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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark One)

 

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

 

For the quarterly period ended June 30, 2015

 

☐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

 

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GOLD RESOURCE CORPORATION

(Exact Name of Registrant as Specified in its charter)

 

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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) 

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Indicate by check mark whether the registrant (1) has 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 Web site, 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 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  ☒ 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 54,179,369 shares of common stock outstanding as of August 4, 2015.

 

 

 

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GOLD RESOURCE CORPORATION

 

FORM 10-Q

 

Index

 

 

References in this report to agreements to which Gold Resource Corporation is a party and the definition of certain terms from those agreements are not necessarily complete and are qualified by reference to the agreements. Readers should refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and the exhibits listed therein.

 

 

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PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

 

GOLD RESOURCE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands, except share and per share amounts)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GOLD RESOURCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

for the three and six months ended June 30, 2015 and 2014

(U.S. dollars in thousands, except share and per share amounts)

(Unaudited)

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

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GOLD RESOURCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

for the six months ended June 30, 2015 and 2014

(U.S. dollars in thousands)

(Unaudited)

 

 

 

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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GOLD RESOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

 

1. Basis of Preparation of Financial Statements

 

Basis of Presentation: The unaudited interim condensed consolidated financial statements included herein are expressed in United States dollars and are prepared in conformance with United States generally accepted accounting principles (“U.S. GAAP”) and applicable rules of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The unaudited interim condensed consolidated financial statements include the accounts of Gold Resource Corporation (“the Company”) and its wholly owned U.S. subsidiary GRC Nevada Inc. (“GRC Nevada”) and its wholly owned Mexican subsidiary Don David Gold Mexico S.A. de C.V. (“Don David Gold Mexico”). Significant intercompany accounts and transactions have been eliminated. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to SEC rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Form 10-K for the year ended December 31, 2014. Unless otherwise noted, there have been no material changes to the footnotes from those accompanying the audited financial statements contained in the Company’s annual report on Form 10-K.

 

In management’s opinion, the unaudited condensed consolidated financial statements contained herein reflect all material normal and recurring adjustments that are necessary for the fair presentation of the Company’s financial position, results of operations, and cash flows on a basis consistent with that of its audited consolidated financial statements for the year ended December 31, 2014. However, the results of operations for the interim period ended June 30, 2015 may not be indicative of results of operations to be expected for the full fiscal year.

 

Revenue Recognition: The Company recognizes revenue when an arrangement exists, the price is fixed and determinable, the title and risk of loss have transferred to the buyer and collection is reasonably assured.

 

Concentrate sales: Concentrate sales are initially recorded using forward metal prices at the time of shipment and contain an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of the concentrates at the forward metal prices at the time of shipment. The embedded derivative, which does not qualify for hedge accounting, is adjusted to fair value through revenue each period prior to final settlement. Changes in the prices of metals that the Company sells, as quoted on the London Metal Exchange and the London Bullion Market, between the shipment and final settlement dates will result in adjustments to revenues related to sales of concentrate previously recorded upon shipment. Sales are recorded net of charges for treatment, refining, smelting losses and other charges negotiated between the Company and the buyer. These charges are estimated upon shipment of concentrates based on contractual terms and adjusted to reflect actual charges at final settlement. Historically, actual charges have not varied materially from the Company’s initial estimates.

 

Doré sales: Doré sales are recognized using quoted metal prices when the title has been transferred and collection of the sales price is reasonably assured, net of treatment and refining charges.

 

Production Costs: Production costs include labor and benefits, royalties, concentrate shipping costs, mining subcontractors, fuel and lubricants, legal and professional fees related to mine operations, stock-based compensation attributable to mine personnel, materials and supplies, repairs and maintenance, explosives, housing and food, insurance, reagents, travel, medical services, security equipment, office rent, tools and other costs that support the Company’s mining operations.

 

Mine Development: The Company expenses general prospecting costs and the costs of acquiring and exploring unevaluated mineral properties. Costs incurred to develop new properties are capitalized as incurred when it has been determined that the property can be economically developed based on the existence of proven and probable reserves or

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mineralized materials. These costs include the cost of building access ways, shaft sinking and access, lateral development, drift development, ramps and infrastructure development.

 

Drilling and related costs are capitalized for an ore body where proven and probable reserves exist, and the activities are directed at obtaining additional information on the ore body or converting mineralized material to proven and probable reserves. All other drilling and related costs are expensed as incurred. Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs and then included as a component of production costs.

 

When mineral properties are developed and operations commence, capitalized costs are charged to operations and amortized using the units-of-production method over the estimated life of the ore body based on estimated recoverable ounces to be produced from proven and probable reserves. Upon abandonment or sale of a mineral property, all capitalized costs relating to the specific property are written off in the period abandoned or sold and a gain or loss is recognized.

 

2. Fair Value Measurement

 

Fair value accounting establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: 

 

Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; 

 

Level 2Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and 

 

Level 3Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). 

 

The following tables set forth certain of the Company’s assets measured at fair value by level within the fair value hierarchy. As required by accounting guidance, assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

 

 

 

Cash and cash equivalents consist primarily of money market funds and are valued at cost, which approximates fair value.

 

Trade accounts receivable include amounts due to us for shipments of concentrates and doré sold to customers.  Concentrate sales contracts provide for provisional pricing as specified in such contracts. These sales contain an embedded derivative related to the provisional pricing mechanism which is bifurcated and accounted for as a derivative. At the end of each reporting period, the Company records an adjustment to sales to reflect the mark-to-market of

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outstanding provisional invoices. Because these provisionally priced sales have not yet settled as of the reporting date, the mark-to-market adjustment related to these invoices is included in accounts receivable as of each reporting date.

 

Our non-current investments consist of marketable equity securities which are valued using quoted market prices for each security when available.

 

Gains and losses related to changes in the fair value of these financial instruments were included in the Company’s condensed consolidated statements of income as shown in the following table:

 

 

 

 

 

 

 

 

3. Gold and Silver Bullion

 

The Company periodically purchases gold and silver bullion on the open market for investment purposes and to use in its dividend exchange program under which shareholders may exchange their cash dividend for gold and silver bullion. The Company’s investment in gold and silver bullion is carried at cost and evaluated at relevant financial reporting dates. 

 

During the six months ended June 30, 2015, the Company made no purchases of gold or silver bullion. The Company recorded write-downs on its gold and silver bullion totaling $0.1 million for the six months ended June 30, 2015. At June 30, 2015 and December 31, 2014, the Company’s holdings of bullion consisted of the following:

 

 

 

 

 

4.  Current Inventories 

 

At June 30, 2015 and December 31, 2014, inventories consisted of the following:  

 

 

 

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5. Income Taxes 

 

The Company recorded income tax expense of $0.3 million and $4.3 million for the three and six months ended June 30, 2015, respectively. During the three and six months ended June 30, 2014, the Company recorded income tax expense of $6.4 million and $11.6 million, respectively

 

During the three and six months ended June 30 2015, the Company received $3.0 million in intercompany dividends from its Mexican operations. The Company has asserted permanent reinvestment of all Mexico undistributed earnings as of December 31, 2014. The impact of the planned intercompany dividends for 2015, net of foreign tax credits, is reflected in the estimated annual effective tax rate.

 

During the six months ended June 30, 2015, the Company experienced a decrease in its annualized effective tax rate principally due to the decrease in intercompany dividends anticipated to be paid in 2015.

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carry-back and carry-forward periods), projected future taxable income and tax-planning strategies in making this assessment. As of June 30, 2015, the Company believes it has sufficient positive evidence to conclude that its federal and foreign deferred tax assets are more likely than not to be realized. However, the Company has determined that the realization of its state deferred tax assets is not more likely that not to be realized and has a valuation allowance offsetting the state deferred tax assets.

 

As of June 30, 2015, the Company believes that it has no liability for uncertain tax positions. If the Company were to determine there was an uncertain tax position, the Company would recognize the liability and related interest and penalties within income tax expense.

 

Currently the Company is undergoing a normal course tax examination by the Mexican tax authorities that relates to the 2011 and 2012 tax years. The tax examinations are open and ongoing, and no further information has been communicated to the Company by the Mexican tax authorities.

 

6. Prepaid Expenses and Other Current Assets

 

At June 30, 2015 and December 31, 2014, prepaid expenses and other current assets consisted of the following:

 

 

 

 

 

 

 

 

 

 

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7. Property, Plant and Mine Development – net

 

At June 30, 2015 and December 31, 2014, property, equipment and mine development consisted of the following:

 

 

 

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(1) Includes accrued capital expenditures of $1.5 million for the six months ended 2015 and $1.1 million for the year ended 2014.

 

The Company recorded depletion, depreciation and amortization expense of $2.3 million and $3.7 million for the three and six months ended June 30, 2015, respectively. During the three and six months ended June 30, 2014, the Company recorded depletion, depreciation and amortization expense of $1.1 million and $1.9 million, respectively.

 

The Company has equipment leases that qualify as capital leases which have been recorded at the present value of the future minimum lease payments, including transaction fees and bargain purchase options, which approximates the net carrying value of the equipment. The equipment leases bear interest at 4.5% to 5.5% per annum, with monthly principal and interest payments of approximately $0.1 million over the three-year lease term. The Company has an option to purchase the equipment at the end of the lease term for less than $0.1 million. Depreciation on the leased assets is recorded over their estimated useful lives. 

 

As of June 30, 2015, the Company’s future obligations under capital leases are as follows:

 

 

 

 

 

 

 

 

 

 

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8. Investments in Equity Securities

 

At June 30, 2015 and December 31, 2014, the value of investments in equity securities consisted of the following:

 

 

 

 

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(1) The Company determined that it is not practicable to estimate the fair value of this investment.

 

 

9. Other Non-Current Assets

 

At June 30, 2015 and December 31, 2014, other non-current assets consisted of the following:

 

 

 

 

 

 

 

10. Accrued Expenses and Other Current Liabilities

 

At June 30, 2015 and December 31, 2014, accrued expenses and other current liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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11. Reclamation and Remediation

 

The Company’s reclamation and remediation obligations relate to the Aguila Project. The following table presents the changes in reclamation and remediation obligations for the six months ended June 30, 2015 and 2014, respectively:

 

 

 

 

 

 

12. Shareholders’ Equity 

 

The Company declared and paid $3.3 million and $3.2 million, respectively, of dividends during each of the six months ended June 30, 2015 and 2014. The Company has declared monthly cash dividends totaling $1.98 per share of common stock to shareholders of record since July 2010. On July 27, 2015,  the Board of Directors declared a dividend on common stock totaling $0.5 million payable in August 2015.

 

 

13. Concentrate Sale Settlements

 

The Company records adjustments to sales of metals concentrate that result from final settlement of provisional invoices in the period that the final invoice settlement occurs. The Company also compares assays taken at the mine site on its concentrate shipments, upon which the Company’s provisional invoices are based, to assays obtained from samples taken at the buyer’s warehouse prior to final settlement, upon which the final invoices are in part based, to assess whether an adjustment to sales is required prior to final invoice settlement. These adjustments resulted in an increase to sales of $0.2 million and a decrease to sales of $0.1 million for the three and six months ended June 30, 2015, respectively, and a decrease to sales of $1.8 million and $2.5 million for the three and six months ended June 30, 2014, respectively.

 

In addition to the final settlement adjustments on provisional invoices, the Company records a sales adjustment to mark-to-market outstanding provisional invoices at the end of each reporting period. These adjustments resulted in a decrease to sales of nil and $0.1 million for the three and six months June 30, 2015 respectively, and a decrease to sales of $0.9 million and $2.1 million for the three and six months ended June 30, 2014, respectively.

 

Sales of metal concentrates are recorded net of smelter refining fees, treatment charges and penalties. Total charges for these items totaled $3.1 million and  $5.8 million for the three and months ended June 30, 2015, and $3.2 million and $6.1 million for the three and six months ended June 30, 2014, respectively.

 

 

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14. Stock Options

 

The Company has a non-qualified stock option and stock grant plan under which equity awards may be granted to key employees, directors and others (the “Plan”). A summary of activity under the Plan for the six months ended June 30, 2015 is presented below:

 

 

 

No options were granted during the six months ended June 30, 2015. Substantially all of the options vest over a three year period and have an exercise term of 10 years. The total fair value of stock options vested during the six months ended June 30, 2015 was $0.7 million.  

 

The following table summarizes information about stock options outstanding at June 30, 2015:

 

 

 

The fair value of stock option grants is amortized over the respective vesting period. Total stock-based compensation expense related to stock options for the three and six months ended June 30, 2015 was $0.8 million and $1.9 million, respectively, and for the three and six months ended June 30, 2014 was $1.2 million and $2.0 million, respectively. 

 

Stock-based compensation expense has been allocated between production costs and general and administrative expense as follows:  

 

 

 

The estimated unrecognized stock-based compensation expense from unvested options as of June 30, 2015 was approximately $0.8 million, and is expected to be recognized over the remaining vesting periods of up to two years. 

 

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The assumptions used to determine the value of stock-based awards under the Black-Scholes-Merton method are summarized below:  

 

 

 

 

 

15. Other (Expense) Income, Net

 

Other (expense) income, net consisted of the following:

 

 

 

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16. Net Income per Share

 

Basic earnings per share is calculated based on the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated based on the assumption that stock options outstanding, which have an exercise price less than the average market price of the Company’s common shares during the period, have been exercised on the later of the beginning of the period or the date granted and that the funds obtained from the exercise were used to purchase common shares at the average market price during the period.

 

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The effect of potentially dilutive stock options on the weighted average number of shares outstanding is as follows:

 

 

 

 

 

 

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion summarizes the results of operations of Gold Resource Corporation and its subsidiaries (“we”, “our”, or “us”) for the three and six months ended June 30, 2015 and compares those results to the three and six months ended June 30, 2014. It also analyzes our financial condition at June 30, 2015 and compares it to our financial condition at December 31, 2014. This discussion should be read in conjunction with the management’s discussion and analysis and the audited financial statements for the year ended December 31, 2014 and footnotes contained in our annual report on Form 10-K for the year ended December 31, 2014.

 

The discussion also presents certain non-U.S. Generally Accepted Accounting Principles (“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 below under Non-GAAP Measures.

 

See Forward-Looking Statements at the end of this Item 2 for important information regarding statements contained herein.

 

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 the Aguila Project in Oaxaca, Mexico. Our mill located at the Aguila project produces doré and metal concentrates from ore mined from the Arista underground mine, which contains precious metal products of gold and silver, and by-products of copper, lead and zinc.

 

The mill located at our Aguila Project produced, on a precious metal gold equivalent basis (at an actual gold/silver ratio of 72:1), 14,858 ounces for the three months ended June 30, 2015. During the same period, we sold 14,589 precious metal gold equivalent ounces produced at a total cash cost per ounce of $533. The mill located at our Aguila Project produced, on a precious metal gold equivalent basis, 34,204 ounces for the six months ended June 30, 2015. During the same period, we sold 33,390 precious metal gold equivalent ounces produced at a total cash cost per ounce of $469. Precious metal gold equivalent is determined by taking gold ounces produced or sold, plus silver ounces produced or sold converted to precious metal gold equivalent ounces using the gold to silver average price 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

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from sales of our gold and silver. Please see the section titled Non-GAAP Measures below for additional information concerning the cash cost per ounce measures.

 

For the three months ended June 30, 2015, we reported revenue of $23.3 million, mine gross profit of $6.9 million and net income of $0.8 million. For the six months ended June 30, 2015, we reported revenue of $51.6 million, mine gross profit of $20.9 million and net income of $5.9 million.

 

Exploration Activities

 

Oaxaca Mining Unit

 

The Aguila Project: Our mine exploration activities during the second quarter of 2015 at the Aguila Project focused mainly on the Switchback vein system, located approximately 500 meters northeast of the Arista underground mine. We continued to advance the exploration ramp to Switchback during the quarter with the goal to access previously delineated mineralized material at the Switchback deposit by year end. As ongoing ramp development advances towards the Switchback, a third drill station is planned for construction. This closer drill station plans for a more advantageous distance and drill angles to continue exploration at Switchback. In addition to our focus on Switchback infill and step-out underground drilling, surface exploration drilling during the quarter continued to target the feeder vein and extensions of manto mineralization at the Aguila open pit on the Aguila Project, where operations ceased in 2011.

 

Surface drilling also resumed during the quarter on the Santiago vein, located northwest of the Arista mine. This program targeted extensions to mineralized material identified during previous drilling campaigns on the Santiago vein. In total, twenty-five diamond drill holes totaling 5,442 meters were completed at the Aguila Project during the second quarter of 2015.

 

Las Margaritas property: A surface diamond drill program commenced at Las Margaritas in the second quarter of 2015 to test numerous targets delineated by geochemical and geophysical data. Eleven surface diamond drill holes totaling 5,925 meters were completed during the quarter at Las Margaritas.

 

Alta Gracia property: A follow-up surface drill program for definition of mineralization and mine planning commenced at Alta Gracia during the second quarter of 2015. Nine surface diamond drill holes totaling 2,524 meters were completed during the second quarter of 2015 at Alta Gracia. Metallurgical testing and mine planning continued on the mineralized material identified at Alta Gracia. The detailed mapping and sampling program of surface veins at Alta Gracia, in the historic San Juan mine area was completed during the second quarter of 2015.  Mining agreements with the local Alta Gracia community are being finalized and mine permitting is underway.

 

Nevada Mining Unit

Radar property:  Phase one surface diamond drilling was completed at Radar during the second quarter of 2015. A total of 2,066 meters in six holes were drilled during the initial phase of drilling at Radar. Evaluation of recent drill results and previously collected rock and soil geochemical data is on-going to help define additional drilling targets at Radar.

 

Goose property: No field work was conducted on the Goose property during the first six months of 2015. Initial field investigations to identify drill targets will commence for the Goose property during the third quarter of 2015.

 

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Results of Operations

 

The following table summarizes our results of operations: