Gold Resource - Earnings Call - Q4 2021

Transcript

Operator (participant)

Good morning and welcome to the Gold Resource Corporation Year-End 2021 and Fourth Quarter Financial and Operating Results for the fall. At this time, all participants are in a listen-only mode. Following management's presentation, there will be a question-and-answer session completed by financial analysts only. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded today, March 11th, 2022, at 10:00 A.M. Eastern Time. I will now turn the conference over to Kim Perry, Gold Resource Corporation's Chief Financial Officer. Ms. Perry, you may proceed.

Kim Perry (CFO)

Thank you, Chris, and good morning to everyone. On behalf of the Gold Resource team, I would like to welcome you to our conference call covering our full year 2021 results. Before we begin the call, there are a couple of housekeeping matters I would like to address. Please note that certain statements to be made today are forward-looking in nature and, as such, are subject to numerous risks and uncertainties, as described in our annual report on Form 10-K and other SEC filings. Joining me on the call today is Allen Palmiere, our President and CEO, and Alberto Reyes, our Chief Operating Officer. Following Allen, Alberto, and my prepared remarks, we will be available to answer questions. This conference call is being webcast. For those of you joining us on the webcast, you can download a PDF of the conference call slides.

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 Form 10-K have been filed with the SEC on paper and are also available on our website at www.goldresourcecorp.com and SEDAR+ at www.sedar.com. Please note that all amounts mentioned in this call are in $ unless otherwise noted. I will now turn the call over to Allen.

Allen Palmiere (President and CEO)

Thank you, Kim, and good morning, everyone. First, I would like to thank the listeners for taking the time to join us on this call. I want to point out a few 2021 accomplishments and provide an update on the Aquila acquisition before handing the call over to Alberto to provide an update on our Don David Gold operations. We will then proceed with remarks from Kim on our full year financial results and 2022 guidance. Lastly, we'll provide a few closing remarks and then we'll take questions from participants. 2021 was a transformative year for the company. We brought in a new management team of highly accomplished independent board of directors and closed the year with the successful acquisition of Aquila Resources and its Back Forty Project. Cultural and operational changes come stress and uncertainty.

I would like to thank our entire team for their efforts and their embrace of the new culture and strategy. I'm very proud of every one of our team and the way with which they are embracing change and a new dynamic environment. Concerning our Don David Gold operations in Mexico, we experienced a positive year and delivered strong operating cash flow despite some challenges. We continue to invest heavily in Mexico, with $25 million spent in 2021 and completed both the filter press and dry stack tailings facilities. These projects, along with other capital and exploration initiatives, were either completed or progressed in 2021 and will significantly benefit us going forward from an operational, financial, and in many cases, an environmental standpoint. Lastly, I want to note that we published the first S-K 1300 report for our Don David Gold Mineral Resources and Mineral Reserves.

Concerning Aquila, we're extremely excited about the Back Forty Project and what this asset offers in terms of diversification and the life of mine production. We provided details as to the acquisition and benefits provided to Gold Resource in a number of presentations and press releases, which you can find on our website. Our short-term focus on this project is to complete the definitive feasibility study in the second half of this year. We're completing a new block model and resource study, finalizing a new mine plan, and evaluating alternative process flow sheets to select the optimal process flow, which will be reflected in the definitive feasibility study. Currently, we've also initiated the process to prepare the applications for the necessary permits. The permitting process and detailed engineering are expected to run in parallel during 2023. Construction is expected to commence in 2024, with the target of initial production in 2025.

All efforts are focused on delivering an environmentally friendly and socially responsible project. I'll now pass the presentation to Alberto to discuss Don David Gold's full year operational results. Alberto?

Alberto Reyes (COO)

Thank you, Allen, and also good morning to all. We experienced a positive year for Don David Gold Mine, despite some challenges faced during the year due to the ground support and the pandemic. Turning to the full year results of operations, I am pleased to report that we sold approximately 23,000 ozs of gold, 1.1 million ozs of silver, equating to a combined 37,500 equivalent ozs of gold. We further sold 1,400 tons of copper, 6,000 tons of lead, and 13,000 tons of zinc. During the full year, we processed ore at an average rate of 1,500 tons per day. Our annual throughput was impacted by the 12-day shutdown in August and the related impact of enhanced safety and quarantine protocols during the year. Notice that gold and silver rates benefited from getting back into solid state after ground conditions were addressed.

As to our investment in infrastructure, as Allen highlighted earlier, the construction of the filter press and dry stack tailings facilities are complete. The dry stack facilities will conserve water, accelerate reclamation of the open pit, as well as extend the life of tailings storage facilities, supporting our objectives of delivery excellence and sustainability. We also installed power capacitors to increase stability and ultimately lower our site diesel consumption. Lastly, with regards to infrastructure, I want to point out progress on the construction of the zinc-tailed gold riggering circuit. As you may recall, we expect the circuit to provide for a 6%-10% increase in gold recovery. The delivery of sufficient tanks was delayed due to shipment constraints out of South America, but the equipment has arrived in Mexico and will be commissioned in early Q2.

As for our activities, our exploration activities will seek to focus on underground drilling from exciting intercepts that were obtained out of the southeast of Switchback, the Sadie, Sasha, and Sandy system, and the completion of Santiago's infill drilling. The following two slides provide updated Mineral Resource and Reserves, which, as Allen noted earlier, are included in our published S-K 1300 report. Please refer to this report for the supporting assumptions, methodologies, and procedures. As a reminder, Don David Gold Mine maintains 100% interest in six properties, including two production stage properties and four exploration stage properties located in Oaxaca, Mexico, along the San Jose Structural Corridor. Concerning resources, during 2021, we performed a comprehensive review of our geological database and interpretation of the mineralization that make up the block models.

In addition, metallurgy, mining methods, ground control, and other modifying factors were reviewed to increase the confidence level of planning and budgeting. As a result of this review, Measured and Indicated Mineral Resources decreased from 2.4 million tons on December 31, 2020, to 1.7 million tons on December 31, 2021. The contributing factors include a reinterpretation of geology, data cleansing, increase in NSR, and more rigorous classification criteria, which increased inferred resources by three times. Concerning Mineral Reserves, Proven and Probable Mineral Reserves decreased from 2.3 million tons on December 31, 2020, to 1.5 million tons on December 31, 2021. The largest contributing factor was the depletion of the reserves by 500,000 tons related to mining activities, and another 300,000 tons were reclassified as Measured and Indicated Mineral Resources. I'll now hand the call over to Kim to provide financial results.

Kim Perry (CFO)

Thank you, Alberto. We closed the year with a strong balance sheet consisting of just over $33.7 million cash and no debt. Cash from operating activities was $34.8 million for the year and working capital was $29.3 million at December 31st. For the year, we reported net income of $8 million. Net revenues of $125 million were 38% higher than 2020 revenues due to higher gold sales and higher average metal prices realized primarily on base metals. Net sales also benefited from a 38% decrease in concentrate treatment charges for base metal gold. This decrease is largely dependent on the spot treatment charge market for zinc. Total production costs of $88.4 million for the year is 13% higher than the production costs in 2020. The increase is primarily due to a 14% price increase in reagents consumed in the process plant, offset by lower volumes of ore tons processed.

Other contributing factors included increased energy costs and the impact of the Mexico labor reform on long-term employee benefit obligations and profit sharing. Don David Gold Mine's total cash cost after co-product credits was $414 per gold equivalent ounce sold, and total all-in sustaining costs for gold equivalent ounce sold was $922 per ounce. These costs are significantly lower than full year 2020. Finally, I would like to take a minute to address item 9A of the Form 10-K. Management and its auditors have assessed the control framework specific to the Aquila transaction and determined there was a material weakness. It is important to point out that all other controls were effective and a clean opinion was issued on the financial statements.

With regards to the acquisition, there was significant judgment required for several of the balances assumed, specifically related to the gold and silver streams, the bird tax liability, and land valuations. While management performed detailed reviews on all balances assumed, the approach applied by management could not be reperformed by the auditors, therefore leading to the conclusion the documentation was insufficient. As a result of this concern, management elected to reschedule the original Form 10-K filing date to March 10th and the related earning call to today. Looking forward to the 2022 guidance, our focus this year will remain on unlocking value from the Arista mine, existing infrastructure, and our large property position in Mexico. As evidenced in the guidance table, significant investments will be made at DDGM for infrastructure and exploration.

The other area of focus is to deliver the Back Forty Project definitive feasibility study, completing the permitting applications, and continued exploration near the project. You will note the 2022 cash costs and all-in sustaining costs per ounce are in line with 2021 results. G&A increases slightly, reflecting management's intentions to further increase the existing strength, to continue the transformation of the organization, and support a disciplined growth strategy. Back to you, Allen.

Allen Palmiere (President and CEO)

Thank you, Kim. As I noted in my opening comments, we've made tremendous strides in 2021 as to ensuring the right management, operational, and technical teams are in place to drive us forward. We continue to progress initiatives around health, safety, community development, and really our overall ESG programs. For this year, we plan to expand our efforts in this area. Further, the Aquila acquisition provides the opportunity for growth and geographic diversification. At our DDGM operations, as Alberto and Kim highlighted, we had a positive year and were able to complete a number of initiatives that will greatly benefit DDGM going forward. Our balance sheet remains strong, and of note is the fact that we have funded our capital programs, the acquisition of Aquila Resources, paid dividends equating to 40% of net income, and sold our cash balance by $8.3 million, or 33%.

This demonstrates our commitment to be responsible with respect to capital allocation and our focus on growing the company in a financially prudent manner. Regarding 2022, we look forward to advancing the Back Forty Project and continuing to focus on improvements at the Don David Gold Mine while maintaining our status as a low-cost producer with a focus on discipline growth. With that, I'll turn the call over to the operator for questions.

Operator (participant)

Thank you. If you'd like to ask a question at this time. Please press star, then one on your telephone keypad, and we'll pause for just a moment to compile the Q&A request. Our first question is from Ron Aubrey with RJ Aubrey Investments Corp. Your line is open.

Ron Aubrey (Founder and President)

Yes. Good morning, Allen.

Allen Palmiere (President and CEO)

Good morning, Ron. How are you doing?

Ron Aubrey (Founder and President)

Hey, terrific. I've got a couple of questions on the Back Forty Project and then one specifically on operational improvements in Mexico. First, it seems that we have a very clear Back Forty roadmap for the construction decision. Your first goal is to complete the definitive feasibility study. What are the goals and objectives and expected timing of the publish of the study?

Allen Palmiere (President and CEO)

In terms of publication, we're anticipating completion of the study second half of this year. I am being vague because we're still undergoing a certain amount of metallurgical testing, and that will drive our ultimate schedule. I anticipate that it will be late Q3, early Q4. As soon as it is finalized, it will be filed in a Form 1300 with SEC to be publicly available.

Ron Aubrey (Founder and President)

Okay. It segues into then filing of the permit applications?

Allen Palmiere (President and CEO)

Permit applications, we're targeting to have submitted directionally about a month after we complete the feasibility forms and components of the applications, along with, as I'm sure you realize, a lot of other documentation regarding monitoring, testing, etc. The target would be directionally a month after we complete the feasibility. The intent would be to submit the permit applications this year. We have to provide for a year and a half to complete the permitting process, get the permits granted, and then we're subject to contested case hearings, which are very difficult to put a timeline on. In aggregate, we expect a year and a half to complete that process.

Ron Aubrey (Founder and President)

Okay. Fair enough. Switching then maybe to the Don David Gold Mine, review of your Q4 results just sequentially showed just a phenomenal improvement in all of your operational performance metrics. So congratulations to you and your management team. A very positive momentum going into this year.

Allen Palmiere (President and CEO)

Appreciate that, Ron. We had some hiccups earlier in the year, but we managed to resolve them late Q3, and we saw the benefits in Q4.

Ron Aubrey (Founder and President)

Yeah. It shows up in all the metrics, a significant reduction on your cash costs as well as your all-in sustaining cost, significant margin improvements on EBITDA and operational cash flow. I agree with your press release statement that the strong performance doesn't reflect on your share price. Maybe given your guidance to significantly increase base metal touch and this continued strong performance increasing, can we expect this operational performance and cash flow generation to continue improving this year?

Allen Palmiere (President and CEO)

The rate of improvement will decline. However, going forward, what we're going to be driven by are two primary factors. One, the grade of the ore that we're accessing, and two, commodity prices, of course. Certainly, in today's environment, commodity prices are looking robust, unfortunately, for reasons that we don't really want to contemplate, but they are very, very strong. In terms of the ore, as Alberto mentioned in his presentation, we redid all of the interpretation of the resource at Don David Gold Mine last year. That resulted in an ability to accurately forecast and plan, and it really is paying dividends. We have a very good idea now of what we're going to be producing for the balance of the year. I will say that the first two and a half months of this year certainly represent a direct continuation of what we saw in Q4.

It's looking so far, so good. It is mining. You may recall last year we had some ground control problems and suffered a decline in grade because we had to relocate into lower grade areas of the mine. Anything can happen, but we have improved our ground control practices and procedures. We're not going to change our mining methods. We're not anticipating a repeat of that. So far, I'm going to be cautiously optimistic. We're setting the basis for a very good year.

Ron Aubrey (Founder and President)

Right. Phenomenal. Thanks for that update. One final question on Mexico, then I'll jump back to queue. You alluded that your increased exploration discovered a new vein, the Three Sisters. Could you maybe articulate on that as potentially what that means?

Allen Palmiere (President and CEO)

Three Sisters is a recently discovered zone of mineralization between our existing two working areas, the Arista and the Switchback. It had not been previously identified. We identified it about a year ago, and we've been gradually working at trying to determine the extent of it. In order to do so, we had to drive a tunnel underground that we could use for a drill site so that we could drill back down into it. The results so far are very encouraging. I would love to be able to tell you it's going to be a significant discovery. I don't know yet. We do know at a minimum that it's highly probable that we will end up with economic—we know there's economic ore. I think we're going to have sufficient tonnage to justify going after it. What I can't tell you yet, Ron, is the extent of it.

We will be drilling there more or less all this coming year. It's a major area of interest.

Ron Aubrey (Founder and President)

Terrific. Thank you for that color. Again, congratulations to you and your management team on a very positive operational performance. I'll jump back on the queue. Thank you.

Allen Palmiere (President and CEO)

Thanks, Ron.

Operator (participant)

Next question is from John Bair with Ascend Wealth Advisors. Your line is open.

John Bair (President)

Thank you. Good morning. I will echo Ron's comments about productivity and so forth and kind of address that. Your metals production was up nicely in the fourth quarter versus third quarter. I was just wondering, is that overall, just clarify, better ore quality and a combination of that as well as higher metal prices? Is it sustainable? I mean, you've alluded that the first quarter so far looks pretty good, but is that sustainable at those levels?

Allen Palmiere (President and CEO)

Okay. John, there are a number of factors that contribute to the increased performance in Q4. Q3, you may recall, we had to take a 12-day shutdown due to a COVID outbreak at the mine. Before we shut down, we were losing productivity and staff, and as we resumed operations, it took a while to build up. The major factors, however, are number one, we were able to get back on track in terms of mining areas that were higher grade, and our productivity has increased fairly significantly. Grade is what Mother Nature gives us, but this year, I'm anticipating that it will be a fairly strong year. Productivity continues to improve, perhaps not quite as quickly, but we are seeing productivity improvements. The entire team at the mine is focused on two things: cost control and productivity enhancements. They are doing a very, very good job.

Commodity prices, your guess is as good as mine, could be a lot better. Certainly, a $1.80+ for zinc is outside of anything I've ever experienced in my career. That's being driven largely by energy curtailment in Europe. Copper, I think, has got legs. There just is not enough copper in the world to satisfy anticipated demand. Gold, given geopolitical turmoil, I would suggest is going to remain strong. I do not see it declining dramatically. Given that.

John Bair (President)

They're broken out. The prices have broken out. Yeah.

Allen Palmiere (President and CEO)

They seem to have broken out. They fell back a little bit, but even if they stay where they are, I'm very happy in terms of the performance of the operation. Given that as a backdrop, I expect that the current year will be a strong year. I think I addressed your questions there, John.

John Bair (President)

Yeah. Oh, yeah. No, no. That's fine. Another question is, can you quantify the cost savings in your operations with the new dry stack and filter press facilities? How much do you think that that is going to save you in operating dollars?

Allen Palmiere (President and CEO)

The reality is operating a dry stack is more expensive than operating thickened tailings. Thickened tailings, the tailings come out of the plant. You have to pump them through a tailings pond. That is effectively it. Dry stack, we have to run it through a filter plant, remove the water, and then take the resultant material out and stack it and compact it, etc. The real benefit comes from two areas. One, we are able to significantly reduce our working function in the mill because we are recirculating as opposed to losing a lot of it to evaporation in the tailings facility. The other one is that from an environmental perspective, dry stack is at least perceived as being much more benign. It also allows us to accelerate the reclamation of the old open pit.

The other advantage associated with dry stack is you don't incur the capital cost of increasing the size of your tailings facility on a regular basis. Your savings really are in terms of ongoing sustaining capital and dependent amortization, not so much on upfront operating cost. Does that make sense?

John Bair (President)

Yeah. Yeah. Yeah. Absolutely. My last question is, you spoke about the Three Sisters here, and one of my questions was going to be, what efforts you were going to make or any anticipation of new development in the Don David and Arista or that area? It sounds like any new mining activities, development, production would likely come from Three Sisters?

Allen Palmiere (President and CEO)

Okay. Not necessarily. You probably recall that we spent the best budget for money on drilling last year. I will say that we are increasing our expenditures this year. We're looking at directionally almost 40,000 m of underground drilling. Now, that's broken into two categories: infill drilling, which is designed to upgrade mineralized material up to Measured and Indicated and upgrade Measured and Indicated to Proven and Probable. The other component is growth expenditures. We're focusing on the Three Sisters, but we have had some very interesting intercepts at depth below Switchback. When I say below, it's 100 m to one hole, I think, is greater than 150 m below our current location and current resource. We've also identified potential at depth under Arista. The Arista one is interesting because our development is almost there. It could be a relatively quick add.

In terms of priority, we're looking at below Arista, southeast, and at depth of Switchback, and to the northwest, and at depth of Switchback. That plus the Three Sisters would be the four areas of focus this year.

John Bair (President)

Okay. Yeah. What I was kind of getting at is anything along trend outside of that immediate mining area. I guess between what you've just spoken with and trying to get Back Forty going, probably not on the priority list at this point.

Allen Palmiere (President and CEO)

No, it is on the priority list, but the more immediate priority, John, is to build up additional reserves and resources ahead of us. This mine is difficult to build a large resource because all of the exploration has to be done underground. Our objective would be within the next year or two to add two to three years to the resource in front of us. Once we do that, we revert to more regional exploration, and that would be along strike probably to the southeast. That is what we view as being very, very expensive. In the short term, it is expand our minable resource as quickly as we can.

John Bair (President)

Yes. That's what I was alluding to. Yep. Absolutely. Okay. Very good. Thank you so much.

Allen Palmiere (President and CEO)

Thanks, John.

Operator (participant)

Again, if you'd like to ask a question, that's star one on the telephone keypad. Our next question is from Boyd Young, an investor in Mexico.

Boyd Young (Analyst)

Good morning, Allen. Thank you so much for your insights into what's going on. I have a question regarding your additional cash flow. At what price point would you consider a normal course issue or bid and to go in there and start buying up your float?

Allen Palmiere (President and CEO)

It's an interesting question, and it's one that's always highly debated. I have been involved in the mining industry for an unfortunately long period of time and have seen many instances where people put in place a normal course issuer bid. I'm going to give you my personal view of this. It's not necessarily that of the board, but from my point of view and the experience I have, normal course issuer bids typically result in depleting cash reserves and not making any impact on market value of the stock. I would rather maintain our dividend because that is a direct return to all of our shareholders. Should we be fortunate enough to generate substantial excess cash flow, potentially increasing it, that is what I view as a better way of returning capital to shareholders rather than the buyback.

Buybacks, in my experience, really are quite ineffective unless you're going to do a substantial issue or bid. That has a major impact on cash resources of the company.

Boyd Young (Analyst)

Okay. Thank you. Wanted to know what the boss was thinking.

Allen Palmiere (President and CEO)

Not everybody agrees with me, but that's my perspective.

Boyd Young (Analyst)

Very good. Thank you so much for your time.

Allen Palmiere (President and CEO)

You're welcome.

Operator (participant)

Showing no further questions at this time, I'll turn the call over to Allen. Oh, my apologies. We do have a call up from Ron Aubrey, RJ Aubrey Investments. The line is open.

Ron Aubrey (Founder and President)

Hey, Allen. Just a quick question on Back Forty. It looks like in your guidance, you're including $8 million-$9 million of new capital growth investment to explore near the project. Can you be—and that's new. Could you update us on what you expect to accomplish with that?

Allen Palmiere (President and CEO)

It's not all exploration. I'm just normally around. We are going to be doing some drilling at Back Forty. We've got a small program planned. Back Forty has got indications of significant mineralization below the identified resource. There are a couple of holes that came back with very good intercepts, both in terms of thickness and in terms of grade. We don't have enough information to be able to establish continuity with the known resource and, as a result, increase our resources. There's one other area to the southeast that is quite prospective. It's relatively shallow, and we want to test that with, again, a limited program. Most of the expenditures at Back Forty this year are going to be related to feasibility and permitting.

Ron Aubrey (Founder and President)

Okay. Thanks again for that, Allen. Again, congratulations on an excellent performance.

Allen Palmiere (President and CEO)

Thanks, Ron. Really appreciate that.

Operator (participant)

We have no further questions at this time. Mr. Palmiere, I'll turn the call over to you for any closing remarks.

Allen Palmiere (President and CEO)

Thank you, Chris. I would like to thank everybody who participated on our call for their time and their attention. I look forward to speaking with you all, if not before, in about a month and a half when we do our Q1 conference call. Again, thank you all very much and have a very good day.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.