GORO 10-Q
Goldgroup Mining Inc. (GORO)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact Name of Registrant as Specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
(
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
a | ||
Title of each class | Trading Symbol | Name of each exchange where registered |
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large 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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
GOLD RESOURCE CORPORATION
FORM 10-Q
Table of Contents
Page | |||
2 | |||
| 3 | ||
3 | |||
4 | |||
5 | |||
7 | |||
8 | |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | ||
47 | |||
48 | |||
49 | |||
49 | |||
49 | |||
49 | |||
49 | |||
50 | |||
50 | |||
51 | |||
Opening ceremony for the new San Jose de Gracia city archway |
Gold Resource Corporation
1
THIRD QUARTER 2022 HIGHLIGHTS
Highlights for the three months ended September 30, 2022 are summarized below and discussed further in our Management’s Discussion and Analysis:
Financial
| ● | Our balance sheet remains strong, with $22.5 million in cash as of September 30, 2022. The decrease of $11.2 million since December 31, 2021, is after: |
| o | year-to-date cash inflow of $7.9 million from operating activities, net of $16.2 million in income tax payments for tax years 2021 and 2022 and $6.9 million investment in the Back Forty Project feasibility study and permitting work; |
| o | investing Canadian dollar (“C$”) 2.4 million (or U.S. dollar $1.7 million) in Maritime Resources Corp., ticker symbol “MAE.V” on the Toronto Stock Exchange—Venture Exchange (“TSX-V”), in exchange for 9.9% of the company’s shares in a private placement; |
| o | investing $14.1 million in capital expenditures; and |
| o | distributing to shareholders $2.7 million in dividends ($0.9 million this quarter, totaling over $122 million since 2010). |
| ● | Net loss was $9.7 million or $0.11 loss per share for the quarter. The third quarter net loss is mainly driven by: |
| o | lower commodity prices in the third quarter relative to the prior quarter and the same period in 2021; |
| o | higher depreciation and amortization due to capital additions and a year-over-year lower Mineral Reserve base; and |
| o | higher exploration expense due to the investment in the Back Forty Project feasibility study and permitting. |
| ● | Working capital was $28.9 million as of September 30, 2022, $0.4 million lower than as of December 31, 2021. The decrease is primarily due to a decrease in cash as discussed above. |
| ● | Total cash cost for the quarter was $1,103 per gold equivalent (“AuEq”) ounce (after co-product credits) and total all-in sustaining cost for the quarter was $1,831 per AuEq ounce (after co-product credits). Both non-GAAP measures were higher in the quarter due to the impact of lower co-product credits as a result of lower base metal prices (see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Measures below for a reconciliation of non-GAAP measures to applicable GAAP measures). |
Don David Gold Mine
| ● | The Don David Gold Mine (“DDGM”) safety program aims to bolster the overall health and safety culture of our employees. |
| o | There were no lost time incidents during the third quarter of 2022. |
| o | The year-to-date lost time injury frequency rate per million hours of 2.76 is substantially below the Camimex (Mexican Chamber of Mines) benchmark of 5.71. |
| o | During the third quarter of 2022, production, mine development, and exploration were deliberately but temporarily slowed to improve safety specific to ground support and ventilation. |
| ● | In the third quarter of 2022, the Don David Gold Mine produced and sold a total of 8,042 gold equivalent ounces, comprising 5,478 gold ounces and 225,012 silver ounces at an average sales price per ounce of $1,627 and $19, respectively. |
| ● | While exploration was temporarily slowed to address safety improvement opportunities, work continued to focus on infill drilling with encouraging results from the Arista and Switchback vein systems. The step-out resource expansion drilling is ongoing, and surface sampling programs at the Alta Gracia project continue. |
Back Forty Project
| ● | The feasibility study work for the Back Forty Project in Michigan, USA progressed during the third quarter of 2022. Work related to metallurgy and the economic model is expected to continue into 2023. Permit applications will not be submitted with state agencies in Michigan until the completion of the feasibility study. |
| ● | On August 5, 2022, the Company was invited by Michigan’s Department of Environment, Great Lakes and Energy (“EGLE”) to participate in a voluntary Scoping Environmental Impact Assessment (“SEIA”) meeting to present to local community leaders the initial site plan and other key improvements being incorporated into the Back Forty Project’s optimized feasibility study. |
1 Further information regarding the Mexican Chamber of Mines benchmark can be found at https://www.camimex.org.mx/index.php/estadisticas/Seguridad
Gold Resource Corporation
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
GOLD RESOURCE CORPORATION
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
(U.S. dollars in thousands, except share and per share amounts)
(Unaudited)
As of | As of | |||||
September 30, | December 31, | |||||
Note | 2022 |
| 2021 | |||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | $ | | |||
Accounts receivable, net | | |||||
Inventories, net | 4 | | ||||
Promissory note | 6 | | ||||
Prepaid expenses and other current assets | 7 | | ||||
Zinc zero cost collar | 17 | | ||||
Total current assets | | | ||||
Property, plant and mine development, net | 8 | | ||||
Other non-current assets | | | ||||
Total assets | $ | | $ | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Income taxes payable, net | | | ||||
Mining royalty taxes payable, net | | | ||||
Zinc zero cost collar | 17 | | ||||
Accrued expenses and other current liabilities | 9 | | | |||
Total current liabilities | | | ||||
Reclamation and remediation liabilities | 11 | | | |||
Gold and silver stream agreements | 10 | | | |||
Deferred tax liabilities, net | 5 | | | |||
Contingent consideration | 12 | | | |||
Other non-current liabilities | 9 | | | |||
Total liabilities | | | ||||
Shareholders' equity: | ||||||
Common stock - $ | ||||||
| | |||||
Additional paid-in capital | | | ||||
Retained earnings | | | ||||
Treasury stock at cost, | ( | ( | ||||
Accumulated other comprehensive loss | ( | ( | ||||
Total shareholders' equity | | | ||||
Total liabilities and shareholders' equity | $ | | $ | | ||
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
3
GOLD RESOURCE CORPORATION
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share amounts)
(Unaudited)
For the three months ended | For the nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
Note | 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Sales, net | 3 | $ | | $ | | $ | | $ | | |||
Cost of sales: | ||||||||||||
Production costs | | | | | ||||||||
Depreciation and amortization | | | | | ||||||||
Reclamation and remediation | | | | | ||||||||
Total cost of sales | | | | | ||||||||
Mine gross (loss) profit | ( | | | | ||||||||
Costs and expenses: | ||||||||||||
General and administrative expenses | | | | | ||||||||
DDGM exploration expenses | | | | | ||||||||
Back Forty Project expenses | | - | | - | ||||||||
Restructuring expenses | - | - | - | | ||||||||
Stock-based compensation | 16 | | | | | |||||||
Realized and unrealized (gain) loss on zinc zero cost collar | 17 | ( | | | | |||||||
Other expense (income), net | 18 | | ( | | | |||||||
Total costs and expenses | | | | | ||||||||
(Loss) income before income taxes | ( | | | | ||||||||
Provision for income taxes | 5 | ( | | | | |||||||
Net (loss) income | $ | ( | $ | | $ | ( | $ | | ||||
Net (loss) income per common share: | ||||||||||||
Basic and diluted net (loss) income per common share | 19 | ( | | ( | | |||||||
Weighted average shares outstanding: | ||||||||||||
Basic | 19 | | | | | |||||||
Diluted | 19 | | | | | |||||||
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
4
GOLD RESOURCE CORPORATION
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands, except share amounts)
(Unaudited)
For the three months ended September 30, 2022 and 2021 | ||||||||||||||||||||
| Number of |
| Par Value of |
| Additional Paid- |
| Retained |
| Treasury |
| Accumulated |
| Total | |||||||
Balance, June 30, 2021 | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Stock-based compensation | - | - | | - | - | - | | |||||||||||||
Common stock issued for vested restricted stock units | | - | - | - | - | - | - | |||||||||||||
Dividends declared | - | - | - | ( | - | - | ( | |||||||||||||
Surrender of stock for taxes due on vesting | ( | - | - | - | - | - | - | |||||||||||||
Net income | - | - | - | | - | - | | |||||||||||||
Balance, September 30, 2021 | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Balance, June 30, 2022 | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Stock-based compensation | - | - | | - | - | - | | |||||||||||||
Common stock issued for vested restricted stock units | | - | - | - | - | - | - | |||||||||||||
Dividends declared | - | - | - | ( | - | - | ( | |||||||||||||
Unclaimed shares related to the Aquila acquisition | ( | - | ( | - | - | - | ( | |||||||||||||
Net income | - | - | - | ( | - | - | ( | |||||||||||||
Balance, September 30, 2022 | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.
GOLD RESOURCE CORPORATION
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands, except share amounts)
(Unaudited)
For the nine months ended September 30, 2022 and 2021 | ||||||||||||||||||||
| Number of |
| Par Value of |
| Additional Paid- |
| Retained |
| Treasury |
| Accumulated |
| Total | |||||||
Balance, December 31, 2020 | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Stock-based compensation | - | - | | - | - | - | | |||||||||||||
Net stock options exercised | | - | | - | - | - | | |||||||||||||
Common stock issued for vested restricted stock units | | - | - | - | - | - | - | |||||||||||||
Dividends declared | - | - | - | ( | - | - | ( | |||||||||||||
Surrender of stock for taxes due on vesting | ( | - | ( | - | - | - | ( | |||||||||||||
Net income | - | - | - | | - | - | | |||||||||||||
Balance, September 30, 2021 | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Balance, December 31, 2021 | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Stock-based compensation | - | - | | - | - | - | | |||||||||||||
Stock options exercised - settled in cash | - | - | ( | - | - | - | ( | |||||||||||||
Common stock issued for vested restricted stock units | | - | - | - | - | - | - | |||||||||||||
Dividends declared | - | - | - | ( | - | - | ( | |||||||||||||
Unclaimed shares related to the Aquila acquisition | ( | - | ( | - | - | - | ( | |||||||||||||
Surrender of stock for taxes due on vesting | ( | - | ( | - | - | - | ( | |||||||||||||
Net income | - | - | - | ( | - | - | ( | |||||||||||||
Balance, September 30, 2022 | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
6
GOLD RESOURCE CORPORATION
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
(Unaudited)
For the nine months ended September 30, | ||||||
Note | 2022 |
| 2021 | |||
Cash flows from operating activities: | ||||||
Net income | $ | ( | $ | | ||
Adjustments to reconcile net income to net cash from operating activities: | ||||||
Deferred income tax benefit | ( | ( | ||||
Depreciation and amortization, including amortization in reclamation | | | ||||
Stock-based compensation | | | ||||
Other operating adjustments | 21 | ( | | |||
Changes in operating assets and liabilities: | ||||||
Accounts receivable | | ( | ||||
Inventories | ( | ( | ||||
Prepaid expenses and other current assets | ( | ( | ||||
Accounts payable and other accrued liabilities | ( | | ||||
Mining royalty and income taxes payable, net | ( | | ||||
Net cash provided by operating activities | | | ||||
Cash flows from investing activities: | ||||||
Capital expenditures | ( | ( | ||||
Equity investment | ( | - | ||||
Proceeds from the sale of gold and silver rounds | | - | ||||
Net cash used in investing activities | ( | ( | ||||
Cash flows from financing activities: | ||||||
Proceeds (for) from the exercise of stock options | ( | | ||||
Dividends paid | ( | ( | ||||
Other financing activities | - | | ||||
Net cash used in financing activities | ( | ( | ||||
Effect of exchange rate changes on cash and cash equivalents | ( | ( | ||||
Net (decrease) increase in cash and cash equivalents | ( | | ||||
Cash and cash equivalents at beginning of period | | | ||||
Cash and cash equivalents at end of period | $ | | $ | | ||
Supplemental Cash Flow Information | ||||||
Interest expense paid | $ | - | $ | - | ||
Income and mining taxes paid | $ | | $ | |||
Non-cash investing activities: | ||||||
Change in capital expenditures in accounts payable | $ | ( | $ | ( | ||
Change in estimate for asset retirement costs | $ | - | $ | | ||
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
7
GOLD RESOURCE CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
1. Basis of Preparation of Financial Statements
The Condensed Consolidated Interim Financial Statements (“interim financial statements”) of Gold Resource Corporation and its subsidiaries (collectively, the “Company”) are unaudited and have been prepared in accordance with the rules of the Securities and Exchange Commission (“SEC”) for interim statements. Certain information and footnote disclosures required by United States Generally Accepted Accounting Principles (“U.S. GAAP”) have been condensed or omitted as permitted by such rules, although the Company believes that the disclosures included are adequate to make the information presented not misleading. In the opinion of management, all adjustments (including normal recurring adjustments) and disclosures necessary for a fair presentation of these interim financial statements have been included. The results reported in these interim financial statements are not necessarily indicative of the results that may be reported for the entire year. These interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2021 included in the Company’s annual report on Form 10-K. The year-end balance sheet data was derived from the audited financial statements. Unless otherwise noted, there have been no material changes to the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s annual report on Form 10-K.
Certain items in the prior period’s consolidated financial statements and notes have been reclassified to conform to the current presentation. These reclassifications had no effect on the reported results of operations.
2. Recently Adopted Accounting Standards
Recent accounting pronouncements issued have been evaluated and do not presently impact our financial statements and supplemental data.
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
8
3. Revenue
The Company derives its revenue from the sale of doré and concentrates. The following table presents the Company’s net sales for each period presented, disaggregated by source:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||||
(in thousands) | (in thousands) | |||||||||||||
Doré sales, net | ||||||||||||||
Gold | $ | | $ | 1,634 | $ | 5,245 | $ | 6,816 | ||||||
Silver | | 38 | 123 | 643 | ||||||||||
Less: Refining charges | ( | (21) | (35) | (112) | ||||||||||
Total doré sales, net | | 1,651 | 5,333 | 7,347 | ||||||||||
Concentrate sales | ||||||||||||||
Gold | | 8,709 | 35,983 | 22,904 | ||||||||||
Silver | | 6,179 | 15,497 | 19,443 | ||||||||||
Copper | | 2,447 | 8,969 | 9,547 | ||||||||||
Lead | | 3,641 | 9,670 | 8,641 | ||||||||||
Zinc | | 9,187 | 40,672 | 27,193 | ||||||||||
Less: Treatment and refining charges | ( | (2,307) | (8,710) | (8,098) | ||||||||||
Total concentrate sales, net | | 27,856 | 102,081 | 79,630 | ||||||||||
Realized (loss) gain - embedded derivative, net (1) | ( | (246) | 814 | 204 | ||||||||||
Unrealized gain (loss) - embedded derivative, net | | (232) | (1,878) | (48) | ||||||||||
Total sales, net | $ | | $ | 29,029 | $ | 106,350 | $ | 87,133 | ||||||
| (1) | Copper, lead, and zinc are co-products. In the Realized gain - embedded derivative, net, there are $ |
4. Inventories, net
At September 30, 2022 and December 31, 2021, inventories, net, consisted of the following:
| As of |
| As of | |||
September 30, | December 31, | |||||
2022 | 2021 | |||||
(in thousands) | ||||||
Stockpiles - underground mine | $ | | $ | - | ||
Concentrates | | | ||||
Doré, net | | | ||||
Subtotal - product inventories | | | ||||
Materials and supplies (1) | | | ||||
Total | $ | | $ | | ||
| (1) | Net of reserve for obsolescence of $ |
5. Income Taxes
The Company recorded an income tax benefit of $
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
9
accounting rules, the interim provision for taxes is calculated using the estimated consolidated annual effective tax rate. The consolidated effective tax rate is a function of the combined effective tax rates for the jurisdictions in which the Company operates. Variations in the relative proportions of jurisdictional income could result in fluctuations to the Company’s consolidated effective tax rate. At the federal level, the Company’s income in the U.S. is taxed at
Mexico Mining Taxation
Mining entities in Mexico are subject to two mining duties in addition to the
On January 1, 2022, the 2022 Tax Reform became effective in Mexico, which included several amendments to the Income Tax Law relevant to tax deductions. For 2022, a depreciation rate of 5% per year was established for construction of facilities, additions, repairs, improvements, adaptations, as well as any other construction performed in a mining lot, in accordance with Article 12 of the Mexican Mining Law.
The Company periodically transfers funds from its Mexican wholly-owned subsidiary to the U.S. in the form of dividends, which are subject to a
As of September 30, 2022, the Company believes that it has
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
10
6. Promissory Note
A promissory note was acquired in the Aquila Resources, Inc. (“Aquila”) acquisition. In October 2021, Aquila sold its Wisconsin assets to Green Light Metals in return for a C$
7. Prepaid Expenses and Other Current Assets
At September 30, 2022 and December 31, 2021, prepaid expenses and other current assets consisted of the following:
| As of |
| As of | |||
September 30, | December 31, | |||||
2022 | 2021 | |||||
(in thousands) | ||||||
Advances to suppliers | $ | | $ | | ||
Prepaid insurance | | | ||||
Other current assets | | | ||||
Total | $ | | $ | | ||
In Mexico value added (“IVA”) tax is assessed on the sales of products and purchases of materials and services. Businesses owe IVA taxes as the business sells a product and collects IVA taxes from its customers. Likewise, businesses are generally entitled to recover the taxes they have paid related to purchases of materials and services, either as a refund or credit to IVA tax payable. Amounts recorded as IVA taxes in the consolidated financial statements represent the net estimated IVA tax payable or receivable, since there is a legal right of offset of IVA taxes. As of September 30, 2022, this resulted in a small asset balance ($
8. Property, Plant and Mine Development, net
At September 30, 2022 and December 31, 2021, property, plant and mine development, net consisted of the following:
| As of |
| As of | |||
September 30, | December 31, | |||||
2022 | 2021 | |||||
(in thousands) | ||||||
Asset retirement costs | $ | | $ | | ||
Construction-in-progress (1) | | | ||||
Furniture and office equipment | | | ||||
Land | | | ||||
Mineral interest | | | ||||
Light vehicles and other mobile equipment | | | ||||
Machinery and equipment | | | ||||
Mill facilities and infrastructure | | | ||||
Mine Development | | | ||||
Software and licenses | | | ||||
Subtotal | | | ||||
Accumulated depreciation and amortization | ( | ( | ||||
Total | $ | | $ | | ||
| (1) |
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
11
The Company recorded depreciation and amortization expense of $
9. Accrued Expenses and Other Liabilities
At September 30, 2022 and December 31, 2021, accrued expenses and other liabilities consisted of the following:
| As of |
| As of | |||
September 30, | December 31, | |||||
2022 | 2021 | |||||
(in thousands) | ||||||
Accrued royalty payments | $ | | $ | | ||
Employee profit sharing obligation | | | ||||
Other payables | | | ||||
Total accrued expenses and other current liabilities | $ | | $ | | ||
Accrued non-current labor obligation | $ | | $ | | ||
Share-based compensation liability | | | ||||
Other long-term liabilities | | | ||||
Total other non-current liabilities | $ | | $ | | ||
10. Gold and Silver Stream Agreements
The following table presents the Company’s liabilities related to the Gold and Silver Stream Agreements as of September 30, 2022 and December 31, 2021:
| As of |
| As of | |||
September 30, | December 31, | |||||
2022 | 2021 | |||||
(in thousands) | ||||||
Liability related to the Gold Stream Agreement | $ | | $ | | ||
Liability related to the Silver Stream Agreement | | | ||||
Total liability | $ | | $ | | ||
Periodic interest expense will be incurred based on an implied interest rate. The implied interest rate is determined based on the timing and probability of future production and an
Gold Streaming Agreement
In November 2017, Aquila entered into a stream agreement with Osisko Bermuda Limited (“OBL”), a wholly-owned subsidiary of Osisko Gold Royalties Ltd (TSX & NYSE: OR), pursuant to which OBL agreed to commit approximately $
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
12
The $
Per the terms of the gold stream agreement, OBL will purchase
Silver Stream Agreement
Through a series of contracts, Aquila executed a silver stream agreement with OBL to purchase silver produced at the Back Forty Project. A total of $
Per the terms of the silver stream agreement, OBL will purchase
The $
11. Reclamation and Remediation
The following table presents the changes in reclamation and remediation obligations for the nine months ended September 30, 2022 and the year ended December 31, 2021:
| 2022 |
| 2021 | |||
(in thousands) | ||||||
Reclamation liabilities – balance at beginning of period | $ | | $ | | ||
Foreign currency exchange loss (gain) | | ( | ||||
Reclamation liabilities – balance at end of period | | | ||||
Asset retirement obligation – balance at beginning of period | | | ||||
Accretion | | | ||||
Foreign currency exchange loss (gain) | | ( | ||||
Asset retirement obligation – balance at end of period | | | ||||
Total period end balance | $ | | $ | | ||
The Company’s undiscounted reclamation liabilities of $
The Company’s asset retirement obligations reflect the additions to the asset for reclamation and remediation costs in Property, Plant & Mine Development, post 2013 development stage status, which are discounted using a credit adjusted
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
13
risk-free rate of
12. Commitments and Contingencies
Commitments
As of September 30, 2022 and December 31, 2021, the Company has equipment purchase commitments of approximately $
Contingent Consideration
With the Aquila acquisition, the Company assumed a contingent consideration related to the December 30, 2013, Aquila acquisition of
The contingent consideration is composed of the following in Canadian dollars:
The value of future installments is based on C$
| a. | C$ |
| b. | C$ |
| c. | C$ |
| d. | C$ |
The value of the contingent consideration as of September 30, 2022 was $
Other Contingencies
The Company has certain other contingencies resulting from litigation, claims, and other commitments that are subject to a variety of environmental and safety laws and regulations incidents related to the ordinary course of business. The Company currently has no basis to conclude that any or all such contingencies will materially affect its financial position, results of operations, or cash flows. However, in the future, there may be changes to these contingencies, or additional contingencies may occur, any of which might result in an accrual or a change in current accruals recorded by the Company, and there can be no assurance that their ultimate disposition will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
With the successful acquisition of Aquila Resources Inc. on December 10, 2021, the Company assumed substantial liabilities that relate to the gold and silver stream agreements with Osisko Bermuda Limited (see Note 10 - Gold and Silver Stream Agreements). Under the agreements, Osisko deposited a total of $
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
14
at a rate agreed with Osisko. If it fails to do so, Osisko may be entitled to enforce their remedies as a secured party and take possession of the assets that comprise the Back Forty Project.
13. Shareholders’ Equity
During the three and nine months ended September 30, 2022, the Company declared and paid dividends of $
14. Derivatives
Embedded Derivatives
Concentrate sales contracts contain embedded derivatives due to the provisional pricing terms for unsettled shipments. At the end of each reporting period, the Company records an adjustment to accounts receivable and revenue to reflect the mark-to-market adjustments for outstanding provisional invoices based on forward metal prices. Please see Note—20 Fair Value Measurement for additional information on the realized and unrealized gain (loss) recorded to adjust accounts receivable and revenue.
The following table summarizes the Company’s unsettled sales contracts at September 30, 2022 with the quantities of metals under contract subject to final pricing occurring through November 2022:
Gold | Silver | Copper | Lead | Zinc | Total | |||||||||||||
| (ounces) |
| (ounces) |
| (tonnes) |
| (tonnes) |
| (tonnes) | |||||||||
Under contract | | |||||||||||||||||
Average forward price (per ounce or tonne) | $ | | $ | $ | $ | $ | ||||||||||||
Unsettled sales contracts value (in thousands) | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Other Derivatives
Derivative instruments that are not designated as hedging instruments are required to be recorded on the balance sheet at fair value. Changes in fair value will impact the Company’s earnings through mark-to-market adjustments until the physical commodity is delivered or the financial instrument is settled. The fair value does not reflect the realized or cash value of the instrument.
As of September 30, 2022, the Company’s derivatives not designated as hedges consist of zinc zero cost collars used to manage its near-term exposure to cash flow variability from zinc price risks. A zero cost collar is a combination of two options: a sold call option and a purchased put option. The Company sold call options to establish the ceiling price of $
Derivatives are carried at fair value and on a net basis when a legal right of offset exists with the same counterparty. Otherwise, any fair value gains or losses are recognized in earnings in the current period. The London Metal Exchange (“LME”) average zinc price of $
The Company manages credit risk by selecting counterparties believed to be financially strong, by entering into netting arrangements with counterparties and by requiring other credit risk mitigants, as appropriate. The Company actively
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
15
evaluates the creditworthiness of its counterparties, assigns appropriate credit limits, and monitors credit exposures against those assigned limits.
15. Employee Benefits
Effective October 2012, the Company adopted a profit sharing plan (the “Plan”) which covers all U.S. employees. The Plan meets the requirements of a qualified retirement plan pursuant to the provisions of Section 401(k) of the Internal Revenue Code. The Plan also provides eligible employees the opportunity to make tax deferred contributions to a retirement trust account up to
Under Mexican law, employees are entitled to receive statutory profit sharing (Participacion a los Trabajadores de las Utilidades or “PTU”) payment. The required cash payment to employees in the aggregate is equal to
16. Stock-Based Compensation
The Company’s compensation program comprises three main elements: base salary, an annual short-term incentive plan (“STIP”) cash award, and long-term equity-based incentive compensation (“LTIP”) in the form of performance share units (“PSUs”), restricted stock units (“RSUs”), stock options, and deferred stock units (“DSUs”).
The Gold Resource Corporation 2016 Equity Incentive Plan (the “Incentive Plan”) allows for the issuance of up to
Effective January 1, 2021, the Company’s Board of Directors, on the recommendation of the Compensation Committee, implemented a program to issue DSUs. DSUs are qualifying instruments under the terms of the Company’s Incentive Plan and therefore do not require additional shareholder approval. The vesting and settlement terms of the DSUs are determined by the Compensation Committee at the time the DSUs are awarded.
DSUs of
RSUs of
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
16
Stock options of
PSUs of
Stock-based compensation expense for the periods presented is as follows:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(in thousands) | (in thousands) | |||||||||||
Stock options | $ | | $ | | $ | | $ | | ||||
Restricted stock units | | | | | ||||||||
Performance stock units | | - | | - | ||||||||
Deferred stock units | | ( | | | ||||||||
Total | $ | | $ | | $ | | $ | | ||||
The Company has a short-term incentive plan (“STIP”) for its management team that provides annual cash payable upon achievement of specified performance metrics. As of September 30, 2022, we accrued $
17. Zinc Zero Cost Collar
During the three and nine months ended September 30, 2022 and 2021, the realized and unrealized (gains) losses related to the Company’s Zinc Zero Cost Collar are the following:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(in thousands) | (in thousands) | |||||||||||
Realized (gain) loss on zinc zero cost collar | $ | ( | $ | | $ | | $ | | ||||
Unrealized (gain) loss on zinc zero cost collar | ( | | ( | | ||||||||
Total | $ | ( | $ | | $ | | $ | | ||||
On May 18, 2021, the Company entered into a Trading Agreement with Auramet International LLC that governs nonexchange traded, over-the-counter, spot, forward and option transactions on both a deliverable and non-deliverable basis involving various metals and currencies. Gains and losses due to changes in fair value are non-cash in nature until such time that they are realized through cash transactions. Please see Note 14—Derivatives for additional information. As of September 30, 2022, the zinc zero cost collar was in an asset position ($
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
17
18. Other Expense, net
Other expense, net, for the periods presented consisted of the following:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(in thousands) | (in thousands) | |||||||||||
Unrealized currency exchange loss (gain) (1) | $ | | $ | ( | $ | | $ | | ||||
Realized currency exchange (gain) loss | ( | | | ( | ||||||||
Realized and unrealized loss (gain) from gold and silver rounds, net | | | ( | | ||||||||
Employee benefit obligation (2) | - | - | - | | ||||||||
Interest on streaming liabilities | | - | | - | ||||||||
Other (income) expense | ( | ( | ( | ( | ||||||||
Total | $ | | $ | ( | $ | | $ | | ||||
| (1) | Gains and losses due to changes in fair value are non-cash in nature until such time that they are realized through cash transactions. For additional information regarding the Company’s fair value measurements and investments, please see Note 20—Fair Value Measurement. |
| (2) | In year-to-date 2022, Employee benefit obligation of $ |
19. Net Income per Common Share
Basic net income per common share is calculated based on the weighted average number of common shares outstanding for the period. Diluted earnings per common share are calculated based on the assumption that stock options and other dilutive securities outstanding, which have an exercise price less than the average market price of the Company’s common shares during the period, would have been exercised on the later of the beginning of the period or the date granted and that the funds obtained from the exercise were used to purchase common shares at the average market price during the period. All the Company’s RSUs and DSUs are considered to be dilutive in periods with net income.
The effect of the Company’s dilutive securities is calculated using the treasury stock method and only those instruments that result in a reduction in net income per common share are included in the calculation. Options to purchase
Basic and diluted net income per common share is calculated as follows:
For the three months ended | For the nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
Numerator: | ||||||||||||
Net income (in thousands) | $ | ( | $ | | $ | ( | $ | | ||||
Denominator: | ||||||||||||
Basic weighted average shares of common stock outstanding | | | | | ||||||||
Dilutive effect of share-based awards | - | | - | | ||||||||
Diluted weighted average common shares outstanding | | | | | ||||||||
Basic and diluted net (loss) income per common share | ( | | ( | | ||||||||
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
18
20. Fair Value Measurement
Fair value accounting establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
Level 2 | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and |
Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
As required by accounting guidance, assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth certain of the Company’s assets measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2022 and December 31, 2021:
| As of | As of |
| |||||
September 30, | December 31, | Input Hierarchy Level | ||||||
2022 |
| 2021 | ||||||
(in thousands) | ||||||||
Cash and cash equivalents | $ | | $ | | Level 1 | |||
Accounts receivable, net | $ | | $ | | Level 2 | |||
Investment in equity securities | $ | | $ | - | Level 1 | |||
Derivative asset - zinc zero cost collar | $ | | $ | - | Level 2 | |||
Derivative liability - zinc zero cost collar | $ | - | $ | ( | Level 2 | |||
Contingent consideration | $ | ( | $ | ( | Level 3 | |||
Gold and silver stream agreements | $ | ( | $ | ( | Level 3 | |||
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents: Cash and cash equivalents consist primarily of cash deposits and are valued at cost, which approximates fair value.
Accounts receivable, net: Accounts receivable, net includes amounts due to the Company for deliveries of concentrates and doré sold to customers, net of embedded derivatives mark-to-market value of $
Investment in equity securities: On September 22, 2022, Gold Resource Corporation invested C$
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
19
Derivative liability - zinc zero cost collar: Derivatives are carried at fair value and on a net basis as a legal right of offset exists with the same counterparty. The valuation is using the Black Scholes model as applied to zinc call options and considers interest rate forecast, market volatility, and the zinc forward price curve for each respective hedge period. Any fair value gains or losses are recognized in earnings in the current period. The fair value does not reflect the realized or cash value of the instrument. Mark-to-market adjustments are made until the physical commodity is delivered or the financial instrument is settled. At each reporting period Management evaluates the unrealized gain (loss) on the derivatives instruments based on average London Metal Exchange forward underlying price over a period from the trade date to the payment date.
For the zinc zero cost collar, when the prior month LME average zinc price is greater than the call price, positions settling in the period are recorded as a realized gain or loss, and unsettled positions are recorded as an unrealized gain or loss.
Contingent consideration: For September 30, 2022, a time value of money calculation was utilized to value the contingent consideration. Each milestone payment was assessed separately. Key risks including permitting, feasibility study, commercial production, and timing were each assigned a probability weighting based on the likelihood of occurrence, and a
Gold and silver stream agreements: The gold and silver stream liabilities are carried at fair value. The discounted cash flow model that was used to determine the fair value utilizes significant unobservable inputs, such as the probability and timing of permitting, feasibility study, and commercial production. Also, a periodic interest expense is recorded based on an implied interest rate. The implied interest rate is determined based on a
Gains and losses related to changes in the fair value of these financial instruments were included in the Company’s Condensed Consolidated Interim Statements of Operations as shown in the following table:
For the three months ended September 30, | For the nine months ended September 30, | Statements of Operations Classification | |||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||||
Note | (in thousands) | ||||||||||||||
Realized and unrealized derivative (loss) gain, net | 14 | $ | ( | $ | ( | $ | ( | $ | | Sales, net | |||||
Realized gain (loss) on zinc zero cost collar | 17 | $ | | $ | ( | $ | ( | $ | ( | Realized and unrealized loss on zinc zero cost collar | |||||
Unrealized gain (loss) on zinc zero cost collar | 17 | $ | | $ | ( | $ | | $ | ( | Realized and unrealized loss on zinc zero cost collar | |||||
Realized/Unrealized Derivatives
The following tables summarize the Company’s realized/unrealized derivatives for the periods presented (in thousands):
| Gold |
| Silver |
| Copper |
| Lead |
| Zinc |
| Total | |||||||
For the three months ended September 30, 2022 | ||||||||||||||||||
Realized loss | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
Unrealized (loss) gain | ( | ( | | | | | ||||||||||||
Total realized/unrealized derivatives, net | $ | ( | $ | ( | $ | ( | $ | | $ | ( | $ | ( | ||||||
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
20
| Gold |
| Silver |
| Copper |
| Lead |
| Zinc |
| Total | |||||||
For the three months ended September 30, 2021 | ||||||||||||||||||
Realized (loss) gain | $ | ( | $ | ( | $ | ( | $ | | $ | | $ | ( | ||||||
Unrealized gain (loss) | | ( | ( | ( | ( | ( | ||||||||||||
Total realized/unrealized derivatives, net | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Gold |
| Silver |
| Copper |
| Lead |
| Zinc |
| Total | |||||||
For the nine months ended September 30, 2022 | ||||||||||||||||||
Realized (loss) gain | $ | ( | $ | | $ | ( | $ | ( | $ | | $ | | ||||||
Unrealized (loss) gain | ( | | | ( | ( | ( | ||||||||||||
Total realized/unrealized derivatives, net | $ | ( | $ | | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Gold |
| Silver |
| Copper |
| Lead |
| Zinc |
| Total | |||||||
For the nine months ended September 30, 2021 | ||||||||||||||||||
Realized (loss) gain | $ | ( | $ | ( | $ | | $ | | $ | | $ | | ||||||
Unrealized gain (loss) | | | ( | ( | ( | ( | ||||||||||||
Total realized/unrealized derivatives, net | $ | ( | $ | ( | $ | | $ | | $ | | $ | | ||||||
21. Supplementary Cash Flow Information
Other operating adjustments and write-downs within the net cash provided by operations on the Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2022 and 2021 consisted of the following:
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
(in thousands) | (in thousands) | |||||||||||
Unrealized loss (gain) on gold and silver rounds | $ | | $ | | $ | ( | $ | | ||||
Unrealized foreign currency exchange loss (gain) | | ( | | | ||||||||
Unrealized (gain) loss on zinc zero cost collar | ( | | ( | | ||||||||
Other | | ( | ( | ( | ||||||||
Total other operating adjustments | $ | | $ | | $ | ( | $ | | ||||
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
21
22. Segment Reporting
As of September 30, 2022, the Company has organized its operations into
The following table shows selected information from the Consolidated Balance Sheets relating to the Company’s segments (in thousands):
| Oaxaca, |
| Michigan, |
| Corporate |
| Consolidated | |||||
As of September 30, 2022 | ||||||||||||
Total current assets | $ | | $ | | $ | | $ | | ||||
Total non-current assets | | | | | ||||||||
Total assets | $ | | $ | | $ | | $ | | ||||
Total current liabilities | | | | | ||||||||
Total non-current liabilities | | | | | ||||||||
Total shareholders' equity | | | | | ||||||||
Total liabilities and shareholders' equity | $ | | $ | | $ | | $ | | ||||
As of December 31, 2021 | ||||||||||||
Total current assets | $ | | $ | | $ | | $ | | ||||
Total non-current assets | | | | | ||||||||
Total assets | $ | | $ | | $ | | $ | | ||||
Total current liabilities | | | | | ||||||||
Total non-current liabilities | | | | | ||||||||
Total shareholders' equity | | | | | ||||||||
Total liabilities and shareholders' equity | $ | | $ | | $ | | $ | | ||||
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
22
The following table shows selected information from the Consolidated Statements of Operations relating to the Company’s segments (in thousands):
| Oaxaca, |
| Michigan, |
| Corporate |
| Consolidated | |||||
For the three months ended September 30, 2022 | ||||||||||||
Sales, net | $ | | $ | - | $ | - | $ | | ||||
Total mine cost of sales, including depreciation | | | | | ||||||||
Exploration expense | | | - | | ||||||||
Total other costs and expenses, including G&A | ( | | | | ||||||||
Provision for income taxes | ( | - | | ( | ||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
For the three months ended September 30, 2021 | ||||||||||||
Sales, net | $ | | $ | - | $ | - | $ | | ||||
Total mine cost of sales, including depreciation | | - | - | | ||||||||
Exploration expense | | - | | | ||||||||
Total other costs and expenses, including G&A | | - | | | ||||||||
Provision for income taxes | | - | | | ||||||||
Net income (loss) | $ | | $ | - | $ | ( | $ | | ||||
| (1) | Michigan, USA was acquired on December 10, 2021, and therefore, there is no information for the three months ended September 30, 2021. |
| Oaxaca, Mexico |
| Michigan, USA (1) |
| Corporate and Other |
| Consolidated | ||||||||||
For the nine months ended September 30, 2022 | |||||||||||||||||
Sales, net | $ | | $ | - | $ | - | $ | 106,350 | |||||||||
Total mine cost of sales, including depreciation | | 54 | 27 | 81,186 | |||||||||||||
Exploration expense | | 6,925 | - | 10,115 | |||||||||||||
Total other costs and expenses, including G&A | | 787 | 7,366 | 9,172 | |||||||||||||
Provision for income taxes | | - | 1,281 | 8,915 | |||||||||||||
Net income (loss) | $ | | $ | (7,766) | $ | (8,674) | $ | (3,038) | |||||||||
For the nine months ended September 30, 2021 | |||||||||||||||||
Sales, net | $ | | $ | - | $ | - | $ | 87,133 | |||||||||
Total mine cost of sales, including depreciation | | - | - | 63,433 | |||||||||||||
Exploration expense | | - | 18 | 3,660 | |||||||||||||
Total other costs and expenses, including G&A | | - | 7,349 | 8,004 | |||||||||||||
Provision for income taxes | | - | 263 | 6,697 | |||||||||||||
Net income (loss) | $ | | $ | - | $ | (7,630) | $ | 5,339 | |||||||||
| (1) | Michigan, USA was acquired on December 10, 2021, and therefore, there is no information for the nine months ended September 30, 2021. |
Gold Resource Corporation—Condensed Consolidated Interim Financial Statements and Notes—Unaudited
23
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion summarizes the results of operations of Gold Resource Corporation and its subsidiaries (“we”, “our”, or “us”) for the three and nine months ended September 30, 2022 and compares those results with the three and nine months ended September 30, 2021. It also analyzes the Company’s financial condition as of September 30, 2022 and compares it to the financial condition as of December 31, 2021. This discussion should be read in conjunction with management’s discussion and analysis and the audited consolidated financial statements and footnotes for the year ended December 31, 2021 contained in our annual report on Form 10-K.
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 and a reconciliation to GAAP financial measures, please see the discussion under “Non-GAAP Measures”.
See Forward-Looking Statements at the end of this Item 2 for important information regarding statements contained herein.
Overview
Gold Resource Corporation is a mining company that pursues gold and silver projects that are expected to achieve both low operating costs and high returns on capital. The Don David Gold Mine currently has six projects with the primary mineral production coming from the Arista underground mine. This mine supplies ore to our processing facilities to produce gold and silver doré and copper, lead, and zinc concentrates which also contain gold and silver.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
The Back Forty Project, when developed, is expected to produce gold and silver doré and copper and zinc concentrates bearing gold and silver. The feasibility study work progressed during the third quarter of 2022. Work related to metallurgy and the economic model is expected to continue into 2023. Permit applications will not be submitted with state agencies in Michigan until the completion of the feasibility study. The Company has formed an integrated project team to optimize the feasibility study, related mine plan, and to ensure a positive long-term impact on the environment and host communities.
Field safety inspection underground | Focusing on a zero-harm workplace for our employees, the environment, and our local communities has resulted in a deliberate but temporary slowdown of the Company’s underground development, exploration drilling, and production rate of tonnes processed by the mill. Safety audits and minor ground failures identified additional training, and a renewed focus on safety was required related to ground support and ventilation. Additionally, the safety audits identified that the ground water conditions were starting to corrode some of the ground support, so an effort was initiated to replace the bolts to further improve the safety of the mine. This deliberate and disciplined approach to safety has also helped to identify opportunities to deploy new ground support and mining methods. The slowdown of mine development and exploration is expected to initially impact the timing of the Mineral Resources and Mineral Reserves update which is now expected in the first half of 2023. The team at Gold Resource Corporation holds itself accountable to the highest environmental, social, and governance standards. Our commitment to acting responsibly and delivering excellence in sustainability allows us to deliver benefits to all our stakeholders, including our employees and local communities. |
COVID-19 Pandemic
The Company continues to protect the health and safety of our employees, contractors, and communities by taking precautionary measures, including specialized training, social distancing, and close monitoring of national and regional COVID-19 impacts and governmental guidelines. Since our non-mining workforce is able to work remotely with the benefit of technology, we are able to maintain our operations and internal controls over financial reporting and disclosures.
As of the date of the issuance of these unaudited Condensed Consolidated Interim Financial Statements, there have been no other significant impacts, including impairments, to the Company’s operations and financial statements. However, the long-term impact of the COVID-19 outbreak on the Company’s results of operations, financial position, and cash flows will depend on future developments, including the duration and spread of the outbreak and related advisories and restrictions. These developments and the impact of COVID-19 on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s results of operations, financial position, and cash flows may be materially adversely affected. The Company is not able to estimate the duration of the pandemic and potential impact on its business if disruptions or delays in business developments and shipments of product occur. In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including a decreased ability to raise additional capital when and if needed on acceptable terms, if at all. As the situation continues to evolve, the Company will continue to monitor market conditions closely and respond accordingly. The Company has completed various scenario planning analyses to consider potential impacts of COVID-19 on its business, including volatility in commodity prices, temporary disruptions and/or curtailments of operating activities
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
(voluntary or involuntary). The Company believes that current working capital balances will be sufficient for the foreseeable future, although there is no assurance that will be the case.
Results of Operations
Don David Gold Mine
Mine activities during the first three quarters of 2022 included development and ore extraction from the Arista mine. The below map is the site layout of the Arista mine and plant site.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
The following table summarizes certain production statistics about our Don David Gold Mine for the periods indicated:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Arista Mine | ||||||||||||
Milled | ||||||||||||
Tonnes Milled | 110,682 | 97,806 | 375,367 | 351,572 | ||||||||
Grade | ||||||||||||
Average Gold Grade (g/t) | 1.98 | 2.68 | 2.57 | 2.04 | ||||||||
Average Silver Grade (g/t) | 80 | 91 | 75 | 82 | ||||||||
Average Copper Grade (%) | 0.37 | 0.37 | 0.37 | 0.39 | ||||||||
Average Lead Grade (%) | 1.59 | 2.29 | 1.86 | 1.84 | ||||||||
Average Zinc Grade (%) | 4.21 | 4.79 | 4.38 | 4.20 | ||||||||
Recoveries | ||||||||||||
Average Gold Recovery (%) | 82.9 | 82.0 | 84.3 | 81.2 | ||||||||
Average Silver Recovery (%) | 91.3 | 93.0 | 92.7 | 92.4 | ||||||||
Average Copper Recovery (%) | 72.8 | 68.4 | 75.0 | 74.7 | ||||||||
Average Lead Recovery (%) | 71.0 | 71.4 | 76.3 | 75.4 | ||||||||
Average Zinc Recovery (%) | 83.7 | 73.9 | 83.5 | 76.1 | ||||||||
Combined | ||||||||||||
Tonnes Milled (1) | 110,682 | 98,010 | 376,625 | 366,580 | ||||||||
Tonnes Milled per Day (2) | 1,361 | 1,353 | 1,492 | 1,495 | ||||||||
Metal production (3) | ||||||||||||
Gold (ozs.) | 5,851 | 6,933 | 26,355 | 19,585 | ||||||||
Silver (ozs.) | 261,256 | 265,829 | 842,636 | 869,418 | ||||||||
Copper (tonnes) | 296 | 284 | 1,030 | 1,093 | ||||||||
Lead (tonnes) | 1,249 | 1,808 | 5,342 | 5,199 | ||||||||
Zinc (tonnes) | 3,901 | 3,920 | 13,745 | 11,980 | ||||||||
Metal produced and sold (3) | ||||||||||||
Gold (ozs.) | 5,478 | 5,809 | 22,605 | 16,525 | ||||||||
Silver (ozs.) | 225,012 | 255,394 | 722,041 | 778,776 | ||||||||
Copper (tonnes) | 282 | 268 | 976 | 1,015 | ||||||||
Lead (tonnes) | 1,056 | 1,550 | 4,450 | 3,940 | ||||||||
Zinc (tonnes) | 2,943 | 3,059 | 10,892 | 9,386 | ||||||||
Percentage payable metal (3) | ||||||||||||
Gold (%) | 94 | 84 | 86 | 84 | ||||||||
Silver (%) | 86 | 96 | 86 | 90 | ||||||||
Copper (%) | 95 | 94 | 95 | 93 | ||||||||
Lead (%) | 85 | 86 | 83 | 76 | ||||||||
Zinc (%) | 75 | 78 | 79 | 78 | ||||||||
| (1) | Combined tonnes milled in the first, second, and third quarter of 2021 included 11,577 tonnes, 3,227 tonnes, and 204 tonnes from the Open Pit Mine, respectively. The Open Pit Mine is no longer in production. Additionally, Q1 and Q2 2022 combined tonnes milled includes 1,043 and 215 purchased tonnes, respectively, related to an environmental initiative with a local community. There were no purchased tonnes processed in the third quarter of 2022. |
| (2) | Based on actual days the mill operated during the period. |
| (3) | The difference between what we report as “Metal production” and “Metal produced and sold” is attributable to the difference between the quantities of metals contained in the concentrates we produce versus the portion of those metals for which we are paid, net of metal deductions, according to the terms of our sales contracts. The terms of our smelting and trading sales contracts reflect customary commercial terms in the mining industry, with withheld metals ranging from less than 1% up to 30% depending on the product sold (doré, copper concentrate, lead concentrate, or zinc concentrate) and the volume of metals contained within that product. The “Percentage payable metals” is the ratio of Metals production divided by metal produced and sold. Differences can also arise from inventory changes related to shipping schedules, or variances in ore grades and recoveries, which impact the amount of metals contained in concentrates produced and sold. |
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Third quarter 2022 compared to third quarter 2021
For the three months ended September 30, 2022, the Don David Gold Mine production totaled 5,851 gold ounces and 261,256 silver ounces, representing a 16% decrease in gold production and a 2% decrease in silver production, from the same period in 2021. The change is a direct result of the lower gold and silver grades processed.
Production Volumes
During the three months ended September 30, 2022, total tonnes milled of 110,682 were 13% higher than in the three months ended September 30, 2021. Metal production for gold, silver, lead, and zinc decreased during the three months ended September 30, 2022 as compared to the same period last year. While metal production generally increased year over year, production in the three months ended September 30, 2022, was lower than metal production in the same period in 2021 due to the Company’s deliberate but temporary slowdown of production to improve safety specific to ground support and ventilation, as well as a more prolonged rainy season in 2022 compared to the same period in 2021.
The paste fill plant continues to provide substantial efficiencies since it commenced operations in 2019 by returning processing waste to underground workings. The paste fill is an effective method of reducing surface tailings and provides structural ground support that allows for more complete mining of mineral reserves. Additionally, the tailings filtration plant and dry stack facility completed in 2021 conserve and recirculate water, eliminate risks related to traditional tailings facilities, accelerate reclamation of certain areas of the open pit mine, and extend the life of the operations. Currently 60% of the tails are sent to the dry stack facility, and the remaining 40% are sent to the underground operations in the form of paste fill for ground support. While the original tailings storage facility is available should the need arises, at this time, there is no plan to deposit tailings in this facility.
Grades & Recoveries
During the three months ended September 30, 2022, the majority of ore processed came from the Arista underground mine with an average gold grade of 1.98 g/t and silver grade of 80 g/t, compared to 2.68 g/t and 91 g/t, respectively, for the same period in 2021. The average gold grade was 26% lower and silver grade 12% lower.
Our base metals average grades during the three months ended September 30, 2022 were 0.37% copper, 1.59% lead, and 4.21% zinc. Copper grades were similar as in the same period in 2021. Lead and zinc grades were 31% and 12% lower, respectively, than in the same period in 2021.
Gold and silver recoveries for the three months ended September 30, 2022 were 82.9% and 91.3%, respectively, reflecting a 1.1% increase for gold and a 1.8% decrease for silver over the same period in 2021. Copper and zinc recoveries for the three months ended September 30, 2022 increased 6.4% and 13.2%, respectively, compared to the same period in 2021. Lead recoveries for the three months ended September 30, 2022 were 71.0%, reflecting a 0.6% decrease over the same period in 2021. Gold recoveries year-to-date have reached design objectives after the installation of the regrind circuit; however, during the third quarter, recoveries for all metals, with the exception of zinc, decreased as a result of a change in the mineralization of the ore processed. The mineralization is being evaluated to identify improvement opportunities that will benefit future recovery rates.
Year-to-date 2022 compared to year-to-date 2021
For the nine months ended September 30, 2022, the Don David Gold Mine production totaled 26,355 gold ounces and 842,636 silver ounces, representing a 35% increase in gold production and a 3% decrease silver production, from the same period in 2021. The change directly results from higher gold grades and lower silver grades.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Production Volumes
During the nine months ended September 30, 2022, total tonnes milled of 376,625 were in line with the same period in 2021. Metal production for gold, lead, and zinc increased during the nine months ended September 30, 2022 as compared to the same period last year, primarily due to increases in grades and recoveries.
Grades & Recoveries
During the nine months ended September 30, 2022, the majority of ore processed came from the Arista underground mine with an average gold grade of 2.57 g/t and silver grade of 75 g/t, compared to 2.04 g/t and 82 g/t, respectively, for the same period in 2021. The average gold grade was 26% higher and silver grade was 8% lower than in the same period in 2021, consistent with the current year mine plan.
Our base metals average grades during the nine months ended September 30, 2022 were 0.37% copper, 1.86% lead, and 4.38% zinc. Lead and zinc grades were 1% and 4% higher, while copper was 6% lower than the same period in 2021, consistent with the current year mine plan. Metal grades are contingent on the location of the ore mined within the deposit and will trend to the average grades reported in the Mineral Reserves and Mineral Resource tables contained in our annual report on Form 10-K for the year ended December 31, 2021.
Gold and silver recoveries for the nine months ended September 30, 2022 were 84.3% and 92.7%, respectively, reflecting a 3.8% and 0.3% increase over the same period in 2021. Gold recoveries have reached design objectives after the installation of the regrind circuit. Copper, lead, and zinc recoveries for the nine months ended September 30, 2022 increased by 0.3%, 1.3%, and 9.8%, respectively, compared to the same period in 2021.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Sales Statistics
The following table summarizes certain sales statistics about the Don David Gold Mine operations for the periods indicated:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net sales | ||||||||||||
Gold | $ | 9,109 | $ | 10,343 | $ | 41,228 | $ | 29,720 | ||||
Silver | 4,312 | 6,217 | 15,620 | 20,086 | ||||||||
Copper | 2,164 | 2,447 | 8,969 | 9,547 | ||||||||
Lead | 2,075 | 3,641 | 9,670 | 8,641 | ||||||||
Zinc | 10,003 | 9,187 | 40,672 | 27,193 | ||||||||
Less: Treatment and refining charges | (2,860) | (2,328) | (8,745) | (8,210) | ||||||||
Realized and unrealized (loss) gain - embedded derivative, net | (934) | (478) | (1,064) | 156 | ||||||||
Total sales, net | $ | 23,869 | $ | 29,029 | $ | 106,350 | $ | 87,133 | ||||
Metal sold | ||||||||||||
Gold (ozs.) | 5,478 | 5,809 | 22,605 | 16,525 | ||||||||
Silver (ozs.) | 225,012 | 255,394 | 722,041 | 778,776 | ||||||||
Copper (tonnes) | 282 | 268 | 976 | 1,015 | ||||||||
Lead (tonnes) | 1,056 | 1,550 | 4,450 | 3,940 | ||||||||
Zinc (tonnes) | 2,943 | 3,059 | 10,892 | 9,386 | ||||||||
Average metal prices realized (1) | ||||||||||||
Gold ($ per oz.) | $ | 1,627 | $ | 1,762 | $ | 1,823 | $ | 1,790 | ||||
Silver ($ per oz.) | $ | 18.54 | $ | 23.19 | $ | 21.65 | $ | 25.63 | ||||
Copper ($ per tonne) | $ | 7,115 | $ | 9,092 | $ | 9,015 | $ | 9,466 | ||||
Lead ($ per tonne) | $ | 1,882 | $ | 2,397 | $ | 2,166 | $ | 2,231 | ||||
Zinc ($ per tonne) | $ | 3,186 | $ | 3,032 | $ | 3,828 | $ | 2,924 | ||||
Precious metal gold equivalent ounces sold | ||||||||||||
Gold Ounces | 5,478 | 5,809 | 22,605 | 16,525 | ||||||||
Gold Equivalent Ounces from Silver | 2,564 | 3,361 | 8,575 | 11,151 | ||||||||
Total AuEq oz | 8,042 | 9,170 | 31,180 | 27,676 | ||||||||
| (1) | Average metal prices realized vary from the market metal prices due to final settlement adjustments from our provisional invoices when they are settled. Our average metal prices realized will therefore differ from the average market metal prices in most cases. |
Third quarter 2022 compared to third quarter 2021
Metal Sold
During the three months ended September 30, 2022, gold sales of 5,478 ounces, silver sales of 225,012 ounces, lead sales of 1,056 tonnes, and zinc sales of 2,943 tonnes decreased by 6%, 12%, 32%, and 4%, respectively, as compared to the same period in 2021. Copper sales increased by 5% during the three months ended September 30, 2022 compared to the same period in 2021.
Average metal prices realized
During the three months ended September 30, 2022, the average metal prices were $1,627 per ounce for gold, $18.54 per ounce for silver, $7,115 per tonne for copper, $1,882 per tonne for lead, and $3,186 per tonne for zinc. Compared to the same period in 2021, the average metal price for zinc increased by 5%, while the average metal price for gold, silver, copper, and lead decreased by 8%, 20%, 22%, and 22%, respectively.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Year-to-date 2022 compared to year-to-date 2021
Metal Sold
During the nine months ended September 30, 2022, gold sales of 22,605 ounces, lead sales of 4,450 tonnes, and zinc sales of 10,892 tonnes increased by 37%, 13%, and 16%, respectively, as compared to the same period in 2021. Silver and copper sales decreased by 7% and 4%, respectively, during the nine months ended September 30, 2022 compared to the same period in 2021.
Average metal prices realized
During the nine months ended September 30, 2022, the average metal prices were $1,823 per ounce for gold, $21.65 per ounce for silver, $9,015 per tonne for copper, $2,166 per tonne for lead, and $3,828 per tonne for zinc. Compared to the same period in 2021, the average metal price for gold and zinc increased by 2% and 31%, respectively, while the average metal price for silver, copper, and lead decreased by 16%, 5%, and 3%, respectively.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
Financial Measures
The following table summarizes certain financial data of the Company for the periods indicated:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
2022 |
| 2021 | 2022 |
| 2021 | |||||||
(in thousands) | (in thousands) | |||||||||||
Doré and concentrate sales | $ | 27,663 | $ | 31,835 | $ | 116,159 | $ | 95,187 | ||||
Less: Treatment and refining charges | (2,860) | (2,328) | (8,745) | (8,210) | ||||||||
Realized/unrealized derivatives, net | (934) | (478) | (1,064) | 156 | ||||||||
Sales, net | 23,869 | 29,029 | 106,350 | 87,133 | ||||||||
Total cost of sales | 26,047 | 20,784 | 81,186 | 63,433 | ||||||||
Mine gross (loss) profit | (2,178) | 8,245 | 25,164 | 23,700 | ||||||||
Other costs and expenses, including tax: | 7,552 | 6,716 | 28,202 | 18,361 | ||||||||
Net (loss) income | $ | (9,730) | $ | 1,529 | $ | (3,038) | $ | 5,339 | ||||
Other Non-GAAP Financial Measures: | ||||||||||||
Total cash cost after co-product credits per AuEq oz sold (1) | $ | 1,103 | $ | 448 | $ | 314 | $ | 519 | ||||
Total consolidated all-in sustaining cost after co-product credits per AuEq oz sold (1) | $ | 1,831 | $ | 1,753 | $ | 938 | $ | 1,318 | ||||
Total all-in cost after co-product credits per AuEq oz sold (1) | $ | 2,449 | $ | 2,286 | $ | 1,323 | $ | 1,691 | ||||
| (1) | For a detailed description of each of the non-GAAP financial measures and a reconciliation to GAAP financial measures, please see the discussion below under “Non-GAAP Measures”. |
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Third quarter 2022 compared to third quarter 2021
Sales, net
DDGM net sales of $23.9 million for the three months ended September 30, 2022 decreased by $5.2 million, or 18%, when compared to 2021. The decrease in 2022 sales is the result of decreased sales volumes and lower realized metal prices outlined in the sales statistics table above. Additionally, treatment and refining charges during the three months ended September 30, 2022 increased by 23% as a result of an increase in the zinc treatment charge benchmark and spot price.
Total cost of sales
Total cost of sales increased to $26.0 million for the three months ended September 30, 2022 from $20.8 million for the same period in 2021. The $5.2 million increase was primarily related to a $3.1 million increase in depreciation expense and a $2.1 million increase in production costs. Depreciation expense was higher as a result of the addition of $16.9 million capital related to the dry stack and filtration plant and the gold regrind project that were placed in service in 2022, and the Mineral Reserve base being lower in the units of production calculation, resulting in higher depreciation cost per tonne of ore processed. Production costs of $19.4 million for the three months ended September 30, 2022 are 13% higher than the production costs of $17.2 million for the same period in 2021. The increase is directly related to a 13% increase in ore tonnes processed.
Mine gross (loss) profit
For the three months ended September 30, 2022, mine gross profit decreased by 126%, or $10.4 million, compared to the same period in 2021. The decrease was primarily due to a 18%, or $5.2 million decrease in net sales and a 25%, or $5.2 million increase in cost of sales as described above.
The relationship between sales and the cost of sales, and therefore mine gross profit, is not perfectly correlated to the tonnes of ore processed. While both sales and the cost of sales are impacted by the tonnes of ore processed, other factors –the grade of ore processed, metal commodity prices, and operating cost unit prices—tend to have a greater impact on the relationship to mine gross profit. For example, in the third quarter of 2022, the volume of ore processed increased 13% compared to the third quarter of 2021; however, sales decreased by 18% and total cost of sales increased by 25%. The decrease in sales is explained by the decrease in grade and metal prices during the third quarter of 2022, and the increase in operating costs is explained by the increase in depreciation in addition to the impact from higher variable costs due to the higher ore tonnes processed.
We expect grades to vary from period to period based on the annual mine plan. The gold and silver grades are expected to trend downwards over time toward the average grade of 1.51 g/t and 77 g/t, respectively (and exclusive of copper, lead, and zinc contained grades), reflected in our Mineral Reserve estimate. However, as capital intensive mine development progresses and infill drilling occurs, opportunities to refine mining methods and eliminate dilution may have a favorable impact on future mined grades.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Net (loss) income
For the three months ended September 30, 2022, we recorded net loss of $9.7 million, as compared to net income of $1.5 million during the same period in 2021. The 747% decrease in net income is attributable to the lower mine gross profit discussed above and higher other costs and expenses discussed below, including $3.8 million expenses related to the Back Forty Project.
Year-to-date 2022 compared to year-to-date 2021
Sales, net
DDGM net sales of $106.4 million for the nine months ended September 30, 2022 increased by $19.2 million, or 22%, when compared to the same period in 2021. The increase in 2022 sales is the result of increased sales volumes in gold, lead, and zinc, and higher realized metal prices for gold and zinc outlined in the Sales Statistics table above. Gold ounces sold for the nine months ended September 30, 2022 increased by 6,080 ounces, or 37% over the same period in 2021. Additionally, treatment and refining charges during the nine months ended September 30, 2022 increased by 7% as a result of an increase in the zinc treatment charge benchmark and spot price.
Total cost of sales
Total cost of sales increased to $81.2 million for the nine months ended September 30, 2022 from $63.4 million for the same period in 2021. The $17.8 million increase was primarily related to a $8.5 million increase in depreciation expense and a $9.2 million increase in production costs. Depreciation expense was higher as a result of the addition of $16.9 million capital related to the dry stack and filtration plant and the gold regrind project that were placed in service in 2022, and the Mineral Reserve base being lower in the units of production calculation, resulting in higher depreciation cost per tonne of ore processed. Production costs of $61.2 million for the nine months ended September 30, 2022 are 18% higher than the production costs of $52.0 million for the same period in 2021. The increase is primarily related to a $2.4 million increase in consumable goods driven by price increases, a $1.8 million increase in spare parts utilized for equipment maintenance, a $2.1 million impact related to an increase in headcount and employee wages, and a $1.6 million increase in transportation costs due to a 9% price increase in negotiated transportation cost.
Mine gross (loss) profit
For the nine months ended September 30, 2022, mine gross profit increased by 6%, or $1.5 million, compared to the same period in 2021. The increase was primarily due to a 22%, or $19.2 million increase in net sales offset by a 28%, or $17.8 million increase in cost of sales as described above.
The relationship between sales and the cost of sales, and therefore mine gross profit, is not perfectly correlated to the tonnes of ore processed. While both sales and the cost of sales are impacted by the tonnes of ore processed, other factors –the grade of ore processed, metal commodity prices and operating cost unit prices—tend to have a greater impact on the relationship to mine gross profit. For example, in 2022, the volume of ore processed increased 3% compared to 2021; however, sales increased by 22% and total cost of sales increased by 28%. The increase in sales is explained by the increase in gold and zinc grade and metal prices during 2022, and the increase in operating costs is explained by the increase in depreciation in addition to the impact from higher costs related to price increases and increased wages as discussed above.
We expect grades to vary from period to period based on the annual mine plan. The gold and silver grades are expected to trend downwards over time toward the average grade of 1.51 g/t and 77 g/t, respectively (and exclusive of copper, lead and zinc contained grades), reflected in our Mineral Reserve estimate. However, as capital intensive mine development progresses and infill drilling occurs, opportunities to refine mining methods and eliminate dilution may have a favorable impact on future mined grades.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
Net (loss) income
For the nine months ended September 30, 2022, we recorded net loss of $3.0 million, as compared to net income of $5.3 million during the same period in 2021. The 157% decrease in net income is attributable to the higher mine gross profit discussed above, offset by higher other costs and expenses discussed below, including $6.5 million or 177% higher exploration costs.
Other Costs and Expenses, Including Taxes
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||
2022 |
| 2021 | 2022 |
| 2021 |
| |||||||
(in thousands) | (in thousands) | ||||||||||||
Other costs and expenses: | |||||||||||||
General and administrative expenses | $ | 1,799 | $ | 2,355 | $ | 5,618 | $ | 6,070 | |||||
DDGM exploration expenses | 1,143 | 1,805 | 3,190 | 3,660 | |||||||||
Back Forty Project expenses | 3,830 | - | 6,925 | - | |||||||||
Restructuring expenses | - | - | - | 496 | |||||||||
Stock-based compensation | 450 | 30 | 1,617 | 711 | |||||||||
Realized and unrealized (gain) loss on zinc zero cost collar | (218) | 184 | 120 | 184 | |||||||||
Other expense, net | 765 | (10) | 1,817 | 543 | |||||||||
Total other costs and expenses | 7,769 | 4,364 | 19,287 | 11,664 | |||||||||
Provision for income taxes | (217) | 2,352 | 8,915 | 6,697 | |||||||||
Total other costs, including taxes | $ | 7,552 | $ | 6,716 | $ | 28,202 | $ | 18,361 | |||||
General and administrative expenses – For the three and nine months ended September 30, 2022, general and administrative expenses were $1.8 million and $5.6 million, respectively, representing a 24% and 7% decrease from the same period of 2021 primarily due to costs in 2021 related to employee and management changes.
DDGM Exploration expenses – For the three and nine months ended September 30, 2022, exploration expenses in DDGM totaled $1.1 million and $3.2 million, respectively, compared to $1.8 million and $3.7 million for the same period in 2021. Exploration activities in Oaxaca, Mexico decreased compared to the same period in 2021 due to the work being conducted to enhance community relationships.
Back Forty Project expenses – For the three and nine months ended September 30, 2022, feasibility study and permitting costs, totaled $3.8 million and $6.9 million, respectively. There were no expenses for the Back Forty Project for the same period in 2021 as the project was not acquired until December 2021. Until a Mineral Reserve and Mineral Resource is defined by Gold Resource Corporation, Back Forty expenditures will continue to be reported as advanced exploration expense.
Stock-based compensation – Stock-based compensation increased by $0.4 million and $0.9 million, respectively, for the three and nine months ended September 30, 2022 compared to the same period in 2021. This increase is mainly due to the equity awarded in March 2022 to Senior Management related to 2021 performance, equity awarded in June 2022 related to Senior Management’s 2022 compensation structure, and DSUs granted in March 2022 to the Board of Directors related to their 2022 compensation structure. Equity awards were not issued to Senior Management during 2021. Management continues to work with an independent compensation consultant to evaluate the stock-based compensation program.
Realized and unrealized loss on zinc zero cost collar – For the three and nine months ended September 30, 2022, respectively, a $0.2 million gain and a $0.1 million loss was recorded related to the zinc zero cost collar. The zinc forward price decreased from $3,666 per tonne as of December 31, 2021 to $2,978 per tonne as of September 30, 2022. This decrease resulted in the $1.8 million liability as of December 31, 2021 turning into a $0.4 million asset as of September 30, 2022. The year-to-date loss of $0.1 million is the result of the year-to-date realized loss of $2.4 million offset by the $2.3 million unrealized gain related to the zero cost collars that will mature October through December 2022.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
Other expense, net – For the three and nine months ended September 30, 2022, respectively, $0.8 million and $1.8 million of other expense was recorded compared to $0.0 million income and $0.5 million other expense during the same period of 2021. The $1.2 million increase in the year-to-date expense is primarily due to a $1.1 million increase in realized and unrealized foreign exchange loss and $0.6 million in interest expense related to the gold and silver stream liabilities assumed with the Aquila acquisition, offset by lower employee benefit obligations as the initial balance as a result of the Mexico Labor Reform was recorded as other expense in 2021 and going forward, they will be included in production costs. See Note 18 - Other expense, net for a detailed breakdown.
Provision for income taxes – For the three and nine months ended September 30, 2022, respectively, income tax benefit was $0.2 million and income tax expense was $8.9 million, a 109% decrease and a 33% increase from $2.4 million and $6.7 million expense for the same period in 2021. The decrease in income tax expense for the three months ended September 30, 2022 is driven by the 356% decrease in the three-month net income before income taxes. The increase in the income tax expense for the nine months ended September 30, 2022 is primarily due to a higher effective tax rate driven by the 2022 Tax Reform that decreased allowable deductions and a $0.8 million deferred tax liability recorded related to the 5% withholding tax on funds available for transfer to the U.S. as dividends in the future.
Other Non-GAAP Financial Measures
Total cash cost after co-product credits per AuEq oz sold – For the three months ended September 30, 2022, the total cash cost after co-product credits per AuEq oz sold is $1,103 compared to $448 for the three months ended September 30, 2021. During the third quarter of 2022, total cash cost per ounce is higher due to the lower amount of co-product credits we received related to the lower base metal prices realized, the 12% decrease in total number of gold equivalent ounces sold in the quarter, and higher production costs discussed above.
For the nine months ended September 30, 2022, the total cash cost after co-product credits per AuEq oz sold is $314 compared to $519 for the same period in 2021. Year-to-date 2022, total cash cost per ounce is lower due to the higher amount of co-product credits we received during the first half of the year and the 13% increase in total number of gold equivalent ounces sold. These favorable impacts to total cash cost after co-product credits were offset by higher production costs discussed above.
Total consolidated all-in sustaining cost after co-product credits per AuEq oz sold – For the three months ended September 30, 2022, the total consolidated all-in sustaining cost after co-product credits per AuEq oz sold was $1,831 compared to $1,753 for the same period in 2021. The increase is directly related to the higher cash costs per ounce discussed above offset by lower sustaining capital expenditures.
For the nine months ended September 30, 2022, the total consolidated all-in sustaining cost after co-product credits per AuEq oz sold was $938 compared to $1,318 for the same period in 2021. The decrease is directly related to the lower cash costs per ounce discussed above offset by higher sustaining capital expenditures and stock-based compensation.
Total all-in cost after co-product credits per AuEq oz sold – For the three months ended September 30, 2022, the total all-in cost after co-product credits per AuEq oz sold was $2,449 compared to $2,286 for the same period in 2021. The increase is due to the higher all-in sustaining costs discussed above and higher exploration expense related to advancing the Back Forty feasibility study work and permitting activities.
For the nine months ended September 30, 2022, the total all-in cost after co-product credits per AuEq oz sold was $1,323 compared to $1,691 for the same period in 2021. The decrease is due to the lower all-in sustaining costs discussed above offset by higher exploration expense related to advancing the Back Forty feasibility study work and permitting activities.
For a detailed description of each of the non-GAAP financial measures and a reconciliation to GAAP financial measures, please see the discussion below under “Non-GAAP Measures.”
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
36
2022 Capital and Exploration Investment Summary
For the nine months ended September 30, 2022 | 2022 full year projection | |||||
(in thousands) | ||||||
Sustaining Investments: | ||||||
Underground Development | Capital | $ | 5,251 | $ | 7.0 - 8.0 million | |
Infill Drilling and Exploration Development | Capital | 5,056 | 7.0 - 7.5 million | |||
Other Sustaining Capital | Capital | 1,922 | 2.0 - 2.5 million | |||
Subtotal of Sustaining Investments: | 12,229 | |||||
Growth Investments: | ||||||
DDGM growth: | ||||||
Gold Regrind | Capital | 745 | - | |||
Dry Stack Completion | Capital | 1,149 | - | |||
Surface Exploration / Other | Exploration | 1,641 | 2.0 - 2.5 million | |||
Underground Exploration Drilling | Exploration | 1,549 | 2.0 - 2.5 million | |||
Back Forty growth: | ||||||
Back Forty Feasibility Study & Permits | Exploration | 6,925 | 9.0-9.5 million | |||
Subtotal of Growth Investments: | 12,009 | |||||
Total Capital and Exploration: | $ | 24,238 | $ | 29.0 - 32.5 million | ||
The Company’s investment in Mexico continued in the third quarter of 2022 totaling $17.3 million year-to-date. Our investment in Mexico is focused on favorably impacting our environment, social and governance programs while creating operational efficiencies and longevity. At the Back Forty Project, $6.9 million has been invested in feasibility and permitting initiatives year-to-date.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
37
Underground and Exploration Development:
Mine development during the quarter included ramps and access to different areas of the deposit, ventilation shafts, and exploration development drifts. A total of 3,210 meters of development, at a cost of $7.5 million (864 meters at a cost of $2.2 million in the third quarter), was completed during the year through September 30, 2022. Through September 30, 2022, underground mine development was $5.3 million and exploration development was $2.2 million (included in Infill Drilling and Exploration Development in the table above). As part of ongoing safety initiatives, the Company also invested in additional ground support and improved ventilation for the mine, which deliberately but temporarily slowed underground and exploration development. We plan to invest a total of $7.0 million to $8.0 million in underground development and an additional $3.5 million to $4.0 million in exploration development in 2022.
Underground safety inspection and ventilation survey |
Back Forty Feasibility and Permitting:
Work on the optimized feasibility study progressed during the third quarter of 2022. Mine planning, process plant design and site layout and infrastructure were significantly completed during the quarter. Current initiatives are focused on finalizing the financial models with operating and capital costs, which may be subject to some volatility due to the inflationary market conditions. Environmental and cultural resource considerations have been a key factor in the overall project design. On August 5, 2022, the Company was invited by Michigan’s Department of Environment, Great Lakes and Energy to participate in a Scoping Environmental Impact Assessment Meeting to present the initial site plan and other key improvements being incorporated into the Back Forty Project’s optimized feasibility study. This was an opportunity to meet with tribal representatives to promote the Back Forty Project, which is focused on favorably impacting our environment, social and governance programs, while identifying economic and operational efficiencies. The feasibility study work for the Back Forty Project progressed during the third quarter of 2022. Work related to metallurgy and the economic model is expected to continue into 2023. Permit applications will not be submitted with state agencies in Michigan until the completion of the feasibility study.
2022 DDGM Exploration Updates
Our portfolio of properties that make up our Don David Gold Mine are located along a 55 kilometer trend of the San Jose structural corridor in the Sierra Madre Sur mountain range. This structural corridor trends north 70 degrees west and
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
38
spans three historic mining districts within Oaxaca. Surface exploration activity continues on several properties with a goal to define priority drill targets, demonstrating our commitment to a long-term investment in Oaxaca, Mexico.
Underground exploration drilling is ongoing, when access is available, from various locations within the Arista mine: 1) to continue testing of the Three Sisters Zone, as well as other new vein targets and 2) to further define and expand the Mineral Reserves and Mineral Resource of the current vein systems in production. The previously discussed temporary slowdown of mine development and exploration during the third quarter impacted the timing of the definition and expansion of Mineral Resources and Mineral Reserves. Work on exploration development headings will resume in the fourth quarter, which will enable further expansion and infill drilling to advance in 2023 on both the Arista and Switchback vein systems.
During the quarter, we completed 4 exploration drill holes (2,409 meters) and 48 infill drill holes (8,590 meters). Year-to-date, we have completed 16 exploration drill holes (8,003 meters) and 127 infill drill holes (18,641 meters).
| ● | Infill drilling continued to focus on the Arista vein system up- and down-dip of existing workings. Additional drilling in the Switchback system continued in the third quarter. Infill drilling continues to confirm zones of high-grade mineralization within the resource model as well as additional mineralized structures outside existing models, in the third quarter, for instance, in the Marena zone (Arista), and Sarabi and Susana N veins (Switchback). |
| ● | Exploration drilling continued to test expansion of the Switchback system to the southeast at depth and along strike and we have confirmed the continuation of the system. During Q4 we plan to continue exploration in the Three Sisters and northwestern part of the Switchback system. The Switchback system extends for over a kilometer along a NW-SE strike and remains open in both directions as well up- and down-dip. |
Susana N vein, from Switchback drilling 2022 |
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Surface exploration programs continued to be performed in the Alta Gracia mining district and focused on soil sampling in the Fundicion zone. Below is a map of the Alta Gracia Project.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
Non-GAAP Measures
Throughout this report, we have provided information prepared or calculated according to U.S. GAAP and have referenced certain non-GAAP performance measures which we believe will assist with understanding the performance of our business. These measures are based on precious metal gold equivalent ounces sold and include cash cost before co-product credits per ounce, total cash cost after co-product credits per ounce, and total all-in sustaining cost per ounce (“AISC”). Because the non-GAAP performance measures do not have any standardized meaning prescribed by U.S. GAAP, they may not be comparable to similar measures presented by other companies. Accordingly, these measures should not be considered in isolation, or as a substitute for, measures of performance prepared in accordance with U.S. GAAP. These non-GAAP measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP.
For financial reporting purposes, we report the sale of base metals as part of our revenue. Revenue generated from the sale of base metals in our concentrates is considered a co-product of our gold and silver production for the purpose of calculating our total cash cost after co-product credits for our Don David Gold Mine. We periodically review our revenues to ensure that our reporting of primary products and co-products is appropriate. Because we consider copper, lead, and zinc to be co-products of our precious metal production, the value of these metals continues to be applied as a reduction to total cash costs in our calculation of total cash cost after co-product credits per precious metal gold equivalent ounce sold. Likewise, we believe the identification of copper, lead, and zinc as co-product credits is appropriate due to their lower per unit economic value contribution compared to the precious metals and since gold and silver are the primary products we intend to produce.
Total cash cost, after co-product credits, is a measure developed by the Gold Institute to provide a uniform standard for industry comparison purposes. AISC is calculated based on the current guidance from the World Gold Council.
Total cash cost before co-product credits includes all direct and indirect production costs related to our production of metals (including mining, milling and other plant facility costs, smelter treatment and refining charges, royalties, and site general and administrative costs) less stock-based compensation allocated to production costs plus treatment and refining costs.
Total cash cost after co-product credits includes total cash cost before co-product credits less co-product credits, or revenues earned from base metals.
AISC includes total cash cost after co-product credits plus other costs related to sustaining production, including allocated sustaining general and administrative expenses, and sustaining capital expenditures. We determined sustaining capital expenditures as those capital expenditures that are necessary to maintain current production and execute the current mine plan.
Cash cost before co-product credits per ounce, total cash cost after co-product credits per ounce, and AISC are calculated by dividing the relevant costs, as determined using the cost elements noted above, by precious metal gold equivalent ounces sold for the periods presented.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
41
Reconciliations to U.S. GAAP
The following table summarizes the Company’s total all-in cost after co-product credits per precious metal gold equivalent ounce sold:
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||
2022 |
| 2021 | 2022 |
| 2021 | ||||||
(in thousands, except per oz) | |||||||||||
Precious metal gold equivalent ounces sold (oz) | 8,042 | 9,170 |
| 31,180 | 27,676 | ||||||
Total production (1) | $ | 19,380 | $ | 17,216 | $ | 61,176 | $ | 51,982 | |||
Treatment and refining charges (2) | 2,860 | 2,328 | 8,745 | 8,210 | |||||||
Co-product credits (2) | (13,369) | (15,434) | (60,128) | (45,841) | |||||||
Total cash cost after co-product credits | 8,871 | 4,110 | 9,793 | 14,351 | |||||||
Total cash cost after co-product credits per AuEq oz sold | $ | 1,103 | $ | 448 | $ | 314 | $ | 519 | |||
Sustaining - capitalized expenditure (3) | 3,605 | 4,356 | 12,229 | 8,568 | |||||||
Sustaining - Exploration Expenditure (3) | - | 5,224 | - | 6,781 | |||||||
Subtotal of DDGM sustaining costs | 3,605 | 9,580 | 12,229 | 15,349 | |||||||
DDGM all-in sustaining cost after co-product credits per AuEq oz sold | 1,551 | 1,493 | $ | 706 | $ | 1,073 | |||||
Sustaining - general and administrative, including stock-based compensation expenses | 2,249 | 2,385 | 7,235 | 6,781 | |||||||
Consolidated all-in sustaining cost after co-product credits | 14,725 | 16,075 | 29,257 | 36,481 | |||||||
Total consolidated all-in sustaining cost after co-product credits per AuEq oz sold | $ | 1,831 | $ | 1,753 | $ | 938 | $ | 1,318 | |||
Non-sustaining cost- capital expenditure (3) | - | 3,085 | 1,894 | 6,649 | |||||||
Non-sustaining cost- exploration expenditure (1) | 4,973 | 1,805 | 10,115 | 3,660 | |||||||
Subtotal of non-sustaining costs | 4,973 | 4,890 | 12,009 | 10,309 | |||||||
Total all-in cost after co-product credits | 19,698 | 20,965 | 41,266 | 46,790 | |||||||
Total all-in cost after co-product credits per AuEq oz sold | $ | 2,449 | $ | 2,286 | $ | 1,323 | $ | 1,691 | |||
| (1) | Refer to Item 1. Financial Statements: Condensed Consolidated Interim Statements of Operations |
| (2) | Refer to Item 1. Financial Statements: Note 3 - Revenue. The prior year (2021) Co-product credits were adjusted to include realized embedded derivatives. |
| (3) | Sum of, refer to Item 1. Financial Statements: Condensed Consolidated Interim Statements of Cash Flows |
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
42
Trending Highlights
2021 | 2022 | |||||||
Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | ||
Operating Data | ||||||||
Total tonnes milled | 138,980 | 129,590 | 98,010 | 135,398 | 136,844 | 129,099 | 110,682 | |
Average Grade | ||||||||
Gold (g/t) | 1.68 | 1.93 | 2.68 | 1.93 | 3.00 | 2.63 | 1.98 | |
Silver (g/t) | 72 | 77 | 91 | 82 | 81 | 64 | 80 | |
Copper (%) | 0.43 | 0.36 | 0.37 | 0.38 | 0.41 | 0.32 | 0.37 | |
Lead (%) | 1.70 | 1.63 | 2.29 | 2.17 | 1.97 | 1.99 | 1.59 | |
Zinc (%) | 4.29 | 3.64 | 4.79 | 4.77 | 4.89 | 4.00 | 4.21 | |
Metal production (before payable metal deductions) | ||||||||
Gold (ozs.) | 6,097 | 6,555 | 6,933 | 6,853 | 11,187 | 9,317 | 5,851 | |
Silver (ozs.) | 307,610 | 295,979 | 265,829 | 330,873 | 332,292 | 249,088 | 261,256 | |
Copper (tonnes) | 441 | 368 | 284 | 413 | 431 | 303 | 296 | |
Lead (tonnes) | 1,737 | 1,654 | 1,808 | 2,345 | 2,073 | 2,020 | 1,249 | |
Zinc (tonnes) | 4,377 | 3,683 | 3,920 | 5,349 | 5,562 | 4,282 | 3,901 | |
Metal produced and sold | ||||||||
Gold (ozs.) | 5,019 | 5,697 | 5,809 | 6,119 | 8,381 | 8,746 | 5,478 | |
Silver (ozs.) | 253,061 | 270,321 | 255,394 | 287,805 | 265,407 | 231,622 | 225,012 | |
Copper (tonnes) | 382 | 365 | 268 | 405 | 408 | 286 | 282 | |
Lead (tonnes) | 1,176 | 1,214 | 1,550 | 2,059 | 1,639 | 1,755 | 1,056 | |
Zinc (tonnes) | 3,134 | 3,193 | 3,059 | 4,167 | 4,359 | 3,590 | 2,943 | |
Average metal prices realized | ||||||||
Gold ($ per oz.) | $ 1,787 | $ 1,822 | $ 1,762 | $ 1,811 | $ 1,898 | $ 1,874 | $ 1,627 | |
Silver ($ per oz.) | $ 26.77 | $ 26.88 | $ 23.19 | $ 23.51 | $ 23.94 | $ 22.05 | $ 18.54 | |
Copper ($ per tonne) | $ 8,873 | $ 10,375 | $ 9,092 | $ 9,768 | $ 10,144 | $ 9,275 | $ 7,115 | |
Lead ($ per tonne) | $ 2,082 | $ 2,162 | $ 2,397 | $ 2,339 | $ 2,347 | $ 2,168 | $ 1,882 | |
Zinc ($ per tonne) | $ 2,797 | $ 2,945 | $ 3,032 | $ 3,466 | $ 3,842 | $ 4,338 | $ 3,186 | |
Precious metal gold equivalent ounces sold | ||||||||
Gold Ounces | 5,019 | 5,697 | 5,809 | 6,119 | 8,381 | 8,746 | 5,478 | |
Gold Equivalent Ounces from Silver | 3,791 | 3,999 | 3,356 | 3,736 | 3,348 | 2,729 | 2,564 | |
Total AuEq oz | 8,810 | 9,696 | 9,165 | 9,855 | 11,729 | 11,475 | 8,042 | |
Financial Data ($'s in thousands except for per ounce) | ||||||||
Total sales, net | $ 27,268 | $ 30,836 | $ 29,029 | $ 38,063 | $ 45,417 | $ 37,064 | $ 23,869 | |
Earnings from mining operations before depreciation and amortization | 11,974 | 11,259 | 11,766 | 17,744 | 25,281 | 15,281 | 4,431 | |
Total cash cost after co-product credits per AuEq oz sold | 408 | 713 | 466 | 73 | (121) | 247 | 1,103 | |
Total consolidated all-in sustaining cost after co-product credits per AuEq oz sold | 937 | 1,280 | 1,031 | 451 | 499 | 799 | 1,831 | |
Production Costs | 15,243 | 19,523 | 17,216 | 20,252 | 20,074 | 21,722 | 19,380 | |
Production Costs/Tonnes Milled | 110 | 151 | 176 | 150 | 147 | 168 | 175 | |
Earnings before interest, taxes, depreciation and amortization | 8,520 | 7,413 | 7,402 | 10,304 | 15,328 | 13,716 | (3,338) | |
Operating Cash Flows | 6,831 | 9,298 | 5,743 | 12,911 | 4,230 | 7,976 | (4,292) | |
Net income | 2,527 | 1,283 | 1,529 | 2,689 | 4,019 | 2,673 | (9,730) | |
Earnings per share - basic | $ 0.03 | $ 0.02 | $ 0.02 | $ 0.03 | $ 0.05 | $ 0.03 | ($ 0.11) | |
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
Liquidity and Capital Resources
As of September 30, 2022, the working capital of $28.9 million, consists of current assets of $48.3 million and current liabilities of $19.5 million. This represents a 1% or $0.4 million decrease from the working capital balance of $29.3 million as of December 31, 2021. The primary factors influencing the decrease in our working capital was a decrease in the liability related to the zinc zero cost collar, as well as the cash provided by operating activities of $7.9 million, offset by $15.3 million of cash used in investing activities as reported in the Condensed Consolidated Interim Statements of Cash Flows. Our working capital balance fluctuates as we use cash to fund our operations, financing and investing activities, including exploration, mine development, income taxes, and shareholder dividends. We believe that as a result of our cash balances, the performance of our current and expected operations, and the current metals prices, we will be able to meet our obligations and other potential cash requirements for at least the next 12 months from the date of this report.
Long-term liabilities assumed with the Aquila acquisition, capital requirements to develop the Back Forty Project, and potential project financing may have an impact on liquidity in the long term. These long-term liabilities are contingent upon the approval of the Back Forty Project by the Company’s Board of Directors and securing project financing. Project financing is not expected to be required any earlier than 2024.
Cash and cash equivalents as of September 30, 2022 decreased to $22.5 million from $33.7 million as of December 31, 2021, a net decrease in cash of $11.2 million. The decrease is primarily due to cash spent on capital and exploration expenditures at DDGM and at the Back Forty Project, equity investment in Maritime, and tax payments for the 2021 and 2022 tax years, offset by cash inflow from operations.
Of the $22.5 million cash balance as of September 30, 2022, $20.3 million was held in foreign subsidiaries, primarily held in U.S. dollar denominated accounts with the remainder in foreign currencies readily convertible to U.S. dollars. The Don David Gold Mine’s primary source of liquidity is the sale of doré and concentrates. The Don David Gold Mine has been self-sustaining since production commencement in 2010 and has provided excess cash for U.S. operations and projects.
Net cash provided by operating activities for the nine months ended September 30, 2022 was $7.9 million compared to $21.9 million for the same period in 2021. Investing activities are mainly attributable to continued reinvestment in DDGM.
Net cash used in investing activities of $15.3 million for the nine months ended September 30, 2022 was in line with the $15.2 million from the same period in 2021.
Net cash used in financing activities for nine months ended September 30, 2022 was a net outflow of $3.0 million compared to a net outflow of $2.2 million for same period in 2021. The change is primarily related to option exercises settled in cash in 2022.
While current macro risk factors, such as economic uncertainties, supply chain interruptions, and COVID-19 have not had a significant adverse impact on exploration plans, results of operations, financial position, and cash flows during the current fiscal year, future impacts are unknown at this time. However, we believe there is sufficient liquidity and capital resources to fund operations and corporate activities for the foreseeable future.
In May 2020, we filed a universal shelf registration statement with the SEC on Form S-3 for the proposed offering from time to time of up to $200,000,000 of our securities, including common stock, preferred stock, and/or warrants (the “Shelf Registration Statement”). We also entered into an At the Market Offering Agreement with H.C. Wainwright & Co., LLC pursuant to which we may sell shares of our common stock under the Shelf Registration Statement at market prices from time to time. However, pursuant to General Instruction I.A.3 of Form S-3, we are not eligible to use the Shelf Registration Statement until the 2022 Form 10-K is filed in 2023 due to the late filing of a Form 8-K including the historical financial statements related to our acquisition of Aquila Resources. Based on our current cash balances and the anticipated performance of our current and expected operations, we do not currently expect that the unavailability of our Shelf Registration Statement or our inability to utilize the ATM Agreement will have a material impact on our liquidity.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
44
Accounting Developments
For a discussion of Recently Adopted and Recently Issued Accounting Pronouncements, please see Note - 2 Recently Adopted Accounting Standards in this Condensed Consolidated Interim Financial Statements and Notes.
Forward-Looking Statements
This report contains “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. We use the words “anticipate,” “continue,” “likely,” “estimate,” “expect,” “may,” “could,” “will,” “project,” “should,” “believe” and similar expressions (including negative and grammatical variations) to identify forward looking statements. Such forward-looking statements include, without limitation, statements regarding:
| ● | Our strategy for significant future investment in Oaxaca, Mexico and in Michigan, USA for development and exploration activities; |
| ● | The anticipated beneficial impacts of the recently constructed dry stack tailings facility; |
| ● | The expected timing for the Back Forty feasibility study, permitting, detailed engineering, and project financing; |
| ● | Our expectations regarding future grades from mining at DDGM; |
| ● | Expectations regarding 2022 capital investment, exploration spending, and general and administrative costs; |
| ● | Future exploration plans at DDGM; |
| ● | Compliance with existing legal and regulatory requirements, including future asset reclamation costs; |
| ● | Estimates of Mineral Resources (“Mineral Resources”) and Mineral Reserves (“Mineral Reserves”); |
| ● | Our expectations regarding the future payment of dividends; and |
| ● | Our ability to satisfy our obligations and other potential cash requirements over the next twelve months. |
Forward-looking statements are neither historical facts nor assurances of future performance. Rather, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict, and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
| ● | The extent of the impact of the COVID-19 pandemic, including the duration, spread, severity, and any repeated resurgence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions, the impact on our employees, and the extent of the impact of the COVID-19 pandemic on our mining operations; |
| ● | Commodity price fluctuations; |
| ● | Mine protests and work stoppages; |
| ● | Rock formations, faults and fractures, water flow and possible CO2 gas exhalation, or other unanticipated geological challenges; |
| ● | Unexpected changes in business and economic conditions, including supply chain challenges, the rate of inflation, and their impact on operating and capital costs; |
| ● | Changes in interest rates and currency exchange rates; |
| ● | Adverse technological changes and cybersecurity threats; |
| ● | Unanticipated increases in our operating costs and other costs of doing business; |
| ● | Access to land and availability of materials, equipment, supplies, labor and supervision, power, and water; |
| ● | Results of current and future feasibility studies; |
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
45
| ● | 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; |
| ● | The inherent uncertainty of Mineral Resource and Mineral Reserve estimates; and |
| ● | Such other factors are discussed below under “Risk Factors”. |
Many of these factors are beyond our ability to control or predict. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, such expectations may prove to be materially incorrect due to known and unknown risks and uncertainties. You should not unduly rely on any of our forward-looking statements. These statements speak only as of the date of this quarterly report on Form 10-Q. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect future events or developments. All subsequent written and oral forward-looking statements attributable to us and persons acting on our behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this Form 10-Q.
Gold Resource Corporation—Management’s Discussion and Analysis of Financial Condition and Results of Operations
46
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risks includes, but is not limited to, the following risks: changes in commodity prices, foreign currency exchange rates, provisional sales contract risks, changes in interest rates, and equity price risks. We do not use derivative financial instruments as part of an overall strategy to manage market risk; however, we may consider such arrangements in the future as we evaluate our business and financial strategy.
Commodity Price Risk
The results of our operations, cash flows, and financial condition depend in large part upon the market prices of gold, silver, copper, lead, and zinc. Metal prices fluctuate widely and are affected by numerous factors beyond our control. The level of interest rates, the rate of inflation, government fiscal and monetary policy, the stability of exchange rates, the world supply of and demand for gold, silver, and other metals, among other factors, can all cause significant fluctuations in commodity prices. Such external economic factors are in turn influenced by changes in international investment patterns, monetary systems, and political developments. The metal price markets have fluctuated widely in recent years, and future price declines could cause a mineral project to become uneconomic, thereby having a material adverse effect on our business and financial condition. We entered into a zinc zero cost collar to protect the selling price for zinc but have not entered into derivative contracts to protect the selling price for gold, silver, copper or lead. We may in the future more actively manage our exposure through additional derivative contracts, although we have no intention of doing so in the near-term.
Effective May 18, 2021, the Company entered into a Trading Agreement with Auramet International LLC that govern non-exchange traded, over-the-counter, spot, forward, and option transactions on both a deliverable and non-deliverable basis involving various metals and currencies. Subsequently the Company entered into zinc zero cost collars. These derivatives are not designated as hedges. The zero cost collars are used to manage the Company’s near-term exposure to cash flow variability from zinc price risks. We do not currently use financial instruments with respect to any of the other base metal production.
In addition to materially adversely affecting our reserve estimates, results of operations and/or our financial condition, declining gold and silver prices could require a reassessment of the feasibility of a project. Even if a project is ultimately determined to be economically viable, the need to conduct such a reassessment may cause delays in the implementation of a project.
Foreign Currency Risk
Our foreign operation sells its gold, silver, copper, lead, and zinc production based on U.S. dollar metal prices. Fluctuations in foreign currency exchange rates do not have a material impact on our revenue since gold, silver, copper, lead, and zinc are sold throughout the world in U.S. dollars.
Foreign currency exchange rate fluctuations can increase or decrease our costs to the extent we pay costs in currencies other than the U.S. Dollar. We are primarily impacted by Mexican peso rate changes relative to the U.S. Dollar, as we incur some costs in the Mexican peso. When the value of the peso rises in relation to the U.S. Dollar, some of our costs in Mexico may increase, thus materially adversely affecting our operating results. Alternatively, when the value of the peso drops in relation to the U.S. Dollar, peso-denominated costs in Mexico will decrease in U.S. Dollar terms. Future fluctuations may give rise to foreign currency exposure, which may affect our financial results. Approximately 50% to 60% of expenses are paid in currencies other than the U.S. dollar.
We have not utilized market-risk sensitive instruments to manage our exposure to foreign currency exchange rates but may in the future actively manage our exposure to foreign currency exchange rate risk.
Gold Resource Corporation
47
Provisional Sales Contract Risk
We enter into concentrate sales contracts which, in general, provide for a provisional payment to us based upon provisional assays and prices. The provisionally priced sales contracts contain an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of concentrates determined at the quoted metal prices at the time of shipment delivery to the customer. The embedded derivative, which does not qualify for hedge accounting, is adjusted to market through revenue each period prior to settlement. Changes in the prices of metals between the shipment delivery and final settlement date will result in adjustments to revenues related to the sales of concentrate previously recorded upon shipment delivery. Please see Note 14—Derivatives in this Condensed Consolidated Interim Financial Statements and Notes for additional information.
Interest Rate Risk
We consider our interest rate risk exposure to be insignificant at this time, as our interest rate is related and embedded in immaterial payments for office leases.
Equity Price Risk
We have in the past, and may in the future, seek to acquire additional funding through sale of common stock and other equity. The price of our common stock has been volatile in the past and may also be volatile in the future. As a result, there is a risk that we may not be able to sell our common stock at an acceptable price should the need for new equity funding arise.
ITEM 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from management, have evaluated the effectiveness of disclosure controls and procedures as of September 30, 2022. This evaluation included consideration of the material weakness in internal controls over financial reporting that was identified and disclosed in our annual report on Form 10-K for the year ended December 31, 2021. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2022 as the material weakness has not yet been fully remediated. Notwithstanding such material weakness in internal control over financial reporting, our management, including our Chief Executive Officer and our Chief Financial Officer, has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of our operations, and our cash flows for the periods presented in this quarterly report, in conformity with U.S. GAAP.
Material Weakness in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Due to the Aquila acquisition on December 10, 2021, management performed review and approval controls related to the balances consolidated into the statement of financial position and statement of operations at December 31, 2021. The Aquila acquisition consisted of multiple complex valuations including the gold and silver stream agreements, the deferred tax liability and land. While multiple layers of approval and reasonableness tests were conducted, management prepared insufficient documentation related to the performance of these review controls to allow the independent registered public
Gold Resource Corporation
48
accounting firm to reperform the controls. Additionally, due to the timing of the acquisition, it was necessary to perform these review controls in a compressed timeframe, which resulted in an adjustment identified by the independent registered public accounting firm between balance sheet accounts.
Due to the complexity of the acquisition, limited timing from the close of the transaction and the inherent limitation of internal controls over financial reporting, management concluded that our internal control over financial reporting as of December 31, 2021, had a material weakness related to the operating effectiveness of review controls over the accounting for and valuation of acquired assets and liabilities in the application of the acquisition method of accounting for asset acquisitions. All other internal controls over financial reporting as of December 31, 2021 and September 30, 2022 remained effective. Management continues to enhance documentation for significant (e.g., implementation of the PSU program) and /or unique (e.g., Maritime investment) transactions and evaluate if any additional action is required to further resolve and fully remediate the material weakness.
Changes in Internal Control Over Financial Reporting
There were no changes that occurred during the three and nine months ended September 30, 2022, other than those enhancements to documentation discussed above, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1: Legal Proceedings
We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation.
In February 2020, a local Ejido community (who claim to be an indigenous community) filed an injunction against the Mexican federal government through which they demanded the cancellation of several concession titles. The federal government ordered a suspension to prevent work related to excavating, drilling, opening tunnels and exploiting the mineral resources on the surface and subsoil of the concessions named in the injunction. Presently, the Don David Gold Mine does not perform such works in the named concessions in lands of the indigenous community. The lawsuit filed in February 2020 has not progressed to a final ruling.
ITEM 1A: Risk Factors
“Item 1A. Risk Factors” of our Form 10-K for the year ended December 31, 2021 includes a discussion of our known material risk factors, other than risks that could apply to any issuer or offering. There have been no material changes from the risk factors described in our Form 10-K.
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3: Defaults upon Senior Securities
None
ITEM 4: Mine Safety Disclosures
While the Company owns an advanced exploration project in Michigan, USA, the project is not yet subject to the Mine Safety and Health Administration (“MSHA”) jurisdiction and therefore, the mine safety disclosure requirements are not applicable.
Gold Resource Corporation
49
ITEM 5: Other Information
None
ITEM 6: Exhibits
The following exhibits are filed or furnished herewith or incorporated herein by reference:
Exhibit | Descriptions | |
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Allen Palmiere. | |
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Kimberly C. Perry. | |
32* | ||
101 | Financial statements from the Quarterly Report on Form 10-Q of Gold Resource Corporation for the three and nine months ended September 30, 2022, formatted in inline XBRL: (i) the Condensed Consolidated Interim Balance Sheets, (ii) the Condensed Consolidated Interim Statements of Operations, (iii) the Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity, (iv) the Condensed Consolidated Interim Statements of Cash Flows, and (v) the Notes to the Condensed Consolidated Interim Financial Statements. | |
104 | Cover Page Interactive Data File (embedded within the XBRL document) |
* | This document is not being “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. Registration Statements or other documents filed with the SEC shall not incorporate this exhibit by reference, except as otherwise expressly stated in such filing. |
Gold Resource Corporation
50
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Company has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
GOLD RESOURCE CORPORATION | |||
Dated: October 31, 2022 | /s/ Allen Palmiere | ||
By: | Allen Palmiere, | ||
Chief Executive Officer, | |||
Dated: October 31, 2022 | /s/ Kimberly C. Perry | ||
By: | Kimberly C. Perry, | ||
Chief Financial Officer | |||
Gold Resource Corporation
51