GOLD RESOURCE CORP annual report, FY2021

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Gold Resource Corporation — FY2021 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021. Gold Resource produced gold, silver, copper, lead, and zinc at its Don David Gold Mine (DDGM) in Oaxaca, Mexico. In December 2021, it acquired Aquila Resources and its advanced exploration-stage Back Forty project in Michigan. Fortitude Gold had been spun off at the end of 2020; its 2020 results are reported as discontinued operations.

Financial and operating performance

  • Revenue: Net sales were $125.2 million, up 38% from $90.7 million in 2020. Higher gold sales, higher realized silver and base-metal prices, and lower treatment charges contributed to the increase.
  • Profit and margins: Net income from continuing operations was $8.0 million versus a $6.3 million loss in 2020; basic and diluted EPS from continuing operations was $0.11 versus a $0.09 loss. Mine gross profit was $36.7 million, or 29% of net sales, compared with $12.5 million, or 14%. Reported net income was $8.0 million versus $4.4 million in 2020, which included $10.7 million from discontinued operations.
  • Fourth quarter: Net sales were $38.1 million versus $29.6 million in Q4 2020; mine gross profit was $13.0 million versus $7.9 million. Continuing-operations net income was $2.7 million versus a $3.1 million loss. Q4 2020 total net income of $4.3 million included $7.4 million from discontinued operations.
  • Cash flow and liquidity: Cash from continuing operating activities was $34.8 million, up from $21.2 million. Cash and cash equivalents were $33.7 million at year-end, up $8.3 million; working capital was $29.3 million versus $30.8 million. Investing activities used $23.0 million and financing activities used $3.1 million.
  • Costs: DDGM total cash cost after co-product credits was $414 per precious-metal gold-equivalent ounce sold, versus $784 in 2020; all-in sustaining cost (AISC) was $922 versus $1,338. These are non-GAAP measures. Production costs increased 19% to $72.2 million, principally reflecting higher consumables, energy, contractor spending, and Mexican labor-law costs.
  • Debt and liabilities: The balance sheet reports total liabilities of $95.0 million, including $42.6 million for acquired gold and silver stream agreements, $4.6 million of contingent consideration, and $13.1 million of net deferred tax liabilities. No separate conventional borrowings balance is presented in the supplied filing text.
  • Production: DDGM produced 26,438 ounces of gold and 1.20 million ounces of silver in 2021, up 29% and 1%, respectively. Gold-equivalent ounces sold were 37,526, up from 30,508. Combined tonnes milled declined 11% to 501,978; higher grades and improved gold recovery partly offset lower throughput.

Material changes and significant developments

  • Acquired Aquila for $29.1 million of total consideration, including 13.7 million GRC shares valued at $24.5 million and $4.6 million of cash transaction costs. The acquisition was accounted for as an asset acquisition. Back Forty is not yet producing; the company was preparing a definitive feasibility study.
  • DDGM reserves declined from 2.33 million tonnes at year-end 2020 to 1.54 million tonnes at year-end 2021, primarily due to 0.5 million tonnes of mining depletion and 0.3 million tonnes reclassified as resources. Measured and indicated resources also declined, while inferred resources increased; management attributed much of the resource change to geological and mine-plan review and reclassification.
  • Completed the water-filtration and dry-stack tailings facilities. The company said the system is expected to enable reuse of about 80% of process water and support reclamation and tailings capacity.
  • Paid $3.4 million in dividends during 2021, or $0.0433 per share. Future dividends are discretionary and not assured.

Outlook, risks, and unusual items

  • 2022 guidance: Payable production of 24,000–26,000 gold ounces and 900,000–1,000,000 silver ounces; DDGM cash costs of $425–$475 per AuEq ounce; DDGM AISC of $950–$1,050 and consolidated AISC of $1,200–$1,300 per AuEq ounce. Planned investment: $13–$14 million DDGM sustaining capital, $8–$9 million Back Forty growth capital, $7–$8 million sustaining exploration, and $5–$6 million growth exploration. G&A guidance is $8.5–$9.0 million, excluding stock-based compensation and restructuring. These projections are forward-looking and depend on assumptions, including metal prices and operating conditions.
  • Back Forty commercial production was targeted for 2025; project financing was expected in 2023 or 2024, subject to feasibility work and permitting. A Michigan water permit had been revoked in January 2021 over a technicality; the company planned to submit permit applications after the feasibility study.
  • Acquired stream agreements carry material project obligations: Osisko holds rights to specified portions of future gold and silver production. A default, including failure to achieve commercial production by an agreed date, could trigger repayment obligations and potentially allow Osisko to enforce security over Back Forty assets. The filing records $42.6 million of stream liabilities at year-end; further gold-stream deposits are milestone- and condition-dependent.
  • A zinc zero-cost collar generated $3.0 million of realized and unrealized losses in 2021, including a $1.8 million year-end derivative liability. It covered 5,700 tonnes for 2022. The company remains exposed to gold and silver price movements and Mexican-peso costs; it reported that about 60% of costs were peso-denominated.
  • COVID-19 caused a 12-day voluntary suspension at DDGM in August 2021; COVID-specific costs were $0.2 million. Four lost-time incidents occurred during the year. Ground-support challenges also reduced throughput.
  • Two customers accounted for 94% of DDGM revenue. A local Ejido community’s 2020 injunction seeking cancellation of certain Mexican concessions remains under court review; the filing states DDGM was not performing specified work on the affected lands.
  • The auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Management identified a material weakness in review controls and documentation for accounting for and valuing acquired assets and liabilities in the Aquila transaction. Management concluded disclosure controls were effective.

Important facts for investors to verify

  • Whether DDGM can sustain planned production and cost levels given lower throughput, ground-support issues, and the 2022 guidance assumptions.
  • Updated Back Forty feasibility, permitting, financing, development timing, and the conditions and default provisions attached to the stream agreements and contingent consideration.
  • Progress in remediating the acquisition-accounting internal-control material weakness and any resulting accounting adjustments.
  • Changes in DDGM reserves and resources, including the implications of the 2021 reclassifications and depletion for mine life and future production.
  • Status and potential operational impact of the Mexican concession litigation, community relationships, water access, and customer concentration.
  • Actual cash requirements for capital, exploration, taxes, reclamation, dividends, and any contingent or stream-related obligations.