GORO

Business Context and Reporting Period

Company: Gold Resource Corporation (GOLD)

Filing Type: Form 10-Q (Quarterly Report)

Period Ended: September 30, 2010

Business Overview: Gold Resource is an exploration-stage company engaged in the exploration and production of precious and base metals, primarily in Mexico. The Company commenced commercial production at its El Aguila Project in Oaxaca, Mexico, on July 1, 2010. Despite generating revenue, the Company remains classified as an exploration-stage entity under SEC guidelines because it has not yet demonstrated proven or probable reserves. Consequently, significant construction and development expenditures are expensed as incurred rather than capitalized.

Key Financial Metrics

Production Metrics (Q3 2010): Produced 7,351 ounces of gold. Cash operating cost was $249 per ounce (net of by-product credits). Daily mill throughput averaged 638 tonnes/day against a target of 800 tonnes/day.

Material Changes vs. Prior Period

• Revenue Generation: The Company recorded $9.6 million in revenue for the three and nine months ended September 30, 2010, compared to zero revenue in the same periods of 2009, marking the start of commercial production.
• Net Loss Reduction: Net loss for the three months ended September 30, 2010, decreased to $1.18 million from $9.63 million in the prior year quarter. For the nine-month period, the loss decreased to $13.95 million from $27.06 million.
• Expense Shift: Construction and development expenses decreased significantly (down 48% for the quarter and 36% for the nine months) as the Company shifted focus from construction to production. However, General and Administrative expenses increased due to higher stock-based compensation ($1.52 million in Q3 2010 vs. $59,677 in Q3 2009) and professional fees related to financing and listing activities.
• Liquidity Expansion: Cash and cash equivalents increased from $6.75 million at December 31, 2009, to $54.86 million at September 30, 2010. This was driven by a $52 million private placement in September 2010 and proceeds from sales to strategic partner Hochschild Mining.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Operational Ramp-up: The El Aguila Project has not yet reached design targets. Management expects improvements in Q4 2010 due to better weather, higher ore grades, and optimized mill operations.
• Capital Allocation: Proceeds from the September 2010 financing are intended to fund the Phase II tailings dam, underground mine development, and exploration. The Company expects to continue depleting working capital until production cash flows cover all expenses.
• Dividends: The Company declared and paid special cash dividends totaling $0.09 per share in Q3 2010. A subsequent dividend of $0.03 per share was declared in October 2010.

Risks and Contingencies:

• Exploration Stage Accounting: The Company must expense construction costs rather than capitalize them until proven/probable reserves are established, resulting in reported losses despite operational progress.
• Single Customer Concentration: 100% of sales and mine gross profit are derived from a single buyer, Consorcio Minero de Mexico Cormin Mex, S.A. de C.V. (Trafigura Group).
• Commodity Price Risk: Revenue is directly tied to gold and silver prices, which are volatile. The Company does not currently use derivative contracts to hedge these prices.
• Country Risk: All operations are in Mexico, exposing the Company to political instability, regulatory changes, and currency fluctuations (MXN vs. USD).
• Production Uncertainty: Early-stage production volumes and costs are difficult to predict; heavy rains in Q3 2010 already complicated operations.

Investor Verification Checklist

• Reserve Status: Verify the timeline for establishing "proven or probable" reserves to exit exploration-stage accounting and capitalize development costs.
• Production Targets: Monitor Q4 2010 and 2011 production reports to confirm if mill throughput (target 800 t/d) and recovery rates (target 90%) improve from Q3 levels.
• Cash Burn Rate: Assess whether operating cash flow from concentrate sales will be sufficient to cover the ~$300,000 monthly overhead and ongoing construction costs without further equity dilution.
• Customer Concentration: Evaluate the risk associated with relying on a single off-take agreement for 100% of revenue.
• Dividend Sustainability: Determine if the recent dividend payments are sustainable given the Company's continued net losses and capital expenditure requirements.