Business context and reporting period
Gold Resource Corporation filed this unaudited Form 10-Q for the quarter ended March 31, 2012. The company produces gold, silver and base-metal concentrates at its El Aguila Project in Oaxaca, Mexico, and began commercial production in July 2010. It remains classified as an exploration-stage company because it has not established SEC-defined proven or probable reserves.
Financial and operating performance
- Revenue: Metal-concentrate sales, net, were $40.6 million, up 259% from $11.3 million in Q1 2011. The company reported its highest quarterly revenue since inception.
- Profit and margins: Mine gross profit was $33.7 million, versus $8.8 million; gross margin rose to 83.0% from 78.4%. Operating income was $25.4 million, compared with $2.2 million. Net income was $16.1 million, or $0.30 basic and $0.29 diluted per share, versus $2.0 million, or $0.04 per share.
- Costs: Mine cost of sales increased to $6.9 million from $2.4 million. Total operating costs and expenses were $8.3 million, up 23.9%; exploration expense rose to $1.4 million from $0.5 million, while construction and development expense fell to $2.4 million from $3.1 million.
- Production: The company produced a record 30,528 gold-equivalent ounces, compared with 7,479 in Q1 2011. Management reported cash operating cost of $131 per gold-equivalent ounce and total cash operating cost, including royalties, of $191. These are non-GAAP measures.
- Cash flow: Operating activities provided $4.9 million, versus $3.6 million used in Q1 2011. Investing activities used $5.2 million, including $2.3 million of capital expenditures and $2.9 million of bullion purchases. Financing activities used $7.9 million, primarily for dividends. Cash and equivalents declined $8.0 million to $44.0 million.
- Liquidity and debt: Working capital was $69.3 million, up from $59.3 million at December 31, 2011. Total current assets were $93.1 million and current liabilities $23.8 million. The company reported no debt outstanding.
- Other balance-sheet items: Total assets were $125.1 million and total liabilities $26.3 million. Gold and silver bullion was carried at $5.6 million; inventories were $7.5 million.
Changes versus Q1 2011 and notable items
- Revenue and earnings increased substantially, reflecting more payable metal sold from the La Arista underground mine, higher-grade ore, improved recoveries, base-metal by-product sales and higher realized metal prices. The prior-year quarter included production from both La Arista and the El Aguila open pit.
- Other expense rose to $2.0 million from $0.1 million, mainly due to a $2.2 million currency exchange loss, compared with a $0.2 million loss in Q1 2011.
- Income-tax expense was $7.2 million, versus none in Q1 2011, primarily due to increased production and Mexican taxes. The company paid $17.3 million in income taxes during the quarter.
- Cash dividends paid were $7.9 million, compared with $4.8 million. In April 2012 the board raised the regular monthly dividend to $0.06 per share; management estimated quarterly dividends of approximately $9.5 million at the then-current share count. Future dividends remain subject to board review.
- Management expects 2012 production of 120,000–140,000 gold-equivalent ounces, without assurance it will reach the target. It planned continued La Arista development and exploration, with exploration activity expected to increase during the year.
Outlook, risks and contingencies
- Management expects ongoing underground mine construction and development. Because the company lacks proven or probable reserves, substantially all qualifying exploration and mine-development expenditures are expensed rather than capitalized, affecting reported profits and comparability with reserve-based mining companies.
- Commodity-price movements can materially affect revenue and project economics. The company had no commodity-price hedges; provisionally priced sales totaled $30.2 million at quarter-end, with an estimated $319,400 fair-value sensitivity for a 1% change in metal prices.
- Foreign-exchange exposure is significant: Mexican-peso movements affect costs and reported results. The filing identifies Mexican security conditions, operational and development risks, access to labor and supplies, and uncertain mineralization estimates among risks to plans and results.
- All Q1 2012 revenue and accounts receivable were attributable to one buyer, Consorcio Minero de Mexico Cormin Mex. The company believed it could find another buyer if necessary, but acknowledged an interruption could temporarily disrupt sales.
- Management stated that it did not believe there was sufficient positive evidence to conclude that certain federal, state and foreign deferred tax assets would be realized. No tax examinations were underway at quarter-end.
- The company held no formal feasibility study for its projects and warned that declining metal prices could require reassessing project feasibility. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether La Arista development and exploration can support the 120,000–140,000-ounce production target and sustained operating performance.
- Reserve status, feasibility work and the consequences of continuing to expense development costs.
- Metal-price, foreign-exchange and provisional-settlement exposures, including the concentration of sales with one buyer.
- Cash needs for mine development, exploration, taxes and dividends, and the board’s continued commitment to the $0.06 monthly dividend.
- The assumptions supporting deferred tax asset recoverability and future tax expense.
- Comparability of the company’s non-GAAP cash-cost measures with other miners’ measures.