Gold Resource Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed March 8, 2016. The company produces gold, silver, copper, lead and zinc concentrates and gold-silver doré at the Arista underground mine and Aguila mill in Oaxaca, Mexico. This is an annual filing; fourth-quarter figures are included where relevant.
Financial and operating results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $92.7 million | $115.4 million |
| Mine gross profit / margin | $30.3 million / 33% | $50.9 million / 44% |
| Operating income | $12.9 million | $31.6 million |
| Net income / diluted EPS | $3.1 million / $0.06 | $15.0 million / $0.28 |
| Operating cash flow | $20.2 million | $37.7 million |
| Capital expenditures | $26.7 million | $17.9 million |
| Cash and cash equivalents at year-end | $12.8 million | $27.5 million |
| Working capital at year-end | $17.7 million | $29.2 million |
- FY2015 production was 29,644 ounces of gold, 2.51 million ounces of silver, 1,310 tonnes of copper, 4,174 tonnes of lead and 13,900 tonnes of zinc. Precious-metal gold-equivalent production was 63,963 ounces, compared with 83,903 in 2014. Gold and silver production fell 17% and 24%, respectively.
- Average realized prices declined year over year: gold 8% to $1,156/oz; silver 14% to $15.82/oz; copper 23%, lead 18% and zinc 17%. Gold-equivalent ounces sold were 61,095; cash cost after by-product credits was $517 per ounce, up from $449.
- Fourth-quarter 2015 sales were $21.6 million, mine gross profit $4.9 million and operating income $2.0 million; the company reported a net loss of $2.3 million, or $0.03 per share. First-quarter net income was $5.1 million; the third quarter also recorded a loss ($0.5 million).
- Total assets were $106.5 million and total liabilities $17.7 million at year-end. Capital lease obligations were $0.8 million, all current; there was no material conventional long-term borrowing disclosed. Reclamation and remediation liabilities were $2.8 million.
Material changes versus prior period
- Sales declined 20% and net income fell approximately 80% from 2014. Management attributed the decline principally to weaker metal prices, lower silver sales and lower precious-metal grades as mining moved deeper at Arista.
- Mine gross profit margin contracted from 44% to 33%. Depreciation and amortization rose to $8.0 million from $4.3 million, in part because mine-development and property costs have been capitalized since the company became a production-stage enterprise in 2014.
- Operating cash flow decreased by $17.5 million. Investing cash outflow increased to $26.7 million, mainly for mine development and the third phase of the tailings facility. Cash fell by $14.7 million over the year.
- Year-end proven and probable reserves totaled 1.645 million tonnes and 258,500 precious-metal gold-equivalent ounces, versus 1.537 million tonnes and 356,100 equivalent ounces in 2014. The filing reports lower grades and metal content; reserves depend on stated price, cost and recovery assumptions.
- Measured and indicated mineralized material increased to 819,700 tonnes from 716,900 tonnes, including Switchback and Alta Gracia. Mineralized material is not a reserve and has no demonstrated economic viability.
Outlook, commentary and risks
- For 2016, management targeted 26,000 ounces of gold, 1.9 million ounces of silver, 1,100 tonnes of copper, 3,200 tonnes of lead and 12,900 tonnes of zinc, each subject to a plus or minus 5% range. Gold and silver targets were below 2015 production.
- Planned 2016 exploration spending was approximately $2.1 million in Oaxaca and $0.8 million in Nevada, compared with $7.2 million in 2015. The budget was reduced to conserve working capital. The company aimed to advance Switchback development and explore Gold Mesa, subject to permits and available funding.
- Management cited thermal-water inflows, heat and carbon dioxide as challenges that slowed underground development; pumping and ventilation capacity were upgraded. Additional geological, water, development and production risks remain. A phase-four tailings expansion was planned for 2017.
- The board cut the monthly dividend in December 2015 from $0.01 to one-sixth of a cent per share (approximately $0.02 annually), citing lower operating cash flow and the weak mining outlook. The company declared $6.1 million and paid $6.5 million in dividends during 2015. Future dividends are discretionary.
- Principal risks include dependence on the single producing Arista mine, volatile unhedged metal prices, falling grades and reserve replacement, Mexican political, permitting and community risks, peso-dollar movements, underground operating hazards, and reliance on two customers (Trafigura generated 85% of revenue; Asahi Refining 15%).
- A former contractor filed a lawsuit in Oaxaca in December 2015 alleging unpaid work; the company disputes the claim and recorded no liability. A Mexican tax examination covering 2011–2012 remained open. Reclamation cost estimates may be inadequate, and certain environmental or interruption risks may not be insured.
- The company disclosed corrections to prior-period tax accounts described as immaterial errors: 2014 deferred tax assets, tax payable, other assets and retained earnings were adjusted; the 2014 tax provision increased $1.2 million and the 2013 provision decreased $5.2 million. Management reported that the previously identified income-tax-controls material weakness was remediated. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether Arista can sustain planned production and control underground water, heat and ventilation conditions, and whether Switchback can be developed on schedule.
- Reserve changes, mine-plan assumptions and the sensitivity of reserve economics to metal prices, costs and recovery rates.
- Cash needs for mine development, tailings capacity and exploration relative to falling cash, working capital and operating cash flow.
- How the lower dividend policy, customer concentration and unhedged metal-price exposure affect future cash generation.
- Progress and potential consequences of the Mexican tax examination and contractor litigation, and the continuing effectiveness of remediated tax controls.