Gold Resource Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Amounts are U.S. dollars; financial statement amounts are in thousands unless stated otherwise. Gold Resource produces metal concentrates at the La Arista underground mine within its El Aguila Project in Oaxaca, Mexico. After reporting proven and probable reserves, the company transitioned from exploration-stage to production-stage accounting effective January 1, 2014.
Financial and operating results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net metal concentrate sales | $21.1 million | $29.4 million | $85.9 million | $98.4 million |
| Mine gross profit | $6.8 million | $11.4 million | $39.8 million | $48.6 million |
| Mine gross margin | 32.7% | 38.7% | 46.3% | 49.4% |
| Operating income (loss) | $(0.4) million | $(1.9) million | $24.4 million | $9.7 million |
| Net income (loss) | $(1.5) million | $(1.8) million | $12.9 million | $4.2 million |
| Basic earnings (loss) per share | $(0.03) | $(0.03) | $0.24 | $0.08 |
| Operating cash flow | Not stated separately | Not stated separately | $26.3 million | $3.7 million |
- Q3 sales fell 28.4%; nine-month sales fell 12.7%. Management cited concentrate stockpiling for the new Doré facility, lower precious-metal grades and, for the nine-month period, lower realized gold and silver prices.
- Nine-month mine production was 65,182 gold-equivalent ounces, up from 64,148; ounces sold fell to 53,194 from 63,998. Q3 production declined to 17,262 ounces from 21,244, while ounces sold declined to 11,923 from 19,033.
- Non-GAAP cash cost after by-product credits was $364 per gold-equivalent ounce sold in Q3 and $434 for the nine months, compared with $756 and $609, respectively. These measures are not GAAP and may not be comparable across companies.
Balance sheet, cash flow and distributions
- At September 30, 2014, cash and equivalents were $24.8 million, working capital was $32.2 million, and total assets were $110.8 million. Working capital was down $1.2 million from year-end 2013.
- Total liabilities were $23.6 million. The company reported no debt outstanding, but had capital lease obligations of $2.8 million, including $1.5 million current. Reclamation and remediation liabilities were $2.8 million.
- Nine-month operating cash flow of $26.3 million included a substantial $11.9 million cash-flow benefit from income taxes payable/receivable changes. Investing cash outflow was $10.6 million, including $10.5 million of capital expenditures; financing cash outflow was $5.9 million, principally dividends.
- Cash increased $9.8 million from December 31, 2013. The filing notes that $12.6 million of outflows historically classified as operating cash flow are now classified as investing cash flow following the production-stage accounting transition.
- The company declared $4.9 million of dividends for the first nine months. Its monthly dividend had been reduced from $0.03 to $0.01 per share effective December 2013; future dividends are not assured.
Outlook, unusual items and risks
- The Doré facility was completed in September and remained in commissioning. Management targeted commercial production in Q4 2014 and expected lower refining, royalty and treatment costs. The company had stockpiled 5,878 gold-equivalent ounces of high-grade concentrate; anticipated savings and the production timetable are forward-looking and not assured.
- Management cited slower-than-expected mine development, lower Q3 grades and reduced tonnes milled. Average Q3 throughput was 865 tonnes per day versus 913 a year earlier. The 1,500-tonne-per-day mill capacity is a future target, with no assurance it can be achieved or sustained.
- Nine-month income tax expense was $12.3 million, versus $3.0 million in 2013; management attributed the increased effective tax rate principally to Mexico’s newly enacted mining tax. Q3 tax expense was $1.1 million despite a pretax loss.
- Results reflect the accounting transition: qualifying mine development costs are capitalized from January 1, 2014, rather than expensed as under the prior exploration-stage presentation. This limits comparability; property and mine development net book value rose to $26.8 million from $18.1 million.
- The company recorded a $1.5 million unrealized investment fair-value gain for the nine months, including gains on its Canamex investment, and a $0.2 million silver-bullion impairment. In July, it sold its Colorado Springs office building to a related party for $1.7 million and leased back part of it; a $0.3 million gain is being recognized over the lease term.
- Management identified an immaterial prior-period labor-cost error and recorded corrections in the nine-month 2014 results, including adjustments to inventory, current liabilities, cost of sales and income taxes.
- Disclosure controls and procedures were reported ineffective at September 30, 2014 because of previously identified material weaknesses involving income-tax controls, cash-disbursement approvals and oversight of external service providers. Remediation was underway; management intended to complete it during 2014.
- Risks include volatile gold and silver prices, peso exchange-rate exposure, mine-development and grade uncertainty, Mexican regulatory and security conditions, and operational access to labor, equipment, supplies, power and water. The company had no commodity-price hedges. A securities class-action dismissal was on appeal; a related derivative case remained stayed, and the company could not estimate potential loss.
Important facts for investors to verify
- Whether the Doré facility reached commercial production in Q4 2014 and delivered the expected cost savings.
- Whether mine development, grades and throughput support sustained production growth toward the stated mill capacity.
- How metal prices, concentrate settlements and by-product credits affect sales, margins and cash costs.
- Whether operating cash generation remains robust excluding the period’s large tax-related working-capital benefit and accounting reclassification.
- Progress in remediating the material weaknesses and any subsequent updates to litigation, tax exposure or dividend policy.