Gold Resource Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. The company produces metal concentrates at the La Arista underground mine, part of its El Aguila Project in Oaxaca, Mexico.
Financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net concentrate sales | $31.2 million | $42.3 million |
| Mine gross profit | $16.2 million | $24.9 million |
| Mine gross margin | 51.9% | 59.0% |
| Operating income | $11.9 million | $12.3 million |
| Net income | $7.1 million | $7.4 million |
| Basic / diluted EPS | $0.13 / $0.13 | $0.14 / $0.13 |
| Net cash from operations | $12.4 million | $6.4 million |
| Capital expenditures | $4.2 million | $3.7 million |
- Cash and equivalents were $19.5 million at March 31, up from $15.0 million at year-end. Working capital was $33.5 million, approximately $0.1 million higher than at December 31, 2013.
- Total liabilities were $17.9 million. The company reported no debt outstanding, but had capital lease obligations of $3.5 million, including $1.5 million current and $2.0 million non-current. Reclamation liabilities were $2.9 million.
- Net cash used in investing activities was $6.0 million, including $1.8 million of investments; net cash used in financing was $1.9 million, including $1.6 million of dividends paid.
Operating performance and changes
- Sales fell 26.2% year over year, primarily due to lower realized gold and silver prices and 17.5% fewer gold-equivalent ounces sold. Realized gold was $1,296/oz versus $1,648; silver was $20/oz versus $31.
- Gold-equivalent mill production rose to 23,734 oz from 22,330 oz, while ounces sold declined to 20,600 from 24,972. Ore milled increased 37% to 1,159 tonnes per day; average gold and silver grades were lower.
- Cash cost after by-product credits was $422 per gold-equivalent ounce sold, compared with $515. This is a company-defined non-GAAP measure.
- Lower general and administrative and exploration expenses, together with no facilities and mine construction expense, largely offset lower mine gross profit. Total costs and expenses declined to $4.3 million from $12.5 million.
- Operating cash flow increased, partly because $4.2 million of mine-development spending was classified as investing after the company began capitalizing qualifying development costs on January 1, 2014, and partly due to a $5.2 million change in income taxes payable/receivable. This accounting transition makes some comparisons less meaningful.
Outlook, risks and unusual items
- The mill expansion raised nominal flotation capacity to 1,500 tonnes per day. Q1 throughput averaged 1,159 tonnes per day; reaching and sustaining the target depends on underground mine development and is not assured.
- In April, the board approved an additional $2.2 million to the 2014 exploration budget, targeting about 10,000 additional metres of drilling. Q1 exploration spending was $1.3 million.
- The company reduced its monthly dividend from $0.03 to $0.01 per share effective December 2013, citing lower mine-site cash flow, lower metal prices and Mexico’s mining tax reform. It stated a long-term goal of distributing about one-third of mine-site cash flow, but future dividends are not assured.
- On April 30, 2014, a reserve report with an effective date of December 31, 2013 confirmed proven and probable reserves at La Arista. The company consequently transitioned to production-stage reporting and capitalized certain mine-development costs beginning January 1, 2014.
- Q1 other income included a $0.7 million unrealized investment fair-value gain; it was non-cash. The company bought an 18.4% interest in Canamex Resources for $1.8 million, whose reported quarter-end fair value was $2.5 million.
- Outstanding provisionally priced concentrate sales had an aggregate fair value of approximately $32.5 million, including embedded derivatives. A 1% change in metal prices would change their total fair value by approximately $0.3 million. The company had no commodity-price hedges.
- Management said disclosure controls were not effective at March 31, 2014, following material weaknesses involving income-tax and cash-disbursement controls and oversight of external service providers. Remediation was underway. Prior-year preliminary financial statements had material misstatements in deferred taxes and tax expense that were corrected before the 2013 annual filing.
- A securities class action dismissal was on appeal; a related derivative action remained stayed. The company could not estimate potential loss and stated it must indemnify certain officers and directors and bear defense costs.
- Key risks include volatile metals prices, reserve and grade uncertainty, mine ramp-up and cost risks, Mexican tax and regulatory changes, currency exposure, and security and political conditions in Mexico.
Investor facts to verify
- Whether La Arista can sustain higher throughput and convert the reserve estimate into profitable production.
- How lower metal prices, grades and sales volumes affect margins, cash generation and dividend capacity.
- Progress in remediating the disclosed material weaknesses and the effectiveness of related controls.
- The assumptions underlying reserves, capitalized mine development, and the Canamex investment valuation.
- Developments in the securities appeal and derivative litigation, including any potential financial exposure.