Gold Resource - Earnings Call - Q1 2021

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Gold Resource Corporation's first quarter 2021 conference call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the prepared remarks, there will be an opportunity to ask questions. I would now like to turn the conference call over to Ann Wilkinson, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

Ann Wilkinson (VP of Investor Relations and Corporate Affairs)

Thank you, Holly, and good morning, everyone. On behalf of the Gold Resource team, I would like to welcome everyone to our first quarter 2021 results conference call. Before we begin the call, there are certain housekeeping matters I would like to cover. Please note that certain statements to be made today by the management team are forward-looking in nature and, as such, are subject to numerous risks and uncertainties, as described in our quarterly report on Form 10-Q and other SEC filings. On the call today, we have Allen Palmiere, President and Chief Executive Officer, as well as Kim Perry, our Chief Financial Officer. Following their prepared remarks, they will be available to answer your questions. This conference call is being webcast.

For those of you joining us on the webcast, you can download a PDF copy of the conference call slides from the Materials tab under the Ask a Question tab. The event will also be available for replay on our website later today. Yesterday's news release issued following the close of the market, and the accompanying financial statements and MD&A contained in our 10-Q have been filed with the SEC on Edgar. Also, please note that all amounts mentioned in this call are in US dollars unless otherwise stated. I will now turn the call over to Allen.

Allen Palmiere (President and CEO)

Thank you, Ann. Good morning, everyone. I'd like to thank our listeners for taking the time to join us. I look forward to discussing our first quarter 2021 operating results. Following my opening remarks, Kim Perry, our Chief Financial Officer, will describe our financial results. I will then provide you with a picture of our plans for the balance of 2021 and a few closing remarks, and then we'll take your questions. As you're all aware by now, I took over as CEO on January 1st following Jason Reid's departure to run Fortitude Gold Corporation, the company created to receive the spin off of the Nevada Mining Unit. Early in the new year, we added three new independent directors: Ms. Lila Manassa Murphy, Mr. Joe Driscoll, and Mr. Ron Little to the board of directors, and created a technical advisory committee whose first members were Dale Finn and Joe Spitieri.

The new leadership all possess the expertise necessary to assist management in unlocking the value of our Mexican assets while implementing best-in-class governance. Before discussing the operating results, I want to congratulate our team in Mexico for being the recipients of a seventh annual Social Responsible Enterprise, or ESR, award. This award is truly a testament to our team, and they're focused not only on efficient operations but on being good corporate citizens and neighbors. Additionally, it is important to note that the operations had no lost-time accidents in the first quarter of this year. Turning to the first quarter results of operations, I'm pleased to report that Gold Resource produced approximately 6,100 ounces of gold, 308,000 ounces of silver, about 440 tons of copper, 1,700 tons of lead, and 4,400 tons of zinc.

During the first quarter, we processed ore at a daily rate of 1,600 tons per day, compared with 2,000 tons per day in 2020, about 20% lower, but consistent with our mine plan for the year as we focus more on narrow-vein mineralization. Our tonnage was according to plan, but the ore grade differed. We encountered poor ground conditions requiring a revision to our mining sequence as we pumped an additional paste fill for ground support. The areas currently being mined have slightly lower grades of zinc and silver, while the gold grade is modestly higher. Ore grades and recoveries vary depending on the areas of the mine being worked at any given time. The fluctuation in grades and recoveries with depth is a function of the way the deposit was created.

As mining progresses at higher levels in future years of Switchback, precious metal grades are expected to increase and base metal grades to decline. During the first quarter, we processed ore with an average gold grade about 10% higher than the same period last year, while silver grades were about 4% lower. The paste fill plant has now processed just under 200,000 tons of tailings. Paste tailings are an effective method of reducing surface tailings and providing ground support to ensure future mining occurs in a safe and uninterrupted manner and to allow for more complete mining of mineral resources. In addition, the paste plant reduces overall wastewater by 17%. We made significant construction progress to our filtration plant and dry stack tailings project, which is targeted for completion early in Q3 of this year.

The dry stack tailings will accelerate reclamation of the old open-pit mine, provide efficient storage of tailings, and reduce water consumption as approximately 80% of the processed water will be available for reuse. With that, I'm going to turn the call over to Kim.

Kim Perry (CFO)

Thank you, Allen. Good morning, everyone. We closed the quarter with a strong balance sheet consisting of just over $27 million cash and no debt. Cash from operating activities at our Don David Gold Mine were $6.8 million, and working capital was nearly $32.5 million at March 31, 2021, an increase of 5% from year-end. For the first quarter, we reported net income of $2.5 million. Net income is a result of just over $27 million in revenue and mining gross profit of approximately $8.6 million. Contributing to the higher net sales was a nearly 30% decrease in concentrate treatment charges, which are netted against concentrate sales in revenue. Treatment charges for the first quarter of 2021 were just under $3 million, or $618 per ton of base metals sold, compared with $5.8 million, or $860 per ton of base metals sold in the first quarter of 2020.

This decrease was expected because of the recent negotiations of new treatment charge agreements, and these costs are expected to trend even lower with the 2021 zinc treatment charge benchmark set at $159 per ton of zinc concentrate sold. Don David Gold Mine's total cash cost after co-product credits was $408 per ounce, down 48% from 2020 full year costs. Total all-in sustaining cost per gold ounce equivalent was $937 per ounce, down 31% from year-end. We expect these costs to continue to trend lower in 2021 and maintain our full year guidance of total cash cost after co-product credits of between $210 and $225 per gold equivalent ounce, and total all-in sustaining costs of between $800 and $900 per gold equivalent ounce. During the quarter, we distributed nearly $750,000 in dividends to shareholders, which since 2010 have totaled over $117 million.

With that, I will turn the call back over to Allen.

Allen Palmiere (President and CEO)

Thanks, Kim. As I indicated last call, management's focus is on locking the value of the mine, existing infrastructure, and large property possession and providing growth to shareholders. Accordingly, we invested $3.6 million of a planned $22 million in infrastructure and spent $1.9 million of the $7 million we plan to spend in exploration in the Don David Gold Mine area. I touched on our investment in our filtration plant and dry stack tailings project earlier and note that it is but one of the initiatives underway. Our underground mine development and construction during the quarter included ramps and access ways to new areas of the deposit. The development completed in the quarter included access to new exploration diamond drilling platforms on level 17. In our process plant, we completed metallurgical testing and initiated design and engineering of a tailings regrind circuit, including procuring certain parts and equipment.

The project is expected to be completed and commissioned by the end of September of this year. The new circuit is expected to increase gold recovery by between 6% and 10%. In closing, our Don David Gold Mine, located in Oaxaca, Mexico, continues to deliver solid production results during a demanding time. While COVID-19 is expected to remain a challenge as we monitor the emergence of variant strains of the virus, it is important to stress the truly excellent job managing the situation our team has accomplished. Their hard work and resilience keep our people safe. I also want to repeat Kim's comment that the company has a strong balance sheet, which provides us with the flexibility as we move to reinvest capital in Mexico to increase the mine's productivity and the life of the operations. Thank you for taking your time to listen in.

This concludes our prepared remarks, and I will now turn the call back over to the operator for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Heiko Ihle. Please announce your affiliation, then pose your question.

Heiko Ihle (Managing Director and Senior Metals and Mining Analyst)

Hey, it's Heiko Ihle with HC Wainwright.

Allen Palmiere (President and CEO)

How are you doing today, Heiko?

Heiko Ihle (Managing Director and Senior Metals and Mining Analyst)

I am doing wonderful. How are you?

Allen Palmiere (President and CEO)

Good.

Heiko Ihle (Managing Director and Senior Metals and Mining Analyst)

Thank you for taking my questions. You mentioned in your release that you plan to invest a total of $9.8 million in mine development during the year. Obviously, the $1.1 million that was spent in the quarter does not really trendline that. Is this more of a second-half thing, or what have you seen in the first 30 days of the second quarter? Have you been trending above that?

Allen Palmiere (President and CEO)

We're trending above it. We were a little bit behind in Q1 because I placed a great deal of emphasis on doing development for underground exploration. It seems we're pretty much on track. That amount will be spent by the end of the year. It's fundamental to our mine plan, Heiko.

Heiko Ihle (Managing Director and Senior Metals and Mining Analyst)

Fair. I figured you'd say something like that, especially given it was in the same paragraph of the press release. Completely different question. First of all, congratulations on your focus on ESG. I mean, I think it just helps your social license and then likely will for a long time to come. Building on that, purely out of curiosity, and I don't know how much of this you can actually share, what specific recommendations has your technical advisory committee made thus far? What should be changed? When do you think that'll be enacted, and what was missed?

Allen Palmiere (President and CEO)

The focus of the technical committee to date has been on geology, and that is ongoing. It's bringing a fresh set of eyes to regional and local geology to assist in identifying potential areas for drilling. That's been the primary focus. Dale Finn has been very involved there. Now, the other aspect is operational. Joe Spitieri will be involved in an operational review, but he's Canadian, and the travel for him right now is a little bit complicated. We also have a member of our board, Joe Driscoll, who is very operational-focused, and the two of them will be spending time at the mine. Joe has been down there once. Joe Driscoll has been down there once already and made some observations about equipment sizing and observations about looking at alternative mining methods.

It's too early to say whether or not the recommendations will be adopted, but they are things that we are looking at. We're gaining, I believe, significant value from the inputs of all of the members of the board and our advisory committee.

Heiko Ihle (Managing Director and Senior Metals and Mining Analyst)

I appreciate that. I'll get back to you. Thank you.

Allen Palmiere (President and CEO)

Thanks, Heiko.

Operator (participant)

Your next question is coming from Ron Aubrey. Your line is live.

Ron Aubrey (Analyst)

Hi, Allen. How are you today?

Allen Palmiere (President and CEO)

I'm doing well, Ron. How are you doing today?

Ron Aubrey (Analyst)

Terrific. Hey, you've been very open as to why, late in your 35-year mining career, why you joined GORO as CEO and with really the one exciting mandate to grow the company. I have two questions regarding your long-term growth plan. The first one is really tied to exploration. To date, less than 2% of the company's significant 216 sq mi land package has been explored, and certainly with this year's emphasis of tripling exploration budget, hopefully to expand reserves and mine life. Could you walk us through your plans for this organic path to future growth? I have a following question.

Allen Palmiere (President and CEO)

Sure. I'd be happy to, Ron. As you indicated, very little of our property position has been explored. The company acquired most of these properties 10, 12 years ago. There was a little bit of work done on each one of them, effectively proving that there is potential. There were ore-grade intercepts pulled on almost all of the properties, but the company's focus at that point was not on exploration so much as it was on being a very consistent dividend payer. The money was never available to adequately explore these areas. Now, the process of drilling this will take time because we need to obtain permits. We need to gain access from private owners in many cases or ahead of time. That work is underway in about three different areas currently, and we will be expanding that significantly next year.

As you said, I have increased the exploration budget significantly this year. However, the constraint on our expenditures was not cash. It was availability of drill sites. We are already working on obtaining additional drill sites for next year, and I would anticipate that we will increase the budget again next year, directionally probably to the area of about $10 million. That will continue until such time as we feel that we understand exactly what we've got in our additional properties, and we will pursue those areas that are the most attractive.

Ron Aubrey (Analyst)

Excellent. Thank you so much for sharing that perspective. Second question really is tied to your guidance. 2021 guidance to produce 40,000-43,000 ounces of gold equivalent ounces. Based on the Q1 results of 10,750, it is already at the upper end of this range. During your BMO Capital Markets presentation, you stated, "A single mine companies are not favored," and you had a company goal to reach 100,000 ounces, which is more than doubling gold equivalent ounce production. Could you please provide us some color on this longer-term strategy and maybe including possible M&A opportunities for future growth?

Allen Palmiere (President and CEO)

I think I've been quite consistent in saying that our primary focus is trying to unlock the value associated with these properties we have in Mexico. The reality is, unless we find something very, very close to our existing operation, we effectively have to develop a new mine, and that takes time. I believe the potential for organic growth is very significant, but I also think that in order to effectively eliminate the single mine focus or discount, we need to look at potentially acquiring something within the next 12-18 months, perhaps. I can't give timelines on acquisitions. Anybody who suggests that they've got a strategy to grow strictly by that, I think, is being a bit duplicitous because it's opportunistic. If we are presented with opportunities that make sense, we will become acquisitive.

Directionally, the size that we would be looking at is not the size that the majors are looking at. If we can acquire something that produces 50,000 or 60,000 ounces a year, that gets us up over the 100,000. Ideally, it would be in a different jurisdiction because I would like to diversify the political risk and be operating in multiple jurisdictions. I do not want to undertake any acquisition that would risk the company, and I would like to identify a potential acquisition that levers off of our strengths. Our strengths really are twofold in this area. We've got a very strong technical team in Mexico, and they have additional bandwidth. We also have a strong balance sheet, and by year-end, I think the cash position is going to be significantly higher, which would allow us to put that to work in any acquisition.

Does that answer your question, Ron?

Ron Aubrey (Analyst)

Yes, it is. I appreciate that perspective. I'll get back into the queue and let others ask some questions. Thank you.

Allen Palmiere (President and CEO)

Thanks, Ron.

Operator (participant)

Your next question is coming from John Bair. Your line is live.

John Bair (President)

Thank you. It's Bair, B-A-I-R, Ascend Wealth Advisors. Congratulations on a safety-free first quarter in your ESR award. I've got two questions. One, in your press release, you indicated that your production was 6,097 ounces of gold and "payable or sold" was 5,019 ounces. Is the difference of 1,078 ounces, is that held in treasury and not sold? Likewise with your silver production? I have a follow-up.

Allen Palmiere (President and CEO)

John, it's in inventory. We've got concentrates in transit at all times, and until the concentrate is delivered and ownership passes to the purchaser, it's still in our inventory. We do not hold inventory of our precious metals. We will, on occasion, have a couple of kilograms, a few kilograms of doré awaiting shipment, but that is as much as we would ever accumulate.

John Bair (President)

Okay. So that difference in ounces is ultimately to be sold in a short period of time, then? Is that right?

Allen Palmiere (President and CEO)

It probably already has been by now because the numbers you're looking at are March 31, and we're late in April. So it's been converted.

John Bair (President)

Okay. Very good. Kind of a follow-up on the exploration aspect. A lot of what I wanted to ask was covered there, previous question. More specifically, have you proceeded to either permit some drill sites to potentially test or delineate the concept of an offset, fault offset of the recent mine? I think it's to the northwest of operations. Where are you focusing more? Is it more close to the existing operations or a little bit more of a step out along your acreage holdings, concession holdings?

Allen Palmiere (President and CEO)

John, thank you for that question. I need to clarify that. The bulk of our exploration this year is near mine. We are exploring both from surface and underground. Underground, we are driving drifts to the northwest and to the southeast. The intent of the drift to the northwest is to look for long strike extensions of the RESTA and switchback, as well as a new area that we have been trying to get a drill into for many years further to the north. The objectives of the drift to the southeast is to, again, test for the long strike extensions of both of our mineralized areas. From surface, we are drilling literally just outside the mine gates. You could probably throw a rock from the mine gate to our drill site. We are drilling to the, effectively, it is almost due west.

There is a structure there that we have identified in the past, and we're testing it. They're long holes. We've only got one completed. We're starting the second one now. The focus this year is near mine because I would like to build up our reserves and resources ahead of us. The common question by a lot of investors is, "You've only got three or four years ahead of you." This mine has been operating for 11 years, and it's never had more than three or four years ahead of it. The nature of the mineralization is such that oftentimes you will continually keep three to four years ahead. I would, if I could possibly build that up to six or seven years, just really to ensure that the investing public recognizes that this mine is not going to be going away.

That's why our focus is primarily near mine. There is going to be four or five holes drilled on some of the other properties, but that's not our focus this year.

John Bair (President)

Okay. Very good. One last quick one. With the extensive amount of land concession that you currently hold, but have not really had the opportunity to fully explore, let's say, or even get into it, do you have any kind of exploration time? Is there a clock ticking on the concession period that you have to hold those concessions in that acreage? Are you at any risk of that going away?

Allen Palmiere (President and CEO)

No. I've looked at all of the expiry dates on the concessions, and we have absolutely no issues. There is one small concession that I think is up for renewal as we speak, but that's sort of a bureaucratic process. There's virtually no likelihood that we're going to lose any of those concessions, John.

John Bair (President)

Do you have essentially a right of first? If there is an expiration date on any of these things, do you get the right of first refusal on it, so to speak, and nobody can come in and jump on top of it?

Allen Palmiere (President and CEO)

It's almost an automatic rollover. Nobody else can come in and take it. If we drop the concession, then obviously somebody else could. As long as we keep it in good standing, nobody can touch it.

John Bair (President)

Okay. Very good. Thanks so much for answering my questions. We'll get back to you in the morning.

Allen Palmiere (President and CEO)

Cheer up, John.

John Bair (President)

Thank you. Thank you.

Allen Palmiere (President and CEO)

Thanks.

Operator (participant)

If you have any questions or comments, please press star one. Your next question is coming from Harvey Volin. Please announce your affiliation, then pose your question.

Harvey Volin (Analyst)

Good morning. I am a long-time investor in Gold Resource Corporation. Frankly, it's hard to recognize the company I see now from the company that was a year ago and before. I don't say that as a critique, but merely as an observation. I'm wondering, in addition to all of the change of management, which is very obvious, how about the technical people that are on the ground in Mexico? Is this the same team pretty much that has been there for the last number of years, or have you made changes on the ground?

Allen Palmiere (President and CEO)

Harvey, the team in Mexico has not changed at all. It is the same team that was put in place. It has been developed over many years. I am very happy to tell you that I think it is an extremely strong team. There are plans only to provide them the resources they need. We're not making any changes.

Harvey Volin (Analyst)

Okay. Good to know. I guess the proof is in the pudding, obviously, as the old cliché goes. With the exploration plans that you have, hopefully some of the, as you put it, unlocked value can in fact be unlocked, and we see some progress moving forward. It's no secret that the stock has languished, and the growth of the company has also languished for whatever reason. We look forward to better times ahead.

Allen Palmiere (President and CEO)

John, I understand your perspective. I think that you will observe over the next period of time that there will be opportunities for growth that present themselves. It is certainly my intent and the intent of the entire management team and the board to grow this company and unlock the value inherent in it. You're right. It is a different company today than it was, at least at the corporate level. It's very different. The commitment that the board and the management team make is that we will operate and disclose things in a very transparent manner continually, and we will be aggressive in trying to grow the company.

Harvey Volin (Analyst)

Good. Thanks for taking my question. I appreciate it.

Allen Palmiere (President and CEO)

Harvey, I appreciate your questions, and hopefully we will be able to make you a happy man in the future.

Harvey Volin (Analyst)

Thanks, Allen.

Operator (participant)

There are no further questions.

Ann Wilkinson (VP of Investor Relations and Corporate Affairs)

As there are no further questions that lend themselves to easy answers, there are questions on the website, but quite technical ones. We would like to thank you again for attending the call, and we look forward to talking to you again next quarter.

Operator (participant)

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.