Gold Resource Corp Q3 FY2022 Earnings Call

Good morning, and welcome to the Gold Resource Corporation Third Quarter 2022 Financial and Operating Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s presentation, there will be a question-and-answer session open to financial analysts only. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference call is being recorded today November 1, 2022, at 10:00 a.m. Eastern Time. I will now turn the conference over to Kim Perry, Gold Resource Corporation, Chief Financial Officer. Ms. Perry, you may proceed.

Thank you, Sergio, and good morning to everyone. On behalf of the Gold Resource team, I would like to welcome you to our conference call covering our Q3 2022 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 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 our webcast, you can download a PDF of the conference 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 on our Form 10-Q, have been filed with the SEC on EDGAR and are also available on our website at www.goldresourcecorp.com. Please note that all amounts mentioned in this call are in U.S. dollars unless otherwise stated. I will now turn the call over to Allen.

Thank you, Kim. Good morning, everyone. I'd like to thank everyone for taking the time to join us on this call. Implementing safety programs has been our top priority in 2021 and 2022. During the third quarter, we took additional measures at DDGM to address ground support and ventilation issues. This disciplined approach had a temporary impact on production volumes, mine development, and exploration. With that said, we are still on track to meet 2022 production and cost guidance. We will always put our people and safety first at the temporary cost of production. I'd like to point out a few achievements related to the Back Forty Project 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 Q3 financial results. Lastly, we'll provide a few closing remarks and then we will take questions from participants. In Michigan, we continue to progress the Back Forty feasibility study. We had a couple of opportunities to engage with local community leaders, including tribal leaders, to provide initial site layout and improvements made to the project. Work on metallurgy and the economic model will continue into 2023. Permit applications will follow after releasing the final feasibility study. I'll now pass the presentation over to Alberto to discuss Don David Gold operational results.

Thank you, Allen, and also good morning to all. Turning to the results of operations, I'm pleased to report that we processed nearly 111,000 tonnes of ore and sold approximately 5,000 ounces of gold and 260,000 ounces of silver, equating to a combined 8,000 gold equivalent ounces. We further sold over 282 tonnes of copper, 1,000 tonnes of lead, and approximately 2.9 thousand tonnes of zinc. As for an update on operations, as Allen mentioned earlier, we are on track to meet guidance for the year. However, we must mention some of the headwinds we faced this quarter that impacted our production. Our Mexican operation experienced lower throughput compared to the two previous quarters. As the hurricane season moved in, Oaxaca received an unusual share of rain slightly impacting crushing activities. Furthermore, the processing plant needed to implement changes to the regrind circuit, causing gold and copper recoveries to decline. Those changes have been adjusted, and recoveries are back to normal. On the mining front, Phase 1 of the ventilation system was completed, but Phase II, the vent shaft connecting Level 22 to Level 27, experienced adverse ground conditions delaying its completion until Q4. As for the health and safety approach mentioned earlier by Allen, we initiated the rollout of an internal health and safety program focused on improving safety standards, review and certifications, and strong leadership in the field. Some of the work required the teams to slow down operations underground to rehabilitate some working areas. This process reduced mining rates for a week in September. Production rates picked up immediately after that, and the workforce seems invigorated with the results. With all the work in Q3, we are confident we can achieve guidance for the year. I'll now pass over the presentation to Kim to discuss Q3 financial results.

Thank you, Alberto. We closed the quarter with a strong balance sheet, consisting of just over $22 million in cash and working capital of $28.9 million at September 30, 2022. Cash in 2022 has declined due to $16 million in tax payments made for both 2021 and 2022, a $14 million investment in capital projects, and nearly $7 million investment in the Back Forty project, a $1.7 million investment in Maritime Resource Corporation, and nearly $3 million distributed in dividends. For the third quarter, we reported net losses of $9.7 million. These losses are primarily driven by a decline in commodity prices, an increase in depreciation expense, and the Back Forty project costs being reflected as an expense on the P&L. The increase in depreciation expense reflects the addition of the filtration plant and dry stack facilities, the addition of the Gold regrind circuit, and a lower mineral reserve depreciation base. Net sales at DDGM of nearly $24 million were 18% lower than the same period in 2021 due to lower sales volumes as a result of lower grades, as well as lower realized metal prices. Total production costs of $19.4 million for the quarter are 13% higher than the production cost for the same period in 2021. This increase is primarily related to the 13% increase in ore tonnes processed over the same period. Don David Gold Mines' total cash cost after co-product credits was $1,103 per gold equivalent ounce sold, and total all-in sustaining cost for gold equivalent ounce sold were $1,831 per ounce. These costs are significantly higher than the 2021 costs and directly related to the lower base metal credits and lower base metal prices realized, as well as lower equivalent production during the quarter. Even with a higher cash cost per ounce realized in Q3, I would like to reiterate the full year cost guidance of $425 to $475 per ounce for total cash costs, and $1,250 to $1,350 for consolidated all-in sustaining costs. Allen, back to you.

Thank you, Kim. As we're all aware, the economic climate continues to present challenges with commodity prices and cost pressures. While we are comfortable with our 2022 guidance, it is making cost and capital projections for the Back Forty project challenging. In an inflationary environment with declining commodity prices and escalating capital costs, we're having to work very hard at optimizing the Back Forty. As you've heard me say before, we remain focused on creating value through disciplined growth and appropriate capital allocation. And as I noted in my opening comments, we have made tremendous strides to demonstrate our commitment to advance 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. With that, I'll turn the call over to the operator for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Heiko Ihle from H.C. Wainwright. Please go ahead.

Hey. Thank you all for taking my question. I appreciate it.

Good morning, Heiko.

Good morning. You all know that I'm not a big fan of cutting expenses just because the market is a bit bearish. And it seems like you've done quite a wonderful job at maintaining at least some exploration at Back Forty; you spent $6.9 million at the site this year. Your full year projection is $9 million to $9.5 million. I mean, that implies flat spending in Q4. But let's look a little bit longer term. I mean, how much of that spending at site relates to permitting, basic expenditures that you can cut down, and how much of that at the site is, for lack of a better word, discretionary spending, how much of that are you forced to spend? And I think this question is especially pertinent since you expect, and I quote, “work related to metallurgy and the economic model to continue.” Maybe just some ideas for 2023, please?

Heiko, it's not coming as any surprise to you, but there are substantial cost pressures. We are looking at refining our met testing to attempt to increase recovery, in particular for zinc, but also for gold at the Back Forty. We feel it's potentially significant enough to justify continuing to work on it before we release the feasibility. In terms of costs on a go-forward basis, our estimates for direct permitting-related expenditures next year are directionally about $2.5 million, $2 million to $2.5 million. Then there are costs of maintaining the property, security, etc., some G&A, insurance, and the like. We're looking directionally at probably $4 million to $4.5 million for next year at the Back Forty. If we're delayed on achieving appropriate results in the financial model and metallurgy, some of that will be deferred until the following year. So it's not a big burn, and it's significantly lower than this year.

Got it. And like I said, I'm in favor of, if not for lack of a better word, giving up on the site. So I'm appreciative that you're continuing to try. And then one other thing, there was a sentence in the release I'm trying to get some clarification on. During the third quarter of 2022, production, mine development, and exploration were deliberately and temporarily slow to improve safety specific to ground support and ventilation. Obviously, when people read ground support, they get a bit scared, and I know we're a day late for Halloween. So can you just sort of expand on what that really means and the impact, not only financially, but on your mining methods, detours, ore recoveries, that kind of stuff as well, please?

I'm happy to provide that information. First, I want to emphasize that our current safety performance is significantly better than the average in the mining industry in Mexico. However, our goal is to achieve safety standards that are comparable to those found anywhere in North America. From our perspective, we still have some progress to make. Since we are recognized as a safe mine in Mexico, there is a mindset within the team that since we are already doing better than others, there may not be a need to continue improving. To address this, we took decisive action. We evaluated work areas that fell short of our standards and temporarily shut them down until they met our requirements. This process lasted about two to three weeks. While this did result in a decrease in production, it reinforced to the workforce that we prioritize safety over production. In some regions, safety may take a back seat to production, but we refuse to compromise in that area. I have never experienced a fatality in any mine I've managed, and I want to maintain that record while making this mine a model of safety. The decisions we made were driven by this goal. We concentrated on ground support and ventilation, as these areas have an immediate impact on safety. We conducted an internal audit where we reviewed 900 individual items, focusing on safety practices that could pose significant risks if not properly managed. This is why we highlighted those two areas in our press release. The production impact was a few thousand tonnes, which didn’t affect recovery but did influence the volume extracted from the mine. We did this intentionally, discussing how we could encourage the workforce to enhance safety practices, and I am pleased with the results. We have expanded our senior safety team and now have personnel underground for every shift, with the authority to shut down work areas if they are not compliant. Interestingly, we no longer need to enforce that as they are performing very well.

I would assume everybody can shut down a workplace, if they deem it necessary, right?

Everybody from a helper right on up to the mine manager; everybody has the authority to shut down the workplace. We had told them that in the past, but they didn't realize that until we started shutting down workplaces. Now they've embraced it, and the culture is changing. Is it a quick fix? No, it's not, Heiko. It's going to take a long time. But at least, we seem to see a trend whereby they recognize that we are absolutely serious about safety as a priority. Did that really address your question?

That went above and beyond; we'll take a call here. Thank you very much. I'll get back in queue.

Okay. You're very welcome, Heiko. Thank you.

Take care.

Okay.

Thank you. There are no further questions at this time. You may proceed.

Thank you, operator. I would like to thank everyone for participating this morning. Financially, as you're aware, it wasn't an overly robust quarter. In part, it's driven by generally accepted accounting principles which preclude us from capitalizing expenditures on the Back Forty until such time as we complete the feasibility study and move it forward to construction. I personally believe that those should be capitalized, but unfortunately, they were not. The lower volume of mines and the yet-to-be-replaced depleting resources resulted in, in my mind, abnormally high depreciation expense, which further contributed to the loss. I would like to point out that notwithstanding the fact that we did experience a loss, we still were able to maintain all of our expenditures, our exploration in Mexico, our development in Mexico, the work on the Back Forty. In fact, we made a small investment in a company called Maritime Resources to get a toehold in the company should it turn into a very attractive opportunity. I would like to thank everyone for joining us this morning, and I look forward to speaking to you, if not before, certainly when we announce our year-end results. Thank you.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.