“This Tiny Gold Stock Is Such a Bargain… the Company Is Spending $20 Million to Buy Its Own Stock!”

"Rare opportunity" teased by Lombardi's Explosive Mine Stocks letter

By Travis Johnson, Stock Gumshoe, October 13, 2011

The latest pitch from Mitchell Clark comes in for the Explosive Mine Stocks newsletter from Lombardi — and I don’t know where the dude finds the time.

Clark is apparently now responsible for four or five newsletters at Lombardi, when I’ve written about him in the past he’s tended to focus on small cap stocks — though now he also says he’s a gold stock expert. And who knows, maybe he is — it wouldn’t be too tough to be a more accomplished gold stock expert than I am, I’ve never even taken a geology class (though I confess to having done the happy prospector dance from time to time).

Clark insists on referring to himself as Mitchell Clark, B. Comm., which doesn’t necessarily lead one to think he’s ever trained in ore assaying — but that’s certainly no requirement for penning a mining newsletter, and I don’t really know what his experience is in the diggin’ business (FYI, B. Comm. is a European designation — or Canadian, in this case, he went to the U. of Guelph — for an undergraduate business degree, sort of like me referring to myself as Travis Johnson, B.A. before I went to graduate school. Now I prefer to be referred to simply as “Master.”)

This same letter has been pitched in the past as edited by Inya Ivkovic, who no longer seems to toil in this particular field, and those teasers have pegged a few mining stocks that at least led to interesting stories over the years — so let’s dig in and see which one Clark is teasing today, shall we?

“This Tiny Gold Stock Is Such a Bargain… the Company Is Spending $20 Million to Buy Its Own Stock!”

“Plus… 3 more Triggers just pulled while Wall Street traders get ready to celebrate Thanksgiving in the Hamptons…”

And that’s actually enough to identify the pick for you (“tiny” gold stocks don’t generally do buybacks), but we’ll check a few other clues just to make sure — we’ve got a 99%+ accuracy rate to defend, after all.

The pitch tells us that there are four “gold stock explosion triggers” set to drive the share price of this pick higher — trigger one:

“On March 14, 2011, this tiny company announced the commencement of gold processing at one of its major underground ore mines…a big deal considering the fact that many gold stocks never get out of the “exploration” phase.

“What’s more, they are pulling gold out of the ground at a cost of about $156 an ounce…less than 1/10th the price of gold!

“That’s a profit of about $1,444 per ounce. And, based on extensive testing, they are expected to pull out 70,000 ounces in the next 12 months…$101 Million worth of profits!”

And two is that buyback one:

“On September 27, 2011, the company announced a $20-million stock buyback program. Under the program, the company will buy back its common stock on the open market.

“The company’s press release said:

“‘Management believes that at current price levels the company’s stock is undervalued and represents an attractive investment opportunity.'”

Trigger three is cash on the books, no debt:

“On August 16, 2011, the company announced its results for the second quarter of 2011 … and what a quarter it was!

Here are just some of the highlights:

“Cash in the bank as of June 30, 2011 of $42.1 million”

And number four? Dividends:

“On August 25, 2011, the company announced it was instituting a regular monthly dividend policy to replace its special dividend policy. Yes, this company pays investors every month!

“That’s a rarity among junior gold mining companies and should eventually attract quite a bit of attention on Wall Street.

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“At today’s current stock price, the shares provide investors with a dividend yield of almost 4%!”

So yes, we’ll toss it into the Thinkolator to confirm our initial guess, but even that takes a scant moment … this is a stock they’ve touted before, Gold Resource Corp (GORO — click here for a free trend analysis from MarketClub, one of our advertising partners)

And in the 15 months or so since I wrote about GORO for an earlier teaser, the price has jumped around a bit and they have paid out those monthly dividends, but they’ve also become a lightning rod for controversy and short-selling — thanks in part to their atypical history and operating practices, and in part to the fact that they’ve been profiled, very negatively, by the folks at the StreetSweeper website which tries to uncover stock scams and frauds.

The basic story for GORO is that they are a small gold and silver miner in Mexico, with one mine that came online last year and is aiming for roughly 70,000 ounces of gold equivalent production in 2011, and a few other exploration projects that are not very well defined yet (in terms of potential resources, etc.).

They say they’ve got roughly 8-9 years of production at their projected levels at their main mine (El Aguila, in Oaxaca), but one drag on the stock has certainly been that they are not listed in Canada and thus have not been forced to issue the kind of standardized independent feasibility studies or reserves reports that most mining stocks produce — so they don’t really have “reserves”, what they have is the current production, what they say their future production might be, and a pretty high dividend that they pay monthly.

And that has been enough to drive the stock up to a $1 billion market cap — it’s also indeed true that they don’t report any debt, they do have $42.1 million in cash on their books, and they do pay a monthly dividend. The dividend is five cents a month, currently, so that’s almost exactly 3% (it approached 4% a few weeks ago, when the company was at the lows for the year down closer to $15) … and the dividend also far exceeds their reported earnings, which can sometimes be a red flag (though mining companies have some non-cash costs, too, like depletion, that depress earnings but not cash flow).

Most mining companies have taken a hit over the last month, with gold and silver coming off their spiky highs, and GORO is no different. They have managed to acquire a pretty loyal base of shareholders, if my correspondence is any indication, largely because they pay that monthly dividend and keep raising the dividend.

Is this a “bargain?” It’s really hard for me to say — when I look at GORO’s basic financials compared to other gold and silver miners, I don’t see a reason to buy the shares unless you think they will (as they say they plan to do) be filing a compliant reserves report and feasibility report and applying for a listing in Canada later this year, and that this report is going to include a dramatic number for their reserves in the ground, and that they’re going to shortly start producing a lot more gold and silver than they have so far this year.

That doesn’t necessarily mean that GORO is really a near-fraud that exists largely to line the pockets of management, as the StreetSweeper folks say, but it does mean that I can’t see the logic of buying a stock like GORO when you can buy a fairly similar-sized company like Minefinders (MFN) at a much lower multiple to earnings, book value, or even sales, and know with much more confidence that MFN has compliant reserves in the ground and a massive mine to deplete over the coming decade(s). Even if GORO is not in any way a fraud, it might still be awfully expensive compared to its peers.

I like the StreetSweeper reports even when I disagree with them, and they’ve helped to expose some really smelly operations … but it’s worth noting that they are conflicted publishers. They say that the editorial folks are not allowed to trade in stocks that they cover, but the StreetSweeper itself often shorts stocks before they publish articles about them and quickly covers those shorts within a few days after publication … which means that the company and/or its “members” are profiting in large part from the share movement that their reports cause, even if the actual analyst/journalist may not be. That’s not illegal, and they disclose it very admirably and I happen to think their editorial stuff is often very go