Gold Resource Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed August 7, 2014. Amounts are in U.S. dollars. Gold Resource produces metal concentrates at the La Arista underground mine, part of its El Aguila Project in Oaxaca, Mexico.
Business context and operating results
After issuing a reserve report confirming proven and probable reserves, the company transitioned from exploration-stage to production-stage reporting effective January 1, 2014. It began capitalizing qualifying mine development costs rather than expensing them, affecting comparisons with 2013.
In Q2, the mill produced 24,172 precious-metal gold-equivalent ounces and sold 20,647. Mill throughput rose 36% to 1,098 tonnes per day; the company said mine development was needed to support its target of 1,500 tonnes per day. For the first half, production was 47,896 equivalent ounces and sales were 41,241.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net concentrate sales | $33.7 million | $26.7 million | $64.8 million | $69.0 million |
| Mine gross profit | $17.8 million | $11.1 million | $34.0 million | $37.2 million |
| Mine gross margin | 52.9% | 41.6% | 52.5% | 53.9% |
| Operating income (loss) | $14.0 million | $(0.8) million | $25.9 million | $11.6 million |
| Net income (loss) | $7.8 million | $(1.4) million | $14.9 million | $6.0 million |
| Basic earnings (loss) per share | $0.14 | $(0.03) | $0.28 | $0.11 |
| Operating cash flow | Not presented by quarter | $27.8 million | $11.0 million | |
| Capital expenditures | Not presented by quarter | $7.4 million | $5.1 million |
Q2 sales increased 26% year over year, principally with higher throughput and more metal sold, despite lower gold and silver grades and realized prices. First-half sales declined 6%, reflecting lower grades, prices and beginning concentrate inventory. First-half realized gold and silver prices were $1,286 and $20 per ounce, down 15.9% and 25.9%, respectively, from 2013. First-half mine gross profit also fell, primarily due to lower grades and prices.
Cash and equivalents were $29.6 million at June 30, up from $15.0 million at December 31, 2013. Working capital was $37.3 million. Total liabilities were $22.4 million, including $3.1 million of capital lease obligations; the company reported no other debt outstanding. First-half cash from operations included an $11.6 million positive change in income taxes payable/receivable. Management also noted that $7.9 million of costs historically classified as operating cash flows were classified as investing activities after the accounting transition.
Cash used in investing activities was $9.2 million, including capital spending and investments; cash used in financing was $3.9 million, including $3.2 million of dividends paid. The company declared $3.2 million in first-half dividends. Its monthly dividend had been reduced from $0.03 to $0.01 per share effective December 2013, and future dividends are not assured.
Changes, outlook, risks and unusual items
- Accounting and comparability: The production-stage transition led to capitalization of eligible mine development costs. Facilities and mine construction expense was nil in 2014 versus $5.6 million in Q2 2013 and $11.7 million in the first half of 2013. This change materially contributed to lower reported costs and higher earnings; it also moved cash outflows from operating to investing activities.
- Costs and cash costs: General and administrative and exploration costs declined year over year. Non-GAAP cash cost after by-product credits was $438 per equivalent ounce sold in Q2 and $430 for the first half, versus $645 and $547, respectively. These measures are not GAAP and may not be comparable across companies.
- Operating outlook: The company is targeting eventual mill throughput of 1,500 tonnes per day, but stated that achievement and sustained operation at that level are not assured. It estimated 2014 royalty payments of $6–$7 million, depending on metal prices, production and settlement timing. The Board approved a 2014 exploration budget of $6.9 million.
- Taxes and settlements: First-half tax expense was $11.6 million; the company attributed an increase in its annualized effective tax rate principally to newly enacted Mexican mining tax. Provisional invoice final settlements and mark-to-market adjustments reduced sales by $2.5 million and $2.1 million, respectively, in the first half.
- Investments: The company purchased an approximately 18.4% interest in Canamex Resources for $1.8 million. The Canamex investment had a June 30 fair value of $2.7 million, including a $0.9 million unrealized gain.
- Controls: Management concluded disclosure controls were not effective at June 30, 2014, citing material weaknesses previously identified in income-tax controls, cash-disbursement approvals and oversight of external service providers. Remediation efforts were underway, with full implementation intended during 2014.
- Legal and operating risks: A securities class action dismissal was on appeal; a related derivative action remained stayed. The company said it could not estimate potential loss and was obligated to indemnify certain officers and directors. Other stated risks include metal-price and currency volatility, Mexican regulatory and country risks, crime, mine development and reserve uncertainty. The company had no metal-price hedges.
Important facts for investors to verify
- How much of the earnings and cash-flow improvement reflects the stage-of-company accounting change rather than underlying operating performance.
- Whether mine development can support higher throughput, and whether the 1,500-tonne-per-day target is achievable and sustainable.
- The sensitivity of margins and cash generation to metal prices, grades, concentrate settlement adjustments and by-product credits.
- Progress in remediating the disclosed material weaknesses and whether controls are subsequently judged effective.
- Developments in the securities appeal and derivative litigation, including any change in estimated exposure.
- Dividend sustainability, Mexican mining-tax effects, and the valuation and risks of the Canamex investment.