ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. Our actual future results or actions may differ materially from these forward-looking statements for many reasons, including but not limited to the risks described in “Risk Factors” and elsewhere in this annual report and other reports filed by us with the SEC. This discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes included in this report and with the understanding that our actual future results may be materially different from what we currently expect.
Introduction
The following discussion summarizes our results of operations for two fiscal years ended December 31, 2019 and 2018 and our financial condition at December 31, 2019 and 2018, with a particular emphasis on the year ended December 31, 2019. A discussion regarding our financial condition and results of operations for 2018 compared with 2017 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the SEC on February 26, 2019.
The discussion also presents certain non-GAAP financial measures that are important to management in its evaluation of our operating results and which are used by management to compare our performance with what we perceive to be peer group mining companies and are relied on as part of management’s decision-making process. Management believes these measures may also be important to investors in evaluating our performance. For a detailed description of each of the non-GAAP financial measures, please see the discussion under Non-GAAP Measures.
In our financial statements, we report the sale of precious and base metals as revenue and we periodically review our revenue streams to ensure that this treatment remains appropriate. We consider precious metals to be the long-term primary driver of our economic decisions and believe that base metals are secondary products.
Precious metal gold equivalent is determined by taking gold ounces produced or sold, plus silver ounces produced or sold converted to precious metal gold equivalent ounces using the gold to silver average realized price ratio for the period.
Highlights for the year ended December 31, 2019 are summarized below and discussed further in our Management’s Discussion and Analysis:
2019 Highlights
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Achieved our ninth consecutive year of profitability;
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·
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Record consolidated annual gold production;
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·
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Achieved 2019 Oaxaca Mining Unit gold production guidance range with 29,435 ounces;
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·
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Achieved 2019 Oaxaca Mining Unit silver production guidance range with 1.72 million ounces
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·
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$135.4 million consolidated net sales, an increase of 17%;
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·
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$5.8 million net income or $0.09 per share;
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·
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Oaxaca Mining Unit $264 total cash costs (after by-product credits) per precious metal gold equivalent ounce sold;
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·
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Oaxaca Mining Unit $646 total all-in sustaining cost per precious metal gold equivalent ounce sold;
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Completed construction and commenced production at the Isabella Pearl Mine, producing 10,883 ounces of gold and 9,752 ounces of silver; and
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·
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$1.5 million distributed in shareholder dividends, totaling over $113 million since 2010.
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Overview
We are a mining company which pursues gold and silver projects that are expected to achieve both low operating costs and high returns on capital. We have two mining units, the Oaxaca Mining Unit located in Oaxaca, Mexico and the Nevada Mining Unit located in Nevada, USA. Our Oaxaca Mining Unit consists of six properties and includes mineral production primarily from the Arista underground mine and to a lesser extent the Aguila Open Pit mine, both of which are located at the Aguila project. We also produce from the Mirador underground mine at the Alta Gracia project. All three mines supply ore to our processing facilities located at the Aguila project. We produce doré and metal concentrates which contain precious metals of gold and silver and base metals of copper, lead and zinc. Our Nevada Mining Unit consists of four properties and includes the Isabella Pearl Mine which commenced production in mid-2019. The Isabella Pearl Mine mineralization is predominantly gold with some silver from which we produce doré.
Results of Operations—Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Sales, net. During the year ended December 31, 2019, consolidated sales, net were $135.4 million as compared to $115.3 million for the same period in 2018. The increase is attributable to an increase in gold and base metal sales volumes in 2019, of which 10,272 gold ounces or $15.1 million was from the Isabella Pearl Mine which began selling doré in May 2019. For the year ended December 31, 2019, consolidated sales volumes totaled 34,439 ounces and 1,477,192 ounces of gold and silver, respectively, as compared to 22,886 ounces and 1,529,951 ounces of gold and silver, respectively, for the same period in 2018. Please see the Oaxaca and Nevada Mining Unit’s sales discussion below for more information.
Mine gross profit. For the year ended December 31, 2019, mine gross profit and mine gross profit percent totaled $29.1 million and 22% compared to $33.7 million and 29% for the same period in 2018. The decrease in mine gross profit and mine gross profit percent during 2019 primarily resulted from higher treatment and refining costs which were slightly offset by higher sales volumes from higher throughput in 2019 as compared to 2018, and higher precious metal prices.
General and administrative expenses. For the year ended December 31, 2019, general and administrative expenses totaled $9.9 million, compared to $9.3 million for the same period of 2018. The $0.6 million increase in 2019, compared to 2018 is primarily due to increased stock-based compensation.
Exploration expenses. For the year ended December 31, 2019, property exploration expenses totaled $3.7 million as compared to $4.7 million for the same period of 2018. The decrease of $1.0 million was the result of the Isabella Pearl Mine commencing production in 2019.
Other expense, net. For the year ended December 31, 2019, we recorded other expense of $0.6 million compared to other expense of $3.1 million during the same period of 2018. The $2.5 million decrease in 2019 compared to the same period in 2018 was due to our mark-to-market gains on our gold and silver bullion/rounds due to the increasing prices in 2019 as compared to 2018 where prices were declining and less exchange rate fluctuation between the U.S. Dollar and Mexican Peso. Additionally, in 2018 we recorded the allowance for doubtful accounts receivable resulting from the bankruptcy filing of one of our customers. Please see Note 17 to the Consolidated Financial Statements for additional information.
Provision for income taxes. For the year ended December 31, 2019, income tax expense increased to $9.1 million from $7.3 million from the same period in 2018. The increase in tax expense is mostly due to the inclusion of the Global Intangible Low Taxed Income (“GILTI”). Please see Note 5 in Item 8. Financial Statements and Supplementary Data for additional information.
Net income. For the ended December 31, 2019, we recorded net income of $5.8 million as compared to net income of $9.3 million during the same period in 2018.
Oaxaca Mining Unit Sales, net
Oaxaca Mining Unit net sales of $120.3 million for the year ended December 31, 2019 increased by $5.0 million, or 4%, when compared to 2018. The increase in our 2019 sales is primarily attributable to an increase in gold and base metal production and sales volumes. Metal sales volume in 2019 increased over 2018 volumes as follows: gold by 6%, copper by 9%, lead by 19%, and zinc by 20%. In addition to higher sales volumes, average realized prices for gold and silver increased 13% and 4%, respectively, from 2018. The increases in gold and base metal sales volumes and gold and silver average price was partially offset by the declining base metal prices from 2018 as well as increased treatment and refining charges. For the year ended December 31, 2019, average realized prices for copper, lead, and zinc decreased from the same period in 2018 as follows: copper by 5%, lead by 6%, and zinc by 7%.
During 2019, we sold 24,167 gold ounces and 1,468,860 silver ounces from our Oaxaca Mining Unit at a total cash cost per precious metal gold equivalent ounce after by-product credits, of $264. During the three months ended December 31, 2019, we sold 6,966 gold ounces and 372,729 silver ounces at a total cash cost per gold equivalent ounce after by-product credits, of $220. Please see Non-GAAP Measures below for additional information concerning the cash cost per ounce measures.
The following Sales Statistics table summarizes certain information about our Oaxaca Mining Unit operations for the periods indicated:
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Three months ended December 31,
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Year ended December 31,
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2019
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2018
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2019
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2018
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Metal sold
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Gold (ozs.)
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6,966
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6,142
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24,167
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22,886
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Silver (ozs.)
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372,729
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285,859
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1,468,860
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1,529,951
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Copper (tonnes)
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436
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420
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1,656
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1,521
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Lead (tonnes)
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2,073
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1,892
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8,034
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6,754
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Zinc (tonnes)
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4,933
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4,596
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19,322
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16,123
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Average metal prices realized (1)
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Gold ($ per oz.)
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1,484
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1,214
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1,418
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1,259
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Silver ($ per oz.)
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17.39
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13.70
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16.31
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15.65
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Copper ($ per tonne)
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5,938
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5,871
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6,003
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6,345
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Lead ($ per tonne)
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2,072
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1,741
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2,001
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2,119
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Zinc ($ per tonne)
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2,382
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1,825
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2,576
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2,770
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Precious metal gold equivalent ounces sold
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Gold Ounces
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6,966
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6,142
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24,167
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22,886
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Gold Equivalent Ounces from Silver
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4,368
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3,226
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16,895
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19,018
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Total Precious Metal Gold Equivalent Ounces
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11,334
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9,368
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41,062
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41,904
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Total cash cost before by-product credits per precious metal gold equivalent ounce sold (2)
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$
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1,864
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$
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1,858
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$
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2,109
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$
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1,722
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Total cash cost after by-product credits per precious metal gold equivalent ounce sold (2) (3)
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$
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220
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$
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42
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$
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264
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$
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84
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Total all-in sustaining cost per precious metal gold equivalent ounce sold(2)
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$
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565
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$
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426
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$
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646
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$
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655
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(1)
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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.
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(3)
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Total cash cost after by-product credits are significantly affected by base metals sales during the periods presented.
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Oaxaca Mining Unit Production
Our 2019 full year production of 29,435 gold ounces and 1,722,852 silver ounces from the Oaxaca Mining Unit achieved our targeted ranges for the year. Our 2019 production outlook was 27,000 gold ounces and 1,700,000 silver ounces plus or minus 10%.
For the year ended December 31, 2019, gold and silver production of 29,435 ounces and 1,722,852 ounces increased 10% and 3%, respectively, from the same period in 2018. The increase in precious metal production is a direct result of a 13% increase in mill throughput. Daily average milled tonnage for 2019 was 1,980 tonnes.
During 2019, the Arista Mine accounted for 91% of the production tonnage followed by the Mirador Mine and Aguila open pit with 5% and 4%, respectively.
For the three months ended December 31, 2019, production totaled 7,554 ounces of gold and 417,877 ounces of silver, representing a decrease of 5% in gold production and an increase of 26% in silver production, from the same period in 2018. The variance in production for gold and silver in the fourth quarter is a result of variation of grades as compared to 2018. The lower gold grade was partially offset by the record average milled tonnage of 2,017 tonnes per day or 7% increase when compared to the same period in 2018. The higher mill throughput resulted from mining efficiencies gained by producing from multiple work faces of the Arista and Switchback vein systems.
Gold and silver ore grades vary depending on the areas of the Arista Mine being worked at any given time. We have seen an expected decrease of precious metal grades and an increase in base metal grades as we have mined deeper in the deposit over the last nine years. The fluctuation in grades with depth is a function of the metal gradation in the epithermal vein system. Higher precious metal and lower base metal grades are present in the upper part of an epithermal system and the reverse, higher base metal and lower precious metal grades, in the lower part of an epithermal system. As we increase mining operations in this particular area of the Switchback vein system, we are currently in an area and at a depth with high base metal grades and lower precious metal grades. As mining progresses in future years at Switchback, precious metal grades are expected to increase and base metal grades decrease. This is not only evidenced by our drill results in the upper levels of the Switchback vein system but our experience with the gradation at the Arista vein system having generally mined it from the top down over the last nine years.
During the three and twelve months ended December 31, 2019, we processed ore at a rate of 2,017 and 1,980 ore tonnes per day, respectively, compared to 1,885 and 1,764 ore tonnes per day for the same periods in 2018. The agitated leach plant maintained a high utilization in 2019 processing 63,306 tonnes and averaging 180 tonnes per day. Feed for this plant was provided by the Aguila Open pit and the Mirador Mine.
The following Production Statistics table summarizes certain information about our Oaxaca Mining Unit operations for the periods indicated:
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Three months ended December 31,
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Year ended December 31,
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2019
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2018
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2019
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2018
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Arista Mine
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Milled
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Tonnes Milled
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160,701
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149,494
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629,868
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560,191
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Grade
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Average Gold Grade (g/t)
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1.77
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1.82
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1.73
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1.69
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Average Silver Grade (g/t)
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78
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65
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|
82
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|
95
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Average Copper Grade (%)
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0.37
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0.35
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0.38
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0.37
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Average Lead Grade (%)
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1.79
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1.72
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1.88
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1.66
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Average Zinc Grade (%)
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4.41
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4.45
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4.64
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4.29
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Aguila Open Pit Mine
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Milled
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Tonnes Milled
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7,367
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10,705
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31,343
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36,435
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Grade
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Average Gold Grade (g/t)
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1.31
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2.02
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1.65
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2.08
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Average Silver Grade (g/t)
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77
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38
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53
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41
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Mirador Mine
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Milled
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Tonnes Milled
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9,422
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3,800
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31,962
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15,044
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Grade
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Average Gold Grade (g/t)
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0.82
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1.52
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|
0.91
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|
|
1.43
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Average Silver Grade (g/t)
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179
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|
222
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|
195
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|
174
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Combined
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Tonnes milled
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177,490
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163,999
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693,173
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611,670
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Tonnes Milled per Day (1)
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2,017
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1,885
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1,980
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1,764
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Metal production (before payable metal deductions) (2)
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Gold (ozs.)
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7,554
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7,974
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29,435
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26,838
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Silver (ozs.)
|
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417,877
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330,605
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1,722,852
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1,672,034
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Copper (tonnes)
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|
452
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|
446
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1,859
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|
|
1,652
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Lead (tonnes)
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2,286
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|
|
2,006
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|
|
9,202
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|
|
7,280
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Zinc (tonnes)
|
|
|
5,734
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|
|
5,572
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|
23,683
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|
19,808
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|
(1)
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Based on actual days the mill operated during the period.
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(2)
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The difference between what we report as "ounces/tonnes produced" and "payable ounces/tonnes sold" is attributable to the difference between the quantities of metals contained in the concentrates we produce versus the portion of those metals actually paid for according to the terms of our sales contracts. Differences can also arise from inventory changes incidental to shipping schedules, or variances in ore grades and recoveries which impact the amount of metals contained in concentrates produced and sold.
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Nevada Mining Unit Sales, net
In May of 2019, we began selling gold and silver doré from our Isabella Pearl Mine. During the three months ended December 31, 2019, we sold 5,097 and 4,186 ounces of gold and silver, respectively, from the Isabella Pearl Mine for net sales of $7.6 million. During the year ended December 31, 2019, we sold 10,272 and 8,332 ounces of gold and silver, respectively, for net sales of $15.1 million.
The following Sales Statistics table summarizes certain information about our Nevada Mining Unit operations for the periods indicated:
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|
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|
|
|
|
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|
Three months ended December 31,
|
|
Year ended December 31,
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2019
|
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2018
|
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2019
|
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2018
|
|
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|
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Metal sold
|
|
|
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|
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Gold (ozs.)
|
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5,097
|
|
|
-
|
|
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10,272
|
|
|
-
|
Silver (ozs.)
|
|
|
4,186
|
|
|
-
|
|
|
8,332
|
|
|
-
|
Average metal prices realized (1)
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|
|
|
|
|
|
|
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Gold ($ per oz.)
|
|
|
1,482
|
|
|
-
|
|
|
1,468
|
|
|
-
|
Silver ($ per oz.)
|
|
|
16.89
|
|
|
-
|
|
|
17.04
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
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Total cash cost before by-product credits per gold ounce sold (2)
|
|
$
|
1,110
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|
$
|
-
|
|
$
|
1,054
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|
$
|
-
|
Total cash cost after by-product credits per gold ounce sold (2)
|
|
$
|
1,096
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|
$
|
-
|
|
$
|
1,040
|
|
$
|
-
|
Total all-in sustaining cost per gold ounce sold (2)
|
|
$
|
1,096
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|
$
|
-
|
|
$
|
1,049
|
|
$
|
-
|
|
(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 market average metal prices in most cases.
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Nevada Mining Unit Production
During the three months ended December 31, 2019, our Isabella Pearl Mine produced 5,502 ounces and 5,293 ounces of gold and silver, respectively. During the year ended December 31, 2019, our Isabella Pearl Mine produced 10,883 ounces and 9,752 ounces of gold and silver, respectively. Production in 2020 is expected to increase from 2019 as the mine began production is April 2019 and was in ramp up until it reached commercial production levels in October 2019. We will begin to access the higher-grade ore of the Pearl deposit in 2020.
The following Production Statistics table summarizes certain information about our Isabella Pearl operations for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
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|
Ore mined
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|
|
|
|
|
|
|
|
|
|
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Ore (tonnes)
|
|
|
164,277
|
|
|
-
|
|
|
934,723
|
|
|
-
|
Gold grade (g/t)
|
|
|
1.09
|
|
|
-
|
|
|
0.76
|
|
|
-
|
Low-grade stockpile (tonnes)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ore (tonnes)
|
|
|
57,839
|
|
|
-
|
|
|
529,959
|
|
|
-
|
Gold grade (g/t)
|
|
|
0.46
|
|
|
-
|
|
|
0.51
|
|
|
-
|
Waste (tonnes)
|
|
|
1,557,021
|
|
|
-
|
|
|
4,504,360
|
|
|
-
|
Metal production (before payable metal deductions) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold (ozs.)
|
|
|
5,502
|
|
|
-
|
|
|
10,883
|
|
|
-
|
Silver (ozs.)
|
|
|
5,293
|
|
|
-
|
|
|
9,752
|
|
|
-
|
|
(1)
|
|
The difference between what we report as "ounces produced" and "payable ounces sold" is attributable to the difference between the quantities of metals contained in the doré we produce versus the portion of those metals actually paid for according to the terms of our sales contracts. Differences can also arise from inventory changes incidental to shipping schedules, or variances in ore grades and recoveries which impact the amount of metals contained in doré produced and sold.
|
2020 Production Targets
Precious metal production targets for 2020 are 54,000 gold ounces, and 1,700,000 silver ounces, with a plus or minus range of 10% of each metal. In addition, significant base metal production of copper, lead, and zinc is expected.
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 our 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, 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 by-product of our gold and silver production for the purpose of our total cash cost after by-product credits for our Oaxaca Mining Unit. We periodically review our revenues to ensure that our reporting of primary products and by-products is appropriate. Because we consider copper, lead and zinc to be by-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 by-product credits per precious metal gold equivalent ounce sold. Likewise, we believe the identification of copper, lead and zinc as by-product credits is appropriate because of their lower individual economic value compared to gold and silver and due to the fact that gold and silver are the primary products we intend to produce. For our Nevada Mining Unit, silver sales are treated as a by-product.
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. AISC is calculated based on the current guidance from the World Gold Council.
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 allocated 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 by-product credits per ounce, total cash cost after by-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.
Reconciliations to U.S. GAAP
The following table provides a reconciliation of Oaxaca and Nevada Mining Units’ total cash cost after by-product credits to total mine cost of sales (a U.S. GAAP measure) as presented in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
Oaxaca Mining Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash cost after by-product credits
|
|
$
|
2,487
|
|
$
|
400
|
|
$
|
10,830
|
|
$
|
3,540
|
Treatment and refining charges
|
|
|
(3,158)
|
|
|
(1,243)
|
|
|
(13,996)
|
|
|
(5,565)
|
By-product credits
|
|
|
18,634
|
|
|
17,009
|
|
|
75,788
|
|
|
68,625
|
Depreciation and amortization
|
|
|
5,973
|
|
|
4,029
|
|
|
18,928
|
|
|
14,616
|
Reclamation and remediation
|
|
|
16
|
|
|
(49)
|
|
|
65
|
|
|
330
|
Share-based compensation allocated to production costs
|
|
|
23
|
|
|
29
|
|
|
55
|
|
|
72
|
Total Oaxaca Mining Unit mine cost of sales
|
|
|
23,975
|
|
|
20,175
|
|
|
91,670
|
|
|
81,618
|
Nevada Mining Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash cost after by-product credits
|
|
|
5,587
|
|
|
-
|
|
|
10,682
|
|
|
-
|
Treatment and refining charges
|
|
|
(10)
|
|
|
-
|
|
|
(19)
|
|
|
-
|
Depreciation and amortization
|
|
|
1,923
|
|
|
-
|
|
|
3,884
|
|
|
-
|
Reclamation and remediation
|
|
|
6
|
|
|
-
|
|
|
34
|
|
|
-
|
Total Nevada Mining Unit mine cost of sales
|
|
|
7,506
|
|
|
-
|
|
|
14,581
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated mine cost of sales
|
|
$
|
31,481
|
|
$
|
20,175
|
|
$
|
106,251
|
|
$
|
81,618
|
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 for our Oaxaca Mining Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(in thousands, except ounces sold and cost per precious metal gold equivalent ounce sold)
|
Total cash cost before by-product credits (1)
|
|
$
|
21,121
|
|
$
|
17,409
|
|
$
|
86,618
|
|
$
|
72,165
|
By-product credits (2)
|
|
|
(18,634)
|
|
|
(17,009)
|
|
|
(75,788)
|
|
|
(68,625)
|
Total cash cost after by-product credits
|
|
|
2,487
|
|
|
400
|
|
|
10,830
|
|
|
3,540
|
Sustaining capital expenditures
|
|
|
3,196
|
|
|
2,530
|
|
|
12,495
|
|
|
20,640
|
Sustaining general and administrative expenses
|
|
|
715
|
|
|
1,070
|
|
|
3,190
|
|
|
3,302
|
Total all-in sustaining cost
|
|
$
|
6,398
|
|
$
|
4,000
|
|
$
|
26,515
|
|
$
|
27,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precious metal gold equivalent ounces sold (3)
|
|
|
11,334
|
|
|
9,368
|
|
|
41,062
|
|
|
41,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash cost before by-product credits per precious metal gold equivalent ounce sold
|
|
$
|
1,864
|
|
$
|
1,858
|
|
$
|
2,109
|
|
$
|
1,722
|
By-product credits per precious metal gold equivalent ounce sold
|
|
|
(1,644)
|
|
|
(1,816)
|
|
|
(1,845)
|
|
|
(1,638)
|
Total cash cost after by-product credits per precious metal gold equivalent ounce sold
|
|
|
220
|
|
|
42
|
|
|
264
|
|
|
84
|
Other sustaining expenditures per precious metal gold equivalent ounce sold
|
|
|
345
|
|
|
384
|
|
|
382
|
|
|
571
|
Total all-in sustaining cost per precious metal gold equivalent ounce sold
|
|
$
|
565
|
|
$
|
426
|
|
$
|
646
|
|
$
|
655
|
|
(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 summarize our Oaxaca Mining Unit’s by-product revenue and by-product credit per precious metal gold equivalent ounce sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
By-product credits by dollar value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper sales
|
|
$
|
2,590
|
|
$
|
2,465
|
|
$
|
9,947
|
|
$
|
9,651
|
Lead sales
|
|
|
4,295
|
|
|
3,294
|
|
|
16,072
|
|
|
14,312
|
Zinc sales
|
|
|
11,749
|
|
|
11,250
|
|
|
49,769
|
|
|
44,662
|
Total sales from by-products (1)
|
|
$
|
18,634
|
|
$
|
17,009
|
|
$
|
75,788
|
|
$
|
68,625
|
|
(1)
|
|
Amounts include realized gain (loss) on embedded derivative. Please see Note 19 to the Condensed Consolidated Financial Statements for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
By-product credits per precious metal gold equivalent ounce sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Copper sales
|
|
$
|
228
|
|
$
|
263
|
|
$
|
242
|
|
$
|
230
|
Lead sales
|
|
|
379
|
|
|
352
|
|
|
391
|
|
|
342
|
Zinc sales
|
|
|
1,037
|
|
|
1,201
|
|
|
1,212
|
|
|
1,066
|
Total by-product credits per precious metal gold ounces sold
|
|
$
|
1,644
|
|
$
|
1,816
|
|
$
|
1,845
|
|
$
|
1,638
|
The following table presents a reconciliation of the non-GAAP measures of total cash cost and AISC for our Nevada Mining Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(in thousands, except ounces sold and cost per gold ounce sold)
|
Total cash cost before by-product credits (1)
|
|
$
|
5,657
|
|
$
|
-
|
|
$
|
10,825
|
|
$
|
-
|
By-product credits (2)
|
|
|
(70)
|
|
|
-
|
|
|
(143)
|
|
|
-
|
Total cash cost after by-product credits
|
|
$
|
5,587
|
|
$
|
-
|
|
$
|
10,682
|
|
$
|
-
|
Sustaining exploration expenses
|
|
|
-
|
|
|
-
|
|
|
88
|
|
|
-
|
Total all-in sustaining cost
|
|
$
|
5,587
|
|
$
|
-
|
|
$
|
10,770
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold ounces sold
|
|
|
5,097
|
|
|
-
|
|
|
10,272
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash cost before by-product credits per gold ounce sold
|
|
$
|
1,110
|
|
$
|
-
|
|
$
|
1,054
|
|
$
|
-
|
By-product credits per gold ounce sold (2)
|
|
|
(14)
|
|
|
-
|
|
|
(14)
|
|
|
-
|
Total cash cost after by-product credits per gold ounce sold
|
|
|
1,096
|
|
|
-
|
|
|
1,040
|
|
|
-
|
Other sustaining expenditures per gold ounce sold
|
|
|
-
|
|
|
-
|
|
|
9
|
|
|
-
|
Total all-in sustaining cost per gold ounce sold
|
|
$
|
1,096
|
|
$
|
-
|
|
$
|
1,049
|
|
$
|
-
|
|
(1)
|
|
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.
|
The following tables summarize our Nevada Mining Unit’s by-product revenue and by-product credit per gold ounce sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
By-product credits by dollar value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Silver sales
|
|
$
|
70
|
|
$
|
-
|
|
$
|
143
|
|
$
|
-
|
Total sales from by-products
|
|
$
|
70
|
|
$
|
-
|
|
$
|
143
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
By-product credits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Silver sales
|
|
$
|
14
|
|
$
|
-
|
|
$
|
14
|
|
$
|
-
|
Total
|
|
$
|
14
|
|
$
|
-
|
|
$
|
14
|
|
$
|
-
|
Liquidity and Capital Resources
As of December 31, 2019, we had working capital of $22.7 million, consisting of current assets of $50.7 million and current liabilities of $28.0 million. This represents an increase of $8.9 million from the working capital balance of $13.8 million at December 31, 2018. 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 our liquidity and capital resources are adequate to fund our operations and corporate activities for the foreseeable future.
Our December 31, 2019 working capital was negatively affected by the current operating lease liability of $7.3 million as a result of the adoption of the new leasing standard in 2019. Please see Note 12 to the Consolidated Financial Statements for more information.
Cash and cash equivalents as of December 31, 2019 increased to $11.1 million from $7.8 million as of December 31, 2018, a net increase in cash of $3.3 million. The increase is primarily due to cash from operations and cash received from our ATM program which was offset by cash spent for the construction and development of our Isabella Pearl Mine.
Net cash provided by operating activities for the years ended December 31, 2019 and 2018 was $21.4 million and $22.3 million, respectively. An increase in depreciation and amortization (a non-cash expense) in 2019 was offset by increases in accounts receivable and inventories and other changes in operating assets and liabilities.
Net cash used in investing activities for the year ended December 31, 2019 was $39.5 million compared to $40.1 million during the same period in 2018. The slight decrease in investing activities is primarily attributable to decreased mine development and completion of critical capital projects at our Oaxaca Mining Unit which was mostly offset with increased development and construction of our Isabella Pearl project.
Net cash provided by financing activities for the year ended December 31, 2019 was $21.8 million compared to $3.5 million in 2018 due to proceeds from the sale of our common stock under the ATM agreement in 2019. During the year ended December 31, 2019, we sold 6,625,588 shares of common stock under the ATM Agreement for net proceeds of $24.4 million. We renewed the ATM Agreement in November 2019, effective if and when the related registration statement is effective. At such time the previous agreement would be terminated.
Off-Balance Sheet Arrangements
As of December 31, 2019, we have the following off-balance sheet arrangements: equipment purchase obligations of $0.9 million and $6.7 million of outstanding reclamation bonds.
Contractual Obligations
The following table represents a summary of our contractual obligations at December 31, 2019, except short-term cancellable purchase order commitments arising in the ordinary course of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
Total
|
|
Less Than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than 5 Years
|
|
|
|
(in thousands)
|
Loan payable
|
|
$
|
1,661
|
|
$
|
879
|
|
|
782
|
|
$
|
-
|
|
$
|
-
|
|
Finance lease obligation
|
|
|
881
|
|
|
447
|
|
|
431
|
|
|
3
|
|
|
-
|
|
Interest on loan payable
|
|
|
65
|
|
|
49
|
|
|
16
|
|
|
-
|
|
|
-
|
|
Interest on finance lease obligation
|
|
|
50
|
|
|
37
|
|
|
13
|
|
|
-
|
|
|
-
|
|
Operating lease obligations
|
|
|
7,594
|
|
|
7,430
|
|
|
164
|
|
|
-
|
|
|
-
|
|
Contract Mining Agreement(1)
|
|
|
8,073
|
|
|
8,073
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Equipment purchase obligations
|
|
|
907
|
|
|
777
|
|
|
130
|
|
|
-
|
|
|
-
|
|
|
|
$
|
19,231
|
|
$
|
17,692
|
|
$
|
1,536
|
|
$
|
3
|
|
$
|
-
|
|
|
(1)
|
|
We signed a 24-month Contract Mining Agreement with a contract miner on November 14, 2018 relating to mining activities at our Isabella Pearl project. We will be paying the contract miner operational costs in the normal course of business. These costs represent the remaining future minimum payments for the Contract Mining Agreement over the initial 24 months of the agreement. The future minimum payments are determined by rates within the Contract Mining Agreement, estimated tonnes moved and bank cubic yards for drilling and blasting.
|
Accounting Developments
For a discussion of Recently Adopted Accounting Pronouncements and Recently Issued Accounting Pronouncements, please see Note 1 in Item 8. Financial Statements and Supplementary Data.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities and contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. As a result, management is required to routinely make judgments and estimates about the effects of matters that are inherently uncertain. Actual results may differ from these estimates under different conditions or assumptions. The following discussion pertains to accounting estimates management believes are most critical to the presentation of our financial position and results of operations that require management’s most difficult, subjective or complex judgments.
Future Metals Prices
Metals prices are key components in estimates that determine the valuation of some of our significant assets and liabilities, including properties, plant and equipment, deferred tax assets, and certain accounts receivable. Metals prices are also an important component in the estimation of reserves. As shown above in Item 1. – Business, metals prices have historically been volatile. Silver demand arises from investment demand, particularly in exchange-traded funds, industrial demand, and consumer demand. Gold demand arises primarily from investment and consumer demand. Investment demand for silver and gold can be influenced by several factors, including: the value of the U.S. dollar and other currencies, changing U.S. budget deficits, widening availability of exchange-traded funds, interest rate levels, the health of credit markets, and inflationary expectations.
Proven and Probable Reserves
Critical estimates are inherent in the process of determining our reserves. Our reserves are affected largely by our assessment of future metals prices, as well as by engineering and geological estimates of ore grade, accessibility and
production cost. Metals prices are estimated at three-year trailing averages. Our assessment of reserves occurs at least annually. Reserves are a key component in the valuation of our property, equipment and mine development and related depreciation rates.
Reserve estimates are used in determining appropriate rates of units-of-production depreciation, with net book value of many assets depreciated over remaining estimated reserves. Reserves are also a key component in forecasts of estimated future cash flows, which we compare to current asset values in an effort to ensure that carrying values are reported appropriately, as well as assessment of the recoverability of deferred tax assets related to expectations of future taxable income. Reserves are a culmination of many estimates and are not guarantees that we will recover the indicated quantities of metals or that we will do so at a profitable level.
Revenue
Concentrate sales are initially recorded based on 100% of the provisional sales prices, net of treatment and refining charges, at the time of delivery to the customer at which point the performance obligations are satisfied and control of the product is transferred to the customer. Adjustments to the provisional sales prices are made to take into account the mark-to-market changes based on the forward prices of metals until final settlement occurs. The changes in price between the provisional sales price and final sales price are considered an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of the concentrates at the quoted metal prices at the time of delivery. The embedded derivative, which does not qualify for hedge accounting, is adjusted to market through revenue each period prior to final settlement. Market changes in the prices of metals between the delivery and final settlement dates will result in adjustments to revenues related to previously recorded sales of concentrate. Sales are recorded net of charges for treatment, refining, smelting losses and other charges negotiated with the buyer. These charges are estimated upon delivery of concentrates based on contractual terms and adjusted to reflect actual charges at final settlement. Historically, actual charges have not varied materially from the Company’s initial estimates.
Doré sales are recognized upon the satisfaction of performance obligations, which occurs when price and quantity are agreed upon with the customer. Doré sales are recorded using quoted metal prices, net of refining charges.
Depreciation and Amortization
Capitalized costs are depreciated or amortized using the straight-line method or unit-of-production (“UOP”) method at rates sufficient to depreciate such costs over the shorter of estimated productive lives of such assets or the useful life of the individual assets. Significant judgment is involved in the determination of the estimated life of the assets. Our estimates for reserves and leach pad capacity key are components in determining our UOP rates. Our estimates of proven and probable ore reserves may change, possibly in the near term, resulting in changes to depreciation, depletion and amortization rates in future reporting periods. Productive lives of the assets range from 1 to 10 years, but do not exceed the useful life of the individual asset.
Please see Note 1 in Item 8. Financial Statements and Supplementary Data for depreciation rates of major asset categories.
Carrying Value of Stockpiles
Stockpiles represent ore that has been extracted from the mine and is available for further processing. Mine sequencing may result in mining material at a faster rate than can be processed. We generally process the highest ore grade material first to maximize metal production; however, a blend of gold ore stockpiles may be processed to balance hardness and/or metallurgy in order to maximize throughput and recovery. Processing of lower grade stockpiled ore may continue after mining operations are completed. Stockpiles are measured by estimating the number of tonnes added and removed from the stockpile, the number of contained ounces (based on assay data), and the estimated metallurgical recovery rates. Stockpile ore tonnages are verified by periodic surveys. Costs are added to stockpiles based on current
mining costs, including applicable overhead and depreciation and amortization relating to mining operations and removed at each stockpile’s average cost per recoverable unit as material is processed.
We record stockpiles at the lower of average cost or net realizable value, and carrying values are evaluated at least quarterly. Net realizable value represents the estimated future sales price based on short-term and long-term metals price assumptions that are applied to expected short-term (12 months or less) and long-term sales from stockpiles, less estimated costs to complete production and bring the product to sale. The primary factors that influence the need to record write-downs of stockpiles include declines in short-term or long-term metals prices, increases in costs for production inputs such as labor, fuel and energy, materials and supplies, as well as realized ore grades and recovery rates. We recorded write-downs to reduce the carrying value of our current open-pit stockpiles at our Isabella Pearl Mine to net realizable value of $0.7 million in 2019 as a component of Production Costs, primarily due to the realized ore grade during the ramp-up stage of the mining activities. No net realizable value write-downs occurred in 2018 and 2017. The significant assumption in determining the stockpile net realizable value at December 31, 2019 is a current gold market price of $1,515 per ounce.
Other assumptions include future operating and capital costs, metal recoveries, production levels, commodity prices, proven and probable reserve quantities, engineering data and other factors unique to each operation based on the life of mine plans. If short-term and long-term commodity prices decrease, estimated future processing costs increase, or other negative factors occur, it may be necessary to record a write-down of ore on stockpiles. A high degree of judgment is involved in determining such assumptions and estimates and no assurance can be given that actual results will not differ significantly from those estimates and assumptions.
Carrying Value of Ore on Leach Pad
Ore on the leach pad represents ore that has been mined and placed on the leach pad where a solution is applied to the surface of the heap to dissolve the gold. Costs are added to ore on the leach pad based on current mining costs, including applicable depreciation and amortization relating to mining operations. Costs are removed from ore on the leach pad as ounces are recovered based on the average cost per estimated recoverable ounce of gold on the leach pad.
Estimates of recoverable ore on the leach pad is calculated from the quantities of ore placed on the leach pad (measured tonnes added to the leach pad), the grade of ore placed on the leach pad (based on assay data) and a recovery percentage (based on ore type). In general, the leach pad is estimated to recover between 60% and 81% of the contained ounces placed on the leach pad, depending upon whether run-of-mine or crushed ore is placed on the leach pad.
Although the quantities of recoverable metal placed on the leach pad are reconciled by comparing the grades of ore placed on pads to the quantities of metal actually recovered (metallurgical balancing), the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process is constantly monitored and estimates are refined based on actual results over time. Variations between actual and estimated quantities resulting from changes in assumptions and estimates that do not result in write-downs to net realizable value are accounted for on a prospective basis. We recorded write-downs to reduce the carrying value of leach pad inventory at our Isabella Pearl Mine to net realizable value of $2.2 million in 2019 as a component of Production Costs, primarily due to the lower realized ore grade during the ramp-up stage of the mining and processing activities. The significant assumption in determining the net realizable value for the leach pad inventory at December 31, 2019 is a current gold market price of $1,515 per ounce.
Other assumptions include future operating and capital costs, metal recoveries, production levels, commodity prices, proven and probable reserve quantities, engineering data and other factors unique to the operation based on the life of mine plans. If short-term and long-term commodity prices decrease, estimated future processing costs increase, or other negative factors occur, it may be necessary to record a write-down of ore on the leach pad. A high degree of judgment is involved in determining such assumptions and estimates and no assurance can be given that actual results will not differ significantly from those estimates and assumptions
Impairment of Long-Lived Assets
We evaluate the carrying value of long-lived assets to be held and used, using a fair-value based approach when events and circumstances indicate that the related carrying amount of our assets may not be recoverable. The economic environment and commodity prices may be considered as impairment indicators for the purposes of these impairment assessments. In accordance with U.S. GAAP, the carrying value of a long-lived asset or asset group is considered impaired when the anticipated undiscounted cash flows from such asset or asset group is less than its carrying value. In that event, a loss will be recorded in our consolidated statements of operations based on the difference between book value and the estimated fair value of the asset or asset group computed using discounted estimated future cash flows, or the application of an expected fair value technique in the absence of an observable market price. Future cash flows include estimates of recoverable quantities to be produced from estimated proven and probable mineral reserves, commodity prices (considering current and historical prices, price trends and related factors), production quantities, production costs, and capital expenditures, all based on life-of-mine plans and projections. In estimating future cash flows, assets are grouped at the lowest level for which identifiable cash flows exist that are largely independent of cash flows from other asset groups. It is possible that actual future cash flows will be significantly different than the estimates, as actual future quantities of recoverable minerals, gold and other commodity prices, production levels and costs and capital are each subject to significant risks and uncertainties.
Asset Retirement Obligation/Reclamation and Remediation Costs
Our mining and exploration activities are subject to various laws and regulations, including legal and contractual obligations to reclaim, remediate, or otherwise restore properties at the time the property is removed from service. Accounting for reclamation and remediation obligations requires management to make estimates of the future costs that we will incur to complete the work required to comply with existing laws and regulations. Actual costs may differ from the amounts estimated. Reclamation costs are allocated to expense over the life of the related assets and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and remediation costs. Also, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required.
Stock-based Compensation
We account for stock-based employee compensation plans under the fair value recognition and measurement provisions in accordance with applicable accounting standards, which require all stock-based payments to employees, including grants of stock options and restricted stock units (“RSUs”), to be measured based on the grant date fair value of the awards, with the resulting expense generally recognized on a straight-line basis over the period during which the employee is required to perform service in exchange for the award.
Stock-based compensation expense is recorded net of estimated forfeitures in our consolidated statements of operations and as such is recorded for only those stock-based awards that we expect to vest. We estimate the forfeiture rate based on historical forfeitures of equity awards and adjust the rate to reflect changes in facts and circumstances, if any. We will revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates.
Income Taxes
In preparing our consolidated financial statements, we estimate the actual amount of taxes currently payable or receivable as well as deferred tax assets and liabilities attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. Changes in deferred tax assets and liabilities generally have a direct impact on earnings in the period of the changes. Mining taxes represent federal and state taxes levied on mining operations. As the mining taxes are calculated as a percentage of mining profits, we classify them as income taxes. Where applicable tax laws and regulations are either unclear or subject to varying interpretations, it is possible that
changes in these estimates could occur that materially affect the amounts of deferred income tax assets and liabilities recorded in the consolidated financial statements.
Each period, we evaluate the likelihood of whether or not some portion or all of each deferred tax asset will be realized and provide a valuation allowance for those deferred tax assets for which it is more likely than not that the related benefits will not be realized. When evaluating our valuation allowance, we consider historic and future expected levels of taxable income, the pattern and timing of reversals of taxable temporary timing differences that give rise to deferred tax liabilities, and tax planning initiatives. Levels of future taxable income are affected by, among other things, market gold and silver prices, production costs, quantities of proven and probable reserves, interest rates, federal and local legislation, and foreign currency exchange rates. If we determine that all or a portion of the deferred tax assets will not be realized, a valuation allowance will be recorded with a charge to income tax expense. Conversely, if we determine that we will ultimately be able to realize all or a portion of the related benefits for which a valuation allowance has been provided, all or a portion of the related valuation allowance will be reduced with a credit to income tax expense.
In addition, the calculation of income tax expense involves significant management estimation and judgment involving a number of assumptions. In determining these amounts, management interprets tax legislation in each of the jurisdictions in which we operate and makes estimates of the expected timing of the reversal of future tax assets and liabilities. We also make assumptions about future earnings, tax planning strategies and the extent to which potential future tax benefits will be used. We are also subject to assessments by various taxation authorities which may interpret tax legislation differently, which could affect the final amount or the timing of tax payments.
ITEM 7A. 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 depend in large part upon the market prices of gold, silver, and 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 state of the global or national economies, 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, 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 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. 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 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. 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 and final settlement date will result in adjustments to revenues related to the sales of concentrate previously recorded upon shipment. Please see Note 14 in Item 8. Financial Statements and Supplementary Data for additional information.
Interest Rate Risk
Our outstanding debt consists of equipment loans and leased equipment classified as finance leases. As the debt is at fixed rates, we consider our interest rate risk exposure to be insignificant at this time.
Equity Price Risk
We have in the past, 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 arise.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Gold Resource Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets as of December 31, 2019 and 2018 and the related consolidated statement of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2019 and the related notes (collectively referred to as the “financial statements”) of Gold Resource Corporation (the “Company”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations, and its cash flows of the Company for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the COSO framework.
Adoption of New Accounting Standards
As discussed in Note 12 to the consolidated financial statements, the Company has changed its method for accounting for leases in 2019 due to the adoption of the new lease standard. The Company adopted the new lease standard using a modified retrospective approach.
Basis for Opinions
The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We have served as the Company’s auditor since 2016.
/s/ Plante & Moran, PLLC
Denver, Colorado
March 2, 2020
Report of Independent Public Accounting Firm
To the Shareholders and Board of Directors
Gold Resource Corporation
Colorado Springs, Colorado
OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS
We have audited the accompanying consolidated statements of operations, shareholders’ equity, and cash flows of Gold Resource Corporation (the “Company”) for the year ended December 31, 2017; and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
BASIS FOR OPINION
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (the “PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
/s/ EKS&H LLLP
March 8, 2018
Denver, Colorado
We began serving as the Company's auditor in 2016. In 2018 we became the predecessor auditor.
GOLD RESOURCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,076
|
|
$
|
7,762
|
Gold and silver rounds/bullion
|
|
|
4,265
|
|
|
3,637
|
Accounts receivable, net
|
|
|
8,362
|
|
|
1,744
|
Inventories, net
|
|
|
24,131
|
|
|
14,342
|
Prepaid taxes
|
|
|
786
|
|
|
1,126
|
Prepaid expenses and other current assets
|
|
|
2,032
|
|
|
2,745
|
Total current assets
|
|
|
50,652
|
|
|
31,356
|
Property, plant and mine development, net
|
|
|
125,259
|
|
|
111,242
|
Operating lease assets, net
|
|
|
7,436
|
|
|
-
|
Deferred tax assets, net
|
|
|
4,635
|
|
|
7,372
|
Other non-current assets
|
|
|
5,030
|
|
|
361
|
Total assets
|
|
$
|
193,012
|
|
$
|
150,331
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
14,456
|
|
$
|
12,429
|
Loans payable, current
|
|
|
879
|
|
|
765
|
Finance lease liabilities, current
|
|
|
446
|
|
|
412
|
Operating lease liabilities, current
|
|
|
7,287
|
|
|
-
|
Mining royalty taxes payable, net
|
|
|
1,538
|
|
|
1,926
|
Accrued expenses and other current liabilities
|
|
|
3,366
|
|
|
2,030
|
Total current liabilities
|
|
|
27,972
|
|
|
17,562
|
Reclamation and remediation liabilities
|
|
|
5,605
|
|
|
3,298
|
Loans payable, long-term
|
|
|
782
|
|
|
1,378
|
Finance lease liabilities, long-term
|
|
|
435
|
|
|
831
|
Operating lease liabilities, long-term
|
|
|
160
|
|
|
-
|
Total liabilities
|
|
|
34,954
|
|
|
23,069
|
Shareholders' equity:
|
|
|
|
|
|
|
Common stock - $0.001 par value, 100,000,000 shares authorized:
|
|
|
|
|
|
|
65,691,527 and 58,850,431 shares outstanding at December 31, 2019 and 2018, respectively
|
|
|
66
|
|
|
59
|
Additional paid-in capital
|
|
|
148,171
|
|
|
121,602
|
Retained earnings
|
|
|
16,876
|
|
|
12,656
|
Treasury stock at cost, 336,398 shares
|
|
|
(5,884)
|
|
|
(5,884)
|
Accumulated other comprehensive loss
|
|
|
(1,171)
|
|
|
(1,171)
|
Total shareholders' equity
|
|
|
158,058
|
|
|
127,262
|
Total liabilities and shareholders' equity
|
|
$
|
193,012
|
|
$
|
150,331
|
The accompanying notes are an integral part of these consolidated financial statements.
GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2019, 2018 and 2017
(U.S. dollars in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Sales, net
|
|
$
|
135,366
|
|
$
|
115,308
|
|
$
|
110,156
|
Mine cost of sales:
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
|
83,340
|
|
|
66,672
|
|
|
53,436
|
Depreciation and amortization
|
|
|
22,812
|
|
|
14,616
|
|
|
14,554
|
Reclamation and remediation
|
|
|
99
|
|
|
330
|
|
|
51
|
Total mine cost of sales
|
|
|
106,251
|
|
|
81,618
|
|
|
68,041
|
Mine gross profit
|
|
|
29,115
|
|
|
33,690
|
|
|
42,115
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
9,949
|
|
|
9,325
|
|
|
8,122
|
Exploration expenses
|
|
|
3,652
|
|
|
4,703
|
|
|
4,349
|
Other expense, net
|
|
|
632
|
|
|
3,111
|
|
|
1,166
|
Total costs and expenses
|
|
|
14,233
|
|
|
17,139
|
|
|
13,637
|
Income before income taxes
|
|
|
14,882
|
|
|
16,551
|
|
|
28,478
|
Provision for income taxes
|
|
|
9,050
|
|
|
7,263
|
|
|
24,328
|
Net income
|
|
$
|
5,832
|
|
$
|
9,288
|
|
$
|
4,150
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.09
|
|
|
0.16
|
|
|
0.07
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
63,681,156
|
|
|
57,534,830
|
|
|
56,854,670
|
Diluted
|
|
|
64,032,990
|
|
|
58,369,666
|
|
|
57,594,993
|
The accompanying notes are an integral part of these consolidated financial statements.
GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 2019, 2018 and 2017
(U.S. dollars in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Common
Shares
|
|
Par Value of
Common
Shares
|
|
Additional Paid-
in Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
Shareholders'
Equity
|
Balance, December 31, 2016
|
|
56,903,272
|
|
$
|
57
|
|
$
|
112,034
|
|
$
|
2,040
|
|
$
|
(5,884)
|
|
$
|
(1,171)
|
|
$
|
107,076
|
Adjustment to beginning retained earnings as a result of adoption of ASU 2016-16
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(533)
|
|
|
-
|
|
|
-
|
|
|
(533)
|
Stock-based compensation
|
|
-
|
|
|
-
|
|
|
1,192
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,192
|
Stock options exercised
|
|
25,000
|
|
|
-
|
|
|
58
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
58
|
Common stock issued for vested restricted stock units
|
|
78,400
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Common stock issued for the acquisition of mineral rights
|
|
246,210
|
|
|
-
|
|
|
1,300
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,300
|
Dividends declared
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,137)
|
|
|
-
|
|
|
-
|
|
|
(1,137)
|
Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,150
|
|
|
-
|
|
|
-
|
|
|
4,150
|
Balance, December 31, 2017
|
|
57,252,882
|
|
$
|
57
|
|
$
|
114,584
|
|
$
|
4,520
|
|
$
|
(5,884)
|
|
$
|
(1,171)
|
|
$
|
112,106
|
Stock-based compensation
|
|
-
|
|
|
-
|
|
|
1,497
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,497
|
Net stock options exercised
|
|
712,271
|
|
|
1
|
|
|
1,203
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,204
|
Common stock issued for vested restricted stock units
|
|
89,921
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Dividends declared
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,152)
|
|
|
-
|
|
|
-
|
|
|
(1,152)
|
Issuance of stock, net of issuance costs
|
|
1,131,755
|
|
|
1
|
|
|
4,318
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,319
|
Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,288
|
|
|
-
|
|
|
-
|
|
|
9,288
|
Balance, December 31, 2018
|
|
59,186,829
|
|
$
|
59
|
|
$
|
121,602
|
|
$
|
12,656
|
|
$
|
(5,884)
|
|
$
|
(1,171)
|
|
$
|
127,262
|
Stock-based compensation
|
|
-
|
|
|
-
|
|
|
1,932
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,932
|
Net stock options exercised
|
|
69,448
|
|
|
1
|
|
|
97
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
98
|
Common stock issued for vested restricted stock units
|
|
121,060
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Dividends declared
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,612)
|
|
|
-
|
|
|
-
|
|
|
(1,612)
|
Issuance of stock, net of issuance costs
|
|
6,650,588
|
|
|
6
|
|
|
24,540
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24,546
|
Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,832
|
|
|
-
|
|
|
-
|
|
|
5,832
|
Balance, December 31, 2019
|
|
66,027,925
|
|
$
|
66
|
|
$
|
148,171
|
|
$
|
16,876
|
|
$
|
(5,884)
|
|
$
|
(1,171)
|
|
$
|
158,058
|
The accompanying notes are an integral part of these consolidated financial statements.
GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2019, 2018 and 2017
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,832
|
|
$
|
9,288
|
|
$
|
4,150
|
Adjustments to reconcile net income to net cash from operating activities:
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
2,940
|
|
|
(501)
|
|
|
14,991
|
Depreciation and amortization
|
|
|
23,318
|
|
|
15,169
|
|
|
14,998
|
Stock-based compensation
|
|
|
1,932
|
|
|
1,497
|
|
|
1,192
|
Other operating adjustments
|
|
|
322
|
|
|
2,535
|
|
|
1,285
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(6,618)
|
|
|
(220)
|
|
|
(2,254)
|
Inventories
|
|
|
(7,846)
|
|
|
(2,820)
|
|
|
(2,797)
|
Prepaid expenses and other current assets
|
|
|
1,443
|
|
|
(417)
|
|
|
(448)
|
Other non-current assets
|
|
|
(3,603)
|
|
|
130
|
|
|
(7)
|
Accounts payable and other accrued liabilities
|
|
|
3,802
|
|
|
1,489
|
|
|
1,636
|
Mining royalty and income taxes payable, net
|
|
|
(106)
|
|
|
(3,894)
|
|
|
2,887
|
Net cash provided by operating activities
|
|
|
21,416
|
|
|
22,256
|
|
|
35,633
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(39,474)
|
|
|
(40,076)
|
|
|
(25,432)
|
Other investing activities
|
|
|
2
|
|
|
6
|
|
|
(257)
|
Net cash used in investing activities
|
|
|
(39,472)
|
|
|
(40,070)
|
|
|
(25,689)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
98
|
|
|
1,261
|
|
|
-
|
Proceeds from issuance of stock
|
|
|
24,449
|
|
|
4,319
|
|
|
-
|
Dividends paid
|
|
|
(1,491)
|
|
|
(1,149)
|
|
|
(1,137)
|
Repayment of loans payable
|
|
|
(812)
|
|
|
(596)
|
|
|
(184)
|
Repayment of capital leases
|
|
|
(419)
|
|
|
(383)
|
|
|
(73)
|
Net cash provided by (used in) financing activities
|
|
|
21,825
|
|
|
3,452
|
|
|
(1,394)
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(455)
|
|
|
(266)
|
|
|
(326)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
3,314
|
|
|
(14,628)
|
|
|
8,224
|
Cash and cash equivalents at beginning of period
|
|
|
7,762
|
|
|
22,390
|
|
|
14,166
|
Cash and cash equivalents at end of period
|
|
$
|
11,076
|
|
$
|
7,762
|
|
$
|
22,390
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Interest expense paid
|
|
$
|
157
|
|
$
|
177
|
|
$
|
65
|
Income and mining taxes paid
|
|
$
|
3,743
|
|
$
|
7,068
|
|
$
|
3,102
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
Change in capital expenditures in accounts payable
|
|
$
|
(550)
|
|
$
|
3,302
|
|
$
|
1,041
|
Change in estimate for asset retirement costs
|
|
$
|
2,172
|
|
$
|
271
|
|
$
|
366
|
Equipment purchased through loan payable
|
|
$
|
330
|
|
$
|
526
|
|
$
|
2,397
|
Equipment purchased under finance leases
|
|
$
|
56
|
|
$
|
26
|
|
$
|
1,686
|
Common stock issued for the acquisition of mineral rights
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,300
|
The accompanying notes are an integral part of these consolidated financial statements.
GOLD RESOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018 and 2017
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Gold Resource Corporation (the “Company”) was organized under the laws of the State of Colorado on August 24, 1998. The Company is a producer of metal concentrates that contain gold, silver, copper, lead and zinc, and doré containing gold and silver at the Aguila and Alta Gracia projects in the southern state of Oaxaca, Mexico (“Oaxaca Mining Unit”). The Aguila project includes the Arista underground mine and processing facility, which are currently in operation. The Alta Gracia project includes the Mirador underground mine which began operations in 2017. The Company also produces gold doré from its Isabella Pearl open-pit mine and performs exploration work on its portfolio of precious metal properties in Nevada, United States of America (“Nevada Mining Unit”) and continues to evaluate other properties for possible acquisition. The Isabella Pearl open-pit mine commenced production in 2019.
Significant Accounting Policies
Basis of Presentation
The consolidated financial statements included herein are expressed in United States dollars, and conform to United States generally accepted accounting principles (“U.S. GAAP”). The consolidated financial statements include the accounts of the Company, its Mexican subsidiary, Don David Gold Mexico S.A. de C.V. (“Don David Gold Mexico”) and its wholly-owned United States subsidiaries GRC Nevada Inc. and Walker Lane Minerals Corp. (“Walker Lane”). Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves that are the basis for future cash flow estimates utilized in impairment calculations and units-of-production depreciation calculations; future metal prices; environmental remediation, reclamation and closure obligations; estimates of recoverable gold and other minerals in stockpile and leach pad inventories; estimates of fair value asset impairments; write-downs of inventory, stockpiles and ore on leach pads to net realizable value; valuation allowances for deferred tax assets; provisional amounts related to income tax effects of newly enacted tax laws; and stock-based compensation. Management routinely makes judgments and estimates about the effects of matters that are inherently uncertain and bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.
Reclassifications
Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. The reclassifications had no material effect on the Company’s results of operations or financial condition.
Cash and Cash Equivalents
Cash and cash equivalents consist of all cash balances and highly liquid investments with a remaining maturity of three months or less when purchased and are carried at cost.
Gold and Silver Rounds/Bullion
From time to time, the Company may purchase gold and silver bullion on the open market in order to diversify its treasury and provide an option for shareholders to convert their dividends into bullion. The purchased gold and silver bullion is carried at quoted market value prices based on the daily London P.M. fix as of the balance sheet date. The Company considers bullion a highly-liquid investment.
Accounts Receivable, net
Accounts receivable consists of trade receivables, which are recorded net of allowance for doubtful accounts, from the sale of doré and metals concentrates, as well an embedded derivative based on mark-to-market adjustments for outstanding provisional invoices based on forward metal prices. Please see Note 14 and Note 19 for additional information related to the embedded derivative. As of December 31, 2019 and 2018, the allowance for doubtful accounts was $1.4 million.
Inventories
The major inventory categories are set forth below:
Stockpile Inventories: Stockpile inventories represent ore that has been mined and is available for further processing. Stockpiles are measured by estimating the number of tonnes added and removed from the stockpile, an estimate of the contained metals (based on assay data) and the estimated metallurgical recovery rates. Costs are allocated to stockpiles based on relative values of material stockpiled and processed using current mining costs incurred, including applicable overhead, depreciation and amortization relating to mining operations. Material is removed at each stockpile’s average cost per tonne. Stockpiles are carried at the lower of average cost or net realizable value. Net realizable value represents the estimated future sales price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the product to sale. The current portion of stockpiles is determined based on the expected amounts to be processed within the next 12 months. Stockpiles not expected to be processed within the next 12 months are classified as long-term. As of December 31, 2019, $4.8 million of stockpiles were classified as current and $4.7 million were classified as long-term. As of December 31, 2018, all stockpiles were classified as current.
Concentrate Inventories: Concentrate inventories include metal concentrates located either at the Company’s facilities or in transit to its customer’s port. Inventories consist of copper, lead and zinc metal concentrates, which also contain gold and silver mineralization. Concentrate inventories are carried at the lower of cost of production or net realizable value based on current metals prices.
Doré Inventory: Doré includes gold and silver doré bars held at the Company’s facility. Doré inventories are carried at the lower of cost of production or net realizable value based on current metals prices.
Leach Pad: Ore on leach pad represents ore that has been mined and placed on the leach pad where a solution is applied to the surface of the heap to extract the gold or silver. Costs are added to ore on leach pads based on current mining costs, including applicable depreciation and amortization relating to mining operations. Costs are removed from ore on leach pads as ounces are recovered based on the average cost per estimated recoverable ounce of gold or silver on the leach pad.
Estimates of recoverable ore on the leach pad are calculated from the quantities of ore placed on the leach pad (measured tonnes added to the leach pad), the grade of ore placed on the leach pad (based on assay data) and a recovery
percentage (based on ore type).
Although the quantities of recoverable ore placed on the leach pad are reconciled by comparing the grades of ore placed on pads to the quantities of metal actually recovered (metallurgical balancing), the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process is constantly monitored and estimates are refined based on actual results over time. Variations between actual and
estimated quantities resulting from changes in assumptions and estimates that do not result in write-downs to net realizable value are accounted for on a prospective basis.
Materials and Supplies Inventories: Materials and supplies inventories consist of chemical reagents, parts, fuels and other materials and supplies. Cost includes applicable taxes and freight. Materials and supplies inventory is carried at lower of average cost or net realizable value.
Write-downs of inventory are charged to expense.
IVA Taxes Receivable and Payable
In Mexico, value added (“IVA”) taxes are assessed on purchases of materials and services and sales of products. Businesses are generally entitled to recover the taxes they have paid related to purchases of materials and services, either as a refund. Likewise, businesses owe IVA taxes as the business sells a product and collects IVA taxes from its customers.
Amounts recorded as IVA taxes in the consolidated financial statements represent the net estimated IVA tax receivable or payable, since there is a legal right of offset of IVA taxes.
Property, Plant and Mine Development
Land and Mineral Rights: The costs of acquiring land and mineral rights are considered tangible assets. Administrative and holding costs to maintain an exploration property are expensed as incurred. If a mineable mineral deposit is discovered, such capitalized costs are amortized when production begins using the units of production (“UOP”) method. If no mineable mineral deposit is discovered or such rights are otherwise determined to have diminished value, such costs are expensed in the period in which the determination is made.
Mine Development: The costs include engineering and metallurgical studies, drilling and other related costs to delineate an ore body, the building of access ways, shafts, lateral access, drifts, ramps and other infrastructure. Costs incurred before mineralization is classified as proven and probable reserves are expensed and classified as exploration expenses. Capitalization of mine development project costs, that meet the definition of an asset, begins once mineralization is classified as proven and probable reserves.
Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs and then included as a component of production costs. All other drilling and related costs are expensed as incurred.
Mine development costs are amortized using the UOP method based on estimated recoverable ounces in proven and probable reserves.
The cost of removing overburden and waste materials to access the ore body at an open pit mine prior to the production phase are referred to as “pre-stripping costs.” Pre-stripping costs are capitalized during the development of an open pit mine. Where multiple open pits exist at a mining complex utilizing common processing facilities, pre-stripping costs are capitalized at each pit. The removal, production, and sale of deminimis saleable materials may occur during the development phase of an open pit mine and are assigned incremental mining costs related to the removal of that material.
The production phase of an open pit mine commences when saleable minerals, beyond a de minimis amount, are produced. Stripping costs incurred during the production phase of a mine are variable production costs that are included as a component of inventory to be recognized in Costs applicable to sales in the same period as the revenue from the sale of inventory.
Property and Equipment: All items of property and equipment are carried at cost. Normal maintenance and repairs are expensed as incurred while expenditures for major maintenance and improvements are capitalized. Gains or losses on disposition are recognized in other (income) expense
Construction in Progress: Expenditures for new facilities or equipment are capitalized and recorded at cost. Once completed and ready for its intended use, the asset is transferred to property and equipment to be depreciated or amortized.
Depreciation and Amortization: Capitalized costs are depreciated or amortized using the straight-line or UOP method at rates sufficient to depreciate such costs over the shorter of estimated productive lives of such assets or the useful life of the individual assets. The estimates for mineral reserves are a key component in determining the UOP depreciation rates. The estimates of reserves may change, possibly in the near term, resulting in changes to depreciation and amortization rates in future reporting periods. The following are the estimated economic lives of depreciable assets:
|
|
|
|
|
Range of Lives
|
|
Asset retirement costs
|
|
UOP
|
|
Furniture, computer and office equipment
|
|
3 to 10 years
|
|
Light vehicles and other mobile equipment
|
|
4 years
|
|
Machinery and equipment
|
|
UOP to 4 years
|
|
Mill facilities, leach pad, and related infrastructure
|
|
UOP
|
|
Mine development and mineral interests
|
|
UOP
|
|
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Asset impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. If an impairment is indicated, a determination is made whether an impairment has occurred and any impairment losses are measured as the excess of carrying value over the total discounted estimated future cash flows, or the application of an expected fair value technique in the absence of an observable market price and are charged to expense on the Company’s consolidated statements of operations. In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups.
Existing reserves and other mineralized material are included when estimating the fair value in determining whether the assets are impaired. The Company’s estimates of future cash flows are based on numerous assumptions including expected gold and other commodity prices, production levels, capital requirements and estimated salvage values. It is possible that actual future cash flows will be significantly different than the estimates, as actual future quantities of recoverable minerals, gold and other commodity prices, production levels and costs and capital requirements are each subject to significant risks and uncertainties.
Fair Value of Financial Instruments
The recorded amounts of cash and cash equivalents, gold and silver rounds/bullion, receivables from provisional concentrate sales, accounts payable, and loans payable approximate fair value because of the short maturity of those instruments.
Treasury Stock
Treasury stock represents shares of the Company’s common stock which have been repurchased on the open market at the prevailing market price at the time of purchase and have not been cancelled. Treasury stock is shown at cost as a separate component of equity.
Revenue Recognition
The Company recognizes revenue from doré and concentrate sales.
Concentrate sales: Concentrate sales are initially recorded based on 100% of the provisional sales prices, net of treatment and refining charges, at the time of delivery to the customer at which point the performance obligations are satisfied and control of the product is transferred to the customer. Adjustments to the provisional sales prices are made to take into account the mark-to-market changes based on the forward prices of metals until final settlement occurs. The changes in price between the provisional sales price and final sales price are considered an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of the concentrates at the quoted metal prices at the time of delivery. The embedded derivative, which does not qualify for hedge accounting, is adjusted to market through revenue each period prior to final settlement. Market changes in the prices of metals between the delivery and final settlement dates will result in adjustments to revenues related to previously recorded sales of concentrate. Sales are recorded net of charges for treatment, refining, smelting losses and other charges negotiated with the buyer. These charges are estimated upon delivery of concentrates based on contractual terms and adjusted to reflect actual charges at final settlement. Historically, actual charges have not varied materially from the Company’s initial estimates.
Doré sales: Doré sales are recognized upon the satisfaction of performance obligations, which occurs when price and quantity are agreed upon with the customer. Doré sales are recorded using quoted metal prices, net of refining charges.
Production Costs
Production costs include labor and benefits, royalties, concentrate and doré shipping costs, mining subcontractors, fuel and lubricants, legal and professional fees related to mine operations, stock-based compensation attributable to mine workers, materials and supplies, repairs and maintenance, explosives, housing and food, insurance, reagents, travel, medical services, security equipment, office rent, tools and other costs that support mining operations.
Exploration Costs
Exploration costs are charged to expense as incurred. Costs to identify new mineral resources and to evaluate potential resources are considered exploration costs.
Stock-Based Compensation
The Company accounts for stock-based compensation under the fair value recognition and measurement provisions of U.S. GAAP. Those provisions require all stock-based payments, including grants of stock options and RSUs to be measured based on the grant date fair value of the awards, with the resulting expense generally recognized on a straight-line basis in the consolidated statements of operations over the period during which services are performed in exchange for the award. The majority of the awards are earned over a service period of three years. The Company's estimates may be impacted by certain variables including, but not limited to, stock price volatility, employee stock option exercise behaviors, additional stock option grants, and estimates of forfeitures.
Reclamation and Remediation Costs
Reclamation costs are allocated to expense over the life of the related assets and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and remediation costs. Reclamation obligations are based in part on when the spending for an existing environmental disturbance will occur. The Company reviews, at least on an annual basis, the reclamation obligation at each mine.
Prior to 2014, the Company had been recognizing only reclamation and remediation obligations and all associated asset retirement costs were written off due to the development stage status as the Company had not been reporting its proven and probable reserves for its Oaxaca Mining Unit. In 2014, the Company became a production stage company and therefore capitalized asset retirement costs and recorded an asset retirement obligation. Please see Note 9 for additional information.
Accounting for reclamation and remediation obligations requires management to make estimates unique to each mining operation of the future costs expected to be incurred to complete the reclamation and remediation work required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required. Any such increases in future costs could materially impact the amounts charged to operations for reclamation and remediation.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is presented in the consolidated statements of changes in shareholders’ equity. Accumulated other comprehensive loss is composed of foreign currency translation adjustment effects related to the historical adjustment when the functional currency was the Mexican peso for our Mexico subsidiary. This loss will remain on our consolidated balance sheet until the sale or dissolution of our Mexico subsidiary.
Income and Mining Royalty Taxes
Income taxes are computed using the asset and liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes and the effect of net operating loss and foreign tax credit carry-forwards using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are evaluated to determine if it is more likely than not that they will be realized. Please see Note 5 for additional information.
Net Income Per Share
Basic earnings per share is calculated based on the weighted average number of common shares outstanding for the period. Diluted income per share reflects the dilution that could occur if potentially dilutive securities, as determined using the treasury stock method, are converted into common stock. Potentially dilutive securities are excluded from the calculation when their inclusion would be anti-dilutive, such as periods when a net loss is reported or when the exercise price of the instrument exceeds the average fair market value of the underlying common stock.
Foreign Currency
The functional currency for all of the Company’s subsidiaries is the United States dollar (“U.S. dollar”).
Concentration of Credit Risk
The Company has considered and assessed the credit risk resulting from its concentrate sales and doré sales arrangements with its customers. In the event that the Company’s relationships with its customers are interrupted for any reason, the Company believes that it would be able to locate another entity to purchase its metals concentrates and doré bars; however, any interruption could temporarily disrupt the Company’s sale of its products and adversely affect operating results.
The Company’s Aguila and Alta Gracia projects, which are located in the State of Oaxaca, Mexico, accounted for 89%, 100%, and 100% of the Company’s total net sales for the years ended December 31, 2019, 2018 and 2017, respectively. The Isabella Pearl Mine in Nevada, U.S.A. accounted for 11% of the Company’s 2019 net sales.
Some of the Company’s operating cash balances are maintained in accounts that currently exceed federally insured limits. The Company believes that the financial strength of the depositing institutions mitigates the underlying risk of loss. To date, these concentrations of credit risk have not had a significant impact on the Company’s financial position or results of operations.
Recently Adopted Accounting Pronouncements
Accounting Standards Update No. 2016-02—Leases (Topic 842). In February 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Reporting entities are also required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.
The Company adopted the standard effective January 1, 2019 and elected certain available practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
The standard had a material impact on the Company’s Consolidated Balance Sheets but did not have a material impact on its Consolidated Statements of Operations. The most significant impact was the recognition of ROU assets and the current and long-term components of lease liabilities for operating leases, while the Company’s accounting for finance leases remained substantially unchanged. See Note 12 for more information.
2. Revenue
The following table presents the Company’s net sales disaggregated by source:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(in thousands)
|
|
Doré sales, net
|
|
|
|
|
|
|
|
|
|
Gold
|
|
$
|
21,847
|
|
$
|
6,250
|
|
$
|
6,270
|
Silver
|
|
|
2,439
|
|
|
1,348
|
|
|
159
|
Less: Refining charges
|
|
|
(190)
|
|
|
(118)
|
|
|
(63)
|
Total doré sales, net
|
|
|
24,096
|
|
|
7,480
|
|
|
6,366
|
Concentrate sales
|
|
|
|
|
|
|
|
|
|
Gold
|
|
|
27,184
|
|
|
22,750
|
|
|
25,526
|
Silver
|
|
|
21,347
|
|
|
22,972
|
|
|
27,567
|
Copper
|
|
|
9,930
|
|
|
9,919
|
|
|
6,646
|
Lead
|
|
|
16,116
|
|
|
15,100
|
|
|
11,568
|
Zinc
|
|
|
48,804
|
|
|
46,743
|
|
|
38,281
|
Less: Treatment and refining charges
|
|
|
(13,825)
|
|
|
(5,447)
|
|
|
(7,697)
|
Total concentrate sales, net
|
|
|
109,556
|
|
|
112,037
|
|
|
101,891
|
Realized/unrealized embedded derivative, net
|
|
|
1,714
|
|
|
(4,209)
|
|
|
1,899
|
Total sales, net
|
|
$
|
135,366
|
|
$
|
115,308
|
|
|
110,156
|
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. The Company did not make any purchases of gold or silver bullion during the years ended December 31, 2019 and 2018.
At December 31, 2019 and 2018, the Company’s holdings of rounds/bullion, using quoted market prices, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
Ounces
|
|
Per Ounce
|
|
Amount
|
|
Ounces
|
|
Per Ounce
|
|
Amount
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
Gold
|
|
1,866
|
|
$
|
1,515
|
|
$
|
2,827
|
|
1,888
|
|
$
|
1,279
|
|
$
|
2,415
|
Silver
|
|
79,662
|
|
$
|
18.05
|
|
|
1,438
|
|
79,864
|
|
$
|
15.30
|
|
|
1,222
|
Total holdings
|
|
|
|
|
|
|
$
|
4,265
|
|
|
|
|
|
|
$
|
3,637
|
4. Inventories
At December 31, 2019 and 2018, current inventories consisted of the following:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
Stockpiles - underground mine
|
|
$
|
3,968
|
|
$
|
2,365
|
Stockpiles - open pit mine
|
|
|
833
|
|
|
414
|
Leach pad
|
|
|
9,103
|
|
|
376
|
Concentrates
|
|
|
1,340
|
|
|
1,231
|
Doré (1)
|
|
|
1,581
|
|
|
1,289
|
Subtotal - product inventories
|
|
|
16,825
|
|
|
5,675
|
Materials and supplies (2)
|
|
|
7,306
|
|
|
8,667
|
Total
|
|
$
|
24,131
|
|
$
|
14,342
|
|
(1)
|
|
Net of reserve of $478 and nil as of December 31, 2019 and 2018, respectively.
|
|
(2)
|
|
Net of reserve for obsolescence of $1,264 and $857 as of December 31, 2019 and 2018, respectively.
|
In addition to the inventory above, as of December 31, 2019, the Company has $4.7 million of low-grade ore stockpile inventory included in other non-current assets on the accompanying Consolidated Balance Sheet.
During the year ended December 31, 2019, the Company recorded a net realizable value inventory adjustment of $2.9 million for inventories at its Isabella Pearl Mine.
5. Income Taxes
Gold Resource Corporation and its U.S. subsidiaries file a consolidated U.S. tax return and the Company’s foreign subsidiary files in Mexico. For financial reporting purposes, net income before income taxes includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
(in thousands)
|
|
U.S. Operations
|
|
$
|
(6,956)
|
|
$
|
(9,378)
|
|
$
|
(8,142)
|
|
Foreign Operations, Mexico
|
|
|
21,838
|
|
|
25,929
|
|
|
36,620
|
|
Total income before income taxes
|
|
$
|
14,882
|
|
$
|
16,551
|
|
$
|
28,478
|
|
The Company's income tax expense from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
(in thousands)
|
|
Current taxes:
|
|
|
|
Federal
|
|
$
|
100
|
|
$
|
-
|
|
$
|
9
|
|
Foreign
|
|
|
6,110
|
|
|
7,763
|
|
|
9,327
|
|
Total current taxes
|
|
$
|
6,210
|
|
$
|
7,763
|
|
$
|
9,336
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
964
|
|
$
|
(1,692)
|
|
$
|
4,923
|
|
Foreign
|
|
|
1,876
|
|
|
1,192
|
|
|
10,069
|
|
Total deferred taxes
|
|
$
|
2,840
|
|
$
|
(500)
|
|
$
|
14,992
|
|
Total income tax provision
|
|
$
|
9,050
|
|
$
|
7,263
|
|
$
|
24,328
|
|
The provision for income taxes for the years ended December 31, 2019, 2018 and 2017, differs from the amount of income tax determined by applying the applicable United States statutory federal income tax rate to pre-tax income from operations as a result of the following differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
(in thousands)
|
|
Tax at statutory rates
|
|
$
|
3,125
|
|
$
|
3,476
|
|
$
|
9,967
|
|
Foreign rate differential
|
|
|
1,969
|
|
|
2,161
|
|
|
(1,780)
|
|
GILTI Inclusion
|
|
|
2,173
|
|
|
-
|
|
|
-
|
|
One-time tax on foreign unremitted earnings (1)
|
|
|
-
|
|
|
-
|
|
|
4,627
|
|
Changes in deferred tax assets
|
|
|
(336)
|
|
|
(189)
|
|
|
6,239
|
|
Mexico mining tax
|
|
|
1,608
|
|
|
1,777
|
|
|
2,816
|
|
U.S. Tax rate reduction from 35% to 21% (1)
|
|
|
-
|
|
|
-
|
|
|
2,671
|
|
Other
|
|
|
511
|
|
|
38
|
|
|
(212)
|
|
Tax provision
|
|
$
|
9,050
|
|
$
|
7,263
|
|
$
|
24,328
|
|
|
(1)
|
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revised the U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing a one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs, among other things.
|
The following table sets forth deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
(in thousands)
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
Tax loss carryforward - U.S.
|
|
$
|
2,268
|
|
$
|
3,862
|
|
Property and equipment
|
|
|
13,629
|
|
|
11,025
|
|
Share-based compensation
|
|
|
4,058
|
|
|
4,339
|
|
Foreign tax credits
|
|
|
4,364
|
|
|
4,448
|
|
Inventory
|
|
|
1,121
|
|
|
-
|
|
Other
|
|
|
1,261
|
|
|
3,572
|
|
Total deferred tax assets
|
|
|
26,701
|
|
|
27,246
|
|
Valuation allowance
|
|
|
(7,333)
|
|
|
(7,318)
|
|
Deferred tax assets after valuation allowance
|
|
$
|
19,368
|
|
$
|
19,928
|
|
|
|
|
|
|
|
|
|
Deferred tax liability – Property, plant and mine development
|
|
|
(14,733)
|
|
|
(12,556)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
4,635
|
|
$
|
7,372
|
|
Mexico Mining Taxation
Mining entities in Mexico are subject to two mining duties, in addition to the 30% Mexico corporate income tax: (i) a “special” mining duty of 7.5% of taxable income as defined under Mexican tax law (also referred to as “mining royalty tax”) on extracting activities performed by concession holders and (ii) the “extraordinary” mining duty of 0.5% on the gross revenue from the sale of gold, silver and platinum. The mining royalty tax is generally applicable to earnings before income tax, depreciation, depletion, amortization, and interest. In calculating the mining royalty tax, there are no deductions related to depreciable costs from operational fixed assets, but exploration and prospecting depreciable costs are deductible when incurred. Both duties are tax deductible for income tax purposes. As a result, our effective tax rate applicable to the Company’s Mexican operations is substantially higher than Mexico statutory rate.
The Company periodically transfers funds from its Mexican wholly-owned subsidiary to the U.S. in the form of dividends. Mexico requires a 10% withholding tax on dividends on all post-2013 earnings. The Company began distributing post-2013 earnings from Mexico in 2018. According to the existing U.S. – Mexico tax treaty, the dividend withholding tax between these countries is limited to 5% if certain requirements are met. The Company determined that it had met such requirements and paid a 5% withholding tax on dividends received from Mexico and as a result paid $0.4 million for both years ending December 31, 2019 and 2018.
Other Tax Disclosures
The Company evaluates the evidence available to determine whether a valuation allowance is required on the deferred tax assets. The Company determined that the deferred tax assets related to state net operating loss carry forwards, and other state related deferred tax assets were not "more likely than not" to be realized and a full valuation allowance was recorded as of December 31, 2019 and 2018.
In January 2018, the Financial Accounting Standards Board released guidance on the accounting for tax on the Global Intangible Low Taxed Income (“GILTI”) provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. The Company has elected to treat GILTI inclusions as period costs.
At December 31, 2019, the Company has federal loss carryforwards of $3.2 million, with no expiration date, U.S. Foreign Tax Credits of $4.4 million that expire at various dates between 2023 and 2029, federal capital loss
carryforwards of $1.5 million that expire at various dates between 2020 and 2024, and state of Colorado tax loss carryforwards of $34.6 million, of which $30.1 million expire at various dates between 2021 and 2037 and $4.5 million that have no expiration. The Company has placed a valuation allowance against all U.S. Foreign Tax Credits, state of Colorado tax loss carryforwards, and federal capital loss carryforwards as of December 31, 2019 and 2018.
As of both December 31, 2019 and 2018, the Company believes that it has no uncertain tax positions. If the Company were to determine there was an uncertain tax position, the Company would recognize the liability and related interest and penalties within income tax expense.
6. Prepaid Expenses and Other Current Assets
At December 31, 2019 and 2018, prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
Advances to suppliers
|
|
$
|
109
|
|
$
|
289
|
Prepaid insurance
|
|
|
1,333
|
|
|
1,179
|
Vendor deposits
|
|
|
-
|
|
|
236
|
IVA taxes receivable, net
|
|
|
245
|
|
|
538
|
Prepaid royalties
|
|
|
127
|
|
|
295
|
Other current assets
|
|
|
218
|
|
|
208
|
Total
|
|
$
|
2,032
|
|
$
|
2,745
|
7. Property, Plant and Mine Development, net
At December 31, 2019 and 2018, property, plant and mine development consisted of the following:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
Asset retirement costs
|
|
$
|
3,412
|
|
$
|
1,240
|
Construction-in-progress (1)
|
|
|
11,965
|
|
|
34,335
|
Furniture and office equipment
|
|
|
2,087
|
|
|
1,861
|
Leach pad and ponds
|
|
|
5,649
|
|
|
-
|
Land
|
|
|
242
|
|
|
242
|
Light vehicles and other mobile equipment
|
|
|
2,553
|
|
|
2,508
|
Machinery and equipment
|
|
|
43,364
|
|
|
27,485
|
Mill facilities and infrastructure
|
|
|
31,408
|
|
|
11,712
|
Mineral interests and mineral rights
|
|
|
18,228
|
|
|
17,958
|
Mine development
|
|
|
90,089
|
|
|
69,487
|
Software and licenses
|
|
|
1,659
|
|
|
1,659
|
Subtotal (2) (3)
|
|
|
210,656
|
|
|
168,487
|
Accumulated depreciation and amortization
|
|
|
(85,397)
|
|
|
(57,245)
|
Total
|
|
$
|
125,259
|
|
$
|
111,242
|
|
(1)
|
|
Nevada construction-in-progress costs of $9.6 million and $21.6 million at December 31, 2019 and 2018, respectively. Mexico construction-in-progress of $2.4 million and $12.7 million at December 31, 2019 and 2018, respectively.
|
|
(2)
|
|
Includes $1.8 and $1.7 million of assets recorded under finance leases at December 31, 2019 and 2018, respectively. Please see Note 12 for additional information.
|
|
(3)
|
|
Includes capital expenditures in accounts payable of $3.8 million and $4.3 at December 31, 2019 and 2018, respectively.
|
The Company recorded depreciation and amortization expense for the years ended December 31, 2019, 2018 and 2017 of $23.3 million, $15.2 million and $15.0 million, respectively.
8. Accrued Expenses and Other Current Liabilities
At December 31, 2019 and 2018, accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
Accrued insurance
|
|
$
|
452
|
|
$
|
364
|
Accrued royalty payments
|
|
|
2,212
|
|
|
1,432
|
Dividends payable
|
|
|
219
|
|
|
98
|
Other payables
|
|
|
483
|
|
|
136
|
Total
|
|
$
|
3,366
|
|
$
|
2,030
|
9. Reclamation and Remediation
The following table presents the changes in the Company’s reclamation and remediation obligations for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
Reclamation liabilities – balance at beginning of period
|
|
$
|
2,009
|
|
$
|
2,005
|
Changes in estimate
|
|
|
(82)
|
|
|
-
|
Foreign currency exchange loss
|
|
|
87
|
|
|
4
|
Reclamation liabilities – balance at end of period
|
|
|
2,014
|
|
|
2,009
|
|
|
|
|
|
|
|
Asset retirement obligation – balance at beginning of period
|
|
|
1,289
|
|
|
941
|
Changes in estimate
|
|
|
2,172
|
|
|
271
|
Accretion
|
|
|
102
|
|
|
78
|
Foreign currency exchange loss
|
|
|
28
|
|
|
(1)
|
Asset retirement obligation – balance at end of period
|
|
|
3,591
|
|
|
1,289
|
Total period end balance
|
|
$
|
5,605
|
|
$
|
3,298
|
The Company’s undiscounted reclamation liabilities are related to the Aguila project in Mexico.
The Company’s asset retirement obligations were discounted using a credit adjusted risk-free rate of 8%. As of December 31, 2019 and 2018, the Company recorded an asset retirement obligation of $2.5 million and $0.8 million, respectively, related to the Isabella Pearl project. As of December 31, 2019 and 2018, the Company’s asset retirement obligation related to the Aguila project in Mexico was $1.1 million and $0.5 million, respectively.
10. Loans Payable
The Company has financed certain equipment purchases. The loans bear annual interest at rates ranging from 3% to 4.48%, are collateralized by the equipment, and require monthly principal and interest payments of $0.07 million. As of December 31, 2019, there is an outstanding balance of $1.7 million which approximates fair value of the loans. Scheduled minimum repayments are $0.9 million in 2020, $0.7 million in 2021, and $0.1 million in 2022. One of the loan agreements is subject to a prepayment penalty of 1% of the outstanding loan balance at time of full repayment.
11. Commitments and Contingencies
The Company has a Contract Mining Agreement with a mining contractor relating to mining activities at its Isabella Pearl project. Included in this Agreement is an embedded lease for the mining equipment for which the Company has recognized a right-of-use asset and corresponding operating lease liability. Please see Note 12 for more information. In addition to the embedded lease payments, the Company pays the contract miner operational costs in the normal course of business. These costs represent the remaining future contractual payments for the Contract Mining Agreement over its term. The contractual payments are determined by rates within the Contract Mining Agreement,
estimated tonnes moved and bank cubic yards for drilling and blasting. As of December 31, 2019, total estimated contractual payments remaining, excluding embedded lease payments, are $8.1 million for the year ended December 31, 2020.
As of December 31, 2019, the Company has equipment purchase commitments aggregating approximately $0.9 million.
12. Leases
Operating Leases
As discussed in Note 1 to the consolidated financial statements (see "Recently Adopted Accounting Pronouncements"), the Company adopted the new lease accounting standard on January 1, 2019. Upon adoption, the Company recognized operating lease assets and corresponding operating lease liabilities totaling $14.2 million. The Company’s finance leases did not change from December 31, 2018.
The Company leases office equipment and administrative offices from third parties as well as an administrative office from a related party. In addition, the Company has an embedded lease in its Contract Mining Agreement. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases as incurred over the lease term. For leases beginning in 2019 and later, the Company accounts for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from the non-lease components (e.g., common-area maintenance costs).
Some leases include one or more options to renew, with renewal terms that can extend the lease term from one to two years. The exercise of lease renewal options is at the Company’s sole discretion. The depreciable life of assets are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The weighted average remaining lease term for the Company’s operating leases as of December 31, 2019 is 0.88 years.
The discount rate implicit within the Company’s leases is generally not determinable and therefore the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for the Company’s leases is determined based on the lease term adjusted for impacts of collateral. The weighted average discount rate used to measure the Company’s operating lease liabilities as of December 31, 2019 was 4.48%.
There are no material residual value guarantees and no restrictions or covenants imposed by the Company’s leases.
Most of the Company’s leases have a standard payment schedule; however, the payments for its mining equipment embedded lease are determined by tonnage hauled. This embedded lease is within a Contract Mining Agreement entered into for the mining activities at the Company’s Isabella Pearl Mine. The payments, amortization of the right-of-use asset, and interest vary immaterially from forecasted amounts due to variable conditions at the mine. During the year ended December 31, 2019, the Company capitalized variable lease costs of $2.4 million to Inventory and $4.7 million to Property, plant, and mine development, respectively.
The components of all other lease costs recognized within the Company’s Consolidated Statements of Operations are as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
Lease Cost Type
|
|
Consolidated Statements of Operations Location
|
|
2019
|
|
|
|
|
(in thousands)
|
Operating lease cost
|
|
General and administrative expenses
|
|
$
|
75
|
Operating lease cost
|
|
Production costs
|
|
|
81
|
Related party lease cost
|
|
General and administrative expenses
|
|
|
47
|
Short term lease cost
|
|
Production costs
|
|
|
489
|
Maturities of operating lease liabilities as of December 31, 2019 are as follows (in thousands)
|
|
|
|
|
|
Year Ending December 31:
|
|
|
|
|
|
2020
|
|
|
|
$
|
7,430
|
2021
|
|
|
|
|
151
|
2022
|
|
|
|
|
13
|
2023
|
|
|
|
|
-
|
Thereafter
|
|
|
|
|
-
|
Total lease payments
|
|
|
|
|
7,594
|
Less imputed interest
|
|
|
|
|
(147)
|
Present value of minimum payments
|
|
|
|
|
7,447
|
Less: current portion
|
|
|
|
|
(7,287)
|
Long-term portion of minimum payments
|
|
|
|
$
|
160
|
As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2018 and under legacy lease accounting (ASC 840), future minimum lease payments, including both the future minimum lease payments and the other non-lease element payments for the Contract Mining Agreement, as of December 31, 2018 are as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31:
|
|
|
|
|
|
2019
|
|
|
|
$
|
16,259
|
2020
|
|
|
|
|
14,839
|
2021
|
|
|
|
|
72
|
2022
|
|
|
|
|
-
|
Thereafter
|
|
|
|
|
-
|
Total lease payments
|
|
|
|
$
|
31,170
|
Finance Leases
The Company has finance lease agreements for certain equipment. The leases bear annual imputed interest of 1.58% to 5.95% and require monthly principal, interest, and sales tax payments of $0.04 million. The weighted average discount rate for the Company’s finance leases is 5.79%. Scheduled minimum annual payments as of December 31, 2019 are as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31:
|
|
|
|
|
|
2020
|
|
|
|
$
|
483
|
2021
|
|
|
|
|
419
|
2022
|
|
|
|
|
13
|
2023
|
|
|
|
|
13
|
Thereafter
|
|
|
|
|
3
|
Total minimum obligations
|
|
|
|
|
931
|
Less: interest portion
|
|
|
|
|
(50)
|
Present value of minimum payments
|
|
|
|
|
881
|
Less: current portion
|
|
|
|
|
(446)
|
Long-term portion of minimum payments
|
|
|
|
$
|
435
|
Scheduled minimum annual payments as of December 31, 2018 were as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31:
|
|
|
|
|
|
2019
|
|
|
|
$
|
470
|
2020
|
|
|
|
|
470
|
2021
|
|
|
|
|
406
|
2022
|
|
|
|
|
-
|
Thereafter
|
|
|
|
|
-
|
Total minimum obligations
|
|
|
|
|
1,346
|
Less: interest portion
|
|
|
|
|
(103)
|
Present value of minimum payments
|
|
|
|
|
1,243
|
Less: current portion
|
|
|
|
|
(412)
|
Long-term portion of minimum payments
|
|
|
|
$
|
831
|
The weighted average remaining lease term for the Company’s finance leases as of December 31, 2019 is 2.01 years.
Supplemental cash flow information related to the Company’s operating and finance leases is as follows for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2019
|
|
|
|
|
(in thousands)
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
|
$
|
2,569
|
Operating cash flows from finance leases
|
|
|
|
|
60
|
Investing cash flows from operating lease
|
|
|
|
|
4,719
|
Financing cash flows from finance leases
|
|
|
|
|
419
|
13. Shareholders’ Equity
The Company declared and paid dividends of $1.6 million or approximately $0.03 per share and $1.5 million or approximately $0.02 per share, respectively, for the year ended December 31, 2019. The Company declared and paid dividends of $1.1 million, or $0.02 per share during each of the years ended December 31, 2018 and 2017.
On April 3, 2018, the Company entered into an At-The-Market Offering Agreement (the “ATM Agreement”) with an investment banking firm (“Agent”) pursuant to which the Agent agreed to act as the Company’s sales agent with respect to the offer and sale from time to time of the Company’s common stock having an aggregate gross sales price of up to $75.0 million (the “Shares”). The ATM agreement was renewed and amended on November 29, 2019, effective on the date that the related registration statement is declared effective by the SEC. The ATM Agreement will remain in full force and effect until the earlier of three years after the effective date, or the date that the ATM Agreement is terminated in accordance with the terms therein. An aggregate of 6,625,588 shares and 1,131,755 shares of the Company’s common stock were sold through the ATM Agreement during the years ended December 31, 2019 and 2018, for net proceeds to the Company, after deducting the Agent’s commissions and other expenses, of $24.4 million and $4.3 million, respectively.
During the year ended December 31, 2019, the Company issued 25,000 shares of its common stock at a value of $3.88 per share as payment for a one-year investor relations agreement with a third-party.
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.
On January 17, 2017, the Company issued 186,568 shares of common stock as partial consideration for mineral rights at the East Camp Douglas property. At the time of issuance, the shares were valued at $5.36 per share, for an aggregate value of $1.0 million.
In 2011, the Board of Directors approved a share repurchase program pursuant to which the Company may repurchase up to $20.0 million of its common stock from time to time in market transactions. There is no pre-determined end date associated with the share repurchase program. During 2019, 2018 and 2017, the Company did not repurchase any additional shares of common stock.
14. Embedded Derivatives
Concentrate sales contracts contain embedded derivatives due to the provisional pricing terms for shipments pending final settlement. 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 19 for additional information.
The following table summarizes the Company’s unsettled sales contracts at December 31, 2019, with the quantities of metals under contract subject to final pricing occurring through February 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
|
|
Silver
|
|
Copper
|
|
Lead
|
|
Zinc
|
|
|
(ounces)
|
|
(ounces)
|
|
(tonnes)
|
|
(tonnes)
|
|
(tonnes)
|
Under contract
|
|
|
10,971
|
|
|
711,190
|
|
|
893
|
|
|
4,467
|
|
|
11,146
|
Average forward price (per ounce or tonne)
|
|
$
|
1,472
|
|
$
|
17.04
|
|
$
|
5,860
|
|
$
|
2,039
|
|
$
|
2,367
|
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 provides eligible employees the opportunity to make tax deferred contributions to a
retirement trust account up to 45% of their qualified wages, subject to the IRS annual maximums. Any matching contribution by the Company on behalf of the employee is immediately vested; the matching contribution expense amounted to $0.1 million for each of the years ended December 31, 2019, 2018, and 2017.
16. Stock-Based Compensation
During 2016, the Company replaced its Amended and Restated Stock Option and Stock Grant Plan (the “Prior Plan”) with the Gold Resource Corporation 2016 Equity Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for the issuance of five million shares of common stock in the form of incentive and non-qualified stock options, stock appreciation rights, restricted stock units (“RSUs”), stock grants, stock units, performance shares, performance share units and performance cash. Additionally, pursuant to the terms of the Incentive Plan, shares underlying any award outstanding under the Prior Plan that is terminated, expired, forfeited, or canceled for any reason, will be available for grant under the Incentive Plan.
A total of 470,000 options with a term of 10 years were granted during the year ended December 31, 2019, of which 250,000 vested immediately and the remainder vest over a three-year period. A total of 310,870 RSUs were granted during the year ended December 31, 2019, of which 35,072 vest within six months and the remainder vest over a three- year period.
Stock Options
A summary of stock option activity under the Incentive Plan for the years ended December 31, 2019 and 2018 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average Exercise
Price (per share)
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic
Value
(thousands)
|
|
Outstanding as of December 31, 2017
|
|
6,245,001
|
|
$
|
7.23
|
|
4.68
|
|
$
|
4,040
|
|
Granted
|
|
505,500
|
|
|
5.41
|
|
-
|
|
|
|
|
Exercised
|
|
(1,412,926)
|
|
|
3.13
|
|
-
|
|
|
|
|
Expired
|
|
(73)
|
|
|
4.60
|
|
-
|
|
|
|
|
Forfeited
|
|
(77,667)
|
|
|
3.44
|
|
-
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
5,259,835
|
|
$
|
8.21
|
|
4.82
|
|
$
|
1,396
|
|
Granted
|
|
470,000
|
|
|
3.78
|
|
-
|
|
|
|
|
Exercised
|
|
(274,750)
|
|
|
3.95
|
|
-
|
|
|
|
|
Expired
|
|
(780,250)
|
|
|
5.62
|
|
-
|
|
|
|
|
Forfeited
|
|
(110,100)
|
|
|
4.55
|
|
-
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
4,564,735
|
|
$
|
8.54
|
|
5.09
|
|
$
|
4,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of December 31, 2019
|
|
4,013,994
|
|
$
|
9.09
|
|
4.58
|
|
$
|
3,783
|
|
The weighted-average fair value of options per share granted during the years ended December 31, 2019, 2018, and 2017 was $1.94, $3.04 and $2.25, respectively. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018, and 2017, was $0.2 million, $2.6 million and $0.1 million, respectively. The total fair value of options vested during the years ended December 31, 2019, 2018 and 2017 was $1.6 million, $0.9 million and $0.8 million, respectively.
During the year ended December 31, 2019, stock options to purchase an aggregate of 274,750 shares of the Company’s common stock were exercised at a weighted average exercise price of $3.95 per share. Of that amount, 250,000 of the options were exercised on a net exercise basis, resulting in 44,698 shares being delivered. The remaining 24,750 options were exercised for cash. During the year ended December 31, 2018, stock options to purchase an aggregate of 1,412,926 shares of the Company’s common stock were exercised at a weighted average exercise price of
$3.13 per share. Of that amount, 945,000 of the options were exercised on a net exercise basis, resulting in 244,345 shares being delivered. The remaining 467,926 options were exercised for cash proceeds of $1.3 million.
The following table summarizes information about stock options outstanding at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
|
Range of Exercise Prices
|
|
Number of
Options
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
Weighted
Average Exercise
Price (per share)
|
|
Number of
Options
|
|
Weighted
Average Exercise
Price (per share)
|
|
$0.00 - $6.25
|
|
2,169,335
|
|
7.28
|
|
$
|
3.46
|
|
1,757,998
|
|
$
|
3.39
|
|
$6.25 -$12.50
|
|
1,025,400
|
|
3.84
|
|
$
|
8.35
|
|
885,996
|
|
$
|
8.58
|
|
$12.50 - $18.75
|
|
1,250,000
|
|
2.78
|
|
$
|
16.37
|
|
1,250,000
|
|
$
|
16.37
|
|
$18.75 - $25.00
|
|
120,000
|
|
0.16
|
|
$
|
20.51
|
|
120,000
|
|
$
|
20.51
|
|
|
|
4,564,735
|
|
5.09
|
|
$
|
8.54
|
|
4,013,994
|
|
$
|
9.09
|
|
The assumptions used to determine the value of stock-based awards under the Black-Scholes method are summarized below:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Risk-free interest rate
|
|
2.20
|
%
|
2.72
|
%
|
1.94
|
%
|
|
Dividend yield
|
|
0.53
|
%
|
0.40
|
%
|
0.53
|
%
|
|
Expected volatility
|
|
62.76
|
%
|
67.11
|
%
|
67.70
|
%
|
|
Expected life in years
|
|
5
|
|
5
|
|
5
|
|
|
Restricted Stock Units
A summary of RSU activity under the Incentive Plan for the years ended December 31, 2019 and 2018 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Aggregate
Intrinsic
Value
(thousands)
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
Nonvested as of December 31, 2017
|
|
209,283
|
|
$
|
920
|
|
1.91
|
|
Granted
|
|
120,002
|
|
|
|
|
-
|
|
Vested
|
|
(89,921)
|
|
|
|
|
-
|
|
Expired
|
|
-
|
|
|
|
|
-
|
|
Forfeited
|
|
(16,610)
|
|
|
|
|
-
|
|
Nonvested as of December 31, 2018
|
|
222,754
|
|
$
|
891
|
|
1.77
|
|
Granted
|
|
310,870
|
|
|
|
|
-
|
|
Vested
|
|
(121,060)
|
|
|
|
|
-
|
|
Expired
|
|
-
|
|
|
|
|
-
|
|
Forfeited
|
|
(11,329)
|
|
|
|
|
-
|
|
Nonvested as of December 31, 2019
|
|
401,235
|
|
$
|
2,223
|
|
8.00
|
|
The weighted-average fair value per share of RSUs granted during the years ended December 31, 2019 and 2018, and 2017 was $4.83, $6.89 and $4.11, respectively. The total intrinsic value of RSUs vested during the years ended December 31, 2019, 2018, and 2017 was $0.4 million, $0.5 million and $0.3 million, respectively.
Stock-Based Compensation Expense
Stock-based compensation expense for stock options and RSUs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(in thousands)
|
Stock options
|
|
$
|
1,458
|
|
$
|
993
|
|
$
|
829
|
Restricted stock units
|
|
|
474
|
|
|
504
|
|
|
363
|
Total
|
|
$
|
1,932
|
|
$
|
1,497
|
|
$
|
1,192
|
The estimated unrecognized stock-based compensation expense from unvested options and RSUs as of December 31, 2019 was approximately $1.1 million and $1.9 million, respectively, and is expected to be recognized over the remaining vesting periods of up to three years.
17. Other Expense, Net
During the years ended December 31, 2019, 2018 and 2017, other expense, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
|
2017
|
|
|
(in thousands)
|
Unrealized currency exchange (gain) loss
|
|
$
|
(19)
|
|
$
|
230
|
|
$
|
983
|
Realized currency exchange loss (gain)
|
|
|
252
|
|
|
707
|
|
|
(457)
|
Unrealized (gain) loss from gold and silver rounds/bullion, net (1)
|
|
|
(671)
|
|
|
134
|
|
|
(493)
|
Loss from sale of investments, net (2)
|
|
|
-
|
|
|
195
|
|
|
-
|
Loss on disposal of fixed assets
|
|
|
12
|
|
|
389
|
|
|
474
|
Increase in reserve for inventory obsolescence
|
|
|
885
|
|
|
114
|
|
|
106
|
Increase in allowance for doubtful accounts receivable
|
|
|
-
|
|
|
1,360
|
|
|
-
|
Other expense (income)
|
|
|
173
|
|
|
(18)
|
|
|
553
|
Total
|
|
$
|
632
|
|
$
|
3,111
|
|
$
|
1,166
|
|
(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.
|
|
(2)
|
|
During 2018, the Company wrote off its equity investment and recognized a loss of $195. For additional information regarding our fair value measurements and investments, please see Note 19.
|
18. Net Income per Common Share
Basic income per common share is calculated based on the weighted average number of shares of common stock outstanding for the period. Diluted income per common share is calculated based on the assumption that stock options outstanding, which have an exercise price less than the average market price of the Company’s common stock 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 restricted stock units are considered to be dilutive.
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 4.2 million, 3.6 million, and 3.1 million shares of common stock at weighted average exercise prices of $8.95, $10.44, and $11.26 were outstanding as of December 31, 2019, 2018, and 2017, respectively, but were not included in the computation of diluted weighted average common shares outstanding, as the exercise price of the options exceeded the average price of the Company’s common stock during those periods, and therefore were anti-dilutive.
Basic and diluted net income per common share is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Net income (in thousands)
|
|
$
|
5,832
|
|
$
|
9,288
|
|
$
|
4,150
|
Basic weighted average shares of common stock outstanding
|
|
|
63,681,156
|
|
|
57,534,830
|
|
|
56,854,670
|
Dilutive effect of share-based awards
|
|
|
351,834
|
|
|
834,836
|
|
|
740,323
|
Diluted weighted average common shares outstanding
|
|
|
64,032,990
|
|
|
58,369,666
|
|
|
57,594,993
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.09
|
|
$
|
0.16
|
|
$
|
0.07
|
19. Fair Value Measurement
Fair value accounting establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity.)
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 tables set forth certain of the Company’s assets measured at fair value by level within the fair value hierarchy as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Input Hierarchy Level
|
|
|
(in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
11,076
|
|
$
|
7,762
|
|
Level 1
|
Gold and silver rounds/bullion
|
|
$
|
4,265
|
|
$
|
3,637
|
|
Level 1
|
Receivables from provisional concentrate sales
|
|
$
|
8,362
|
|
$
|
1,744
|
|
Level 2
|
Loans payable
|
|
$
|
1,661
|
|
$
|
2,143
|
|
Level 2
|
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents consist primarily of cash deposits and are valued at cost, which approximates fair value. Gold and silver rounds/bullion consist of precious metals used for investment purposes and in the dividend program which are valued using quoted market prices. Please see Note 3 for additional information. During the year ended December 31, 2018, the Company became aware of adverse events that affected the fair value of its non-current investment in equity securities of $0.2 million and as such, adjusted the investment to nil as of December 31, 2018.
Trade accounts receivable include amounts due to the Company for deliveries of concentrates and doré sold to customers, net of allowance for doubtful accounts of $1.4 million. Concentrate sales contracts provide for provisional pricing as specified in such contracts. These sales contain an embedded derivative related to the provisional pricing mechanism which is bifurcated and accounted for as a derivative. At the end of each reporting period, the Company records an adjustment to sales to reflect the mark-to-market of outstanding provisional invoices based on the forward price curve. Because these provisionally priced sales have not yet settled as of the reporting date, the mark-to-market adjustment related to these invoices is included in accounts receivable as of each reporting date. At December 31, 2019 and 2018, the Company had an unrealized gain of $0.2 million and an unrealized loss of $0.1 million, respectively,
included in its accounts receivable on the accompanying Consolidated Balance Sheets related to mark-to-market adjustments. Please see Note 14 for additional information.
Loans payable consist of obligations for equipment purchases financed on a long-term basis. Loans payable are recorded at amortized cost, which approximates fair value. See Note 10 for additional information.
Gains and losses related to changes in the fair value of these financial instruments were included in the Company’s Consolidated Statements of Operations as shown in the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Statement of Operations Classification
|
|
|
(in thousands)
|
|
|
Realized/unrealized derivative gain (loss), net
|
|
$
|
1,714
|
|
$
|
(4,209)
|
|
$
|
1,899
|
|
Sales, net
|
Realized/unrealized gold and silver rounds/bullion gain (loss), net
|
|
$
|
663
|
|
$
|
(148)
|
|
$
|
282
|
|
Other expense, net
|
Investment loss
|
|
$
|
-
|
|
$
|
(195)
|
|
$
|
-
|
|
Other expense, net
|
Realized/Unrealized Derivatives, net
The following tables summarize the Company’s realized/unrealized derivatives, net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
|
|
Silver
|
|
Copper
|
|
Lead
|
|
Zinc
|
|
Total
|
Year ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss)
|
|
$
|
318
|
|
$
|
167
|
|
$
|
17
|
|
$
|
(44)
|
|
$
|
965
|
|
$
|
1,423
|
Unrealized gain (loss)
|
|
|
117
|
|
|
208
|
|
|
114
|
|
|
(64)
|
|
|
(84)
|
|
|
291
|
Total realized/unrealized derivatives, net
|
|
$
|
435
|
|
$
|
375
|
|
$
|
131
|
|
$
|
(108)
|
|
$
|
881
|
|
$
|
1,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
|
|
Silver
|
|
Copper
|
|
Lead
|
|
Zinc
|
|
Total
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized loss
|
|
$
|
(191)
|
|
$
|
(374)
|
|
$
|
(268)
|
|
$
|
(788)
|
|
$
|
(2,081)
|
|
$
|
(3,702)
|
Unrealized gain (loss)
|
|
|
222
|
|
|
272
|
|
|
(162)
|
|
|
(39)
|
|
|
(800)
|
|
|
(507)
|
Total realized/unrealized derivatives, net
|
|
$
|
31
|
|
$
|
(102)
|
|
$
|
(430)
|
|
$
|
(827)
|
|
$
|
(2,881)
|
|
$
|
(4,209)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
|
|
Silver
|
|
Copper
|
|
Lead
|
|
Zinc
|
|
Total
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain
|
|
$
|
154
|
|
$
|
151
|
|
$
|
128
|
|
$
|
131
|
|
$
|
798
|
|
$
|
1,362
|
Unrealized (loss) gain
|
|
|
(93)
|
|
|
(183)
|
|
|
64
|
|
|
72
|
|
|
677
|
|
|
537
|
Total realized/unrealized derivatives, net
|
|
$
|
61
|
|
$
|
(32)
|
|
$
|
192
|
|
$
|
203
|
|
$
|
1,475
|
|
$
|
1,899
|
20. Supplementary Cash Flow Information
During the years ended December 31, 2019, 2018, and 2017, other operating adjustments and write-downs within the net cash provided by operations on the Consolidated Statements of Cash Flows consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(in thousands)
|
|
|
|
Unrealized (gain) loss on gold and silver rounds/bullion
|
|
$
|
(671)
|
|
$
|
134
|
|
$
|
(493)
|
Unrealized foreign currency exchange (gain) loss
|
|
|
(19)
|
|
|
230
|
|
|
983
|
Loss on sale of investments
|
|
|
-
|
|
|
195
|
|
|
-
|
Loss on disposition of fixed assets
|
|
|
12
|
|
|
389
|
|
|
474
|
Increase in reserve for inventory
|
|
|
885
|
|
|
114
|
|
|
106
|
Change in allowance for doubtful accounts receivable
|
|
|
-
|
|
|
1,360
|
|
|
|
Other
|
|
|
115
|
|
|
113
|
|
|
215
|
Total other operating adjustments
|
|
$
|
322
|
|
$
|
2,535
|
|
$
|
1,285
|
21. Segment Reporting
The Company has organized its operations into two geographic regions. The geographic regions include Oaxaca, Mexico and Nevada, U.S.A. and represent the Company’s operating segments. Intercompany revenue and expense amounts have been eliminated within each segment in order to report on the basis that management uses internally for evaluating segment performance. The Company’s business activities that are not considered operating segments are included in Corporate and Other.
The financial information relating to the Company’s segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexico
|
|
Nevada
|
|
Corporate and Other
|
|
Consolidated
|
Year ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
120,301
|
|
$
|
15,065
|
|
$
|
-
|
|
$
|
135,366
|
Exploration expense
|
|
|
2,614
|
|
|
932
|
|
|
106
|
|
|
3,652
|
Net income (loss)
|
|
|
17,416
|
|
|
300
|
|
|
(11,884)
|
|
|
5,832
|
Capital expenditures (1)
|
|
|
17,986
|
|
|
23,477
|
|
|
19
|
|
|
41,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexico
|
|
Nevada
|
|
Corporate and Other
|
|
Consolidated
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
115,308
|
|
$
|
-
|
|
$
|
-
|
|
$
|
115,308
|
Exploration expense
|
|
|
2,217
|
|
|
2,314
|
|
|
172
|
|
|
4,703
|
Net income (loss)
|
|
|
20,631
|
|
|
(2,585)
|
|
|
(8,758)
|
|
|
9,288
|
Capital expenditures (2)
|
|
|
24,039
|
|
|
20,133
|
|
|
29
|
|
|
44,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexico
|
|
Nevada
|
|
Corporate and Other
|
|
Consolidated
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
110,156
|
|
$
|
-
|
|
$
|
-
|
|
$
|
110,156
|
Exploration expense
|
|
|
1,288
|
|
|
2,916
|
|
|
145
|
|
|
4,349
|
Net income (loss)
|
|
|
20,379
|
|
|
(2,423)
|
|
|
(13,806)
|
|
|
4,150
|
Capital expenditures (3)
|
|
|
21,760
|
|
|
10,087
|
|
|
9
|
|
|
31,856
|
|
(1)
|
|
Includes a decrease in capital expenditures in accounts payable of $550 and non-cash additions of $2,558; consolidated capital expenditures on a cash basis were $39,474.
|
|
(2)
|
|
Includes an increase in capital expenditures in accounts payable of $3,302 and non-cash additions of $823; consolidated capital expenditures on a cash basis were $40,076.
|
|
(3)
|
|
Includes an increase in capital expenditures in accounts payable of $1,041 and non-cash additions of $5,383; consolidated capital expenditures on a cash basis were $25,432.
|
Total asset balances, excluding intercompany balances at December 31, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
Mexico
|
|
$
|
98,718
|
|
$
|
91,590
|
Nevada
|
|
|
84,669
|
|
|
46,677
|
Corporate and Other
|
|
|
9,625
|
|
|
12,064
|
Consolidated
|
|
$
|
193,012
|
|
$
|
150,331
|
22. Quarterly Financial Data (Unaudited)
The following represents selected information from the unaudited quarterly Consolidated Statements of Operations for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
|
(in thousands, except per common share data)
|
|
Sales, net
|
|
$
|
26,578
|
|
$
|
29,374
|
|
$
|
40,066
|
|
$
|
39,348
|
|
Mine gross profit
|
|
$
|
5,439
|
|
$
|
6,491
|
|
$
|
9,318
|
|
$
|
7,867
|
|
Net income
|
|
$
|
882
|
|
$
|
1,798
|
|
$
|
2,978
|
|
$
|
174
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.05
|
|
$
|
-
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
60,672,133
|
|
|
62,778,445
|
|
|
65,495,958
|
|
|
65,691,527
|
|
Diluted
|
|
|
61,142,088
|
|
|
63,066,616
|
|
|
65,796,899
|
|
|
66,092,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
|
(in thousands, except per common share data)
|
|
Sales, net
|
|
$
|
32,151
|
|
$
|
30,768
|
|
$
|
24,258
|
|
$
|
28,131
|
|
Mine gross profit
|
|
$
|
12,920
|
|
$
|
9,521
|
|
$
|
3,293
|
|
$
|
7,956
|
|
Net income (loss)
|
|
$
|
5,457
|
|
$
|
3,754
|
|
$
|
(781)
|
|
$
|
858
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
0.07
|
|
$
|
(0.01)
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.09
|
|
$
|
0.06
|
|
$
|
(0.01)
|
|
$
|
0.01
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
57,120,077
|
|
|
57,315,472
|
|
|
57,642,966
|
|
|
58,049,972
|
|
Diluted
|
|
|
57,911,299
|
|
|
58,314,123
|
|
|
57,642,966
|
|
|
58,571,874
|
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective October 1, 2018, EKS&H LLLP (“EKS&H”), our independent registered public accounting firm combined with Plante & Moran PLLC (“Plante Moran”). As a result of this transaction, on October 1, 2018, EKS&H resigned as the independent registered public accounting firm for the Company. Concurrent with such resignation, the Company’s audit committee approved the engagement of Plante Moran as the new independent registered public accounting firm for the Company. The audit report of EKS&H on our consolidated financial statements for the year ended December 31, 2017, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. During the interim periods up to October 1, 2018, there were no (1) disagreements between us and EKS&H on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference thereto in their reports on the consolidated financial statements for such years, or (2) “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
During the fiscal year ended December 31, 2017, and in the interim period up to October 1, 2018, we have not consulted with Plante Moran regarding either (1) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, and no written report or oral advice was provided by Plante Moran to us that was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue; or (2) any matter that was the subject of a disagreement (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions) or a “reportable event” (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).
ITEM 9A. 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 December 31, 2019. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2019.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting as of December 31, 2019, was effective.
Plante Moran PLLC, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an opinion on the effectiveness of our internal control over financial reporting which is included as part of Item 8. Financial Statements and Supplementary Data.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the fourth quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.