Gold Resource Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Comparisons are with Q1 2018 unless stated otherwise. Amounts are U.S. dollars; financial statement figures are in millions unless indicated.
Business context and operating update
The company operates the Oaxaca Mining Unit in Mexico and is developing the Isabella Pearl project in Nevada. Oaxaca generated all reported revenue in the quarter. Isabella Pearl construction continued; by quarter-end the company had begun circulating leach solution on three heap-leach panels. It reported that it shipped loaded carbon after quarter-end and sold its first Isabella Pearl gold.
Financial and operating metrics
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Net sales | $26.6 million | $32.2 million |
| Mine gross profit | $5.4 million; 20.5% of sales | $12.9 million; 40.2% of sales |
| Net income | $0.9 million; diluted EPS $0.01 | $5.5 million; diluted EPS $0.09 |
| Operating cash flow | $(0.6) million | $14.0 million |
| Capital expenditures, cash basis | $8.8 million | $7.3 million |
| Cash and cash equivalents | $8.5 million | $7.8 million at Dec. 31, 2018 |
| Working capital | $10.5 million | $13.5 million at Dec. 31, 2018 |
| Total assets / liabilities | $181.2 million / $42.0 million | $150.3 million / $23.1 million at Dec. 31, 2018 |
Current assets were $41.7 million and current liabilities $31.2 million (current ratio approximately 1.34). Equipment loans totaled $2.3 million; finance lease liabilities were $1.1 million and operating lease liabilities $12.7 million. Operating lease liabilities were recognized upon adoption of the new lease standard, which increased reported assets and liabilities but did not materially affect earnings or cash flows.
Oaxaca produced 6,538 ounces of gold and 364,653 ounces of silver, versus 6,647 and 425,884 ounces, respectively. Precious-metal gold-equivalent production was 10,825 ounces versus 11,909; gold-equivalent ounces sold were 7,911 versus 10,275. Management reported total cash cost after by-product credits of $340 per ounce sold, versus a $316 per-ounce credit in Q1 2018, and all-in sustaining cost of $834 versus $347. These are non-GAAP measures and may not be comparable across companies.
Material changes and drivers
- Sales fell 17%, primarily due to higher concentrate treatment charges, lower precious-metal sales volumes and lower realized base-metal prices, partly offset by higher base-metal sales volumes.
- Mine gross profit declined 58%; management cited lower sales, higher treatment charges and increased production costs.
- Net income decreased to $0.9 million from $5.5 million. Income tax expense was $1.1 million versus $3.6 million, broadly reflecting lower pretax income.
- Operating cash flow fell by $14.6 million year over year, reflecting lower net income and working-capital movements, including inventory growth. Inventories increased to $20.5 million from $14.3 million, with the filing identifying a $4.9 million increase at Isabella Pearl.
- Financing cash flow included $10.8 million net proceeds from sales of 2.54 million shares under the at-the-market (ATM) program. After quarter-end through May 6, a further 1.13 million shares generated $4.1 million net proceeds.
- Mexico base-metal realized prices declined year over year: copper 12%, lead 20% and zinc 25%, as reported by the company.
Outlook, risks and contingencies
No formal production or earnings guidance is provided in the supplied filing text. Management said it believes liquidity and capital resources are adequate for the foreseeable future. Isabella Pearl’s ADR plant completion was scheduled for Q2 2019; initial gold processing had begun, and the first gold sale was reported after quarter-end.
Key exposures include gold, silver and base-metal price changes; Mexican peso fluctuations; provisional pricing adjustments on concentrate sales; exploration and production outcomes; permitting and political or regulatory risks; weather and ground movement; and the ability to meet operating and revenue targets. The company stated it had not entered into commodity-price or foreign-exchange hedges. Provisional-price derivatives contributed a net $1.8 million gain to Q1 sales, so reported revenue is exposed to final settlement prices.
Contractual obligations included $15.5 million of remaining contract-mining operational payments, excluding embedded lease payments, and approximately $2.5 million of equipment purchase commitments. The company recorded a $0.46 million increase in asset-retirement obligation estimate during the quarter; total reclamation and remediation liabilities were $3.8 million.
Investor verification priorities
- Track Isabella Pearl ramp-up, ADR plant completion, recovery rates, production, and whether it generates sufficient cash to offset development spending.
- Verify the drivers and sustainability of the sharp decline in mine margin and net income, including treatment charges, ore grades, metal prices, and by-product credits.
- Monitor operating cash flow, inventory build, capital spending, working capital and liquidity needs; assess continued reliance on ATM equity issuance and resulting dilution.
- Review final settlement of provisionally priced concentrate sales and exposure to commodity-price changes.
- Check the timing and cash impact of contract-mining, lease, equipment-purchase and reclamation obligations.