GORO

Business Context and Reporting Period

Company: Gold Resource Corporation (Colorado)

Reporting Period: Quarterly period ended June 30, 2010 (Form 10-Q)

Business Stage: Exploration Stage Company transitioning to commercial production. The Company operates primarily in Mexico, focusing on the El Aguila Project. It announced the achievement of commercial production at its El Aguila mill on July 1, 2010, following a ramp-up phase in the first half of 2010.

Key Financial Metrics

Note: While the Company generated $2,694,771 in net sales proceeds from concentrate during the ramp-up phase, these were offset against production start-up expenses rather than recognized as revenue under exploration stage accounting rules.

Material Changes vs. Prior Period

• Reduced Net Loss: Net loss decreased by approximately $4.36 million (25%) compared to the prior six-month period, driven by a shift from heavy construction costs to production activities and a significant reduction in stock-based compensation expenses.
• Expense Structure Shift: Engineering and construction expenses decreased by $3.48 million ($11.76M to $8.28M) as the open-pit mine and mill construction neared completion. Conversely, property exploration expenses increased by $303,376 (15%) due to accelerated drilling.
• Stock-Based Compensation: Non-cash stock option compensation expense dropped significantly from $2.69 million in the prior period to $196,480, reflecting fewer option grants in 2010.
• Inventory Buildup: Inventories increased from $224,853 to $2.67 million, primarily due to the accumulation of $2.6 million in ore stockpiles (approx. 195,369 tonnes) in preparation for processing.
• Financing Activity: The Company raised $11.4 million in equity financing during the period, primarily through sales to Hochschild Mining Holdings Limited ($11.17 million).

Outlook, Risks, and Management Commentary

• Commercial Production: Management declared commercial production achieved on July 1, 2010, as the mill reached 80% of design throughput and recoveries. Revenue recognition from metal sales will commence immediately following this date.
• Future Operations: The Company is developing an underground mine at the La Arista Vein, with $5.67 million of restricted cash remaining for this purpose. It anticipates producing base metals (copper, lead, zinc) as by-products to offset gold production costs.
• Liquidity: The Company has no outstanding debt and relies on equity financing. Management expects to continue depleting working capital until cash flow from operations becomes self-sustaining. A special cash dividend of $0.03 per share was declared on July 29, 2010.
• Key Risks:
  • Single Offtake Agreement: All ore concentrate is sold to a single purchaser, Consorcio Minero de Mexico Cormin Mex, S.A. de C.V. Financial performance is dependent on this counterparty's ability to pay.
  • Exploration Stage Accounting: Despite commercial production, the Company remains an "exploration stage" entity under SEC rules because it has no proven or probable reserves. Consequently, construction costs are expensed rather than capitalized, resulting in reported losses despite operational progress.
  • Commodity Prices: Profitability is highly sensitive to fluctuations in gold and silver prices. The Company does not currently use derivative contracts to hedge these risks.
  • Country Risk: All operations are in Mexico, exposing the Company to political instability, regulatory changes, and currency exchange fluctuations (MXN vs. USD).

Investor Verification Checklist

• Reserve Classification: Verify the timeline for converting mineralized material into "proven or probable" reserves to exit exploration stage accounting and begin capitalizing development costs.
• Offtake Agreement Terms: Review the specific terms of the agreement with Consorcio Minero de Mexico Cormin Mex, S.A. de C.V., including payment schedules and breach clauses.
• Restricted Cash Usage: Monitor the drawdown of the $7.74 million in restricted cash designated for the La Arista underground mine and El Aguila exploration.
• Production Metrics: Confirm actual mill throughput and recovery rates post-July 1, 2010, against the design targets used to declare commercial production.
• Dividend Sustainability: Assess whether the declared $0.03 dividend is sustainable given the current cash burn rate and reliance on future equity financing.