Fortitude Gold Corp: Form 10-Q for the period ended Jun 30, 2023

We are a Colorado corporation and our subsidiaries are GRC Nevada Inc. (“GRCN”), Walker Lane Minerals Corp. (“WLMC”), County Line Holdings Inc. (“CLH”), County Line Minerals Corp. (“CLMC”), and Golden Mile Minerals Corp. (“GMMC”). WLMC, CLH, CLMC and GMMC are wholly-owned subsidiaries of GRCN. We are a mining company which pursues gold and silver projects that are expected to have both low operating costs and high returns on capital. We are presently focused on mineral production from our Isabella Pearl Mine in Nevada. The ore mined at Isabella Pearl is processed on site at our processing facilities and sold to a refiner as doré, which contains precious metals of gold and silver. We also continue exploration and evaluation work on our portfolio of other precious metal properties in Nevada and continue to evaluate other properties for possible acquisition.

In February 2021, we began trading on the OTC Market “pink sheets” operated by the OTC Markets Group under the ticker symbol "FRTT". Subsequently the symbol was changed to “FTCO”. Our common stock was subsequently up listed to the OTCQB on March 5, 2021.

The following discussion summarizes our results of operations for the three and six months ended June 30, 2023 and 2022. It also analyzes our financial condition at June 30, 2023. This discussion should be read in conjunction with the management’s discussion and analysis and the audited consolidated financial statements and footnotes for the year ended December 31, 2022 contained in our annual report on Form 10-K for the year ended December 31, 2022.

The discussion also presents certain financial measures that are not prepared in accordance with U.S. Generally Accepted Accounting Principles (“Non-GAAP”) but which are important to management in its evaluation of our operating results and are used by management to compare our performance with what we perceive to be peer group mining companies and are relied on as part of management’s decision-making process. Management believes these measures may also be important to investors in evaluating our performance. For a detailed description of each of the non-GAAP financial measures, please see the discussion below under Non-GAAP Measures.

See Forward-Looking Statements at the end of this Item 2 for important information regarding statements contained herein.

Second Quarter 2023 Financial Results and Highlights

• $19.2 million net sales
• $3.6 million net income or $0.15 per share
• $46.9 million cash balance on June 30, 2023
• 9,684 gold ounces produced
• 3.36 grams per tonne average gold grade mined
• $91.9 million working capital at June 30, 2023
• $11.2 million mine gross profit
• $6.1 million exploration expenditures
• $527 total cash cost after by-product credits per gold ounce sold
• $680 per ounce total all-in sustaining cost
• $3.9 million dividends paid
• $0.04 special dividend

Operating Data: The following tables summarize certain information about our operations at our Isabella Pearl Mine for the periods indicated:

(1) The difference between what we report as “metal production” and “metal sold” is attributable to the difference between the quantities of metals contained in the doré we produce versus the portion of those metals actually paid for according to the terms of our sales contracts. Differences can also arise from inventory changes incidental to shipping schedules, or variances in ore grades and recoveries which impact the amounts of metals contained in doré produced and sold.

(1) Average metal prices realized vary from the market metal prices due to final settlement adjustments from our provisional invoices when they are settled. Our average metal prices realized will therefore differ from the market average metal prices in most cases.

During the three months ended June 30, 2023 and 2022, we produced 9,684 and 10,980 ounces of gold, respectively. The lower production is primarily due to higher utilization of the low-grade stockpile for blending of ore placed on the pad. Cash cost after by-product credit decreased due to lower mining costs due to higher utilization of the low-grade stockpile.

During the six months ended June 30, 2023 and 2022, we produced 21,171 and 20,855 ounces of gold, respectively. The higher production is primarily due to higher-grade ore mined and placed on the pad during the period. Cash cost after by-product credit decreased due to lower mining costs due to less waste mining.

Consolidated Results of Operations – Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Sales, net. For the three months ended June 30, 2023, consolidated sales, net were $19.2 million as compared to $24.0 million for the same period in 2022. The decrease is attributable to a 25% decrease in sales volumes due to decreased production, offset by a 6% increase in average sales price.

Mine gross profit. For the three months ended June 30, 2023, we recorded $11.2 million mine gross profit did not materially change compared to $11.6 million mine gross profit for the same period in 2022.

General and administrative. For the three months ended June 30, 2023, general and administrative expenses of $1.1 million did not materially change from $1.1 million in the same period in 2022.

Exploration expenses. For the three months ending June 30, 2023, property exploration expenses totaled $6.1 million as compared to $2.4 million for the same period of 2022. The increase was largely due to increased drilling at the County Line and Golden Mile properties and the completion of two additional monitoring wells at the Golden Mile property.

Other (income) expense, net. For the three months ending June 30, 2023, other income totaled $0.4 million as compared to other expense of $0.1 million for the same period of 2022. The change is due to an increase in interest income in 2023.

Income and mining tax expense. For the three months ended June 30, 2023, income and mining tax expense was $0.9 million as compared to $1.4 million for the same period in 2022. The decrease is the result of our lower income before income and mining taxes and decreased Nevada net proceeds of minerals tax due to lower metal sales. See Note 5 to the Condensed Consolidated Financial Statements.

Net income. For the three months ended June 30, 2023, we recorded net income of $3.6 million as compared to $6.6 million in the corresponding period for 2022. The decrease is due to the changes in our consolidated results of operations, as discussed above.

Consolidated Results of Operations – Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Sales, net. For the six months ended June 30, 2023, consolidated sales, net were $40.8 million as compared to $39.4 million for the same period in 2022. The increase is attributable to a 3% increase in average sales price.

Mine gross profit. For the six months ended June 30, 2023, we recorded $23.6 million mine gross profit compared to $18.3 million mine gross profit for the same period in 2022. The increase is primarily attributable to higher sales and lower cash cost after by-product credit per ounce sold, as discussed above.

General and administrative. For the six months ended June 30, 2023, general and administrative expenses of $2.1 million did not materially change from $2.3 million in the same period in 2022.

Exploration expenses. For the six months ending June 30, 2023, property exploration expenses totaled $9.7 million as compared to $4.9 million for the same period of 2022. The increase was largely due to increased drilling, as well as increased geotechnical and metallurgical studies at the County Line property. Drilling also increased at the Golden Mile property, as well as the completion of three additional monitoring wells.

Other (income) expense, net. For the six months ending June 30, 2023, other income totaled $0.8 million as compared to other expense of $0.1 million for the same period of 2022. The change is due to an increase in interest income in 2023.

Income and mining tax expense. For the six months ended June 30, 2023, income and mining tax expense was $2.5 million as compared to $1.8 million for the same period in 2022. The increase is the result of our higher income before income and mining taxes. See Note 5 to the Condensed Consolidated Financial Statements.

Net income. For the six months ended June 30, 2023, we recorded net income of $10.0 million as compared to $9.2 million in the corresponding period for 2022. The increase is due to the changes in our consolidated results of operations, as discussed above.

Non-GAAP Measures

Throughout this report, we have provided information prepared or calculated according to U.S. GAAP and have referenced some non-GAAP performance measures which we believe will assist with understanding the performance of our business. These measures are based on precious metal gold equivalent ounces sold and include cash cost before by-product credits per ounce, total cash cost after by-product credits per ounce, and total all-in sustaining cost per ounce (“AISC”). Because the non-GAAP performance measures do not have any standardized meaning prescribed by U.S. GAAP, they may not be comparable to similar measures presented by other companies. Accordingly, these measures should not be considered in isolation, or as a substitute for measures of performance prepared in accordance with U.S. GAAP. These non-GAAP measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP.

Revenue generated from the sale of silver is considered a by-product of our gold production for the purpose of our total cash cost after by-product credits for our Isabella Pearl Mine. We periodically review our revenues to ensure that our reporting of primary products and by-products is appropriate. Because we consider silver to be a by-product of our gold production, the value of silver continues to be applied as a reduction to total cash costs in our calculation of total cash cost after by-product credits per precious metal gold equivalent ounce sold. Likewise, we believe the identification of silver as by-product credits is appropriate because of its lower individual economic value compared to gold and since gold is the primary product we produce.

Total cash cost, after by-product credits, is a measure developed by the Gold Institute to provide a uniform standard for comparison purposes. AISC is calculated based on the current guidance from the World Gold Council.

Total cash cost before by-product credits includes all direct and indirect production costs related to our production of metals (including mining, crushing and conveying and other plant facility costs, royalties, and site general and administrative costs) plus treatment and refining costs.

Total cash cost after by-product credits includes total cash cost before by-product credits less by-product credits, or revenues earned from silver.

AISC includes total cash cost after by-product credits plus other costs related to sustaining production, including sustaining allocated general and administrative expenses and sustaining capital expenditures. We determined sustaining capital expenditures as those capital expenditures that are necessary to maintain current production and execute the current mine plan.

Cash cost before by-product credits per ounce, total cash cost after by-product credits per ounce and AISC are calculated by dividing the relevant costs, as determined using the cost elements noted above, by gold ounces sold for the periods presented.

Reconciliations to U.S. GAAP

The following table provides a reconciliation of total cash cost after by-product credits to total mine cost of sales (a U.S. GAAP measure) as presented in the Consolidated Statements of Operations (in thousands):

(in thousands)

The following table presents the non-GAAP measures of total cash cost and AISC:

(in thousands, except ounces sold and cost per precious metal gold equivalent ounce sold)

(1) Production cost plus treatment and refining charges.

(2) Please see the tables below for a summary of our by-product revenue and by-product credit per precious metal equivalent ounces sold.

(3) Sustaining capital expenditures and sustaining exploration expenses divided by gold ounces sold.

The following tables summarize our by-product revenue and by-product credit gold ounce sold (in thousands):

Liquidity and Capital Resources

As of June 30, 2023, we had a cash position of $46.9 million compared to $45.1 million at December 31, 2022. The increase is primarily due to increased cash from operations.

As of June 30, 2023, we had working capital of $91.9 million compared to $84.1 million at December 31, 2022. Our working capital balance fluctuates as we use cash to fund our operations, financing and investing activities, including exploration, mine development and income taxes. With our working capital balance as of June 30, 2023, we believe that our liquidity and capital resources are adequate to fund our operations, exploration, capital, and corporate activities for the next twelve months.

Net cash provided by operating activities for the six months ended June 30, 2023 was $12.8 million, compared to $14.5 million for six months ended June 30, 2022. The decrease is primarily due changes in inventory and deferred taxes.

Net cash used in investing activities for the six months ended June 30, 2023 was $4.2 million compared to $8.1 million during the same period in 2022. The decrease is primarily due to less capital expenditures for the Golden Mile project.

Net cash used in financing activities for the six months ended June 30, 2023 of $6.7 million compared to $5.8 million for the same period in 2022. The increase is primarily due to higher shareholder dividends due to special dividend paid in May 2023.

Development and Exploration Activities

Isabella Pearl Mine: During the second quarter, operations continued at the Isabella Pearl Mine open-pit and heap leach operations. Exploration reverse circulation (“RC”) drilling continued in the Plan of Operation footprint of the Isabella Pearl Mine, Scarlet area, and Twin Hills area that are to the northwest of the Isabella Pearl Mine. These drilling programs completed 66 RC holes that totaled 6,821 meters. The focus of these exploration drilling programs was on identifying areas with oxide extractable gold.

County Line property: The County Line Project Plan of Operations and Nevada Reclamation Permit Application was submitted in May 2023 to the U.S. Department of the Interior Bureau of Land Management (“BLM”) and State of Nevada Department of Conservation and Natural Resources Division of Environmental Protection. RC drilling continued in the second quarter to further delineate gold mineralization at the County Line main pit along with mine plan optimization and to test the East Zone pit that included 86 holes, totaling 7,065 meters. In addition, the metallurgical and geotechnical core programs continued that resulted in 12 additional holes being completed that totaled 683 meters. The hydrogeology program advanced with drilling of two holes that will be used for water monitoring.

Golden Mile property: Environmental Assessment permit preparation continued with the goal to submit the Plan of Operations to regulatory authorities in 2023. Additional studies advanced in the second quarter include interpretation of the spectral analytical program results from the RC drill hole chip samples, an independent assessment by a third-party consultant to review sampling, and completion of a seven-hole core program that totaled 825 meters. This core program was designed to further constrain structural and lithological controls associated with gold mineralization. Two additional water monitoring wells were drilled to further assist with planning the proposed phase one open pit.

East Camp Douglas property: Approval of the next phase of RC hole drilling in the Lithocap target area by the Bureau of Land Management, was granted in April 2023. Road building and pad construction are underway; drilling is scheduled for the third quarter. The first phase of a comprehensive surface mapping and sampling program was completed in the northern portion of the East Camp Douglas property. Results from this surface mapping program were used to design a drilling campaign and a Notice of Intent (“NOI”) to drill is in progress for submission to the BLM. Pending approval of this NOI application, drilling is scheduled to commence in the third quarter.

Ripper property: Compilation and interpretation of the 2022 field work and geochemical results from the Ripper property were finalized in the first quarter of 2023. A drilling application with the Bureau of Land Management was completed in the quarter ended June 30, 2023, and environmental studies are currently underway.

Accounting Developments

Recently issued accounting pronouncements have been evaluated and do not presently impact our financial statements and supplemental data.

Forward-Looking Statements

This report contains or incorporates by reference “forward-looking statements,” as that term is used in federal securities laws, about our financial condition, results of operations and business. These statements include, among others:

• statements about our future exploration, permitting, production, development, and plans for development of our properties
• statements concerning the benefits that we expect will result from our business activities and certain transactions that we contemplate or have completed, such as receipt of proceeds, decreased expenses and avoided expenses and expenditures
• statements of our expectations, beliefs, future plans and strategies, our targets, exploration activities, anticipated developments and other matters that are not historical facts

These statements may be made expressly in this document or may be incorporated by reference from other documents that we will file with the SEC. You can find many of these statements by looking for words such as “believes,” “expects,” “targets,” “anticipates,” “estimates,” or similar expressions used in this report or incorporated by reference in this report.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied in those statements. Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied. We caution you not to put undue reliance on these statements, which speak only as of the date of this report. Further, the information contained in this document or incorporated herein by reference is a statement of our present intention and is based on present facts and assumptions, which may change at any time and without notice, based on changes in such facts or assumptions.

Risk Factors Impacting Forward-Looking Statements

The important factors that could prevent us from achieving our stated goals and objectives include, but are not limited to, those set forth in other reports we have filed with the SEC, including our Form 10-K for the year ended December 31, 2022, and the following:

• The Biden administration’s current and future stance on resource permitting and development
• Inflationary pressures and supply chain disruptions, with particular consideration on the outlook for increased costs specific to labor, materials, consumables and fuel and energy on operations
• Global pandemics such as COVID-19 and governmental responses designed to control the pandemic
• Changes in the worldwide price for gold and/or silver
• Volatility in the equities markets
• Adverse results from our exploration or production efforts
• Producing at rates lower than those targeted
• Political and regulatory risks
• Weather conditions, including unusually heavy rains
• Earthquakes or other unforeseen ground movements impacting mining or processing
• Failure to meet our revenue or profit goals or operating budget
• Technological innovations by competitors or in competing technologies
• Cybersecurity threats
• Investor perception of our industry or our prospects
• Lawsuits
• General economic trends

Disclosure Controls and Procedures

As required by Rule 15d-15 under the 1934 Act, as of June 30, 2023, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer). Based upon and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2023.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the 1934 Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the 1934 Act) during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.