Earnings Call Transcript - GORO Q2 2020

Operator, Operator

Good day, everyone, and welcome to the Gold Resource Corporation Second Quarter 2020 Earnings Call. At this time, I am pleased to hand it over to Mr. Jason Reid, CEO and President of Gold Resource. The floor is yours, sir.

Jason Reid, CEO

Thank you. Good morning, everyone, and thank you for joining Gold Resource Corporation's 2020 second quarter conference call. I expect my comments to run approximately 10 minutes, followed by a brief question-and-answer period. Joining me on the call today for the Q&A portion will be Mr. John Labate, our Chief Financial Officer. Let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K, the current quarterly report on 10-Q and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued yesterday, along with the comments on this call are made only as of today, August 5, 2020, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of our non-GAAP financial measures referred to in our remarks in our Form 10-K filed with the SEC for the year ended December 31, 2019, as well as this current quarterly report on 10-Q. During the second quarter, the global pandemic negatively impacted most businesses around the world to varying degrees. Our Nevada Mining Unit was less impacted, while our Oaxaca Mining Unit was shut down for 2 of the 3 months of the quarter from the Mexican government's mandatory closure decree in response to the COVID-19 pandemic. We lost April and May production and associated revenue of approximately $15 million in revenues compared to the prior year, while sustaining most of the normal operational costs of a mining unit like overhead and payroll. A mining operation does not return to full production immediately upon start-up under normal circumstances. So you can imagine, when we were allowed to restart operations under our new COVID protocols that slowed the restart even more. We are happy to have kept 100% of our team on the payroll during the shutdown and also provided financial support to the local communities in which we operate to help offset the impacts of the pandemic, including food banks and children's charities. Our overall production, cost of production and financials suffered due to the shutdown. We applied for and were given regulatory permission to restart our operations with a limited number of employees, while focusing on the health and safety of our team, contractors and communities in which we operate. By the end of June, we were able to increase our workforce to 100%. We continue to ramp up production and barring another unforeseen governmental shutdown, we expect Q3 to resemble a normal operating quarter. During the quarter, strong health-screening protocols were put in place in response to the pandemic at both our Oaxaca and Nevada Mining Units. We have encountered a few positive COVID cases between both mining units. Our screening protocols and procedures were able to identify the affected individuals early enough to isolate them and restrict the spread of the virus throughout our operations by also identifying and quarantining others who may have come in contact with them. The cases thus far seem to have originated from family or others outside the operational team or acquaintances of employees and not from our site. Since we anticipate the presence of COVID-19 periodically in both Nevada and Oaxaca for the foreseeable future, we remain vigilant with the goal of keeping everyone safe and healthy as the top priority. During the quarter, the company's Nevada Mining Unit continued with its Isabella Pearl mine ramp-up phase, which resulted in gold production increase of 41% over the first quarter of 2020. As previously stated, the ramp-up has required us to move a significant amount of overburden to access the high-grade Pearl zone, while we mine the Isabella zone of lower and varied gold grades. During the quarter, we reached the top of the Pearl zone and have been mining and processing significantly higher-grade gold. Approximately 80% of this deposit's gold is located in the Pearl zone. As mining continues, we expect our ramp-up to continue into the second half, targeting a bigger ramp-up focus during Q4. We've had some nice high-grade gold surprises to the upside in the initial Pearl benches. The model predicted about 1.5 grams gold per tonne, but the grade was closer to 2.5 grams. We have also seen some small areas of unexpected grades of over 7 grams gold. I am not mentioning this to increase shareholders' overall expectations of the project. As you know, exploration and delineation drilling allows for tonnes and grade estimation, while the ultimate sample is only known when mining the deposit. Some deposits disappoint when compared to the model. I think shareholders would appreciate knowing at this point that the Pearl zone of the Isabella Pearl deposit has exceeded our expectations at the top of the deposit. We see this reflected in the crusher head grades of Pearl zone ore when we often experience 2 to 4 grams gold on days when we crush the ore. While the available mineralized tonnes of this high-grade ore is still limited at these higher elevations, as we continue to mine deeper into lower Pearl benches in the future, we expect a continuation of not only high-grade but gold with greater available tonnages helping us execute on our targeted production ramp-up in the back half of the year. During the quarter, the company announced its acquisition of the Golden Mile property in Nevada. Golden Mile is not only located along the Walker Lane mineral belt but just off the road from our Isabella Pearl mine. We are very excited about this acquisition as it checks most of our required boxes as an acquisition target, including being located geographically within our mining unit, surface and near-surface high-grade gold, 100% ownership, large district size property, two known substantially drilled areas of mineralization completed by previous exploration companies, the potential to become an open pit heap leach operation and a reasonable 3% NSR. Initial bottle roll tests commissioned during the due diligence process indicate mineralization is amenable to cyanide leaching with over 81% recovery. Patented ground encompasses the larger of the two known mineralized zones providing for potential permitting efficiency on both exploration and future development optionality in that portion of the property. We remain committed to continuing to explore our exciting 10 kilometers of the Isabella Pearl trend and the numerous known exploration targets. We also are excited to commence the initial drill program in East Camp Douglas planned during the second half of 2020. The Golden Mile property is an advanced stage exploration property. With this acquisition, we are evaluating it to a resource confirmation and delineation stage. We are now targeting, subject to drill permit timing, the initiation of a Golden Mile drill campaign later this year as well. Our focus is to confirm, delineate, and expand on past exploration programs with the goal to define a maiden resource that ultimately warrants moving the project into the development stage. Our full team of exploration managers, resource estimators, operation managers, environmental and permitting managers, engineers, finance executive team recently held our first Golden Mile conference call meeting to lay out strategy, optionality, timelines and next steps to move the Golden Mile property forward on an expedited basis with the goal of making it our next mine. It's still early in the properties evolution. As we view it today, it has all the earmarks to become our next operating mine. And it is exciting to get the ball rolling to prove that to ourselves. We envision this project may have multiple open pits feeding ore to a strategically located heap leach and processing facility. At this point, we plan to only take gold to a carbon stage and then truck the carbon down the road to our Isabella Pearl's ADR plant to be converted into doré. This is targeted to keep project capital costs to a minimum, permit a processing facility to only a carbon stage, which could dramatically shorten the permitting process time, which is often held up by the additional time trying to permit the ADR hot side and leverage our existing Isabella Pearl plant's ADR for operational longevity. Following up on last quarter's conference call regarding the depressed zinc market prices at that time, the high zinc treatment charge experienced thus far in 2020. Zinc prices as of this morning have rebounded by 32% since the lows in the second quarter. Initial reads on potential 2021 zinc treatment charges or charge terms are looking to be far more favorable in 2021 than in 2020. These are good signs, not to mention the dramatic rise in precious metals since the last conference call with gold hitting new record highs. I mentioned on the last call to help counter the high 2020 zinc treatment charges and depressed base metal prices at that time. The company had revisited its Oaxaca Mining Unit's mine plan to focus on areas with less zinc. With zinc rising to $1.08 this morning, and if it looks like it will stay anywhere around there, we will be taking another look at mining optionality to potentially bring more zinc into the fold. While the pandemic has created various challenges, we have met the challenges head-on and are well positioned to emerge from the pandemic fallout to capitalize on a world of wash in unsound and unprecedented currencies by producing real money and producing real long-term stores of value, gold and silver. And now with the prospect of doing so with this morning's new all-time record gold price high of $2,046 per ounce, add leverage to the excitement of being a gold miner. With that, I would like to thank everyone for their time today on this conference call. Let's move on to the question-and-answer portion of the call in an effort to efficiently address the Q&A portion without wasting anyone's time. Any antagonistic or distracting calls will be terminated, and I will simply move on to the next productive caller's questions. Operator, with that, if we do have any questions, let's open up the line.

Operator, Operator

Thank you. We'll go first to Heiko Ihle with H.C. Wainwright.

Heiko Ihle, Analyst

Can you hear me?

Jason Reid, CEO

We can.

Heiko Ihle, Analyst

Perfect, perfect. First question, I thought you did a really good job with Mexico given the suspension, so well done on that. Thinking out loud about Golden Mile, I mean, clearly, the whole thing was quite a bargain, especially since one generally hears right now that prices for early-stage assets have just gone through the roof. But you frankly seem to have a knack for getting things done. And just thinking ahead a little bit, I mean, would you consider continuing to acquire more assets if you get the right price in the right locations?

Jason Reid, CEO

Absolutely, it's all about timing in my view. Some properties are more appealing at certain times than others, but the property must meet all our criteria. The Golden Mile represents an amazing opportunity. Our reasonable NSR helps us secure these properties that larger companies may overlook. For example, we acquired East Camp Douglas because we offered an NSR, which I learned was crucial since we were up against two major gold mining companies for that property. The key difference was our status as a junior company offering an NSR while they did not. The sellers, who believe in their properties, prefer to be part of an operation moving forward, and the NSR facilitates that. The situation with Golden Mile is similar. It has over 200 drill holes, and for context, Isabella Pearl also had over 200 drill holes when we first evaluated it, and we know how successful that turned out. We are confident there is a resource at Golden Mile. We don't want to depend on a third party, so we need to confirm and begin delineating and expanding the resource, establishing a maiden resource. Once we achieve that, we can move forward. This will be our next project. There is a lot of potential with patented ground, and our substantial land position stretches from Golden Mile to our Mina Gold property. This could allow for at least three open pits across these locations, with a strategically placed processing facility, enabling us to transport carbon down the road to our ADR plant. Everything aligns perfectly. Now, it's just about proving this to ourselves and our shareholders. I believe this project is set to be the next exciting venture for us.

Heiko Ihle, Analyst

Fair enough. Sound completely different. I mean, I'm just trying to weigh off two contrasting things. On one hand side, I heard you talk about expenses, precautionary COVID measures, specialized training, social distancing, governmental guidelines, all that stuff. And earlier on this call, you also mentioned this is going to continue for the foreseeable future. In contrast, can you provide a little bit of color on the expected impact on the second half? This is just a quote from your release, you think precious metal production and cash costs are expected to improve in the second half. How much of an impact really is from there? Is it fair to say the actual financial impact from COVID in the second half is going to be small given the higher grade ore from Pearl?

Jason Reid, CEO

Thank you for your questions. To address the first one about the impact of our precautionary measures, I believe we've taken all possible steps to manage the situation effectively. We've been able to identify COVID cases early and isolate them, preventing further spread within our operations, which has been very positive. Moving forward, I think the significant impact is largely behind us since we have our precautionary measures in place. As long as we maintain a safe environment without reaching a critical mass that requires shutdowns, whether voluntary or mandated, we should be okay. However, it's important to remember that the threat is still present everywhere, so we need to keep our protocols at a high level. Initially, when we resumed operations in Mexico, we couldn't bring everyone back at once, and that slowed our restart process. We had to manage resources differently, which took some time, but I'm confident that challenge is now behind us, provided we continue to keep COVID off our site. What was the second question?

Heiko Ihle, Analyst

Just pointing out that you're discussing lower costs, so the impact can't be significant on an absolute level, correct?

Jason Reid, CEO

Right. The overall situation is challenging. Who wants to be shut down for two months? That definitely has an impact. However, as long as we don't face another shutdown, we will be able to move forward effectively. It's difficult to assess our financials coming from Mexico as an indicator of future performance. When operating an underground mine, costs are managed by increasing throughput, so shutdowns disrupt that process. And when operations resume, not having the entire team ready affects productivity. Still, we have largely recovered from this setback. I anticipate Q3 will be a typical operating quarter, provided we can keep COVID off our site. Therefore, I don't think it makes sense to focus on this quarter's numbers, as this is an unusual situation. We'll proceed into the third quarter, and if we maintain a safe environment, we should be in good shape.

Heiko Ihle, Analyst

I think you guys are doing a great job, just keep doing what you're doing. And thank you very much for taking my questions.

Jason Reid, CEO

Good to talk to you, Heiko. Have a good day. Thank you, be safe.

Operator, Operator

And we'll take our next question from John Bower with Ascent Wealth Advisors.

Jason Reid, CEO

Good morning, John.

Unidentified Analyst, Analyst

Good morning. Thank you. First, I want to say, I think it's very commendable that you maintained your staff and continued paying them and supporting the workforce and your communities that you're involved in. And also I want to say that you covered a lot of the questions in general that I had. How you're handling the outbreak and evaluating the areas that you're working in and trying to mitigate and evaluate the folks ahead of time so that you're not bringing it into your operations. One of my questions was going to be about the outbreak within your operating areas, and I think you covered that very well.

Jason Reid, CEO

I can provide some additional details. We haven't had many cases. There were a few people in Mexico and one in Nevada. In Nevada, it involved a relative or family member who entered a house with COVID and then came to work. Our screening process detected it quickly. Since it was a night shift situation, exposure was minimal. Those who were exposed and worked near him were quarantined and tested. They are not allowed to return until they have had a couple of negative tests. This does have a slight impact in Nevada since people have to be pulled out during quarantine. My focus is to keep the situation from becoming a material issue for us. This is not only our challenge; many mining companies are facing widespread cases. Our priority is to ensure that doesn’t happen here. In Mexico, there were some individuals from a truckers' union with small trucks who tested positive, but again, the exposure did not come from the site. We are taking extra precautions. If someone doesn’t have a compelling reason to be on site, they can’t enter. If they can work from home, they should do so. We are putting in every effort to manage this situation, and while it’s not easy, it will not stop us. Overall, as long as we keep the virus off our sites, we can keep operating.

Unidentified Analyst, Analyst

Right. That's good because I'm well aware of situations within the hospital setting because of family members. And very often have heard that health care workers that have been affected have not picked it up from being in units, treating patients. It's come from outside, which is very much in line with what you have expressed here. But nonetheless, the real question that I wanted to have put out here is with the Golden Mile acquisition you got, obviously, commodity prices going in the direction. And now it is about Pearl with increased production and higher grades. What are your plans as far as accelerating perhaps your exploration activity? I mean you did address that in your comments. So that's great. Do you think that accelerates the potential for bringing that property online further than what maybe you originally thought?

Jason Reid, CEO

Yes. On exploration, our focus in Mexico has shifted primarily to maintaining a COVID-free operation instead of active exploration. We are still conducting some underground exploration, but that's not currently the main emphasis in Mexico. In Nevada, we are drilling along the trend where Isabella Pearl is located and have secured 10 kilometers of this trend. There are four old historic open pit heap leaches along this trend, with Isabella Pearl being the next target. I believe we will discover more deposits, as there is a clear mineralized trend. This remains a priority, and we are actively exploring it. We are particularly excited about drilling at East Camp, which has significant potential with a large lithocap and high-grade mineralization. It has the potential to be as impactful as the Arista project in the Nevada Mining Unit. This area will require substantial time and resources for exploration, but we are starting this year. The acquisition of Golden Mile enhances our position with a delineation drilling program involving 200 holes, representing advanced stage exploration. With gold prices at $2,040, we can increase our exploration budget. Additionally, with zinc prices at $1.08, we expect a boost of $15 million to our bottom line in Mexico based on previous pricing. This increase comes alongside potential gains in gold and silver. If metal prices remain strong, we anticipate great success in Mexico and are positioning Nevada to also perform strongly. So yes, this will certainly help. Any other questions, John?

Unidentified Analyst, Analyst

Well, I do, but I'll do them off-line.

Jason Reid, CEO

So yes, please call Greg. We're almost out of time. We're going to take one more call, please.

Unidentified Analyst, Analyst

Yeah, I'll get up. Thank you very much and good luck.

Jason Reid, CEO

Thank you, John.

Operator, Operator

We'll take our next question from Chen Lin with Lin Asset Management.

Chen Lin, Analyst

Hi Jason.

Jason Reid, CEO

Good morning, Chen.

Chen Lin, Analyst

Great job on navigating this challenging quarter. I have a few questions regarding the Golden Mile, but most have already been addressed. Could you provide an update for this quarter? I understand it's been tough. Are you comfortable with the balance sheet, particularly on the ATM side? How much have you raised, if anything? Also, do you feel confident about the incoming revenue with the Mexican operations restarting? I assume this will generate more cash for your balance sheet for the remainder of the year.

Jason Reid, CEO

Yes. As I mentioned in the last call, we raised $10 million as soon as we recognized that the COVID pandemic was approaching. That was a wise decision, as it provided us with some financial cushion. While we've temporarily lost some revenue, our long-term production has not been affected. We're pleased we made that move, and it contributes to our financial stability. If we need to use that cushion and then replenish the $10 million we raised, that's great; we have it available. Looking ahead, we should manage well even with previous metal prices. With the new metal prices, the potential is significant, and we've seen rapid fluctuations recently, like gold increasing by $40 in just 24 hours. There will likely be some healthy pullbacks in metal prices. However, as they continue to reach higher highs and higher lows, we should be alright. That said, we must remain cautious because the future is unpredictable. I've stressed the importance of keeping COVID off our site. We do not want to face the situation other miners have experienced, where operations are shut down, either by choice or government mandate. We certainly want to avoid a repeat of the difficulties we faced last quarter when we had to shut down for two months. Our primary focus is on maintaining operations, and as long as we do that, we’ll be fine, and any increases in metal prices will be an added benefit.

Chen Lin, Analyst

Thank you. Yes, that's mostly correct. Regarding the $10 million you mentioned, we fully understand the shareholder aspect of the $10 million ATM you previously executed, and that should be sufficient. We don't anticipate needing any more and are instead looking to increase cash on the balance sheet moving forward. Is that the message?

Jason Reid, CEO

That's the goal. That is the goal. Yes, that is the goal.

Chen Lin, Analyst

Okay, great. Good job in this very difficult environment...

Jason Reid, CEO

I appreciate your comments, Chen. I truly sympathize with some of my mining industry colleagues whose operations have been overwhelmed. My heart goes out to them. It has indeed been tough, but there are those who have faced greater challenges, and we must remain focused. I'm confident that we will come out of this and take advantage of the upcoming bull market that's clearly underway. We previously experienced a successful seven-year bull market, followed by a seven-year bear market, and it appears we are now back in a bullish phase. Let's hope for another seven-year bull market, and we are well-positioned to benefit from it. If you have any questions, please contact Greg Patterson, and he will ensure you receive answers. We need to conclude today's call now. Thank you very much, and we look forward to updating you next quarter. Stay safe, everyone. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.