Gold Resource Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also presents unaudited fourth-quarter results. Gold Resource produces gold, silver and base-metal concentrates in Oaxaca, Mexico, and gold-silver doré at the Isabella Pearl mine in Nevada. Isabella Pearl reached commercial production in October 2019.
Financial and operating results
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Net sales | $135.4 million | $115.3 million | Up 17%; Oaxaca contributed 89% of 2019 sales and Nevada 11%. |
| Mine gross profit | $29.1 million | $33.7 million | Gross margin fell to 22% from 29%. |
| Net income | $5.8 million; $0.09/share | $9.3 million; $0.16/share | Lower despite higher sales; tax expense rose to $9.1 million, including $2.2 million related to GILTI. |
| Operating cash flow | $21.4 million | $22.3 million | Accounts receivable and inventory increases weighed on cash generation. |
| Capital expenditures | $39.5 million cash basis | $40.1 million | Primarily mine development and Isabella Pearl construction. |
| Cash and working capital | $11.1 million cash; $22.7 million working capital | $7.8 million cash; $13.8 million working capital | Working capital includes $7.3 million of current operating lease liabilities recognized under the new lease standard. |
| Debt and leases | $1.7 million equipment loans; $0.9 million finance lease liabilities; $7.4 million operating lease liabilities | — | Equipment loans bear fixed rates of 3%–4.48%; operating lease liabilities largely reflect the 2019 accounting adoption. |
Fourth quarter: Net sales were $39.3 million, mine gross profit was $7.9 million, and net income was $0.2 million, compared with $28.1 million, $8.0 million, and $0.9 million, respectively, in Q4 2018.
- Oaxaca produced 29,435 gold ounces and 1.72 million silver ounces in 2019, meeting its guidance ranges. Throughput rose 13% year over year; gold and silver production increased 10% and 3%.
- Isabella Pearl produced 10,883 gold ounces and 9,752 silver ounces in 2019. It sold 10,272 gold ounces for $15.1 million in net sales. Nevada full-year all-in sustaining cost was $1,049 per gold ounce sold; Oaxaca’s was $646 per precious-metal gold-equivalent ounce sold. These are non-GAAP measures.
- Consolidated gold and silver sales volumes were 34,439 ounces and 1.48 million ounces. Oaxaca’s realized gold and silver prices increased 13% and 4%, while copper, lead and zinc realized prices fell 5%, 6% and 7%.
- Oaxaca’s total cash cost after by-product credits was $264 per precious-metal gold-equivalent ounce sold for the year. This measure was substantially affected by base-metal credits and should not be viewed in isolation.
Material changes and financial position
- Sales growth reflected higher gold and base-metal volumes, including new Nevada production. Mine gross profit declined mainly because of higher treatment and refining charges, despite higher volumes and precious-metal prices.
- Production costs increased to $83.3 million from $66.7 million, and depreciation and amortization increased to $22.8 million from $14.6 million, reflecting the expanded operating base and Isabella Pearl.
- Operating cash flow was below cash capital expenditures. The resulting approximate operating-cash-flow-minus-capex shortfall was $18.1 million; the company also raised $24.4 million net through its at-the-market share offering, selling 6.63 million shares.
- Total assets were $193.0 million and shareholders’ equity was $158.1 million at year-end. The company paid $1.5 million in dividends during 2019; the dividend rate increased to an annualized $0.04 per share beginning in November.
- Proven and probable reserves totaled 5.08 million tonnes and 554,400 precious-metal gold-equivalent ounces, versus 6.01 million tonnes and 576,900 equivalent ounces at year-end 2018. Estimates depend on metal-price and operating assumptions. The additional 1.77 million tonnes of reported Oaxaca mineralized material is not a reserve and has no demonstrated economic viability.
Outlook, commentary and risks
- For 2020, management targeted 54,000 gold ounces and 1.7 million silver ounces, each with a ±10% range, plus significant copper, lead and zinc production. It expected Nevada production to rise as Isabella Pearl moved beyond ramp-up and accessed higher-grade Pearl ore.
- Management anticipated approximately $7 million of 2020 exploration spending, subject to results, metal prices and available capital. It stated liquidity was adequate for operations and corporate activities for the foreseeable future.
- Management attributed Oaxaca’s lower precious-metal grades in parts of the deeper Switchback area to deposit gradation and expected precious-metal grades to improve as mining advances. Mirador development was at times slowed by difficult ground conditions.
- Isabella Pearl inventory was written down by $2.9 million in 2019, including $0.7 million for stockpiles and $2.2 million for leach-pad inventory, primarily because of lower realized ore grades during ramp-up.
- Key risks include volatile precious- and base-metal prices, concentration of revenue in Oaxaca and dependence on a small number of customers, reserve and recovery uncertainty, mining costs and execution, contractor reliance, water availability, permits and environmental obligations, Mexican political and currency exposure, and the absence of price hedging.
- A local ejido community filed a February 2020 lawsuit challenging certain Mexican mining concessions. The concessions at issue did not affect current operations, but a decision for the community could affect future access for exploration or mining.
- Reclamation and remediation liabilities were $5.6 million. The filing also reported $6.7 million of outstanding reclamation bonds and $0.9 million of equipment purchase obligations. The independent auditor gave unqualified opinions on the financial statements and internal controls; management likewise concluded internal controls were effective.
Most important facts for investors to verify
- Whether Isabella Pearl’s higher-grade access and ramp-up deliver the stated 2020 production outlook and improve unit costs after the 2019 inventory write-downs.
- Whether Oaxaca throughput, mine grades and base-metal by-product credits sustain margins, given lower 2019 gross profit and the concentration of revenue in Mexico.
- Cash generation relative to capital spending, the need for additional equity financing, and dilution following the 2019 ATM share issuance.
- Changes in reserve estimates, recoveries and mine plans, distinguishing proven and probable reserves from non-reserve mineralized material.
- Developments in the ejido concession lawsuit, customer and smelter arrangements, and environmental, water-rights and reclamation obligations.