Gold Resource Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts are U.S. dollars; financial statement figures are in millions unless stated otherwise. The company operates the El Aguila Project in Oaxaca, Mexico, and began commercial concentrate production in July 2010. It remains classified as an exploration-stage company because it has not established SEC-defined proven or probable reserves.
Financial and Operating Performance
| Metric | Q3 2011 | Nine months 2011 | Comparable 2010 |
|---|---|---|---|
| Net concentrate sales | $37.8 | $69.7 | $10.0 for each comparable period |
| Mine gross profit | $31.2 | $57.2 | $7.1 Q3; $7.0 nine months |
| Mine gross margin | 82.5% | 82.0% | 71.0% Q3; 70.4% nine months |
| Net income (loss) | $15.2 | $20.4 | $(1.2) Q3; $(14.0) nine months |
| Diluted earnings (loss) per share | $0.27 | $0.36 | $(0.02) Q3; $(0.28) nine months |
- Q3 output was a record 25,289 gold-equivalent ounces (AuEq) at a reported non-GAAP cash cost of $154 per ounce. Nine-month production was 46,225 AuEq ounces at $143 per ounce.
- Q3 cash and cash equivalents were $45.0 million, versus $47.6 million at year-end 2010. Working capital was $48.3 million, down from $51.2 million. The company reported no outstanding debt.
- Nine-month operating cash flow was $24.2 million, compared with cash used of $13.7 million in 2010. Investing activities used $7.1 million, including equipment expenditures and bullion purchases; financing activities used $19.5 million, primarily for dividends and share repurchases.
- Total assets were $79.5 million and shareholders’ equity was $55.5 million at September 30. Current liabilities were $21.6 million, including $10.2 million of income taxes payable.
Changes and Key Drivers
- Sales rose sharply against 2010, when commercial production had only begun in July. Management attributed the increase to higher payable metals sold, higher realized metal prices, improved recoveries and higher-grade ore; 2011 sales also included base-metal concentrates from the La Arista underground mine.
- The production mix shifted from entirely open-pit ore in 2010 to primarily La Arista underground ore in Q3 2011, supplemented by approximately 17% open-pit mill throughput. Recoveries improved year over year for gold and silver.
- Mine costs, construction and development expenses, and non-cash stock compensation increased. Nine-month construction and development expense was $13.6 million, compared with $12.1 million in 2010; stock-based compensation was $4.7 million, versus $1.7 million.
- Other income included foreign-exchange gains of $2.7 million for Q3 and $2.6 million for nine months. These were partly offset in comprehensive income by currency translation losses of $4.2 million and $3.8 million, respectively.
- The company recorded a $1.8 million after-tax extraordinary loss for the April 2011 storm and flooding at La Arista, which damaged the mine, roads, buildings and equipment.
Outlook, Capital Allocation and Risks
- Management maintained its 2011 production target of 60,000–70,000 AuEq ounces and targeted 20,000 ounces for Q4; it cautioned that the annual target was not assured. Q3 production represented an approximate 100,000-ounce annualized run rate, not a stated full-year forecast.
- Management expected ongoing La Arista underground mine development and further spending on production optimization, facilities and exploration. It said it did not anticipate raising equity in the foreseeable future, citing profitability.
- A regular monthly cash dividend of $0.05 per share was instituted, equivalent to $0.60 annually if maintained. Management estimated quarterly dividends of about $8 million at the share count then outstanding, subject to board review and operating conditions. The board also authorized repurchases of up to $20 million; 51,000 shares had been bought for $972,000 by quarter-end.
- The company began holding physical gold and silver as a treasury diversification measure and was considering allowing shareholders to receive bullion instead of cash dividends. Holdings were carried at the lower of cost or market; a $287,000 unrealized loss was recognized in Q3 and nine-month results.
- Key risks include the absence of proven or probable reserves and a formal feasibility study; exposure to gold and silver prices without price hedges; reliance on a single buyer for all Q3 sales and substantially all nine-month sales; Mexican operating, currency and security risks; and the possibility of weather-related disruption. The filing notes that interruptions to the buyer relationship could temporarily disrupt sales.
- Because reserve criteria are not met, substantially all exploration and mine-development expenditures are expensed rather than capitalized. Management expects this accounting treatment to continue and may produce lower reported profits than at miners that capitalize qualifying development costs.
Important Facts to Verify
- Whether production and development at La Arista support the stated 2011 target, and how mine access, stopes and recoveries progress.
- Whether the company establishes SEC-defined reserves and completes feasibility work; neither was in place at September 30, 2011.
- Concentrate sales settlement terms, buyer concentration, receivable collection and exposure to provisional pricing and metal-price changes.
- The sustainability of operating cash flow and the planned scale of dividends, repurchases and underground-development spending.
- The financial and operational effects of the flood, including any further costs or interruptions, and the treatment of construction and development expenses.
- Tax payments, foreign-exchange effects, and the extent to which the fully reserved deferred tax assets may ultimately be usable.