UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
⌧ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31 2017, 2021
◻ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
◻TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-34857
Gold Resource Corporation
(Exact name of registrant as specified in its charter)
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Colorado | 84-1473173 |
(State or other jurisdiction of | (I.R.S. Employer |
2886 Carriage Manor Point, Colorado Springs, Colorado 80906
7900 E. Union Ave,Suite 320,Denver,Colorado80237
(Address of Principal Executive Offices) (Zip Code)
(303) (303) 320-7708
(Registrant’s telephone number including area code)
Securities registered underpursuant to Section 12(b) of the Exchange Act:
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Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, $0.001 par value | GORO | NYSE American |
Securities registered underpursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻ No ☒⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻ No ☒⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒◻ No ◻⌧
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to postsubmit such files). Yes ☒⌧ No ◻
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Non-accelerated filer | ◻ | Smaller reporting company |
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| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report ◻
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No ☒
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The aggregate market value of the common stock of Gold Resource Corporation held by non-affiliates as of June 30, 2017,2021, the last business day of the registrant’s most recently completed second fiscal quarter, was $223,772,333$192,056,111 based on the closing price of the common stock of $4.08$2.58 as reported on the NYSE American.
As of March 7, 2018,9, 2022, there were 57,107,884 88,338,774shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Definitive Proxy Statement to be filed pursuant to Regulation 14A for the registrant’s 20182022 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.
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2021 HIGHLIGHTS
Highlights for the full year ended December 31, 2021 are summarized below and discussed further in our Management’s Discussion and Analysis:
Strategic:
● | In 2021, Gold Resource Corporation (the “Company” or “GRC”) was focusing on strengthening the senior leadership team. After adding a highly accomplished CEO, Mr. Allen Palmiere, the Company added three independent directors, Ms. Lila Manassa Murphy, Mr. Joe Driscoll, and Mr. Ron Little, to the Board of Directors. In May, Alberto Reyes, with more than 20 years of international mining experience, was added as the new Chief Operating Officer. These additions to the Company’s leadership add the expertise necessary to focus on unlocking the value of our assets while implementing best in class governance. |
● | In December, the Company successfully completed the acquisition of all the issued and outstanding common shares of Aquila Resources Inc. (“Aquila”), the owner of the Back Forty Project. The Back Forty Project is an advanced exploration stage property in Michigan, USA, for which the Company is currently preparing a definitive feasibility study. |
● | $3.4 million was distributed in shareholder dividends, totaling over $119 million since 2010. |
Operational:
● | Don David Gold Mine (“DDGM”) initiated a safety program that aims to bolster the health and safety culture. Despite program progress, four lost time incidents occurred during 2021, with one occurring in the fourth quarter. All incidents are thoroughly investigated, and the appropriate actions are taken. |
● | DDGM received the Mexican ESR award for the seventh consecutive year in 2021 at our Don David Gold Mine. Additionally, in September, the Company released its 2020 Sustainability Accounting Standards Report. |
● | The Don David Gold Mine produced and sold a total of 37,526 gold equivalent ounces, comprising 22,644 gold ounces and 1,066,581 silver ounces, sold at an average price per ounce of $1,796 and $25, respectively. |
● | Construction of the water filtration plant and dry stack tailings facilities is complete. The dry stack facilities will conserve and recirculate water, eliminate risks related to traditional tailings facilities, accelerate reclamation of certain areas of the open pit mine, and extend the life of the operations. |
● | During the year, the Company announced encouraging result from our DDGM exploration program. Vein structures were confirmed up to 250 meters above the current production area and drilling confirmed the potential for the down-dip extension of the Switchback vein system. |
● | In August the Company experienced an increase in COVID-19 cases at the Don David Gold Mine and temporarily suspended operations for 12 days. The effort controlled the spread of COVID-19 and operations have steadily ramped back up under enhanced screening and safety protocols. |
Financial:
● | Our balance sheet remains strong with a $33.7 million cash balance as at December 31, 2021, an increase of $8.3 million from December 31, 2020. |
● | Cash from operating activities for 2021 was $34.8 million, a 64% increase over the prior year cash from operating activities of $21.2 million. |
● | Working capital as at December 31, 2021 was $29.3 million, a 5% decrease over December 31, 2020 working capital of $30.8 million. |
● | Don David Gold Mine total cash costs (after co-product credits) and total all-in sustaining cost per precious metal gold equivalent ounce sold were $414 and $922, respectively. |
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FORWARD LOOKING STATEMENTS
Descriptions of agreements or other documents contained in this report are intended as summaries and are not necessarily complete. Please refer to the agreements or other documents filed or incorporated herein by reference as exhibits. Please see the exhibit index at the end of this report for a complete list of those exhibits.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report,We use the words “plan,” “target,” “anticipate,” “believe,“continue,” “likely,” “estimate,” “intend”, “expect”“expect,” “may,” “could,” “will,” “project,” “should,” “believe” and similar expressions are intended(including negative and grammatical variations) to identify such forward-lookingforward looking statements. Such forward-looking statements include, without limitation, statements regarding:
● | Our strategy for significant future investment in Oaxaca, Mexico and in Michigan, USA for development and exploration activities; |
● | The expected completion dates for the Back Forty definitive feasibility study and permitting; |
● | Our 2022 guidance for payable production, cash costs per ounce after co-product credits, and all-in sustaining costs per ounce after co-product credits; |
● | Expectations regarding 2022 capital investment; |
● | Expectations regarding 2022 exploration spending; |
● | Expectations regarding 2022 general and administrative costs; |
● | Compliance with existing legal and regulatory requirements, including future asset reclamation costs; |
● | Estimates of Mineral Resources (“Mineral Resources”) and Mineral Reserves (“Mineral Reserves”); |
● | The sufficiency of our water rights; |
● | Our expectations regarding the future payment of dividends; |
● | Anticipated grades from future production; |
● | Our ability to locate another customer to purchase our products if the relationship with our existing customers is interrupted; and |
● | Our ability to satisfy our obligations and other potential cash requirements over the next twelve months. |
Forward-looking statements are neither historical facts nor assurances of future performance. Rather, they are based only on our current beliefs, expectations, and assumptions regarding the statements regarding Gold Resource Corporation’s strategy,future of our business, future plans for production,and strategies, projections, anticipated events and trends, the economy, and other future expenses and costs, future liquidity and capital resources, future dividends and estimates of mineralized material. Allconditions. Because forward-looking statements in this reportrelate to the future, they are based upon information availablesubject to Gold Resource Corporation on the date of filing this report, and the company assumes no obligation to update any such forward-looking statements. Forward looking statements involve a number ofinherent uncertainties, risks, and uncertaintieschanges in circumstances that are difficult to predict, and there can be no assurance that such statements will prove to be accurate. Gold Resource Corporation’smany of which are outside of our control. Our actual results couldand financial condition may differ materially from those discussedindicated in this report. Factorsthe forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause or contributeour actual results and financial condition to such differences include, but are not limited to,differ materially from those discussedindicated in the Item 1A. Risk Factors section of this report.
In addition to the specific factors identified under Item 1A. Risk Factors in this report, other uncertainties that could affect the accuracy of forward-looking statements include:include, among others, the following:
| The extent of the impact of the COVID-19 pandemic, including the duration, spread, severity, and any repeated resurgence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions, the impact on our employees, and the extent of the impact of the COVID-19 pandemic on our mining operations; |
● | Commodity price fluctuations; |
| Mine protests and work stoppages; |
| Rock formations, faults and fractures, water flow and possible CO2 gas exhalation, or other unanticipated geological |
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| Unexpected changes in business and economic conditions, including the rate of inflation; |
| Changes in interest rates and currency exchange rates; |
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| Access to land and availability of materials, equipment, supplies, labor and supervision, power, and water; |
| Results of current and future feasibility studies; |
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| Interpretation of drill hole results and the geology, grade, and continuity of mineralization; |
| Litigation by private parties or regulatory action by governmental entities; |
| Acts of God, such as floods, earthquakes, and any other natural disasters; |
| The uncertainty of |
● | Such other factors are discussed below under “Risk Factors”. |
This list, together withMany of these factors are beyond our ability to control or predict. Although we believe that the factors identified under Item 1A. Risk Factors, isexpectations reflected in our forward-looking statements are based on reasonable assumptions, such expectations may prove to be materially incorrect due to known and unknown risks and uncertainties. You should not exhaustive of the factors that may affectunduly rely on any of our forward-looking statements. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect. These forward-looking statements represent our beliefs, expectations and opinionsspeak only as of the date of filing this report. We doannual report on Form 10-K. Except as required by law, we are not intendobligated to updatepublicly release any revisions to these forward-looking statements except as required by law. We qualify all of ourto reflect future events or developments. All subsequent written and oral forward-looking statements attributable to us and persons acting on our behalf are qualified in their entirety by thesethe cautionary statements.statements contained in this section and elsewhere in this annual report on Form 10-K.
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ITEM 1. | BUSINESS |
Gold Resource Corporation was organized under the laws of the State of Colorado, USA on August 24, 1998. WeSince 2010, GRC has produced gold and silver doré and copper, lead, and zinc concentrates in Oaxaca, Mexico at our subsidiary, Don David Gold Mexico S.A. de C.V. (“Don David Gold Mine” or “DDGM”). The Don David Gold Mine holds six (6) properties which are all located in what is known as the San Jose structural corridor. Our properties span 55 continuous kilometers of this structural corridor which include three historic mining districts in Oaxaca.
On December 10, 2021, the Company successfully completed the acquisition of all the issued and outstanding common shares of Aquila Resources Inc (the “Aquila Transaction”). Aquila’s principal asset is its 100% interest in the Back Forty Project located in Menominee County, Michigan, USA. The Back Forty Project has a producer of metal concentrates that contain gold,polymetallic (gold, silver, copper, lead, and zinc,zinc) Volcanogenic Massive Sulfide deposit. The Back Forty Project controls surface and doré containing goldmineral rights through ownership and silver fromleases with the AguilaState of Michigan. The Company is currently advancing a definitive feasibility study 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. We also perform exploration and evaluation work on our portfolio of precious and base metal exploration properties in Nevada, United States of America (“Nevada Mining Unit”) and continue to evaluate other properties for possible acquisition.preparing permit applications.
In this report, “Company,” “our,” “us” and “we” refer to Gold Resource Corporation together with our subsidiaries, unless the context otherwise requires. See the glossary on page 30 for additional definitions.
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Mexico Production Stage Properties:
The majority of our assets are locatedprimary production stage properties at our Oaxaca Mining Unit, including our Aguila processing facility, and Arista and Mirador underground mines.DDGM commenced operations in 2010. The Aguila processing facility produces metal concentrates and doré from ore mined from bothoperation included the Arista and Mirador Mines. All of our production and revenue currently comes from our Oaxaca Mining Unit.
The Aguila and Alta Gracia Projects, which comprise our only operating properties, include a total of approximately 35,390 hectares of mining concessions, access roads from a major highway, haul roads, a processing facility, and adjoining buildings, an assay lab, an open pit and underground mines, tailings facilitiesmine and other infrastructure. Please seeItem 2. Properties for maps and additional information.
We commenced mining and milling operations from the Aguila Project in July 2010, initially from the Aguila open pitDDGM processing facility. The underground mine followed by development and mining the Arista underground mine. The Arista Mine was expanded in 2016 with the development of the Switchback vein system. The Arista underground mine is located approximately two kilometers from the processing facility. MostAdditionally, underground mining at the Alta Gracia mine was conducted from 2017 to 2019. Alta Gracia is approximately 32 kilometers from the processing facilities.
The DDGM processing facility produces doré and metal concentrates from ore mined from both the Arista and Alta Gracia Mines. The Arista and Alta Gracia mines include a total of approximately 30,000 hectares of mining concessions, access roads from a major highway, haul roads, a processing facility and adjoining buildings, an assay lab, a now depleted open pit, underground mines, tailings facilities, and other infrastructure. Please see Item 2. Properties for additional information.
Mexico Exploration Prospects:
Within the 55-kilometer-long San Jose structural corridor, in Oaxaca, Mexico, sits a highly prospective ground package. Multiple volcanic domes of various scales, and likely non-vented intrusive domes, dominate the district geology. These volcanogenic features are imposed on a pre-volcanic basement of sedimentary rocks. Gold and silver, as well as base metal mineralization in this district is related to the manifestations of this classic volcanogenic system and is considered epithermal in character. The Company intends to advance organic growth and to unlock the value of the productionmine, existing infrastructure, and our large property position by continuing to invest in exploration and development. Please see Item 2. Properties for additional information.
View from our Oaxaca Mining Unit from 2011 to present has been fromAlta Gracia southeast towards Arista
Back Forty Project:
There is a long history of exploration and studies being performed at the Arista Mine.
We first reported ProvenBack Forty Project. In 2014, a Preliminary Feasibility Study prepared under Canadian National Instrument 43-101 (“NI 43-101”) was completed which contemplated an open pit mine and Probable (“P&P”) reserves for our Arista Mine in 2014.processing operation. In 2016, we expanded Arista Mine’s P&P reserves withOctober 2019, Aquila filed a NI 43-101 Feasibility Study which estimated the additionopen pit project would produce 1.1 million gold equivalent ounces over a seven-year mine life. Over the next couple of years, the Switchback vein system.necessary permits were obtained. In February 2017, we announced our first proven and probable reserves for our Mirador Mine.August 2020, a Preliminary Economic Assessment was published. In 2017, development ofJanuary 2021, the Mirador Mine advancedwater permit was revoked due to a point which allowedtechnicality related to a contingent condition established in the permit. In 2021, a Definitive Feasibility Study was initiated to address the mine’s footprint, potential for consistent ore feed to the Aguila processing facility. an underground mine,
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wetland mitigation, and other key construction and design decisions. Please seeItem 2. Properties Proven and Probable Reserves for moreadditional information.
Administrative Offices:
Our operations in Oaxaca are conducted through our Mexican subsidiary, Don David Gold Mexico S.A. de C.V. (“DDGM”). Our Nevada exploration and evaluation work is performed through two wholly-owned subsidiaries, GRC Nevada Inc. and Walker Lane Minerals Corp. (“Walker Lane”).
Our principal executive offices are located at 2886 Carriage Manor Point,7900 E. Union Ave, Suite 320, Denver, Colorado Springs, Colorado 80906,80237, and our telephone number is (303) 320-7708. We maintainThe Company maintains a website at www.goldresourcecorp.comand through a link. Information on our website you can view the periodic filings that we make with theis not incorporated into this annual report on Form 10-K and is not a part of this report. The U.S. Securities and Exchange Commission (“SEC”) maintains an internet site (www.sec.gov) on which the reports that we file with the SEC are available to review. The SEC site may also be accessed through a link in our website.
Before the acquisition of Aquila Resources Inc., as well as certainAquila’s common shares were traded on the Toronto Stock Exchange (“TSX”) under the ticker symbol AQA. Effective December 10, 2021, Aquila ceased to be a reporting issuer in British Columbia, Alberta, Saskatchewan, Ontario, and Nova Scotia. At the same time, GRC has become a reporting issuer in British Columbia, Alberta, Saskatchewan, Ontario, and Nova Scotia by virtue of our corporate governance documents such as our codethe completion of ethics. the acquisition. As a Canadian Issuer, GRC is now required to file reports on the System for Electronic Document Analysis and Retrieval (“SEDAR”) in Canada. All financial statements filed on SEDAR will conform to United States Generally Accepted Accounting Principles (“U.S. GAAP”).
Segment Information
Our segments are broken into two geographic regions. The geographic regions include Oaxaca, Mexico (“Mexico”) and Nevada, U.S.A. (“Nevada”) and represent the Company’s operating segments. Please seeNote 21 in Item 8. Financial Statements and Supplementary Data for additional information.
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Developments in 2017
For the year ended December 31, 2017, we2021, the Company reported net income of $8.0 million. Financial results for 2021 include revenue of $110.2$125.2 million and mine gross profit of $42.1 million$36.7 million. Although DDGM experienced some ground support challenges early in the year and net incomevoluntarily ramped down operations in mid-August and early September 2021 at the Don David Gold Mine due to a spike in COVID-19 cases, the Company achieved solid production results totaling 26,438 gold ounces, 1,200,291 silver ounces, 1,506 copper tonnes, 7,544 lead tonnes and 17,329 zinc tonnes.
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Seventh consecutive ESR award |
For the seventh consecutive year, the Don David Gold Mine received the prestigious Empresa Socialmente Responsable (“ESR”) award from the Mexican Center for Philanthropy (CEMEFI).Awards are given to organizations that demonstrate a commitment to supporting social and environmental protection programs within their local communities.
The Company finalized the construction of $4.2 million. Substantially allthe water filtration and dry stack facilities in 2021. The dry stacked tailings will accelerate reclamation of our 2017 revenue was fromcertain areas of the open pit mine, as well as allowing for the extension of life of the current tailings facility.
We completed 112 underground diamond drill holes totaling 25,104 meters and 30 surface diamond drill holes totaling 9,930 meters at the Arista mine during 2021. Our exploration activities were mainly focused on exploration drilling at the Arista and Switchback vein systems in the Arista Mine. The Switchback drill program targeted the expansion and delineation of multiple high-grade parallel veins to define additional Mineral Reserves and optimize the mine plan. Likewise, we continued to explore for extensions of the Arista vein system currently in production. Surface geologic mapping and rock chip sampling also continued in the vicinity of the Arista Mine, the DDGM open pit, and the geological targets Cerro Pilon and Cerro Colorado among other prospects. Our exploration efforts demonstrate our commitment to long-term investment in Oaxaca, Mexico. Our
On December 10, 2021, the Company successfully completed the acquisition of all the issued and outstanding common shares of Aquila Resources Inc. Aquila’s principal asset is its 100% interest in the Back Forty Project located in Menominee County, Michigan, USA. The Back Forty Project has a polymetallic (zinc, gold, copper, silver, and lead)
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Volcanogenic Massive Sulfide deposit. The company is in the process of preparing a definitive feasibility study for the Back Forty Project.
The SEC adopted amendments to modernize the property disclosure requirements for mining registrants and related guidance as described in subpart 1300 of Regulation S-K (“S-K 1300”). Registrants engaged in mining operations must comply with the final rule amendments for the annual 2017 mill production totaled 28,117 gold ounces, 1,773,263 silver ounces, 1,141 copper tonnes, 5,365 lead tonnes and 16,301 zinc tonnes. In 2017, dividends distributedreport for the first fiscal year beginning on or after January 1, 2021. Relevant information disclosed in this annual report on Form 10-K has been prepared in accordance with S-K 1300.
2022 Guidance
The Company’s focus continues to shareholders totaled $0.02 per share or $1.1 million.
Oaxaca Mining Unit
During 2017, we continued to developbe on unlocking the value of the Arista underground mine, includingexisting infrastructure, and large property position in Oaxaca, Mexico. Therefore, we plan to make significant investments for infrastructure and exploration in 2022. Additionally, significant capital will be invested in the Switchback vein system. Developmentdelivery of the Switchback vein systemdefinitive feasibility study for the Back Forty Project, permitting applications, and exploration in 2017 reached the point that allows for bulk tonnage mining techniques planned in 2018.
In addition to the Arista underground mine, we advanced developmentimmediate vicinity of the Mirador Mine in 2017 and began delivering a limited amount of development ore to the Aguila processing facility in the second quarter. proposed project.
Nevada Mining Unit
During 2017, we acquired the highly prospective East Camp Douglas exploration property, and added a significant number of additional claims to the Isabella Pearl Project. In addition, we continued to advance the permitting process for our Isabella Pearl Project.
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Measure | 2022 Guidance |
Payable Production | 24,000 to 26,000 Gold Ounces 900,000 to 1,000,000 Silver Ounces |
Cash Costs after co-product credits per gold equivalent (“AuEq”) ounce (1) | $425 to $475 |
All-in Sustaining Costs after co-product credits per AuEq ounce (1) (2) | $950 to $1,050 (DDGM) |
Capital Investment | $13 to $14 million DDGM Sustaining |
Exploration Commitment | $7 to $8 million Sustaining |
G & A | $8.5 million to $9.0 million, excluding Stock-based Compensation & Restructuring |
(1) | Calculations of cash cost after co-product credits per gold equivalent ounce and all-in sustaining cost after co-product credits per gold equivalent ounce are non-GAAP financial measures. Please see the “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Measures” below for a complete reconciliation of the non-GAAP measures to U.S. GAAP. |
(2) | Co-product credits directly impact the Cash Costs and AISC per AuEq ounce calculation. Guidance is based on approximately 7,000 tonnes of lead sold at an $0.94 per pound metal price, approximately 1,675 tonnes of copper sold at a $4.00 per pound metal prices, and 20,000 tonnes of zinc sold at a $1.25 per pound metal price. |
The table above contains forward-looking projections about our financial condition, results of operations, and business. These projections are subject to numerous assumptions, risks, and uncertainties that are discussed in the risk factors, including the on-going impact of the global pandemic. Because these projections are subject to risks and uncertainties, actual results may differ materially from those expressed or implied. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Measures” below for a discussion of the calculation of Cash Costs per Ounce and All-in Sustaining Costs per Ounce, which are non-GAAP measures.
Since July 2010, we have paid a monthly dividend.
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Dividends
During 2017,2021, we paid one-sixth centdividends of $0.0433 per share per month, which totaled $0.02 per share per year.share. Please seeItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securitiesfor additional information.
Condition of Physical Assets and Insurance
Our business is capital intensive and requires ongoing investment for the replacement, modernization or expansion of equipment and facilities. For more information, please see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources, below. We maintain insurance policies against property loss and business interruption and insure against most risks that are typical in the operation of our business in amounts that we believe to be reasonable. Such insurance, however, contains exclusions and limitations on coverage, particularly with respect to property loss, environmental liability, and political risk. There can be no assurance that claims would be paid under such insurance policies in connection with a particular event. Please see Item 1A. Risk Factors, below for additional information.
We conduct our operations so as to protect the environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our operating mines have reclamation plans in place that we believe meet all applicable legal and regulatory requirements. At December 31, 2017, $2.9 million was accrued on our consolidated balance sheet for reclamation costs relating to operating properties.
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Competitive Business Conditions
The exploration for, and the acquisition of gold and silver properties areis subject to intense competition. Identifying and evaluating potential mining prospects is a costly and time-consuming endeavor. DueIn 2021, we were successful in acquiring the Back Forty Project as discussed above. In 2022, we expect to continue our limited capital and personnel, we are at a competitive disadvantage compared to many other companies with regard tosignificant investment in exploration and if warranted, advancement of mining properties. Our present limited capital means that our ability to compete for properties to be explored and developed is limited. Wegrowth activities; however, we believe that competition for acquiring mineral prospects will continue to be intense in the future.
Government Regulations and Permits
In connection with mining, milling and exploration activities in Mexico, we are subject to United States and Mexican federal, state, and local laws and regulations governing the protection of the environment, including laws and regulations relating to protection of air and water quality, hazardous waste management and mine reclamation as well as the protection of endangered or threatened species. The government department responsible for environmental protection in Mexico is Secretaria de Medio Ambiente y Recursos Naturales (“SEMARNAT”), which is similar to the United States Environmental Protection Agency.. SEMARNAT has broad authority to shut down and/or levy fines against facilities that do not comply with itsover environmental regulations orand standards. Potential areas of environmental consideration for mining companies, includingsuch as ours, include but are not limited to, acid rock drainage, cyanide containment and handling, contamination of water sources, dust, and noise. The agencies responsible for environmental protections and permitting in our Nevada Mining Unit include the Bureau of Land Management (“BLM”) and the Nevada Division of Environmental Protection (“NDEP”).
For operations at our Oaxaca Mining Unit,Don David Gold Mine, we have secured and continue to securemaintain various regulatory permits from federal, state, and local agencies. These governmental and regulatory permits generally govern the processes being used to operate, the stipulations concerning air quality and water issues, and the plans and obligations for reclamation of the properties at the conclusion of operations. We have received the required local community support for the Aguila and Alta Gracia Projects in the area where we are currently producing.
We are actively seeking the permits necessary to place our Nevada Mining Unit’s Isabella Pearl Project into production. Please seeItem 2. Properties – Nevada Mining Unit, for more information on the status of our permitting efforts. In connection with these permits and exploration activities in Nevada, we are subject to various federal, state and local laws and regulations governing protection of the environment, including, but not limited to, the Clean Air Act; the Clean Water Act; the Comprehensive Environmental Response, Compensation and Liability Act; the Emergency Planning and Community Right-to-Know Act; the Endangered Species Act; the Federal Land Policy and Management Act; the National Environmental Policy Act; the Resource Conservation and Recovery Act; and related state laws. These laws and regulations are continually changing and are generally becoming more restrictive.
Our production stage mines in Mexico have reclamation plans in place that we believe meet all applicable legal and regulatory requirements. As of December 31, 2021, $3.1 million has been accrued on our Consolidated Balance Sheets for reclamation costs relating to our production and exploration stage properties in Mexico.
The State of Michigan has been delegated authority under federal environmental law to issue all necessary environmental permits required for the Back Forty project. The State of Michigan’s “Natural Resource Environmental Protection Act” provides rules and regulations for the State Department of Environment, Great Lakes and Energy (EGLE) to issue permits for mining, treated wastewater discharge, air emissions and related environmental permits necessary for the project. Pending positive results from the definitive feasibility study, the company plans to submit all necessary permit applications in 2022.
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Customers
During the year ended December 31, 2017, one customer2021, two customers accounted for 95%94% of our revenue in our Oaxaca Mining Unit.from DDGM. In the event that our relationship with any of the customercustomers is interrupted for any reason, we believe that we would be able to locate another entity to purchase our products.products in a timely manner on substantially similar terms. However, any interruption could temporarily disrupt the sale of our principal products and materially adversely affect our operating results. We periodically review our options for alternative sales outlets to mitigate the concentration of risk in case of any unforeseen disruptions.
Human Capital Resources
On April 23, 2021, a decree that reforms labor outsourcing in Mexico was published in the Federation’s Official Gazette. This new decree stipulated that operating companies will no longer be able to source the labor resources used to carry out their core business functions from service entities or third-party providers. Following this transition, DDGM employed approximately 530 employees during 2021. Under Mexican law, employees are entitled to receive statutory profit sharing (Participacion a los Trabajadores de las Utilidades or “PTU”) payments. PTU payments will total $1.9 million for 2021.
We currently have sixteenOn December 10, 2021, we acquired six full-time employees sixthrough the Aquila Transaction. As of whichFebruary 24, 2022, GRC has ten full-time employees, and three of them serve as our executive officers. These individuals devote all of their business time to our affairs.GRC.
We contract forvalue excellence and recognize that embracing the servicesdiverse backgrounds, skills, and perspectives of approximately 490 individuals employedthe workforce will lead to a competitive advantage. We are committed to leading by example and to maintaining a third partyfair and also use various independent contractors for undergroundinclusive work environment that is built on mutual respect and integrity. Diversity means understanding, accepting, respecting, and valuing differences among people regardless of their age, gender, race, ethnicity, culture, religion or spiritual practices, disabilities, sexual orientation, gender identity, family status, or veteran status.
We believe we have good morale and a dedicated workforce. Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing, and integrating our existing employees and new hires. The principal purposes of our equity incentive plans are to attract, retain, and motivate selected employees and directors through the granting of stock-based compensation awards that align employee compensation with shareholder returns.
ITEM 1A.RISK FACTORS
Our business and the mining surface exploration drillingindustry in general are influenced by significant risk and trucking.
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This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that mayoperations could be materially adversely affected by several risk factors, including those summarized below:any of these risks, and the trading price of our common stock could decline by virtue of these risks. These risks should be read in conjunction with the other information in this annual report on Form 10-K.
Financial Risks Relating to Our Company
Our results of operations, cash flows and the value of our properties are highly dependent on the market prices of gold, and silver and certain base metals, and these prices can be volatile.
The profitability of our gold and silver mining operations and the value of our mining properties are directly related to the market price of gold, and silver, and to a lesser extent, copper, lead, and zinc. The price of gold and silver may also have a significant influence on the market price of our common stock. The market price of gold and silverthese metals historically has fluctuated significantly and isare affected by numerous factors beyond our control. These factors includecontrol, including (i) global or regional consumption patterns; (ii) supply of and demand fundamentals, global or nationalfor
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silver and gold on a worldwide basis; (iii) speculative and hedging activities; (iv) expectations for inflation; (v) political orand economic conditions; (vi) supply of, and demand for, consumables required for extraction and processing of metals, and (vii) general economic conditions expectations with respectworldwide. Over the last five years, gold prices (as reported on the London Metal Exchange) have fluctuated from a low of $1,151 per ounce to the ratea high of inflation, the relative strength of the U.S. dollar and other currencies, interest rates, gold$2,067 per ounce, and silver sales and loans by central banks, forward sales by metal producers, accumulation and divestiture by exchange traded funds, andprices have fluctuated from a numberlow of other factors.
We derive$12.01 per ounce to a significant portionhigh of our revenue from the sale of gold and silver and our results of operations will fluctuate as the prices of these metals change. A period of significant and sustained lower$29.59 per ounce. On March 9, 2022, gold and silver prices would materiallywere $1,989 per ounce and adversely affect$26.18 per ounce, respectively.
We do not currently use hedging transactions with respect to any of our resultsgold and silver production, and we do not expect to do so in the future. Accordingly, we are fully exposed to price fluctuations in precious metals. Effective May 18, 2021, the Company entered into a Trading Agreement with Auramet International LLC that govern non-exchange traded, over-the-counter, spot, forward, and option transactions on both a deliverable and non-deliverable basis involving various metals and currencies. Subsequently the Company entered into zinc zero cost collars. These derivatives are not designated as hedges. The zero cost collars are used to manage the Company’s near-term exposure to cash flow variability from zinc price risks. We do not currently use financial instruments with respect to any of operations and cash flows. The volatility of mineral prices represents a substantial risk which no amount of planning or technical expertise can fully eliminate. the other base metal production.
In the event mineralmetal prices decline or remain low for prolonged periods of time, we might be unable to develop our existing exploration properties, which may materially adversely affect our results of operations, financial performance, and cash flows. An asset impairment charge may result from the occurrence of unexpected adverse events that impact our estimates of expected cash flows generated from our producing properties mining operationsor the market value of our non-producing properties, including a material diminution in the price of gold and/or silver.metals.
During 2017, the price of goldWe may not continue to be profitable.
Our single producing asset may not generate sufficient cash flow to cover our operating, development, exploration, and silver, as measured by the London P.M. fix, fluctuated from a low of $1,151 per ounceother costs due to a high of $1,346 per ounce while the price of silver fluctuated from a low of $15.22 per ounce to a high of $18.56 per ounce. As of March 7, 2018, gold and silver prices were $1,329 per ounce and $16,65 per ounce, respectively. The volatility in gold and silver prices is illustrated by the following table, which sets forth for each of the past five calendar years, the high, low, and average annual market prices in U.S. dollars per ounce of gold and silver based on the daily London P.M. fix:
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Gold: |
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High |
| $ | 1,694 |
| $ | 1,385 |
| $ | 1,297 |
| $ | 1,366 |
| $ | 1,346 |
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Low |
| $ | 1,192 |
| $ | 1,142 |
| $ | 1,049 |
| $ | 1,077 |
| $ | 1,151 |
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Average |
| $ | 1,411 |
| $ | 1,266 |
| $ | 1,160 |
| $ | 1,251 |
| $ | 1,257 |
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Silver: |
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High |
| $ | 32.23 |
| $ | 22.05 |
| $ | 18.23 |
| $ | 20.71 |
| $ | 18.56 |
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Low |
| $ | 18.61 |
| $ | 15.28 |
| $ | 13.71 |
| $ | 13.58 |
| $ | 15.22 |
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Average |
| $ | 23.79 |
| $ | 19.08 |
| $ | 15.68 |
| $ | 17.14 |
| $ | 17.04 |
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Most of our production is limited to a single mine and anycertain risk factors.Unexpected interruptions or stoppages in our mining activities would adversely affect our revenue.We are presently relying on revenuesbusiness may cause us to incur losses, or the revenue that we generate from a single mine to fund our operations. Any interruption in our ability to mine this location, such as a labor strike, natural disaster, or loss of permits would negatively impact our ability to collect revenue following such interruption. Additionally, if we are unable to economically develop additional mines, we will eventually deplete the body of mineralized material and will no longer generate revenueextraction may not be sufficient to fund our operations. A decrease in, or cessation of, our miningcontinuing operations, would adversely affect our financial performance and may eventually cause us to cease operations.
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If we are unable to achieve anticipated gold and silver production levels, our financial condition and results of operations will be adversely affected. We have proceeded with the processing of the mineralized material from the Arista and Mirador underground mines at the Aguila and Alta Gracia Projects, respectively, based on estimates of mineralized material identified duringincluding exploration and in our Proven and Probable Reserve report. However, risks relatedmine development costs. Our failure to metallurgy are inherent when working with extractable minerals. Sales of gold and silver that we realize fromgenerate future mining activity will be less than anticipated if the mined material does not contain the concentration of gold and silver predicted by our geological exploration, studies and reports. If sales of gold and silver are less than anticipated, weprofits may not be able to recover our investment in our property and our operations may be adversely affected. Our inability to realize production based on quarterly or annual projections may alsomaterially adversely affect the price of our common stock, and youstockholders may lose all or part or all of yourtheir investment.
Estimates of proven and probable reserves and mineralized material are uncertain and the volume and grade of ore actually recovered may vary from our estimates. The proven and probable reserves stated in this report represent the amount of gold, silver, copper, lead and zinc that we estimated, at December 31, 2017 could be economically and legally extracted or produced at the time of the reserve determination. Estimates of proven and probable reserves and mineralized material are subject to considerable uncertainty. Such estimates are, to a large extent, based on the Metal prices of gold, silver, copper, lead and zinc and interpretations of geologic data obtained from drill holes and other exploration techniques. These prices and interpretations are subject to change. If we determine that certain of our estimated reserves or mineralized material have become uneconomic, we may be forced to reduce our estimates. Actual production may be significantly less than we expect.
Any material changes in mineral estimates and grades of mineralization may affect the economic viability of placing a property into production and such property’s return on capital. There can be no assurance that minerals recovered in small scale tests will be recovered in large‑scale tests under on‑site conditions or in production scale. Extended declines in market prices for gold and/or silver may render portions of our mineralization estimates uneconomic and result in reduced reported mineralization or adversely affect the commercial viability of one or more of our properties. Any material reductions in estimates of mineralization, or of our ability to extract this mineralization, could have a material adverse effect on our results of operations or financial condition.
Additionally, the term “mineralized material” as used in this report does not indicate proven and probable reserves as defined by Industry Guide 7 (“Guide 7”) promulgated by the SEC or our standards. Estimates of mineralized material are subject to further exploration and development and are therefore subject to considerable uncertainty. We cannot be certain that any part or parts of the mineralized material deposit will ever be confirmed or converted into Guide 7 compliant reserves or that mineralized material can be economically or legally extracted.
Our current property portfolio is limited to two producing properties and our ability to remain profitable over the long-term will depend on our ability to expand the known deposits like Arista and Mirador, and /or identify, explore and develop additional properties in Mexico and Nevada. Gold and silver producers must continually replace reserves depleted by production to maintain production levels over the long term and provide a return on invested capital. Depleted reserves can be replaced in several ways, including expanding known ore bodies, locating new deposits, or acquiring interests in reserves from third parties. Exploration is highly speculative in nature, capital intensive, involves many risks and is frequently unproductive. Our current or future exploration programs may not result in new mineral producing operations. Even if significant mineralization is discovered, it will likely take many years from the initial phases of exploration until commencement of production, during which time the economic feasibility of production may change.
From time to time, we may acquire mineral interests from other parties. Such acquisitions are based on an analysis of a variety of factors including historical exploration results, estimates of and assumptions regarding the extent of ore reserves, the timing of production from such reserves and cash and other operating costs. In addition, we may rely on data and reports prepared by third parties (including the ability to permit and compliance with existing regulations) and which may contain information or data that we are unable to independently verify or confirm. All of these factors are
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uncertain and may have an impact on our ability to develop the properties, as well as contributing to the uncertainties related to the process used to estimate ore reserves.
As a result of these uncertainties, our exploration programs and any acquisitions which we may pursue may not result in the expansion or replacement of our current production with new ore reserves or operations, which could have a material adverse effect on our business, prospects, results of operations and financial position.
We may not continue to be profitable. During the fiscal years ended December 31, 2017, 2016 and 2015, we reported net income of $4.2 million, $4.4 million and $3.1 million, respectively. We have accumulated retained earnings of $4.5 million as of December 31, 2017. The metal prices in recent years have had a significant impact on our profit margin, and there is no assurance that we will be profitable in the future. Unexpected interruptions inSee “Risk Factors – Our results of operations, cash flows and the value of our mining business may cause us to incur losses, orproperties are highly dependent on the revenue that we generate from productionmarket prices of gold, silver and certain base metals and these prices can be volatile.”
We may not behave access to sufficient to fund continuing operations including exploration and mine construction costs. Our failure to generate future profits may adversely affect the price of our common stock and you may lose all or part of your investment.capital.
We may require significant additional capital to fund our business plans.We may be required to expend significant funds to determine if mineralized material and proven and probable mineral reservesMineral Reserves exist at any of our non-producing properties, to continue exploration, and if warranted, develop our existing properties and to identify and acquire additional properties to diversify our property portfolio. If we receive the necessary permits and make a positive development decision, we will require significant additional capital to bring the project into production. We have spent, and may be required to continue to expend, significant amounts of capital for drilling, geological and geochemical analysis, assaying, feasibility studies, mine development, and process equipment in connection with our exploration, development, and production activities. We may not benefit from these investments if we are unable to identify commercially exploitable mineralized material.
Our ability to obtain necessary funding for these purposes, in turn, depends upon a number of factors, including our historical and prospective results of operations, the status of the national and worldwide economy, the price of gold, silver, and other valuable metals, the condition of the debt and equity markets, and the costs associated with extracting minerals. We may not be successful in generating or obtaining the required financing, or if we can obtain such financing, such financing may not be on terms that are favorable to us. We also may not be able to obtain funding by monetizing additional non-core exploration or other assets at an acceptable price.
We cannot assure you that we will be able to obtain financing to fund our general and administrative costs and other working capital needs to fund our continuing business activities in the future on favorable terms or at all. Failure to obtain such additional financing could result in delay or indefinite postponement of further mining operations, or exploration, and construction, andas well as the possible partial or total loss of our interest in our properties.
If we do not hedge our exposure to reductions in gold and silver prices, we may be subject to significant reductions in price. We do not use hedging transactions with respect to any of our gold and silver production and we do not expect to do so in the future. Accordingly, we may be fully exposed to price fluctuations if gold and/or silver prices decline. While the use of hedging transactions limits the downside risk of price declines, their use also may limit future revenues from price increases. Hedging transactions also involve the risk that the counterparty may be unable to satisfy its obligations.
Revenue from the sale of metal concentrate may be adversely affected by loss or damage during shipment and storage at our buyer’s facilities. We rely on third-party transportation companies to transport our metal concentrate to the buyer’s facilities for processing and further refining. The terms of our sales contracts with the buyers require us to rely on assay results from samples of our metal concentrate that are obtained at the buyer’s warehouse to determine the final sales value for our metals. Once the metal concentrate leaves our processing facility, we no longer have direct custody and control of these products. Theft, loss, automobile accidents, improper storage, fire, natural disasters, tampering or other unexpected events while in transit or at the buyer’s location may lead to the loss of all or a portion of our metal concentrate products. Such losses may not be covered by insurance and may lead to a delay or interruption in our revenue and our operating results may be adversely affected.
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Exploration and, if deemed feasible, development of mineral properties is inherently risky and could lead to unproductive properties and/or capital investments. Our long-term success depends on our ability to identify additional mineral deposits on our properties and any other properties that we may acquire and to develop one or more of those properties into commercially viable mining operations. Mineral exploration is highly speculative in nature, involves many risks and is frequently unproductive. These risks include unusual or unexpected geologic formations and the inability to obtain suitable or adequate machinery, equipment or labor. The success of gold exploration is determined in part by the following factors:
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Substantial expenditures are required to establish proven and probable reserves through detailed drilling and analysis, to develop metallurgical processes to extract metal and to develop the mining and processing facilities and infrastructure at any site chosen for mining. Whether a mineral deposit will be commercially viable depends on a number of factors, which include, without limitation, the particular attributes of the deposit, such as size, grade, metallurgy, rock competency and proximity to infrastructure like power, water and roads; metal prices, which fluctuate widely; and government regulations, including, without limitation, regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals, environmental protection and local and community support. We may invest significant capital and resources in exploration activities and abandon such investments if we are unable to identify commercially exploitable mineral reserves. The decision to abandon a project may have an adverse effect on the market value of our securities and our ability to raise future financing.
We may acquire additional exploration stage properties and our business may be negatively impacted if reserves are not located on acquired properties. We have in the past and may in the future acquire additional exploration stage properties. There can be no assurance that reserves will be identified on any properties that we acquire. We may also experience negative reactions from the financial markets if we successfully complete acquisitions of additional properties and reserves are not located on acquired properties. These factors may adversely affect the trading price of our common stock or our financial condition or results of operations.
To the extent that we seek to expand our operations and increase our reserves through acquisitions, we may experience issues in executing acquisitions or integrating acquired operations. From time to time, we examine opportunities to make selective acquisitions in order to provide increased returns to our shareholders and to expand our operations and reported reserves and, potentially, generate synergies. The success of any acquisition would depend on a number of factors, including, but not limited to:
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There can be no assurance that we will be able to conclude any acquisitions successfully, or that any acquisition will achieve the anticipated synergies or other positive results. Any material problems that we encounter in connection with such an acquisition could have a material adverse effect on our business, results of operations and financial position.
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We rely on contractors to conduct a significant portion of our operations and construction projects. A significant portion of our okperations and construction projects are currently conducted in whole or in part by contractors. As a result, our operations are subject to a number of risks, some of which are outside our control, including:
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In addition, we may incur liability to third parties as a result of the actions of our contractors. The occurrence of one or more of these risks could adversely affect our results of operations and financial position.
Our profits are subject to two mining duties imposed by the Mexican government. The Mexican government requires mineral producers to pay a ‘special’ mining duty to the government of 7.5% on net profits and an additional ‘extraordinary’ mining duty of 0.5% on gross sales of precious metals of gold, silver and platinum. This legislation has and may in the future significantly and adversely affect our results of operations, including our cash flows, which may in turn affect the amount of capital we have available for typical uses of cash, including but not limited to, reinvestment into our business, funding new projects and paying dividends to our shareholders.
The facilities and development of our underground mine and operations are subject to all of the risks inherent in development and operations. These risks include potential delays, cost overruns, shortages of material or labor, construction defects, breakdowns and injuries to persons and property. We expect to engage subcontractors and material suppliers in connection with the continued mine activities at the Aguila and Alta GraciaProjects. While we anticipate taking all measures which we deem reasonable and prudent in connection with our facilities, construction of the underground mine and the operation of the processing facility, there is no assurance that the risks described above will not cause delays or cost overruns in connection with such construction or operation. Any delays would postpone our anticipated receipt of revenue and adversely affect our operations, which in turn may adversely affect the price of our stock.
Underground mining operations are subject to unique risks. The exploration for minerals, mine construction and mining operations in an underground mine involve a high level of risk and are often affected by hazards outside of our control. Some of these risks include, but are not limited to, underground fires or floods, fall-of-ground accidents, seismic activity and unexpected geological formations or conditions including noxious fumes or gases. The occurrence of one or more of these events in connection with our exploration, mine construction, or production activities may result in the death of, or personal injury to, our employees, other personnel or third parties, the loss of mining equipment, damage to or destruction of mineral properties or production facilities, monetary losses, deferral or unanticipated fluctuations in production, environmental damage and potential legal liabilities, all of which may adversely affect our reputation, business, prospects, results of operations and financial condition.
Construction of mine and process facilities is subject to all of the risks inherent in construction and start-up, including delays and costs of construction in excess of our projections. Many factors could delay or prevent the start or completion of, or increase the costs of, anticipated future construction of the mine and process facility, including:
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If any of the foregoing events were to occur, our financial condition could be adversely affected and we may be required to seek additional capital, which may not be available on commercially acceptable terms, or at all. If we are unable to complete such construction, we may not be able to recover any costs already incurred. Even if construction of the mine and the processing facilities is completed as scheduled, the costs could exceed our expectations and result in a materially adverse effect on our business, results of operations, financial condition, and cash flows.
Our operations are subject to permitting requirements which could result in the delay, suspension or termination of our operations. Our operations, including our ongoing exploration drilling programs and production, require permits from governmental authorities. If we cannot obtain or maintain the necessary permits or if there is a delay in receiving future permits, our timetable and business plan will be adversely affected.
Our ability to recognize the benefits of deferred tax assets is dependent on future cash flows and taxable income.
We recognize deferred tax assets when the tax benefit is considered to be more likely than not of being realized; otherwise, a valuation allowance is applied against deferred tax assets. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, our ability to realize the deferred tax assets could be impacted. Additionally, future changes in tax laws could limit our ability to obtainrealize the future tax benefits represented by our deferred tax assets. At December 31, 2017, our net deferred tax
Our accounting and other estimates may be imprecise.
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts and related disclosure of assets, were $6.9 million.liabilities, revenue, and expenses at the date of the consolidated financial statements and reporting periods. The more significant areas requiring the use of management assumptions and estimates relate to:
● | Mineral Resources and other resources that are the basis for future income and cash flow estimates and units-of-production depreciation, depletion and amortization calculations; |
● | Future ore grades, throughput, and recoveries; |
● | Future metals prices; |
● | Future capital and operating costs; |
● | Environmental, reclamation, and closure obligations; |
● | Gold and Silver Stream Agreements; |
● | Permitting and other regulatory considerations; |
● | Asset impairments; |
● | Asset acquisition accounting, including the valuation of the transaction and related instruments; |
● | Future foreign exchange rates, inflation rates, and applicable tax rates; and |
● | Deferred tax asset valuation allowance. |
Our continuing reclamation obligations at our operations could require significantFuture estimates and actual results may differ materially from these estimates as a result of using different assumptions or conditions. For additional expenditures.information, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We are responsible for the reclamation obligations relatedmay be required to disturbances located on all of our properties. We have a liability on our balance sheet to cover the estimated reclamation obligation. However, there is a risk that any reserve could be inadequate to cover the actual costs of reclamation when carried out. Continuing reclamation obligations will requirerepay a significant amount if we default under certain gold and silver stream agreements.
With the successful acquisition of Aquila Resources Inc. on December 10, 2021, the Company assumed substantial liabilities related to the gold and silver stream agreements with Osisko Bermuda Limited (“Osisko”). Under the agreements, Osisko deposited a total of $37.2 million upfront in exchange for a portion of the future gold and silver production from the Back Forty Project. The stream agreements contain customary provisions regarding default and security. In the event that our subsidiary defaults under the stream agreements, including achieving commercial production at an agreed upon date, it may be required to repay the deposit plus accumulated interest at a rate agreed with Osisko. If the Company fails to do so, Osisko may be entitled to enforce their remedies as a secured party and take possession of the assets that comprise the Back Forty Project.
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Operational Risks
Our production is primarily derived from a single operating unit and any interruptions or stoppages in our mining activities at that operating unit would materially adversely affect our revenue.
We are largely dependent on revenues from a single operating unit to fund our operations. Any interruption in our ability to mine this location, such as a labor strike, natural disaster, or loss of permits would negatively impact our ability to generate revenue following such interruption. Additionally, if we are unable to economically develop additional mines, we will eventually deplete the body of mineralized material and will no longer generate cash flow sufficient to fund our operations. A decrease in, or cessation of, our mining operations at this operating unit would materially adversely affect our financial performance and may eventually cause us to cease operations.
Since our current property portfolio is limited to one operating unit, our ability to remain profitable over the long-term will depend on our ability to 1) expand the known Arista and Switchback vein systems and /or identify, explore, and develop additional properties in Mexico, and 2) successfully develop the Back Forty Project in Michigan, USA.
Gold and silver producers must continually replace reserves depleted by production to maintain production levels over the long-term and provide a return on invested capital. ThereDepleted reserves can be replaced in several ways, including expanding known ore bodies, locating new deposits, or acquiring interests in reserves from third parties. Exploration is highly speculative in nature, capital intensive, involves many risks, and frequently unproductive. Our current or future exploration programs may not result in new mineralization. Even if significant mineralization is discovered, it will likely take many years from the initial phases of exploration until commencement of production, during which time the economic feasibility of production may change.
From time to time, we may acquire mineral interests from other parties. Such acquisitions are based on an analysis of a riskvariety of factors including historical exploration results, estimates of and assumptions regarding the extent of mineralized material, and/or reserves, the timing of production from such reserves and cash and other operating costs. In addition, we may rely on data and reports prepared by third parties which may contain information or data that we will beare unable to fundindependently verify or confirm. All of these additional obligationsfactors are uncertain and further, thatmay have an impact on our ability to develop the regulatory authoritiesminerals interests.
As a result of these uncertainties, our exploration programs and any acquisitions which we may increase reclamation requirements to suchpursue may not result in the expansion or replacement of our current production with new ore reserves or operations, which could have a degree that it would not be commercially reasonable to continue miningmaterial adverse effect on our business, prospects, results of operations, and exploration activities, which mayfinancial position.
Increased operating and capital costs could materially adversely affect our results of operations, financial performance and cash flows.operations.
Our operatingCosts at our mining properties located in Mexico are subject to fluctuation due to a number of factors, such as variable ore grade, changing metallurgy and revisions to mine plans in response to the physical shape and location of the ore body, as well as the age and utilization rates for the mining and processing-related facilities and equipment. In addition, costs are affected by the price and availability of input commodities, such as fuel, electricity, labor, chemical reagents, explosives, steel, concrete, and mining and processing related equipment and facilities. Commodity costs are, at times, subject to volatile price movements, including increases that could make mineral extraction less profitable. Further, changes in political or economic conditionslaws and regulations in that country. The risks with respect to Mexico or other developing countries include, but are not limited to: nationalization of properties, military repression, extreme fluctuations in currency exchange rates, criminal activity, lack of personal safety or ability to safeguard property, labor instability or militancy, mineral title irregularitiescan affect commodity prices, uses and high rates of inflation. In addition,transport. Reported costs may also be affected by changes in mining or investment policies or shiftsaccounting standards. A material increase in political attitudecosts could have a significant effect on our results of operations and operating cash flow.
We could have significant increases in Mexico may adversely affect our business. We may be affectedcapital and operating costs over the next several years in varying degrees by government regulation with respect to restrictions on production, price controls, export controls, income taxes, expropriation of property, maintenance of claims, environmental legislation, land use, land claims of local people, opposition from non-governmental organizations, water use and mine safety. The effect of these factors cannot be accurately predicted and may adversely impact our operations.
Our ability to develop our Mexican properties is subject to the rights of the Ejido (agrarian cooperatives) who use or own the surface for agricultural purposes. Our ability to mine minerals is subject to maintaining satisfactory arrangements and relationshipsconnection with the Ejido for accessdevelopment of new projects in challenging jurisdictions and surface disturbances. Ejidos are groupsin the sustaining and/or expansion of local inhabitants who were granted rights to conduct agricultural activities onexisting mining and processing operations. Costs associated with capital expenditures may increase in the property. We must negotiate and maintainfuture as a satisfactory arrangement with these residents in order to disturb or discontinue their rights to farm. While we have successfullyresult of factors beyond
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negotiatedour control, such as inflation. Increased capital expenditures may have an adverse effect on the results of operations and signed such agreements related tocash flow generated from existing operations, as well as the Aguila and Alta Gracia Projects, our inability to maintain these agreements or consummate similar agreements foreconomic returns anticipated from new projects, could impair or impede our ability to successfully explore, develop and minemay make the properties.development of future projects uneconomic.
Competition in the mining industry is intense, and we have limited financial and personnel resources with which to compete.
Competition in the mining industry for desirable properties, investment capital, and personnelhuman capital is intense. Numerous companies headquartered in the United States, Canada, and elsewhere throughout the world compete for properties and personnelhuman capital on a global basis. We are a small participant in the gold mining industry due to our limited financial and personnelhuman capital resources. We presently operate with a limited number of personnelpeople, and we anticipate operating in the same manner going forward. We compete with other companies in our industry to hire qualified personnelemployees and consultants when needed to successfully operate our mine minesand processing facility.to advance our exploration properties. We may be unable to attract the necessary investmenthuman capital or personnel to fully explore, and if warranted, develop our properties and be unable to acquire other desirable properties. We believe that competition for acquiring mineral properties, as well as the competition to attract and retain qualified personnel, mayhuman capital, will continue to be intense in the future.
Since a significantEstimates of proven and probable Mineral Reserves and measured and indicated Mineral Resources are uncertain, and the volume and grade of ore actually recovered may vary from our estimates.
The proven and probable Mineral Reserves stated in this report represent the amount of our expenses in Mexico are paid in Mexican pesos,gold, silver, copper, lead, and zinc that we estimated at December 31, 2021, could be economically and legally extracted or produced at the time of the reserve determination. Estimates of proven and probable reserves and measured and indicated Mineral Resources are subject to changes in currency values that may adversely affect our resultsconsiderable uncertainty. Such estimates are, to a large extent, based on the prices of operations. Our operations in the future could be affected by changes in the valuegold, silver, copper, lead, and zinc, as well as interpretations of the Mexican peso against the United States dollar. The appreciation of non-U.S. dollar currencies such as the peso against the U.S. dollar increases expenses and the cost of purchasing capital assets in U.S. dollar terms in Mexico, which can adversely impact our operating results and cash flows. Conversely, depreciation of non-U.S. dollar currencies usually decreases operating costs and capital asset purchases in U.S. dollar terms. The value of cash and cash equivalents,geologic data obtained from drill holes and other monetary assetsexploration techniques. These prices and liabilities denominated in foreign currencies also fluctuate with changes in currency exchange rates.
Our activitiesinterpretations are subject to significant environmental regulations, which could raise the costchange. If we determine that certain of doing businessour estimated Mineral Reserves or adversely affectMineral Resources have become uneconomic, we may be forced to reduce our ability to develop our properties. Our mining operations in Mexico are subject to environmental regulation by SEMARNAT. Regulations governing advancement of new projects or significant changes to existing projects require an environmental impact statement, known in Mexico as a MIA. Weestimates. Actual production from proven and probable reserves may also be required to submit proof of local community support for a project to obtain final approval. If an environmental impact statement is adverse or ifsignificantly less than we cannot obtain community support, our ability to explore and develop our properties could be adversely affected. Significant environmental legislation exists in Mexico, including fines and penalties for spills, release of emissions into the air, and other environmental damage, which fines or penalties could adversely affect our financial condition or results of operations.
In addition, significant state and federal environmental protection laws in the U.S. may hinder our ability to explore at our Nevada Mining Unit and may also delay or prohibit us from developing properties where economic mineralization is found. Federal laws that govern mining claim location and maintenance and mining operations on federal lands are generally administered by the BLM. Additional federal laws, governing mine safety and health, also apply. State laws also require various permits and approvals before exploration, development or production operations can begin. Among other things, a reclamation plan must typically be prepared and approved, with bonding in the amount of projected reclamation costs. The bond is used to ensure that proper reclamation takes place, and the bond will not be released until that time. Local jurisdictions may also impose permitting requirements (such as conditional use permits or zoning approvals).
Our business is subject to the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws, a breach or violation of which could lead to civil and criminal fines and penalties, loss of licenses or permits and reputational harm. We operate in certain jurisdictions that have experienced governmental and private sector corruption to some degree, and in certain circumstances, strict compliance with anti-bribery laws may conflict with certain local customs and practices. The U.S. Foreign Corrupt Practices Act and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. Our Code of Ethics and other corporate policies mandate compliance with these anti-bribery laws, which often carry substantial penalties.expect. There can be no assurance that estimates of Mineral Resources will be upgraded to Mineral Reserves or may ultimately be extracted.
Any material changes in Mineral Reserve or Mineral Resource estimates and grades of mineralization may affect the economic viability of our internal control policiescurrent operations, our decision to place a new property into production, and/or such property’s return on capital. There can be no assurance that mineral recoveries in small scale laboratory tests will be duplicated in a large-scale on-site operation in a production environment. Declines in market prices for contained metals may render portions of our Mineral Reserve or Mineral Resource estimates uneconomic and
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procedures will always protect us from recklessness, fraudulent behavior, dishonestyone or other inappropriate acts committed bymore of our affiliates, employeesproperties. Any material reductions in estimates of mineralization, or agents. As such,of our corporate policies and processes may not prevent all potential breaches of law or other governance practices. Violations of these laws, or allegations of such violations, could leadability to civil and criminal fines and penalties, litigation, and loss of operating licenses or permits, and may damage our reputation, whichextract this mineralization, could have a material adverse effect on our business, financial position and results of operations or cause the market value offinancial condition.
Products processed from our common stock to decline.
We are dependent upon information technology systems, which are subject to disruption, damage, failure and risks associated with implementation and integration. We are dependent upon information technology systemsoperating mines or other mines in the conduct offuture could contain higher than expected contaminants, thereby negatively impacting our operations. Our information technology systems are subjectfinancial condition.
Contracts for treatment charges paid to disruption, damage or failuresmelters and refineries include penalties for certain deleterious elements that exceed contract limits. If the material mined from a variety of sources, including, without limitation, computer viruses, security breaches, cyber-attacks, natural disastersour operating mines includes higher than expected contaminants, this would result in higher treatment expenses and defects in design. Cybersecurity incidents, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breachespenalty charges that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected informationincrease our costs and the corruption of data. Various measures have been implemented to manage our risks related to information technology systems and network disruptions. However, given the unpredictability of the timing, nature and scope of information technology disruptions, we could potentially be subject to production downtimes, operational delays, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our cash flows, competitive position, financial condition or results of operations.
We may also be adversely affected by system or network disruptions if new or upgraded information technology systems are defective, not installed properly or not properly integrated into our operations. We are modifying our enterprise software to support various operational functions, financial reporting and controls management. The modification of this system carries risks such as cost overruns, delays and interruptions. If we are not able to successfully implement these system modifications, we may have to rely on manual reporting processes and controls over financial reporting that have not been planned, designed or tested. Various measures have been implemented to manage our risks related to the system implementation and modification, but system modification failures could have a material adverse effect onnegatively impact our business, financial condition and results of operations. This could occur due to unexpected variations in the occurrence of these elements in the material mined, problems that occur during blending of material from various locations in the mine prior to processing and other unanticipated events.
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Continuation of our mining and processing activities is dependent on the availability of sufficient water supplies to support our mining activities.
Water is critical to our business, and the increasing pressure on water resources requires us to consider both current and future conditions in our management approach. Across the globe, water is a shared and regulated resource. Mining operations require significant quantities of water for mining, ore processing and related support facilities. Many of our properties in Mexico are in areas where water is scarce, and competition among users for continuing access to water is significant. Continuous production and mine development are dependent on our ability to acquire and maintain water rights and to defeat claims adverse to current water uses in legal proceedings. Although we believe that our operations currently have sufficient water rights and claims to cover operating demands, we cannot predict the potential outcome of future legal proceedings relating to water rights, claims and uses. Water shortages may also result from weather or environmental and climate impacts beyond our control. Shortages in water supply could result in production and processing interruptions. In addition, the scarcity of water in certain regions could result in increased costs to obtain sufficient quantities of water to conduct our operations. The loss of some or all water rights, in whole or in part, or ongoing shortages of water to which we have rights or significantly higher costs to obtain sufficient quantities of water (or the failure to procure sufficient quantities of water) could result in our inability to maintain mineral extraction at current or expected levels, require us to curtail or shut down mining operations, and prevent us from pursuing expansion or any development opportunities. Laws and regulations may be introduced in some jurisdictions in which we operate, which could if not successfully implemented,also limit access to sufficient water resources, thus materially adversely impact the effectiveness ofaffecting our internal controls over financial reporting.operations
The nature of mineral exploration, mining, and productionprocessing activities involves significant hazards, a high degree of risk, and the possibility of uninsured losses.
Exploration for and the production of minerals is highly speculative and involves greater risk than many other businesses. Many exploration programs do not result in the discovery of mineralization, and any mineralization discovered may not be of sufficient quantity or quality to be profitably mined. Our operations are, and any future mining operations or construction we may conduct will be, subject to all of the operating hazards and risks normally incident to exploring for and mining of mineral properties, such as, but not limited to:
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| ● | Fluctuation in production costs that make mining uneconomic; |
| ● | Labor disputes; |
| ● | Unanticipated variations in grade and other geologic problems; |
| ● | Environmental |
| ● | Water conditions; |
| ● | Difficult surface or underground conditions; |
| ● | Industrial accidents; |
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| ● | Mechanical and equipment performance problems; |
| ● | Failure of pit walls, dams, declines, drifts, and shafts; |
| ● | Unusual or unexpected rock formations; |
| ● | Personal injury, fire, flooding, cave-ins, seismic activity, and landslides; and |
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| ● | Decrease in the value of mineralized material due to lower gold, silver, |
Any of these risks can materially and adversely affect, among other things, the construction of properties, production quantities and rates, costs and expenditures, potential revenues and targeted production dates. We currently have limited insurance to guard against some of these risks. If we determine that capitalized costs associated with any of our mineral interests are not likely to be recovered, we would incur a write down of our investment in these interests. All of these factors mayThese occurrences could result in damage to, or destruction of, mineral properties or processing facilities, equipment, personal injury or death, environmental damage, reduced extraction and processing and delays in mining, asset write-downs, monetary losses, in relation to amounts spent which are not recoverable or result in additional expenses.
We do not insure against all of the risks to whichand possible legal liability. Although we may be subject in our operations. While we currently maintain insurance for general commercial liability claims and the physical assets at our AguilaArista and Alta Gracia Projects,mines and against risks inherent in the conduct of our business in amounts that we doconsider reasonable, this insurance contains exclusions and limitations on coverage and will not maintain insurance to cover all of the potential risks associated with our operations. Wemining and exploration activities, and related liabilities might be subject to liability for environmental, pollutionexceed policy limits. As a result of any or other hazards associated with mineral explorationall of the forgoing, we could incur significant liabilities and mine construction, for which insurance may not be available, whichcosts that may exceed the limits of our
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insurance coverage or whichthat we may elect not to insure against because of premium costs or other reasons.reasons, which could materially adversely affect our results of operations and financial condition. We may also not be insured against all interruptions to our operations. Losses from these or other events may cause us to incur significant costs which could materially adversely affect our financial condition and our ability to fund activities on our property.properties. A significant loss could force us to reduce or suspend our operations.operations and development.
Revenue from the sale of metal concentrate may be materially adversely affected by loss or damage during shipment and storage at our buyer’s facilities.
We depend uponrely on third-party transportation companies to transport our metal concentrate to the buyer’s facilities for processing and further refining. The terms of our sales contracts with the buyers require us to rely, in part, on assay results from samples of our metal concentrate that are obtained at the buyer’s warehouse to determine the final sales value for our metals. Once the metal concentrate leaves our processing facility, we no longer have direct custody and control of these products. Theft, loss, road accidents, improper storage, fire, natural disasters, tampering or other unexpected events while in transit or at the buyer’s location may lead to the loss of all or a limitedportion of our metal concentrate products. Such losses may not be covered by insurance and may lead to a delay or interruption in our revenue and as a result, our operating results may be materially adversely affected.
A significant delay or disruption in sales of doré or concentrates as a result of the unexpected disruption in services provided by smelters or refiners could have a material adverse effect on results of operations.
We rely on third party smelters and refiners to refine and process and, in some cases, purchase, the gold and silver doré and copper, lead, and zinc concentrate produced from our mines. Access to smelters and refiners on economic terms is critical to our ability to sell our products to buyers and generate revenues. We periodically enter into agreements with smelters and refiners, some of which operate their smelting or refining facilities outside the United States, and we believe we currently have contractual arrangements with a sufficient number of personnelsmelters and refiners so that the loss of any one refiner or smelter would not significantly or materially impact our operations or our ability to generate revenues. Nevertheless, services provided by a refiner or smelter may be disrupted by operational issues, new or increased tariffs, duties or other cross-border trade barriers, the bankruptcy or insolvency of one or more smelters, or refiners or the inability to agree on acceptable commercial or legal terms with a refiner or smelter. Such an event or events may disrupt an existing relationship with a refiner or smelter or result in the inability to create a contractual relationship with a refiner or smelter, which may leave us with limited, uneconomical, or no access to smelting or refining services for short or long periods of time. Any such delay or loss of access may significantly impact our ability to sell doré and concentrate products. We cannot ensure that alternative smelters or refiners would be available or offer comparable terms if the need for them were to arise or that we would not experience delays or disruptions in sales that would materially and materially adversely affect results of operations.
We rely on contractors to conduct a significant portion of our development construction projects.
A significant portion of our development and construction projects are currently conducted in whole or in part by contractors. As a result, our operations are subject to a number of risks, some of which are outside our control, including:
● | The difficulty and inherent delay in replacing a contractor and its equipment in the event that either party terminates the agreement; |
● | Reduced control and oversight over those aspects of the work which are the responsibility of the contractor; |
● | Failure of a contractor to perform under its agreement; |
● | Interruption of development and construction or increased costs in the event that a contractor ceases its business due to insolvency or other unforeseen events; |
● | Injuries or fatalities on the job as a result of the failure to implement or follow adequate safety measures; |
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● | Failure of a contractor to comply with applicable legal and regulatory requirements, to the extent it is responsible for such compliance; and |
● | Problems of a contractor with managing its workforce, labor unrest or other related employment issues. |
In addition, we may incur liability to third parties as a result of the actions of our contractors. The occurrence of one or more of these individualsrisks could materially adversely affect our business. Dueresults of operations and financial position.
Risks Related to our Exploration Activities
The exploration of our mineral properties is highly speculative in nature, involves substantial expenditures, and is frequently non-productive.
● | Identifying suitable candidates for acquisition and negotiating acceptable terms; |
● | Obtaining approval from regulatory authorities and potentially our shareholders; |
● | Implementing our standards, controls, procedures, and policies at the acquired business and addressing any pre-existing liabilities or claims involving the acquired business; and |
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● | To the extent the acquired operations are in a country in which we have not operated historically, understanding the regulations and challenges of operating in that new jurisdiction. |
Regulatory Risks
Our operations are subject to ongoing permitting requirements which could result in the delay, suspension, or termination of our operations.
Our operations, including our ongoing exploration drilling programs and mining, require ongoing permits from governmental and local authorities. We may also be required to obtain certain property rights to access or use our properties. Obtaining or renewing licenses and permits, and acquiring property rights, can be complex and time-consuming processes. There can be no assurance that we will be able to acquire all required licenses, permits or property rights on reasonable terms or in a timely manner, or at all, and that such terms will not be adversely changed, that required extensions will be granted, or that the issuance of such licenses, permits or property rights will not be challenged by third parties. If we cannot obtain or maintain the necessary permits or if there is a delay in receiving future permits, our timetable and business plan will be materially adversely affected.
Our operating properties located in Mexico are subject to changes in political or economic conditions and regulations in that country.
The risks with respect to operating in Mexico or other developing countries include, but are not limited to: nationalization of properties, military repression, extreme fluctuations in currency exchange rates, increased security risks, labor instability or militancy, mineral title irregularities, and high rates of inflation. In addition, changes in mining or investment policies or shifts in political attitude in Mexico may materially adversely affect our business. We may be affected in varying degrees by government regulation with respect to restrictions on production, price controls, export controls, income taxes, expropriation of property, maintenance of claims, environmental legislation, land use, land claims of local people, opposition from non-governmental organizations, labor legislation, water use, and mine safety. The effect of these factors cannot be accurately predicted and may adversely impact our operations.
Most of our properties are subject to extensive environmental laws and regulations which could materially adversely affect our business.
Our exploration and miningoperations are subject to extensive laws and regulations governing land use and the protection of the environment, which control the exploration and mining of mineral properties and their effects on the environment, including air and water quality, mine reclamation, waste generation, handling and disposal, the protection of different species of flora and fauna and the preservation of lands. These laws and regulations require us to acquire permits and other authorizations for conducting certain activities. In many countries, there is relatively new comprehensive environmental legislation, and the permitting and the authorization process may not be established or predictable. We may not be able to acquire necessary permits or authorizations on a timely basis, if at all. Delays in acquiring any permit or authorization could increase the cost of our projects and could suspend or delay the commencement of extraction and processing of mineralized material.
Environmental legislation in Mexico and in many other countries is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for companies and their officers, directors, and employees. Future changes in environmental regulation in the jurisdictions where our properties are located may materially adversely
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affect our business, make our business prohibitively expensive, or prohibit it altogether. We cannot predict what environmental legislation or regulations will be enacted or adopted in the future or how future laws and regulations will be administered or interpreted. Compliance with more stringent laws and regulations, as well as potentially more vigorous enforcement policies or regulatory agencies or stricter interpretation of existing laws, may (i) necessitate significant capital outlays, (ii) cause us to delay, terminate or otherwise change our intended activities with respect to one or more projects, or (iii) materially adversely affect our future exploration activities.
Climate change and climate change legislation or regulations could impact our business.
We are subject to physical risks associated with climate change, which could seriously harm our results of operations and increase our costs and expenses. The occurrence of severe adverse weather conditions, including increased temperatures and droughts, fires, longer wet or dry seasons, increased precipitation, floods, hail, snow, or more severe storms may have a potentially devastating impact on our operations. Adverse weather may result in physical damage to our employee base ifoperations, instability of our infrastructure and equipment, washed-out roads to our properties, and alter the supply of water and electricity to our projects. Increased temperatures may also decrease worker productivity at our projects and raise ventilation and cooling costs. Should the impacts of climate change be material in nature or occur for lengthy periods of time in the areas in which we operate, our financial condition or results of operations could be materially adversely affected.
Changes in the quantity of water, whether in excess or deficient amounts, may impact exploration and development activities, mining and processing operations, water storage and treatment facilities, tailings storage facilities, closure and reclamation efforts, and may increase levels of dust in dry conditions and land erosion and slope stability in case of prolonged wet conditions. Increased precipitation, extreme rainfall events may potentially impact tailings storage facilities through flooding of the water management infrastructure, exceeding surface water runoff network capacity, overtopping the facility, or undermining the slope stability of the structure. Further, increased amounts of water may result in extended periods of flooding to the mine pits and site infrastructure; or may exceed current water treatment facility capacity to store and treat water physical conditions resulting in an unintended overflow either on or off of the mine site property.
U.S. and international legislative and regulatory action intended to ensure the protection of the environment are constantly changing and evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability, and potentially increased capital expenditures and operating costs. Transitioning our business to meet regulatory, societal and investor expectations may cause us to incur higher costs and lower economic returns than originally estimated for new exploration projects and development plans of existing operations.
Our continuing reclamation obligations at our operations could require significant additional expenditures.
We are responsible for the reclamation obligations related to disturbances located on all of our properties and have recorded a liability on our Consolidated Balance Sheets to cover the estimated reclamation obligation. However, there is a risk that becomes necessary. We have no life insurance on any individual, andreserve could be inadequate to cover the actual costs of reclamation when carried out. Continuing reclamation obligations will require a significant amount of capital. There is a risk that we maywill be unable to hirefund these additional obligations and further, that the regulatory authorities may increase reclamation requirements to such a suitable replacement on favorable terms shoulddegree that become necessary.it would not be commercially reasonable to continue mining and exploration activities, which may materially adversely affect our results of operations, financial performance, and cash flows.
Title to mineral properties can be uncertain and we are at risk of loss of ownership of one or more of our properties. Our ability to explore and operate our properties depends on the validity of our title to that property. Our U.S. mineral properties include patented and unpatented mining claims. Unpatented mining claims provide only possessory title and their validity is often subject to contest by third parties or the federal government, which makes the validity of unpatented mining claims uncertain and generally riskier. Our concessions in Mexico are subject to continuing government regulation and failure to adhere to such regulations will result in termination of the concession. Uncertainties inherent in mineral properties relate to such things as the sufficiency of mineral discovery, proper posting and marking of boundaries, assessment work and possible conflicts with other claims not determinable from public record. We have not obtained title opinions covering our entire property, with the attendant risk that title to some claims, particularly title to undeveloped property, may be defective. There may be valid challenges to the title to our property which, if successful, could impair development and/or operations.
In the event of a dispute regarding title to our Mexican properties, it will likely be necessary for us to resolve the dispute in Mexico, where we would be faced with unfamiliar laws and procedures.
Our ability to explore and operate our properties depends on the validity of our title to that property. Uncertainties inherent in mineral properties relate to such things as the sufficiency of mineral discovery, proper posting and marking of
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boundaries, assessment work and possible conflicts with other claims not determinable from public record. There may be valid challenges to the title to our properties which, if successful, could impair development and/or operations. The resolution of disputes in foreign countries can be costly and time consuming. In a foreign country, we face the additional burden of understanding unfamiliar laws and procedures. We may not be entitled to a jury trial, as we might be in the United States.U.S. Further, to litigate in any foreign country, we would be faced with the necessity of hiring lawyers and other professionals who are familiar with the foreign laws. For these reasons, we may incur unforeseen costs if we are forced to resolve a dispute in Mexico or any other foreign country.
Our directorsIn most of the countries in which we operate, failure to comply with applicable laws and officers may be protected from certain typesregulations relating to mineral right applications and tenure could result in loss, reduction or expropriation of lawsuits.Theentitlements, or the imposition of additional local or foreign parties as joint venture partners. Any such loss, reduction, or imposition of partners could have a material adverse effect on our financial condition, results of operations, and prospects.
Under the laws of Mexico, mineral resources belong to the Statestate, and government concessions are required to explore for or exploit mineral reserves. Mineral rights derive from concessions granted, on a discretionary basis, by the Ministry of Colorado provide that our directorsEconomy, pursuant to the Mexican mining law and regulations thereunder. Our concessions in Mexico are subject to continuing government regulation, and failure to adhere to such regulations will not be liable to us or our shareholders for monetary damages for all but certain types of conduct as directorsresult in termination of the company. Our Articlesconcession. A title defect could result in losing all or a portion of Incorporation permitour right, title, and interest in and to the properties to which the title defect relates.
Additionally, in 2014, new mining concessions became subject to additional review and approval by the Mexico Ministry of Energy, and in recent years, the federal government has been reluctant to issue new mining concessions at all.
Mining concessions in Mexico give exclusive exploration and exploitation rights to the minerals located in the concessions but do not include surface rights to the real property, which requires that we negotiate the necessary agreements with surface landowners. Many of our mining properties are subject to the Mexican ejido system, requiring us to indemnify our directors and officers against all damages incurredcontract with the local communities surrounding the properties in order to obtain surface rights to land needed in connection with our businessmining exploration activities. See “Risk Factors- Our ability to develop our Mexican properties is subject to the fullest extent providedrights of the Ejido (agrarian cooperatives) who use or allowed by law. Additionally,own the surface for agricultural purposes.”
Our ability to develop our Mexican properties is subject to the rights of the Ejido (agrarian cooperatives) who use or own the surface for agricultural purposes.
Our ability to mine minerals is subject to maintaining satisfactory arrangements and relationships with the Ejido for access and surface disturbances. Ejidos are groups of local inhabitants who were granted rights to conduct agricultural activities on the property. We must negotiate and maintain a satisfactory arrangement with these residents in order to disturb or discontinue their rights to farm. While we entered into individual indemnificationhave successfully negotiated and signed such agreements withrelated to the Arista and Alta Gracia mines, our current directorsinability to maintain these agreements or consummate similar agreements for new projects could impair or impede our ability to successfully explore, develop, and officers and wemine the properties, which in turn could materially adversely affect our future cash flow.
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intendA significant amount of our mining properties are subject to execute substantially similar agreements with future directorsexchange control policies, the effects of inflation, and officers. The exculpation provisions of any of these items may havecurrency fluctuations between the effect of preventing shareholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our directorsU.S. dollar and officers against claims, including claims arising out of their negligence, poor judgment or other circumstances. Pursuant to the terms of the indemnification agreements, we are required to advance funds to our directors and officers prior to the final disposition of any threatened or actual legal proceeding, and including in the event it is ultimately determined that such officer or director is not entitled to indemnification pursuant to the terms of the indemnification agreement, in which case we will depend on reimbursement of advanced expenses from such individual.Mexican peso.
Our revenue and external funding are primarily denominated in U.S. dollars. However, certain mining, processing, maintenance, and exploration costs are denominated in Mexican pesos. These costs principally include electricity, labor, water, maintenance, local contractors, and fuel. The appreciation of the peso against the U.S. dollar increases expenses and the cost of purchasing capital assets in U.S. dollar terms in Mexico, which can adversely impact our operating results and cash flows. Conversely, depreciation of the Mexican peso decreases operating costs and capital asset purchases in U.S. dollar terms. When inflation in Mexico increases without a corresponding devaluation of the Mexican peso, our financial position, results of operations and cash flows could be materially adversely affected. The annual average inflation rate in Mexico was approximately 5.53% in 2021, 3.40% in 2020, and 3.64% in 2019. At the same time, the peso has been subject to fluctuation, which may not have been proportionate to the inflation rate and may not be proportionate to the inflation rate in the future. The value of the peso decreased by3.08% in 2021, decreased by 5.53% in 2020, and increased by 4.45% in 2019. In addition, fluctuations in currency exchange rates may have a significant impact on our financial results. There can be no assurance that the Mexican government will maintain its current policies with regard to the peso or that the peso's value will not fluctuate significantly in the future. We cannot assure you that currency fluctuations, inflation and exchange control policies will not have an adverse impact on our financial condition, results of operations, earnings, and cash flows.
Lack of infrastructure could forestall or prevent further exploration and advancement.
Exploration activities, as well as any advancement activities, depend on adequate infrastructure. Reliable roads, bridges, power sources, and water supply are important factors that affect capital and operating costs and the feasibility and economic viability of a project. Unanticipated or higher than expected costs and unusual or infrequent weather phenomena, or government or other interference in the maintenance or provision of such infrastructure, could materially adversely affect our business, financial condition, and results of operations.
Risks Related to Ourour Common Stock
Our stock price may be volatile and as a result youshareholders could lose part or all of yourtheir investment.
In addition to other risk factors identified and due to volatility associated with equity securities in general, the value of youra shareholder’s investment could decline due to the impact of numerous factors upon the market price of our common stock, including:
| ● | Changes in the worldwide price for |
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| ● | Adverse results from our exploration, development, or production efforts; |
| ● | Producing at rates lower than those targeted; |
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| Political and regulatory |
| ● | Weather conditions, including unusually heavy rains; |
| ● | Failure to meet our revenue or profit goals or operating budget; |
| ● | Decline in demand for our common stock; |
| ● | Downward revisions in securities analysts’ estimates or changes in general market conditions; |
| ● | Technological innovations by competitors or in competing technologies; |
| ● | Investor perception of our industry or our prospects; |
| ● | Lawsuits; |
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● | Actions by government or central banks; and |
| ● | General economic trends. |
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Stock markets in general have experienced extreme price and volume fluctuations and the market prices of individual securities have been highly volatile. These fluctuations are often unrelated to operating performance and may materially adversely affect the market price of our common stock. As a result, youshareholders may be unable to resell yoursell their shares at a desired price.
Past payments of dividends on our common stock are not an indicatora guaranty of future payments of dividends.
In 2011,2010, we instituted a monthlybegan paying cash dividend payabledividends to the holders of our common stock. However, our ability to continue to pay dividends in the future will depend on a number of factors, including, free cash flow, mine construction requirements and strategies, other acquisition and/or construction projects, spot gold and silvermetal prices, taxation, government-imposed royalties, and general market conditions. Further, a portion of our cash flow is expected to be retained to finance our operations and explorations and development of mineral properties. Any material change in our operations may affect future dividends which may be modified or canceled at the discretion of our Board of Directors. Any decrease in our monthly dividend would likely have an adverse impact on the price of our common stock.
Issuances of our stock in the future could dilute existing shareholders and materially adversely affect the market price of our common stock.
We are subjecthave the authority to issue up to 200,000,000 shares of common stock, 5,000,000 shares of preferred stock, and to issue options and warrants to purchase shares of our common stock, in some cases without shareholder approval. As of March 9, 2022, there were 88,338,774 shares of common stock outstanding. Future issuances of our securities could be at prices substantially below the Continued Listing Criteriaprice paid for our common stock by our current shareholders. We can issue significant blocks of our common stock without further shareholder approval. Because we have issued less common stock than many of our larger peers, the issuance of a significant amount of our common stock may have a disproportionately large impact on our share price compared to larger companies.
Failure to meet the maintenance criteria of the New York Stock Exchange (“NYSE American”), and our failure to satisfy these criteriaAmerican may result in the delisting of our common stock.stock, which could result in lower trading volumes and liquidity, lower prices of our common shares, and make it more difficult for us to raise capital.
Our common stock is currently listed on the NYSE American. In order to maintain thethat listing, we must maintainmeet certain share price and other targets,requirements, including maintaining a minimum amount of shareholders’ equity and a minimum number of public shareholders. In addition to objective standards, the NYSE American may delist the securities of any issuer if, in its opinion, the issuer’s financial condition and/or operating results appear unsatisfactory; if it appears that the extent of public distribution or the aggregate market value of the security has become so reduced as to make continued listing on the NYSE American inadvisable; if the issuer sells or disposes of principal operating assets or ceases to be an operating company; if an issuer
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fails to comply with the NYSE American’s listing requirements; if an issuer’s common stock sells at what the NYSE American considers a “low selling price” and the issuer fails to correct this via a reverse split of shares after notification by the NYSE American; or if any other event occurs or any condition exists which makes continued listing on the NYSE American, in its opinion, inadvisable.
If we are unable to remain in compliance with the NYSE American continued listing requirements, our common stock may be suspended from trading on and/or delisted from the NYSE American. Although we have not been notified of any delisting proceedings, there is no assurance that we will not receive such notice in the future or that we will be able to then comply with NYSE American listing standards. If the NYSE American delists our common stock, investors may face material adverse consequences, including, but not limited to, a lack of trading market for our securities, reduced liquidity, decreased analyst coverage of our securities, and an inability for us to obtain additional financing to fund our operations.
23
Issuances
General Risks
Our operations may be further disrupted, and our financial results may be materially adversely affected by the novel coronavirus (COVID-19) pandemic.
The novel strain of coronavirus known as COVID-19, which was declared a pandemic by the World Health Organization in March 2020, poses a risk to our business and operations. If a significant portion of our stockworkforce becomes unable to work or travel to our operations due to illness or state or federal government restrictions (including travel restrictions and “shelter-in-place” and similar orders restricting certain activities that may be issued or extended by authorities), we may be forced to reduce or suspend exploration activities and/or development projects which may impact liquidity and financial results. These restrictions have significantly disrupted economic activity in both the world, national and local economies and have caused volatility in capital markets. Our operations at the Arista mine in Oaxaca were temporarily suspended, and our cash flows were negatively impacted during 2020 and 2021 as a result. The various government restrictions arising due to the virus have curtailed the travel of our executives, which might materially adversely affect our operations on a long-term basis. The effects of the continued outbreak of COVID-19 and related government responses have caused and could continue to cause disruptions to supply chains and capital markets, reduced labor availability and productivity and a prolonged reduction in economic activity. These effects could have a variety of adverse impacts on us, including reduced demand for our products; impairment of goodwill or long-lived assets; impairment of our ability to develop and construct new mines, to operate existing projects, and to access funds from financial institutions and capital markets. In particular, these effects could disrupt or delay mining at our operating projects, which in turn could have a material adverse effect on our operations, cash flow and financial condition. Due to circumstances beyond our control, including the availability and distribution of the COVID-19 vaccine, we are unable to determine the long-term impact that the COVID-19 outbreak will have on operations.
To the extent the COVID-19 pandemic materially adversely affects our business and financial results as discussed above, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our operation and indebtedness and financing. Because of the highly uncertain and dynamic nature of events relating to the COVID-19 pandemic, it is not currently possible to estimate the impact of the pandemic on our business. However, these effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely.
We may not be able to operate successfully if we are unable to recruit, hire, retain, and develop key personnel and a qualified and diverse workforce. In addition, we are dependent upon our employees being able to safely perform their jobs, including the potential for physical injuries or illness.
We depend upon the services of a number of key executives and management personnel. These individuals include our executive officers and other key employees. If any of these individuals were to die, become disabled, or leave our company, we would be forced to identify and retain individuals to replace them. We may be unable to hire a suitable replacement on favorable terms should that become necessary.
Our success is also dependent on the contributions of our highly skilled and experienced workforce. Our ability to achieve our operating goals depend upon our ability to recruit, hire, retain, and develop qualified and diverse personnel to execute on our strategy. There continues to be competition over highly skilled personnel in our industry. If we lose key personnel or one or more members of our senior management team; or if we fail to develop adequate succession plans; or if we fail to hire, retain, and develop qualified and diverse employees; our business, financial condition, results of operations, and cash flows could be harmed. COVID-19 vaccine mandates and other COVID-19 related laws and policies could make hiring and retaining highly skilled key employees more difficult in the future.
Our business is dependent upon our workforce being able to safely perform their jobs, including the potential for physical injuries or illness. If we experience periods where our employees are unable to perform their jobs for any reason,
24
including as a result of illness (such as COVID-19), our business, financial condition, results of operations, and cash flows could be materially adversely affected. As a result of the COVID-19 pandemic, we have experienced temporary workforce disruptions and periods where we temporarily placed our Mexican operations in care and maintenance. These events, or if similar events occur in the future, could dilute existing shareholdershave a material adverse impact on the business in the future.
We are dependent on information technology systems, which are subject to certain risks, including cybersecurity risks, data leakage risks, and risks associated with implementation and integration.
We are dependent upon information technology systems in the conduct of our business. Any significant breakdown, invasion, virus, cyberattack, security breach, destruction, or interruption of these systems by employees, others with authorized access to our systems, or unauthorized persons could negatively impact our business. To the extent any invasion, cyberattack, or security breach results in disruption to our business; such as loss or disclosure of, or damage to our data or confidential information; our reputation, business, results of operations, and financial condition could be materially adversely affectaffected. We have implemented various measures to manage our risks related to information technology systems and network disruptions. However, given the unpredictability of the timing, nature, and scope of information technology disruptions, we could potentially be subject to production downtimes, operational delays, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems, and networks or financial losses from remedial actions, any of which could have a material adverse effect on our cash flows, competitive position, financial condition, or results of operations. Our systems and insurance coverage for protecting against cyber security risks may not be sufficient. Although to date we have not experienced any material losses relating to cyberattacks, we may suffer such losses in the future. We may be required to expend significant additional resources to continue to modify or enhance our protective measures. We also may be subject to significant litigation, regulatory investigation, and remediation costs associated with any information security vulnerabilities, cyberattacks or security breaches.
We may also be materially adversely affected by system or network disruptions if new or upgraded information technology systems are defective, not installed properly, or not properly integrated into our operations. If we are unable to successfully implement system upgrades or modifications, we may have to rely on manual reporting processes and controls over financial reporting that have not been planned, designed, or tested. Various measures have been implemented to manage our risks related to the system upgrades and modifications, but system upgrades and modification failures could have a material adverse effect on our business, financial condition and results of operations and could, if not successfully implemented, adversely impact the effectiveness of our internal controls over financial reporting.
Our business is subject to the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws, a breach or violation of which could lead to civil and criminal fines and penalties, loss of licenses or permits and reputational harm.
We operate in certain jurisdictions that have experienced some degree of governmental and private sector corruption, and in certain circumstances, strict compliance with anti-bribery laws may conflict with certain local customs and practices. The U.S. Foreign Corrupt Practices Act and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. Our Code of Ethics and other corporate governance mandate compliance with these anti-bribery laws, which often carry substantial penalties. However, there can be no assurance that our internal control policies and procedures will always protect us from recklessness, fraudulent behavior, dishonesty, or other inappropriate acts committed by our affiliates, employees, contractors, or agents. As such, our corporate policies and processes may not prevent all potential breaches of law or other governance practices. Violations of these laws, or allegations of such violations, could lead to civil and criminal fines and penalties, litigation, loss of operating licenses or permits, and may damage our reputation, which could have a material adverse effect on our business, financial position, and results of operations, or cause the market price of our common stock. We have the authority to issue up to 100,000,000 shares of common stock, 5,000,000 shares of preferred stock, and to issue options and warrants to purchase sharesvalue of our common stock without stockholder approval. Asto decline.
25
Our awards of our shares and stock options to employees may not have their intended effect.A portion of our total compensation program for our executive officers and key personnel has historically included the award of shares and options to buy shares of our common stock. If the price of our common stock performs poorly, such performance may adversely affect our ability to retain or attract critical personnel. In addition, any changes made to our stock option policies or to any other of our compensation practices which are made necessary by governmental regulations or competitive pressures could affect our ability to retain and motivate existing personnel and recruit new personnel.
ITEM 1B.UNRESOLVED1B.UNRESOLVED STAFF COMMENTS
None.
ITEM 2.PROPERTIES
We classify our mineral properties into twothree categories: “Operating“Production Stage Properties”, “Development Stage Properties”, and “Exploration Stage Properties”. OperatingProduction Properties are properties onfor which we operate a producing mine and are whatmine.
At our Don David Gold Mine, we consider a “material” property in accordance with SEC Industry Guide 7.
We currently have an100% interest in ten properties. Six of oursix properties, including two OperatingProduction Stage Properties and four Exploration Stage Properties, are within our Oaxaca Mining Unit located in Oaxaca, Mexico, along the San Jose structural corridor. In addition,Because of their proximity and relatively integrated operations, we have fourcollectively refer to the six properties as the Don David Gold Mine. The two Production Stage Properties are the only two of the six properties that make up the Don David Gold Mine that we consider to be independently material at this time. The Company also has 100% interest in the Back Forty Project, an advanced Exploration Properties within our Nevada Mining UnitStage Property, located in south central Nevada, U.S.AMenominee County, Michigan, USA.
Mineral Resources
Under SEC S-K 1300, a Mineral Resource is defined as “a concentration or occurrence of material of economic interest in or on the Earth’s crust in such form, grade or quality, and quantity that there are reasonable prospects for economic extraction.” A Mineral Resource is a “reasonable estimate of mineralization, taking into account relevant factors such as cut-off grade, likely mining dimensions, location or continuity, that, with the assumed and justifiable technical and economic conditions, is likely to, in whole or in part, become economically extractable. It is not merely an inventory of all mineralization drilled or sampled.” More information supporting assumptions, methodologies, and procedures can be found in the Walker LaneTechnical Report Summary filed as Exhibit 96.1 to this Form 10-K.
Don David Gold Mine – Summary of Gold, Silver, and Base Metal Mineral Belt. We own three of the Nevada properties and have an option to purchase the fourth. Please see Item 1. Business for additional information about our business.Resources
at December 31, 2021(1)(2)(3)(4)
| | | | | | | | | | | | | | | | | | | | | | | | |
Description | | KTonnes | | Gold | | Silver | | Copper % | | Lead % | | Zinc % | | Cut-off grade | | Metallurgical Recovery (%) | ||||||||
Arista | | | | | | | | | | | | | | $/Tonne | | Au | | Ag | | Cu | | Pb | | Zn |
Measured Mineral Resources | | 352 | | 2.18 | | 171.69 | | 0.38 | | 1.57 | | 4.79 | | 88 | | 81 | | 92 | | 80 | | 80 | | 82 |
Indicated Mineral Resources | | 1,208 | | 1.46 | | 120.06 | | 0.31 | | 1.21 | | 3.49 | | 88 | | 81 | | 92 | | 80 | | 80 | | 82 |
Measured + Indicated | | 1,560 | | 1.62 | | 131.72 | | 0.33 | | 1.29 | | 3.79 | | 88 | | 81 | | 92 | | 80 | | 80 | | 82 |
Inferred Mineral Resources | | 1,766 | | 0.90 | | 94.16 | | 0.27 | | 1.18 | | 3.19 | | 88 | | 81 | | 92 | | 80 | | 80 | | 82 |
Alta Gracia | | | | | | | | | | | | | | AuEq/tonne | | | | | | | | | | |
Measured Mineral Resources | | 24 | | 0.81 | | 367.95 | | - | | - | | - | | 2.36 | | 85 | | 72 | | - | | - | | - |
Indicated Mineral Resources | | 90 | | 0.61 | | 327.18 | | - | | - | | - | | 2.36 | | 85 | | 72 | | - | | - | | - |
Measured + Indicated | | 114 | | 0.65 | | 335.82 | | - | | - | | - | | 2.36 | | 85 | | 72 | | - | | - | | - |
Inferred Mineral Resources | | 148 | | 0.62 | | 295.61 | | - | | - | | - | | 2.36 | | 85 | | 72 | | - | | - | | - |
Proven and Probable ReservesNotes on Mineral Resources:
1. | Mineral Resource estimated at December 31, 2021 are based on $1,744/oz for Gold, $23.70/oz for Silver, $3.59/pound Copper, $0.97/pound Lead and $1.15/pound Zinc. These prices reflect the August 2021 average five-year street consensus as provided by the Bank of Montreal. |
2. | The definitions for Mineral Resources in S-K 1300 were followed which are consistent with CIM (2014) definitions and are exclusive of Mineral Reserves. |
3. | Mineral Resources that are not Mineral Reserves are materials of economic interest with reasonable prospects for economic extraction. |
4. | Rounding of tonnes, average grades, and contained ounces may result in apparent discrepancies with total rounded tonnes, average grades, and total contained ounces. |
The term “proven (measured) reserves” means reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, grade, and/or quality are computed from the results of detailed sampling; and (b) the sites for inspection, sampling and measurements are spaced so closely and the geologic character is sufficiently defined that the size, shape, depth and mineral content of reserves is well established. The term “probable (indicated) reserves” means reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation.
1726
As ofFor comparison, as at December 31, 2017, our estimate2020, DDGM’s estimates of ProvenMineral Resources, exclusive of Mineral Reserves, are provided in the below table.
Don David Gold Mine – Summary of Gold, Silver, and Probable (“P&P”) reserves was: Base Metal Mineral Resources
at December 31, 2020(1)(2)(3)(4)
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Description |
| Tonnes |
| Gold |
| Silver |
| Precious Metal Gold Equivalent g/t |
| Gold Ounces |
| Silver Ounces |
| Precious Metal Gold Equivalent Ounces |
| Copper % |
| Lead % |
| Zinc % |
|
Arista Mine |
|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Proven |
| 1,987,600 |
| 1.87 |
| 130 |
| 3.64 |
| 119,800 |
| 8,299,800 |
| 232,600 |
| 0.3 |
| 1.3 |
| 3.6 |
|
Probable |
| 433,400 |
| 1.50 |
| 124 |
| 3.19 |
| 20,800 |
| 1,730,600 |
| 44,400 |
| 0.3 |
| 1.1 |
| 3.0 |
|
Arista Mine Total |
| 2,421,000 |
| 1.81 |
| 129 |
| 3.56 |
| 140,600 |
| 10,030,400 |
| 277,000 |
| 0.3 |
| 1.3 |
| 3.6 |
|
Mirador Mine |
|
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|
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|
Proven |
| 59,400 |
| 0.71 |
| 352 |
| 5.49 |
| 1,400 |
| 672,600 |
| 10,500 |
|
|
|
|
|
|
|
Probable |
| 20,700 |
| 0.65 |
| 337 |
| 5.23 |
| 400 |
| 224,900 |
| 3,500 |
|
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|
|
|
|
|
Mirador Mine Total |
| 80,100 |
| 0.69 |
| 348 |
| 5.43 |
| 1,800 |
| 897,500 |
| 14,000 |
|
|
|
|
|
|
|
Oaxaca Mining Unit Total |
| 2,501,100 |
| 1.77 |
| 136 |
| 3.62 |
| 142,400 |
| 10,927,900 |
| 291,000 |
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| | | | | | | | | | | | | | | | | | | | | | | | |
Description | | KTonnes | | Gold | | Silver | | Copper % | | Lead % | | Zinc % | | Cut-off grade | | Metallurgical Recovery (%) | ||||||||
Arista | | | | | | | | | | | | | | $/Tonne | | Au | | Ag | | Cu | | Pb | | Zn |
Measured Mineral Resources | | 576 | | 1.56 | | 114.28 | | 0.28 | | 1.02 | | 3.08 | | 77 | | 76 | | 92 | | 80 | | 79 | | 80 |
Indicated Mineral Resources | | 1,704 | | 1.43 | | 154.25 | | 0.22 | | 1.25 | | 3.54 | | 77 | | 76 | | 92 | | 80 | | 79 | | 80 |
Measured + Indicated | | 2,280 | | 1.47 | | 143.87 | | 0.24 | | 1.19 | | 3.42 | | 77 | | 76 | | 92 | | 80 | | 79 | | 80 |
Inferred Mineral Resources | | 642 | | 0.91 | | 74.36 | | 0.35 | | 1.17 | | 3.86 | | 77 | | 76 | | 92 | | 80 | | 79 | | 80 |
Alta Gracia | | | | | | | | | | | | | | AuEq/tonne | | | | | | | | | | |
Measured Mineral Resources | | 37 | | 0.61 | | 273.00 | | - | | - | | - | | 2.33 | | 85 | | 72 | | - | | - | | - |
Indicated Mineral Resources | | 132 | | 0.85 | | 405.00 | | - | | - | | - | | 2.33 | | 85 | | 72 | | - | | - | | - |
Measured + Indicated | | 169 | | 0.80 | | 376.00 | | - | | - | | - | | 2.33 | | 85 | | 72 | | - | | - | | - |
Inferred Mineral Resources | | 53 | | 0.74 | | 368.00 | | - | | - | | - | | 2.33 | | 85 | | 72 | | - | | - | | - |
Notes to the 2017 P&P reserves:on Mineral Resources:
1. |
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2. |
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3. | Mineral Resources that are not Mineral Reserves are materials of economic interest with reasonable prospects for economic extraction. |
4. |
|
During 2021, we performed a comprehensive review of our geological database and interpretation of the mineralization, the block models derived from them and ultimately the mine plan to ensure more reliable and accurate mine planning and forecasting. In addition, metallurgy, mining methods, ground control and other parameters were reviewed. As a result of this review, Measured and Indicated Mineral Resources decreased from 2.4 million tonnes at December 31, 2020 to 1.7 million tonnes at December 31, 2021. The largest contributing factor to this decrease was the reclassification of mineralization from Measured and Indicated Mineral Resource to Inferred Mineral Resource. Inferred Mineral Resources increased from 0.7 million tonnes as at December 31, 2020 to 1.9 million tonnes at December 31, 2021.
Mineral Reserves
Under S-K 1300, a Mineral Reserve is defined as “an estimate of tonnage and grade or quality of indicated and measured mineral resources that, in the opinion of the qualified person, can be the basis of an economically viable project.” More information supporting assumptions, methodologies, and procedures can be found in the Technical Report Summary filed as Exhibit 96.1 to this Form 10-K.
27
Don David Gold Mine – Summary of Gold, Silver and Base Metal Mineral Reserves
at December 31, 2021 (1) (4)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Recovery |
| ||||||||
Description | | Tonnes | | Gold | | Silver | | Cu (%) | | Pb (%) | | Zn (%) | | Cut-off Grade | | % Au | | % Ag | | % Cu | | % Pb | | % Zn | |
Don David Gold Mine | | | | | | | | | | | | | | | | | | | | | | | | | |
Arista Mine (2) | | | | | | | | | | | | | | $/Tonne | | | | | | | | | | | |
Proven Mineral Reserves | | 353,500 | | 2.63 | | 93 | | 0.4 | | 1.9 | | 4.9 | | 88 | | 80.7 | | 92.4 | | 80.0 | | 79.9 | | 81.5 | |
Probable Mineral Reserves | | 1,131,200 | | 1.22 | | 61 | | 0.2 | | 1.0 | | 2.8 | | 88 | | 80.7 | | 92.4 | | 80.0 | | 79.9 | | 81.5 | |
Arista Mine Total | | 1,484,700 | | 1.55 | | 69 | | 0.3 | | 1.2 | | 3.3 | | | | | | | | | | | | | |
Alta Gracia Mine (3) | | | | | | | | | | | | | | AuEq/tonne | | | | | | | | | | | |
Proven Mineral Reserves | | 3,000 | | 0.85 | | 392 | | 0.0 | | 0.1 | | 0.3 | | 2.33 | | 85.0 | | 72.0 | | | | | | | |
Probable Mineral Reserves | | 50,800 | | 0.27 | | 169 | | 0.0 | | 0.0 | | 0.0 | | 2.33 | | 85.0 | | 72.0 | | | | | | | |
Alta Gracia Mine Total | | 53,800 | | 0.30 | | 181 | | 0.0 | | 0.0 | | 0.0 | | | | | | | | | | | | | |
Don David Gold Mine Total | | 1,538,500 | | 1.51 | | 73 | | | | | | | | | | | | | | | | | | | |
Notes on Mineral Reserves:
1. | Mineral Reserves estimated at December 31, 2021 are based on $1,744/oz for Gold, $23.70/oz for Silver, $3.59/pound Copper, $0.97/pound Lead, and $1.15/pound Zinc. These prices reflect the August 2021 average five-year street consensus as provided by the Bank of Montreal. |
2. | The Arista Mine cut-off grades for Mineral Reserves are $88/tonne NSR. |
3. | No appreciable amounts of base metals are present in the Alta Gracia veins identified to-date. A breakeven cut-off grade of 2.33 g/t AuEq was used for Mineral Reserves using gold and silver only to calculate gold equivalencies. |
| Rounding of tonnes, average grades, and contained ounces may result in apparent discrepancies with total rounded tonnes, average grades, and total contained ounces. |
For comparison, as at December 31, 2020, DDGM’s estimates of Mineral Reserves are presented in the table below.
Don David Gold Mine – Summary of Gold, Silver and Base Metal Mineral Reserves
at December 31, 2020 (1) (4)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Recovery |
| ||||||||
Description | | Tonnes | | Gold | | Silver | | Cu (%) | | Pb (%) | | Zn (%) | | Cut-off Grade | | % Au | | % Ag | | % Cu | | % Pb | | % Zn | |
Don David Gold Mine | | | | | | | | | | | | | | | | | | | | | | | | | |
Arista Mine (2) | | | | | | | | | | | | | | $/Tonne | | | | | | | | | | | |
Proven Mineral Reserves | | 1,775,600 | | 2.22 | | 116 | | 0.4 | | 1.6 | | 4.5 | | 77 | | 76.0 | | 92.0 | | 80.0 | | 79.0 | | 80.0 | |
Probable Mineral Reserves | | 490,600 | | 1.88 | | 138 | | 0.4 | | 1.5 | | 3.9 | | 77 | | 76.0 | | 92.0 | | 80.0 | | 79.0 | | 80.0 | |
Arista Mine Total | | 2,266,200 | | 2.16 | | 121 | | 0.4 | | 1.5 | | 4.0 | | | | | | | | | | | | | |
Alta Gracia Mine (3) | | | | | | | | | | | | | | AuEq/tonne | | | | | | | | | | | |
Proven Mineral Reserves | | 51,900 | | 0.76 | | 325 | | 0.0 | | 0.0 | | 0.0 | | 2.33 | | 85.0 | | 72 | | | | | | | |
Probable Mineral Reserves | | 10,400 | | 0.85 | | 514 | | 0.0 | | 0.0 | | 0.0 | | 2.33 | | 85.0 | | 72 | | | | | | | |
Alta Gracia Mine Total | | 62,300 | | 0.77 | | 357 | | 0.0 | | 0.0 | | 0.0 | | | | | | | | | | | | | |
Don David Gold Mine Total | | 2,328,500 | | 2.11 | | 127 | | | | | | | | | | | | | | | | | | | |
Notes on Mineral Reserves:
| Mineral Reserves estimated at December 31, 2020 were based on $1,477/oz for Gold, $17.47/oz for Silver, $2.83/pound Copper, $0.92/pound Lead, and $1.17/pound Zinc. These prices reflect the three-year trailing average prices. |
2. | The Arista Mine cut-off grades for Mineral Reserves are $77/tonne |
| No appreciable amounts of base metals are present in the Alta Gracia veins identified |
28 |
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For comparison,
Proven and Probable Mineral Reserves decreased from 2.3 million tonnes at December 31, 2016, our estimate of P&P reserves was:
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Description |
| Tonnes |
| Gold |
| Silver |
| Precious Metal Gold Equivalent g/t |
| Gold Ounces |
| Silver Ounces |
| Precious Metal Gold Equivalent Ounces |
| Copper % |
| Lead % |
| Zinc % |
|
Arista Mine |
|
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Proven |
| 1,495,300 |
| 2.72 |
| 163 |
| 5.03 |
| 131,000 |
| 7,860,500 |
| 241,900 |
| 0.3 |
| 1.3 |
| 3.6 |
|
Probable |
| 352,400 |
| 3.07 |
| 147 |
| 5.15 |
| 34,800 |
| 1,667,400 |
| 58,300 |
| 0.3 |
| 1.1 |
| 3.0 |
|
Arista Mine Total |
| 1,847,700 |
| 2.79 |
| 160 |
| 5.05 |
| 165,800 |
| 9,527,900 |
| 300,200 |
| 0.3 |
| 1.3 |
| 3.6 |
|
Mirador Mine |
|
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Proven |
| 32,600 |
| 1.12 |
| 358 |
| 6.18 |
| 1,200 |
| 374,800 |
| 6,500 |
|
|
|
|
|
|
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Probable |
| 11,200 |
| 0.86 |
| 295 |
| 5.03 |
| 300 |
| 106,600 |
| 1,800 |
|
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Mirador Mine Total |
| 43,800 |
| 1.06 |
| 342 |
| 5.88 |
| 1,500 |
| 481,400 |
| 8,300 |
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Oaxaca Mining Unit Total |
| 1,891,500 |
| 2.75 |
| 165 |
| 5.07 |
| 167,300 |
| 10,009,300 |
| 308,500 |
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Notes2020 to the 2016 P&P reserves:
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18
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Mineralized Material
We use the term “mineralized material” to describe mineralization in our mineral deposits that do not constitute “reserves” under U.S. reporting requirements set forth in Guide 7.
In addition to our P&P reserves, we estimate measured and indicated (“M&I”) mineralized material within the definition of Guide 7. Mineralized material does not have demonstrated economic viability. The SEC only permits issuers to report “mineralized material” in tonnage and average grade without reference to contained ounces or quantities of other metals. All of our mineralized material is located at our Oaxaca Mining Unit.
As of December 31, 2017, our estimate of M&I mineralized material was:
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| Description |
| Tonnes |
| Gold |
| Silver |
| Copper % |
| Lead % |
| Zinc % |
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| Arista Mine |
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| Measured |
| 677,100 |
| 1.55 |
| 112 |
| 0.3 |
| 1.2 |
| 3.9 |
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| Indicated |
| 1,008,700 |
| 1.49 |
| 99 |
| 0.2 |
| 1.2 |
| 3.6 |
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| Arista Mine Total |
| 1,685,800 |
| 1.51 |
| 104 |
| 0.3 |
| 1.7 |
| 3.7 |
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| Alta Gracia Project |
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|
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| Measured |
| 23,300 |
| 0.74 |
| 275 |
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|
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|
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| Indicated |
| 23,900 |
| 0.58 |
| 241 |
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| Alta Gracia Project Total |
| 47,200 |
| 0.66 |
| 258 |
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| Margaritas Project |
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| Measured |
| 19,800 |
| 0.70 |
| 280 |
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| Indicated |
| 38,100 |
| 0.73 |
| 274 |
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| Margaritas Project Total |
| 57,900 |
| 0.72 |
| 276 |
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| Oaxaca Mining Unit Total |
| 1,790,900 |
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Notes to the 2017 M&I mineralized material:
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For comparison,1.5 million tonnes at December 31, 2016, our estimate of M&I mineralized material was:
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Description |
| Tonnes |
| Gold |
| Silver |
| Copper % |
| Lead % |
| Zinc % |
|
Arista Mine |
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|
|
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|
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|
|
|
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|
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Measured |
| 777,800 |
| 1.95 |
| 127 |
| 0.4 |
| 1.7 |
| 5 |
|
Indicated |
| 955,100 |
| 1.21 |
| 118 |
| 0.3 |
| 1.6 |
| 4.5 |
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Arista Mine Total |
| 1,732,900 |
| 1.54 |
| 122 |
| 0.3 |
| 1.7 |
| 4.8 |
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Alta Gracia Project |
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|
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|
|
|
|
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|
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Measured |
| 145,000 |
| 0.36 |
| 242 |
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Indicated |
| 151,900 |
| 0.36 |
| 222 |
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Alta Gracia Project Total |
| 296,900 |
| 0.36 |
| 232 |
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Margaritas Project |
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|
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|
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Measured |
| 19,800 |
| 0.70 |
| 280 |
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Indicated |
| 38,100 |
| 0.73 |
| 274 |
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Margaritas Project Total |
| 57,900 |
| 0.72 |
| 276 |
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Oaxaca Mining Unit Total |
| 2,087,700 |
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Notes to2021. The largest contributing factor was the 2016 M&I mineralized material:
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Our P&P Reserve and M&I Mineralized Material estimates were prepared by our technical staff under the direction of Fred H. Brown, Senior Resource Geologist, and Barry Devlin, Vice President of Exploration. Mr. Brown graduated with a Bachelor of Science degree in Geology from New Mexico State University in 1987, obtained a Graduate Diploma in Engineering (Mining) in 1997 from the Universitydepletion of the Witwatersrandreserves by 0.5 million tonnes related to mining activities and a Master of Science in Engineering (Civil) from the University of the Witwatersrand in 2005. He is registered with the Association of Professional Engineersanother 0.3 million tonnes were reclassified as Measured and Geoscientists of British Columbia and as a Professional Geoscientist and the Society for Mining, Metallurgy and Exploration as a Registered Member. Mr. Devlin holds a Bachelor of Science degree with honors in Geology, 1981, and a Masters in Geology, 1987, from the University of British Columbia, Vancouver, Canada. He is also a Professional Geologist registered with the Association of Professional Engineers and Geoscientists of British Columbia.Indicated Mineral Resources.
For a description of the key assumptions, parameters and methods used to estimate Proven and Probable Reserves and Mineralized Material included in this report, as well as data verification procedures and a general discussion of the extent to which the estimates may be affected by any known environmental, permitting, legal, title, taxation, socio-political, marketing or other factors, investors may review the annual reserve report posted on our website (http://www.goldresourcecorp.com.)Don David Gold Mine
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All of the properties that make up our Oaxaca Mining UnitDon David Gold Mine are located in Oaxaca, Mexico in what is known as the San Jose structural corridor, which runs north 70 degrees west.northwest. Our properties comprise 55 continuous kilometers of this structural corridor which spans three historic mining districts in Oaxaca; the map below shows the general location of our properties:
We areThe Company was granted concessions from the Mexican federal government to explore and mine our properties in Mexico. Please see below Mining Concessions and Regulations in Mexico for additional information. We hold certain properties directly as the concession holder and lease other properties from a third party. Our Oaxaca Mining Unit encompasses approximately 69,889 hectares (172,700 acres) covered by 25 miningWe are required to pay concession fees to the Mexican government to maintain our interest in these concessions, and 5 lease concessions. The annualwe pay concession fees are $430,454 and we have madefor all necessary payments for 2017. Please see Mining Concessions and Regulations in Mexico,below.
Operating Properties
Aguila Project
Background: The Aguila Project currently comprises 19 mining concessions aggregating 30,215 hectares.
The early history of activity at the Aguila Project included prospecting and limited mining for gold and silver from the early 1900’s to the mid 1960’s. In 1998, the concessions were leased to Apex Silver Mines Corporation of Denver, Colorado. Apex carried out an exploration program involving geologic mapping, surface sampling and an 11-hole drilling program (1,242 meters). The results did not meet Apex’s expectations so it cancelled its lease on the property in 2002.
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In 2002, we leased the Aguila, El Aire, and La Tehuana concessions from a third party. The Aguila and El Aire concessions are part of the Aguila Project and the La Tehuana concession comprises the Margaritas property. The lease agreement is subject to a 4% net smelter return royalty where production is sold in the form of gold/silver doré and 5% for production sold in concentrate form. Subject to meeting minimum exploration requirements, there is no expiration term for the lease. We may terminate it at any time upon written notice to the lessor and the lessor may terminate it if we fail to fulfill any of our obligations, which primarily consist of paying the appropriate royalty to the lessor.
In August 2003, we commenced an initial drilling and exploration program at the Aguila Project. Through 2017, we have drilled a total of 907 core holes (both surface and underground) equaling 274,212 meters and 166 reverse circulation holes equaling 14,367 meters for a total of 1,073 holes totaling 288,579 meters.
In 2010, we acquired from a third party, at no additional cost, the El Chacal and El Pilon concessions,mineral properties, including those which are subject to a 2% royalty, but are not subject to the Aguila lease agreement. We filed for and received additional concessions from the Mexican government which are also not partthird-party lease.
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Location and Access: The Aguila Project is located in the Sierra Madre del Sur Mountains of southern Mexico in the central part of the State of Oaxaca. The property is located along a major paved highway approximately 120 kilometers southeast of Oaxaca City, the state’s capital city. The property is approximately four kilometers due northwest from the village of San Jose de Gracia. We have constructed gravel and paved roads from the village to the mine and processing facility which provides adequate access to the property.
The climate of the Aguila Project area is dry and warm to very warm with most rainfall occurring in June through September and annual precipitation averaging 423.7 mm. The average yearly temperature is 26.6 degrees centigrade. The area is very rocky with arid vegetation. Subsistence farming occurs and the main agricultural crop is agave cactus that is cultivated for the production of mescal.
Geology and Mineralization: The Aguila Project is located in the San Jose de Gracia Mining District in Oaxaca. Multiple volcanic domes of various scales, and probably non-vented intrusive domes, dominate the district geology. These volcanogenic features are imposed on a pre-volcanic basement of sedimentary rocks. Gold and silver mineralization in this district istable below details information related to the manifestations of this classic volcanogenic system and is considered epithermalmining concessions that comprise our properties in character.Oaxaca, Mexico:
Historically, we have produced ore from two locations on the Aguila property, the Aguila open pit mine and the Arista underground mine. The Aguila open pit mineralization is considered low sulfidation, epithermal mineralization primarily of gold with some silver and no base metals. The Arista underground mine is considered intermediate epithermal mineralization of gold, silver, copper, lead, and zinc. The host rock in the Arista vein system is primarily andesite.
Facilities: We constructed a processing facility and other infrastructure at the Aguila Project for approximately $35 million in 2009, and expanded the processing facility in 2012 and 2013, spending an additional $23 million. The flotation mill expansion, completed at the end of 2013, increased the number of flotation cells, added a second ball mill to allow for additional processing capacity and a Knelson gravity concentrator. In 2014 we completed a doré processing facility. The Aguila processing facility is flexible in its ability to process several types of mineralization. It has a differential flotation section capable of processing polymetallic ore and producing up to three separate concentrate products for sale. The facility also has an agitated leach circuit capable of producing gold and silver doré for sale. Depending on the specific type and characteristics of the ore, the facility can process sulfide material in its flotation circuit at a nominal 1,500 tonnes of ore per day. The agitated leach circuit can process a nominal 300 tonnes per day.
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Power is provided by diesel generators at the site. We obtained water rights from the Mexican government for an amount of water that we believe is sufficient to meet our operating requirements and pump it approximately five kilometers to the site from a permitted well located near the Totolapam River.
Additional improvements at the site include installation of a second diesel generation power plant and switch gear, paving a three-kilometer section of the road from the mine to the processing facility, construction of a new surface maintenance garage and fuel station, construction of haul roads from the mine site to the processing facility, office space at the processing facility, an assay lab, an exploration office, a tailings impoundment facility and other infrastructure.
Major construction projects in 2017 consisted of new underground explosive magazines on the second level, a ventilation upgrade for the Switchback mining zone, which included the installation of a new 400 horsepower surface exhaust fan, and the upgrade of the diesel power generation plant to 9.6 MW installed capacity.
Exploration Activities
Our exploration activities during 2017 mainly focused on underground exploration drilling at the Arista and Switchback vein systems in the Arista Mine. The Switchback drilling program continued to target further expansion and delineation of the multiple high-grade parallel veins for reserve definition, expansion and mine plan optimization. The Switchback strike length has expanded to over 625 meters, a 325-meter expansion from the beginning of 2017, with results adding to reserve definition, expansion and Arista Mine plan optimization. The Switchback vein system remains open on strike and vertical extent. Underground drilling during 2017 also delineated 200 meters of strike length on a new high-grade ore-shoot discovered on the Splay 31 vein of the Arista vein system. Forty-one underground diamond drill holes totaling 13,021 meters were completed at the Aguila Project during 2017. Data compilation, review, and field studies were also conducted during the year in a prospective exploration target area located in the southern portion of the Aguila Project.
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| | Total Number of Concessions | | Total Size | | Acquisition Date Range | | | 2021 Maintenance Fees Paid |
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| | | (in hectares) | | | | | | ||
Production Stage Properties: | | | | | | | | | ||
Arista | | 18 | | 24,372 | | 2002 to 2016 | | $ | 405,057 | |
Alta Gracia | |
| | 5,175 | | 2008 | | | 91,760 | |
Total Production Stage Properties: | | | | 29,547 | | | | $ | 496,817 | |
Exploration Stage Properties: | | | | | | | | | ||
Rey | | 4 | | 2,335 | | 2002 to | | $ | 41,399 | |
Chamizo | | 2 | | 19,758 | | 2011 to 2013 | | | 350,319 | |
Margaritas | | 1 | | 925 | | 2002 | | | 16,401 | |
Fuego | | 1 | | 2,554 | | 2013 | | | 45,284 | |
Total Exploration Stage Properties: | | | | 25,572 | | | | $ | 453,403 | |
| | | | | | | | | | |
Total: | | 29 | | 55,119 | | | | $ | 950,220 | |
Production Stage Properties
Arista & Alta Gracia Mines
History: The Arista and Alta Gracia mines are in the regional Tlacolula mining district within Oaxaca State, in the southwestern part of Mexico. According to the Mexican Geological Survey, the Servicio Geologico Mexicano (“SGM”) mining activity was initiated in the early 1880s in the Tlacolula mining district, producing some 300,000 ounces of gold and silver from an ore shoot of the La Leona mine. However, no separate amounts of production were reported for each metal. According to the SGM, in 1892 two smelters were built and operated (Magdalena Teitipac and O'Kelly) near the village of Tlacolula for processing ores from the Alta Gracia La Soledad, San Ignacio y Anexas, La Leona, La Victoria, and San Rafael silver mines. Subsequently, in 1911, Mr. Sken Sanders investigated the Totolapam mining region with a particular interest in the Margaritas mine. Most of these historical mines are within DDGM's mining concessions.
While the DDGM Arista Mine and Alta Gracia Mine are in the smaller mining subdistricts of San Jose de Gracia and Alta Gracia, respectively, only small-scale artisanal mining was historically conducted in these areas’ subdistricts. No reliable production records exist for the historic production performed in the Arista and Alta Gracia Project areas.
In 1998 and 1999, some concessions now held by DDGM were leased to Apex Silver Corporation (“Apex”). Apex carried out an exploration program involving geologic mapping, surface sampling, and an eleven (11) hole reverse circulation drilling program (1,242 m) into the Arista flat-lying vein (manto-style) deposit.
Arista Mine
Background:The Arista Mine currently holds 18 mining concessions aggregating 24,372 hectares.
In 2002, we leased the Aguila, El Aire, and La Tehuana concessions from a third party. The Aguila and El Aire concessions are part of the Arista Mine and the La Tehuana concession comprises the Margaritas property. The lease agreement is subject to a 4% net smelter return royalty where production is sold in the form of gold/silver doré and 5% for production sold in concentrate form. Subject to meeting minimum exploration requirements, there is no expiration term
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for the lease. We may terminate it at any time upon written notice to the lessor, and the lessor may terminate it if we fail to fulfill any of our obligations, which primarily consist of paying the appropriate royalty to the lessor.
In August 2003, we commenced an initial drilling and exploration program at the Arista mine. Through 2020, we have drilled a total of 1,293 core holes (both surface and underground) equaling 375,669 meters and 166 reverse circulation holes equaling 14,367 meters for a total of 1,459 holes totaling 390,036 meters.
In 2010, we acquired from a third party additional concessions, at no additional cost, which are subject to a 2% royalty, but are not subject to the Aguila lease agreement. We filed for and received additional concessions from the Mexican government which are also not part of the concessions leased or acquired from the third party. While not subject to the Aguila lease, the two concessions are considered within the Arista mine.
Location and Access: The Arista mine is located in the Sierra Madre del Sur Mountains of southern Mexico in the central part of the State of Oaxaca. The property is located along a major paved highway approximately 120 kilometers southeast of Oaxaca City, the state’s capital city. The property is approximately four kilometers northwest from the village of San Jose de Gracia. We have constructed gravel and paved roads from the village to the mine and processing facility which provides adequate access to the property.
The climate of the Arista mine area is dry and warm to very warm with most rainfall occurring in June through September, and annual precipitation averaging 423.7 mm. The average yearly temperature is 26.6 degrees centigrade. The area is very rocky with arid vegetation. Subsistence farming occurs, and the main agricultural crop is agave cactus that is cultivated for the production of mescal.
Geology and Mineralization: The Arista mine is located in the San Jose de Gracia Mining District in Oaxaca. Multiple volcanic domes of various scales, and likely non-vented intrusive domes, dominate the district geology. These volcanogenic features are imposed on a pre-volcanic basement of sedimentary rocks. Gold and silver mineralization in this district is related to the manifestations of this classic volcanogenic system and is considered epithermal in character.
Historically, we have produced ore from two locations on the Arista mine, the open pit mine and the underground mine. The open pit mineralization is considered low sulfidation, epithermal mineralization primarily of gold with some silver and no base metals. In 2021, mining activities were completed in the open pit, and it will now become the site for filtered dry stack tailings deposition. The Arista underground mine is considered intermediate epithermal mineralization of gold, silver, copper, lead, and zinc. The host rock in the Arista vein system is primarily andesite.
Facilities: We constructed a processing facility and other infrastructure at the Arista mine for approximately $35 million in 2009, and expanded the processing facility in 2012 and 2013, spending an additional $23 million. The flotation mill expansion, completed at the end of 2013, increased the number of flotation cells, added a second ball mill to allow for additional processing capacity, and added a Knelson gravity concentrator. In 2014 we completed a doré processing facility. In 2019, an increase in pumping capacity to the cyclones in the plant resulted in plant capacity increasing to nominal 2,000 tpd. The DDGM processing facility is flexible in its ability to process several types of mineralization. It has a differential flotation section capable of processing polymetallic ore and producing up to three separate concentrate products for sale. The facility also has an agitated leach circuit capable of producing gold and silver doré for sale.
We obtained water rights from the Mexican government for an amount of water that we believe is sufficient to meet our operating requirements and pump it approximately five kilometers to the site from a permitted well located near the Totolapam River.
Additional improvements at the site include electrical power lines connecting to the Mexican national power grid, installation of backup diesel generation power plants and switch gear, paving a three-kilometer section of the road from the mine to the processing facility, construction of a new surface maintenance garage and fuel station, construction of haul
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roads from the mine site to the processing facility, office space at the processing facility, an assay lab, an exploration office, tailings impoundment facilities and lift, a paste fill plant, mine camp facilities, and other infrastructure.
Exploration Activities:
We completed 112 underground diamond drill holes totaling 25,104 meters and 30 surface diamond drill holes totaling 9,929 meters at the Arista mine during 2021. The underground drilling included significant infill drilling, particularly on the Switchback system, in order to convert Inferred Mineral Resources to Mineral Reserves and to optimize the mine plan. A total of 68 underground infill drill holes were completed totaling 9,687 meters. The drilling, in conjunction with expansion drilling, identified a number of high-grade zones in the southeastern part of the Soledad vein, within and peripheral to existing Mineral Resources. The underground expansion drilling activities were mainly focused on the Switchback and, the newly defined, Three Sisters vein system in the Arista Mine; 44 drill holes were completed totaling 15,418 meters. The Switchback vein system extends for over a one-kilometer strike length and remains open on both strike and vertical extent, with 2021 drilling targeting the expansion and delineation of the multiple sub-parallel veins. The Three Sisters vein system lies at the northern limit of known mine working and between the Switchback and Arista vein systems; Three Sisters drilling focused on the Sandy vein which is open to the northwest and up- and down-dip.
Surface drilling continued to explore for potentially economic mineralization in zones close to the Arista Mine; along strike drilling from the Arista vein system confirmed the presence of felsic dykes which are often intimately associated with mineralization within the Arista mine and confirm the need to continue exploring along strike to the southeast. An infill program from surface targeted the along strike extension of the Santiago vein confirming the presence of mineralization. A condemnation drilling program below the open pit was also undertaken. Surface geologic mapping and rock chip sampling continued in the vicinity of the Arista mine, the open pit and the geological targets Cerro Pilon and Cerro Colorado amongst other prospects. Our exploration efforts demonstrate our commitment to long-term investment in Oaxaca, Mexico.
Please see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operationsfor additional information concerning our mining operations at the Alta Gracia project.
Alta Gracia Mine
Background: In 2008, we were granted claims adjacent to the Margaritas property in the Alta Gracia Mining District by filing three mining concessions known as the David Fracción I, the David Fracción II, and La Herradura, totaling 5,175 hectares.
As of December 31, 2016, proven and probable reserves had been established for the Mirador Underground Mine on our Alta Gracia property. In July 2017, mine development reached the economic ore zone of the Mirador vein, and mining began.
Location and Access: The Alta Gracia project is approximately 20 kilometers northeast of the village of San Pedro Totalapam, in the Municipality of San Pedro Totolapam. Access to the project is by a gravel road that departs the paved highway approximately 13 kilometers east of the village of San Pedro Totalapam. The haulage distance by road from Alta Gracia to the DDGM processing facility is approximately 32 kilometers.
Geology and Mineralization: The sedimentary and volcanic units mapped at Alta Gracia are similar to those observed at the Arista mine. The district is dominated by tertiary-age rhyolite flows and tuffs which are underlain by andesite flows and tuff. Granodiorite and felsic intrusives are observed to crop out to the north and east of the Mirador mine. Known vein occurrences at Alta Gracia are mainly hosted in andesite and rhyolite. The veins at Alta Gracia are considered low sulfidation epithermal mineralization with economic values only for gold and silver.
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Facilities: During 2016, we received our operating permit for the Mirador Mine.
In 2017, two mine portals were developed to provide access to the Mirador vein. Mine site offices and a mobile equipment maintenance shop were established. Additionally, a diesel power generation plant, a compressed air and a mine water pumping station were developed and put into service. In 2018, old workings were improved to create a second access to the vein system called Independencia. The portal for this access is located approximately 500 meters southwest of the Mirador portal. Development is now established to access the mineralization, delineated by drill campaigns during 2018 and 2019, within the Mirador’s Independencia vein.
Ore from the Mirador Mine, primarily silver ore, is transported by contracted haul trucks to and processed at our agitated leach plant at the DDGM processing facility, with final product being doré.
Exploration Activities: The 2021 Alta Gracia exploration program mainly included surface geological mapping along with rock chip sampling in the historic mining areas at Alta Gracia. The new information will be used to guide future surface drilling programs.
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Open Pit and |
As of December 31, 2016, proven and probable reserves had been established for the Mirador Underground Mine on our Alta Gracia property. In July 2017, mine development reached the economic ore zone of the Mirador vein and mining began. A total of 6,350 tonnes were extracted from the Mirador Mine, trucked to, and processed at our Aguila processing facility in 2017.
Location and Access: The Alta Gracia Project is approximately 20 kilometers northeast from the village of San Pedro Totalapam, in the Municipality of San Pedro Totolapam. Access to the project is by a gravel road that departs the paved highway approximately 13 kilometers east of the village of San Pedro Totalapam. The haulage distance by road from Alta Gracia to the Aguila processing facility is approximately 32 kilometers.
Geology and Mineralization: The sedimentary and volcanic units mapped at Alta Gracia are similar to those observed at the Aguila project. The district is dominated by Tertiary-age rhyolite flows and tuffs which are underlain by andesite flows and tuff. Granodiorite and felsic intrusives are observed to outcrop to north and east of the Mirador mine. Known vein occurrences at Alta Gracia are mainly hosted in andesite and rhyolite. The veins currently being mined at Alta Gracia are considered low sulfidation epithermal mineralization with economic values only for gold and silver.
Facilities: During 2016, we received our operational permit for the Mirador Mine. Explosive magazines, located inside the Mirador Mine at the Alicia portal, were also constructed and permitted.
In 2017, two mine portals were developed to provide access to the Mirador vein. Mine site offices and a mobile equipment maintenance shop was established adjacent to the Aguacate portal at the lower 1470 level. Additionally, a
23
diesel power generation plant, compressed air and a mine water pumping station were developed and became operational.
High grade silver ore from the Mirador Mine is transported by contracted haul trucks to and processed at our agitated leach plant at the Aguila processing facility, with final product being doré.
Exploration Activities: In 2017, we completed 44 surface exploration diamond drill holes totaling 9,936 meters. These holes mainly targeted extensions of ore shoots on known veins, such as Huaje and Victoria, that were historically mined on a small-scale. Surface and underground geological mapping and sampling along with detailed topographic surveying also continued in the historic mining areas at Alta Gracia. The new information was used for estimation of additional ore and mineralized material and to guide follow-up drilling planned for Alta Gracia in 2018.
Please see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for information concerning our mining operations at the Aguila Project.
Exploration Properties
Margaritas Property
The Margaritas property is made up of the La Tehuana concession. We leased this concession from a third party in October 2002. The terms of this agreement are discussed under “Aguila Project” above. It is comprised of approximately 925 hectares located along our 55-kilometer mineralized trend and adjacent to the Aguila Project
In 2017, results from previous surface drilling, surveying, detailed geological mapping and rock chip channel sampling were analyzed for the Margaritas property. Additional rock chip channel sampling of historic workings was also carried out in the Trenes mineralized zone. A follow-up surface diamond drilling program is targeted for Trenes in 2018. Trenes is located approximately 10-kilometers northwest of the Arista Mine along our 55-kilometer mineralized trend.
Chamizo Property
In June 2011, we staked mineral claims between the Rey property and Alta Gracia property along a trend and acquired an exploration concession from the Mexican government of approximately 26,386 hectares referred to as Chamizo. In March 2013, we acquired a property known as Cerro Colorado (comprised of the San Pedro Fracc. 2 concession) from Almaden Minerals, Ltd. consisting of approximately 1,860 hectares. The Cerro Colorado property is surrounded by our Chamizo concession and we include it as part of the Chamizo property. Any future production from the Cerro Colorado concession is subject to a 2% net smelter return royalty in favor of Almaden.
Because of the close proximity of Chamizo to Alta Gracia, exploration activity began on this property during late 2011 and to date has included geochemical sampling and drilling of eight shallow core holes for a total of 1,327 meters. We completed the acceptable minimum amount of work required to maintain the claims during 2017 and target the same amount of work in 2018.
Fuego Property
In March 2013, we acquired the Fuego property (comprised of the San Pedro Fracc. 1 concession) from Almaden Minerals Ltd. subject to a 2% net smelter return royalty. The Fuego property consists of approximately 2,554 hectares and is located south of our Alta Gracia and Chamizo properties. In 2013, Fuego was included in the property-wide airborne geophysical survey. Geologic mapping and surface sampling were conducted on the Fuego property during 2013 through 2017 to allow us to meet the acceptable minimum amount of work required to maintain the claims. We do
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not anticipate any significant exploration activities at El Fuego in 2018. However, we plan to conduct the acceptable minimum amount of work required to maintain the claims.
Rey Property
The Rey property consists of concessions on the far northwest end of our 55-kilometer mineralized corridor in the State of Oaxaca known as Rey, El Virrey, La Reyna and El Marquez. We acquired the Rey concession from a third party and it is subject to a 2% net smelter return royalty payable to them on a portion of the claims. We obtained the remaining concessions by staking claims and filing for concessions with the Mexican government.
The Rey property is located approximately 64.4 kilometers by road from the Aguila Project. There is no plant or equipment on the Rey property. If exploration is successful, any mining would probably require an underground mine where mineralized material could be trucked to the Aguila processing facility for processing. To date, we have drilled 48 core holes for a total of 5,273 meters at the Rey property. Early in 2012, we completed a small amount of work to finish refurbishing and extending an existing shaft on the property to permit underground exploratory drilling. We ceased work at the Rey property during 2012, following a request to obtain additional approvals from local community agencies. In 2018, we plan to work with the local agencies and anticipate resolving the matter, but we have no assurance that we will be able to resume our exploration activities in the near term. If the matter is resolved, we plan to conduct follow-up drilling and exploration based on the drilling done in 2008. We do not anticipate any significant exploration activities at Rey in 2018. However, we plan to conduct the acceptable minimum amount of work required to maintain the claims.
Mining Concessions and Regulations in Mexico
Mineral rights in Mexico belong to the Mexican federal government and are administered pursuant to Article 27 of the Mexican Constitution. All of our mining concessions are exploitation concessions, which may be granted or transferred to Mexican citizens and corporations. Our leases or concessions are held by our Mexican subsidiary. Exploitation concessions have a term of 50 years and can be renewed for another 50 years. Concessions grant us the right to explore and exploit all minerals found in the ground. Maintenance of concessions requires the semi-annual payment of mining duties (due in January and July) and the performance of assessment work, on a calendar year basis, with assessment work reports required to be filed in the month of May for the preceding calendar year. The amount of mining duties and annual assessment are set by regulation, may increase over the life of the concession and include periodic adjustments for inflation. Mining concessions are registered at the Public Registry of Mining in Mexico City and in regional offices in Mexico.
Mexican mining law does not require payment of finder’s fees to the government, except for a discovery premium in connection with national mineral reserves, concessions and claims or allotments contracted directly from the Mexican Geological Survey. None of the claims held by DDGM are under such a discovery premium regime.
Ejido Lands and Surface Right Acquisitions in Mexico
Surface lands within our Oaxaca Mining Unit are Ejido lands (agrarian cooperative lands granted by the federal government to groups of Campesinos pursuant to Article 27 of the Mexican Constitution of 1917). Prior to January 1, 1994, Ejidos could not transfer Ejido lands into private ownership. Amendments to Article 27 of the Mexican Constitution in 1994 now allow individual property ownership within Ejidos and allow Ejidos to enter into commercial ventures with individuals or entities, including foreign corporations. We have an agreement with the local San Pedro Totolapam Ejido allowing exploration and exploitation of mineralization at the Aguila Project and some of our surrounding properties.
Mexican law recognizes mining as a land use generally superior to agriculture. However, the law also recognizes the rights of the Ejidos to compensation in the event mining activity interrupts or discontinues their use of the agricultural lands. Compensation is typically made in the form of a cash payment to the holder of the agricultural rights.
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Exploration Properties
Margaritas Property
The Margaritas property is made up of the La Tehuana concession, which is approximately 925 hectares, located along our 55-kilometer mineralized trend, and adjacent to the Arista mine.
In 2021, we continued to review results from previous surface drilling, surveying, detailed geological mapping, and rock chip channel sampling for the Margaritas property. We completed the work required to maintain the claims during 2021, with work focused on re-interpretation of geochemical data and additional data compilation to identify new targets of interest, as well as continued surface mapping. We expect to target the same amount of work in 2022, along with identifying opportunities to strengthen our relationship in the local communities.
Chamizo Property
In June 2011, we acquired an exploration concession from the Mexican government of approximately 17,898 hectares referred to as Chamizo. In March 2013, we acquired a property known as Cerro Colorado from Almaden Minerals, Ltd. (“Almaden”) consisting of approximately 1,860 hectares. The Cerro Colorado property is surrounded by our Chamizo concession, and we include it as part of the Chamizo property. The Chamizo Property is adjacent to the Alta Gracia Property. Any future production from the Cerro Colorado concession is subject to a 2% net smelter return royalty in favor of Almaden.
Due to the distance of Chamizo from the Arista mine, exploration activity undertaken in 2021 was limited to data compilation. We do not anticipate any significant work in 2022, although we will be looking to identify opportunities to strengthen our relationship in the local communities to facilitate future work.
Fuego Property
In March 2013, we acquired the Fuego property from Almaden subject to a 2% net smelter return royalty. The Fuego property consists of approximately 2,554 hectares and is located south of our Alta Gracia and Chamizo properties. In 2013, Fuego was included in the property-wide airborne geophysical survey. Geologic mapping and surface sampling have been conducted on the Fuego property, which allows us to meet the acceptable amount of work required to maintain the claims. We do not anticipate any significant exploration activities at Fuego in 2022. However, we plan to conduct the work required to maintain the claims.
Rey Property
The Rey property consists of concessions on the far northwest end of our 55-kilometer mineralized corridor in the State of Oaxaca known as Rey, El Virrey, La Reyna, and El Marquez. The Rey property consists of 2,335 hectares. We acquired the El Virrey concession from a third party, and it is subject to a 2% net smelter return royalty. We obtained the remaining concessions by staking claims and filing for concessions with the Mexican government.
The Rey property is located approximately 64.4 kilometers by road from the Arista mine. There is no plant or equipment on the Rey property. If exploration is successful, any mining would probably require an underground mine where ore could be trucked to the DDGM processing facility for processing. To date, we have drilled 48 core holes for a total of 5,273 meters at the Rey property. Early in 2012, we completed a small amount of work to finish refurbishing and extending an existing shaft on the property to permit underground exploratory drilling. We ceased work at the Rey property during 2012, following a request to obtain additional approvals from local community agencies. In 2022, we plan to continue working with the local agencies to understand and address any concerns the community may have, but we have no assurance that we will be able to resume our exploration activities in the near term. Once community support is obtained,
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we plan to conduct follow-up drilling and exploration based on the drilling done in 2007 and 2008. Regardless of the outcome, we plan to perform enough work to maintain the claims in 2022.
Mining Concessions and Regulations in Mexico
Mineral rights in Mexico belong to the Mexican federal government and are administered pursuant to Article 27 of the Mexican Constitution. All of our mining concessions are exploitation concessions, which may be granted or transferred to Mexican citizens and corporations. Our leases or concessions are held by our Mexican subsidiary DDGM. Exploitation concessions have a term of 50 years and can be renewed for another 50 years. Concessions grant us the right to explore and exploit all minerals found in the ground. Maintenance of concessions requires the semi-annual payment of mining duties (due in January and July) and the performance of assessment work, on a calendar year basis, with assessment work reports required to be filed in the month of May for the preceding calendar year. The amount of mining duties and annual assessment are set by regulation, may increase over the life of the concession, and include periodic adjustments for inflation. Failure to pay the mining duties can lead to cancellation of the relevant concession.
Mexican mining law does not require payment of finder’s fees to the government, except for a discovery premium in connection with national Mineral Reserves, concessions and claims, or allotments contracted directly from the Mexican Geological Survey. None of the claims held by DDGM are under such a discovery premium regime.
Ejido Lands and Surface Right Acquisitions in Mexico
Surface lands within DDGM are Ejido lands (agrarian cooperative lands granted by the federal government to groups of Campesinos pursuant to Article 27 of the Mexican Constitution of 1917). Prior to January 1, 1994, Ejidos could not transfer Ejido lands into private ownership. Amendments to Article 27 of the Mexican Constitution in 1994 now allow individual property ownership within Ejidos and allow Ejidos to enter into commercial ventures with individuals or entities, including foreign corporations. We have an agreement with the local San Pedro Totolapam Ejido allowing exploration and exploitation of mineralization at the Arista mine and some of our surrounding properties.
Mexican law recognizes mining as a land use generally superior to agriculture. However, the law also recognizes the rights of the Ejidos to compensation in the event mining activity interrupts or discontinues their use of the agricultural lands. Compensation is typically made in the form of a cash payment to the holder of the agricultural rights. The amount of such compensation is generally related to the perceived value of the agricultural rights as negotiated in the first instance between the Ejidos and the owner of the mineral rights. If the parties are unable to reach an agreement on the amount of the compensation, the decision can be referred to the government.
We have established surface rights agreements with the San Pedro Totolapam Ejido and the individuals impacted by our proposed operations which allow disturbance of the surface where necessary for our exploration activities and mining operations.
Office Facilities
We constructed an administrative office building adjacent to the DDGM processing facility and a mine office adjacent to the Arista Mine portal. We also lease approximately 3,000 square feet of office space in Oaxaca City, Oaxaca. The lease commenced in 2012 and was renewed in December 2021 for two years.
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Back Forty
The Back Forty Project is an advanced Exploration Stage Property located in Menominee County, Michigan, USA in the mineral-rich Penokean Volcanic Belt. Because the property does not currently have a Mineral Reserve estimate, we do not consider the property to be independently material at this time. Our property is made up of approximately 1,304 hectares (3,222 acres) of private and public (State of Michigan) mineral lands. The project is centered at latitude 46 degrees 27 North and longitude 87 degrees and 51 West.
Background: On December 10, 2021, the Company successfully completed the acquisition of all the issued and outstanding common shares of Aquila Resources Inc. Aquila’s principal asset is its 100% interest in the Back Forty Project located in Menominee County, Michigan, USA. The Back Forty Project has a polymetallic (gold, silver, copper, lead, and zinc) Volcanogenic Massive Sulfide deposit. The Back Forty Project controls surface and mineral rights through ownership, leases with the State of Michigan, and royalties with private parties. We are currently advancing a definitive feasibility study and preparing permit applications.
Permitting: The State of Michigan governs and regulates the permitting process as it relates to the Back Forty Project. Upon completion of the definitive feasibility study, we plan to submit an omnibus application for required permits.
Community: Tribal engagement has been very important to the Project, especially considering the cultural resources near the site. Outreach to local Tribes, including the Menominee Indian Tribe of Wisconsin, began as early as June of 2010. Aquila conducted extensive archeological studies throughout the effected and unaffected areas. As agreed with the authorities, Aquila identified areas for permanent protection and established appropriate buffers. We plan to continue working with the Tribes to better understand their concerns and to find opportunities to work together on issues that are
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important to both parties, such as preservation of cultural sites and historical artifacts, impact to the Menominee river, and wetland mitigation.
Office Facilities: In Michigan, we own and operate an administrative office building in Stephenson, MI and another field office close to the location of the potential future mine facilities.
Glossary
The following terms used in this report shall have the following meanings:
Andesite: | An extrusive igneous, volcanic rock, of intermediate composition, with aphanitic to porphyritic texture characteristic of subduction zones, such as the western margin of South America. |
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Concentrate: | A product from a mineral processing facility, such as gravity separation or flotation, in which the valuable constituents have been upgraded and unwanted gangue materials rejected as waste. |
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Doré: | Composite gold and silver bullion, usually consisting of approximately 90% precious metals that will be further refined to separate pure metals. |
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Drift: | A horizontal tunnel generally driven within or alongside an ore body and aligned parallel to the long dimension of the ore. |
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Epithermal: | Used to describe gold deposits found on or just below the surface close to vents or volcanoes, formed at low temperature and pressure. |
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Exploration: | Prospecting, sampling, mapping, diamond-drilling, and other work involved in locating the presence of economic deposits and establishing their nature, shape, and grade. |
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Grade: | The concentration of an element of interest expressed as relative mass units (percentage, ounces per ton, grams per tonne (“g/t”), etc.). |
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Hectare: | A metric unit of measurement, for surface area. One hectare equals 1/200th of a square kilometer, 10,000 square meters, or 2.47 acres. A hectare is approximately the size of a soccer field. |
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Long-hole Stoping: | Mining method which uses holes drilled by a production drill to a predetermined pattern by a mining engineer. Long-hole stoping is a highly selective and productive method of mining and can cater for varying ore thicknesses and dips (0 - 90 degree). Blasted rock is designed to fall into a supported drawpoint or removed with remote control LHD (load, haul, dump machine). |
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Net Smelter Return (“NSR”): | The net revenue that the owner of a mining property receives from the sale of the mine's metal products, less transportation and refining costs. As a royalty, it refers to the fraction of net smelter return that a mine operator is obligated to pay the owner of the |
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Mineral Deposit: | Rocks that contain economic amounts of minerals in them and that are
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Tonne: | A metric ton. One tonne equals 1000 kg. It is equal to approximately 2,204.62 pounds. |
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Not applicable. There were no legal proceedings at December 31, 2017.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable. We have no U.S. mines in operation.
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ITEM MARKET FOR Market Information Our common stock trades on the New York Stock Exchange American (“NYSE American”) under the symbol “GORO”. On March 9, 2022, there were 88,338,774 shares of Gold Resource Corporation, which were held by approximately 200 holders of record. Performance Graph The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference in such filing. The following graph compares the performance of our common stock with the performance of the NYSE American Composite Index and the S&P TSX Global Gold Fund, assuming reinvestment of dividends on December 31 of each year indicated. The graph assumes $100 invested at the per share closing price in Gold Resource Corporation and each of the indices included below from December 31, 2016 to December 31, 2021. The spin-off of Fortitude Gold Corporation to our shareholders at December 31, 2020 is reflected as a special dividend in 2021, as the shares started trading on the OTQB in February 2021. 5.MARKET5.REGISTRANT’SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASEPURCHASES OF EQUITY SECURITIES
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* for $100 invested on 12/31/16 in stock or index, including reinvestment of dividends
Transfer Agent
Computershare Trust Company, N.A. is the transfer agent for our common stock. The principal office of Computershare is located at 6200 S. Quebec St., Greenwood Village, CO 80111, and its telephone number is (303) 262-0600.
Dividend Policy
Since our inception, one of management’s primary goals has been to make cash dividend distributions to shareholders. Since commercial production began at the DDGM in July 2010, we have returned over $119 million to our shareholders in dividends. Regular dividends should not be considered a prediction or guarantee of future dividends.
ITEM 6.RESERVED
Not applicable.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 “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 that pursues gold and silver projects that are expected to achieve both low operating costs and high returns on capital. DDGM holds six properties and includes mineral production primarily from the Arista underground mine. During 2021, we temporarily suspended operations voluntarily in late August in response to a spike in COVID-19. 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. We are also currently preparing a definitive feasibility study at our Back Forty Project with the goal of commencing commercial production in 2025.
The following discussion summarizes our results of operations for the two fiscal years ended December 31, 2021 and 2020 and our financial condition as of December 31, 2021 and 2020, with a particular emphasis on the year ended December 31, 2021. For discussion regarding the results of operations for the years ended December 31, 2020 and 2019, as well as discussion regarding the financial condition as of December 31, 2020 compared to 2019, please refer to the audited consolidated financial statements for the year ended December 31, 2020 included in the our annual report on Form 10-K filed with the SEC on February 24, 2021. On December 31, 2020, we spun-off our wholly-owned subsidiary, Fortitude Gold Corporation, which held a Nevada Mining Unit. We presented the operating results and cash flows of the Nevada Mining Unit reportable segment within discontinued operations in the prior periods. See Note 21, Discontinued Operations, in the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information.
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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COVID-19 Pandemic
We continue to protect the health and safety of our employees, contractors, and communities, by taking 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 with the benefit of technology, we are able to maintain our operations and internal controls over financial reporting and disclosures.
On August 18, 2021, we announced the temporary suspension of activities at the Don David Gold Mine in response to a spike in COVID-19 cases at our mine and surrounding communities. The suspension lasted twelve days and by September 7, 2021, we had significantly ramped back up operations under further enhanced COVID-19 protocols. We incurred incremental COVID-19 specific costs of $0.2 million during 2021 for activities such as additional health and safety procedures, increased transportation, and community contributions. We are working with local authorities to improve the availability of vaccines to our employees and host communities.
As of the date of the issuance of these audited Consolidated Financial Statements, there have been no other significant impacts, including impairments, to our operations and financial statements. However, the long-term impact of the COVID-19 outbreak on our results of operations, financial position, and cash flows will depend on future developments, including the duration and spread of the outbreak and related advisories and restrictions. These developments and the impact of COVID-19 on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, our results of operations, financial position, and cash flows may be materially adversely affected. We are not able to estimate the duration of the pandemic and potential impact on its business if disruptions or delays in business developments and shipments of product occur. In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including a decreased ability to raise additional capital when and if needed on acceptable terms, if at all. As the situation continues to evolve, we will continue to closely monitor market conditions and respond accordingly. We have completed various scenario planning analyses to consider the potential impacts of COVID-19 on its business, including volatility in commodity prices, temporary disruptions, and curtailments of operating activities (voluntary or involuntary). We believe that current working capital balances will be sufficient for the foreseeable future, although there is no assurance that will be the case.
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Results of Operations
Don David Gold Mine
Mine activities during 2021 included development and ore extraction from the Arista mine. The following table summarizes certain production statistics about our Don David Gold Mine for the periods indicated:
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| | For the three months ended December 31, | | For the year ended December 31, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Arista Mine | | | | | | | | | | | | |
Milled | | | | | | | | | | | | |
Tonnes Milled | | | 135,398 | | | 133,353 | | | 486,970 | | | 506,747 |
Grade | | | | | | | | | | | | |
Average Gold Grade (g/t) | | | 1.93 | | | 1.81 | | | 2.01 | | | 1.47 |
Average Silver Grade (g/t) | | | 82 | | | 66 | | | 82 | | | 74 |
Average Copper Grade (%) | | | 0.38 | | | 0.40 | | | 0.39 | | | 0.39 |
Average Lead Grade (%) | | | 2.17 | | | 1.93 | | | 1.93 | | | 1.92 |
Average Zinc Grade (%) | | | 4.77 | | | 4.93 | | | 4.36 | | | 4.87 |
Open Pit Mine | | | | | | | | | | | | |
Milled | | | | | | | | | | | | |
Tonnes Milled | | | - | | | 16,409 | | | 15,008 | | | 51,149 |
Grade | | | | | | | | | | | | |
Average Gold Grade (g/t) | | | - | | | 1.61 | | | 1.88 | | | 1.41 |
Average Silver Grade (g/t) | | | - | | | 31 | | | 33 | | | 35 |
Alta Gracia Mine | | | | | | | | | | | | |
Milled | | | | | | | | | | | | |
Tonnes Milled | | | - | | | - | | | - | | | 7,450 |
Grade | | | | | | | | | | | | |
Average Gold Grade (g/t) | | | - | | | - | | | - | | | 0.91 |
Average Silver Grade (g/t) | | | - | | | - | | | - | | | 130 |
Combined | | | | | | | | | | | | |
Tonnes Milled | | | 135,398 | | | 149,762 | | | 501,978 | | | 565,346 |
Tonnes Milled per Day (1) | | | 1,559 | | | 1,702 | | | 1,512 | | | 1,829 |
Metal production (before payable metal deductions) (2) | | | | | | | | | | | | |
Gold (ozs.) | | | 6,853 | | | 6,854 | | | 26,438 | | | 20,473 |
Silver (ozs.) | | | 330,873 | | | 276,902 | | | 1,200,291 | | | 1,189,366 |
Copper (tonnes) | | | 413 | | | 431 | | | 1,506 | | | 1,593 |
Lead (tonnes) | | | 2,345 | | | 1,914 | | | 7,544 | | | 7,725 |
Zinc (tonnes) | | | 5,349 | | | 5,310 | | | 17,329 | | | 19,696 |
(1) | Based on actual days the |
(2) | The
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2021 compared to 2020
For the year ended December 31, 2021, the Oaxaca operations produced 26,438 gold ounces and 1,200,291 silver ounces. These production results reflect an increase of 29% and 1%, respectively, from the same period in 2020. For the three months ended December 31, 2021, production totaled 6,853 gold ounces and 330,873 silver ounces. While gold production was the same period over period, silver production increased by 19% from the same period in 2020. Production increases are directly related to the increase in gold and silver grades in 2021.
Production Volumes
During the three and twelve months ended December 31, 2021, we processed ore at a rate of 1,559 and 1,512 ore tonnes per day, respectively, as compared to 1,702 and 1,829 ore tonnes per day for the same periods in 2020. Tonnes milled were 10% and 11% lower for the three and twelve months ended December 31, 2021, respectively, as compared to the same periods in 2020. The lower production rates were a result of ground support challenges throughout the year and a twelve-day voluntary suspension of the operations in the third quarter of 2021 due to a spike in COVID-19 cases. The operations team has responded to ground support challenges through mine sequencing and taken measures to ensure the safety of our employees.
Grades & Recoveries
During the three and twelve months ended December 31, 2021, we processed ore with an average gold grade of 1.93 g/t and 2.01 g/t, respectively, as compared to 1.81 g/t and 1.47 g/t for the same periods in 2020. Likewise, during both the three and twelve months ended December 31, 2021, we processed ore with an average silver grade of 82 g/t, as compared to 66 g/t and 74 g/t, respectively, for the same periods in 2020. Full-year average gold grade was approximately 37% higher than the prior year, and the full-year average silver grade was 11% higher than the prior year, as a result of mining more ore from the Arista high-grade narrow veins. Additionally, overall recoveries for gold in 2021 improved by 5% due to process improvement initiatives.
Our base metals average grades during the three months ended December 31, 2021 were 0.38% for copper, 2.17% for lead, and 4.77% for zinc, compared to 0.40% for copper, 1.93% for lead, and 4.93% for zinc, for the same period in 2020. The average grades for our base metals for the twelve months ended December 31, 2021 were 0.39% for copper, 1.93% for lead, and 4.36% for zinc, compared to 0.39% for copper, 1.92% for lead, and 4.87% for zinc in 2020. Overall copper and lead grades and recoveries during the three and twelve months ended December 31, 2021, were in line with the same period in 2021. While zinc grades were 3% and 10% lower during the three and twelve months ended December 31, 2021, the zinc recoveries were slightly higher (approximately 2%) than the same period in 2021.
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The following table summarizes certain financial data of the Company for the periods indicated:
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| | For the three months ended December 31, | | For the year ended December 31, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
| | (in thousands) | | (in thousands) | ||||||||
Doré and concentrate sales | | $ | 40,492 | | $ | 35,650 | | $ | 135,679 | | $ | 111,879 |
Less: Treatment and refining charges | | | (3,275) | | | (5,998) | | | (11,485) | | | (21,140) |
Realized/unrealized derivatives, net | | | 846 | | | (65) | | | 1,002 | | | (47) |
Sales, net | | | 38,063 | | | 29,587 | | | 125,196 | | | 90,692 |
Total mine cost of sales | | | 25,016 | | | 21,693 | | | 88,449 | | | 78,205 |
Mine gross profit | | | 13,047 | | | 7,894 | | | 36,747 | | | 12,487 |
Other costs and expenses, including tax: | | | 10,358 | | | 11,013 | | | 28,719 | | | 18,818 |
Net income (loss) from continuing operations | | | 2,689 | | | (3,119) | | | 8,028 | | | (6,331) |
Net income from discontinued operations, net of income taxes | | | - | | | 7,410 | | | - | | | 10,690 |
Net income | | $ | 2,689 | | $ | 4,291 | | $ | 8,028 | | $ | 4,359 |
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Total cash cost after co-product credits per AuEq oz sold | | $ | 73 | | $ | 647 | | $ | 414 | | $ | 784 |
Total all-in sustaining cost after co-product credits per AuEq oz sold | | $ | 451 | | $ | 1,357 | | $ | 922 | | $ | 1,338 |
Total all-in cost after co-product credits per AuEq oz sold | | $ | 845 | | $ | 1,781 | | $ | 1,300 | | $ | 1,634 |
Sales
DDGM net sales of $125.2 million for the year ended December 31, 2021 increased by $34.5 million, or 38%, when compared to 2020. The increase in 2021 sales is the result of increased gold sales volumes, higher silver and base metal prices, and lower treatment charges. Gold ounces sold in 2021 increased over 2020 by 5,177 ounces or 30%. Silver and base metal volumes decreased as follows: silver by 5%, copper by 5%, lead by 9%, and zinc by 14%. These decreases were offset by higher average realized prices as follows: silver 19%, copper 51%, lead 26%, and zinc 37%. Concentrate treatment charges, which are net against concentrate sales, deceased by 46%.
Treatment Charges
Treatment charges for the twelve months ended December 31, 2021 were $11.5 million, or $548 per tonne of base metal produced and sold, as compared to $21.1 million, or $885 per produced and sold base metal tonne for the same period in 2020. This 38% decrease in the per base metal tonne sold was expected as a result of the negotiations of new treatment charge agreements for 2021. The decrease is largely dependent on the spot treatment charge market for zinc, which can be volatile.
Operating Costs
Total Mine Cost of Sales of $88.4 million increased $10.2 million or 13%, compared to 2020. The primary driver is related to the $11.6 million, or 19%, increase in production costs from $60.6 million in 2020 to $72.2 million in 2021, offset by a $1.4 million, or 8%, decrease in depreciation expense. The increase in production costs is mostly related to a $8.7 million increase in consumable goods caused by a 14% price increase in materials used in the operations, a $2.9 million increase in energy costs due to higher consumption, a $2.8 million increased spend on contractors, a $2.8 million impact related to the Mexico Labor Reform for long-term employee obligations ($0.9 million) and profit sharing ($1.9 million), offset by a $6.3 million decrease due to lower tonnes processed through the mill.
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Mine Gross Profit
For the year ended December 31, 2021, mine gross profit and mine gross profit percent totaled $36.7 million and 29%, as compared to $12.5 million and 14% for the same period in 2020. The increase in mine gross profit and mine gross profit percent during 2021 primarily resulted from higher sales, offset by higher operating costs discussed above.
Net income (loss) from continuing operations.
For the year ended December 31, 2021, we recorded net income from continuing operations of $8.0 million, as compared to a net loss from continuing operations of $6.3 million during the same period in 2020. The change was attributable to the factors noted above.
Net income from discontinued operations.
For the year ended December 31, 2021, net income from discontinued operations was nil. We recorded net income from discontinued operations of $10.7 million during the same period in 2020.
Net income.
For the year ended December 31, 2021, we recorded net income of $8.0 million, as compared to net income of $4.4 million during the same period in 2020. The change was attributable to the factors noted above.
The following table summarizes certain sales statistics about the Don David Gold Mine operations for the periods indicated:
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| | For the three months ended December 31, | | For the year ended December 31, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Metal sold | | | | | | | | | | | | |
Gold (ozs.) | | | 6,119 | | | 6,314 | | | 22,644 | | | 17,467 |
Silver (ozs.) | | | 287,805 | | | 255,945 | | | 1,066,581 | | | 1,118,032 |
Copper (tonnes) | | | 405 | | | 398 | | | 1,420 | | | 1,488 |
Lead (tonnes) | | | 2,059 | | | 1,755 | | | 5,999 | | | 6,582 |
Zinc (tonnes) | | | 4,167 | | | 4,281 | | | 13,553 | | | 15,815 |
Average metal prices realized (1) | | | | | | | | | | | | |
Gold ($ per oz.) | | | 1,811 | | | 1,867 | | | 1,796 | | | 1,803 |
Silver ($ per oz.) | | | 23.51 | | | 24.18 | | | 25.06 | | | 21.03 |
Copper ($ per tonne) | | | 9,768 | | | 7,360 | | | 9,553 | | | 6,330 |
Lead ($ per tonne) | | | 2,339 | | | 1,870 | | | 2,268 | | | 1,803 |
Zinc ($ per tonne) | | | 3,466 | | | 2,650 | | | 3,091 | | | 2,259 |
Precious metal gold equivalent ounces sold | | | | | | | | | | | | |
Gold Ounces | | | 6,119 | | | 6,314 | | | 22,644 | | | 17,467 |
Gold Equivalent Ounces from Silver | | | 3,736 | | | 3,315 | | | 14,882 | | | 13,041 |
Total AuEq oz | | | 9,855 | | | 9,629 | | | 37,526 | | | 30,508 |
(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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Other Costs and Expenses, Including Taxes
| | | | | | | | | | | | | |
| | For the three months ended December 31, | | For the year ended December 31, | | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 |
| ||||
| | (in thousands) | | (in thousands) | | ||||||||
Other costs and expenses: | | | | | | | | | | | | | |
General and administrative expenses | | | 830 | | | 2,441 | | | 6,900 | | | 8,402 | |
Exploration expenses | | | 1,226 | | | 353 | | | 4,886 | | | 2,485 | |
Restructuring expenses | | | 1,927 | | | 1,316 | | | 2,423 | | | 1,316 | |
Stock-based compensation | | | 164 | | | 1,055 | | | 875 | | | 2,230 | |
Realized and unrealized loss on zinc zero cost collar | | | 2,816 | | | - | | | 3,000 | | | - | |
Other (income) expense, net | | | 477 | | | (145) | | | 1,020 | | | (1,188) | |
Total other costs and expenses | | | 7,440 | | | 5,020 | | | 19,104 | | | 13,245 | |
Provision for income taxes | | | 2,918 | | | 5,993 | | | 9,615 | | | 5,573 | |
Total other costs, including taxes | | $ | 10,358 | | $ | 11,013 | | $ | 28,719 | | $ | 18,818 | |
As noted above, we have reflected the results of operations of the Nevada Mining Unit as discontinued operations for the three and twelve months ended December 31, 2020, and therefore, have not included such operations in the discussion below.
General and administrative expenses. For the year ended December 31, 2021, general and administrative expenses totaled $6.9 million compared to $8.4 million for the same period of 2020. The $1.5 million decrease in 2021, compared to 2020 is directly related to the lower administrative costs as a result of the spin-off of Fortitude Gold Corporation.
Exploration expenses. For the year ended December 31, 2021, property exploration expenses totaled $4.9 million as compared to $2.5 million for the same period of 2020, which demonstrated GRC’s commitment to expand the DDGM operations and invest in Mexico.
Restructuring expenses. Restructuring expenses of $2.4 million were incurred during the year ended December 31, 2021 for employee severance compensation related to the spin-off of Fortitude Gold Corporation in the first quarter of 2021, and change of control payments related to the Aquila Transaction in December 2021.
Stock-based compensation. For the year ended December 31, 2021, stock-based compensation expense totaled $0.9 as compared to $2.2 million for the same period of 2020. The higher 2020 costs are the result of additional expense recognized related to the spin-off of Fortitude Gold Corporation.
Other expense, net. For the year ended December 31, 2021, we recorded other expense of $4.0 million compared to other income of $1.2 million during the same period of 2020. The $5.2 million change from 2020 was due to the $3.0 million realized and unrealized losses on the zinc zero cost collars, $0.9 million related to long-term employee obligations as a result of the Mexico Employment Reform, and $0.4 million foreign currency losses due to volatility in the Mexican Peso. 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, 2021, income tax expense increased to $9.4 million from $5.6 million from the same period in 2020. The 2021 income tax expense is primarily driven by the increase in net income at DDGM. Please see Note 6inItem 8. Financial Statements and Supplementary Data for additional information.
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2021 Capital and Exploration Investment Summary
| | | | | | |
| | For the year ended December 31, 2021 | | 2021 full year guidance | ||
| | (in thousands) | ||||
Sustaining Investments: | | | | | | |
Underground Development | Capital | $ | 4,935 | | $ | 5,000 |
Infill Drilling | Capital | | 1,959 | | | 1,600 |
Other Sustaining Capital | Capital | | 4,413 | | | 4,100 |
Growth Investments: | | | | | | |
Surface Exploration Expense | Exploration | | 3,983 | | | 3,000 |
Underground Exploration Drilling | Exploration | | 903 | | | 1,000 |
Surface Exploration & Other | Capital | | 1,931 | | | 1,600 |
Gold Regrind | Capital | | 1,025 | | | 700 |
Dry Stack Completion | Capital | | 6,347 | | | 6,200 |
Total | | $ | 25,496 | | $ | 23,200 |
Gold Regrind Project:Metallurgical testing, full-scale design, and engineering of the zinc tailings regrind circuit was completed through the second quarter of 2021. In the third quarter of 2021, work began to repurpose the existing ball mill and refurbish flotation cells. New flotation cells are expected to be delivered later in the first quarter of 2022. Regrinding of the zinc tailings has already resulted in an increase in gold recoveries in the fourth quarter of 2021 and is expected to increase gold recovery by 6% to 10% overall. The reground material will be leached to produce doré bars. Completion and commissioning are expected in the first quarter of 2022. As of December 31, 2021, $1.0 million has been invested in this project with another $1.2 million expected before completion.
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Dry Stack Tailings Project:Construction and commissioning of the filtration plant and dry stack tailings project is complete. The dry stacked tailings will accelerate reclamation of certain areas of the open pit mine, extend the life of the existing tailings and storage facilities, and significantly reduce water consumption as approximately 80% of the process water will be available for reuse. As of December 31, 2021, $14 million has been invested in this project.
|
Dry Stack Tailings Filtration Plant and |
Underground and Exploration Development: Mine development during the quarter included ramps and accesses to various areas of the Arista and Switchback vein systems and exploration development drifts. A total of 2,501 meters of underground development and exploration development, at a cost of $4.9 million, was completed during the year, including access to new exploration drill stations on level 17.
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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 co-product credits per ounce, total cash cost after co-product credits per ounce, and total all-in sustaining cost per ounce (“AISC”). Because the non-GAAP performance measures do not have any standardized meaning prescribed by U.S. GAAP, they may not be comparable to similar measures presented by other companies. Accordingly, these measures should not be considered in isolation, or as a substitute for, measures of performance prepared in accordance with U.S. GAAP. These non-GAAP measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP.
For financial reporting purposes, we report the sale of base metals as part of our revenue. Revenue generated from the sale of base metals in our concentrates is considered a co-product of our gold and silver production for the purpose of our total cash cost after co-product credits for our Don David Gold Mine. We periodically review our revenues to ensure that our reporting of primary products and co-products remains appropriate. Because we consider copper, lead, and zinc to be co-products of our precious metal production, the value of these metals continues to be applied as a reduction to total cash costs in our calculation of total cash cost after co-product credits per precious metal gold equivalent ounce sold. Likewise, we believe the identification of copper, lead, and zinc as co-product credits is appropriate 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 co-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 co-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 co-product credits includes total cash cost before co-product credits, less co-product credits (revenues earned from base metals).
AISC includes total cash cost after co-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 co-product credits per ounce, total cash cost after co-product credits per ounce, and AISC are calculated by dividing the relevant costs, as determined using the cost elements noted above, by precious metal gold equivalent ounces sold for the periods presented.
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Reconciliations to U.S. GAAP
The following table summarizes Don David Gold Mine’s total all-in cost after co-product credits per precious metal gold equivalent ounce sold:
| | | | | | | | | | | |
| For the three months ended December 31, | | For the year ended December 31, | ||||||||
| 2021 | | 2020 | | 2021 | | 2020 | ||||
| (in thousands, except per oz) | ||||||||||
Precious metal gold equivalent ounces sold (oz) | | 9,855 | | | 9,629 | | | 37,526 | | | 30,508 |
Total production (1) | $ | 20,252 | | $ | 17,770 | | $ | 72,234 | | $ | 60,626 |
Treatment and refining charges (2) | | 3,275 | | | 5,999 | | | 11,485 | | | 21,140 |
Co-product credits (2) | | (22,812) | | | (17,540) | | | (68,193) | | | (57,850) |
Total cash cost after co-product credits | | 715 | | | 6,229 | | | 15,526 | | | 23,916 |
Total cash cost after co-product credits per AuEq oz sold | $ | 73 | | $ | 647 | | | 414 | | | 784 |
Sustaining - capital expenditure (3) | | 2,739 | | | 3,341 | | | 11,307 | | | 6,280 |
Sustaining - general and administrative, including stock-based compensation expenses | | 994 | | | 3,496 | | | 7,775 | | | 10,632 |
Subtotal of sustaining costs | | 3,733 | | | 6,837 | | | 19,082 | | | 16,912 |
Total all-in sustaining cost after co-product credits | | 4,448 | | | 13,066 | | | 34,608 | | | 40,828 |
Total all-in sustaining cost after co-product credits per AuEq oz sold | $ | 451 | | $ | 1,357 | | | 922 | | | 1,338 |
Non-sustaining cost- capital expenditure (3) | | 2,654 | | | 3,733 | | | 9,303 | | | 6,531 |
Non-sustaining cost- exploration expenditure (1) | | 1,226 | | | 354 | | | 4,886 | | | 2,485 |
Subtotal of non-sustaining costs | | 3,880 | | | 4,087 | | | 14,189 | | | 9,016 |
Total all-in cost after co-product credits | | 8,328 | | | 17,153 | | | 48,797 | | | 49,844 |
Total all-in cost after co-product credits per AuEq oz sold | $ | 845 | | $ | 1,781 | | | 1,300 | | | 1,634 |
(1) | Refer to Item 8. Financial Statements and Supplemental Data: Consolidated Statements of
|
(2) | Refer to Item 8. Financial Statements and Supplemental Data: Note 3. |
(3) | Sum of, |
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Trending Highlights
| | | | | | | | |
| 2020 | | 2021 | |||||
| Q3 | Q4 | | Q1 | Q2 | Q3 | Q4 | Full Year |
Operating Data | ||||||||
Total tonnes milled | 153,531 | 149,762 | | 138,980 | 129,590 | 98,010 | 135,398 | 501,978 |
Average Grade | | | | | | | | |
Gold (g/t) | 1.26 | 1.79 | | 1.68 | 1.93 | 2.68 | 1.93 | 2.01 |
Silver (g/t) | 68 | 59 | | 72 | 77 | 91 | 82 | 80 |
Copper (%) | 0.40 | 0.40 | | 0.43 | 0.36 | 0.37 | 0.38 | 0.39 |
Lead (%) | 1.93 | 1.93 | | 1.70 | 1.63 | 2.29 | 2.17 | 1.93 |
Zinc (%) | 5.02 | 4.93 | | 4.29 | 3.64 | 4.79 | 4.77 | 4.36 |
Metal production (before payable metal deductions) | ||||||||
Gold (ozs.) | 4,728 | 6,854 | | 6,097 | 6,555 | 6,933 | 6,853 | 26,438 |
Silver (ozs.) | 324,592 | 276,902 | | 307,610 | 295,979 | 265,829 | 330,873 | 1,200,291 |
Copper (tonnes) | 428 | 431 | | 441 | 368 | 284 | 413 | 1,506 |
Lead (tonnes) | 2,157 | 1,914 | | 1,737 | 1,654 | 1,808 | 2,345 | 7,544 |
Zinc (tonnes) | 5,538 | 5,310 | | 4,377 | 3,683 | 3,920 | 5,349 | 17,329 |
Metal produced and sold | | | | | | | | |
Gold (ozs.) | 3,619 | 6,314 | | 5,019 | 5,697 | 5,809 | 6,119 | 22,644 |
Silver (ozs.) | 316,993 | 255,945 | | 253,061 | 270,321 | 255,394 | 287,805 | 1,066,581 |
Copper (tonnes) | 447 | 398 | | 382 | 365 | 268 | 405 | 1,420 |
Lead (tonnes) | 1,849 | 1,755 | | 1,176 | 1,214 | 1,550 | 2,059 | 5,999 |
Zinc (tonnes) | 4,586 | 4,281 | | 3,134 | 3,193 | 3,059 | 4,167 | 13,553 |
Average metal prices realized | | | | | | | | |
Gold ($ per oz.) | 1,887 | 1,867 | | 1,787 | 1,822 | 1,762 | 1,811 | 1,796 |
Silver ($ per oz.) | 25.47 | 24.18 | | 26.77 | 26.88 | 23.19 | 23.51 | 25.06 |
Copper ($ per tonne) | 6,711 | 7,360 | | 8,873 | 10,375 | 9,092 | 9,768 | 9,553 |
Lead ($ per tonne) | 1,902 | 1,870 | | 2,082 | 2,162 | 2,397 | 2,339 | 2,268 |
Zinc ($ per tonne) | 2,392 | 2,650 | | 2,797 | 2,945 | 3,032 | 3,466 | 3,091 |
Precious metal gold equivalent ounces sold | | | | | | | | |
Gold Ounces | 3,619 | 6,314 | | 5,019 | 5,697 | 5,809 | 6,119 | 22,644 |
Gold Equivalent Ounces from Silver | 4,279 | 3,315 | | 3,791 | 3,999 | 3,356 | 3,736 | 14,882 |
Total AuEq oz | 7,898 | 9,629 | | 8,810 | 9,696 | 9,165 | 9,855 | 37,526 |
Financial Data ($'s in thousands except for per ounce) | ||||||||
Total sales, net | $ 26,435 | $ 29,587 | | $ 27,268 | $ 30,836 | $ 29,029 | $ 38,063 | $ 125,196 |
Earnings from mining operations before depreciation and amortization | 10,105 | 11,770 | | 11,974 | 11,259 | 11,766 | 17,744 | 52,743 |
Total cash cost after co-product credits per AuEq oz sold | 612 | 647 | | 408 | 713 | 466 | 73 | 414 |
Total all-in sustaining cost after co-product credits per AuEq oz sold | 1,109 | 1,357 | | 937 | 1,280 | 1,031 | 451 | 922 |
Production Costs | 16,286 | 17,770 | | 15,243 | 19,523 | 17,216 | 20,252 | 72,234 |
Production Costs/Tonnes Milled | 106 | 119 | | 110 | 151 | 176 | 150 | 144 |
Earnings before interest, taxes, depreciation and amortization (from continuing operations) | 7,020 | 6,750 | | 8,520 | 7,413 | 7,402 | 10,304 | 33,639 |
Operating Cash Flows | 6,396 | 9,125 | | 6,831 | 9,298 | 5,743 | 12,911 | 34,783 |
Net income (loss) | (251) | (3,119) | | 2,527 | 1,283 | 1,529 | 2,689 | 8,028 |
Earnings per share - basic (from continuing operations) | ($ 0.00) | ($ 0.04) | | $ 0.03 | $ 0.02 | $ 0.02 | $ 0.03 | $ 0.11 |
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Liquidity and Capital Resources
As of December 31, 2021, our working capital was $29.3 million, a decrease of $1.5 million from $30.8 million at December 31, 2020. Our working capital balance at December 31, 2021 reflects an increase in cash, offset by liabilities related to the zinc zero cost collar, Mexico employee profit sharing. Our working capital balance fluctuates as we use cash to fund our operations, financing and investing activities, including exploration, mine development, income taxes, and shareholder dividends. We believe that as a result of our cash balances, the performance of our current and expected operations, and current metals prices, we will be able to meet our obligations and other potential cash requirements during the next 12 months from the date of this report.
Long-term liabilities assumed with the Aquila acquisition, capital requirements to develop the Back Forty Project, and potential project financing may have an impact on liquidity in the long term. These long-term liabilities are contingent upon the Back Forty Project securing project financing and achieving commercial production. We are currently preparing a definitive feasibility study at our Back Forty Project with the goal of commencing commercial production in 2025. Depending on the capital requirements, project financing is currently expected for 2023 or 2024.
Cash and cash equivalents as of December 31, 2021 increased to $33.7 million from $25.4 million as of December 31, 2020, a net increase in cash of $8.3 million. The increase is primarily due to cash from operations which was offset by cash spent on capital and exploration expenditures at DDGM.
Net cash provided by operating activities from continuing operations for the years ended December 31, 2021 and 2020 was $34.8 million and $21.2 million, respectively. The increase is mainly attributable to the increase in net income from continuing operations.
Net cash used in investing activities from continuing operations for the year ended December 31, 2021 was $23.0 million compared to $8.0 million during the same period in 2020. The increase in investing activities is primarily attributable to more mine development in 2021 at our Don David Gold Mine and the investment in Aquila acquisition.
Net cash used in financing activities from continuing operations for the year ended December 31, 2021 was a net outflow of $3.1 million compared to a net outflow of $5.2 million in 2020.
Off-Balance Sheet Arrangements
As of December 31, 2021, 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.
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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. Gold demand arises primarily from investment and consumer demand. Silver demand arises from investment demand, particularly in exchange-traded funds, industrial demand, and consumer demand. Investment demand for gold and silver 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.
Mineral Resources and Mineral Reserves
Critical estimates are inherent in the process of determining our Mineral Resources and Mineral Reserves. Our Mineral Resources and Mineral 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 based on a five-year street consensus as provided by the Bank of Montreal. Our assessment of Mineral Resources and Mineral Reserves occurs at least annually. Mineral Reserves are a key component in the valuation of our property, equipment and mine development and related depreciation rates.
Mineral 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. Mineral Resources and Mineral Reserves are also key components 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. Mineral Resources and Mineral 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.
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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. The Company’s estimates for Mineral Reserves is used in determining our UOP rates. The Company’s 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.
Other assumptions include future operating and capital costs, metal recoveries, production levels, commodity prices, Mineral Resource and Mineral 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 Mineral Resources and Mineral Reserves, commodity prices
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(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
The Company accounts 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, restricted stock units (“RSUs”), and deferred share units (“DSUs”) to be measured based on the grant date fair value of the awards. 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 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 Mineral Resource and Mineral Reserves, interest rates, federal and local legislation,
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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.
Effective May 18, 2021, the Company entered into a Trading Agreement with Auramet International LLC that govern non-exchange traded, over-the-counter, spot, forward, and option transactions on both a deliverable and non-deliverable basis involving various metals and currencies. Subsequently the Company entered into zinc zero cost collars. These derivatives are not designated as hedges. The zero cost collars are used to manage the Company’s near-term exposure to cash flow variability from zinc price risks. We do not currently use financial instruments with respect to any of the other base metal production.
In addition to materially adversely affecting our reserve estimates, results of operations and/or our financial condition, declining gold and silver prices could require a reassessment of the feasibility of a project. Even if a project is ultimately determined to be economically viable, the need to conduct such a reassessment may cause delays in the implementation of a project.
Foreign Currency Risk
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 60% 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
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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.
As of December 31, 2021, we held 4.9 million Mexican Pesos ($0.2 million) and 0.2 million Canadian Dollars ($0.1 million). 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 |
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58
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Gold Resource Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Gold Resource Corporation (the “Company”) as of December 31, 2021 and 2020 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, 2021, 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 financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”) and our report dated March 10, 2022 expressed an adverse opinion.
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 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. 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. We believe that our audits provide a reasonable basis for our opinions.
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.
59
Accounting for and Valuation of Asset Acquisition
Critical Audit Matter Description
On December 10, 2021, the Company completed the acquisition of all the issued and outstanding common shares of Aquila Resources Inc. The Company determined that the acquisition should be accounted for as an asset acquisition. Refer to notes 1, 2, 6, 10, and 12 of the consolidated financial statements.
We identified the asset acquisition as a critical audit matter due to the significant judgment and estimation required in management’s determination of the accounting and the related valuation for the gold and silver stream agreements and value ascribed to the acquired land. Additionally, there is significant judgement required from management related to the tax basis of the acquired assets and the related valuation of the deferred tax liability.
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 obtained an
controls over the acquisition |
for the years ended December 31, 2017, 2016 and 2015
(U.S. dollars in thousands)
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| 2017 |
| 2016 |
| 2015 | |||
Cash flows from operating activities: |
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Net income |
| $ | 4,150 |
| $ | 4,387 |
| $ | 3,062 |
Adjustments to reconcile net income to net cash from operating activities: |
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Deferred income taxes |
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| 14,991 |
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| (1,555) |
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| 5,133 |
Depreciation and amortization |
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| 14,998 |
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| 12,588 |
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| 9,097 |
Stock-based compensation |
|
| 1,192 |
|
| 1,240 |
|
| 3,472 |
Other operating adjustments |
|
| 1,285 |
|
| 298 |
|
| 2,874 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (2,254) |
|
| (309) |
|
| 1,095 |
Inventories |
|
| (2,797) |
|
| (738) |
|
| (430) |
Prepaid expenses and other current assets |
|
| (448) |
|
| 793 |
|
| 233 |
Accounts payable and other accrued liabilities |
|
| 1,636 |
|
| (3,579) |
|
| 3,357 |
Mining royalty and income taxes payable/receivable |
|
| 2,887 |
|
| 4,695 |
|
| (7,721) |
Other noncurrent assets |
|
| (7) |
|
| 79 |
|
| (2) |
Net cash provided by operating activities |
|
| 35,633 |
|
| 17,899 |
|
| 20,170 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (25,432) |
|
| (15,140) |
|
| (26,685) |
Proceeds from the sale of equity investments |
|
| - |
|
| 749 |
|
| - |
Other investing activities |
|
| (257) |
|
| (302) |
|
| (55) |
Net cash used in investing activities |
|
| (25,689) |
|
| (14,693) |
|
| (26,740) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options |
|
| - |
|
| 391 |
|
| - |
Dividends paid |
|
| (1,137) |
|
| (1,670) |
|
| (6,502) |
Repayment of loan payable |
|
| (184) |
|
| - |
|
| - |
Repayment of capital leases |
|
| (73) |
|
| (606) |
|
| (1,501) |
Net cash used in financing activities |
|
| (1,394) |
|
| (1,885) |
|
| (8,003) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
| (326) |
|
| 23 |
|
| (146) |
Net increase (decrease) in cash and cash equivalents |
|
| 8,224 |
|
| 1,344 |
|
| (14,719) |
Cash and cash equivalents at beginning of period |
|
| 14,166 |
|
| 12,822 |
|
| 27,541 |
Cash and cash equivalents at end of period |
| $ | 22,390 |
| $ | 14,166 |
| $ | 12,822 |
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information |
|
|
|
|
|
|
|
|
|
Interest expense paid |
| $ | 65 |
| $ | 13 |
| $ | 78 |
Income and mining taxes paid |
| $ | 3,102 |
| $ | 256 |
| $ | 9,514 |
Non-cash investing activities: |
|
|
|
|
|
|
|
|
|
Increase (decrease) in accrued capital expenditures |
| $ | 1,041 |
| $ | (2,868) |
| $ | 1,358 |
Equipment purchased through loan payable |
| $ | 2,397 |
| $ | - |
| $ | - |
Equipment purchased under capital leases |
| $ | 1,686 |
| $ | 300 |
| $ | - |
Common stock issued for the acquisition of mineral rights |
| $ | 1,300 |
| $ | 13,910 |
| $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
55
GOLD RESOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
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 performs exploration and evaluation work on our portfolio of precious metal exploration properties in Nevada, United States of America (“Nevada Mining Unit”) and continues to evaluate other properties for possible acquisition.
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. 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
● | We evaluated the Company’s
|
● | We evaluated the Company’s use of |
● | We involved our valuation specialists to assist in evaluating the |
● | We involved our real estate valuation specialist to assist in testing the significant assumptions used to value the acquired land |
● | We performed sensitivity analysis around the significant assumptions used in the valuation of |
● | We involved our tax specialists to assist in auditing the historical tax basis of the properties acquired as well as testing the key assumptions used in the valuation of the deferred tax liability |
/s/ Plante & Moran, PLLC
We have served as the Company’s auditor since 2016.
Denver, Colorado
March 10, 2022
60
GOLD RESOURCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share and per share amounts)
| | | | | | |
| | As of | | As of | ||
| | December 31, | | December 31, | ||
| Note | 2021 | | 2020 | ||
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 33,712 | | $ | 25,405 |
Gold and silver rounds | 4 | | 589 | | | 671 |
Accounts receivable, net | | | 8,672 | | | 4,226 |
Inventories, net | 5 | | 10,361 | | | 9,995 |
Promissory Note | 20 | | 3,885 | | | - |
Prepaid expenses and other current assets | 7 | | 1,696 | | | 2,576 |
Total current assets | | | 58,915 | | | 42,873 |
Property, plant and mine development, net | 8 | | 156,771 | | | 62,511 |
Deferred tax assets, net | 6 | | - | | | 309 |
Other non-current assets | | | 76 | | | 41 |
Total assets | | $ | 215,762 | | $ | 105,734 |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 13,308 | | $ | 8,782 |
Income taxes payable, net | | | 6,801 | | | 73 |
Mining royalty taxes payable, net | | | 2,975 | | | 955 |
Accrued expenses and other current liabilities | 9 | | 6,575 | | | 2,275 |
Total current liabilities | | | 29,659 | | | 12,085 |
Reclamation and remediation liabilities | 11 | | 3,112 | | | 3,098 |
Gold and silver stream agreements | 10 | | 42,560 | | | - |
Deferred tax liabilities, net | 6 | | 13,126 | | | - |
Contingent consideration | 12 | | 4,603 | | | |
Other non-current liabilities | 9 | | 1,952 | | | 13 |
Total liabilities | | | 95,012 | | | 15,196 |
Shareholders' equity: | | | | | | |
Common stock - $0.001 par value, 200,000,000 shares authorized: | | | | | | |
88,338,774 and 74,376,958 shares outstanding at December 31, 2021 and December 31, 2020, respectively | | | 89 | | | 75 |
Additional paid-in capital | | | 110,153 | | | 84,865 |
Retained earnings | | | 17,563 | | | 12,653 |
Treasury stock at cost, 336,398 shares | | | (5,884) | | | (5,884) |
Accumulated other comprehensive loss | | | (1,171) | | | (1,171) |
Total shareholders' equity | | | 120,750 | | | 90,538 |
Total liabilities and shareholders' equity | | $ | 215,762 | | $ | 105,734 |
The accompanying notes are an integral part of these consolidated financial statements.
61
GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2021, 2020 and 2019
(U.S. dollars in thousands, except share and per share amounts)
| | | | | | | | | | |
| | | For the year ended | |||||||
| | | December 31, | |||||||
| Note | | 2021 | | 2020 | | 2019 | |||
Sales, net | 3 | | $ | 125,196 | | $ | 90,692 | | $ | 120,301 |
Mine cost of sales: | | | | | | | | | | |
Production costs | | | | 72,234 | | | 60,626 | | | 72,056 |
Depreciation and amortization | | | | 15,996 | | | 17,413 | | | 19,549 |
Reclamation and remediation | | | | 219 | | | 166 | | | 64 |
Total mine cost of sales | | | | 88,449 | | | 78,205 | | | 91,669 |
Mine gross profit | | | | 36,747 | | | 12,487 | | | 28,632 |
Costs and expenses: | | | | | | | | | | |
General and administrative expenses | | | | 6,900 | | | 8,402 | | | 8,017 |
Exploration expenses | | | | 4,886 | | | 2,485 | | | 2,720 |
Restructuring expenses | | | | 2,423 | | | 1,316 | | | - |
Stock-based compensation | 16 | | | 875 | | | 2,230 | | | 1,932 |
Realized and unrealized loss on zinc zero cost collar | 17 | | | 3,000 | | | - | | | - |
Other expense (income), net | 18 | | | 1,020 | | | (1,188) | | | 464 |
Total costs and expenses | | | | 19,104 | | | 13,245 | | | 13,133 |
Income (loss) before income taxes | | | | 17,643 | | | (758) | | | 15,499 |
Provision for income taxes | | | | 9,615 | | | 5,573 | | | 9,967 |
Net income (loss) from continuing operations | | | | 8,028 | | | (6,331) | | | 5,532 |
Net income from discontinued operations, net of income taxes | 21 | | | - | | | 10,690 | | | 300 |
Net income | | | $ | 8,028 | | $ | 4,359 | | $ | 5,832 |
Net income per common share: | | | | | | | | | | |
Basic and diluted net income (loss) per common share from continuing operations | 19 | | | 0.11 | | | (0.09) | | | 0.09 |
Basic and diluted net income per common share from discontinued operations | 19 | | | - | | | 0.15 | | | - |
Basic and diluted net income per common share | 19 | | $ | 0.11 | | $ | 0.06 | | $ | 0.09 |
| | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | |
Basic | 19 | | | 75,301,253 | | | 69,902,708 | | | 63,681,156 |
Diluted | 19 | | | 75,608,627 | | | 70,686,243 | | | 64,032,990 |
The accompanying notes are an integral part of these consolidated financial statements.
62
GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 2021, 2020 and 2019
(U.S. dollars in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | Number of | | Par Value of | | Additional Paid- | | Retained | | Treasury | | Accumulated | | Total | ||||||
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 |
Stock-based compensation | | - | | | - | | | 3,039 | | | - | | | - | | | - | | | 3,039 |
Common stock issued for vested restricted stock units | | 238,062 | | | 1 | | | - | | | - | | | - | | | - | | | 1 |
Dividends declared | | - | | | - | | | - | | | (2,819) | | | - | | | - | | | (2,819) |
Spin-off of Fortitude Gold Corporation | | - | | | - | | | (92,232) | | | (5,763) | | | - | | | - | | | (97,995) |
Issuance of stock, net of issuance costs | | 8,447,369 | | | 8 | | | 25,887 | | | - | | | - | | | - | | | 25,895 |
Net income | | - | | | - | | | - | | | 4,359 | | | - | | | - | | | 4,359 |
Balance, December 31, 2020 | | 74,713,356 | | $ | 75 | | $ | 84,865 | | $ | 12,653 | | $ | (5,884) | | $ | (1,171) | | $ | 90,538 |
Stock-based compensation | | - | | | - | | | 671 | | | - | | | - | | | - | | | 671 |
Net stock options exercised | | 237,719 | | | - | | | 288 | | | - | | | - | | | - | | | 288 |
Common stock issued for vested restricted stock units | | 75,262 | | | - | | | - | | | - | | | - | | | - | | | - |
Dividends declared | | - | | | - | | | - | | | (3,118) | | | - | | | - | | | (3,118) |
Issuance of stock, net of issuance costs | | 13,714,630 | | | 14 | | | 24,536 | | | - | | | - | | | - | | | 24,550 |
Surrender of stock for taxes due on vesting | | (65,795) | | | - | | | (207) | | | - | | | - | | | - | | | (207) |
Net income | | - | | | - | | | - | | | 8,028 | | | - | | | - | | | 8,028 |
Balance, December 31, 2021 | | 88,675,172 | | $ | 89 | | $ | 110,153 | | $ | 17,563 | | $ | (5,884) | | $ | (1,171) | | $ | 120,750 |
The accompanying notes are an integral part of these consolidated financial statements.
63
GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2021, 2020 and 2019
(U.S. dollars in thousands)
| | | | | | | | | |
| | For the year ended December 31, | |||||||
| Note | 2021 | | 2020 | | 2019 | |||
Cash flows from operating activities: | | | | | | | | | |
Net income | | $ | 8,028 | | $ | 4,359 | | $ | 5,832 |
Net income from discontinued operations | | | - | | | 10,690 | | | 300 |
Net income (loss) from continuing operations | | $ | 8,028 | | $ | (6,331) | | $ | 5,532 |
Adjustments to reconcile net income from continuing operations to net cash from operating activities: | | | | | | | | | |
Deferred income tax (benefit) expense | | | (2,216) | | | 3,508 | | | 3,857 |
Depreciation and amortization | | | 16,147 | | | 17,601 | | | 19,917 |
Stock-based compensation | | | 877 | | | 2,230 | | | 1,932 |
Other operating adjustments | 22 | | 2,709 | | | (404) | | | 305 |
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | | | (4,446) | | | 4,136 | | | (6,618) |
Inventories | | | (708) | | | 1,036 | | | (1,976) |
Prepaid expenses and other current assets | | | (267) | | | (405) | | | 1,097 |
Other noncurrent assets | | | (8) | | | 4 | | | (3) |
Accounts payable and other accrued liabilities | | | 5,930 | | | (588) | | | 175 |
Mining royalty and income taxes payable, net | | | 8,737 | | | 426 | |
| (106) |
Net cash provided by operating activities from continuing operations | | | 34,783 | | | 21,213 | | | 24,112 |
| | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | |
Capital expenditures | | | (20,610) | | | (12,811) | | | (16,936) |
Cash acquisition costs, net of cash acquired | | | (2,363) | | | - | | | - |
Proceeds from the sale of gold and silver rounds | | | - | | | 4,846 | | | 2 |
Net cash used in investing activities from continuing operations | | | (22,973) | | | (7,965) | | | (16,934) |
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | |
Proceeds from the exercise of stock options | | | 300 | | | - | | | 98 |
Proceeds from issuance of stock | | | - | | | 25,795 | | | 24,449 |
Dividends paid | | | (3,366) | | | (2,790) | | | (1,491) |
Cash related to the spin-off | | | - | | | (27,774) | | | - |
Other financing activities | | | 3 | | | - | | | - |
Other financing activities from discontinued operations | | | - | | | (452) | | | (2,019) |
Net cash (used in) provided by financing activities | | | (3,063) | | | (5,221) | | | 21,037 |
Effect of exchange rate changes on cash and cash equivalents | | | (440) | | | (528) | |
| (455) |
| | | | | | | | | |
Cash flows from discontinued operations: | | | | | | | | | |
Net cash provided by operating activities | | | - | | | 14,184 | | | (2,705) |
Net cash used in investing activities | | | - | | | (6,488) | | | (22,538) |
| | | | | | | | | |
Net increase in cash and cash equivalents | | | 8,307 | | | 15,195 | | | 2,517 |
Cash and cash equivalents of continuing operations at beginning of period | | | 25,405 | | | 10,210 | | | 7,693 |
Cash and cash equivalents of continuing operations at end of period | | $ | 33,712 | | $ | 25,405 | | $ | 10,210 |
| | | | | | | | | |
Supplemental Cash Flow Information Continuing Operations | | | | | | | | | |
Interest expense paid | | $ | - | | $ | 20 | | $ | 18 |
Income and mining taxes paid | | $ | 4,939 | | $ | 2,734 | | $ | 3,743 |
Non-cash investing activities: | | | | | | | | | |
Change in capital expenditures in accounts payable | | $ | 684 | | $ | (643) | | $ | 624 |
Change in estimate for asset retirement costs | | $ | 7 | | $ | 82 | | $ | 443 |
The accompanying notes are an integral part of these consolidated financial statements
64
GOLD RESOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
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 doré containing gold and silver and metal concentrates that contain gold, silver, copper, lead, and zinc in Oaxaca, Mexico.
Acquisition
On December 10, 2021, the Company completed the acquisition of all the issued and outstanding common shares of Aquila Resources Inc. Aquila’s principal asset is its 100% interest in the Back Forty Project located in Menominee County, Michigan, USA. The Back Forty Project has a polymetallic (gold, silver, copper, silver, lead, and zinc) Volcanogenic Massive Sulfide deposit. The Back Forty Project controls surface and mineral rights through ownership, leases with the State of Michigan, and royalties with private parties. The Company considered the appropriate accounting treatment with regards to the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 805 Business Combinations and determined it was appropriate to account for this transaction as an asset acquisition. Please see Note 2 for additional information.
Spin-Off
On December 31, 2020, The Company completed the spin-off of its wholly-owned subsidiary, Fortitude Gold Corporation and its subsidiaries (“FGC” or “Nevada Mining Unit”), into a separate, public company. FGC and its subsidiaries are presented as discontinued operations in the Company’s consolidated financial statements. Please see Note 21 for additional information.
The spin-off was affected by the distribution of all of the outstanding shares of FGC common stock to the Company’s shareholders (the “Distribution”). The Company’s shareholders of record as of the close of business on December 28, 2020 (the “Record Date”) received one share of FGC common stock for every 3.5 shares of the Company’s common stock held as of the Record Date. The Company issued fractional shares of FGC common stock in the Distribution, except in certain instances where fractional shares were not permissible and, in such case, shareholders received cash in lieu of fractional shares. As a result, the Company ceased to have any ownership interest in FGC and its subsidiaries following the spin-off.
Significant Accounting Policies
Basis of Presentation
The consolidated financial statements included herein are expressed in United States dollars and conform to 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., and its newly acquired Aquila subsidiaries (See Exhibit 21.1 for material subsidiaries). Intercompany accounts and transactions have been eliminated in consolidation.
65
Asset Acquisition
The Company considered the appropriate accounting treatment with regards to the Financial Accounting Standards Board’s ASC 805 Business Combinations for all material merger and acquisition transactions as they occur. The facts and circumstances of each transaction are evaluated to determine the appropriate accounting. Please see Note 2 for additional information regarding the accounting for the Aquila Transaction.
Discontinued Operations
The Company presents discontinued operations when there is a disposal of a component group or a group of components that in its judgment represents a strategic shift that will have a major effect on its operations and financial results. The Company aggregates the results of operations for discontinued operations into a single line item in the Consolidated Statements of Operations for all periods presented. General corporate overhead is not allocated to discontinued operations. See Note 20for additional information.
Segment Reporting
The Company has organized its operations into 3 geographic regions. The geographic regions include Oaxaca, Mexico, Michigan, U.S.A. and Corporate and Other. Oaxaca, Mexico represents the Company’s only production stage property. Michigan, U.S.A. is an advanced exploration stage property. The Company’s business activities that are not considered production stage or advanced exploration stage properties are included in Corporate and Other.
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 Resources and Mineral Reserves that are the basis for future cash flow estimates utilized in impairment calculations and units-of-production depreciation calculations; asset and liability valuation related to acquisitions; accounting for asset acquisitions; future metal prices, especially as it relates to zinc zero cost collar; environmental remediation, reclamation and closure obligations; estimates of recoverable gold and other minerals in stockpiles; write-downs of inventory, stockpiles to net realizable value; valuation allowances for deferred tax assets and liabilities; valuation of contingent considerations and gold and silver stream agreements, 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. Starting 2020, the Company showed Stock-based compensation as a separate line item in the Consolidated Statements of Operations. In 2019, Stock-based compensation was included with General and administrative expenses. 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 are highly liquid. Cash held in Mexican Pesos or Canadian Dollars is converted to U.S. Dollars at the closing exchange rate on December 31, 2021.
66
Gold and Silver Rounds
The Company sponsored a physical dividend program which was concluded in 2021. Historically, the Company purchased gold and silver rounds on the open market in order to diversify its treasury and provide an option for shareholders to convert their dividends into rounds. At December 31, 2021, the Company held gold and silver rounds carried at quoted market value prices based on the daily London P.M. fix as of the balance sheet date. The Company considers rounds 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 both December 31, 2021 and 2020, the allowance for doubtful accounts was NaN.
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 and 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.
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.
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 production costs on the Consolidated Statements of Operations.
Promissory Note
The promissory note was acquired in the Aquila Transaction. In October 2021, Aquila sold its Wisconsin assets to Green Light Metals in return for a C$4.9 million ($3.9 million) promissory note. Under the promissory note, Green Light Metals is to pay C$0.9 million cash and deliver C$4.0 million in Green Light Metal shares once Green Light Metals goes public. The cash and shares will be delivered upon completion of Green Light Metals listing on the TSX and the shares are expected to represent approximately 18% of the total outstanding shares of Green Light Metals. Upon maturity on December 31, 2022, the shares of Green Light Metals will be recorded at fair value as available-for-sale securities. Due to the short maturity of the promissory note, the carrying amount approximates the fair value, and likewise, no interest and collateral is required.
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Property, Plant and Mine Development
Land and Mineral Interests: The costs of acquiring land, mineral rights, and mineral interests 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 Mineral 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 recorded as mine development and amortized using UOP. 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 Mineral Reserves.
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 Mineral 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 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. Impairment losses are measured either 1) as the excess of carrying value over the total discounted estimated future cash flows, or 2) by applying an expected fair value technique in the absence of an observable market price; losses 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.
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Existing Mineral Resources and Mineral Reserves 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 from 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, receivables from provisional concentrate sales and accounts payable approximate fair value because of the short maturity of those instruments. The recorded amounts for the zinc zero cost collar are based on the London Metal Exchange forward underlying price over a period from the trade date to the payment date.
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.
Doré sales: Doré sales are recognized upon the satisfaction of performance obligations, which occurs upon delivery of doré and when the price and quantity are agreed with the customer. Doré sales are recorded using quoted metal prices, net of refining charges.
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.
Production Costs
Production costs include labor and benefits, royalties, concentrate and doré shipping costs, mining costs, 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, site support, housing and food, insurance, reagents, travel, medical services, security equipment, office rent, tools and other costs that support mining operations.
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Exploration Costs
Exploration costs are charged to expense as incurred. Costs to identify new Mineral Resources and to evaluate potential Mineral Resources are considered exploration costs. Exploration activities conducted within the defined Mineral Resources are capitalized.
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, RSUs, and DSUs 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. DSUs are earned immediately at grant and expected to be paid out in cash in the future. DSUs are considered liability instruments and marked-to-market each reporting period. 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.
Prior to 2014, the Company had been recognizing only reclamation and remediation obligations and all associated asset retirement costs were written off as the Company had not been reporting its proven and probable Mineral Reserves for its Don David Gold Mine. In 2014, the Company became a production stage company and therefore capitalized asset retirement costs along with the asset retirement obligation. Please see Note 11 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 Sheets until the sale or dissolution of our Mexico subsidiary.
Income and Mining Royalty Taxes
Income and Mining Royalty 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 carryforwards 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 seeNote 6 for additional information.
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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 materially adversely affect operating results.
The Company’s Arista and Alta Gracia mines, which are located in the State of Oaxaca, Mexico, accounted for 100%of the Company’s total net sales from continuing operations for the years ended December 31, 2021, 2020 and 2019, respectively.
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.
2. Aquila Acquisition
On December 10, 2021, the Company completed the Definitive Arrangement Agreement pursuant to which GRC acquired all of the issued and outstanding common shares of Aquila Resources Inc. (the "Acquisition").
Under the terms of the Acquisition, each holder of Aquila common shares (a “Shareholder”) received 0.0399 of GRC common share per Aquila share. Aquila had 343,725,063 issued and outstanding common shares immediately prior to consummation of the Acquisition. GRC issued 13,714,630 shares for a total value of $24.5 million. The value of GRC stock issued as consideration was based upon the closing share price of $1.79 per share on December 10, 2021. The total purchase price consideration of $29.1 million was comprised of the common stock issued at a value of $24.5 million and cash paid for certain transactions costs totaling $4.6 million.
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The Company considered the appropriate accounting treatment with regards to ASC 805 Business Combinations and determined it was appropriate to account for this transaction as an asset acquisition. This determination was made as the Back Forty Project, as a single asset, made up more than 90% of the acquired assets and there were no significant outputs or substantive processes. The following table summarizes the allocation of purchase price to the assets acquired and liabilities assumed as of the date of acquisition (in thousands):
| | |
AQUILA ACQUISITION | | As of December 10, 2021 |
Consideration: | | |
Cash Consideration, including transaction costs | $ | 4,571 |
Stock Consideration (13,714,630 shares at $1.79 per share) | | 24,549 |
Total Consideration: | $ | 29,120 |
| | |
Value of net assets acquired: | | |
Assets: | | |
Cash and cash equivalents | $ | 2,208 |
Accounts receivable | | 142 |
Promissory Note | | 3,885 |
Prepaid expenses | | 29 |
Security deposits | | 27 |
Property, plant and mine development | | 89,579 |
Total Assets | | 95,870 |
Liabilities: | | |
Accounts payable and accrued liabilities | | 3,314 |
Leases payable - current | | 127 |
Exploration reclamation liability | | 611 |
Gold and silver stream agreements | | 42,421 |
Contingent consideration | | 4,603 |
Leases payable - long term | | 205 |
Deferred tax liability | | 15,469 |
Total Liabilities | | 66,750 |
Total net assets: | $ | 29,120 |
The deferred tax liability assumes an Internal Revenue Code Section 338(g) election (“338(g) election”) will not be made to step up the tax basis of the Back Forty Project to the book basis. The Company is currently evaluating certain elections, including the 338(g) election, and post-transaction structuring strategies to optimize the tax impacts of the acquisition. The final determination to implement these elections or strategies may impact the Consolidated Statements of Operations in a future period.
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3. Revenue
The Company derives its revenue from the sale of doré and concentrates. The following table presents the Company’s net sales disaggregated by source:
| | | | | | | | | |
| | For the year ended December 31, | |||||||
| | 2021 | | 2020 | | 2019 | |||
| | (in thousands) | | ||||||
Doré sales, net | | | | | | | | | |
Gold | | $ | 8,120 | | $ | 8,719 | | $ | 6,763 |
Silver | | | 678 | | | 2,774 | | | 2,439 |
Less: Refining charges | | | (136) | | | (233) | | | (171) |
Total doré sales, net | | | 8,662 | | | 11,260 | | | 9,031 |
Concentrate sales | | | | | | | | | |
Gold | | | 32,593 | | | 22,145 | | | 27,184 |
Silver | | | 26,095 | | | 20,391 | | | 21,347 |
Copper | | | 13,495 | | | 9,387 | | | 9,930 |
Lead | | | 13,442 | | | 12,012 | | | 16,116 |
Zinc | | | 41,256 | | | 36,451 | | | 48,804 |
Less: Treatment and refining charges | | | (11,349) | | | (20,907) | | | (13,825) |
Total concentrate sales, net | | | 115,532 | | | 79,479 | | | 109,556 |
Realized gain embedded derivative, net | | | 777 | | | 138 | | | 1,423 |
Unrealized gain (loss) - embedded derivative, net | | | 225 | | | (185) | | | 291 |
Total sales, net | | $ | 125,196 | | $ | 90,692 | | $ | 120,301 |
4. Gold and Silver Rounds
The Company holds gold and silver rounds which were formerly used in its dividend exchange program which was discontinued in 2021. The Company plans to sell the gold and silver rounds on the open market in 2022. During the year ended December 31, 2021, the Company distributed one (1) ounce of gold and thirty-nine (39) ounces of silver for a realized gain of $2 thousand in the dividend exchange program. Additionally, the Company used twelve (12) ounces of gold for employee recognition and one hundred forty-eight (148) ounces of silver rounds for marketing purposes. The realized gain is recorded in other income on a net basis. During the year ended December 31, 2020, the Company sold 1,641 ounces of gold rounds and 67,560 ounces of silver rounds for a realized gain of $1.0 million.
At December 31, 2021 and 2020, the Company’s holdings of rounds, using quoted market prices, consisted of the following:
| | | | | | | | | | | | | | | | |
| | As of December 31, 2021 | | As of December 31, 2020 | ||||||||||||
| | Ounces | | Per Ounce | | Amount | | Ounces | | Per Ounce | | Amount | ||||
| | | | | | | (in thousands) | | | | | | | (in thousands) | ||
Gold | | 176 | | $ | 1,820 | | $ | 320 | | 189 | | $ | 1,888 | | $ | 357 |
Silver | | 11,655 | | $ | 23.09 | | | 269 | | 11,842 | | $ | 26.49 | | | 314 |
Total holdings | | | | | | | $ | 589 | | | | | | | $ | 671 |
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5. Inventories
At December 31, 2021 and 2020, current inventories consisted of the following:
| | | | | | |
| | As of | | As of | ||
| | December 31, | | December 31, | ||
| | 2021 | | 2020 | ||
| | (in thousands) | ||||
Stockpiles - underground mine | | $ | - | | $ | 648 |
Stockpiles - open pit mine | | | - | | | 41 |
Concentrates | | | 2,048 | | | 1,919 |
Doré, net (1) | | | 452 | | | 459 |
Subtotal - product inventories | | | 2,500 | | | 3,067 |
Materials and supplies (2) | | | 7,861 | | | 6,928 |
Total | | $ | 10,361 | | $ | 9,995 |
(1) | Net of reserve of NaN and $368 as of December 31, |
(2) | Net of reserve for |
6. Income Taxes
The Company accounts for income taxes in accordance with the provisions of ASC 740, "Income Taxes" ("ASC 740") on a tax jurisdictional basis. The Company and its U.S. subsidiaries file U.S. tax returns and the Company’s foreign subsidiaries file tax returns in Mexico and in Canada. For financial reporting purposes, net income before income taxes includes the following components:
| | | | | | | | | | |
| | Years Ended December 31, | | |||||||
| | 2021 | | 2020 | | 2019 | | |||
| | (in thousands) | | |||||||
U.S. Operations | | $ | (6,369) | | $ | (7,196) | | $ | (6,338) | |
Foreign Operations | | | 24,012 | | | 6,438 | | | 21,837 | |
Total income before income taxes | | $ | 17,643 | | $ | (758) | | $ | 15,499 | |
The Company's income tax expense from continuing operations consists of the following:
| | | | | | | | | | |
| | Years ended December 31, | | |||||||
| | 2021 | | 2020 | | 2019 | | |||
| | (in thousands) | | |||||||
Current taxes: | | | | |||||||
U.S. Federal | | $ | - | | $ | - | | $ | - | |
U.S. State | | | 305 | | | - | | | - | |
Foreign | | | 11,426 | | | 3,294 | | | 6,210 | |
Total current taxes | | $ | 11,731 | | $ | 3,294 | | $ | 6,210 | |
| | | | | | | | | | |
Deferred taxes: | | | | | | | | | | |
U.S. Federal | | $ | - | | $ | 2,999 | | $ | 1,881 | |
U.S. State | | | - | | | - | | | - | |
Foreign | | | (2,116) | | | (720) | | | 1,876 | |
Total deferred taxes | | $ | (2,116) | | $ | 2,279 | | $ | 3,757 | |
Total income tax provision | | $ | 9,615 | | $ | 5,573 | | $ | 9,967 | |
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The provision for income taxes for the years ended December 31, 2021, 2020 and 2019, 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:
| | | | | | | | | | |
| | For the year ended December 31, | | |||||||
| | 2021 | | 2020 | | 2019 | | |||
| | (in thousands) | | |||||||
Tax at statutory rates | | $ | 3,705 | | $ | (159) | | $ | 3,255 | |
Foreign rate differential | | | 2,095 | | | 558 | | | 1,969 | |
GILTI Inclusion | | | - | | | (886) | | | 2,173 | |
Changes in deferred tax assets | | | (1,189) | | | 3,919 | | | 277 | |
Mexico mining tax | | | 1,590 | | | 280 | | | 1,126 | |
Foreign exchange | | | 535 | | | 866 | | | 255 | |
Stock option expiration | | | 2,471 | | | 449 | | | 361 | |
Mexico withholding tax | | | 679 | | | 192 | | | 374 | |
Deduction for inflation in Mexico | | | (981) | | | (550) | | | (338) | |
U.S. State income tax | | | 585 | | | 127 | | | 139 | |
Other | | | 125 | | | 777 | | | 376 | |
Tax provision | | $ | 9,615 | | $ | 5,573 | | $ | 9,967 | |
The following table sets forth deferred tax assets and liabilities:
| | | | | | | |
| | As of December 31, | | ||||
| | 2021 | | 2020 |
| ||
| | | (in thousands) | | |||
Non-current deferred tax assets: | | | | | | | |
Tax loss carryforward | | $ | 29,496 | | $ | 2,190 | |
Property and equipment | | | 12,092 | | | 10,355 | |
Share-based compensation | | | 1,068 | | | 4,018 | |
Foreign tax credits | | | 4,089 | | | 4,089 | |
Inventory | | | 142 | | | 79 | |
Foreign mining tax | | | 793 | | | 199 | |
Accounts payable | | | 2,708 | | | 912 | |
Employee profit sharing obligation | | | 566 | | | - | |
Zinc derivatives | | | 608 | | | - | |
Other | | | 362 | | | 377 | |
Total deferred tax assets | | | 51,924 | | | 22,219 | |
Valuation allowance | | | (36,933) | | | (10,592) | |
Deferred tax assets after valuation allowance | | $ | 14,991 | | $ | 11,627 | |
Deferred tax liability – Property, plant and mine development | | | (28,117) | | | (11,318) | |
Net deferred tax (liability) asset | | $ | (13,126) | | $ | 309 | |
In accordance with ASC 740, the Company presents deferred tax assets net of its deferred tax liabilities on a tax jurisdictional basis on its Consolidated Balance Sheets. The net deferred tax liability of $13.1 million as of December 31, 2021 is primarily related to the Aquila acquisition. The Company is currently evaluating certain elections and post-transaction structuring strategies to optimize the tax impacts of the acquisition. The final determination to implement these elections or strategies may impact the Consolidated Statements of Operations in a future period.
The Company evaluates the evidence available to determine whether a valuation allowance is required on deferred tax assets. As of December 31, 2021, the Company determined that a valuation allowance of $36.9 million was necessary due to the uncertain utilization of specific deferred tax assets, primarily net operating loss carryforwards, in both U.S. and Canada. $27.5 million of the valuation allowance related to the Aquila acquisition. As of December 31, 2020, the Company determined that a full valuation allowance on the US deferred tax assets was necessary as a result of the spin-off of Fortitude Gold Corporation and its subsidiaries.
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At December 31, 2021, the Company has U.S. federal loss carryforwards of $80.7 million, of which $33.9 million have no expiration date, and $46.8 million that expire at various dates between 2027 and 2037; U.S. Foreign Tax Credits of $4.1 million that expire at various dates between 2023 and 2026; federal capital loss carryforwards of $0.4 million that expire at various dates between 2022 and 2024; state of Colorado tax loss carryforwards of $40.5 million, of which $30.8 million expire at various dates between 2022 and 2037 and $9.8 million that have no expiration; state of Michigan tax loss carryforwards of $51.6 million, of which $24.4 million have no expiration and $27.2 million expire at various dates between 2022 and 2027; and Canadian tax loss carryforwards of $30.8 million that expire between 2026 and 2041.
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 extraction activities performed by concession holders, and (ii) the “extraordinary” mining duty of 0.5% on 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 $0.5 million, $0.2 million, and $0.4 million for years ending December 31, 2021, 2020 and 2019, respectively.
Other Tax Disclosures
The U.S. Treasury Department issued final regulations in July 2020 concerning global intangible low-taxed income, commonly referred to as GILTI tax and introduced by the Tax Act of 2017. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The final tax regulations allow income to be excluded from GILTI tax that are subject to an effective tax rate higher than 90% of the U.S. tax rate. The Company determined that it was not subject to GILTI tax in 2019 due to this high tax exception rule, therefore the Company recorded the reversal of the prior year GILTI tax expense that resulted in $0.9 million tax benefit for the year ended December 31, 2020.
As of both December 31, 2021 and 2020, the Company believes that it has 0 unrecognized tax benefits. If the Company were to determine there was an unrecognized tax benefit, the Company would recognize the liability and related interest and penalties within income tax expense.
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7. Prepaid Expenses and Other Current Assets
At December 31, 2021 and 2020, prepaid expenses and other current assets consisted of the following:
| | | | | | |
| | As of | | As of | ||
| | December 31, | | December 31, | ||
| | 2021 | | 2020 | ||
| | (in thousands) | ||||
Advances to suppliers | | $ | 188 | | $ | 374 |
Prepaid insurance | | | 1,222 | | | 709 |
IVA taxes receivable, net | | | 20 | | | 846 |
Other current assets | | | 266 | | | 647 |
Total | | $ | 1,696 | | $ | 2,576 |
IVA taxes receivable, net is a value added (“IVA”) tax in Mexico assessed on purchases of materials and services and sales of products. Likewise, businesses owe IVA taxes as the business sells a product and collects IVA taxes from its customers. Businesses are generally entitled to recover the taxes they have paid related to purchases of materials and services, either as a refund or credit to IVA tax payable. Amounts recorded as IVA taxes in the consolidated financial statements represent the net estimated IVA tax receivable or payable, since there is a legal right of offset of IVA taxes.
8. Property, Plant and Mine Development, net
At December 31, 2021 and 2020, property, plant and mine development consisted of the following:
| | | | | | |
| | As of | | As of | ||
| | December 31, | | December 31, | ||
| | 2021 | | 2020 | ||
| | (in thousands) | ||||
Asset retirement costs | | $ | 1,065 | | $ | 1,064 |
Construction-in-progress (1) | | | 15,854 | | | 7,158 |
Furniture and office equipment | | | 1,685 | | | 1,839 |
Land | | | 9,230 | | | 230 |
Mineral interest | | | 79,964 | | | - |
Light vehicles and other mobile equipment | | | 2,224 | | | 2,192 |
Machinery and equipment | | | 33,213 | | | 31,227 |
Mill facilities and infrastructure | | | 24,973 | | | 24,407 |
Mine Development | | | 92,138 | | | 83,859 |
Software and licenses | | | 1,592 | | | 1,619 |
Subtotal (2) | | | 261,938 | | | 153,595 |
Accumulated depreciation and amortization | | | (105,167) | | | (91,084) |
Total | | $ | 156,771 | | $ | 62,511 |
Accounting Standards Update 2016-16 – Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). In October 2016, the FASB issued guidance intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by requiring an entity to recognize the income tax consequences when a transfer occurs, instead of when an asset is sold to an outside party. The amendments in this guidance should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is required to adopt this new standard on January 1, 2018, for its fiscal year 2018 and for interim periods within that fiscal year. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued. The Company elected to early adopt this guidance as of January 1, 2017 which resulted in the Company adjusting its deferred tax charge, previously reported in other long-term assets, to nil with the related offset to beginning retained earnings. The net effect was a decrease of $0.5 million to other long-term assets and a corresponding decrease to beginning retained earnings.
Recently Issued Accounting Standards Updates
Accounting Standards Update No. 2014-09—Revenue from Contracts with Customers (Topic 606). On May 28, 2014, the FASB issued guidance that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU was further amended in August 2015, March 2016, April 2016, May 2016 and December 2016 by ASU No. 2015-14, No. 2016-08, No. 2016-10, No. 2016-12 and No. 2016-20, respectively. The guidance provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures about revenue recognition.
The Company has performed an assessment of the revised guidance and the impacts on the Company’s Consolidated Financial Statements and disclosures. The Company has completed the review of all contracts and determined that the adoption of this guidance will not impact the timing or the amounts of revenue recognized based on the Company’s determination of when control is transferred. Currently, revenue is recognized for contracts upon delivery of material to the customer and will not change under the new guidance.
The Company completed its evaluation of variable consideration for concentrate sales
(1) | Primarily related to the |
(2) | Includes capital expenditures in accounts payable and accruals of $1.7 million and $1.0 at December 31, 2021 and 2020, respectively. |
The Company recorded depreciation and amortization expense for the years ended December 31, 2021, 2020 and 2019 of $16.1 million, $17.6 million, and $19.9 million, respectively.
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9. Accrued Expenses and Other Liabilities
At December 31, 2021 and 2020, accrued expenses and other current and non-current liabilities consisted of the following:
| | | | | | |
| | As of | | As of | ||
| | December 31, | | December 31, | ||
| | 2021 | | 2020 | ||
| | (in thousands) | ||||
Accrued royalty payments | | | 1,743 | | | 1,796 |
Dividends payable | | | - | | | 247 |
Zinc derivatives | | | 1,844 | | | - |
Employee profit sharing obligation | | | 1,888 | | | - |
Other payables | | | 1,100 | | | 232 |
Total accrued expenses and other current liabilities | | $ | 6,575 | | $ | 2,275 |
| | | | | | |
Accrued non-current labor obligation | | | 920 | | | - |
Deferred stock unit compensation liability | | | 206 | | | - |
Other long-term liabilities | | | 826 | | | 13 |
Total other non-current liabilities | | $ | 1,952 | | $ | 13 |
In 2021, the Company entered into zinc zero cost collars consisting of call and put options on the same volume to manage its near-term exposure to cash flow variability from zinc price risks. As of December 31, 2021, the Company had $1.8 million liability related to the program.
On April 23, 2021, a decree that reforms labor outsourcing in Mexico was published in the Federation’s Official Gazette. This new decree amends the outsourcing provisions, whereby operating companies will no longer be able to source their labor resources used to carry out the core business functions from service entities or third-party providers.
Under Mexican law, employees are entitled to receive statutory profit sharing (Participacion a los Trabajadores de las Utilidades or “PTU”) payments. The required cash payment to employees in the aggregate is equal to 10% of their employer’s profit subject to PTU, which differs from profit determined under U.S. GAAP. In the past, the Company was not subject to PTU payments, as it had been sourcing its labor resources through a third-party service provider.
As a result of adopting the new legislation in 2021, $1.9 million for PTU was recorded in current liabilities and production cost, as well as $0.9 million for statutory employee severance benefits recorded in other long-term liabilities and other expenses.
10. Gold and Silver Stream Agreements
The following table presents the Company’s liabilities related to the Gold and Silver Stream Agreements as of December 31, 2021 and 2020:
| | | | | | |
| | As of | | As of | ||
| | December 31, | | December 31, | ||
| | 2021 | | 2019 | ||
| | (in thousands) | ||||
Liability related to the Gold Stream Agreement | | $ | 20,364 | | $ | - |
Liability related to the Silver Stream Agreement | | | 22,196 | | | - |
Total liability | | $ | 42,560 | | $ | - |
Periodic interest expense will be incurred based on an implied interest rate. The implied interest rate is determined based on the timing and probability of future production and an 8% discount rate. Interest expense will be recorded to
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the Consolidated Statements of Operations and the gold and silver stream agreement liability on the Consolidated Balance Sheet.
Gold Streaming Agreement
In November 2017, Aquila completed a financing transaction with Osisko Bermuda Limited (“OBL”), a wholly-owned subsidiary of Osisko Gold Royalties Ltd (TSX & NYSE: OR), pursuant to which OBL agreed to commit approximately $55 million to Aquila through a gold stream purchase agreement. In June 2020, Aquila amended its agreement with Osisko, reducing the total committed amount to $50 million as well as adjusting certain milestone dates under the gold stream to align with the current project development timeline. Aquila had received a total of $20 million of the committed funds at the time of the Gold Resource Corporation acquisition. Remaining deposits from OBL are $5 million upon receipt of permits required for the development and operation of the Back Forty Project and $25 million upon the first drawdown of an appropriate project debt finance facility. OBL has been provided a general security agreement over the Back Forty Project which consists of the subsidiaries of Gold Resource Acquisition CO, a 100% owned subsidiary of Gold Resource Corporation. The initial term of the agreement is for 40 years, automatically renewable for successive ten-year periods. The agreement is subject to certain operating and financial covenants, which are in good standing as of December 31, 2021.
The $20 million received from OBL through December 31, 2021 is shown as a long-term liability on the Consolidated Balance Sheet along with an implied interest rate. The implied interest rate is applied on OBL advance payments and calculated on the total expected life-of-mine production to be deliverable (as supported in the Back Forty Project Preliminary Economic Assessment) at the five-year average street consensus metal prices (based on the median) evaluated at December 31, 2021 and is discounted at 8.0%. As the remaining $30 million deposit is subject to the completion of certain milestones and the satisfaction of certain other conditions, this amount is not reflected on the Consolidated Balance Sheet.
Per the terms of the gold stream agreement, OBL will purchase 18.5% of the refined gold from Back Forty (the “Threshold Stream Percentage”) until the Company has delivered 105,000 ounces of gold (the “Production Threshold”). Upon satisfaction of the Production Threshold, the Threshold Stream Percentage will be reduced to 9.25% of the refined gold (the “Tail Stream”). In exchange for the refined gold delivered under the Stream Agreement, OBL will pay the Company ongoing payments equal to 30% of the spot price of gold on the day of delivery, subject to a maximum payment of $600 per ounce. Where the market price of gold is greater than price paid, the difference realized from the sale of the gold will be applied against the deposit received from Osisko. (See Note 12 Commitments and Contingencies.)
Silver Stream Agreement
Through a series of contracts, Aquila executed a silver stream agreement with OBL to purchase 85% of the silver produced and sold at the Back Forty Project. A total of $17.2 million has been advanced under the agreement as at December 31, 2021. There are 0 future deposits remaining under the agreement. The initial term of the agreement is for 40 years, automatically renewable for successive ten-year periods. The agreement is subject to certain operating and financial covenants, which are in good standing as of December 31, 2021.
Per the terms of the silver stream agreement, OBL will purchase 85% of the silver produced from the Back Forty Project at a fixed price of $4 per ounce of silver. Where the market price of silver is greater than $4 per ounce, the difference realized from the sale of the silver will be applied against the deposit received from Osisko.
The $17.2 million received from OBL through December 31, 2021 is shown as a long-term liability on the Consolidated Balance Sheet and includes an implied interest rate. (See Note 12 Commitments and Contingencies.)
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11. Reclamation and Remediation
The following table presents the changes in the Company’s reclamation and remediation obligations for the years ended December 31, 2021 and 2020:
| | | | | | |
| | 2021 | | 2020 | ||
| | (in thousands) | ||||
Reclamation liabilities – balance at beginning of period | | $ | 1,890 | | $ | 2,003 |
Foreign currency exchange gain | | | (57) | | | (113) |
Reclamation liabilities – balance at end of period | | | 1,833 | | | 1,890 |
| | | | | | |
Asset retirement obligation – balance at beginning of period | | | 1,208 | | | 1,105 |
Changes in estimate | | | - | | | 82 |
Accretion | | | 109 | | | 79 |
Foreign currency exchange gain | | | (38) | | | (58) |
Asset retirement obligation – balance at end of period | | | 1,279 | | | 1,208 |
Total period end balance | | $ | 3,112 | | $ | 3,098 |
The Company’s undiscounted reclamation liabilities of $1.8 million and $1.9 million as of December 31, 2021 and 2020, respectively, are related to DDGM in Mexico. These represent reclamation liabilities that were expensed through 2013 before proven and probable Mineral Reserves were established and the Company was considered to be a development stage entity; therefore, most of the costs, including asset retirement costs, were not allowed to be capitalized as part of our property, plant and mine development.
The Company’s asset retirement obligations reflect the additions to the asset for reclamation and remediation costs in property, plant & mine development, post 2013 development stage status, which were discounted using a credit adjusted risk-free rate of 8%. As of December 31, 2021, and 2020, the Company’s asset retirement obligation related to the Don David Gold Mine in Mexico was $1.3 million and $1.2 million, respectively.
The Company has recoded $0.6 million in reclamation liabilities to remediate exploration drill holes at the Back Forty Project in Michigan, USA. The amount is recorded in other non-current liabilities. Upon completion of the definitive feasibility study and the related mine closure plan, an asset for asset retirement obligation and corresponding liability for reclamation and remediation will be recorded.
12.Commitments and Contingencies
As of December 31, 2021 and 2020, the Company had equipment purchase commitments aggregating approximately $0.4 million.
Contingent Consideration
With the Aquila acquisition, the Company assumed contingent consideration. On December 30, 2013, Aquila’s shareholders approved the acquisition of 100% of the shares of HudBay Michigan Inc. (“HMI”), a subsidiary of HudBay Minerals Inc. (“HudBay”), effectively giving Aquila 100% ownership in the Back Forty Project (the “HMI Acquisition”). Pursuant to the HMI Acquisition, HudBay’s 51% interest in the Back Forty Project was acquired in consideration for the issuance of common shares of Aquila, future milestone payments tied to the development of the Back Forty Project and a 1% net smelter return royalty on production from certain land parcels in the project. The issuance of shares and 1% net smelter obligations were settled before the Company acquired Aquila.
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The contingent consideration is composed of the following:
The value of future installments is based on C$9 million tied to development of the Back Forty project as follows:
a. | C$3 million payable on completion of any form of financing for purposes including the commencement of construction of Back Forty, up to 50% of the
|
b. | C$2 million payable in cash 90 days after the commencement of |
c. | C$2 million payable in cash 270 days after the |
d. | C$2 million payable in cash 450 days after the
|
The value of the contingent consideration at December 31, 2021 was $4.6 million. The contingent consideration will be adjusted for the time value of money and the likelihood of the milestone payments. Any future changes in the value of the contingent consideration will be recognized in the Consolidated Statements of Operations.
Other Contingencies
The Company has certain other contingencies resulting from litigation, claims, and other commitments and is subject to a variety of environmental and safety laws and regulations incident to the ordinary course of business. The Company currently has no basis to conclude that any or all of such contingencies will materially affect its financial position, results of operations or cash flows. However, in the future, there may be changes to these contingencies, or additional contingencies may occur, any of which might result in an accrual or a change in current accruals recorded by the Company, and there can be no assurance that their ultimate disposition will not have a material adverse effect on the Company’s financial position, results of operations or cash flow.
With the successful acquisition of Aquila Resources Inc. on December 10, 2021, the Company assumed substantial liabilities that relate to the gold and silver stream agreements with Osisko Bermuda Limited. Under the agreements, Osisko deposited a total of $37.2 million upfront in exchange for a portion of the future gold and silver production from the Back Forty Project. The stream agreements contain customary provisions regarding default and security. In the event that our subsidiary defaults under the stream agreements, including achieving commercial production at an agreed upon date, it may be required to repay the deposit plus accumulated interest at a rate agreed with Osisko. If it fails to do so, Osisko may be entitled to enforce their remedies as a secured party and take possession of the assets that comprise the Back Forty Project.
13. Shareholders’ Equity
In the year ended December 31, 2021, the Company declared dividends of $3.1 million and paid dividends of $3.4 million, or $0.0433 per share. The Company declared and paid dividends of $2.8 million, or $0.04 million per share for the year ended December 31, 2020.
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”), which was subsequently renewed in June 2020. The ATM Agreement will remain in effect until the earlier of (i) June 3, 2023 or (ii) the date that the ATM Agreement is terminated in accordance with its terms. An aggregate of NaN, 8,421,259 shares, and 6,625,588 shares of the Company’s common stock were sold through the ATM Agreement during the years ended December 31, 2021, 2020 and 2019, for net proceeds to the Company, after deducting the Agent’s commissions and other expenses, of $0.0 million, $25.8 million, and $24.4 million, respectively.
During the year ended December 31, 2021, the Company issued 13,714,630 shares of common stock in connection with the Aquila acquisition at a price of $1.79 per share in exchange for 100% of Aquila’s common shares. During the year ended December 31, 2020, the Company issued 26,110 shares of its common stock at a price of $3.83 per share in
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connection with its purchase of the Golden Mile project (a Nevada Mining Unit Asset). 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.
14. Derivatives
Embedded Derivatives
Concentrate Sales
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 20 for additional information.
The following table summarizes the Company’s unsettled sales contracts at December 31, 2021, with the quantities of metals under contract subject to final pricing occurring through February 2022:
| | | | | | | | | | | | | | | | | | |
| | Gold | | Silver | | Copper | | Lead | | Zinc | | | Total | |||||
| | (ounces) | | (ounces) | | (tonnes) | | (tonnes) | | (tonnes) | | | | |||||
Under contract | | | 3,014 | | | 215,786 | | | 275 | | | 1,503 | | | 4,180 | | | |
Average forward price (per ounce or tonne) | | $ | 1,803 | | $ | 23.18 | | $ | 9,598 | | $ | 2,311 | | $ | 3,356 | | | |
Unsettled sales contracts value (in thousands) | | $ | 5,434 | | $ | 5,002 | | $ | 2,639 | | $ | 3,473 | | $ | 14,028 | | $ | 30,576 |
Other Derivatives
Zinc zero cost collar
Derivative instruments that are not designated as hedging instruments are required to be recorded on the balance sheet at fair value. Changes in fair value will impact the Company’s earnings through mark-to-market adjustments until the physical commodity is delivered or the financial instrument is settled. The fair value does not reflect the realized or cash value of the instrument.
Effective May 18, 2021, GRC entered into Trading Agreement with Auramet International LLC that govern nonexchange traded, over-the-counter, spot, forward and option transactions on both a deliverable and non-deliverable basis involving various metals and currencies. In 2021, the Company had a realized loss of $1.2 million and an unrealized loss of $1.8 million related to the program. The agreement allows for the trader to require cash collateral should market value of contracts be above uncommitted trading line. As of December 31, 2021, our remaining hedge program was in an acceptable position to the trading line, thus there was no collateral required.
As of December 31, 2021, the Company’s derivatives not designated as hedges consist of zinc zero cost collars used to manage its near-term exposure to cash flow variability from zinc price risks. A zero cost collar is a combination of two options: a sold call option and a purchased put option. As of December 31, 2021, the Company maintained an outstanding derivative position of 5,700 tonnes for January 2022 through December 2022 with an average ceiling price of $3,342 per tonne of zinc and a floor price of $3,047 per tonne of zinc.
Derivatives are carried at fair value and on a net basis as a legal right of offset exists with the same counterparty. Otherwise, any fair value gains or losses are recognized in earnings in the current period. The fair value does not reflect the realized or cash value of the instrument. Mark-to-market adjustments are made until the physical commodity is delivered or the financial instrument is settled. The December 2021 London Metal Exchange (“LME”) average zinc price of $3,408 exceeded the call option ceiling of $3,066, resulting in a realized loss of $478 thousand. The mark-to-market
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adjustment on the remaining 5,700 tonnes resulted in an unrealized loss of $1.8 million recorded in the Consolidates Statements of Operations and in Accrued expenses and other current liabilities in the Consolidated Balance Sheets.
Subsequent to year end, on January 4, 2022, the Company executed additional derivatives of zero cost collars to manage its near-term exposure to cash flow variability from zinc price risks through December 2022. The Company sold call options to establish the ceiling price of $3,500 per tonne of zinc that the Company will receive for the contracted zinc volume of 3,150 tonnes for April 2022 through December 2022. The purchased put establishes the floor price of $3,200 per tonne of zinc that we will receive for the same contracted tonnes and period of time.
The Company manages credit risk by selecting counterparties that it believes to be financially strong, by entering into netting arrangements with counterparties and by requiring other credit risk mitigants, as appropriate. The Company actively evaluates the creditworthiness of its counterparties, assigns appropriate credit limits, and monitors credit exposures against those assigned limits.
15. EmployeeBenefits
Effective October 2012, the Company adopted a profit sharing plan (the “Plan”) which covers all U.S. employees. The Plan meets the requirements of a qualified retirement plan pursuant to the provisions of Section 401(k) of the Internal Revenue Code. The Plan also provides eligible employees the opportunity to make tax deferred contributions to a retirement trust account up to 50% of their qualified wages, subject to the IRS annual maximums.
On April 23, 2021, a decree that reforms labor outsourcing in Mexico was published in the Federation’s Official Gazette. This new decree amends the outsourcing provisions, whereby operating companies will no longer be able to source their labor resources used to carry out the core business functions from service entities or third-party providers. Under Mexican law, employees are entitled to receive statutory profit sharing (Participacion a los Trabajadores de las Utilidades or “PTU”) payments. The required cash payment to employees in the aggregate is equal to 10% of their employer’s profit subject to PTU, which differs from profit determined under U.S. GAAP. Please see Note 9for additional information.
16. Stock-Based Compensation
The Gold Resource Corporation 2016 Equity Incentive Plan (the “Incentive Plan”) allows for the issuance of up to 5 million shares of common stock in the form of incentive and non-qualified stock options, stock appreciation rights, restricted stock units, stock grants, stock units, performance shares, performance share units and performance cash. Additionally, pursuant to the terms of the Incentive Plan, 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.
Effective January 1, 2021, the Company’s Board of Directors, on the recommendation of the Compensation Committee, implemented a program to issue deferred stock units. DSUs are a qualifying instrument under the terms of the Company’s Incentive Plan and therefore do not require additional shareholder approval. The vesting and settlement terms of the DSUs are determined by the Compensation Committee at the time the DSUs are awarded.
130,000 DSUs were granted to the Board of Directors during the period ended March 31, 2021 and are redeemable in cash or shares at the earlier of 10 years or upon the eligible directors’ termination. Termination is deemed to occur on the earliest of (1) the date of voluntary resignation or retirement of the director from the Board; (2) the date of death of the director; or (3) the date of removal of the director from the Board whether by shareholder resolution, failure to achieve re-election or otherwise; and on which date the director is not a director or employee of the Company or any of its affiliates. These awards contain a cash settlement feature and are therefore classified as a liability and are marked to fair value each reporting period. The Company may also issue DSUs for directors in lieu of board fees at their request. As of December 31, 2021, there were 1,960 DSUs granted in lieu of board fees that are also subject to mark-to-market adjustment. As of December 31, 2021, the Company recorded $0.2 million of other non-current liability and expense for the DSUs based on the fair value of the Company’s stock price.
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Stock-Based Compensation Expense
Stock-based compensation expense for stock options, RSUs, and DSUs is as follows:
| | | | | | | | |
| For the year ended December 31, | |||||||
| 2021 | | 2020 | | 2019 | |||
| (in thousands) | |||||||
Stock options | $ | 549 | | $ | 1,956 | | $ | 1,458 |
Restricted stock units | | 120 | | | 1,083 | | | 474 |
Deferred stock units | | 206 | | | - | | | - |
Total | $ | 875 | | $ | 3,039 | | $ | 1,932 |
In 2020, in connection with the Fortitude Gold Spin-Off, the Company accelerated the vesting on 105,568 stock options and 127,068 RSU’s for 4 employees which resulted in $0.8 million of incremental stock-based compensation, included in restructuring expense.
The estimated unrecognized stock-based compensation expense from unvested options and RSUs as of December 31, 2021 was approximately $0.7 million and $0.3 million, respectively, and is expected to be recognized over the remaining vesting periods of up to three years.
The Company has a short-term incentive plan (“STIP”) for its executive officers that provides for the grant of either cash or stock-based bonus awards payable upon achievement of specified performance metrics. As of December 31, 2021 we accrued $0.7 million related to the STIP program. As of December 31, 2020, there were 0 accruals related to the STIP.
Stock Options
A summary of stock option activity under the Incentive Plan for the years ended December 31, 2021 and 2020 is presented below:
| | | | | | | | | | |
| | Shares | | Weighted | | Weighted Average | | Aggregate | ||
Outstanding as of December 31, 2019 | | 4,564,735 | | $ | 8.54 | | 5.09 | | $ | 4,513 |
Granted | | 100,000 | | | 3.45 | | - | | | |
Exercised | | - | | | - | | - | | | |
Expired | | (486,666) | | | 13.82 | | - | | | |
Forfeited | | (4,901) | | | 6.57 | | - | | | |
Outstanding as of December 31, 2020 | | 4,173,168 | | $ | 6.83 | | 3.58 | | $ | 1,324 |
Granted | | 600,000 | | | 3.22 | | - | | | |
Exercised | | (253,335) | | | 1.31 | | - | | | |
Expired | | (2,035,966) | | | 9.14 | | - | | | |
Forfeited | | (29,167) | | | 5.89 | | - | | | |
Outstanding as of December 31, 2021 | | 2,454,700 | | $ | 4.62 | | 4.58 | | $ | 109 |
| | | | | | | | | | |
Vested and exercisable as of December 31, 2021 | | 1,848,033 | | $ | 5.06 | | 3.17 | | $ | 109 |
The weighted-average fair value of options per share granted during the years ended December 31, 2021, 2020, and 2019 was $1.65, $2.38 and $1.94, respectively. The total intrinsic value of options exercised during the years ended December 31, 2021, 2020, and 2019, was $0.1million, NaN, and $0.2 million, respectively. The total fair value of options vested during the years ended December 31, 2021, 2020 and 2019 was $0.3 million, $1.0 million and $1.6 million, respectively.
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253,335 options were exercised during the year ended December 31, 2021, at a weighted average exercise price of $1.31 per share. For these exercises, 237,719 shares of the Company’s common stock were issued. For the remaining 15,616 options, 0 common shares were issued because the same number of common shares were surrendered due to exercise by attestation. NaN stock options were exercised during the year ended December 31, 2020.
The following table summarizes information about stock options outstanding at December 31, 2021:
| | | | | | | | | | | | |
| | Outstanding | | Exercisable | ||||||||
Range of Exercise Prices | | Number of | | Weighted Average | | Weighted | | Number of | | Weighted | ||
$0.00 - $6.25 | | 2,154,700 | | 5.12 | | $ | 3.04 | | 1,548,033 | | $ | 2.96 |
$6.25 -$12.50 | | - | | - | | $ | - | | - | | $ | - |
$12.50 - $18.75 | | 300,000 | | 0.64 | | $ | 15.92 | | 300,000 | | $ | 15.92 |
| | 2,454,700 | | 4.58 | | $ | 4.62 | | 1,848,033 | | $ | 5.06 |
The assumptions used to determine the value of stock-based awards under the Black-Scholes method are summarized below:
| | | | | | | | | |
| | For the year ended December 31, | |||||||
| | 2021 | | 2020 | | 2019 | | ||
Risk-free interest rate | | 0.55 | % | | 0.23 | % | | 2.20 | % |
Dividend yield | | 0.26 | % | | 0.97 | % | | 0.53 | % |
Expected volatility | | 64.71 | % | | 66.03 | % | | 62.76 | % |
Expected life in years | | 6 | | | 6 | | | 5 | |
Restricted and Deferred Stock Units
A summary of RSU and DSU activity under the Incentive Plan for the years ended December 31, 2021 and 2020 is presented below:
| | | | | | | |
| | Shares | | Aggregate | | Weighted Average | |
Nonvested as of December 31, 2019 | | 401,235 | | $ | 2,223 | | 8.00 |
Granted | | 203,181 | | | | | - |
Vested | | (238,062) | | | | | - |
Expired | | - | | | | | - |
Forfeited | | (16,489) | | | | | - |
Nonvested as of December 31, 2020 | | 349,865 | | $ | 1,017 | | 4.87 |
Granted | | 134,574 | | | | | - |
Vested | | (207,222) | | | | | - |
Expired | | - | | | | | - |
Forfeited | | (171,418) | | | | | - |
Nonvested as of December 31, 2021 | | 105,799 | | $ | 165 | | 2.69 |
2,614 RSUs and 131,960 DSUs were granted during the year ended December 31, 2021. The weighted-average fair value per share of RSUs granted during the years ended December 31, 2021, 2020, and 2019 was, $2.56, $3.78 and $4.83, respectively. The weighted-average fair value per share of DSUs granted during the years ended December 31, 2021 was $1.63. The total intrinsic value of RSUs vested during the years ended December 31, 2021, 2020, and 2019 was $0.1 million, $0.8 million, and $0.4 million, respectively. NaN DSUs were converted to common shares.
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17. Zinc Zero Cost Collar
During the years ended December 31, 2021, 2020 and 2019, the realized and unrealized losses related to the Company’s Zinc Zero Cost Collar are the following:
| | | | | | | | | |
| | For the year ended December 31, | |||||||
| | 2021 | | 2020 | | 2019 | |||
| | (in thousands) | |||||||
Unrealized loss on zinc zero cost collar (1) | | | 1,844 | | | - | | | - |
Realized loss on zinc zero cost collar (1) | | | 1,156 | | | - | | | - |
Total | | $ | 3,000 | | $ | - | | $ | - |
(1) | Gains and losses due to changes in fair value |
Effective May 18, 2021, GRC entered into Trading Agreement with Auramet International LLC that govern nonexchange traded, over-the-counter, spot, forward and option transactions on both a deliverable and non-deliverable basis involving various metals and currencies. In 2021, the Company had a realized loss of $1.2 million and an unrealized loss of $1.8 million related to the program. Please see Note 14for additional information
18. Other (Income) Expense, Net
During the years ended December 31, 2021, 2020 and 2019, other expense, net consisted of the following:
| | | | | | | | | |
| | For the year ended December 31, | |||||||
| | 2021 | | 2020 | | 2019 | |||
| | (in thousands) | |||||||
Unrealized currency exchange (gain) loss (1) | | $ | 493 | | $ | 105 | | $ | (19) |
Realized currency exchange loss (gain) | | | (111) | | | (17) | | | 252 |
Realized and unrealized loss (gain) from gold and silver rounds, net (1) | | | 55 | | | (1,173) | | | (671) |
Loss on disposal of fixed assets | | | 26 | | | 3 | | | 12 |
(Decrease) increase in reserve for inventory | | | - | | | (148) | | | 885 |
Employee benefit obligation | | | 947 | | | - | | | - |
Other (income) expense | | | (390) | | | 42 | | | 5 |
Total | | $ | 1,020 | | $ | (1,188) | | $ | 464 |
(1) | Gains and
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19. 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 2.2 million, 4.2 million, and 3.6 million shares of common stock at weighted average exercise prices of $10.69, $8.95, and $10.44 were outstanding as of December 31, 2021, 2020, and 2019, 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.
The preliminary allocation of the purchase price is based on management’s estimates at the time of closing and may be adjusted after obtaining additional information regarding, among other things, asset valuations, liabilities assumed and revisions of previous estimates. During 2017, the Company revised its temporary book and tax differences and as a result finalized the purchase price allocation. The following table summarizes the final purchase price allocation:
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| Preliminary Purchase Price Allocation |
| Measurement Period Adjustments |
| Final Purchase Price Allocation |
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| (in thousands) |
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Purchase Price |
| $ | 14,280 |
| $ | - |
| $ | 14,280 |
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Preliminary allocation of purchase price: |
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|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
| $ | 60 |
| $ | - |
| $ | 60 |
|
Mineral interests and mineral rights |
|
| 19,413 |
|
| (4,155) |
|
| 15,258 |
|
Other non-current assets |
|
| 460 |
|
| - |
|
| 460 |
|
Total assets |
|
| 19,933 |
|
| (4,155) |
|
| 15,778 |
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
Deferred tax liability |
|
| 5,615 |
|
| (4,155) |
|
| 1,460 |
|
Reclamation and remediation liabilities |
|
| 38 |
|
| - |
|
| 38 |
|
Total liabilities |
|
| 5,653 |
|
| (4,155) |
|
| 1,498 |
|
Net fair value |
| $ | 14,280 |
| $ | - |
| $ | 14,280 |
|
3. Gold and Silver Rounds/Bullion
The Company periodically purchases gold and silver bullion on the open market for investment purposes and to use in its dividend exchange program under which shareholders may exchange their cash dividends for minted gold and silver rounds. During the twelve months ended December 31, 2017 and 2016, the Company purchased 215.85 ounces and nil ounces, respectively, of gold bullion and 90 ounces and nil ounces, respectively, of silver bullion.
At December 31, 2017 and 2016, the Company’s holdings of rounds/bullion, using quoted market prices, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||||||||||||
|
| Ounces |
| Per Ounce |
| Amount |
| Ounces |
| Per Ounce |
| Amount | ||||
|
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
| (in thousands) | ||
Gold |
| 1,905 |
| $ | 1,291 |
| $ | 2,459 |
| 1,579 |
| $ | 1,159 |
| $ | 1,830 |
Silver |
| 80,224 |
| $ | 16.87 |
|
| 1,353 |
| 90,971 |
| $ | 16.24 |
|
| 1,477 |
Total holdings |
|
|
|
|
|
| $ | 3,812 |
|
|
|
|
|
| $ | 3,307 |
63
4. Current Inventories
At December 31, 2017 and 2016, inventories consisted of the following:
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
|
| (in thousands) | ||||
Stockpiles - underground mine |
| $ | 1,450 |
| $ | 84 |
Stockpiles - open pit mine |
|
| 101 |
|
| 288 |
Concentrates and doré |
|
| 2,367 |
|
| 1,881 |
Materials and supplies (1) |
|
| 7,718 |
|
| 6,693 |
Total |
| $ | 11,636 |
| $ | 8,946 |
86 |
|
|
5. Income Taxes
Impact of New U.S. Tax Law
On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revises the ongoing 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 Company is subject to the provisions of the Financial Accounting Standards Board (“FASB”) ASC 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined. Accordingly, the Company recorded the following estimates of the tax impact in its earnings for the year ended December 31, 2017.
|
|
|
|
Pursuant to the SAB118, the Company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The final impact on the Company from the Tax Act’s transition tax legislation may differ from the aforementioned estimates due to the complexity of calculating and supporting with primary evidence such U.S. tax attributes such as accumulated foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations for prior years back to 1998. Such differences could be material, due to, among other things, changes in interpretations of the Tax Act, future legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition tax's reasonable estimate. The Company will continue to evaluate the impact of the U.S. Tax Act and will record any resulting tax adjustments during 2018.
Based on our current estimate, the new tax legislation did not result in any cash payments as the Company was able to utilize foreign tax credits to offset the tax liability created by the one-time transition tax, and the Company does not expect any future cash implications. However, should the estimate of the impact change in the future, the Company may
64
elect to pay any transition tax in installments over the period of 8 years, pursuant to the guidance of the new Internal Revenue Code Section 965.
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, |
| |||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||
|
| (in thousands) |
| |||||||
U.S. Operations |
| $ | (8,142) |
| $ | (7,001) |
| $ | (10,389) |
|
Foreign Operations, Mexico |
|
| 36,620 |
|
| 16,147 |
|
| 20,842 |
|
Total income before income taxes |
| $ | 28,478 |
| $ | 9,146 |
| $ | 10,453 |
|
The Company's income tax expense (benefit) from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, |
| |||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||
|
| (in thousands) |
| |||||||
Current taxes: |
|
|
| |||||||
Federal |
| $ | 9 |
| $ | 353 |
| $ | 353 |
|
State |
|
| - |
|
| - |
|
| - |
|
Foreign |
|
| 9,327 |
|
| 5,961 |
|
| 1,905 |
|
Total current taxes |
| $ | 9,336 |
| $ | 6,314 |
| $ | 2,258 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes: |
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | 4,923 |
| $ | (1,715) |
| $ | (1,396) |
|
State |
|
| - |
|
| - |
|
| - |
|
Foreign |
|
| 10,069 |
|
| 160 |
|
| 6,529 |
|
Total deferred taxes |
| $ | 14,992 |
| $ | (1,555) |
| $ | 5,133 |
|
Total income tax provision |
| $ | 24,328 |
| $ | 4,759 |
| $ | 7,391 |
|
The provision for income taxes for the years ended December 31, 2017, 2016 and 2015, 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, |
| |||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||
|
| (in thousands) |
| |||||||
Tax at statutory rates |
| $ | 9,967 |
| $ | 3,110 |
| $ | 3,554 |
|
Foreign rate differential |
|
| (1,780) |
|
| (617) |
|
| (819) |
|
Dividends, net of foreign tax credits |
|
| - |
|
| 795 |
|
| 267 |
|
One-time tax on foreign unremitted earnings (Tax Act) |
|
| 4,627 |
|
|
|
|
|
|
|
Changes in deferred tax assets |
|
| 6,239 |
|
| (625) |
|
| 2,600 |
|
Mexico mining tax |
|
| 2,816 |
|
| 1,270 |
|
| 1,103 |
|
U.S. Tax rate reduction from 35% to 21% (Tax Act) |
|
| 2,671 |
|
| - |
|
| - |
|
Other |
|
| (212) |
|
| 826 |
|
| 686 |
|
Tax provision |
| $ | 24,328 |
| $ | 4,759 |
| $ | 7,391 |
|
65
The following table sets forth deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
| At December 31, |
| ||||
|
| 2017 |
| 2016 |
| ||
|
|
| (in thousands) |
| |||
Non-current deferred tax assets: |
|
|
|
|
|
|
|
Tax loss carryforward - U.S. |
| $ | 1,450 |
| $ | 1,466 |
|
Property and equipment |
|
| 1,935 |
|
| 11,879 |
|
Stock-based compensation |
|
| 4,622 |
|
| 7,128 |
|
Foreign tax credits |
|
| 4,185 |
|
| 3,029 |
|
Other |
|
| 2,284 |
|
| 2,200 |
|
Total deferred tax assets |
|
| 14,476 |
|
| 25,702 |
|
Valuation allowance |
|
| (6,720) |
|
| (2,507) |
|
Deferred tax assets after valuation allowance |
| $ | 7,756 |
| $ | 23,195 |
|
|
|
|
|
|
|
|
|
Long-term deferred tax liability |
|
| (902) |
|
| (5,615) |
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
| $ | 6,854 |
| $ | 17,580 |
|
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.
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 the foreign tax credits, the 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, 2017.
As a result of the adoption of ASU 2016-09 in the first quarter of 2017, excess tax benefits and tax deficiencies will be prospectively classified to the statement of operations instead of additional paid-in capital. Upon adoption, the Company recorded a $4.2 million deferred tax asset related to previously unrecognized foreign tax credits but placed a valuation allowance against the full amount of the deferred tax asset due to the Company’s assessment of the realizability of these foreign tax credits. Thus, no net impact to the financial statements was generated as a result of adoption of ASU 2016-09.
During the year ended December 31, 2017, the Company revised its temporary book and tax differences in the basis of its Isabella Pearl property, included in its Walker Lane Minerals Corp. acquisition which resulted in a $4.2 million increase in deferred tax assets, net, and a corresponding decrease in property, plant and mine development.
At December 31, 2017, the Company has U.S. tax loss carry-forward deferred tax assets approximating $1.5 million, which expire between 2021 and 2037, and foreign tax credits of $4.2 million that expire between 2023 and 2026.
During 2016 the Company concluded a tax examination by the Mexican tax authorities of the 2012 and 2013 income tax returns with no adjustments to income taxes being recorded.
66
As of both December 31, 2017 and 2016, 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, 2017 and 2016, prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
|
| (in thousands) | ||||
Advances to suppliers |
| $ | 163 |
| $ | 122 |
Prepaid insurance |
|
| 869 |
|
| 531 |
Vendor deposits |
|
| 501 |
|
| 218 |
IVA taxes receivable, net |
|
| - |
|
| 489 |
Other current assets |
|
| 234 |
|
| 227 |
Total |
| $ | 1,767 |
| $ | 1,587 |
|
7. Property, Plant and Mine Development, net
At December 31, 2017 and 2016, property, plant and mine development consisted of the following:
|
|
|
|
|
| |
|
| 2017 |
| 2016 | ||
|
| (in thousands) | ||||
Asset retirement costs |
| $ | 1,079 |
| $ | 637 |
Construction-in-progress |
|
| 10,838 |
|
| 586 |
Furniture and office equipment |
|
| 1,664 |
|
| 1,580 |
Land |
|
| 242 |
|
| 230 |
Light vehicles and other mobile equipment |
|
| 2,211 |
|
| 1,914 |
Machinery and equipment |
|
| 22,916 |
|
| 20,293 |
Mill facilities and infrastructure |
|
| 10,075 |
|
| 9,643 |
Mineral interests and mineral rights (1) |
|
| 17,658 |
|
| 19,413 |
Mine development |
|
| 56,957 |
|
| 42,951 |
Software and licenses |
|
| 1,678 |
|
| 1,624 |
Subtotal (2) (3) |
|
| 125,318 |
|
| 98,871 |
Accumulated depreciation and amortization |
|
| (42,719) |
|
| (28,812) |
Total |
| $ | 82,599 |
| $ | 70,059 |
Basic and diluted net income per common share is calculated as follows:
20. Fair Value Measurement Fair value accounting establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: |
|
|
|
|
|
|
The Company recorded depreciation and amortization expense for years ended December 31, 2017, 2016 and 2015 of $15.0 million, $12.6 million and $9.1 million, respectively.
67
8. Accrued Expenses and Other Current Liabilities
At December 31, 2017 and 2016, accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
|
| (in thousands) | ||||
Accrued insurance |
| $ | 662 |
| $ | 381 |
Accrued royalty payments |
|
| 1,805 |
|
| 1,043 |
Dividends payable |
|
| 95 |
|
| 94 |
IVA taxes payable, net |
|
| 274 |
|
| - |
Other payables |
|
| 15 |
|
| 8 |
Total |
| $ | 2,851 |
| $ | 1,526 |
9. Reclamation and Remediation
The following table presents the changes in the Company’s reclamation and remediation obligations for the years ended December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
|
| (in thousands) | ||||
Reclamation liabilities – balance at beginning of period |
| $ | 1,907 |
| $ | 2,192 |
Changes in estimate |
|
| 10 |
|
| 82 |
Foreign currency exchange loss (gain) |
|
| 88 |
|
| (367) |
Reclamation liabilities – balance at end of period |
|
| 2,005 |
|
| 1,907 |
|
|
|
|
|
|
|
Asset retirement obligation – balance at beginning of period |
|
| 518 |
|
| 623 |
Changes in estimate |
|
| 366 |
|
| (21) |
Accretion expense |
|
| 35 |
|
| 23 |
Foreign currency exchange loss (gain) |
|
| 22 |
|
| (107) |
Asset retirement obligation – balance at end of period |
|
| 941 |
|
| 518 |
Total period end balance |
| $ | 2,946 |
| $ | 2,425 |
The Company’s reclamation and remediation obligations as of December 31, 2017 and 2016 were discounted using a discount rate of 8%.
10. Loan Payable
On August 8, 2017, the Company entered into a 48-month loan agreement in the amount of $2.4 million for the purchase of certain equipment. The loan bears annual interest of 4.48%, is collateralized by the equipment, and requires monthly principal and interest payments of $0.05 million. As of December 31, 2017, there is an outstanding balance of $2.2 million. Scheduled minimum repayments are $0.6 million in 2018, $0.6 million in 2019, $0.6 million in 2020, and $0.4 million in 2021. The Company is subject to a prepayment penalty, ranging from 1% to 3% of the outstanding loan balance at time of full repayment, depending on time of repayment.
68
11. Capital Lease
On November 13, 2017, the Company entered into a 48-month capital lease agreement in the amount of $1.6 million for certain equipment. The lease bears annual imputed interest of 5.95% and requires monthly principal, interest, and sales tax payments of $0.04 million. Scheduled minimum annual payments as of December 31, 2017 are as follows (in thousands):
|
|
|
|
Year Ending December 31: |
|
|
|
2018 |
| $ | 461 |
2019 |
|
| 461 |
2020 |
|
| 461 |
2021 |
|
| 397 |
Total minimum obligations |
|
| 1,780 |
Interest portion |
|
| (180) |
Present value of net minimum payments |
|
| 1,600 |
Less: current portion |
|
| (382) |
Non-current portion |
| $ | 1,218 |
12. Commitments and Contingencies
Operating leases
The Company leases its office in Colorado Springs from a related party under a non-cancelable operating lease which expires in 2018. The Company also leases an office in Denver, Colorado consisting of approximately 2,500 square feet, which was renewed in 2015 for three years. The Company’s Mexican subsidiary leases office space in Oaxaca City, Oaxaca. The subsidiary entered into a ten-year lease commencing January 1, 2012. Future minimum lease payments under operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Payments due by Period |
| ||||||||||||||||
|
| Total |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 and |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
Operating leases |
| $ | 397 |
| $ | 164 |
| $ | 87 |
| $ | 74 |
| $ | 72 |
| $ | - |
|
Other Commitments
As of December 31, 2017, the Company has equipment purchase commitments aggregating approximately $3.8 million.
13. Shareholders’ Equity
The Company declared and paid dividends of $1.1 million during the year ended December 31, 2017. During the year ended December 31, 2016, the Company declared and paid dividends of $1.7 million. During the year ended December 31, 2015, the Company declared dividends of $6.1 million and paid dividends of $6.5 million.
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.
69
During the year ended December 31, 2016, the Company issued 130,169 shares of common stock as partialconsideration for mineral rights at the Mina Gold property. At the time of issuance, the shares were valued at $6.53 per share, for an aggregate value of $0.9 million. Please see Note 2 for more information.
During the year ended December 31, 2016, the Company issued 2,000,000 shares of common stock as partial consideration for its acquisition of Walker Lane. Please see Note 2 for more information.
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 2017, 2016 and 2015, 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 unsettled shipments. At the end of each reporting period, the Company records an adjustment to accounts receivable and revenue to reflect the mark-to-market adjustments for outstanding provisional invoices based on metal forward prices. Please see Note 19 for additional information.
The following table summarizes the Company’s unsettled sales contracts at December 31, 2017, with the quantities of metals under contract subject to final pricing occurring through February 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gold |
|
| Silver |
|
| Copper |
|
| Lead |
|
| Zinc |
|
|
| (ounces) |
|
| (ounces) |
|
| (tonnes) |
|
| (tonnes) |
|
| (tonnes) |
Under contract |
|
| 9,434 |
|
| 706,199 |
|
| 437 |
|
| 2,148 |
|
| 6,490 |
Average forward (price per ounce or tonne) |
| $ | 1,286 |
| $ | 16.87 |
| $ | 6,754 |
| $ | 2,462 |
| $ | 3,057 |
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 in 2017, $0.1 million in 2016 and $0.2 million in 2015. The unfunded matching contribution obligation was nil for the year ended December 31, 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, RSUs, stock grants, stock units, performance shares, performance share units and performance cash. Additionally, pursuant to the terms of the Incentive Plan, 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 416,000 options with a term of 10 years were granted during the year ended December 31, 2017, of which 37,000 vested immediately and the remainder vest over a three-year period. A total of 105,945 RSUs were granted during the year ended December 31, 2017, of which 14,964 vest within six months and the remainder vest over a three- year period.
70
Stock Options
A summary of stock option activity under the Incentive Plan for the years ended December 31, 2017 and 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares |
| Weighted |
| Weighted Average |
| Aggregate |
| ||
Outstanding as of December 31, 2015 |
| 5,550,000 |
| $ | 7.75 |
| 5.10 |
| $ | - |
|
Granted |
| 717,000 |
|
| 3.85 |
| - |
|
|
|
|
Exercised |
| (169,999) |
|
| 2.30 |
| - |
|
|
|
|
Expired |
| - |
|
| - |
| - |
|
|
|
|
Forfeited |
| (48,000) |
|
| 3.16 |
| - |
|
|
|
|
Outstanding as of December 31, 2016 |
| 6,049,001 |
| $ | 7.48 |
| 5.36 |
| $ | 3,963 |
|
Granted |
| 416,000 |
|
| 4.08 |
| - |
|
|
|
|
Exercised |
| (25,000) |
|
| 2.30 |
| - |
|
|
|
|
Expired |
| (195,000) |
|
| 8.99 |
| - |
|
|
|
|
Forfeited |
| - |
|
| - |
| - |
|
|
|
|
Outstanding as of December 31, 2017 |
| 6,245,001 |
| $ | 7.23 |
| 4.68 |
| $ | 4,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of December 31, 2017 |
| 5,181,995 |
| $ | 7.99 |
| 3.87 |
| $ | 3,035 |
|
The weighted-average fair value of options granted during the years ended December 31, 2017, 2016, and 2015 was $2.25, $1.96 and $0.78, respectively. The total intrinsic value of options exercised during the years ended December 31, 2017 and 2016, was $0.1 million and $0.6 million, respectively. There were no options exercised during the year ended December 31, 2015. The total fair value of options vested during the years ended December 31, 2017, 2016 and 2015 was $0.8 million, $1.3 million and $4.7 million, respectively.
The Company received nil and $0.4 million in cash proceeds from options exercised during 2017 and 2016, respectively.
The following table summarizes information about stock options outstanding at December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding |
| Exercisable |
| ||||||||
Range of Exercise Prices |
| Number of |
| Weighted Average |
| Weighted |
| Number of |
| Weighted |
| ||
$0.00 - $6.25 |
| 3,975,001 |
| 4.67 |
| $ | 3.41 |
| 2,911,995 |
| $ | 3.37 |
|
$6.25 -$12.50 |
| 810,000 |
| 4.56 |
| $ | 8.75 |
| 810,000 |
| $ | 8.75 |
|
$12.50 - $18.75 |
| 1,340,000 |
| 4.77 |
| $ | 16.46 |
| 1,340,000 |
| $ | 16.46 |
|
$18.75 - $25.00 |
| 120,000 |
| 4.68 |
| $ | 20.51 |
| 120,000 |
| $ | 20.51 |
|
|
| 6,245,001 |
| 4.68 |
| $ | 7.23 |
| 5,181,995 |
| $ | 7.99 |
|
The assumptions used to determine the value of stock-based awards under the Black-Scholes method are summarized below:
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
|
| ||||
|
| 2017 |
| 2016 |
| 2015 |
|
|
Risk-free interest rate |
| 1.94 | % | 0.87 | % | 1.03 | % |
|
Dividend yield |
| 0.53 | % | 0.46 | % | 5.2 | % |
|
Expected volatility |
| 67.70 | % | 62.74 | % | 58.79 | % |
|
Expected life in years |
| 5 |
| 5 |
| 5 |
|
|
71
Restricted Stock Units
A summary of RSU activity under the Incentive Plan for the years ended December 31, 2017 and 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares |
| Weighted |
| Weighted Average |
| Aggregate |
| ||
Nonvested as of December 31, 2015 |
| - |
| $ | - |
| - |
| $ | - |
|
Granted |
| 188,803 |
|
| - |
| - |
|
|
|
|
Vested |
| - |
|
| - |
| - |
|
|
|
|
Expired |
| - |
|
| - |
| - |
|
|
|
|
Forfeited |
| (7,065) |
|
| - |
| - |
|
|
|
|
Nonvested as of December 31, 2016 |
| 181,738 |
| $ | - |
| 1.82 |
| $ | 791 |
|
Granted |
| 105,945 |
|
| - |
| - |
|
|
|
|
Vested |
| (78,400) |
|
| - |
| - |
|
|
|
|
Expired |
| - |
|
| - |
| - |
|
|
|
|
Forfeited |
| - |
|
| - |
| - |
|
|
|
|
Nonvested as of December 31, 2017 |
| 209,283 |
| $ | - |
| 1.91 |
| $ | 920 |
|
The weighted-average fair value of RSUs granted during the years ended December 31, 2017 and 2016, was $4.11 and $4.60, respectively. There were no RSUs granted in 2015. The total intrinsic value of RSUs vested during the years ended December 31, 2017, 2016, and 2015 was $0.3 million, nil and nil, respectively.
Stock-Based Compensation Expense
Stock-based compensation expense for stock options and RSUs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
| |||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||
|
| (in thousands) |
| |||||||
Stock options |
| $ | 829 |
| $ | 1,036 |
| $ | 3,472 |
|
Restricted stock units |
|
| 363 |
|
| 204 |
|
| - |
|
Total |
| $ | 1,192 |
| $ | 1,240 |
| $ | 3,472 |
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation related to stock options and RSUs has been allocated between production costs, general and administrative expenses, and exploration expense as follows:
|
|
|
|
|
|
|
|
| |
|
| Year ended December 31, | |||||||
|
| 2017 |
| 2016 |
| 2015 | |||
|
| (in thousands) | |||||||
Production costs |
| $ | 99 |
| $ | 186 |
| $ | 1,073 |
General and administrative expenses |
|
| 1,029 |
|
| 1,040 |
|
| 2,399 |
Exploration expense |
|
| 64 |
|
| 14 |
|
| - |
Total |
| $ | 1,192 |
| $ | 1,240 |
| $ | 3,472 |
The estimated unrecognized stock-based compensation expense from unvested options and RSUs as of December 31, 2017 was approximately $2.2 million and $1.1 million, respectively, and is expected to be recognized over the remaining vesting periods of up to three years.
72
17. Other Expense (Income), Net
During the years ended December 31, 2017, 2016 and 2015, other expense (income) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, | |||||||
|
| 2017 |
| 2016 |
| 2015 | |||
|
| (in thousands) | |||||||
Unrealized currency exchange loss (gain) |
| $ | 983 |
| $ | (267) |
| $ | (256) |
Realized currency exchange (gain) loss |
|
| (457) |
|
| (261) |
|
| 246 |
Unrealized (gain) loss from gold and silver rounds/bullion, net (1) |
|
| (493) |
|
| (411) |
|
| 420 |
(Gain) loss from sale of investments, net (1) |
|
| - |
|
| (348) |
|
| 1,989 |
Loss on disposal of fixed assets |
|
| 474 |
|
| 578 |
|
| 144 |
Gain on insurance reimbursement |
|
| - |
|
| (620) |
|
| - |
Increase (decrease) in reserve for inventory obsolescence |
|
| 106 |
|
| 545 |
|
| (125) |
Other expense |
|
| 553 |
|
| 224 |
|
| 48 |
Total |
| $ | 1,166 |
| $ | (560) |
| $ | 2,466 |
|
|
18. Net Income per Common Share
Basic earnings per common share is calculated based on the weighted average number of common shares outstanding for the period. Diluted earnings 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 shares during the period, would have been exercised on the later of the beginning of the period or the date granted and that the funds obtained from the exercise were used to purchase common shares at the average market price during the period. All the Company’s 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 3.1 million, 2.8 million, and 4.3 million shares of common stock at weighted average exercise prices of $11.26, $12.39, and $9.34 were outstanding as of December 31, 2017, 2016, and 2015, 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, |
| |||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||
Net income (in thousands) |
| $ | 4,150 |
| $ | 4,387 |
| $ | 3,062 |
|
Basic weighted average shares of common stock outstanding |
|
| 56,854,670 |
|
| 55,140,237 |
|
| 54,186,547 |
|
Dilutive effect of share-based awards |
|
| 740,323 |
|
| 584,969 |
|
| 72,765 |
|
Diluted weighted average common shares outstanding |
|
| 57,594,993 |
|
| 55,725,206 |
|
| 54,259,312 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
| $ | 0.07 |
| $ | 0.08 |
| $ | 0.06 |
|
73
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 1Unadjusted1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and |
Level | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity.) |
As required by accounting guidance, assets and liabilities 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 and liabilities measured at fair value by level within the fair value hierarchy as of December 31, 2021 and 2020:
| | | | | | | | |
| | As of | | As of | | | ||
| | December 31, | | December 31, | | Input Hierarchy Level | ||
| | 2021 | | 2020 | | | ||
| | (in thousands) | | | ||||
Cash and cash equivalents | | $ | 33,712 | | $ | 25,405 | | Level 1 |
Gold and silver rounds | | $ | 589 | | $ | 671 | | Level 1 |
Accounts receivable, net | | $ | 8,672 | | $ | 4,226 | | Level 2 |
Derivative liability - zinc zero cost collar | | $ | (1,844) | | $ | - | | Level 2 |
87
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents &Gold and silver rounds: Cash and cash equivalents consist primarily of cash deposits and are valued at cost, which approximates fair value. Gold and silver rounds consist of precious metals used for investment purposes and in the now discontinued physical dividend program and are valued using quoted market prices.
Accounts receivable, net: Accounts receivable, net include amounts due to the Company for deliveries of concentrates and doré sold to customers. 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, 2021 and 2020, the Company had an unrealized gain or loss of NaN and an unrealized gain of $0.2 million, respectively, included in its accounts receivable on the accompanying Consolidated Balance Sheets related to mark-to-market adjustments. Please see Note 14for additional information.
Derivative liability - zinc zero cost collar: Derivatives are carried at fair value and on a net basis as a legal right of offset exists with the same counterparty. The valuation is using the Black Scholes model as applied to zinc call options and considers interest rate forecast, market volatility, and the zinc forward price curve for each respective hedge period. Any fair value gains or losses are recognized in earnings in the current period. The fair value does not reflect the realized or cash value of the instrument. Mark-to-market adjustments are made until the physical commodity is delivered or the financial instrument is settled. At each reporting period Management evaluates the unrealized gain (loss) on the derivatives instruments based on average London Metal Exchange forward underlying price over a period from the trade date to the payment date.
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:
| | | | | | | | | | | | |
| | | For the year ended December 31, | | Statements of Operations Classification | |||||||
| | | 2021 | | 2020 | | 2019 | | | |||
| Note | | | | | | | | | | | |
Realized and unrealized derivative gain (loss), net | 16 | | $ | 1,002 | | $ | (47) | | $ | 1,714 | | Sales, net |
Realized and unrealized gold and silver rounds (loss) gain | 18 | | $ | (55) | | $ | 1,173 | | $ | 663 | | Other expense, net |
Realized loss on zinc zero cost collar | 18 | | $ | (1,156) | | $ | - | | $ | - | | Realized and unrealized loss on zinc zero cost collar |
Unrealized loss on zinc zero cost collar | 18 | | $ | (1,844) | | $ | - | | $ | - | | Realized and unrealized loss on zinc zero cost collar |
88
Realized/Unrealized Derivatives, net
The following tables summarize the Company’s realized/unrealized derivatives, net (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Gold | | Silver | | Copper | | Lead | | Zinc | | Total | ||||||
For the year ended December 31, 2021 | | | | | | | | | | | | | | | | | | |
Realized (loss) gain | | $ | (47) | | $ | (44) | | $ | 73 | | $ | 163 | | $ | 632 | | $ | 777 |
Unrealized (loss) gain | | | - | | | (159) | | | 6 | | | (2) | | | 380 | | | 225 |
Total realized/unrealized derivatives, net | | $ | (47) | | $ | (203) | | $ | 79 | | $ | 161 | | $ | 1,012 | | $ | 1,002 |
| | | | | | | | | | | | | | | | | | |
| | Gold | | Silver | | Copper | | Lead | | Zinc | | Total | ||||||
For the year ended December 31, 2020 | | | | | | | | | | | | | | | | | | |
Realized gain (loss) | | $ | 623 | | $ | 344 | | $ | 35 | | $ | (143) | | $ | (722) | | $ | 137 |
Unrealized (loss) gain | | | (237) | | | (244) | | | (15) | | | 59 | | | 253 | | | (184) |
Total realized/unrealized derivatives, net | | $ | 386 | | $ | 100 | | $ | 20 | | $ | (84) | | $ | (469) | | $ | (47) |
| | | | | | | | | | | | | | | | | | |
| | Gold | | Silver | | Copper | | Lead | | Zinc | | Total | ||||||
For the 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 |
For the zinc zero cost collar, when the prior month LME average zinc price is greater than the call price, positions settling in the period are recorded as a realized gain or loss, and unsettled positions are recorded as an unrealized gain or loss.
21. Discontinued Operations
As described in Note 1, on December 31, 2020, the Company completed its spin-off of its wholly-owned subsidiary Fortitude Gold Corporation and its subsidiaries (“FGC” or “Nevada Mining Unit”). FGC is presented as discontinued operations in the Company’s consolidated financial statements.
Results of discontinued operations for the years ended December 31, 2021, 2020, and 2019 are as follows (in thousands):
| | | | | | | | | |
| | For the year ended December 31, | |||||||
|
| 2021 | | 2020 | | 2019 | |||
| | | |||||||
Sales, net | | $ | - | | $ | 53,967 | | $ | 15,065 |
Mine cost of sales | | | - | | | 37,784 | | | 14,582 |
Mine gross profit | | | - | | | 16,183 | | | 483 |
Exploration expenses | | | - | | | 2,649 | | | 932 |
Other expense, net | | | - | | | 838 | | | 168 |
Profit (loss) before income taxes | | | - | | | 12,696 | | | (617) |
Income tax expense (benefit) | | | - | | | 2,006 | | | (917) |
Net income from discontinued operations | | $ | - | | $ | 10,690 | | $ | 300 |
89
Selected Statements of Cash Flows presenting depreciation and amortization, capital expenditures, sale proceeds and significant operating noncash items of FGC were as follows:
| | | | | | | | | | |
| | | For the year ended December 31, | |||||||
| | | 2021 | | 2020 | | 2019 | |||
| | | | | | | | | | |
Cash flows from discontinued operating activities: | | | | | | | | | | |
Net income | | | $ | - | | $ | 10,690 | | $ | 300 |
Adjustments to reconcile net income to net cash from discontinued operating activities: | | | | | | | | | | |
Deferred income benefit | | | | - | | | (224) | | | (917) |
Depreciation and amortization | | | | - | | | 10,377 | | | 4,022 |
Other operating adjustments | | | | - | | | 48 | | | 17 |
Changes in operating assets and liabilities: | | | | | | | | | | |
Accounts receivable | | | | - | | | (145) | | | - |
Inventories | | | | - | | | (2,300) | | | (6,490) |
Prepaid expenses and other current assets | | | | - | | | (1,670) | | | 346 |
Other non-current assets | | | | - | | | (2,085) | | | (3,600) |
Accounts payable and other accrued liabilities | | | | - | | | (1,707) | | | 3,617 |
Mining royalty and income taxes payable, net | | | | - | | | 1,200 | | | - |
Net cash provided by (used in) discontinued operating activities | | | | - | | | 14,184 | | | (2,705) |
| | | | | | | | | | |
Cash flows from discontinued investing activities: | | | | | | | | | | |
Capital expenditures | | | | - | | | (6,488) | | | (22,538) |
Net cash used in discontinued investing activities | | | | - | | | (6,488) | | | (22,538) |
| | | | | | | | | | |
Cash flows from discontinued financing activities: | | | | | | | | | | |
Other financing activities | | |
| - | |
| (452) | |
| (2,019) |
Net cash provided used in discontinued financing activities | | | | - | | | (452) | | | (2,019) |
| | | | | | | | | | |
| | | | | | | | | | |
Supplemental Cash Flow Information Discontinued Operations | | | | | | | | | | |
Non-cash investing activities: | | | | | | | | | | |
Change in capital expenditures in accounts payable | | | $ | - | | $ | (1,544) | | $ | (1,174) |
Change in estimate for asset retirement costs | | | $ | - | | $ | 1,159 | | $ | 1,726 |
Effective December 31, 2020, in connection with the spin-off, the Company entered into an agreement with FGC that governs the relationship of the parties following the spin-off. The Management Services Agreement provided that the Company and its subsidiaries provide services to FGC to assist in the transition of FGC as a separate company. The agreed upon charges for services rendered were based on market rates that align with the rates that an unaffiliated service provider would charge for similar services. Due to the successful development of FGC’s corporate, administrative, and technical capabilities, the Company terminated the Agreement effective on May 21, 2021.
90
22. Supplementary Cash Flow Information
During the years ended December 31, 2021, 2020, and 2019, other operating adjustments and write-downs within the net cash provided by operations on the Consolidated Statements of Cash Flows consisted of the following:
| | | | | | | | | |
| | For the year ended December 31, | |||||||
| | 2021 | | 2020 | | 2019 | |||
| | (in thousands) | | | | ||||
Unrealized loss (gain) on gold and silver rounds | | $ | 53 | | $ | (170) | | $ | (671) |
Realized loss (gain) on gold and silver rounds | | | 2 | | | (1,003) | | | - |
Unrealized foreign currency exchange loss (gain) | | | 493 | | | 105 | | | (19) |
Loss on disposition of fixed assets | | | 37 | | | 3 | | | 12 |
Increase (decrease) in reserve for inventory | | | 175 | | | (148) | | | 885 |
Stock-based compensation related to restructuring | | | - | | | 809 | | | - |
Unrealized loss on zinc zero cost collar | | | 1,844 | | | - | | | - |
Other | | | 105 | | | - | | | 98 |
Total other operating adjustments | | $ | 2,709 | | $ | (404) | | $ | 305 |
23. Segment Reporting
As of December 31, 2021, the Company has organized its operations into 3 geographic regions. The geographic regions include Oaxaca, Mexico, Michigan, U.S.A. and Corporate and Other. Oaxaca, Mexico represents the Company’s only production stage property. Michigan, U.S.A. is an advanced exploration stage property. 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 production stage or advanced exploration stage properties are included in Corporate and Other.
The following table shows selected information from the Consolidated Balance Sheets relating to the Company’s segments (in thousands):
| | | | | | | | | | | | |
| | Oaxaca, Mexico | | Michigan, USA (1) | | Corporate and Other | | Consolidated | ||||
As of December 31, 2021 | | | | | | | | | | | | |
Total current assets | | $ | 50,057 | | $ | 5,528 | | $ | 3,330 | | $ | 58,915 |
Total non-current assets | | | 66,756 | | | 90,018 | | | 73 | | | 156,847 |
Total assets | | $ | 116,813 | | $ | 95,546 | | $ | 3,404 | | $ | 215,762 |
Total current liabilities | | | 25,833 | | | 2,459 | | | 1,367 | | | 29,659 |
Total non-current liabilities | | | 1,436 | | | 63,438 | | | 479 | | | 65,353 |
Total shareholders' equity | | | 89,544 | | | 29,649 | | | 1,557 | | | 120,750 |
Total liabilities and shareholders' equity | | $ | 116,813 | | $ | 95,546 | | $ | 3,403 | | $ | 215,762 |
| | | | | | | | | | | | |
As of December 31, 2020 | | | | | | | | | | | | |
Total current assets | | $ | 34,744 | | $ | - | | $ | 8,129 | | $ | 42,873 |
Total non-current assets | | | 62,695 | | | - | | | 166 | | | 62,861 |
Total assets | | $ | 97,439 | | $ | - | | $ | 8,295 | | $ | 105,734 |
Total current liabilities | | | 11,007 | | | - | | | 1,078 | | | 12,085 |
Total non-current liabilities | | | 3,098 | | | - | | | 13 | | | 3,111 |
Total shareholders' equity | | | 83,334 | | | - | | | 7,204 | | | 90,538 |
Total liabilities and shareholders' equity | | $ | 97,439 | | $ | - | | $ | 8,295 | | $ | 105,734 |
(1) | Michigan, USA was acquired on December 10, 2021 and therefore there are no December 31,
24. COVID-19 The Company continues to protect the health and safety of our employees, contractors, and communities, by taking 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 with the benefit of technology, we are able to maintain our operations and internal controls over financial reporting and disclosures. On August 18, 2021, we announced the temporary suspension of activities at the Don David Gold Mine in response to a spike in COVID-19 cases at our mine and surrounding communities. The suspension lasted twelve days and by September 7, 2021, we had significantly ramped back up operations under further enhanced COVID-19 protocols. The Company incurred COVID-19 specific costs of $0.2 million in 2021 for activities such as additional health and safety procedures, increased transportation, and community contributions. We are working with local authorities, to improve the availability of vaccines to our employees and host communities. As of the date of the issuance of these Consolidated Financial Statements, there have been no other significant impacts, including impairments, to the Company’s operations and financial statements. However, the long-term impact of the COVID-19 outbreak on the Company’s results of operations, financial position, and cash flows will depend on future developments, including the duration and spread of the outbreak and related advisories and restrictions. These developments and the impact of COVID-19 on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s results of operations, financial position, and cash flows may be materially adversely affected. The Company is not able to estimate the duration of the pandemic and potential impact on its business if disruptions or delays in business 92 developments and shipments of product occur. In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including a decreased ability to raise additional capital when and if needed on acceptable terms, if at all. As the situation continues to evolve, the Company will continue to closely monitor market conditions and respond accordingly. The Company has completed various scenario planning analyses to consider potential impacts of COVID-19 on its business, including volatility in commodity prices, temporary disruptions and/or curtailments of operating activities (voluntary or involuntary). The Company believes that current working capital balances will be sufficient for the foreseeable future, although there is no assurance that will be the case. 25. Subsequent Events None.
ITEM 9. CHANGES IN AND None. 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, 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, Due to the Aquila acquisition at December 10, 2021, management performed review and approval controls related to the balances consolidated into the statement of financial position and statement of operations at December 31, 2021. The Aquila acquisition consisted of multiple complex valuations including the gold and silver stream agreements, the deferred tax liability and land. While multiple layers of approval and reasonableness tests were conducted, management prepared insufficient documentation related to the performance of these review controls to allow the auditor to reperform the controls. Additionally, due to the timing of the acquisition, it was necessary to perform these review controls in a compressed timeframe, which resulted in an adjustment identified by the independent registered public accounting firm between balance sheet accounts. 93 Due to the complexity of the acquisition, limited timing from the close of the transaction and the inherent limitation of internal controls over financial reporting, management concluded that our internal control over financial reporting as of December 31,
Changes in Internal Control over Financial Reporting The Company evaluates the adequacy of its internal control over financial reporting quarterly. In addition, the Company enhances its internal controls in response to internal control evaluations, internal and external audits and regulations, when appropriate. There has been no change in our internal control over financial reporting during the fourth quarter ended December 31, ITEM 9B.OTHER INFORMATION None. ITEM 9C.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS None. PART III Item The information required by this item is incorporated by reference from the information to be contained in our Proxy Statement for the We have adopted a code of ethics that applies to all of our employees, including the principal executive officer, principal financial officer, principal accounting officer, and those of our officers performing similar functions. The full text of our code of ethics can be found on the Corporate Governance page on our website. In the event our Board of Directors approves an amendment to or waiver from any provision of our code of ethics, we will disclose the required information pertaining to such amendment or waiver on our website. Item The information required by this item is incorporated by reference from the information to be contained in our
94 The information required by this item is incorporated by reference from the information to be contained in our 2022 Proxy Statement.
The information required by this item is incorporated by reference from the information to be contained in our Item 14.Principal Accountant Fees and Services
The information required by this item is incorporated by reference from the information to be contained in our
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None. SIGNATURES
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