Gold Resource Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; balance-sheet comparisons are with December 31, 2014. Unless otherwise stated, financial amounts below are U.S. dollars in millions. The company’s principal producing operation was the Aguila Project in Oaxaca, Mexico, including the Arista underground mine and mill.
Financial results
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $23.3 | $33.7 | $51.6 | $64.8 |
| Mine gross profit / margin | $6.9 / 30% | $17.8 / 53% | $20.9 / 41% | $34.0 / 52% |
| Operating income | $1.6 | $14.0 | $11.2 | $25.9 |
| Net income | $0.8 | $7.8 | $5.9 | $14.9 |
| Basic and diluted EPS | $0.01 | $0.14 | $0.11 | $0.28 basic; $0.27 diluted |
- First-half operating cash flow was $9.5 million, down from $27.8 million. Capital expenditures were $11.9 million versus $7.4 million; cash used in investing activities totaled $11.9 million. Dividends and capital-lease repayments contributed to $4.0 million of financing cash outflows.
- Cash and equivalents were $21.0 million at June 30, down from $27.5 million at year-end. Working capital was $25.2 million, down from $29.3 million.
- Total liabilities were $18.1 million, including $1.6 million of capital-lease obligations and $2.8 million of reclamation and remediation liabilities. The filing reports no other conventional borrowing; management described interest-rate exposure as insignificant.
- First-half cash cost after by-product credits was $469 per precious-metal gold-equivalent ounce sold, compared with $430 in 2014; Q2 was $533 versus $438. These are non-GAAP measures and may not be comparable across companies.
Operating performance and changes
- Q2 gold-equivalent production fell 39% to 14,858 ounces; first-half production fell 29% to 34,204 ounces. Q2 gold and silver output decreased 33% and 38%, respectively.
- Management attributed weaker production and sales principally to slower mine development, water-inflow management difficulties that led to mining lower-grade ore outside the 2015 plan, and a protest and unsanctioned work stoppage involving about one-third of unionized workers. The company increased primary pump-station capacity.
- Lower production and realized metal prices reduced sales: Q2 sales declined 31% and first-half sales declined 20%. Q2 realized gold and silver prices were $1,201/oz and $16.70/oz, down 6% and 12% year over year. Higher depreciation and amortization also weighed on mine profit.
- Exploration expense increased to $2.9 million in Q2 and $4.6 million in the first half, reflecting activity at Las Margaritas, Alta Gracia and Radar. Exploration continued at Aguila, including Switchback and Santiago. Alta Gracia permitting and community mining agreements were in progress.
Outlook, risks and unusual items
- No specific production, earnings or financial guidance is provided. Management said liquidity and capital resources were adequate for foreseeable operations. Development and exploration spending are discretionary and may change with available capital, drilling results and market conditions.
- The company planned to advance the Switchback exploration ramp with the goal of accessing previously delineated mineralized material by year-end. Mill capacity is nominally 1,500 tonnes per day, but achieving it depends on consistent mine development and ore availability.
- Management declared a further $0.5 million dividend payable in August 2015. It cautioned that dividends may vary or be discontinued at management’s discretion.
- Commodity-price declines, peso exchange-rate movements, provisional concentrate pricing, Mexican country and regulatory risks, access to labor, supplies, power and water, geological uncertainty, and protests or work stoppages could affect results. The company had not hedged gold or silver prices and stated no near-term intention to do so.
- A routine Mexican tax examination covering 2011 and 2012 was ongoing; the company said it had received no further information from tax authorities. The filing reported no liability for uncertain tax positions.
- Disclosure controls were deemed ineffective because of a material weakness in income-tax accounting controls, including tax-account reconciliation and management review. Management was implementing remediation and intended full implementation during 2015. Prior related errors were described as immaterial and corrected.
- Other notable items included a $1.5 million first-half unrealized investment loss, a $0.1 million bullion write-down, and $1.6 million of deferred tax expense. These non-cash or tax-related items affected reported results; the income statement’s other expense was $1.0 million for the first half.
Important facts for investors to verify
- Whether mine development and water management improve sufficiently to restore planned grades, production and access to stopes.
- Whether labor relations remain stable after the reported protest and work stoppage, and whether the company achieves consistent mill feed.
- Progress and spending on mine development, the tailings facility, Switchback, and other exploration projects, relative to operating cash generation.
- Remediation and subsequent testing of the income-tax control weakness, as well as the outcome of the Mexican tax examination.
- Cash and working-capital trends, capital-lease payments, dividend decisions, and exposure to metal prices, provisional settlements and currency movements.