Gold Resource Corp (GORO) 2018 Q4 法說會逐字稿

Thank you for joining Gold Resource Corporation's Fourth Quarter and Year-End 2018 Conference 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 Fourth Quarter and Year-End Conference Call. I expect my comments to run approximately 10 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 earnings release that we issued yesterday, along with the comments on this call, are made only as of today, February 27, 2019, 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, 2018.

2018 was another great year for Gold Resource Corporation. We fired on all cylinders executing on our business plans, positioned the company for substantial production growth and increased future monthly dividends. I'm very proud that the company delivered its eighth consecutive year of profitability. An 8-year stretch of profitability in any industry is respectable, but to accomplish 8 years of profitability in the mining industry is a special accomplishment. In addition to being profitable, we succeeded on numerous fronts including the following: We achieved our 2018 annual gold and silver production outlook range coupled with substantial base metal production. We had net sales of $115.3 million. We remained a low-cost producer. We expanded our Oaxaca Mining Unit's proven and probable reserves, not only replacing all tonnes that we mined in 2018, but we also increased total tonnage, increased gold ounces and increased silver ounces. In addition, we increased our Nevada Mining Unit's Isabella Pearl Project's proven and probable reserve tonnage. We increased gold ounces and we increased the gold grade. We obtained the necessary permits to construct and operate our Isabella Pearl Project. We deployed $15.4 million of our cash and cash flow to construct and build our Isabella Pearl Project. We raised $15 million through an ATM equity sales program with our sales agent, H.C. Wainwright & Company, who did an excellent job executing the ATM. The equity raise was needed to bridge the estimated funding gap to complete construction. We sustained just 6.3% dilution for our targeted 100% increase in global annual gold production. We are now finalizing Isabella Pearl construction of which I will update you on shortly. We are not only on target to reach our production by June of 2019, but we may be selling gold sooner.

In 2018, we posted annual net sales of $115.3 million, mine gross profit of $33.7 million and increased annual net income to $9.3 million or $0.16 per share, a boost to net income of 124% over the prior year. We also remained committed to the dividend with our monthly dividend distributions.

The company produced 26,838 gold ounces, 1.67 million silver ounces, 1,652 tonnes of copper, 7,280 tonnes of lead, and 19,808 tonnes of zinc. We successfully reached our production outlook target from our Oaxaca Mining Unit for 2018. For 2019, we targeted a similar Oaxaca Mining Unit outlook of 27,000 ounces of gold and 1.7 million ounces of silver with a plus or minus range of 10%.

In addition to our precious metal production targets from Oaxaca, we expect to produce significant base metals again in 2019, especially from the deeper areas in the Arista Mine targeted for production for additional substantial revenue.

We have not yet included our Nevada Mining Unit's Isabella Pearl production in the 2019 production outlook. We plan to include that estimate after declaring commercial production at Isabella Pearl in the near term. On an annualized basis, we target 29,000 gold ounces, plus or minus 10% from Isabella Pearl during year 1, ramping up to over 40,000 ounces a year for years 2 through 4. We were pleased and excited to see our modest 2018 exploration drill program around the margins of the known Isabella Pearl pit boundary added gold ounces and extended the mine life beyond the current 4 years into the beginning of a fifth year of production. We also had several initial mining benches in the pit that were modeled as ways proved to be ore that are now on the pad. Many of those ounces were not captured in the updated reserve report numbers. We remain optimistic we will continue to add ounces to this deposit as well as find the expansion or neighboring deposits on trend.

Looking at our 2018 production costs, we had $84 total cash cost after byproduct credits and a $655 total all-in sustaining costs for precious metal ounce. We continue to position Gold Resource among the industry's low-cost peer group.

In addition to achieving our production goals, at our Oaxaca Mining Unit, we expended the strike length of both the Arista and Switchback vein systems in the Arista Mine leading to our 2018 proven and probable reserve increase that was just announced.

Our exploration team had a great year delivering significant increases to reserve tonnes and gold and silver ounces at both Oaxaca and Nevada Mining Units. With gold ounce increases of 26.6% and 11.5% at our Oaxaca and Nevada Mining Units, respectively, coupled with substantial silver ounce and base metal tonne additions underscore this reserve as being one of the best reserves in the company's history.

This latest report also marks the sixth consecutive annual reserve report where the company has increased the proven and probable reserve tonnes in each consecutive quarter.

We have said, for over a decade now, that the Arista Mine is part of a very powerful epithermal vein system with tremendous potential. This is exciting, as the Isabella Pearl Mine's 2.9 million tonnes now grading 2.28 grams per tonne gold adding additional critical mass to the company's production and growth profile. Please see the recent reserve press release just issued for more details and watch for the full report to be posted on the website in the near future.

During '18, we also initiated construction of 3 large and important CapEx projects in Oaxaca, above and beyond our typical operating CapEx. These included the tailings dam Phase III lift, the paste fill plant for the Arista Mine, and the power grid program. All 3 of these 2018 projects required a tremendous amount of planning, engineering, construction time and cash. I'm pleased to report that Phase III tailings dam lift is now complete. The paste fill plant construction continues with targeted operation around mid-2019. The paste fill plant will move a portion of our surface tailings material back underground to drill open stopes previously mined, adding to the longevity of the surface tailings dam capacity and adding to the project's overall tailings storage capacity.

Additionally, the paste fill was targeted to increase mine safety and enable 100% extraction of valuable stope pillars in many areas of the Arista Mine.

I'm also pleased to report the power grid program is nearing completion. This project has taken over 5 years in the making. 4 of those years were consumed with state and federal regulatory approvals, engineering, reengineering, several proposed routes and seeking local and community support and approval. 2018 marked the commencement of powerline construction. The line construction, as of a few days ago, is now complete. We're now being told by the Federal Power Commission that the line testing and final line commissioning is underway. While the company does not control this time line, again, this has taken over 5 years to get to this point. We look forward to being connected to the power grid and all the benefits of additional power that we will need as we expand the ever growing Arista Mine as well as lower our unit power costs.

It is a testament to our Oaxaca Mining Unit team who have worked tirelessly and diligently to overcome numerous challenges on this project. It is also important to note that over 25,000 families along the route can have first-time access to electricity, not to mention the future additional available power to communities further down the route as the line construction continues past our operations. Watch for a future press release with the power grid project -- when the power grid project is complete and the line is energized to the mine.

Turning to our Nevada Mining Unit. In May of 2018, we acquired all the necessary permits to construct and operate the Isabella Pearl Project. This was no small feat in and of itself. We broke ground in June of 2018 and are currently closing in on first gold production. We've accomplished a great deal since June, including: mine site preparation; the office and laboratory were installed and commissioned, water and power infrastructure were installed; the heap leach pad and ponds were constructed and lined; mining both ore and waste on the deposit was initiated and continues to ramp up; the crushing facility was installed and commissioned; all the crushed rock over liner on the heap pad is now complete; and the first run of mine ore lift, or ROM, lift was started. The radial stacker and grasshopper conveyor belts from the crushing plant to the heap leach pad are being installed as I speak in preparation for the first crushed ore lift. Concrete foundations were poured for the absorption, deabsorption, refining plant, or ADR plant for short. The carbon tanks and other equipment have been set with plumbing and wiring of the ADR underway. We're excited to begin circulating solution on the pad and beginning the leeching process. We target this important milestone in the very near term. The goal is to achieve first gold sale as soon as possible. With the permits in hand and the estimated funding for the project construction in place, we've eliminated 2 of the 3 primary gating factors for the project with construction time lines being the third.

Our gold production time line from Isabella Pearl is primarily subject to remaining construction of the ADR plant. As we near construction completion and production of this open pit heap leach mine, we are not only on track to reach our June 29 production goal, but it is possible we may be selling gold before then.

We accomplished our business plan in 2018 making it another great year. Among the better achievements for the year was our eighth consecutive year of profitability, a notable and respectable milestone.

Looking forward into 2019 and beyond, we've continued to position the company as a profitable, low-cost producer that advances and improves its operations. We've also positioned the company with a substantial production growth profile and near-term market rerating for a potential 100% plus increase in gold production. This production growth profile, coupled with becoming a multijurisdictional metal producer targeting higher monthly dividends, is our plan to increase shareholder value. A plan we have remained committed to for some time now, and we are excited as we see it coming to fruition.

With that, I would like to thank everyone for their time on the call today. Let's move to the question-and-answer portion of the call. In an effort to efficiently address the Q&A portion of the call, without wasting anyone's time, and since we don't screen, filter or limit who can call in, any distracting or antagonistic calls will be terminated and I will simply move on to next productive caller's question.

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

(Operator Instructions) We will now take our first question.

This is Vijay Marolia, Regal Point Capital. I want to tell you, very impressed with what you guys are doing with Isabella Pearl. And very impressed that you might be able to start pouring gold before June. Does that mean that we could, maybe in the fourth quarter or possibly in the third, see some sales from that show up on the P&L?

Yes, we remain committed that June is our public target. But I just put everybody on notice that we could be producing and selling gold sooner. I can't give you a month, Vijay, because we're trying as hard as we can to get into production as soon as we can. And if we can sell gold, then we will. But obviously, I can't give you an exact time, but we are close, we are very close. And as soon as we can start making sales, we will and we'll tell the market about that. But if we can beat our June target, more power to us.

Just a quick follow-up question. The energy savings, which as you mentioned, you've been working on that for years now. And it looks like we're almost at the finish line. What percentage of your cost, do you think are energy-related?

Energy is one of our largest costs. Off the top of my mind, I'm not so sure.

Would that be about 1/3?

Yes. I don't know but I can give you that percentage and say it's 1/3, but what's happened in Mexico over the last couple years is they gave a diesel credit. And that credit has helped us out the last couple years for the price of diesel. There is speculation that credit goes away with the new government that's coming in. If it goes away, the order of magnitude we could be saving being hooked to the line is millions, $4 million to $5 million potentially. If the credit does not go away, we're still looking at millions. But let's wait and see, but the long and short of it is, the Arista Mine continues to grow. You guys are seeing that, just as we are with the proven and probable increased, these veins keep going -- find more veins, it's getting bigger and it takes more energy. So you're obviously -- being hooked to the grid is very important so that we have that energy, but to be hooked to the grid and get that energy at less cost is even more important. But 5 years, we've been -- you've been hearing me talk about this plan, and we are right there. We were informed, like I said, a couple of days ago, the line is 100% complete construction. They're just starting to test the line and we don't have time frames. It could be a week, it could be 3 weeks, it could be a month. I don't know. But it's close, really close. And once that's synergized, we'll let everybody know and we'll have additional power and additional cost savings. But Vijay, coming back to your original question, I don't want to give you percentage yet, let's see how it all shakes out.

We will now take our next question.

Mark Smith, private investor. I have been with you for all these years where you guys have been and we have been profitable. And this is indeed a really great year, and you do have a lot of accomplishments to herald. I have one question though and that is regarding these grades. Your throughput in the mill has been increased and that's great, but boy, those grades down on the Aguila mill, they just continue to kind of waver and come downward. I wondered if, and I know you do have mine plans, are those grades going to come up any time or -- I know as you go higher in the deposits, you mined up for example in Switchback that you're going to get into more gold and silver, but is that in your mine plan for 2019?

Good question. Good to talk with you again, Mark. Just to reiterate for anybody who might be listening that doesn't understand the history here. We've been mining down on the Arista vein system now since 2010. And in an epithermal system, there is a gradation to it. As the ore-bearing fluids move up, they boil and drop out the metals. And the precious metals often drop out higher up in the system. There's still precious metals deep but really high-grade base metals deep. So over the years, we've seen a degradation in our precious metal grade, and you've seen base metals go to the roof. That's why our costs go lower because we use the base metals as byproduct credits. But we have been struggling to keep our precious metals production where it is. And to counter that, we've increased throughput, and you're seeing that. And so to your question, where do grades go from here? We discovered the Switchback vein system 500 meters away from the Arista vein system. We drifted over to the deepest area in the Switchback. So again, we're in the high base metal, still good precious metal, but not as high as higher up in the elevations. So that's where we entered the vein system. We're now going to be developing and mining over time up. So on the long term, you're going to see a reversal in the grades where you're going to see precious metals go up, base metals will come down, there'll be a push-pull there. We won't have quite as low cost, so to speak, right, because you don't have the base metal credits, but you're going to have more precious metals but it's all good. It's an ideal situation. If we could just come into this epithermal system and say, hey, let's mine it from wherever we want, we want to mine from the bottom of it. And that's what we're doing. To specifically answer your question on 2019, the grades will be more or less similar because what we did in 2018 is we developed -- well, first of all in 2017, we took the whole year to develop numerous levels. What we wanted to do is get off the treadmill of hand to mouth. So we took our capital and just developed multiple levels. And then in 2018, we planned to stope a lot of those. We didn't stope as many as we wanted to. Why? Because these veins widened out to 20, 30, almost 40 meters wide. So we were able to pull the tonnes in all the development. So we did stope last year, absolutely, but not as much as we thought we were going to because we could feed the mill easily with development. So we have a tremendous amount of development in front of us. We are going to stope it all -- not all, but mostly predominantly stoping this year. So all those levels and those grades that were associated with those levels in 2018, now we're going to be stoping in between those levels. So it should be a similar grade. So I don't expect to see a big pop in grade. Over time, we fully expect the grade to increase. And that will be a function of us starting to mine more upwards into the higher grade that we drilled that we know we have lived through in the Arista gradation and now we're going to be reversing it. So it's going to take some time, but the way I see this is, we're completely happy with where we are, with all the base metals because it's tremendous amount of revenue too. And in the end of the day, this is what it's about, it's about making money. And as far as the market is concerned, our growth premium is going to be coming from Isabella Pearl, and we will turn it back into a gold company, so to speak, for any critics to say, oh, you're a base metal company. Okay, we'll be that for last year but this year, we're going to be gold company when Isabella Pearl comes online and that's our predominant. So it's just the evolution of mining this whole deposit. We have a long way to go. I mean, this deposit keeps growing, and hopefully, we're just at the tip of the iceberg in Mexico. So hopefully, I've answered your question, specifically and generally.

Yes. I appreciate that rundown and that summary that goes back for people who don't go back as far as many people who have listened to this do. And it's that slow and steady smart management. Why I'm still around with this company as far as being an owner in part with you. One other quick question then on Mirador over there. Is that going to be a slow and steady increase on the tonnage out of there as well?

Yes. Mirador, for those who are listening and may not know, is the -- another mine we put into production with cash flow along our trend at our Alta Gracia project, and we bootstrapped that. We started out very small, just pushing 150 tonne, pushing 200 tonne occasionally a day, not really impressive, so to speak, for the industry, but we wanted to do it with cash flow and we did. And we're in there developing it. We are not yet really into some of the higher-grade areas. There'll be some news coming out shortly regarding this area -- the Mirador. But it's going to be slow and steady, to your point. We're not expecting big things from that. In large part, because we're doing it with our own cash, trying to bootstrap it. So it takes a little longer. But at the end of the day, we think it's the best approach.

It's better than taking on debt in my estimation as well. And then lastly, down there in the Oaxaca Unit, what is the next property that would be, and I realize it will probably be down the road quite a little ways. But what will be the next property that you will be really starting to dig into down there?

That's a good question. What comes to mind is the Arista Mine. We have tremendous potential to expand that and so that should be our focus...

Okay. So yes, because it's all developed underground and so forth and you'll be able to go get some of those splays and so forth that are going out all over the place down there. Okay.

Right. So we just don't want to get too distracted, so to speak. Part of the company right now and that will change over time because we have good things coming from Nevada but that last year we started...

Okay. It's really good to talk to you. I really appreciate the ability to actually access you and I know that you're good e-mail wise as well with your guy that tends those, and I appreciate that. I appreciate your management. You've learned well from that.

Mark, and you, anybody who has my number and I don't have a secretary. So you call, you're going to get me. So if you call the office and just for me, anybody can call me anytime. Thank you, Mark.

(Operator Instructions) We'll now take our next question.

Jason, it's Harvey Volen. You have the numbers and the description of the year and the anticipation of 2019, it all sounds great. I have a couple of questions. The deal with Wainwright, you said that you raised $15 million, which is obviously, going toward the development of Isabella Pearl. And that resulted in 3,668,885, to be exact, shares -- additional shares outstanding. Is that the end of it? Or will you be going for more sales?

All right, great question. I also want to add to that, it's only 6.3% dilution. And I said that earlier, and I'll say it again. Very proud of the fact that we gave it a shot to build this with cash flow. We have built about half of it. And it was just -- the market was too volatile and like I've said in every conference call, all options are on the table. We looked at this option and saw it as the best one and hence we only have 6.3% dilution, and we believe we've raised all the money necessary for the construction of the Isabella Pearl. Now we've said it in the K, we -- it's open, it remains open. We will use it if we need to. But we believe we've raised all the money necessary for the construction of the Isabella Pearl.

So possibly the rest of that money could be used for other development of some of the other Nevada properties. Is that what you are saying parenthetically?

No, we're not going to change our strategy as a company. Look, we've fought tooth and nail to have one of the tightest capital structures for produce in this space. This -- and we've grown organically for 8 years, this is our first raise in 8 years. We take it very seriously. We're not just going to go continue to dilute to go -- grow. It's just when this particular project, we told everybody in advance, we're going to give it a shot doing it with cash flow, it's going to be tight. And believe me, looking at spreadsheets this week or that week or this month and that month. You had weeks where you're like, "Yes, we can make it, while it's going to be tight," and we just couldn't. But I'm proud of the fact that we did half. So no, don't see that it's still in place, meaning we're just going to continue to hit that over and over again like everybody else in our industry does. We are not like everybody else and I put my track record against that. So...

I appreciate you saying that and I appreciate hearing it.

Yes. No, I just want to be as transparent as possible. It remains active, but I will say it a third time. We believe we've raised all the money necessary to construct the Isabella Pearl Project.

Okay. Sounds good. Let me ask you about the contract mining agreement. Can you talk about that as far as Isabella Pearl is concerned?

In what way? In doing it or...

Well, I see it as a $30 million for 24 months, a contract miner, what does that entail? What is that contract for exactly?

Okay. We are contracted with Ledcor for our contract mining of the deposit, and that entails them blasting and mining, the waste and ore, calling the ore down to the crushing facility or if it's ROM, straight on the pad and hauling waste to the waste locations. That's what it entails. So does that answer your question?

Well, $30 million over 2 years, that digs pretty deeply into what you expect to get out of Isabella Pearl. So what other costs are involved in the production from Isabella Pearl besides the mining agreement?

Yes. We have employee costs. We're trying to run with a real tight ship of about 40 people. So it's going to be really tight, but we're pretty confident we can do that. And then we obviously have all the cost associated with the process with crushing, with loading the heap, with processing through the ADR. But coming back to the Ledcor contract, let me put this in context of Mexico. We use many different contractors in Mexico and you guys, who many of which are on this call and have been with us for long time, in years where we faltered, in large part it was the contractor who just didn't deliver. And so we basically brought all mining in-house. And we're delivering because for years now, it's all in-house in Mexico. So let me apply that here to Nevada. I can at any point in time, basically, after 24 months, I can walk away from this Ledcor contract if they don't perform or if it make sense to go somewhere else. So yes, I know you're looking and focusing on that number, but we're going to be looking at the economics of this the whole way through. And I have optionality, if I want to bring mining in-house. One of the approach is that we looked that earlier on, should we buy all the mining fleet and just do it ourselves because that is ultimately one of the better ways to go about it. But I didn't want to dilute it, none of us wanted to dilute that much to go buy the mining fleet right now. But believe me, when we're in production and we're spinning off a lot of cash like we expect to, especially when we get deep in the Pearl, we will have that option to afford that equipment and bring it in-house. I know what you're trying to dig that on what are these total costs and that looks a big number, and wow they're going to take all the money. No, they're not. I mean, I fully expect to make a lot of money here and perhaps even keep more of it than I do in Mexico. So we'll be watching costs but Ledcor is a good group. Like any project, there's been a few hiccups along the way, and but we're getting on through them and we're doing fine. So we'll see where it goes.

Okay. One more question, if I might. Dividend policy. Historically, the company's always talked about 1/3, 1/3, 1/3, you know what I'm talking about. And you put that on the back burner for the last several years for obvious reasons. It made much more sense to use all the cash flow you could to build out Nevada and to make other operations more efficient. So now, once Nevada goes into production and starts to contribute cash to the company's coffers. Will the dividend policy go back to 1/3, 1/3, 1/3, where it's applied to mine gross profit?

That's a great question. My gut answer to that is if it was to go back to 1/3, 1/3, 1/3, we need to see a little bit of increase in the gold price. But for the time, for the foreseeable future, we're going to stand with what we speak now and that is return as much back to the shareholders as soon as possible. For anybody who's listening, who doesn't understand what we're talking about, we had a policy early on back in the last bull market, where we stated that 1/3 of the revenue would go to taxes, 1/3 for growth being put back into the project and 1/3 for the dividends. And for years, we nailed it. And believe me, we got calls from you guys if we were off by a tiny little bit. But we did it, 1/3, 1/3, 1/3. Now the bear market hit us and you just can't do that. The margins got too tight, and you couldn't do it -- we couldn't do it, in the bear market. If we go back into a bull market, we've done it in the past it's possible, I'll say that. But I'd like to see that bull market in full effect before I start talking about going back to the 1/3, 1/3, 1/3. But coming back to dividends in general, I fully want this dividend to start going up. There's nothing better than cash and dividend checks, nothing. For those who were in this company, during the last bull market, those were great years, and we all want to go back to that. So hence why we build half of this with our cash even though it was very difficult, and not the easy route because we want to keep a tight capital structure. So yes, I mean, just to clarify, I can't give you the answer that we're going to go back to 1/3, 1/3, 1/3, without a real strong bull market.

Got it. Okay, I accept that. Jason, again congratulations. I appreciate your conservative management style. I think you've done very, very well in the face of well, the status of the gold price market and all of the other challenges that the company has had to face. So congratulations.

I appreciate it. And I hope as time goes on, these calls will get a lot more fun when we're talking about additional production and you're asking me okay, it went up by this much, where is it going next? That's what I look forward to, Harvey. I hope you call when we're increasing the dividend to ask those questions.

I will and I look forward to it as well.

Perfect. Thank you, Harvey.

We will now take our next question.

Jason, just a couple of last questions and as a side note, I'm...

Who's this?

This is Vijay Marolia, Regal Point Capital, sorry about that. So the long-term debt that's on the P&L, that just like equipment financing, is that correct?

Yes. We have no long-term debt from my perspective meaning what we have is equipment. Yes. We don't....

Okay. Perfect. And then you already talked about dilution. In terms of CapEx, it seems like there should be drastic reductions in CapEx for this year and next or am I looking at it wrong?

No, I wanted it to be -- obviously, this is -- we're still finishing everything. But last year, and I know that -- I referenced it in my remarks earlier, those 3 programs were a huge cash drain on us, all while we were trying to build the Isabella Pearl. It was over $10 million. And that was a lot of money when you're trying to build something. That would have gone a long way. Having said that, the tailings again is done. So that CapEx is done. Now the pay slot is a little bit less because we're still finishing it, but then the electric lines done. So I mean, we fully expect less CapEx. So yes, that's an accurate statement.

And then I guess, the last question would be, in terms of Las Margaritas, do we have expected development date on that?

On Las Margaritas or...

Yes.

No. We're still exploring Las Margaritas.

Okay, okay. Jason, I'm very excited and congrats again. And looking forward to going over the future results.

Well, we appreciate you calling us, Vijay. You've been around for a whole while and good thing that you're -- hopefully, back in -- I think, we have some exciting things ahead. So good to hear from you..

We will now take our next...

Operator, I think, we've gone over time, so let's go ahead and close the call out and for anybody who may have been on the queue, feel free to just pick up the phone and call. I have a few things right after this so I know I said I'm always available, but my associate Greg will be right after this. But anyway, we're around all day. So thank you very much and we'll talk to you next quarter.

This concludes today's call. Thank you for your participation. You may now disconnect.