Gold Resource - Earnings Call - Q2 2020

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Gold Resource Corporation second quarter 2020 earnings call. After the presentation, there will be a question-and-answer session. If you should require assistance during the call, please press star zero, and an operator will assist you. At this time, it's my pleasure to turn the floor over to Mr. Jason Reid, CEO and President of Gold Resource. 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 Second Quarter Conference Call. I expect my comments to run approximately 10 minutes, followed by a brief question-and-answer period. Joining me on the call today for the Q&A portion will be Mr. John Lebate, 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, August 5th, 2020, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks in our Form 10-K filed with the SEC for the year ended December 31st, 2019, as well as this current Quarterly Report on 10-Q. During the second quarter, the global pandemic negatively impacted most businesses around the world to varying degrees. Our Nevada mining unit was less impacted, while our Oaxaca mining unit was shut down two of the three months of the quarter from the Mexican government's mandatory closure decree in response to the COVID-19 pandemic.

We lost April and May production and associated revenue of approximately $15 million in revenues compared to the prior year, while sustaining most of the normal owner's costs of a mining unit like overhead and payroll. A mining operation does not return to full production immediately upon start-up under normal circumstances, so you can imagine when we were allowed to restart operations under our new COVID protocols, that slowed the restart even more. We are happy to have kept 100% of our team on the payroll during the shutdown and also provided financial support to the local communities in which we operate to help offset the impacts of the pandemic, including food banks and children's charities. Our overall production, cost of production, and financials suffered due to the shutdown.

We applied for and were given regulatory permission to restart our operations with a limited number of employees while focusing on the health and safety of our team, contractors, and communities in which we operate. By the end of June, we were able to increase our workforce to 100%. We continue to ramp up production and, barring another unforeseen governmental shutdown, we expect Q3 to resemble a normal operating quarter. During the quarter, strong health screening protocols were put in place in response to the pandemic at both our Oaxaca and Nevada mining units. We have encountered a few positive COVID cases between both mining units. Our screening protocols and procedures were able to identify the affected individuals early enough to isolate them and restrict the spread of the virus throughout our operations by also identifying and quarantining others who may have come in contact with them.

The cases thus far seem to have originated from family or others outside the operational team or acquaintances of employees and not from our site. Since we anticipate the presence of COVID-19 periodically in both Nevada and Oaxaca for the foreseeable future, we remain vigilant with the goal of keeping everyone safe and healthy as the top priority. During the quarter, the company's Nevada mining unit continued with its Isabella Pearl mine ramp-up phase, which resulted in gold production increase of 41% over the first quarter of 2020. As previously stated, the ramp-up has required us to move a significant amount of overburden to access the high-grade Pearl zone while we mine the Isabella zone of lower and varied gold grades. During the quarter, we reached the top of the Pearl zone and have been mining and processing significantly higher-grade gold.

Approximately 80% of this deposit's gold is located in the Pearl zone. As mining continues, we expect our ramp-up to continue into the second half, targeting a bigger ramp-up focus during Q4. We have had some nice high-grade gold surprises to the upside in the initial Pearl benches. The model predicted about 1.5 g gold per ton, but the grade was closer to 2.5 g. We have also seen some small areas of unexpected grades of over 7 g gold. I am not mentioning this to increase shareholders' overall expectations of the project. As you know, exploration and delineation drilling allows for tons and grade estimation, while the ultimate sample is only known when mining the deposit. Some deposits disappoint when compared to the model.

I think shareholders would appreciate knowing, at this point at least, that the Pearl zone of the Isabella Pearl deposit has exceeded our expectations at the top of the deposit. We see this reflected in the crusher head grades of Pearl zone ore when we often experience 2-4 g gold on days when we crush Pearl ore. While the available mineralized tons of this high-grade ore are still limited at these higher elevations, we continue to mine deeper into lower Pearl benches. In the future, we expect the continuation of not only high-grade but gold with greater available tonnages, helping us execute on our targeted production ramp-up the back-half of the year. During the quarter, the company announced its acquisition of the Golden Mile property in Nevada.

Golden Mile is not only located along the Walker Lane mineral belt but just up the road from our Isabella Pearl mine. We are very excited about this acquisition as it checks most all our required boxes as an acquisition target, including being located geographically within our mining unit, surface and near-surface high-grade gold, 100% ownership, large district-sized property, two known substantially drilled areas of mineralization completed by previous exploration companies, potential to become an open-pit heap leach operation, and a reasonable 3% NSR. Initial bottle roll tests commissioned during the due diligence process indicate mineralization is amicable to cyanide leaching with over 81% recovery. Patented ground encompassed the larger of the two known mineralized zones, providing for potential permitting efficiency on both exploration and future development optionality in that portion of the property.

We remain committed to continuing to explore our exciting 10 km of Isabella Pearl trench and the numerous known exploration targets. We also are excited to commence the initial drill program at East Camp Douglas planned during the second half of 2020. The Golden Mile property is an advanced stage exploration property. With its acquisition, we are evaluating it to a resource confirmation and delineation stage. We are now targeting, subject to drill permit timing, the initiation of a Golden Mile drill campaign later this year as well. Our focus is to confirm and delineate and expand on past exploration programs with the goal to define a maiden resource that ultimately warrants moving the project into a development stage project.

Our full team of exploration managers, resource estimators, operation managers, environmental and permitting managers, engineers, finance, executive team recently held our first Golden Mile conference call meeting to lay out strategy, optionality, timelines, and next steps to move the Golden Mile property forward on an expedited basis with the goal of making it our next mine. It's still early in the property's evolution. As we view it today, it has all the earmarks to become our next operating mine, and it is exciting to get the ball rolling to prove that to ourselves. We envision this project may have multiple open pits feeding ore to a strategically located heap leach and processing facility. At this point, we plan to only take gold to a carbon stage and then truck the carbon down the road to our Isabella Pearl ADR plant to be converted into doré.

This is targeted to keep project capital costs to a minimum, permit a processing facility to only a carbon stage, which could dramatically shorten the permitting process time, which is often held up by the additional time trying to permit the ADR hot side, and leverage our existing Isabella Pearl plant's ADR for operational longevity. Following up on last quarter's conference call regarding the depressed zinc market prices at that time, the high zinc treatment charges experienced thus far in 2020. Zinc prices as of this morning have rebounded by 32% since the lows in the second quarter. Initial reads on potential 2021 zinc treatment charges or charge terms are looking to be far more favorable in 2021 than in 2020. These are good signs, not to mention the dramatic rise in precious metals since the last conference call with gold hitting new record highs.

I mentioned on the last call to help counter the high 2020 zinc treatment charges and depressed base metal prices at that time, the company had revisited its Oaxaca mining unit's mine plan to focus on areas with less zinc. With zinc rising to $1.08 this morning, and if it looks like it will stay anywhere around there, we will be taking another look at mining optionality to potentially bring more zinc into the fold. While the pandemic has created various challenges, we have met the challenges head-on and are well positioned to emerge from the pandemic fallout to capitalize on a world awash in unsound and unprecedented fiat currencies by producing real money and producing real long-term stores of value, gold and silver.

Now with the prospect of doing so with this morning's new all-time record gold price high of $2,046 per ounce adds leverage to the excitement of being a gold miner. 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. Any antagonistic or distracting calls will be terminated, and I will simply move on to the next productive caller's questions. Operator, with that, if we do have any questions, let's open up the line. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, it is star one on your touchstone telephone.

If you're using a speakerphone, we ask that while posing your question, you pick up your phone to allow for favorable sound quality. Again, ladies and gentlemen, that's star one on your touch-tone telephone if you do have a question at this time. We'll go first to Heiko Ihle with H.C. Wainwright.

Jason Reid (CEO and President)

Good morning, Heiko. Can you hear me?

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

Hey, there. We can now. Perfect, perfect. [crosstalk]

Jason Reid (CEO and President)

Hey, Heiko.

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

More of a complimentary question. I thought you did a really good job with Mexico given the suspension, so well done on that.

Jason Reid (CEO and President)

Hey. Thank you.

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

Thinking out loud with gold mining, I mean, clearly the whole thing was quite the bargain, and especially since one generally hears right now that prices for early-stage assets have just gone through the roof. You frankly seem to have a knack for getting things done.

Just thinking ahead a little bit, I mean, would you consider continuing acquiring more assets if you get the right price in the right locations?

Jason Reid (CEO and President)

Absolutely. Absolutely. It's all about timing on anything, in my opinion. Some properties look better at certain times than others, but obviously the property has to check all the boxes we need to see. The Golden Mile is an incredible opportunity. I think the fact that we offer a reasonable NSR helps us acquire some of these properties where some of the bigger companies don't want to do that. For instance, that's how I believe we got East Camp Douglas. I don't believe we ever would have got that had we not offered an NSR because I found out after the fact we were competing with two major gold mining companies for that property.

The differentiating factor with us being a junior and them being majors is we offered an NSR and they didn't. The people who have these properties want to be part of because they believe in their properties themselves, they want to be part of an operation, so to speak, going forward, and the NSR allows them to do that. A Golden Mile, exactly the same thing. The exciting thing about Golden Mile, it has over 200 drill holes in it. To give you some perspective on that, Isabella Pearl had over 200 drill holes in it when we looked at it initially and got it. We all know how that turned out. We have confidence that there is a resource there.

Now, we don't want to rely on a third party, so we need to go in, not only confirm, but start delineating and expanding that, putting our arms around a resource, a maiden resource. Once we do that, we are off and running. This will be the next project. A lot of optionality with patented ground. It's a huge land position. It ties land all the way from Golden Mile all the way up into our minor gold property. This could be a situation where there could be at least now three open pits between all three of those, and with a strategically located process facility, then truck carbon down the road and feed the ADR plant. It's perfect. Now it's just a function of you heard me talk about the launch of this 2B, in my opinion, hopefully 2B mine.

Now we just got to go prove it to ourselves and obviously the shareholders. I think it's going to be the next one, and it's really exciting.

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

Fair enough. Hey, something completely different. I mean, I'm just trying to weigh off two contrasting things. On the one hand side, I heard you talk about extensive precautionary COVID measures, specialized training, social distancing, governmental guidelines, all that stuff. Early on this call, you also mentioned this is going to continue for the foreseeable future. In contrast, can you provide a little bit of color on the expected impact on the second half? This is just a quote from your release. You think precious metal production and cash costs are expected to improve the second half. How much of an impact really is from there?

Is it fair to say the actual financial impact from COVID in the second half is going to be small given the higher-grade ore from Pearl?

Jason Reid (CEO and President)

Good questions. Let me take the first one, and that is what is the impact of the extensive precautionary measures? In my opinion, we have done everything we possibly can to get in front of this, as evidenced by the fact we have actually identified COVID situations very early and early enough to isolate that, not allow anybody else to get it. We have kept it off our operations in doing so, which is terrific. The impact of that going forward, I think in large part is over.

We have the precautionary measures in place, and as long as we can keep it off our site so that we do not have enough critical mass to have to be shut down either on our own accord or a governmental mandate, we should be fine moving forward. I want to caveat that we all know it is all around us, it is everywhere, and so it is just a function of we have to stay at a high elevated level as far as our protocols. Now, obviously, the protocols impacted us starting back up. When we applied for the startup back in Mexico, we were not allowed to bring 100% of people on site. We had only local people could help at first, and then we had to quarantine people coming in. You can imagine that it is not like a car you get in, turn the key, you drive. No.

We had to build the cars to some extent, at least maintain it before it could start going, and it took a while. That is behind us. The impact, I believe, is behind us, subject to us keeping it off our site, and that would be a different story. What was the second part? What was the second question?

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

Just contrasting the fact that you're

Jason Reid (CEO and President)

sorry?

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

Just contrasting the fact that you're talking about lower costs. I guess the impact cannot be on an absolute basis, not that big, right?

Jason Reid (CEO and President)

Right. In the bigger picture, obviously, it hurts. I mean, who wants to be shut down for two months? That does not help. As long as we are not shut down again, we will be off and running.

I don't think anybody can actually look at our financials coming out of Mexico and think it's any semblance of what the future holds or what have you. How can you? I mean, costs and an underground operating mine like that, you get your cost down by putting a lot of throughput through. That's part and parcel with it. When you're shut down, yeah, it affects everything. Like I said, when you're shut down and then you start back up and you can't start with 100% of your team, that affects stuff. We'll, in large part, have bounced back completely from this. I expect Q3 to just be a normal operating quarter, and we'll move on. Again, subject to keeping COVID off our site.

I do not think you can look at this quarter, and that is why I did not even go—people probably will notice—I did not even go into any of the numbers. How can you? This is an anomalous situation. We will just move on to the third quarter and keep COVID off our site. We should be fine.

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

I think you guys are doing a great job. Just keep doing what you are doing, and thank you very much for taking my questions.

Jason Reid (CEO and President)

Hey, good to talk to you, Heiko. Have a good day. Thank you. Be safe.

Operator (participant)

We will take our next question from John Baer with Ascend Wealth Advisors.

Jason Reid (CEO and President)

Good morning, John.

John Baer (Research Analyst)

Good morning. Thank you. First, I want to say I think it is very commendable that you maintained your staff and continued paying them and supporting the workforce and your communities that you are involved in.

I want to say that you covered a lot of the questions in general that I had, how you're handling the outbreak and evaluating the areas that you're working in and trying to mitigate and evaluate the folks ahead of time so that you're not bringing it into your operations. One of my questions was going to be about the outbreak within your operating areas, and I think you covered that very well.

Jason Reid (CEO and President)

Yeah, I can give you some additional color. It hadn't been that many. It hadn't been that many people. We had a couple of people in Mexico and one in Nevada. In the Nevada situation, it was either a relative or a family member came into that house with COVID, and then they came to work. Our screening process picked it up quickly.

It was a night shift situation, so we did not have a lot of people exposed. And those who worked on night shift next to him got quarantined, tested. You pull them off. You are not allowed to bring them back till they have a couple of negative tests. Does that have an impact in Nevada? Sure, it does a little bit. You are having to pull people out during the quarantine. That is why I, during that quarantine period, that is why I say as long as we can keep not have it come into our site in a material way to hurt us. But listen, this is not just us. This is the world. I mean, there are other mining companies where their whole operations are getting overrun with it. Our goal and task is to make sure that does not happen.

In Mexico, we had some of the truckers' union, small trucks, 10-ton trucks, those some individuals tested positive. It did not come from site. It was outside area people. We are going above and beyond. If you want to come to site and you do not have an absolute reason to be there, you do not get to come to site. If you can work from home, you work from home. We are doing everything we possibly can in that regard. That is what we have to do going forward. Does that make it easy? No. It is not going to hinder us in the big picture. As long as we can just keep it off our site so we do not have to shut down.

John Baer (Research Analyst)

That is good because I am well aware of situations within the hospital setting because of family members.

Very often have heard that healthcare workers that have been affected have not picked it up from being in the units treating patients. It has come from outside, which is very much in line with what you have expressed here. Nonetheless, the real question I wanted to have put out here is with the Golden Mile acquisition you have got, obviously, commodity prices going in your direction, and now it is Isabella Pearl with increased production and higher grades. What are your plans as far as accelerating perhaps your exploration activity? I mean, you did address that in your comments, so that is great. Do you think that it accelerates the potential for bringing that property online further than what maybe you originally thought?

Jason Reid (CEO and President)

Yes. A couple of things on exploration.

Obviously, exploration in Mexico has taken, I don't want to say back burner, but a back step to our primary focus has to be on keeping that operation COVID-free and operating. Are we still going to explore? Are we still exploring? Yes, from underground, but we're not going to be doing it. I mean, that's not the focus for exploration in Mexico. Exploration in Nevada, you heard me talk about how we are drilling the trend where Isabella Pearl sits. We have locked up 10 km of this trend. Off of that trend, there are four old historic open-pit heap leaches on this trend. Isabella Pearl is the next one. I believe whether it's Scarlet or any of these others, at some point, we'll hit several more of these, I believe, because there is an obvious mineralized trend where deposits are. We have it.

That is still at the top of our list, and we're exploring it as we speak. As you heard me say, exploration in East Camp Douglas, we're so excited to drill East Camp Douglas. East Camp Douglas, as you've heard me maybe say in other conference calls, it is a home run potential. Massive lithocap with all this high-grade bleeding around the edges of this thing. It could be a big one. I see that as maybe being the Arista equivalent of the Nevada mining unit. It's a huge area. It's going to take a lot of time, a lot of money to explore it. We're starting soon this year. That is exciting. The acquisition of Golden Mile has just elevated it into the fold to where it's now going to be, with 200 holes in it, a delineation drilling program. I mean, it is advanced stage exploration.

Obviously, can we ramp that up with gold at $2,040? Absolutely. I mean, more money is going to be coming in. We can allocate more exploration capital and off and running. Yes, all the metal prices this morning, before I jumped on this call, zinc at $1.08? Are you kidding? That adds $15 million to our bottom line in Mexico, all being equal with the crappy terms we used to have. $15 million. Every penny in zinc is $500,000. That is working off of last conference call. We were close to $0.90. Now we are at $1.08. That is $15 million, let alone the millions in gold and silver, all being equal. If this is where the metals are going to be next year, look out. Mexico is going to kill it.

Obviously, Nevada is going to kill it to a lesser degree, but we're trying to position that to ultimately be as strong as Mexico. Yeah, it's going to help. Absolutely. Any other questions, John?

John Baer (Research Analyst)

I do, but I'll do them offline.

Jason Reid (CEO and President)

Please call Greg. We're almost out of time. We're going to take one more call, please.

John Baer (Research Analyst)

Yeah, yeah, yeah. I'll get out. Thank you very much, and good luck.

Jason Reid (CEO and President)

Thank you, John.

Operator (participant)

We'll take our next question from Chen Lin with Lin Asset Management.

Chen Lin (Founder and Portfolio Manager)

Hi, Jason.

Jason Reid (CEO and President)

Good morning, Chen.

Chen Lin (Founder and Portfolio Manager)

Hi. Good job with this difficult quarter. Actually, I want to ask a lot of those Golden Mile, but most has been answered. Can you give us a little bit of update on this quarter? I know it's a very difficult quarter.

What kind of mostly on the balance sheet, on the ATM side, are you comfortable? How much did you raise if you did? Are you comfortable with what your money coming in with Mexican restarting that should generate more cash on your balance sheet, I assume, for the rest of the year?

Jason Reid (CEO and President)

Yeah. As I believe previously mentioned from the last call, we raised $10 million as soon as we realized that this COVID pandemic was coming our way. Obviously, that was a good move. It gave us a little bit of a cushion because startup, yeah, you have not lost any long-term production, but you have obviously lost some revenue temporarily. We are glad we did that, and that adds to the cushion.

If we have to tap it and then replace that, so to speak, of the $10 million that we did raise, great, fine, we have it. Going forward, we should be fine, even at the previous metal prices. These new metal prices, the sky's the limit. There is recalibration by the minute lately, at least this morning, with gold being up $40 within a 24-hour period. Obviously, there should be some healthy pullbacks in the metals prices. I mean, as they continue to set higher highs and higher lows, then yeah, we should be fine. Caveating that, you never know what's going to happen. I mean, that's why I've emphasized so much that we have to keep COVID off our sites. We do not want to be like one of the miners that I feel so bad for them.

Their whole operation effectively gets overtaken by, and they have to shut down, whether they choose to or they have to because the government forces them to. We do not want that. That is the last thing we need, having gotten our teeth kicked in in that last quarter, having to shut down for two months. That is the focus. As long as we do that, we are fine. This other metal price stuff is gravy.

Chen Lin (Founder and Portfolio Manager)

Great. Thank you. Yeah, that is mostly. Basically, from the $10 million you discussed, we fully understand the shareholders. The $10 million ATM you are down before, and then it is over, right? You do not need any more, and then we are looking for more to actually accumulate money on the balance sheet going forward. Is that the message?

Jason Reid (CEO and President)

That is the goal. That is the goal. Yeah, that is the goal.

Chen Lin (Founder and Portfolio Manager)

Okay, great. Thank you.

Good job in this very difficult environment, but

Jason Reid (CEO and President)

hey, listen, I appreciate that, Chen. I appreciate that. I appreciate your comments. Having said that, I feel really bad for some of my heart goes out to some of the other mining companies who I read about where their whole operation has been overtaken. I feel my heart goes out to them. Yeah, it's been tough, but others have had it tougher. We'll just stay focused. Like I said, we're going to emerge from this and capitalize on this next bull market that's absolutely taken hold. I mean, look out. We had a great seven-year run bull market years ago and then a seven-year bear market, and now clearly we're back into it. Let's hope this is another seven-year bull market, and boy, are we positioned to capitalize on it.

With that, if you have a question in the queue, please reach out to Greg Patterson directly, and he'll get your questions answered. With that, we need to close the call for today. Thank you very much. We look forward to updating you next quarter. Everybody be safe. Thank you.

Operator (participant)

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