Gold Resource Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. U.S. dollars unless noted. The company’s operating mine is the Don David Gold Mine (DDGM) in Mexico; Back Forty in Michigan is an advanced exploration-stage project.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $37.1 million | $30.8 million | $82.5 million | $58.1 million |
| Mine gross profit | $8.0 million | $6.9 million | $27.3 million | $15.5 million |
| Net income | $2.7 million | $1.3 million | $6.7 million | $3.8 million |
| Diluted earnings per share | $0.03 | $0.02 | $0.08 | $0.05 |
| Operating cash flow | Not separately presented in the statements | Not separately presented in the statements | $12.2 million | $16.1 million |
- Q2 mine gross margin was approximately 21.6%, compared with 22.3% a year earlier. Cost of sales increased 21% to $29.0 million, including higher production costs and $2.9 million more depreciation and amortization.
- Q2 sales rose 20%; gold sold increased 54% to 8,746 ounces. Total gold-equivalent ounces sold rose 18% to 11,475. Gold production was 9,317 ounces; silver production was 249,088 ounces.
- Higher gold grades and increased gold sales contributed to growth. Zinc prices and sales also supported revenue, while silver prices were lower. The company reported Q2 non-GAAP cash cost of $247 and consolidated all-in sustaining cost (AISC) of $799 per gold-equivalent ounce, after co-product credits. Management cautions these measures benefited from higher base-metal credits.
- At June 30, cash was $33.3 million, versus $33.7 million at year-end 2021; working capital was $37.1 million, up $7.8 million. First-half investing cash outflow was $10.0 million, including $10.5 million of capital expenditures; dividends paid were $1.8 million.
- Total liabilities were $87.6 million. The balance sheet lists no conventional borrowings line, but includes $43.0 million of gold and silver stream liabilities, $4.3 million of contingent consideration, and reclamation obligations. Interest expense on stream liabilities was $0.3 million in the first half; no interest was paid in the period.
Changes versus comparable periods
- First-half net sales increased 42% and net income increased 76% year over year. Mine gross profit increased 77% to $27.3 million.
- Higher output and gold grades supported sales: first-half gold sold rose 60%, while silver sold declined 5%. First-half production costs increased 20%; management cited consumables, royalties, labor-reform-related obligations and profit sharing, and transportation costs. Depreciation also increased as the reserve base used in the units-of-production calculation was lower.
- Operating cash flow declined to $12.2 million from $16.1 million, primarily due to working-capital movements, including tax payments. Cash was nearly flat versus year-end after operating cash generation, investment, dividends, and foreign-exchange effects.
- Exploration expense rose to $5.1 million for the first half, including $3.1 million for Back Forty feasibility and permitting work; the Michigan project was acquired in December 2021, so it had no comparable 2021 project expense.
Outlook, risks and unusual items
- 2022 capital and exploration investment guidance is $33 million–$37 million. First-half spending was $15.7 million. The filing gives no earnings or production guidance.
- Management expected the optimized Back Forty feasibility study to be completed in the second half of 2022, with permit applications to follow; permitting is expected to continue into 2023. The filing describes possible project financing no earlier than 2024, subject to project approval and financing conditions.
- The zinc zero-cost collar covers 3,900 tonnes for July–December 2022, with a $3,200-per-tonne floor and $3,500 ceiling. It generated a $3.8 million Q2 accounting gain, mainly from unrealized fair-value changes; the collar was a $0.3 million asset at quarter-end. These non-cash marks can make earnings volatile.
- Osisko stream agreements entitle the counterparty to portions of future Back Forty gold and silver production. The agreements include security over the project; if the subsidiary defaults, including failure to achieve commercial production by an agreed date, repayment obligations and enforcement remedies could arise. Additional gold-stream deposits depend on permits and project financing.
- The company reported five lost-time incidents in the first half, including three in Q2. It also disclosed a pending community injunction in Mexico seeking cancellation of certain concession titles; the case had not reached a final ruling, and the company said it does not perform the specified activities on the affected lands.
- Disclosure controls were judged ineffective at June 30 because a material weakness related to documentation and operating effectiveness of review controls over complex acquisition accounting had not been fully remediated. Management nevertheless concluded the interim financial statements fairly present the company’s position and results under U.S. GAAP.
- Management cited commodity-price volatility, inflation and operating-cost increases, foreign exchange, geological and operational uncertainty, permitting, and COVID-19-related disruption among risks. It believed current liquidity was sufficient for foreseeable needs and obligations over the next 12 months, but noted uncertainty in future conditions.
Important facts for investors to verify
- Whether DDGM production, grades, recoveries, and co-product credits support reported margins and unusually low per-ounce non-GAAP costs.
- Progress and cost against the $33 million–$37 million 2022 investment plan, and timing, permitting, financing requirements, and economics for Back Forty.
- Terms, milestones, production obligations, default remedies, and valuation of the Osisko streams and contingent consideration.
- Remediation of the material weakness in acquisition-accounting review controls and the status of the Mexico concession injunction.
- Exposure to metal prices, especially the zinc collar’s settlement outcomes, and the sustainability of cash flow, dividends, and liquidity.