Gold Resource Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Dollar amounts are U.S. dollars. The company produces metal concentrates at the La Arista underground mine in Oaxaca, Mexico, and remains classified as an exploration-stage company because it has not demonstrated SEC-defined proven or probable reserves.
Financial and operating performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net concentrate sales | $42.3 million | $36.7 million |
| Mine gross profit | $24.9 million | $27.9 million |
| Operating income | $12.3 million | $21.5 million |
| Net income | $7.4 million; $0.14 basic EPS, $0.13 diluted | $13.5 million; $0.26 basic EPS, $0.24 diluted |
| Operating cash flow | $6.2 million | $4.4 million |
| Capital expenditures | $3.7 million | $1.6 million |
Mine gross margin declined to approximately 59% from 76%; net margin was approximately 17% versus 37%. Gold-equivalent mill production fell 26% to 22,330 ounces, while ounces sold rose 19% to 24,972, reflecting inventory and settlement timing. Total cash cost, a company-defined non-GAAP measure, increased to $515 per gold-equivalent ounce sold from $311. Gold and silver average realized prices declined 3.3% and 6.1%, respectively.
At March 31, cash and equivalents were $29.0 million, down $6.8 million from year-end; working capital was $42.6 million, down $3.4 million. Current assets were $58.8 million and current liabilities $16.2 million. The company reported no debt. Dividends paid were $9.5 million; operating cash flow less investing cash flow did not cover dividends during the quarter.
Changes and management commentary
- Sales increased 15%, principally because more concentrate from year-end inventory was sold. However, higher mine costs and lower production reduced gross profit and net income.
- Lower grades and recoveries contributed to reduced production. Management attributed higher costs to deeper mining and increased personnel, contractor, repair, maintenance, security, safety, fuel, and supply costs.
- General and administrative expense rose to $4.4 million from $2.6 million; exploration expense to $3.3 million from $1.4 million; and construction and development expense to $4.8 million from $2.4 million.
- The company spent $3.7 million on capital expenditures and $0.5 million on gold bullion purchases. It held $5.5 million of gold and silver bullion at quarter-end.
Outlook, risks, and unusual items
- The mill expansion is intended to raise nominal processing capacity from 900 to 1,500 tonnes per day; commissioning was expected in Q3 2013. Achieving that rate depends on mining sufficient ore, and management cautioned there is no assurance it can be achieved or sustained. Management expects the expansion to support higher mining and processing rates in 2014 and later years.
- On April 29, 2013, the company reduced its monthly dividend from $0.06 to $0.03 per share, citing higher expected 2013 spending and the sharp decline in gold and silver prices in April. Future dividends are not assured.
- Management estimated 2013 royalty payments of $6–$7 million, subject to production, metal prices, and settlement timing. Exploration spending is discretionary.
- Q1 sales included a $2.3 million downward mark-to-market adjustment on provisionally priced concentrate invoices, partly offset by a $0.5 million increase from final invoice settlements. A 1% change in metal prices would change the fair value of outstanding provisional sales by approximately $0.4 million.
- Key risks include commodity-price and foreign-exchange volatility, mine-development and grade risks, Mexico operating and country risks, and dependence on access to labor, equipment, materials, power, and water. The company had no commodity-price hedges and no debt.
- The company and certain officers face a consolidated securities class action relating to production targets and mine operations; a related derivative action is stayed. The company says it intends to defend the claims; it could not estimate the derivative action’s potential loss. Management reported disclosure controls effective as of quarter-end.
Important facts for investors to verify
- Whether La Arista grades, recoveries, development, and mine supply can support the planned 1,500-tonne-per-day rate and expansion timetable.
- Whether higher production and sales can offset rising cash costs, lower metal prices, and continued development and exploration spending.
- Cash generation, working capital, and capital requirements after the dividend reduction, including actual dividend policy and payments.
- Final settlements and subsequent metal-price changes on provisional concentrate sales, and the effect on reported revenue and receivables.
- Developments in the litigation and any resulting defense costs, indemnification obligations, or potential losses.