Gold Resource Corp Q1 FY2021 Earnings Call

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 U.S. dollars unless otherwise stated.

Thank you, Ann, and good morning, everyone. We'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 1, following Jason Reed's departure to run Fortitude Gold Corporation, the company created to receive a spin-off of the Nevada Mining Unit. Early in the New Year, we had 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 Spiteri. 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 socially responsible enterprise, or ESR award. This award is truly a testament to our team and their focus not only on efficient operations but on being good corporate citizens and neighbors. Additionally, it's 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 tonnes of copper, 1,700 tonnes of lead and 4,400 tonnes of zinc. During the first quarter, we processed ore at a daily rate of 1,600 tonnes per day compared with 2,000 tonnes 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 in additional paste fill for ground support. The area is currently being mined as slightly lower grades of zinc and silver, while the gold grade is modestly higher. Ore grades and recoveries can 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 plan has now processed just under 200,000 tonnes 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 on 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.

Thank you, Allen, and good morning, everyone. We closed the quarter with a strong balance sheet, consisting of just over $27 million in cash and no debt. Cash from operating activities at our Don David Gold Mine was $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 tonne of base metals sold compared with $5.8 million or $860 per tonne of base metals sold in the first quarter of 2020. This decrease was expected due to 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 tonne 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. In total, all-in sustaining costs 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 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.

Thanks, Kim. As I indicated last call, management's focus is unlocking the value of the mine, existing infrastructure, and large property position while 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 planned to spend on exploration in the Don David Gold Mine area. I touched on our investments 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 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 our team has done managing the situation. 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.

Your first question for today is coming from Heiko Ihle. Please announce your affiliation then pose your question.

It's Heiko Ihle with H.C. Wainwright. 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 doesn't really trendline that. So 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?

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.

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 likely will for a long time to come. But building on that and purely out of curiosity, and I don't know how much of this you can actually share, but what specific recommendations has your technical advisory committee made thus far? What should be changed? When do you think that will be enacted and what was missed?

The focus of the technical advisory committee to date has been on geology, which is still ongoing. They are bringing a fresh perspective to regional and local geology to help identify potential drilling areas, which has been a primary focus. Dale Finn has been heavily involved in this aspect. On the operational side, Joe Spiteri will take on an operational perspective, although his travel is currently a bit complicated since he is from Canada. Additionally, board member Joe Driscoll, who is also focused on operations, will be spending time at the mine. Joe has already visited once and made some observations regarding equipment sizing and alternative mining methods. It is too early to determine whether the recommendations will be implemented, but they are under consideration. Overall, we are gaining considerable value from the insights provided by all members of the board and our advisory committee.

You've been very open as to why late in your 35-year mining career, why you joined GORO as CEO with the one exciting mandate to grow the company. So 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 square mile land package has been explored, and certainly with this year's emphasis on tripling exploration budget, hopefully, to expand reserves and mine life. So could you walk us through your plans for this organic path to future growth? And then I have a follow-on question.

Sure. I'd be happy, 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 wasn't on exploration so much as it was on being a very consistent dividend payer. So 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, and 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 constraints on our expenditures were not cash; it was the 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 in 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.

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

I've consistently emphasized that our main priority is to unlock the value of our properties in Mexico. The reality is that unless we discover something very close to our current operations, we will need to develop a new mine, which takes time. I believe the potential for organic growth is substantial, but to effectively eliminate the single-mine focus and discount, we should consider potential acquisitions within the next 12 to 18 months. I can't provide specific timelines for acquisitions. Anyone claiming to have a strategy for growth based solely on this is being somewhat misleading, as it's largely opportunistic. If the right opportunities arise, we will pursue acquisitions. Generally, the size of acquisition we are looking for is smaller than what major companies typically target. Ideally, we would like to acquire something that produces 50,000 or 60,000 ounces per year, preferably in a different jurisdiction to diversify political risk and operate in multiple locations. I want to ensure that any acquisition we undertake does not jeopardize the company. I aim to find an acquisition that capitalizes on our strengths. We have a robust technical team in Mexico with extra capacity, and we also have a strong balance sheet. By year-end, I expect our cash position to be much higher, which would enable us to pursue any acquisition opportunities. Does that address your question, Rob?

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

Your next question is coming from John Blair.

It's Bair, B-A-I-R, Ascend Wealth Advisors. Congratulations on a safe first quarter and 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.' So is the difference of 1,078 ounces held in treasury and not sold? And likewise, with your silver production? And then I have a follow-up.

John, it's in inventory. We've got concentrate in transit at all times. And until the concentrate is delivered and ownership passes to the purchaser, it's still in our inventory. So we do not hold inventory in 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.

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

It has likely already been converted since the numbers you're looking at are from March 31, and we're now late in April.

Okay. Very good. As a follow-up on the exploration aspect, most of my questions were already addressed previously. Specifically, have you moved forward with obtaining permits and identifying drill sites to potentially test or define the concept of a fault offset related to the recent mine? I believe it's located to the northwest of the operations. Are you focusing more on areas closer to the existing operations or exploring further out along your acreage and session holdings?

Thank you for your question, John. I want to clarify that most of our exploration this year is focused near the mine. We are exploring both above ground and underground. Underground, we are extending drifts to the northwest and southeast. The northwest drift aims to find long strike extensions of Arista and Switchback, as well as a new area we have been trying to drill into for many years further north. The southeast drift's purpose is to examine long strike extensions of both of our mineralized areas. From the surface, we are drilling just outside the mine gates, practically in throwing distance from the site. The drilling will primarily head west, where we have previously identified a structure that we are currently testing. These are long holes, with only one completed so far and the second one underway. Our focus this year is near the mine because I want to increase our reserves and resources. Many investors commonly ask about our 3 to 4-year outlook. This mine has been in operation for 11 years and has always maintained a 3 to 4-year projection. However, the nature of the mineralization often allows us to stay 3 to 4 years ahead. Ideally, I would like to extend that to 6 or 7 years to reassure investors that this mine is not going anywhere. Therefore, our primary focus is near the mine. We plan to drill 4 or 5 holes on some other properties, but that's not our main focus this year.

Okay. One last quick question. Given the large amount of land concessions you currently hold but haven't had the chance to fully explore, is there a time limit on the concession period for those areas? Is there any risk of losing those concessions?

No. I've looked at all of the expiry dates on the concessions. 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 the bureaucratic process. There's virtually no likelihood that we're going to lose any of those concessions, John.

Do you have a right of first refusal if there is an expiration date on any of these matters?

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

Your next question is coming from Harvey Volen.

I'm a long-time investor in Gold Resource Corporation. And frankly, it's hard to recognize the company I see now from the company that it was a year ago and before. I don't say that as a critique, but merely as an observation. So I'm wondering, in addition to all of the changes in management, which is very obvious, how about the people, 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?

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

It's good to hear. As the saying goes, the proof is in the pudding. With your exploration plans, I hope that some of the value can truly be realized, and we can see progress ahead. It's clear that the stock has been stagnant and the company's growth has also slowed for various reasons, but we are optimistic about better times to come.

I understand your perspective, and I believe you will see opportunities for growth in the near future. It is my intention, as well as that of the entire management team and the Board, to expand this company and realize its inherent value. You are correct that this company is different now compared to how it was at the corporate level. However, the Board and management team are committed to operating transparently and will actively pursue growth for the company.

There are no further questions.

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.

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.