Gold Resource Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company’s principal producing operation was the Aguila Project in Oaxaca, Mexico, with processing at its mill of ore from the Arista underground mine. Unless otherwise noted, financial amounts below are in U.S. dollars; statement amounts are in millions.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $19.4 million | $21.1 million | $71.1 million | $85.9 million |
| Mine gross profit (margin) | $4.4 million (23%) | $6.8 million (33%) | $25.4 million (36%) | $39.8 million (46%) |
| Operating income (loss) | $(0.3) million | $(0.4) million | $10.9 million | $24.4 million |
| Net income (loss) | $(0.5) million | $(1.5) million | $5.4 million | $12.9 million |
| Net income (loss) per diluted share | $(0.01) | $(0.03) | $0.10 | $0.24 |
- Production and costs: Q3 gold-equivalent production was 14,133 ounces, down 18% year over year; nine-month production was 48,370 ounces, down 26%. Q3 gold-equivalent ounces sold were 12,773. Total cash cost after by-product credits was $603 per ounce in Q3 and $505 for the nine-month period, versus $364 and $434, respectively, in 2014. These are non-GAAP measures.
- Cash flow: Operating cash flow was $14.5 million for the first nine months, compared with $26.3 million in 2014. Capital expenditures were $21.8 million; net investing cash outflow was $21.8 million. Dividends paid were $4.9 million, and cash declined by $13.4 million to $14.1 million.
- Liquidity and debt: Current assets were $36.2 million and current liabilities $18.4 million, yielding working capital of $17.8 million, down from $29.3 million at year-end 2014. Capital lease obligations totaled $1.2 million, all current at September 30; the filing reports no other borrowings. Total liabilities were $21.0 million.
- Other balance-sheet items: Total assets were $114.9 million and shareholders’ equity $93.9 million. Property, plant and mine development, net, increased to $47.8 million from $32.3 million at year-end, reflecting investment in development and facilities.
Material changes and operating drivers
- Nine-month sales fell 17% year over year, while mine gross profit fell 36% and net income fell 58%. Management attributed lower results mainly to reduced realized metal prices and lower silver production; higher depreciation also weighed on mine margins.
- Q3 realized prices were lower year over year: gold $1,115 per ounce (down 14%), silver $14.50 (down 28%), with copper, lead and zinc prices also lower. Q3 silver production declined 18%; gold production increased 5%.
- Management cited excessive mining dilution, primarily in August, which reduced ore grades. Throughput improved: Q3 tonnes milled per day rose 34% to 1,143, while nine-month average throughput rose 6% to 1,104 tonnes per day.
- Other expense was $1.0 million in Q3 and $2.1 million for the nine months, including currency effects, equity-investment losses and bullion write-downs. Nine-month results also included a $1.7 million unrealized investment loss.
Outlook, risks and notable disclosures
- Production outlook: The company revised its 2015 target to 29,600 ounces of gold and 2.5 million ounces of silver, below the original targets of 31,500 ounces and 2.97 million ounces. Management said production through Q3 had reached 93% of the original low-end gold target and 87% of the silver target.
- Development and exploration: The third phase of the tailings facility was completed. Mine development and exploration continued at Aguila, Las Margaritas and other properties; spending was reduced in Q3 as the company sought to control costs. Access to the Switchback deposit was targeted by year-end, and additional Radar and Goose drilling was planned for 2016.
- Liquidity outlook: Management stated that available liquidity and capital resources were adequate for foreseeable operations and corporate activities. It also noted development and drilling spending is discretionary and may vary with capital availability, results and market conditions.
- Tax matters and controls: Mexican tax authorities were conducting examinations relating to 2011 and 2012; the filing said no further information had been communicated. Disclosure controls and internal control over financial reporting were reported ineffective because of a material weakness in income-tax accounting and review. Remediation was underway, with management intending full implementation during 2015.
- Key risks: Exposure includes gold and silver price volatility, Mexican peso movements, provisional concentrate pricing and settlement, equity-price changes, operating costs, mine development and grade uncertainty, and political, regulatory and country risks in Mexico. The company had not entered into gold or silver price hedges.
- The board declared a $0.5 million dividend on October 27, 2015, payable in November. Dividends are discretionary and may change or be discontinued.
Important facts for investors to verify
- Whether the revised 2015 gold and silver production targets were achieved, and whether dilution and ore grades improved.
- Whether operating cash generation can support mine development, exploration and dividends as cash balances decline.
- Whether realized metal prices, by-product credits and cash costs sustain margins; cash-cost figures are non-GAAP and may not be comparable across miners.
- Progress and any findings from the Mexican tax examinations, and completion and effectiveness of the planned income-tax control remediation.
- Capital spending requirements, the timing and results of exploration, and exposure from provisional concentrate settlements and Mexican operating risks.