Gold Resource Corporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter results. Gold Resource is a Colorado-based gold and silver producer operating in Oaxaca, Mexico; 2011 was its first full year of commercial production.
Financial and operating results
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Metal concentrate sales | $105.2 million | $14.8 million |
| Mine gross profit | $87.2 million | $9.8 million |
| Mine gross margin | 82.9% | 66.4% |
| Operating income (loss) | $45.7 million | $(22.8) million |
| Net income (loss) | $58.4 million | $(23.1) million |
| Diluted earnings (loss) per share | $1.03 | $(0.46) |
| Net cash from (used in) operating activities | $42.4 million | $(21.3) million |
Revenue rose substantially as 2011 included a full production year and higher realized prices: average realized gold was $1,596/oz versus $1,201, and silver was $35/oz versus $20. Production totaled 66,159 gold-equivalent ounces at a reported non-GAAP cash cost of $136 per ounce, net of by-product credits. The company milled 214,215 tonnes. Its La Arista underground mine supplied most production from March onward.
Fourth-quarter 2011 sales were $35.4 million and mine gross profit was $30.0 million, compared with $4.8 million and $2.7 million, respectively, in fourth-quarter 2010. Fourth-quarter net income was $38.0 million; the filing attributes the annual tax benefit principally to a fourth-quarter reduction in deferred-tax valuation allowances.
Financial position and capital allocation
- At year-end, cash and cash equivalents were $52.0 million, total current assets $89.5 million, current liabilities $30.2 million, working capital $59.3 million, and shareholders’ equity $87.1 million.
- The company reported no outstanding debt. Total liabilities were $32.5 million, including a $2.3 million asset-retirement obligation.
- 2011 cash flows included $9.3 million used in investing and $28.4 million used in financing. Financing outflows chiefly reflected $26.5 million of dividends declared and $2.0 million of share repurchases.
- The company declared $0.50 per share in dividends during 2011 and began a regular $0.05 monthly dividend in August. Dividends were classified as return of capital; future payments remain at the board’s discretion.
- The board authorized a $20 million repurchase program; 104,251 shares were repurchased for approximately $2.0 million by year-end. The company also bought $3.0 million of physical gold and silver bullion.
Changes, outlook, and notable items
- Gold Resource moved from losses in 2010 and 2009 to reported 2011 profitability. The improvement reflects higher sales and margins, but also a $12.0 million income-tax benefit, including a $28.3 million valuation-allowance reduction, and $2.7 million of currency-exchange gains.
- An unusual April 2011 storm flooded lower levels of the La Arista mine and damaged site infrastructure. The company reported a $2.5 million loss, or $1.8 million net of tax, and said mining was affected for approximately two months.
- Management targeted 2012 production of 120,000–140,000 gold-equivalent ounces, expecting more stopes and working faces. It budgeted approximately $8.0 million for 2012 exploration, including $4.8 million at El Aguila; these are plans, not assured results.
- The mill’s agitated-leach circuit had not been used; processing was through the flotation circuit. The company planned continued underground development and mill optimization.
- The company had no proven or probable reserves at any property and had not completed a feasibility study. It remained an SEC-defined exploration-stage company and expensed substantially all exploration and mine-development costs as incurred.
Risks and contingencies
Operations depended on a single producing project and mine, with exposure to mine interruptions, geology and recovery, metal prices, Mexican peso movements, permitting and environmental requirements, community and surface-access arrangements, and political or security conditions in Oaxaca. The company did not hedge metal production. Sales were highly concentrated: 96% of 2011 concentrate sales went to Consorcio and 4% to Beheer, both Trafigura Group companies. The filing reported no material legal proceedings and no off-balance-sheet arrangements. Management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether La Arista can sustain production and achieve the 2012 target despite the 2011 flood disruption and the project’s lack of proven or probable reserves.
- Whether reported earnings and cash generation are repeatable without the valuation-allowance release, favorable currency gains, or elevated metal prices.
- Actual cash costs, recoveries, mine-development spending, and the reconciliation of the reported non-GAAP cash-cost measure to GAAP costs.
- Customer concentration, provisional concentrate pricing exposure, and the company’s ability to maintain alternative buyers and timely collections.
- The sustainability and funding of monthly dividends, exploration plans, and share repurchases alongside underground development and reclamation obligations.