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. See “Special Note Regarding Forward-Looking Statements” above. 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
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. DDGM 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. Metal production is also generated from the Mirador underground mine within the Alta Gracia project. All three mines supply ore to our processing facilities located at the Aguila project. During 2020, we temporarily suspended operations from April 1, 2020 to May 26, 2020 as a result of an order by the Mexican federal government in response to the worldwide pandemic (see “COVID-19 Pandemic” below). We produce gold and silver doré and metal concentrates which contain precious metals of gold and silver and base metals of copper, lead and zinc.
The following discussion summarizes our results of operations for three fiscal years ended December 31, 2020, 2019 and 2018 and our financial condition as of December 31, 2020 and 2019, with a particular emphasis on the year ended December 31, 2020. At December 31, 2020, we spun-off our wholly-owned subsidiary, Fortitude Gold Corporation, which holds the Nevada Mining Unit. We are presenting the operating results and cash flows of the Nevada Mining Unit reportable segment within discontinued operations in the current and prior periods. The assets and liabilities of the Nevada Mining Unit reporting segment are presented as assets and liabilities of discontinued operations in the Consolidated Balance Sheet as of December 31, 2019. See “Fortitude Spin-Off” below.
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 for non-GAAP financial measures.
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.
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2020 Strategic, Operational and Financial Results
Results for the year ended December 31, 2020 are summarized below and discussed further in our Management’s Discussion and Analysis:
Strategic:
● Successfully spun-off our Nevada Mining Unit to our shareholders.
Operational:
Financial:
● Cash from operating activities was $21.2 million;
Fortitude Spin-Off
On December 31, 2020, we completed our previously announced spin-off of our wholly-owned subsidiary, Fortitude Gold Corporation and its subsidiaries, which included the Nevada Mining Unit, into a separate, public company. The separation was completed by way of a pro rata distribution of all the outstanding shares of our newly created subsidiary, Fortitude Gold Corporation, to our shareholders on December 31, 2020. The spin-off did not require the approval of our shareholders.
We are presenting the operating results and cash flows of the Nevada Mining Unit reportable segment within discontinued operations in the current and prior periods. The assets and liabilities of the Nevada Mining Unit reporting segment are presented as assets and liabilities of discontinued operations on the Consolidated Balance Sheet as of December 31, 2019.
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See Note 2, Discontinued Operations, in the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information.
COVID-19 Pandemic
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure. In response to the pandemic, many jurisdictions, including the United States and Mexico, instituted restrictions on travel, public gatherings and certain business operations.
On March 31, 2020, the Mexican government issued a national health emergency with an immediate suspension order for all “non-essential” public and private sector business (which included mining). As a result, we suspended our Mexico operations and production on April 1, 2020. The Mexican government then designated mining as an essential business in mid-May 2020 and as a result, we were given approval to restart our operations on May 27, 2020.
In an effort to mitigate the spread of COVID-19 and protect the health and safety of our employees, contractors, and communities, we have taken precautionary measures including specialized training, social distancing, screening workers before they enter facilities, a work from home mandate where possible, and close monitoring of national and regional COVID-19 impacts and governmental guidelines. Since our non-mining workforce is able to work remotely using various technological tools, we are able to maintain our operations and internal controls over financial reporting and disclosures.
While it is not feasible to estimate the long-term impact of COVID-19 on our business, financial condition, results of operations, and liquidity, the immediate impact on our financial results stemmed from almost two-months of mandatory operations shut-down in 2020, which resulted in loss of production and gross sales of approximately $14 million based on our actual monthly average production and sales during 2020. We do believe, however, that we have sufficient liquidity available from operating cash flow and cash on hand going forward.
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Results of Operations—Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
As noted above, we have reflected the results of operations of the Nevada Mining Unit as discontinued operations and therefore not included in the below discussion.
Don David Gold Mine Production
The following Production Statistics table summarizes certain information about our Don David Gold Mine operations for the periods indicated:
Three months ended December 31, Year ended December 31,
Arista Mine
Milled
Grade
Average Silver Grade (g/t) 66 78 74 82
Aguila Open Pit Mine
Milled
Grade
Average Silver Grade (g/t) 31 77 35 53
Mirador Mine
Milled
Grade
Average Gold Grade (g/t) - 0.82 0.91 0.91
Average Silver Grade (g/t) - 179 130 195
Combined
Metal production (before payable metal deductions) (2)
(3) Based on actual days the mill operated during the period.
For the year ended December 31, 2020, the Oaxaca operations produced 20,473 gold ounces and 1,189,366 silver ounces during a demanding 2020. We withdrew our 2020 production outlook in April 2020 as a result of the impacts of the global pandemic and the temporary government-mandated suspension of Mexican mining operations. These production results reflect a decrease of 30% and 31%, respectively, from the same period in 2019. For the three months ended December 31, 2020, production totaled 6,854 gold ounces and 276,902 silver ounces, representing a decrease of 9% and 34% in gold and silver production, respectively, from the same period in 2019.
Production Volumes
During the three and twelve months ended December 31, 2020, we processed ore at a rate of 1,702 and 1,829 ore tonnes per day, respectively, as compared to 2,017 and 1,980 ore tonnes per day for the same periods in 2019. Tonnes
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milled were 16% and 8% lower for the three and twelve months ended December 31, 2020 as compared to the same period in 2019 as a result of two-month mandatory shut-down and subsequent lost workdays from our workforce related to COVID-19 protocols and safety measures. During the year ended December 31, 2020, the Arista Mine accounted for 90% of the production tonnage followed by the Aguila open pit and Mirador Mine with 9% and 1%, respectively.
Grades & Recoveries
Gold and silver ore grades and recoveries vary depending on the areas of the Arista Mine being worked at any given time as reflected in the Proven & Probable Reserve disclosures above (see “Item 2. Properties” above). We have seen an expected decrease of precious metal grades, an increase in base metal grades and corresponding decrease in recoveries, as we have mined deeper in the deposit over the last ten years. The fluctuation in grades and recoveries with depth is a function of the metal head grades and finer materials in the epithermal vein system. Higher precious metal and lower base metal grades are present in the upper part of an epithermal system which was evident in the late 2020 drilling campaign. As mining progresses at higher levels 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, 2020, we processed ore with an average gold grade of 1.42 g/t and 1.13 g/t, respectively, as compared to 1.32 g/t and 1.32 g/t for the same periods in 2019. Likewise, during the three and twelve months ended December 31, 2020, we processed ore with an average silver grade of 58 g/t and 66 g/t, respectively, as compared to 73 g/t and 77 g/t for the same periods in 2019. Full-year average gold and silver grade were both approximately 14% lower than the prior year as a result of mining deeper in the Switchback vein system of the Arista Mine. Mining activities at Alta Gracia in 2019 contributed ore with higher silver grade. Additionally, overall recoveries declined in 2020 by approximately 5% as expected due to the nature of the deposit (approximately 1%) and impact of the plant being shut down due to the worldwide pandemic (approximately 4%).
Our base metals average grades during the three months ended December 31, 2020 were 0.40% for copper, 1.93% for lead, and 4.93% for zinc, compared to 0.37% for copper, 1.79% for lead, and 4.41% for zinc, for the same periods in 2019. An average grade for our base metals for twelve months ended December 31, 2020 was 0.39% for copper, 1.92% for lead, and 4.87% for zinc, compared to 0.38% for copper, 1.88% for lead, and 4.64% for zinc, for the same period in 2019. Overall base metal grades and recoveries were slightly higher during the three and twelve months ended December 31, 2020, as a result of mining deeper in the Switchback vein system of the Arista Mine with finer mineral particles in the deposit and the impact of the plant being down due to the worldwide pandemic.
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Don David Gold Mine Mining Gross Profit, Sales and Operating Costs
The following Sales Statistics table summarizes certain information about our Don David Gold Mine operations for the periods indicated:
Three months ended December 31, Year ended December 31,
Metal sold
Average metal prices realized (1)
Precious metal gold equivalent ounces sold
For the year ended December 31, 2020, mine gross profit and mine gross profit percent totaled $12.5 million and 14% as compared to $28.6 million and 24% for the same period in 2019. The decrease in mine gross profit and mine gross profit percent during 2020 primarily resulted from the higher contracted base metal treatment costs due to local smelting and refining market conditions and reduction in metal sales as a result of the worldwide pandemic.
Sales
DDGM net sales of $90.7 million for the year ended December 31, 2020 decreased by $29.6 million, or 25%, when compared to 2019. The decrease in our 2020 sales is primarily a result of the decreased sales volumes due to the suspension of operations related to the worldwide pandemic (see “COVID-19 Pandemic” above). Metal sales volume in 2020 decreased over 2019 volumes as follows: gold by 28%, silver by 24%, copper by 10%, lead by 18%, and zinc by 18%. Additionally, contributing to the lower net sales was a 34% increase in concentrate treatment charges which are net against concentrate sales. Decreased averaged realized prices for zinc and lead were slightly offset by increased average realized prices for gold, silver, and copper. For the year ended December 31, 2020, average realized prices for gold, silver, copper, lead, and zinc changed from the same period in 2019 as follows: gold, silver, and copper increased by 27%, 29% and 5%, respectively, while lead and zinc decreased by 10% and 12%, respectively.
Operating Costs
Total production costs of $60.6 million for the twelve months ended December 31, 2020 are 16% lower than the production costs of $72.1 million for the same period in 2019. The decrease is related to the decrease in sales volumes discussed above, slightly offset by the costs related to the closure of the mine for two months. Production costs per tonnes milled in 2020 of $107 reflects a 3% increase as compared to the 2019 production costs per tonnes milled of $104. This increase is related to inflation on labor rates and transportation costs.
Treatment charges for the twelve months ended December 31, 2020 were $21.1 million, or $729 per tonne of concentrate, as compared to $13.8 million, or $403 per produced concentrate tonne for the same period in 2019. The
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treatment charges for 2021 are expected to decrease to $525 to $550 per processed tonne, approximately 30%. This expected decrease is a result of recent negotiations and dependent on the benchmark and spot treatment market for zinc, which can be volatile.
Capital Improvements
The paste fill plant, which was completed in 2019, returned 136,000 tonnes of processing waste to depleted underground workings that would otherwise have been placed in the tailings storage facility. The paste is an effective method of reducing surface tailings and also providing ground support that allows to a more complete mining of mineral reserves.
We realized approximately $3.3 million cost saving in 2020 as compared to 2019, and 69% reduction in diesel fuel consumption and emissions as result of efficient and lower cost source of electricity from the power grid; while improving local infrastructure and allowing for first-time access to electricity for approximately 25,000 families along the electricity transmission route.
Finally, we progressed on construction of our dry stack filtration plant which is expected to be completed mid-2021. The dry stack facilities will also accelerate reclamation of certain areas of the open-pit mine as well as allowing for efficient storage of tailings.
Other Financial Measures
As noted above, we have reflected the results of operations of the Nevada Mining Unit as discontinued operations and therefore have not included such operations in the discussion below.
General and administrative expenses. For the year ended December 31, 2020, general and administrative expenses totaled $8.4 million, compared to $8.0 million for the same period of 2019. The $0.4 million increase in 2020, compared to 2019 is primarily due to increased legal, regulatory, and compensation costs.
Restructuring expenses. Restructuring expenses of $1.3 million were incurred during the year ended December 31, 2020 for legal, accounting, consulting, and employee severance compensation related to the spin-off of Fortitude Gold Corporation.
Exploration expenses. For the year ended December 31, 2020, property exploration expenses totaled $2.5 million as compared to $2.7 million for the same period of 2019. The decrease of $0.2 million was the result of the COVID-19 related suspension of activities in the second quarter of 2020.
Stock-based compensation. For the year ended December 31, 2020, stock-based compensation expense totaled $2.2 million as compared to $1.9 million for the same period of 2019. The increase of $0.3 million was the result of additional expense recognized related to the spin-off and was partially offset with fewer award grants in 2020.
Other expense, net. For the year ended December 31, 2020, we recorded other income of $1.2 million compared to other expense of $0.5 million during the same period of 2019. The $1.7 million change from 2019 was primarily due to realized gains on sales of our gold and silver bullion/rounds, and unrealized gains due to the increase in gold and silver prices in 2020 as compared to 2019 and less reserve for inventory in 2019 as compared to 2020. Please see Note 16 in Item 8. Financial Statements and Supplementary Data for additional information.
Provision for income taxes. For the year ended December 31, 2020, income tax expense decreased to $5.6 million from $10.0 million from the same period in 2019. The 2020 income tax expense is primarily driven by the tax allocations required as a result of the Fortitude Spin-Off. Please see Note 6inItem 8. Financial Statements and Supplementary Data for additional information.
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Net loss from continuing operations. For the year ended December 31, 2020, we recorded net loss from continuing operations of $6.3 million as compared to net income from continuing operations of $5.5 million during the same period in 2019. The change was attributable to the factors noted above.
Net income from discontinued operations. For the year ended December 31, 2020, we recorded net income from discontinued operations of $10.7 million as compared to net income of $0.3 million during the same period in 2019. The increase was a result of realizing a full year of production in 2020 as the Nevada Mining Unit commenced production in May 2019 and declared commercial production in October 2019. The Nevada Mining Unit also benefited from higher grade ore mined in 2020 and higher average realized precious metal prices.
Net income. For the year ended December 31, 2020, we recorded net income of $4.4 million as compared to net income of $5.8 million during the same period in 2019. The change was attributable to the factors noted above.
Results of Operations—Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
As noted above, we have reflected the results of operations of the Nevada Mining Unit as discontinued operations and therefore have not included such operations in the below discussion.
Sales, net. During the year ended December 31, 2019, net sales were $120.3 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. Metal sales volume in 2019 increased over 2018 volumes as follows: gold by 6%, copper by 9%, lead by 19%, and zinc by 20%.
Mine gross profit. For the year ended December 31, 2019, mine gross profit totaled $28.6 million as compared to $33.7 million 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 and higher precious metal prices.
General and administrative expenses. For the year ended December 31, 2019, general and administrative expenses of $8.0 million did not materially change from $7.8 million for the same period of 2018.
Exploration expenses. For the year ended December 31, 2019, property exploration expenses totaled $2.7 million as compared to $2.4 million for the same period of 2018. The increase of $0.3 million was the result of increased drilling at the Aguila project.
Stock-based compensation. For the year ended December 31, 2019, stock-based compensation expense totaled $1.9 million as compared to $1.5 million for the same period of 2018. The increase of $0.4 million was the result of additional expense related to new award grants in 2019.
Other expense, net. For the year ended December 31, 2019, we recorded other expense of $0.5 million compared to other expense of $2.9 million during the same period of 2019. The $2.4 million decrease in 2019 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 and there was less exchange rate fluctuation between the U.S. Dollar and Mexican Peso in 2019 as compared to 2018. Additionally, in 2018 we recorded a $1.4 million allowance for doubtful accounts receivable resulting from the bankruptcy filing of one of our customers. Please see Note 17 in Item 8. Financial Statements and Supplementary Data for additional information.
Provision for income taxes. For the year ended December 31, 2019, income tax expense increased to $10.0 million from $7.2 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 6in Item 8. Financial Statements and Supplementary Data for additional information.
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Net (loss) income from continuing operations. For the ended December 31, 2019, we recorded net income from continuing operations of $5.5 million as compared to net income from continuing operations of $11.9 million during the same period in 2018. The change was attributable to the factors noted above.
Net income (loss) from discontinued operations. For the year ended December 31, 2019, we recorded net income from discontinued operations of $0.3 million as compared to net loss from discontinued operations of $2.6 million during the same period in 2018. The change was due to the Isabella Pearl Mine commencing production in 2019 and generating revenue.
Net income. For the year 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. The change was attributable to the factors noted above.
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 Don David Gold Mine. 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.
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, 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.
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Reconciliations to U.S. GAAP
The following table summarizes Don David Gold Mine’s total all-in cost after by-product credits per precious metal gold equivalent ounce sold:
Three months ended December 31, Year ended December 31,
(in thousands, except per oz)
(2) Refer to Item 8. Financial Statements and Supplemental Data: Foot Note 3.
Liquidity and Capital Resources
As of December 31, 2020, our working capital was $30.8 million, an increase of $5.4 million from $25.4 million at December 31, 2019, which excludes current assets and current liabilities of discontinued operations. Our working capital balance at December 31, 2020 reflects the $10 million payment made to Fortitude Gold Corporation in the fourth quarter in conjunction with the spin-off that was finalized on December 31, 2020. 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 as a result of our cash balances, the performance of our current and expected operations, current metals prices, proceeds from potential ATM sales of common stock, we will be able to meet our obligations and other potential cash requirements during the next 12 months from the date of this report.
Cash and cash equivalents as of December 31, 2020 increased to $25.4 million from $10.2 million as of December 31, 2019, a net increase in cash of $15.2 million. The increase is primarily due to cash from operations and cash received from our ATM program which was offset by cash spent on capital expenditures at our Aguila project.
Net cash provided by operating activities from continuing operations for the years ended December 31, 2020 and 2019 was $21.2 million and $24.1 million, respectively. The decrease is mainly attributable to the decrease in net income from continuing operations.
Net cash used in investing activities from continuing operations for the year ended December 31, 2020 was $8.0 million compared to $16.9 million during the same period in 2019. The decrease in investing activities is primarily attributable to less mine development in 2020 and the critical capital projects at our Don David Gold Mine that commenced in 2018 which were completed in 2019.
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Net cash (used in) provided by financing activities for the year ended December 31, 2020 was a net outflow of ($5.2) million compared to a net inflow of $21.0 million in 2019. The decrease is due to cash contributions related to discontinued operations as a result of the Fortitude Spin-Off.
Off-Balance Sheet Arrangements
As of December 31, 2020, we have off-balance sheet arrangements related to equipment purchase obligations of $0.4 million.
Accounting Developments
Recent accounting pronouncements issued have been evaluated and do not presently impact our financial statements and supplemental 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. The investments in the construction industry, rising electrical and electronics production, and demand for industrial equipment, are some of the major factors driving the demand for base metals and their prices.
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.
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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 is used 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.
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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.
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.
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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.
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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 approximately 40% of 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 seeNote 13in Item 8. Financial Statements and Supplementary Data for additional information.
Interest Rate Risk
None.
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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Index to Financial Statements:
Report of Independent Registered Public Accounting Firm 54
Consolidated Balance Sheets at December 31, 2020 and 2019 57
Notes to Consolidated Financial Statements 61
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Report of Independent Registered Public Accounting Firm
To the Stockholders 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 of Gold Resource Corporation (the “Company”) as of December 31, 2020 and 2019 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, 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, 2020, based on criteria established in the COSO framework.
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
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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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Income taxes and Uncertain Tax Positions- Refer to Notes 1 and 6 to the financial statements.
Critical Audit Matter Description
The Company’s net deferred income tax asset was $0.3 million as of December 31, 2020 and the related total income tax expense was $5.6 million for the year ended December 31, 2020. Income taxes are provided based on the asset and liability method of accounting. The provision for income taxes is based on pretax financial income. Deferred tax assets and liabilities are recognized for the future expected tax consequences of temporary differences between income tax and financial reporting and principally relate to differences in the tax basis of assets and liabilities and their reported amounts, using enacted tax rates in effect for the year in which differences are expected to reverse. Filing positions in all of the federal and state jurisdictions where the Company is required to file income tax returns are analyzed by the Company, as well as all open tax years in these jurisdictions, to determine whether the positions will be more likely than not be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are not recorded as a tax benefit or expense in the current year.
We identified income taxes and uncertain tax positions as a critical audit matter due to the multiple jurisdictions in which the Company operates including foreign jurisdictions, the industry in which the Company operates in, and the complexity of tax laws and regulations. Performing audit procedures and evaluating audit evidence obtained related to these considerations required a high degree of judgement and effort.
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How the Critical Audit Matter was Addressed in the Audit
Our audit procedures performed to address this critical audit matter included the following, among others:
We evaluated the assumptions and estimates used by management in the context of other audit evidence obtained during the audit.
We have served as the Company’s auditor since 2016.
/s/ Plante & Moran, PLLC
Denver, Colorado
February 24, 2021
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GOLD RESOURCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share and per share amounts)
December 31, December 31,
ASSETS
Current assets:
Gold and silver rounds/bullion 671 4,265
Accounts receivable, net 4,226 8,362
Prepaid taxes - 786
Prepaid expenses and other current assets 2,576 2,024
Current assets of discontinued operations - 11,809
Property, plant and mine development, net 62,511 65,242
Deferred tax assets, net 309 3,900
Other non-current assets 41 45
Non-current assets of discontinued operations - 72,862
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Income taxes payable, net 73 -
Mining royalty taxes payable, net 955 1,538
Accrued expenses and other current liabilities 2,275 3,102
Current liabilities of discontinued operations - 14,291
Reclamation and remediation liabilities 3,098 3,108
Other non-current liabilities 13 160
Long-term liabilities of discontinued operations - 3,705
Shareholders' equity:
Common stock - $0.001 par value, 100,000,000 shares authorized:
Accumulated other comprehensive loss (1,171) (1,171)
Total liabilities and shareholders' equity $ 105,734 $ 193,012
The accompanying notes are an integral part of these consolidated financial statements.
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GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2020, 2019 and 2018
(U.S. dollars in thousands, except share and per share amounts)
Mine cost of sales:
Reclamation and remediation 166 64 330
Costs and expenses:
General and administrative expenses 8,402 8,017 7,828
Restructuring expenses 1,316 - -
Other (income) expense, net (1,188) 464 2,934
(Loss) income before income taxes (758) 15,499 19,043
Net (loss) income from continuing operations (6,331) 5,532 11,874
Net income per common share:
Basic net income (loss) per common share $ 0.06 $ 0.09 $ 0.17
Diluted net income per common share $ 0.06 $ 0.09 $ 0.16
Weighted average shares outstanding:
The accompanying notes are an integral part of these consolidated financial statements.
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GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 2020, 2019 and 2018
(U.S. dollars in thousands, except share amounts)
Stock-based compensation - - 1,497 - - - 1,497
Dividends declared - - - (1,152) - - (1,152)
Net income - - - 9,288 - - 9,288
Stock-based compensation - - 1,932 - - - 1,932
Net stock options exercised 69,448 1 97 - - - 98
Dividends declared - - - (1,612) - - (1,612)
Net income - - - 5,832 - - 5,832
Stock-based compensation - - 3,039 - - - 3,039
Dividends declared - - - (2,819) - - (2,819)
Net income - - - 4,359 - - 4,359
The accompanying notes are an integral part of these consolidated financial statements.
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GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2020, 2019 and 2018
(U.S. dollars in thousands)
Cash flows from operating activities:
Net income (loss) from discontinuing operations 10,690 300 (2,586)
Net (loss) income from continuing operations $ (6,331) $ 5,532 $ 11,874
Other operating adjustments (404) 305 2,535
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (405) 1,097 (225)
Other non-current assets 4 (3) (1)
Accounts payable and other accrued liabilities (588) 175 1,363
Mining royalty and income taxes payable, net 426 (106) (3,894)
Cash flows from investing activities:
Proceeds from the sale gold and silver bullion/rounds 4,846 2 6
Cash flows from financing activities:
Proceeds from the exercise of stock options - 98 1,261
Cash related to the Spin-Off (27,774) - -
Other financing activities (452) (2,019) (909)
Cash flows from discontinued operations:
Net cash used in investing activities (6,488) (22,538) (16,028)
Net increase in cash and cash equivalents 15,195 2,517 (14,559)
Cash and cash equivalents at beginning of year 10,210 7,693 22,252
Supplemental Cash Flow Information Continuing Operations
Interest expense paid $ 20 $ 18 $ 10
Non-cash investing activities:
Change in capital expenditures in accounts payable $ (643) $ 624 $ 437
Change in estimate for asset retirement costs $ 82 $ 443 $ (433)
The accompanying notes are an integral part of these consolidated financial statements
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GOLD RESOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020, 2019 and 2018
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. 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.
Spin-Off