Mere weeks after suffering through one of the goriest moments in this miner's brief history, investors will now get to sift through the gory details.
Gold Resource (NYSEMKT: GORO) blindsided investors a few weeks back with news of a second major downward revision to full-year guidance for 2012, and sent the stock for a related 16% dive. Since then, a spate of class action lawsuits and related investigations has cast a shadow over the near-term outlook for the shares, rendering the information that may be gleaned from the company's third-quarter earnings report all the more crucial in ascertaining the likelihood of a prompt recovery for the shares.
Since the company remained profitable through the horrific second quarter, when production plummeted to just 14,488 gold-equivalent ounces (GEOs), I expect the company to maintain a modest net profit for the third quarter given production volume of 22,300 GEOs. Similarly, I hope to see a sharp retreat in per-GEO production cost from the $509 mark recorded in that second quarter. It's not uncommon to see costs spike dramatically when operational challenges strike, but any failure of those costs to retreat can indicate a sluggish resolution of those challenges.
Specifically, investors will want to watch for progress in minimizing dilution of the underground mine's high-grade ores by sub-optimal mining procedures. The company has taken strong steps in the right direction, including the hires of multiple new unit managers, and a new general manager who previously oversaw one of Yamana Gold's (NYSE:AUY) high-quality mines. The company has warned that dilution challenges will remain for the remainder of the year, but I encourage investors to watch the sequential progression of average ore grades in order to gauge the company's progress on that front.
A parting note on ore dilution
Ore dilution is an ever-present threat to miners. The key aspect for shareholders to watch for resides in the measures undertaken to minimize dilution, and how effectively those measures are executed. El Aguila is a young mining operation, and it is not unusual to suffer bouts of dilution. What you don't want to see is a company that suffers from excessive dilution quarter after quarter with no plan in place to fix it. AuRico Gold (UNKNOWN:AUQ.DL) failed to unlock the value in the El Cubo mine, partly as a result of poor mine oversight and widespread ore dilution. That created an opportunity for new mine owner Endeavour Silver (NYSE:EXK) to leverage its operational excellence and achieve a quick turnaround in average ore grades. Ore dilution only becomes a red flag to investors in cases where the condition persists over extended periods with no indications of a coordinated or effective response effort. Although I will certainly scour GORO's earnings report for indications of ongoing progress with respect to restoring previously envisioned production volumes at El Aguila, as a long-term investor I permit mine operators more than a quarter or two of leeway with the industry's inevitable sorts of setbacks before I begin to grow concerned.
Fool contributor Christopher Barker owns shares of AuRico Gold and Endeavour Silver (CAN). The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.