10-K 1 goro-20191231x10k.htm 10-K goro_Current folio_10K_Taxonomy2019

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

 

For the fiscal year ended December 31, 2019

 

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

 

Picture 4

 

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) 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.001 par value

GORO

NYSE American

 

 

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

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes   ☐    No   ☒

 

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

 

Indicate by check mark whether the registrant (1) 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 every Interactive Data File required to be submitted 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 submit such files).     Yes   ☒     No   ☐

 

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

 

 

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

☐ 

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☐

 

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

 

The aggregate market value of the common stock of Gold Resource Corporation held by non-affiliates as of June 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was $212,855,186 based on the closing price of the common stock of $3.38 as reported on the NYSE American.  

 

As of February 28, 2020, there were 65,691,527 shares of the registrant’s common stock outstanding. 


 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the Definitive Proxy Statement to be filed pursuant to Regulation 14A for the registrant’s 2020 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

 

TABLE OF CONTENTS

 

 

 

 

Page

 

PART I

 

 

 

 

 

 

ITEM 1:

BUSINESS

 

4

ITEM 1A:

RISK FACTORS

 

7

ITEM 1B:

UNRESOLVED STAFF COMMENTS

 

18

ITEM 2:

PROPERTIES

 

18

ITEM 3:

LEGAL PROCEEDINGS

 

33

ITEM 4:

MINE SAFETY DISCLOSURES

 

33

 

 

 

 

 

PART II

 

 

 

 

 

 

ITEM 5:

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES

 

34

ITEM 6:

SELECTED FINANCIAL DATA

 

37

ITEM 7:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

38

ITEM 7A:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

52

ITEM 8:

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

53

ITEM 9:

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

83

ITEM 9A:

CONTROLS AND PROCEDURES

 

84

ITEM 9B:

OTHER INFORMATION

 

84

 

 

 

 

 

PART III

 

 

 

 

 

 

ITEM 10:

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

85

ITEM 11:

EXECUTIVE COMPENSATION

 

85

ITEM 12:

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

85

ITEM 13:

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

85

ITEM 14:

PRINCIPAL ACCOUNTING FEES AND SERVICES

 

85

 

 

 

 

 

PART IV

 

 

 

 

 

 

ITEM 15:

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

86

 

10-K SUMMARY

 

87

 

SIGNATURES

 

88

 

2

 

ADDITIONAL INFORMATION

 

Descriptions of agreements or other documents contained in this report are intended as summaries and are not necessarily complete. Please refer to the agreements or other documents filed or incorporated herein by reference as exhibits. Please see Item 15. Exhibits for a complete list of those exhibits.

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

·

Commodity price fluctuations;

·

Mine protests and work stoppages;

·

Rock formations, faults and fractures, water flow and possible CO2 gas exhalation or other unanticipated geological situations;

·

Decisions of foreign countries and banks within those countries;

·

Unexpected changes in business and economic conditions, including the rate of inflation;

·

Changes in interest rates and currency exchange rates;

·

Timing and amount of production;

·

Technological changes in the mining industry;

·

Our operating costs and other costs of doing business;  

·

Access to and availability of materials, equipment, supplies, labor and supervision, power and water;

·

Results of current and future feasibility studies;

·

The level of demand for our products;

·

Changes in our business strategy, plans and goals;

·

Interpretation of drill hole results and the geology, grade and continuity of mineralization;

·

Litigation by private parties or regulatory action by governmental entities;

·

Acts of God such as floods, earthquakes and any other natural disasters; and

·

The uncertainty of mineralized material estimates and timing of mine construction and attaining commercial production levels.

 

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

 

3

 

PART I

ITEM 1.        BUSINESS

 

History and Organization

 

Gold Resource Corporation was organized under the laws of the State of Colorado on August 24, 1998. We are a producer of metal concentrates that contain gold, silver, copper, lead and zinc, and doré containing gold and silver from the Aguila and Alta Gracia projects in the southern state of Oaxaca, Mexico (“Oaxaca Mining Unit”) and the Isabella Pearl Mine in Nevada, United States of America (“Nevada Mining Unit”).

 

Our operations in Oaxaca are conducted through our Mexican subsidiary, Don David Gold Mexico S.A. de C.V. (“DDGM”). Our Nevada exploration, development and operations are performed through two wholly-owned subsidiaries, GRC Nevada Inc. and Walker Lane Minerals Corp. (“Walker Lane”).

 

The Aguila project includes the Arista underground mine and processing facility, which commenced operation in 2010, initially from the Aguila open pit mine, followed by development and mining the Arista underground mine.  The Arista Mine was expanded in 2016 with the development of the Switchback vein system.  The Arista underground mine is located approximately two kilometers from the processing facility.  The Alta Gracia project includes the Mirador underground mine which began operations in 2017.  The Aguila processing facility produces metal concentrates and doré from ore mined from both the Arista and Mirador Mines. The Aguila and Alta Gracia projects include a total of approximately 29,547 hectares of mining concessions, access roads from a major highway, haul roads, a processing facility, and adjoining buildings, an assay lab, an open pit and underground mines, tailings facilities and other infrastructure. Please see Item 2. Properties for maps and additional information.  Most of the production from the Aguila and Alta Gracia projects from 2011 to present has been from the Arista Mine. 

 

On August 12, 2016, we acquired all of the outstanding stock of Walker Lane, which included the Isabella Pearl project.  Construction of the Isabella Pearl Mine commenced in June 2018, was substantially completed in April 2019 and commercial production levels were achieved in October 2019.  We also continue exploration and evaluation work on our portfolio of other precious metal properties in our Nevada Mining Unit and continue to evaluate other properties for possible acquisition.

 

In this report, “Company,” “our,” “us” and “we” refer to Gold Resource Corporation together with our subsidiaries, unless the context otherwise requires.  See glossary on page 33 for additional definitions.

 

Our principal executive offices are located at 2886 Carriage Manor Point, Colorado Springs, Colorado 80906, and our telephone number is (303) 320-7708. We maintain a website at www.goldresourcecorp.com and through a link on our website you can view the periodic filings that we make with the U.S. Securities and Exchange Commission (“SEC”), as well as certain of our corporate governance documents such as our code of ethics free of charge.  

 

2019 Developments

 

For the year ended December 31, 2019, we reported revenue of $135.4 million, mine gross profit of $29.1 million and net income of $5.8 million. Approximately 89% of our 2019 revenue was from the Oaxaca Mining Unit.  We achieved our Oaxaca Mining Unit’s annual production outlook of 27,000 gold ounces and 1,700,000 silver ounces within our planned range of plus or minus 10%.  Our annual 2019 mill production from our Oaxaca Mining Unit totaled 29,435 gold ounces, 1,722,852 silver ounces, 1,859 copper tonnes, 9,202 lead tonnes and 23,683 zinc tonnes. Our Isabella Pearl Mine in Nevada produced its first doré in April 2019.  Our 2019 doré production from our Nevada Mining Unit totaled 10,883 gold ounces and 9,752 silver ounces.

 

4

 

Oaxaca Mining Unit

 

During 2019, we continued to develop the Arista underground mine, including the Switchback vein system.  In 2019, we continued bulk tonnage mining techniques at Switchback, while also processing a large amount of development ore.  We completed construction of the three critical capital projects which were started in 2018.  These projects are the paste fill plant, the tailings lift, and the power grid project. 

 

In addition to the Arista underground mine, we continued to develop the Mirador Mine in 2019 and consistently delivered development ore to the Aguila processing facility.  While difficult ground conditions slowed development at times, we continued to target higher grade areas in the mine.  We have built, commissioned and continued to develop and operate the Mirador Mine with internally generated cash flow.

 

Nevada Mining Unit

 

During 2019, we completed construction of the Isabella Pearl Mine and began producing and selling gold doré.    During the year, we were mining lower-grade ore in order to access the higher-grade portions of the Pearl deposit.

 

Dividends 

 

During 2019, we paid $0.02 per share on an annualized basis from January to October of 2019, when it was then increased to $0.04 per share on an annualized basis beginning in November 2019. Please see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities for additional information.

 

Condition of Physical Assets and Insurance

 

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

 

Environmental Matters 

 

We conduct our operations so as to protect the environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our operating mines have reclamation plans in place that we believe meet all applicable legal and regulatory requirements. At December 31, 2019, $5.6 million was accrued on our consolidated balance sheet for reclamation costs relating to operating and exploration properties in the U.S. and Mexico.

 

Competitive Business Conditions

 

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

 

5

 

Government Regulations and Permits 

 

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

 

For operations at our Oaxaca Mining Unit, we have secured and continue to maintain various regulatory permits from federal, state and local agencies. These governmental and regulatory permits generally govern the processes being used to operate, the stipulations concerning air quality and water issues, and the plans and obligations for reclamation of the properties at the conclusion of operations. These laws and regulations are continually changing and are generally becoming more restrictive. We have received the required local community support for the Aguila and Alta Gracia projects in the area where we are currently producing.  

 

For our operations at our Nevada Mining Unit, we have obtained the permits necessary to develop, construct, and operate our Isabella Pearl Mine.  In connection with our mining operation and exploration activities in Nevada, we are subject to various federal, state and local laws and regulations governing protection of the environment, including, but not limited to, the Clean Air Act; the Clean Water Act; the Comprehensive Environmental Response, Compensation and Liability Act; the Emergency Planning and Community Right-to-Know Act; the Endangered Species Act; the Federal Land Policy and Management Act; the National Environmental Policy Act; the Resource Conservation and Recovery Act; and related state laws. These laws and regulations are continually changing and are generally becoming more restrictive.

 

Customers

 

During the year ended December 31, 2019, two customers accounted for 91% of our revenue in our Oaxaca Mining Unit and one customer accounted for 100% of our sales in our Nevada Mining Unit.  In the event that our relationship with any of the customers is interrupted for any reason, we believe that we would be able to locate another entity to purchase our products. However, any interruption could temporarily disrupt the sale of our principal products and adversely affect our operating results. We periodically review our options for alternative sales outlets to mitigate the concentration of risk in case of any unforeseen disruptions.

 

Employees and Contractors

 

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

 

We contract for the services of approximately 566 individuals employed by third parties in Mexico and Nevada and also use various independent contractors for environmental permitting, mining, surface exploration drilling and trucking. 

 

6

 

ITEM 1A.     RISK FACTORS

 

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

 

Risks Relating to Our Company 

 

Our results of operations, cash flows and the value of our properties are highly dependent on the market prices of gold and silver and certain base metals and these prices can be volatile.  The profitability of our gold and silver mining operations and the value of our mining properties are directly related to the market price of gold and silver, copper, lead and zinc. The price of gold and silver may also have a significant influence on the market price of our common stock. The market price of gold and silver historically has fluctuated significantly and is affected by numerous factors beyond our control. These factors include supply and demand fundamentals, global or national political or economic conditions, expectations with respect to the rate of inflation, the relative strength of the U.S. dollar and other currencies, interest rates, gold and silver sales and loans by central banks, forward sales by metal producers, accumulation and divestiture by exchange traded funds, and a number of other factors.

 

We derive a significant portion of our revenue from the sale of gold, silver, and zinc, and to a lesser extent copper and lead, and our results of operations will fluctuate as the prices of these metals change.  A period of significant and sustained lower metal prices would materially and adversely affect our results of operations and cash flows. The volatility of mineral prices represents a substantial risk which no amount of planning or technical expertise can fully eliminate. In the event metal prices decline or remain low for prolonged periods of time, we might be unable to develop our existing exploration properties, which may adversely affect our results of operations, financial performance, and cash flows. An asset impairment charge may result from the occurrence of unexpected adverse events that impact our estimates of expected cash flows generated from our producing properties or the market value of our non-producing properties, including a material diminution in the price of metals.  

 

During 2019, the price of gold, as measured by the London P.M. fix, fluctuated from a low of $1,270 per ounce to a high of $1,546 per ounce while the price of silver fluctuated from a low of $14.38 per ounce to a high of $19.31 per ounce. As of February 28, 2020, gold and silver prices were $1,610 per ounce and $17.19 per ounce, respectively. The volatility in gold and silver prices is illustrated by the following table, which sets forth for each of the past five calendar years, the high, low, and average annual market prices in U.S. dollars per ounce of gold and silver based on the daily London P.M. fix:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2015

    

2016

    

2017

    

2018

    

2019

 

Gold:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$

1,297

 

$

1,366

 

$

1,346

 

$

1,355

 

$

1,546

 

Low

 

$

1,049

 

$

1,077

 

$

1,151

 

$

1,178

 

$

1,270

 

Average

 

$

1,160

 

$

1,251

 

$

1,257

 

$

1,268

 

$

1,393

 

Silver:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$

18.23

 

$

20.71

 

$

18.56

 

$

17.52

 

$

19.31

 

Low

 

$

13.71

 

$

13.58

 

$

15.22

 

$

13.97

 

$

14.38

 

Average

 

$

15.68

 

$

17.14

 

$

17.04

 

$

15.71

 

$

16.21

 

 

Most of our production is currently derived from a single mine and any interruptions or stoppages in our mining activities would adversely affect our revenue. We are largely dependent on revenues from a single mine to fund our operations. Any interruption in our ability to mine this location, such as a labor strike, natural disaster, or loss of permits would negatively impact our ability to generate revenue following such interruption. Additionally, if we are unable to economically develop additional mines, we will eventually deplete the body of mineralized material and will no longer generate revenue sufficient to fund our operations. A decrease in, or cessation of, our mining operations at this mine would adversely affect our financial performance and may eventually cause us to cease operations.

 

7

 

If we are unable to achieve anticipated gold and silver production levels, our financial condition and results of operations will be adversely affected. We have been processing ore from the Arista and Mirador underground mines at the Aguila and Alta Gracia projects, respectively, and from our open pit mine at our Isabella Pearl project based on estimates of mineralized material identified during exploration and in our Proven and Probable Reserve report. However, risks related to reserve estimates, metallurgy, and/or mining dilution are inherent when working with extractable minerals. Sales of gold and silver that we realize from future mining activity will be less than anticipated if the mined material does not contain the concentration of gold and silver predicted by our geological exploration, studies and reports. If sales of gold and silver are less than anticipated, we may not be able to recover our investment in our properties and our operations may be adversely affected. Our inability to realize production based on quarterly or annual projections may also adversely affect the price of our common stock and you may lose part or all of your investment.

 

Estimates of proven and probable reserves and mineralized material are uncertain and the volume and grade of ore actually recovered may vary from our estimates. The proven and probable reserves stated in this report represent the amount of gold, silver, copper, lead and zinc that we estimated, at December 31, 2019, could be economically and legally extracted or produced at the time of the reserve determination. Estimates of proven and probable reserves and mineralized material are subject to considerable uncertainty. Such estimates are, to a large extent, based on the prices of gold, silver, copper, lead and zinc as well as interpretations of geologic data obtained from drill holes and other exploration techniques. These prices and interpretations are subject to change.  If we determine that certain of our estimated reserves or mineralized material have become uneconomic, we may be forced to reduce our estimates.  Actual production may be significantly less than we expect.

 

Any material changes in mineral estimates and grades of mineralization may affect the economic viability of our current operations, our decision to place a new property into production and/or such property’s return on capital. There can be no assurance that mineral recoveries in small scale laboratory tests will be duplicated in a large‑scale on-site operation in a production environment. Extended declines in market prices for gold and/or silver may render portions of our mineralization estimates uneconomic and result in reduced reported mineralization or adversely affect the commercial viability of one or more of our properties. Any material reductions in estimates of mineralization, or of our ability to extract this mineralization, could have a material adverse effect on our results of operations or financial condition.

 

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

 

Our current property portfolio is limited to three producing properties and our ability to remain profitable over the long-term will depend on our ability to expand the known deposits like Arista, Mirador, and Isabella Pearl, and /or identify, explore and develop additional properties in Mexico and Nevada. Gold and silver producers must continually replace reserves depleted by production to maintain production levels over the long term and provide a return on invested capital. Depleted reserves can be replaced in several ways, including expanding known ore bodies, locating new deposits, or acquiring interests in reserves from third parties. Exploration is highly speculative in nature, capital intensive, involves many risks and is frequently unproductive. Our current or future exploration programs may not result in new mineral producing operations. Even if significant mineralization is discovered, it will likely take many years from the initial phases of exploration until commencement of production, during which time the economic feasibility of production may change.

 

From time to time, we may acquire mineral interests from other parties. Such acquisitions are based on an analysis of a variety of factors including historical exploration results, estimates of and assumptions regarding the extent of mineralized material, and/or reserves, the timing of production from such reserves and cash and other operating costs. In addition, we may rely on data and reports prepared by third parties (including the ability to permit and compliance with

8

 

existing regulations) which may contain information or data that we are unable to independently verify or confirm. All of these factors are uncertain and may have an impact on our ability to develop the properties.

 

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

 

We may not continue to be profitable. During the fiscal years ended December 31, 2019, 2018 and 2017, we reported net income of $5.8 million, $9.3 million, and $4.2 million, respectively. We have accumulated retained earnings of $16.9 million as of December 31, 2019. Metal prices have a significant impact on our profit margin and there is no assurance that we will be profitable in the future. Unexpected interruptions in our mining business may cause us to incur losses, or the revenue that we generate from production may not be sufficient to fund continuing operations including exploration and mine construction costs. Our failure to generate future profits may adversely affect the price of our common stock and you may lose all or part of your investment.

 

We may require significant additional capital to fund our business plans. We may be required to expend significant funds to determine if mineralized material and proven and probable mineral reserves exist at any of our non-producing properties, to continue exploration, and if warranted, develop our existing properties and to identify and acquire additional properties to diversify our property portfolio.  If we receive the necessary permits and make a positive development decision, we will require significant additional capital to bring the project into production. We have spent, and may be required to continue to expend, significant amounts of capital for drilling, geological and geochemical analysis, assaying, feasibility studies, mine development, and mining and process equipment in connection with our exploration, development, and production activities.

 

Our ability to obtain necessary funding for these purposes, in turn, depends upon a number of factors, including our historical and prospective results of operations, the status of the national and worldwide economy, the price of gold, silver and other valuable metals, the condition of the debt and equity markets, and the costs associated with extracting minerals. We may not be successful in generating or obtaining the required financing, or if we can obtain such financing, such financing may not be on terms that are favorable to us. Failure to obtain such additional financing could result in delay or indefinite postponement of further mining operations or exploration and construction and the possible partial or total loss of our interest in our properties.

 

If we do not hedge our exposure to fluctuations in gold and silver prices, we may be subject to significant reductions in price. We do not use hedging transactions with respect to any of our gold and silver production and we do not expect to do so in the future.  Accordingly, we are fully exposed to price fluctuations if precious and base metal prices decline. While the use of hedging transactions limits the downside risk of price declines, their use also may limit future revenues from price increases. Hedging transactions also involve the risk that the counterparty may be unable to satisfy its obligations.

 

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

 

A significant delay or disruption in sales of concentrates or doré as a result of the unexpected disruption in services provided by smelters or refiners could have a material adverse effect on results of operations.  We rely on refiners and smelters to refine and process and, in some cases, purchase, the gold and silver doré and gold, silver, copper,

9

 

lead and zinc concentrate produced by our mines. Access to refiners and smelters on economic terms is critical to our ability to sell our products to buyers and generate revenues. We periodically enter into agreements with refiners and smelters, some of which operate their refining or smelting facilities outside the United States, and we believe we currently have contractual arrangements with a sufficient number of refiners and smelters so that the loss of any one refiner or smelter would not significantly or materially impact our operations or our ability to generate revenues. Nevertheless, services provided by a refiner or smelter may be disrupted by new or increased tariffs, duties or other cross-border trade barriers, the bankruptcy or insolvency of one or more refiners or smelters or the inability to agree on acceptable commercial or legal terms with a refiner or smelter. Such an event or events may disrupt an existing relationship with a refiner or smelter or result in the inability to create a contractual relationship with a refiner or smelter, which may leave us with limited, uneconomical or no access to refining or smelting services for short or long periods of time. Any such delay or loss of access may significantly impact our ability to sell doré and concentrate products. We cannot ensure that alternative refiners or smelters would be available or offer comparable terms if the need for them were to arise or that it would not experience delays or disruptions in sales that would materially and adversely affect results of operations.

 

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

 

·

The identification of potential gold mineralization based on surface and drill analysis;

·

Availability of government-granted exploration and construction permits;

·

The quality of our management and our geological and technical expertise; and

·

The capital available for exploration and development.

 

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

 

We may acquire additional exploration stage properties and our business may be negatively impacted if reserves are not located on acquired properties. We have in the past and may in the future acquire additional exploration stage properties. There can be no assurance that reserves will be identified on any properties that we acquire. We may experience negative reactions from the financial markets if we successfully complete acquisitions of additional properties and reserves are not located on acquired properties. These factors may adversely affect the trading price of our common stock or our financial condition or results of operations.

 

To the extent that we seek to expand our operations and increase our reserves through acquisitions, we may experience issues in executing acquisitions or integrating acquired operations.  From time to time, we examine opportunities to make selective acquisitions in order to provide increased returns to our shareholders and to expand our

10

 

operations and reported reserves and, potentially, generate synergies. The success of any acquisition would depend on a number of factors, including, but not limited to:

 

·

Identifying suitable candidates for acquisition and negotiating acceptable terms;

·

Obtaining approval from regulatory authorities and potentially our shareholders;

·

Implementing our standards, controls, procedures and policies at the acquired business and addressing any pre-existing liabilities or claims involving the acquired business; and

·

To the extent the acquired operations are in a country in which we have not operated historically, understanding the regulations and challenges of operating in that new jurisdiction.

 

There can be no assurance that we will be able to conclude any acquisitions successfully, or that any acquisition will achieve the anticipated synergies or other positive results. Any material problems that we encounter in connection with such an acquisition could have a material adverse effect on our business, results of operations and financial position.

 

We rely on contractors to conduct a significant portion of our operations and construction projects.  A significant portion of our operations and construction projects are currently conducted in whole or in part by contractors.  As a result, our operations are subject to a number of risks, some of which are outside our control, including:

 

·

The difficulty and inherent delay in replacing a contractor and its operating equipment in the event that either party terminates the agreement;

·

Reduced control and oversight over those aspects of operations which are the responsibility of the contractor;

·

Failure of a contractor to perform under its agreement;

·

Interruption of operations and construction or increased costs in the event that a contractor ceases its business due to insolvency or other unforeseen events;

·

Injuries or fatalities on the job as a result of the failure to implement or follow adequate safety measures;

·

Failure of a contractor to comply with applicable legal and regulatory requirements, to the extent it is responsible for such compliance; and

·

Problems of a contractor with managing its workforce, labor unrest or other related employment issues.

 

In addition, we may incur liability to third parties as a result of the actions of our contractors. The occurrence of one or more of these risks could adversely affect our results of operations and financial position.

 

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

 

Increased operating and capital costs could adversely affect our results of operations.  Costs at any particular mining location are subject to variation due to a number of factors, such as variable ore grade, changing metallurgy and revisions to mine plans in response to the physical shape and location of the ore body, as well as the age and utilization rates for the mining and processing- related facilities and equipment. In addition, costs are affected by the price and availability of input commodities, such as fuel, electricity, labor, chemical reagents, explosives, steel, concrete and mining and processing related equipment and facilities. Commodity costs are, at times, subject to volatile price movements, including increases that could make production at certain operations less profitable. Further, changes in laws and regulations can affect commodity prices, uses and transport. Reported costs may also be affected by changes in accounting standards. A material increase in costs at any significant location could have a significant effect on our results of operation and operating cash flow.

11

 

We could have significant increases in capital and operating costs over the next several years in connection with the development of new projects in challenging jurisdictions and in the sustaining and/or expansion of existing mining and processing operations. Costs associated with capital expenditures may increase in the future as a result of factors beyond our control. Increased capital expenditures may have an adverse effect on the results of operation and cash flow generated from existing operations, as well as the economic returns anticipated from new projects.

 

The facilities and development of our underground and open pit mines and operations are subject to all of the risks inherent in development, construction, and operations. These risks include potential delays, cost overruns, shortages of material or labor, construction defects, breakdowns and injuries to persons and property. We expect to engage subcontractors and material suppliers in connection with the continued mine activities at the Aguila, Alta Gracia, and Isabella Pearl projects. While we anticipate taking all measures which we deem reasonable and prudent in connection with our facilities, construction of the underground mine and the operation of the processing facility, there is no assurance that the risks described above will not cause delays or cost overruns in connection with such construction or operation. Any delays would postpone our anticipated generation of revenue and adversely affect our operations, which in turn may adversely affect the price of our stock. 

 

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

 

Construction, start-up, and ramp-up of mine and process facilities is subject to all of the risks inherent in construction and operation, including delays and costs of construction in excess of our projections and differing recovery vs. our projections of minerals.  Many factors could increase the costs of ongoing mine and process facility operations, including:

 

·

Design, engineering and construction difficulties or delays;

·

Cost overruns;

·

Our failure or delay in obtaining necessary ongoing legal, regulatory and other approvals;

·

Interruptions in the supply of the necessary equipment, or construction materials or labor or an increase in their price;

·

Injuries to persons and property;

·

Opposition of local and or Non-Governmental-Organization interests; and

·

Natural disasters, accidents, political unrest or unforeseen events.

 

If any of the foregoing events were to occur, our financial condition could be adversely affected and we may be required to seek additional capital, which may not be available on commercially acceptable terms, or at all. If we are unable to achieve our projected ramp up of the project, we may not be able to recover any costs already incurred and result in a materially adverse effect on our business, results of operations, financial condition, and cash flows.

 

Our operations are subject to ongoing permitting requirements which could result in the delay, suspension or termination of our operations.  Our operations, including our ongoing exploration drilling programs and production, require ongoing permits from governmental authorities. If we cannot obtain or maintain the necessary permits or if there is a delay in receiving future permits, our timetable and business plan will be adversely affected.  We have from time to time relied on third party environmental firms to assist in our efforts to obtain and remain current with required regulations and permits.  While we attempt to manage and oversee third party firms, we are dependent on the firm to operate in a professional and knowledgeable manner.

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Continuation of our mining operations is dependent on the availability of sufficient and affordable water supplies.  Our mining operations require significant quantities of water for mining, ore processing and related support facilities. Our properties in Mexico and Nevada are in areas where water is scarce and competition among users for continuing access to water is significant. Continuous production and mine development is dependent on our ability to acquire and maintain water rights and claims and to defeat claims adverse to current water uses in legal proceedings. Although each of our operating mines currently has sufficient water rights and claims to cover its operating demands, we cannot predict the potential outcome of pending or future legal proceedings relating to water rights, claims and uses. Water shortages may also result from weather or environmental and climate impacts out of our control. Shortages in water supply could result in production and processing interruptions. In addition, the scarcity of water in certain regions could result in increased costs to obtain sufficient quantities of water to conduct our operations. The loss of some or all water rights, in whole or in part, or ongoing shortages of water to which we have rights or significantly higher costs to obtain sufficient quantities of water (or the failure to procure sufficient quantities of water) could result in our inability to maintain production at current or expected levels, require us to curtail or shut down mining production and prevent us from pursuing expansion or development opportunities. Laws and regulations may be introduced in some jurisdictions in which we operate which could also limit access to sufficient water resources, thus adversely affecting our operations.

 

Our ability to recognize the benefits of deferred tax assets is dependent on future cash flows and taxable income. We recognize deferred tax assets when the tax benefit is considered to be more likely than not of being realized; otherwise, a valuation allowance is applied against deferred tax assets. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, our ability to realize the deferred tax assets could be impacted. Additionally, future changes in tax laws could limit our ability to obtain the future tax benefits represented by our deferred tax assets. At December 31, 2019, our net deferred tax assets were $4.6 million.

 

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

 

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

 

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

13

 

agreements or consummate similar agreements for new projects could impair or impede our ability to successfully explore, develop and mine the properties.

 

Competition in the mining industry is intense, and we have limited financial and personnel resources with which to compete. Competition in the mining industry for desirable properties, investment capital and personnel is intense. Numerous companies headquartered in the United States (“U.S.”), Canada, and elsewhere throughout the world compete for properties and personnel on a global basis. We are a small participant in the gold mining industry due to our limited financial and personnel resources. We presently operate with a limited number of personnel and we anticipate operating in the same manner going forward. We compete with other companies in our industry to hire qualified personnel when needed to successfully operate our mine and processing facility. We may be unable to attract the necessary investment capital or personnel to fully explore and if warranted, develop our properties and be unable to acquire other desirable properties. We believe that competition for acquiring mineral properties, as well as the competition to attract and retain qualified personnel, may continue to be intense in the future.

 

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

 

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

 

In addition, significant state and federal environmental laws and regulations in the U.S. may hinder our ability to explore, develop, and operate at our Nevada Mining Unit. Federal laws that govern mining claim location and maintenance and mining operations on federal lands are generally administered by the BLM.   Additional federal laws, governing mine safety and health, also apply. State laws also require various permits and approvals before exploration, development or production operations can begin. Among other things, a reclamation plan must typically be prepared and approved, with bonding in the amount of projected reclamation costs. The bond is used to ensure that proper reclamation takes place, and the bond will not be released until that time. Local jurisdictions may also impose permitting requirements (such as conditional use permits or zoning approvals). 

 

Our business is subject to the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws, a breach or violation of which could lead to civil and criminal fines and penalties, loss of licenses or permits and reputational harm. We operate in certain jurisdictions that have experienced some degree of governmental and private sector corruption, and in certain circumstances, strict compliance with anti-bribery laws may conflict with certain local customs and practices. The U.S. Foreign Corrupt Practices Act and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. Our Code of Ethics and other corporate policies mandate compliance with these anti-bribery laws, which often carry substantial penalties. There can be no assurance that our internal control policies and procedures will always protect us from recklessness, fraudulent behavior, dishonesty or other inappropriate acts committed by our affiliates, employees, contractors, or agents. As such, our corporate policies and processes may not

14

 

prevent all potential breaches of law or other governance practices. Violations of these laws, or allegations of such violations, could lead to civil and criminal fines and penalties, litigation, and loss of operating licenses or permits, and may damage our reputation, which could have a material adverse effect on our business, financial position and results of operations or cause the market value of our common stock to decline.

 

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

 

We may also be adversely affected by system or network disruptions if new or upgraded information technology systems are defective, not installed properly or not properly integrated into our operations. If we are not able to successfully implement system upgrades or modifications, we may have to rely on manual reporting processes and controls over financial reporting that have not been planned, designed or tested. Various measures have been implemented to manage our risks related to the system upgrades and modifications, but system upgrades and modification failures could have a material adverse effect on our business, financial condition and results of operations and could, if not successfully implemented, adversely impact the effectiveness of our internal controls over financial reporting.

 

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

 

·

Economically insufficient mineralized material;

·

Fluctuation in production costs that make mining uneconomic;

·

Labor disputes;

·

Unanticipated variations in grade and other geologic problems;

·

Environmental hazards;

·

Water conditions;

·

Difficult surface or underground conditions;

·

Industrial accidents;

·

Metallurgical and other processing problems;

·

Mechanical and equipment performance problems;

·

Failure of pit walls, dams, declines, drifts and shafts;

·

Unusual or unexpected rock formations;

·

Personal injury, fire, flooding, cave-ins and landslides; and

·

Decrease in the value of mineralized material due to lower gold, silver prices, and other metal prices.

 

15

 

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

 

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

 

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

 

Title to mineral properties can be uncertain.  Our ability to explore and operate our properties depends on the validity of our title to that property. Our U.S. mineral properties include patented and unpatented mining claims. Unpatented mining claims provide only possessory title and their validity is often subject to contest by third parties or the federal government, which makes the validity of unpatented mining claims uncertain and generally riskier. Our concessions in Mexico are subject to continuing government regulation and failure to adhere to such regulations will result in termination of the concession. Uncertainties inherent in mineral properties relate to such things as the sufficiency of mineral discovery, proper posting and marking of boundaries, assessment work and possible conflicts with other claims not determinable from public record. There may be valid challenges to the title to our properties which, if successful, could impair development and/or operations.

 

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

 

Our directors and officers may be protected from certain types of lawsuits. The laws of the State of Colorado provide that our directors will not be liable to us or our shareholders for monetary damages for all but certain types of conduct as directors of the company. Our Articles of Incorporation permit us to indemnify our directors and officers against all damages incurred in connection with our business to the fullest extent provided or allowed by law. Additionally, we entered into individual indemnification agreements with our current directors and officers and we intend to execute substantially similar agreements with future directors and officers. The exculpation provisions of any of these items may have the effect of preventing shareholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our directors and officers against claims, including claims arising out of their negligence, poor judgment

16

 

or other circumstances. Pursuant to the terms of the indemnification agreements, we are required to advance funds to our directors and officers prior to the final disposition of any threatened or actual legal proceeding, and including in the event it is ultimately determined that such officer or director is not entitled to indemnification pursuant to the terms of the indemnification agreement, in which case we will depend on reimbursement of advanced expenses from such individual.

 

Risks Related to Our Common Stock

 

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

 

·

Changes in the worldwide price for gold and/or silver;

·

Adverse results from our exploration, development, or production efforts;

·

Producing at rates lower than those targeted;

·

Political and regulatory risks;  

·

Weather conditions, including unusually heavy rains;

·

Failure to meet our revenue or profit goals or operating budget;

·

Decline in demand for our common stock;

·

Downward revisions in securities analysts’ estimates or changes in general market conditions;

·

Technological innovations by competitors or in competing technologies;

·

Investor perception of our industry or our prospects;

·

Lawsuits;

·

Economic impact from spread of disease;

·

Actions by government or central banks; and

·

General economic trends.

 

Stock markets in general have experienced extreme price and volume fluctuations and the market prices of individual securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, you may be unable to sell your shares at a desired price.

 

Past payments of dividends on our common stock are not a guaranty of future payments of dividends. In 2010, we began paying cash dividends to the holders of our common stock.  However, our ability to continue to pay dividends in the future will depend on a number of factors, including, cash flow, mine construction requirements and strategies, other acquisition and/or construction projects, spot gold and silver prices, taxation, government-imposed royalties and general market conditions. Further, a portion of our cash flow is expected to be retained to finance our operations and development of mineral properties. Any material change in our operations may affect future dividends which may be modified or canceled at the discretion of our Board of Directors. Any decrease in our monthly dividend would likely have an adverse impact on the price of our common stock.

 

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

17

 

by the NYSE American; or if any other event occurs or any condition exists which makes continued listing on the NYSE American, in its opinion, inadvisable.

 

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

 

Issuances of our stock in the future could dilute existing shareholders and adversely affect the market price of our common stock. We have the authority to issue up to 100,000,000 shares of common stock, 5,000,000 shares of preferred stock, and to issue options and warrants to purchase shares of our common stock without stockholder approval. As of February 28, 2020, there were 65,691,527 shares of common stock outstanding. Future issuances of our securities could be at prices substantially below the price paid for our common stock by our current shareholders. In addition, we can issue blocks of our common stock in amounts up to 20% of the then-outstanding shares without further shareholder approval. Because we have issued less of our common stock than many of our larger peers, the issuance of a significant amount of our common stock may have a disproportionately large impact on our share price compared to larger companies.

 

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

 

ITEM 1B.     UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.        PROPERTIES

 

We classify our mineral properties into three categories: “Operating Properties”, “Development Properties”, and “Exploration Properties”. Operating Properties are properties on which we operate a producing mine and are what we consider a “material” property in accordance with SEC Industry Guide 7.  Other properties may also be material to our business.

 

We currently have 100% interest in ten properties in the Americas. Six of our properties, including two Operating Properties and four Exploration Properties, are within our Oaxaca Mining Unit located in Oaxaca, Mexico, along the San Jose structural corridor. In addition, we have one Operating and three Exploration Properties within our Nevada Mining Unit located in south central Nevada, U.S.A in the Walker Lane Mineral Belt.

 

Proven and Probable Reserves

 

The term “proven (measured) reserves” means reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, grade, and/or quality are computed from the results of detailed sampling; and (b) the sites for inspection, sampling and measurements are spaced so closely and the geologic character is sufficiently defined that the size, shape, depth and mineral content of reserves is well established. The term “probable (indicated) reserves” means reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.

 

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As of December 31, 2019, our estimate of Proven and Probable (“P&P”) reserves was: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

  

Tonnes

   

Gold
g/t

  

Silver
g/t

  

Precious
Metal
Gold
Equivalent
g/t

  

Gold
Ounces

  

Silver
Ounces

  

Precious
Metal
Gold
Equivalent
Ounces

  

Copper
%

  

Lead
%

  

Zinc
%

 

Oaxaca Mining Unit Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arista Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proven

 

2,591,700

 

2.04

 

112

 

3.43

 

169,600

 

9,295,900

 

285,900

 

0.4

 

1.7

 

4.9

 

Probable

 

163,700

 

1.47

 

172

 

3.62

 

7,800

 

906,400

 

19,000

 

0.3

 

1.3

 

4.0

 

Arista Mine Total

 

2,755,400

 

2.00

 

115

 

3.44

 

177,400

 

10,202,300

 

304,900

 

0.4

 

1.7

 

4.8

 

Mirador Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proven

 

75,500

 

0.75

 

365

 

5.31

 

1,800

 

885,700

 

12,900

 

 

 

 

 

 

 

Probable

 

700

 

1.33

 

393

 

6.25

 

100

 

8,400

 

100

 

 

 

 

 

 

 

Mirador Mine Total

 

76,200

 

0.76

 

365

 

5.32

 

1,900

 

894,100

 

13,000

 

 

 

 

 

 

 

Oaxaca Mining Unit Total

 

2,831,600

 

1.97

 

122

 

3.58

 

179,300

 

11,096,400

 

317,900

 

 

 

 

 

 

 

Nevada Mining Unit Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Isabella Pearl Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proven

 

893,300

 

5.39

 

35

 

5.82

 

154,800

 

998,000

 

167,300

 

 

 

 

 

 

 

Probable

 

1,354,100

 

1.50

 

 7

 

1.59

 

65,300

 

312,700

 

69,200

 

 

 

 

 

 

 

Isabella Pearl Mine Total

 

2,247,400

 

3.05

 

18

 

3.27

 

220,100

 

1,310,700

 

236,500

 

 

 

 

 

 

 

Nevada Mining Unit Total

 

2,247,400

 

3.05

 

18

 

3.27

 

220,100

 

1,310,700

 

236,500

 

 

 

 

 

 

 

Total

 

5,079,000

 

2.45

 

76

 

3.40

 

399,400

 

12,407,100

 

554,400

 

 

 

 

 

 

 

 

Notes to the 2019 P&P reserves:

 

1.

Metal prices used for P&P reserves were $1,306 per ounce of gold, $16.32 per ounce of silver, $2.83 per pound of copper, $0.99 per pound of lead and $1.27 per pound of zinc.  These prices reflect the three-year trailing average prices for gold, silver, copper, lead and zinc.

2.

Precious metal gold equivalent is 80.03:1 using gold and silver only to calculate gold equivalencies.

3.

A breakeven Net Smelter Return (“NSR”) cutoff grade of $76 per tonne was used for estimations of P&P reserves at the Arista Mine.  The term “cutoff grade” means the lowest NSR value considered economic to process.

4.

No appreciable amounts of base metals are present in the veins identified to-date at the Mirador Mine at the Alta Gracia project.  A breakeven cutoff grade of 2.50 g/t gold-equivalent (AuEq) was used for proven and probable reserves at the Mirador Mine using gold and silver only to calculate gold equivalencies.

5.

Mining, processing, energy, administrative and smelting/refining costs were based on 2019 actual costs for the Oaxaca Mining Unit.

6.

Arista Mine metallurgical recovery assumptions used were 78% for gold, 91% for silver, 78% for copper, 78% for lead and 81% for zinc.  Mirador Mine metallurgical recovery assumptions used were 87% for gold and 88% for silver.  These recoveries reflect 2019 actual average recoveries for the Aguila and Alta Gracia projects.

7.

P&P reserves are diluted and factored for expected mining recovery.

8.

Minimum mining width for P&P reserves is 1.5 meters for the Arista and Mirador underground mines.

9.

For the Isabella Pearl Mine, the quantities of material within the designed pits were calculated using a cutoff grade of 0.44 Au g/t.

10.

Mining, processing, energy, administrative and smelting/refining costs were based on 2019 actual costs for the Isabella Pearl Mine.

11.

Metallurgical gold recovery assumptions used for the Isabella Pearl project were 81% for crushed ore and 60% for ROM ore.  These recoveries reflect predicted average recoveries from metallurgical test programs.

12.

Isabella Pearl P&P reserves are diluted and factored for expected mining recovery.

13.

Figures in tables are rounded to reflect estimate precision and small differences generated by rounding are not material to estimates.

 

19

 

For comparison, at December 31, 2018, our estimate of P&P reserves was:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

  

Tonnes

  

Gold
g/t

  

Silver
g/t

  

Precious
Metal
Gold
Equivalent
g/t

  

Gold
Ounces

  

Silver
Ounces

  

Precious
Metal
Gold
Equivalent
Ounces

  

Copper
%

  

Lead
%

  

Zinc
%

 

Oaxaca Mining Unit Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arista Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proven

 

2,669,000

 

1.87

 

112

 

3.35

 

160,500

 

9,574,900

 

287,000

 

0.4

 

1.5

 

4.6

 

Probable

 

279,900

 

1.88

 

115

 

3.40

 

17,000

 

1,032,400

 

30,600

 

0.3

 

1.3

 

3.7

 

Arista Mine Total

 

2,948,900

 

1.87

 

112

 

3.35

 

177,500

 

10,607,300

 

317,600

 

0.4

 

1.5

 

4.5

 

Mirador Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proven

 

107,000

 

0.69

 

495

 

7.23

 

2,400

 

1,704,000

 

24,900

 

 

 

 

 

 

 

Probable

 

21,300

 

0.62

 

409

 

60.30

 

400

 

280,000

 

4,100

 

 

 

 

 

 

 

Mirador Mine Total

 

128,300

 

0.68

 

481

 

7.03

 

2,800

 

1,984,000

 

29,000

 

 

 

 

 

 

 

Oaxaca Mining Unit Total

 

3,077,200

 

1.82

 

127

 

3.50

 

180,300

 

12,591,300

 

346,600

 

 

 

 

 

 

 

Nevada Mining Unit Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Isabella Pearl Mine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proven

 

719,800

 

5.65

 

35

 

6.10

 

130,700

 

801,600

 

141,300

 

 

 

 

 

 

 

Probable

 

2,214,600

 

1.18

 

 5

 

1.25

 

84,100

 

375,100

 

89,000

 

 

 

 

 

 

 

Isabella Pearl Mine Total

 

2,934,400

 

2.28

 

12

 

2.44

 

214,800

 

1,176,700

 

230,300

 

 

 

 

 

 

 

Nevada Mining Unit Total

 

2,934,400

 

2.28

 

23

 

2.44

 

214,800

 

1,176,700

 

230,300

 

 

 

 

 

 

 

Total

 

6,011,600

 

2.04

 

71

 

2.99

 

395,100

 

13,768,000

 

576,900

 

 

 

 

 

 

 

 

Notes to the 2018 P&P reserves:

 

1.

Metal prices used for P&P reserves were $1,258 per ounce of gold, $16.62 per ounce of silver, $2.65 per pound of copper, $0.97 per pound of lead and $1.20 per pound of zinc.  These prices reflect the three-year trailing average prices for gold, silver, copper, lead and zinc.

2.

Precious metal gold equivalent is 75.69:1 using gold and silver only to calculate gold equivalencies.

3.

A breakeven Net Smelter Return (“NSR”) cutoff grade of $80 per tonne was used for estimations of P&P reserves at the Arista Mine.  The term “cutoff grade” means the lowest NSR value considered economic to process.

4.

No appreciable amounts of base metals are present in the veins identified to-date at the Mirador Mine at the Alta Gracia project.  A breakeven cutoff grade of 1.98 g/t gold-equivalent (AuEq) was used for proven and probable reserves at the Mirador Mine using gold and silver only to calculate gold equivalencies.

5.

Mining, processing, energy, administrative and smelting/refining costs were based on 2018 actual costs for the Oaxaca Mining Unit.

6.

Arista Mine metallurgical recovery assumptions used were 80% for gold, 92% for silver, 80% for copper, 78% for lead and 83% for zinc.  Mirador Mine metallurgical recovery assumptions used were 79% for gold and 78% for silver.  These recoveries reflect 2018 actual average recoveries for the Aguila and Alta Gracia projects.

7.

P&P reserves are diluted and factored for expected mining recovery.

8.

Minimum mining width for P&P reserves is 1.5 meters for the Arista and Mirador underground mines.

9.

For the Isabella Pearl project, the quantities of material within the designed pits were calculated using a cutoff grade of 0.61 Au g/t for crushed ore and 0.38 Au g/t for Run-of-Mine (“ROM”) ore.

10.

Mining, processing, energy, administrative and smelting/refining costs were based on 2018 cost estimates used for the Isabella Pearl project feasibility study.

11.

Metallurgical gold recovery assumptions used for the Isabella Pearl project were 81% for crushed ore and 60% for ROM ore.  These recoveries reflect predicted average recoveries from metallurgical test programs.

12.

Isabella Pearl P&P reserves are diluted and factored for expected mining recovery.

13.

Figures in tables are rounded to reflect estimate precision and small differences generated by rounding are not material to estimates.

 

Mineralized Material

 

We use the term “mineralized material” to describe mineralization in our mineral deposits that do not constitute “reserves” under U.S. reporting requirements set forth in Guide 7.

 

20

 

In addition to our P&P reserves, we estimate mineralized material within the definition of Guide 7. Mineralized material does not have demonstrated economic viability. The SEC only permits issuers to report “mineralized material” in tonnage and average grade without reference to contained ounces or quantities of other metals. All of our mineralized material is located at our Oaxaca Mining Unit.

 

As of December 31, 2019, our estimate of mineralized material was:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

    

Tonnes

    

Gold
g/t

    

Silver
g/t

    

Copper %

    

Lead %

    

Zinc %

 

 

Arista Mine

 

1,574,700

 

1.46

 

141

 

0.2

 

1.2

 

3.4

 

 

Alta Gracia

 

170,400

 

0.77

 

376

 

 

 

 

 

 

 

 

Margaritas

 

26,000

 

0.51

 

260

 

 

 

 

 

 

 

 

Oaxaca Mining Unit Total

 

1,771,100

 

 

 

 

 

 

 

 

 

 

 

 

Notes to the 2019 mineralized material:

 

1.

Mineralized Material is exclusive of P&P Reserves.

2.

Metal prices used for mineralized material were $1,306 per ounce of gold, $16.32 per ounce of silver, $2.83 per pound of copper, $0.99 per pound of lead and $1.27 per pound of zinc.  These prices reflect the three-year trailing average prices for gold, silver, copper, lead and zinc.

3.

A breakeven Net Smelter Return (“NSR”) cutoff grade of $76 per tonne was used for estimations of mineralized material.  The term “cutoff grade” means the lowest NSR value considered economic to process.

4.

No appreciable amounts of base metals are present in the veins identified to-date at the Alta Gracia project including the Mirador Mine, and the Margaritas project.  A breakeven cutoff grade of 2.50 g/t gold-equivalent (AuEq) was used for mineralized material at the Alta Gracia and Margaritas projects using gold and silver only to calculate gold equivalencies at a ratio of 80.03 to 1.

5.

Arista Mine metallurgical recovery assumptions used were 78% for gold, 91% for silver, 78% for copper, 78% for lead and 81% for zinc.  Alta Gracia and Margaritas projects metallurgical recovery assumptions used were 87% for gold and 80% for silver. These recoveries reflect 2019 actual average recoveries for the Aguila and Alta Gracia projects.

6.

Mineralized material is diluted and factored for expected mining recovery.

7.

Minimum mining width for mineralized material is 1.5 meters for the Arista Mine and the Alta Gracia and Margaritas projects.

8.

Figures in tables are rounded to reflect estimate precision and small differences generated by rounding are not material to estimates.

9.

100% of the Isabella Pearl project pit contained mineralized material was converted to reserves.

 

For comparison, at December 31, 2018, our estimate of mineralized material was:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

    

Tonnes

    

Gold
g/t

    

Silver
g/t

    

Copper %

    

Lead %

    

Zinc %

 

Arista Mine

 

1,843,900

 

1.59

 

110

 

0.3

 

1.2

 

3.7

 

Alta Gracia

 

66,600

 

0.63

 

363

 

 

 

 

 

 

 

Margaritas

 

26,000

 

0.51

 

260

 

 

 

 

 

 

 

Oaxaca Mining Unit Total

 

1,936,500

 

 

 

 

 

 

 

 

 

 

 

 

Notes to the 2018 mineralized material:

 

1.

Mineralized Material is exclusive of P&P Reserves.

2.

Metal prices used for mineralized material were $1,258 per ounce of gold, $16.62 per ounce of silver, $2.65 per pound of copper, $0.97 per pound of lead and $1.20 per pound of zinc.  These prices reflect the three-year trailing average prices for gold, silver, copper, lead and zinc.

3.

A breakeven Net Smelter Return (“NSR”) cutoff grade of $80 per tonne was used for estimations of mineralized material.  The term “cutoff grade” means the lowest NSR value considered economic to process.

4.

No appreciable amounts of base metals are present in the veins identified to-date at the Alta Gracia project including the Mirador Mine, and the Margaritas project.  A breakeven cutoff grade of 1.98 g/t gold-equivalent (AuEq) was used for mineralized material at the Alta Gracia and Margaritas projects using gold and silver only to calculate gold equivalencies at a ratio of 75.69 to 1.

5.

Arista Mine metallurgical recovery assumptions used were 80% for gold, 92% for silver, 80% for copper, 78% for lead and 83% for zinc.  Alta Gracia and Margaritas projects metallurgical recovery assumptions used were 79% for gold and 78% for silver. These recoveries reflect 2018 actual average recoveries for the Aguila and Alta Gracia projects.

6.

Mineralized material is diluted and factored for expected mining recovery.

7.

Minimum mining width for mineralized material is 1.5 meters for the Arista Mine and the Alta Gracia and Margaritas projects.

21

 

8.

Figures in tables are rounded to reflect estimate precision and small differences generated by rounding are not material to estimates.

9.

100% of the Isabella Pearl project pit contained mineralized material was converted to reserves.

 

Our P&P Reserve and Mineralized Material estimates were prepared by our technical staff under the direction of Fred H. Brown, Senior Resource Geologist, and Barry Devlin, Vice President of Exploration.  Mr. Brown graduated with a Bachelor of Science degree in Geology from New Mexico State University in 1987, obtained a Graduate Diploma in Engineering (Mining) in 1997 from the University of the Witwatersrand and a Master of Science in Engineering (Civil) from the University of the Witwatersrand in 2005.  He is registered with the Association of Professional Engineers and Geoscientists of British Columbia and as a Professional Geoscientist and the Society for Mining, Metallurgy and Exploration as a Registered Member.  Mr. Devlin holds a Bachelor of Science degree with honors in Geology, 1981, and a Masters in Geology, 1987, from the University of British Columbia. He is also a Professional Geologist registered with the Association of Professional Engineers and Geoscientists of British Columbia.

 

For a description of the key assumptions, parameters and methods used to estimate Proven and Probable Reserves and Mineralized Material included in this report, as well as data verification procedures and a general discussion of the extent to which the estimates may be affected by any known environmental, permitting, legal, title, taxation, socio-political, marketing or other factors, investors may review the annual reserve report posted on our website (http://www.goldresourcecorp.com.)

 

22

 

Oaxaca Mining Unit

 

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

 

Picture 1

 

We are granted concessions from the Mexican federal government to explore and mine our properties in Mexico.  We hold certain properties directly as the concession holder and lease other properties from a third party. As of December 31, 2019, our Oaxaca Mining Unit encompassed approximately 55,119 hectares (136,199 acres) covered by 24 mining concessions and 5 lease concessions.  The annual concession fees are $728,929 and we have made all necessary payments for 2019.  Please see Mining Concessions and Regulations in Mexico, below.

 

Operating Properties 

 

Aguila Project

 

Background: The Aguila project currently comprises 18 mining concessions aggregating 24,372 hectares.

 

In 2002, we leased the Aguila, El Aire, and La Tehuana concessions from a third party. The Aguila and El Aire concessions are part of the Aguila project and the La Tehuana concession comprises the Margaritas property. The lease agreement is subject to a 4% net smelter return royalty where production is sold in the form of gold/silver doré and 5% for production sold in concentrate form. Subject to meeting minimum exploration requirements, there is no expiration

23

 

term for the lease. We may terminate it at any time upon written notice to the lessor and the lessor may terminate it if we fail to fulfill any of our obligations, which primarily consist of paying the appropriate royalty to the lessor.

 

In August 2003, we commenced an initial drilling and exploration program at the Aguila project. Through 2018, we have drilled a total of 935 core holes (both surface and underground) equaling 286,424 meters and 166 reverse circulation holes equaling 14,367 meters for a total of 1,101 holes totaling 300,791 meters.

 

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

 

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

 

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

 

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

 

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

 

Facilities: We constructed a processing facility and other infrastructure at the Aguila project for approximately $35 million in 2009, and expanded the processing facility in 2012 and 2013, spending an additional $23 million. The flotation mill expansion, completed at the end of 2013, increased the number of flotation cells, added a second ball mill to allow for additional processing capacity and a Knelson gravity concentrator. In 2014 we completed a doré processing facility. The Aguila processing facility is flexible in its ability to process several types of mineralization. It has a differential flotation section capable of processing polymetallic ore and producing up to three separate concentrate products for sale. The facility also has an agitated leach circuit capable of producing gold and silver doré for sale. Depending on the specific type and characteristics of the ore, the facility has processed sulfide material in its flotation circuit at well above its nominal capacity of 1,500 tonnes of ore per day. The agitated leach circuit can process a nominal 300 tonnes per day.

 

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

 

24

 

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

 

In 2019, we completed the power grid project and now nearly all power to the site is provided from the Mexican power grid.

 

Exploration Activities:

 

Our exploration activities during 2019 mainly focused on underground exploration drilling at the Arista and Switchback vein systems in the Arista Mine.  The Switchback drilling program continued to target further expansion and delineation of the multiple high-grade parallel veins for reserve definition, expansion and mine plan optimization.  The Switchback vein system extends for over one kilometer and remains open on strike and vertical extent. 

 

Underground drilling during 2019 also continued to expand the ore zones in the Arista Mine, mainly on the Baja, Santiago and Splay 31 veins of the Arista vein system currently in production, and two new veins, Sadie and Sasha, discovered in the Switchback vein system.  Thirty-four underground diamond drill holes totaling 11,795 meters were completed at the Aguila project during 2019.  Surface geologic mapping and rock chip sampling was also conducted in the vicinity of the Arista Mine, the Aguila open pit and other prospects of the Aguila project. 

 

Alta Gracia

 

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

 

As of December 31, 2016, proven and probable reserves had been established for the Mirador Underground Mine on our Alta Gracia property.  In July 2017, mine development reached the economic ore zone of the Mirador vein and mining began.  

 

Location and Access: The Alta Gracia project is approximately 20 kilometers northeast from the village of San Pedro Totalapam, in the Municipality of San Pedro Totolapam.  Access to the project is by a gravel road that departs the paved highway approximately 13 kilometers east of the village of San Pedro Totalapam.  The haulage distance by road from Alta Gracia to the Aguila processing facility is approximately 32 kilometers.

 

Geology and Mineralization: The sedimentary and volcanic units mapped at Alta Gracia are similar to those observed at the Aguila project.  The district is dominated by Tertiary-age rhyolite flows and tuffs which are underlain by andesite flows and tuff.  Granodiorite and felsic intrusives are observed to outcrop to north and east of the Mirador mine.  Known vein occurrences at Alta Gracia are mainly hosted in andesite and rhyolite.  The veins currently being mined at Alta Gracia are considered low sulfidation epithermal mineralization with economic values only for gold and silver.

 

Facilities:  During 2016, we received our operating permit for the Mirador Mine. Explosive magazines, located inside the Mirador Mine at the Alicia portal, were also constructed and permitted.

 

In 2017, two mine portals were developed to provide access to the Mirador vein. Mine site offices and a mobile equipment maintenance shop were established adjacent to the Aguacate portal. Additionally, a diesel power generation plant, compressed air and a mine water pumping station were developed and put into service.  In 2018, old workings were improved to create a second access to the vein system called Independencia. The portal for this access is located approximately 500 meters southwest of the Mirador portal. Development is now established to the mineralization delineated within the Mirador’s Independencia vein during the 2018 and 2019 drill campaigns.  

 

25

 

Ore from the Mirador Mine, primarily silver, is transported by contracted haul trucks to and processed at our agitated leach plant at the Aguila processing facility, with final product being doré.

 

Exploration Activities: The 2019 Alta Gracia surface and underground drill campaign focused primarily on the Independencia vein.  The goal of this drill campaign was to test the extensions of the high-grade ore shoot previously identified on the Independencia vein.  In 2019, we completed 18 step-out and in-fill diamond drill holes totaling 2,327 meters at Alta Gracia.  Surface and underground geological mapping and sampling along with detailed topographic surveying also continued in the historic mining areas at Alta Gracia, mainly at the Aguacatillo prospect.  A surface geochemical soil sampling program was also carried out to the west, along the projected extension of the Independencia vein.  The new information was used for estimation of reserves and mineralized material and to guide future follow-up drilling programs.  To date, over 49 veins have been identified and modelled at the Alta Gracia Project at or near its Mirador Mine.

 

Please see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information concerning our mining operations at the Aguila project. 

 

Exploration Properties

 

Margaritas Property

 

The Margaritas property is made up of the La Tehuana concession. It is comprised of approximately 925 hectares located along our 55-kilometer mineralized trend and adjacent to the Aguila  project

 

In 2019, we continued to review results from previous surface drilling, surveying, detailed geological mapping and rock chip channel sampling for the Margaritas property.  Additional rock chip channel sampling of historic workings and expansion of the soil and rock geochemical program were also carried out in the Trenes mineralized zone.  This included identification of significant historic small-scale mine workings called “Chileños” in the Trenes area.  A future follow-up surface diamond drilling program is targeted for Trenes.  Trenes is located approximately 10-kilometers northwest of the Arista Mine along our 55-kilometer mineralized trend.

 

Chamizo Property

 

In June 2011, we acquired an exploration concession from the Mexican government of approximately 17,898 hectares referred to as Chamizo.  In March 2013, we acquired a property known as Cerro Colorado from Almaden Minerals, Ltd. (Almaden) consisting of approximately 1,860 hectares. The Cerro Colorado property is surrounded by our Chamizo concession and we include it as part of the Chamizo property. Any future production from the Cerro Colorado concession is subject to a 2% net smelter return royalty in favor of Almaden.

 

Because of the close proximity of Chamizo to Alta Gracia, exploration activity began on this property during late 2011 and to date has included geochemical sampling and drilling of eight shallow core holes for a total of 1,327 meters. We completed the acceptable minimum amount of work required to maintain the claims during 2019 and target the same amount of work in 2020.

 

Fuego Property

 

In March 2013, we acquired the Fuego property from Almaden subject to a 2% net smelter return royalty. The Fuego property consists of approximately 2,554 hectares and is located south of our Alta Gracia and Chamizo properties. In 2013, Fuego was included in the property-wide airborne geophysical survey. Geologic mapping and surface sampling has been conducted on the Fuego property allow us to meet the acceptable minimum amount of work required to maintain the claims.  We do not anticipate any significant exploration activities at El Fuego in 2020. However, we plan to conduct the acceptable minimum amount of work required to maintain the claims.

 

26

 

Rey Property

 

The Rey property consists of concessions on the far northwest end of our 55-kilometer mineralized corridor in the State of Oaxaca known as Rey, El Virrey, La Reyna and El Marquez. The Rey property consists of 2,774 hectares.  We acquired the Rey concession from a third party, and it is subject to a 2% net smelter return royalty payable to them on a portion of the claims. We obtained the remaining concessions by staking claims and filing for concessions with the Mexican government.

 

The Rey property is located approximately 64.4 kilometers by road from the Aguila project. There is no plant or equipment on the Rey property. If exploration is successful, any mining would probably require an underground mine where mineralized material could be trucked to the Aguila processing facility for processing.  To date, we have drilled 48 core holes for a total of 5,273 meters at the Rey property. Early in 2012, we completed a small amount of work to finish refurbishing and extending an existing shaft on the property to permit underground exploratory drilling. We ceased work at the Rey property during 2012, following a request to obtain additional approvals from local community agencies. In 2020, we plan to continue working with the local agencies and anticipate resolving the matter, but we have no assurance that we will be able to resume our exploration activities in the near term.  If the matter is resolved, we plan to conduct follow-up drilling and exploration based on the drilling done in 2007 and 2008.  We do not anticipate any significant exploration activities at Rey in 2020.  However, we plan to conduct the acceptable minimum amount of work required to maintain the claims.

 

Mining Concessions and Regulations in Mexico

 

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

 

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

 

Ejido Lands and Surface Right Acquisitions in Mexico 

 

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

 

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

27

 

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

 

Nevada Mining Unit

 

In Nevada, we are the owner of four properties totaling 973 unpatented mining claims covering approximately 17,715 acres, subject to the paramount title of the United States of America, under the administration of the Bureau of Land Management (“BLM”). Under the Mining Law of 1872, which governs the location of unpatented mining claims on federal lands, the owner (locator) has the right to explore, develop, and mine minerals on unpatented mining claims without payments of production royalties to the U.S. government, subject to the surface management regulation of the BLM.  Currently, annual claim maintenance fees are the only federal payments related to unpatented mining claims.  Annual maintenance fees of $172,355 were paid during 2019.

 

In addition to the unpatented claims, we also own 17 patented mining claims covering approximately 276 acres and an additional 200 acres of fee lands in Mineral County, Nevada.  Patented claims and fee lands unlike unpatented claims, pass title to the holder.  The patented claims and fee lands are subject to payment of annual property taxes made to the county where they are located.  Annual property taxes on our patented claims and fee lands have been paid through June 30, 2020.

 

Our properties in Nevada are located in the Walker Lane Mineral Belt which is known for its significant and high-grade gold and silver production.  Activities at our properties in Nevada range from exploration at East Camp Douglas and County Line to mineral delineation at Mina Gold to production at Isabella Pearl.  We believe that our Nevada properties have excellent potential for additional discoveries of both bulk tonnage replacement-type and bonanza-grade vein-type gold deposits, similar to other gold deposits historically mined in the nearby Paradise Peak, Borealis, Bodie, Tonopah, and Goldfield districts.

 

Our primary focus is to discover, delineate and advance potential open pit heap leach gold operations, in addition to Isabella Pearl, at our Nevada Mining Unit.  We believe that our Nevada properties are highly prospective based on their geology, surface samples, drill results, and close proximity to past and current high-grade gold and silver producing mines. We also target equipment sharing synergies whereby we may move equipment from one project to the next due to

28

 

their close proximity (approximately 20 miles or less) to each other.  The map below shows the general location of our properties (yellow stars) and significant nearby gold deposits held by other parties (red stars) within Nevada:

 

Picture 5

29

 

Operating Properties

 

Isabella Pearl

 

Background:  In August 2016, we purchased Walker Lane, which owns a 100% interest in the Isabella Pearl project which covers an area of 8,891 acres consisting of 496 unpatented claims.  In April 2018, we released our maiden Proven and Probable mineral reserve estimate for the Isabella Pearl project totaling 192,600 gold ounces at an average grade of 2.22 g/t.  In 2019, we commenced production of gold doré from an open pit heap leach operation.  Based on metallurgical testing, we expect gold recoveries of approximately 81% for crushed ore and 60% for the run-of-mine (“ROM”) ore. 

 

Location and Access:  The Isabella Pearl project is located in the Gabbs Valley Range in Mineral County, Nevada, approximately 240 kilometers (150 miles) southeast of Reno.  Access to the project is by a paved road approximately 10 kilometers  (six miles) north of the town of Luning, Nevada. The project has good connections to the infrastructure of west-central Nevada, with access roads to the project site linking to Nevada State Route 361 and U.S. Route 95, the main highway between Reno and Las Vegas.  

 

Geology and Mineralization: The Isabella Pearl project is located in the central portion of the Walker Lane Mineral Belt, a major northwest-trending zone near the western border of Nevada characterized by a series of closely spaced dextral strike-slip faults that were active throughout much of the middle to late Cenozoic.  Volcanic rocks of middle Tertiary age cover much of the property and include intermediate lava flows and ignimbrite ash flow sheets.  The volcanic rocks unconformably overlie Mesozoic strata including Triassic and Jurassic sedimentary units and Cretaceous and Jurassic igneous units.  Within the regional Walker Lane tectonic setting, several major fault zones trend through the property and are dominated by various splays and offset branches that host the gold mineralization in the area. 

 

The gold-silver mineralized zones mainly include the Isabella, Pearl, and Civit Cat North deposits, collectively referred to as the Isabella Pearl deposit.  Alteration and mineral assemblages at Isabella Pearl, including widespread argillic alteration and generally abundant alunite, indicate the deposits belong to the high-sulfidation class of epithermal mineral deposits.  The age of the mineralization is approximately 19 million years and this early Miocene age conforms to the age of other high-sulfidation epithermal precious-metal deposits in the Walker Lane Belt in which we have no interest (e.g., Goldfield and Paradise Peak).

 

Facilities:  We were granted a positive Record of Decision (“ROD”) from the BLM on the Environmental Assessment (“EA”) for the Isabella Pearl project in May 2018.  This final permit, along with approval from the Company’s Board of Directors, allowed us to move the project forward into development and construction.  Construction commenced in June 2018 and by the end of 2019 we had completed construction of the Isabella Pearl mine including haul roads, office and laboratory buildings, crushing facility, the heap leach pad, pregnant and barren solution ponds, the ADR processing facility and two water wells.  We began shipping gold-loaded carbon to a third-party to be processed into doré April 2019, made initial gold sales of doré in May 2019, and reached commercial production levels in October 2019.  In December 2019, we completed construction of the ADR plant and commenced producing doré at the Isabella Pearl Mine site.

 

Exploration Activities: In 2019, we completed a 110-hole, 8,096-meter reverse circulation drilling program targeted to explore and expand mineral reserves at the Isabella Pearl Mine.  This program included in-fill and step-out drill holes on the Pearl, Civit Cat North and Scarlet targets.  Numerous high-grade surface samples are situated over historic drill intercepts at Civit Cat North and Scarlet, the latter a potential new deposit located 400 meters northwest of the Isabella Peal Mine.  Surface geological and alteration mapping and rock chip sampling continued along the Scarlet trend to the northwest and further to the historic mining area at the Civit Cat North West target.  These areas are targeted for surface drilling in the future.

30

 

Exploration Properties 

 

Mina Gold

 

In August of 2016, we purchased 100% interest in the Mina Gold property located in Nevada’s Walker Lane Mineral Belt.  The property has the potential to be a future open pit heap leach gold operation.  Mina Gold reported a historic third-party estimate of mineralized material totaling 1,606,000 tonnes grading 1.88 g/t gold.  The property covers an area of 1,328 acres consisting of 66 unpatented claims and 5 patented claims.  In 2019, we reviewed results from previous surface drilling to guide follow-up drilling and other exploration activities for Mina Gold.  During 2019, we also expanded our land position at Mina Gold by leasing an additional 23 unpatented lode mining claims.  These claims will be evaluated along with our other claims at the Mina Gold property in preparation for future surface drilling programs.

 

East Camp Douglas

 

In January 2017, we purchased 100% interest in the East Camp Douglas gold property located in Nevada’s Walker Lane Mineral Belt.  The property covers an area of approximately 5,571 acres consisting of 289 unpatented claims, 12 patented claims and additional fee lands in Mineral County, Nevada.  Precious metal epithermal mineralization at East Camp Douglas occurs as both widespread high sulfidation alteration areas and low sulfidation veins.  Modern exploration by several mining and exploration companies has established modest gold resource potential in five separate areas on the property, with over 3,000 meters of drill core and a large exploration database.  We believe this large property has numerous untested gold targets with open pit heap leach potential warranting an extensive exploration program.  During 2019, we continued to review historic geological, exploration and mining data on the East Camp Douglas property.  Additional exploration activities included surface geological and alteration mapping and rock chip geochemical sampling of the historic mine workings, mainly at the Kernick, Sunset, and Triumph mines, of the historic Cerro Duro mining area.  We also commenced initial 3D-modeling for the historic mine areas.  In 2020, we intend to continue to evaluate the resource potential of the historic Cerro Duro mining area using extensive historic drilling and sample data available as well as identifying targets for our first drilling program on the gold-bearing silicified volcanic rocks further to the south in the area we call the “lithocap”.

 

County Line

 

In March 2018, we purchased 100% interest in the County Line property.  The property is located close to our other Nevada properties in central Nevada’s Walker Lane Mineral Belt in Mineral and Nye counties.  In addition, we staked additional unpatented claims around the property to strengthen the land position and exploration potential.  The total land package is 2,401 acres consisting of 116 unpatented lode mining claims and 6 unpatented placer mining claims.  During 2019, we continued to review historic geological, exploration and mining data along with conducting surface mapping and rock chip sampling in preparation for a future initial surface drilling program.

 

2020 Exploration 

 

In 2020, we anticipate spending a total of approximately $7 million for exploration activities in our Oaxaca and Nevada Mining Units.  Exploration expenditures may be modified depending on exploration results, metal market conditions and available capital.

 

Office Facilities 

 

We constructed an administrative office building adjacent to the Aguila processing facility, a mine office adjacent to the Arista Mine portal as part of the Aguila  project, and an administrative office building adjacent to the Isabella Pearl open pit mine.  We also lease approximately 3,000 square feet of office space in Oaxaca City, Oaxaca.  The lease commenced in 2012 and continues for ten years. In 2014, we sold the building that serves as our executive and administrative headquarters in Colorado Springs, Colorado and have leased back a portion under a renewable one-year lease. We also lease approximately 2,500 square feet of office space in Denver, Colorado, which we renewed through February 2022.

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Glossary

 

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

 

 

 

ADR

An adsorption, desorption and refining (“ADR”) facility which recovers gold from the leached pregnant solution.

 

 

Andesite:

An extrusive igneous, volcanic rock, of intermediate composition, with aphanitic to porphyritic texture characteristic of subduction zones, such as the western margin of South America.

 

 

 

 

Concentrate:

A product from a mineral processing facility such as gravity separation or flotation in which the valuable constituents have been upgraded and unwanted gangue materials rejected as waste.

 

 

Doré:

Composite gold and silver bullion usually consisting of approximately 90% precious metals that will be further refined to separate pure metals.

 

 

Drift:

A horizontal tunnel generally driven within or alongside an orebody and aligned parallel to the long dimension of the ore.

 

 

Epithermal:

Used to describe gold deposits found on or just below the surface close to vents or volcanoes, formed at low temperature and pressure.

 

 

 

 

Exploration:

Prospecting, sampling, mapping, diamond-drilling and other work involved in locating the presence of economic deposits and establishing their nature, shape and grade.

 

 

Grade:

The concentration of an element of interest expressed as relative mass units (percentage, ounces per ton, grams per tonne (“g/t”), etc.).

 

 

 

 

Hectare:

Another metric unit of measurement, for surface area. One hectare equals 1/200th of a square kilometer, 10,000 square meters, or 2.47 acres. A hectare is approximately the size of a soccer field.

 

 

 

 

Long-hole Stoping:

Mining method which uses holes drilled by a production drill to a predetermined pattern by a mining engineer.  Long-hole stoping is a highly selective and productive method of mining and can cater for varying ore thicknesses and dips (0 - 90 degree).  Blasted rock is designed to fall into a supported drawpoint or removed with remote control LHD (load, haul, dump machine).  

 

 

Heap Leaching:

Consists of stacking crushed or run-of-mine ore on impermeable pads, where a weak cyanide solution is applied to the surface of the heap to dissolve the gold.  The gold-bearing solution is then collected and pumped to process facilities to remove the gold by collection on carbon.

 

 

Mineralized Material:

Minerals or any mass of host rock in which minerals of potential commercial value occur.

 

 

 

 

32

 

Net Smelter Return

(“NSR”):

The net revenue that the owner of a mining property receives from the sale of the mine's metal products less transportation and refining costs. As a royalty it refers to the fraction of net smelter return that a mine operator is obligated to pay the owner of the royalty agreement.

 

 

 

 

Mineral Deposit:

Rocks that contain economic amounts of minerals in them and that are expected to be profitably mined.

 

 

 

 

 

 

Patented Claim:

A mining claim for which the U.S. Federal Government has passed its title to the claimant, making it private land.  A person may mine and remove minerals from a mining claim without a mineral patent. However, a mineral patent gives the owner exclusive title to the locatable minerals and in most cases, grants title to the surface.

 

 

Tonne:

A metric ton. One tonne equals 1000 kg.  It is equal to approximately 2,204.62 pounds.

 

 

 

 

Unpatented Claim:

A particular parcel of U.S. Federal land, valuable or believed to be valuable for a specific mineral deposit or deposits. It is a parcel for which an individual has asserted a right of possession. The right is restricted to the extraction and development of a mineral deposit.

 

 

Volcanogenic:

Of volcanic origin.

 

 

 

 

Volcanic domes:

These are mounds that form when viscous lava is erupted slowly and piles up over the vent, rather than moving away as lava flow. The sides of most domes are very steep and typically are mantled with unstable rock debris formed during or shortly after dome emplacement. Most domes are composed of silica-rich lava which may contain enough pressurized gas to cause explosions during dome extrusion.

 

 

 

 

ITEM 3.        LEGAL PROCEEDINGS 

 

In February 2020, a local ejido community filed a lawsuit against the Mexican federal government challenging the validity of mining concessions that affect the ejido land. We are one of several mining companies identified as interested third parties and are prepared to defend the validity of the issuance of the mining concessions to us to the extent possible as a non-named party in the proceeding. While none of the mining concessions at issue impact our current operations, future access to these concessions for exploration or mining may be impacted should the matter be decided in favor of the local community.

 

ITEM 4.        MINE SAFETY DISCLOSURES

 

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Annual Report.

 

33

 

PART II

 

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

 

Market Information

 

Our common stock trades on the New York Stock Exchange American (“NYSE American”) under the symbol “GORO”.

 

On February 28, 2020, the high and low market prices of our common stock on the NYSE American were $4.42 and $3.99, respectively, and we had approximately 200 holders of record. 

 

Purchases of Equity Securities by the Company

 

In September 2011, our Board of Directors authorized a share repurchase of up to $20.0 million with no pre-established end date. During 2019 and 2018, we did not repurchase any shares of Gold Resource Corporation common stock on the open market, and approximately $14.0 million remains available in the share repurchase program as of December 31, 2019.  

 

Performance Graph 

 

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

 

34

 

The following graph compares the performance of our common stock with the performance of the NYSE American Composite Index and the S&P TSX Global Gold Fund, assuming reinvestment of dividends on December 31 of each year indicated. The graph assumes $100 invested at the per share closing price in Gold Resource Corporation and each of the indices on from December 31, 2014 to December 31, 2019. 

 

Picture 3

Transfer Agent 

 

Computershare Trust Company, N.A. is the transfer agent for our common stock. The principal office of Computershare is located at 8742 Lucent Boulevard, Suite 225, Highlands Ranch, Colorado 80129 and its telephone number is (303) 262-0600.

 

Dividend Policy 

 

Since our inception, one of management’s primary goals has been to make cash dividend distributions to shareholders. Since commercial production began at the Aguila project in July 2010, we have returned over $113 million

35

 

to our shareholders in consecutive monthly dividends. Regular dividends should not be considered a prediction or guarantee of future dividends.

 

Physical Dividend Program

 

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

 

·

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 held in a “street name”. 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”), 1325 Avenue of the Americas, 7th Floor, Suite 0703-2, New York, NY 10019. GBI facilitates the cash to gold and silver conversion.

·

Shareholders then direct their cash dividend check issued by Computershare to be electronically deposited to the shareholder’s GBI account for the option to have it, or any portion thereof that denominates into a one-ounce gold or silver bullion round. 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 or cash allocations for their cash dividend must do so by midnight Eastern Time 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 plus gold bullion minting cost factors on the record date or the London Bullion Market silver fix plus silver bullion minting cost factors 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 or cash allocations in effect at that time. The shareholder may also choose to move their cash out of their GBI account. Shareholders cannot move cash into their GBI account for conversion into gold and silver. Only the shareholder’s cash dividend sent from Computershare is eligible for conversion.

 

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

 

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ITEM 6.        SELECTED FINANCIAL DATA

 

The following selected financial data sets forth our summary historical financial data as of and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015. This information was derived from our audited consolidated financial statements for each year. Our selected historical financial data is qualified in its entirety by, and should be read in conjunction with, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and the notes thereto included elsewhere in this report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31, 

 

 

    

2019

    

2018

    

2017

    

2016

    

2015

 

 

 

(In thousands, except per share amounts)

 

Sales, net

 

$

135,366

 

$

115,308

 

$

110,156

 

$

83,227

 

$

92,701

 

Mine gross profit

 

 

29,115

 

 

33,690

 

 

42,115

 

 

22,433

 

 

30,323

 

Net income

 

 

5,832

 

 

9,288

 

 

4,150

 

 

4,387

 

 

3,062

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

0.09

 

 

0.16

 

 

0.07

 

 

0.08

 

 

0.06

 

Cash dividends declared

 

 

0.03

 

 

0.02

 

 

0.02

 

 

0.03

 

 

0.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 

 

 

    

2019

    

2018

    

2017

    

2016

    

2015

 

 

 

(In thousands)

 

Total Assets

 

$

193,012

 

$

150,331

 

$

132,923

 

$

118,443

 

$

106,499

 

Long-term obligations

 

 

6,982

 

 

5,507

 

 

5,809

 

 

2,425

 

 

2,815

 

 

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

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

 

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

 

Introduction

 

The following discussion summarizes our results of operations for two fiscal years ended December 31, 2019 and 2018 and our financial condition at December 31, 2019 and 2018, with a particular emphasis on the year ended December 31, 2019.  A discussion regarding our financial condition and results of operations for 2018 compared with 2017 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the SEC on February 26, 2019.

 

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

 

In our financial statements, we report the sale of precious and base metals as revenue and we periodically review our revenue streams to ensure that this treatment remains appropriate. We consider precious metals to be the long-term primary driver of our economic decisions and believe that base metals are secondary products.

 

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 realized price ratio for the period.

 

Highlights for the year ended December 31, 2019 are summarized below and discussed further in our Management’s Discussion and Analysis:

 

2019 Highlights

 

·

Achieved our ninth consecutive year of profitability;

·

Record consolidated annual gold production;

·

Achieved 2019 Oaxaca Mining Unit gold production guidance range with 29,435 ounces;

·

Achieved 2019 Oaxaca Mining Unit silver production guidance range with 1.72 million ounces

·

$135.4 million consolidated net sales, an increase of 17%;

·

$5.8 million net income or $0.09 per share;

·

Oaxaca Mining Unit $264 total cash costs (after by-product credits) per precious metal gold equivalent ounce sold;

·

Oaxaca Mining Unit $646 total all-in sustaining cost per precious metal gold equivalent ounce sold;

·

Completed construction and commenced production at the Isabella Pearl Mine, producing 10,883 ounces of gold and 9,752 ounces of silver; and

·

$1.5 million distributed in shareholder dividends, totaling over $113 million since 2010.

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Overview

 

We are a mining company which pursues gold and silver projects that are expected to achieve both low operating costs and high returns on capital. We have two mining units, the Oaxaca Mining Unit located in Oaxaca, Mexico and the Nevada Mining Unit located in Nevada, USA.  Our Oaxaca Mining Unit consists of six properties and includes mineral production primarily from the Arista underground mine and to a lesser extent the Aguila Open Pit mine, both of which are located at the Aguila project.  We also produce from the Mirador underground mine at the Alta Gracia project.  All three mines supply ore to our processing facilities located at the Aguila project.  We produce doré and metal concentrates which contain precious metals of gold and silver and base metals of copper, lead and zinc.  Our Nevada Mining Unit consists of four properties and includes the Isabella Pearl Mine which commenced production in mid-2019.  The Isabella Pearl Mine mineralization is predominantly gold with some silver from which we produce doré.

 

Results of Operations—Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

 

Sales, net.  During the year ended December 31, 2019, consolidated sales, net were $135.4 million as compared to $115.3 million for the same period in 2018.  The increase is attributable to an increase in gold and base metal sales volumes in 2019, of which 10,272 gold ounces or $15.1 million was from the Isabella Pearl Mine which began selling doré in May 2019.   For the year ended December 31, 2019, consolidated sales volumes totaled 34,439 ounces and 1,477,192 ounces of gold and silver, respectively, as compared to 22,886 ounces and 1,529,951 ounces of gold and silver, respectively, for the same period in 2018.  Please see the Oaxaca and Nevada Mining Unit’s sales discussion below for more information. 

 

Mine gross profit. For the year ended December 31, 2019, mine gross profit and mine gross profit percent totaled $29.1 million and 22% compared to $33.7 million and 29% for the same period in 2018. The decrease in mine gross profit and mine gross profit percent during 2019 primarily resulted from higher treatment and refining costs which were slightly offset by higher sales volumes from higher throughput in 2019 as compared to 2018, and higher precious metal prices.  

 

General and administrative expenses. For the year ended December 31, 2019, general and administrative expenses totaled $9.9 million, compared to $9.3 million for the same period of 2018. The $0.6 million increase in 2019, compared to 2018 is primarily due to increased stock-based compensation.  

 

Exploration expenses.  For the year ended December 31, 2019, property exploration expenses totaled $3.7 million as compared to $4.7 million for the same period of 2018. The decrease of $1.0 million was the result of the Isabella Pearl Mine commencing production in 2019.

 

Other expense, net. For the year ended December 31, 2019, we recorded other expense of $0.6 million compared to other expense of $3.1 million during the same period of 2018.  The $2.5 million decrease in 2019 compared to the same period in 2018 was due to our mark-to-market gains on our gold and silver bullion/rounds due to the increasing prices in 2019 as compared to 2018 where prices were declining and less exchange rate fluctuation between the U.S. Dollar and Mexican Peso.  Additionally, in 2018 we recorded the allowance for doubtful accounts receivable resulting from the bankruptcy filing of one of our customers.  Please see Note 17 to the Consolidated Financial Statements for additional information.

 

Provision for income taxes. For the year ended December 31, 2019, income tax expense increased to $9.1 million from $7.3 million from the same period in 2018. The increase in tax expense is mostly due to the inclusion of the Global Intangible Low Taxed Income (“GILTI”).     Please see Note 5 in Item 8. Financial Statements and Supplementary Data for additional information.  

 

Net income.  For the ended December 31, 2019, we recorded net income of $5.8 million as compared to net income of $9.3 million during the same period in 2018.

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Oaxaca Mining Unit Sales, net

 

Oaxaca Mining Unit net sales of $120.3 million for the year ended December 31, 2019 increased by $5.0 million, or 4%, when compared to 2018. The increase in our 2019 sales is primarily attributable to an increase in gold and base metal production and sales volumes. Metal sales volume in 2019 increased over 2018 volumes as follows: gold by 6%, copper by 9%, lead by 19%, and zinc by 20%.  In addition to higher sales volumes, average realized prices for gold and silver increased 13% and 4%, respectively, from 2018.  The increases in gold and base metal sales volumes and gold and silver average price was partially offset by the declining base metal prices from 2018 as well as increased treatment and refining charges.  For the year ended December 31, 2019, average realized prices for copper, lead, and zinc decreased from the same period in 2018 as follows: copper by 5%, lead by 6%, and zinc by 7%.

 

During 2019, we sold 24,167 gold ounces and 1,468,860 silver ounces from our Oaxaca Mining Unit at a total cash cost per precious metal gold equivalent ounce after by-product credits, of $264.  During the three months ended December 31, 2019, we sold 6,966 gold ounces and 372,729 silver ounces at a total cash cost per gold equivalent ounce after by-product credits, of $220. Please see Non-GAAP Measures below for additional information concerning the cash cost per ounce measures.

 

The following Sales Statistics table summarizes certain information about our Oaxaca Mining Unit operations for the periods indicated: