Gold Resource Corp (GORO) 2018 Q2 法說會逐字稿

Thank you for joining Gold Resource Corporation's second quarter call. Mr. Jason Reid, President and Chief Executive Officer, will be hosting today's call. (Operator Instructions) As a reminder, today's call is being recorded.

Please go ahead, Mr. Reid.

Thank you. Good morning, everyone and thank you for joining Gold Resource Corporation's 2018 Second Quarter Conference Call. I expect my comments to run approximately 8 minutes, followed by a 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 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 earning release that will be issued yesterday, along with the comments on this call, are made only as of today, August 1, 2018, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks in our Form 10-K filed with the SEC for the year-ended December 31, 2017.

As I noted on the year-end conference call, in an effort to streamline quarterly conference calls while still being available to take shareholder questions, I'm taking a different approach to conference call. I'm not going to just regurgitate the quarterly numbers that anyone can just read in the 10-K or quarterly reports, I'm going to cover the highlights, give color on updates and address problems or issues that may need to be addressed and then turn the call over for questions. This, hopefully, will benefit everyone attending the calls by making them much shorter and far more efficient.

The second quarter of 2018 was another strong quarter for Gold Resource Corporation. It also marked an important milestone for the company as it's not every day in the mining industry that you get to build a mine. We obtained final permits for the Isabella Pearl Project in our Nevada mining unit, and commenced construction of the project on June 18, 2018. Our goal is to be in production in less than 12 months from that date. We have already posted 2 tranches of projects construction photos on our website, and we look forward to providing continued updates as the project build progresses.

Having been on site several times during the quarter, I am pleased to convey the fact that mine construction has to be one of the most thrilling aspects of this industry. This is a very exciting time for Gold Resource Corporation shareholders, as we have positioned the company to be the next Nevada gold producer, and we targeted a 100% increase in our annual gold production profile.

The second quarter of 2018 launched Gold Resource into a build-and-grow phase. Highlights for the second quarter included sales increases of 44% from the corresponding quarter in 2017. Our net sales totaled $30.8 million. We maintained a solid cash position at $26.6 million. We had mine gross profit of $9.5 million, and our net income was $3.8 million or $0.07 per share for the quarter.

We produced 5,806 gold ounces and 593,955 silver ounces before payable metal deductions. Our precious metal gold equivalent ounce sold totaled 12,572 at a Gold Institute cash cost calculation of $70 per ounce after strong base metal credits. Our total all-in sustaining cost for precious metal gold equivalent ounce sold was $577.

Although Oaxaca Mining Unit's mill throughput on a combined flotation and agitated leach circuit basis totaled 150,507 tonnes for the second quarter or 1,735 milled tonnes per day, this compares to 1,636 milled tonnes per day the previous quarter. This demonstrates continued success in our efforts to increase total mill throughput over time, and we have additional headroom as we further optimize both processing circuits. This and future additional throughputs, could have positive impacts on milling operations as we mine upwards and laterally at Switchback into higher-grade areas and ore shoots over time.

Remember that we entered the Switchback in a deep, base-metal-rich area and began developing to mine upwards. Exploration drilling indicated increased precious metal grade at higher elevations than where we are currently mining. Our mine plan at Switchback takes a long-term view as opposed to cherry picking the high-grade area.

April 9, we announced a press release of the northwest expansion of the Arista Mine's Arista vein system with 12 additional step-outs and infield drill holes. Intercepts included 2.00 meters of 6.68 grams per tonne gold and 864 grams per tonne silver and 2.08 meters of 1.98 grams per tonne gold and 1,583 grams per tonne silver. As Barry Devlin, our VP of Exploration, stated in that press release, the known veins in this area have previously pinched down in width, and to see them begin to swell again to form new ore shoots, along with adding additional veins, is exciting. I agree with Barry, and it demonstrates the fact that these veins do pinch out and then swell again to become new ore shoots that were previously unknown, a good lesson for continued exploration.

In addition to expanding the Arista deposit, other Oaxaca Mining Unit projects, including the power grid, tailing (inaudible) expansion and [pace build] program all moved forward.

Turning to our Nevada mining unit. We announced during the quarter in the April 19 press release our maiden proven and probable mineral reserve report for the Isabella Pearl Gold Project. We increased our company-wide gold reserves by 135%. The reserve consists of almost 2.7 million tonnes of 2.22 grams per tonne gold containing 192,600 gold ounces.

Metallurgical testing indicates 81% crushed rock recovery and 60% run of mine ore recovery. We have finalized the report and associated feasibility study and uploaded it to our website.

Subsequent to the second quarter, on July 16, we announced the Mina Gold near-surface high-grade gold intercepts, including 5.24 meters of 3.34 grams per tonne gold from surface, and 12.19 meters of 2.98 grams per tonne gold from 6.1 meters downhole. A third drill program is being planned to further delineate Mina Gold mineralization on our patented claims.

In the same press release, we announced that we terminated our Gold Mesa property purchase option following the latest Gold Mesa drill results and analysis of the limited expansion potential of the known mineralization. We chose to focus our capital resources on our 4 other 100% owned and prospective properties as well as our Isabella Pearl Project build.

During the first quarter conference call, I mentioned that the environmental assessment comment period was the final stage of the permit process, and we were excited to receive the official letter of Finding of No Significant Impact and EA permit approval for the Isabella Pearl Project very soon. Well, during the second quarter, we received our final permit approvals to build the Isabella Pearl Mine. We broke ground June 19 and target production in less than 12 months. We are moving full speed ahead with construction.

Since the last call, we paid the final payment of the $4.3 million ADR plant, paid for with cash. The ADR sits complete and ready to move to the project site, once foundations allow. We have cleared and grubbed the vast majority of the heap leach, crushing pad, ADR location and office building location. Fences are being constructed. The office building is complete. It just passed inspection and has been electrified. Final earthworks on the pregnant and barren solution pond and the heat leach pad are under way. The crushing plant has been moved to site and is being installed. The conveyers have been transported to site, and a concrete foundation for the electrical switch gears is being poured. The liner installation contractor is due on site shortly. Liner construction will begin under the process plant's ADR cement foundation and being scheduled to commence in the coming weeks, followed by the pregnant and barren solution pond liners and then the heap leach pad installation shortly thereafter. It is a very exciting active mine site, and construction is going well.

To wrap up the call, we had a great second quarter, hitting our production numbers that remain at low cost. We continue to hold a solid bank account. We posted earnings per share of $0.07. We continued to expand the Arista deposit at Oaxaca Mining Unit. We continued Nevada mining unit exploration success with Mina Gold exploration drilling, and we begin construction of the Isabella Pearl Gold Project. We more recently announced our 98th consecutive monthly dividend as well. It was a very busy and successful quarter.

With that, I would like to thank everyone for their time today on the conference call. Let's move on to the question-and-answer portion of the call. (Operator Instructions)

Operator, if you can open up the lines for the Q&A, and take our first question, if there is one.

(Operator Instructions) Thank you. Our first question.

Can you state your name?

This is [Warren Stanley]. I'm a private investor. I noticed your stock price is getting hit hard this morning. Do you know why?

I have no idea why, especially with such a great quarter and all the good news. I can tell you that we're up 26% year-to-date and 32% over the last year. So we have moved up quite rapidly. But no, I don't. I can only imagine that whoever is selling now is not going to be pleased with the outcome. In less than a year, we're going to be in production and have over twice the amount of gold produced. That's our target. We reach that target, I think we'll be multiples of where we are today. But I have no color as to why we're getting hit hard.

Yes. It seems that the construction being done in 12 months and that mine going online, it looks optimistic to me.

(Operator Instructions) Our next question.

It's [Harvey Volen]. I've been a long-time stockholder, as you know. And I want to say that, not only do I agree that the quarter was really a good one, but my sense is that your management has been very conservative over the years. You've avoided debt. You've done things very methodically and carefully. You've been cognizant of the changes in the price of metals, and you've basically run the company with minimal risk. And I'd like to compliment you about that and say that there are a lot of companies out there that are flyers that burn up very quickly. And you're still around, and I think doing a really good job. Unfortunately, the market doesn't seem to recognize that. I don't understand why, but hopefully, there'll come a day of reckoning.

Well, [Harvey], first of all, thanks for your call. It's always good to talk with you over the years. Thank you for the compliments. That's only possible by the great team we have here at the company. But don't let a morning of 400,000 shares that somebody had to blow out for who knows what reason taint the fact that we're up 32% over the year, 26% year-to-date. We're doing great. We were $4 in March. We ran up to $7.30 a few weeks ago. That's pretty fast. Stocks always have to fill in. Maybe we're filling in.

The last conference I was at, there was a long-term shareholder who made a bunch of money on us, and he'd sold out long ago. And then he was coming back in, but he said, "Boy, I missed it. I was waiting for that pullback, waiting for that pullback." And at the time we were $6-something. This is that time. I mean, if you're watching us and you're waiting for that pullback, some -- who knows what reason that somebody has to blow these shares out after a excellent quarter like that, this is the opportunity.

So I see it as an opportunity, but don't let days or even weeks of a volatile of the market taint the fact that we are doing good things. We had a great quarter, and we're positioning ourselves to have 100% increase to our gold production. That'll be huge. A year from now, nobody will remember this couple of hours of trading.

Yes. I agree. Let me get to my questions. I'm wondering about financing for Nevada. At the last conference call, I think you talked about there's a number of options on the table. But how far -- how much more is there to go to build out before production starts? And how do you expect to pay for that?

Right. The last conference call, I mentioned that we have spent and committed an equipment financing of about $10 million of the $30 million CapEx. The board agreed to allocate $10 million of our cash capital to $10 million of the CapEx, which leaves about $10 million left, of which we target to do with cash flow. I stated all along, I'll state it again today, our goal is to do it with cash, equity and/or debt or a combination of those. But so far, we've been doing it with cash. We put Alta Gracia into production with cash. Be nice to have this be the next mine we do with cash.

It's not easy. I've said it all along, but we're doing it. Every month that goes by, if we do have to either take on debt or sell some equity, it's even that much less. But all options are on the table, coming back to your question how we expect to fund this. But we continue to move forward with cash. Like I mentioned in the conference call, we just finished up -- finished paying the ADR with $3.4 million. We made our final payment all with cash.

So a lot of this depends on where the metal prices go, and they've been soft. And that will drive the bus to a large degree. There are things we can try to do internally, but that'll ultimately be the driving force of what has to happen. If the metal prices hang in there, and we can do it with cash, we'll do it.

Got it. Let me ask you about management in Nevada. How does management allocate its time to Nevada versus Mexico? And are there -- have you added to staff? And do you need to?

Yes, we are staffing up in Nevada. Now we have brought on our project manager for our Nevada Mining Unit. He actually came on in 2016. For various reasons, we were of the belief we're going to get our permit sooner, so we brought him on much sooner. His name is Bob Cassinelli, and he's been with us since 2016. We have since poached from other mining companies many different positions of the staff we need. And we're targeting to hire about 37 people, and we're maybe not quite 1/4 into that. But we are staffing up as we speak.

We're obviously using a mine contractor-led core, and they're doing the heavy lifting with their equipment. We didn't want to undertake buying the equipment and doing it ourselves, because it would've sent the CapEx through the roof. So we're using -- we're utilizing them right now. But we're staffing up there.

As far as allocating management's time, we're busy. That's all I can say. Been out to Nevada a lot, and I'll be out there a lot, going forward until this thing gets up and running. But it's so exciting. I was just out there a couple weeks ago, and it is the ultimate adult sandbox. I mean, stand on a hill on -- at Isabella deposit, and you look down at this construction. It's just a beautiful thing. Its going really well. If it continues to go well, you know obviously, our target of putting it into production 12 months or less, it'll be far less. But we'll just wait and see. But things are going well.

Sounds good. And I like the fact that you're posting updates to the website and along with pictures. That's really good stuff.

I'm going to continue to do that. I'll be out there in 2 weeks, and I'll keep taking pictures and putting them up on the website. It's -- and this is the best part about this industry. You're creating something. This is the true creation. We're creating a mine. We're going to pour gold, and we're going to make money. It's going to be fun.

Our next question.

My name is [Doug Smith], and I was going to ask a question about your electrical hookup on your mine in Mexico. How's that going?

It is going. It continues to progress. All the materials have been purchased and staged along the route. They have started to put the -- some of the electrical on our site, some of the transformer stations and such. So it is progressing. But having said that, we've been [working] on this for 5 years. So we -- I'm not giving you any time frame because we're under the thumb of the CFE, the federal power commission. So they just work at a different time frame. It's a little frustrating for us, but what are you going to do? But it's happening, and that's what's exciting. So once we get hooked up to the power grid, we look for additional cost savings there.

Yes. I was going to ask you about that. How much debt is going to fall the bottom line, do you think?

There's a lot of variables in there. Right now, they did a diesel credit, which really helps. But they could pull that diesel credit anytime they want to, and we don't know what's going to happen with the new president that was just elected, what his stance on diesel credit's going to be. So percentage wise, versus electric and being full diesel, we could be saving 15% plus on our energy cost going to electric. So there's a lot of reasons to go, the big one being cost, the second one being -- this mine is growing. The Arista Mine is getting bigger. We keep expanding it. We expanded the Arista in the second quarter. In the third quarter, we expanded the Switchback vein system. Over time, this is going to be a really big mine, and we're going to need that electric hookup so...

Okay. Okay. Now my next question is about your dividend. Maybe I shouldn't -- raise that until you finish with the mine in Nevada, get that operational, going (inaudible)

Yes, a lot of shareholders call and say, "Hey, you keep building your cash on various quarters. When are you going to increase the dividend?" Well, we're serious. We're trying to build this thing with cash flow. It's hard to do, and if you're going to that, you can't be paying more dividend. Our $0.02 per year is pretty nominal. It doesn't cost us that much. It cost about $1 million a year. So we're not going to increase it until the Nevada comes online.

But what could happen -- and I'm not going to guarantee anything. But what could happen, looking at our history as a company, is once the capital expenditure's done and we're pouring gold in Nevada, then Mexico could potentially kick in additional dividend. Because it’s been funding Nevada up until this point, right. Mexico will have more money to increase the dividend and Nevada. We could potentially go back to levels of our previous monthly dividend of days of old. I don't know if we can get back to (inaudible). Maybe we can do more or maybe less. But regardless, that will be a driver for our share price.

Our next question.

This is [Bill Pace]. Am I on?

You are.

I'm in Tucson, Arizona. And a couple of points. First, we commend you upon the excellent second quarter results, and the good outlook. That's great. But I'm perplexed at the stock movement today. You've spoken to that. Apparently no one knows. It seems very strange. I'll have to leave that there. The other question is a year or so ago, there was a New York wealth firm pushing for support on the class action suit having to do with your incentive plan, I believe. Is there any -- it's been very quiet the last few months. Is that dead, do you know, or any information on it?

Dead as far as I know, we haven't heard anything. So those class-action lawsuit groups are such leeches. They're just running around looking for hostage payments. And that was another one. And whatever, I'm not going to pay a hostage payment. If they're going to push on us, I'll take them to task, and we'll go to court and we're going to win. So whatever. I'm not worried about them. We haven't heard from them much. I'm certain it's dead. And secondly, and what -- whatever. I'll let that go. Do you have any more questions?

No. Not for me.

Our next question.

This is [Ryan Curry]. I'm a long-term private investor. Congratulations on finally moving forward on the electric. For years, I've been commenting that you guys are basically on a 20-year plan, and you look to be implementing it in a methodical and competent manner. And I want to congratulate you on that.

Thank you.

I am a little bit concerned about 2 things. But I have 2 concerns. One is, I'm a little concerned about the gold equivalent ounce silver -- precious metal silver and gold grading numbers. They're acceptable but they're lower than they used to be. Is -- and I didn't see anything in the financial documents about Switchback. So I'm a little confused as to why the grading numbers haven't climbed at all, basically. And they stuck around maybe 3.5 and -- that's acceptable but 5 would be better, obviously. And I'm wondering where Switchback is in the financial docs. I see Arista. I see Aguila and I see Mirador, but I don't really see anything for Switchback.

Those were good question. Let me address first of all, the grade. This is a -- I mentioned this in the conference call, and I'm happy to restate this. This is a very important point. When we discovered Switchback and were delineating Switchback and were mine planning Switchback, we had a choice: We could come into the high -- some of the higher-grade areas and get a quick pop, which were higher up in elevation. Or we could do the right thing and develop this thing from the bottom up.

In doing so, we came in at the very low -- lowest elevation of the Switchback as far as known mineralized elevation. It may be lower somewhere else, but in this particular area that we know about. So we developed into that, and then we're going to mine up.

Well, that particular area is lower in precious metal grades and higher in base metal grades. That's a choice that we made, but it's a long-term view as opposed to, well, hey, let's just race over to this really known high grade and get a pop in the stock. That's not what we're about. We're going to develop this thing the right way, and that's what we're doing.

But in doing so, that's why you see and have seen, our precious metal grades go down and our base metal grades go up. That also comports with an epithermal system. The top half, the top 1/3 of an epithermal system are your higher precious metal grade, and as you go down, the precious metal grades are still there, but the base metal grades go up.

The fun thing about Switchback is that we get to start out at the bottom and mine up. So our future -- I expect our future to be higher and higher grades over time. It's not going to happen in a quarter. But over time, we're going to see higher grades. I wish we could've come into the bottom of Arista and mined up, but that wasn't economically possible. So that's what you're seeing in the grades.

As far as you’re not seeing visually where it is, we don't break out Arista vein system and Switchback vein system because they're in the same mine. They're in the Arista Mine. So on the 10-Q, or on the earnings release we announced yesterday, there's a production and statistics table, it's the second page on the earnings release that we announced yesterday. And in that, we call out the Arista Mine, and that is the Arista vein system and Switchback vein system. It's the same mine. So it's been put together. We're not breaking them out. But that's where you're going to see them.

Now that was the grade. What was the second part of your question?

I'm not sure. That's was a good answer to that, though. That's what I assumed. But I didn't see (inaudible) precious metals. I understand that you're not going to hit the higher-grade areas in Switchback for a while. Is a while a year?

Well, it depends. Think of these deposits as a big sheet cake with some blueberries in it. The sheet cake is good to eat, but it's the blueberries that really taste great. And that's your high-grade ore shoots. So they're not -- it's not as uniform, hey, we'll get to this area, and it'll be smooth sailing from there. No, it varies, just like the Arista vein system did. So not only vertically but laterally, we're going to see areas where we go in and out of these higher-grade ore shoots. That's how the system is.

But the long and short of it is, this is a very powerful high-grade system that has allowed us to be profitable for 7 consecutive years, so I think the grade is more than adequate. We'll have some quarters that are higher, some that are lower. But the long term in the Switchback is we get to mine up into predominantly higher precious metals based on our exploration. So it's a good situation. In fact, it's an ideal situation to mine this with a long-term view.

Mr. Reid, at this time, I am showing no further questions in the queue.

Perfect. I do have one e-mail question, and this will be the final one. It's from [Joe Nordgard].

You have 2 questions. I believe Switchback stokes have been in full development and operation at this point. Could you please discuss the mining of Switchback and the tonnage and grades being developed?

I kind of addressed that in the last question. On the production and stats table in both the earnings release on the second page of the Q, you can see the tonnes and grade. But I want to point out something that's very important, and I mentioned it in the conference call as well. Look at the tonnages. We got up to 1,700 tonnes. We were -- last year we were -- I can't see that. Anyway, we were like 1,300 last year, more or less. And already, we're 1,700 tonnes. So we're doing well.

Now what possible impact could this be? Coming back to the last question and your question. As we get into higher grades, we're going to have this additional potential throughput of 1,700; that could help with additional ounces being recovered. So good situation as far as the optimizations of the mill.

Now I do have a percentage for you. The Switchback represents 53% of all mill feed year-to-date. So that gives you a sense for how much the development of Switchback is taking place, and that's 57% of the Arista Mine in general. So we're still mining a lot of tonnes from the Arista vein system, more or less 50-50. I'll slide it a little bit towards Switchback. But that'll give you a sense, [Joe], that things are going quite well at Switchback. And that's in large part because we took 1 year of mine development, in which we could've started mining but we didn't, and to develop and have multiple levels, multiple working bases from which to pull ore from.

And your second part of your question has to do with Alta Gracia, the same thing. Alta Gracia's broken out on the production and stats. And you asked how it's doing. We're making progress at Alta Gracia. Remember, we bootstrapped this. And we got it into production. We've had some challenges, as I've mentioned in previous quarters, with complicated ground. But we've worked around that, and we're doing fine there. So things are going well. So I hope, Joe , hopefully that answers your question.

With that, we'll close out the call. We'd like to thank everyone for their time today. And we look forward to talking to you next quarter. Thanks.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.