Gold Resource Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited results; dollars below are U.S. dollars. The company produces metal concentrates from its La Arista underground mine in Oaxaca, Mexico. It remains classified as an exploration-stage company because it has not established SEC-defined proven or probable reserves.
Financial and operating results
- Q3 revenue: $36.5 million, down 3.4% from $37.8 million in Q3 2011. Nine-month revenue: $103.4 million, up 48.4% from $69.7 million.
- Q3 mine gross profit and margin: $23.8 million and 65.1%, versus $29.9 million and 79.1% a year earlier. Nine-month mine gross profit was $70.6 million, with a 68.2% margin, versus $52.4 million and 75.1% in 2011.
- Net income: Q3 was $7.3 million, or $0.14 basic and $0.13 diluted per share, compared with $15.2 million, or $0.29 basic and $0.27 diluted, in Q3 2011. Nine-month net income was $24.5 million, or $0.46 basic and $0.43 diluted per share, compared with $20.4 million, or $0.38 basic and $0.36 diluted.
- Cash cost: Non-GAAP total cash cost, including royalties, was $459 per gold-equivalent ounce sold in Q3, up from $260; the nine-month figure was $396, versus $258 in 2011.
- Cash flow: Nine-month operating cash flow was $19.2 million, down from $23.2 million. Investing activities used $7.1 million, including $3.8 million of capital expenditures and $4.7 million spent purchasing bullion. Financing activities used $27.9 million, primarily for dividends and share repurchases.
- Liquidity and debt: At September 30, cash was $36.2 million, bullion was $6.6 million, working capital was $60.7 million, and current liabilities were $15.1 million. Working capital was $59.3 million at December 31, 2011. The company reported no debt outstanding.
- Shareholder returns: The company declared $27.0 million in dividends and paid $26.4 million during the first nine months. Its monthly dividend was increased to $0.06 per share in April 2012.
Material changes and operating commentary
- Nine-month revenue growth reflected increased payable metal sales as La Arista ramped up. Q3 revenue and earnings declined year over year; management cited lower silver sales and realized prices, lower-than-expected production, and higher production costs.
- Q3 tonnes milled rose to 76,786 from 57,156, but management said production remained below expectations. Higher-than-planned dilution in long-hole stopes, mining lower-grade vein margins and splays, and ongoing mine development and infrastructure needs contributed. Management shifted part of mining to mechanized cut-and-fill, increased ramp development, and improved infill drilling to target more selective mining.
- The level 11 underground pump station was about 80% complete and expected to be operational in Q1 2013; management said it should help control mine water. A ventilation upgrade added 120,000 cubic feet per minute of fresh air.
- Production costs, general and administrative expenses, and exploration expenses increased year over year for the nine-month period. The company also recorded $2.5 million of currency-exchange losses, versus $2.6 million of gains in the comparable 2011 period.
Restatement, risks, and outlook
- Concentrate settlement and restatement: A November 5, 2012 settlement with the concentrate buyer addressed assay differences between samples at the mine and the buyer’s warehouse. The settlement required a $3.7 million reduction to sales for February and March shipments and provided for $1.5 million to be paid to the company for April through June shipments. The company said its first- and second-quarter 2012 financial statements would be restated. For the six months ended June 30, restated sales decreased $3.722 million, net income decreased $2.520 million, and basic and diluted EPS each decreased $0.04. The adjustments are reflected in nine-month results but did not affect Q3 results.
- Controls: The assay-related error resulted from a material weakness in internal controls over concentrate sales. Management reported adding monthly review controls and stated the weakness was remediated as of September 30, 2012; disclosure controls were assessed as effective at that date.
- Customer and market exposure: All Q3 and nine-month 2012 revenue and receivables came from one buyer, Consorcio Minero de Mexico Cormin Mex. The company warned that a disruption could temporarily affect sales. Metal prices, provisional settlements, and Mexican peso exchange rates can materially affect results. At September 30, a 1% change in metal prices was estimated to change the fair value of outstanding provisionally priced sales by about $381,000.
- Outlook and distributions: Management expected cash flow from mine-site operations to cover anticipated operating, capital, tax, and other disbursements for at least 12 months, assuming current metal prices and expected mine performance, and did not anticipate external financing needs in that period. Dividends are discretionary and may be changed or suspended. Management forecast 2012 royalty payments of $6 million to $7 million, subject to prices, production, and settlement timing.
- Legal and other contingencies: A securities class action filed October 25, 2012 alleges violations related to statements about production targets and mine operations. The company disputes the claims but could not estimate the financial impact. A claim relating to a 2011 flood loss remained uncertain; the filing did not state a clear expected recovery.
- Other subsequent events: From October 18 through November 11, the company repurchased 149,407 shares for $2.4 million. On October 31, it declared a $0.06-per-share monthly dividend.
Key facts for investors to verify
- Progress against production targets and whether dilution, grade, mine development, water, and infrastructure issues improve.
- The effect of the concentrate settlement and restatements, and the effectiveness of the new assay and revenue controls.
- Ongoing dependence on a single concentrate buyer and the reliability of buyer-side sampling, storage, and settlement practices.
- Whether cash generation supports mine development, exploration, dividends, and repurchases under changing metal prices and currency rates.
- Developments in the securities litigation, any potential liability, and the status of the unresolved flood-related insurance claim.
- Reserve status: the filing reports no SEC-defined proven or probable reserves, a condition affecting the company’s exploration-stage classification and accounting for development expenditures.