Gold Resource Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; interim financial statements are unaudited. Unless otherwise stated, financial amounts below are U.S. dollars in millions. The company produces doré and concentrates in Oaxaca, Mexico, and is developing the Isabella Pearl mine in Nevada.
Financial results and position
- Third-quarter revenue: $24.3 million, down 22% from $31.1 million a year earlier. Net loss was $0.8 million, or $0.01 per share, versus net income of $4.6 million, or $0.08 per share. Mine gross profit fell to $3.3 million from $11.2 million.
- Nine-month revenue: $87.2 million, up 13% from $76.8 million. Net income was $8.4 million, down from $9.8 million; diluted EPS was $0.14 versus $0.17.
- Margins: Mine gross margin was approximately 13.6% in Q3 versus 36.0% in Q3 2017; for the first nine months it was 29.5% versus 34.9%. Net margin was approximately negative 3.2% versus 14.7% in Q3, and 9.7% versus 12.8% for the nine-month periods.
- Cash flow: Nine-month operating cash flow was $20.8 million, down from $23.5 million. Cash capital expenditures were $26.1 million, compared with $20.4 million, leaving operating cash flow less cash capex of negative $5.3 million versus positive $3.1 million. Financing activities used $0.3 million. Cash declined $5.8 million to $16.6 million.
- Liquidity: Current assets were $37.3 million and current liabilities $19.6 million, for working capital of $17.6 million, down from $27.5 million at December 31, 2017. Current assets included $3.4 million of gold and silver rounds/bullion, separate from cash.
- Debt and obligations: Equipment loans totaled $2.3 million and capital leases $1.3 million, or about $3.6 million combined. Reclamation and remediation liabilities were $3.7 million. The Isabella Pearl reclamation bond was approximately $9.2 million, obtained through a surety contract without cash collateral; the surety may require collateral.
- Investment and shareholder returns: Property, plant and mine development, net, rose to $102.1 million from $82.6 million. Dividends paid during the first nine months were $0.9 million; Q3 distributions were $0.005 per share.
Material changes and operating performance
- Q3 revenue and earnings declined mainly because realized metal prices were lower and the company recorded a $1.9 million loss from metal-price adjustments on prior-period concentrate sales. Q3 realized prices were lower year over year for gold, silver, copper, lead and zinc; zinc fell 38%.
- For the first nine months, higher silver and base-metal sales volumes lifted revenue, partly offset by weaker prices and higher production costs. Sales volumes rose 11% for silver, 43% for copper, 47% for lead and 22% for zinc.
- Q3 gold production was 6,411 ounces, roughly flat year over year; silver production fell to 321,590 ounces from 392,153. Mill throughput increased 34%, but expected lower ore grades largely offset the throughput benefit. Nine-month gold production was nearly flat, while silver production increased to 1.34 million ounces from 1.22 million.
- Q3 cash cost after by-product credits was $582 per precious-metal gold-equivalent ounce sold, versus $2 a year earlier; all-in sustaining cost was $1,338 versus $714. The company cautions that these non-GAAP measures are affected by base-metal credits and are not necessarily comparable across companies.
- Construction and mine development drove higher investment spending. At September 30, Nevada construction-in-progress was $19.4 million, and Mexico construction-in-progress was $8.9 million.
Outlook, commentary and risks
- Management reported substantial Isabella Pearl construction progress: approximately 80% of the heap-leach pad and ponds were complete, with ADR plant and ancillary work underway. First gold was targeted in less than 12 months from construction commencement in June 2018; the company targeted more than doubling consolidated annual gold production in the project's first full year of commercial production.
- Management expected higher precious-metal production in Q4 2018 from higher-grade planned work areas. This is an expectation, not a guarantee.
- Approximately $20 million of Isabella Pearl expenditures remained after $15.3 million had been paid or financed. Management considered liquidity adequate for the foreseeable future, but said it was evaluating equity financing, debt financing, or both if cash and future cash flow proved insufficient; availability and terms were not assured.
- Revenue was highly concentrated: one customer accounted for 90% of Q3 revenue and 93% for the first nine months. Provisional concentrate pricing creates revenue and receivable adjustments as metal prices move before final settlement; the nine-month embedded-derivative loss was $3.7 million.
- Principal risks include volatility in precious- and base-metal prices, production and grade variability, exploration and project-development outcomes, permitting and political/regulatory factors, weather and ground conditions, Mexican peso movements, and potential difficulty raising equity on acceptable terms. The company reported no use of commodity-price or foreign-exchange hedges and considered fixed-rate interest-rate exposure insignificant.
- Other notable items: the company recorded $3.2 million of Mexican fuel tax credits for the first nine months, applied against production costs and tax payable. It reported no liability for uncertain tax positions. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Progress, remaining cost, financing plan and production ramp at Isabella Pearl, including whether the stated timing and production targets remain achievable.
- Customer concentration and the impact of final metal-price settlements on revenue, receivables and cash realization.
- Production grades, recoveries, throughput and the sustainability of by-product credits and reported non-GAAP unit costs.
- Liquidity and cash-flow needs as construction spending continues, including potential financing requirements and dilution or debt implications.
- The filing text gives inconsistent share counts: the balance sheet and cover page report 57,718,676 shares outstanding, while the shareholders’ equity roll-forward reports 58,055,074 shares at September 30, 2018. Verify the correct period-end figure against the filed statements and subsequent share disclosures.