Gold Resource (GORO) - 2022 Q2 - Quarterly Report

Second Quarter 2022 Highlights Strategic The company received a corporate social responsibility award and strengthened its senior leadership team - The Don David Gold Mine received the "Corporate Social Responsibility" (ESR) award for the eighth consecutive year from the Mexican Center for Philanthropy (CEMEFI), recognizing its commitment to social and environmental protection programs[11] - The company continues to process tailings from nearby communities to ensure proper environmental handling and storage[11] - To strengthen the senior leadership team, Patrick Frenette was hired as Vice President, Technical Services, and Steve Donohue was seconded as Vice President, Environmental and Regulatory Affairs (Michigan) to further de-risk the Back Forty Project's optimized feasibility study and permit applications[11] Operational The Don David Gold Mine produced 11,475 gold equivalent ounces while exploration and feasibility studies progressed Don David Gold Mine Q2 2022 Production | Metric | Quantity | | :--- | :--- | | Gold Equivalent Ounces | 11,475 | | Gold Ounces | 8,746 | | Silver Ounces | 231,622 | | Average Realized Gold Price | $1,874/oz | | Average Realized Silver Price | $22/oz | - Exploration efforts continued to focus on infill drilling of the Arista vein system with encouraging results, while sampling programs were initiated at the Alta Gracia and Chamizo projects[11] - The feasibility study for the Back Forty Project in Michigan progressed during Q2 2022, with completion expected in the second half of the year, followed by the submission of permit applications to state agencies[11] Financial The company maintained a strong balance sheet with $33.3 million in cash and reported net income of $2.7 million Key Financial Data for Q2 2022 | Metric | Amount (in millions of USD) | | :--- | :--- | | Cash (as of June 30) | 33.3 | | Cash (as of Dec 31) | 33.7 | | Capital and Exploration Expenditures | 15.7 | | Year-to-Date Operating Cash Flow | 12.2 | | Net Income (Quarter) | 2.7 | | Earnings Per Share (Quarter) | $0.03 | | Working Capital (as of June 30) | 37.1 | | Working Capital (as of Dec 31) | 29.3 | | Total Cash Cost per AuEq oz | $247 | | Total All-In Sustaining Cost per AuEq oz | $799 | - The company paid $0.9 million in dividends to shareholders during the quarter, bringing the cumulative total to over $121 million since 2010[11] Part I - FINANCIAL INFORMATION ITEM 1. Financial Statements This section presents the unaudited condensed consolidated interim financial statements for the period ended June 30, 2022 Condensed Consolidated Interim Balance Sheets Total assets slightly decreased to $213.6 million, while shareholders' equity increased to $126.0 million Condensed Consolidated Interim Balance Sheets Summary (in thousands of USD) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 33,335 | 33,712 | | Total current assets | 60,426 | 58,915 | | Property, plant and mine development, net | 152,777 | 156,771 | | Total assets | 213,606 | 215,762 | | Liabilities and Shareholders' Equity | | | | Total current liabilities | 23,373 | 29,659 | | Gold and silver stream agreements liability | 42,987 | 42,560 | | Total liabilities | 87,604 | 95,012 | | Total shareholders' equity | 126,002 | 120,750 | | Total liabilities and shareholders' equity | 213,606 | 215,762 | Condensed Consolidated Interim Statements of Operations Net sales and net income showed significant growth for the three and six months ended June 30, 2022 Condensed Consolidated Interim Statements of Operations Summary (in thousands of USD) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net sales | 37,064 | 30,836 | 82,481 | 58,104 | | Total cost of sales | 29,045 | 23,956 | 55,139 | 42,649 | | Mine gross profit | 8,019 | 6,880 | 27,342 | 15,455 | | Net income | 2,673 | 1,283 | 6,692 | 3,810 | | Net income per share, basic and diluted | 0.03 | 0.02 | 0.08 | 0.05 | Condensed Consolidated Interim Statements of Changes in Shareholders' Equity Total shareholders' equity increased to $126.0 million, driven by net income and stock-based compensation Summary of Changes in Shareholders' Equity (in thousands of USD) | Metric | Balance at March 31, 2021 | Balance at June 30, 2021 | Balance at March 31, 2022 | Balance at June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Common stock | 75 | 75 | 89 | 89 | | Additional paid-in capital | 84,966 | 85,269 | 109,982 | 110,480 | | Retained earnings | 14,436 | 14,974 | 20,699 | 22,488 | | Treasury stock | (5,884) | (5,884) | (5,884) | (5,884) | | Accumulated other comprehensive loss | (1,171) | (1,171) | (1,171) | (1,171) | | Total Shareholders' Equity | 92,422 | 93,263 | 123,715 | 126,002 | - In Q2 2022, the company paid a dividend of $0.01 per share, totaling $0.884 million; for the first half of 2022, dividends paid were $0.02 per share, totaling $1.767 million[18][21] Condensed Consolidated Interim Statements of Cash Flows Net cash from operating activities was $12.2 million for the six months ended June 30, 2022 Condensed Consolidated Interim Statements of Cash Flows Summary (in thousands of USD) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | 12,206 | 16,129 | | Net cash used in investing activities | (9,985) | (9,333) | | Net cash used in financing activities | (2,143) | (1,471) | | Effect of exchange rate changes on cash | (455) | (195) | | Net (decrease) increase in cash and cash equivalents | (377) | 5,130 | | Cash and cash equivalents at end of period | 33,335 | 30,535 | Notes to the Condensed Consolidated Interim Financial Statements This section provides detailed notes covering key accounting policies, revenue sources, and financial instrument details Note 1. Basis of Preparation of Financial Statements The unaudited interim financial statements are prepared in accordance with SEC rules for interim reporting - The condensed consolidated interim financial statements are unaudited and have omitted or condensed certain U.S. GAAP disclosures as permitted by SEC rules[26] Note 2. Recently Adopted Accounting Standards Recently issued accounting standards currently have no impact on the company's financial statements - After evaluation, recently issued accounting standards currently have no impact on the company's financial statements and supplementary data[28] Note 3. Revenue Revenue is primarily derived from dore and concentrate sales, with net sales increasing significantly year-over-year Net Sales by Source (in thousands of USD) | Source | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Doré sales, net | 2,531 | 2,903 | 3,788 | 5,696 | | Concentrate sales, net | 36,697 | 27,264 | 78,823 | 51,774 | | Realized gain on embedded derivatives, net | 1,160 | 359 | 2,026 | 450 | | Unrealized (loss) gain on embedded derivatives, net | (3,324) | 310 | (2,156) | 184 | | Total Net Sales | 37,064 | 30,836 | 82,481 | 58,104 | - In Q2 2022, zinc sales from concentrate were $14.352 million, a substantial increase from $9.240 million in the same period of 2021[30] Note 4. Inventories, net Net inventories increased to $12.5 million, primarily due to higher levels of concentrate, dore, and supplies Inventories, net (in thousands of USD) | Inventory Category | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Stockpile - underground mine | 61 | - | | Concentrate | 2,986 | 2,048 | | Doré, net | 800 | 452 | | Materials and supplies | 8,659 | 7,861 | | Total | 12,506 | 10,361 | Note 5. Income Taxes Income tax expense increased significantly, driven by higher net income and Mexico's tax regime Income Tax Expense (in thousands of USD) | Period | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Income tax expense | 3,781 | 1,751 | 9,132 | 4,345 | - In addition to a 30% corporate income tax, mining entities in Mexico are subject to a 7.5% "special" mining duty (treated as income tax) and a 0.5% gold and silver sales mining duty (treated as a production cost)[35] - The company is subject to a 5% dividend withholding tax when transferring funds from its Mexican subsidiary to the U.S., in accordance with the U.S.-Mexico tax treaty[37] Note 6. Promissory Note The company holds a non-interest-bearing promissory note from Green Light Metals due in December 2022 - The company holds a CAD 4.9 million (approx. USD 3.9 million) promissory note issued by Green Light Metals, due on December 31, 2022, payable in Green Light Metals common stock[39] Note 7. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets increased, mainly due to advances to suppliers and prepaid insurance Prepaid Expenses and Other Current Assets (in thousands of USD) | Category | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Advances to suppliers | 1,149 | 188 | | Prepaid insurance | 2,414 | 1,222 | | Other current assets | 429 | 875 | | Total | 3,992 | 2,285 | Note 8. Property, Plant and Mine Development, net Net property, plant, and mine development decreased slightly, while depreciation and amortization expenses increased Property, Plant and Mine Development, net (in thousands of USD) | Category | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Mine development | 98,900 | 92,138 | | Plant facilities and infrastructure | 35,200 | 24,973 | | Accumulated depreciation and amortization | (118,888) | (105,167) | | Total | 152,777 | 156,771 | - Depreciation and amortization expenses were $7.3 million for Q2 2022 and $13.2 million for H1 2022, a significant increase from the same periods in 2021[44] Note 9. Accrued Expenses and Other Liabilities Accrued expenses increased due to higher royalty fees and employee profit-sharing obligations in Mexico Accrued Expenses and Other Liabilities (in thousands of USD) | Category | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Accrued royalties | 2,145 | 1,743 | | Employee profit sharing obligation | 2,113 | 1,888 | | Other payables | 1,331 | 1,100 | | Total accrued expenses and other current liabilities | 5,589 | 4,731 | | Accrued non-current labor obligations | 1,105 | 920 | | Deferred Stock Unit (DSU) compensation liability | 671 | 206 | | Other long-term liabilities | 160 | 826 | | Total other non-current liabilities | 1,936 | 1,952 | - Mexican labor outsourcing reform resulted in the company assuming employee profit sharing (PTU) obligations, with a $2.1 million current liability and a $1.1 million long-term liability for statutory severance recorded as of June 30, 2022[47][48] Note 10. Gold and Silver Stream Agreements The total liability related to gold and silver stream agreements with Osisko Bermuda Limited was $43.0 million Gold and Silver Stream Agreements Liability (in thousands of USD) | Category | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Liability related to Gold Stream Agreement | 20,459 | 20,364 | | Liability related to Silver Stream Agreement | 22,528 | 22,196 | | Total Liability | 42,987 | 42,560 | - The Gold Stream Agreement entitles OBL to purchase 18.5% of refined gold from the Back Forty Project until 105,000 ounces are delivered, after which the percentage drops to 9.25%; OBL will pay 30% of the spot gold price, capped at $600 per ounce[52] - The Silver Stream Agreement entitles OBL to purchase 85% of the silver production from the Back Forty Project at a fixed price of $4.00 per ounce[56] Note 11. Reclamation and Remediation Total reclamation and remediation obligations increased slightly to $3.3 million, primarily related to the Don David Gold Mine Change in Reclamation and Remediation Obligations (in thousands of USD) | Category | 2022 | 2021 | | :--- | :--- | :--- | | Beginning reclamation liability | 1,833 | 1,890 | | Foreign currency translation (gain) loss | 55 | (57) | | Ending reclamation liability | 1,888 | 1,833 | | Beginning asset retirement obligation | 1,279 | 1,208 | | Accretion | 51 | 109 | | Foreign currency translation (gain) loss | 40 | (38) | | Ending asset retirement obligation | 1,370 | 1,279 | | Total ending balance | 3,258 | 3,112 | Note 12. Commitments and Contingencies The company has equipment purchase commitments and contingent considerations tied to the Back Forty Project's development - As of June 30, 2022, the company had equipment purchase commitments of approximately $0.8 million, an increase from $0.4 million at December 31, 2021[59] - A contingent consideration of $4.3 million is tied to development milestones for the Back Forty Project, including financing completion and phased payments after commercial production begins[63][67] - The company has significant liabilities under the gold and silver stream agreements with Osisko Bermuda Limited; failure to achieve commercial production on schedule could require repayment of advances with interest or result in Osisko taking possession of the Back Forty Project assets[65] Note 13. Shareholders' Equity The company had 88,372,692 common shares issued and outstanding and distributed dividends during the period Dividend Distribution | Period | Dividend per Share | Total Amount (in millions of USD) | | :--- | :--- | :--- | | Three Months Ended June 30, 2022 | $0.01 | 0.9 | | Six Months Ended June 30, 2022 | $0.02 | 1.8 | | Three Months Ended June 30, 2021 | $0.01 | 1.0 | | Six Months Ended June 30, 2021 | $0.02 | 1.7 | - As of June 30, 2022, there were 88,372,692 common shares issued and outstanding[66] Note 14. Derivatives The company manages commodity price risk through zinc zero-cost collars and accounts for embedded derivatives in concentrate sales - Concentrate sales contracts contain embedded derivatives that require mark-to-market adjustments for unsettled invoices based on forward metal prices at each reporting period[68][69] - The company uses zinc zero-cost collars to manage zinc price risk, which resulted in a $2.5 million realized loss and a $2.1 million unrealized gain in the first half of 2022[71][72] Value of Unsettled Sales Contracts (in thousands of USD) | Metal | Quantity | Average Forward Price | Value | | :--- | :--- | :--- | :--- | | Gold (oz) | 5,029 | $1,845 | $9,279 | | Silver (oz) | 158,039 | $21.87 | $3,456 | | Copper (tonnes) | 163 | $9,092 | $1,482 | | Lead (tonnes) | 1,711 | $2,157 | $3,691 | | Zinc (tonnes) | 3,553 | $3,984 | $14,155 | | Total | | | $32,063 | Note 15. Employee Benefits The company provides a 401(k) plan for U.S. employees and statutory profit sharing for employees in Mexico - The company offers a qualified retirement plan under Section 401(k) for its U.S. employees[74] - Under Mexican law, employees are entitled to statutory profit sharing (PTU) payments equivalent to 10% of the employer's taxable income[75] Note 16. Stock-Based Compensation Stock-based compensation expense increased significantly due to new equity awards granted to management and the board Stock-Based Compensation Expense (in thousands of USD) | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Stock options | 250 | 135 | 399 | 362 | | Restricted stock units | 256 | 70 | 304 | (16) | | Performance stock units | 94 | - | 94 | - | | Deferred stock units | (207) | (8) | 370 | 335 | | Total | 393 | 197 | 1,167 | 681 | - In H1 2022, 214,357 DSUs were granted to the Board, along with 377,076 RSUs and 695,041 PSUs; PSUs typically vest over three years based on relative total shareholder return and are expected to be cash-settled[79][80][82] - In H1 2022, 355,000 stock options were exercised and settled in cash[81] Note 17. Zinc Zero Cost Collar The zinc zero-cost collar generated a net gain in the second quarter due to falling zinc forward prices Realized and Unrealized Gain (Loss) on Zinc Zero Cost Collar (in thousands of USD) | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Realized loss | 829 | - | 2,457 | - | | Unrealized gain | (4,628) | - | (2,119) | - | | Total | (3,799) | - | 338 | - | - The forward price of zinc decreased from $4,244 per tonne at March 31, 2022, to $3,130 per tonne at June 30, 2022, causing the collar position to shift from a liability to an asset[87][162] Note 18. Other Expense, net Other expenses for the six-month period increased, primarily due to higher unrealized foreign exchange losses Other Expense, net (in thousands of USD) | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Unrealized foreign exchange loss | 77 | 75 | 522 | 316 | | Realized foreign exchange (gain) loss | 30 | 114 | 159 | (59) | | Realized and unrealized (gain) loss on gold and silver rounds, net | 8 | (34) | (28) | 32 | | Employee benefit obligation | - | 700 | - | 700 | | Stream agreement interest | 134 | - | 310 | - | | Other (income) expense | (35) | 12 | 89 | (436) | | Total | 214 | 867 | 1,052 | 553 | Note 19. Net Income per Common Share Basic and diluted net income per share increased due to higher net income Net Income per Common Share Calculation Summary | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income (in thousands of USD) | 2,673 | 1,283 | 6,692 | 3,810 | | Basic weighted-average common shares outstanding | 88,343,992 | 74,485,672 | 88,341,398 | 74,445,058 | | Effect of dilutive stock-based awards | 447,560 | 501,887 | 305,451 | 423,129 | | Diluted weighted-average common shares outstanding | 88,791,552 | 74,987,559 | 88,646,849 | 74,868,187 | | Net income per common share, basic and diluted | $0.03 | $0.02 | $0.08 | $0.05 | - 2.3 million and 2.6 million stock options were excluded from the diluted weighted-average share calculation for the periods ended June 30, 2022 and 2021, respectively, as they were anti-dilutive[92] Note 20. Fair Value Measurement Assets and liabilities are measured at fair value using a three-level hierarchy Assets by Fair Value Hierarchy (in thousands of USD) | Asset Category | June 30, 2022 | December 31, 2021 | Input Level | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | 33,335 | 33,712 | Level 1 | | Accounts receivable, net | 6,277 | 8,672 | Level 2 | | Derivative asset - zinc zero cost collar | 275 | - | Level 2 | | Derivative liability - zinc zero cost collar | - | (1,844) | Level 2 | - Accounts receivable, net, includes a $1.9 million mark-to-market adjustment for embedded derivatives as of June 30, 2022[96] - The zinc zero-cost collar derivative is valued using the Black-Scholes model, considering interest rate forecasts, market volatility, and the zinc forward price curve[97] Note 21. Supplementary Cash Flow Information Other operating adjustments significantly impacted cash flow from operations Other Operating Adjustments (in thousands of USD) | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Unrealized (gain) loss on gold and silver rounds | 8 | (35) | (62) | 31 | | Realized loss on gold and silver rounds | - | 1 | 34 | 1 | | Unrealized foreign exchange loss | 77 | 75 | 522 | 316 | | Unrealized loss on zinc zero cost collar | (4,628) | - | (2,119) | - | | Other | 165 | 60 | (202) | 93 | | Total other operating adjustments | (4,378) | 101 | (1,827) | 441 | Note 22. Segment Reporting The company operates in three geographic segments: Oaxaca, Mexico; Michigan, USA; and Corporate and Other Segment Asset Summary (in thousands of USD) | Segment | Total Assets at June 30, 2022 | Total Assets at December 31, 2021 | | :--- | :--- | :--- | | Oaxaca, Mexico | 113,995 | 116,813 | | Michigan, USA | 94,164 | 95,546 | | Corporate and Other | 5,447 | 3,403 | | Consolidated Total Assets | 213,606 | 215,762 | Segment Operating Results Summary (in thousands of USD) | Metric | Oaxaca, Mexico (Q2 2022) | Michigan, USA (Q2 2022) | Corporate and Other (Q2 2022) | Consolidated Total (Q2 2022) | | :--- | :--- | :--- | :--- | :--- | | Net sales | 37,064 | - | - | 37,064 | | Net income (loss) | 7,309 | (2,181) | (2,455) | 2,673 | - The Michigan segment was acquired on December 10, 2021, so no comparable information exists for the same period in 2021[105][106] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses operating results and financial condition for the three and six months ended June 30, 2022 Overview The company focuses on mining gold and silver projects with low operating costs and high returns on capital - The company primarily produces gold and silver dore, as well as copper, lead, and zinc concentrates, from its Don David Gold Mine[111] - The Back Forty Project is expected to complete its feasibility study in the second half of 2022, with permitting activities planned to continue into 2023[111] - The company is committed to a zero-harm workplace and adheres to the highest ESG standards for the benefit of its employees and local communities[112][114] COVID-19 Pandemic The company continues to take precautions to protect its workforce and has not experienced material operational impacts - The company continues to implement preventative measures to protect the health and safety of its employees and communities, including professional training, social distancing, employee screening, and remote work[116] - To date, the COVID-19 pandemic has not had a material impact on the company's operations or financial statements, but the long-term effects remain uncertain, and the company will continue to monitor market conditions[117] Results of Operations Higher gold production and zinc prices drove significant increases in net sales and net income for H1 2022 Don David Gold Mine Production Statistics Gold production increased year-over-year due to higher grades, while silver production declined Don David Gold Mine Production Statistics Summary | Metric | Q2 2022 | Q2 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Tonnes Milled | 128,884 | 126,363 | +2.0% | | Average Gold Grade (g/t) | 2.63 | 1.91 | +37.7% | | Average Silver Grade (g/t) | 64 | 79 | -19.0% | | Gold Production (oz) | 9,317 | 6,555 | +42.1% | | Silver Production (oz) | 249,088 | 295,979 | -15.9% | | Lead Grade (%) | 1.99 | 1.63 | +22.1% | | Zinc Grade (%) | 4.00 | 3.64 | +9.9% | | Gold Recovery (%) | 85.1 | 80.0 | +5.1% | | Zinc Recovery (%) | 83.1 | 79.4 | +3.7% | - The tailings filtration plant and dry stack facility, completed in 2021, now process 85% of tailings for dry stacking and 15% for underground paste backfill, conserving water and extending operational life[125][127] Sales Statistics Sales volumes for gold, lead, and zinc increased, with a significant rise in the average realized zinc price Don David Gold Mine Sales Statistics Summary | Metric | Q2 2022 | Q2 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Gold Sold (oz) | 8,746 | 5,697 | +53.5% | | Silver Sold (oz) | 231,622 | 270,321 | -14.3% | | Lead Sold (tonnes) | 1,755 | 1,214 | +44.6% | | Zinc Sold (tonnes) | 3,590 | 3,193 | +12.4% | | Average Gold Price ($/oz) | 1,874 | 1,822 | +2.9% | | Average Silver Price ($/oz) | 22.05 | 26.88 | -17.9% | | Average Zinc Price ($/tonne) | 4,338 | 2,945 | +47.3% | | Total Gold Equivalent Ounces Sold | 11,475 | 9,685 | +18.5% | Financial Measures Net sales, mine gross profit, and net income all increased significantly year-over-year for Q2 and H1 2022 Key Financial Data Summary (in thousands of USD) | Metric | Q2 2022 | Q2 2021 | Change (YoY) | H1 2022 | H1 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | 37,064 | 30,836 | +20.2% | 82,481 | 58,104 | +42.0% | | Total cost of sales | 29,045 | 23,956 | +21.2% | 55,139 | 42,649 | +29.3% | | Mine gross profit | 8,019 | 6,880 | +16.6% | 27,342 | 15,455 | +76.9% | | Net income | 2,673 | 1,283 | +108.3% | 6,692 | 3,810 | +75.6% | - The increase in cost of sales was primarily due to a $2.9 million increase in depreciation and a $2.2 million increase in production costs, related to higher prices for consumables, royalties, and equipment parts[145][146] Other Costs and Expenses, Including Taxes Total other costs and expenses rose in H1 2022, driven by Back Forty project expenses and higher income taxes Other Costs and Expenses, Including Taxes (in thousands of USD) | Category | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | General and administrative | 1,920 | 2,134 | 3,819 | 3,715 | | DDGM exploration | 810 | 648 | 2,047 | 1,855 | | Back Forty project | 2,027 | - | 3,095 | - | | Stock-based compensation | 393 | 197 | 1,167 | 681 | | Realized and unrealized (gain) loss on zinc zero cost collar | (3,799) | - | 338 | - | | Other expense, net | 214 | 867 | 1,052 | 553 | | Provision for income taxes | 3,781 | 1,751 | 9,132 | 4,345 | | Total other costs, including taxes | 5,346 | 5,597 | 20,650 | 11,645 | - Back Forty project expenses were $3.1 million in H1 2022, primarily for the feasibility study and permitting applications[160] - Income tax expense increased to $9.1 million in H1 2022, driven mainly by a 76% increase in net income[165] Other Non-GAAP Financial Measures Total cash cost and all-in sustaining cost per gold equivalent ounce decreased significantly due to higher by-product credits Non-GAAP Financial Measures Summary | Metric | Q2 2022 | Q2 2021 | Change (YoY) | H1 2022 | H1 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Cash Cost per AuEq oz, net of by-product credits | $247 | $687 | -64.0% | $40 | $554 | -92.8% | | Total All-in Sustaining Cost per AuEq oz, net of by-product credits | $799 | $1,254 | -36.2% | $626 | $1,104 | -43.3% | | Total All-in Cost per AuEq oz, net of by-product credits | $1,094 | $1,512 | -27.6% | $929 | $1,397 | -33.5% | - The decrease in total cash cost is primarily attributable to increased by-product credits from base metal sales and higher gold equivalent ounces sold[166][167] 2022 Capital and Exploration Investment Summary Total capital and exploration investment for H1 2022 was $15.7 million, focused on development and growth projects H1 2022 Capital and Exploration Investment (in thousands of USD) | Investment Category | H1 2022 | Full Year 2022 Guidance | | :--- | :--- | :--- | | Sustaining Investment | | | | Underground development | 3,168 | $8.5 - $9.5 million | | In-fill drilling and exploration development | 4,040 | $7.0 - $7.5 million | | Other sustaining capital | 1,416 | $4.0 - $4.5 million | | Sustaining Investment Subtotal | 8,624 | | | Growth Investment | | | | DDGM Growth: Gold regrind | 745 | - | | DDGM Growth: Dry stack completion | 1,149 | - | | DDGM Growth: Surface exploration/other | 935 | $2.5 - $3.0 million | | DDGM Growth: Underground exploration drilling | 1,112 | $3.0 - $3.5 million | | Back Forty Growth: Feasibility study & permitting | 3,095 | $8.0 - $9.0 million | | Growth Investment Subtotal | 7,036 | | | Total Capital and Exploration | 15,660 | $33.0 - $37.0 million | - The gold regrind project was commissioned in Q2 2022 and is expected to continue improving gold recovery rates, which have already increased by approximately 5% since the same period in 2021[174] - The dry stack tailings project continued operational optimization in H1 2022, with 85% of tailings now sent to the dry stack facility and 15% used for underground paste backfill[176] 2022 DDGM Exploration Updates Exploration activities in H1 2022 focused on infill and expansion drilling of the Arista and Switchback vein systems - Underground exploration drilling continued to test the Three Sisters area and other new vein targets within the Arista vein system, while also defining and expanding reserves and resources of existing vein systems[181] - During the second quarter, 5 exploration drill holes (2,890 meters) and 34 infill drill holes (4,404 meters) were completed[181] - Surface exploration programs initiated soil sampling at the Alta Gracia mining area and geological mapping and rock chip sampling at the Chamizo project area[183] Non-GAAP Measures This section provides definitions and reconciliations for non-GAAP financial measures used by the company - Non-GAAP measures include cash cost before by-product credits, total cash cost net of by-product credits, and all-in sustaining cost (AISC), calculated on a per precious metal gold equivalent ounce sold basis[184] - Copper, lead, and zinc are considered by-products of gold and silver production, and their sales revenue is treated as a by-product credit to reduce total cash costs[185] Reconciliation of Non-GAAP Cost Measures to U.S. GAAP (in thousands of USD, except per ounce data) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Precious Metal Gold Equivalent Ounces Sold (oz) | 11,475 | 9,685 | 23,204 | 18,491 | | Total cash cost, net of by-product credits | 2,832 | 6,650 | 922 | 10,241 | | Total cash cost per AuEq oz, net of by-product credits | $247 | $687 | $40 | $554 | | Consolidated total all-in sustaining cost, net of by-product credits | 9,173 | 12,149 | 14,532 | 20,406 | | Consolidated total all-in sustaining cost per AuEq oz, net of by-product credits | $799 | $1,254 | $626 | $1,104 | | Total all-in cost, net of by-product credits | 12,551 | 14,642 | 21,568 | 25,825 | | Total all-in cost per AuEq oz, net of by-product credits | $1,094 | $1,512 | $929 | $1,397 | Trending Highlights Quarterly data from 2021 and 2022 shows positive trends in production, sales, and profitability Operational Data Trend Summary | Metric | Q1 2021 | Q2 2021 | Q1 2022 | Q2 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Tonnes Milled | 138,980 | 129,590 | 136,844 | 129,099 | | Average Gold Grade (g/t) | 1.68 | 1.93 | 3.00 | 2.63 | | Gold Production (oz) | 6,097 | 6,555 | 11,187 | 9,317 | | Gold Sold (oz) | 5,019 | 5,697 | 8,381 | 8,746 | | Average Zinc Price ($/tonne) | $2,797 | $2,945 | $3,842 | $4,338 | | Total Gold Equivalent Ounces Sold | 8,810 | 9,696 | 11,729 | 11,475 | Financial Data Trend Summary (in thousands of USD, except per ounce data) | Metric | Q1 2021 | Q2 2021 | Q1 2022 | Q2 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Net Sales | $27,268 | $30,836 | $45,417 | $37,064 | | Income from Mining Operations before D&A | 11,974 | 11,259 | 25,281 | 15,281 | | Total Cash Cost per AuEq oz, net of by-product credits | $408 | $713 | $(121) | $247 | | Net Income | 2,527 | 1,283 | 4,019 | 2,673 | | Basic EPS | $0.03 | $0.02 | $0.05 | $0.03 | Liquidity and Capital Resources Working capital increased to $37.1 million, and the company believes it has sufficient liquidity for the next 12 months Liquidity Metrics (in millions of USD) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Working Capital | 37.1 | 29.3 | | Cash and Cash Equivalents | 33.3 | 33.7 | | Net Cash from Operating Activities (H1) | 12.2 | 16.1 | | Net Cash from Investing Activities (H1) | (10.0) | (9.3) | | Net Cash from Financing Activities (H1) | (2.1) | (1.5) | - Of the $33.3 million cash balance at June 30, 2022, $28.4 million was held by foreign subsidiaries, primarily in U.S. dollar-denominated accounts[199] - The company has filed a universal shelf registration statement to issue up to $200 million in securities, but it is not usable until the 2022 Form 10-K is filed in 2023 due to delays in filing historical financial statements related to the Aquila acquisition[204][205] Accounting Developments Information on recently adopted accounting standards is available in the financial statement notes - For a discussion of recently adopted and issued accounting standards, please refer to Note 2 of the Condensed Consolidated Interim Financial Statements[207] Forward-Looking Statements This report contains forward-looking statements that are subject to inherent risks and uncertainties - Forward-looking statements relate to future investments, project completion dates, gold recovery expectations, capital expenditures, dividend payments, and the ability to meet future obligations[208][210] - Actual results may differ due to factors including the COVID-19 pandemic, commodity price volatility, operational challenges, economic conditions, and uncertainties in mineral resource estimates[209][211][215] - The company undertakes no obligation to publicly revise these forward-looking statements to reflect future events or developments, except as required by law[214] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks including commodity prices, foreign exchange rates, and interest rates Commodity Price Risk The company's financial performance is highly dependent on volatile market prices for gold, silver, and base metals - The company's operating results are significantly affected by the market prices of gold, silver, copper, lead, and zinc, which are highly volatile[217] - The company has entered into a zinc zero-cost collar to protect the sales price of zinc but does not currently have derivative contracts for gold, silver, copper, or lead[217][218] Foreign Currency Risk The company's primary foreign currency exposure relates to the Mexican peso, as a majority of its expenses are peso-denominated - The company is primarily affected by changes in the exchange rate between the Mexican peso and the U.S. dollar, as approximately 50% to 60% of its expenses are paid in Mexican pesos[221] - As metal sales are denominated in U.S. dollars, exchange rate fluctuations do not have a material impact on revenue[220][221] Provisional Sales Contract Risk Provisional pricing terms in concentrate sales contracts create revenue volatility due to mark-to-market adjustments - Provisional pricing clauses in concentrate sales contracts contain embedded derivatives that are marked-to-market through revenue each reporting period, causing revenue volatility[223] Interest Rate Risk The company's current interest rate risk is considered insignificant - The company's current interest rate risk is considered insignificant and is primarily related to minor payments for office leases[224] Equity Price Risk The company's common stock price has been and may continue to be volatile, which could impact future equity financing - The price of the company's common stock has been volatile in the past and may be volatile in the future, which could prevent the sale of stock at an acceptable price if new equity financing is required[225] ITEM 4. Controls and Procedures Disclosure controls were deemed ineffective due to a material weakness related to the Aquila acquisition accounting Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were concluded to be ineffective as of June 30, 2022 - As of June 30, 2022, the company's disclosure controls and procedures were deemed ineffective due to a material weakness in internal control related to the Aquila acquisition that has not been fully remediated[226] - Despite the material weakness, management concluded that the consolidated financial statements fairly present the company's financial position, results of operations, and cash flows in all material respects[226] Material Weakness in Internal Control Over Financial Reporting A material weakness was identified in the review controls over the accounting for the Aquila acquisition - The company identified a material weakness in internal control over financial reporting as of December 31, 2021, related to the operating effectiveness of review controls over the accounting and valuation of assets and liabilities in the Aquila acquisition[231] - This material weakness resulted from the complexity of the Aquila acquisition, the compressed timeline for transaction completion, and insufficient documentation of the execution of review controls[228][230] Changes in Internal Control Over Financial Reporting No material changes occurred in internal control over financial reporting during the period - Other than the documentation enhancement efforts described above, there were no material changes in internal control over financial reporting during the three and six months ended June 30, 2022[232] Part II - OTHER INFORMATION ITEM 1. Legal Proceedings The company is not currently involved in any material legal proceedings - The company is not currently a party to any material existing or pending legal proceedings[234] - A lawsuit filed by a local Ejido community in Mexico seeking cancellation of several concessions has not yet reached a final ruling, but the Don David Gold Mine is not currently conducting relevant operations on the disputed concession land[235] ITEM 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report - There have been no material changes from the risk factors described in the company's Annual Report on Form 10-K for the year ended December 31, 2021[236] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds None - No unregistered sales of equity securities and use of proceeds[237] ITEM 3. Defaults upon Senior Securities None - No defaults upon senior securities[237] ITEM 4. Mine Safety Disclosures Mine safety disclosure requirements are not applicable as the company's U.S. project is not yet subject to MSHA jurisdiction - The company's advanced exploration project in Michigan, USA, is not yet subject to the jurisdiction of the Mine Safety and Health Administration (MSHA), making mine safety disclosure requirements inapplicable[237] ITEM 5. Other Information None - No other information[238] ITEM 6. Exhibits This report includes certifications and financial statements in inline XBRL format - Exhibits include certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[238] - Exhibits also include the Condensed Consolidated Interim Financial Statements and the cover page interactive data file, formatted in inline XBRL[238] Signatures Signatures The report was duly signed by the company's Chief Executive Officer and Chief Financial Officer - This report has been signed by Allen Palmiere (Chief Executive Officer, President, and Director) and Kimberly C. Perry (Chief Financial Officer) on July 27, 2022[242]