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 (NYSE: AUQ) 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.