Gold Resource Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; U.S. dollars unless stated otherwise. Gold Resource operates in Oaxaca, Mexico, and Nevada, including the Isabella Pearl mine.
Financial and operating results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $40.1 million | $24.3 million | $96.0 million | $87.2 million |
| Mine gross profit | $9.3 million | $3.3 million | $21.2 million | $25.7 million |
| Net income (loss) | $3.0 million | $(0.8) million | $5.7 million | $8.4 million |
| Diluted EPS | $0.05 | $(0.01) | $0.09 | $0.14 |
| Operating cash flow | Not separately presented | Not separately presented | $7.8 million | $20.8 million |
| Capital expenditures, cash basis | Not separately presented | Not separately presented | $29.2 million | $26.1 million |
Q3 mine gross margin was approximately 23%, versus 14% a year earlier; nine-month margin was approximately 22%, versus 30%. Q3 sales rose 65%, while nine-month sales rose 10%. Q3 earnings improved to a profit, but nine-month net income declined about 33%.
- Production: Q3 gold production totaled 11,165 ounces across the operations, including a company-record quarter for gold production. Oaxaca produced 7,462 ounces of gold and 473,810 ounces of silver; Isabella Pearl produced 3,703 ounces of gold and 3,487 ounces of silver.
- Cash and liquidity: Cash and equivalents were $8.8 million at September 30, up from $7.8 million at year-end. Working capital was $22.5 million, up from $13.8 million. Current assets were $48.8 million and current liabilities $26.3 million.
- Debt and obligations: Equipment loans were $1.9 million; finance lease liabilities were $1.0 million. Operating lease liabilities totaled $9.5 million, including $8.6 million current. Total liabilities were $33.6 million.
- Equity financing: The company sold 6.6 million shares through its at-the-market program for net proceeds of $24.4 million during the first nine months. It reported no ATM sales after July 30. Common shares outstanding were 65.7 million as of October 29.
Material changes and drivers
- Q3 sales increased mainly on higher volumes and realized metal prices, including gold, silver, and zinc. Nevada began selling Isabella Pearl doré in May; it contributed $6.0 million of Q3 sales.
- Q3 mine gross profit improved year over year, but nine-month mine gross profit fell 17%, reflecting higher treatment charges and production costs associated with increased throughput.
- Operating cash flow fell by $13.1 million year over year for the first nine months, primarily due to working-capital changes, including increased Isabella Pearl inventories and receivables. Capital spending increased as the company developed Isabella Pearl and built its ADR plant.
- A $1.6 million Isabella Pearl inventory net-realizable-value adjustment reduced mine gross profit, attributed primarily to low-grade ore placed on the leach pad during ramp-up.
- Adoption of the new lease standard added $14.2 million of operating lease assets and liabilities at January 1, 2019; management said it did not materially affect earnings or cash flows. The current operating lease liability reduced reported working capital.
Outlook, risks, and unusual items
- Management said liquidity and capital resources were adequate for operations and corporate activities for the foreseeable future and did not foresee a need to use the ATM program, while reserving the right to do so.
- The Isabella Pearl ADR plant was substantially completed, with testing and commissioning scheduled for Q4 2019. The mine reached commercial production levels in September. These are stated plans, not a quantified production or earnings forecast.
- Key risks include volatile gold, silver, and base-metal prices; Mexican peso exchange-rate movements; exploration and production results; lower-than-targeted output; permitting, regulatory, political, weather, and ground-movement risks; and the potential need for further equity financing.
- Concentrate sales are provisionally priced, so metal-price movements before final settlement can change reported revenue. The company had no commodity-price hedges and said it did not intend to hedge in the near term.
- Other notable items include a $1.5 million increase in the Isabella Pearl asset-retirement obligation estimate during the first nine months and a $478,000 reserve for inventory included in other expense. Income taxes are affected by different U.S. and Mexican tax rates and dividend withholding taxes.
Important facts for investors to verify
- Whether Isabella Pearl commissioning and ramp-up proceeded as scheduled, and how its production, recoveries, and unit costs developed after Q3.
- Whether the $1.6 million inventory adjustment and low-grade leach-pad material indicate continuing cost or recovery pressure.
- How operating cash flow and working capital evolve as inventory and receivables convert to cash, given substantial capital spending.
- Whether management’s stated liquidity outlook remains supported by cash generation and whether further ATM equity issuance is needed; assess the resulting dilution.
- How metal prices, provisional settlements, treatment charges, and the peso affect realized revenue and margins. Oaxaca cash-cost and all-in sustaining-cost measures are non-GAAP and depend materially on base-metal by-product credits.
- Reconcile reported share counts: the balance sheet reports 65,691,527 shares outstanding, while the equity statement reports 66,027,925 shares; verify the distinction and subsequent October 29 count.