Gold Resource Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; dollar amounts below are USD unless noted.
Business context and operations
The company operates mines in Oaxaca, Mexico, and Nevada, U.S. It sells gold and silver doré and concentrates containing precious and base metals. Mexico operations were suspended from April 1 until approval to restart on May 27 because of COVID-19 restrictions; Nevada’s Isabella Pearl mine continued operating.
- Q2 consolidated production was 7,649 ounces of gold and 191,232 ounces of silver. Mexico production fell substantially during the suspension, while Nevada production increased as Isabella Pearl completed a full quarter of production.
- Management said Mexican mining and milling rates had returned to normal by the filing date. The company began accessing the higher-grade Pearl zone late in Q2 and expected gold grades and production to ramp gradually, primarily in Q4 2020.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $21.1M | $29.4M | $49.1M | $56.0M |
| Mine gross profit (loss) | $(1.6)M | $6.5M | $(1.9)M | $11.9M |
| Net income (loss) | $(1.8)M | $1.8M | $(4.9)M | $2.7M |
| Diluted earnings (loss) per share | $(0.03) | $0.03 | $(0.07) | $0.04 |
- Sales declined 28% in Q2 and 12% for the first half year over year. The Q2 mine gross margin was approximately negative 7.5%, compared with positive 22.1% in Q2 2019.
- Q2 mine gross profit was pressured by lower sales, higher treatment and refining costs, COVID-related suspension costs, and a $2.0M inventory net-realizable-value adjustment at Isabella Pearl. The first-half inventory adjustment totaled $3.6M.
- Gold and silver prices improved, but lower base-metal prices and reduced Mexico sales volumes weighed on results. Q2 other income included currency and bullion valuation gains; these included non-cash items.
- Six-month operating cash flow was $3.1M, versus $1.1M in 2019. Investing cash outflow was $10.6M, mainly capital expenditures; financing provided $9.9M, including $11.9M of net ATM share proceeds. Cash increased to $13.3M from $11.1M at year-end.
- Working capital was $33.6M, up 48% from $22.7M at December 31, 2019. Current assets were $51.0M and current liabilities $17.3M.
- Total liabilities were $24.3M, down from $35.0M at year-end, including reduced operating lease liabilities. Equipment loans were $1.2M and finance lease liabilities were $0.7M; operating lease liabilities were $3.2M.
Material changes and capital allocation
- Mexico’s temporary shutdown reduced production and sales; Nevada’s contribution grew as Isabella Pearl moved into a fuller production period.
- Capital expenditures were $10.6M in the first half, down from $21.4M in the prior-year period.
- The company issued 4.33M shares through its at-the-market offering in the first half for $11.9M net proceeds. Shares outstanding on the June 30 balance sheet were 70.1M, compared with 65.7M at year-end.
- Dividends declared were $0.01 per share in Q2 and $0.02 per share for the first half. The company also acquired the Golden Mile Nevada property for $0.65M, partly paid in shares, subject to a 3% net smelter return royalty with a buy-down option.
Outlook, risks, and unusual items
- No formal numeric earnings or production guidance is provided. Management expected Isabella Pearl grades and production to improve as mining advanced into the Pearl zone, with the principal ramp expected in Q4.
- Management stated that liquidity and capital resources were adequate for the foreseeable future and that ATM proceeds added flexibility, but cautioned that financing sufficiency is not assured.
- COVID-19’s duration and potential effects remain uncertain. Prolonged disruption, weaker markets, or delayed shipments could adversely affect operations, cash flow, and the ability to raise capital. Mexico exploration was also curtailed during the suspension.
- Other material risks include volatile gold, silver, and base-metal prices; Mexican peso exchange-rate movements; provisional concentrate pricing adjustments; political and regulatory conditions; production and exploration performance; and possible inability to obtain equity financing on acceptable terms.
- The company recorded $3.6M of first-half Isabella Pearl inventory adjustments and a $1.1M increase in asset-retirement obligation estimates. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Mexican operations sustain normal rates and whether COVID-19 restrictions or disruptions recur.
- Whether Isabella Pearl achieves the expected higher-grade production ramp, and how the $3.6M inventory adjustment affects subsequent periods.
- Cash generation relative to capital spending, dividends, and remaining commitments, including estimated $2.9M contract-mining payments and $0.6M equipment purchase commitments for 2020.
- Further ATM share issuance, dilution, and the company’s ability to fund operations without additional equity financing.
- Metal-price, provisional-pricing, currency, and tax impacts, including management’s ongoing assessment of new GILTI tax regulations.