore to produce 110,000 gold equivalent ounces in the second year of operations and then step up to 200,000 for an additional six years. Gold Resource Corporation will be drilling the extents of the Arista deposit in the near future.  The Company is hopeful that it can double the size of the Arista deposit as it is currently open in both strike and depth.  Any additional discoveries  will extend the current 8 year mine life of the project. 

Surface sampling on an 8 kilometer strike line that encompasses the La Arista portal and the El Aguila open pit, known as the San Jose corridor gave high grade mineralized rock chip samples along its entire length. The strike line between the underground mine and open pit already shows potential for multiple discoveries of mineralized veins, and already includes a vein 150 meters northwest from La Arista carrying 9.9 g/t gold and 589 g/t silver over 0.73 meters. GORO is also  considering developing the El Rey Project, which is located 80 kilometers from the process plant.  El Rey is a high grade gold vein system with multiple intersections of up to 9 meters at 19.4 g/t and 1 meter at 132.5 g/t gold.

Gold Resource Corporation has 5 high grade properties, which show great potential and remain 99% unexplored. To accelerate development of the project, the company recently raised $55.6 million, which  could be utilized to increase mill capacity by 50% and fast track ore resource development.

The previous production target for the third year of operations was set at a process rate of 440,000 tonnes per year of ore, grading a gold equivalent 23.2 g/t.

This compares extremely favorably against a range of major producers such as Goldcorp ( NYSE:GG, TSX:G) where its Pensquito Mine operates at a low of 1.31 g/t or Yamana Gold (NYSE:AUY, TSX:YRI) operates at a high grade of 10.56 g/t at the El Penon Mine.

Another interesting metric is that Gold Resource Corporation targets an Internal Rate of Return of 100% at La Arista, where majors such as Xstrata (LSE:XTA, SIX:XTAN) target an IRR of +20% on their worldwide metals mines.

Gold Resource Corporation expects production of base metals from La Arista to cover all cash operating costs, so that projected annualized output of 200,000 ounces of gold equivalent at a gold price of US$950 per ounces will produce a free cash flow of US$190 million. The company expects to payout one third of this cash flow in annualized dividends of US$1.11 per share, which equates to a dividend yield of 4.8% on the current share price, where its peer group typically pays out no more than 1%.

As the U.S. economy recovers, and the need for capital preservation ebbs, investors will turn to high yield dividend plays in the gold sector to underpin returns on investment. The bodes very well for Gold Resource Corp as a not only a gold producer, but as a high yield stock.