Gold Resource Corp (GORO) 2019 Q4 法說會逐字稿

Thank you for joining Gold Resource Corporation's fourth quarter and year-end earnings conference call. Mr. Jason Reid, President and Chief Executive Officer, will be hosting today's call. Following Mr. Reid's opening remarks, there will be a question-and-answer period. 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 2019 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, March 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 non-GAAP financial measures referred to in our remarks in our Form 10-K filed with the SEC for the year ended December 31, 2019. 2019 was a stellar year for Gold Resource Corporation with a long list of accomplishments and successes. There are simply too many highlights to mention them all during the call, but 3 very important highlights include the company delivering its 9th consecutive year of profitability; secondly, we built, commissioned and reached commercial production from our new Isabella Pearl mine in our Nevada Mining Unit; and third, we produced a record number of gold ounces in 2019. What is especially exciting going forward is we are poised to potentially set another annual gold production record in 2020.

In addition to producing a record of 40,318 gold ounces, we also produced over 1.7 million silver ounces, successfully achieving our stated 2019 annual gold and silver production outlook range. This precious metal production was coupled with substantial base metal production as well. 10,883 ounces of our annual gold production were from our new Nevada Mining Unit, Isabella Pearl mine commissioned during the year. We are very proud of the fact we produced first doré in April of 2019 and just 10 months after official groundbreaking on the project. We're also very proud of the fact we built a large portion of this project with cash flow and only sustained a total of just 13% share dilution to reach commercial production at our Nevada Mining Unit.

In 2019, we posted annual consolidated net sales of $135 million, an increase of 17% over the prior year. Mine gross profit of $29 million and annual net income of $5.8 million or $0.09 per share. We also remain committed to the dividend with our 2019 monthly dividend distributions set at $0.02 per share annually until our Isabella Pearl mine reached commercial production in October of 2019, after which, we increased the dividend by 100% to $0.04 per share on an annualized basis.

As you all know, we pay our dividends on a monthly basis. As we continue to succeed, we look forward toward additional potential future dividend increases. Yesterday, we updated our annual proven and probable reserve estimate as of December 31, 2019, increasing our consolidated proven and probable gold reserve grade by 20.1%, and consolidated proven and probable gold reserve ounces by 1.1%. Our exploration team delivered these great results with a relatively modest $3.6 million 2019 exploration spend.

For 2020, we are targeting a $7 million exploration budget. Watch for the updated 2019 proven and probable reserve report to be posted on our website in the near future. We were both pleased and excited to see the successes of our modest 2019 exploration drill program in Nevada around the margins of the known Isabella Pearl pit as well as deep total drilling to help better define the sulfide-oxide boundary in which we identified additional leachable ore.

We added gold ounces to the deposit, which offset ounces produced in 2019 and hold steady our mine life at 4.5 years. We also recently announced 2019 Nevada exploration drill results intercepting near-surface high-grade gold at our Scarlet target, which is located directly adjacent to the Isabella Pearl deposit being mined. Among numerous intercepts, we hit 24 meters of 1.03 grams per tonne gold, just 1.5 meters downhole. This is very exciting, and though we have a lot of drilling to do to see if we have, in fact, found our next deposit on the Isabella Pearl project mineralized trend, our first Scarlet drill program is strong indication we may have found our next one.

I've said it before and I will say it again, having closed 4 deals in 14 months during the bear market in metals, Gold Resource Corporation has accumulated one of the most exciting land positions along the prolific water -- Walker Lane Mineral Belt, and drill results like this strengthen our belief. Exploration in 2019 at our Oaxaca Mining Unit continued to expand the veins and vein system in the Arista mine as per press releases announced throughout the year.

For 2020, we have commissioned an exciting exploration plan, the likes of which we have never attempted before. We have always set up drill pads in the Arista mine along the vein system where a mine development access allowed. For 2020, we have designed and have already bought -- begun construction of what is to be at least 2 exploration drifts specifically developed for the purpose of exploration. This kind of exploration project has always been a management goal but to have the time and capital to allocate to this type of exploration project has alluded us until now.

Having completed enough 2019 mine development for our targeted production in 2020, we believe we can now take on a project like this. It will be tremendously advantageous and exciting to have these dedicated exploration drifts from which to not only drill new areas of the Arista mine's vein system, not tested before, but these dedicated exploration drifts will also help us target new areas beyond the known vein systems of the Arista mine, which were previously unreachable due to available drill pad locations. We believe we may have other parallel vein systems to the Arista Mine's Arista and Switchback vein systems. There is strong potential for other parallel vein systems located to the Southwest of the Arista vein system and to the Northeast of the Switchback vein system. At surface, a ridge and small veinlets outcrop above both the Arista and Switchback vein systems.

Those outcrop veinlets continue vertically underground until about 100 meters or more and then they widen out to the vein systems we are currently mining from. There are several additional and similar ridges with outcropped veins at the surface along this trend. The next one is a ridge located to the Northeast of the Switchback vein system. The surface topography of this area has a much higher elevation as the mountain climbs in that direction. Testing for parallel vein systems at these depths is best done from underground, but we previously had no way to reach this new area, given the long drill distances required to test it. As we complete portions of these new dedicated exploration drifts, which put us closer in that direction, we plan to set up drill pads along the way and test highly prospective new areas never tested before. Finding another Arista vein system or Switchback vein system could add tremendous shareholder value.

This 2020 exploration plan with dedicated exploration drifts, driven off the veins, will be the first of its kind for our company. And we are very excited to have evolved to this advanced style of underground exploration. Looking at our 2019 production cost of Oaxaca Mining Unit's total cash cost after by-product credits per ounce sold was $264 per precious metal ounce, and all-in sustaining cash cost after by-product credits was $646 per precious metal ounce. We continue to position Gold Resource among the industry's low-cost peer group with our Oaxaca Mining Unit. And once the ramp-up phase of our Nevada Mining Unit is behind us, we expect it too to be in the low-cost peer group, especially with it being an open pit heap leach operation.

2019 was a tremendously busy construction year for the company. A year to not only saw the construction and commissioning of our new Nevada Mining Unit, Isabella Pearl mine, but we also saw the completion of 3 large and important CapEx projects at our Oaxaca Mining Unit. These included the tailings dam Phase III lift, the commissioning of the paste fill plant for the Arista underground mine and the Arista Mine's connection to the power grid.

With these 3 projects successfully completed in 2019, we now look to the long-term future tailing needs of the El Aguila project by investing in a dry stack tailing storage project. Dry stack is more environmentally friendly, has greater optionality on storage area locations and is in the same direction, many of the leaders in the industry are going towards regarding tailings facilities. In 2019, we designed the dry stack project. We are currently securing equipment and preparing for construction, as we await the final permits, and the project is targeted to be completed and commissioned late 2020 or early 2021.

The estimated CapEx for the dry stack is approximately $12 million. What is also great about the dry stack project is that the initial 4 years of stacking location is targeted for our old Aguila open-pit mine. We plan to effectively restore the landscape of the open pit we created back to its prior condition. After reclaiming the open pit, we have other areas for dry stack storage with a second location on a portion of the existing tailings facility. The company's global precious metal production targets for 2020 are 54,000 gold ounces and 1.7 million silver ounces with a plus or minus 10% range of each metal.

In addition, significant base metal production of copper, lead and zinc are expected as well. Of this, 27,000 gold ounces are targeted from the Isabella Pearl during 2020 as we look to then ramp up to 40,000 gold ounces per year in 2021. A primary driver for 2020 gold production growth will be accessing the higher grade gold ore in the Pearl deposit. As a reminder, the Pearl hosts approximately 80% of the gold ounces at the Isabella Pearl Gold project at average grade exceeding 4 grams per tonne.

We expect to begin processing higher-grade ore from Pearl approximately midyear 2020, when we expect gold production to increase and production costs to drop substantially. We accomplished a great deal in 2019, including the achievement of our ninth consecutive year of profitability, while setting a new gold production record. We built a new mine in Nevada, completed numerous projects in Mexico, and are building value for shareholders in a bright future for the company. Looking forward into 2020 and beyond, we are positioned for substantial gold production growth and are very excited about the years to come. The precious metal markets can stay around this price, and I believe we will do very well. But if gold continues to climb, like it has over the last few years, we are positioned to exceed expectations.

With that, I would like to thank everyone for their time today on this conference call. 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 do not screen, filter or limit who can call in, any distracting or antagonistic calls will simply be terminated and I'll move on to the next productive caller's question. Operator, if you can open up the lines for the Q&A. And those -- if there are any, can get in the queue. But before I jump to that, I would like to address several email questions.

The first is from Amit Ghate. He's asking, can we please provide details of the exploration plans for the remainder of the year at both the Mexican and Nevada properties? If possible, please include approximate dates when drill results should be available for the various properties being explored. I did touch on this. Obviously, we're going to be focusing on expanding our Arista Mine. We think it has tremendous potential, both on the Arista and Switchback vein systems to expand. But if we can find another one of these, that could be another game changer for the company. And as I mentioned, we are now going to have a specific exploration risk to test new areas, we've never been able to test before. So it's going to -- I expect it to be a very exciting year in Mexico.

In Nevada, as I mentioned, we did a great job adding some ounces in the bottom of the pit and around some margins of the pit. But we may have found our next deposit at Scarlet. It's too early to call it, but they have a first drill program hit high grade, 1.5 meters downhole. That could become an economic deposit very soon, given the fact there's very little overburden to move. And it's a stone throw away from our current operations. So we're going to remain focused on both those areas. Having said that, we are also going to focus on East Camp Douglas as well, and we're going to drill that about midyear. And I think, and I've said it numerous times before, East Camp is home run potential for us. I see the East campus potentially being the Arista mine equivalent in Nevada. It's a big property. It's going to take a long time to explore, but we are positioning ourselves to drill it soon and it's going to be fun to start doing that. So hopefully, that answers your question.

As far as the second part of your question, I can't give you the dates in which we're going to announce drill results. I don't know those dates yet. We have to wait and see how the exploration transpires. The second write-in question was from Liam Stryker. A novice question about the Arista Mine, is the ore or concentrate center refinery? And is that in China? I'm concerned there will be a backlog there. Any comments you can provide would be welcome.

Now great question, Liam. We transact all our concentrate in doré in Mexico and the U.S. So we are paid and the concentrate buyers may send it to China, they may not but that's their problem. So we don't expect any interruptions in the sales of our product because we sell in Mexico and the U.S. but great question.

Another question from Richard and they didn't put a last name here, but I'm going to read the question and turn it over to John because this is a tax question. And I will probably butcher it if I try to answer it. But it says, can anyone explain the seemingly high provision for income tax? Income tax before taxes are about $14 million, provision for the income tax is $9 million, a 61% rate. I'm not an accountant, perhaps someone can shed light on this subject? So John, if you wouldn't mind addressing that question?

Sure. And this is a product of the new Tax Act that was enacted at the end of 2017, which basically changed the basis on which U.S. firms are taxed from earnings from -- for affiliates. And Congress was concerned that there would be in-car shifting because the U.S. generally exempts earnings from foreign affiliates now. So they put in a minimum tax and they call this the guilty tax. I won't explain what that means, but at any rate, it's a minimum tax. It caused us to have the book, about $2.1 million, which we otherwise would have had to pay had it not been for net operating losses, that we were able to offset that tax risk. Looking forward, since it was meant to keep from income shifting to low-tax jurisdictions, Mexico is not one of those. And there may be an exemption coming down the pike for high-tax jurisdictions, which would cause this to be no longer a factor for us at all.

So it could reverse. Having said that, in 2019, we were hit with an additional 15% tax on our consolidated tax rate. That's why we have 61% instead of about 46%, which would have been in line with the prior year, and nearly $0.04 a share. Our earnings would have been about $0.13 a share rather than the $0.09 that we're showing in 2019. Hope that answers the question.

Yes. No, that's a great explanation, John. Thank you. And again, just to reiterate, it would have been $0.13, but we were -- we're hit pretty hard by that additional tax. So with that, operator, if there are any questions, you can open up the line.

(Operator Instructions) We do have one question lined up already.

This is Tyler Bisset on for Heiko. Congrats on another year of profitability. Just one quick question for you guys, and I know you mentioned that there would be no interruption to the sale of your product, but has the current coronavirus outbreak had any impact on your corporate operations or even mining operations?

No, it's a great question. We have been getting out in front of this circling with our general managers and making sure that any areas that could be sensitive or impacted by China to get out in front of it. At this point, we don't see any issues. Obviously, something could get us, we're not seeing at this point. But we don't foresee the impact at this time from the coronavirus. Now obviously, if the coronavirus spreads to an extent where everybody at site got it, and we -- obviously, our production would be impacted as would any operations. But as far as supplies as such, at this point, we do not see that. So to be clear, we have not been impacted. And at this point, we don't expect to be impacted.

And on -- and then any changes in terms of being more conservative with any future dividend payments or minimum cash balances or just like travel arrangements?

This company was founded to pay a dividend. And if you -- you guys are fully aware and most people on this call are fully aware how committed we are to them, and we paid them all the way to the bear market. And you saw us increasing 100%. We absolutely want to remain consistent with focusing on dividends. Having said that, we also want to find another Switchback vein system. And you heard me talk about us, putting out these exploration drifts and such. So we continue to try to find that balance. It's always been a challenging balance to find, right? But I think we've done a good job with it. But at this point, it's business as usual. We hope to increase the dividend and hope to find another Switchback. So we're trying to do both. We'll continue to try to do both and not a real big game plan to change in that regard.

We can now move along to our next question.

Jason, John, thank you for that discussion on that tax change. That was one of my questions. But jumping to metallurgy. The metallurgy on the deep Pearl stuff, is that complete? And you're real confident that your extraction is going to be effective on that deep Pearl processing?

Yes, that's a great question. This deposit has been looked at by almost a handful of metallurgists. McCallum looked at it, Kappes, Cassiday looked at it. Numerous big name groups have looked at this. And we noticed when we first acquired a property that the deep transition zone, if you will, between oxide and sulfide have never really been defined to a point where we knew roughly where it was. But what we wanted to do is go in there and really put additional holes to get a sense for it and to confirm previous metallurgy that said you could recover it with heap leaching. So this recent drill program did just that. It was solely to better define the sulfide-oxide boundary. Every result we gave you in that press release is leachable ore, and we've had that question numerous times.

All that high-grade leachable ore, we didn't mean to show you the deeper stuff that -- doesn't mean because you couldn't get it leachable, but it goes into much higher grade ore. But the point being is we added about 20,000 ounces in the bottom. And we put it through a battery of tests, legibility tests. And it's so high grade, you don't get quite the recovery. But on balance, you're making a lot of money. So yes, at this point, we have tested this. Others have tested it with the same indication that can be recovered. But it ultimately does transition into a full-on sulfide that cannot be recovered. But as far as we're concerned, there is some upside. We always knew there's going to be upside in the bottom of the pit, and we wanted to test that. We did it and it worked out for us. Great question.

And then one other question on Scarlet up there. A lot of that deposit's inside of the permitted pit boundary, and -- are -- what -- at what point are you in the permitting process to expand that pit boundary?

Okay. That's a great question as well. As you just mentioned, if you look at the permitted EA boundary, there's a bit of a pop out, I call it a dog nose in the upper left, where -- that's where we drill all these holes from that we announced. And the trend was it was getting higher and higher grade as it got closer and closer to that border. So what -- we could not keep drilling past that boundary at that point in time. So we stopped. But we have since gone for the NOI notice of intent, which enables you to go drill, and we've received that. So we now can go drill it. And we are very excited to keep testing because as that was moving toward that current mine plan boundary and moving off of it, that's where that highest grade hole was. And it's only 1.5 meters downhole. So if that mineralization continues, which we'll know soon because we're going to drill it, that could be our next deposit.

The fact that it's only 1.5 meters deep is terrific. There's not a huge amount of overburden to access that. And obviously, a couple of stone throws away from our current operations. So we do have the NOI in place. We can test now new areas we couldn't test before. But the initial drill program is terrific. Very exciting. It's what we had hoped. And again, it's early days. We have a lot of work to do. But also keep in mind that we have 10 kilometers of this trend. And all we're doing now is -- everything we're doing now is on the far right side of this trend. But for 10 kilometers to the Northwest, we have numerous targets. They all will not be deposits, but I believe many of them will. And so I fully expect to be just the Isabella Pearl project mining for over 10 years, let alone the other properties, let alone East Camp, which I mentioned to be home run potential.

So I think what this does, what the first drill program does, what the high-grade in Isabella Pearl does, what this potential does, really emphasizes what I said in my conference call that we have the pole position, the best land there is along this portion of the trend. And it's really exciting. And we couldn't have timed it better. We picked up these properties during the fair market, it looks like now we're going into a full market. And so -- even if we don't, we're going to do well, but if we do, we're going to exceed expectations. So very exciting times. I think you know -- I recognize you boys, and you know our story well enough to know that Scarlet could be our next one.

Any other questions?

We can now move along to our next question.

Jason, this is [Lee Pigorsch]. I've got a question here on your Mexico operation. My understanding is the mill right now is running at almost 100% capacity. Is there any plans to expand that mill operation to process more ore?

No. No. And that's just the long and short of it. There are several things. Yes, it's pretty possible, but where this mill sits, we had to flatten the mountain top to actually put this mill here. And over time, with cash flow, we've taken this mill from several hundred tonnes a day all the way up to 2,000 tonnes a day. So it would be difficult, not impossible, but it would be difficult to increase capacity. But the decision to do that has to hinge on the mine and pulling 2,000 tonnes a day from the mine, we're pushing it. We're doing it, and we've done it, but there's no reason to put additional pressure on ourselves, in my opinion. We know that we mined down on the Arista vein system for over 8 years now. And we know that the mineral and the deposit change and the higher grade precious metals are up towards the top 1/2 to 2/3.

You still have precious metal deep but the base metals come in very strong, deep. So then we drift over to Switchback deep, we're in the heavy base metals, and now we're going to be mining up over the years. So where I expect over the years to see some increase at the current mine throughput, is grade increases. So I expect to see the reverse happen where we see our precious metals have gone down a bit over the years at Arista. They should go up a bit at Switchback just to have some additional growth, if you will. But I don't think at this point in time, we need to put the pressure on the operations to just keep increasing the mill and try to make up for it on the tonnes. Now we did a really great thing in doing the paste fill plant. That allows us -- I mean it's a safer -- the limit -- it lowers the amount of tailings you have to have on the surface because you're putting a lot back underground. That allows us to extract 100% of some of these valuable pillars, which can be in excess of $1 million on occasion.

Plus we're in this wide area of the Switchback vein system where we need it. And so right now, we're going to be targeting the approximate 2,000 tonnes a day for the year and probably next year as well. But yes, there's no reason to increase it at this point.

Okay. I just was thinking but -- I asked that question. Appreciate the answer.

That's a great question. But at this point that isn't in the plan. Now the plan is to perhaps see a bump as we get into the higher grade precious metals mining up on the Switchback, with the same tunnels. Good question, Lee. Thank you.

We have another...

Operator, I do notice that we're at time. And so with that, if -- let's stop the call. And if you're in the queue, and you have a question that hasn't been answered, please call the office directly, Greg and myself are here. We're happy to answer any and all questions. With that, I'll close the call, I'd like to thank everyone for the time today, and we look forward to updating you next quarter. And at this point, 2020 is looking like it's going to be a very exciting year for shareholders. Thank you very much. Have a good day.

This will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.