Gold Resource Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. All financial amounts are U.S. dollars; financial statement amounts are in thousands unless noted. Interim statements are unaudited.
Business context and operating results
Gold Resource operates mining units in Oaxaca, Mexico, and Nevada, U.S. The Mexico unit produces doré and concentrates; Nevada’s Isabella Pearl mine began selling doré in May 2019. Q1 2020 consolidated production was 10,142 gold ounces and 407,625 silver ounces.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $28.0 million | $26.6 million, up 5% |
| Mine gross profit (loss) | $(0.3) million | $5.4 million |
| Net income (loss) | $(3.1) million; $(0.05) per share | $0.9 million; $0.01 per share |
| Operating cash flow | $5.0 million provided | $0.6 million used |
| Capital expenditures | $6.9 million cash outflow | $8.8 million |
| Cash and cash equivalents | $18.4 million at March 31 | $11.1 million at December 31, 2019 |
| Working capital | $28.2 million | $22.7 million at December 31, 2019 |
| Total assets / liabilities | $196.1 million / $31.0 million | At March 31, 2020 |
| Loans payable | $1.4 million | At March 31, 2020; equipment loans bear 3%–4.48% interest |
Cash increased by $7.3 million during the quarter. Financing provided $9.4 million, including $10.35 million of net ATM offering proceeds, partly offset by dividends and debt and lease repayments. Capital spending and operating cash flow together were not sufficient to fund investment spending without financing. The company also held $4.1 million of gold and silver bullion/rounds. Current liabilities include $5.2 million of operating lease liabilities; total finance lease liabilities were $0.8 million.
Material changes versus the prior comparable period
- Sales rose primarily because of higher gold sales, including $5.9 million from Isabella Pearl, which had no sales in Q1 2019. Lower zinc prices and higher concentrate treatment and refining charges partly offset the increase.
- Mine results deteriorated from $5.4 million gross profit to a $0.3 million gross loss. The company cited higher base-metal treatment and refining costs and a $1.6 million Isabella Pearl inventory net realizable value adjustment, associated primarily with low-grade ore placed on the leach pad.
- Production costs increased to $20.9 million from $17.5 million, while depreciation and amortization increased to $7.4 million from $3.6 million.
- Other expense increased to $1.5 million from $25,000, mainly due to a $1.6 million unrealized Mexican peso exchange loss, partly offset by realized currency gains. The period also included a net $0.7 million realized/unrealized loss on provisional sales derivatives, recorded against sales.
- Net loss included a $2.1 million income tax benefit; Q1 2019 had $1.1 million of income tax expense.
- The company sold 3.85 million shares through its ATM program for $10.4 million net proceeds, versus $10.8 million in Q1 2019. It declared and paid dividends of $0.01 per share, or $0.7 million, compared with $0.005 per share, or $0.3 million.
Outlook, risks and contingencies
- Mexico suspended mining operations on April 1 following the government’s COVID-19 emergency order; the suspension was extended through May 30. The company said operations would remain suspended until government approval to restart. Nevada continued operating with additional safety measures.
- The company withdrew its 2020 production outlook because of the Mexico suspension and uncertainty surrounding the pandemic. It said it could not reasonably estimate the pandemic’s full effect on 2020 results, cash flows or financial condition, while management believed liquidity and capital resources could withstand a prolonged disruption under scenarios it assessed.
- Management anticipated adverse effects on exploration plans, results, financial position and cash flows, and was evaluating potential supply-chain disruptions. It stated the company generally did not qualify for CARES Act relief.
- Subsequent to quarter-end, the company sold 484,500 shares through the ATM program for $1.6 million net proceeds.
- Q1 Oaxaca all-in sustaining cost was $1,229 per precious-metal gold-equivalent ounce, versus $808 a year earlier; cash cost after by-product credits was $918 versus $314, reflecting lower base-metal by-product credits. Nevada reported AISC of $1,330 per gold ounce for its first comparable sales period. These are non-GAAP measures and may not be comparable across companies.
- Management expected Isabella Pearl to access the higher-grade Pearl zone around mid-2020, with production expected to ramp later in the year; this outlook is subject to operating and pandemic uncertainties.
- Key exposures include metal-price volatility, Mexican peso fluctuations, provisional pricing adjustments, COVID-19-related operating disruption, permitting and exploration outcomes, and potential difficulty raising equity at acceptable prices. The company reported no material changes to internal control over financial reporting and said disclosure controls were effective.
Important facts for investors to verify
- Whether and when Mexico operations restarted, and the resulting effect on production, cash flow and liquidity.
- Whether Nevada production and the anticipated Isabella Pearl grade and production ramp were achieved.
- The drivers and persistence of the $1.6 million inventory adjustment, elevated mine costs, and higher depreciation and amortization.
- Cash runway and future financing needs, including ATM share issuance and dilution, under prolonged operational disruption scenarios.
- Metal prices, base-metal by-product credits, provisional-price settlements and Mexican peso movements that may affect reported sales and earnings.
- Reconcile reported common shares: the balance sheet reports 69,541,527 shares outstanding at March 31, while the equity statement reports 69,877,925 shares at that date; investors should confirm the correct figure in the filing’s source exhibits.