Gold Resource Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 18, 2013. The company mines and explores for gold and silver in Mexico. Production came from the La Arista underground mine at the El Aguila Project. Despite commercial production, the company remained classified as an exploration-stage company because it had no SEC-defined proven or probable reserves.
Financial and operating highlights
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales of metal concentrates | $131.8 million | $105.2 million |
| Mine gross profit | $87.8 million | $80.5 million |
| Mine gross margin | 66.6% | 76.6% |
| Operating income | $49.7 million | $45.7 million |
| Net income | $33.7 million | $58.4 million |
| Diluted earnings per share | $0.60 | $1.03 |
| Net cash from operating activities | $31.2 million | $41.3 million |
| Cash and cash equivalents at year-end | $35.8 million | $52.0 million |
| Working capital at year-end | $46.0 million | $59.3 million |
At year-end, total assets were $105.6 million, total liabilities $15.8 million, and shareholders’ equity $89.8 million. The company reported no debt outstanding. Current liabilities were $13.0 million. Net cash used in investing activities was $7.7 million and net cash used in financing activities was $39.9 million, principally reflecting dividends and share repurchases.
La Arista milled 282,120 tonnes in 2012, at average grades of 4.3 grams per tonne gold and 355 grams per tonne silver. Mill production totaled 90,432 gold-equivalent ounces, up 36.5% from 2011; sales were 72,399 equivalent ounces. Reported total cash cost, including royalties, was $419 per equivalent ounce sold, versus $269 in 2011.
For the fourth quarter of 2012, net sales were $27.9 million, mine gross profit $16.2 million, operating income $6.4 million, and net income $8.7 million. Fourth-quarter 2011 comparatives were $35.4 million, $28.2 million, $14.9 million, and $38.0 million, respectively.
Changes versus 2011
- Sales rose 25.3%, primarily because La Arista operated for a full year and payable metal volumes increased.
- Mine gross profit increased, but margin declined to 66.6% from 76.6%, reflecting higher labor, contractor, diesel, transportation, and other operating costs.
- Net income fell to $33.7 million from $58.4 million. The principal driver was the swing from a $12.0 million income tax benefit in 2011 to $13.3 million of tax expense in 2012.
- Operating cash flow declined by $10.1 million, mainly because the company paid its 2011 Mexican income tax liability in 2012. Cash fell by $16.2 million overall.
- Cash dividends declared increased to $0.69 per share from $0.50. The company distributed $35.9 million in dividends, about 39.5% of its non-GAAP cash flow from mine-site operations.
Outlook, risks, and unusual items
- 2013 outlook: Management targeted 80,000–100,000 gold-equivalent ounces of mill production and said output could be similar to 2012. The mine plan expected higher base-metal content. Planned exploration budgets included approximately $7.4 million at El Aguila, $2.2 million at other Mexican properties, and $2.0 million in Turkey for exploration and acquisitions. These plans were discretionary.
- Operating challenges: Higher-than-planned dilution, lower-grade vein margins and splays, underground water inflows, and carbon dioxide levels affected La Arista. The company added pumping capacity and ventilation, and planned further mine development and infrastructure work.
- Concentrate settlement and reporting: A dispute over concentrate handling, sampling, and assay differences led to a November 2012 settlement. The buyer paid $1.5 million for certain provisional invoices; the settlement and related adjustments reduced 2012 sales by a net $3.3 million for the first half and reduced equivalent ounces sold by about 1,400. The first- and second-quarter 2012 statements were restated. Management said it believed concentrates had been tampered with or compromised in transit or at the buyer’s facility.
- Customer concentration: The filing says 100% of 2012 concentrate sales went to Consorcio Minero de Mexico Cormin Mex., a Trafigura Group company. A disruption could temporarily interrupt sales.
- Reserves and commodity exposure: No properties had proven or probable reserves or a feasibility study. Production and economic viability therefore remain uncertain. The company did not hedge gold or silver prices and was exposed to metal-price and Mexican-peso fluctuations.
- Legal matters: The company and certain executives faced a consolidated securities class action alleging misstatements concerning production targets, mine operations, and financial reporting. A derivative action was filed in February 2013. Management said it would defend the class action; potential damages and costs were not estimable, and no reserve was recorded.
- Controls and accounting: The company identified a material weakness in concentrate sales controls after the assay differences were not timely reflected in interim reporting; management said the weakness did not exist at December 31, 2012. Management and the auditor concluded internal control over financial reporting was effective at year-end, and the auditor issued an unqualified opinion on the financial statements and controls. A $2.8 million out-of-period currency-related adjustment was recorded in the fourth quarter; management said it was not material.
- Other exposures: The company relied on a single producing mine, faced Mexican permitting, community, water, environmental, reclamation, and regulatory risks, and reported an approximately $2.8 million asset-retirement obligation. The 2011 flood caused about $2.5 million of damage; recovery under the insurance claim remained uncertain.
Investor verification priorities
- Review the restated 2012 quarterly results, the concentrate settlement terms, assay differences, and the status of controls over provisional sales and final settlements.
- Assess mine dilution, grades, water and ventilation remediation, development progress, and whether production guidance is supported by operating results.
- Confirm customer concentration and the availability and terms of alternative concentrate buyers.
- Evaluate the lack of proven or probable reserves and feasibility studies, and the resulting uncertainty around mine life, recoverability, and future spending.
- Track liquidity after dividends, development and exploration spending, taxes, and bullion purchases; the filing reports no debt but lower cash and working capital year over year.
- Monitor the securities and derivative litigation, Mexican regulatory and community risks, and the unresolved insurance recovery from the 2011 flood.