Gold Resource Corporation — Q3 2017 Form 10-Q
Business context and reporting period. The unaudited filing covers the three and nine months ended September 30, 2017, compared with the same 2016 periods. Gold Resource operates the Aguila Project and develops the Mirador Mine in Oaxaca, Mexico, and is advancing the Isabella Pearl project and other properties in Nevada. Financial amounts below are in U.S. dollars unless noted.
Financial and operating performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $31.1 million | $21.4 million | $76.8 million | $65.0 million |
| Mine gross profit | $11.2 million | $5.4 million | $26.8 million | $21.2 million |
| Net income | $4.6 million | $1.6 million | $9.8 million | $8.0 million |
| Diluted earnings per share | $0.08 | $0.03 | $0.17 | $0.14 |
- Q3 mine gross margin was approximately 36%, compared with 25% a year earlier. Sales growth and higher gross profit were principally driven by stronger base-metal prices and volumes and lower treatment charges. Q3 realized copper, lead and zinc prices increased year over year; realized gold and silver prices declined.
- Q3 production was 6,465 ounces of gold and 392,153 ounces of silver; nine-month production was 18,908 ounces of gold and 1,217,713 ounces of silver. Nine-month gold-equivalent production fell to 35,630 ounces from 42,281, primarily because of lower average grades.
- The company reported non-GAAP cash cost after by-product credits of $2 per gold-equivalent ounce sold in Q3 and $181 for the first nine months, versus $623 and $511, respectively, in 2016. AISC was $639 per ounce in Q3 and $664 year to date, versus $757 and $765. The exceptionally low cash-cost figure reflects substantial base-metal by-product credits and should not be read as a stand-alone measure of total operating cost.
- Nine-month operating cash flow was $23.5 million, up from $17.5 million. Investing cash use was $20.6 million, mainly capital expenditures of $20.4 million; financing cash use was $0.9 million. Cash increased $1.7 million from year-end to $15.8 million.
- At September 30, working capital was $23.3 million, up from $20.3 million at December 31, 2016. Current assets were $36.1 million and current liabilities $12.8 million. Total liabilities were $17.4 million. Equipment financing added a $2.4 million loan balance, of which $0.6 million was current and $1.8 million long-term; the loan bears 4.48% interest.
Material changes versus the prior period
- Q3 sales increased 46% year over year; nine-month sales rose 18%. Q3 net income increased to $4.6 million from $1.6 million, while nine-month net income rose to $9.8 million from $8.0 million.
- Q3 gold production increased, but silver production declined; over nine months, both gold and silver production were lower. Base-metal grades and production were higher in Q3. Q3 mill throughput averaged 1,346 tonnes per operating day, up from 1,278.
- Nine-month exploration expense increased to $3.4 million from $2.0 million, primarily due to Isabella Pearl spending. Nine-month other expense shifted to $1.2 million from $1.2 million of other income in 2016, largely reflecting lower currency gains and the absence of investment-sale gains.
- Capital expenditures increased to $20.4 million from $12.6 million for the nine-month period. Property, plant and mine development, net, rose to $79.4 million from $70.1 million.
Outlook, risks and unusual items
- Management expected Q4 production to benefit from higher-grade Arista areas and expected Mirador output to improve as additional working faces are developed and the recently commissioned leach plant is optimized. The leach plant ran at about 48% of the targeted 150-tonne-per-day throughput in Q3; lower-than-planned throughput and lower silver grades reduced Mirador production. These are expectations, not assured outcomes.
- Isabella Pearl permitting continued. The company had Nevada environmental approvals and was awaiting Bureau of Land Management permits; its goal of advancing the project toward production is subject to permit timing and funding.
- Management stated liquidity and capital resources were adequate for the foreseeable future. The filing gives no specific revenue or earnings guidance.
- Key exposures include gold, silver and base-metal prices, Mexican peso movements, provisional pricing of concentrate sales, production and grade variability, permitting and regulatory delays, weather and ground movement, and potential difficulty raising equity capital.
- Outstanding cancellable equipment purchase contracts totaled $7.2 million; cancellation would require reimbursement of vendor costs incurred through cancellation. The company declared $0.9 million of dividends during the first nine months and declared an additional $0.1 million dividend in October, payable in November.
- A Q3 tax-basis adjustment for Isabella Pearl reduced property, plant and mine development by $4.2 million and increased deferred tax assets by the same amount. Early adoption of ASU 2016-16 reduced beginning retained earnings by $0.5 million. The company also recorded $2.6 million of Mexican fuel tax credits against production costs year to date.
Important facts for investors to verify
- Whether Q4 grades, production and Mirador throughput improved as management expected, and whether the 150-tonne-per-day target was achieved.
- The status and timing of remaining Isabella Pearl permits, project funding needs and expected development costs.
- The sustainability of revenue and margins given dependence on base-metal prices and unusually large by-product credits behind the reported $2 Q3 cash cost per ounce.
- How the $7.2 million equipment commitments, capital spending and new loan affect liquidity and future cash requirements.
- Any subsequent changes to production, commodity prices, Mexican peso exposure, provisional sales settlements or reclamation obligations.