Gold Resource Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed April 1, 2014. This is an annual report, with unaudited fourth-quarter results also disclosed. The company produces gold, silver and base-metal concentrates at its El Aguila Project in Oaxaca, Mexico, principally from the La Arista underground mine. It reports as an exploration-stage company under SEC Industry Guide 7 because it had no proven or probable reserves as of year-end.
Financial and operating results
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net concentrate sales | $125.8 million | $131.8 million |
| Mine gross profit / margin | $58.3 million / 46.3% | $87.8 million / 66.6% |
| Operating income | $10.3 million | $49.7 million |
| Net income | $0.085 million; $0.00 per basic share | $33.7 million; $0.64 per basic share |
| Cash from operating activities | $6.6 million | $31.1 million |
| Cash and cash equivalents at year-end | $15.0 million | $35.8 million |
- FY2013 mine production was 84,835 precious-metal gold-equivalent ounces, down 6.2%; sales were 82,935 equivalent ounces, up 14.6%. The filing attributes lower sales revenue despite higher ounces sold primarily to lower realized metal prices. Realized gold and silver prices fell 17.2% and 22.6%, respectively.
- Cash declined $20.8 million during 2013. The company reported $25.5 million of dividends paid, $6.7 million of capital expenditures and $4.5 million of equipment-financing proceeds. It reported no off-balance-sheet arrangements.
- Year-end current assets were $45.0 million and current liabilities $11.4 million on the audited balance sheet. Long-term obligations were $2.9 million, consisting principally of reclamation liabilities; capital lease obligations totaled $3.9 million, including $1.5 million current. The filing states there was no debt outstanding, while also disclosing these capital leases.
- Fourth-quarter 2013 sales were $27.4 million, mine gross profit $9.7 million, operating income $0.6 million and net loss $4.1 million. Fourth-quarter 2012 net income was $8.7 million.
Changes versus the prior year
- Net income fell by $33.6 million, while mine gross profit declined $29.5 million. Lower precious-metal prices, higher production costs and increased general, exploration, and mine-construction expenses contributed to the deterioration.
- Production costs increased to $65.0 million from $42.6 million. Total costs and expenses rose 25.7% to $47.9 million; mill expansion and underground mine development were significant cost factors.
- The company completed a mill expansion in Q4, spending approximately $7.5 million during 2013. The flotation circuit’s nominal capacity increased to 1,500 tonnes per day, but actual 2013 throughput averaged below that level.
- Cash operating flow fell to $6.6 million from $31.1 million, and cash and cash equivalents declined by $20.8 million.
Outlook, risks and unusual items
- For 2014, management targeted mill production of 85,000–100,000 precious-metal gold-equivalent ounces, assuming a 63:1 silver-to-gold ratio. Reaching expanded mill capacity depends on advancing the underground mine and securing sufficient mine feed; the filing cautions the targeted rate may not be achieved or sustained.
- Planned 2014 exploration spending was approximately $4.7 million at El Aguila, plus budgets of $750,000 at Las Margaritas, $500,000 at Alta Gracia and $150,000 for El Chamizo/regional exploration. Management expected funding from working capital.
- Mexican tax reforms effective January 1, 2014 retained a 30% corporate tax rate and introduced a 7.5% mining royalty on defined net profits, a 0.5% royalty on gross gold, silver and platinum revenue, and a 10% dividend withholding tax subject to treaty rates. The company estimated 2014 mining royalty tax/fee liability of $4.0–$5.0 million, excluding the concession-holder royalty.
- The monthly dividend was reduced from $0.06 to $0.03 per share in April 2013 and to $0.01 in December. Future dividends remain discretionary. The report’s dividend disclosures are not fully consistent: it lists $0.43 per share declared in 2013, while one MD&A passage states $0.48 per share distributed.
- Key risks include dependence on one producing mine, no proven or probable reserves or completed feasibility study, metal-price and peso exposure, underground mining and ramp-up risks, and reliance on a single concentrate buyer. The company disclosed 100% of 2013 concentrate sales to Consorcio Minero de Mexico, while a financial-statement note describes sales to two Trafigura Group subsidiaries.
- KPMG gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Material weaknesses involved income-tax and cash-disbursement controls and oversight of external service providers; related preliminary deferred-tax and tax-provision misstatements were corrected before filing.
- A securities class action was dismissed with prejudice, but the plaintiff appealed. A related shareholder derivative case remained stayed; the company said it could not estimate potential loss. The filing also recorded a $1.7 million impairment of gold and silver bullion in 2013.
Important facts for investors to verify
- Reconcile the reported working-capital figures: MD&A states $30.8 million and current assets of $42.2 million, whereas the audited balance sheet reports current assets of $45.0 million and current liabilities of $11.4 million.
- Verify 2013 dividend amounts and timing, including the $0.43-per-share declared figure, the separate $0.48-per-share passage, and cash dividends paid of $25.5 million.
- Confirm the concentrate-buyer concentration and contractual terms, given the differing disclosures about Consorcio and two Trafigura subsidiaries.
- Assess the path to a Guide 7-compliant reserve estimate and feasibility work, and whether mine development can supply the expanded mill at targeted throughput.
- Track remediation of the reported internal-control material weaknesses and the status and potential cost of the pending litigation.
- Review the actual effect of Mexico’s new mining royalties and tax rules on cash flow, liquidity, and dividend capacity.