Gold Resource Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unless otherwise noted, financial amounts are in U.S. dollars; statements present amounts in thousands. The company’s principal producing operation was the Aguila Project in Oaxaca, Mexico, centered on the Arista underground mine.
Financial and operating performance
- Revenue: Net sales were $17.4 million, down 39% from $28.4 million in Q1 2015.
- Profit and margins: Mine gross profit fell to $3.5 million from $14.0 million; mine gross margin was 20%, versus 49%. Operating income was $0.8 million, compared with $9.6 million. Net income was $0.8 million, or $0.01 per share, versus $5.1 million, or $0.09 per share.
- Cash flow: Operating cash flow was $3.7 million, compared with $0.9 million. Investing used $5.5 million, mainly for Aguila mine development; financing used $0.7 million, including $0.3 million of dividends paid. Cash declined $2.5 million to $10.3 million.
- Liquidity and debt: Working capital was $17.8 million, versus $17.7 million at year-end 2015. Total current liabilities were $13.8 million. Capital lease obligations totaled $0.7 million; the filing identifies no other outstanding debt.
- Capital spending and costs: Capital expenditures were $5.7 million. Non-GAAP total cash cost after by-product credits was $667 per precious-metal gold-equivalent ounce sold, up from $416.
- Production and sales: The mill produced 6,463 ounces of gold and 434,142 ounces of silver; precious-metal gold-equivalent production was 11,669 ounces. Sales were 6,215 gold ounces and 378,794 silver ounces, or 10,757 gold-equivalent ounces.
Changes versus Q1 2015
- Sales and earnings declined substantially, primarily reflecting lower production and lower realized prices for silver and several base metals. Realized silver, copper and zinc prices decreased 14%, 25% and 14%, respectively; realized gold price was nearly unchanged.
- Gold and silver production decreased 23% and 45%, respectively, despite a 23% increase in tonnes milled. Lower grades, including processing 16,697 tonnes of low-grade open-pit stockpiled ore, weighed on output.
- Mine gross margin contracted as lower sales volumes and prices combined with higher depreciation and amortization ($2.8 million, versus $1.4 million).
- General and administrative expense decreased to $2.2 million from $2.7 million, and exploration expense to $0.5 million from $1.7 million, reflecting cost reductions and reduced exploration spending.
- Other income was $0.7 million, versus other expense of $0.5 million. The 2016 result included gains on investments and bullion; these gains are not necessarily recurring.
Outlook, risks and notable items
- Management maintained its 2016 production outlook of 26,000 ounces of gold and 1.9 million ounces of silver. It said future throughput depends on developing Arista sufficiently to supply the mill’s nominal 1,500-tonne-per-day capacity; Q1 throughput averaged 1,301 tonnes per operating day.
- Management believed liquidity and capital resources were adequate for operations and corporate activities for the foreseeable future. Mine-development and drilling spending is discretionary and may vary with available capital, results and market conditions.
- At Alta Gracia, access agreements and a mining permit were obtained, but a blasting permit was still pending. Small-scale mining later in 2016 was conditional on a decision to proceed. A Gold Mesa exploration drilling program began in April 2016.
- Key risks include gold and silver price volatility, production and grade variability, exploration results, Mexican political, regulatory and security conditions, foreign-exchange movements, and provisional concentrate-sale settlements. The company reported no commodity-price or currency hedges.
- The company reported that disclosure controls were effective. It transitioned to a new ERP system effective January 1, 2016 and said it monitored related IT controls. A Mexican tax examination covering 2011 and 2012 closed with no material adjustments. The board declared a $0.1 million dividend payable in May 2016.
Important facts for investors to verify
- Assess whether the production outlook remains achievable given Q1 grades, stockpile processing and the development needed to sustain higher mill throughput.
- Review the sustainability of cash generation against mine-development capital needs, dividends and the $10.3 million quarter-end cash balance.
- Examine the composition and recurrence of Q1 other income, including investment and bullion gains, and the effect of provisional sales settlements.
- Confirm the units and quantities shown for metals committed under forward sales contracts; the filing table labels several reported quantities as tonnes.
- Distinguish issued shares from shares outstanding: the balance sheet reports treasury shares, while the cover page reports 54,266,706 shares outstanding as of May 3, 2016.