Gold Resource Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance sheet compared with December 31, 2014. Unless stated otherwise, financial amounts below are U.S. dollars. The company’s primary producing operation was the Arista underground mine at the Aguila Project in Oaxaca, Mexico.
Financial and operating highlights
| Metric | Q1 2015 | Q1 2014 or prior period |
|---|---|---|
| Net sales | $28.4 million | $31.2 million; down 8.9% |
| Mine gross profit | $14.0 million | $16.2 million |
| Mine gross margin | 49.4% | 52.0% |
| Operating income | $9.6 million | $11.9 million |
| Net income | $5.1 million; $0.09 per basic and diluted share | $7.1 million; $0.13 per share |
| Operating cash flow | $0.9 million | $12.4 million |
| Capital expenditures | $4.9 million | $4.2 million |
| Cash and equivalents | $21.4 million | $27.5 million at December 31, 2014 |
| Working capital | $28.8 million, approximately $28.9 million as reported in MD&A | $29.3 million at December 31, 2014 |
| Total liabilities | $21.7 million | $21.6 million at December 31, 2014 |
Capital lease obligations totaled $2.0 million, including $1.5 million current and $0.4 million non-current. The filing reports no other conventional debt. Cash fell by $6.1 million, mainly from capital expenditures and $1.6 million of dividends, partly offset by operating cash generation. Operating cash flow was affected by a $6.0 million increase in accounts receivable and cash income-tax payments of $5.2 million.
Arista processed 92,359 tonnes, down 11.5%; production was 8,348 ounces of gold and 790,300 ounces of silver. Precious-metal gold-equivalent production was 19,347 ounces, down 18.5%, while sales were reported as 18,800 gold-equivalent ounces. Cash cost after by-product credits was $416 per ounce sold, compared with $422; this is a non-GAAP measure.
Changes and management commentary
- Lower realized metal prices and reduced production contributed to weaker sales and gross profit. Realized gold and silver prices were $1,203 per ounce and $16.74 per ounce, down 7.1% and 17.5%, respectively, from Q1 2014.
- Lower mill throughput was attributed primarily to mining narrower veins. Depreciation and amortization increased to $1.4 million from $0.7 million as the company capitalized property, plant and mine-development costs during 2014.
- General and administrative expense declined to $2.7 million from $3.0 million following cost reductions; exploration expense rose to $1.7 million from $1.3 million.
- Other expense was $0.5 million, versus other income of $0.5 million a year earlier, primarily reflecting unrealized losses on equity investments, partly offset by foreign-currency gains.
Outlook, risks and unusual items
- Management said liquidity and capital resources were adequate for operations and corporate activities for the foreseeable future. No specific financial or production guidance was provided.
- Exploration and development continued at Aguila, including Arista and Switchback; an exploration ramp was intended to access Switchback mineralized material by year-end. Drilling at Las Margaritas and Alta Gracia was planned for Q2 2015; initial Radar drilling began late in Q1. These plans are subject to exploration results and market conditions.
- Management cited exposure to gold and silver price volatility, Mexican peso movements, provisional concentrate pricing, equity prices and operating conditions in Mexico. The company had not entered commodity-price hedges and stated no near-term intention to do so.
- Mexican tax examinations covering 2011 and 2012 remained open, with no further information communicated by the authorities. Management reported no liability for uncertain tax positions.
- Disclosure controls and procedures were deemed ineffective at March 31, 2015 because of a material weakness in income-tax accounting controls, including tax-account reconciliation and review. Management planned remediation during 2015. The filing says prior-year errors were corrected and were not material.
- The securities class action dismissal was affirmed on appeal and the appeal period expired; a related shareholder derivative action was voluntarily dismissed and terminated in February 2015.
Important facts for investors to verify
- Reconcile the filing’s gold-equivalent sales figures: the operating table reports 18,800 ounces, while a footnote refers to 18,880 ounces.
- Monitor the income-tax control remediation and the open Mexican tax examinations, including any subsequent assessments or disclosures.
- Assess whether mine development can raise throughput toward the mill’s stated nominal capacity of 1,500 tonnes per day, given Q1 throughput of 1,026 tonnes per day.
- Review cash conversion, receivables and investment valuation changes; Q1 operating cash flow was substantially below net income and the prior-year quarter.
- Evaluate metal-price and currency sensitivity, the sustainability of dividends, and planned exploration and development spending against available liquidity.