Gold Resource Corp.: The Back Forty Project (NYSE:GORO)

1 – Introduction

On August 5, 2022, Colorado Springs-based Gold Resource (NYSE: NYSE:GORO) was invited by Michigan’s Department of Environment, Great Lakes and Energy (“EGLE”) to participate in a Scoping Environmental Impact Assessment (“SEIA”) Meeting.

The Company will be given the opportunity to present the initial site plan and other key improvements being incorporated into the Back Forty Project’s optimized feasibility study. Another key objective of the meeting is for EGLE and key stakeholders to discuss the permitting process and related requirements of the Back Forty Project.

Note: This article is an update of my article published on July 29, 2022. I have followed GORO on Seeking Alpha since March 2014.

Gold Resource produces gold, silver, and other by-product metals (copper, lead, and zinc) from one single complex called the Don David Gold mine in Oaxaca, Mexico, and owns the Back Forty Project in Michigan.

In my preceding article, I have discussed the recent second-quarter earnings results in detail, and I recommend reading the article for complete information.

However, to give more support to my thesis for why I believe the Back Forty project will positively affect the company’s bottom line, I felt compelled to provide a quick fundamental presentation.

1.1 – Gold Resource balance sheet and production

• Revenues were $37.06 million in 2Q22

Note: Fortitude (FTPO) was spun-off in 4Q20.

GORO reported an income per share of $0.03 on revenue of $37.064 million, compared with a pay per share of $0.02 on revenue of $30.84 million in the last year’s second quarter (please look at the table above for more financial details). The company posted a net income of $2.673 million during the second quarter, compared to $1.28 million a year ago.

After by-product credits, Don David Gold Mine’s total cash cost was $247 per gold equivalent ounce sold. All-in-sustaining costs (AISC) were $799 per gold equivalent ounce sold.

Shares outstanding diluted count was 88.79 million in 2Q22 (fully diluted by adding options, DSUs, and RSUs were 91.3 million shares) from 77.91 million at the end of December 2021.

• GORO has no debt and a good cash position of $33.34 million as of June 30, 2022

Gold Resource has an excellent cash position of $33.335 million in 2Q22 and no long-term debt.

• GORO produces Gold, Silver and Copper, Lead, and Zinc

The gold equivalent production has been estimated based on 9,317 Au ounces and 249,088 Ag ounces. The company has indicated it sold 11,475 GEOs in 2Q22, nearly the same as in 1Q22.

• Detailed history, including Copper, Lead, and Zinc

The company indicated a GEO production of an estimated 12,252 Au Eq. Oz. The gold price was $1,874 per ounce, and the silver price was $22.05 per ounce. During the second quarter, GORO processed ore at an average rate of 1,516 TPD, compared with 1,506 TPD in 2Q21. The average gold grade g/t was 2.63 in 2Q22 compared to 1.91 g/t in 2Q21.

Gold Resource sold (with gold and silver as co-products) 11,475 Au Eq, including 2,724 Au Eq. Oz (silver) and 8,746 Au Oz in 2Q22. The company also produced copper (303 tonnes), lead (2,020 tonnes), and zinc (4,282 tonnes) at its Mexican mines.

2 – The Back Forty Project in Michigan

The Back Forty project was acquired by Gold Resource on December 10, 2021, from Aquila Resources Inc., in a $24+ million all-share deal.

Upon closing of the Transaction, the existing GRC and Aquila shareholders will own approximately 85.1% and 14.9%, respectively, of the combined company on a fully diluted basis.

Aquila Resources has spent 17 years and over $100 million trying to develop the Back Forty mine. The company received a mining permit from Michigan regulators in late 2016 and wetlands permitted in 2018. Those permits have been abandoned since then.

Gold Resource bought Aquila Resources and its Back Forty project at a bargain price due to many hurdles that jeopardized the project’s feasibility. Aquila estimated that the mine could be worth at least $250 million and has significant expansion potential that could extend beyond its current 10-year LOM.

Gold Resource’s main objective for this acquisition was to transition from “a one-mine company to a two-mine company with jurisdictional diversification.”

A presence in the USA would shield the company from possible disruptions in its Oaxaca mine complex in Mexico, which is considered a relatively challenging jurisdiction for mining investors due to corruption, security concerns, and other risks.

GORO indicated that the feasibility study work for the Back Forty Project in Michigan, USA, progressed during 2Q22 with completion expected in H2 2022, followed by permit applications being submitted with state agencies in Michigan.

Gold Resource’s exclusive right to acquire Aquila Resources expires on October 2022 unless the parties reach a final agreement or terminate negotiations before that date. However, Gold Resource is facing persistent legal opposition from the Coalition to SAVE the Menominee River and the Menominee Indian Tribe of Wisconsin.

Assuming the project is approved, the company expects to start construction in 2024 and achieve commercial production in 2025.

Note: The company is investing a non-negligible CapEx in the project estimated at $33 million to $37 million in 2022, of which $15.66 million have been spent at the end of 2Q22.

• 2.1 – What happened in 2021-2022?

In 2021, an administrative law judge overturned Aquila’s permits to disrupt wetlands at the mine site due to Aquila Resources’ failure to submit the information needed for potential wetland impacts.

Thus, Aquila Resources renounced all four of its Back Forty permits, letting Gold Resources start the planning and permitting process from scratch.

On January 11, 2022, the Michigan Department of Natural Resources issued new mineral leases for almost 2,000 acres of state-owned land at the site of the proposed Back Forty mine.

The new leases were issued to Gold Resource despite public opposition. Minerals leases are valid for 10 years and can be renewed for another 10 years by payment of a minimum royalty fee.

• 2.2 – Michigan’s Department of Environment, Great Lakes and Energy (“EGLE”)

On August 5, 2022, Colorado Springs-based Gold Resource was invited by Michigan’s Department of Environment, Great Lakes and Energy (“EGLE”) to participate in a Scoping Environmental Impact Assessment (“SEIA”) Meeting.

It is a critical phase for GORO due to a lot of opposition based on the potential pollution of the Menominee River. GORO must provide a new approach to get the permits.

The optimized initial site plan highlights the following project improvements from the 2018 project:

• Combined open pit and underground mine
• Pit is smaller and pulled back from Menominee River and River Road
• Filtered tails facility (dry stack) eliminates the traditional tailings dam and therefore the need for a dam safety permit; streamlines water management of the tailings management facility, including at closure.
• Addresses Administrative Law Judge’s decision related to alternatives analysis (2019 Wetland Permit Contested Case)
• Eliminates a waste storage facility in proximity to neighboring properties and wetlands
• Reduced wetland dredge and fill impacts (now less than 2 acres)
• Reduced visual intrusion on Menominee River and identified cultural resources.

3 – Conclusion

GORO propositions are pretty significant, especially the dry-stack tailings from the Back Forty mine instead of constructing a tailings basin, as Aquila had initially proposed. It will cost more for GORO, but it may win the day.

This new development is encouraging and may allow Gold Resource to get the green light for constructing the Back Forty mine.

Dry-stack tailings are dewatered and can be deposited in piles without a tailings dam. A design Gold Resource uses at its existing mine in Mexico.

However, as a setback, on September 23, 2020, the nomination of Menominee Indian cultural sites along the Menominee River was approved unanimously by the Michigan Historic Preservation Review Board.

The Michigan review board’s approval was the final step in the nomination process. The application now goes to the National Park Service to decide whether to include the Menominee cultural sites on the National Register of Historic Places.

The strong opposition from the Menominee Indian Tribe, who occupied the site for many generations before the tribe was relocated to a reservation in Wisconsin, is a critical brake that could derail and kill the project’s feasibility.

An omnibus application for all required project permits should be submitted by GORO in the second half of 2022, according to the timeline presented by CEO Allen Palmiere, with operations to begin in mid-to-late 2025. Until then, we will have to wait to see if this forecast can be successfully met.