Gold Resource Corporation
NYSE Amex: GORO
2011 Annual Report
2011 Annual Report
Corporate Strategy
2010 Dividend Distribution
Focus on cash flow and dividends
Significant gold production growth
profile
Remain a "low-cost" industry leader
Develop projects on an accelerated
basis
Build the Company with cash-flow,
limit dilution
Develop multiple projects to supply ore
to strategically located El Aguila mill
Aggressive and organic growth
$0.18
July 2010
Aug. 2010
Sept. 2010
Oct. 2010
Nov. 2010
Dec. 2010
$0.03
$0.03
$0.03
$0.03
$0.03
$0.03
Gold Resource Corporation
NYSE Amex: GORO
www.GoldResourceCorp.com
Gold Resource Corporation
TABLE OF CONTENTS
President’s Letter
El Aguila Mill
Arista Underground Mine
Exploration
Communities and Environment
Management’s Discussion and Analysis
Auditors’ Report
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Corporate Information
Page(s)
2
3
4
5
6
7 - 18
19 - 20
21 - 27
28 - 43
45
Gold Resource Corporation
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PRESIDENT’S LETTER
Dear Fellow Shareholders,
2010 was a year of tremendous firsts for Gold Resource Corporation. We commissioned the mill at our El Aguila
Project, and commenced commercial production of gold and silver concentrates on July 1, 2010. That same month,
we declared our first dividend back to the owners of the Company, its shareholders, and by the end of 2010 we
distributed a total of $9.5 million to the shareholders. In August 2010, our shares were first listed for trading on the
NYSE Amex.
Every mining company's value starts with the quality of its mineralization in the ground. To date, our El Aguila
Project has demonstrated high-grade mineralization within an exciting and potentially world class geologic system.
Our initial production came from the open pit mineralization at El Aguila, which provided us with many advantages
during our early operations, including early cash flow, mill optimization opportunities, supplying waste rock to
construct the tailings impoundment facilities and contributing to putting in place a successful team of professionals
ready to take the Company into its next phase.
We have been transitioning since March 2011 from processing the open pit ore to the underground mine ore from
our Arista deposit, which contains higher levels of gold and silver mineralization but also the base metals of lead,
zinc and copper. The Arista vein system is the Company's largest deposit discovered to date and represents the
source of longevity for our operations. We are accelerating exploration and mine development here and expect to
extend this deposit. We also believe there is potential for a larger replacement style ore body deep under the Arista
veins and plan to test many deep drill targets in this area as well.
We believe the high-grade epithermal system giving rise to our deposits to date is very exciting. We have
consolidated a 16 kilometer land position across what we believe to be an important structural corridor. Our Oaxaca
Mining Unit consists of 5 potentially high-grade gold and silver properties. All of these properties are within trucking
distance of the El Aguila mill facility. We are expanding exploration at our Alta Gracia property and have a select
development team that is evaluating the possibility of a small, potentially high-grade gold mine at our El Rey
property. The potential development of these properties is consistent with our objective of having all of our
properties eventually feeding the El Aguila mill and may enable us to maximize head grade run through the mill
which helps us continue to be a low cost producer and it would keep additional capital costs to a minimum.
We are very proud of our Oaxaca Mining Unit team. Our team is comprised of 100% Mexican nationals, many of
whom are pictured throughout this report. We have a team of experienced mining professionals and have many
locals who have been trained in our operations. They have acquired a great deal of skill and experience and come
to work each day with a professional attitude and enthusiasm. Their efforts have made a tremendous impact on the
Company and in the local community and we would like to thank them for their contributions and good work.
Looking forward, we expect 2011 will be a transformational year as we continue to transition and optimize the
processing of the high-grade Arista ore and continue working toward our goal to produce 200,000 ounces or more of
gold equivalent precious metals at “zero” cash cost by 2013. In 2011, we expect increased mineral production,
increased cash flow and opportunities to continue to pay a divided to shareholders when such cash flow allows. It is
my goal to not only institute a fixed dividend in the future but to increase it. We also hope in the future to create a
program where shareholders have an option to choose an in-kind distribution of gold or silver in the form of the Gold
Resource Corporation one ounce Double Eagle, which is featured on the covers of this annual report. Without you
we would not be where we are today and we will continue to look for ways to reward that support of our vision of
what a producing gold company can be.
Sincerely,
Jason Reid
President
Gold Resource Corporation
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EL AGUILA MILL
“FLEXIBLE” MILL DESIGN with TWO Production Circuits
FLOTATION CIRCUIT
Capacity: 440,000 tonnes/year
Product = 3 Concentrates
Copper/Gold - Lead/Silver - Zinc
AGITATED
LEACH CIRCUIT
Capacity: 100,000 tonnes/year
Product = Au/Ag Dore
Gold Resource Corporation
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THE ARISTA UNDERGROUND MINE
A High-Grade Epithermal System
High-Grade 3 Meter Nominal Mining Width
True
Thick
Gold
Au g/t
Silver
Ag g/t
Copper
Cu %
Lead
Pb %
Zinc
Zn %
Tonnes
Avg.
3.64
6.50
506
0.60
2.24
6.75
2,962,000
Precious Metal AuEq (Au, Ag) At Full Production
By-Product Base Metal Credits
Avg. Head Grade = 15.5 g/t (0.50 oz/t) AuEq
(Gold @ $950 & Silver @ $17)
Metal
Grade
Price
Copper
0.60%
$2.70
Lead
2.24%
$1.00
Zinc
6.75%
$1.00
440,000 tonnes/yr. x 92% recovery = 200,000 oz/t AuEq
In Place Value of $233/t x 94% recovery X 60% NSR = $132/t
(Precious Metals)
(Base Metals)
ALL ESTIMATED PRODUCTION COSTS
POTENTIALLY PAID FOR BY BASE METAL
REVENUES OF $132/TONNE
Internal Estimate, Not SEC Proven & Probable
Reserves; see Risk Factors in Company's 10K
Calendar Year-End Production Targets
0 200,000
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200,000
175,000
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50,000
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0
2010 11 12 13 14 15 16 17 18
YEAR
Cash Cost / Ounce Targets
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Gold Resource Corporation
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2010 11
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YEAR
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Gold Resource Corporation
EXPLORATION
100% Interest in Five Potential High-Grade Gold and Silver Properties
100% interest in 5 potential high-grade
gold and/or silver properties
All properties within trucking distance
to strategically located El Aguila Mill
Consolidated 3 historic mining districts
with over 16+ kilometer mineralized
structural corridor
99% of properties yet to be drilled,
numerous exploration targets
Underground Arista polymetallic vein
deposit open in both strike and depth
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Gold Resource Corporation
Gold Resource Corporation
5
Communities and Environment
Commitment to Hire Locally
Student Scholarships
Health and Dental Clinics
Sustainable Development
Community Participation
6
Gold Resource Corporation
Gold Resource Corporation
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Except for the historical information, the following discussion contains forward-looking statements that
are subject to risks and uncertainties. We caution you not to put undue reliance on any forward-looking
statements, which speak only as of the date of this report. Our actual results or actions may differ materially
from these forward-looking statements for many reasons, including the risks described in “Risk Factors” and
elsewhere in this annual report. Our discussion and analysis of our financial condition and results of operations
should be read in conjunction with the audited consolidated financial statements and related notes included in
this report and with the understanding that our actual future results may be materially different from what we
currently expect.
Introduction
The following discussion analyzes our operating results for the three fiscal years ended December 31, 2010
and our financial condition at December 31, 2010 and 2009, with a particular emphasis on the year ended December
31, 2010.
Overview
We commenced commercial production July 1, 2010 at our El Aguila Project, part of our Oaxaca Mining
Unit, generating $14.8 million in revenue for the year ended December 31, 2010. Prior to 2010, none of our
properties were in production, and consequently, we did not record any revenue from the sale of minerals. We
expect to continue to incur losses and may rely on equity financing to fund our operations, until such time as
production is able to generate sufficient revenues to fund all continuing operations.
We continue to refine our ongoing capital requirements. Although we have no specific capital budget for
2011, we anticipate finishing Phase II of our tailings dam, continuing the development of the La Arista underground
mine and incurring exploration costs. In 2011, exploration costs related to our El Aguila Project, El Rey and Alta
Gracia properties are expected to be approximately $500,000 per month. As an exploration stage company, there is
significant uncertainty in our estimates regarding both future costs and future revenue. We may require additional
capital resources to complete our plans.
Exploration Stage Company
We are considered an exploration stage company under the SEC criteria since we have not yet
demonstrated the existence of proven or probable reserves at our El Aguila Project in Oaxaca, Mexico or any of our
properties. As a result, and in accordance with accounting principles generally accepted in the United States for
exploration stage companies, all expenditures for exploration and evaluation of our properties are expensed as
incurred. Furthermore, unless mineralized material is classified as proven or probable reserves, substantially all
expenditures for mine and mill construction have been or will be expensed as incurred. Certain expenditures, such
as for rolling stock or other general purpose equipment, may be capitalized, subject to our evaluation of the possible
impairment of the asset. As required by the SEC guidelines, substantially all of our expenditures to date, including
construction of the mill, have been expensed and we expect to expense additional construction expenditures in 2011
related to the Phase II tailings dam construction and the underground mine development at the La Arista vein
system. Therefore, most of our investment in mining properties and equipment does not appear as an asset on our
balance sheet. We expect to remain as an exploration stage company for the foreseeable future, even though we
have reached commercial production. We will not exit the exploration stage until we demonstrate the existence of
proven or probable reserves that meet the SEC guidelines.
Our accounting treatment as an exploration stage company regarding the classification of construction
expenditures as an operating expense rather than as a capital expenditure, has caused us to report large losses during
the last two years instead of building assets on the balance sheet. Although the majority of expenditures for the El
Aguila Project were completed during the last two years, we expect underground mine construction and tailings dam
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construction to continue in future years. In comparison to other mining companies that capitalize development
expenditures because they have exited the exploration stage, we will report larger losses or lesser profits as a result
of this ongoing construction which will be expensed instead of capitalized for accounting purposes.
Exploration of our properties accelerated in late 2006, continued throughout 2010 during production ramp
up and we expect them to accelerate again in 2011. From inception to December 31, 2010, we expensed
approximately $29.2 million on the exploration and evaluation of our various properties, substantially all of which
has been spent on the currently active properties known as El Aguila. In addition, we have expensed, from inception
to December 31, 2010, approximately $54.1 million in design, engineering, and construction and production ramp
up costs all of which apply to the El Aguila Project.
Results of Operations – Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Revenue
During the year ended December 31, 2010, we sold 10,493 ounces of gold at an average price of $1,201
per ounce for $12.6 million of revenue, net of smelter treatment charges and 111,316 ounces of silver at an average
price of $20 per ounce for approximately $ 2.2 million of revenue, net of smelter treatment charges. There were no
comparable sales of precious metals in 2009.
Although we commissioned the mill in the first half of 2010, we did not declare commercial production
until July 1, 2010. Prior to commencement of commercial production, revenue from the sale of concentrate was
recorded as an offset to costs of production. Our first revenue was recorded in the third quarter of 2010
Mine Gross Profit
During the six months ended December 31, 2010, we produced 10,493 ounces of gold at a cash cost of
$217 per ounce net of by-product credits. See, “Non GAAP Measures in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation” for more information. The El Aguila Project mine
operations had a mine gross profit of $9.8 million for the year ended December 31, 2010. For the year, daily mill
throughput averaged 755 tonnes/day, having reached design capacity in the fourth quarter of 2010 of 851
tonnes/day; mill recovery averaged 77% and mill head grade averaged 3.7 grams/tonne. We experienced extensive
and unusually heavy rains during the third quarter and first half of the fourth quarter of 2010, which complicated
production. We expect improvement of operations in 2011 as we anticipate processing a higher grade and higher
volume of ore. We began the transition from processing the open pit ore to processing the La Arista underground
polymetallic ore in March 2011. We are accelerating development of the La Arista vein deposit and have been
stockpiling ore for processing since late 2010.
Net Loss
For the year ended December 31, 2010, we reported a net loss of $23.1 million, or $0.46 per share,
compared to a net loss of $34.1 million, or $0.78 per share, for the year ended December 31, 2009. The net loss per
share for the year ended December 31, 2010 decreased as a result of the gross profit generated from sales of our
metals concentrate. However, we expect to incur losses until such time as we reach optimal performance in the
operation of our mill and until such time, if ever, as we can exit the exploration stage and capitalize our construction
and development expenditures or until our revenue is sufficient to cover all expenses, including construction,
development, exploration and operations.
Costs and Expenses
Total costs and expenses in the year ended December 31, 2010 were $32.6 million compared to $34.2
million in the comparable period of 2009, a decrease of $1.6 million or 4.6%. The decrease in costs and expenses is
primarily due to operations shifting from construction activities to production activities consistent with our plan of
commercial production during 2010.
Page 8
The property exploration expense component in the year ended December 31, 2010, decreased $3.1
million, or 39.7%, from the comparable period of 2009, from $7.8 million to $4.7 million. The decrease is
attributable to focusing activities and funds to establishing commercial production and a concurrent decrease in
exploration activities. We expect to increase exploration activities and corresponding expenses in 2011 as we ramp
up our exploration programs.
The construction and development cost component in the year ended December 31, 2010, decreased $2.6
million, or 12.4%, from the comparable period of 2009, from $21.0 million to $18.4 million. We have substantially
completed engineering and construction of the open pit mine and mill and are shifting our construction emphasis to
the underground La Arista mine development and production.
General and administrative expenses increased $3.9 million or 72.2% to $9.3 million for the fiscal year
ended December 31, 2010 as compared to $5.4 million for the comparable period last year. The component of
general and administrative expense of non-cash stock based compensation expense was $2.7 million for the year
ended December 31, 2010, compared to $2.8 million for the comparable period in 2009. We use an option pricing
model to estimate the value of stock options granted to officers, directors, employees and consultants. It is difficult
to estimate the value of options that we grant. The options are subject to significant restrictions and cannot be
purchased or sold on the open market. Therefore, there is no objective and independent valuation measurement for
them. We use the Black-Scholes-Merton model, which requires considerable judgment selecting the subjective
assumptions that are critical to the results produced by the model, to calculate the estimated fair value. We record
the estimated fair value as an expense on a pro-rata basis over the vesting period of the options.
The cash components of general and administrative expense increased to $6.6 million during the year
ended December 31, 2010, from $2.6 million during the comparable period in 2009, an increase of $4 million, or
153.8.%. This increase was primarily due to an increase in salaries and benefits of $1.9 million, or 228%,
attributable to an increase in the number of employees in Mexico and changes to our executive employment
agreements. In addition, during the year ended December 31, 2010, professional fees increased by $614,000 or
106% for legal and accounting services related to, our September 2010 financing transaction, application for listing
on the NYSE Amex and annual meeting preparations. Other general and administrative expense increased by $1.5
million, or 226%. This increase was primarily due to an increase in travel expenses, insurances expenses and other
office expenses. We anticipate that some of these costs such as the professional fees will decrease but that salaries
and benefits will increase or remain the same now that we have commenced commercial production.
Interest income for the year ended December 31, 2010 increased to $99,000 compared to $55,000 for the
comparable period of 2009, an increase of $44,000 or 80%, primarily representing increased deposits in short term
interest bearing accounts.
Our mining operations are located in Mexico and we primarily transact business in Mexican pesos. Our
reporting currency for financial statement purposes is the U.S. dollar. Changes in the period end currency exchange
rate between the Mexican peso and the U.S. dollar create translation adjustment gains and losses, which are
reported as a component of other comprehensive income in our statements of operations. For the years ended
December 31, 2010 and 2009, we recorded a currency translation adjustment gain of $215,000 and a currency
translation adjustment loss of $968,000 respectively.
Results of Operations – Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
For the year ended December 31, 2009, we reported a net loss of $34.1 million, or $0.78 per share,
compared to a net loss of $26.0 million, or $0.76 per share for the year ended December 31, 2008. In neither year
did we report any revenue from the sale of gold or other minerals.
Total costs and expenses in the year ended December 31, 2009 were $34.2 million compared to $26.3
million in the comparable period of 2008, an increase of $7.9 million or 30%. The additional expenditures reflect
our increasing activities at the El Aguila Project. Total mineral property costs increased $6.1 million or 26.9%, for
the year ended December 31, 2009 to $28.8 million from $22.7 million for the comparable period in 2008.
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The property exploration and evaluation component decreased $400,000 or 4.9 %, from $8.2 million for
the year ended December 31, 2008 to $7.8 million for the year ended December 31, 2009. Our exploration and
other drilling activity temporarily decreased as we focused our efforts on engineering and construction.
The engineering and construction cost component during the year ended December 31, 2009 was $21.0
million, compared to $14.5 million during the comparable period in 2008. As more fully described in the preceding
discussions of our liquidity and capital resources, we accelerated construction of the mine and mill site and
infrastructure during 2009.
General and administrative expenses increased $1.7 million, or 45.9%, to $5.4 million for the fiscal year
ended December 31, 2009 as compared to $3.7 million for the comparable period in 2008. Of that amount, $0.8
million represented an increase in stock option compensation expense.
The other components of general and administrative expense, including salaries and benefits, professional
fees, investor relations, and travel, increased to $1.7 million during the twelve months ended December 31, 2009
from $1.3 million during the comparable period in 2008, an increase of $400,000 or 30.8%. There were no
significant changes in this component of our cost structure, although we increased activity levels as we prepare the
El Aguila Project for production.
Interest income for the year ended December 31, 2009 decreased to $55,000 compared to $334,000 for the
comparable period of 2008, a decrease of $279,000 or 83.5%, primarily representing lower interest rates and
decreased deposits in short term interest bearing accounts.
For the years ended December 31, 2009 and 2008, we recorded a currency translation adjustment loss of
$968,000 and a currency translation adjustment gain of $63,000, respectively.
Liquidity and Capital Resources
As of December 31, 2010, we had working capital of $51.2 million, consisting of current assets of $57.7
million and current liabilities of $6.5 million. This represents an increase of $31.2 million from the working capital
balance of $20 million at December 31, 2009 and primarily represents cash received from a financing completed in
September 2010, a reduction in cash used in operations and proceeds from restricted cash. Consistent with our
plans, our working capital balance fluctuates as we use cash to fund our production, exploration and construction
activities and other operating expenses.
We have historically relied on equity financings to fund our operations. From inception through December
31, 2010, we received $152.4 million in cash, services, stock options, and other consideration through issuance of
our common stock. As of December 31, 2010, we did not have any outstanding debt. We believe that we will
continue to fund our future working capital requirements through operations and the sale of equity, if warranted, and
we have not made arrangements to borrow funds for working capital requirements. However, we may consider debt
financing if market conditions allow.
In 2010, we conducted three financing transactions. In the first transaction, completed in March 2010, we
sold 600,000 shares of common stock to Hochschild Mining Holdings Limited (“Hochschild”) at a price of $8.62
per share for gross proceeds of $5.2 million. In the second transaction, completed in May 2010, we sold 631,579
shares to Hochschild at a price of $9.50 per share for proceeds of $6 million. In the third transaction, completed in
September 2010, we sold 3,475,000 shares of common stock to a group of institutional investors at a price of $16.00
per share for gross proceeds of $55.6 million. In connection with the Hochschild transaction, we paid no
commissions or placement agent fees. In the third transaction, we paid a total of $3.3 million to the placement
agent.
During the year ended December 31, 2010, we spent $4.7 million on the exploration and evaluation of our
properties, predominantly at our El Aguila Project. This compares to $7.8 million spent during the year ended
December 31, 2009. While we continued our exploration program to further delineate the area of mineralized
material, our emphasis shifted to production of the mine and mill. Our most significant expenditures for 2010 were
Page 10
related to the construction of the tailings dam and further development of the open pit and underground
mines. During the year ended December 31, 2010, we spent $18.4 million on construction and mine
development activities. During 2010, we incurred operating expenses approximating $550,000 per month for
salaries and other overhead expenses at our Colorado executive offices and Oaxaca mining locations.
As we continue production of our gold and silver concentrate, it is uncertain if we will be successful in
producing minerals in quantities needed to sustain our entire operations. Furthermore, the amount of revenue
generated during these early stages of a mining operation is difficult to predict and tends to be highly
variable. However, with the cash received from our last private placement, we believe we have sufficient funds for
exploration and development activities for the balance of 2011. If additional funds are required, we expect to
continue our plan of obtaining such funds from equity sales.
Net cash used in operating activities was $22.9 million during the year ended December 31, 2010,
compared to $33.4 million during 2009, a decrease of $10.5 million. The significant decrease in 2010 is primarily
attributable to a reduction in our net loss, in turn attributable to the commencement of commercial production. Also
during 2010, increases in accounts receivable, prepaid and refundable taxes and inventories were substantially offset
by increases in accounts payable and accrued liabilities.
Net cash provided by investing activities for the year ended December 31, 2010 was $7.9 million,
compared to net cash used in investing activities of $12.6 million for the year ended December 31, 2009. Much of
the cash provided by our investing activities came from restricted cash, the use of which is specifically designated
for exploration, construction and development activities. Although most of our exploration stage expenditures are
recorded as an expense rather than an investment, we capitalize the acquisition cost of land and mineral rights and
certain equipment that has alternative future uses or significant salvage value, including rolling stock, furniture, and
electronics, and the cost of these capitalized assets is reflected in our investing activities. During 2010, we invested
in an office building, office furniture and equipment. During 2009, we acquired additional vehicles and capital
equipment, and we filed mineral concessions with the Mexican government.
Net cash provided by financing activities for the year ended December 31, 2010 was $55.7 million,
consisting of net proceeds in the amount of $63.3 million from the sales of our common stock. We also paid cash
dividends of $7.7 million from cash flows generated from the sales of our metals concentrate. The dividends were
charged against our additional paid in capital and were considered a return of capital dividend since we have
no current or accumulated earnings at this time. During 2009, all of the cash from financing activities related to the
sales of our common stock. For the year ended December 31, 2009, financing activities provided cash of $49.2
million, consisting of proceeds from sales of our common stock.
The balance of cash and equivalents increased to $47.6 million as of December 31, 2010 from $6.8 million
as of December 31, 2009, a net increase in cash of $40.8 million.
Non-GAAP Measures
Throughout this report, we have provided information prepared or calculated according to U.S. generally
accepted accounting principles (GAAP), as well as some non-GAAP performance measures. Because the non-
GAAP performance measures do not have any standardized meaning prescribed by GAAP, they may not be
comparable to similar measures presented by other companies. We use cash operating cost per ounce as one
indicator for comparative monitoring of our mining operations from period to period and believe that investors also
find this information helpful when evaluating our performance. Accordingly, these measures are intended to
provide additional information and should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with U.S. GAAP. We have defined the non-GAAP measures below and
reconciled them to reported U.S. GAAP measures.
Our cash operating cost is a non-GAAP measure calculated in accordance with the Gold Institute’s
standards. The cash operating cost is arrived at by taking our mine cost of sales and adding treatment charges paid to
the buyer of the metals concentrate, subtracting by-product credits earned from all metals other than the primary
metal produced, and subtracting depreciation expense, accretion expense, and royalty payments.
Page 11
The most comparable financial measures to our cash operating cost calculated in accordance with U.S.
GAAP are cost of sales. Mine cost of sales are derived from amounts included in the Consolidated Statements of
Operations.
Unit costs
The following summary of our cash operating costs for year ended December 31, 2010 was calculated in
accordance with the Gold Institute Production Cost Standard and begins with our mine cost of sales in accordance
with U.S. GAAP as noted below:
Year Ended
December 31,
2010
(in thousands,
except ounces and
per ounce)
10,493
4,955
552
(2,342)
(166)
(68)
(652)
2,279
217
$
$
$
Gold ounces produced
Mine cost of sales - (U.S. GAAP)
Treatment charges
By-product credits
Depreciation costs
Accretion costs
Royalties
Cash operating cost
Cash operating cost per ounce
As of December 31, 2010, we had no off-balance sheet arrangements.
Contractual Obligations
Our known obligations at fiscal year end December 31, 2010, are set forth in the table below:
Contractual Obligations
Payments due by period
Total
Less than 1
year
1-3
years
3-5
years
(in thousands)
More than
5
years
Purchase Obligations(1)
Employee Salary Compensation (1)
Total
$
$
$
1,324 $
3,873 $
1,324
1,549 $
--
2,324
5,197 $
2,873 $
2,324
--
--
--
--
--
--
________________________________
(1) Represents amounts due to our executive officers and key employees pursuant to their respective employment
agreements with our company.
Critical Accounting Policies
We believe that application of the following accounting policies, which are critical to our financial position
and results of operations, requires significant judgments and estimates on the part of management.
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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 period. Management routinely makes judgments and estimates about the effects of matters that are
inherently uncertain. Estimates that are critical to the accompanying consolidated financial statements include the
identification and valuation of proven and probable reserves, obligations for environmental, reclamation, and closure
matters, estimates related to asset impairments of long lived assets and investments, classification of expenditures as
either an asset or an expense, valuation of deferred tax assets, and the likelihood of loss contingencies Management
bases its estimates and judgments on historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are
revised periodically and the effects of revisions are reflected in the financial statements in the period it is determined
to be necessary. Actual results could differ from these estimates.
Proven and Probable Reserves
The definition of proven and probable reserves is set forth in SEC Industry Guide 7. Proven reserves are
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 measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and
mineral content of reserves are well-established. Probable reserves are reserves for which quantity and grade and/or
quality are computed from information similar to that used for proven 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 reserves, is high enough to assume continuity between points of observation. In
addition, reserves cannot be considered proven and probable until they are supported by a feasibility study,
indicating that the reserves have had the requisite geologic, technical and economic work performed and are
economically and legally extractable at the time of the reserve determination.
Mineral Acquisition Costs
The costs of acquiring land and mineral rights are considered tangible assets. Significant acquisition
payments are capitalized. General, administrative and holding costs to maintain an exploration property are
expensed as incurred. If a mineable ore body is discovered, such costs are amortized when production begins using
the units-of-production method. If no mineable ore body 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.
Exploration Costs
Exploration costs are charged to expense as incurred. Costs to identify new mineral resources, to evaluate
potential resources, and to convert mineral resources into proven and probable reserves are considered exploration
costs.
Design, Construction, and Development Costs
Certain costs to design and construct mine and processing facilities may be incurred prior to establishing
proven and probable reserves. Under these circumstances, we classify the El Aguila Project as an exploration stage
project and expense substantially all costs, including design, engineering, construction, and installation of
equipment. Certain types of equipment, which have alternative uses or significant salvage value, may be
capitalized. If a project is determined to contain proven and probable reserves, costs incurred in anticipation of
production can be capitalized. Such costs include development drilling to further delineate the ore body, removing
overburden during the pre-production phase, building access ways, constructing facilities, and installing
equipment. Interest costs, if any, incurred during the development phase, would be capitalized until the assets are
ready for their intended use. The cost of start-up activities and on-going costs to maintain production are expensed
as incurred. Costs of abandoned projects are charged to operations upon abandonment.
Page 13
If a project commences commercial production and the project is determined to contain proven and
probable reserves, amortization and depletion of capitalized costs is computed on a unit-of–production basis over the
expected reserves of the project based on estimated recoverable gold equivalent ounces.
Impairment of Long-Lived Assets
We evaluate our long-lived assets for impairment. If impairment indicators exist, we perform additional
analysis to quantify the amount by which capitalized costs exceed recoverable value. The periodic evaluation of
capitalized costs is based upon expected future cash flows, including estimated salvage values. As of December 31,
2010, our mineral resources do not meet the definition of proven or probable reserves or value beyond proven and
probable reserves and any potential revenue has been excluded from the cash flow assumptions. Accordingly,
recoverability of capitalized cost is based primarily on estimated salvage values, or alternative future uses.
Property and Equipment
All items of property and equipment are carried at cost not in excess of their estimated net realizable
value. Normal maintenance and repairs are charged to earnings while expenditures for major maintenance and
betterments are capitalized. Gains or losses on disposition are recognized in operations.
Asset Retirement Obligation
The Company’s 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. A liability is initially recorded at the estimated present value for an obligation associated with the
retirement of tangible long-lived assets in the period in which it is incurred if a reasonable estimate of fair value can
be made. For exploration stage properties that do not qualify for asset capitalization, the costs associated with the
obligation are charged to operations. For development and production stage properties, the costs are added to the
capitalized costs of the property and amortized using the unit of production method.
Stock Based Compensation
We record compensation expense for the fair value of stock options that are granted. Expense is
recognized on a pro-rata basis over the vesting periods, if any, of the options. The fair value of stock options at their
grant date is estimated by using the Black-Scholes-Merton option pricing model.
Foreign Currency Translation
The local currency where our properties are located, the Mexican peso, is the functional currency for our
subsidiaries. Assets and liabilities are translated using the exchange rate in effect at the balance sheet
date. Intercompany equity accounts are translated using historical rates. Revenues and expenses are translated at
the average exchange rate for the year. Translation adjustments are not included in the determination of net loss for
the period and are reported as a separate component of shareholders' equity.
Income Taxes
Income taxes are computed using the 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 carry-forwards. Deferred tax assets are evaluated to determine if it is more likely
than not that they will be realized. Valuation allowances have been established to reduce the carrying value of
deferred tax assets in recognition of significant uncertainties regarding their ultimate realization. Further, the
evaluation has determined that there are no uncertain tax positions required to be disclosed.
Page 14
Recent Accounting Pronouncements
We evaluate the pronouncements of various authoritative accounting organizations, primarily the Financial
Accounting Standards Board (“FASB”), the SEC, and the Emerging Issues Task Force (“EITF”), to determine the
impact of new pronouncements on U.S. GAAP and the impact on the Company.
Recently Adopted Accounting Standards
Fair Value Measurements
In January 2010, ASU No. 2010-06 amended existing disclosure requirements about fair value
measurements by adding required disclosures about items transferring into and out of levels 1 and 2 in the fair value
hierarchy; adding separate disclosures about purchase, sales, issuances, and settlements relative to level 3
measurements; and clarifying, among other things, the existing fair value disclosures about the level of
disaggregation. The ASU was adopted during the period ended March 31, 2010, and its adoption had no impact on
our consolidated financial position, results of operations or cash flows.
Embedded Derivatives
ASU No. 2010-11 was issued in March 2010, and clarifies that the transfer of credit risk that is only in the
form of subordination of one financial instrument to another is an embedded derivative feature that should not be
subject to potential bifurcation and separate accounting. This ASU will be effective for the first fiscal quarter
beginning after June 15, 2010, with early adoption permitted. The ASU was adopted during the period ended June
30, 2010, and its adoption had no impact on our consolidated financial position, results of operations or cash flows.
Consolidations
ASU No. 2009-17 revises the consolidation guidance for variable-interest entities. The modifications
include the elimination of the exemption for qualifying special purpose entities, a new approach for determining
who should consolidate a variable-interest entity, and changes to when it is necessary to reassess who should
consolidate a variable-interest entity. The ASU was adopted during the period ended March 31, 2010 and its
adoption had no impact on our consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Standards Updates
The following accounting standards updates were recently issued and have not yet been adopted by
us. These standards are currently under review to determine their impact on our consolidated financial position,
results of operations, or cash flows.
ASU No. 2010-06, was issued in January 2010, and clarifies existing disclosures of inputs and valuation
techniques for Level 2 and 3 fair value measurements. The disclosure of activity within Level 3 fair value
measurements is effective for fiscal years beginning after December 15, 2010, and for interim periods within those
years. We do not expect there will be an impact to our financial position or results of operations for the additional
disclosure requirements in 2011.
ASU No. 2010-13 was issued in April 2010, and will clarify the classification of an employee share based
payment award with an exercise price denominated in the currency of a market in which the underlying security
trades. This ASU will be effective for the first fiscal quarter beginning after December 15, 2010, with early
adoption permitted.
ASU 2010-29 was issued in December 2010, and requires a public entity to disclose pro forma information
for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue
and earnings of the combined entity for the current reporting period as though the acquisition date for all business
combinations that occurred during the year had been as of the beginning of the annual reporting period. This ASU
will be effective for business combinations for which the acquisition date is on or after the beginning of the first
Page 15
annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does
not expect the provisions of ASU 2010-29 to have a material effect on its financial position, results of operations or
cash flows.
There were various other updates recently issued, most of which represented technical corrections to the
accounting literature or application to specific industries and are not expected to a have a material impact on our
consolidated financial position, results of operations or cash flows.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data sets forth our summary historical financial data as of and for the years
ended December 31, 2010, 2009, 2008, 2007 and 2006. This information was derived from our audited consolidated
financial statements for each period. Our selected historical financial data is qualified in its entirety by, and should
be read in conjunction with, “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the financial statements and the notes thereto included elsewhere in this report. For
additional information relating to our operations, see “Item 1. Business” and “Item 2. Properties.”
2010
Year Ended December 31,
2008
2009
2007
2006
Operating Data
(in thousands, except share data)
Sales of metals concentrate
$
Mine gross profit
Loss from operations
Other income (expense)
Net loss
Basic & diluted loss per share
Weighted average shares
14,754 $
9,799
(22,839)
(235)
(23,074)
(0.46)
-
-
(2,744)
57
(2,687)
(0.13)
50,042,471 43,764,703 34,393,854 28,645,038 20,218,659
- $
-
(34,184)
55
(34,129)
(0.78)
- $
-
(26,349)
334
(26,015)
(0.76)
- $
-
(8,319)
242
(8,076)
(0.28)
Balance Sheet Data
(in thousands)
Cash and cash equivalents
Total current assets
Property and equipment, net
Land and mineral rights
Total assets
Current liabilities
Long-term obligations
Shareholders’ equity
$
47,582 $
57,687
4,849
227
62,797
6,456
2,495
53,846
6,752 $
20,701
1,726
227
22,665
725
1,992
19,948
3,535 $
3,737
812
227
4,781
1,753
--
3,028
22,007 $
22,051
352
152
22,557
768
--
21,789
7,660
7,866
96
--
7,964
451
--
7,513
See the consolidated financial statements attached hereto under Item 8 for additional information.
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 foreign
currency exchange rates, changes in interest rates, equity price risks, commodity price fluctuations, and country risk.
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
Page 16
The results of our operations will depend in large part upon the market prices of gold and silver. 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 world supply of gold and silver and the stability of exchange rates, 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.
Our provisional concentrate sales 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 the gold and silver
concentrates at the prevailing indices’ prices at the time of sale. The embedded derivative, which does not qualify
for hedge accounting, is marked-to-market through earnings each period prior to final settlement.
In addition to adversely affecting our mineralized material estimates and our financial condition, declining
gold and silver prices could require a reassessment of the feasibility of a particular 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
We transact a significant amount of our business in Mexican pesos. As a result, currency exchange
fluctuations may impact our operating costs. 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, a 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 denominated in foreign currencies also fluctuates with changes in
currency exchange rates. Appreciation of non-U.S. dollar currencies results in a foreign currency gain on such
investments and a decrease in non-U.S. dollar currencies results in a loss. 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. We also hold portions of our cash reserves in non-U.S. dollar
currencies.
Interest Rate Risk
We have no debt outstanding nor do we have any investment in debt instruments other than highly liquid
short-term investments. Accordingly, we consider our interest rate risk exposure to be insignificant at this time.
Equity Price Risk
We have in the past sought and may in the future seek to acquire additional funding by sale of common
stock and other equity. Movements in the price of our common stock have 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.
Country Risk
All of our mineral properties are located in Mexico. In the past, that country has been subject to political
instability, changes and uncertainties which may cause changes to existing government regulations affecting mineral
exploration and mining activities. Civil or political unrest could disrupt our operations at any time. Our exploration
and mining activities may be adversely affected in varying degrees by changing government regulations relating to
the mining industry or shifts in political conditions that could increase the costs related to our activities or
Page 17
maintaining our properties. Finally, Mexico’s status as a developing country may make it more difficult for us to
obtain required financing for our properties.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
Management's Report on Internal Controls over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2010 and 2009
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008, and for the
period from Inception (August 24, 1998) to December 31, 2010
Consolidated Statement of Changes in Shareholders' Equity (Deficit) for the period from Inception (August
24, 1998) to December 31, 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008, and for the
period from Inception (August 24, 1998) to December 31, 2010
Notes to Consolidated Financial Statements
28
29
30
31
32
35
36
GOLD RESOURCE CORPORATION
MANAGEMENT'S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
The Securities Exchange Act of 1934 defines internal control over financial reporting in Rules 13a-15(f) and 15d-
15(f) as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
- Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and disposition of assets;
- Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations of management and our directors; and
- Provide reasonable assurance regarding prevention and timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial statements.
Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems that
are determined to be effective provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting based on criteria for effective
internal control over financial reporting described in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on its assessment, management concluded that we maintained effective internal control over financial
reporting as of December 31, 2010.
Page 18
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Gold Resource Corporation
Colorado Springs, Colorado
We have audited the accompanying consolidated balance sheets of Gold Resource Corporation as of December 31,
2010 and 2009, and the related consolidated statements of operations, changes in shareholders’ equity and cash
flows for each of the years in the three year period ended December 31, 2010, and the period August 24, 1998
(inception) to December 31, 2010. We also have audited Gold Resource Corporation’s internal control over
financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Gold
Resource Corporation’s management is responsible for these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, including in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Gold Resource Corporation as of December 31, 2010 and 2009, and the results of its operations
and its cash flows for each of the years in the three year period ended December 31, 2010, and the period August 24,
1998 (inception) to December 31, 2010, in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, Gold Resource Corporation maintained, in all material respects, effective
Page 19
internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
/s/ StarkSchenkein, LLP
StarkSchenkein, LLP
Denver, Colorado
March 14, 2011
3500 South Yosemite Street | Suite 600 | Denver, CO 80237 | P: 303.694.6700 | TF: 888.766.3985 | F: 303.694.6761
| www.starkcpas.com
An Independent Member of BKR International
Page 20
GOLD RESOURCE CORPORATION AND SUBSIDIARIES
(An Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable
Inventories
Prepaid and refundable taxes
Other current assets
Total current assets
Land and mineral rights
Property and equipment – net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses
Dividends payable
Total current liabilities
Asset retirement obligation
Commitments and contingencies (Note 10)
December 31,
2010
2009
$
47,582 $
-
1,185
3,063
5,848
9
57,687
227
4,849
34
6,752
11,436
-
225
2,132
156
20,701
227
1,726
11
$
62,797 $
22,665
$
4,866 $
1,590
6,456
725
-
725
2,495
1,992
Shareholders' equity:
Preferred stock - $0.001 par value, 5,000,000 shares authorized:
no shares issued and outstanding
Common stock - $0.001 par value, 100,000,000 shares authorized:
52,998,303 and 48,100,284 shares issued and outstanding, respectively
Additional paid-in capital
(Deficit) accumulated during the exploration stage
Accumulated other comprehensive income (loss):
Currency translation adjustments
Total shareholders' equity
-
-
53
152,444
(97,891)
(760)
53,846
48
95,692
(74,818)
(974)
19,948
Total liabilities and shareholders' equity
$
62,797 $
22,665
The accompanying notes are an integral part of these financial statements
Page 21
GOLD RESOURCE CORPORATION AND SUBSIDIARIES
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2010, 2009, and 2008
and for the period from Inception (August 24, 1998) to December 31, 2010
(U.S. dollars in thousands, except shares and per share amounts)
Inception
(August
24, 1998)
to
December
31, 2010
2010
2009
2008
Sales of metals concentrate
$
14,754 $
- $
- $
14,754
Mine Cost of Sales:
Production costs applicable to sales
Depreciation, depletion, amortization
Accretion
Total mine cost of sales
Mine Gross Profit
Costs and Expenses:
4,721
166
68
4,955
9,799
-
-
-
-
-
-
-
-
-
4,721
166
68
4,955
-
9,799
General and administrative (includes $2,694 in 2010,
$2,844 in 2009 and $1,999 in 2008 of non-cash stock based
compensation)
Exploration expenses
Construction and development
Production start up expense, net
Management contract - US Gold, related party
Total costs and expenses
9,302
4,692
18,435
209
-
5,378
7,811
20,995
-
-
3,676
8,171
14,502
-
-
24,082
29,178
53,930
209
752
32,638
34,184
26,349 108,151
Operating (loss)
(22,839)
(34,184)
(26,349)
(98,352)
Other income (expense):
Currency exchange (loss)
Loss on sale of assets
Interest income
Total other income (expense)
(Loss) before income taxes
Provision for income taxes
(330)
(4)
99
(235)
-
-
55
55
-
-
334
334
(330)
(4)
795
461
(23,074)
(34,129)
(26,015)
(97,891)
-
-
-
-
Net (loss)
(23,074)
(34,129)
(26,015)
(97,891)
Other comprehensive income:
Page 22
Currency translation adjustment
215
(968)
63
(760)
Net comprehensive (loss)
$
(22,859) $
(35,097) $
(25,952) $
(98,651)
Net (loss) per common share:
Basic and Diluted
$
(0.46) $
(0.78) $
(0.76)
Weighted average shares outstanding:
Basic and Diluted
50,042,471 43,764,703 34,393,854
The accompanying notes are an integral part of these consolidated financial statements.
GOLD RESOURCE CORPORATION
(An Exploration Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the period from Inception (August 24, 1998) to December 31, 2010
(U.S. dollars in thousands, except shares)
Accumulated
Other
Number of
Common
Shares
Par Value
of
Common
Shares
Additional
Paid - in
Capital
Accumulated
(Deficit)
Comprehensive
Income
(Loss)
Total
Shareholders'
Equity (Deficit)
Balance at
Inception,
August 24, 1998
Shares for
contributed
capital at
$0.005 per share
- related parties
Net (loss)
Balance,
December 31,
1998
Shares for
contributed
capital at
$0.005 per share
- related parties
Net (loss)
Balance,
December 31,
1999
- $
- $
- $
- $
- $
-
2,800,000
-
3
-
(1)
-
2,800,000
3
(1)
1,000,000
-
1
-
(1)
-
3,800,000
4
(2)
-
(1)
(1)
-
(1)
(2)
-
-
-
-
-
-
2
(1)
1
-
(1)
-
Shares issued for management contract
at $0.17 per
share - related
party
1,226,666
1
203
-
-
204
Page 23
-
-
-
-
-
-
-
-
-
(205)
(1)
188
51
204
(346)
96
98
225
(789)
(370)
145
25
(496)
Net (loss)
Balance,
December 31,
2000
-
-
-
(205)
5,026,666
5
201
(207)
1,333,334
Shares issued for management contract
at $0.14 per
share - related
party
Conversion of
debentures at
$0.25 per share
- related parties
Sale of shares
for cash at $0.25
per share
Net (loss)
820,000
200,000
-
1
187
1
50
-
-
-
204
-
-
(346)
7,380,000
7
642
(553)
392,000
1,351,352
-
2
-
98
223
-
(789)
9,123,352
9
963
(1,343)
Balance,
December 31,
2001
Shares issued for
cash at $0.25 per
share
Shares issued for
cash at $0.17 per
share
Net (loss)
Balance,
December 31,
2002
Shares issued for
cash at $0.25
per share
Share issuance
costs forgiven
Net (loss)
Balance,
December 31,
2003
577,000
-
-
1
-
-
144
25
-
-
-
(496)
-
-
-
9,700,352
10
1,132
(1,839)
-
(696)
1,200,000
Shares issued for
cash at $0.25 per
share
608,000
Shares issued in repayment of loan related
to exploration
agreement at
$0.42 per share
Shares issued as
stock grant at
$0.25 per share
Currency
translation
adjustment
Net (loss)
Balance,
December 31,
2004
12,108,352
600,000
-
1
151
-
-
152
1
1
-
499
148
-
-
-
(853)
-
-
(1)
-
500
150
(1)
(855)
13
1,931
(2,692)
(1)
(749)
Page 24
Stock grant at $0.25 per share
Stock option exercised at $0.25 per
share
Stock issued for cash at $0.25 per
share
Stock issued for satisfaction of payables
at $0.25 per share
Shares issued for cash at $0.47 per
share
Shares issued for cash at $0.50 per
share
Shares issued for cash at $0.50 per
share
Net (loss)
Balance, December 31, 2005
1,280,000
2,728,500
122,000
30,000
-
18,304,852
Stock options exercised at $0.25 per
share
Stock options granted
Director stock grant at $1.00 per
share
Shares issued for cash at $1.00 per share,
net of issue costs
Shares issued for investor relations
services at $1.14 per share
Shares issued for cash at $1.20 per share,
net of issue costs
Shares issued for investment
banking
services at $1.20 per share
Employee stock grants at $1.71 per
share
Currency translation adjustment
Net (loss)
Balance, December 31, 2006
240,000
-
100,000
4,600,000
4,322,000
257,700
35,000
-
-
28,139,552
Shares issued for investor relations
services at weighted average price
of $3.39 per share
Share issued for consulting services
in
Mexicon at $3.65 per share
Stock options granted
Shares issued for cash at $4.00 per
share, net
of issue costs
issued for investment banking
services
Currency translation adjustment
Net (loss)
Balance, December 31, 2007
Stock options granted
Shares issued for investor relations
services at $4.25 per share
Stock options exercised at $1.00 per
share
Shares issued for cash at $3.00 per
5,558,500
263,900
-
-
34,146,952
-
10,000
260,604
1,670,000
1,750,000
2
436
-
10,000
276,000
2
69
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
20
-
20
438
2
69
320
1,275
61
15
(1,218)
213
60
147
100
4,352
320
4,928
-
60
20
(2,687)
7,513
1
319
-
3
1,272
61
15
-
4,105
60
147
100
-
19
-
-
5
4,347
4
4,924
-
-
-
-
-
60
-
-
28
14,062
-
-
(1,218)
(3,910)
-
-
-
-
-
-
-
-
-
(2,687)
(6,597)
280,000
-
320
170,000
-
576
-
-
576
15,000
-
-
-
55
99
-
-
-
-
55
99
6
21,706
-
-
21,712
-
-
-
-
-
-
34
36,498
-
-
(8,076)
(14,673)
-
-
-
2
1,957
42
181
5,008
-
-
-
-
-
(90)
-
(70)
-
-
-
-
-
(90)
(8,076)
21,789
1,957
42
181
5,010
Page 25
share
Currency translation adjustment
Net (loss)
Balance, December 31, 2008
Stock options granted
Stock options exercised, cashless
exercise
Shares issued for cash at $3.00 per
share
Shares issued for cash at $4.00 per
share
Shares issued for cash at $8.185 per
share
Stock options exercised at $3.68 per
share
Currency translation adjustment
Net (loss)
Balance, December 31, 2009
Stock options granted
Stock options exercised, cashless
exercise
Shares issued for cash at $4.63 per
share
Shares issued for cash at $8.62 per
share
Shares issued for cash at $9.50 per
share
Shares issued for cash at $16.00 per
share, net of issue costs
Return of Capital Dividend
Currency translation adjustment
Net (loss)
Balance, December 31, 2010
-
-
36,087,556
-
-
-
-
36
43,687
-
(26,015)
(40,688)
63
-
(7)
63
(26,015)
3,028
-
-
2,844
677,933
1
(1)
4,330,000
4
12,986
5,000,000
5
19,995
1,954,795
2
15,998
-
-
-
-
-
-
-
-
-
-
50,000
-
-
48,100,284
-
-
-
184
-
-
48
95,693
-
-
(34,129)
(74,817)
-
(968)
-
(975)
-
141,440
50,000
-
-
-
2,387
-
538
600,000
1
5,171
631,579
1
5,999
-
-
-
-
-
-
-
-
-
-
2,844
-
12,990
20,000
16,000
184
(968)
(34,129)
19,949
2,387
-
538
5,172
6,000
3,475,000
-
-
-
52,998,303 $
3
-
-
-
51,986
(9,330)
-
-
53 $
152,444 $
-
-
-
(23,074)
(97,891) $
-
-
215
-
(760) $
51,989
(9,330)
215
(23,074)
53,846
The accompanying notes are an integral part of these financial statements
GOLD RESOURCE CORPORATION AND SUBSIDIARIES
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2010, 2009, and 2008
and for the period from Inception (August 24, 1998) to December 31, 2010
(U.S. dollars in thousands, except shares)
Cash flows from operating activities:
Net (loss)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation
2010
2009
2008
(August 24,
1998) to
December
31, 2010
$ (23,074) $ (34,129) $ (26,015 ) $
(97,891)
324
167
124
688
Page 26
Accretion expense
Stock compensation
Asset retirement costs
Management fee paid in stock
Related party payable paid in stock
Foreign currency translation adjustment
Loss on sale of assets
Issuance cost forgiven
Changes in operating assets and liabilities:
Accounts receivable
Prepaid and refundable taxes
Other current assets
Inventories
Accounts payable and accrued liabilities
Other
Total adjustments
68
2,694
315
-
-
215
4
-
(1,185)
(3,716)
146
(2,838)
4,142
(24)
-
2,844
1,992
-
-
(968)
-
-
-
(2,132)
47
(225)
(1,029)
(6)
-
1,999
-
-
-
63
-
-
-
-
(162 )
-
985
-
68
9,481
2,307
392
320
(760)
4
25
(1,185)
(5,848)
(9)
(3,063)
4,866
(37)
145
690
3,009
7,249
Net cash (used in) operating activities
(22,929)
(33,439)
(23,006 )
(90,642)
Cash flows from investing activities:
Capital expenditures
Restricted cash
(3,560)
11,436
(1,204)
(11,436)
(658 )
-
(5,999)
-
Net cash provided by (used in) investing activities
7,876
(12,640)
(658 )
(5,999)
Cash flows from financing activities:
Proceeds from sales of stock
Proceeds from exercise of options
Proceeds from debentures – founders
Dividends paid
Proceeds from exploration funding agreement - Canyon
Resources
63,393
-
-
(7,740)
48,990
184
-
-
5,010 150,633
428
50
(7,740)
181
-
-
-
-
-
500
Net cash provided by financing activities
55,653
49,174
5,191 143,871
Effect of exchange rates on cash and equivalents:
230
123
-
353
Net increase (decrease) in cash and equivalents
40,830
3,218
(18,473 )
47,582
Cash and equivalents at beginning of period
6,752
3,534
22,007
-
Cash and equivalents at end of period
$
47,582 $
6,752 $
3,534 $
47,582
Supplemental Cash Flow Information
Interest paid
Income taxes paid
Non-cash investing and financing activities:
Conversion of Canyon Resources funding into common
stock
Conversion of founders debentures into common stock
$
$
$
$
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
-
-
- $
- $
500
50
The accompanying notes are an integral part of these financial statements
Page 27
GOLD RESOURCE CORPORATION AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008
1.
Summary of Significant Accounting Policies
Basis of Presentation: Gold Resource Corporation (the “Company”) was organized under the laws of
the State of Colorado on August 24, 1998. The Company has been engaged in the exploration for precious and base
metals, in Mexico, as an exploration stage company. It has emerged as a producer of gold and silver metals
concentrates and it plans to continue to develop mineral properties as well as become a producer of base metals
concentrates. The consolidated financial statements included herein are expressed in United States dollars, the
Company's reporting currency. The accounting policies conform to accounting principles generally accepted in the
United States of America (“U.S. GAAP”).
Basis of Consolidation: The consolidated financial statements include the accounts of the Company and
its wholly owned Mexican corporation subsidiaries. The significant subsidiaries are Don David Gold S.A. de C.V.
and Golden Trump Resources S.A. de C.V. The expenditures of Don David Gold and Golden Trump Resources are
generally incurred in Mexican pesos. Significant intercompany accounts and transactions have been eliminated.
Reclassifications: Certain amounts previously presented for prior periods have been reclassified to
conform to the current presentation. The reclassifications had no effect on net loss, total assets, or total
shareholders’ equity.
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 period. Management routinely makes judgments and estimates about
the effects of matters that are inherently uncertain. Estimates that are critical to the accompanying consolidated
financial statements include the identification and valuation of proven and probable reserves, obligations for
environmental, reclamation, and closure matters, estimates related to asset impairments of long lived assets and
investments, classification of expenditures as either an asset or an expense, valuation of deferred tax assets, and the
likelihood of loss contingencies. Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Estimates and assumptions are revised periodically and the effects of revisions are reflected in the financial
statements in the period it is determined to be necessary. Actual results could differ from these estimates.
Cash and Cash Equivalents: Cash and cash equivalents consists of all cash balances and highly liquid
investments with a remaining maturity of three months or less when purchased and carried at cost, which
approximates fair value.
Restricted Cash: Pursuant to the terms of two subscription agreements that were closed during 2009, the
Company agreed to reserve cash proceeds of $12.0 million for specific purposes. Under the first agreement, $4.0
million was restricted for the purpose of additional exploration at the El Aguila Project. Under the second
agreement, $8.0 million was restricted for the purpose of constructing a decline ramp, drifts and crosscuts, and
associated surface facilities to support underground development and mining of the La Arista vein.
The restricted cash balances were placed in separate interest bearing bank accounts. Transfer of funds
from the restricted accounts required the approval of Hochschild Mining Holdings Limited (“Hochschild”). During
the year ended December 31, 2010 the Company obtain final approval from Hochschild to release all remaining
funds from the restricted bank accounts.
Accounts Receivable: Accounts receivable consists of trade receivables from gold and silver sales. As
of December 31, 2010, 81.5 % of the Company’s total sales of metals concentrate were generated from sales to
Page 28
Consorcio Minero de Mexico Cormin Mex, S.A. de C.V., (“Consorcio”) a Trafigura Group Company and the other
18.5% of the Company’s total sales of metals concentrate were generated from to sales Trafigura Beheer, B.V.,
(Beheer) a Trafigura Group Company.
Ore Stockpile Inventories: Ore stockpile inventories 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. Write-downs
of ore stockpiles and concentrate inventories, resulting from net realizable value impairments, are reported as a
component of production costs applicable to sales. The current portion of ore stockpiles is determined based on the
expected amounts to be processed within the next 12 months. Ore stockpile inventories not expected to be processed
within the next 12 months, if any, are classified as long-term. At December 31, 2010, all ore stockpile inventories
were classified as current.
Ore stockpile inventories represent mineralized materials that have been mined and are available for further
processing. Ore 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 ore stockpile inventories based on relative values of material stockpiled and processed using current
mining costs incurred up to the point of stockpiling the ore, including applicable overhead, depreciation, depletion
and amortization relating to mining operations. Material is removed from the stockpile at an average cost per tonne.
Concentrate Inventories: Concentrates inventories include concentrates located either at our facilities, or
in transit to our customer’s port. Inventories are valued at the lower of full cost of production or net realizable value
based on current metals prices.
Materials and Supplies Inventories: Materials and supplies inventories are valued at the lower of average
cost or net realizable value. Cost includes applicable taxes and freight.
Proven and Probable Reserves: The definition of proven and probable reserves is set forth in SEC
Industry Guide 7. Proven reserves are 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 measurement are spaced so closely and the geologic character is so
well defined that size, shape, depth and mineral content of reserves are well-established. Probable reserves are
reserves for which quantity and grade and/or quality are computed from information similar to that used for proven
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 reserves, is high enough to assume continuity
between points of observation. In addition, reserves cannot be considered proven and probable until they are
supported by a feasibility study, indicating that the reserves have had the requisite geologic, technical and economic
work performed and are economically and legally extractable at the time of the reserve determination.
As of December 31, 2010, none of the Company’s mineralized material met the definition of proven or
probable reserves.
Mineral Acquisition Costs: The costs of acquiring land and mineral rights are considered tangible
assets. Significant acquisition payments are capitalized. General, administrative and holding costs to maintain an
exploration property are expensed as incurred. If a mineable ore body is discovered, such costs are amortized when
production begins using the units-of-production method. If no mineable ore body 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.
Exploration Costs: Exploration costs are charged to expense as incurred. Costs to identify new mineral
resources, to evaluate potential resources, and to convert mineral resources into proven and probable reserves are
considered exploration costs.
Design, Construction, and Development Costs: Certain costs to design and construct mine and
processing facilities may be incurred prior to establishing proven and probable reserves. Under these circumstances,
the Company classifies a project as an exploration stage project and expenses substantially all costs, including
Page 29
design, engineering, construction, and installation of equipment. Certain types of equipment, which have alternative
uses or significant salvage value, may be capitalized. If a project is determined to contain proven and probable
reserves, costs incurred in anticipation of production can be capitalized. Such costs include development drilling to
further delineate the ore body, removing overburden during the pre-production phase, building access ways,
constructing facilities, and installing equipment. Interest costs, if any, incurred during the development phase,
would be capitalized until the assets are ready for their intended use. The cost of start-up activities and on-going
costs to maintain production are expensed as incurred. Costs of abandoned projects are charged to operations upon
abandonment.
If a project commences commercial production and the project is determined to contain proven and
probable reserves, amortization and depletion of capitalized costs is computed on a unit-of–production basis over the
expected reserves of the project based on estimated recoverable gold equivalent ounces.
Impairment of Long-Lived Assets: The Company evaluates its long-lived assets for impairment. If
impairment indicators exist, the Company performs additional analysis to quantify the amount by which capitalized
costs exceed recoverable value. The periodic evaluation of capitalized costs is based upon expected future cash
flows, including estimated salvage values. As of December 31, 2010, the Company’s mineral resources do not meet
the definition of proven or probable reserves or value beyond proven and probable reserves and any potential
revenue has been excluded from the cash flow assumptions. Accordingly, recoverability of capitalized cost is based
primarily on estimated salvage values, or alternative future uses.
Property and Equipment: All items of property and equipment are carried at cost not in excess of their
estimated net realizable value. Normal maintenance and repairs are charged to operations while expenditures for
major maintenance and betterments are capitalized. Gains or losses on disposition are recognized in operations.
Depreciation: Depreciation of property and equipment is computed using straight-line methods over the
estimated economic lives, as follows:
Trucks and autos
4 to 5 years
Office furniture and equipment 5 to 10 years
3 to 6 years
Computer hardware and
software
Exploration equipment
Buildings
6 to 8 years
20 to 30 years
Asset Retirement Obligations: The Company’s 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. A liability is initially recorded at the estimated present
value for an obligation associated with the retirement of tangible long-lived assets in the period in which it is
incurred if a reasonable estimate of fair value can be made. For exploration stage properties that do not qualify for
asset capitalization, the costs associated with the obligation are charged to operations. For development and
production stage properties, the costs are added to the capitalized costs of the property and amortized using the unit
of production method.
Stock Based Compensation: The Company records compensation expense for the fair value of stock
options that are granted. Expense is recognized on a pro-rata basis over the vesting periods, if any, of the options.
The fair value of stock options at their grant date is estimated by using the Black-Scholes-Merton option pricing
model.
Net Loss Per Share: Basic loss per share includes no dilution and is computed by dividing net loss by
the weighted average number of common shares outstanding during each period. Diluted loss per share reflects the
potential dilution that could occur if potentially dilutive securities are converted into common shares. Potentially
dilutive securities, such as stock options and warrants, 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
fair market value. During the years ended December 31, 2010, 2009, and 2008, the calculation excluded potential
Page 30
dilution of 4,860,000, 3,745,000, and 3,683,000 shares, respectively, because the effect would have been anti-
dilutive.
Income Taxes: Income taxes are computed using the 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 carry-forwards. Deferred tax assets are evaluated to
determine if it is more likely than not that they will be realized. Valuation allowances have been established to
reduce the carrying value of deferred tax assets in recognition of significant uncertainties regarding their ultimate
realization. Further, the evaluation has determined that there are no uncertain tax positions required to be disclosed.
Comprehensive Income: Total comprehensive income and the components of accumulated other
comprehensive income (loss) are presented in the Consolidated Statement of Changes in Equity. Accumulated other
comprehensive income (loss) is composed of foreign currency translation adjustment effects.
Fair Value of Financial Instruments: ASC 825, “Disclosures About Fair Value of Financial
Instruments,” requires disclosure of fair value information about financial instruments. ASC 820, “Fair Value
Measurements” defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. Fair value estimates discussed
herein are based upon certain market assumptions and pertinent information available to management as of
December 31, 2010.
The respective carrying value of certain on-balance-sheet financial instruments approximate their fair
values. These financial instruments include cash, cash equivalents, restricted cash, accounts receivable, prepaid and
refundable taxes, accounts payable and accrued expenses. Fair values were assumed to approximate carrying values
for these financial instruments due to their short term nature or they are receivable or payable on demand.
Foreign Operations: The Company's present mining activities are in Mexico. As with all types of
international business operations, currency fluctuations, exchange controls, restrictions on foreign investment,
changes to tax regimes, political action and political instability could impair the value of the Company's
investments.
Foreign Currency Translation: The local currency where the Company’s properties are located, the
Mexican peso, is the functional currency for the Company's subsidiaries. Assets and liabilities are translated using
the exchange rate in effect at the balance sheet date. Intercompany equity accounts are translated using historical
rates. Revenues and expenses are translated at the average exchange rate for the year. Translation adjustments are
not included in the determination of net loss for the period and are reported as a separate component of shareholders'
equity.
Prepaid and Refundable Taxes: In Mexico, value added taxes (IVA) are assessed on purchases of
materials and services. Businesses are generally entitled to recover the taxes they have paid, either as a refund or as
a credit against future taxes payable. For the period from inception through 2008, substantially all of the Company’s
refund claims were initially denied by the tax authorities. Accordingly, the Company provided a full valuation
allowance for potentially refundable IVA. During 2009, the Company was successful in establishing the validity of
its claims and received IVA refunds in the amount of $1.1 million. Furthermore, it appears that the tax authorities
will honor the Company’s claims for substantially all of the IVA paid during 2009 and any future years. Amounts
recorded as prepaid and refundable taxes in the consolidated financial statements represent the estimated recoverable
payments made during 2009 and 2010. Although the taxing authorities may reconsider claims filed for previous
years, significant uncertainties regarding ultimate recovery preclude recognition of an asset for taxes paid in years
prior to 2009.
Revenue Recognition: Sales of all metals products sold directly to the Company’s metals concentrate
buyer, including by-product metals, are recorded as revenues when title and risk of loss transfer to the buyer
(generally at the time shipment is delivered at buyer’s port) at estimated forward prices for the anticipated month of
settlement. Due to the time elapsed from shipment and the final settlement with the buyer, we must estimate the
prices at which sales of our metals will be settled. Previously recorded sales are adjusted to estimated settlement
metals prices until final settlement by the buyer.
Page 31
Sales to the Company’s buyer are recorded net of charges by the buyer for treatment, refining, smelting
losses, and other charges negotiated by the Company with the buyer. Charges are estimated upon shipment of
concentrates based on contractual terms, and actual charges do not vary materially from estimates. Costs charged by
smelters include a metals payable fee, fixed treatment and refining costs per ton of concentrate.
Changes in metals prices on the London Bullion Market between shipment and final settlement will result
in adjustments to revenues related to sales of concentrate previously recorded upon shipment. Concentrate sales are
based on a provisional sales price containing 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 forward
price at the time of the sale. The embedded derivative, which does not qualify for hedge accounting, is adjusted to
market through earnings each period prior to final settlement.
Changes in the market price of metals significantly affect the Company’s revenues, results of operations,
and cash flow. Metals prices can and often do fluctuate widely and are affected by numerous factors beyond the
Company’s control, such as political and economic conditions, demand, forward selling by producers, expectations
for inflation, custom smelter activities, the relative exchange rate of the U.S. dollar, investor sentiment, and global
mine production levels. The aggregate effect of these factors is impossible to predict. Because the Company’s
revenue is derived from the sale of gold and silver, it’s earnings are directly related to the prices of these metals.
Concentration of Credit Risk: As of December 31, 2010, 81.5% of our total sales of metals concentrate
and 81.5% of our mine gross profits were generated from sales to Consorcio Minero de Mexico Cormin Mex. S.A.
de C.V.(Consorcio), a Trafigura Group Company and 18.5% of our total sales of metals concentrate and 18.5% of
our mine gross profits were generated from sales to Trafigura Beheer, B.V.(Beheer) of Lucerne Switzerland,
Trafigura Group Company.
The Company’s El Aguila Project, which is located in the state of Oaxaca, Mexico, accounted for 100% of
it’s total sales of metals concentrate for the year ended December 31, 2010.
The Company has carefully considered and assessed the credit risk resulting from its concentrate sales
arrangement with Consorcio or Beheer, and believes it is not exposed to significant credit risk in relations to the
counterparty meeting its contractual obligations as it pertains to its trade receivables during the ordinary course of
business.
In the event that our relationship with Consorcio or Beheer is interrupted for any reason, we believe that we
would be able to locate another entity to purchase our metals concentrate and by-product metals. However, any
interruption could temporarily disrupt the sale of our principal products and adversely affect our operating results.
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 depositing institutions mitigate the underlying
risk of loss. To date, these concentrations of credit risk have not had a significant impact on the Company’s
financial position or results of operations.
Recently Adopted Accounting Standards: The Company evaluates the pronouncements of various
authoritative accounting organizations, primarily the Financial Accounting Standards Board (“FASB”), the U.S.
Securities and Exchange Commission (“SEC”), and the Emerging Issues Task Force (“EITF”), to determine the
impact of new pronouncements on U.S. GAAP and the impact on the Company. The Company has adopted the
following new accounting standards during 2010:
Fair Value Measurements - In January 2010, Accounting Standards Updates (“ASU”) No. 2010-06
amended existing disclosure requirements about fair value measurements by adding required disclosures about items
transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchase,
sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the existing
fair value disclosures about the level of disaggregation. The ASU was adopted during the period ended March 31,
010, and its adoption had no impact on the Company’s consolidated financial position, results of operations or cash
flows.
Page 32
Embedded Derivatives - ASU No. 2010-11 was issued in March 2010, and clarifies that the transfer of
credit risk that is only in the form of subordination of one financial instrument to another is an embedded derivative
feature that should not be subject to potential bifurcation and separate accounting. This ASU will be effective for
the first fiscal quarter beginning after June 15, 2010, with early adoption permitted. The ASU was adopted during
the period ended June 30, 2010, and its adoption had no impact on our consolidated financial position, results of
operations or cash flows.
Consolidations - ASU No. 2009-17 revises the consolidation guidance for variable-interest entities. The
modifications include the elimination of the exemption for qualifying special purpose entities, a new approach for
determining who should consolidate a variable-interest entity, and changes to when it is necessary to reassess who
should consolidate a variable-interest entity. The ASU was adopted during the period ended March 31, 2010 and its
adoption had no impact on the Company’s consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Standards Updates:
The following accounting standards updates were recently issued and have not yet been adopted by the
Company. These standards are currently under review to determine their impact on the Company’s consolidated
financial position, results of operations, or cash flows.
ASU No. 2010-06, was issued in January 2010, and clarifies existing disclosures of inputs and valuation
techniques for Level 2 and 3 fair value measurements. The disclosure of activity within Level 3 fair value
measurements is effective for fiscal years beginning after December 15, 2010, and for interim periods within those
years. We do not expect there will be an impact to our financial position or results of operations for the additional
disclosure requirements in 2011.
ASU No. 2010-13 was issued in April 2010, and will clarify the classification of an employee share based
payment award with an exercise price denominated in the currency of a market in which the underlying security
trades. This ASU will be effective for the first fiscal quarter beginning after December 15, 2010, with early
adoption permitted.
ASU 2010-29 was issued in December 2010, and requires a public entity to disclose pro forma information
for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue
and earnings of the combined entity for the current reporting period as though the acquisition date for all business
combinations that occurred during the year had been as of the beginning of the annual reporting period. This ASU
will be effective for business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does
not expect the provisions of ASU 2010-29 to have a material effect on its financial position, results of operations or
cash flows.
There were various other updates recently issued, most of which represented technical corrections to the
accounting literature or application to specific industries. None of the updates are expected to a have a material
impact on the Company's consolidated financial position, results of operations or cash flows.
2.
Inventories
Inventories at December 31, 2010 and 2009 consist of the following:
Ore stockpiles
Concentrate
Materials and supplies
$
2010
2009
(in thousands)
1,825 $
15
1,223
-
-
225
Total current inventories
$
3,063 $
225
Page 33
3. Mineral Properties
The Company currently has an interest in five properties, the El Aguila Project, the El Rey property, the
Las Margaritas property, the Solaga property, and the Alta Gracia property.
The El Aguila Project: Effective October 14, 2002, the Company leased three mining concessions,
El Aguila, El Aire, and La Tehuana from a former consultant of the Company. The lease agreement is subject to a
4% net smelter return royalty where production is sold in the form of gold/silver dore and 5% for production sold in
concentrate form. The Company has made periodic advance royalty payments under the lease totaling $260,000 and
no further advance royalty payments are due. Subject to minimum exploration requirements, there is no expiration
term for the lease. The Company may terminate it at any time upon written notice to the lessor and the lessor may
terminate it if the Company fails to fulfill any of its obligations. The El Aguila and El Aire concessions make up the
El Aguila Project and the La Tehuana concession makes up the Las Margaritas property. The Company
subsequently acquired two additional claims the El Chacal and the El Pilon, totaling 1,445 hectares, where this same
individual receives a 2% royalty.
The Company has filed for and received additional concessions for the El Aguila Project that total an
additional 17,639 hectares. These additional concessions are not part of the concessions leased from a former
consultant of the Company, and bring the Company’s interest in the El Aguila Project to an aggregate of 20,055
hectares. The mineral concessions making up the El Aguila Project are located within the Mexican State of Oaxaca.
The El Rey Property: The Company has acquired claims in another area in the state of Oaxaca by filing
concessions under the Mexican mining laws, referred to by the Company as the El Rey property. These concessions
total 892 hectares and are subject to a 2% royalty on production payable to a former consultant of the Company.
The Company has conducted minimal exploration and drilling on this property to date.
The El Rey property is an exploration stage property with no known reserves. It is approximately 64
kilometers (40 miles) from the El Aguila Project. There is no plant or equipment on the El Rey property. If
exploration is successful, any mining would probably require an underground mine but any mineralized material
could be processed at the El Aguila Project mill.
The Las Margaritas Property: The Las Margaritas property is made up of the La Tehuana
concession. The Company leased this property in October 2002 from a former consultant of the Company. It is
comprised of approximately 925 hectares located adjacent to the El Aguila property. To date, the Company has
conducted limited surface sampling, geologic mapping and has defined drill targets for a future exploration drill
program.
The Solaga Property: In February 2007, the Company leased a 100% interest in a property known as the
Solaga property from an entity partially owned by a former consultant of the Company. The property totals 618
hectares, and is located approximately 120 kilometers (75 miles) from the El Aguila Project. A dormant silver mine
is located on the Solaga property which was in production as recently as the 1980’s, however the Company cannot
estimate if or when the mine will reopen. The lease requires the Company to perform $25,000 in additional work
and is subject to a 4% net smelter return royalty on any production. To date, the Company has conducted limited
surface sampling, geologic mapping and has defined drill targets for a future exploration drill program.
The Alta Gracia Property: In August 2009, the Company acquired claims adjacent to the Las Margaritas
property in the Alta Gracia mining district by filing concessions under the Mexican mining laws. The Company
refers to this property as the Alta Gracia property. These concessions are comprised of three mining claims, the
David 1, the David 2 and La Hurradura. The concessions total 5,175 hectares, and the acquisition of these claims
extended the Company’s land position along what is known as the San Jose structural corridor to just over 16
kilometers. The Company has conducted limited surface sampling, geologic mapping and defined drill targets for a
future exploration drill program.
Page 34
As of December 31, 2010, none of the mineralized material at the Company’s properties met the SEC’s
definition of proven or probable reserves.
4.
Property and Equipment
At December 31, 2010 and 2009, property and equipment consisted of the following:
Trucks and autos
Office building
Furniture and equipment
Exploration equipment
Subtotal
Accumulated depreciation
Totals
2010
2009
(in thousands)
$
835
$
1,737
1,506
1,442
5,520
(671)
$
4,849 $
425
-
491
1,145
2,061
(335)
1,726
Depreciation expense for the years ended December 31, 2010, 2009, and 2008 was $324,000, $167,000 and
$123,900, respectively. The Company evaluates the recoverability of property and equipment when events and
circumstances indicate that such assets might be impaired.
5.
Accounts payable and accrued expenses
At December 31, 2010 and 2009, accounts payable and accrued expenses consisted of the following:
Accounts payable
Accrued payable and taxes
Accrued expenses
Totals
2010
2009
(in thousands)
2,449
777
1640
$
4,866
$
577
100
48
725
$
$
6.
Income Taxes
Loss before income taxes, segregated as to the U. S. and foreign components, is as follows:
U. S.
Foreign
Totals
2010
2009
2008
(in thousands)
$
(7,187) $
(15,887)
(2,947)
(31,182)
$ (12,698)
(13,317)
$ (23,074) $ (34,129)
$ (26,015)
At December 31, 2010, the Company has tax loss carry-forwards for U. S. tax purposes approximating
$21.8 million, which primarily expire from 2026 to 2029. The principal difference between the net loss reported for
financial reporting purposes and the taxable loss reported for tax purposes relates to the taxation of foreign
subsidiaries. Secondly, stock based compensation expenses are generally deductible for tax purposes in different
periods and in different amounts than the expense recognized for financial reporting purposes. Finally, certain
expenditures for property and equipment are capitalized for tax purposes, but not for financial reporting purposes.
Page 35
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at
December 31, 2010 and 2009 are presented below:
Deferred tax assets:
Tax loss carry forward – U. S.
Tax loss carry forward – Foreign
Property and equipment
Stock based compensation
Total deferred tax assets
Valuation allowance
Net deferred tax asset
2010
2009
(in thousands)
$
7,399 $
23,900
1,378
516
33,193
(33,193)
2,129
19,321
3,700
350
25,500
(25,500)
$
-- $
--
At this time, the Company is unable to determine if it will be able to benefit from its deferred tax
asset. There are limitations on the utilization of net operating loss carry-forwards, including a requirement that
losses be offset against future taxable income, if any. In addition, there are limitations imposed by certain
transactions which are deemed to be ownership changes. Accordingly, a valuation allowance has been established
for the entire deferred tax asset. The change in the valuation allowance was approximately $7.7 million during
2010.
A reconciliation of taxes reported at the Company’s effective tax rate and the U. S. federal statutory tax
rate is comprised of the following components:
Tax at statutory rates
Increase (reduction) in taxes due to:
Stock based compensation
Valuation allowance
Tax provision
2010
2009
2008
(in thousands)
( 11,604) $
(7,845) $
--
7,845
--
11,604
-- $
-- $
$
$
(8,845)
--
8,845
--
7.
Shareholders' Equity
All of the financial information in this report has been adjusted to reflect the effect of the two-for-one stock
split that was effective February 21, 2005, whereby the Company declared and effected a 100% forward stock split
where one additional share of common stock, par value $0.001, was issued for each common share outstanding as of
that date.
The Company was formed August 24, 1998 by William W. Reid and David C. Reid (the
“Founders”). During 1998 and 1999, the Founders received 3,800,000 shares of common stock valued at $2,000 for
administrative and organization expenses. The Company remained generally inactive through 1999.
Commencing July 1, 2000, the Company and US Gold Corporation, a publicly traded Colorado
corporation, entered into a management contract whereby US Gold provided general management of the business
activities of the Company through December 31, 2001. Under this management contract, US Gold was issued
2,560,000 shares of common stock of the Company. The 2,560,000 shares were valued at $392,000 or
approximately $0.15 per share. Through this arrangement, the Company benefited from experienced management
Page 36
without the need to raise cash for the related cost of such management and administration. The Company was,
however, responsible for all additional funding needed.
During 2001, the Founders made convertible debenture loans in the amount of $50,000 to the Company
and then converted those debentures into 200,000 shares of common stock of the Company at a conversion price of
$0.25 per share.
In September 2001, the Company commenced the sale of its common shares under exemptions offered by
federal and state securities regulations. During 2001, the Company sold 820,000 shares at $0.25 per share (total
$205,000).
During 2002, the Company sold 392,000 shares at $0.25 per share ($98,000) to various parties and
1,351,352 shares at approximately $0.17 per share ($225,000) to an institutional investor, RMB International
(Dublin) Limited (“RMB”).
During 2003, the Company sold 577,000 shares at $0.25 per share raising net proceeds of
$144,000. Effective September 30, 2003, US Gold acquired the RMB shares in exchange for US Gold shares, and
terminated the obligation of the Company to pay RMB approximately $25,000 in transaction costs, which was added
back into paid-in-capital.
During 2004, the Company sold 608,000 shares at $0.25 per share raising net proceeds of $152,000. Also
during 2004, the Company issued 1,200,000 shares valued at approximately $0.42 per share to Canyon Resource
Corporation for repayment of a loan for funding of exploration cost at the El Aguila property. Also during 2004, the
Company made a stock grant of 600,000 shares at $0.25 per share or $150,000 to a consultant of the Company.
Effective January 2, 2005, the Company granted common stock awards to its two executive officers and a
consultant of an aggregate 1,750,000 shares for services performed during 2004 and 2005. The shares were valued
at $437,000 (or $0.25 per share) which was recorded as stock based compensation expense of $350,000 in 2004 and
$87,000 in 2005. In this issuance of common stock, William W. Reid received 1,000,000 shares, David C. Reid
received 500,000 shares and the consultant received 250,000 shares
During 2005, an individual exercised stock options for 10,000 shares for $2,500. In June 2005, the
Company issued 1,280,000 shares to US Gold Corporation in satisfaction of $320,000 owed for a prior year
management contract.
During 2005, the Company sold 428,000 shares to individual investors for cash proceeds of $145,000
(276,000 shares at $0.25 per share and 152,000 shares at $0.50 per share).
In addition, during July and August 2005, the Company closed transactions under a Subscription
Agreement and Stock Purchase Option Agreement with Heemskirk Consolidated Limited (“Heemskirk”), an
Australian global mining house, whereby Heemskirk purchased 2,000,000 shares of common stock of the Company
at $0.50 per share. A finder’s fee of 140,000 shares was paid to a third party (resulting in a net value of $0.47 per
share). Heemskirk had previously purchased (in April, 2005) 150,000 shares of common stock at $0.50 per share
and the Company had paid a finder’s fee of 10,500 shares. The Company agreed to give Heemskirk a first right of
offer for any financings, including sale of equity, the Company may pursue. In a similar transaction during August
2005, the Company sold 400,000 shares to another investor raising $200,000 and paid a finder’s fee to a third party
of 28,000 shares. These transactions resulted in the issuance of 2,728,500 shares for net cash proceeds of $1.3
million ($0.47 per share).
During 2006, the Company sold 4,600,000 shares of common stock at $1.00 per share in a public offering
under a registration statement filed with the SEC that was declared effective on May 15, 2006. The Company
received cash proceeds of $4.4 million (net of finders’ fees of $249,000).
During 2006, the Company completed a private placement of 4,322,000 shares of common stock at $1.20
per share, and received net cash proceeds of $4.9 million, after deducting finders’ fees of $258,000. The Company
also issued 257,700 shares of common stock as finders’ fees in connection with this private placement.
Page 37
During 2006, the Company received cash proceeds of $60,000 pursuant to the exercise of options to
purchase 240,000 shares at $0.25 per share.
In May 2006, the Company made a common stock award of 100,000 shares to a director. These shares
were valued at $100,000. In December 2006, the Company made a common stock award of 35,000 shares to two
employees. These shares were valued at $60,000. In October 2006, the Company issued 250,000 shares of
restricted common stock in exchange for investor relations services. These shares were valued at $275,000.
Pursuant to a contract effective November 1, 2006, the Company agreed to issue a series of shares of
common stock to a consultant performing investor relations work on its behalf. The 30,000 shares issued in 2006
were valued at $1.50 per share, or $45,000. The 30,000 shares issued in February 2007 were valued at $2.428 per
share, or $73,000. The 30,000 shares issued in May 2007 were valued at $3.39 per share or $102,000. In November
2007, 30,000 shares were issued at a value of $4.14 per share or $124,000, and 20,000 shares were issued at a value
of $4.235 per share or $85,000. The Company agreed to issue an additional 10,000 shares for services performed
during December 2007 valued at $4.375 per share or $44,000.
On May 1, 2007, the Company entered into an investor relations contract for international investors that
required the issuance of 50,000 shares of common stock during the second quarter of 2007. These shares were
valued at fair market value of $148,000.
On October 2, 2007, the Company agreed to issue 15,000 shares of common stock for consulting services
performed in Mexico. These shares were valued at $3.68 per share or $55,000 and were recorded as stock
compensation during the year ended December 31, 2007.
On December 5, 2007, the Company completed the sale of 5,558,500 shares of common stock in a private
placement for a price of $4.00 per share, for aggregate gross proceeds of $22.2 million. The sales were made
pursuant to a subscription agreement between the Company and each subscriber. In connection with the private
placement, the Company agreed to pay finders’ fees of $522,000 cash and 263,900 shares of common stock.
Effective January 13, 2008, the Company agreed to issue 10,000 shares of common stock for investor
relations consulting services. The 10,000 shares were valued at $4.247 per share or $42,000.
During the year ended December 31, 2008, a Director of the Company exercised options to purchase
100,000 shares of the Company's common stock at the exercise price of $1 per share for total cash proceeds of
$100,000.
Effective July 28, 2008, an officer exercised options to purchase 87,000 shares of common stock at $1.00
per share. The officer elected the “cashless exercise” method for payment, under which he immediately surrendered
19,333 shares of common stock that he would have otherwise been entitled to receive. These shares were valued at
$4.50 per share, for a total valuation of $87,000. The transaction resulted in a net increase of 67,667 common shares
outstanding.
Effective October 12, 2008, a consultant exercised options to purchase 81,000 shares of common stock at
$1.00 per share for cash proceeds of $81,000. In addition, the consultant exercised options to purchase 19,000
shares using the “cashless exercise” method of payment, under which he immediately surrendered 7,063 shares of
common stock that he would have otherwise been entitled to receive. The 7,063 shares were valued at $2.69 per
share, for a total valuation of $19,000 and resulting in a net issuance of 11,937 shares. As a result of both
transactions, common shares outstanding increased by 92,937 shares.
On December 5, 2008, the Company entered into a subscription agreement and a strategic alliance
agreement with Hochschild Mining Holdings Limited (Hochschild). Under the terms of the subscription agreement,
the Company sold 1,670,000 shares of its common stock to Hochschild at $3.00 per share for total cash proceeds of
$5.0 million. Under the terms of the strategic alliance agreement the Company granted Hochschild an option to
purchase an additional 4,330,000 shares of its common stock at a price of $3.00 per share for total cash proceeds of
Page 38
$13 million. The option was exercised on February 25, 2009. The strategic alliance agreement also contains a
number of additional covenants between the parties.
On June 30, 2009, the Company entered into a subscription agreement with Hochschild to sell 5,000,000
shares of its common stock at a price of $4.00 per share, or a total of $20 million. The transaction was completed in
two tranches. Simultaneously with the execution of the subscription agreement, the Company sold 1,250,000 shares
of common stock for gross proceeds of $5 million. The closing for the remaining 3,750,000 shares of common
stock was held on July 20, 2009. The Company agreed to reserve $4 million of the gross proceeds for exploration
activities.
Effective October 2, 2009, a consultant exercised options to purchase 50,000 shares of common stock at
$3.68 per share for total cash proceeds of $184,000.
On December 17, 2009, the Company entered into a subscription agreement with Hochschild to sell
1,954,795 shares of restricted common stock at $8.185 per share for gross proceeds of $16 million. The Company
agreed to reserve $8 million of the proceeds for underground mining expenses at the La Arista Vein.
During 2009, the Company issued 677,933 shares of common stock pursuant to the exercise of stock
options by officers and directors. Two option-holders exercised 913,000 options using the “cashless exercise”
method for payment, whereby each option-holder immediately surrendered shares of common stock that he would
have otherwise been entitled to receive. In the aggregate, the option-holders exercised 913,000 options and
immediately surrendered 235,067 shares of common stock, resulting in a net issuance of 677,933 shares of common
stock. The Company received no cash proceeds in the transactions.
On March 8, 2010, the Company issued 600,000 restricted shares of common stock at $8.62 per share to
Hochschild pursuant to the strategic alliance agreement. The Company received cash proceeds of $5.2 million.
On May 7, 2010, the Company agreed to issue 50,000 shares of common stock to an individual
investor. The transaction was valued at $10.77 per share based upon the quoted market price of the common stock,
and consisted of cash proceeds of $232,000, or $4.63 per share, and stock compensation expense of $307,000, or
$6.14 per share.
On May 26, 2010, the Company issued 631,579 restricted shares of common stock at $9.50 per share to
Hochschild pursuant to a subscription agreement in connection with the parties’ strategic alliance. The Company
received cash proceeds of $6 million.
On September 23, 2010, the Company completed a financing transaction whereby it sold 3,475,000 shares
of restricted common stock at $16.00 per share for net proceeds of $52 million to various institutional
investors. Jefferies & Company Inc. acted as the placement agent in connection with the transaction, and was
compensated in the amount of approximately $3.6 million.
During the year ended December 31, 2010, the Company issued 141,440 shares of common stock pursuant
to the exercise of stock options. Two option-holders exercised 200,000 options using the “cashless exercise” method
for payment, whereby the option-holder immediately surrendered shares of common stock that he would have
otherwise been entitled to receive. In the aggregate, the option-holders exercised 200,000 options and immediately
surrendered 58,560 shares of common stock, resulting in a net issuance of 141,440 shares of common stock. The
Company received no cash proceeds in the transactions.
The Company declared commercial production July 1, 2010 and subsequently declared special cash
dividends, totaling $0.18 per common share in six dividend payments to shareholders of record as reflected in the
table below. The dividends have been charged against the Company’s additional paid in capital and are considered
return of capital dividend since the Company has no current earnings or accumulated earnings at this time. The
Company paid $7.7 million in the year ended December 31, 2010. Dividends declared in 2010, to be paid after
December 31, 2010, total $1.6 million.
Page 39
Date Declared
Date of Record
Date Paid
July 30, 2010
August 30, 2010
August 16, 2010
$
September 17, 2010 September 29, 2010
August 26, 2010
September 29, 2010 October 15, 2010
October 27, 2010
October 28, 2010 November 12, 2010 November 24, 2010
November 27, 2010 December 14, 2010 December 27, 2010
January 28, 2011
January 14, 2011
December 21, 2010
Total
$
Special Cash
Dividend Per
Common Share
0.03
0.03
0.03
0.03
0.03
0.03
0.18
Aggregate
Amounts Paid
(in thousands)
$
$
1,484
1,486
1,590
1,590
1,590
1,590
9,330
During the year ended December 31, 2010, the shareholders of the Company approved an amendment to
the Company’s Articles of Incorporation to increase the authorized amount of common stock to 100,000,000 shares
and the number of shares of common stock reserved for issuance under its Non-Qualified Stock Option and Stock
Grant Plan to 10 million shares.
8.
Stock Options
The Company has a non-qualified stock option and stock grant plan under which equity awards may be
granted to key employees, directors and others (the “Plan”). The Plan is administered by the Board of Directors
which determines the terms pursuant to which any option is granted. The maximum number of common shares
subject to grant under the Plan is 10 million.
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton
option pricing model. The option pricing model requires the input of subjective assumptions which are based on
several different criteria. Expected volatility is based on the historical price volatility of the Company’s common
stock. The Company paid dividends during 2010, which resulted in an expected dividend yield of approximately
2%. Based on historical experience, forfeitures and cancellations are not significant. The expected life is estimated
in accordance with SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” for plain vanilla options. Risk
free interest rates are based on U.S. government obligations with a term approximating the expected life of the
option.
The fair value of stock option grants is amortized over the respective vesting period. Total non-cash
compensation expense related to stock options included in general and administrative expense for the years ended
December 31, 2010, 2009, and 2008 was $2.7 million, $2.8 million, and $2.0 million respectively. The estimated
unrecognized compensation cost from unvested options as of December 31, 2010 was approximately $15.1 million,
which is expected to be recognized over the remaining vesting period of 3 years.
Effective January 9, 2008, the Company entered into an investor relations consulting services contract
which included the issuance of options to purchase 50,000 shares of common stock at an exercise price of $4.45 and
a term of eighteen months. The options vested upon issuance. The grant date fair value was calculated as $67,000
($1.35 per option) using the following assumptions: expected life of eighteen months, stock price of $4.45 at date of
grant, dividend yield of 0%, interest rate of 2.1%, and volatility of 61%.
Effective February 22, 2008, grants covering 1,000,000 shares were issued to officers and directors at an
exercise price of $3.40 and a term of ten years. The options vested upon issuance. The grant date fair value was
calculated as $1,803,000 ($1.80 per option) using the following assumptions: expected life of five years, stock price
of $3.40 at date of grant, dividend yield of 0%, interest rate of 2.1%, and volatility of 61%.
During 2008, the Company granted options to employees covering 270,000 shares of common stock at
exercise prices ranging from $3.74 to $4.51 and terms of ten years. The options vest over a three year period. The
grant date fair value was calculated as $637,000 ($2.36 weighted average per option) using the following
assumptions: expected life of six years, stock price equal to exercise price at date of grant, dividend yield of 0%,
interest rate of 3.38%, and volatility of 61%.
Page 40
Effective April 23, 2009, grants covering 1,000,000 shares were issued to officers and directors at an
exercise price of $3.95 and a term of ten years. The options vested upon issuance. The grant date fair value was
calculated as $2.6 million ($2.575 per option) using the following assumptions: expected life of five years, stock
price of $3.95 at date of grant, dividend yield of 0%, interest rate of 1.9%, and volatility of 81%.
During 2009, grants covering 75,000 shares of common stock were issued to an employee at an exercise
price of $7.00 and a term of ten years. These options were cancelled during 2010. The grant date fair value was
calculated as $332,000 ($4.423 per option) using the following assumptions: expected life of five years, stock price
of $7.00 at date of grant, dividend yield of 0%, interest rate of 1.5%, and volatility of 78%.
Effective August 17, 2010, grants covering 100,000 shares of common stock were issued to a member of
the Board of Director at an exercise price of $14.35 and a term of ten years. The stock options vest and are
exercisable on the date of grant. The grant date fair value was calculated as $1.1 million ($10.658 per option) using
the following assumptions: expected life of 10 years, stock price of $14.35 at date of grant, dividend yield of 0.56%,
interest rate 2.64%, and volatility of 71%.
During the year ended December 31, 2010, the Company granted options to employees covering 1,290,000
shares of common stock at exercise prices ranging from $10.10 to $26.10 and terms of ten years. The options vest
over a three year period. The grant date fair value was calculated as $17.1 million ($12.47 weighted average per
option) using the following assumptions: expected life of ten years, stock price equal to exercise price at date of
grant, dividend yield of 2%, average interest rate of 3.07%, and an average volatility of 71%.
The weighted average grant date fair value of options granted was $12.34, $2.70 and $1.90 per option
during 2010, 2009 and 2008, respectively. The weighted average grant date fair value of options vested was $1.21,
$2.56 and $1.78 per option during 2010, 2009 and 2008, respectively.
The following table summarizes annual activity for all stock options for each of the three years ended
December 31, 2010:
Outstanding, January 1, 2008
Granted
Exercised
Outstanding, December 31, 2008
Granted
Exercised
Expired
Outstanding, December 31, 2009
Granted
Exercised
Expired
Number of
Shares
Weighted
Average
Exercise
Price
Aggregate
Intrinsic Value
Number of
Shares
Exercisable
2,650,000
1,320,000
(287,000)
$0.65
3.54
1.00
$10,058,500
--
717,500
2,650,000
--
--
3,683,000
1,075,000
(963,000)
(50,000)
3,745,000
1,390,000
(200,000)
(75,000)
1.66
4.16
1.14
4.45
2.48
12.34
13.47
7.00
6,932,500
--
2,901,456
--
32,850,250
--
1,900,600
--
3,413,000
--
--
--
3,500,000
--
--
--
Outstanding, December 31, 2010
4,860,000
$7.05
$108,608,200
3,500,000
Page 41
The following table summarizes information about outstanding stock options as of December 31, 2010:
Options Outstanding
Remaining
Contractual
Life (in
years)
Weighted
Average
Exercise
Price
Number of
Shares
Options Exercisable
Number
Exercisable
Weighted Average
Exercise Price
Aggregate
Intrinsic
Value
1,400,000
1,000,000
70,000
1,000,000
1,390,000
3.0
7.2
7.6
8.3
9.7
$0.25
$3.40
$3.74
$3.95
$18.93
1,400,000
1,000,000
-
1,000,000
100,000
$0.25
$3.40
-
$3.95
$14.35
$40,810,000
$26,000,000
-
$25,450,000
$1,505,000
4,860,000
$7.05
3,500,000
$2.61
$93,765,000
Exercise
Prices
$0.25
$3.40
$3.74
$3.95
$10.10 -
$26.10
9.
Asset Retirement Obligations
The Company’s asset retirement obligations (“ARO”) relate to the reclamation, remediation, and closure
costs for its El Aguila Project. During the year ended December 31, 2010, the Company’s asset retirement
obligation was revised for a projected increase in costs related to estimated reclamation, remediation and closure
costs based on local government requirements. The estimated present value of the incremental obligation amounted
to $315,000, all of which was charged to operations. There were no other liability additions, liability settlements, or
revision in estimated cash flows for the year ended December 31, 2010.
The following table presents the changes in ARO for the year ended December 31, 2010 and 2009.
Balance as of January 1,
Reclamation costs
Revisions in previous estimates
Foreign Currency Translation
Accretion
Balance as of December 31,
2010
2009
$
(in thousands)
1,992 $
-
315
120
68
$
2,495 $
-
1,992
-
-
-
1,992
10. Commitments and Contingencies
The Company leased office space in Denver, Colorado under an agreement that expired in February
2011. Rent expense for 2010, 2009, and 2008 was $30,700, $34,800 and $29,900, respectively.
The Company has entered into certain employment agreements with senior executive employees and key
management employees. Under these agreements the Company will have a contractual obligation to pay employee
salary compensation of $1,549,000 in 2011, $1,549,000 and $774,500 in 2013.
11. Related Party Transactions
The Company has certain contractual agreements with an individual who was a former consultant of the
Company in 2009 and 2008. This individual served as the general manager of the Company’s Mexico operations on
a consulting basis and was paid $145,000, $162,500, and $140,000, for the years ended December 31, 2010, 2009,
and 2008, respectively. In addition, the Company leased three mining concessions from the individual, El Aguila, El
Aire, and La Tehuana. The lease required advance royalty payments of $260,000, all of which have been paid, and
Page 42
will require a 4% net smelter return royalty when production is sold in the form of gold/silver doré and 5% for
production sold in concentrate form. This individual is also a part owner in an entity from which the Company
leased its interest in the Solaga property.
12. Quarterly Financial Data (Unaudited)
2010
(Amounts in
thousands except
per share data)
Sales of metals
concentrate
Mine gross profit
Loss from
operations
Other income
Net loss
$
$
Common Stock
Data
Basic and Diluted:
Net loss per share $
Average common
shares outstanding:
Basic and Diluted
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
- $
-
(7,291)
25
(7,266) $
- $
-
(5,820)
8
(5,811) $
9,975 $
7,024
(830)
(45)
(876) $
4,779
2,775
(8,898)
(223)
(9,121)
(0.15) $
(0.12) $
(0.02) $
(0.17)
48,253,617 49,011,275 49,851,542 52,998,303
2009
(Amounts in thousands except per
share data)
1st
2nd
3rd
Quarter
Quarter
Quarter
4th
Quarter
Sales of metals concentrate
Mine gross profit
Loss from operations
Other income
Net loss
$
$
- $
-
(7,145)
4
(7,141) $
- $
-
(10,302)
5
(10,297) $
- $-
- -
(9,641)
16
(9,625) $
(7,096)
30
(7,066)
Common Stock Data
Basic and Diluted:
Net loss per share
Average common shares
outstanding:
Basic and Diluted
13. Subsequent Events
$
(.19) $
(0.25) $
(0.21) $
(0.15)
38,135,296 41,109,225 45,280,272 46,399,375
On January 26, 2011, the Company declared a special cash dividend of $0.03 per common share to its
shareholders of record February 14, 2011 which was paid on February 25, 2011 in the aggregate amount of $1.6
million.
On February 23, 2011 the Company declared a special cash dividend of $0.03 per common share to its
shareholders of record March 18, 2011 which is expected to be paid on March 25, 2011 in the aggregate amount of
$1.6 million.
Page 43
CORPORATE INFORMATION
Comparison of Cumulative Total Return
Company/Index
Gold Resource Corporation
NYSE Area Gold Bugs Index
NYSE Amex Corporation Index
Base
Period
12/31/06
$100
$100
$100
Base
Period
12/31/07
$247.22
$121.03
$117.17
Base
Period
12/31/08
$194.44
$89.11
$67.96
Base
Period
12/31/09
$625.00
$127.10
$88.74
Base
Period
12/31/10
$1,645.20
$169.50
$107.39
)
$
(
s
r
a
l
l
o
D
S
U
l
a
t
o
T
$1,800
$1,600
$1,400
$1200
$1,000
$800
$600
$400
$200
$0
Company/Index
Gold Resource Corporation
NYSE Area Gold Bugs Index
NYSE Amex Corporation Index
12/31/2006
12/31/2007
12/31/2008
12/31/2009
12/31/2010
Total Cumulative Return Years Ending
Stock Performance 2009
Share information as of December 31, 2010
Stock Performance 2010
Year Ending
December 31, 2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$5.75
$5.45
$7.47
$11.25
Low
$3.15
$3.85
$4.13
$7.05
High
Low
)
$
(
s
r
a
l
l
o
D
S
U
$12
$10
$8
$6
$4
$2
$0
Closing price per share: $29.40
Exchange: NYSE Amex (GORO)
Shares Outstanding: 52,998,303
Shareholders of Record: ~64
Year Ending
December 31, 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$11.60
$13.00
$19.97
$29.75
Low
$9.30
$9.80
$12.01
$18.70
High
Low
)
$
(
s
r
a
l
l
o
D
S
U
$30
$25
$20
$15
$10
$5
$0
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Management & Directors
Corporate Information
William (Bill) W. Reid
CEO, Chairman, Director and Interim CFO
Jason Reid
President and Director
David Reid
Vice President of Exploration
Bill M. Conrad
Independent Director
CFO/Director of MCM Capital
Isac Burstein
Vice President of Business Development
for Hochschild Mining plc
Independent Director
Tor Falck
Independent Director
Director of Blackstone Venture Inc.
Transfer Agent
Computershare
Denver, CO
(800) 962-4284
(781) 575-3120
Auditor
StarkSchenkein, LLP
Denver, CO
303-694-6700 (Office)
Legal Counsel
Dufford & Brown, P.C.
Denver, CO
303-861-8013 (Office)
The Company will provide at no charge a copy of our report on Form 10K
upon request. Please direct such request in writing to Greg Patterson at
2886 Carriage Manor Point, Colorado Springs, CO 80906.
t
r
o
p
e
R
l
a
u
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n
A
1
1
0
2
ENGINEERED TO MAXIMIZE SHAREHOLDER VALUE
www.GoldResourceCorp.com
Gold Resource Corporation
Gold Resource Corporation
45
U.S. Office
2886 Carriage Manor Point
Colorado Springs, CO 80906
303-320-7708 (Office)
303-320-7835 (Fax)
Mexico Office
Macedonio Alcala, N201-105
Col. Centro, c.p. 6800
Oaxaca, Oaxaca, Mexico
011-52-951-516-8258 (Office)
Gold Resource Corporation
NYSE Amex: GORO