Gold Resource Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; filed August 9, 2012. Amounts below are U.S. dollars unless noted. Interim financial statements are unaudited.
Business context
The company produces gold, silver, copper, lead and zinc concentrates at the La Arista underground mine within its El Aguila Project in Oaxaca, Mexico. It also explores in Mexico and remains an SEC-defined exploration-stage company because it has not demonstrated proven or probable reserves, despite commercial production.
Financial and operating highlights
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net concentrate sales | $30.0 million | $20.7 million | $70.6 million | $31.9 million |
| Mine gross profit | $17.2 million | $15.4 million | $50.5 million | $22.5 million |
| Mine gross margin | 57.4% | 74.4% | 71.5% | 70.4% |
| Net income | $3.6 million | $3.1 million | $19.7 million | $5.2 million |
| Diluted earnings per share | $0.06 | $0.06 | $0.35 | $0.09 |
| Gold-equivalent ounces sold | 17,211 | 13,097 | 39,780 | 18,151 |
| Total cash cost per gold-equivalent ounce sold | $509 | $303 | $347 | $258 |
Q2 operating cash cost is a company-defined non-GAAP measure that includes royalties; the filing cautions it may not be comparable with other companies’ measures.
- Cash flow: Six-month operating cash flow was $16.5 million, versus $8.6 million in 2011. Investing cash use was $6.3 million, including bullion purchases and capital expenditures; financing cash use was $17.5 million, principally dividends. Cash declined $7.2 million to $44.8 million.
- Liquidity and debt: Working capital was $63.8 million, up from $59.3 million at year-end 2011. Total liabilities were $14.5 million, including a $2.4 million asset-retirement obligation; the company reported no debt outstanding.
- Balance sheet: Total assets were $108.4 million and shareholders’ equity was $93.8 million at June 30, 2012. Gold and silver bullion totaled $5.5 million at fair value.
Changes versus the prior period
- Revenue increased 45% in Q2 and 121% for the first half, reflecting greater payable metal sales following La Arista’s ramp-up and higher realized prices. Higher operating costs and lower-than-expected production reduced Q2 mine gross margin to 57.4% from 74.4%.
- Q2 production was affected by underground power, ventilation and water-management work, as well as lower-grade mining and more diluted development ore. Management said this limited preparation and mining of higher-grade stopes.
- Six-month general and administrative costs rose to $6.0 million from $3.0 million, and exploration expense rose to $3.6 million from $1.5 million. Construction and development expense declined to $8.1 million from $9.1 million.
- Income-tax expense was $11.8 million for the first half, compared with $1.8 million in the 2011 period. The 2012 expense reflects Mexican operating income and planned partial repatriation of Mexican earnings, which also led the company to accrue U.S. tax on the amount repatriated.
- Q2 2011 included a $1.8 million after-tax flood loss; no comparable extraordinary loss was recorded in Q2 2012.
Outlook, risks and unusual items
- Production outlook: Management revised its 2012 target to annual mill production of 100,000–120,000 gold-equivalent ounces, assuming a 53:1 gold-to-silver price ratio. The company cautioned there is no assurance it will meet the target.
- Liquidity and distributions: Management expected operating cash flow to fund operating needs, capital spending and planned distributions for at least 12 months, and did not anticipate external financing during that period. The company targets annual distributions of about one-third of mine-site operating cash flow, but the board may change or suspend dividends. The monthly dividend was increased to $0.06 per share; management estimated approximately $9.5 million per quarter at the then-current share count.
- Development and reserve risk: Development and exploration spending is expensed because the company has no SEC-defined proven or probable reserves. Management expects to remain in the exploration stage for the foreseeable future; further underground development is expected.
- Concentration and market risks: All Q2 and first-half 2012 revenue and receivables came from one customer, Consorcio, although management believed another buyer could be found if needed. Metal prices, Mexican peso exchange rates, production, mine development, power and water availability, and security conditions in Mexico could affect results. The company reported no commodity or currency hedges.
- Provisional sales exposure: At June 30, provisionally priced concentrate sales had a fair value of approximately $30.8 million; a 1% move in each metal price would change aggregate fair value by approximately $332,928.
- Taxes and bullion: The company estimated a $17.5 million taxable dividend from Mexican operations and reported a 55.9% annualized effective tax rate associated with its changed repatriation plans. It purchased $4.2 million of bullion in the first half; bullion investments were exposed to market-price changes.
- Contingency: The company’s claim for insurance recovery of losses from the April 2011 flood remained unresolved; the amount, if any, was unknown.
- Subsequent events: After quarter-end, the company repurchased 82,740 shares for $1.5 million and declared a $0.06-per-share monthly dividend payable August 23, 2012.
Important facts for investors to verify
- Whether mine development and infrastructure work supports the revised 100,000–120,000 AuEq production target, and how production and cash costs progress.
- The basis and comparability of the non-GAAP cash-cost measure, particularly the Q2 increase to $509 per AuEq ounce.
- Reserve status and the assumptions underlying the company’s continued exploration-stage accounting and expense treatment of development costs.
- Customer concentration, current concentrate sales terms, and exposure to provisional settlement metal prices.
- The final tax and cash consequences of Mexican earnings repatriation, and the sustainability and discretion of dividend payments.
- Any recovery from the 2011 flood insurance claim and the adequacy of reclamation and closure estimates.