Gold Resource Corp Q2 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Gold Resource Corporation Q2 Earnings Conference. During today's conference call, there will be a question-and-answer session. I will now turn the conference over to Kim Perry, Gold Resource’s Chief Financial Officer, please go ahead.

Thank you, Sara. And good morning to everyone. On behalf of Gold Resource, our Disturbed Gold Resource team, I would like to welcome you to our conference call covering our Q2 2022 results. Before we begin the call, there are a couple of housekeeping matters I'd 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 copy 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-Q have been filed with the SEC and EDGAR and are also available on our website at www.goldresourcecorp.com. 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.

Thank you, Kim. And good morning, everyone. I want to thank the listeners for taking the time to join us on this call. The first half of 2022 has proven to be a solid start to the year. While we are expecting production results to dip lower in the second half as a result of grade, I would like to reiterate our full year guidance of 24,000 ounces to 26,000 ounces of gold and 900,000 to 1 million ounces of silver. This is approximately 40,000 gold equivalent ounces. While the base metal prices in the first half of the year helped our cash cost and all in sustaining costs, we expect that we will achieve our cost guidance. Finally, capital exploration and G&A forecast remain on track for guidance. I'd like to point out a few achievements related to Q2 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 Q2 financial results. Lastly, we'll provide a few closing remarks and then we will take questions from participants. We continue to heavily invest in Mexico, which will benefit us going forward from an operational, financial, and, in many cases, an environmental standpoint. With the completion of the filter plant and dry stock facility in late 2021, we are processing 85% of the tailings through the new plant. The residual 15% is used for Paceville and goes underground. The facilities not only conserve water; they reduce the traditional risks associated with the tailings storage facility and accelerate the reclamation of the open debt. We also processed over 200 tons of artisanal tailings from a local community. In addition to financially giving back to the community, we were able to ensure they were properly handled and stored. We are encouraged by the results of our investment in the infill drilling program, which is producing positive results. In Michigan, we continue to work on the feasibility study. Inflationary environments and capital cost pressures combined with lower commodity prices are creating challenges. We continue to work on alternatives and are working to optimize the value inherent in this world-class deposit. I'll now pass the presentation to Alberto to discuss Don David gold's operational results.

Thank you, Allen. And also good morning to all. We experienced a positive quarter for David goldmine. Turning to the results of operations, I am pleased to report that we processed nearly 129,000 tons of ore and sold approximately 9,000 ounces of gold, 230,000 ounces of silver equating to a combined 11,500 gold equivalent ounces. We further sold over 285 tonnes of copper, 1800 tonnes of lead, and 3,600 tonnes of zinc. Regarding an update on investment, as Allen mentioned earlier, I want to highlight the details of David Don gold’s circuit, which has reached the target recoveries reflected towards the end of Q2. Also in the underground, we have successfully completed phase one of the ventilation circuit. The new circuit includes ventilation shafts, 273 meters in length and three meters in diameter that connect level three all the way down to level 22. The system allows for 450,000 CFM to be delivered to the lower levels while reducing resistance to airflow. Phase two is underway, and it will be completed in Q3. The secondary raceway will connect level 22 to level 27. Our underground exploration program has improved ventilation. The amount of drilling will achieve 35,000 to 40,000 meters in the year. Drilling in the underground continues to deliver positive results supporting potential extensions to the current work in areas. I will now pass over the presentation to Kim to discuss Don David gold's financial results.

Thank you, Alberto. We closed the quarter with a strong balance sheet consisting of just over $33 million in cash and a working capital increase of $5 million during the quarter. We reported net income of $2.7 million and operating cash flows of $8 million for the three months ended June 30. Net sales of over $37 million were 20% higher than the same period in 2021 due to higher gold sales and higher base metal prices. Total production costs of $21.7 million for the quarter were 11% higher than the production costs for the same period in 2021. The increase is largely related to a $0.5 million increase in consumable products driven by price increases. There was a $0.5 million increase in royalty expenses due to higher sales and almost $1 million in spare parts for heavy equipment repairs. Finally, there was a $0.5 million increase in transportation costs due to an agreed 9% rate increase. Don David gold mine's total cash cost was $247 per ounce, and total all-in sustaining costs per gold equivalent ounce were $799 per ounce. These costs are significantly lower than in 2021 and are directly related to the higher base metal prices realized. Allen, back to you.

Thanks, Kim. The economic climate has changed dramatically in the past few months. While we are comfortable with the guidance for the year, it is making new projects challenging. Across the industry, we are seeing projects suffer from cost escalation as well as increased cost of capital at a time when commodity prices are declining. It is, unfortunately, a perfect storm, the duration of which is unknown. However, as you've heard me say before, we remain focused on creating value through disciplined growth and capital allocation. As I noted in my opening comments, we've made tremendous strides to demonstrate our commitment to advancing initiatives around health, safety, community development, and our overall ESG programs. We plan to continually expand our efforts in this area. With our healthy balance sheet and strong management team, 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 disciplined growth. Now I’ll turn the call over to the operator for questions.

Thank you. One moment please for your first question. Your first question comes from the line of Jake Sekelsky of Alliance Global Partners, please go ahead.

Hey, Allen, and team, thanks for taking my questions.

Good morning, Jake.

So obviously, we've seen industry-wide cost inflation that you just touched on a bit, but it seems like you've been somewhat insulated with all-in sustaining costs coming in below $800 an ounce. Any color on the steps that you're taking proactively to mitigate these pressures? And are you concerned at all with any of them surfacing in a larger way in the second half of the year?

I'm not anticipating significant changes in the second half, Jake. We had anticipated cost escalation when we did the budget last year, and as it's turned out, we've been unfortunately fairly accurate. So a lot of the cost increases that we've seen had already been anticipated. On a go forward basis, we're beginning to see a correction, albeit slight, in the cost of grinding media, and some of the other inputs seem to be stabilizing a little bit. We were fortunate that we were able to negotiate a 6% increase in labor early in the year, and again, that was budgeted for. We are, of course, benefiting from the high base metal prices that we experienced in the first half of the year. That has corrected somewhat, but obviously, the current rates are still significant. We do have some hedging in place for zinc production, which will ensure solid revenue for the balance of this year. What that will do is enable us to maintain our cash cost and assets, at least for the balance of this year.

Do you think even with prices having come down a bit off the highs, we're still sitting at around $1.50 or so a pound, which historically is a strong level? Are you comfortable with putting in longer-term hedges, I would think at current levels?

It's something that we consider actively on an ongoing basis. Jake, I will tell you that my personal view, and this is not one that we've necessarily adopted corporately, yet is that I would take $50 zinc all day long forever. I've been involved in zinc for unfortunately a few decades now. And I've never seen zinc prices at this level for an extended period of time. I think there is a strong possibility that zinc may in fact increase in the short term because of smelter curtailments in Europe and uncertainty around COVID in China that could result in reductions in capacity. Europe is being driven by the energy crisis and the zinc smelters are not going to be operating at full capacity, which may result in a supply squeeze in the short term. I think we're going to see a period of strong zinc prices persisting.

Okay, that's fair. And then just lastly, on Back Forty. I mean, we're coming up to the feasibility study in the next couple of quarters and then kicking off the permitting process after that. Can you just touch a bit on what that permitting process might look like going forward? It's my understanding that the process rests solely with the state, with no federal permitting needed, is that right?

That is correct. Michigan is one of two states in the union that has complete control over the permitting process. They do have a little bit of input from the EPA from a technical perspective, but only the state has total authority over granting permits. All of the permits that we deal with are under the control of a department called Energy Great Lakes and Environment, or Eagle for short. We deal with five sub-departments of that group. This enables us to have a relatively focused approach to the permitting process as we submit applications for the various permits to the appropriate departments. There will be a back-and-forth, public hearings, and commentary from the departments. We will respond accordingly. We're forecasting that this process will take 10 to 12 months. After that period, we anticipate that we will receive the permits from Eagle. Permits in Michigan are subject to a contested case process whereby opponents of the project can challenge the permits in an administrative court. It’s a normal process, and we fully anticipate that we will be going through that process. It will take again, 6 to 12 months and the guidance of the timelines are really fuzzy here because it's entirely out of our control. We do know, or we've been led to believe, that the court would like to have a combined contested case process for all permits concurrently. That would shorten the timeline to conclusion. Once the court rules that we have valid permits, assuming they do so, then we will begin construction. Does that address it, Jake?

Yes, that was very helpful. That's all on my end. Thanks again, and congrats on a strong quarter.

Thanks, Jake. Good hearing from you.

Thanks, Jake.

There are no further questions at this time. I will turn the call to Mr. Allen Palmiere for closing remarks.

Well, that was short and sweet. I would suggest that our disclosure was so all-encompassing that there were no questions generated. Probably it's the economic times in which we live that are creating a lot of attention on other issues. That being said, I would very much like to thank everyone for joining us. I look forward to speaking to you all in Q3. Have a very good afternoon. Thank you again.

This concludes today's conference call. You may now disconnect your lines.