Gold Resource Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Amounts are U.S. dollars unless noted. Gold Resource produces metal concentrates at the La Arista underground mine in Oaxaca, Mexico. The company states it has no SEC-defined proven or probable reserves and remains an exploration-stage company.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net concentrate sales | $26.7m | $30.7m | $69.0m | $67.4m |
| Mine gross profit | $11.1m | $17.9m | $37.2m | $47.4m |
| Mine gross margin | 41.6% | 58.3% | 53.9% | 70.3% |
| Operating income (loss) | $(0.8)m | $8.2m | $11.6m | $29.7m |
| Net income (loss) | $(1.4)m | $4.1m | $6.0m | $17.6m |
| Basic earnings (loss) per share | $(0.03) | $0.08 | $0.11 | $0.33 |
- Q2 gold-equivalent ounces sold rose 14.7% to 19,992, but sales fell 13.0%, principally because realized gold and silver prices declined. Six-month ounces sold increased 17.3% to 44,998 while sales rose only 2.4%.
- Realized Q2 gold and silver prices were $1,386/oz and $23/oz, down 13.5% and 14.8% year over year. Six-month realized prices were $1,530/oz and $27/oz, down 8.5% and 10.0%.
- Higher production costs, lower metal prices, and increased exploration and development spending pressured profitability. Total cash cost, a non-GAAP measure, increased to $645 per gold-equivalent ounce sold in Q2 from $497, and to $547 for six months from $352.
- Q2 production was 20,574 gold-equivalent ounces, up from 14,488. Six-month production was 42,999 ounces, compared with 44,467.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $30.4m at June 30, down from $35.8m at year-end 2012. Working capital was $40.7m, down from $46.0m.
- Six-month operating cash flow was $10.7m; investing cash outflow was $4.9m; financing cash outflow was $11.2m. Cash use included $15.9m of dividends and $5.1m in capital expenditures; equipment financing provided $4.5m.
- The company reported no conventional debt outstanding, but recorded capital lease obligations of $4.5m, including $1.4m current and $3.1m non-current. Leases carry 4.5%–5.5% interest and have three-year terms.
- Total assets were $107.4m and total liabilities $22.1m. Income tax receivable increased to $6.9m from $0.4m at year-end.
- The monthly dividend was reduced from $0.06 to $0.03 per share effective April 2013. Six-month dividends declared were $14.3m; the company targets distributions of approximately one-third of annual mine-site cash flow, subject to conditions.
Material changes, outlook and risks
- Production costs increased as mining advanced into deeper zones, with higher personnel, contractor, maintenance, security, safety, fuel and supply costs. Exploration expense rose to $6.1m for the half year; construction and development expense rose to $11.7m, principally due to the mill expansion.
- Management expected the lower year-over-year sales trend to continue at least through Q3 2013, based on July metal prices, and longer if prices did not recover.
- The mill expansion is intended to raise nominal processing capacity from 900 to 1,500 tonnes per day, with commissioning expected by year-end. Achieving that throughput also depends on mining sufficient material; management cautioned that the target is not assured. Mining from the Splay 5 zone was expected to begin in Q3, and mechanized stoping was expected to support higher production.
- In Q2 the company drilled 38 holes totaling 19,449 meters at El Aguila and reported a new mineralized discovery in the Switchback area. Exploration results, mineralized-material estimates and mine development timing remain uncertain.
- Gold and silver bullion impairment was $1.7m for the six months. Provisional concentrate sales are marked to market through earnings; related adjustments reduced sales by $4.4m in the half year. At June 30, provisionally priced sales had a reported fair value of approximately $69.4m; a 1% change in metal prices would change total fair value by approximately $0.8m.
- Principal risks include volatile metal prices, operating-cost increases, mine-development execution, foreign-exchange movements, Mexican political and security conditions, and the lack of reserves or formal feasibility studies. The company does not hedge gold or silver prices.
- A securities class action was dismissed with prejudice on July 15, 2013, but the plaintiff gave notice of intent to appeal. A related shareholder derivative action was stayed; the company said it could not estimate potential loss and is obligated to indemnify officers and directors for litigation costs.
- Management reported disclosure controls were effective as of June 30, 2013. The filing provides no formal earnings or production guidance.
Important facts for investors to verify
- Whether metal prices and provisional invoice settlements support the reported revenue and outlook, including the sensitivity of unsettled concentrate sales.
- Whether La Arista development can sustain sufficient ore supply and whether the mill expansion reaches its targeted capacity and timing.
- Whether higher mine costs and cash costs per ounce persist, and how they affect margins and cash available for dividends and investment.
- The sufficiency of liquidity after dividends, development spending and equipment lease payments; also verify the terms and availability of additional equipment financing.
- Reserve status and exploration results: the company expressly states it has no SEC-defined reserves, and mine life and profitability are not assured.
- Developments in the securities-litigation appeal and derivative action, and any associated defense or indemnification costs.