Gold Resource Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter operating data. Results distinguish continuing Oaxaca operations from discontinued Nevada operations; the Fortitude Gold spin-off was completed on December 31, 2020.
Business context
After the spin-off, the Company’s principal operating business is the Don David Gold Mine in Oaxaca, Mexico, comprising the Arista and Aguila mines and the Mirador mine at Alta Gracia. It sells gold and silver doré and concentrates containing precious and base metals. The Company is substantially dependent on this single operating unit.
Key financial and operating metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Continuing-operations net sales | $90.7 million | $120.3 million |
| Mine gross profit / margin | $12.5 million / 14% | $28.6 million / 24% |
| Net income (loss) from continuing operations | $(6.3) million | $5.5 million |
| Net income, including discontinued operations | $4.4 million | $5.8 million |
| Cash from continuing operating activities | $21.2 million | $24.1 million |
| Cash and cash equivalents at year-end | $25.4 million | $10.2 million |
| Working capital from continuing operations | $30.8 million | $25.4 million |
| Continuing-operations capital expenditures | $12.8 million | $16.9 million |
Production was 20,473 gold ounces and 1.19 million silver ounces, down 30% and 31%, respectively. Gold-equivalent ounces sold were 30,508 versus 41,062. Total cash cost after by-product credits was $784 per gold-equivalent ounce sold; all-in sustaining cost (AISC) was $1,365, compared with $273 and $820, respectively, in 2019. These are non-GAAP measures.
Fourth-quarter production totaled 6,854 gold ounces and 276,902 silver ounces. Fourth-quarter cash cost after by-product credits was $647 per gold-equivalent ounce sold and AISC was $1,357.
The continuing-operations balance sheet reported $15.2 million of total liabilities, including $3.1 million of reclamation and remediation liabilities. No continuing-operations borrowings are separately listed on the balance sheet. Equipment purchase commitments were approximately $0.4 million.
Material changes versus the prior comparable period
- Sales fell 25%, primarily because of the COVID-19 shutdown and lower sales volumes. Treatment and refining charges increased 34% and reduced net sales.
- Mine gross profit declined to $12.5 million from $28.6 million; management attributed the reduction to lower sales and higher contracted base-metal treatment costs.
- Average realized gold and silver prices increased 27% and 29%, respectively, but did not offset lower volumes and higher treatment charges. Production costs declined 16%, while costs per tonne milled rose 3%.
- The Mexican government-mandated shutdown ran from April 1 through May 26, 2020. Management estimated approximately $14 million of lost gross sales based on average monthly production and sales.
- Total reported net income includes $10.7 million of discontinued-operation income from Nevada. The 2019 comparative included $0.3 million from discontinued operations; these amounts should not be confused with continuing results.
- Cash increased by $15.2 million year over year, supported by continuing operating cash flow and $25.8 million of net proceeds from at-the-market stock sales, partly offset by capital spending and spin-off-related cash outflows.
- Proven and probable reserves declined to 2.33 million tonnes from 2.83 million tonnes; estimated contained gold declined to 157,900 ounces from 179,300 ounces.
Outlook, management commentary, risks and unusual items
For 2021, management expects slightly higher metal production than in 2020 and targets improved operating margins. Guidance is 19,500–21,500 payable gold ounces and 1.7–1.8 million payable silver ounces; cash costs after by-product credits of $210–$225 and AISC of $800–$900 per gold-equivalent ounce. These cost measures are non-GAAP.
Planned 2021 capital investment is $22.0 million, including $6.2 million to complete the dry-stack filtration plant, $9.8 million for underground development and $1.9 million for a gold regrind project. Planned exploration spending is $7.2 million, and G&A guidance is $6.0–$6.5 million excluding stock-based compensation and restructuring. Dry-stack completion was expected by mid-2021. Management expected treatment charges to decrease to $525–$550 per processed tonne, subject to volatile market conditions.
- The Fortitude spin-off generated $1.3 million of restructuring expense, a $10 million payment to Fortitude, and changes in the Company’s leadership and board. A full valuation allowance was recorded against U.S. deferred tax assets; 2020 continuing-operations income tax expense was $5.6 million.
- Two customers accounted for 91% of 2020 revenue at the Mexican subsidiary. The Company does not hedge its metal-price exposure; approximately 40% of costs are incurred in Mexican pesos.
- Key risks include renewed COVID-19 disruption, metal-price and foreign-exchange volatility, reliance on one operating unit, reserve and grade uncertainty, water availability, permitting and community relations, environmental and reclamation obligations, and contractor and smelter/refiner dependence.
- A local Ejido community filed an injunction in February 2020 seeking cancellation of certain concession titles. A suspension order applies to specified work on the named concessions; the case had not reached a final ruling in the filing.
- A Don David Gold Mine employee suffered a fatal injury in December 2020. The filing also notes limited insurance coverage for some operational and environmental risks.
- The Company paid dividends of $0.04 per share in 2020 but states that future dividends are not guaranteed. It reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion and identified income taxes and uncertain tax positions as a critical audit matter.
Important facts for investors to verify
- Separate continuing-operation performance from the Nevada discontinued-operation results included in consolidated net income.
- Track payable production, grades, recoveries, treatment charges and progress on the dry-stack plant against 2021 guidance.
- Assess the reserve decline and whether exploration converts additional mineralization into economically mineable reserves.
- Review cash needs, future equity issuance and dilution, dividend decisions, reclamation costs and any tax consequences or continuing obligations related to the Fortitude spin-off.
- Monitor the Ejido injunction, community agreements, COVID-19 impacts, customer concentration and exposure to metal prices and the Mexican peso.