Please see important disclosure information on pages 30 - 33 of this report. Event We a re in tr odu ci ng r es ea r ch c ov erag e of Gold Re so u rc es Corporation (GORO) with a Buy rating and a $45 price target - a top small cap pick in our universe. In September 2010, Jefferies acted as sole placement agent for Private Investment in Public Equity (PIPE) for GORO. Key Points • Low Cost Gold and Silver Production Gr owth – We are for ecasti ng annual gol d equivalent pro duc tion of 15,000 ounces during 2010, 90,000 ounces during 2011 and 160,000 ounces during 2012. Management's annualized outpu t target of 200,0 00 ounces could be reached by 2013. Given near current base metals prices, copper, lead and zinc revenues net of recoveri es and smelter charges, by-product revenues could offset operating costs once operations are optimized. • Intriguing Resour ce Expans ion Potential – In addi tion to its producing El Aguila and La Arist a deposits, Gold Resour ces controls various properties stretching over 16 kilometers of a gold and silv er mineralized trend along a lineament in southe astern Oaxaca. Management is working towards gold and silver resource expansion potential along strike and at depth below the current duel vein systems at La Arista, which could double its current resource estimate. • Unique Business Model – We find GORO's business model quite unique in the mining sector. Founders/insiders, who own 20% of the company, have developed an internal philosophy that targets high return on capital and measured, growing excess cash distribution to shareholders in the form of dividends. Management has stated that its goal is to distribute at least one-third of excess cash flow to common shareholders on a regular basis. Rarely has the market seen such an emerging mining company focus on returns on and returns of capital for shareholders. Valuation/Risks We suppor t our $45 price tar get through a blend of NAV, rel ati ve cas h flo w and div idend yield valu ation metrics. We note that the shares are suitable for small cap investors who understand pri ce volati lity. Risks includ e a turnaround in recent preci ous metals pricin g levels, abilit y to coordi nat e and ramp up produc tion at its flagship underg round mine, tangi ble progr ess towar ds publish ing resour ce study and not achieving the expected resource potential at La Arista. January 5, 2011 Industrials Metals & Mining United States of America Initiating Coverage Gold Resource Corp. (AMEX: GORO) Low Cost Growth with a Dividend Kicker - Initiate with a Buy Rating Investment Summary Gold Resources, an emerging gold and silver mining producer, has a str ong produc tion gro wth and cash flow pro fil e. Its founders, who have experi enced a long and successful career in discovering, develo ping and monetizing precious metals depos its, control multiple high-grade deposits in southern Mexico. Rating: BUY Price: $27.60 Price Target: $45.00 Bloomberg: AMEX: GORO Market Data 52-Week Range: $29.90-$9.43 Total Entprs. Value (MM): $1,407.9 Market Cap. (MM): $1,462.8 Insider Ownership: 20.0% Institutional Ownership: 48.0% Shares Out. (MM): 53.0 Float (MM): 27.5 Avg. Daily Vol.: 217,096 Financial Summary Net Debt (MM): ($54.9) USD 2009A 2010E 2011E 2012E Rev. (MM) 0.0 21.3 135.2 275.3 EV/Rev. NM 66.1x 10.4x 5.1x EPS Mar (0.19) (0.15)A Jun (0.25) (0.12)A Sep (0.21) (0.03)A Dec (0.14) (0.05) FY Dec (0.78) (0.35) 1.25 2.50 FY P/E NM NM 22.1x 11.0x Michael S. Dudas, CFA (212) 284-2383, [email protected]Satyadeep Jain (212) 284-2227, satyadeep.jain@jef feries.com
Please see important disclosure information on pages 30 - 33 of this report.
EventWe are introducing research coverage of Gold ResourcesCorporation (GORO) with a Buy rating and a $45 price target - a topsmall cap pick in our universe. In September 2010, Jefferies acted assole placement agent for Private Investment in Public Equity (PIPE)for GORO.
Key Points• Low Cost Gold and Silver Production Growth – We are
forecasting annual gold equivalent production of 15,000 ounces
during 2010, 90,000 ounces during 2011 and 160,000 ouncesduring 2012. Management's annualized output target of 200,000ounces could be reached by 2013. Given near current base metalsprices, copper, lead and zinc revenues net of recoveries andsmelter charges, by-product revenues could offset operating costsonce operations are optimized.
• Intriguing Resource Expansion Potential – In addition to itsproducing El Aguila and La Arista deposits, Gold Resourcescontrols various properties stretching over 16 kilometers of a goldand silver mineralized trend along a lineament in southeasternOaxaca. Management is working towards gold and silver resourceexpansion potential along strike and at depth below the current duel
vein systems at La Arista, which could double its current resourceestimate.
• Unique Business Model – We find GORO's business model quiteunique in the mining sector. Founders/insiders, who own 20% of thecompany, have developed an internal philosophy that targets highreturn on capital and measured, growing excess cash distribution toshareholders in the form of dividends. Management has stated thatits goal is to distribute at least one-third of excess cash flow tocommon shareholders on a regular basis. Rarely has the marketseen such an emerging mining company focus on returns on andreturns of capital for shareholders.
Valuation/Risks
We support our $45 price target through a blend of NAV, relativecash flow and dividend yield valuation metrics. We note that theshares are suitable for small cap investors who understand pricevolatility. Risks include a turnaround in recent precious metals pricinglevels, ability to coordinate and ramp up production at its flagshipunderground mine, tangible progress towards publishing resourcestudy and not achieving the expected resource potential at La Arista.
January 5, 2011
IndustrialsMetals & Mining
United States of America
Initiating Coverage
Gold Resource Corp. (AMEX: GORO)Low Cost Growth with a Dividend Kicker - Initiate witha Buy Rating
Investment SummaryGold Resources, an emerging gold and silver mining producer, has astrong production growth and cash flow profile. Its founders, who
have experienced a long and successful career in discovering,developing and monetizing precious metals deposits, control multiplehigh-grade deposits in southern Mexico.
Rating: BUY
Price: $27.60
Price Target: $45.00
Bloomberg: AMEX: GORO
Market Data
52-Week Range: $29.90-$9.43
Total Entprs. Value (MM): $1,407.9Market Cap. (MM): $1,462.8
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 2 of 33
Executive Summary
Based in Denver, Colorado, Gold Resource Corporation is one of the most interesting emerging gold and silver miningcompanies. Its founders, who have experienced a long and successful career in discovering, developing andmonetizing precious metals deposits, may have developed a sizeable potential mine and possible mining district in theMexican state of Oaxaca. Gold Resources exhibits a potential rapid production growth profile at very low capital andoperating costs. Its 100% controlled ore bodies encompass very high grades and host an attractive amount of basemetals. At current metals prices, Gold Resource could produce gold and silver at negative cash costs. We believemanagement has followed a very focused and unique strategy among global precious metals producers set and
exceed high return hurdle rates and distribute a healthy level of excess cash to shareholders through dividendpayments. Given the upside potential in its resource and land positions, Gold Resource could be a long-term growthvehicle with an attractive and increasing relative dividend yield. Since July 2010, the board has declared and paid fiveconsecutive monthly dividends of $0.03 as high margined production from its newly commissioned processing facilitiesramps through the start-up phase.
We are targeting at least 200,000 ounces of gold equivalent output from Gold Resources assets by 2013. Continuedpositive drilling results and excess milling capacity could drive longer-term annual output to the 300,000+ goldequivalent levels during the mid part of this decade. These levels could be achieved at net operating costsapproaching zero. We believe Gold Resources current financial profile, capital availability and expected free cash flowgeneration potential should allow for its growth profile to be achieved without any owner dilution.
At current levels, we believe Gold Resources shares provide an opportunity to outperform other small cap metals
equities as gold and silver prices remain at elevated levels and management’s internal production, grade and coststargets are met during the next 12–18 months.
Valuation
We believe Gold Resources’ profile as a fast-growing, low-cost primary precious metal producer given its high-gradegold and silver output generated by its La Arista underground deposit should allow for a premium multiple goingforward relative to other small cap metals equities. Its transformation from an exploration driven into an emerging andhigh growth precious metals company with resource expansion potential and strong unhedged exposure to gold andsilver prices should help, as well. We have introduced an initial $45 per share target reflecting a blend of threevaluation metrics NAV, OCF and dividend yield. As depicted in Exhibits 1–3, we have applied targeted multipleswithin various comparables on our 2012 cash flow and net asset value estimates while we have assumed a currentannualized yield relative to our expectations of possible annualized dividend improvement. We arrive at our price
target of $45 for GORO by applying 2.0x multiple on NAV and 16x multiple on our 2012 CFPS estimate of $2.80. Wenote that during the recent pricing cycle, major and mid-tier precious metals producers have shifted excess capitalgeneration towards dividend allocations, raising yields towards 1%. As operations and resources mature for GoldResources, we believe such a target could be achievable on a sustainable basis. We believe GORO could generatemore than $200 million in operating cash flow (before taxes) through 2012E and could distribute one-third of it asdividends to shareholders.
As consolidation occurs throughout the mining sector, we should continue to witness healthy acquisition prices forprospective and emerging deposits. We found the recent purchase of Andean Resources by Goldcorp as an intriguingtransaction given Andeans’ high grade resources at its Cerro Negro deposits. Andean had similar resource estimatesand high gold equivalent grades (although not as high as GORO); Goldcorp paid $3.4 billion for Andean’s shares. Assustainable growth mine districts become more controlled and more difficult to exploit, small-to mid tier companies likeGORO could benefit.
Risks
Risks include a turnaround in recent precious metals pricing levels, ability to coordinate and ramp up production at itsflagship underground mine, tangible progress towards publishing resource study and not achieving the expectedresource potential at La Arista.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 5 of 33
Reasons to Invest
Low-Cost Growth – We are forecasting annual production growth of 15,000 gold equivalent ounces during 2010,90,000 ounces during 2011 and 160,000 ounces during 2012, shown in Exhibit 4. Management’s annualized outputtarget of 200,000 ounces should be reached by 2013. Given near current base metals prices, copper, lead and zincrevenues net of recoveries and smelter charges, by-product revenues could offset operating costs. While manyprecious metals producers have benefited from higher by-product prices, very few precious metals producersencompass the combination of strong production growth and such a potential operating cost profile. Management
plans to run highest grade material through the mill when prices are high.
EXHIBIT 4: GOLD RESOURCE CORPORATION PRODUCTION GROWTH
15,000
90,000
160,000
200,000
300,000
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Gold Equivalent
Ounces
Potential Expansion/Acce
leration
Mill's Current Capacity
Source: Company reports, Jefferies & Co., Inc. estimates
Resource Expansion Potential – In addition to its producing El Aguia and La Arista deposits, Gold Resource controlsproperties stretching over 16kms of a mineralized trend along a lineament trending from NW to SE depicted in Exhibit5. Management sees resource expansion potential along strike and at depth below the current duel vein systems at LaArista, which could double its 1.5 million ounce resource estimate. GORO controls other early stage explorationproperties (El Rey, El Aire, Alta Gracia, Las Margaritas) that are within 60 kms of its milling facilities (More than 99% ofits total land concessions have yet to be fully explored.)
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 6 of 33
EXHIBIT 5: GOLD RESOURCE LAND PACKAGE AND EXPLORATION
Source: Gold Resources Corp
Strong Financial Position – Management has been quite methodical and calculated in its development plan,stressing focus on cash flow, less than one-year investment payback and to limit shareholder dilution. Its recent equityoffering was targeted to accelerate near-mine exploration and underground development, which we estimated movedforward potential targets by 9–12 months. Management was able to build a brand new milling facility for only $35million; a budget that we estimate was 50%–60% of what other companies could have provided. GORO has no debtand should generate more than $50 million of free cash flow during the next 12 months.
Unique Business Model – We find GORO’s business model quite unique in the sector. Founders/insiders, who own
around 20% of the company, have developed an internal philosophy that targets high return on capital and measured,growing excess cash distribution to shareholders in the form of dividends. Management expects that at least one-thirdof excess cash flow will be distributed to shareholders on a regular basis (the other two-thirds covering taxes andmaintenance/growth capital needs). As the market increasingly focuses on companies that look to sustain and growdividends, we believe GORO could find support from a broader range of investors who desire exposure to metals.
Higher Gold and Silver Prices – We continue to expect gold and silver prices will achieve higher highs and higherlows during 2011. Continued monetary accommodativeness by US and European central banks, emerging economies’desires to diversify reserve base away from developed nation currencies, low real interest rates, prospect of improvedglobal economic demand for commodities should be supportive for pricing.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 7 of 33
Potential Concerns
The major risks to Gold Resources include:
Lack of Published Reserve Calculations - While Gold Resources has successfully developed and started up itsmining operations during 2010, management has not produced an SEC proven and probable reserve or a 43-101compliant resource study. According to the SEC, reserves cannot be considered proven and probable until they aresupported by a feasibility study, indicating that the reserves have had the requisite geologic, technical and economicwork performed and are economically and legally extractable at the time of the reserve determination. Given the
extremely high grade deposits and elevated gold and silver prices, management decided to focus on obtainingnecessary governmental, operating permits, continued drilling, mine development rather than shift attention to suchstudies. Drill hole spacing consistent with P&P categories, economic progress, proper permit accumulation andgeologic data compiled by the company that shows 23 grams per tonne of gold equivalent material should supportSEC definitions. However, we first expect management to work towards delivering to the market a 43-101 feasibilitystudy (Canadian) by mid-year 2011.
Significant Management and Third-Party Share Ownership - We estimate founders/insiders control 20% whileHochschild Mining, a Latin America based mining company, controls 28% of Gold Resources’ 53 million commonshares outstanding. Hochschild was an early and consistent investor and capital provider to Gold Resources. Sinceestablishing a strategic alliance with Gold Resource during 2008, Hochschild has invested $65 million; at currentmarket prices Hochschild’s investment exceeds $400 million. At times, the market may be weary of the Hochschildownership and monetization potential.
Resource Conversion - The recent move in the shares has reflected stronger metals prices, but a more visibleproduction profile after start-up. Management believes GORO’s orebodies could potentially double in size withadditional drilling and modeling. While we concede that GORO’s land positions could provide resource growth potentialgiven early drill results, the market will need to become more comfortable with resource growth potential to supporthigher production, cash flow and dividend profiles.
Execution - GORO has begun mining ores from its underground deposit at La Arista. A key to feeding the millefficiently will be management’s ability to keep up with mine development and establish a reasonable amount ofworking faces through the two vein systems. Stockpiled open pit ore from El Agulia deposit needs to be replaced.Timing and limiting grade dilution will be important as to meeting targets. The key will be management’s ability to feedthe mill with ore and grades that would justify growth in dividend payments.
Deflation - If global central banks judge that the economic growth risks of inflation merit withdrawal of liquiditythroughout the monetary system, we would see investors look to liquidate commodity investments and commodity-
based equities, such as Gold Resources. Also, given GORO’s base metal profile (copper, lead and zinc by-products),potential industrial metal volatility could have negative impacts to valuations.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 8 of 33
Company Details
“Unique” Aspect of the Company
We believe Gold Resource is unique because of its extremely high-grade 100% controlled deposits and management’sfocus on return on capital and commitment to a sustaining and potentially growing dividend. Gold and silver contributesnearly 85% of expected revenues with the remaining 15% generated by base metals.
GORO’s control of highly prospected, under analyzed land packages along a NW trend from its highly valuable La
Arista underground orebody could generate a multi-year program of resource and production growth. Also, Mexico hasone of the most supportive mining governments and cultures among metal-dominant countries; Mexico leads the worldin primary silver production.
Stock Price Discussion
GORO’s share price has been impacted by gold and silver price expectations as well as success in its initial minedevelopment, overall money flow through the commodity equity space, and margin expectations. As shown in Exhibit6, GORO reacted quite favorably during 2010 as metals prices trended higher, but also as the company was comingcloser to commencing production of ore from its El Aguila open pit deposit through its brand new mill. We havehighlighted key milestones achieved by the company in Exhibit 7.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 9 of 33
EXHIBIT 6: STOCK PRICE CHART – GOLD RESOURCES
0
0.5
1
1.5
2
2.5
$0
$5
$10
$15
$20
$25
$30
$35
GORO Trading Volume
Millions
GORO Share Price
GORO Trading Volume GORO Share Price
(1)
(2)
(9)
(8)(6)
(3)
(5)(4)
(14)
(13)
(11)
(10)(12)
(20)
(19)
(18)
(23)
Source: CapitalIQ, Jefferies & Co., Inc.
EXHIBIT 7: GOLD RESOURCE KEY COMPANY MILESTONES 2006-2010
(1) 14-Sep-06 Gold Resource begins trading on OTC Bulletin Board after completing its IPO in August 2006
(2) 12-Jun-08 GORO gets federal permission to construct the El Aguila Project mill
(3) 10-Dec-08 GORO forms strategic alliance with Hochschild through $5 million private placement
(4) 26-Feb-09 Hochschild exercises option to purchase 4.33 million additional shares at $3.00 per share
(5) 30-Jun-09 Hochschild completes $20 million private placement of 5 million restricted shares of GORO at $4.00 per share
(6) 13-Aug-09 GORO gets federal permission to mine at its El Aguila open pit deposit
(7) 9-Dec-09 Commissioning of the initial floatation cicrcuit is underway at its El Aguila Project mill
(8) 14-Dec-09 El Aguila Project gets approval to develop the underground high-grade Arista deposit
(9) 18-Dec-09 Hochschild invests $16 million in a private placement
(10) 3-Feb-10 GORO announces first concentrate produciton at its El Aguila Project Mill
(11) 9-Mar-10 Hochschild increases its holding in the company to 28.7%
(12) 26-May-10 Hochschild increases its holding in the company from 28.7% to 29.6%
(13) 1-Jul-10 GORO announces Commerial production at its 100% owned El Aguila high-grade gold and silver project.
(14) 8-Jul-10 GORO gets approval for listing of its common stock on NYSE: AMEX
(15) 29-Jul-10 GORO announces initial special cash dividend of $0.03 per common share
(16) 30-Aug-10 GORO begins trading on AMEX
(17) 31-Aug-10 GORO announces second special dividend of $0.03 per common share
(18) 3-Sep-10 GoldCorp makes $3.4 billion bid for Andean Resources
(19) 27-Sep-10 GORO holds conference call; draws similarities between Andean Resources and GORO
(20) 20-Sep-10 GORO executes $55.6 million private placement to accelerate produciton profile and exploration(21) 30-Sep-10 GORO declares third special dividend of $0.03 per common share
(22) 29-Oct-10 GORO declares fourth special dividend of $0.03 per common share
(23) 23-Nov-10 GORO commences mining Arista Vein system
(24) 30-Nov-10 GORO declares fifth special dividend of $0.03 per common share
(25) 30-Dec-10 GORO declares sixth special dividend of $0.03 per common share
Source: Company reports, Jefferies & Company, Inc.
Gold Resource Corporation is a mining company focused on production and pursuing development of select, high-grade gold and silver projects that feature low operation costs and produce high returns on capital.
Company History – Gold Resources completed its IPO in September 2006. William and David Reid co-founded the
company with expectations of developing high grade precious metals deposits. They took a disciplined approach tocreating value while focusing on rapid project execution and attaining a goal of meaningful dividend distributions. TheReids have been very active and visible forces within the North American mining sector. The Reids co-founded U.S.Gold Corporation (USGL) and ran that company from 1977 through August of 2005. During the 28 years USGLoperated under the Reid's management, US Gold developed six producing precious metals mines. In 2005 the Reidssold their interests to Rob McEwen, who became the US Gold’s largest shareholder and chief executive. The Reidshave developed a demonstrated track record of project development and operational experience.
The Reids became interested in the mining district southeast of Oaxaca City in the early 2000s. GORO staked claimson properties once explored by Apex Silver. Also, Apex took 2000 samples. Of those gathered, the highest 115 hadindications of average of 0.4 ounce per ton material sporadically over an 8km stretch of land. Apex also drilled 10holes, one in Agula pit, others didn’t fit. Ignored by larger companies, GORO focused on these concessions.
GORO now controls 100% interest in five high-grade gold and silver deposits in Mexico's southern state of Oaxaca.
Gold Resources’ flagship property, its El Aguila Project, commenced mill operations during the summer.
Oaxaca mining unit
The El Aguila Complex consists of very high-grade gold and silver deposits that host significant copper, lead and zincmineralization. Management declared commercial production from the El Aguila project during the summer of 2010.During the past few years, management has discovered three high-grade poly-metallic deposits at its El Aguila Project.The high-grade open pit deposit (El Aguila), which has been the initial feeder ore to the mill, the La Arista high-gradepoly-metallic dual vein system and El Aire high-grade poly-metallic vein system.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 12 of 33
Exhibit 11 shows a cross section of the El Aguila open pit deposit. An added benefit from the mine was GORO’srequirement of 2 million tons of waste rock in order to build its two tailings impoundments next to the mill. As such,along with an estimated 330,000 tonnes of mineralized material and the healthy average grades of 7.5 g/t gold and 63g/t silver, El Aguila became the cash flow generator deposit helping to fund the development of La Arista. Managementbelieves a feeder vein at bottom of pit could be lurking below the pit, which provides additional targets for more higher-grade ore.
EXHIBIT 11: EL AGUILA OPEN PIT
Source: Gold Resource Corporation
La Arista – The Company Maker
The dual parallel veins systems called Arista and Baja are approximately 30 meters apart. When management fullydevelops the targeted working faces (5-6 meter wide blocks generating 200-240 tonne blasts), the mine couldgenerate 1600–2000 tonnes per day of ore. Currently, the dual vein systems remain open on strike and depth. Theores from the deposit require much less grinding that the El Aguila open pit ores, which will help improve millperformance and output. Initial plan is to mine to the 500 meter level. However, management believes that the vein
systems could extend to at least 1000 meters. We could see a potential epithermal deposit forced into a deep coppergold skarn deposit or porphory system. We expect accelerated drilling to delineate its expectations. In addition, its ElAire target will be accessed for drilling as management drifts off the spiral.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 13 of 33
As depicted in Exhibit 13, La Arista gold and silver grades are among the highest relative to other important gold/silvermines in the region. The deposit is estimated to contain 2.9 million tonnes of mineralized material at 6.5g/t gold and506 g/t silver, generating over 15 g/t or about 0.5 ounce per ton of gold equivalent metal. Its current mine life at atargeted 200,000 ounce per year rate hovers around eight years. The mill is located only 2 km from the mine portal.What we believe separates La Arista from the other deposits is the large base metal by-product revenue potential.Base metal contributions after recoveries and smelter charges should fluctuate between $125-175 per ton, withexpected mining and milling costs of $75–$90 per ton. Also, the El Aire target most likely will be accessed for drillingby drifting off the spiral. As shown in Exhibit 12, mining of the Arista and Baja veins will be off the decline withhorizontal stopes shooting off for production and development.
EXHIBIT 13: ORE GRADE COMPARISON AMONG SELECTED DEPOSITS
Company Mine Name
o u
g/t
ver g
g/t
opper u
%
ea
%
nc n
%
o qu va en
Grade g/t
Agnico Eagle LaRonde 2.8 68 0.35 3.65 6.29
Pinos Altos 3.01 86 4.45
GoldCorp Penasquito 0.44 29 0.33 0.72 1.43
Yamana Chapada 0.24 0.34 0.77
El Penon 6.64 280 0.15 11.31
Minera Florida 4.51 37 5.13
Gold Resource Corp La Arista 6.5 506 0.6 2.24 6.75 20.26 Source: Gold Resource Corp, Company reports, Goldminerpulse.com, Jefferies & Co. Inc.
El Aguila Mill – Flexible and New
The El Aguila mill was commissioned during the second quarter of 2010. Flexibility in the mill design was a key featureas management’s objective appears to support having multiple mines feeding ore to its strategically located mill at ElAgullia. The Flotation circuit can produce gold/silver concentrates or has three circuits for poly-metallic concentrates copper, lead and zinc gold associates with copper, silver with the lead. There is also an agitated leach circuit thatcould produce dore which is sold to a refinery offsite.
Management constructed the mill for a total of $35 million inclusive of power, infrastructure, roads and Phase 1 ofthe tailings impoundment. The milling facility was built with all new equipment except for refurbish ball mills. The millhas the capacity to process 1,200 tons per day of the softer underground ore. Management has targeted processing800 tons per day (given the harder Aguila open pit ore) during the fourth quarter and through 2011 which should allowachievement of the 90,000 ounce target. The Phase 1 of the tailings impoundment will allow for operation through2013, while Phase 2 will provide ten years (each with double liners). Mill optimization will be a key focus during 2011as optimization and ramp-up are still underway as management targets a 90% recovery rate. Grades should improveas the start up phase wanes.
Exploration Potential – Along the Lineament
The land package GORO controls appears to be the youngest geologic district in Mexico. It is estimated that thedistrict is only 15 million years old, while many of the prolific northern Mexico districts are aged between 25 and 30million years old. Therefore, the southern districts have not witnessed enough weathering and erosion and encouragedmuch less historical development. Many geologists and prospectors missed this mineralization. There have been somelocal workings, but no drilling. The deposits are 100–200 meters below the surface. The 16 kilometers controlled byGORO are of this young age, providing some geologic potential to expand resources.
El Rey consists of a high-grade gold vein system. Drill results were encouraging, with several drill holes showingaverage grades near one ounce per ton and ore within 100 meters of the surface. Management considering a rampdecline to develop and mine this material. The deposit could provide 100–200 tons per day of ore to the mill. We could
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 14 of 33
see some ore to the mill late in 2011 or first half of 2012. The site has been mined previously on a very small scale butvery little historical information is known about the property. GORO has taken two selective grab samples from thedump material around the original shaft. The two samples assayed 80 and 85 g/t of gold, indicating that the samplesare of potential vein material.
Las Margaritas looks to be a high-grade silver property comprised of four northwest kilometers of the important N 70 Wstructural corridor, which is an extension of the El Aguila system. In addition, Las Margaritas occupies ground within aninferred caldera (collapsed volcanic center). Though mineralization at these levels is rare, the important point is that
the Las Margaritas property shows indications of potentially significant silver mineralization. Surface samples taken byGORO have yielded silver mineralization as high as 1,200 g/t. Alta Gracia is a high-grade silver and gold property.Expect to start drilling in first half targeting 100-200 meters below surface. The site has been mined previously on avery limited scale in the 1970's but very little historical information is known about the property. GORO has taken rockchip surface samples from the property with the highest silver assayed in excess of 1.4 kilos per tonne of silver. Solagais a high-grade silver property which was previously mined in the 1980s. Initial high-grade selective sampling ran 15kilo's (15,000 grams / tonne or 488 oz/ton or 1.5%) silver per tonne. Also, any ore from either of these deposits couldbe transported to the El Aguila mill for processing.
We expect management to continue efforts into acquiring the concessions along the 45km lineament running east of ElRey to the La Arista underground mine. We believe a good portion of the excess cash flow generated by theoperations will be allocated towards exploration and district development.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 16 of 33
Financial Outlook
2010–2013 Earnings
We expect strong earnings and cash flow growth for Gold Resources from 2010–2013 driven by production ramp-up atits Oaxaca Mining Unit, full production at La Arista, increasing silver and gold prices, and controlled production costsgiven pricing for copper, lead, zinc. While the market price of gold and silver is one of the most significant factors indetermining any precious metals company’s profitability (we forecast an average price per ounce of $1,350 for goldand $23 per ounce for silver in 2011, up from average price in 2010 of $1,225 per ounce for gold and $20 per ounce
for silver). We note that a 5% increase/decrease in gold/silver prices impacts revenues by roughly $6 million assuming2011 production of 90,000 gold-equivalent ounces, or EPS by 7%. Increasing gold and silver price realizations,relatively smooth improvement in mill feed, and well-managed production costs should expand margins and generatefree cash flow for the company. As the company produces gold and silver at higher price levels, we believe improvingrealized prices and production growth will outweigh any potential negative impact on consumables (diesel fuel,commodities, other production related costs) or if base metal prices decline. We are forecasting 2012 cash flow (beforetaxes) of more than $200 million, of which nearly 30% could be released as dividends to shareholders. Our costforecasts are near zero given $3.00, $0.90, $0.95 copper, lead and zinc realizations net of recoveries and smeltercharges.
Balance Sheet, Cash Flow
At September 30, 2010, Gold Resources had no debt outstanding and cash and cash equivalents balance of $55million. During September, management completed a private placement of equity securities (3,475,000 shares at
$16.00) that realized $51.9 million net of fees. Proceeds expected to accelerate underground mine development at LaArista, exploration and ore development drilling among its key exploration targets, allow more efficient supply andequipment ordering to better manage growth and potential to ramp up mill throughput by 50%. Since 2008, HochschildMining has been investing in GORO shares and now controls 28%. We expect cash flow to grow as production rampsup through 2011-2012, limited by the amount of underground ore production brought to the mill. Going forward, we donot expect any external acquisition activity as we believe GORO has enough prospective targets and medium termproduction growth potential. Besides, we do not see any regional targets that would have anywhere near the gradesand metallurgy controlled by GORO.
We expect GORO balance sheet to strengthen and liquidity to continue improving in 2011–12 as the company realizeshigher prices and generates positive cash flow. We expect GORO to incur $20-$30 million on capital expenditure in2011. GORO’s restricted cash account set aside for underground development and exploration should exhaust in Q12011. Cash dividend payments are currently declared monthly. Management has indicated a desire to allow investorswho control a certain level of shares the ability to choose to receive their dividends in either cash or physical gold andor silver coins; management has contracted a designer who has coinage experience. We may hear more about thisconcept during the next few months. In the meantime, the board declared an initial special cash dividend of $0.03 pershare on July 29, 2010 and has declared subsequent $0.03 per share dividends each month since its initialdeclaration.If resource expansion goes as planned, mill capacity could be expanded to accommodate an additional 100,000ounces of annual gold equivalent output beginning in 2014. Management targets a ten-year optimal mine life profile, soattaining gross resource of around three million ounces would justify such an expansion. The mill was designed to addpower, machinery and infrastructure quite easily for minimal expense.
EXHIBIT 20: GORO - SENSITIVITY ANALYSIS ON NAV/SHARE
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 17 of 33
EXHIBIT 21: GORO VALUATION-P/NAV
Valuation NAV ($thousands) Multiple Value/Share
Properties $1,210,483 2.0x $44.02
Other Balance Sheet Items $54,862 1.0x $1.00
Others $0 1.0x $0.00
Implied Valuation $45.02
Source: Company reports, Jefferies & Company estimates
Management
Mr. William W. Reid, Co-Founder, Chairman and Chief Executive Officer
Mr. William Reid has been Chief Executive Officer of Gold Resource Corp. since 1998. He co-founded Gold ResourceCorp. on August 24, 1998 and serves as its Chairman. He founded and served as the Chief Executive Officer of U.S.Gold Corporation (USGL) from 1977 to August 18, 2005. During his tenure with U.S. Gold, the company built orparticipated in six producing mines.
Mr. David C. Reid, Co-Founder, Secretary and Treasurer
Mr. David Reid co-founded Gold Resource Corp. in August 24, 1998 and serves as its Secretary and Treasurer. Mr.Reid served as Vice President of Gold Resource Corp. since 1998. He served as Consultant of US Gold Corporationfrom August 19, 2005 to September 30, 2005 and Vice President of Exploration from January 1, 1994 to August 18,2005.
Mr. Jason D. Reid, President
Mr. Jason Reid has been President of Gold Resource Corp. since July 1, 2010. Mr. Reid served as Vice President of
Corporate Development of Gold Resource Corp. from January 2008 to July 2010. He was responsible for formulatingcorporate growth strategies, retail and institutional marketing, raising capital and overseeing investor relationsprograms. Prior to Gold Resource, Mr. Reid operated two businesses founded by him, one in the equine industry andone in the construction industry.
Mr. Frank L. Jennings, Chief Financial Officer and Principal Accounting Officer
Mr. Jennings has been Chief Financial Officer of Gold Resource Corp. since June 20, 2006 and also serves as itsPrincipal Accounting Officer. He is responsible for maintaining the company's system of controls over accounting andfinancial reporting. For the past 10 years, he has served as an executive officer and director of several publiccompanies, including American Educational Products, Global Casinos and OnSource. He received his BA degree inEconomics from Austin College and an MBA in Finance from Indiana University.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 18 of 33
Gold – Investment Summary
We believe the combination of macro, micro and technical drivers should allow gold prices to achieve higher highs andhigher lows during the next 12–18 months. As investors continue to discount a higher perceived price for gold andsilver, given its monetary and historic value storage profile, we anticipate gold-related equities to better reflectrealizations and scarcity value.
Macro news flow should continue to support prices, especially as domestic economic trends, unemployment,deflationary fears, global currency volatility and concerns keep investor attention on gold and silver. Micro factorssurrounding central bank purchases of gold, growing ETF accumulation and solid coinage demand should also helppricing continue to seek new highs.
EXHIBIT 22: DOLLAR GOLD PRICE 1970–2010
$0$100$200$300$400$500$600$700
$800$900
$1,000$1,100$1,200$1,300$1,400$1,500
Oil Shock1
Reflation
Inflation
Volcker at Fed Irrational
Exuberance
Plaza AccordDeflation
September 11
Oil Shock 2
Disinflation
Crisis
Oil Shock 3
Source: Bloomberg, Jefferies & Co., Inc.
While monetary stimulus and global investor perception regarding currency values and direction should allow globalgold prices to sustain higher than historic pricing levels, well capitalized North American-based precious metalproducers will recognize the full benefit of the increased value placed on gold during the next three to four yearsdespite fighting geologic, metallurgy, and capital cost challenges.
We believe precious metal shares should continue to trade higher during 2011 as economic, policy and politicaluncertainty combined with global currency devaluation fears continue to support metals prices.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 19 of 33
EXHIBIT 23: GOLD PRICES VERSUS NORTH AMERICAN GOLD EQUITIES 1985-2010
0
50
100150
200
250
300
350
400
450
XAU Price of G old
Source: Bloomberg, Jefferies & Company
Gold Price Forecast
Our positive bias towards gold price level and direction reflects our belief that excess liquidity will continue to berecognized in the price of commodities in general and gold in particular. We characterize the gold market as a “stock”rather than a “flow” market. We contend global investor and policy sentiment as well as currency perception drivesgold price movements rather than traditional supply-demand analytics. The exhibit below highlights our average priceforecasts and ranges.
EXHIBIT 24: JEFFERIES GOLD PRICE EXPECTATIONS
2005 2006 2007 2008 2009 2010 2011E
Average $445.42 $604.65 $697.09 $872.25 $974.00 $1,227.00 $1,350.00
High $528.00 $714.80 $840.50 $1,002.95 $1,216.00 $1,424.00 $1,400.00
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 20 of 33
Risks
For the Commodity
Deflation – Gold’s value as a store of value should allow for relative outperformance in inflation and deflationaryperiods. However, the perceived overcapacity among the capital and labor stock may allow for continued liquiditysupport, which should lead to higher prices once economies recover. If expectations of asset deflation take hold, thenominal dollar price of gold would likely decline, as would equities.
Dollar Strength - As a global commodity, we would typically see negative price correlation relative to the foreignexchange value of the U.S. dollar. The global market prices gold, as well as most other commodities, in dollars. Asignificant strengthening of the value of the U.S. dollar relative to European or Asian currencies could pressure goldprices.
Energy Prices – Gold prices have been sensitive to price changes in oil prices. Historically, gold priced in oil averagedbetween 10–15 barrels. Today, the ratio hovers above 15 barrels. Gold may compete with commodity fund flows intoother commodities, such as oil. A sustained fall in crude oil prices would further injure sentiment and risk profiles in ourview. The market can be quite swift in discounting lower energy prices among other commodities.
Central Bank Withdrawals of Excess Liquidity – We believe the massive monetary response provided by the U.S.Federal Reserve Board as well as other developed country central banks has been quite helpful in arresting a seriousfinancial panic. As structural and cyclical issues weigh down efforts by policy makers in reviving global economicactivity, bankers may continue to maintain very aggressive liquidity posture. If bankers look to drain the liquidity fromthe system sooner than required, deflation fears could return, removing support for commodities in general and gold inparticular.
Investor Liquidation – Any material slowdown in emerging economies such as China and India or aggressiveincrease in global interest rates encouraging hedging or creating higher hurdle rates to hold very low interest-bearing gold could drive a de-stocking of gold inventories held within ETFs. The gold held within these relativelylong-leaning accounts could provide an overhang to the market if hard-asset investor sentiment wanes.
For the Equities
Margin Squeeze – During 2007–08 gold lagged energy and hard rock commodities. The demand placed on availablegeologists, metallurgists, mining equipment, contractors, foundry space, consumable product helped push miningcosts higher, aiding a squeeze in expected margin generation.
Resource Development – Gold mines are hard to find, develop and effectively operate in varied geopolitical,
environmental and social environments. Mature gold producers deplete between 8%–12% of gross proven/probablereserves each year. The need to replenish and grow will accelerate as overall discovery success appears muted.Either these companies shrink or need to purchase smaller companies with less-developed, but prospective resources.Dilution may enter into investor calculus.
Compression of Relative Multiple - We contend that investors could continue to reduce the historical premiumaccorded gold equity valuations relative to diversified miners. The advent of the ETF has contributed to this trend. Goldproducer managements must be able to generate growth and investment opportunities to offset the concentratedprice-taking aspect of its business and exhibit a level of capital efficiency.
Niche Appeal – As global capital flows towards the basic infrastructure and resource needs of developing nations andglobal mega resource companies grow through acquisition and price realizations, gold producers may find strongercompetition for investment and recognition from money management and capital firms.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 21 of 33
Quantitative Easing -2
After cutting the Fed Funds rate to near zero during the credit crisis, the Fed turned to its balance sheet as a primarytool of monetary policy. The Fed’s total assets, which include loans and securities other than those used for monetary-policy operations, have risen to more than $2 trillion from $878 billion at the start of 2007.
On November 3, the Federal Reserve announced it will buy an additional $600 bill ion worth assets by the end of June.This monetary policy response has been dubbed QE2. This latest stimulus follows the August 2010 announcement,where Fed decided to use cash received from maturing mortgage bonds to buy new mortgage or Treasury bonds. The
decision underscored the Committee's intent to maintain accommodative financial conditions as needed to support therecovery.
We believe the added monetary liquidity provided by the Federal Reserve, which started slowly in August 2007 andaccelerated dramatically in the fourth quarter of 2008, the subsequent expansion of its balance sheet and monetizingdebt will continue to be reflected in monetary metrics as well as a lower relative value of the US currency. We expectcentral bankers to err on the side of too much monetary accommodation without tangible evidence of a sustained, job-creating economic recovery.
EXHIBIT 26: ADJUSTED MONETARY BASE JUNE 2000-2010
$0
$500
$1,000
$1,500
$2,000
$2,500
$ billions
Adjusted Monetary Base
Source: Federal Reserve Bank of Saint Louis
The money stock remains excessive, especially relative to the value of US gold reserves. If monetary velocity everaccelerates, inflation expectations could accelerate prior to a defined monetary exit strategy unfolding.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 22 of 33
EXHIBIT 27: M2 VELOCITY OF MONEY (NOMINAL GDP DIVIDED BY M2 MONEY SUPPLY)
1.6
1.7
1.8
1.9
2
2.1
2.2
M2 Velocity of Money
Source: Bloomberg, Jefferies & Company
The projected budget deficits in the Administration projections never fall below $438 billion, and will generatecumulative budget deficits of more than $6 trillion from 2011 through 2020. Over the course of the budget horizon,annual outlays will increase from $3.714 trillion in 2011 to, gasp, $5.541 trillion in 2020, a 50% increase! TheCongressional Budget Office estimates annual debt increases of nearly $600 million annually through 2020. By 2020the total U.S. national debt held by public is projected to be more than $16 trillion. We believe the certainty of addedTreasury debt issuance may continue to cast uncertainty over the U.S. ability to support its currency.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 23 of 33
European Debt Crisis
The debt crisis in Europe has escalated recently as investors fear that Ireland's debt problems, despite the EUapproving an emergency aid package, could spread to other countries such as Portugal and Spain. Borrowing costs ofcountries such as Spain, Italy, Portugal and Belgium have shot higher. Gold has rallied as euro zone's debt crisis hasprompted investors to buy gold to hedge against currency and economic uncertainties.
Central Bank Buying
Central banks purchased 222 tonnes of gold from the IMF. India bought 200 tonnes, Sri Lanka 10 tonnes andMauritius 2 tonnes. Thailand imported 45 million tonnes of gold in July 2010 (more than 13x June imports); Bank ofThailand is expected to have played a major role in these gold imports as it is looking to diversify its forex reserves.The International Monetary Fund has now sold 403.3 metric tons, or 13 percent of its reserves, and has announcedthat it has completed the planned sale of some of its bullion reserves, a program that began in September 2009.
We believe the dollar will remain the world’s reserve currency for the foreseeable future. However, the increase in non-U.S. holdings of government debt and an over-weighted dollar based position among developing economies reservesalong with heightened uncertainty of Euro’s ability to effectively weather the crisis should move gold up in the ranks ofglobal reserve assets. Given our expectations of declining mine production, increased investor access, and globalcurrency volatility, we expect Asian central banks or governments to remain active in net adding to gold reserves.Asian central banks or governments could look to directly invest or enter into off-take agreements.
Dollar Direction – Gold in FX
Historically, dollar price gold has generated an inverse correlation to changes in the value of the dollar, as depicted inthe exhibit below. During 2008, the dollar weakened quite dramatically as the market accelerated purchase ofcommodities and the Fed was too dovish. After the commodity prices peaked and the impact of the global liquidity andconfidence crises accelerated, gold prices fell hard as risk-averse investors globally turned toward dollars and U.S.government supported bonds. Since Ben Bernanke’s Jackson Hole speech in August 2009, dollar gold prices hadbeen negatively tracking the dollar’s direction. However, since mid November, when European debt concerns surfacedagain, gold prices and dollar have moved in the same direction.
EXHIBIT 29: DOLLAR GOLD PRICE VS. VALUE OF U.S. DOLLAR
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 24 of 33
Exchange Traded Fund (ETF)
We believe the advent of the ETF has been the most significant change to the investment profile and market visibilitythis decade. Prior to 2005, investors who wished to own or control physical gold, the choices surrounded morecumbersome (coins, bars, bullion) and financially levered (futures, options, gold-related equities or gold/naturalresource mutual funds) ways to participate in the potential in the perceived value of gold. The ETF was created toallow ownership of physical gold through one-for-one backing of a share of the ETF. So when an investor owns ashare of the gold ETF, a tenth of an ounce of gold is purchased and transferred to a depository. When an investor sellsits share of ownership in the ETF, the gold is sold out of the depository into the market. Since 2005, over 1,300 tonnesof gold have been accumulated, despite price volatility ranging from $500–$1400 per ounce. We tend to identify theETF ownership as another “central bank,” or large controller of inventoried gold. This ownership has tended to besticky and supportive to the gold market during most periods, in our view.
But, the advantages of gold ownership through the ETF, along with the added visibility brought to the global goldmarket, have provided disadvantages for gold equities. The ETF has shifted investment and support for gold equitiesin general. Institutional investors had looked at well-capitalized gold producers as a proxy for gold price expectations.However, retail and institutional investors have shied away from investment, in our view.
EXHIBIT 30: ACCUMULATION OF GOLD WITHIN GLOBAL ETFS AND GOLD PRICES
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 25 of 33
EXHIBIT 31: INVESTORS’ NET POSITIONS IN COMEX GOLD FUTURES
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
-100,000
-50,000
0
50,000
100,000
150,000
200,000
250,000
300,000
Gold Price ($/ounce)
Net Positions (Contracts, thousand
s)
Investors' Net Positions in Comex Gold Futures Gold Price
Source: CFTC, Bloomberg, Jefferies & Company
China’s Gold ETF Move
China recently allowed mainland Chinese to invest in foreign exchange-traded gold funds for the first time. Chinese
investors face negative real interests on bank deposits, and this new announcement could generate strong interest inGold ETFs from these investors who are concerned about inflation and are looking to gold as a store of value.
This move to approve foreign ETFs is the latest step in the expansion of the gold market in China. A few months agoChina announced an increase in the number of commercial banks allowed to import and export gold. The central bankalso announced China would "actively push forward the building of infrastructure for gold trading and reserves to fendoff disasters." China is also creating many new gold-backed products and is urging retail investors to buy gold.
We note China is the world’s second largest gold consumer behind India. Underlining China's growing importance tothe precious metal markets was the recent news that Chinese imports have surged by more than 500% due toincreased investment demand. In the first ten months of 2010, Chinese gold imports hit 209 tonnes compared to 45tonnes for all of 2009, according to the Shanghai Gold Exchange.
Considering China’s burgeoning middle class and ever-increasing demand for gold (driven mainly by jewelry demand
so far), we view these developments as strongly positive for gold demand and prices.
Source: Company reports, Reuters, Yahoo finance, CapitalIQ, Jefferies & Co., Inc. estimates. Consensus estimates used for NC companies and forAEM’s 2012E earnings.
Source: Company reports, Reuters, Yahoo finance, CapitalIQ, Jefferies & Co., Inc. estimates. Consensus estimates used for NC companies and forAEM’s 2012E earnings.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 30 of 33
Company DescriptionGold Resource Corporation is engaged in the exploration for and production of gold and silver, primarily in Mexico'ssouthern state of Oaxaca. The Company holds a 100% interest in five properties, including the El Aguila property, theLas Margaritas property, the El Rey property, the Solaga property and the Alta Gracia property. The Company'sflagship property, the El Aguila Project, recently commenced mill operations and initial production. The company wasfounded in 1998 and is based in Denver, Colorado.
ANALYST CERTIFICATIONS
I, Michael Dudas, certify that all of the views expressed in this research report accurately reflect my personal viewsabout the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or willbe, directly or indirectly, related to the specific recommendations or views expressed in this research report.
I, Satyadeep Jain, certify that all of the views expressed in this research report accurately reflect my personal viewsabout the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or willbe, directly or indirectly, related to the specific recommendations or views expressed in this research report.
Important Disclosures
As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instrumentsdiscussed in this report receive compensation based in part on the overall performance of the firm, includinginvestment banking income. We seek to update our research as appropriate, but various regulations may prevent usfrom doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are
published at irregular intervals as appropriate in the analyst's judgement.
In September 2010, Jefferies acted as sole placement agent for Private Investment in Public Equity (PIPE) for GoldResource Corporation.
Meanings of Jefferies & Company, Inc, RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a12-month period.
Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus10% within a 12-month period.
Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10%or more within a 12-month period.
Our focus on mid-capitalization and growth companies implies that many of the companies we cover are typically morevolatile than the overall stock market, which can be amplified for companies with an average stock price consistentlybelow $10. For companies in this category only, the expected total return (price appreciation plus yield) for Buy ratedstocks is 20% or more within a 12-month period. For Hold rated stocks with an average stock price consistently below$10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated stocks with an average stock price consistently below $10, the expected total return (priceappreciation plus yield) is minus 20% within a 12-month period.
NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliancewith applicable regulations and/or Jefferies & Company, Inc. policies.
CS - Coverage Suspended. Jefferies & Company, Inc. has suspended coverage of this company.
NC - Not covered. Jefferies & Company, Inc. does not cover this company.
Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policyor applicable securities regulations prohibit certain types of communications, including investment recommendations.
Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which nofinancial projections or opinions on the investment merits of the company are provided.
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 31 of 33
Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value,volatility and expected total return over the next 12 months. The price targets are based on several methodologies,which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow(DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium(discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value,dividend returns, and return on equity (ROE) over the next 12 months.
Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific toindividual investors. As such, the financial instruments discussed in this report may not be suitable for all investors andinvestors must make their own investment decisions based upon their specific investment objectives and financialsituation utilizing their own financial advisors as they deem necessary. Past performance of the financial instrumentsrecommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected bychanges in economic, financial and political factors. If a financial instrument is denominated in a currency other thanthe investor's home currency, a change in exchange rates may adversely affect the price of, value of, or incomederived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whosevalues are affected by the currency of the underlying security, effectively assume currency risk.
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q10
8
16
24
32
2008 2009 2010 2011
Rating and Price Target History for: Gold Resource Corporation (GORO) as of 01-03-2011
Please see important disclosure information on pages 30 - 33 of this report.
Michael S. Dudas, CFA, [email protected], (212) 284-2383 Page 32 of 33
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q10
20
40
60
80
100
2008 2009 2010 2011
08/28/09I:B:$70
02/19/10B:$75
07/30/10B:$70
10/05/10B:$80
10/28/10B:$85
Rating and Price Target History for: Agnico-Eagle Mines Ltd. (AEM) as of 01-03-2011
Created by BlueMatrix
Distribution of Ratings
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [BUY] 572 52.00 45 7.87
HOLD [HOLD] 476 43.30 24 5.04
SELL [UNPF] 51 4.60 5 9.80
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