Gold Resource Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; balance-sheet comparisons are to December 31, 2016. Financial amounts are U.S. dollars; statement amounts below are in millions unless stated otherwise. Interim results are unaudited.
Business context
The company produces gold, silver and base-metal concentrates from its Oaxaca Mining Unit in Mexico, principally at the Aguila mill and Arista mine. It is developing the Mirador mine in Mexico and advancing exploration and permitting at Nevada properties, including Isabella Pearl.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $21.4 | $26.2 | $45.7 | $43.6 |
| Mine gross profit | $5.2 | $12.4 | $15.6 | $15.8 |
| Net income | $0.9 | $5.6 | $5.2 | $6.4 |
| Diluted EPS | $0.02 | $0.10 | $0.09 | $0.12 |
| Operating cash flow | Not separately stated for quarter | $14.0 | $11.6 |
Q2 mine gross margin was approximately 24% of sales, compared with 47% a year earlier; first-half margin was approximately 34%, versus 36%. Q2 sales fell 18%, primarily due to lower precious-metal production, partly offset by higher realized metal prices and lower treatment charges. First-half sales increased 5% on improved prices and lower treatment charges, despite lower precious-metal output.
Q2 gold and silver production declined to 5,696 ounces and 397,670 ounces, from 10,011 and 572,499, respectively. The company attributed the decline to lower grades in development ore, including Switchback development, and lower recoveries on Aguila open-pit ore. Q2 mill throughput rose 5% to 1,293 tonnes per operating day. Non-GAAP cash cost after by-product credits was $272 per precious-metal gold-equivalent ounce sold, and all-in sustaining cost was $770; the comparable 2016 figures were $317 and $547.
Liquidity, cash flow and balance sheet
Cash and cash equivalents were $16.4 million, up $2.2 million from year-end; working capital was $18.9 million, down from $20.3 million. Current assets were $33.9 million and current liabilities $15.0 million. Total liabilities were $17.8 million, including $15.0 million current liabilities; the filing reports no significant borrowing balance. Operating cash flow of $14.0 million funded $11.0 million of investing outflows, principally capital expenditures, and $0.6 million of dividends. Cash increased to $16.4 million after exchange-rate effects. Management said liquidity and capital resources should fund operations for the foreseeable future.
Capital expenditures were $10.8 million on a cash basis. Property, plant and mine development, net, increased to $79.5 million from $70.1 million. Accounts payable increased to $11.8 million from $5.4 million; accrued capital expenditures included $4.3 million at quarter-end. The company had cancellable equipment contracts totaling $8.3 million, had incurred $3.9 million by June 30, and had $3.4 million of those costs in accounts payable. No material debt facility or debt repayment program is described; capital-lease repayments were $1,000 in the first half.
Changes, outlook and risks
- Management expects second-half production to benefit from selected higher-grade Arista veins, including Switchback, and consistent high-grade ore deliveries from Mirador. This is an expectation, not quantified production guidance.
- Mirador development had advanced to support consistent ore feed to the Aguila mill’s leach circuit. After unsatisfactory and delayed contractor results, development was brought in-house.
- Isabella Pearl permitting continued; advancing it toward production depends on permit timing and funding. The company was awaiting Nevada regulator approvals.
- Q2 other expense was $0.6 million, versus $0.5 million of other income a year earlier; first-half other expense was $1.1 million versus $1.2 million of income. The shift reflected realized foreign-exchange losses, associated by management with a stronger Mexican peso, and fewer investment gains.
- Market exposures include gold and silver and base-metal prices, Mexican-peso exchange rates, and provisional pricing on concentrate sales. The company reported that it did not use derivative instruments to manage these risks.
- The company early-adopted income-tax guidance, recording a $0.5 million reduction to opening retained earnings and other long-term assets. A separate stock-compensation accounting adoption recognized a $4.2 million deferred tax asset fully offset by a valuation allowance.
- Management identified risks including lower-than-target production, exploration outcomes, permitting and regulatory delays, commodity-price declines, currency movements, weather and ground conditions, and funding or equity-market conditions. Disclosure controls were assessed as effective, with no material change to internal control over financial reporting reported.
Important facts for investors to verify
- Whether grades, recoveries and production improve as development ore is replaced by higher-grade Arista and Mirador feed.
- Mirador’s ability to deliver consistent ore and the timing and cost of bringing the mine into operation.
- Isabella Pearl permit approvals, project funding needs and development schedule.
- Capital spending, accrued equipment obligations, and whether working capital and operating cash flow remain adequate.
- Metal prices, peso movements and provisional settlement adjustments; non-GAAP per-ounce costs are not directly comparable across all companies.
- Dividend policy and share dilution: 56,839,823 common shares were outstanding at July 31, 2017.