Business context and reporting period
US Gold Corporation (the registrant identified in this filing) filed this unaudited Form 10-Q for the quarter ended September 30, 2011. It was a gold and silver exploration and development company, with major activities in Nevada and Mexico, and was not yet generating mining revenue. The interim results may not indicate full-year performance.
Financial results and liquidity
Amounts below are in U.S. dollars; income and cash-flow figures are for the nine months ended September 30 unless otherwise stated.
| Metric | 2011 | Prior comparable period / balance |
|---|---|---|
| Revenue and margins | No operating revenue reported; no meaningful operating margin | — |
| Net loss | $45.6 million; $0.33 per share | $25.8 million; $0.21 per share |
| Operating loss | $44.1 million | $28.2 million |
| Exploration expense | $32.7 million | $13.1 million |
| Cash used in operations | $40.2 million | $19.3 million |
| Cash and cash equivalents | $32.8 million | $6.8 million at December 31, 2010 |
| Working capital | $57.9 million | $13.5 million at December 31, 2010 |
| Total assets / liabilities | $327.1 million / $91.5 million | $261.6 million / $88.3 million at December 31, 2010 |
| Debt | No debt outstanding | — |
Cash provided by financing was $106.2 million, principally from a February 2011 share offering that generated $105.4 million net proceeds. Investing activities used $38.9 million. Current assets included $26.6 million of gold and silver bullion and $2.2 million of marketable equity securities. The company said available working capital was sufficient to fund the planned $15 million El Gallo Phase 1 development and ongoing exploration and corporate activities through the end of 2012.
Material changes and unusual items
- Net loss increased year over year as exploration expense rose substantially, particularly in Mexico and Nevada. Exploration spending in Mexico was $22.8 million versus $8.2 million; in Nevada it was $9.1 million versus $4.5 million.
- General and administrative expense rose to $7.2 million from $3.7 million, primarily reflecting $2.1 million of proposed Minera Andes transaction costs and higher stock-based compensation. Property holding costs fell to $3.5 million from $4.8 million, partly because the Tonkin North claims were purchased.
- Other items included a $2.1 million unrealized silver bullion loss, a $1.7 million realized gain on bullion sales, and a $1.1 million foreign-currency loss. A $2.0 million tax recovery was reported in the prior-year period, but none in 2011.
- In July, the company acquired Tonkin North claims for CDN$8.4 million (approximately $8.7 million) and a royalty interest. It also invested approximately $7 million in surface rights around the El Gallo Complex.
- Equity increased after the public offering; common shares issued and outstanding were approximately 136.5 million at September 30. The filing reported 136.5 million common shares and 3.24 million exchangeable shares outstanding as of November 2.
Outlook, commentary and risks
- Management planned to begin El Gallo Phase 1 mining in the second quarter of 2012, targeting approximately 30,000 ounces of gold annually after ramp-up. Infrastructure upgrades were budgeted at $15 million, with $7 million planned for the fourth quarter of 2011. A six-year contract-mining agreement and an engineering and construction management contract were signed in October.
- The production plan proceeded without a completed feasibility study or SEC-defined proven or probable reserves. Management cautioned that assumptions could prove inaccurate and that the company might not recover sufficient mineralized material to become profitable. Production timing and profitability were not assured.
- The 2011 exploration budget was approximately $44 million: $32 million in Mexico, $11 million in Nevada and $1 million in Alaska. The company continued work on Gold Bar, Tonkin, Limo and the Richardson project; assay results from three Richardson core holes were pending.
- A proposed acquisition of Minera Andes, announced September 22, remained subject to shareholder, court, exchange and other approvals. The stated exchange ratio was 0.45 exchangeable share per Minera Andes share. Estimated transaction costs were approximately $3 million; specified termination fees were $20.1 million for Minera Andes and $25.6 million for US Gold, with separate $4 million expense payments possible in certain breach-related circumstances.
- Key risks include exploration and reserve uncertainty, permitting and construction execution, gold and silver price volatility, foreign-exchange exposure, Mexican political and security conditions, and completion of the proposed transaction. The company used no derivatives to manage market risks. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether El Gallo Phase 1 construction, permitting, contractor mobilization and the second-quarter 2012 production target proceeded as planned.
- Whether further technical work established SEC-defined reserves and supported the expected production profile and economics.
- Actual exploration and development spending, cash burn and liquidity against management’s stated funding horizon.
- Completion terms, approvals, share issuance effects and any termination payments related to the Minera Andes arrangement.
- Subsequent changes in bullion values, foreign-exchange exposure, reclamation obligations and project security or permitting conditions.