Earnings Call Transcript - GORO Q3 2020

Operator, Operator

Good day, everyone, and welcome to the Gold Resource Corporation Third Quarter 2020 Earnings Call. As a reminder, this conference is being recorded.

Jason Reid, CEO

Thank you. Good morning, everyone, and thank you for joining Gold Resource Corporation's 2020 Third Quarter Conference Call. I expect my comments to run approximately 15 to 20 minutes, followed by a question-and-answer period. Joining me on the call today for the Q&A portion will be Ms. Kim Perry, our Chief Financial Officer. We welcomed Kim to the management team of Gold Resource Corporation. As you know, Kim transitioned from her Board seat with the company to join the management team, which I believe speaks volumes for the company and its future. 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 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, November 3, 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 and 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. We are very excited to embark on a new chapter of Gold Resource Corporation with our announcement to spin off our Nevada Mining Unit 100% to shareholders at a future date as Fortitude Gold Corporation. But before jumping into that exciting news, I will briefly summarize the third quarter results. With both mining units operating continuously during the third quarter, the company delivered strong quarterly earnings of $5 million or $0.07 per share, with positive cash flow from both Mexico and Nevada delivering positive earnings for the year. Strong gold and silver production in the third quarter totaled 12,575 ounces and 333,761 ounces, respectively, along with substantial base metals. Mexico production was up substantially coming off the prior quarter's mandatory 2-month shutdown with third quarter gold, silver, copper, lead and zinc production increases of 94%, 85%, 74%, 89% and 84% for each of those metals, respectively. We also recorded record gold production from the Nevada Mining Unit, totaling 7,847 ounces of gold, a gold production increase of 51% over the prior quarter as the Isabella Pearl mine continues to demonstrate a strong production ramp-up phase. The third quarter was the first full quarter that the company was able to regularly access a portion of the deposit's high-grade Pearl zone while also mining the deposit's lower-grade Isabella zone. The Pearl zone is estimated to contain 80% of the gold ounces at the Isabella Pearl deposit, with an estimated average gold grade of 4 grams per tonne. We remain on track for our targeted gold production ramp-up into the fourth quarter, positioning the mine for its 40,000 ounce gold production target in 2021. We continued strong health screening protocols for COVID-19 prevention and mitigation. Nevada identified one positive employee COVID case, while Mexico identified 29 positive employee cases. In addition to the 29 positive cases in Mexico, 138 additional employees were quarantined as potentially exposed or otherwise suspected cases, resulting in 1,201 lost workdays for those individuals. It is noteworthy that of the positive COVID tests, only one individual resulted in illness warranting hospitalization. Many of the positive cases reported asymptomatic as the individuals felt fine. While our Oaxaca operations were up and running the entire quarter, production was impacted as we managed through the COVID screening, testing and quarantine. Since we anticipate the presence of COVID-19 periodically in both Nevada and Oaxaca for the foreseeable future, we remain vigilant with our protocols, with safety and health as the top priority. Following up on the zinc market comments from the last call, continued indications of potential 2021 zinc treatment charge terms are looking to be far more favorable in 2021 compared to 2020. Zinc prices have also strengthened in the back half of 2020 as more world economies continue to open after the mandated shutdowns. These are good signs for 2021, not to mention the strong precious metal prices. With a strong Q3 behind us, we look to focus on both Q4 production and the upcoming spin-off transaction and creation of Fortitude Gold Corporation. We took the spin-off decision very seriously after over 1 year of due diligence and analysis. The impetus for the spin-off was driven by the Oaxaca Mining Unit. While the Mexico operations historically achieved both aggressive growth and aggressive dividends in the early years, it has grown into a large operation requiring a different approach. I will walk you through some of the specifics later. For the Oaxaca Mining Unit's long-term longevity, efficiency and profitability, we must focus primarily on growth going forward and less on dividends. This new focus in Mexico is irrespective of the spin-off. To be clear, the Oaxaca mine unit can and still plans to distribute dividends, but the primary focus for future cash flow allocation will be on putting more money into the ground, targeting aggressive growth. Focus includes increased exploration, mine development and continued operational efficiency programs, a few of which were previously mentioned in the spin-off press release. Over the years, we have done very well expanding the Arista Mine's Arista vein system and then discovering the Switchback vein system. We believe we can add to the known vein systems and also believe there are other vein systems yet to be discovered in the near vicinity. We are currently positioning our exploration programs to find them with dedicated exploration drifts from which to set up drill pads to explore numerous untested targets. Deploying more exploration capital should put us in a position of expediting mineral expansions and accelerating new discoveries. It is very exciting to think about what discovering another Arista or Switchback vein system and additional deposit discoveries on our other properties would do for Gold Resource Corporation's longevity, production and overall shareholder value. This transition of deploying more capital into the ground has slowly been building over several years and very recently reached the point where the Board made the correct decision to apply this new primary business strategy for the Oaxaca Mining Unit. In addition, the company will be evaluating mergers and acquisitions focused on advanced-stage or bolt-on regional acquisition opportunities. With this required modification at our Oaxaca Mining Unit, taking Mexico down the common business strategy of most all other mining companies, comes an incredible opportunity for our Nevada Mining Unit, an opportunity to continue the business strategy the company was originally built for, that of aggressive dividends. Spinning off the Nevada Mining unit into Fortitude Gold Corporation focused on growth and dividends accomplishes the continuation of the original dividend strategy but in a much more efficient and strategic company vehicle to distribute dividends. Many of our shareholders over the last decade have experienced substantial dividends and expect them in the future. We look to replicate GORO's success in its early years with market valuations based off yield due to substantial dividends. Assuming the trajectory of Fortitude Gold's production, with a 41% increase in gold production in Q2 and now a 51% production increase in Q3, we look toward to the potential to deploy future cash flows of Fortitude Gold towards exploration, organic growth and substantial dividends. Deploying these deliberate strategies will allow us to focus on our very large underexplored land position at our Oaxaca Mining Unit. We have a 55-kilometer or 30-mile mineralized trend with known mineralization at each end and along the trend. We have drilled less than 2% of our huge 560 square kilometer land position. It would be a competing interest to exploration to continue to try to pull substantial dividends out of Oaxaca. Dedicating more to exploration budgets will put the Oaxaca Mining Unit back in position for exciting and aggressive growth. Operationally, the Arista Mine started out small, lean and mean and could distribute substantial dividends, which it did. Over the last decade, it has grown into a larger mine with larger capital requirements. Early in the mine's evolution, capital projects, including a paste plant, weren't warranted. Additional tailings facilities weren't warranted, and a dry stack plant wasn't warranted. These large capital expenditures have taken place over the last few years, with the latter dry stack project still underway. As the mine continues to grow, so too will these projects and others like them in the future, not to mention additional expenditures on mine development infrastructure as the deposit grows. The Arista Mine is becoming a large mine and requires the mainstream mining industry approach toward capital allocation, which demands more capital put back into operations. Sure, a dividend still can be paid along the way, but in the future, most of the next $115 million that had been previously paid in dividends will now go back into operations for more efficient and aggressive growth. The Oaxaca Mining Unit demands it and will be much better off in the long run for it. To highlight the benefit of separating the mining units regarding aggressive dividends, consider the deployment of any dividend amount over a tighter capital structure of approximately 20 million shares versus that same dividend amount over GORO's 72 million shares outstanding. The market impact of a dividend with a tight capital structure is multiples of what could be achieved by deploying that same dividend amount over the larger capital structure. That's well over 3x the impact in this case. A substantial dividend per share is likely to attract, as it did in the early years of GORO, a pool of new investment capital much larger than the gold investment space. New investors chasing large dividends and yield often look to a substantial dividend as an interest rate and purchase stock based on that rate of return. Historic gold resource yields in the first 3 to 4 years of operations reached 2% and 3% rate, which was one of the primary drivers of Gold Resource going from $1 per share and reaching a high of $30 per share. Probably half of that valuation was based on substantial dividends. At that time, the market was rewarding the company with premium yield valuation metrics. Fortitude Gold will be in a strong position to deliver a targeted future dividend substantial enough to both reward current shareholders and attract new yield investors. This is a known path we have walked before with great success maximizing shareholder value. We are confident we can walk the same path again. What all of this highlights is the strategic nature of continuing to deliver to shareholders both an aggressive growth strategy and an aggressive dividend strategy by separating the mining units. There are, of course, other ancillary benefits, like isolating Nevada within one of the world's premier mining jurisdictions. The market regularly rewards companies as such with a market premium. Each unit can also be better evaluated and valued in the marketplace for what it produces. One is simply a gold play while the other is a polymetallic gold and silver play with substantial base metals of copper, lead and zinc. In addition, by separating the units, each unit is set free to be far more efficient and effective at each business strategy without juggling the competing interests and opposite demands of resources that detract from one another under the combined scenario. It is management's job to maximize long-term shareholder value. After the spin-off, shareholders who are content with both strategies continue to own them both. However, each strategy will be in a company vehicle far more suited to achieve their strategic business plan. Those shareholders that may want a strategy more than the other may now choose on their own accord which strategy they prefer. Spinning off Fortitude Gold out of Gold Resource positions us to maximize future shareholder value at both mining units and continue to deliver on both business strategies shareholders have experienced and continue to demand. We have had numerous shareholders express their excitement on the creation of Fortitude. This transaction underscores our commitment to shareholders to continue to deliver on both a growth and dividend story rather than to walk away from one or the other strategy. We believe unleashing Gold Resources' Oaxaca Mining Unit at this stage in its evolution to achieve its full growth potential is in the best interest of our Mexico operations long term, which is ultimately in the best interest of all shareholders. At the same time, creating Fortitude Gold Oaxaca's separate but well-known path that previously demonstrated maximizing shareholder value is in the best interest of shareholders and in the Nevada Mining Unit. I believe this is the best of both worlds. History will be the judge, but I can't be more excited with each operation and its future prospects, and we'll continue to be a fervent supporter of both companies. It's been a challenging year for most everyone and most every company, Gold Resource included. As one supportive shareholder wrote me the other day, 'Between the unsettled zinc market and the mandatory mine closure due to COVID, both of which were out of your control, this management adjusted well to those challenges.' I appreciate those comments. So thank you. That's what we do. We solve challenges as evidenced by the solid third-quarter results. To conclude the third quarter review, we delivered strong production numbers, are positive on earnings, having bounced back from the previous quarter, achieved a record in Nevada with a 51% gold production increase, all while remaining vigilant mitigating the impacts of COVID-19. On a personal note, this is likely my last quarterly call as CEO of Gold Resource depending on the timing of obtaining an effective registration statement and the spin-off of Fortitude Gold. If it is the last time I speak as such, I humbly thank all those colleagues and shareholders who have given their support over the last 14 years, which helped enable the company's milestones like the likes of which few of the mining companies will ever achieve. Gold Resource will remain in solid hands with experienced and dedicated mining professionals poised to achieve additional industry milestones. And I look forward to speaking with you again as Fortitude Gold's CEO when it officially launches. After Fortitude Gold's registration statement is declared effective, please note we will go into a mandatory 40-day quiet period. Please don't read anything into that temporary silence. We have exciting things in store for both Gold Resource and Fortitude Gold. 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. But before opening up the live Q&A lines, I want to reiterate and address the most frequently asked questions on the spin-off. The most frequently asked questions include, how long has the company been considering the transaction? I want to reiterate that the company has been evaluating the concept of a potential spin-off for more than a year. Extensive due diligence and evaluation of the requirements and criteria for the spin-off were reviewed and satisfied over time. With the Nevada Mining Unit's gold production in ramp-up phase and final due diligence recently completed, the Board made the decision to move forward with the transaction. Another question we continually get is GORO's dividend. The most common misconception is that GORO is eliminating its dividend or some shareholders assume that GORO will not pay future dividends. The answer is that for the foreseeable future, GORO intends to continue to pay a dividend and will be in a position to do so. Another one is on the ownership of the assets. Shareholders continue to voice their concerns that they were somehow losing a portion of the Nevada Mine Unit in the transaction. This couldn't be further from the truth. The answer is that shareholders are not losing any part of the Nevada Mining Unit in the transaction. At the time of the distribution of shares, 100% of the Nevada Mining Unit will go to shareholders. Shareholders will own the exact same assets post spin-off as they own pre-spin-off. If you have 100 shares of GORO pre-spin-off, you will have 100 shares of GORO post-spin-off. In addition, new shares of Fortitude Gold will be issued to you at a specific ratio to be determined at the execution date. Another one is on the OTC listing, why not list on a major exchange? After spinning out the Nevada Mining Unit, it will become a junior gold producer with a yet-to-be-determined market cap and share price. Market cap and share price are two of the primary factors of exchange listing threshold, and we do not want to run the risk of being delisted if we do not hold these and other thresholds and requirements for a major exchange listing. Our goal is to start on the OTC, just like we did with GORO early on, and once we consistently demonstrate we can hold minimum exchange threshold requirements, consider up-listing to an exchange. It is far better to up-list to an exchange than to be forced to delist by trying to join an exchange before a company can continually meet the required exchange listing. Another question is why the sell-off, was it unexpected? In a spin-off where each company is going to take a different business strategy, we expect the share registry to change and we were advised as such. In addition, certain institutional shareholders cannot own OTC stock and may sell due to the internal requirements of their own self-imposed charters. Adding to this are the high-frequency traders pushing on the momentum. Some of the selling pressure could be shareholders that choose not to own OTC stock. While spinco will be a U.S. company planning to list in the OTC market, there is a reason why the majority of the Canadian junior mining industry lists on the OTC market. It is a good market for junior mining companies to start out on until they reach thresholds to up-list to a major exchange. We have had numerous shareholders call us with concerns that their broker won't take an OTC share only to find out later after they speak with their broker that they can and will, in fact, accept OTC shares. Why is the CEO leaving GORO? In order to satisfy certain requirements necessary to obtain tax-free treatment of the transaction, post-separation, there must be two independent companies, which generally require separate management, specifically the CEO and Board of Directors, with little overlap. In addition to the tax treatment issue, overlapping executives may also create independent issues for each company. For additional color on this, I lobbied to remain the CEO of both companies. My argument was that I'm the CEO of each mining unit now, why can't I be the CEO of each company post-spin just because they're in separate companies? It's clearly not that I can't handle the work. To which our SEC counsel advised that for a transaction to remain tax-free, it is imperative to demonstrate independence between the companies at the highest level, specifically CEO and Board Chairman. The IRS would likely view the same CEO and Chairman of the Board of each company as not being truly independent companies, and I don't disagree with that advice. This was not an easy revelation for me to digest. I've been with Gold Resource for almost 15 years, and I love this company. We were in deep due diligence and analysis of the spin-off, and we had already identified the strategic and positive reasons to consider moving forward with it, subject to checking additional due diligence questions. I put my ego aside and did the right thing for each mining unit and shareholders. This decision makes itself as to why I must move to the CEO of Fortitude. Me and Bill Conrad are the only remaining team members that were part of the GORO team that executed on outsized dividends and garnered yield valuations for GORO early on. We have walked that path. We know it. We believe we can do it again at Fortitude. On an emotional level, this is very difficult for me. But we are a public company; it's not about me. It's about management's primary task of maximizing shareholder value. We are currently evaluating very qualified candidates for the CEO role at GORO. Whomever the new CEO is, they will be walking into a great company poised for continued success. Another question is, is the company being sold? There is no plan to sell either company. One requirement for the tax-free nature of the spin-off is that management must attest the spin-off will not be sold for at least one year. Another question we get concerns possible increased G&A expenses. Each mining unit already has its own independent team for general management from the General Manager down, with no overlapping expenses. On the corporate side, there are about 10 total shared executives and managers that work on both mining units. Under the proposed annual management services agreement, this small management group will continue to work on both mining units post spin to the same extent as they were currently doing now. This will actually lower the cost for each mining unit, respectively, for this group of shared managers. As an example, let's take a Vice President in this group and look at what can transpire under the services agreement. The Vice President will allocate and record their time as they do now between Oaxaca and Nevada. For example, if Oaxaca is 70% of the Vice President's time and Nevada is 30%, Fortitude will pay Gold Resource for the 30% of the Vice President's time. This actually lowers Gold Resource's overhead on the VP by 30%. Fortitude Gold is paying the 30% as opposed to 100% for the same time and work that would have been completed under no spin-off. The VP is doing the same job at the same pay as before. But under the services agreement, the allocation of time results in less cost to each company and no duplication of cost for the VP position at Gold Resource. This is a win-win scenario. There are only two duplicative costs for management under the spin-off: the CEO position and one shared Board member. Gold Resource will hire a new CEO and add one Board member. Fortitude Gold will have its own CEO. Fortitude will only have two Board members to start with. One member is the CEO, which is a non-paid position for Board service; and one is independent. This will keep initial costs to a minimum at first. Fortitude will be looking to add additional Board members or members down the road at a later date. So duplicative costs are one CEO and one Board member. They are not material costs in the larger picture of the transaction as proposed under the management services agreement. As for infrastructure, for instance, on the corporate side, Gold Resource currently has two corporate offices. Post-spin, one office will go with Gold Resource, one office will go with Fortitude, effectively lowering office overhead for each company by not having two offices. Even if there was complete duplicity in this group of ten managers, the benefits of the transaction would still warrant the spin-off. All considered, nothing about the G&A of this transaction is concerning. And under the services agreement, the duplicative costs are countered by the cost savings of time allocation mentioned in my example, the Vice President. And my last and most common question is why now. It is the charge of the company's Board of Directors to maximize shareholder value. Once all the analysis and due diligence questions were answered on the spin-off, the choices and decision became very clear. We could keep the mining units combined, but maximizing value would be hamstrung trying to be both an aggressive growth and aggressive dividend company for the aforementioned reasons given during the shareholder call. To have a chance at maximizing shareholder value for each mining unit, Mexico needs one strategy and Nevada needs another. Executing on the spin-off has a much greater opportunity to maximize shareholder value for each mining unit. The Board would be remiss in waiting. Now that all the due diligence and analysis are complete and both mining units are cash-flowing and positioned for success, waiting will just prolong the inevitable. Several shareholders have asked us why don't we wait until a few more quarters or a year out to do the spin-off. My answer to that is we make business decisions when we deem them appropriate and in the best interest of the company and its shareholders. We believe this is the perfect time. To put this in perspective, one can always take the approach of wait and see or wait until a potentially better time exists in the future. To wait ignores the need to separate the mining units so they can begin down the path identified to best deliver long-term value. To me, the view to wait and see is counter to most good business decisions and opportunities. The question of why not wait for Nevada to grow another year so it could potentially enable it to list on the exchange as opposed to the OTC market? That wait-and-see approach would delay what needs to happen now to try to maximize long-term value. That's one full year of not allowing each company to begin down the path it needs to go. Let me give you the perfect example. Take the 'wait for a better time' rationale and apply it to the Nevada Mining Unit. We built our Nevada Mining Unit during the last bear market. It was a difficult time and we didn't have much money doing everything to survive like all other mining companies back then. Many shareholders pushed back on our goals to build the Nevada Mining Unit. Numerous shareholders labeled it a distraction at the time and stated it would be a decade before our company would have production from Nevada. Had we waited for a better time, we would have missed the best buying opportunity in the Walker Lane Mineral Belt in Nevada in the last 20 years. Had we waited, we could not and would not have compiled the exceptional property portfolio in Nevada we now have. Had we waited for a better time, it would have been far more costly as competition in the Walker Lane area is fierce today. While we had shareholder pushback against building our Nevada Mining Unit at the time, we were in the trenches, making the decisions we deemed fit in the best interest of shareholders. And where are we today? We have five high-grade gold properties, one in production in just ten months from groundbreaking, cash flowing and poised for success. Everyone now loves Nevada, and the pushback is all gone. Had we taken the 'wait for a better time' approach being suggested by so many shareholders back then, we most likely would have missed the opportunity of our Nevada Mining Unit that we all enjoy today. We as management identified the opportunity and acted on it. We made the correct call. Waiting for a better time once an opportunity has been identified and due diligence is complete often translates into waiting for missed opportunities. So with that, I would like to open up the live Q&A. And in an effort to efficiently address the Q&A, if there's any distracting or antagonistic calls, we'll move on to another productive caller's question. So operator, if there are any questions, if you can please open up the lines for the live Q&A, please?

Heiko Ihle, Analyst

Thank you so much, by the way, for going through all that Q&A here on the call, Jason. I appreciate that.

Jason Reid, CEO

Yes. Yes. Thanks, Heiko. I was just trying to get in front of it. It's amazing there's still the misconceptions as some shareholders, I guess, haven't read fully the press releases or what we've talked about. But I just wanted to get out in front of all of it, so maybe we could have additional new questions.

Heiko Ihle, Analyst

It blows my mind that people think that one asset just disappears with a spinco.

Jason Reid, CEO

So many people were thinking that.

Heiko Ihle, Analyst

I also want to point out that.

Jason Reid, CEO

Heiko, we lost you. Yes, it kind of broke up. Say your question again.

Heiko Ihle, Analyst

I said I also want to point out that it's really nice to see you guys pay a dividend because, I mean, less than a handful of other companies we cover do. But anyways, off to my questions. Profitability going forward, I mean, you guys just put out an extremely strong quarter, how much of that can we trend line into Q4 and then also on a combined basis into next year?

Jason Reid, CEO

I can't provide specific numbers at this time. We don't have an outlook for this year because of the COVID situation. However, our goal is to remain profitable each quarter. While not every quarter may achieve this, we believe we are past the most challenging phase of COVID. We need to continue to be proactive, but I don’t anticipate another shutdown, which is why we lack an outlook for the year. Looking ahead to Q4, I am optimistic that it will be another strong quarter, and I believe 2021 will be an exciting year for Gold Resource. The zinc price has risen to $1.15, compared to around $0.90 a year ago. This increase is significant and will positively impact our financial results, with every penny contributing nearly $0.5 million to the bottom line. We must remain vigilant concerning COVID to minimize its impact on our operations, and I believe we are set for a good Q4 and a successful year ahead.

Heiko Ihle, Analyst

Fair enough. Speaking of next year and just general outlook, you answered my second question, but one more that I had, the regulatory environment in Mexico and Nevada, I mean post-COVID, do you anticipate any longer-term changes? Have you seen anything that people are trying to enact? Is there anything that maybe we wouldn't be as privy to as you?

Jason Reid, CEO

Yes, it's a great question. I don't have any additional insights that others may not be aware of. Governments are always unpredictable, whether in Mexico or the U.S., and this election will significantly affect the U.S. moving forward, especially considering today's election. I can't provide any more information on that. We can't dwell too much on it. Our focus is to ensure that each operation runs as efficiently as possible, and we will adapt to any challenges that arise. Unfortunately, I can't offer any further details on that.

Heiko Ihle, Analyst

Fair enough. Well, keep doing what you're doing. I think you're doing a great job at it.

Jason Reid, CEO

Thank you, Heiko.

Unknown Analyst, Analyst

Jason and Kim, first, congratulations on an amazing quarter during a very difficult time.

Jason Reid, CEO

Thank you.

Unknown Analyst, Analyst

No problem. I had a few questions. The first was related to the OMU. Obviously, it's a difficult time, and my thoughts are with the team there. But do you have any visibility on how production might ramp back up to normalized levels over the next few quarters, how quickly we could see that?

Jason Reid, CEO

Yes, it's a great question. The impact of COVID is present and varies week to week based on case numbers and quarantine levels. It's challenging, and it's not going away anytime soon, perhaps not even next year. We need to remain vigilant and maintain our protocols, which we've demonstrated we can do successfully while operating with COVID at our site. This will be a challenge for all companies, regardless of the industry. Regarding our Oaxaca Mining Unit, we are targeting some optimizations like an ore pass and a regrind circuit. The ore pass could help us avoid double-handling underground, leading to cost savings and more efficient mining. This is planned for next year as per the preliminary budget. We're also evaluating the regrind circuit for improved gold recovery. We're committing more funds to underground projects, highlighting the necessity of the spin-off, as Mexico needs greater investment underground. While we could stick to our current path, it’s important to recognize the trade-offs, particularly when it comes to outside dividends versus project funding. This new strategy is exciting as it allows us to increase our exploration budgets back up to $10 million after a reduction over the past eight years. This increase will help us find additional ore and new deposits, adding significant value. The evolution of our strategy is essential, and I believe our optimization programs and strict health screenings will lead us to a successful year in 2021.

Unknown Analyst, Analyst

Another question related to what you just mentioned. OMU has performed exceptionally well partly due to the base metal prices, especially zinc. One of the challenges this year and in 2021 was linked to the treatment charges. Do you have any insights on what kind of cost adjustments we can expect as you prepare to renew that contract?

Jason Reid, CEO

I can't discuss specifics until we finalize a contract, so I'll be careful with my comments here. What we're observing is much more favorable treatment charges, which could significantly impact us. Securing those better terms would be very beneficial, especially with the increase in zinc prices. However, I prefer not to go into details until we have a contract signed. It would be better to discuss this in a future call. In previous calls, I mentioned that years ago, when zinc prices were falling, we set a goal to reduce our costs by $10 million due to various internal factors. We implemented several cost-cutting measures to achieve that goal, but the treatment charges canceled out those savings. It would be great to see that $10 million savings return, and we will have to wait and see once we get the contract signed. It's too early to provide specifics until then, but things are looking promising.

Unknown Analyst, Analyst

And that's fair. And I've seen the current market price, it seemed to reflect a couple of hundred dollars potential in savings, which I just wanted to see if I can validate, but I understand. In terms of an update, looking at the exploration side, can you provide any update on the drilling that was done at either East Camp Douglas and/or the Golden Mile, and maybe any exploration efforts being done at the OMU as well?

Jason Reid, CEO

Yes. Regarding exploration in Nevada, we've launched our first program at East Camp Douglas, which is very exciting. We're just starting to drill a couple of holes, and this is a large property, so it will take some time, but we're actively drilling. We haven’t received any results yet. With respect to Golden Mile, we are in the process of mobilizing a drill to begin work there, which is also exciting. There are two known areas of mineralization where previous companies have established resources. We haven't reported that number yet because we want to verify the findings ourselves before making any announcements. We plan to drill to confirm the existing data and potentially expand the resource. While it’s still too early to discuss the exact timing, I aim to disclose our first resource by next year. Both properties are currently being explored and will soon be drilled. In the case of the Oaxaca Mining Unit, we are thrilled about the development of these exploration drifts. As a company, we've not had the opportunity to allocate resources solely to exploration drifts until now. Previously, we always had to position drilling rigs based on where mining was occurring, which is a common scenario in underground operations, balancing exploration with production. However, we are now able to extend these exploration drifts, as illustrated in a schematic on our website presentation, which will allow us to investigate new areas around the Arista. The Arista is structurally controlled, and there are visible ridges on the surface that lead us to believe there are more Switchbacks to discover. These drifts will help us in that search. We expect not only to add to known vein systems but also to discover new ones, which would be very exciting. As I mentioned earlier in the call, we are shifting our strategy to reinvest more capital into exploration instead of focusing solely on dividends. This is an exciting time for us as we believe we can accelerate our expansions and discoveries through exploration efforts on both fronts.

Unknown Analyst, Analyst

And Jason, and this may be a question for Kim as well. In looking and thinking about the CapEx requirements over the next year as you expand exploration and continue building out the dry stack, how should we model or think about the future CapEx over the next 4 or 5 quarters?

Jason Reid, CEO

Yes. We've been involved in several significant capital expenditure projects, such as the tailings lift, the installation of an electrical power grid, and the construction of a paste fill plant, all of which are capital-intensive but necessary for the growth of the mine. Currently, we are working on a thickened tail, and this capital expenditure will extend into next year. We initially planned to complete the project this year before COVID, but the shutdown delayed that, pushing the timeline to next year. There are also optional capital expenditure projects we are considering, like the ore pass and regrind, which are not essential but could improve efficiency. As we expect the mine to continue growing, especially with additional exploration capital, more infrastructure will be needed. Although we are actively working on our budget for next year and do not have fixed numbers yet, we've typically spent around $10 million a year on capital projects. This amount could also be allocated for mine development if there are no major capital projects, and it is likely to be reinvested into the operations.

Unknown Analyst, Analyst

No, that's fair, and that's helpful. The last question, and then I'll jump back in the queue, is regarding the key milestones related to up-listing to the NYSE. Do you have a sense of the timeline you might be examining for market cap, share price, or any other milestones? Are you looking at a two-quarter process, a year? If you can provide some guidance before considering that up-list, that would be great.

Jason Reid, CEO

The market will largely determine our value, especially regarding Gold Resource's representation of Nevada. The current market isn't fully valuing this yet, making it hard to assign a specific number. Once we proceed with the spin-off, we expect the market to establish a value as we continue executing our production plan. Although we won’t initiate a dividend immediately, I believe that once we do and potentially increase it, the market will react positively. This response will influence our share price and market capitalization, which are crucial for a successful up-listing. However, the timing is ultimately in the market's hands; we cannot force it. One concern with the spin-off is whether we should aim to list on a major exchange. There's a risk of failing and being delisted, which can lead to serious consequences. We'd prefer to up-list when we are certain that our market cap and share price will support our position. Could this happen in six months? It's possible but ambitious. A year seems more reasonable if we follow through on our plans. Ultimately, we need to focus on our production, issue dividends, and increase them, and the market will indicate when we're ready to proceed.

Unknown Analyst, Analyst

Fair enough. And with the cash flows that I'm projecting out, you guys should have a very successful 2021. All right. I'll go ahead and jump off the questions and jump back in the queue. Good luck with the job and keep up with the good work.

Jason Reid, CEO

Thanks.

Operator, Operator

We'll take our next question from Ronald Brandstetter.

Unknown Analyst, Analyst

Jason, you did a great job this quarter and on the conference call explaining the reasons behind the spin-off transaction. I would like to confirm my understanding that, in a spin-off transaction, there are more protocols and regulations concerning the extent to which you can promote or provide forecasts for the new entity. Is that correct?

Jason Reid, CEO

It is, but only for a limited time. The SEC prefers that you don't prepare the market. As I mentioned, we will enter a 40-day quiet period. The next steps involve our S-1, which we have submitted to the SEC for review. There are a few possible outcomes: one, they may review it and return it with no comments, declaring it effective, allowing us to finalize the spin-off and start the quiet period; two, they could come back with questions that we need to answer, after which we move forward; or three, they might require us to resubmit the document, which would extend the process by another 30 days. We are awaiting the SEC's feedback. We have invested significant time and effort into the S-1 and believe it is a strong document, so I am hopeful and optimistic for a quick approval. We expect to hear back by the end of next week or the week after, marking the end of the 30 days. Once they declare it effective, we will proceed with the 10-day record date as required by the SEC, then execute the spin-off, and enter the 40-day quiet period. During that time, we will not provide any updates about the company until it concludes. The only information we can discuss will be what is included in the S-1. After that, we will reassess.

Unknown Analyst, Analyst

So you're kind of limited in terms of your ability at this point to promote the spin-off, which is no fault of yours, it's just a function of the regulation surrounding that.

Jason Reid, CEO

Those are rules and regulations, yes. Correct. We are limited on what we can say.

Unknown Analyst, Analyst

And the reason I bring that up is I sense that, that may have been a contributing factor to maybe a bit of the downdraft over the last 2 or 3 weeks in the stock price. And I imagine you're chomping at the bit, but if you're not allowed to be out there doing a roadshow or issuing projections or anything like that, that it might be a little frustrating.

Jason Reid, CEO

Yes, it is what it is. I don't look at the world like many shareholders do on a quarterly basis; I think long-term, and this pullback is temporary. It's similar to the situation in Nevada, where initially, many viewed our presence as a distraction, but now it's well-regarded. Talk to me in a year, and everyone will appreciate this spin-off. Mexico will also follow a promising path and will succeed. I'm confident about that. Fortitude will experience the same outcome. People will reflect on this situation and forget the current concerns; both companies will emerge stronger, and it's an exciting time. The 40-day quiet period is not an issue for me; in the grand scheme, it means nothing.

Unknown Analyst, Analyst

Yes. I believe that during the upcoming months, we'll see a significant amount of news from the company, including the new CEO and other developments. That won't hinder our ability to move forward.

Jason Reid, CEO

For GORO, yes.

Unknown Analyst, Analyst

For GORO, that's correct. I don't think that will impact the spin-off. If you're planning to announce a new CEO for GORO, I'm looking forward to it. Please continue.

Jason Reid, CEO

Okay. No, sorry. I interrupted. Go ahead.

Unknown Analyst, Analyst

It seems like there will be a significant amount of news coming from the company in the next two to three months. I wanted to know how much the quiet period would impact the ability to share this news.

Jason Reid, CEO

The quiet period only affects Fortitude Gold.

Unknown Analyst, Analyst

Got you. Right. And I...

Jason Reid, CEO

Gold Resource will have updates regarding the new Board member and the new CEO. There will also be additional announcements as usual. The quiet period only impacts the spin-off company.

Unknown Analyst, Analyst

Okay. One final comment. In my research on the company, I've listened to four years of conference calls and read through four years of your press releases. One thing that stood out to me is that you always prioritize the long-term interests of the company and its shareholders. Based on my experience listening to many conference calls and discussing matters with industry professionals, I believe you are an exceptional and honest leader, and I appreciate all your efforts.

Jason Reid, CEO

Yes. I appreciate the comments. Thank you very much.

Operator, Operator

If you're in the queue for questions and we didn't get to you, please call us, and we'll have a one-on-one conversation. I wish you farewell and look forward to talking with you on another conference call in the future. Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you again for your participation. You may disconnect your lines at this time, and have a great day.