Gold Resource Corp Q4 FY2023 Earnings Call

Good morning, and welcome to the Gold Resource Corporation Fourth Quarter 2023 Financial and Operating Results Conference Call. At this time, all participants are in listen-only mode. Following management's presentation, there will be a question-and-answer session. I would like to remind everyone that this conference call is being recorded today, March 14, 2024, at 10:00 a.m. Eastern Time. I will now turn the conference over to Chet Holyoak, Gold Resource Corporation Chief Financial Officer. Mr. Holyoak, you may proceed.

Thank you, Joelle, and good morning to everyone. On behalf of the Gold Resource team, I would like to welcome you to our conference call covering our fourth quarter 2023 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. All financial measures are unaudited. Audited financial statements will be presented in our 2023 Form 10-K, which will be filed at a future date no later than April 1, 2024, once our external audit firm, BDO USA, LLP, completes their audit procedures. Please note, all amounts referenced during this presentation are in U.S. dollars unless otherwise stated. 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 that was issued following the close of the market has been filed with the SEC on EDGAR and is available on our website at www.goldresourcecorp.com. I will now turn the call over to Allen.

Thank you, Chet, and good morning, everyone. I'd like to thank you for joining our Q4 conference call. I'd like to address a few points first, and then Alberto will address operations, followed by Chet with the financial results. Following their remarks, I will then make a few closing comments, and we will take questions. The fourth quarter was another challenging one for us. As previously guided, mine sequencing resulted in lower ore grades. While this was always in the plan for the latter part of the year, the unexpected strengthening of the peso and the lower than forecast price of zinc adversely affected our byproduct revenues. While commodity prices and foreign exchange rates are beyond our control, we are very focused on those factors that we can control, including costs and productivity. During 2023, we performed an assessment of our workforce in Mexico that ultimately resulted in a reduction of approximately 10%, and we will continue to evaluate for further reductions. Additionally, we renegotiated certain supply and service contracts that resulted in cost reductions. We obtained certain practices underground to reduce mining costs, reduce dilution, and increase productivity. Concerning our processing plant, we are doing test work to attempt to improve recovery while maintaining concentrate quality. Cash continues to be tight and remains our primary focus. We published a preliminary economic analysis for the Back Forty Project last year, which demonstrated the robust nature of the project and confirmed our assumptions when we first acquired it. The project carries some life of mine NPV at a 6% discount rate of approximately $215 million with an initial capital requirement of $325 million. This study demonstrated the economic viability of the Back Forty Project. Now please turn to Slide 4, and I'll provide a brief update on our Q4 exploration results. Our exploration program continues to produce good results, which will result in higher-grade material in our reserves and resources and will increase the mine life. In the past 1.5 years, we have discovered areas of mineralization known as Three Sisters, Gloria, Marena and a continuation of Splay 31, which had been previously identified, all of which contain high-grade intercepts and will be part of the future of Don David. As you know, exploration has been the major use of cash over the past two plus years, but the results are more than sufficient to justify the expense and point to the need and desirability of additional drilling in the future. I will now turn the call over to Alberto for an update on the operations.

Thank you, Allen, and good morning to everyone. I'm excited to discuss our recent accomplishments, which reflect our strong dedication to fostering a mature health and safety culture. We are pleased to report that our leading indicators continue to exceed expectations, demonstrating the exceptional commitment and participation from our leadership team. I am happy to share that our combined efforts have led to our lowest Lost Time Injury Frequency Rate yet, with a rate of 0.2, exceeding our annual target of 0.25. This achievement highlights our relentless pursuit of safety excellence and the significant impact of our team's hard work and collaboration. Challenges persisted in the fourth quarter due to inflationary pressures, fluctuating exchange rates, and changes in operational procedures, presenting ongoing hurdles. Nevertheless, our proactive cost-saving initiatives played a crucial role in sustaining our operational success. Despite these difficulties, we strengthened our resilience to manage inflation and exchange rate fluctuations more successfully this time. With the support of our communities and suppliers, we successfully negotiated further cost-saving measures, helping to ease financial strain and position us for greater stability amid economic uncertainties. Production in Q4 reached 111,000 tonnes, which is lower than in Q3. Although the mine produced 118,000 tonnes, the processing plant underwent significant changes in how we manage water for processing. As of December, the Tailings Storage Facility has been prepared for reclamation and is no longer a large water storage reservoir where reagents can quickly dilute. Consequently, optimizing the various flotation circuits was temporarily disrupted, necessitating a lower throughput to maintain consistency. Processing operated at an average of 1,380 tonnes per day, and our targets for 2024 have been revised to reflect these changes. I am pleased to report that we processed nearly 111,000 tonnes of ore, sold about 3,760 ounces of gold, and 259,000 ounces of silver, totaling over 6,770 equivalent ounces. Furthermore, we sold 327 tonnes of copper, around 820 tonnes of lead, and more than 2,180 tonnes of zinc. Year-to-date through December 31, we processed nearly 460,000 tonnes of ore, sold approximately 18,500 ounces of gold and over 1 million ounces of silver, equating to over 31,000 gold equivalent ounces. We also sold over 1,230 tonnes of copper, roughly 4,500 tonnes of lead, and close to 11,000 tonnes of zinc. Regarding DDGM's capital costs, we faced significant challenges in 2023, including maintaining cash flow while expanding development to target higher NSR stopes beyond 2023. This adjustment was reiterated several times to ensure optimal returns on our investments. The total underground development for the quarter was around $850,000 and $5.8 million for the year. The total sustaining capital expenditure amounted to $1.6 million for the quarter and about $11 million for the full year. Encouraging near-mine exploration results also impacted our capital growth spending. The team quickly pivoted and prioritized models to reflect new results and the necessary indicators for 2024, aligning exploration and development efforts with the right targets. Despite these modifications, Q4's total capital and exploration investment totaled $2.2 million, and the overall total for the year was $17.2 million, which is within our guidance range of $15 million to $18 million. In closing my operational update, I want to recognize the resilience and determination of our team as we reflect on the challenges encountered in Q4 2023. Despite these obstacles, we stood firm and emerged stronger, showcasing our ability to adapt and thrive in the face of adversity. As we look forward to 2024 and beyond, we have carefully considered the challenges ahead in our strategic planning. We are confident that the measures we have implemented and the lessons learned will set us up for success in the upcoming years. I will now turn the presentation over to Chet for a discussion on the financial results.

Thank you, Alberto. Turning to Slide 7. During the fourth quarter, we realized a small decrease in our cash balance, and we ended the quarter with $6.3 million. The decline in cash is primarily due to increased cash costs at DDGM, which we will discuss in just a moment and to our exploration program, as was mentioned earlier by Allen. Cash used in operating activities was $5.2 million for the year and includes over $4.5 million spent on exploration in Mexico and over $1.5 million spent in Michigan related to the Back Forty studies. For the fourth quarter 2023, we reported net losses of $3.1 million or $0.03 per share. And for the full year, we reported net losses of $16 million or $0.18 per share. For the quarter, net sales of $21 million were 35% lower than the same period in 2022, due mainly to lower volumes of all metals sold. Year-to-date net sales of $97.7 million were 30% lower than the same period in 2022, also due to lower volumes of all metals sold and significantly lower zinc prices. The lower zinc prices are also impacting cash cost per ounce, which we will discuss on the next page. While production costs for the quarter and year of approximately $17 million and $76 million respectively, are slightly lower than the prior year, the significantly lower tonnes processed along with gold equivalent ounces sold resulted in an unfavorable impact on unit costs, such as cost per tonne processed and cost per gold equivalent ounce sold. We will discuss this in a bit more on the next page. Depreciation for the period is largely in line with the depreciation for the same period in 2022. Finally, mining gross profit is lower in 2023, primarily due to the lower sales, not being proportionally offset by lower production costs. Turning to Slide 8. We will discuss cash costs for the quarter and year. For the quarter, Don David Gold Mine's total cash cost after co-product credit was $1,397 per gold equivalent ounce, and total all-in sustaining cost per gold equivalent ounce sold was $1,664 per ounce. For the year, Don David Gold Mine's total cash cost after co-product credits was $1,250 per gold equivalent ounce sold and total all-in sustaining cost per gold equivalent ounces sold was $1,630 an ounce. There are five key drivers related to the increase in cash cost per gold equivalent ounce sold: the first reduction in gold equivalent ounces sold; second, a reduction in co-product credits; third, the strengthening of the Mexican peso; fourth, treatment charges; and fifth, other production cost increases such as power and transportation. The gold equivalent ounces are lower due to the lower-grade ore and lower recoveries realized both during the quarter and year-to-date. The lower co-product credits were the result of lower copper, lead, and zinc tonnes being sold as compared to the respective 2022 periods and the significantly lower realized metal price of zinc during the year. The Mexican peso has strengthened against the U.S. dollar in 2023. With approximately 60% of our production and capital costs originating in the peso, this has resulted in a larger-than-planned unfavorable impact on our costs. While the above-mentioned drivers have resulted in a negative impact, we have made positive strides in managing the costs that we can control, resulting in a decrease in total cash cost after co-product credits and total all-in sustaining cost per gold equivalent ounce sold from quarter three to quarter four. While the drivers above also resulted in the company missing guidance on several key performance measures, we were able to stay within or exceed guidance on other measures such as safety, production, mine development, and exploration. Allen, back to you.

Thank you, Chet. Our share price, along with most of our peer group, continues to languish. A producing mine in Mexico and a project having a $200 million NPV in Michigan are trading at prices that do not reflect the underlying value. We are not getting any recognition for the intrinsic value of our assets, relatively strong balance sheet, and excellent technical and operating teams. The current environment has and will persist for an indeterminate period of time, and as previously announced, the Board of Directors and management engaged the services of Cormark Securities Inc. as a financial adviser to explore and evaluate strategic alternatives to unlock value for our shareholders. There is no certainty around the outcome, but we are confident that the process is necessary to ensure that we are acting in the best interest of all stakeholders. 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 with H.C. Wainwright. Please go ahead.

Hello, there. Thanks for taking the questions. Sorry if there is some background noise on the road, as you can probably hear. During the year, your exploration program actually went quite well. Looking ahead a little bit, I mean, you focused on Switchback, Arista, and the Three Sisters. Can you walk us through priorities by target for 2024 and maybe the same question across your asset base?

I'm happy to share, Heiko. I'm glad you could join the call while traveling. As you mentioned, our exploration program last year was very successful. We have started developing an area of mineralization known as Gloria and the Three Sisters. To provide some context, historically, we mined two separate vein swarms, Arista and Switchback, which are about 500 meters apart. The Gloria and Three Sisters mineralization is situated between the two, making it very close to existing infrastructure. Unfortunately, we couldn't include much of that material in our S-K 1300 filing that will come out in the next few weeks, with an update as of December 31, 2023. However, since the cutoff for that data, we have six additional months of drilling results that are guiding us to continue focusing on the Three Sisters and Gloria targets, trending to the northwest. We will be expanding our drill stations to extend the resource along strike. We continue to receive promising results in both Gloria and the Three Sisters, and importantly, the thicknesses are favorable for highly productive mining. Currently, these areas of mineralization are not included in the life of mine plan outlined in the S-K 1300 because we didn’t have enough information to include them as resources. However, I can confidently say that we will be mining in those zones within the next two years, regardless of what the current life of mine plan indicates. They are positioned relatively high and close to existing infrastructure, with good grades. As soon as we can gather enough data to support detailed mining plans, we aim to include those zones in a revised life of mine plan by the end of this year. This represents the future of Don David, and we are very optimistic that the drill results will continue to be promising, ensuring that Don David not only has an extended life but also higher grades moving forward. Does that answer your question, Heiko?

It does. And you actually went as far as to start hinting at my next question here. Building on that last question, speaking of exploration, your expectations right now are $2 million to $3.5 million at Don David, and an additional $700,000 to $900,000 in Michigan. I might sound like a bit of an in-house geologist right now, but I mean, assuming results continue to impress the way they have, is there room in the budget to raise those numbers a little bit?

We're constrained right now by available cash. Let me address it in a different way. In Mexico, we're not going to be doing any drilling. The budgeted numbers for Michigan really are property maintenance and a little bit of technical work. Every spare dollar we can devote to exploration in Mexico, we will. We are actually looking at potentially arranging a bit of a debt facility for a couple of reasons. One, we'd like to update our mining fleet. But two, we'd like to spend a little bit more money on exploration. And if we're successful in arranging that debt facility, a partial use of proceeds will be to increase our exploration budget, very much for the reasons that you just alluded to. It is the future of the mine.

Fair enough. Well, gold is at $21.60 right now. Hopefully, a couple of extra dollars can be found. And with that, I'll get back to you. Thank you very much.

Thanks, Heiko. I appreciate it. Gold at $21.60 is, by any measure, a wonderful price, and it's obviously going to help our cash flow above and beyond what we had budgeted. So if we get a corresponding break on the peso, we will be generating sufficient funds internally to expand that exploration program. Operator?

Your next question comes from Jake Sekelsky with Alliance Global Partners. Please go ahead.

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

Good morning, Jake. How are you doing?

Good. Thank you. So just starting with costs, I mean I think you just mentioned, obviously, the strength of the peso had an impact last year. And just looking at your cost guide for this year, can you remind us what FX rate are you assuming in that guide? And I guess how exposed are you to both further strength or even weakness in the peso going forward?

Chet, do you want to take this one?

Yeah. Currently, in the budget that we're using, we're using an exchange rate of 17.1. We are closely monitoring the movement in the peso. As I mentioned, we are 60% of our production capital costs in Mexico are in the Mexican peso. So there is quite a bit of exposure there.

Chet, what's the impact of a 100 basis point move in the peso on our cash flow?

I will get you that number in just one second.

I just want to elaborate a little bit, Jake. The peso right now is at about 16.8. As Chet indicated, we budgeted 17.1. The peso was being held up primarily by the carry trade. Prime rate in Mexico is north of 11%, the U.S. at 5%. Dollars flow to higher interest rate environments. There is an expectation in Mexico that the Central Bank will start easing the interest rate potentially as soon as this month. And the people who are far smarter than I am have led us to believe that once the Mexican Central Bank starts easing off on the interest rate, the carry trade will start to unwind and the peso will trend towards a more real value that's based on economic fundamentals as opposed to bank rates. The expectation is that it will be 18.5 to 19:1 by the end of the year.

And Allen, I can just add that if the peso were to go from our budget of 17.5 up to 18.5, it has about a $2 million impact.

So there's a high degree of sensitivity, Jake.

Okay. Yeah. That's helpful. That's helpful. And then just switching to exploration. Obviously, you announced some pretty strong results in December last year. It sounds like that drilling didn't make it into the updated resource. So I guess do you feel you need to bring Gloria and the Three Sisters into a particular resource category before bringing them into the mine plan going forward or do you think internally you can get to a level of comfort to start accessing that material over the next year or two as you mentioned?

I appreciate that question, Jake, because it highlights the difference between operational reality and the limitations of S-K 1300. We have already developed the Deswik stope optimizer and are working on mine plans for some of that material. As we continue drilling, we aim to incorporate some of it into the mine plan for 2025. However, we won't achieve that this year because we need more information. That said, I believe there's a strong possibility we will integrate some of that material into the 2025 mine plan and the overall life of mine plan.

Got it. Okay. Perfect. That’s all for me. Thanks again.

Thanks, Jake.

Your next question comes from Ron Gold with Heart of New York. Please go ahead.

Hi. How are you? I was just wondering, last time, you mentioned that you would not do a reverse split as we know it's a kiss of death on any stock. However, at the price of $0.38, how do you propose to get the extension in order to maintain being on the NYSE?

Well, we're on the NYSE American. And to date, we've had no communication from the exchange about a problem with our pricing. I will point out that we're up 25% in the last five days, and that is largely thanks to the gold price. And the other factor to keep in mind is we do have a strategic process underway. That process, while I don't want to prejudge the outcome, could involve a merger of some sort. It could involve an outright sale of the company. It could result in almost any type of business combination. And that in itself, we would hope would give a fair amount of support to our stock price and address the issue that you've raised, Ron. Currently, we don't have any plans, and we haven't had any correspondence with the exchange.

The exchange will not inform you until the year ends. I would anticipate that by next month, they will notify you of the delisting unless you manage to secure an extension. I'm uncertain about the process. How would you respond if you were unable to implement what you mentioned? Would you seek an extension or choose to let the stock delist in favor of a different strategy?

First alternative that's available to us would obviously be to obtain an extension.

Can you get an extension?

I can't answer that right now. I haven't specifically discussed that with legal counsel. I apologize, but I will try to find out and get back to you.

Great. Okay. What's the second?

I'm sorry.

You said that's the first. What's the second...

That's assuming we are not involved in a transaction and we don't have any other alternatives. So it's status quo and the exchange came to us and said they wanted to delist, we would look at an alternative trading platform, a different exchange.

Right. So you would not do a reverse split, which would destroy everything that you have. So you wouldn't even consider...

No. I am very uncomfortable, and I mentioned this earlier. I'm very uncomfortable with the reverse split because I've yet to see one that does anything other than destroy value.

Exactly. Okay. Thank you very much.

That would not be something I am speaking about without having Board approval, but I am quite confident the Board would agree with me that it's not a solution we would want to pursue.

Great. Okay. Wishing you good luck, hope things turn out the right way. Nice, talking to you.

Thank you. I appreciate it.

There are no further questions at this time. I will now turn the call over to Allen Palmiere. Please go ahead.

Thank you, operator, and thank you all for participating in our end of year and Q4 conference call. The world can change very quickly in the mining industry as evidenced by the fact that we are now seeing gold prices that are setting all-time highs. Our stock is beginning to respond to the higher price of gold. We do have the strategic initiative underway to identify a mechanism by which we can improve or increase shareholder value. We're very aware of the problem of a single mine asset. And in order to create value, we would like to see a merger or a transaction whereby there were two or three operating entities within the corporate umbrella. While that might not be the final stage, it would certainly get us well north of 100,000 ounces, and it would be a big step along the way to achieving the size necessary to enable us to start gaining some attention in the marketplace. Again, I thank you all for participating, and we will be talking relatively soon when we have our first quarter of 2024 conference call. Thank you very much, and back to you, operator.

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