Gold Resource Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are U.S. dollars; financial statement figures are in millions unless noted. The company produces gold, silver and base-metal concentrates and doré in Oaxaca, Mexico, and is developing the Isabella Pearl project in Nevada.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $30.8m | $21.4m | $62.9m | $45.7m |
| Mine gross profit | $9.5m | $5.2m | $22.4m | $15.6m |
| Net income | $3.8m | $0.9m | $9.2m | $5.2m |
| Basic EPS | $0.07 | $0.02 | $0.16 | $0.09 |
| Operating cash flow | — | $19.5m | $14.0m |
Q2 mine gross margin was approximately 31%, versus 24% a year earlier; net margin was approximately 12%, versus 4%. Revenue rose 44% in Q2, primarily on higher base-metal sales volumes and prices and higher silver sales volumes. Six-month revenue increased 38%. Q2 mine cost of sales was $21.2m, including $17.6m production costs; Q2 general and administrative expense was $2.2m, exploration expense $1.3m, and income tax expense $1.8m.
Q2 production included 5,806 ounces of gold and 593,955 ounces of silver; precious-metal gold-equivalent production was 13,335 ounces, up from 11,133. Combined mill throughput rose 34% year over year. First-half gold recovery at Arista fell to 78% from 87%, which management attributed partly to Switchback ore characteristics. Q2 metal sales included 5,460 ounces of gold and 561,009 ounces of silver.
Management-reported non-GAAP costs per precious-metal gold-equivalent ounce sold were $70 cash cost after by-product credits and $577 all-in sustaining cost in Q2, compared with $272 and $856, respectively. The unusually high base-metal contribution drove the low cash-cost figure; it should not be viewed as a standalone measure of profitability.
Financial position and cash flows
At June 30, cash and cash equivalents were $26.6m, up $4.3m from year-end; current assets were $46.2m and current liabilities $18.5m, yielding working capital of $27.7m. Total assets were $146.1m and shareholders’ equity $122.3m. Loan and capital-lease obligations totaled approximately $3.3m; reclamation and remediation liabilities were $3.0m.
First-half operating cash flow of $19.5m funded $15.1m of cash capital expenditures. Financing activities provided $0.1m, including stock-option exercise proceeds, partly offset by loan and lease repayments and $0.6m of dividends paid. Cash increased from $22.4m to $26.6m. The company declared Q2 dividends of $0.005 per share, or approximately $0.3m.
Material changes, outlook and risks
- Construction and development at Isabella Pearl began June 18 after permits were obtained. The company had incurred $11.3m of an estimated $30m development cost by June 30 and was evaluating cash, equity, debt or a combination to fund the remainder. No financing assurance was given.
- Management targeted first gold production at Isabella Pearl within 12 months of construction commencement and more than a 100% increase in annual consolidated gold production in the project’s first full commercial year. These are forward-looking targets, not guarantees.
- The Isabella Pearl feasibility study reported 2.695m tonnes of proven and probable reserves grading 2.22 g/t gold and 13 g/t silver, equivalent to 192,600 gold ounces and 1,129,100 silver ounces.
- The company had an at-the-market equity facility authorizing up to $75m of gross share sales, but reported no sales under it through June 30. Equipment purchase commitments were approximately $2.3m.
- Q2 revenue included a $2.3m negative mark-to-market adjustment on provisionally priced concentrate sales, principally reflecting zinc-price movements. The adjustment is recognized in revenue before final settlement and can fluctuate with metal prices.
- One customer accounted for 94% of revenue in both the quarter and first half of 2018 and the comparable 2017 periods. Commodity-price movements, Mexican peso fluctuations, operational performance, permitting and project execution are material risks. The company reported it does not hedge metal prices or foreign currency exposure.
- Management said liquidity was adequate for operations and corporate activities for the foreseeable future, while noting that Isabella Pearl’s remaining capital needs could require financing. No formal consolidated production or earnings guidance was provided in the supplied filing text.
Most important facts for investors to verify
- Isabella Pearl construction schedule, remaining funding requirement, financing terms and progress toward the targeted production start.
- Whether Arista’s lower gold recovery persists and how Switchback ore affects grades, recoveries and operating costs.
- Concentration and credit exposure from the customer representing 94% of revenue.
- How metal-price movements and final settlements affect provisional-sales revenue and reported margins.
- The assumptions and reserve basis underlying Isabella Pearl’s feasibility study and production targets.