10-Q 1 c791-20120930x10q.htm 10-Q d0a91c00d0a5403

             

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2012

¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 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)

 

 

 

 

Colorado

84-1473173

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

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) 

 

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  x    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  x 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.

 

 

 

 

 

 

 

 

 

Larger accelerated filer

x

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨(Do not check if a smaller reporting company)

Smaller reporting company

¨

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 52,679,369 shares of common stock outstanding as of November 13, 2012.

 

 


 

GOLD RESOURCE CORPORATION

FORM 10-Q

Index

 

 

8

 

 

 

 

 

 

Page

Part I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

Consolidated Balance Sheets at September 30, 2012 (unaudited) and December 31, 2011

1

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011, and for the period from Inception (August 24,1998) to September 30, 2012 (unaudited)

2

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, and for the period from Inception (August 24, 1998) to September 30, 2012 (unaudited)

3

 

Notes to Consolidated Financial Statements (unaudited)

4

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

Item 3

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4

Controls and Procedures

22

 

 

Part II - OTHER INFORMATION

 

Item 1.

Legal Proceedings 

23

Item 1A.

Risk Factors 

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds 

23

Item 6.

Exhibits 

23

SIGNATURES 

25

 

 

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, 2011 and the exhibits listed therein.

 

 

 

 

 

 


 

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

 

 

 

 

 

 

 

 

GOLD RESOURCE CORPORATION

(An Exploration Stage Company)

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands, except shares)

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2012

 

2011

 

 

(unaudited)

 

 

ASSETS

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

36,242 

$

51,960 

Gold and silver bullion

 

6,560 

 

2,549 

Accounts receivable

 

16,090 

 

14,281 

Inventories

 

5,086 

 

4,243 

Deferred tax assets

 

11,118 

 

11,118 

Prepaid expenses and other assets

 

701 

 

957 

Total current assets

 

75,797 

 

85,108 

Land and mineral rights

 

227 

 

227 

Property and equipment - net

 

12,959 

 

10,318 

Inventories

 

890 

 

 -

Deferred tax assets

 

19,517 

 

19,517 

Total assets

$

109,390 

$

115,170 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$

2,437 

$

1,691 

Accrued expenses

 

4,314 

 

4,879 

IVA taxes payable

 

3,191 

 

559 

Income taxes payable

 

1,990 

 

15,987 

Dividends payable

 

3,170 

 

2,645 

Total current liabilities

 

15,102 

 

25,761 

Asset retirement obligation

 

2,539 

 

2,281 

Total liabilities

 

17,641 

 

28,042 

Shareholders' equity:

 

 

 

 

Preferred stock - $0.001 par value, 5,000,000 shares authorized:

 

 

 

 

no shares issued and outstanding

 

 -

 

 -

Common stock - $0.001 par value, 100,000,000 shares authorized:

 

 

 

 

53,015,767 and 52,998,303 shares issued and outstanding, respectively

 

53 

 

53 

Additional paid-in capital

 

112,201 

 

132,529 

(Deficit) accumulated during the exploration stage

 

(15,021)

 

(39,522)

Treasury stock at cost, 186,991 shares

 

(3,449)

 

(1,954)

Other comprehensive (loss) - currency translation adjustment

 

(2,035)

 

(3,978)

Total shareholders' equity

 

91,749 

 

87,128 

Total liabilities and shareholders' equity

$

109,390 

$

115,170 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

1


 

 

   

 

 

 

 

 

 

 

 

 

 

 

GOLD RESOURCE CORPORATION

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

for the three and nine months ended September 30, 2012 and 2011

and for the period from Inception (August 24, 1998) to September 30, 2012

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Inception

 

 

 

 

 

 

 

 

 

 

(August 24, 1998)

 

Three months ended September 30,

Nine months ended September 30,

 

to September 30,

 

 

2012

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Sales of metals concentrate, net

$

36,490 

$

37,781 

$

103,399 

$

69,725 

$

223,315 

Mine cost of sales:

 

 

 

 

 

 

 

 

 

 

Production costs

 

12,141 

 

7,690 

 

31,838 

 

16,967 

 

62,300 

Depreciation and amortization

 

556 

 

184 

 

940 

 

327 

 

1,579 

Accretion

 

20 

 

20 

 

60 

 

63 

 

210 

Total mine cost of sales

 

12,717 

 

7,894 

 

32,838 

 

17,357 

 

64,089 

Mine gross profit

 

23,773 

 

29,887 

 

70,561 

 

52,368 

 

159,226 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

2,933 

 

1,812 

 

8,922 

 

4,790 

 

40,283 

Exploration expenses

 

1,882 

 

1,735 

 

5,466 

 

3,271 

 

39,571 

Construction and development

 

5,394 

 

4,467 

 

13,492 

 

13,557 

 

88,408 

Production start-up expense, net

 

 -

 

 -

 

 -

 

 -

 

209 

Management contract expense

 

 -

 

 -

 

 -

 

 -

 

752 

Total costs and expenses

 

10,209 

 

8,014 

 

27,880 

 

21,618 

 

169,223 

Operating income (loss)

 

13,564 

 

21,873 

 

42,681 

 

30,750 

 

(9,997)

Other income (expense)

 

(485)

 

2,476 

 

(1,782)

 

2,333 

 

1,093 

Income (loss) before income taxes

 

13,079 

 

24,349 

 

40,899 

 

33,083 

 

(8,904)

Provision for income taxes

 

5,782 

 

9,131 

 

16,398 

 

10,937 

 

4,361 

Net income (loss) before extraordinary item

 

7,297 

 

15,218 

 

24,501 

 

22,146 

 

(13,265)

Extraordinary items:

 

 

 

 

 

 

 

 

 

 

Flood loss, net of income tax benefit of $750

 

 -

 

 -

 

 -

 

(1,756)

 

(1,756)

Net income (loss)

$

7,297 

$

15,218 

$

24,501 

$

20,390 

$

(15,021)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

Currency translation gain (loss)

 

2,168 

 

(4,227)

 

1,943 

 

(3,844)

 

(2,035)

Net comprehensive income (loss)

$

9,465 

$

10,991 

$

26,444 

$

16,546 

$

(17,056)

Net income per common share:

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

Before extraordinary item

$

0.14 

$

0.29 

$

0.46 

$

0.41 

 

 

Extraordinary item

$

 -

$

 -

$

 -

$

(0.03)

 

 

Net income

$

0.14 

$

0.29 

$

0.46 

$

0.38 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

Before extraordinary item

$

0.13 

$

0.27 

$

0.43 

$

0.39 

 

 

Extraordinary item

$

 -

$

 -

$

 -

$

(0.03)

 

 

Net income

$

0.13 

$

0.27 

$

0.43 

$

0.36 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

Basic

 

52,848,586 

 

52,997,194 

 

52,885,640 

 

52,997,929 

 

 

Diluted

 

56,254,632 

 

56,357,096 

 

56,365,316 

 

56,475,441 

 

 

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

 

 

     

2


 

 

 

 

 

 

 

 

GOLD RESOURCE CORPORATION

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the nine months ended September 30, 2012 and 2011

and for the period from Inception (August 24, 1998) to September 30, 2012

(U.S. dollars in thousands)

(Unaudited)

 

 

 

 

 

 

Inception

 

 

 

 

(August 24, 1998)

 

 

Nine months ended September 30,

 

to September 30,

 

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

$

24,501 

$

20,390 

$

(15,021)

Adjustments to reconcile net income (loss) to net cash

 

 

 

 

 

 

provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

1,117 

 

511 

 

2,661 

Accretion

 

60 

 

63 

 

210 

Asset retirement obligation

 

 -

 

 -

 

2,307 

Stock-based compensation

 

6,640 

 

4,670 

 

22,691 

Management fee paid in stock

 

 -

 

 -

 

392 

Related party payable paid in stock

 

 -

 

 -

 

320 

Currency translation gain (loss)

 

1,943 

 

(3,843)

 

(2,035)

Unrealized loss from gold and silver bullion held

 

(744)

 

287 

 

(315)

Realized loss from gold and silver bullion converted

 

109 

 

 -

 

109 

Deferred tax assets

 

 -

 

 -

 

(30,635)

Other

 

 

 -

 

36 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

(1,809)

 

(13,549)

 

(16,090)

Inventories

 

(1,733)

 

(1,477)

 

(5,976)

Prepaid expenses and other assets

 

256 

 

(1,180)

 

(701)

Accounts payable

 

746 

 

1,549 

 

2,436 

Accrued expenses

 

(565)

 

116 

 

4,314 

IVA taxes payable

 

2,632 

 

5,451 

 

3,191 

Income taxes payable

 

(13,997)

 

10,187 

 

1,990 

Total adjustments

 

(5,339)

 

2,785 

 

(15,095)

Net cash provided by (used in) operating activities

 

19,162 

 

23,175 

 

(30,116)

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

(3,763)

 

(5,044)

 

(16,089)

Purchases of gold and silver bullion

 

(4,707)

 

(2,012)

 

(7,684)

Proceeds from conversion of gold and silver bullion

 

1,331 

 

 -

 

1,331 

Net cash used in investing activities

 

(7,139)

 

(7,056)

 

(22,442)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from sales of common stock

 

 -

 

 -

 

150,633 

Proceeds from exercise of stock options

 

 -

 

 -

 

428 

Proceeds from debentures - founders

 

 -

 

 -

 

50 

Dividends paid

 

(26,444)

 

(17,490)

 

(59,613)

Treasury stock purchases

 

(1,495)

 

(972)

 

(3,449)

Proceeds from exploration funding agreement

 

 -

 

 -

 

500 

Net cash provided by (used in) financing activities

 

(27,939)

 

(18,462)

 

88,549 

Effect of exchange rates on cash and equivalents

 

198 

 

(225)

 

251 

Net increase (decrease) in cash and cash equivalents

 

(15,718)

 

(2,568)

 

36,242 

Cash and equivalents at beginning of period

 

51,960 

 

47,582 

 

 -

Cash and equivalents at end of period

$

36,242 

$

45,014 

$

36,242 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes paid

$

30,395 

$

 -

$

30,395 

Non-cash investing and financing activities:

 

 

 

 

 

 

Conversion of funding into

 

 

 

 

 

 

common stock

$

 -

$

 -

$

500 

Conversion of founders debentures into

 

 

 

 

 

 

common stock

$

 -

$

 -

$

50 

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

 

 

 

 

 

 

 

 

 

3


 

GOLD RESOURCE CORPORATION

(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012 

(Unaudited)

1.     Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Gold Resource Corporation (the “Company”) was organized under the laws of the State of Colorado on August 24, 1998. The Company is a producer of metal concentrates that contain gold, silver, copper, lead and zinc at its El Aquila Project in Southern Mexico.  The Company is also performing exploration and evaluation work on its portfolio of base and precious metal exploration properties in Mexico and is evaluating other properties for possible acquisition in Turkey.

Significant Accounting Policies

Exploration Stage Company: Despite the fact that the Company commenced production in 2010, it is still considered an exploration stage company under the criteria set forth by the Securities and Exchange Commission (“SEC”) since it has not yet demonstrated the existence of proven or probable reserves, as defined by the SEC in Industry Guide 7, at its El Aguila Project in Oaxaca, Mexico or any of its other properties. As a result, and in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for exploration stage companies, all expenditures for exploration and evaluation of the Company’s properties are expensed as incurred until mineralized material is classified as proven or probable reserves. Accordingly, substantially all expenditures for mine development and mill construction have been expensed as incurred. Certain expenditures, such as for rolling stock or other general-purpose equipment, may be capitalized, subject to evaluation for possible impairment of the asset. As of September 30, 2012, none of the mineralized material at the Company’s El Aguila Project or any of its other properties met the SEC’s definition of proven or probable reserves. The Company expects to remain an exploration stage company for the foreseeable future, even though it has reached commercial production. The Company will not exit the exploration stage unless and until it demonstrates the existence of proven or probable reserves that meet SEC guidelines.

Basis of PresentationThe consolidated balance sheet as of December 31, 2011 was derived from audited financial statements at that date, but this report does not include all information and footnotes required by U.S. GAAP for complete audited financial statements.  The interim consolidated financial statements included herein have been prepared by the Company, without audit, in accordance with the rules and regulations of the SEC pursuant to Item 210 of Regulation S-X promulgated by the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations, although the Company believes that the disclosures included are adequate to make the information presented not misleading.

In management’s opinion, the unaudited consolidated financial statements contained herein reflect all 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 prior audited consolidated financial statements. However, the results of operations for interim periods may not be indicative of results to be expected for the full fiscal year. Therefore, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, including the summary of significant accounting policies, included in the Company’s Form 10-K for the year ended December 31, 2011.  Unless otherwise noted, there have been no material changes in the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s Form 10-K.

Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management routinely makes judgments and estimates about the effects of matters that are inherently uncertain and bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances.  Actual results could differ from these estimates.

ReclassificationsCertain amounts presented in prior periods have been reclassified to conform with the current period presentation. The reclassifications had no effect on the Company’s net income (loss).

Concentration of Credit Risk: During the three and nine months ended September 30, 2012, 100% of the Company’s revenues and accounts receivable resulted from sales to Consorcio Minero de Mexico Cormin Mex. S.A. de C.V. (“Consorcio”), a subsidiary of the Trafigura Group Company. For the three months ended September 30, 2011, 100% of the Company’s revenues and accounts receivables resulted from sales to Consorcio.  For the nine months ended September 30,

4


 

2011, 95.2% of the Company’s revenues and accounts receivables resulted from sales to Consorcio and the remaining 4.8% to Trafigura Beheer, B.V. (“Beheer”) of Lucerne Switzerland, also a subsidiary of the Trafigura Group Company.

Sales to Consorcio and Beheer are made under separate contracts with different contract terms. The Company has carefully considered and assessed the credit risk resulting from its concentrate sales arrangements with Consorcio and Beheer and believes it is not exposed to significant credit risk in relation to the counterparty meeting its contractual obligations as it pertains to its trade receivables during the ordinary course of business. In the event that the Company’s relationship with Consorcio or Beheer is interrupted for any reason, the Company believes that it would be able to locate another entity to purchase its metals concentrates.  However, any interruption could temporarily disrupt the Company’s sale of its principal products and adversely affect operating results. 

The Company’s El Aguila Project, which is located in the state of Oaxaca, Mexico, accounted for 100% of the Company’s total sales of metals concentrate for the three and nine months ended September 30, 2012 and 2011.

Net Income (Loss) Per Share: Diluted income per share reflects the potential dilution that could occur if potentially dilutive securities, as determined using the treasury stock method, are converted into common stock. Potentially dilutive securities, such as stock options and warrants, are excluded from the calculation when their inclusion would be anti-dilutive, such as periods when a net loss is reported or when the exercise price of the instrument exceeds the average fair market value.  For the three and nine months ended September 30, 2012, potentially dilutive securities included 3.4 and 3.5 million shares, respectively, relating to stock options.  For the three and nine months ended September 30, 2011, potentially dilutive securities included 3.4 and 3.5 million shares, respectively, relating to stock options.

Fair Value of Financial Instruments: The Company’s financial instruments consist of cash and cash equivalents, investments in gold and silver bullion, accounts receivable and accounts payable as of September 30, 2012 and December 31, 2011. The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximated their fair values at September 30, 2012 and December 31, 2011 due to their short maturities. See also Note 2, “Gold and Silver Bullion.”

 

Revenue Recognition:  Sales of all metals products sold directly to the Company’s metals concentrate buyer, including by-product metals, are recorded as revenue when title and risk of loss transfer to the buyer (generally at the time shipment is delivered at buyer’s port) at estimated forward prices for the anticipated month of settlement.  Due to the time elapsed between shipment and the final settlement with the buyer, the Company must estimate the prices at which sales of metals will be settled. These estimates are based on various factors, including assay measurements taken at the time of shipment. At the end of each financial reporting period, previously recorded provisional sales are adjusted to estimated settlement metals prices until final settlement with the buyer.

 

    Sales to the Company’s buyer are recorded net of charges for treatment, refining, smelting losses, and other charges negotiated by the Company with the buyer. Charges are estimated upon shipment of concentrates based on contractual terms, and actual charges typically do not vary materially from estimates. Costs charged by smelters include a metals payable fee, fixed treatment and refining costs per ton of concentrate.

 

    Changes in metals prices on the London Bullion Market between shipment and final settlement will result in adjustments to revenues related to sales of concentrate previously recorded upon shipment.  Concentrate sales, which are initially recorded based on estimated forward pricing, 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 price at the time of the sale. The embedded derivative, which does not qualify for hedge accounting, is adjusted to market through earnings each period prior to final settlement.

 

Changes in the market price of metals significantly affect the Company’s revenues, results of operations and cash flow. Metals prices can and often do fluctuate widely and are affected by numerous factors beyond the Company’s control, such as political and economic conditions, demand, forward selling by producers, expectations for inflation, custom smelter activities, the relative exchange rate of the U.S. dollar, investor sentiment, and global mine production levels. The aggregate effect of these factors is impossible to predict. Because the Company’s revenue is derived from the sale of gold, silver, copper, lead and zinc, its results of operations are directly related to the prices of these metals.

Recently Adopted Accounting Standards: The Company evaluates the pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board (“FASB”), the SEC, and the Emerging Issues Task Force (“EITF”), to determine the impact of new pronouncements on U.S. GAAP on the Company’s financial statements.  The following are recent accounting pronouncements adopted by the Company:

 

In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and

5


 

IFRSs” (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. On January 1, 2012, the Company adopted ASU 2011-04 and does not anticipate that it will materially expand its consolidated financial statement footnote disclosures or have an impact on the Company’s consolidated financial position, results of operations or cash flows.

 

In September 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (“ASC Topic 220”): Presentation of Comprehensive Income” (“ASU 2011-05”), which amends current comprehensive income guidance.  This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity.  Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements.  ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011, with early adoption permitted.  On January 1, 2012, the Company adopted ASU 2011-05 and does not anticipate that it will have an impact on the Company’s consolidated financial position, results of operations or cash flows as it only requires a change in the format of the current presentation.

 

 

2.             Gold and Silver Bullion

 

The Company continues to invest a portion of its treasury in physical gold and silver bullion.  During the three months ended September 30, 2012, the Company purchased approximately 300 ounces of gold and 990 ounces of silver at market prices for a total cost of $0.5 million. During the nine months ended September 30, 2012, the Company purchased approximately 1,672 ounces of gold and 59,001 ounces of silver at market prices for a total cost of $4.7 million. During the three and nine months ended September 30, 2011, we purchased approximately 579 ounces of gold and 25,689 ounces of silver at market prices for a total cost of $2.0 million. The bullion was purchased to diversify the Company’s treasury and is being used in conjunction with a recently adopted program offering shareholders the ability to convert their cash dividend into gold and silver bullion.   The table below shows the balance of the Company’s holdings of bullion as of September 30, 2012 and December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012   

 

December 31, 2011   

 

 

Gold

 

Silver

 

Gold

 

Silver

 

 

(in thousands, except ounces and per ounce )

 

(in thousands, except ounces and per ounce )

Ounces

 

1,798 

 

96,911 

 

868 

 

41,728 

Average cost per ounce

$

1,665.18 

$

33.54 

$

1,720.93 

$

35.55 

Fair value per ounce

$

1,778.30 

$

34.69 

$

1,574.50 

$

28.32 

Total cost

$

2,994 

$

3,251 

$

1,494 

$

1,484 

Total fair value

$

3,198 

$

3,362 

$

1,367 

$

1,182 

 

ASC 820: “Fair Value Measurement” (“ASC 820”) establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value measurement of each class of assets and liabilities is dependent upon its categorization within the fair value hierarchy, based upon the lowest level of input that is significant to the fair value measurement of each class of asset and liability. Pursuant to the fair value hierarchy established in ASC 820, the fair value of the Company’s gold and silver bullion is established based on quoted prices in active markets for identical assets or liabilities (Level 1); specifically, the fair value is based on the daily London P.M. fix as of September 30, 2012 and December 31, 2011. As a result of changes in fair value during the three and nine months ended September 30, 2012, unrealized gains of $1.1 million and $0.7 million, respectively, were included in the Company’s other income (expense). Unrealized losses of $0.3 million were included in the Company’s other income (expense) for the three and nine months ended September 30, 2011. In addition, the Company incurred a realized loss of $0.0 and $0.1 million for the three and nine months ended September 30, 2012, respectively, as a result of certain shareholders electing to convert their cash dividend into gold and silver bullion held by the Company. No bullion was converted during the three and nine months ended September 30, 2011.

 

3.            Inventories 

Inventories at September 30, 2012 and December 31, 2011 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2012

 

2011

 

 

(in thousands)

Ore stockpiles - underground mine

$

779 

$

1,629 

Concentrates

 

1,400 

 

663 

Materials and supplies

 

2,907 

 

1,951 

Inventories- current

 

5,086 

 

4,243 

 

 

 

 

 

Ore stockpiles - open pit mine

 

890 

 

 -

Inventories- non-current

 

890 

 

 -

Total inventories

$

5,976 

$

4,243 

6


 

 

 

 

 

 

 

 

 

 

4.          Other income (expense)

Other income (expense) for the three and nine months ended September 30, 2012 and 2011 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2012

 

2011

 

2012

 

2011

 

 

(in thousands)

 

(in thousands)

Currency exchange gain (loss)

$

(1,538)

$

2,748 

$

(2,477)

$

2,564 

Unrealized (loss) from gold and silver bullion held

 

1,073 

 

(287)

 

744 

 

(287)

Realized (loss) from gold and silver bullion converted

 

(19)

 

 -

 

(109)

 

 -

Interest income

 

30 

 

21 

 

93 

 

65 

Other (expense)

 

(31)

 

(6)

 

(33)

 

(9)

Total other income (expense)

$

(485)

$

2,476 

$

(1,782)

$

2,333 

 

 

 

 

5.          Property and Equipment 

                At September 30, 2012 and December 31, 2011, property and equipment consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2012

 

2011

 

 

(in thousands)

Trucks and autos

$

1,553 

$

1,095 

Building

 

1,737 

 

1,737 

Office furniture and equipment

 

2,137 

 

1,768 

Machinery and equipment

 

10,176 

 

7,245 

Subtotal

 

15,603 

 

11,845 

Accumulated depreciation

 

(2,644)

 

(1,527)

Total property and equipment, net

$

12,959 

$

10,318 

 

   Depreciation expense for the three months ended September 30, 2012 and 2011 was $0.6 million and $0.2 million, respectively.  Depreciation expense for the nine months ended September 30, 2012 and 2011 was $1.1 million and $0.5 million, respectively.

6.         Income Taxes 

The Company recorded an income tax expense of $5.8 million and $16.4 million, for the three and nine months ending September 30, 2012, respectively. During the three and nine months ended September 30, 2011, the Company incurred income tax expense of $9.1 million and $10.9 million, respectively. 

7


 

During the nine months ending September 30, 2012, the Company has repatriated $12.3 million in dividends from its Mexican operations, which were not previously subject to US tax, as a partial repatriation of current year earnings. The company has historically asserted permanent reinvestment of all Mexico earnings. The impact of this change in repatriation is included in the Company’s income tax expense, net of foreign tax credit of $3.6 million.

 

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 carryback and carry forward periods), projected future taxable income and tax-planning strategies in making this assessment. As of September 30, 2012, the Company believes it has sufficient positive evidence to conclude that realization of its federal, state and the foreign deferred tax assets of Gold Resource Corporation and Golden Trump Resources, S.A. de C.V. are more likely than not to be realized. 

             The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2012, the Company has not identified any uncertain tax positions. The Company files income tax returns in Mexico and U.S. federal and state jurisdiction and various states. There are currently no Mexican or U.S. federal or state income tax examinations underway for these jurisdictions. Furthermore, the Company is no longer subject to U.S. federal income tax examination by the Internal Revenue Service or by state and local tax authorities for tax years ended on or before December 31, 2009 or Mexican tax examinations for tax years ended on or before December 31, 2006. Although certain tax years are closed under the statute of limitations, tax authorities can still adjust tax losses being carried forward to open tax years.

 

7.          Asset Retirement Obligation

 

The Company’s asset retirement obligation (“ARO”) relates to the estimated reclamation, remediation, and closure costs for its El Aguila Project.   Changes in the Company’s asset retirement obligation for the nine months ended September 30, 2012 and year ended December 31, 2011 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended  September 30,

 

Year Ended December 31,

 

 

2012

 

2011

 

 

(in thousands)

Asset retirement obligation – opening balance

$

2,281 

$

2,495 

Foreign currency translation

 

198 

 

(296)

Accretion

 

60 

 

82 

Asset retirement obligation – ending balance

$

2,539 

$

2,281 

 

 

 

 

 

 

 

 

8.         Shareholders’ Equity 

The Company declared dividends of $27.0 million and paid dividends of $26.4 million during the nine months ended September 30, 2012. During the nine months ended September 30, 2011, the Company declared dividends of $18.4 million and paid dividends of $17.4 million. The Board of Directors has authorized the Company’s dividends to be charged to paid-in-capital until such time as the Company has retained earnings, at which time any subsequent dividends will be charged to retained earnings. Subsequent to September 30, 2012, the Company declared a regular monthly cash dividend of $0.06 per common share as described in Note 13.

 

On September 23, 2011, the Board of Directors approved a share repurchase program pursuant to which the Company may repurchase up to $20 million of its common stock from time to time in market transactions.  There is no pre-determined end date associated with the share repurchase program.  As of September 30, 2012, the Company had repurchased 186,991 shares of common stock for $3.5 million. 

9.            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 reviews 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

8


 

the buyer’s warehouse prior to final settlement, upon which the final invoices are in part based, to assess whether an adjustment to revenues is required prior to final invoice settlement. These adjustments resulted in no change to sales revenue during the three months ended September 30, 2012, and a decrease to sales revenue of $3.7 million (see Note 13) for the nine months ended September 30, 2012, respectively, and an increase to sales revenue of $0.2 million and $0.1 million for the three and nine months ended September 30, 2011, respectively.

            In addition to the final settlement adjustments on provisional invoices, the Company records a sales revenue adjustment to mark-to-market outstanding provisional invoices at the end of each reporting period.  These adjustments resulted in an increase to sales revenue of $2.1 million and $1.4 million for the three and nine months ended September 30, 2012, respectively, and a decrease to sales revenue of $2.0 million and $0.8 million for the three and nine months ended September 30, 2011, respectively.

 

Smelter refining fees, treatment charges and penalties are netted against sales of metals concentrates in the consolidated statement of operations.  Total charges for these items totaled $4.1 million and $12.7 million for the three and nine months ended September 30, 2012, respectively, and $4.3 million and $7.4 million for the three and nine months ended September 30, 2011, respectively.

10.        Stock Options 

The fair value of stock option grants is amortized over the respective vesting period. Total stock-based compensation expense related to stock options allocated among production costs and general and administrative expense for the three months ended September 30, 2012 and 2011 was $1.9 million and $1.8 million, respectively. Total stock-based compensation expense related to stock options allocated among production costs and general and administrative expense for the nine months ended September 30, 2012 and 2011 was $6.6 million and $4.7 million, respectively. Below is a table of stock-based compensation expense allocated between production and general and administrative expense for the three and nine months ended September 30, 2012 and 2011.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2012

 

2011

 

2012

 

2011

 

 

(in thousands)

 

(in thousands)

Production costs

$

799 

$

1,066 

$

2,988 

$

3,141 

General and administrative expenses

 

1,181 

 

705 

 

3,652 

 

1,529 

Total stock-based compensation

$

1,980 

$

1,771 

$

6,640 

$

4,670 

The estimated unrecognized stock-based compensation expense from unvested options as of September 30, 2012 was approximately $12.8 million, which is expected to be recognized over the remaining vesting periods of up to 3.0 years.

            In August 2012, the Company offered certain employees the option to cancel their unexercised stock options in exchange for an equal number of new stock options at a lower exercise price, and subject to a new three-year graded vesting period.  As of September 30, 2012, 13 employees elected to participate in the offer, which resulted in 1.3 million outstanding stock options with an exercise period of 10 years being cancelled at exercise prices ranging from $22.45 to $27.95 per share.  Replacement options of 1.3 million with an exercise period of 10 years were issued on August 14, 2012, at an exercise price of $17.64 per share. As a result of the cancellation and reissuance of these stock options, stock-based compensation expense decreased $0.6 million during the three and nine months ended September 30, 2012.   

11.       Extraordinary Item - Flood 

On April 20, 2011, the El Aquila Project experienced a rain and hail storm that was unusual and infrequent to the area which flooded the La Arista underground mine and damaged roads, buildings and equipment. The Company experienced resultant property damage of approximately  $2.5 million, for which it recorded an extraordinary loss of $1.8 million, net of a $0.8 million income tax benefit, for the nine months ended September 30, 2011. The Company has filed an insurance claim to recover damages and losses resulting from business interruption. It is unknown how much, if anything, the Company will recover.

12.            Legal Proceedings

On October 25, 2012, a putative securities class action lawsuit was filed in the U.S. District Court for the District of Colorado naming the Company and certain of its officers individually as defendants.  The complaint alleges, among other things, that the Company and those officers violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 in connection with statements relating to its annual production targets and mine operations. The plaintiffs seek damages, including interest,

9


 

equitable relief and reimbursement of the costs and expenses they incur in the lawsuit.  The Company believes the allegations are without merit and intends to defend this action vigorously.  The Company is unable at this time to provide a meaningful quantification of how the final resolution of these claims may impact its future consolidated financial position or results of operations.

13.              Subsequent Events 

 

 Between October 18, 2012 and November 11, 2012, the Company purchased 149,407 shares of common stock for $2.4 million under its share repurchase program adopted and approved by the Board of Directors on September 23, 2011.

On October 31, 2012, the Company declared a regular monthly dividend of $0.06 per common share to shareholders of record on November 12, 2012, and payable on November 23, 2012.

On November 5, 2012 the Company entered into a settlement agreement with the buyer of its concentrates relating to a dispute over buyer’s handling, control and sampling of those concentrates at the buyer’s warehouse, and the resulting assays that were obtained from those samples.  The settlement agreement provides that the Company will be paid $1.5 million, the amount by which the Company’s provisional invoices for April, May and June 2012 exceeded the tentative settlement value, based on assays taken at the buyer’s warehouse, for the provisional invoices.  In addition, the settlement agreement required the Company to accept the final settlement value, based on assays taken at the buyer’s warehouse, for shipments made in February and March 2012, which resulted in a reduction to sales of metal concentrates of $3.7 million.   The Company’s first and second quarter 2012 financial statements will be restated to reflect this settlement.  The effect of this settlement, and related income tax effects, as of June 30, 2012 and for the six months ended June 30, 2012 are as follows (These adjustments are also reflected in the financial statements for the nine month period ended September 30, 2012; however, there was no impact of these adjustments in the financial statements for the three month period ended September 30, 2012):

 

10


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restated

 

As reported

 

Adjustments

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

 

June 30,

 

June 30,

 

June 30,

 

 

2012

 

2012

 

2012

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

    Accounts receivable   

$

4,585 

$

8,307 

$

(3,722)

    Income tax receivable

 

712 

 

 -

 

712 

         Total current assets

 

72,866 

 

75,876 

 

(3,010)

         Total assets

$

105,361 

$

108,371 

$

(3,010)

 

 

 

 

 

 

 

    Income taxes payable

$

 -

$

490 

$

(490)

         Total current liabilities

 

11,649 

 

12,139 

 

(490)

 

 

 

 

 

 

 

    (Deficit) accumulated during the exploration stage

$

(22,318)

$

(19,798)

$

(2,520)

         Total shareholders' equity

 

91,307 

 

93,827 

 

(2,520)

         Total liabilities and shareholders' equity

$

105,361 

$

108,371 

$

(3,010)

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2012

 

Six months ended June 30, 2012

 

Six months ended June 30, 2012

CONSOLIDATED STATEMENT OF OPERATIONS

 

 

 

 

 

 

    Sales of metals concentrate, net

$

66,909 

$

70,631 

$

(3,722)

    Mine gross profit

 

46,788 

 

50,510 

 

(3,722)

    Operating income

 

29,117 

 

32,839 

 

(3,722)

    Income before income taxes

 

27,820 

 

31,542 

 

(3,722)

         Provision for income taxes

 

10,616 

 

11,818 

 

(1,202)

    Net Income

$

17,204 

$

19,724 

$

(2,520)

 

 

 

 

 

 

 

    Net income per common share:

 

 

 

 

 

 

         Basic

$

0.33 

$

0.37 

$

(0.04)

         Diluted

$

0.31 

$

0.35 

$

(0.04)

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2012

 

Six months ended June 30, 2012

 

Six months ended June 30, 2012

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

    Cash flow from operating activities:

 

 

 

 

 

 

    Net income

$

17,204 

$

19,724 

$

(2,520)

    Changes in operating assets and liabilities:

 

 

 

 

 

 

         Accounts receivable

 

9,696 

 

5,974 

 

3,722 

         Income tax receivable

 

(712)

 

 -

 

(712)

         Income taxes payable

 

(15,987)

 

(15,497)

 

(490)

 

 

 

 

 

 

 

 

 

 

 

11


 

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 nine months ended September 30, 2012 and compares those results to the three and nine months ended September 30, 2011.  It also analyzes our financial condition at September 30, 2012 and compares it to our financial condition at December 31, 2011. This discussion should be read in conjunction with the Management’s Discussion and Analysis and the audited financial statements for the years ended December 31, 2011 and 2010 and footnotes contained in our Form 10-K for the year ended December 31, 2011.

 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 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”.

As discussed in Note 13 to the consolidated financial statements for the three and nine months ended September 30, 2012, the Company will restate its consolidated financial statements for the quarters ended March 31, 2012 and June 30, 2012.  The impact of this restatement is reflected throughout management’s discussion and analysis where the results for the nine months ended September 30, 2012 are presented.

Overview

Business

Gold Resource Corporation is a mining company that 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 at the El Aguila Project, which includes both the La Arista underground mine and the El Aguila open pit mine, in Oaxaca, Mexico.  We achieved commercial production in July 2010 at our El Aguila open pit mine with a metal concentrate containing our primary product of gold and a silver by-product.  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 metals concentrates that contain our primary metal products of gold and silver, and by-products of copper, lead and zinc.  For the three months ended September 30, 2012, the sale of our metal concentrates generated revenues of $36.5 million, mine gross profit of $23.8 million and net income of $7.3 million. For the nine months ended September 30, 2012, we recorded revenues of $103.4 million, mine gross profit of $70.6 million, and net income of $24.5 million.

For the third quarter of 2012, we sold 18,059 gold equivalent (AuEq) ounces at a total cash cost (including royalties) of $459 per ounce.  For the nine months ended September 30, 2012, we sold 56,291 ounces AuEq at a total cash cost (including royalties) of $396 per ounce.  AuEq ounces are determined by taking silver ounces sold and converting them to equivalent gold ounces by using the gold to silver average price ratio. The gold and silver average prices used in the calculation are the actual metal prices realized from the sales of our metal concentrates. Cash cost per ounce is considered a “non-GAAP” performance measure and as such is not prepared in accordance with U.S. GAAP.  Please see the section titled “Non-GAAP Measures” below for additional information.

 

Our third quarter mineral production was an improvement over the prior quarter but lower than expected. Several factors contributed to the lower than expected production at our La Arista underground mine including higher than planned dilution in our long hole stopes, mining of lower grade vein margins and splays and continued development and infrastructure needs in the mine. 

Exploration Stage Company

We are considered an exploration stage company under SEC criteria since we have not demonstrated the existence of proven or probable reserves at our El Aguila Project or any of our other properties in Oaxaca, Mexico. Accordingly, as required by SEC guidelines (see Note 1 to the Unaudited Consolidated Financial Statements) and U.S. GAAP for companies in the exploratory stage, substantially all of our investment in mining properties to date, including construction of the mill and mines, has been expensed and therefore does not appear as assets on our consolidated balance sheet.  We expect to expense additional construction and development expenditures in 2012 related to the La Arista underground mine.   All expenditures for exploration and evaluation of our properties are expensed as incurred. Certain expenditures, such as expenses for rolling stock or other general purpose equipment may be capitalized, subject to our evaluation of the possible impairment of the asset.

Our status as an exploration stage company and the required recognition of construction and development expenditures as current period expenses rather than as capital expenditures has caused us to report lower net income in 2012 and 2011 than if we had capitalized the expenditures.  Additionally, we will not have corresponding depreciation or amortization expense for these costs in the future since they are expensed as incurred rather than capitalized.   Although the majority of the capital expenditures for the El Aguila Project were completed between 2007 and 2010, we expect

12


 

underground mine construction to continue in future years.  In comparison to other mining companies that capitalize development expenditures because they have exited the exploration stage, we may report lesser profits as a result of this ongoing construction, which will be expensed instead of capitalized for financial reporting purposes.

We expect to remain an exploration stage company for the foreseeable future, even though we have achieved commercial production. We will not exit the exploration stage until such time, if ever, that we demonstrate the existence of proven or probable reserves that meet SEC guidelines.

Exploration Activities

We continue to drill and conduct additional exploration at the La Arista underground mine, located at the El Aguila Project, to further delineate the vein system.  Other El Aguila exploration activities consist of drilling other areas of the property to test new targets. Our primary focus for 2012 is to expand the La Arista vein system.  We are also performing exploration activities to test targets on our other properties.  

Physical Dividend Program

 

The physical dividend program was officially launched in April 2012. We continue to purchase gold and silver bullion to diversify our treasury and for use in conjunction with our physical dividend program which allows our shareholders the option to convert their cash dividends into physical gold and silver bullion we purchased. 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 any 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/silver bullion. 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:

 

·

Shareholders must register and hold their Gold Resource Corporation common shares in their name directly with our transfer agent, Computershare Investor Services, and not through a brokerage house or other intermediary. This is a requirement so that we can locate and validate the shareholder’s position in our common stock.

·

Shareholders must set up an individual account with Gold Bullion International (“GBI”), 225 Liberty Street New York, NY 10006.   GBI facilitates the cash to gold and silver conversion.

·

Shareholders then direct their cash dividend check issued by Computershare to be electronically sent to that shareholder’s GBI account for the option to have it, or any portion thereof, converted into bullion.  The election to convert all or any portion of the shareholder’s cash dividend into bullion is governed by an agreement between the shareholder and GBI. 

·

Shareholders with accounts at GBI who wish to change their current gold, silver and/or cash allocations for their cash dividend must do so by midnight EDT on the date preceding the monthly dividend record date.   (We issue a press release with details of each dividend declaration, and the dividend record and payment dates.) 

·

On the dividend record date, the number of bullion ounces to be converted and distributed to the shareholder’s individual account on the dividend payment date is calculated as the dollar value of that portion of the cash dividend the shareholder elected to convert to bullion, divided by the London Bullion Market PM gold fix on the record date or the London Bullion Market silver fix on the record date.

·

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 and/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.

During the three months ended September 30, 2012, we purchased approximately 300 ounces of gold and 990 ounces of silver at market prices for a total cost of $0.5 million. During the nine months ended September 30, 2012, we purchased approximately 1,672 ounces of gold and 59,001 ounces of silver at market prices for a total cost of $4.7 million. During the three and nine months ended September 30, 2011, we purchased approximately 579 ounces of gold and 25,689 ounces of silver at market prices for a total cost of $2.0 million.      

Results of Operations 

13


 

The following table summarizes our results of operations for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2012

 

2011

 

2012

 

2011

 

 

(in thousands)

 

(in thousands)

Sales of metals concentrate, net

$

36,490 

$

37,781 

$

103,399 

$

69,725 

Mine cost of sales

 

12,717 

 

7,894 

 

32,838 

 

17,357 

Mine gross profit

 

23,773 

 

29,887 

 

70,561 

 

52,368 

Costs and expenses:

 

 

 

 

 

 

 

 

General and administrative expenses

 

2,933 

 

1,812 

 

8,922 

 

4,790 

Exploration expenses

 

1,882 

 

1,735 

 

5,466 

 

3,271 

Construction and development

 

5,394 

 

4,467 

 

13,492 

 

13,557 

Total costs and expenses

 

10,209 

 

8,014 

 

27,880 

 

21,618 

Operating income

 

13,564 

 

21,873 

 

42,681 

 

30,750 

Other income (expense)

 

(485)

 

2,476 

 

(1,782)

 

2,333 

Income before income taxes

 

13,079 

 

24,349 

 

40,899 

 

33,083 

Provision for income taxes

 

5,782 

 

9,131 

 

16,398 

 

10,937 

Net income before extraordinary item

 

7,297 

 

15,218 

 

24,501 

 

22,146 

Extraordinary items:

 

 

 

 

 

 

 

 

Flood loss, net of income tax benefit of $750

 

 -

 

 -

 

 -

 

(1,756)

Net income

$

7,297 

$

15,218 

$

24,501 

$

20,390 

Sales of metals concentrate, net

During the three and nine months ended September 30, 2012, we generated sales revenue of $36.5 million and $103.4 million respectively, net of treatment charges, compared to sales revenue of $37.8 million and $69.7 million during the same periods in 2011, a decrease of 3.4% and an increase of 48.4%, respectively. For our nine months ended September 30, 2012, sales revenue includes a reduction to sales of metal concentrates of $3.7 million, which includes a reclassification and a reversal of a derivative adjustment of $0.7 million, due to a settlement agreement with its buyer to accept final settlement values based on assays taken at the buyer’s warehouse on shipments made in February and March 2012 (See Note 13) to the unaudited Consolidated Financial Statements for additional information.

 

The significant increase in sales revenue for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 reflects an increase in payable metals sold principally resulting from an increase in tonnes milled during the current period compared with lesser payable metals sold and less tonnes milled due to La Arista underground mine operations not commencing until March of 2011.  Although the Company had higher sales of gold, copper, lead and zinc during the three months ended September 30, 2012 as compared to 2011, a decrease in the quantity of silver ounces sold and a lower average realized silver price during the three months ended September 30, 2012 contributed to the $1.3 million decrease in sales in 2012.  Revenue generated from sale of base metals contained in our concentrates are considered by-products of our gold and silver production.  (See Production and Sales Statistics tables titled “La Arista Underground Mine” and “El Aguila Open Pit Mine” below for additional information regarding the three and nine months ended September 30, 2012 and 2011).    

Production

 

Our production for the three and nine months ended September 30, 2012 consisted of ore from our La Arista underground mine.  Our production for the nine months ended September 30, 2011 consisted of ore from both the La Arista underground mine and the El Aguila open pit mine. Production for the three months ended September 30, 2011 did not include ore from the El Aguila open pit mine, which ceased operations in February 2011, but it did include ore from the La Arista underground mine, which began operations in March 2011. Our production rate at La Arista is directly a result of mine development and the establishment of sufficient stopes and working faces.  The number of stopes and working faces has increased as we have gone deeper in the mine, which has resulted in more tonnes of ore processed at the mill in 2012 as compared to 2011. 

 

Our third quarter mineral production was an improvement over the prior quarter but lower than expected. Several factors contributed to the lower than expected production at our La Arista underground mine including higher than planned dilution in our long hole stopes, mining of lower grade vein margins and splays and continued development and infrastructure needs in the mine.  With respect to dilution, we have changed our mining method from 100% long hole stoping

14


 

to 30% mechanized cut and fill, which will allow us to be more selective in mining ore from narrower veins and splays. We recently enhanced our underground infill drilling methods to better define new mining stopes and minimize dilution.  We recently increased the rate of development of the main ramp, which we expect will result in more working faces, an increase in ore tonnes mined and a higher likelihood of delivering targeted tonnes and grade to the processing plant.  Our underground pump station on level 11 is approximately 80% complete and is anticipated to be operational in the first quarter of 2013. The implementation of the inflow water control program is expected to reduce the levels of water flowing into the mine.   In addition, we recently completed a ventilation upgrade by adding another 120,000 cubic feet per minute of fresh air volume into the mine.

Below are certain key operating statistics for our La Arista underground mine during the three and nine months ended September 30, 2012 and 2011 and the El Aguila open pit mine during the nine months ended September 30, 2011.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production and Sales Statistics

 

 

La Arista Underground Mine

 

La Arista Underground Mine

 

 

Three Months Ended September 30,

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2012

 

2011

 

2012

 

2011

Production Summary

 

 

 

 

 

 

 

 

Milled:

 

 

 

 

 

 

 

 

Tonnes Milled

 

76,786 

 

57,156 

 

211,792 

 

112,372 

Tonnes Milled per Day

 

835 

 

621 

 

773 

 

621 

Grade:

 

 

 

 

 

 

 

 

Average Gold Grade (g/t)

 

4.17 

 

3.89 

 

4.08 

 

3.02 

Average Silver Grade (g/t)

 

320 

 

491 

 

365 

 

438 

Average Copper Grade (%)

 

0.43 

 

0.47 

 

0.44 

 

0.44 

Average Lead Grade (%)

 

2.14 

 

1.30 

 

1.88 

 

1.18 

Average Zinc Grade (%)

 

4.43 

 

2.91 

 

4.01 

 

2.58 

Recoveries:

 

 

 

 

 

 

 

 

Average Gold Recovery (%)

 

88 

 

89 

 

89 

 

90 

Average Silver Recovery (%)

 

94 

 

93 

 

93 

 

93 

Average Copper Recovery (%)

 

75 

 

78 

 

74 

 

75 

Average Lead Recovery (%)

 

64 

 

77 

 

69 

 

78 

Average Zinc Recovery (%)

 

80 

 

77 

 

77 

 

73 

Mill production (before payable metal deductions)(2)

 

 

 

 

 

 

 

 

Gold (ozs.)

 

9,047 

 

6,371 

 

24,611 

 

9,855 

Silver (ozs.)

 

739,576 

 

841,820 

 

2,317,110 

 

1,472,486 

Copper (tonnes)

 

245 

 

211 

 

687 

 

369 

Lead (tonnes)

 

1,051 

 

569 

 

2,734 

 

1,027 

Zinc (tonnes)

 

2,705 

 

1,281 

 

6,567 

 

2,117 

Payable metal sold

 

 

 

 

 

 

 

 

Gold (ozs.)

 

7,287 

 

5,605 

 

20,317 

 

13,219 

Silver (ozs.)

 

599,501 

 

780,317 

 

1,982,868 

 

1,356,806 

Copper (tonnes)

 

214 

 

189 

 

596 

 

270 

Lead (tonnes)

 

869 

 

497 

 

2,231 

 

888 

Zinc (tonnes)

 

1,993 

 

938 

 

5,003 

 

1,422 

Average metal prices realized

 

 

 

 

 

 

 

 

Gold (oz.)

$

1,769 

$

1,702 

$

1,690 

$

1,553 

Silver (oz.)

$

32 

$

38 

$

31 

$

37 

Copper ( tonne)

$

8,161 

$

8,835 

$

8,162 

$

8,869 

Lead (tonne)

$

2,107 

$

2,346 

$

2,080 

$

2,402 

Zinc ( tonne)

$

1,999 

$

2,182 

$

1,997 

$

2,185 

Gold equivalent ounces produced (mill production)(2)

 

 

 

 

 

 

 

 

Gold Ounces

 

9,047 

 

6,371 

 

24,611 

 

9,397 

Gold Equivalent Ounces from Silver

 

13,289 

 

18,918 

 

42,038 

 

31,270 

Total Gold Equivalent Ounces

 

22,336 

 

25,289 

 

66,649 

 

40,667 

Gold equivalent ounces sold

 

 

 

 

 

 

 

 

Gold Ounces

 

7,287 

 

5,605 

 

20,317 

 

13,219 

Gold Equivalent Ounces from Silver

 

10,772 

 

17,535 

 

35,974 

 

32,651 

Total Gold Equivalent Ounces

 

18,059 

 

23,140 

 

56,291 

 

45,870 

Total Cash Cost per Gold Equivalent Ounce(1)

$

459 

$

260 

$

396 

$

 -

15


 

 

(1)

A reconciliation of this non-GAAP measure to mine cost of sales, the most comparable GAAP measure, can be found below in Non-GAAP Measures. Total cash cost per gold equivalent ounce sold for the combined  La Arista underground  mine and the El Aguila open pit mine for the for the nine months ended September 30, 2011, can be found in the Non-GAAP Measures.

(2)

Mill production represents metal contained in concentrates produced at the mill, which is before payable metal deductions are levied by the buyer of the Company’s concentrates.    In addition, mill production quantities fort the nine months ended September 30, 2012 do not reflect any deduction for 757 gold ounces and 43,435 silver ounces (approximately 1,800 gold equivalent ounces) resulting from the settlement agreement with the buyer of the Company’s concentrates as discussed in Note 13 of the Consolidated Financial Statements. Gold equivalent ounces sold for the nine months ended September 30, 2012 have been reduced by approximately 1,800 gold equivalent ounces as a result of the settlement.

 

 

 

 

 

 

 

 

 

Production and Sales Statistics

 

 

El Aguila Open Pit Mine

 

 

Nine Months Ended September 30,

 

 

2011 (1)

Production Summary

 

 

Milled:

 

 

Tonnes Milled

 

46,409 

Tonnes Milled per Day

 

829 

Grade:

 

 

Average Gold Grade (g/t)

 

4.18 

Average Silver Grade (g/t)

 

53 

Recoveries:

 

 

Average Gold Recovery (%)

 

89 

Average Silver Recovery (%)

 

75 

Mill production (before payable metal deductions)

 

 

Gold (ozs.)

 

5,559 

Silver (ozs.)

 

58,309 

Payable metal sold

 

 

Gold (ozs.)

 

3,917 

Silver (ozs.)

 

43,605 

Average metal prices realized

 

 

Gold (oz.)

$

1,383 

Silver (oz.)

$

34 

Gold equivalent ounces produced (mill production)

 

 

Gold Ounces

 

5,559 

Gold Equivalent Ounces from Silver (2)

 

 -

Total Gold Equivalent Ounces

 

5,559 

Gold equivalent ounces sold

 

 

Gold Ounces

 

3,917 

Gold Equivalent Ounces from Silver (2)

 

 -

Total Gold Equivalent Ounces

 

3,917 

 

 

(1)

No activity for the three months ended September 30, 2011.

(2)

Silver ounces were considered a by-product in arriving at the total cash cost per ounce equivalent.

(3)

Total cash cost per gold equivalent ounce sold for the combined  La Arista underground mine and the El Aguila open pit mine for the for the nine months ended September 30, 2011 can be found in the Non-GAAP Measures.

 

Mine gross profit. For the three months ended September 30, 2012, mine gross profit totaled $23.8 million compared to $29.9 million for the three months ended September 30, 2011.  Gross profit percentages for the three months ended September 30, 2012 decreased to 65.1% from 79.1% for the three months ended September 30, 2011.  We experienced lower production and higher operating costs at the La Arista underground mine due primarily to an increase in labor, contractor service costs, diesel fuel costs and concentrate shipping costs during the three months ended September 30, 2012, principally due to higher than planned dilution in our stopes, needed development work in the mine and mining of lower grade ore zones. For the nine months ended September 30, 2012, mine gross profit totaled $70.6 million compared to $52.4 million for the nine months ended September 30, 2011. Gross profit percentages for the nine months ended September 30, 2012 decreased to 68.2% from 75.1% for the nine months ended September 30, 2011. The decrease in mine gross profit from the prior period

16


 

was primarily due to an increase in higher operating costs in 2012 including labor, contractor service costs, diesel fuel costs and concentrate shipping costs. 

Net income. For the three months ended September 30, 2012, net income was $7.3 million, or $0.14 per basic share, as compared to $15.2 million, or $0.29 per basic share, for the comparable period of 2011. For the nine months ended September 30, 2012, net income was $24.5 million, or $0.46 per basic share, as compared to $20.4 million, or $0.38 basic per share, for the comparable period of 2011.  Lower net income for the three months ended September 30, 2012, resulted from lower gold equivalent production and an increase in production costs, general and administrative expense and construction and development costs. For the nine months ended September 30, 2012 higher net income resulted from significantly higher revenue from the sale of precious metals and base metals in 2012 due to further ramp up of the operations at the La Arista underground mine. 

Costs and expenses. Total costs and expenses during the three months ended September 30, 2012 were $10.2 million compared to $8.0 million during the comparable period of 2011, an increase of $2.2 million, or 27.5%.  The increase in cost and expenses, which are discussed by category below, was the result of increases in general and administrative and exploration expenses, and construction and development expenses. Total costs and expenses during the nine months ended September 30, 2012 were $27.9 million compared to $21.6 million during the comparable period of 2011, an increase of $6.3 million, or 29.2%.  

General and administrative expenses.  General and administrative expenses for the three and nine months ended September 30, 2012 were $2.9 million and $8.9 million, respectively, compared to $1.8 million and $4.8 million, respectively, for the same periods of 2011.  General and administrative expenses include salaries and benefits, stock-based compensation, professional consulting fees, investor relations, and travel.  The general and administrative expense for the three and nine months ended September 30, 2012 increased by $1.1 million and $4.1 million, respectively, from the prior period, due to an increase in stock-based compensation, salaries and benefits and professional consulting fees.  

Exploration expenses.  Property exploration expenses totaled $1.9 million and $5.5 million for the three and nine months ended September 30, 2012, respectively, compared to $1.7 million and $3.3 million, respectively, for the same periods of 2011.  The increase resulted from additional drilling activity at our exploration projects.   Exploration costs associated with definition and delineation drilling of the La Arista vein system are reflected in construction and development expenses.

Construction and development expenses.  Construction and development expenses during the three months and nine months ended September 30, 2012 was $5.4 million and $13.5 million, respectively, compared to $4.5 million and $13.6 million, respectively, during the comparable period in 2011.  The three month increase was due to continued construction and development activity at the mine site. Construction and development expense includes definition and delineation of the La Arista vein system.

 

Other income (expense). For the three months ended September 30, 2012, we recorded other expense of $0.5 million, compared to other income of $2.5 million during the same period of 2011. For the nine months ended September 30, 2012, we recorded other expense of $1.8 million, compared to other income of $2.3 million during the same period of 2011.   The change in other income (expense) resulted primarily from recognizing currency exchange losses of $2.5 million during the nine months ended September 30, 2012 compared to a currency exchange gain of $2.6 million in the comparable period in 2011.  The 2012 currency exchange losses resulted from translating U.S. dollar cash balances held by our Mexican subsidiaries into the Mexican peso functional currency during a period when the U.S. dollar was decreasing compared to the Mexican peso. 

Provision for income taxesDuring the three and nine months ended September 30, 2012, the Company recorded a provision for income taxes of $5.8 million and $16.4 million, respectively. During the three and nine months ended September 20, 2011, the Company recorded a provision for income taxes of $9.1 million and $10.9 million, respectively.   The increase in income taxes during the nine months ended September 30, 2012, was principally due to an increase in net income as a result of higher sales of metals concentrates in 2012 due to start-up of operations at the La Arista underground mine in March 2011.

Non-GAAP Measures

Throughout this report, we have provided information prepared or calculated according to U.S. GAAP, as well as provided some non-U.S. GAAP (“non-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.

17


 

Total Cash Cost per Gold Equivalent Ounce Sold

We use total cash cost (including royalties) per gold equivalent ounce sold, calculated in accordance with the Gold Institute’s Standard, 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.  Total cash costs are arrived at by taking mine cost of sales, plus treatment and refining charges (which are netted against revenues), less by-product credits earned from sales of metals we consider by-products (copper, lead and zinc at the La Arista underground mine and silver at the El Aguila open pit mine) less any noncash items such as depreciation, amortization and stock-based compensation, and reclamation costs.  Total cash costs are divided by gold equivalent ounces sold (gold sold, plus gold equivalent ounces of silver sold converted to gold using our realized gold price to silver price ratio, at the La Arista underground mine; and gold sold at the El Aguila open pit mine) to arrive at total cash cost per gold equivalent ounce sold. There can be no assurance that our reporting of this Non-GAAP measure is similar to that reported by other mining companies.

For reporting periods prior to April 1, 2012, we reported cash operating cost per gold equivalent ounce produced (on-site mill production).  The principal difference between cash operating costs and total cash costs is that cash operating costs exclude royalty payments, whereas total cash costs include royalty payments.  Our concentrates are subject to a 5% net smelter returns royalty.  The principal difference between gold equivalent ounces produced at the mill and gold equivalent ounces sold, is that gold equivalent ounces produced at the mill do not reflect payable metal deductions levied by smelters, whereas gold equivalent ounces sold are after payable metal deductions levied by smelters.  Total cash cost per ounce figures for all periods presented in this Management’s Discussion and Analysis are presented on an ounces sold basis, which in our opinion is the most common method used by companies that apply the Gold Institute Standard.  

We have reconciled total cash cost per gold equivalent ounce sold to reported U.S. GAAP measures in the table below.  The most comparable financial measures to our total cash cost is mine cost of sales calculated in accordance with U.S. GAAP. Mine cost of sales is obtained from the unaudited consolidated statements of operations. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2012

 

2011

 

2012

 

2011

 

  

(In thousands, except ounces sold and total cash cost per gold equivalent ounce)

  Gold equivalent ounces sold

  

18,059 

 

23,140 

 

56,291 

 

45,870 

Cost of sales - production costs

$

12,717 

$

7,894 

$

32,838 

$

17,357 

Treatment and refining charges

  

4,146 

 

4,274 

 

12,702 

 

7,353 

By-product credits

  

(7,148)

 

(4,882)

 

(19,228)

 

(9,331)

Depreciation and amortization

  

(556)

 

(184)

 

(940)

 

(327)

Accretion

  

(20)

 

(20)

 

(60)

 

(63)

Reclamation costs

 

(59)

 

 -

 

(59)

 

 -

Stock-based compensation

 

(799)

 

(1,066)

 

(2,988)

 

(3,141)

Total cash costs

$

8,281 

$

6,016 

$

22,265 

$

11,848 

Total cash cost per gold equivalent ounce sold (including royalties)

$

459 

$

260 

$

396 

$

258 

Cash Flow from Mine Site Operations

 

Cash flow from mine site operations (“Cash Flow From Mine Site Operations”) is furnished to provide additional information and is a Non-GAAP measure. This measure should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP.  We believe that certain investors use this measure as a basis to assess mine performance and we use it as a measure on which our planned distributions to shareholders are currently based. The following table provides a reconciliation of Cash Flow From Mine Site Operations to mine gross profit as presented in the consolidated statements of operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2012

 

2011

 

2012

 

2011