Gold Resource - Earnings Call - Q1 2020

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to your Gold Resource Corporation First Quarter Conference Call. Joining the call today are Mr. Jason Reid, CEO and President, and Mr. John Labate, CFO. As a reminder, today's call is being recorded. All lines have been placed in a listen-only mode, and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to Mr. Jason Reid, CEO and President. Sir, the floor is yours.

Jason Reid (CEO and President)

Thank you. Good morning, everyone, and thank you for joining Gold Resource Corporation's 2020 First Quarter Conference Call. I expect my comments to run approximately five minutes, followed by a question-and-answer period. Joining me on the call today for the Q&A portion will be Mr. John Labate, our Chief Financial Officer. Let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties, as described in our annual report on Form 10-K, the current quarterly report on 10-Q, and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments.

Forward-looking statements in the earnings release that we issued yesterday, along with the comments on this call, are made only as of today, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks in our Form 10-K filed with the SEC for the year ended December 31, 2019, as well as this current quarterly report on 10-Q. The first-quarter production was within estimated production ranges at both our Oaxaca Mining Unit and Nevada Mining Unit. The company's Nevada Mining Unit production continues with the Isabella Pearl mine ramp-up phase, which, as previously stated, requires us to move a lot of overburden to access the high-grade Pearl zone while we mine the Isabella zone's lower and varied gold grades.

This lower grade Isabella ore outcropped at the surface and was the first ore placed on the heap leach pad. As mining continues on schedule the back half of 2020, we expect to see gold production ramp up as we mine deeper into the high-grade Pearl zone. The model predicted the top of the Pearl zone to have about a one-and-a-half-gram gold per ton. Mining has now progressed into the very top of the Pearl zone, and the last few days of April, we have seen crusher grades of Pearl ore at over two-and-a-half grams per ton gold, along with a few more tons than the model expected. This has exceeded our estimates this high up in the deposit.

While the available mineralized tonnages of this high-grade ore are still limited at these higher elevations, as we continue to mine deeper into lower pearl benches in the future, we expect high-grade gold to continue, but with greater available tonnages as we ramp up production into the back half of the year. As this much higher-grade Pearl zone is loaded on the pad and given time to leach, we expect to see, by the end of Q3 and more so in Q4, gold production to substantially increase in Nevada. The company recorded a net loss of $3.1 million or $0.05 per share because of lower revenues and higher non-cash depreciation and amortization. The company generated $5 million in operating cash flow and paid $0.7 million to its shareholders in dividends, or $0.01 per share during the quarter. Cash and cash equivalents at quarter end totaled $18.4 million.

Lower revenues were directly tied to the steep base metal market price declines, particularly in zinc, along with the higher treatment charges, or TCs, for zinc as compared to years past. Two years ago, zinc TCs were at attractive multi-year record low levels. Last year, they rose substantially, and they again rose dramatically this year to record high TCs. This has led to numerous zinc mine closures, irrespective of the recent and compounding impact of the COVID-19 pandemic on suspensions to global mine production. When asked, our concentrate buyer acknowledged the record high TCs being imposed on the market at the time would likely put zinc-exclusive mines out of business and potentially bring some semblance of balance back into the TC market for 2021.

Subsequently, the COVID-19 global mine suspension has added to the impact of taking metals, including zinc, out of the market, and TC charges are beginning to drop again, setting the stage for a much better 2021 year for the company's base metal TCs. To help counter the high 2020 zinc TCs and depress base metal prices, the company has revisited its Oaxaca Mining Unit's mine plan to focus less on zinc areas and more on precious metal areas. While the rise in gold price has helped offset some of the base metal market fallout, it still had an impact on our bottom line. Unfortunately, the COVID-19 pandemic has impacted large percentages of the world's economy. The company strives to mitigate the spread of COVID-19 and protect the health and safety of our employees, contractors, and communities in which we operate.

The company has taken precautionary measures, including specialized training, social distancing, a work-from-home mandate where possible, and close monitoring of national and regional COVID-19 impacts and government guidelines. To date, the company is not aware of any cases of COVID-19 at its operations. At the end of the first quarter, Mexico's health minister declared an emergency due to the COVID-19 pandemic, along with a 30-day suspension of non-essential businesses, including mining, until April 30. In response to this, the company adhered to the mandatory suspension and sent its workforce home and placed its Oaxaca Mining Unit in care and maintenance. In addition, we withdrew our 2020 production outlook. Mexico recently extended the suspension for another 30 days until the end of May.

The company has recently submitted its restart proposal to the federal government in hopes it will be granted an early start-up based on Oaxaca being a low-impacted COVID-19 zone and the staged reopening proposal focused on utilizing local workers to help mitigate potential COVID-19 infections to its workforce and local communities. Not knowing the full impact of the pandemic, how long the suspension in Mexico may last, if Nevada would be impacted by a similar work stoppage, and all the global uncertainty around the pandemic, we utilized the existing ATM to raise additional capital just short of $12 million. If this money is not needed to combat the impacts from suspensions and operations, its use could include being deployed to existing CapEx plans for the year, like the thickened tailings plant, or other capital needs.

We believe this additional capital will help bridge the potential gap of a possible extended business interruption from COVID-19 and help ensure the company is poised to capitalize on the coming bull market in gold and silver. The unprecedented creation of trillions of dollars by the U.S. government in a matter of weeks is the quintessential definition of inflation. Additional debt is being added to the already bloated global debt levels. Massive and unprecedented job losses, recently announced bankruptcies, oil turning negative, and shortages of goods and services add to the dramatic impact of the pandemic. All of this is a recipe for the next bull market in gold. The company is well-positioned to emerge from the pandemic fallout and capitalize on a world awash in unsound and unprecedented fiat currencies by producing real money and producing real long-term stores of value, which are gold and silver.

With that, I would like to thank everyone for their time today on this conference call. Let's move on to the question-and-answer portion of the call in an effort to efficiently address the Q&A portion of the call without wasting anyone's time. Since we do not screen, filter, or limit who can call in, any distracting and antagonistic calls will be terminated, and I will simply move on to the next productive caller's question. Operator, please prepare to open up the lines for the Q&A and take our first question if there is one. Before we do, I would like to get to the first write-in question, email question by Juergen. It comes in three parts. They are all good questions. The first one is, is the loss in Q1 all attributed to Nevada, or is Mexico all in the red?

The loss in Q1 is primarily driven by $7.5 million of non-cash dealing with amortization and depreciation. Having to do with, from Mexico, we had three projects that we put into service: a new tailings lift, the power plant, and the paste plant. All three of those are in some of the amortization and depreciation. The ADR in Nevada, we put that in service and started accounting for that on January 1, 2020. That is being amortized. That has been the primary drivers, the amortization and depreciation, non-cash items driving the loss. Number two, I think the ATM raise was a smart move, but it was unexpected and, of course, comes with the dilution of existing shareholders. Assuming GRC sees better times again in this gold bull market, does the board consider reversing the ATM and buying back shares? I believe there is still a facility in existence for this.

You are correct. There is a facility still in place to do this, but there are currently no plans to do that. Number three, the $6.9 million CapEx is higher than the $5 million cash flow from operations. Is this attributable to timing of the dry stack tailings facility CapEx in Mexico? There is a lot that goes into that number. $3 million of that is pearl waste being capitalized. We are capitalizing this waste because we are not into a material amount of ore yet. We just reached the top of the ore body in the Pearl we have been mining from Isabella. We will probably, or more than likely, not be capitalizing that anymore in the second quarter. That will actually be an OpEx cost. To put this in perspective, we have mined about one-half of 1% of the Pearl deposit.

That's basically $1 million worth of a $300 million value in the ground. We are just at the very top of the Pearl ore body. Again, 80% of the ore in the Isabella Pearl deposit is in the Pearl. What's really exciting, and that's why I led off with it in the conference call, is we've reached it now, and we're seeing it, and it actually is exceeding our expectations. I don't say that to try to raise expectations, but I'm just saying that as it's a fact that it's higher grade. Coming back to the question of the $6.9 million, $1.5 million of that is in development, mine development in Mexico. $1.5 million is payment of the dry stack tailings project for long lead-time equipment. Hopefully that gives you some insight onto the $6.9 million CapEx. Okay.

With that, if there are any questions for callers, Operator, if you can open up the line, please.

Operator (participant)

Thank you. The floor is now open for questions. If you do have a question or comment, please press star one on your telephone keypad. If you are on a speakerphone, please pick up your handset for the best sound quality. Again, star one to signal for a question. We will take our first question from Heiko Ihle with H.C. Wainwright. Please go ahead.

Heiko Ihle (Managing Director)

Hey, guys. Hey, Jason.

Jason Reid (CEO and President)

Hey, Heiko. How are you?

Heiko Ihle (Managing Director)

I am doing wonderful. Thank you very much. Just warranting like everybody else. First one might be a little bit more of a comment, but I just want to point out, I mean, you guys have $5 million of free cash flow.

If nothing else, I think that shows that the low zinc prices can be more than offset by higher gold prices. I commend you for that diversification.

Jason Reid (CEO and President)

Thank you. Yeah. Everybody knows we mine from a polymetallic deposit, and that is a great thing. I want to kind of everybody's probably focused right now on, "Oh, zinc, oh, zinc." That drove a lot of the quarter. Okay. Let me put it in perspective. Back in the bear market for gold and silver, when the space was struggling, we remained profitable as a company for nine years now, in part during the bear market because of base metals, because they often move countercyclical to precious metals. At that time, they helped us remain positive. It is what it is. I expect the base metal price actually to start coming back. Why do I say that?

I'm seeing TC charges lower because a lot of supply has been taken out of the market. I think this is a short-term thing. It is what it is. Yeah, good comment.

Heiko Ihle (Managing Director)

You were talking about the longer term a second ago, like the eight, nine-year period, actually leads overall to my next question. I mean, you guys do not really have any debt. Interest rates are low, probably going to be low for a while. At what point in time would that ever change? Or maybe the answer is that will never change, period. I mean, can you maybe just provide a little bit of color on that, please?

Jason Reid (CEO and President)

As far as taking on debt?

Heiko Ihle (Managing Director)

Correct.

Jason Reid (CEO and President)

We would consider it. We did consider it when we were looking to build the Isabella Pearl project. In large part, it is going to be driven by what the terms are.

The terms in debt that we have seen to date are atrocious. It is not so much that so many of the debt guys will not get out of bed for less than 20% effective interest rate. It is all the other hooks they put in you. Covenants. I sleep so well during this period right now, during the closure. Why? Because we have no debt. I do not have any bank or anybody leaning over me saying, "Hey, you are going to trigger these covenants. You are going to get in trouble. You are going to..." None of that. Generally speaking, and factually, we have been adverse to debt, and I do not imagine we take on debt. To your point, in the future, if debt terms become very attractive, sure. I mean, we will consider them. Absolutely. It just depends on the actual terms.

Yeah, that's just kind of where we stand on debt. We don't have any. I tell you, it pays huge. It pays dividends, not to mix the fact that we're a dividend payer, but in a different context, it pays dividends to not have any debt during times like this.

Heiko Ihle (Managing Director)

Fair enough. Speaking of times like this, I've seen a variety of conflicting reports. I've seen operations reopening in May. I've seen May 17th. I've seen May 18th. I mean, it seems like some guys never even closed. Can you maybe just provide a little bit more color in excess of what you were talking about earlier on what you're seeing in that area, please?

Jason Reid (CEO and President)

Yeah. It's a bit of a mixed bag.

I have been told, and I believe it's to be the case, that some of the big Mexican miners like Peñoles, Frisco, Fresnillo, they all got together and lobbied the president, and they got a side deal and never stopped. I'm not 100% sure of that, but the word is that that's the case. For most mining companies, we did the right thing, us included. When the mandate came, we closed operations. Most mining companies couldn't get side deals with the government. I know several that were trying to lobby the government and didn't succeed, and they were some of the last to come out with their press releases that they shut down. It's a wide range. There've been some who've ignored it completely. There've been some who've got side deals. For the bulk that I'm aware of, everybody acknowledged the government-mandated shutdown, and we shut down.

Now, as far as restart, they're kind of walking back some of their earlier statements that, "Hey, you can do an early start if you do this proposal." Now they're just coming out, so much as recently I saw the president speak where he said construction and mining can start on the 17th. Until we actually see that happen, then we'll know for sure. Having said that, when the president recently, as a couple of days ago, was out there saying, "Mining companies can start by the 17th," I'm optimistic we can start by the 17th. We're fully prepared to go to the 30th? Heck, we are fully prepared and can survive many more months, far more than I think most mining companies could if COVID takes a turn and gets worse and they do additional lockdowns. I mean, it's just a wide, varied scenario.

It's ever-changing. It changes almost by the hour. As I talk to you today, at this point, it looks like we might be able to start up by the 17th.

Heiko Ihle (Managing Director)

Very good. Thank you so much. In the interest of time, I'll go back and queue. Take care, guys.

Jason Reid (CEO and President)

Hey, thanks, Heiko. Appreciate it.

Operator (participant)

Thank you. Our next question comes from Jake Sekelsky with Roth Capital Partners. Please go ahead.

Jake Sekelsky (Director and Research Analyst)

Hey, Jason. Thanks for taking my questions.

Jason Reid (CEO and President)

Hey, Jake. How are you?

Jake Sekelsky (Director and Research Analyst)

Not too bad. Hanging in there. I know you noted higher treatment charges during the quarter, and you alluded to this briefly earlier, but I'm just curious if you've seen those come down at all in Q2 as we've obviously seen some supply come offline. If these are levels you're budgeting for for the year or if you're expecting them to come down.

Jason Reid (CEO and President)

No, Jake, that's a great question. Let me just put some context on zinc. TC charges as recently as 2018 were $29. In 2019, they were $190. They were pushing us in 2020 for over $400. We were able to push it down to about $380. To go in a three-year period from $29 to $380 is brutal. I don't have the complete picture of why zinc TCs went this direction, but I was being told by the concentrate buyers that it's a supply-demand in large part because China is trying to put in these scrubbers and systems that are more environmentally friendly, and they don't have them 100% operating, so they have to operate at less capacity. They can still operate, but at less capacity. Therefore, there's not as much capacity. On top of that, there's huge supply.

The supply and demand, and I'm sure there's many other things, and other shareholders could probably weigh in on some of the other driving factors, but that's one of them. The supply and demand imbalance has been huge. Like I mentioned on my call when I'm talking to the concentrate buyer, I said, "You know you're going to pull, put zinc mines out of business." He said, "Yeah, we know that." Sure enough, I'm not going to call them out, but there's been several zinc mines just go under. Supply is coming off. Now, on top of that, the pandemic, nobody saw that coming. That's taken off huge supply. We're already seeing TC charges cut in half for what they were pushing for. That's not going to impact us because we sign a yearly contract. Most mines do.

Some mines sign two-year contracts, but we do yearly. So we're locked into these high TCs. Having said that, we do have optionality in that we have over a year's worth of development in our mine in front of us, so we can go and try to poach areas with higher precious metals and being less dependent on zinc. Secondly, I think watching the TCs drop already. I've heard that some are locked in at 200, and I bet they come down even further. Those are leaders, I believe, to an increase in zinc. Given all that's transpired, the supply and demand, the pandemic, everything, zinc could bounce back. That could help our focus on trying not to mine the heavy zinc areas, which we have plenty of optionality there to try to make that happen, and the gold price to help offset it.

No, we're locked in, and we plan that for the whole year as far as the TC charge. It's just a brutal time. I'm just glad we're not a sole zinc producer. My goodness. We may be having a completely different call.

Jake Sekelsky (Director and Research Analyst)

Yeah, that's fair. It's good to hear that you guys are able to remain nimble down in Mexico and try to focus on some more precious metal-rich areas.

Right. Just shifting over to Isabella Pearl, it looks like you guys are making good progress towards accessing a higher-grade portion towards the second half of this year. Are you able to just quantify the remaining capital required for stripping there and the removal of overburden until you get into, I guess, the heart of the system?

Jason Reid (CEO and President)

No, because the heart of the system is much deeper.

We're going to be into a very material amount in the next couple of levels. We call it the high-grade finger, and it's just a function of the way the mineral is situated, and it rises at an angle. We're mining down, and we're into the top of it, but it balloons out to the bottom. I'm more focused on just getting to another lower level because every level we go down, it widens a bit. Obviously, if this grade continues, that's going to be material. There's not going to be a lot of capital to get down to a material amount of this ore, I don't believe. I don't have the exact answer to your question right in this format as far as the capital to get down to the heart. Again, it's how you define the heart of it.

I believe we're going to try to answer your question. I believe we are in the process of turning the corner, so to speak. We always knew this mine is not about Isabella. Isabella just helps us generate cash flow early while we're trying to get to the pearl. That's the long and short of it. Now we're there. I think we're turning the corner. As the next couple of months go by, we're going to put more of this high grade on the heap, give it some time to leach. That's why I stated we're going to start seeing a bump, I believe, in Q3. I believe a big one in Q4. That's when our lives change. We're going to put more ounces on the pad with less mining as we mine down on this.

I think we're close. We're very close. And our story hasn't changed as far as this ramp-up. Right now, we're on track for that. As long as we continue to take the precautions not to have COVID hit that site, COVID would have to be really bad, I believe, in Nevada for them to do what Mexico did. In Nevada, they see mining as essential, and Mexico as non-essential. Unless Nevada gets hit very badly, I don't think they're going to change course and shut down mining. As long as we can keep it out of our site, off of our mine site, we should be good to go. In the next couple of months, we're going to start seeing some additional levels with higher grade. Again, it's mining.

There's going to be a lag time before you guys see it, but that's why it's coming. It's happening now. I hope that kind of gets to some of your question, but I don't have the CapEx number for you.

Jake Sekelsky (Director and Research Analyst)

Yeah, no, that's helpful. Looking forward to that in the second half. That's all I had on my end. Thanks again.

Jason Reid (CEO and President)

Appreciate it. Thanks, Jake.

Operator (participant)

Our next question comes from Chen Lin with Lin Assets. Please go ahead.

Chen Lin (President)

Taking my question. Just out of curiosity, when you restart the Mexican operation, hopefully sometime this month, is there a cost associated with because you put it on care maintenance last month, I believe?

Jason Reid (CEO and President)

Yeah. There's going to be some cost that would be there if you didn't have a stoppage. Having said that, we also saw some revenue as we were winding it down.

I mean, we had it's not this clean break. When we told everybody to go home, we had numerous trucks in transit going to the buyer. And so we saw additional revenue for that month as well, even though we were closed down. I think we're in a very strong financial position, especially taking the insurance policy, if you will, of the ATM raise. Because again, nobody knows what's going to happen. Both sites could get hit with COVID on site, and I think we can weather many months with that raise. Starting up in Mexico, it really depends on how we get to start up. To your point, there's going to be heavy capital. What I hope happens is that the 17th, which the president just mentioned, that we get to bring everybody back and start at the 17th.

Earlier, they were saying, "You got to give us a business plan to show us that you're going to do all these things to mitigate." We had a whole different business plan. We were going to start with a fraction of the workforce and slowly ramp up. Now it looks like we might be able to start sooner. It just really depends. Whatever we do, and we already run the numbers on the slower ramp-up, we want to make sure we're cash flow positive. I mean, we don't want to start up and lose more money, no matter how small we started. At this point, I'm more optimistic today, and this just recently happened, but today that we can start with maybe the whole team.

At that point, yeah, there's going to be costs, but we're in a strong financial position to weather those costs, and we're going to get it back shortly once we get everything up and running. These are unprecedented times, and it's tough to give exact figures to these, but I can tell you we're looking at all these things. It's just they're all in flux, and we'll just have to see when we can start. I don't think it'll be damaging is the point to start up, if that's your question, Chen.

Chen Lin (President)

Thank you. I heard the encouraging news that TC charge of zinc is going down. Unfortunately, you already signed up for the year. That I understand, you signed a yearly contract. Is there a minimum amount of zinc you need to deliver this year?

Because of the stoppage, I'm worried if you may need to deliver in Q1 of next year of this year's zinc and this year's TC charge. Hopefully, next year will be much lower.

Jason Reid (CEO and President)

Yeah. That's a good question. I think there's a lot of grounds to stand on, force majeure, for the equivalent amount of tons. Believe me, I will be pushing for that so that I don't have to deliver the full contract. We'll see how that goes. I don't want to have this extend into next year at these terms. I want to get out from under these terms as soon as possible. It's been brutal. Unfortunately, we're a small miner. We stand no chance in really setting the tone or setting the price.

The big, big zinc players that drive the whole market, and they're the ones who set the $400 TC that were ridiculous. Yeah, we'll see what happens, but I want to close out the year under these terms and be done, irrespective. I can deliver the tonnage contractually from here on out once we get to start, but I don't want to be on the hook for a pandemic amount. I think that's definitely in the force majeure.

Chen Lin (President)

Great. Thank you. Good luck.

Jason Reid (CEO and President)

Hey, thanks, Chen. Thanks for your call.

Operator (participant)

Ladies and gentlemen, that is all the time we have allotted for our questions today. Before we return to Mr. Jason Reid for closing remarks.

Jason Reid (CEO and President)

First, thanks everybody for being on the call. Again, if you were in the queue and you have a question, Greg and I are both around, so call us.

We'll be available to answer any and all questions. Thanks everybody for being on the call, and I hope everybody is remaining safe and avoiding this pandemic. Hopefully, its impact's lessened sooner rather than later. This isn't going to be over anytime soon, but hopefully, it has less impact on all of us soon. Be safe, and we'll talk to you next quarter. Thank you.

Operator (participant)

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.