Are Short Sellers Onto Something at Gold Resource?

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into profits.

Below we take a look at junior gold miner Gold Resource (NYSE: GORO  ) , which saw some of the largest percentage increases in shares sold short among AMEX stocks in the last reporting period. We'll take a look at why short sellers might be eying the stock and combine that with the collective intelligence of Motley Fool CAPS to see if Fools believe it has the power to make short work of short sellers.

Gold Resource snapshot

Market Cap $1.2 billion
Revenues, TTM $144 million
1-Yr. Stock Return 2.7%
Return on Investment 97.2%
Dividend & Yield $0.72/3.2%
Recent Price $22.20
Shares Short Aug 31 4.5 million
Shares Short Aug 15 4.3 million
% Change 3.5%
CAPS Rating *

Sources: wsj.com, FinViz.com

Just because the shorts are piling in doesn't mean you should too. Such stocks could have serious problems that warrant their short interest, but they might also just be stricken by short-term troubles. Only Foolish due diligence will tell you for certain and our 180,000-strong CAPS community offers a good place to start.

The short story
Back in July, Gold Resource said production from its La Arista mine in southern Mexico would fall short of prior forecasts and it was lowering its full-year-production guidance by around 15% to 100,000-120,000 ounces. While upgrades to the mine's infrastructure was partially to blame for the lower target levels, it also ran into lower-grade ores. These issues do crop up from time to time, as even Goldcorp (NYSE: GG  ) experienced difficult comparisons with grades coming in 35% below last year.

But Gold Resource now has to reevaluate whether it can achieve its stated goal of producing 200,000 ounces of gold equivalent by next year or whether it will have to extend that timeline for an additional 12 months or more.

Fool's gold
Gold Resource bears might look at its elevated total cash costs of $509 per ounce this past quarter as validating concerns it can't maintain its low-cost-producer status for an extended period of time. Management says that but for lower production levels it would have seen cash costs at half the levels it reported. But that's just it, there are going to be issues that miners encounter so that these exceptionally low costs are hard to sustain.

The bulls would counter that Gold Resource is merely preparing for mining at greater depths where better grades are apt to be found. The miner chose to speed up production early on to drive cash flow to the company, and investors were paid handsomely with $53 million in monthly dividends convertible into bullion!

Pocket full of change
Some of the biggest names in gold and silver mining are pegging their dividends to the price of precious metals. Hecla Mining (NYSE: HL  ) became the first to tie its dividend to the price of silver, while Newmont Mining (NYSE: NEM  ) has done the same thing with gold prices. As the price of the metal rises, so does the value of your dividend (and vice versa), though you need to own a lot of stock to get just one ounce of gold, and transferring the gold and storing it eats into the dividend's value as well.

But the miner's accelerated development pace necessitated delaying infrastructure improvements, which are now being completed. It slowed down production, but now it's ready for the next three quarters that will see those higher ore grades brought to the surface.

Once Gold Resource does produce 200,000 ounces a year, it estimates that with gold at $1,500 an ounce it will be paying shareholders $100 million in dividends. It anticipates having zero cost for its gold and silver production because of credits it's developing through base metal byproducts like copper, lead, and zinc. Both Goldcorp and Barrick Gold (NYSE: ABX  ) have achieved super low cash costs through using such credits, though they suffered slightly higher costs than a year ago.

Don't sell yourself short
I've rated Gold Resource to outperform the broad market indexes, but share your views below on whether short sellers should be squeezed till it hurts, or if the stock ought to be shorted till the sun doesn't shine.

And if you like investing in metals, the Motley Fool has a stock you should really take a look at. Read the Fool's latest special report on gold to discover the tiny gold stock digging up massive profits. It's free but only available for a limited time.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 22, 2012, at 1:18 AM, iamamadeus wrote:

    Short squeeze happend on a wonderful Friday, 21 September 2012 at the end of the trading session. It was beautiful watching a 8% jump along with volume exploding in the last trading minutes. Someone had to cover, and I would add - cover desperately - as that someone had to buy back with a rising price whatsoever, now at $ 23,57. Quite visibly the shorts have been fighting against a tidal wave of buying for weeks - but ultimately invain.

    The company not only kept on paying dividends since last September's short-and-distort attack but increased them signifcantly. With QE now officially without limits, shorting a debt-free undiluted gold miner appears not to be the wisest of all exercises. With gold rallying towards the $2000 price mark it is reasonable to expect panicked shorts to get flushed big style.

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