Gold Resource Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unless otherwise noted, financial amounts are in U.S. dollars; statement amounts below are in millions. The company operates the El Aguila project in Oaxaca, Mexico and began commercial production in July 2010, but remains classified as an exploration-stage company because it has not established SEC-defined proven or probable reserves.
Financial and operating results
| Metric | Q2 2011 | Six months 2011 |
|---|---|---|
| Metal concentrate revenue, net | $20.7 million | $31.9 million |
| Mine gross profit | $17.2 million | $26.0 million |
| Mine gross margin | Approximately 83.1% | Approximately 81.5% |
| Net income | $3.1 million; $0.06 per diluted share | $5.2 million; $0.09 per diluted share |
| Operating cash flow | Not separately stated | $8.6 million |
| Capital expenditures | Not separately stated | $3.1 million |
- Q2 net income before the separately reported flood loss was $4.9 million. The $1.8 million after-tax extraordinary loss reduced reported net income.
- At June 30, cash and equivalents were $42.1 million, down from $47.6 million at year-end 2010. Working capital was $45.9 million, versus $51.2 million at December 31, 2010. The company reported no outstanding debt.
- Current assets were $59.0 million and current liabilities $13.1 million. The balance sheet also included a $2.7 million asset retirement obligation.
- For the six months, financing cash outflow was $11.1 million, principally dividends. Dividends paid during the period totaled $11.1 million; a further $0.04-per-share dividend was declared after quarter-end.
- Company-reported non-GAAP cash cost per gold-equivalent ounce was $156 for Q2 and $126 for the first half. These measures are not GAAP measures and may not be comparable across companies.
Changes versus the prior comparable periods
- There were no concentrate sales in Q2 or the first half of 2010; commercial production began July 1, 2010. In 2011, the company reported Q2 net income versus a $5.8 million loss in Q2 2010, and first-half net income versus a $13.1 million loss in the first half of 2010.
- First-half operating cash flow improved from $16.0 million used in 2010 to $8.6 million provided in 2011, reflecting production revenue. Cash nevertheless declined during the first half, with dividends, capital spending, storm-related costs, and operating needs among the uses.
- Q2 total costs and expenses increased 81% year over year to $10.5 million; first-half costs and expenses rose 31% to $17.1 million. Management cited the transition to underground mine development and higher stock-based compensation. First-half non-cash stock compensation was $2.9 million, compared with $0.5 million in 2010.
Outlook, commentary, risks, and unusual items
- An April 20 rain and hail storm flooded lower levels of the La Arista underground mine and damaged roads, buildings, and equipment. Management said cleanup delayed underground mining about six weeks and hurt April and May production. The company recorded a $2.5 million loss before tax benefits, or $1.8 million after tax, and had submitted an insurance claim; reimbursement was undetermined.
- Production began returning toward expected levels in June, when management reported an annualized run rate of approximately 80,000 gold-equivalent ounces. The 2011 production target was reduced from 90,000 to 60,000–70,000 ounces, with targets of 20,000 ounces in each of Q3 and Q4. The filing cautions that the revised target is not assured.
- The company planned continued La Arista underground development, mill optimization, and exploration. Management expected approximately $600,000 per month in cash overhead, excluding non-cash stock compensation, in addition to project spending.
- Gold and silver prices, foreign exchange rates, operating costs, production levels, and Mexican operating conditions are material risks. The company had no commodity-price hedges and reported currency exchange losses of $0.2 million for the first half.
- Sales were concentrated: 100% of Q2 sales and 95.2% of first-half sales were to Consorcio Minero de Mexico Cormin, with the remainder to another Trafigura Group company. All reported trade receivables at June 30 were due from Consorcio.
- Because no properties had proven or probable reserves, substantially all exploration and mine construction/development costs were expensed rather than capitalized. Management expected this treatment to continue and the company to remain in the exploration stage for the foreseeable future.
- Income tax expense was $1.8 million, offset in part by a $0.75 million tax benefit associated with the flood loss. The company maintained a full valuation allowance against its deferred tax assets because realization was uncertain.
Important facts for investors to verify
- Whether underground operations recovered from the storm disruption and achieved the revised 60,000–70,000-ounce 2011 production target.
- Whether insurance reimbursed any of the storm-related loss and whether further operational or repair costs arose.
- Customer concentration, receivable collection, and the availability of alternative concentrate buyers if the current sales relationship is interrupted.
- Cash generation and liquidity after dividends, mine development, exploration, and other planned spending; confirm the company’s no-debt position in subsequent filings.
- Reserve status and the resulting expense treatment for development costs, as well as the impact of substantial unrecognized stock-option compensation costs.