Gold Resource Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Gold Resource operates mines in Oaxaca, Mexico, and Nevada, U.S. Dollar amounts below are in millions unless stated otherwise.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $42.3 | $40.1 | $91.4 | $96.0 |
| Mine gross profit | $10.9 | $9.3 | $9.0 | $21.2 |
| Net income | $5.0 | $3.0 | $0.1 | $5.7 |
| Basic and diluted EPS | $0.07 | $0.05 | $0.00 | $0.09 |
| Cash provided by operating activities | Not provided for quarter | $17.7 | $7.8 | |
| Cash used in investing activities | Not provided for quarter | $(12.8) | $(29.2) | |
| Cash provided by financing activities | Not provided for quarter | $15.6 | $22.7 |
- Q3 mine gross margin was approximately 25.8%, compared with 23.2% a year earlier; nine-month mine gross margin was approximately 9.9%, versus 22.1%.
- At September 30, cash and cash equivalents were $31.3, up $20.2 from year-end 2019. Working capital was $50.0, up from $22.7.
- Total liabilities were $27.5, including $1.0 in equipment loans, $0.5 in finance lease liabilities, and $1.4 in current operating lease liabilities. Shareholders’ equity was $176.0.
- Nine-month capital expenditures were $12.9 in cash. The company raised $18.7 net through its at-the-market stock offering and paid $2.1 in dividends.
Changes versus comparable periods
- Q3 sales rose about 5.5% year over year, mainly as Nevada production and sales increased and realized metal prices were higher. Oaxaca sales fell amid lower production and higher concentrate treatment charges.
- Nine-month sales fell about 4.8%; mine gross profit declined about 58%, and net income fell to $0.1. The company attributed the deterioration principally to Mexico’s COVID-19 shutdown, lower Oaxaca sales volumes, higher treatment costs, and a $3.6 inventory net-realizable-value adjustment for Isabella Pearl.
- Q3 Nevada gold production reached a record 7,847 ounces. Oaxaca Q3 gold and silver production decreased to 4,728 ounces and 324,592 ounces, respectively, from 7,462 and 473,810 a year earlier.
- Q3 cash cost after by-product credits per ounce was $589 for Oaxaca, compared with $299 a year earlier; Nevada’s cost per gold ounce was $935, compared with $1,115. These are company-defined non-GAAP measures and may not be comparable across companies.
Outlook, risks, and notable items
- Management expected Nevada gold grades and production to continue increasing through the remainder of 2020 as mining accessed higher-grade ore. The filing provides no quantified consolidated earnings or revenue guidance.
- Mexico suspended mining from April 1 until operations were approved to restart May 27, 2020. Nevada continued operating. Management said the long-term effects of COVID-19 remained uncertain, although it believed available liquidity and operating cash flow could fund operations for the foreseeable future.
- On October 5, 2020, the company announced plans to spin off its Nevada Mining Unit as Fortitude Gold, targeted for year-end 2020 or Q1 2021, subject to conditions and approvals. It planned to contribute $10 million of additional capital to Fortitude, reducing consolidated cash.
- Management cited commodity-price volatility, foreign exchange exposure, provisional-price adjustments on concentrate sales, operating and regulatory risks, and potential pandemic-related disruptions. The company had not hedged gold or silver prices.
- The nine-month tax benefit included a $0.9 reversal of prior-year GILTI tax expense following the company’s review of final regulations. The $3.6 inventory adjustment and gains on bullion and rounds also affected results; some bullion valuation gains were non-cash.
- The filing reports that disclosure controls and procedures were effective as of period-end and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Nevada spin-off was completed as planned, its final terms, and the effect of the $10 million capital contribution on Gold Resource’s liquidity.
- Subsequent Oaxaca production and sales recovery after the COVID-19 suspension, including any continuing workforce or operating constraints.
- Whether Nevada’s higher-grade production expectations were achieved and how unit costs and leach-pad inventory developed.
- Cash generation, capital spending, and share dilution from continued ATM issuance; shares outstanding increased from 65.7 million at year-end 2019 to 71.9 million at September 30, 2020.
- Exposure to metal prices, concentrate treatment charges, inventory valuation adjustments, and reclamation obligations, including the $6.7 million recorded reclamation and remediation liability.