Gold Resource Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts are U.S. dollars; financial statement amounts are in thousands unless otherwise noted. The company’s principal producing operation was the Aguila Project in Oaxaca, Mexico.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $21.4 million | $19.4 million | $65.0 million | $71.1 million |
| Mine gross profit | $5.4 million | $4.4 million | $21.2 million | $25.4 million |
| Operating income (loss) | $2.5 million | ($0.3 million) | $13.3 million | $10.9 million |
| Net income (loss) | $1.6 million | ($0.5 million) | $8.0 million | $5.4 million |
| Diluted EPS | $0.03 | ($0.01) | $0.14 | $0.10 |
| Operating cash flow | Not separately reported for the quarter | $17.5 million | $14.5 million |
- Q3 mine gross margin was approximately 25%, compared with 23% a year earlier; nine-month margin was approximately 33%, compared with 36%.
- For the first nine months, capital expenditures were $12.6 million, investing cash outflow was $12.2 million, and financing cash outflow was $1.0 million. Cash and equivalents rose by $4.2 million to $17.1 million.
- At September 30, current assets were $35.4 million and current liabilities $9.1 million, yielding working capital of $26.3 million and a current ratio of approximately 3.9. Total liabilities were $11.7 million; the company reported that its equipment capital leases had been paid off during the quarter.
- At September 30, total assets were $123.0 million and shareholders’ equity was $111.3 million. Shares issued and outstanding were 56.9 million; the filing reports 56.6 million outstanding as of November 1, 2016.
- Q3 cash cost after by-product credits was $623 per precious-metal gold-equivalent ounce sold, and all-in sustaining cost (AISC) was $907. For the first nine months, these were $511 and $910, respectively. These are non-GAAP measures and may not be comparable across companies.
Changes versus prior periods
- Q3 sales increased 10%, primarily because realized prices rose, partly offset by lower production. Nine-month sales declined 9%, principally due to lower silver, copper and lead production from lower grades.
- Q3 gold and silver production declined 11% and 23%, respectively. Nine-month gold production increased 3%, while silver, copper and lead production fell; zinc production increased 11%.
- Management attributed lower grades in part to mining deeper Arista levels and processing lower-grade open-pit stockpiles. Throughput increased: 1,278 tonnes per operating day in Q3 versus 1,143 in Q3 2015.
- Q3 operating results improved to income from a loss; nine-month net income increased despite lower sales and mine gross profit. Lower production costs and higher realized metal prices supported Q3 gross profit. Reduced general and administrative and exploration spending lowered expenses in both comparison periods.
- Operating cash flow increased $3.0 million for the first nine months, mainly reflecting higher net income. Capital spending fell from $21.8 million to $12.6 million, while dividends paid declined from $4.9 million to $0.8 million.
Outlook, developments and risks
- Management remained on target for 2016 production of approximately 26,000 ounces of gold and 1.9 million ounces of silver, with a plus-or-minus 5% range.
- The company acquired the Isabella Pearl project and Mina Gold property in Nevada in August. Isabella Pearl has a third-party estimate of 191,400 proven and probable gold ounces; Mina Gold has a historic third-party estimate of mineralized material. These estimates are not equivalent in status, and the filing describes Isabella Pearl engineering and permitting as ongoing. Management was advancing the project toward a production decision, not reporting a production commitment.
- The Alta Gracia blasting permit was received; initial small-scale underground mining was expected to deliver material to the Aguila processing facility in Q4 2016 or Q1 2017. Exploration drilling continued in Oaxaca and Nevada.
- Management said liquidity and capital resources were adequate to fund operations for the foreseeable future. The filing gives no quantified production or earnings guidance beyond the 2016 production target.
- Key risks include metal-price volatility, lower-than-targeted production or adverse exploration results, Mexican peso movements, political and regulatory conditions in Mexico, provisional concentrate pricing, weather and ground movements, and equity-market access. The company had no commodity or currency hedges and noted that provisional sales contracts create mark-to-market earnings volatility.
- Unusual or notable items include $2.3 million of Mexican fuel tax credits recorded in the first nine months, the preliminary acquisition allocation for Nevada properties (including a $5.6 million deferred tax liability), and non-cash gains from bullion and investments among other income items. Management reported effective disclosure controls and no material change to internal control over financial reporting.
Important facts for investors to verify
- Whether Aguila grades, production and throughput support the stated 2016 production target and the planned mine development schedule.
- Progress on Isabella Pearl permitting, engineering, reserve definition and the eventual production decision; also verify the status and basis of the Mina Gold historic estimate.
- The sustainability of cash costs and AISC, including the effect of by-product credits, metal prices and lower-grade stockpile processing.
- Cash conversion and future capital requirements, including mine development, exploration, dividends and the newly acquired Nevada properties.
- Final purchase-price allocation and associated tax assumptions for the Walker Lane acquisition, plus the realization of deferred tax assets and application of Mexican fuel tax credits.
- Exposure to provisional pricing, commodity and currency volatility, and operating, regulatory and country risks in Mexico.