“This Tiny Gold Stock Is Such a Bargain…” (Mitchell Clark)

Sleuthyfiying the latest teaser from Lombardi's Explosive Mine Stocks

We’ve seen ads very similar to this one for about a year and a half now, and I wrote about them when they first started running, but since there’s been a big push again for this idea from the Lombardi folks I thought I ought to take another look for you.

The ad is from Mitchell Clark, who edits about a gazillion different newsletters for Lombardi — the ad this time is for Explosive Mine Stocks, and it’s all about a gold stock that’s doing buybacks, paying a monthly dividend, and that gets gold out of the ground for $136 an ounce.

Which all sounds good, right? That $136 number is certainly lower than any active gold miner I’ve heard of.

It sounds even better in Clark’s words, here’s a sample:

“Some very exciting news just crossed my desk.

“Over the last few months, it seems a tiny gold stock has quietly been making a series of very important announcements and financial moves.

“But here’s the thing…

“The big institutional guys on Wall Street usually move prices so fast you don’t have a prayer of getting the best gains.

“But right now, those same guys are more concerned about which fancy country club they’re going to spend their Mother’s Day at than they are about this tiny, relatively unknown gold stock.

“That leaves you with what I believe to be an incredible, although rare, opportunity.”

He then goes on to explain why this particular stock is such a favorite — he calls them four “triggers” for profit:

“Gold Stock Explosion Trigger #1 — Pulling Real Gold Out of the Ground

“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 cash cost of about $136 an ounce…less than 1/10th the price of gold!”

He also says that they’re expecting to produce 120,000 ounces this year.

Next trigger?

“Gold Stock Explosion Trigger #2 — Company Buying Its Own Stock

“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.'”

OK, so they started production last March, started buying back stock in September, what else?

“Gold Stock Explosion Trigger #3 — Lots of Cash, No Debt!

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“On February 29, 2012, the company announced its full year results for 2011…and what a year it was!

“Here are just some of the highlights:

  • Cash in the bank as of December 31, 2011 of $52 million
  • No warrants outstanding
  • No debt
  • Gold produced in 2011 at a cash cost of only $136 per gold equivalent ounce”

OK, I know — that’s plenty of clues (especially since it’s starting to sound really, really familiar) … but we don’t want to miss out on that last “trigger,” do we? Of course not!

“Gold Stock Explosion Trigger #4 — 21 Consecutive Months of Dividends!

“In 2011, the company paid $26.5 million in cash dividends to its shareholders. 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.

“At today’s current stock price, the shares provide investors with a dividend yield of almost 2.5%!

“The company has stated on several occasions that its goal is to return approximately one-third of the cash flow generated from operations back to shareholders.”

So how about now? Have the answer at hand? Don’t worry, the Thinkolator does … this is [still] Gold Resource Corp (GORO)

Though the company has grown a bit since it was teased by this same newsletter back in 2010, when they paid their first special dividend (back then it was Inya Ivkovic at the helm of the letter), and even since it was pushed pretty heavily by Clark last Fall on the original “buying back its own stock” news.

And mostly for the good, it must be said — the company now has a “real” stock market listing (it was traded over the counter when they started teasing it a couple years ago), and they do have a track record of paying a nice monthly dividend now, not just a “special” dividend (in fact, they just raised the dividend this quarter — so it will now be six cents a month, which works out to 72 cents per year and an expected yield of 2.8% … which is quite high for a gold miner).

The company also sort of lets you take your dividends in precious metals — which sound kind of cool and exciting, but it really just means they pay your dividend in cash, you buy coins with that cash, and they either store or send you the coins. It might be a better bet than reinvesting your dividends if it turns out that GORO’s resources are depleting over time without reserves being replenished (those situations are the only time that I consider taking dividends in cash instead of reinvesting), but it’s not particularly different than just taking your dividend and buying your own coins. Except you get special Gold Resource Corp coins. More info on that here if you’re curious — and do note that if you’re a smallish shareholder who puts, say $10,000 into GORO that means that each month you’d get a dividend of about $24. So it would take a long time to build that up into enough to buy a one-ounce gold Gold Resource Corp coin … though they do also make one ounce silver coins available, so at current prices you could probably get two one-ounce silver coins per quarter with your dividend.

Which gets to the concern that some folks have with GORO — it’s as much a silver miner as it is a gold miner, so when they say they get gold for $136 per ounce, that means they’re using the sale of silver to cover most of the costs of mining. Which may well be fine — and it has certainly been nice for them with silver above $30 — but it does introduce additional risks if silver and gold prices diverge.

And more broadly, the concern with Gold Resource Corp among some investors has really mostly just been that they do things differently — they focus on cash flow and dividends and production, not so much on booking reserves and extending the potential life of their mine using the same sorts of “bankable feasibility” studies that most junior miners go through before they get funding to build a mine. They’ve been producing gold for a year and a half or so, and just last week released their first resource statement and don’t have any actual “reserves” according to the standards that most precious metals investors follow (measured and inferred resources are what the geologists have found or believe will be there based on their standards, proven and probable reserves are resources that they know they can actually produce economically).

So the fact that they’ve grown to become a billion-dollar company with profits and a solid dividend without having a NI 43-101 resource estimate gives some folks the heebie jeebies. They’re starting to rectify that now with this new preliminary resource release, but it’s still early days on that front.

The company is trying to remain a low-cost producer, using credits not just from the abundant silver in its mines but also from the copper, lead and zinc, and they’re trying to ramp up production to 200,000 ounces of “precious metal gold equivalent” (gold and silver, basically) by sometime next year. And they say they have several other “high grade” deposits that they’re exploring in the region that will use the central mill they’re expanding for their Aguila/Arista mine (from what I can tell, Aguila is the open pit that they started with, Arista is the underground mine that’s targeting higher-grade veins). Right now, they have five other exploration projects, all in the same general region in Oaxaca, Mexico, but when it comes to anything like an resource estimate or actual production, it’s all about Arista.

They think they have a seven-year mine life with Arista, and that since the deposit is still open (meaning they haven’t found the edges), that mine life might double. Which wouldn’t be surprising, since most successful mines grow over time as mining companies feel the need to spend the cash to “book” the reserves that their geologists, in most cases, are “pretty sure” they’ll find. But still, though the preliminary resource estimate gives some third party backing to GORO’s internal estimates, it’s still quite early — and that preliminary resource looks like it was computed using numbers that are more conservative than the company’s.

So there you have it — still the same company, and it has done very well as they focus on things that most mining investors are not used to, like cash flow and dividends, instead of the stuff they are used to, like mine life and reserves.

And if you check out the numbers on their presentation, you’ll see that they don’t really like to come out and say just how much of their “precious metal gold equivalent” value comes from silver — here’s a quick crayon-on-the-napkin summary for their main deposit that’s currently being attacked, the Arista Vein System:

Three million tonnes “in situ.”
6.5 grams per ton of gold
506 grams per ton of silver
Enough potential copper, lead and zinc to cover the projected costs.

There are 31.1 grams per troy ounce, so here’s how we figure:

19.5 million grams of gold, which equals 627,000 ounces. At $1,600 an ounce that’s about a billion dollars.
and roughly 1.5 billion grams of silver, which equals about 47 million ounces. At $30 an ounce, that’s about $1.4 billion dollars.

So it’s probably fairer to think of this as a silver mine that’s being buttressed by “gold credits”, but that doesn’t get the attention of investors quite as easily. And there’s nothing wrong with a silver mine, but it’s worth noting that silver prices will have an outsize impact on the mine’s economics, and that silver has been far more volatile.

So that’s, in part, why the company can say that their cash cost per ounce of gold is so low, and why the company isn’t trading for a much steeper valuation. There’s also been some broader concern about the company put out by folks like the StreetSweeper investigative bloggers (who also are short sellers of the stocks they cover, just to clarify that they’re not disinterested), so whether or not you’re worried about their less glittery past or not it’s probably worth familiarizing yourself with the company and the seedier allegations. But yes, for those of us who aren’t mining mavens it’s always tempting to get excited about a gold miner who, golly, actually pays a good dividend and is focused, at least partly, on shareholder returns.

Of course, do note that the gold stocks in general are getting cheap, including huge guys like Barrick (ABX) and Newmont (NEM) who are raising dividends, too … and who do have massive, long-lived gold reserves booked and verified and spread out around the world, so there is a lower risk option for those who want exposure to dividend-paying gold miners.

And if you’re getting excited about the “this news is urgent” aspect of Clark’s teaser, do note that almost identical language has been used every time they’ve trotted this teaser out over the past two years … the stock has gone up since that teasing started, but it’s also more or less where it was a year ago when they first turned a profit — there’s no particular reason I’m aware of to think that it’s going to suddenly double tomorrow, they probably will release their first quarter results in a week or so (it was May 10 last year), but they generally preannounce any good news they can squeeze into a press release whenever they feel like sharing it. Take your time.

Full disclosure: I don’t own any of the stocks mentioned above, and won’t buy any for at least three days.


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