Gold Resource Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 8, 2018. Gold Resource is a gold, silver and base-metal producer whose operating revenue came entirely from its Oaxaca, Mexico mining unit. Arista was the principal producing mine; Mirador began mining in 2017. Nevada properties remained in exploration, engineering and permitting stages.
Financial and operating results
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Net sales | $110.2 million | $83.2 million | Up 32%, mainly from higher base-metal prices and sales volumes and lower treatment charges; precious-metal sales were lower. |
| Mine gross profit | $42.1 million; 38% margin | $22.4 million; 27% margin | Improved with higher sales, base-metal prices and lower treatment and refining costs. |
| Income before taxes | $28.5 million | $9.1 million | Substantially higher. |
| Income tax expense | $24.3 million | $4.8 million | Included estimated Tax Act charges and other tax effects. |
| Net income | $4.2 million; $0.07 per share | $4.4 million; $0.08 per share | Down slightly despite improved pretax income. |
| Operating cash flow | $35.6 million | $17.9 million | Up $17.7 million. |
| Capital expenditures, cash basis | $25.4 million | $15.1 million | Higher mine development and Nevada property investment. |
| Cash and cash equivalents | $22.4 million | $14.2 million | Up $8.2 million. |
| Working capital | $27.5 million | $20.3 million | Up $7.2 million. |
Fourth-quarter sales were $33.3 million and mine gross profit was $15.3 million, but the company recorded a $5.7 million net loss, or $0.11 per share. The filing attributes the significant full-year tax adjustments to the fourth quarter.
Year-end total assets were $132.9 million and total liabilities $20.8 million. Loan and capital-lease principal totaled approximately $3.8 million; the contractual-obligations table also lists $3.8 million of equipment purchase commitments. The filing reports no off-balance-sheet arrangements. Management considered liquidity adequate for foreseeable operations, but said Isabella Pearl development could require cash, equity, debt or a combination.
Production and year-over-year developments
- Gold production was 28,117 ounces, up 2%; silver production was 1.77 million ounces, down 5%. Total precious-metal gold-equivalent production was 52,050 ounces versus 53,023 ounces.
- Base-metal production increased: copper to 1,141 tonnes, lead to 5,365 tonnes and zinc to 16,301 tonnes. Higher realized prices were significant to the sales and cost improvement.
- Management-reported non-GAAP total cash cost after by-product credits was $75 per precious-metal gold-equivalent ounce sold, versus $548 in 2016; all-in sustaining cost was $590 versus $845. These measures are not GAAP and are strongly affected by base-metal by-product credits.
- Mirador delivered 6,350 tonnes of ore in 2017. Its leach circuit was commissioned in the fourth quarter, but operating challenges constrained monthly throughput to just over 1,000 tonnes.
- Proven and probable reserves increased to 2.50 million tonnes from 1.89 million tonnes; reported precious-metal gold-equivalent reserves decreased to 291,000 ounces from 308,500 ounces. Arista’s reported gold grade and gold-equivalent ounces fell, while Mirador reserves expanded.
- One customer accounted for 95% of Oaxaca revenue. The company paid $0.02 per share in dividends, totaling $1.1 million, and cautioned that future dividends are discretionary.
Outlook, risks and unusual items
- For 2018, management targeted 27,000 gold ounces and 1.70 million silver ounces, each with a plus-or-minus 10% range, and expected significant copper, lead and zinc production. Plans include beginning Switchback stoping, increasing Mirador output and continuing Arista mining.
- Management targeted Mirador throughput of 100 tonnes per day, contingent on mine development and consistent ore extraction meeting grade and dilution parameters. Switchback bulk-tonnage mining was planned to begin in a lower-grade area before mining upward toward higher-grade zones.
- Management anticipated approximately $4.2 million in 2018 Oaxaca exploration and $2.0 million in Nevada exploration, expected to be funded internally.
- Isabella Pearl remained subject to BLM permit approval and funding; the company was advancing engineering and permitting and targeted production as early as practicable. Management did not assure financing would be available on acceptable terms.
- The Tax Act prompted estimated 2017 charges of $4.6 million for the transition tax and $2.7 million from the U.S. federal rate reduction. The company said foreign tax credits meant no current cash payment was expected and no future cash implication was expected, but estimates could change during the 2018 measurement period.
- Key risks include metal-price and Mexican-peso volatility; dependence on a small number of mines and a highly concentrated customer base; reserve, grade, recovery and cost uncertainty; permitting, community and Ejido arrangements; underground mining and environmental hazards; and potential need for additional capital. The company does not hedge metal-price exposure.
- No legal proceedings were reported at year-end. Management and the auditor concluded internal control over financial reporting was effective; the auditor gave an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether the unusually high 2017 tax expense and Tax Act estimates are finalized, and how they affect future tax expense and cash taxes.
- Whether Mirador can achieve planned throughput and Switchback can deliver expected grades, tonnage and cost performance.
- Current BLM permitting status, capital requirements and financing plan for Isabella Pearl, including any effects on liquidity or shareholder dilution.
- Reserve reconciliation and assumptions, particularly the decrease in Arista grade and total gold-equivalent reserves despite higher total reserve tonnage.
- Continuity of the principal customer relationship and alternative sales arrangements, given the 95% customer concentration.
- Cash generation and capital needs relative to debt, equipment commitments, exploration plans and the discretionary dividend.