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GORO Stock: Finally Time for Sticker Shock?

by Melissa Davis - 9/22/2011 1:10:31 PM

Years ago, around the same time that it debuted on the OTC Bulletin Board, Gold Resource Corporation (AMEX: GORO) hired a young promoter who would later present a detailed valuation formula that – if updated with even the high end of current production estimates – now suggests that the company’s shares are ridiculously overpriced.

A recent college graduate when he landed GORO as his first client, records show, Ian Cassel dutifully set out to publicize the hot new penny stock and (with the company compensating him for his services) quickly became a significant shareholder himself. He loudly celebrated the stock for years, touting GORO alongside some risky small-cap names that included at least one reputed fraud, and -- by his own admission last September – pocketed big gains as those shares soared ever higher.

At the time that he mentioned his profit-taking, records indicate, Cassel had just published his last big report on GORO during his final days as a vocal cheerleader for the company. Back then, with GORO fast approaching $20 a share, Cassel actually suggested that the stock looked somewhat pricey for new investors who had missed out on the rally that helped fatten his own bank account.

“My cost basis in GORO is $1.35, and I’ve sold a nice chunk along the way, so take that into consideration,” he allowed a year ago. “I wouldn’t blame anyone for being skeptical about buying at these levels after this run-up.”

(TheStreetSweeper hoped to interview Cassel before publishing this story. It could not locate him, however, because he disabled his website earlier this year.)

Cassel sounded a whole lot more confident when he could base his analysis of the stock, which he valued at $22 a share almost two full years ago, on rosy production estimates rather than the actual results that the company would deliver on down the road. GORO nevertheless flew straight past his target price, eventually peaking above $31 a share earlier this year, even though the company has yet to approach (let alone achieve) the projected earnings that served as the basis for that lofty target.

His original formula, when applied to the latest production estimates for 2011 (the company’s first full year of actual gold production), indicates that GORO should trade for less than half the price that the stock currently enjoys.

The stock, reignited last week with the help of an upbeat presentation from management, closed Wednesday at $21.60 share. 

Magic Formula

Meanwhile, the projections used by Cassel to value the stock very near that level look downright quaint at this point.

Specifically, back in the fall of 2009, Cassel predicted that GORO would produce 85,000 ounces of gold (exceeding management’s own 70,000-ounce target) and -- by selling that gold at much lower prices than those seen today -- would generate total earnings of $1.11 a share during its first full year of commercial operations. He then multiplied that figure by 20, assigning GORO the same premium sported by efficient low-cost gold producers, to value the stock comfortably above $20 a share. 

GORO barely managed to sell 20,000 ounces of gold and (mostly) silver during the first half of 2011, however, with the company earning just 13 cents per share during that period. Going forward, GORO must double that output just to reach the low end of its newly reduced production target – down from 90,000 ounces originally to between 60,000 and 70,000 ounces right now – for the current year. Even if GORO actually hits its production target for a change, the miner’s per-ounce profit for the first half indicates, the company will likely post full-year earnings of no more than 40 cents to 50 cents a share. 

Those figures, when multiplied by the same generous premium Cassel used in his old forecast, render a stock price of just $8 to $10 a share for the company.

To be sure, records show, Cassel has touted other risky highfliers that later crashed straight back down to earth. One of those, Electronic Game Card (OTC: EGMIQ.PK), turned out to be an “outright fraud” (in the words of none other than Cassel himself) and looks like a worthless Pink Sheet stock – selling for a fraction of a penny – these days. While others escaped total disaster, particularly those that trade with GORO on a major stock exchange, they have recorded some spectacular losses as well.

Take Quepasa (AMEX: QPSA), for example, a bleeding social media company with big dreams of becoming the equivalent of Facebook for Latinos. Cassel breathlessly celebrated QPSA as a great stock pick for the better part of a year (touting the company at least 100 different times by one count), with the shares more than tripling in price through that period. QPSA finally peaked above $15 this January, with Cassel suddenly pulling the plug on his promotional website one month later, and has plummeted to barely $4 a share since that time.

Cassel also pushed a bleeding outfit called iBio (AMEX: IBIO) before he shut his website down, catching the attention of TheStreetSweeper in the process. That stock has followed a similar rocky path, first tripling to $6 and then rapidly losing all of those impressive gains to sink back to its current level below $2 a share. IBIO took its first major hit when TheStreetSweeper published a big investigative story on the company in February, losing 20% of its value in the span of just two days, with Cassel suddenly throwing in the towel a few weeks later.

“I told myself from the beginning that, once my website became too big of a distraction for the companies that I’m invested in (a negative distraction), I would shut it down,” he explained at the time. “And I think that point has been reached.” 

GORO itself soared higher for a while, helped by the breathless rally in underlying gold prices, but the stock – just like other Cassel favorites – has given back some of its big gains, down 31% from its April peak, with the steady passage of time.

Fool’s Gold?

Still, records indicate, Cassel obviously expected far better results from GORO to warrant the stock price that the company sports even after that dramatic slide. His early praise for GORO, as well as his conviction in its promises, now looks decidedly misplaced with the benefit of hindsight.   

“The company has continued to execute its strategy to near perfection, especially in an imperfect industry such as mining,” Cassel gushed in mid-2008, two full years before GORO actually launched commercial gold production. “The company is targeting 70,000 ounces of gold production in year one, which is expected to commence around the fourth quarter of 2008 or the first quarter of 2009.

“This might not sound fantastic,” he said of the target that now represents the high end of the company’s estimated production for the current year. “But when you add in the low-cost nature of this project … you have a very rare and explosive situation brewing.

“The future cash flows are off the charts,” he continued, “with margins a tech software maker would love.”

GORO has now reported four quarters of results since it finally began producing gold last summer (after numerous delays), records show, with the company posting numbers that bear no resemblance to those presented by Cassel when forecasting the miner’s results for its first full year of commercial operations. GORO produced less than 40,000 ounces of gold equivalent during that period (with silver accounting for the vast majority of that total), falling wildly short of a 70,000-ounce target that even Cassel -- a former stock promoter – once found trouble celebrating

GORO actually burned cash throughout most of that period, too, with its negative cash flow from operations for the first three quarters (a combined $26.5 million) eclipsing the positive cash flow achieved by the company in the final quarter ($12.2 million) with the help of delayed payments on outstanding bills. The company remains saddled with a negative profit margin in the meantime, based on its trailing 12-month results, while both the gold sector and the lucrative software industry sport handsome double-digit profit margins instead.

Of course, GORO has never really traded on the traditional metrics – revenues, profits, margins, reserves – used to value other public companies. After all, records show, GORO boasted a handsome market value before the company ever generated any revenues (let alone profits) and ultimately became a $1 billion corporation without formally establishing any gold reserves at all. GORO currently trades at an astounding 25 times its prior-year sales, a multiple that dwarfs the single-digit ratios (of five or even less) viewed as steep by some financial experts, and spent years losing money before it finally became marginally profitable earlier this year. 

GORO looks incredibly rich based upon its potential earnings for the current year as well. Even if GORO somehow manages to triple its profits during the second half of 2011, records indicate, the company would earn barely 50 cents a share over the course of the entire year. Nevertheless, at its current price, the stock already trades at more than 40 times that optimistic full-year earnings estimate right now.

That handsome multiple clearly stands out from the crowd. The broader gold market features a price-to-earnings ratio that’s less than half that size instead, with some of the industry’s biggest – and most successful – miners trading at even lower multiples still.

GORO failed to answer questions from TheStreetSweeper ahead of this article last week and recently stated that it will decline to answer any future questions from this website as well.

Battle Cry 

Meanwhile, records indicate, GORO has attracted little interest among mainstream analysts who follow the gold industry. Since it first surfaced five years ago as a brand-new penny stock, records show, GORO has garnered research coverage from only one major firm that tried to assess the potential value of the company. 

After pocketing millions of dollars in investment banking fees for managing a private placement for GORO last fall, Jefferies initiated coverage of the company in January with a buy recommendation and a $45 target price on the stock. GORO has yet to seriously approach that price so far, however, topping out just above $30 in late April before finally losing steam – with Jefferies quietly dropping coverage of the company at some point – and ultimately losing almost a third of its peak value in the months that followed.

GORO actually fetched a higher price before Jefferies began recommending the stock than it does right now, records show, despite the soaring value of gold itself throughout that period. A $27 stock when Jefferies slapped a buy rating on its stock, GORO now fetches just $21.60 a share – or 20% less – and currently trades on the low end of its broad 52-week range.

GORO weathered some noteworthy blows this summer in particular, hit first by a scathing article in Barron’s and next by an investigative report published by TheStreetSweeper itself, and has continued to struggle since that time. Although GORO has tried to fight back with some powerful news of its own, records indicate, the company is still nursing its recent wounds – while battling to regain its former strength – despite those efforts.

Last month alone, records show, GORO issued at least four major announcements that might have supercharged its stock in better times. It touted record quarterly results. It suggested a possible dividend paid in gold. It further increased the cash dividend it already pays. And it trumpeted a recent jump in gold production.

GORO still failed to stage a dramatic comeback, however, with the stock instead losing ground in six out of the past eight weeks. The company has responded to that downturn with obvious frustration, blaming short sellers – rather than weak results – for mounting pressure on its stock price.

To critics, however, that strategy reeks of desperation. After all, they note, strong companies typically focus on their operations instead – paying little notice to short sellers who bet against their stock – and assume that the market will assign a fair value to their shares based upon their performance. Warren Buffett even went a step further at one point, they add, famously offering to lend out his own stock to short sellers because he knew they would eventually have to buy those shares back (at potentially higher prices) on down the road.

As a rule, of course, short sellers normally avoid strong companies like that and hunt for opportunities to profit on overpriced stocks that defy reality instead.

“The battle with the bear is an age-old problem that typically hits companies with weak fundamentals, thin balance sheets and high hopes,” CFO Magazine observed earlier this month. “While many consider this practice manipulative, short-selling is a necessary market strategy, and the much-maligned short sellers have often been the canaries in the coal mines, indentifying corporate frauds long before regulators.” 

Mixed Messages

For its part, GORO has declared outright war on short sellers who have borrowed and sold more than 5 million shares of the company’s stock – a full 17% of the freely trading stock that accounts for the entire “float” – based on the belief that they can repurchase the stock at lower prices in the future and profit handsomely on that decline. By directing investors to prevent brokerage houses from lending out their stock, GORO hopes to not only block short sellers from dumping additional shares but also force them to buy back the shares they’ve already borrowed as well.

“I believe they will have to buy GORO’s stock back at higher prices,” CEO William Reid told investors in a recent discussion of short sellers that seemed obsessive to even some apparent fans of the gold miner. “And if they’re not prudent enough to do it now, then how about at $30 a share? And if not then, how about $40 a share?”

“Look, I believe I know what’s going to happen with the Gold Resource Corporation,” he continued. “And I would not want to be short this stock.”

Reid apparently saw no compelling reason to buy the stock, either, which has lost another 20% of its value (with the short interest actually rising) since he made those bold remarks. He clearly has some extra money, too, since he’s already pocketed millions by selling some of his own GORO stock and collects generous dividend payments (set to boost his income by another $1 million-plus this year) on the giant mountain of company stock that he still owns.

GORO insiders have banked more than $12 million on stock sales since last summer alone, records show, when they finally began reporting those transactions to the public after quietly trimming their stake in the company for years. They never purchased a single share throughout that period, records suggest, even though they could have exercised cheap stock options and scored fatter dividend payments by further increasing their direct stock holdings in the company. For his part, however, the CEO has indicated that he will likely sell additional stock – despite his forecast of a big rebound in the price – instead.

“Yes, management have sold some shares,” Reid admitted during the company’s latest conference call. “But sales have always been within SEC (Securities and Exchange Commission) compliance and small relative to our holdings. Speaking of myself, I will continue selling shares in the future …

“Whether for estate-planning purposes, retirement planning (or) taxes to pay on options exercised,” he concluded, “I make no apologies.” 

* Important Disclosure: Prior to the publication of this article, TheStreetSweeper established a new short position in GORO with the intention of profiting on future declines in the stock price. Since Aug. 31, TheStreetSweeper has sold a total of 40,506 shares of GORO short at an average price of $22.08 a share. Due to "forced buy-ins," TheStreetSweeper repurchased 3,389 of those shares at $21.60 a share on Sept. 15 and another 3,922 shares at $20.78 on Sept. 22 before this story appeared. Since then, on Sept. 23, it purchased 8,394 shares at $19.35 a share and 14,300 shares at $18.29 a share in two separate transactions. It covered another 7,601 shares at $17.93 a share on Sept. 26. It covered the final 2,900 shares at $20 a share on Sept. 27 and no longer holds a short position in the stock. Going forward, TheStreetSweeper may choose to establish a new short position in GORO and will fully disclose the details of any future transactions as they occur. 

As a matter of policy, TheStreetSweeper prohibits members of its editorial staff from taking financial positions in the companies that they cover. To contact Melissa Davis, the editor of this website and the author of this story, please send an email to editor@thestreetsweeper.og.

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