Gold Resource Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The company’s primary producing operation was the Aguila Project in Oaxaca, Mexico, including the Arista underground mine. Financial amounts below are U.S. dollars; unless noted, amounts are in millions.
Financial and operating performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $26.2 | $23.3 | $43.6 | $51.6 |
| Mine gross profit | $12.4 | $6.9 | $15.8 | $20.9 |
| Operating income | $10.1 | $1.6 | $10.9 | $11.2 |
| Net income | $5.6 | $0.8 | $6.4 | $5.9 |
| Diluted EPS | $0.10 | $0.01 | $0.12 | $0.11 |
| Mine gross margin | 47.3% | 29.8% | 36.3% | 40.6% |
| Operating margin | 38.5% | 7.1% | 24.9% | 21.7% |
Q2 production was 10,011 ounces of gold and 572,499 ounces of silver; sales were 8,197 gold ounces and 548,537 silver ounces. Precious-metal gold-equivalent ounces sold were 15,570. Q2 cash cost after by-product credits was $317 per equivalent ounce and all-in sustaining cost was $649 per ounce (both non-GAAP). First-half equivalent ounces sold were 26,362, with cash cost after credits of $459 and AISC of $916 per ounce.
For the six months, operating cash flow was $11.6 million, capital expenditures were $10.3 million, and cash increased $0.4 million to $13.3 million. Working capital was $24.6 million, up from $17.7 million at year-end 2015. Total assets were $107.4 million and total liabilities $12.3 million. The company paid off all capital leases during Q2 and reported no remaining capital lease obligations at June 30.
Changes versus comparable periods
- Q2 sales rose 13% and net income increased to $5.6 million from $0.8 million. Management attributed improved Q2 results to higher gold and base-metal production, stronger realized precious-metal prices, lower production costs, and a Mexican diesel fuel tax credit.
- First-half sales fell 16% and mine gross profit fell 24%, mainly due to lower silver production and weaker realized prices for silver and base metals. First-half net income nevertheless increased to $6.4 million from $5.9 million.
- First-half production was 16,474 ounces of gold, up 9%, and 1,006,640 ounces of silver, down 27%, year over year. Production costs, G&A, and exploration spending were lower; depreciation and amortization was higher.
Outlook, commentary, and risks
- Management maintained its 2016 production outlook of 26,000 gold ounces and 1.9 million silver ounces. The mill’s nominal capacity is 1,500 tonnes per day; sustained throughput depends on mine development, available working faces, grades, and dilution.
- At Alta Gracia, mining was contingent on receipt of a blasting permit; the company targeted delivery of mineralized material to its Aguila mill in Q4 2016. Exploration drilling at the Las Margaritas Trenes zone was targeted for later in 2016. Gold Mesa drilling confirmed and extended near-surface gold mineralization; further drilling was planned.
- Liquidity was considered adequate for operations and corporate activities for the foreseeable future. Development drilling and capital spending were discretionary and could vary with available capital, drilling results, and market conditions.
- Reported results included a $1.7 million fuel tax credit recorded as a receivable and reduction to production costs; the company said it expected to use the remaining credit during 2016. Q2 and first-half other income also benefited from currency and precious-metal bullion/equity investment valuation gains. Provisional concentrate invoices are marked to market through sales, creating exposure to metal-price movements before settlement.
- Key risks include gold, silver, and base-metal price volatility; production or exploration shortfalls; Mexican regulatory, political, currency, and security conditions; weather and ground movement; and the ability to maintain mine development and processing rates. The company had no commodity-price or foreign-currency hedges and stated near-term hedging was not intended.
Important facts for investors to verify
- Whether the 2016 production targets were achieved and whether Arista development supported the required ore grades and throughput.
- Actual realization and timing of the Mexican fuel tax credits, and their effect on reported production costs and taxes.
- Trends in silver output, base-metal prices and by-product credits, which materially affect revenue and per-ounce cost measures.
- Permit status and timing for Alta Gracia, and subsequent results from planned exploration at Trenes and Gold Mesa.
- Cash flow after sustaining and development capital spending, dividend decisions, and any changes to the company’s stated liquidity outlook.