Business Context and Reporting Period
Company: Gold Resource Corp (GOLD)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Gold Resource is an exploration-stage company under SEC guidelines, despite commencing commercial production in July 2010. The company operates the El Aguila Project in Oaxaca, Mexico, producing gold, silver, lead, and zinc concentrates. It has not yet demonstrated proven or probable reserves, requiring the expensing of mine construction costs rather than capitalization.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue (Sales of metals concentrate) | $11,280,000 | $0 |
| Mine Gross Profit | $8,843,000 | $0 |
| Net Income (Loss) | $2,033,000 | $(7,265,000) |
| Diluted EPS | $0.04 | $(0.15) |
| Cash and Equivalents (Ending) | $37,904,000 | $3,690,000 |
| Working Capital | $49,152,000 | N/A |
| Total Debt | $0 | $0 |
| Net Cash Used in Operating Activities | $(3,571,000) | $(9,713,000) |
Non-GAAP Metric: Cash operating cost per gold equivalent ounce was $87 for the quarter.
Material Changes vs. Prior Period
- Revenue Generation: The company recorded its first-ever revenue of $11.3 million, compared to zero in Q1 2010, following the declaration of commercial production in July 2010.
- Profitability: The company achieved a net income of $2.0 million, reversing a net loss of $7.3 million in the prior year period.
- Expense Structure: Total costs and expenses decreased by 9% to $6.7 million. This was driven by a 29.5% decrease in construction and development expenses ($3.1M vs $4.4M) and a 58% decrease in exploration expenses ($0.5M vs $1.2M).
- Stock-Based Compensation: Non-cash stock-based compensation increased significantly to $1.4 million from $83,000 in the prior year, contributing to a 246% increase in General and Administrative expenses.
- Dividends: The company paid $4.8 million in special cash dividends during the quarter, whereas no dividends were paid in Q1 2010.
Outlook, Risks, and Management Commentary
- Production Transition: Operations transitioned in March 2011 from processing open-pit ore to the La Arista underground ore. While underground ore is currently lower grade (diluted development ore), full stoping of the targeted vein system is expected to begin in May 2011.
- Exploration Stage Status: Management expects to remain an exploration-stage company for the foreseeable future. Consequently, significant expenditures for Phase II tailings dam construction and underground mine development will continue to be expensed, potentially suppressing reported profits compared to capitalized peers.
- Recent Operational Event: An anomalous storm on April 20, 2011, caused flooding in the lower levels of the La Arista underground mine. Cleanup is expected to take four weeks. Management does not currently believe production will be impacted, but offers no assurance.
- Liquidity: The company holds $37.9 million in cash with no outstanding debt. It anticipates funding future operations through existing cash balances, though it has historically relied on equity financings.
- Risks: Key risks include commodity price fluctuations (gold/silver), foreign currency exchange rates (MXN/USD), and the uncertainty of mineralized material estimates. The company has no hedging strategy for commodity prices.
Investor Verification Checklist
- Reserve Status: Verify the timeline for demonstrating "proven or probable" reserves to exit exploration-stage accounting, which currently forces the expensing of capital construction costs.
- Underground Ore Grade: Monitor the transition from diluted development ore to full stoping of the La Arista vein system starting May 2011 to confirm expected grade improvements.
- Storm Impact: Confirm that the April 2011 storm damage to the La Arista mine does not result in prolonged production delays or unexpected capital costs.
- Dividend Sustainability: Assess the sustainability of the aggressive dividend policy ($0.13 per share declared in Q1) against the cash burn rate of $3.6 million in operating activities.
- Customer Concentration: Note that 100% of sales are from the El Aguila Project, with 84.1% of sales volume going to a single counterparty (Consorcio Minero de Mexico, a Trafigura Group Company).