UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

◻TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to              

Commission File Number: 001-34857

 

GOLD RESOURCE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

2886 Carriage Manor Point, Colorado Springs, Colorado 80906

(Address of Principal Executive Offices) (Zip Code)

 

 (303) 320-7708

(Registrant’s telephone number including area code) 

 

Securities registered under Section 12(b) of the Exchange Act:

 

 

 

Securities registered under Section 12(g) of the Exchange Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act.     Yes   ◻    No   ☒   

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes   ◻    No   ☒   

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   ☒     No   ◻ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to post such files).     Yes   ☒     No   ◻ 

 

 

---

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☒ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ◻ No  ☒ 

The aggregate market value of the common stock of Gold Resource Corporation held by non-affiliates as of June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, was $274,147,607 based on the closing price of the common stock of $5.06 as reported on the NYSE MKT, LLC. 

As of March 18, 2015 there were 54,179,369 shares of common stock outstanding. 

 

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Definitive Proxy Statement to be filed pursuant to Regulation 14A for the registrant’s 2015 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

 

 

 

---

 

TABLE OF CONTENTS

ADDITIONAL INFORMATION

Descriptions of agreements or other documents contained in this report are intended as summaries and are not necessarily complete. Please refer to the agreements or other documents filed or incorporated herein by reference as exhibits. Please see the exhibit index at the end of this report for a complete list of those exhibits.

---

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words “plan,” “target,” “anticipate,” “believe,” “estimate,” “intend” and “expect” and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements include, without limitation, the statements regarding Gold Resource Corporation’s strategy, future plans for production, future expenses and costs, future liquidity and capital resources, future dividends and estimates of mineralized material. All forward-looking statements in this report are based upon information available to Gold Resource Corporation on the date of filing this report, and the company assumes no obligation to update any such forward-looking statements. Forward looking statements involve a number of risks and uncertainties and there can be no assurance that such statements will prove to be accurate. Gold Resource Corporation’s actual results could differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the Item 1A. Risk Factors section of this Form 10-K.

In addition to the specific factors identified under Item 1A. Risk Factors in this report, other uncertainties that could affect the accuracy of forward-looking statements include:

This list, together with the factors identified under Item 1A. Risk Factors, is not exhaustive of the factors that may affect any of our forward-looking statements. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect. These forward-looking statements represent our beliefs, expectations and opinions only as of the date of filing this report. We do not intend to update these forward-looking statements except as required by law. We qualify all of our forward-looking statements by these cautionary statements.

 

 

---

 

 PART I 

ITEM 1.BUSINESS 

History and Organization 

Gold Resource Corporation was organized under the laws of the State of Colorado on August 24, 1998. We are a producer of metal concentrates that contain gold, silver, copper, lead and zinc, as well as, doré containing gold and silver at the El Aguila Project in the southern state of Oaxaca, Mexico. The El Aguila Project includes the El Aguila open pit mine, which ceased operations in February 2011, and the La Arista underground mine, which is currently in operation. We are also performing exploration and evaluation work on certain of our portfolio of precious and base metal exploration properties in Mexico and Nevada and are evaluating other properties for possible acquisition.

 

In this report, “Company,” “our,”  “us” and “we” refer to Gold Resource Corporation together with our affiliates and subsidiaries, unless the context otherwise requires.

On April 30, 2014, we announced the completion of our initial reserve study and issued a report dated December 31, 2013, confirming the existence of proven and probable reserves as defined in Industry Guide 7 (“Guide 7”) promulgated by the U.S. Securities and Exchange Commission (“SEC”). As a result of the completion of the reserve study, we have transitioned from an Exploration Stage Enterprise to a Production Stage Enterprise in accordance with Guide 7. We no longer consider ourselves to be a Development Stage Entity as defined in Accounting Standards Codification 915 – Development Stage Entities (“ASC 915”).

We completed our initial public offering (“IPO”) in August 2006. Since that time, we have raised additional capital pursuant to several private placements of our common stock. We used the proceeds of our IPO and additional private placements to conduct exploration activities at the El Aguila property. Based on our successful exploration efforts, we decided on April 11, 2007, to move forward to construct a mill and a mine at the El Aguila Project. We began mining and milling operations at the El Aguila Project on July 1, 2010. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information. The El Aguila Project includes approximately 30,074 hectares of mining concessions, an access road from a major highway, haul roads, a mill facility and adjoining buildings, including an assay lab, an open pit and underground mine, tailings pond and other infrastructure. See Item 2. Properties for additional information.

Our principal executive offices are located 2886 Carriage Manor Point, Colorado Springs, Colorado 80906, and our telephone number is (303) 320-7708.  We maintain a website at www.goldresourcecorp.com and through a link on our website you can view the periodic filings that we make with the SEC.

Our operations at our Oaxaca Mining Unit in Mexico are conducted through our wholly-owned Mexican subsidiary, Don David Gold Mexico S.A.de C.V. (DDGM). In November 2013, we divested our interest in Golden Trump Mexico S.A. de C.V. Our Nevada Exploration Unit operates through our wholly-owned subsidiary, GRC Nevada Inc.

Developments During 2014 

We completed our fourth full year of mining operations in 2014. Two mines are located at our El Aguila Project; the El Aguila open pit mine and the La Arista underground mine. Mining at the El Aguila open pit mine was essentially completed in 2010, and we transitioned to processing mineralized material from the La Arista underground mine in March 2011. In 2014, we processed ore from the La Arista underground mine with gold and silver as our primary metal products and copper, lead and zinc as by-products. Our El Aguila milling facility located on our El Aguila Project produced both concentrates and doré.  

During 2014, we continued to develop the La Arista underground mine; reaching Level 19 on the decline ramp by year end. We developed multiple stopes and working faces for mining, predominantly from Levels 12 to Level 17 during the year. The mining methods of long-hole stoping and cut-and-fill were utilized.    

Our optimization of the mill expansion, completed in the fourth quarter of 2013, resulted in our ability to begin producing a higher grade gold and silver concentrate in the first quarter of 2014, due to being able to utilize a Knelson gravity concentrator at our mill facilities. With the goal of reducing refining costs, royalties and treatment costs, we completed the commissioning phase of the doré processing facility and achieved commercial production in the fourth quarter of 2014.

In 2014, we leased two properties in Nevada, United States of America, for exploration purposes.  We leased the Radar property from Altan Nevada Minerals Limited and the Goose property from Nevada Eagle LLC, and formed our Nevada Mining Unit.  We believe that these properties have excellent potential for discovery of both bulk tonnage replacement-type and bonanza-grade vein-type gold deposits, similar to other gold deposits historically mined in the Paradise Peak and Goldfield districts.  These mines are also in the Walker Lane Mineral Belt and well known for their significant and high-grade gold-silver production. We believe the Radar and Goose properties are highly prospective based on their proximity to other major gold deposits in the Walker Lane Mineral Belt. Our operations in Nevada are in the exploration stage. See Item 2. Properties for additional information.

Production Summary

During 2014, mill production totaled 83,903 ounces of precious metal gold equivalent from the La Arista mine, which was a 1.1% decrease in mill production from 2013.  We processed an aggregate of 375,623 tonnes of mineralized material with an average grade of 3.21 grams per tonne gold and 296 grams per tonne silver. See the table titled Production and Sales Statistics—El Aguila Project in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for detailed information regarding our production statistics.

Exploration 

Exploration during 2014 continued to focus primarily on our Oaxaca Mining Unit and specifically the El Aguila Project with infill and step-out drilling at the La Arista deposit’s vein system.  This included follow-up of the new Switchback discovery which is an area of mineralization approximately 500 meters northeast of the La Arista deposit, for which drill results continue to show multiple veins over a 60 to 80 meter interval.  We also performed exploration at several of our other properties, including continuing a surface drill program on portions of the Alta Gracia property that focused on previously identified drill targets.  Please see the map of our properties under Oaxaca Mining Unit in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information regarding our exploration properties in Mexico. See Item 2. Properties for additional information regarding our exploration activities.

Dividends 

We declared and paid an aggregate of $0.12 per share in dividends in 2014. In 2012, we commenced a physical dividend program pursuant to which our shareholders have the option to convert the cash dividends into physical gold and silver bullion and take physical delivery of bullion or have it stored in a secured vault network.  See Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities for additional information.  

Proven and Probable Reserves    

Beginning January 1, 2014, we transitioned from an Exploration Stage Enterprise to a Production Stage Enterprise as defined by Guide 7. On April 30, 2014, we announced the completion of our reserve study and issued a report dated December 31, 2013 confirming the existence of proven and probable reserves as defined in Guide 7 promulgated by the SEC. As a result of the completion of the reserve study, we have transitioned from an Exploration Stage Enterprise to a Production Stage Enterprise in accordance with Guide 7.  We no longer consider ourselves to be a Development Stage Entity as defined in ASC 915 and accordingly cumulative and other disclosures required by ASC 915 are no longer included in our financial statements.

Prior to January 1, 2014, we were considered an Exploration Stage Enterprise under SEC criteria since we had not demonstrated proven and probable reserves at our El Aguila Project in Oaxaca, Mexico or any of our other properties. Accordingly, as required under SEC guidelines, substantially all of our investment in mining properties up to that date, including construction of the mill, mine facilities and mine construction expenditures, were expensed as incurred and therefore do not appear as assets on our balance sheet.

   

Our characterization as an Exploration Stage Enterprise resulted in the classification of our facilities and mine construction expenditures as operating expenses rather than capital expenditures, and may have caused us to report lower net income than if we had capitalized the expenditures.  In addition, prior to January 1, 2014, our financial statements did not reflect a corresponding depreciation or amortization expense for our facilities and mine construction costs since they were expensed as incurred rather than capitalized. The change in our accounting presentation as a result of our transition to a Production Stage Enterprise may make certain period-over-period comparisons less meaningful than otherwise since we capitalized mine development related expenditures that would have been expensed under our prior accounting presentation.

---

 

As of December 31, 2014, our proven and probable reserves were:

 

Notes to the above proven and probable (“P & P”) reserves:

 

 

In addition to our proven and probable reserves, we estimated measured and indicated mineralized material within the definition of Guide 7.  Mineralized material does not have demonstrated economic viability. As of December 31, 2014, our measured and indicated mineralized material was:

 

 

 

Notes to the above measured and indicated (“M & I”) mineralized material:

 

Reserve estimates are prepared by Barry Devlin, Vice President of Exploration.  Mr. Devlin holds a BS degree with honors in Geology, 1981, and a Masters in Geology, 1987, from the University of British Columbia, Vancouver, Canada.  He is also a Professional Geologist registered with the Association of Professional Engineers and Geoscientists of British Columbia. 

Condition of Physical Assets and Insurance    

Our business is capital intensive and requires ongoing capital investment for the replacement, modernization or expansion of equipment and facilities. For more information, see Item 7, Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, Liquidity and Capital Resources, below. We maintain insurance policies against property loss and business interruption and insure against risks that are typical in the operation of our business in amounts that we believe to be reasonable. Such insurance, however, contains exclusions and limitations on coverage, particularly with respect to loss, environmental liability and political risk. There can be no assurance that claims would be paid under such insurance policies in connection with a particular event. See Item 1A, Risk Factors, below for additional information

Environmental Matters 

We conduct our operations so as to protect the environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our operating mine has a reclamation plan in place that we believe meets all applicable legal and regulatory requirements. At December 31, 2014, $3.0 million was accrued for reclamation costs relating to current or recently producing properties.

Competitive Business Conditions

The exploration for, and the acquisition of, gold and silver properties are subject to intense competition. Identifying and evaluating potential mining prospects is a costly and time-consuming endeavor. Due to our limited capital and personnel, we are at a competitive disadvantage compared to many other companies with regard to exploration and, if warranted, advancement of mining properties. Our present limited capital means that our ability to compete for properties to be explored and developed is limited. We believe that competition for acquiring mineral prospects will continue to be intense in the future.

Government Regulations and Permits 

In connection with mining, milling and exploration activities, we are subject to the United States and Mexican federal, state and local laws and regulations governing the protection of the environment, including laws and regulations relating to protection of air and water quality, hazardous waste management and mine reclamation as well as the protection of endangered or threatened species. The department responsible for environmental protection in Mexico is Secretaria de Medio Ambiente y Recursos Naturales (“SEMARNAT”), which is similar to the United States Environmental Protection Agency. SEMARNAT has broad authority to shut down and/or levy fines against facilities that do not comply with its environmental regulations or standards. Potential areas of environmental consideration for mining companies, including ours, include but are not limited to, acid rock drainage, cyanide containment and handling, contamination of water sources, dust and noise.

In connection with our mill and mining operations at the El Aguila Project, we have and intend to secure various regulatory permits from federal, state and local agencies. These governmental and regulatory permits generally govern the processes being used to operate, the stipulations concerning air quality and water issues, and the plans and obligations for reclamation of the properties at the conclusion of operations. Regulations require that an environmental impact statement, known in Mexico as a Manifiestacion de Impacto Ambiental (“MIA”), be prepared by a third-party contractor for submission to SEMARNAT. We have submitted our MIA to SEMARNAT for their review, and it has been approved. Studies required to support the MIA include a detailed analysis of these areas, among others: soil, water, vegetation, wildlife, cultural resources and socio-economic impacts. Although the regulatory process in Mexico has a public review component, proof of local community support for a project is required to gain final MIA approval. We have received the required local community support for the El Aguila area from which we are currently producing.  

 

We have obtained, and plan to obtain at the appropriate time, environmental permits, licenses or approvals required for operations. During 2014, we received a permit to begin constructing the third phase of the tailings impoundment facility at the El Aguila Project.  We are not aware of any material violations of environmental permits, licenses or approvals issued with respect to our operations.

 

In connection with exploration activities in the state of Nevada, United States of America, we are subject to various federal and state laws and regulations governing protection of the environment, including the Clean Air Act; the Clean Water Act; the Comprehensive Environmental Response; the Compensation and Liability Act; the Emergency Planning and Community Right-to-Know Act; the Endangered Species Act; the Federal Land Policy and Management Act; the National Environmental Policy Act; the Resource Conservation and Recovery Act; and related state laws. These laws and regulations are continually changing and are generally becoming more restrictive. Our activities outside the United States are also subject to various levels of governmental regulations for the protection of the environment and, in some cases, those regulations can be as, or more, restrictive than those in the United States.

 

We conduct our operations so as to protect public health and the environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our operating mine has a reclamation plan in place that we believe meets all applicable legal and regulatory requirements.

Customers

During the year ended December 31, 2014, our revenue was predominately through the sales of metals concentrate to Consorcio Minero de Mexico Cormin Mex. S.A. de C.V., a Trafigura Group Company (“Trafigura”) which was 93% of our sales for the year. During the fourth quarter of 2014, we reached commercial production of gold and silver doré bars and began selling to Johnson Matthey Gold & Silver Refining Inc. (“Johnson Matthey”). In the event that our relationships with Trafigura or Johnson Matthey is interrupted for any reason, we believe that we would be able to locate another entity to purchase our precious metals and by-product metals. However, any interruption could temporarily disrupt the sale of our principal products and adversely affect our operating results. We periodically review our options of alternative sales outlets to mitigate the concentration of risk with one concentrate buyer in case of any unforeseen disruptions.

 Employees and Contractors

We currently have eleven full-time employees, six of which serve as our executive officers. These individuals devote all of their business time to our affairs. 

During 2013, we divested a wholly-owned Mexican subsidiary that held our Mexican employees to a third-party employee service company,  and our El Aguila Project General Manager is currently our only employee in Mexico. We contract for the services of our approximately 380 former employees with the firm that acquired our subsidiary and also use various independent contractors for constructing our underground mine, surface exploration drilling and trucking.

 

ITEM 1A.RISK FACTORS 

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operation, contains forward-looking statements that may be materially affected by several risk factors, including those summarized below:

Risks Relating to Our Company 

Our existing production is limited to a single mine and any interruptions or stoppages in our mining activities would adversely affect our revenue. We are presently relying on a single mine to provide mineralized material for processing at our mill facility which we sell to fund our operations. Any interruption in our ability to mine this location, such as a labor strike, natural disaster, or loss of permits would negatively impact our ability to collect revenue following such interruption. Additionally, if we are unable to economically develop additional mines, we will eventually deplete the body of mineralized material and will no longer generate revenue sufficient to fund our operations. A decrease in or cessation of our mining operations would adversely affect our financial performance and may eventually cause us to cease operations.

If we are unable to achieve gold and silver production levels anticipated from our El Aguila Project, our financial condition and results of operation will be adversely affected. We have proceeded with the processing of the mineralized material from the La Arista underground mine at the El Aguila Project based on estimates of mineralized material identified in our drilling program and estimates of gold and silver recovery based on test work developed during our initial scoping study, reports and subsequent Proven and Probable Reserve report. However, risks related to metallurgy are inherent when working with extractable minerals. Sales of gold and silver that we realize from future mining activity will be less than anticipated if the mined material does not contain the concentration of gold and silver predicted by our geological exploration, studies and reports. If sales of gold and silver are less than anticipated, we may not be able to recover our investment in our property and our operations may be adversely affected. Our inability to realize production based on quarterly or annual projections may also adversely affect the price of our common stock and you may lose all or part of your investment.

Estimates of proven and probable reserves and mineralized material are uncertain and the volume and grade of ore actually recovered may vary from our estimates. The proven and probable reserves and mineralized material stated in this report represent the amount of gold, silver, copper, lead and zinc that we estimated, at December 31, 2014, could be economically and legally extracted or produced at the time of the reserve determination. Estimates of proven and probable reserves and mineralized material are subject to considerable uncertainty. Such estimates are, to a large extent, based on the prices of gold, silver, copper, lead and zinc and interpretations of geologic data obtained from drill holes and other exploration techniques.

 

Additionally, the term “mineralized material” as used in this report does not indicate proven and probable reserves as defined by Guide 7 or our standards. Estimates of mineralized material are subject to further exploration and development, and are, therefore, subject to considerable uncertainty. We cannot be certain that any part or parts of the mineralized material deposit will ever be confirmed or converted into Guide 7 compliant reserves or that mineralized material can be economically or legally extracted.

If the price of gold or silver declines from recent levels, if production costs increase or recovery rates decrease or if applicable laws and regulations are adversely changed, we can offer no assurance that the indicated level of recovery will be realized or that mineral reserves as currently reported can be mined or processed profitably. If we determine that a portion of our ore reserves become uneconomic, this may ultimately lead to a reduction in our reported reserves. Consequently, if our actual mineral reserves are less than current estimates, our business, prospects, results of operations and financial position may be materially impaired.

We may be unable to replace reserves as they become depleted. Gold and silver producers must continually replace reserves depleted by production to maintain production levels over the long term and provide a return on invested capital. Depleted reserves can be replaced in several ways, including expanding known ore bodies, locating new deposits, or acquiring interests in reserves from third parties. Exploration is highly speculative in nature, involves many risks and is frequently unproductive. Our current or future exploration programs may not result in new mineral producing operations. Even if significant mineralization is discovered, it will likely take many years from the initial phases of exploration until commencement of production, during which time the economic feasibility of production may change.

 

As a result of these uncertainties, our exploration programs and any acquisitions which we may pursue may not result in the expansion or replacement of our current production with new ore reserves or operations, which could have a material adverse effect on our business, prospects, results of operations and financial position.

 

We have identified material weaknesses in our internal controls over financial reporting that, if not properly corrected, could materially adversely affect our operations and result in material misstatements in our financial statements. As described in Item 9A. Controls and Procedures, we have concluded that our internal control over financial reporting was ineffective as of December 31, 2014, because certain material weaknesses existed in our internal control over financial reporting related to the validation of the completeness and accuracy of underlying data used in the determination of significant estimates and accounting transactions and the presentation of income tax expense. We are working to remediate these material weaknesses, however, if we are unable to remediate our material weaknesses in a timely manner, we may be unable to provide holders of our securities with the required financial information in a timely and reliable manner and we may incorrectly report financial information. Additionally, if our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results. These events could have a material adverse effect on our operations, result in sanctions or investigations by regulatory authorities, or loss of investor, supplier and customer confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock.

The volatility of the price of gold and silver could adversely affect our future operations and, if warranted, our ability to develop our properties. The profitability of our operations, the value of our properties and our ability to raise funding to conduct continued exploration and mine construction, if warranted, are directly related to the market price of gold, silver and other base metals. The price of gold and silver may also have a significant influence on the market price of our common stock. Our decision to put a mine into production and to commit the funds necessary for that purpose must be made long before the first revenue from production would be received. A decrease in the prices of gold and silver may prevent our properties from being economically mined or result in the write-off of assets whose value is impaired as a result of lower gold or silver prices. The volatility in gold and silver prices is illustrated by the following table, which sets forth for each of the past five calendar years, the average annual market prices in U.S. dollars per ounce of gold and silver based on the daily London P.M. fix:

 

 

 

The price of gold and silver is affected by numerous factors beyond our control, including inflation, fluctuation of the United States dollar and foreign currencies, global and regional demand, the sale of gold and silver by central banks, and the political and economic conditions of major gold and silver producing countries throughout the world and accordingly no amount of planning or technical expertise can fully eliminate these risks. In the event gold or silver prices decline or remain low for prolonged periods of time, we might be unable to develop our properties, which may adversely affect our results of operations, financial performance and cash flows.

We have incurred substantial losses in the past and may not continue to be profitable.  During the fiscal years ended December 31, 2014, 2013 and 2012, we reported comprehensive net income of $16.2 million, $0.1 million and $36.0 million, respectively. We have accumulated retained earnings of $4.0 million as of December 31, 2014. While we were profitable during the past three years, there is no assurance that we will be profitable in the future. Unexpected interruptions in our mining business may cause us to incur losses, or the revenue that we generate from production may not be sufficient to fund continuing operations including exploration and mine construction costs. Our failure to generate future profits may adversely affect the price of our common stock and you may lose all or part of your investment.

We may require significant additional capital to fund our business plan. We may be required to expend significant funds to determine if mineralized material and proven and probable mineral reserves exist at any of our non-producing properties, to continue exploration and if warranted, develop our existing properties and to identify and acquire additional properties to diversify our property portfolio. We have spent, and may be required to continue to expend, significant amounts of capital for drilling, geological and geochemical analysis, assaying and feasibility studies with regard to the results of our exploration. We may not benefit from these investments if we are unable to identify commercially exploitable mineralized material. 

Our ability to obtain necessary funding for these purposes, in turn, depends upon a number of factors, including our historical and prospective results of operations, the status of the national and worldwide economy, the price of gold, silver and other valuable metals and the costs associated with extracting them. The mining sector has been negatively impacted by declining metal prices in the last two years. We may not be successful in generating or obtaining the required financing, or if we can obtain such financing, such financing may not be on terms that are favorable to us. Failure to obtain such additional financing could result in delay or indefinite postponement of further mining operations or exploration and construction and the possible partial or total loss of our potential interest in our properties.

Revenue from the sale of our metals may be adversely affected by loss or damage during shipment and storage at our buyer’s facilities.  We rely on third-party transportation companies to transport our metals to the buyer’s facilities for processing and further refining.  The terms of our sales contract with the buyers require us to rely on assay results from samples of our metals that are obtained at the buyer’s warehouse to determine the final sales value for our metals.  Once the metal leaves our mill facility, we no longer have direct custody and control of these products.  Theft, loss, automobile accidents, improper storage, fire, natural disasters, tampering or other unexpected events while in transit or at the buyer’s location may lead to the loss of all or a portion of our metal products.  Such losses may not be covered by insurance and may lead to a delay or interruption in our revenue and our operating results may be adversely affected. 

Exploration and if deemed feasible, development of mineral properties is inherently risky and could lead to unproductive properties and/or capital investments. Our long-term success depends on our ability to identify additional mineral deposits on the El Aguila Property and any other properties that we have or may acquire and to develop one or more of those properties into commercially viable mining operations.  Mineral exploration is highly speculative in nature, involves many risks and is frequently unproductive.  These risks include unusual or unexpected geologic formations and the inability to obtain suitable or adequate machinery, equipment or labor.  The success of gold exploration is determined in part by the following factors:

 T

 

Substantial expenditures are required to establish proven and probable reserves through detail drilling and analysis, to develop metallurgical processes to extract metal and to develop the mining and processing facilities and infrastructure at any site chosen for mining.  Whether a mineral deposit will be commercially viable depends on a number of factors, which include, without limitation, the particular attributes of the deposit, such as size, grade, metallurgy, and proximity to infrastructure like power, water and roads; metal prices, which fluctuate widely; and government regulations, including, without limitation, regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and environmental protection.  We may invest significant capital and resources in exploration activities and abandon such investments if we are unable to identify commercially exploitable mineral reserves.  The decision to abandon a project may have an adverse effect on the market value of our securities and our ability to raise future financing.

 

We currently do not enter into forward sales, commodity, derivatives or hedging arrangements with respect to our gold and silver production, and as a result, we are exposed to the impact of any significant decrease in the price of gold or silver. We sell the gold and silver we produce at quoted market metal prices. Currently, we do not enter into forward sales, commodity, derivative or hedging arrangements to establish a price in advance for the sale of future gold or silver production, although we may do so in the future. As a result, we may realize the benefit of any short-term increase in the gold or silver price, but we are not protected against decreases in the gold or silver price. If the gold or silver price decreases significantly, our revenues may be materially adversely affected.     

 

Our current property portfolio is limited to a single producing property and our ability to remain profitable over the long-term will depend on our ability to expand the known deposits like La Arista and /or identify, explore and develop additional properties. Gold and silver properties are wasting assets. They eventually become depleted or uneconomical to continue mining. The acquisition of gold and silver properties and their exploration, mine construction and mining activities are subject to intense competition. Companies with greater financial resources, larger staff, more experience and more equipment for these types of activities may be in a better position than us to compete for such mineral properties. If we are unable to find, advance, and economically mine new properties, we most likely will not be profitable on a long-term basis and the price of our common stock may suffer.

 

Our producing property is subject to a lease in favor of a third party which provides for royalties on production.  The leased portion of the property provides for a net smelter return royalty of 4% where production is sold in the form of gold and silver doré and 5% where production is sold in concentrate form. All of our production to date has been from the leased property and processed and sold as either concentrate or doré. The requirement to pay royalties to the owner of the concessions at our El Aguila property, which includes the open pit mine and underground mine, reduces our profitability.

 

Our profits are subject to a new royalty tax imposed by the Mexican government.  The Mexican government enacted tax reform legislation which requires mineral producers to pay a royalty tax to the government of 7.5% on net profits from metal concentrate sales and an additional 0.5% royalty fee on gross sales of precious metals of gold, silver and platinum.  This legislation has and may in the future significantly and adversely affect our results of operations, including our cash flows, which may in turn affect the amount of capital we have available for typical uses of cash, including but not limited to, reinvestment into our business, funding new projects and paying dividends to our shareholders. 

 

The facilities and development of our underground mine and operation of our mill are subject to all of the risks inherent in development and operations. These risks include potential delays, cost overruns, shortages of material or labor, construction defects, breakdowns and injuries to persons and property. We expect to engage a combination of North American and Mexican subcontractors and material suppliers in connection with the continued mine construction of the El Aguila Project. While we anticipate taking all measures which we deem reasonable and prudent in connection with our facilities, construction of the underground mine and the operation of the mill, there is no assurance that the risks described above will not cause delays or cost overruns in connection with such construction or operation. Any delays would postpone our anticipated receipt of revenue and adversely affect our operations, which in turn may adversely affect the price of our stock. 

 

Our underground mining operations are subject to unique risks. The exploration for minerals, mine construction and mining operations from an underground mine involve a high level of risk and are often affected by hazards outside of our control. Some of these risks include, but are not limited to, underground fires or floods, fall-of-ground accidents, seismic activity and unexpected geological formations or conditions including noxious fumes or gases. The occurrence of one or more of these events in connection with our exploration, mine construction, or production activities may result in the death of, or personal injury to, our employees, other personnel or third parties, the loss of mining equipment, damage to or destruction of mineral properties or production facilities, monetary losses, deferral or unanticipated fluctuations in production, environmental damage and potential legal liabilities, all of which may adversely affect our reputation, business, prospects, results of operations and financial position.

 

Our operations are subject to permitting requirements which could result in the delay, suspension or termination of our operations. Our operations, including our ongoing exploration drilling programs and production at the El Aguila Project, require permits from the Mexican government. If we cannot obtain or maintain the necessary permits or if there is a delay in receiving future permits, our timetable and business plan will be adversely affected. We will be required to obtain necessary exploration permits for our Nevada Mining Unit and any delays in receiving future permits, our timetable and business plan will be adversely affected. 

 

Our ability to recognize the benefits of deferred tax assets is dependent on future cash flows and taxable income. We recognize the expected future tax benefit from deferred tax assets when the tax benefit is considered to be more likely than not of being realized; otherwise, a valuation allowance is applied against deferred tax assets. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, our ability to realize the deferred tax assets could be impacted. Additionally, future changes in tax laws could limit our ability to obtain the future tax benefits represented by our deferred tax assets. At December 31, 2014, our current and long-term deferred tax assets were $3.9 million and $25.5 million, respectively.

Our continuing reclamation obligations at the El Aguila Project and our other properties could require significant additional expenditures.  We are responsible for the reclamation obligations related to disturbances located on all of our properties, including the El Aguila Project. We have reserved a liability on our balance sheet to cover the estimated fair value of our reclamation obligation.  However, there is a risk that any reserve could be inadequate to cover the actual costs of reclamation when carried out.  Continuing reclamation obligations will require a significant amount of capital. There is a risk that we will be unable to fund these additional obligations and further, that the regulatory authorities may increase reclamation requirements to such a degree that it would not be commercially reasonable to continue exploration activities, which may adversely affect our results of operations, financial performance and cash flows.

Our operating properties located in Mexico are subject to changes in political or economic conditions and regulations in that country.  The risks with respect to Mexico or other developing countries include, but are not limited to: nationalization of properties, military repression, extreme fluctuations in currency exchange rates, criminal activity, lack of personal safety or ability to safeguard property, labor instability or militancy, mineral title irregularities and high rates of inflation.  In addition, changes in mining or investment policies or shifts in political attitude in Mexico may adversely affect our business. We may be affected in varying degrees by government regulation with respect to restrictions on production, price controls, export controls, income taxes, expropriation of  property, maintenance of claims, environmental legislation, land use, land claims of local people, opposition from non-governmental organizations, water use and mine safety. The effect of these factors cannot be accurately predicted but may adversely impact our operations.

Our ability to develop our Mexican properties is subject to the rights of the Ejido (local inhabitants) to use the surface for agricultural purposes. Our ability to mine minerals is subject to maintaining satisfactory arrangements with the Ejido for access and surface disturbances. Ejidos are groups of local inhabitants who were granted rights to conduct agricultural activities on the property. We must negotiate and maintain a satisfactory arrangement with these residents in order to disturb or discontinue their rights to farm. While we have successfully negotiated and signed such agreements related to the El Aguila Project, our inability to maintain these agreements or consummate similar agreements for new projects could impair or impede our ability to successfully mine the properties.

Competition in the mining industry is intense, and we have limited financial and personnel resources with which to compete. Competition in the mining industry for desirable properties, investment capital and personnel is intense. Numerous companies headquartered in the United States, Canada and elsewhere throughout the world compete for properties and personnel on a global basis. We are a small participant in the gold mining industry due to our limited financial and personnel resources. We presently operate with a limited number of personnel and we anticipate that we will compete with other companies in our industry to hire additional qualified personnel which will be required to successfully operate our mine and mill site. We may be unable to attract the necessary investment capital or personnel to fully explore and if warranted, develop our properties and be unable to acquire other desirable properties. We believe that competition for acquiring mineral properties will continue to be intense in the future.

 

Since most of our expenses are paid in Mexican pesos and we sell our production in United States dollars, we are subject to changes in currency values that may adversely affect our results of operation. Our operations in the future could be affected by changes in the value of the Mexican peso against the United States dollar. The appreciation of non-U.S. dollar currencies such as the peso against the U.S. dollar increases expenses and the cost of purchasing capital assets in U.S. dollar terms in Mexico, which can adversely impact our operating results and cash flows. Conversely, depreciation of non-U.S. dollar currencies usually decreases operating costs and capital asset purchases in U.S. dollar terms. The value of cash and cash equivalents, and other monetary assets and liabilities denominated in foreign currencies also fluctuate with changes in currency exchange rates.

 

Our activities are subject to significant environmental regulations, which could raise the cost of doing business or adversely affect our ability to develop our properties. Our mining operations are subject to environmental regulation by SEMARNAT. Regulations governing advancement of new projects or significant changes to existing projects require an environmental impact statement, known in Mexico as a MIA. We may also be required to submit proof of local community support for a project to obtain final approval. If an environmental impact statement is adverse or if we cannot obtain community support, our ability to develop our properties could be adversely affected. Significant environmental legislation exists in Mexico, including fines and penalties for spills, release of emissions into the air, seepage and other environmental damage, which fines or penalties could adversely affect our financial condition or results of operation. 

 

Our business is subject to the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws, a breach or violation of which could lead to civil and criminal fines and penalties, loss of licenses or permits and reputational harm. We operate in certain jurisdictions that have experienced governmental and private sector corruption to some degree, and in certain circumstances, strict compliance with anti-bribery laws may conflict with certain local customs and practices. For example, the U.S. Foreign Corrupt Practices Act and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. Our Code of Ethics and other corporate policies mandate compliance with these anti-bribery laws, which often carry substantial penalties. There can be no assurance that our internal control policies and procedures always will protect us from recklessness, fraudulent behavior, dishonesty or other inappropriate acts committed by our affiliates, employees or agents. As such, our corporate policies and processes may not prevent all potential breaches of law or other governance practices. Violations of these laws, or allegations of such violations, could lead to civil and criminal fines and penalties, litigation, and loss of operating licenses or permits, and may damage our reputation, which could have a material adverse effect on our business, financial position and results of operations or cause the market value of our common stock to decline.

 

We are dependent upon information technology systems, which are subject to disruption, damage, failure and risks associated with implementation and integration. We are dependent upon information technology systems in the conduct of our operations. Our information technology systems are subject to disruption, damage or failure from a variety of sources, including, without limitation, computer viruses, security breaches, cyber-attacks, natural disasters and defects in design. Cybersecurity incidents, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. Various measures have been implemented to manage our risks related to information technology systems and network disruptions. However, given the unpredictability of the timing, nature and scope of information technology disruptions, we could potentially be subject to production downtimes, operational delays, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our cash flows, competitive position, financial condition or results of operations.

We could also be adversely affected by system or network disruptions if new or upgraded information technology systems are defective, not installed properly or not properly integrated into our operations. We are modifying our enterprise software to support various operational functions, financial reporting and controls management. The modification of this system carries risks such as cost overruns, delays and interruptions. If we are not able to successfully implement these system modifications, we will have to rely on manual reporting processes and controls over financial reporting that have not been planned, designed or tested. Various measures have been implemented to manage our risks related to the system implementation and modification, but system modification failures could have a material adverse effect on our business, financial position and results of operations and could, if not successfully implemented, adversely impact the effectiveness of our internal controls over financial reporting. 

The nature of mineral exploration and production activities involves a high degree of risk and the possibility of uninsured losses. Exploration for and the production of minerals is highly speculative and involves greater risk than many other businesses. Many exploration programs do not result in the discovery of mineralization, and any mineralization discovered may not be of sufficient quantity or quality to be profitably mined. Our operations are, and any future mining operations or construction we may conduct will be, subject to all of the operating hazards and risks normally incident to exploring for and mining of mineral properties, such as, but not limited to:

Any of these risks can materially and adversely affect, among other things, the construction of properties, production quantities and rates, costs and expenditures, potential revenues and targeted production dates. We currently have limited insurance to guard against some of these risks. If we determine that capitalized costs associated with any of our mineral interests are not likely to be recovered, we would incur a write down of our investment in these interests. All of these factors may result in losses in relation to amounts spent which are not recoverable or result in additional expenses.

We do not insure against all of the risks to which we may be subject in our operations. While we currently maintain insurance against general commercial liability claims and the physical assets at our El Aguila Project, we do not maintain insurance to cover all of the potential risks associated with our operations. We might be subject to liability for environmental, pollution or other hazards associated with mineral exploration and mine construction, which risks may not be insured against, which may exceed the limits of our insurance coverage, or which we may elect not to insure against because of premium costs or other reasons. We may also not be insured against interruptions to our operations. Losses from these or other events may cause us to incur significant costs which could materially adversely affect our financial condition and our ability to fund activities on our property. A significant loss could force us to reduce or terminate our operations.

We depend upon a limited number of personnel and the loss of any of these individuals could adversely affect our business. Due to the relatively limited number of personnel that we employ, we are dependent on certain individuals to run our business. These individuals include our executive officers, including Jason Reid, Joe Rodriguez, Rick Irvine and Barry Devlin. If any of these individuals were to die, become disabled or leave our company, we would be forced to identify and retain individuals to replace them. There is no assurance that we can find suitable individuals to replace them or to add to our employee base if that becomes necessary. We have no life insurance on any individual, and we may be unable to hire a suitable replacement for them on favorable terms should that become necessary.

In the event of a dispute regarding title to our operating property or any facet of our operations, it will likely be necessary for us to resolve the dispute in Mexico, where we would be faced with unfamiliar laws and procedures. The resolution of disputes in foreign countries can be costly and time consuming. In a foreign country we face the additional burden of understanding unfamiliar laws and procedures. We may not be entitled to a jury trial, as we might be in the United States. Further, to litigate in any foreign country, we would be faced with the necessity of hiring lawyers and other professionals who are familiar with the foreign laws. For these reasons, we may incur unforeseen losses if we are forced to resolve a dispute in Mexico or any other foreign country.

We have been named as a defendant in securities class action and shareholder lawsuits which could result in substantial damages and may divert management’s time and attention from our business. As described in more detail in Item 3. Legal Proceedings, we and certain of our officers and directors are named as defendants in a securities class action and shareholder derivative lawsuits.  On January 16, 2015, the United States Court of Appeals for the Tenth Circuit affirmed the District Court’s decision to dismiss the case with prejudice.  While the securities class action lawsuit may be further appealed within a specified time period, we believe the plaintiff does not intend to take any further action regarding the lawsuit. Subsequent to the appellate court ruling, all parties to the shareholder derivative lawsuit agreed to voluntarily dismiss the proceeding and the case was terminated on February 25, 2015.  These lawsuits and any other potential future lawsuits are subject to inherent uncertainties, and the actual costs incurred relating to these lawsuits will depend upon many unknown factors. The outcome of litigation is necessarily uncertain, and we could be forced to expend significant resources in the defense of these suits, and we may not prevail. Monitoring and defending against legal actions is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, we may incur substantial legal fees and costs in connection with the litigation. We are not currently able to estimate the possible cost to us from these matters, and we cannot be certain how long it may take to resolve the litigation or the possible amount of any damages that we may be required to pay. We have not established any reserves for any potential liability relating to these or any other lawsuits. It is possible that we could, in the future, incur judgments or enter into settlements of claims for monetary damages. A decision adverse to our interests on these actions could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations, financial position and stock price.

 

Our directors and officers may be protected from certain types of lawsuits. The laws of the State of Colorado provide that our directors will not be liable to us or our shareholders for monetary damages for all but certain types of conduct as directors of the company. Our Articles of Incorporation permit us to indemnify our directors and officers against all damages incurred in connection with our business to the fullest extent provided or allowed by law. Additionally, we entered into individual indemnification agreements with our current directors and officers and we intend to execute substantially similar agreements with future directors and officers. The exculpation provisions of any of these items may have the effect of preventing shareholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our directors and officers against claims, including claims arising out of their negligence, poor judgment or other circumstances.  Pursuant to the terms of the indemnification agreements, we are required to advance funds to our directors and officers prior to the final disposition of any threatened or actual legal proceeding, and including in the event it is ultimately determined that such officer or director is not entitled to indemnification pursuant to the terms of the indemnification agreement, in which case we will depend on reimbursement of advanced expenses from such individual.

Risks Related to Our Common Stock 

Our stock price may be volatile and as a result you could lose all or part of your investment. In addition to other risk factors identified and to volatility associated with equity securities in general, the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock:

 

During the 2014 year the price of our stock has ranged from a low of $2.70 to a high of $6.35. In addition, stock markets in general have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, you may be unable to resell your shares at a desired price.

Past payments of dividends on our common stock are not indictors of future payments of dividends. In 2012, we instituted a monthly cash dividend payable to holders of our common stock.  During 2014, and as of March 19, 2015, the instituted monthly dividend was $0.01 per share per month. However, our ability to continue to pay dividends in the future will depend on a number of factors, including cash flow, mine construction requirements and strategies, other acquisition and/or construction projects, spot gold and silver prices, taxation, government imposed royalties and general market conditions. Further, a portion of our cash flow will likely be retained to finance our operations. Any material change in our operations may affect future dividends which may be modified at the discretion of our Board of Directors. Any decrease in our monthly dividend would likely have an adverse impact on the price of our common stock.

We are subject to the Continued Listing Criteria of the NYSE MKT, and our failure to satisfy these criteria may result in delisting of our common stock. Our common stock is currently listed on the NYSE MKT. In order to maintain the listing, we must maintain certain share prices, financial and share distribution targets, including maintaining a minimum amount of shareholders’ equity and a minimum number of public shareholders. In addition to objective standards, the NYSE MKT may delist the securities of any issuer if, in its opinion, the issuer’s financial condition and/or operating results appear unsatisfactory; if it appears that the extent of public distribution or the aggregate market value of the security has become so reduced as to make continued listing on the NYSE MKT inadvisable; if the issuer sells or disposes of principal operating assets or ceases to be an operating company; if an issuer fails to comply with the NYSE MKT’s listing requirements; if an issuer’s common stock sells at what the NYSE MKT considers a “low selling price” and the issuer fails to correct this via a reverse split of shares after notification by the NYSE MKT; or if any other event occurs or any condition exists which makes continued listing on the NYSE MKT, in its opinion, inadvisable.

If the NYSE MKT delists our common stock, investors may face material adverse consequences, including, but not limited to, a lack of trading market for our securities, reduced liquidity, decreased analyst coverage of our securities, and an inability for us to obtain additional financing to fund our operations.

Issuances of our stock in the future could dilute existing shareholders and adversely affect the market price of our common stock. We have the authority to issue up to 100,000,000 shares of common stock, 5,000,000 shares of preferred stock, and to issue options and warrants to purchase shares of our common stock without stockholder approval. As of March 19, 2015, there were 54,179,369 shares of common stock outstanding. Future issuances of our securities could be at prices substantially below the price paid for our common stock by our current shareholders. In addition, we can issue blocks of our common stock in amounts up to 20% of the then outstanding shares without further shareholder approval. Because we have issued less of our common stock than many of our larger peers, the issuance of a significant amount of our common stock may have a disproportionately large impact on our share price compared to larger companies.

 

Our awards of stock options to employees may not have their intended effect. A portion of our total compensation program for our executive officers and key personnel has historically included the award of options to buy our common stock.  If the price of our common stock performs poorly, such performance may adversely affect our ability to retain or attract critical personnel.  In addition, any changes made to our stock option policies or to any other of our compensation practices which are made necessary by governmental regulations or competitive pressures could affect our ability to retain and motivate existing personnel and recruit new personnel.

 

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.PROPERTIES  

We classify our mineral properties into two categories: “Operating Properties” and “Exploration Properties.” Operating Properties are properties on which we operate a producing mine and are what we consider a “material” property in accordance with Guide 7. 

We currently have an interest in eight properties.  Six of our properties, including one Operating Property and five Exploration Properties, are in the southern state of Oaxaca, Mexico. During 2014, we leased two properties in Nevada which are considered Exploration Properties.

Oaxaca Mining Unit

All of the properties that make up our Oaxaca Mining Unit are located in what is known as the San Jose structural corridor, which runs north 70 degrees west. Our properties comprise 55 continuous kilometers of this structural corridor which spans three historic mining districts in Oaxaca.  The map below shows the general location of our six Oaxaca properties:

We are granted concessions from the Mexican federal government to explore and mine our properties in Mexico, see Mining Concessions and Regulations in Mexico.  Certain properties are held by us as the concession holder and other properties that we lease from a third party.  We are required to pay concession fees to the Mexican government to maintain our interest in these concessions, and we pay concession fees for all of our mineral properties, including those which are subject to the third-party lease.  The table below details information related to the mining concessions that comprise our six properties in Oaxaca.

 

* One hectare is equal to 2.4711 acres. The 73,748 hectares in which we hold an interest is equal to approximately 285 square miles.

 

Operating Properties 

The El Aguila Project

Background

The El Aguila Project currently comprises 17 mining concessions aggregating 30,074 hectares as described in the table above.

In 2002, we leased the El Aguila,  El Aire and La Tehuana concessions from a third party. The El Aguila and El Aire concessions are part of the El Aguila Project and the La Tehuana concession comprises the Las Margaritas property. The El Aguila lease agreement is subject to a 4% net smelter return royalty where production is sold in the form of gold/silver doré and 5% for production sold in concentrate form. Subject to meeting minimum exploration requirements, there is no expiration term for the lease. We may terminate it at any time upon written notice to the lessor and the lessor may terminate it if we fail to fulfill any of our obligations, which primarily consists of paying the appropriate royalty to the lessor.

In 2010, we acquired from a third party, at no additional cost, the El Chacal and El Pilon concessions, which are subject to a 2% royalty, but are not subject to the El Aguila lease agreement.  We filed for and received additional concessions from the Mexican government which are also not part of the concessions leased or acquired from the third party. The mineral concessions making up the El Aguila Project are located within the San Pedro Totolapam Ejido.  

 

Location and Access

The El Aguila Project is located in the Sierra Madre del Sur Mountains of southern Mexico in the central part of the State of Oaxaca. The property is located along a major paved highway approximately 120 kilometers southeast of Oaxaca City, the state’s capital city. The property is approximately four kilometers due northwest from the village of San Jose de Gracia. We have constructed gravel and paved roads from the village to the mine and mill sites which supports adequate access to the property.

 

The climate of the El Aguila Project area is dry and warm to very warm with most rainfall occurring in the summer and annual precipitation averaging 423.7 mm. The average yearly temperature is 26.6 degrees centigrade. The area is very rocky with arid vegetation. Subsistence farming occurs and the main agricultural crop is agave cactus that is cultivated for the production of mescal.  

 

Geology and Mineralization

The El Aguila Project is located in the San Jose de Gracia Mining District in Oaxaca. Multiple volcanic domes of various scales, and probably non-vented intrusive domes, dominate the district geology. These volcanogenic features are imposed on a pre-volcanic basement of sedimentary rocks. Gold and silver mineralization in this district is related to the manifestations of this classic volcanogenic system and is considered epithermal in character.

Historically, we have produced ore from two locations on the El Aguila property, the open pit mine (“El Aguila open pit”) and the underground mine at the La Arista vein system. The El Aguila open pit mineralization is considered low sulfidation, epithermal mineralization primarily of gold with some silver and no base metals. The La Arista vein system is considered intermediate epithermal mineralization of gold, silver, copper, lead, and zinc. The host rock at the La Arista vein system is primarily andesite.

 

Facilities

We constructed a mill facility and infrastructure at the El Aguila Project for approximately $35 million in 2009, and expanded the mill facility in 2012 and 2013, by $23 million. The flotation mill expansion, completed at the end of 2013, increased the number of flotation cells and added a second ball mill to allow for additional processing capacity. The mill is flexible in its ability to process several types of mineralization. It has a differential flotation section capable of processing polymetallic mineralized material and producing up to three separate concentrate products for sale. The mill also has an agitated leach circuit capable of producing gold and silver doré for sale.  Depending on the specific type and characteristics of the mineralized material the mill can process sulfide material in its flotation circuit at a nominal 1,500 tonnes of mineralized material per day. The agitated leach circuit can process a nominal 300 tonnes per day.

Our optimization of the mill expansion, which was completed in the fourth quarter of 2013, resulted in our ability to begin producing a higher grade gold and silver concentrate in the first quarter of 2014, by utilizing a Knelson gravity concentrator at our mill facilities. With the goal of reducing refining costs, royalties and treatment costs, we completed the commissioning phase of the doré processing facility and achieved commercial production in the fourth quarter of 2014.

 

Power is provided by diesel generators at the site. We obtained water rights from the Mexican government for an amount of water that we believe is sufficient to meet our operating requirements and pump it approximately five kilometers to the site from a permitted well located near the Totolapam River.

 

Additional improvements at the site include a second diesel generation power plant and switch gear, paving a 3 kilometer section of the road from the mine to the mill, construction of a new surface maintenance garage and fuel station, haul roads from the mine site to the mill, mill facility office space, an assay lab, an exploration office, a tailings impoundment facility and other infrastructure.

 

Exploration Activities

The early history of activity at the El Aguila Project, as known by us, is prospecting and limited mining for gold and silver from the early 1900’s to the mid 1960’s. In 1998, the concessions were leased to Apex Silver Mines Corporation of Denver, Colorado. Apex carried out an exploration program involving geologic mapping, surface sampling and an 11-hole drilling program (1,242 meters). The results did not meet Apex’s expectations so it cancelled its lease on the property in 2002. We leased the property from a third party in October 2002.

In August 2003, we commenced an initial drilling and exploration program. Through 2014, we have drilled a total of 764 core holes (both surface and underground) equaling 220,829 meters and 166 reverse circulation holes equaling 14,367 meters for a total of 930 holes totaling 235,196 meters. 

 

Exploration at the El Aguila Project includes drilling the El Aguila open pit mineralization and the discovery and subsequent detailed drilling of the La Arista deposit’s vein system. The La Arista vein system is made up of multiple en echelon parallel veins with the two primary veins, the Baja vein and the Arista vein which are approximately 30 meters apart. Currently more than 15 veins have been identified with indications of at least 5 more. The drilling of the La Arista vein system has shown mineralized material over 1,000 meters of strike length and more than 500 meters of depth with veins open along strike and depth. 

 

Drilling at El Aguila in 2014, was mainly a continuation of the previous year’s activities of infill and step out drilling from the La Arista mine.  In 2014, 136 diamond drill holes (both surface and underground) totaling 43,137 meters were completed on the El Aguila Project. 

 

In 2014, exploratory drilling from the La Arista deposit also continued to expand the systems high-grade mineralization at the new Switchback discovery, located 500 meters to the northeast of the La Arista deposit. Switchback has been drilled 450 meters along strike by 450 meters at depth, containing significant gold, silver, copper, lead and zinc mineralization.  Drilling highlights include a 19.3 meter wide vein zone averaging 2.56 g/t gold, 129 g/t silver, 0.62% copper, 1.28% lead and 3.84% zinc which included 1.71 meters of 13.45 g/t gold, 860 g/t silver, 1.81% copper, 3.52% lead and 7.18% zinc.

 

Operating Activities

We commenced mining and milling operations at the El Aguila Project’s La Arista Mine on July 1, 2010. Mineral production during 2010 consisted of processing mineralized material from the El Aguila open pit located approximately 0.5 kilometers from the mill. Mining of the open pit was essentially completed in 2010. Approximately one-half of the open pit material was processed and one-half remains in long-term stockpiles.

 

During 2010, we began developing an underground mine to access the La Arista deposit’s vein system. The underground mine is approximately two kilometers from the mill.  As of December 31, 2014, the construction of our primary decline ramp has now reached Level 19 which is approximately 360 vertical meters below the mine portal.

 

During 2014, we continued underground mining of the La Arista mineralized material at our El Aguila Project. In 2014, a record 9,654 linear meters of tunnel construction was completed in the mine. This included 4,576 linear meters of capital mine infrastructure construction and a further 695 meters of vertical rise development. Mine infrastructure improvements include a third surface exhaust fan installation and an underground water pumping station.

 

In 2014, we processed underground ore through the mill at an average of 1,111 tonnes per day and totaled 375,623 tonnes for the year, with an average grade of 3.21 grams per tonne gold and 296 grams per tonne silver. All of our processing is taking place using the mill’s flotation circuit processing sulfide ore from the La Arista underground mine, as we have not yet utilized the mill’s agitated leach circuit. We anticipate that we would use the agitated leach circuit if ever we are able to mine sufficient oxide material from one of our properties.  

 

Please see the table titled Production and Sales Statistics—El Aguila Project in Item 7. Management’s Discussion and Analysis for additional details concerning our mineral production statistics for 2014 and 2013.

 

Exploration Properties 

We currently hold an interest in five additional properties in our Oaxaca Mining Unit located in Oaxaca, Mexico and two properties in Nevada, United States of America, which we classify as exploration properties. We do not currently consider any of these properties to be a “material” property for purposes of Guide 7 and none of these properties has any known reserves. We anticipate that all exploration activities at these properties will be funded through our working capital.

In 2015, we anticipate spending approximately $10.4 million for exploration which includes approximately $2.0 million for exploration ramps to the Switchback.

Oaxaca Mining Unit

The Las Margaritas Property

The Las Margaritas property is made up of the La Tehuana concession. We leased this concession in October 2002, from a third party along with two of the concessions comprising the El Aguila property and the terms of this agreement are discussed under “The El Aguila Project” above. It is comprised of approximately 925 hectares located along our 55 kilometer mineralized trend and adjacent to the El Aguila Project. 

 

To date, we have drilled 24 core holes for a total of 8,035 meters at the Las Margaritas property.  In 2014, a soil and rock geochemical program was conducted at the Las Margaritas property.  This program was a follow-up of the stream sediment geochemical program conducted in 2010 and 2012.  A total of 1,494 soil and 66 rock samples were collected on lines oriented from southwest to northeast across the projection of known regional structures.  The soil data showed a series of west-northwest and northwest trending trends visible in the epithermal pathfinder suite of metals (gold, silver, arsenic, antimony, mercury and thallium).  These linear patterns spatially correlate with known historical mining in the Las Margaritas district.  The linear patterns also extend beyond and between the known workings and establish additional trends for prospecting along mapped structural orientations. 

The Alta Gracia Property

In August 2009, we acquired claims adjacent to the Las Margaritas property in the Alta Gracia Mining District by filing concessions known as the David 1, the David 2 and La Herradura,  totaling 5,175 hectares. 

 

Follow-up surface drilling was conducted at Alta Gracia during 2014, with 39 diamond drill holes totaling 7,589 meters completed.  The 2014 drill campaign initially focused near the historic El Mirador underground mine, testing the Mirador vein.  This drilling encountered significant intercepts including 5.06 meters grading 1.53 g/t gold and 1,383 g/t silver and 8.58 meters grading 1.34 g/t and 700 g/t silver for the El Mirador vein.  The San Juan Vein, located approximately 500 meters southwest of the historic El Mirador underground mine, was also tested and returned 1.19 meters grading 3.16 g/t gold and 2,232 g/t silver.  We also drilled the El Huaje vein, a parallel vein structure located approximately 200 meters southeast of the El Mirador vein, which returned 2.23 meters of 0.85 g/t gold, 710 g/t silver, 1.03% lead and 5.14% zinc.  The El Mirador and San Juan vein gold and silver mineralization discovered to date does not show any appreciable base metals, so this precious metal mineralization could potentially be trucked to and processed through the El Aguila Mill’s agitated leach circuit.  In 2015, mineable resources are planned to be estimated and metallurgical test work done to determine if mining and processing of Alta Gracia mineralized material is warranted at our El Aguila processing facility.

The El Chamizo Property

In June 2011, we staked mineral claims between the El Rey property and Alta Gracia property along trend and acquired an exploration concession from the Mexican government of approximately 26,386 hectares referred to as El Chamizo.  In March 2013, we acquired a property known as Cerro Colorado (comprised of the San Pedro Fracc. 2 concession) from Almaden Minerals, Ltd. consisting of approximately 1,860 hectares.  The Cerro Colorado property is surrounded by our El Chamizo concession and we include it as part of the El Chamizo property.  Any future production from the Cerro Colorado concession is subject to a 2% net smelter return royalty in favor of Almaden. 

 

Because of the close proximity of El Chamizo to Alta Gracia, exploration activity began on this property during late 2011, and to date has been limited to geochemical sampling and drilling of eight shallow core holes for a total of 1,327 meters.  No significant work was conducted at El Chamizo during 2014. In 2015, exploration on the property is expected to include additional surface geological mapping and geochemical sampling of several new prospective targets identified on the El Chamizo property. 

 

The El Fuego Property

 

In March 2013, we acquired the El Fuego property (comprised of the San Pedro Fracc. 1 concession) from Almaden Minerals Ltd. subject to a 2% net smelter return royalty. The El Fuego property consists of approximately 2,554 hectares and is located south of our Alta Gracia and El Chamizo properties.  In 2013, El Fuego was included in the property-wide airborne geophysical survey. Geologic mapping and surface sampling were conducted on the El Fuego property during 2013 and 2014 to allow us to meet the acceptable minimum amount of work required to maintain the claims.   

 

The El Rey Property

 

The El Rey property consists of concessions on the far northwest end of our 55 kilometer mineralized corridor in the State of Oaxaca known as El Rey,  El Virrey,  La Reyna and El Marquez. We acquired the El Rey concession from a third party and it is subject to a 2% net smelter return royalty payable to them on a portion of the claims. We obtained the remaining concessions by staking claims and filing for concessions with the Mexican government.

 

The El Rey property is approximately 64.4 kilometers by road from the El Aguila Project. There is no plant or equipment on the El Rey property. If exploration is successful, any mining would probably require an underground mine where mineralized material could be trucked to the El Aguila mill located on the El Aguila Project for processing. Limited drilling at El Rey has encountered gold and silver mineralization up to one meter of 132.5 g/t gold and 1.5 meters of 958 g/t silver. The mineralized material has been located within 100 meters from the surface. To date, we have drilled 48 core holes for a total of 5,278 meters at the El Rey property. Early in 2012, we completed a small amount of work to finish refurbishing and extending an existing shaft on the property to permit underground exploratory drilling.  We ceased work at El Rey during 2012, following a request to obtain additional approvals from local community agencies. We continue to work with the local agencies and anticipate resolving the matter, but we have no assurance that we will be able to resume our exploration activities in the near term.  If the matter is resolved, we will conduct follow-up drilling and exploration based on the drilling done in 2008.  We do not anticipate any significant exploration activities at El Rey in 2015. However, we plan to conduct the acceptable minimum amount of work required to maintain the claims.

 

Other Properties

 

Other properties include the 4,000-hectare Lachiguiri exploration concession granted from the Mexican government in 2014.  The Lachiguiri claim, located 55 kilometers east of El Aguila, was staked to cover zones of interesting gold-silver-base metal mineralization occurring in limestone conglomerates affected by intense fracturing, oxidation and some silicified zones.  Discussions with the local community for surface access and preliminary field investigations are planned for Lachiguiri in 2015.

 

During 2015, we also plan to acquire additional properties and conduct exploration programs including drilling along the 55 kilometer mineralized trend and geologic structural corridor which encompasses our other properties in Mexico. 

Mining Concessions and Regulations in Mexico

Mineral rights in Mexico belong to the Mexican federal government and are administered pursuant to Article 27 of the Mexican Constitution. All of our mining concessions are exploitation concessions, which may be granted or transferred to Mexican citizens and corporations. Our leases or concessions are held by our Mexican subsidiary. Exploitation concessions have a term of 50 years and can be renewed for another 50 years. Concessions grant us the right to explore and exploit all minerals found in the ground. Maintenance of concessions requires the semi-annual payment of mining duties (due in January and July) and the performance of assessment work, on a calendar year basis, with assessment work reports required to be filed in the month of May for the preceding calendar year. The amount of mining duties and annual assessment are set by regulation and may increase over the life of the concession and include periodic adjustments for inflation. Mining concessions are registered at the Public Registry of Mining in Mexico City and in regional offices in Mexico.

Mexican mining law does not require payment of finder’s fees to the government, except for a discovery premium in connection with national mineral reserves, concessions and claims or allotments contracted directly from the Mexican Geological Survey. None of the claims held by any of our subsidiaries are under such a discovery premium regime.

Ejido Lands and Surface Right Acquisitions in Mexico 

Surface lands at our Oaxaca mining properties are Ejido lands (agrarian cooperative lands granted by the federal government to groups of Campesinos pursuant to Article 27 of the Mexican Constitution of 1917). Prior to January 1, 1994, Ejidos could not transfer Ejido lands into private ownership. Amendments to Article 27 of the Mexican Constitution in 1994 now allow individual property ownership within Ejidos and allow Ejidos to enter into commercial ventures with individuals or entities, including foreign corporations. We have an agreement with the local San Pedro Totolapam Ejido allowing exploration and exploitation of mineralization at the El Aguila Project and some of our surrounding properties.

 

Mexican law recognizes mining as a land use generally superior to agricultural. However, the law also recognizes the rights of the Ejidos to compensation in the event mining activity interrupts or discontinues their use of the agricultural lands. Compensation is typically made in the form of a cash payment to the holder of the agricultural rights. The amount of such compensation is generally related to the perceived value of the agricultural rights as negotiated in the first instance between the Ejidos and the owner of the mineral rights. If the parties are unable to reach agreement on the amount of the compensation, the decision will be referred to the government.

 

We have established surface rights agreements with the San Pedro Totolapam Ejido and the individuals impacted by our proposed operations which allow disturbance of the surface where necessary for our exploration activities and mining operations.

 

Nevada Mining Unit

 

In 2014, we acquired an interest in two properties in the State of Nevada, United States of America, both of which we classify as Exploration Properties. We do not currently consider any of these properties to be a material property for purposes of Guide 7 and neither of these properties has any known reserves. We anticipate that all exploration activities at these properties will be funded through our working capital.

 

 

The Radar Property

 

In September 2014, we leased the Radar property from Altan Nevada Minerals Limited for ten years. The Radar property covers an area of approximately 3,550 acres and is made up of 178 unpatented lode claims located in the area known as the Walker Lane Mineral Belt in central Nevada. Radar is immediately adjacent to the former gold-silver-mercury past producing Paradise Peak Mine, near the Round Mountain and Rawhide mines. Pursuant to the lease, we will be required to make work expenditures of up to $250,000 annually to maintain our interest in the property and at our option we may purchase the property for $1.5 million, subject to a 3% net smelter return royalty, at any time prior to the expiration of the lease term.

 

The Goose Property

 

In December 2014, we leased the Goose property from Nevada Eagle LLC for five years. The Goose property consists of five unpatented lode claims covering approximately 100 acres adjacent to Radar in the Walker Lane Mineral Belt. The claims comprising the Goose property cover “Newman Ridge,” a mountain located directly west of the past producing Paradise Peak mine, near the Round Mountain and Rawhide mines.  We have an option to purchase the property for $175,000, subject to a 2% net smelter return royalty, at any time prior to the expiration of the lease term. The Goose Property is located within the area of interest for the Radar Property which is being leased from Altan Nevada Minerals Limited and falls under an additional 3% smelter return royalty.

Office Facilities 

We maintain offices in Oaxaca and in Colorado.  We constructed an administrative office building adjacent to the mill site as part of the facilities at the El Aguila Project. We also lease office space in Oaxaca City, Oaxaca consisting of approximately 3,000 square feet.  The lease commenced in 2012 for ten years. In 2014, we sold the building that serves as our executive and administrative headquarters in Colorado Springs and have leased a portion back under a renewable one-year lease. We also established a satellite office in Denver, Colorado consisting of approximately 2,500 square feet, the lease commenced in 2012 for three years.

Glossary

The following terms used in this report shall have the following meanings:

  

 

ITEM 3.LEGAL PROCEEDINGS 

A securities class action lawsuit subsequently captioned In re Gold Resource Corporation. Securities Litigation, No.1:12-cv-02832 was filed in U.S. District Court for the District of Colorado naming us and certain of our current and former officers and directors as defendants on October 25, 2012.   The complaint alleged violations of federal securities laws by us and certain of our officers and directors. On July 15, 2013, the federal district court granted our motion to dismiss the lawsuit with prejudice.  On January 16, 2015, the United States Court of Appeals for the Tenth Circuit affirmed the District Court’s decision. While the securities class action lawsuit may be subject to rehearing or appealed to the U.S. Supreme Court within a specified time period, we believe the plaintiff does not intend to take any further action regarding this lawsuit.

 

On February 8, 2013, a shareholder’s derivative lawsuit entitled City of Bristol Pension Fund v. Reid et al., No. 1:13-CV-00348 was filed in the U.S. District Court for the District of Colorado naming us as a nominal defendant, and naming seven of our current and former officers and directors as defendants. The lawsuit alleges breach of fiduciary duty, gross mismanagement and unjust enrichment and seeks to recover, for the Gold Resource Corporation’s benefit, unspecified damages purportedly sustained by us in connection with the alleged misconduct identified in the class action lawsuit discussed above and an award of attorney’s fees and costs. The action was stayed pending resolution of the appeal of the dismissal of the securities class action lawsuit. Following the appellate court’s decision to affirm the District Court’s ruling, all parties to the shareholder derivative lawsuit agreed to voluntarily dismiss the proceedings and the case was terminated on February 25, 2015.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

---

 

 PART II 

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES 

Market Information 

Our common stock trades on the NYSE MKT LLC stock exchange, which we refer to as the NYSE MKT, under the symbol “GORO”.  The table below sets forth the high and low sales prices for our common stock on the NYSE MKT for the last two fiscal years on a quarterly basis. 

 

 

 

On March 18, 2015, the high and low sales prices of our common stock on the NYSE MKT stock exchange were $2.85 and $2.62, respectively, and we had approximately 200 record holders. 

Securities authorized for issuance under equity compensation plans

The following table provides information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans as of December 31, 2014.

 

 

 

Purchases of Equity Securities by the Company and Affiliated Purchasers

 

In September 2011, our Board of Directors authorized a share repurchase of up to $20.0 million with no pre-established end date.  During 2014 and 2013, we did not repurchase any shares of Gold Resource Corporation common stock on the open market, and approximately $14 million remains available in the share repurchase program as of December 31, 2014.

 

Performance Graph 

The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference in such filing.

The following graph compares the performance of Gold Resource Corporation common stock with the performance of the NYSE MKT Composite Index and the S&P TSX Global Gold Fund, assuming reinvestment of dividends on December 31 of each year indicated. The graph assumes $100 invested at the per share closing price in Gold Resource Corporation and each of the indices on December 31, 2009.

Transfer Agent 

Computershare Investor Services, Inc. is the transfer agent for our common stock. The principal office of Computershare is located at 8742 Lucent Boulevard, Suite 225, Highlands Ranch CO  80129 and its telephone number is (303) 262-0600.

Dividend Policy 

Since commencing mining operations at our El Aguila Project, one of management’s primary goals has been to make cash dividend distributions to shareholders. Since commercial production began July of 2010, the Company has returned over $102 million back to shareholders in consecutive monthly dividends.   Our dividend philosophy remains consistent in returning as much in dividends as possible to the shareholders when possible. Regular dividends should not be considered a prediction or guarantee of future dividends. Our instituted dividend may be modified or discontinued at any time at the discretion of our Board of Directors, depending on variables such as, but not limited to, operating cash flow, mine construction requirements and strategies, other construction projects, spot gold and silver prices, taxation, government royalties and general market conditions. At the present time, we are not a party to any agreement that would limit our ability to pay dividends. For the fiscal year ended December 31, 2014 we declared cash dividends on our common stock of $0.01 per share for each month of the year. For the fiscal year ended December 31, 2013, we declared cash dividends on our common stock of $0.06 per share for the first three months, $0.03 per share the next eight months and $0.01 per share for the last month.

 

Physical Dividend Program

 

In 2012, we launched a physical dividend program pursuant to which our shareholders have the option to convert the cash dividends that we pay into physical gold and silver bullion. As part of our overall strategy to diversify our treasury and to facilitate this program, we may periodically purchase gold and silver bullion.  In order for a shareholder to convert their cash dividend into physical gold and/or silver, the shareholder must opt-in to the physical dividend program and request the conversion of their cash dividend, or portion thereof, into physical gold and/or silver. For those shareholders who elect to convert their cash dividend into gold and/or silver bullion, the gold and silver will be delivered in the form of gold or silver Gold Resource Corporation one ounce bullion rounds. No action is required by any shareholder who elects not to participate in the physical metals program. For those shareholders who wish to convert any portion of their cash dividend into gold and/or silver bullion, the process is summarized as follows:

 

 

 

 

 

 

Only whole ounces of gold and silver bullion are credited to a shareholder’s individual account on the dividend payment date. The cash value attributable to fractional ounces will remain in the shareholder’s individual account as cash until such time as future dividends provide the shareholder with sufficient cash to convert to whole ounces of gold or silver based on the London PM gold fix and silver fix on a future dividend record date, and based on the shareholder’s self-directed gold, silver or cash allocations in effect at that time. The shareholder may also choose to move their cash out of their GBI account. Shareholders cannot move cash into their GBI account for conversion into gold and silver. Only the shareholder’s cash dividend sent from Computershare is eligible for conversion.

 

 We encourage shareholders who have questions concerning the physical dividend program to contact our investor relations department at (303) 320-7708.

 

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data sets forth our summary historical financial data as of and for the years ended December 31, 2014, 2013, 2012, 2011 and 2010. This information was derived from our audited consolidated financial statements for each period. Our selected historical financial data is qualified in its entirety by, and should be read in conjunction with, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and the notes thereto included elsewhere in this report. For additional information relating to our operations, see Item 1. Business and Item 2. Properties.  

 

 

 

See the consolidated financial statements included in this Form 10-K under Item 8 for additional information.

---

 

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. Our actual future results or actions may differ materially from these forward-looking statements for many reasons, including the risks described in “Risk Factors” and elsewhere in this annual report and other reports filed by us with the SEC. Our discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes included in this report and with the understanding that our actual future results may be materially different from what we currently expect.  

 

The following discussion summarizes our results of operations for three fiscal years ended December 31, 2014, 2013 and 2012 and our financial condition at December 31, 2014 and 2013, with a particular emphasis on the year ended December 31, 2014.

 

The discussion also presents certain Non-GAAP financial measures that are important to management in its evaluation of our operating results and which are used by management to compare our performance with what we perceive to be peer group mining companies, and are relied on as part of management’s decision-making process. Management believes these measures may also be important to investors in evaluating our performance. For a detailed description of each of the Non-GAAP financial measures, please see the discussion under Non-GAAP Measures.

Overview 

Business

We are a mining company which pursues gold and silver projects that are expected to have low operating costs and high returns on capital.  We are presently focused on mineral production from ore at the El Aguila Project in Oaxaca, Mexico.  Operations at the El Aguila open pit mine ceased in February 2011, with the start-up of mine operations at the La Arista underground mine in March 2011. Our La Arista underground mine produces metal concentrates from ore containing our precious metal products of gold and silver, and by-products of copper, lead and zinc, as well as gold and silver doré. 

 

The mill located at our El Aguila Project produced a total of 83,903 precious metal gold equivalent ounces for the year ended December 31, 2014, which was approximately 1.1% less than our stated 2014 targeted mill production range.  During the same period we sold 69,845 precious metal gold equivalent ounces. Precious metal gold equivalent is determined by taking the gold ounces produced or sold, plus silver ounces produced or sold converted to precious metal gold equivalent ounces using the gold to silver average ratio for the period. The gold and silver average prices used to determine the gold to silver average price ratio are the actual metal prices realized from sales of our gold and silver. For the years ended December 31, 2014, 2013 and 2012, we had cash cost per ounce of $449, $626 and $419, respectively.  (Please see the section titled Non-GAAP Measures below for additional information concerning the cash cost per ounce measure.)    

For the year ended December 31, 2014, we recorded revenues of $115.4 million, mine gross profit of $50.9 million and net income of $16.2 million.  In 2014, dividends distributed to shareholders totaled $0.12 per share or $6.5 million.

 

Our optimization of the mill expansion, which was completed in the fourth quarter of 2013, resulted in our ability to begin producing a higher grade gold and silver concentrate in the first quarter of 2014 by utilizing a Knelson gravity concentrator at our mill facilities. With the goal of reducing refining costs, royalties and treatment costs, we completed the commissioning phase of the doré processing facility and achieved commercial production in the fourth quarter of 2014. We capitalized approximately $0.9 million during 2014 on the doré processing facility. 

 

Underground mine operational challenges during 2014 included mine advancements of infrastructure, dewatering of the mine, management of carbon dioxide gas, limiting dilution of ore while mining and variable grades of the mineralized material depending on the location of the deposit being mined at any point in time. Our mining team takes a proactive approach to mitigating these challenges as we improve and optimize our mining techniques. In addition to operational challenges, we experienced significant volatility and declining metals prices during 2014, which unfavorably impacted the ratio which we use to calculate gold equivalent ounces.

 

Our annual mill precious metal production in 2014 was 35,552 gold ounces, an increase of approximately 4.7% over 2013, while annual silver production increased approximately 8.7%, or 3,297,204 ounces over the same period. Our 2014 production on a precious metal gold equivalent basis totaled 83,903 ounces at a 68.2:1 silver to gold ratio, which included 19,057 ounces precious metal gold equivalent produced during the fourth quarter at a 77.6:1 silver to gold ratio.  The Company’s full 2014, production year budget assumed a 63.2:1 silver to gold ratio ($19.00 silver and $1,200 gold) based on spot metal prices at the beginning of 2014.  Had 2014 seen less volatility in the metal prices and the budget estimate of 63.2:1 silver to gold ratio held for the year, we would have produced approximately 87,720 gold equivalent ounces.

 

Reserve Report

 

Beginning January 1, 2014, we transitioned from an Exploration Stage Enterprise to a Production Stage Enterprise as defined by Guide 7. On April 30, 2014, we issued a report on the reserve estimate for the La Arista underground mine at the El Aguila Project with an effective date of December 31, 2013. The report confirms the existence of proven and probable reserves as defined in Guide 7 and we therefore transitioned from a Development Stage Entity as defined in Accounting Standards Codification 915 – Development Stage Entities (“ASC 915”), we also transitioned from an Exploration Stage Enterprise to a Production Stage Enterprise as defined in Guide 7. We no longer consider ourselves to be a Development Stage Entity as defined in ASC 915 and accordingly cumulative and other disclosures required by ASC 915 are no longer included in our financial statements.

Prior to January 1, 2014, we were considered a Development Stage Entity under SEC criteria since we had not demonstrated proven and probable reserves at our El Aguila Project in Oaxaca, Mexico or any of our other properties. Accordingly, as required under SEC guidelines, substantially all of our investment in mining properties up to that date, including construction of the mill, mine facilities and mine construction expenditures, were expensed as incurred and therefore do not appear as assets on our balance sheet.

   

Our characterization as an exploration stage company resulted in the classification of our facilities and mine construction expenditures as operating expenses rather than capital expenditures, and may have caused us to report lower net income than if we had capitalized the expenditures.  In addition, prior to January 1, 2014, our financial statements did not reflect a corresponding depreciation or amortization expense for our facilities and mine construction costs since they were expensed as incurred rather than capitalized. The change in our accounting presentation as a result of our transition to a production stage enterprise may make certain period-over-period comparisons less meaningful than otherwise since we capitalized mine development related expenditures that would have been expensed under our prior accounting presentation.  

 

We plan to update our reserve report annually.   

 

Doré Processing Facility

   

Our optimization of the mill expansion during 2013 resulted in our ability to begin producing a higher grade gold and silver concentrate in the first quarter of 2014 by utilizing a Knelson gravity concentrator at our mill facilities. With the goal of reducing refining costs, royalties and treatment costs, we completed the commissioning phase of the doré processing facility, and achieved commercial production in the fourth quarter of 2014, resulting in 1,561 gold equivalent ounces or $3.1 million, net of treatment charges, sold in the form of commercial grade doré bars for the year ended December 31, 2014. At December 31, 2014 we had approximately 6,400 ounces of high grade gold and silver concentrate inventory awaiting to be processed into doré bars at our doré facility in early 2015.  

 

Exploration Activities

During 2014, we continued to focus primarily on infill and step-out drilling at the La Arista underground mine, located at the El Aguila Project.  Because this drilling is used to define the mineralization and to assist in mining of the ore at the underground mine, these expenses are considered development and delineation of the ore body (not exploration), and these costs are classified as construction and development in the consolidated statements of operations.

Exploration activities that are classified as exploration expenses in the consolidated statements of operations include, but are not limited to, drilling other areas of the El Aguila Project to test new geologic targets, and exploration work on our other exploration properties. In 2015, we anticipate spending approximately $9.7  million for exploration activities in Mexico. This shall include approximately $6.5 million for surface drilling and $1.2 million for underground drilling and $2.0 million on the exploration ramp to the Switchback.  By comparison, we spent $6.9 million on exploration in 2014. We anticipate that all exploration activities will be funded from working capital.

In Nevada, United States of America, we anticipate spending an additional $0.7 million on exploration, mainly for surface drilling on our Radar property during 2015.

During 2014, we made the decision to drift several hundred meters from the Arista deposit towards the Switchback discovery, located approximately 500 meters northeast of the operating La Arista mine, to set up a drill station better suited to test the Switchback mineralization.  Drilling thus far has defined a mineralized strike length of 450 meters by a depth of 450 meters.  Drilling from the new drill pad late in 2014 continued to identify infill intercepts of high-grade polymetallic gold, silver, copper, lead and zinc mineralization in multiple en echelon veins. Visual similarities exist among the drill core and the assayed high-grade mineralization when comparing the Switchback to the Arista deposit.  We are in the preliminary stages of mine planning and additional core drilling at the Switchback for the purposes of obtaining better data to decide whether to move forward with targeted future production while being able to utilize the current infrastructure of the La Arista mine to efficiently access and mine the Switchback.

El Aguila Project:  During 2014, our exploration activities at El Aguila continued to emphasize mine expansion at the La Arista vein system.  We continued to focus primarily on infill and step-out drilling to define the mineralization and to assist in mining of the mineralized material at the La Arista underground mine.  Drilling has principally targeted extensions of the La Arista deposit vein system.  Surface drilling was also conducted on the potential feeder veins of the El Aguila open pit and Santiago veins and the Chacal and Salina Blanca prospects, located northwest and southwest of the La Arista mine, respectively. Economically significant gold, silver and base metal values were encountered and further drilling is planned in 2015.  The results from these activities have also generated additional exploration targets that are marked for future drilling.

Oaxaca Mining Unit Exploration

 

Alta Gracia property:  Surface diamond drilling was conducted at Alta Gracia during 2014. We drilled 39 core holes totaling 7,589 meters in 2014.  Mineable resources are being estimated and metallurgical test work done to determine if mining and processing of Alta Gracia mineralized material is warranted at our El Aguila processing facility.  Follow-up drilling is also being planned for Alta Gracia in 2015.

 Las Margaritas property: A soil and rock geochemical program was conducted at the Las Margaritas property in 2014.  Follow-up investigation and drilling is being planned for Las Margaritas in 2015.

El Chamizo property:  Surface geological mapping and geochemical sampling of several new prospective targets identified on the El Chamizo property are planned in 2015.

El Fuego property:  During 2014, preliminary investigations were conducted on the El Fuego property.  Further investigations and diamond drilling are planned for El Fuego in 2015.

Nevada Mining Unit Exploration

Radar property:  During 2014, data review and field investigations to identify drilling targets were conducted on the Radar property.    Further investigations and diamond drilling are planned for Radar in 2015.

 

Goose property:  Initial field investigations to identify drill targets are planned for the Goose property in 2015.

 

Results of Operations—Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Sales of metals, net

Metal sales for the twelve months ended December 31, 2014 decreased by $10.4 million, or 8.3%. This decrease was primarily due to the increase of 6,400 ounces of high-grade gold and silver concentrate inventory awaiting to be processed at our doré facility as of December 31, 2014, lower average grades mined and processed during the year, and lower realized gold and silver prices when compared to the corresponding period in 2013. Gold and silver prices realized for the year ended December 31, 2014 decreased by 9.2% to $1,260 per ounce and 21.8% to $18.48 per ounce, respectively, when compared to the same period in 2013. Revenue generated from the sale of base metals in our concentrates is considered a by-product of our gold and silver production for the purpose of our total cash cost after by-product credits measure noted in our Non-GAAP measures disclosure. (See Production and Sales Statistics - La Arista Underground Mine table below for additional information regarding our mineral production statistics for the three and twelve months ended December 31, 2014 and 2013).

 

We periodically review our revenues to ensure that our reporting of primary products and by-products is appropriate. Because we consider copper, lead and zinc to be by-products of our precious metal gold equivalent production, the value of these metal s is applied as a reduction to total cash costs in our calculation of total cash cost, after by-product credits, per precious metal gold equivalent ounce sold, including royalties. (See Non-GAAP Measures disclosures).

Production

For the year ended December 31, 2014, mill production totaled 35,552 ounces of gold, an increase of approximately 4.7% over 2013; silver production increased to 3,297,204 ounces, an increase over prior year of approximately 8.7%. On a precious metal gold equivalent basis, our mill production totaled 83,903ounces, compared to 84,835 precious metal gold equivalent ounces for 2013, or a 1.1% decrease.  The decrease in the precious metal gold equivalent ounces was primarily due to a higher gold to silver average ratio as a result of a drop in our actual metal prices realized from sales of our gold and silver during 2014. For the year ended December 31, 2014, we sold 25,872 ounces gold and 2,998,685 ounces silver from the La Arista underground mine for a gross sales value of approximately $32.6 million and $55.4 million, respectively. This compares to 31,563 ounces of gold and 3,047,076 ounces of silver sold during 2013 from the La Arista underground mine for a gross sales value of $43.8 million and $72.0 million, respectively. This decrease in sold ounces was in large part due to the increase in concentrate inventory.

See Production and Sales Statistics-La Arista Underground Mine table below for additional information regarding our mineral production statistics. 

We continue to focus on mining and development activities at the La Arista underground mine. Our production rate at La Arista is directly a result of mine development and the establishment of sufficient stopes and working faces. The  El Aguila mill’s flotation circuit processing capacity is a nominal 1,500 tonnes per day. Achieving this processing rate in the future is dependent upon our ability to develop the La Arista underground mine to a point where ore extraction can consistently achieve an average rate of 1,500 tonnes per day. During the three and twelve months ended December 31, 2014 we processed on average 1,068 and 1,111 ore tonnes per day, respectfully, as compared to 906 and 866 ore tonnes per day for the same periods in 2013, representing an increase of 17.9% and  28.3%, respectively.  

Below are certain key operating statistics for our La Arista underground mine for 2014 and 2013.

 

 

 

Our 2015 mine plan anticipates that we will be mining areas of the deposit that contain higher levels of base metals along with the primary production of gold and silver, as compared to 2014 levels. We are targeting a mill production range of 80,000 to 90,000 ounces of precious metal gold equivalent in 2015, assuming a 64.1:1 silver to gold ratio. 

 

Mine gross profit. 

For the year ended December 31, 2014, mine gross profit totaled $50.9 million compared to $58.3 million for the year ended December 31, 2013. The $7.4 million decrease in mine gross profit principally resulted from lower realized metal prices and a decrease in our operating costs when compared to 2013. Cost decreases were attributable to our cost reduction program that we implemented in the second half of 2013 which continued through 2014. We continue to monitor costs including labor, on-site contractors, repairs and maintenance, security, safety costs, fuel, materials and supplies.    

 

General and administrative expenses.

 

General and administrative expenses for the year ended December 31, 2014, were $12.3 million, compared to $16.3 million for the same period of 2013.  The $4.0 million decrease in 2014, principally resulted from cost cutting measures including a decrease in compensation, computer IT support, investor relations and legal expenses. 

 

Exploration expenses.

Property exploration expenses totaled $6.9 million for the year ended December 31, 2014, compared to $9.5 million during the same period of 2013.  Costs associated with definition and delineation drilling of the La Arista vein system were reflected in mine development and capitalized. The $2.6 million decrease in 2014 includes a $1.1 million credit due to the reversal of an allowance for an uncollectible IVA receivable. 

 

Facilities and mine construction expenses.

 

Facilities and mine construction expenses, which was a line item required prior to having proven and probable reserves effective as of January 1, 2014, were nil for the year ended December 31, 2014, compared to $22.2 million during the same period of 2013. The decrease in facilities and mine construction expenses was due to our changed status from an Exploration Stage company to a Production Stage company having proven and probable reserves for the first time in 2014. In 2013 we had $5.6 million of expenses related to our mill expansion.

 

Costs and expenses.

 

Total costs and expenses during the year ended December 31, 2014, were $19.3 million compared to $47.9 million during the comparable period of 2013, a decrease of $28.6 million or 59.7%. The decrease in cost and expenses, as discussed in more detail below, resulted from a decrease in general administrative, exploration, facilities and mine construction expenses from the mill expansion during 2013. A significant portion of the reduction was related to the change in recognition and presentation, as a result of the change in status from an Exploration Stage Enterprise to a Production Stage Enterprise, as certain development costs were capitalized in 2014, while such costs were expensed in 2013.

 

Other expense.

 

For the year ended December 31, 2014, we recorded other expense of $0.3 million compared to other expense of $1.4 million during the same period of 2013. The improvement was primarily due to the $1.8 million impairment of gold and silver bullion in 2013.

 

Provision for income taxes. 

 

For the year ended December 31, 2014, income tax expense increased to  $15.0 million as compared to an income tax expense of $8.9 million for the year ended December 31, 2013. As of December 31, 2014, the increase is primarily due to the new mining royalty tax and deferral of exploration expense for tax purposes.  See Note 8 to the Consolidated Financial Statements for additional information. 

 

Net income.

 

For the year ended December 31, 2014, net income was $16.2 million, or $0.30 per basic share, as compared to $0.1 million or $0.00 per basic share, for the comparable period of 2013. The increase in net income for the year was impacted by the matters described above.

Results of Operations – Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

During the year ended December 31, 2013, sales of metals totaled $125.8 million, net of treatment charges, compared to sales of $131.8 million during the same period of 2012. Gold equivalent ounces sold in 2013, increased to 82,935 ounces compared to 72,399 ounces sold in 2012. Gold prices realized for 2013, were $1,388 per ounce, down from $1,676 per ounce in 2012. Mine gross profit for the year ended December 31, 2013, was $58.3 million compared to $87.8 million in the comparable period of 2012, a decrease of $29.5 million or 33.6%.

For the year ended December 31, 2013, we reported net income of $0.1 million, or $0.00 per basic share, compared to net income of $33.7 million, or $0.64 per basic share, for the year ended December 31, 2012. The $33.6 million decrease in net income in 2013, was principally attributable to a decrease in metal prices, and higher production, general and administrative, exploration, and facilities and mine construction expenses. Total costs and expenses for the year ended December 31, 2013, were $47.9 million compared to $38.1 million in the same period of 2012, an increase of $9.8 million or 25.7%. The increase in costs and expenses was primarily due to an increase in exploration, general administrative, and facilities and mine construction expenses.

 Exploration expense for the year ended December 31, 2013, was $9.5 million compared to $8.0 million in the same period of 2012. The $1.5 million increase in exploration expenses principally resulted from an expanded drilling program and from an aerial geophysical survey over our Oaxaca property trend.

Facilities and mine construction expenses for the year ended December 31, 2013, were $22.2 million compared to $16.6 million in the same period of 2012. The $5.6 million increase in facilities and mine construction expenses was principally due to our mill expansion project.

General and administrative expenses for the year ended December 31, 2013, were $16.3 million, compared to $13.5 million in the same period of 2012.  The $2.8 million increase in 2013 principally resulted from an increase in compensation, insurance, computer IT support, investor relations and legal expenses. 

Other expense for the year ended December 31, 2013, was $1.4 million, compared to $2.7 million in the same period of 2012.  The $1.3 million decrease in 2013 principally resulted from a decrease in foreign currency losses of $2.5 million and increase in other income of $0.6 million, which was partially offset by an increase in impairment of gold and silver bullion of $1.8 million.  

Provision for income tax for the year ended December 31, 2013, was $8.9 million, compared to $13.3 million in the same period of 2012.

Non-GAAP Measures 

Reconciliation of Non-GAAP Measures to Total Mine Cost of Sale

In this report, we have provided information prepared or calculated according to U.S. GAAP, as well as referenced some Non-U.S. GAAP performance measures. Because the Non-GAAP performance measures do not have any standardized meaning prescribed by U.S. GAAP, they may not be comparable to similar measures presented by other companies. Accordingly, these measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP.

We have reconciled total cash cost, before by-product credits and total cash cost, after by-product credits to total mine cost of sales which is a reported U.S. GAAP measure. Total cash cost, before by-product credits, includes all direct and indirect operating cash costs related directly to our production of metals which includes mining, milling and other plant facility costs, smelter treatment and refining charges, royalties, and general and administrative costs.

We use total cash cost, after by-product credits per precious metal gold equivalent ounce sold (including royalties) as one indicator for comparative monitoring of our mining operations from period-to-period and believe that investors also find this information helpful when evaluating our performance.  By-product credits include revenues earned from all metals other than the primary precious metals sold.  Management also uses this measurement for the comparative monitoring of performance of our mining operations period-to-period from a cash flow perspective.  Total cash cost, after by-product credits, per precious gold equivalent ounce sold is a measure developed by the Gold Institute Standard in an effort to provide a uniform standard for comparison purposes. However, there can be no assurance that our reporting of this Non-GAAP measure is similar to that reported by other mining companies.

The following tables present a reconciliation between the Non-GAAP measures of total cash cost, before by-product credits and total cash cost, after by-product credits to the U.S. GAAP measure of total mine cost of sales and depreciation, reclamation and remediation and stock-based compensation for our operations at the El Aguila project for the three and twelve month periods ended December 31, 2014 and 2013: