Recently Issued Accounting Pronouncements
Accounting Standards Update (“ASU”) No. 2014-09—Revenue from Contracts with Customers (Topic 606).
On May 28, 2014, the FASB issued guidance that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
This ASU was further amended in August 2015, March 2016, April 2016, May 2016 and December 2016 by ASU No. 2015-14, No. 2016-08, No. 2016-10, No. 2016-12 and No. 2016-20, respectively.
The guidance
provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures about revenue recognition.
The Company has performed an assessment of the revised guidance and the impacts on the Company’s Consolidated Financial Statements and disclosures. The Company has completed the review of all contracts and determined that the adoption of this guidance will not impact the timing of revenue recognition based on the Company’s determination of when control is transferred. Currently, revenue is recognized for contracts upon delivery of material to the customer and will not change under the new guidance.
The Company furthered its evaluation of variable consideration for concentrate sales related to the variable nature of the price and metal quantity. Based on its current analysis, the estimate of revenue recognized for concentrates will remain unchanged as sales will initially be recorded on a provisional basis based on the forward prices for the estimated month of settlement and the Company’s estimated metal quantities delivered based on weighing and assay data. The Company believes changes in the underlying weight and metal content are not significant to the sale as a whole and therefore do not preclude the recognition of revenue upon transfer of control.
Additionally, the Company completed its evaluation of the impacts of refining fee classification. The Company also determined that revenue will be recognized, net of treatment and refining charges when these payments are made to customers. This classification remains unchanged from current practice.
The Company will adopt the new guidance effective January 1, 2018. The guidance may be applied retrospectively for all periods presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company currently anticipates adopting the guidance retrospectively with the cumulative effect of initially applying the amended guidance recognized at January 1, 2018. As there are no changes to the Company’s current revenue recognition model, no changes will be made to prior period amounts or related prior period disclosures.
Accounting Standards Update No. 2016-02 Leases (Topic 842).
I
n February 2016, the FASB issued a new standard regarding leases. Lessees will be required to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and a lease liability. Public business entities are required to adopt the new leasing standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For calendar year-end public companies, this means an adoption date of January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements and disclosures.
3. Gold and Silver Rounds/Bullion
The Company periodically purchases gold and silver bullion on the open market for investment purposes and to use in its dividend exchange program under which shareholders may exchange their cash dividends for minted gold and silver rounds. During the six months ended June 30, 2017 and 2016, the Company purchased 151.55 ounces and nil ounces, respectively, of gold bullion.
At June 30, 2017 and December 31, 2016, the Company’s holdings of rounds/bullion, using quoted market prices, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
Gold
|
|
Silver
|
|
Gold
|
|
Silver
|
|
|
(in thousands, except ounces and per ounce)
|
Ounces
|
|
|
1,730
|
|
|
90,763
|
|
|
1,579
|
|
|
90,971
|
Per ounce
|
|
$
|
1,242
|
|
$
|
16.47
|
|
$
|
1,159
|
|
$
|
16.24
|
Total
|
|
$
|
2,149
|
|
$
|
1,495
|
|
$
|
1,830
|
|
$
|
1,477
|
4. Inventories, net
At June 30, 2017 and December 31, 2016, inventories, net consisted of the following:
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Stockpiles - underground mine
|
|
$
|
424
|
|
$
|
84
|
Stockpiles - open pit mine
|
|
|
82
|
|
|
288
|
Concentrates and doré
|
|
|
2,673
|
|
|
1,881
|
Materials and supplies
(1)
|
|
|
6,816
|
|
|
6,693
|
Total
|
|
$
|
9,995
|
|
$
|
8,946
|
|
(1)
|
|
Net of reserve for obsolescence of $637 at June 30, 2017 and December 31, 2016.
|
5
. Income Taxes
The Company recorded income tax expense of $0.9 million and $3.9 million for the three and six months ended June 30, 2017. During the three and six months ended June 30, 2016, the Company recorded income tax expense of $5.0 million and $5.7 million, respectively.
In 2015, the Mexican government approved a 2016 Federal Revenue Act that provides tax incentives, including tax credits on Mexican Excise Duty (a.k.a., IEPS), for the acquisition of combustible fossil fuels to be used in productive processes. The Company’s Mexican operations utilize a significant amount of diesel fuel for power generation that qualifies for such tax credits. These tax credits can be applied against income taxes payable, as well as other income tax withholdings during the year. In the three and six months ended June 30, 2017, the Company recorded $0.9 million and $1.6 million of fuel tax credits to offset production costs and such credits were applied against the income tax payable.
The Company has asserted permanent reinvestment of all Mexico undistributed earnings as of June 30, 2017. The impact of the planned annual dividends for 2017, net of foreign tax credits, is reflected in the estimated annual effective tax rate. The Company’s annualized effective rate differs from the statutory rate primarily due to planned annual dividends from our Mexican subsidiary as well as differences in statutory rates for income and mining taxes in Mexico.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are available for deduction. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making
this assessment. Except as noted in the following paragraph, as of June 30, 2017, the Company believes it has sufficient positive evidence to conclude that its federal and foreign deferred tax assets are more likely than not to be realized. The Company has determined that the realization of its state deferred tax assets is not more likely that not to be realized and has a valuation allowance offsetting its state deferred tax assets.
As a result of the adoption of ASU 2016-09 in the first quarter of 2017, excess tax benefits and tax deficiencies will be prospectively classified to the statement of operations instead of additional paid-in capital. Upon adoption, the Company recorded a $4.2 million deferred tax asset related to previously unrecognized foreign tax credits but placed a valuation allowance against the full amount of the deferred tax asset due to the Company’s assessment of the realizability of these foreign tax credits. Thus, no net impact to the financial statements was generated as a result of adoption of ASU 2016-09. The Company's effective tax rate for the three and six months ended June 30, 2017 was not materially impacted by the adoption of ASU 2016-09.
As of June 30, 2017, the Company believes that it has no liability for uncertain tax positions.
7. Prepaid a
6. Prepaid Expenses and Other Current Assets
At June 30, 2017 and December 31, 2016, prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Advances to suppliers
|
|
$
|
180
|
|
$
|
122
|
Prepaid insurance
|
|
|
1,039
|
|
|
531
|
Vendor deposits
|
|
|
249
|
|
|
218
|
IVA taxes receivable
|
|
|
405
|
|
|
489
|
Other current assets
|
|
|
211
|
|
|
227
|
Total
|
|
$
|
2,084
|
|
$
|
1,587
|
7. Property, Plant and Mine Development, net
At June 30, 2017 and December 31, 2016, property, plant and mine development, net consisted of the following:
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Asset retirement costs
|
|
$
|
637
|
|
$
|
637
|
Construction-in-progress
|
|
|
5,036
|
|
|
586
|
Furniture and office equipment
|
|
|
1,627
|
|
|
1,580
|
Land
|
|
|
242
|
|
|
230
|
Light vehicles and other mobile equipment
|
|
|
1,900
|
|
|
1,914
|
Machinery and equipment
|
|
|
21,312
|
|
|
20,293
|
Mill facilities and infrastructure
|
|
|
9,659
|
|
|
9,643
|
Mineral interests and mineral rights
|
|
|
21,813
|
|
|
19,413
|
Mine development
|
|
|
50,557
|
|
|
42,951
|
Software and licenses
|
|
|
1,677
|
|
|
1,624
|
Subtotal
(1)
|
|
|
114,460
|
|
|
98,871
|
Accumulated depreciation and amortization
|
|
|
(34,962)
|
|
|
(28,812)
|
Total
|
|
$
|
79,498
|
|
$
|
70,059
|
|
(1)
|
|
Includes accrued capital expenditures of $4.3 million and nil at June 30, 2017 and December 31, 2016, respectively.
|
The Company recorded depreciation and amortization expense of $4.0 million and $6.7 million for the three and six months ended June 30, 2017, respectively. For the three and six months ended June 30, 2016, the Company recorded depreciation and amortization of
$3.2 million and $6.0 million,
respectively.
8. Accrued Expenses and Other Current Liabilities
At June 30, 2017 and December 31, 2016, accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Accrued insurance
|
|
$
|
617
|
|
$
|
381
|
Accrued royalty payments
|
|
|
1,515
|
|
|
1,043
|
Dividends payable
|
|
|
95
|
|
|
94
|
Other payables
|
|
|
16
|
|
|
8
|
Total
|
|
$
|
2,243
|
|
$
|
1,526
|
9. Reclamation and Remediation
The Company’s reclamation and remediation obligations primarily relate to the Aguila Project.
The following table presents the changes in reclamation and remediation obligations for the six months ended June 30, 2017 and the twelve months ended December 31, 2016:
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Reclamation liabilities – balance at beginning of period
|
|
$
|
1,907
|
|
$
|
2,192
|
Changes in estimate
|
|
|
-
|
|
|
82
|
Foreign currency exchange loss (gain)
|
|
|
283
|
|
|
(367)
|
Reclamation liabilities – balance at end of period
|
|
|
2,190
|
|
|
1,907
|
|
|
|
|
|
|
|
Asset retirement obligation – balance at beginning of period
|
|
|
518
|
|
|
623
|
Changes in estimate
|
|
|
-
|
|
|
(21)
|
Accretion expense
|
|
|
23
|
|
|
23
|
Foreign currency exchange loss (gain)
|
|
|
81
|
|
|
(107)
|
Asset retirement obligation – balance at end of period
|
|
|
622
|
|
|
518
|
Total period end balance
|
|
$
|
2,812
|
|
$
|
2,425
|
10. Commitments and Contingencies
During the six months ended June 30, 2017, the Company entered into cancellable equipment purchase contracts totaling $8.3 million. The contracts require payments during the equipment construction period and the Company is required to reimburse the vendor for all costs up to the cancellation date, if cancelled. The Company expects to take possession of the equipment during 2017 and as of June 30, 2017, the Company had incurred costs of $3.9 million, of which $0.5 million has been paid and $3.4 million is included in accounts payable on the accompanying condensed consolidated balance sheet.
11. Shareholders’ Equity
The Company declared and paid $0.6 million of dividends during the six months ended June 30, 2017. During the six months ended June 30, 2016, the Company declared and paid dividends of $0.5 million. On July 25, 2017, the Board of Directors declared a dividend on common stock totaling $0.1 million payable in August 2017.
On January 6, 2017, the Company issued 59,642 shares of common stock as partial consideration for additional mineral rights for its Isabella Pearl project. At the time of issuance, the shares were valued at $5.03 per share, for an aggregate value of $0.3 million.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
s
The following discussion summarizes the results of operations of Gold Resource Corporation and its subsidiaries (“we”, “our”, or “us”) for the three and six months ended June 30, 2017 and compares those results to the three and six months ended June 30, 2016. It also analyzes our financial condition at June 30, 2017 and compares it to our financial condition at December 31, 2016. This discussion should be read in conjunction with the management’s discussion and analysis and the audited consolidated financial statements and footnotes for the year ended December 31, 2016 contained in our annual report on Form 10-K for the year ended December 31, 2016.
The discussion also presents certain financial measures that are not prepared in accordance with U.S. Generally Accepted Accounting Principles (“non-GAAP”) but which are important to management in its evaluation of our operating results and are used by management to compare our performance with what we perceive to be peer group mining companies, and are relied on as part of management’s decision-making process. Management believes these measures may also be important to investors in evaluating our performance. For a detailed description of each of the non-GAAP financial measures, please see the discussion below under
Non-GAAP Measures
.
See
Forward-Looking Statements
at the end of this Item 2 for important information regarding statements contained herein.
Overview
We are a mining company which pursues gold and silver projects that are expected to have both low operating costs and high returns on capital. We are presently focused on mineral production from the Aguila Project and development of the new Mirador Mine on the Alta Gracia Project within our Oaxaca Mining Unit. Our processing facilities at the Aguila Project produce doré and concentrates primarily from ore mined from the Arista underground mine, which contains precious metals of gold and silver and base metals of copper, lead and zinc
. Additionally, we are focused on
exploration and advancement of our Nevada properties, including our Isabella Pearl Project which is in advanced stages of engineering and permitting.
In our financial statements, we report the sale of precious metals and base metals as revenue and we periodically review our revenue streams to ensure that this treatment remains appropriate. We consider precious metals to be the primary driver of our economic decisions and believe that base metals are secondary products.
Precious metal gold equivalent, used periodically throughout this discussion, is determined by taking gold ounces produced or sold, plus silver ounces produced or sold converted to precious metal gold equivalent ounces using the gold to silver average price ratio for the period. The gold and silver average prices used to determine the gold to silver average price ratio are the actual metal prices realized from sales of our gold and silver. Please see the section titled
Non-GAAP Measures
below for additional information concerning cash cost per ounce measures.
Highlights for the second quarter of 2017 are included below and discussed further in our Results of Operations.
Highlights
|
·
|
|
Working capital was $18.9 million at the end of the quarter;
|
|
·
|
|
Cash balance was $16.4 million at the end of the quarter;
|
|
·
|
|
Net income was $0.9 million or $0.02 per share;
|
|
·
|
|
We advanced development of the Mirador Mine to allow for consistent ore feed for the third quarter of 2017 to the Aguila mill;
|
|
·
|
|
Additional 50-meter strike expansion of Switchback mineralization, for a total strike of 625 meters;
|
|
·
|
|
Total cash cost per precious metal gold equivalent ounce sold was $272;
|
|
·
|
|
Total all-in sustaining cost per precious metal gold equivalent ounce sold was $770.
|
Exploration and Development Activities
Exploration activities are performed on our portfolio of exploration properties in Oaxaca, Mexico and Nevada, U.S.A. All of the properties that make up our Oaxaca Mining Unit are located along what is known as the San Jose structural corridor, which runs north 70 degrees west. Our properties comprise 55 continuous kilometers of this structural corridor which spans three historic mining districts in Oaxaca. Our Nevada Mining Unit properties are in close proximity to each other as well as other major gold deposits in the Walker Lane Mineral Belt which are known for their significant and high-grade gold-silver production from historic mines.
Oaxaca Mining Unit, Mexico
The Aguila Project
: Our mine
activities during the second quarter of 2017 continued to focus on development and ore extraction from the Arista Mine’s Arista vein systems and Switchback vein system. Switchback mine development began in the third quarter of 2016, with plans to commence bulk tonnage mining methods, including long hole open stope and/or cut and fill methods in late 2017 or early 2018. Exploration activities during the quarter focused on underground exploration drilling at the Arista and Switchback vein systems. The Switchback drilling program continued to target further expansion and delineation of the multiple high-grade parallel veins. The Switchback strike length has expanded to 625 meters, a 325-meter expansion during the first half of 2017, with results adding to reserve definition, expansion and Arista Mine plan optimization. The Switchback vein system remains open on strike and vertical extent. Underground drilling during the second quarter also delineated 200 meters of strike length on a new high-grade ore-shoot discovered on the Splay 31 vein of the Arista vein system. Nine underground diamond drill holes totaling 3,389 meters were completed during the second quarter of 2017.
Alta Gracia property
: Mirador Mine development and access to previously identified mineralization at Alta Gracia continued during the second quarter of 2017 and as of the end the
quarter, development
had advanced to a point which allows for consistent ore feed for the Aguila Mill's agitated leach circuit. Our utilization of a mine contractor for Alta Gracia’s Mirador Mine development was met with unacceptable and delayed results and we have since brought the Mirador Mine development in-house. In addition, 20 surface exploration diamond drill holes totaling 5,496 meters were completed at Alta Gracia during the second quarter of 2017. These holes mainly targeted extensions of ore shoots on known veins, that were historically mined on a small scale.
Nevada Mining Unit, U.S.A.
Isabella Pearl Project:
Project production permitting continued during the second quarter. Our goal remains to advance the project into production at the earliest possible date, subject to permit timing and funding. We are targeting the production of gold doré from a potential open pit heap leach operation. During the second quarter of 2017, we also completed five reverse circulation condemnation drill holes totaling 1,356 meters in the proposed heap leach area. We are awaiting Nevada Department of Environmental Protection and the Bureau of Land Management regulatory permit approvals to move the project forward.
Mina Gold property:
During the second quarter of 2017, we completed a five-hole reverse circulation drilling program totaling 930 meters on the Mina Gold property for condemnation of the proposed heap leach site. Additional reverse circulation drilling, environmental baseline studies and a preliminary engineering evaluation are targeted for the Mina Gold property during the remainder of 2017.
Gold Mesa property
: Reverse circulation drilling continued at Gold Mesa during the second quarter of 2017. The program is targeted to extend several of the areas of surface and near surface high-grade gold mineralization discovered during previous drilling programs. 1,343 meters of drilling were completed on the Gold Mesa property during the second quarter of 2017. The Company has tested a total of eight exploration targets at Gold Mesa.
East Camp Douglas property
: Historical geological, exploration and mining data on the East Camp Douglas property was reviewed during the second quarter of 2017. Reconnaissance geological mapping and rock chip sampling on several prospects were also carried out at East Camp Douglas during the quarter.
Results of Operations
The following table summarizes our results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Sales, net
|
|
$
|
21,391
|
|
$
|
26,198
|
|
$
|
45,727
|
|
$
|
43,601
|
Mine gross profit
|
|
|
5,226
|
|
|
12,393
|
|
|
15,642
|
|
|
15,847
|
General and administrative expenses
|
|
|
1,675
|
|
|
1,670
|
|
|
3,487
|
|
|
3,848
|
Exploration expenses
|
|
|
1,136
|
|
|
642
|
|
|
1,958
|
|
|
1,146
|
Other expense (income)
|
|
|
609
|
|
|
(538)
|
|
|
1,073
|
|
|
(1,244)
|
Income before income taxes
|
|
|
1,806
|
|
|
10,619
|
|
|
9,124
|
|
|
12,097
|
Provision for income taxes
|
|
|
942
|
|
|
5,011
|
|
|
3,884
|
|
|
5,692
|
Net income
|
|
$
|
864
|
|
$
|
5,608
|
|
$
|
5,240
|
|
$
|
6,405
|
Sales, net
Metal sales of $21.4 million for the second quarter of 2017 decreased by $4.8 million, or 18%, when compared to the same period in 2016. Our decrease in net sales was primarily a result of lower production due to lower precious metal head grades in the quarter. The decrease was offset partially by stronger market prices for precious and base metals and lower treatment charges as a result of more favorable contract terms.
For the three months ended June 30, 2017, average realized prices for metals increased from the same period in 2016 as follows: gold by 2% to $1,300 per ounce, silver by 14% to $17.77 per ounce, copper by 21% to $5,753 per tonne, lead by 27% to $2,173 per tonne, and zinc by 31% to $2,543 per tonne.
Metal sales for the first half of the year of 2017 were $45.7 million as compared to $43.6 million for the same period of 2016, representing a $2.1 million increase. The increase is primarily attributable to an increase in realized metal prices and lower treatment charges, partially offset by lower precious metals production.
Please see the
Production and Sales Statistics
table below for additional information regarding our mineral sales statistics.
Production
For the second quarter of 2017, gold and silver production was 5,696 ounces and 397,670 ounces, respectively, as compared to 10,011 and 572,499 ounces over the same period in 2016. Production during the quarter was impacted by lower precious metal grades processed, as the mine focused on development of the new Switchback zone. During the second quarter 60% of feed to the Aguila mill (of which 50% consisted of ore from the Switchback Zone) was development ore which is typically lower grade than production or stoping ore due to mining dilution during
development. Additionally, i
n the second quarter of 2017, 11,250 tonnes, representing 10% of total period milled tonnage, came from the Aguila open pit. The open pit ore contains primarily gold, negligible silver and no base metals and on average, recoveries from open pit ore is 14% and 11% lower for gold and silver, respectively, compared to ore from the Arista mine.
For the first half of 2017, the Company produced 12,443 and 825,560 ounces of gold and silver, respectively, as compared to 16,474 and 1,006,640 ounces of gold and silver, over the same period in 2016. The decrease in gold and silver production was again the result of lower grades processed from our Switchback development ore as noted above. Ore grades in the Arista Mine vary depending on the mining locations and mining techniques being utilized during a particular quarter. Second half 2017 production is expected to benefit from selected higher grade veins in the Arista Mine including higher value ore from the Switchback Zone. Additionally, consistent ore delivery from the high grade Mirador Mine is expected to contribute significantly to second half 2017 silver production.
During the quarter ended June 30, 2017, we processed 1,293 ore tonnes per day compared to 1,228 ore tonnes per day for the same period in 2016, representing an increase of 5%. The Aguila Mill’s flotation circuit processing capacity is a nominal 1,500 tonnes per day. Achieving this processing rate in the future is dependent upon our ability to develop the mine to a point where ore extraction can consistently achieve target capacity while meeting grade and dilution parameters. In addition to the floatation circuit, the agitated leach circuit is targeting a milling rate of 150 ore tonnes per day from the Mirador Mine.
On a precious metal gold equivalent basis, our mill production totaled 11,133 ounces and 24,014 ounces for the second quarter and first six months of 2017, respectively, compared to 17,706 ounces and 29,445 ounces for same periods of 2016. Please see the
Production and Sales Statistics
table below for additional information regarding our mineral production statistics.
During the three months ended June 30, 2017, we sold 4,716 gold ounces and 329,881 silver ounces at a total cash cost per ounce, after by-product credits, of $272. Please see
Non-GAAP Measures
below for additional information concerning the cash cost per ounce measures
.
The following
Production and Sales Statistics
table summarizes certain information about our mining operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Production and Sales Statistics
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Milled
|
|
|
|
|
|
|
|
|
|
|
|
|
Tonnes Milled
(1)
|
|
|
113,790
|
|
|
104,333
|
|
|
215,120
|
|
|
217,478
|
Tonnes Milled per Day
(2)
|
|
|
1,293
|
|
|
1,228
|
|
|
1,251
|
|
|
1,265
|
Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Gold Grade (g/t)
|
|
|
1.82
|
|
|
3.27
|
|
|
2.10
|
|
|
2.68
|
Average Silver Grade (g/t)
|
|
|
118
|
|
|
182
|
|
|
130
|
|
|
156
|
Average Copper Grade (%)
|
|
|
0.33
|
|
|
0.40
|
|
|
0.31
|
|
|
0.30
|
Average Lead Grade (%)
|
|
|
1.41
|
|
|
1.40
|
|
|
1.29
|
|
|
1.20
|
Average Zinc Grade (%)
|
|
|
4.34
|
|
|
4.40
|
|
|
3.74
|
|
|
3.90
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Gold Recovery (%)
|
|
|
85
|
|
|
92
|
|
|
86
|
|
|
91
|
Average Silver Recovery (%)
|
|
|
92
|
|
|
94
|
|
|
92
|
|
|
93
|
Average Copper Recovery (%)
|
|
|
78
|
|
|
77
|
|
|
78
|
|
|
76
|
Average Lead Recovery (%)
|
|
|
77
|
|
|
71
|
|
|
78
|
|
|
71
|
Average Zinc Recovery (%)
|
|
|
85
|
|
|
84
|
|
|
85
|
|
|
84
|
Mill production (before payable metal deductions)
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold (ozs.)
|
|
|
5,696
|
|
|
10,011
|
|
|
12,443
|
|
|
16,474
|
Silver (ozs.)
|
|
|
397,670
|
|
|
572,499
|
|
|
825,560
|
|
|
1,006,640
|
Copper (tonnes)
|
|
|
294
|
|
|
320
|
|
|
514
|
|
|
564
|
Lead (tonnes)
|
|
|
1,207
|
|
|
1,009
|
|
|
2,134
|
|
|
1,847
|
Zinc (tonnes)
|
|
|
4,176
|
|
|
3,813
|
|
|
6,820
|
|
|
7,074
|
Payable metal sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold (ozs.)
|
|
|
4,716
|
|
|
8,197
|
|
|
11,849
|
|
|
14,413
|
Silver (ozs.)
|
|
|
329,881
|
|
|
548,537
|
|
|
750,116
|
|
|
927,331
|
Copper (tonnes)
|
|
|
216
|
|
|
319
|
|
|
441
|
|
|
539
|
Lead (tonnes)
|
|
|
1,071
|
|
|
974
|
|
|
1,910
|
|
|
1,737
|
Zinc (tonnes)
|
|
|
2,977
|
|
|
3,424
|
|
|
5,126
|
|
|
7,074
|
Average metal prices realized
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold ($ per oz.)
|
|
|
1,300
|
|
|
1,271
|
|
|
1,248
|
|
|
1,240
|
Silver ($ per oz.)
|
|
|
17.77
|
|
|
17.08
|
|
|
17.50
|
|
|
15.97
|
Copper ($ per tonne)
|
|
|
5,753
|
|
|
4,740
|
|
|
5,819
|
|
|
4,497
|
Lead ($ per tonne)
|
|
|
2,173
|
|
|
1,717
|
|
|
2,251
|
|
|
1,757
|
Zinc ($ per tonne)
|
|
|
2,543
|
|
|
1,940
|
|
|
2,667
|
|
|
1,844
|
Precious metal gold equivalent ounces produced (mill production)
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold Ounces
|
|
|
5,696
|
|
|
10,011
|
|
|
12,443
|
|
|
16,474
|
Gold Equivalent Ounces from Silver
|
|
|
5,437
|
|
|
7,695
|
|
|
11,571
|
|
|
12,971
|
Total Precious Metal Gold Equivalent Ounces
|
|
|
11,133
|
|
|
17,706
|
|
|
24,014
|
|
|
29,445
|
Precious metal gold equivalent ounces sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold Ounces
|
|
|
4,716
|
|
|
8,197
|
|
|
11,849
|
|
|
14,413
|
Gold Equivalent Ounces from Silver
|
|
|
4,510
|
|
|
7,373
|
|
|
10,513
|
|
|
11,949
|
Total Precious Metal Gold Equivalent Ounces
|
|
|
9,226
|
|
|
15,570
|
|
|
22,362
|
|
|
26,362
|
Total cash cost before by-product credits per precious metal gold equivalent ounce sold
(5)
|
|
$
|
1,479
|
|
$
|
948
|
|
$
|
1,185
|
|
$
|
1,088
|
Total cash cost after by-product credits per precious metal gold equivalent ounce sold
(5)
|
|
$
|
272
|
|
$
|
317
|
|
$
|
267
|
|
$
|
459
|
Total all-in sustaining cost per precious metal gold equivalent ounce sold
(5)
|
|
$
|
770
|
|
$
|
547
|
|
$
|
677
|
|
$
|
773
|
Total all-in cost per precious metal gold equivalent ounce sold
(5)
|
|
$
|
881
|
|
$
|
625
|
|
$
|
775
|
|
$
|
871
|
|
(1)
|
|
For the second quarter of 2017 and 2016 and first half of 2017 and 2016, this includes 11,250, 10,608, 39,971, and 27,305 tonnes, respectively of open pit ore.
|
|
(2)
|
|
Based on actual days the mill operated during the period.
|
|
(3)
|
|
Mill production represents metal contained in concentrates produced at the mill, which is before payable metal deductions are levied by the buyer of our concentrates. Payable metal deduction quantities are defined in our contracts with the buyer of our concentrates and represent an estimate of metal contained in the concentrates which the buyer cannot recover through the smelting process. There are inherent limitations and differences in the sampling method and assaying of estimated metal contained in concentrates that are shipped, and those contained metal estimates are derived from sampling methods and assaying throughout the mill production process. We monitor these differences to ensure that precious metal mill production quantities are materially correct.
|
|
(4)
|
|
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 market average metal prices in most cases.
|
|
(5)
|
|
For a reconciliation of this non-GAAP measure to total mine cost of sales, which is the most comparable U.S. GAAP measure, please see
Non-GAAP Measures
.
|
Other Financial Results
Mine gross profit.
For the second quarter of 2017, mine gross profit decreased by $7.2 million or 58% compared to the same periods in 2016. The second quarter 2017 gross profit decrease was due to increased production costs as a result of higher throughput and decreased metals grades, which were partially offset with increased metal prices, as well as reduced treatment and refining costs.
Gross profit remained flat for the first half of 2017 as compared to the same period in 2016.
General and administrative expenses.
For the quarter and six months ended June 30, 2017, general and administrative expenses totaled $1.7 million and $3.5 million, respectively, compared to $1.7 million and $3.8 million, respectively, for the same periods in 2016. The decrease in the first half of 2017 of $0.3 million was due to a decrease in stock-based compensation expense, lower IT support costs, and lower tax and audit fees.
Exploration expenses.
For the quarter and six months ended June 30, 2017, exploration expenses totaled $1.1 million and $2.0 million as compared to $0.6 million and $1.1 million for the three and six months ended June 30, 2016, respectively. The $0.5 and $0.9 million increase for the three and six months ended June 30, 2017, respectively, was primarily the result of increased exploration spending at our Isabella Pearl property.
Other expense (income).
F
or the three and six months ended June 30, 2017, we recorded other expense of $0.6 million and $1.1 million, respectively, compared to other income of $0.5 million and $1.2 million for the three and six months ended June 30, 2016, respectively. The $1.1 million and $2.3 million change in the second quarter and first half of 2017, respectively, was a result of increased foreign exchange losses due to the strengthening of the Mexican Peso and a decrease in unrealized gains on investments as the Company sold its investments in 2016.
Provision for income taxes.
F
or the three and six months ended June 30, 2017, our provision for income tax was $0.9 million and $3.9 million, respectively, compared to $5.0 million and $5.7 million for the three and six months ended June 30, 2016, respectively. The decrease of $4.1 and $1.8 in taxes is commensurate with our decrease in income for the three and six months ended June 30, 2017 as compared to the same periods in 2016, respectively.
Please see
Note 5 to the Condensed Consolidated Financial Statements
for additional information.
Non-GAAP Measures
Throughout this report, we have provided information prepared or calculated according to U.S. GAAP and have referenced some non-GAAP performance measures which we believe will assist with understanding the performance of the business. These measures are based on precious metal gold equivalent ounces sold and include cash cost before by-product credits per ounce, total cash cost after by-product credits per ounce, total all-in sustaining cost per ounce (“AISC”) and all-in cost per ounce (“AIC”). 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.
Total cash cost, after by-product credits, is a measure developed by the
Gold Institute
in an effort to provide a uniform standard for comparison purposes. The guidance was first issued in 1996 and revised in November 1999.
AISC and AIC are calculated based on guidance from the World Gold Council issued in June 2013.
Total cash cost before by-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 by-product credits
includes total cash cost before by-product credits less by-product credits, or revenues earned from base metals.
AISC
includes total cash cost after by-product credits plus other costs related to sustaining production, including 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.
AIC
includes all-in sustaining costs plus non-sustaining capital expenditures, exploration expense, and allocated corporate general and administrative expenses related to Oaxaca Mining Unit. Capital expenditures and exploration expenses related to projects in our Oaxaca Mining Unit are classified as non-sustaining. Exploration and capital expenditures to develop new properties outside our Oaxaca Mining Unit are excluded from this calculation.
Cash cost before by-product credits per ounce, total cash cost after by-product credits per ounce, AISC and AIC 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.
Reconciliations to U.S. GAAP
The following table provides a reconciliation of total cash cost after by-product credits to total mine cost of sales (a U.S. GAAP measure) as presented in the
Condensed Consolidated Statements of Operations
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Total cash cost after by-product credits
|
|
$
|
2,506
|
|
$
|
4,927
|
|
$
|
5,955
|
|
$
|
12,100
|
Treatment and refining charges
|
|
|
(1,483)
|
|
|
(4,066)
|
|
|
(3,009)
|
|
|
(6,997)
|
By-product credits
|
|
|
11,140
|
|
|
9,830
|
|
|
20,537
|
|
|
16,582
|
Depreciation and amortization
|
|
|
3,952
|
|
|
3,054
|
|
|
6,509
|
|
|
5,860
|
Reclamation and remediation
|
|
|
35
|
|
|
44
|
|
|
64
|
|
|
91
|
Stock-based compensation allocated to production costs
|
|
|
15
|
|
|
16
|
|
|
29
|
|
|
118
|
Total mine cost of sales
|
|
$
|
16,165
|
|
$
|
13,805
|
|
$
|
30,085
|
|
$
|
27,754
|
The following table presents a reconciliation of the non-GAAP measures of total cash cost before by-product credits, total cash cost after by-product credits and AISC to AIC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in thousands, except ounces sold and cost per precious metal gold equivalent ounce sold)
|
Total cash cost before by-product credits
(1)
|
|
$
|
13,646
|
|
$
|
14,757
|
|
$
|
26,492
|
|
$
|
28,682
|
By-product credits
(2)
|
|
|
(11,140)
|
|
|
(9,830)
|
|
|
(20,537)
|
|
|
(16,582)
|
Total cash cost after by-product credits
|
|
|
2,506
|
|
|
4,927
|
|
|
5,955
|
|
|
12,100
|
Sustaining capital expenditures
|
|
|
4,599
|
|
|
3,580
|
|
|
9,171
|
|
|
8,290
|
Total all-in sustaining cost
|
|
|
7,105
|
|
|
8,507
|
|
|
15,126
|
|
|
20,390
|
Non-sustaining capital expenditures
|
|
|
9
|
|
|
1,009
|
|
|
9
|
|
|
1,986
|
Non-sustaining general and administrative expenses
|
|
|
789
|
|
|
789
|
|
|
1,578
|
|
|
1,578
|
Non-sustaining exploration expense
|
|
|
227
|
|
|
209
|
|
|
604
|
|
|
607
|
Total all-in cost
|
|
$
|
8,130
|
|
$
|
10,514
|
|
$
|
17,317
|
|
$
|
24,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precious metal gold equivalent ounces sold
(3)
|
|
|
9,226
|
|
|
15,570
|
|
|
22,362
|
|
|
26,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash cost before by-product credits per precious metal gold equivalent ounce sold
|
|
$
|
1,479
|
|
$
|
948
|
|
$
|
1,185
|
|
$
|
1,088
|
By-product credits per precious metal gold equivalent ounces sold
|
|
|
(1,207)
|
|
|
(631)
|
|
|
(918)
|
|
|
(629)
|
Total cash cost after by-product credits per precious metal gold equivalent ounce sold
|
|
|
272
|
|
|
317
|
|
|
267
|
|
|
459
|
Other sustaining expenditures per precious metal gold equivalent ounces sold
|
|
|
498
|
|
|
230
|
|
|
410
|
|
|
314
|
Total all-in sustaining cost per precious metal gold equivalent ounce sold
|
|
|
770
|
|
|
547
|
|
|
677
|
|
|
773
|
Non-sustaining expenditures per precious metal gold equivalent ounce sold
|
|
|
111
|
|
|
78
|
|
|
98
|
|
|
98
|
Total all-in cost per precious metal gold equivalent ounce sold
|
|
$
|
881
|
|
$
|
625
|
|
$
|
775
|
|
$
|
871
|
|
(1)
|
|
Production cost less stock-based compensation allocated to production cost plus treatment and refining charges.
|
|
(2)
|
|
Please see the tables below for a summary of our by-product revenue and by-product credit per precious metal equivalent ounces sold.
|
|
(3)
|
|
Gold ounces sold, plus gold equivalent ounces of silver ounces sold converted to gold ounces using our realized gold price per ounce to silver price per ounce ratio.
|
The following tables summarizes our by-product revenue and by-product credit per precious metal gold equivalent ounce sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
By-product credits by dollar value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper sales
|
|
$
|
1,242
|
|
$
|
1,512
|
|
$
|
2,566
|
|
$
|
2,425
|
Lead sales
|
|
|
2,328
|
|
|
1,673
|
|
|
4,302
|
|
|
3,051
|
Zinc sales
|
|
|
7,570
|
|
|
6,645
|
|
|
13,669
|
|
|
11,106
|
Total sales from by-products
|
|
$
|
11,140
|
|
$
|
9,830
|
|
$
|
20,537
|
|
$
|
16,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
By-product credits per precious metal gold equivalent ounce sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper sales
|
|
$
|
135
|
|
$
|
97
|
|
$
|
115
|
|
$
|
92
|
Lead sales
|
|
|
252
|
|
|
107
|
|
|
192
|
|
|
116
|
Zinc sales
|
|
|
820
|
|
|
427
|
|
|
611
|
|
|
421
|
Total by-product credits per precious metal gold ounces sold
|
|
$
|
1,207
|
|
$
|
631
|
|
$
|
918
|
|
$
|
629
|
Liquidity and Capital Resources
As of June 30, 2017, we had working capital of $18.9 million, consisting of current assets of $33.9 million and current liabilities of $15.0 million. This represents a decrease of $1.4 million from the working capital balance of $20.3 million at December 31, 2016. 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.
Cash and cash equivalents increased $2.2 million to $16.4 million during the first six months of 2017.
Net cash provided by operating activities of $14.0 million increased $2.4 million for the first six months of 2017 compared to the same period in 2016, primarily due to increased accounts payable and accrued liabilities.
Net cash used in investing activities of $11.0 million increased $1.1 million for the first six months of 2017 compared to the same period in 2016 due to the purchase of additional mineral rights in our Nevada Mining Unit.
Net cash used in financing activities decreased $0.5 million for the first six months of 2017 compared to the same period in 2016 primarily due to the early repayment of capital leases which occurred in 2016. No such payments were made in 2017.
We believe that our liquidity and capital resources are adequate to fund our operations for the foreseeable future.
Accounting Developments
For a discussion of Recently Adopted and Recently Issued Accounting Pronouncements, please see
Note 2
to the
Condensed Consolidated Financial Statements
.
Contractual Obligations
Please see
Note 10
to the
Condensed Consolidated Financial Statements
.
Critical Accounting Estimates
There have been no changes in our critical accounting estimates since December 31, 2016.
Forward-Looking Statements
This report contains or incorporates by reference “forward-looking statements,” as that term is used in federal securities laws, about our financial condition, results of operations and business. These statements include, among others:
|
·
|
|
statements about our future exploration, permitting, and plans for development of our properties;
|
|
·
|
|
statements concerning the benefits that we expect will result from our business activities and certain transactions that we contemplate or have completed, such as receipt of proceeds, decreased expenses and avoided expenses and expenditures; and
|
|
·
|
|
statements of our expectations, beliefs, future plans and strategies, our targets, exploration activities, anticipated developments and other matters that are not historical facts.
|
These statements may be made expressly in this document or may be incorporated by reference from other documents that we will file with the SEC. You can find many of these statements by looking for words such as “believes,” “expects,” “targets,” “anticipates,” “estimates,” or similar expressions used in this report or incorporated by reference in this report.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied in those statements. Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied. We caution you not to put undue reliance on these statements, which speak only as of the date of this report. Further, the information contained in this document or incorporated herein by reference is a statement of our present intention and is based on present facts and assumptions, which may change at any time and without notice, based on changes in such facts or assumptions.
Risk Factors Impacting Forward-Looking Statements
The important factors that could prevent us from achieving our stated goals and objectives include, but are not limited to, those set forth in other reports we have filed with the SEC, including our Form 10-K for the year ended December 31, 2016 and the following:
|
·
|
|
Changes in the worldwide price for gold and/or silver;
|
|
·
|
|
Volatility in the equities markets;
|
|
·
|
|
Adverse results from our exploration or production efforts;
|
|
·
|
|
Producing at rates lower than those targeted;
|
|
·
|
|
Political and regulatory risks;
|
|
·
|
|
Weather conditions, including unusually heavy rains;
|
|
·
|
|
Earthquakes or other unforeseen ground movements impacting mining or processing;
|
|
·
|
|
Failure to meet our revenue or profit goals or operating budget;
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Decline in demand for our common stock;
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Downward revisions in securities analysts’ estimates or changes in general market conditions;
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Technological innovations by competitors or in competing technologies;
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Investor perception of our industry or our prospects;
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Actions by government central banks; and
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General economic trends.
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We undertake no responsibility or obligation to update publicly these forward-looking statements, but may do so in the future in written or oral statements. Investors should take note of any future statements made by us or on our behalf.
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, 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
T
he results of our operations depend in large part upon the market prices of gold and silver, and to a lesser extent on base metal prices of copper, lead and zinc. Gold and silver prices fluctuate widely and are affected by numerous factors beyond our control. The level of interest rates, the rate of inflation, 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 price of gold and silver has 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 have not entered into derivative contracts to protect the selling price for gold or silver. We may in the future more actively manage our exposure through derivative contracts or other commodity price risk management programs, although we have no intention of doing so in the near-term
.
In addition to 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
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. When the value of the peso rises in relation to the U.S. Dollar, some of our costs in Mexico may increase, thus affecting our operating results. Alternatively, when the value of the peso drops in relation to the US Dollar, peso-denominated costs in Mexico will decrease in U.S. Dollar terms. These fluctuations do not impact our revenues since we sell our metals in U.S. dollars. Future fluctuations may give rise to foreign currency exposure, which may affect our financial results
.
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.
Provisional Sales Contract Risk
We enter into concentrate sales contracts which, in general, provide for a provisional payment 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 average forward prices at the time of sale. The embedded derivative, which is the final settlement based on a future price, does not qualify for hedge accounting and the marked-to-market adjustments are recorded in net sales each period prior to final settlement.
Please see
Note 13
to the
Condensed Consolidated Financial Statements
for additional information.
Equity Price Risk
We have in the past sought and may in the future seek to acquire additional funding by 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 aris
e.
ITEM 4: Controls and Procedures
During the fiscal period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the required time periods and are designed to ensure that information required to be disclosed in our reports 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.
There were no changes that occurred during the three months ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.