Gold Resource Corporation
Q2 2018 Earnings Call Transcript

Published: 1 Aug 2018

[Operator:]

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. 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.

[Jason 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 eight 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 reconsideration 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 two 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 position the company to be the next Nevada gold producer, and we target 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 indicate 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-out 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 [indiscernible] expansion and pace build program all moved forward. Turning to our Nevada mining unit, we announced during the quarter in 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 four 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 [indiscernible] 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 18 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 planned, 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 underway. 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 continue to expand the Arista deposit at Oaxaca Mining Unit. We continue Nevada mining unit exploration success with Mina Gold exploration drilling, and we begin construction at 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. And in an effort to efficiently address the Q&A portion of the call without wasting anyone’s time 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 the next productive caller’s question. Operator, if you can open up the lines for the Q&A, and take our first question, if there is one.

[Operator:]

Thank you, sir. [Operator Instructions] Thank you. Our first question…

[Jason Reid:]

Hello, can you state your name?

[Unidentified Analyst:]

[Indiscernible] I’m a private investor. I noticed your stock price is getting hit hard this morning. Do you know why?

[Jason Reid:]

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 all but 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.

[Unidentified Analyst:]

Yes. It seems that the construction being done in 12 months and that mine going online, it looks optimistic need. Thank you. You’re welcome.

[Operator:]

[Operator Instructions Our next question…

[Unidentified Analyst:]

It’s Harvey Volen [ph]. 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.

[Jason Reid:]

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 that the fact that we’re up 32% over the year. 26% year-to-date, we’re doing great. Very were flooring all in March. We ran up do the 30 few against. That’s pretty fast. Stock 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 fall 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.

[Unidentified Analyst:]

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? Jason D. Reid - Gold Resource

[Jason Reid:]

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 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 in 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 now 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.

[Unidentified Analyst:]

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

[Jason Reid:]

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 – or 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.

[Unidentified Analyst:]

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

[Jason Reid:]

You’re welcome. I’m going to continue to do that. I’ll be out there in two 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 pull our gold, and we’re going to make money. It’s going to be fun.

[Unidentified Analyst:]

I’m happy to be along for the ride.

[Jason Reid:]

Great. Thanks, Harvey.

[Operator:]

Thank you. Your next question.

[Unidentified Analyst:]

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

[Jason Reid:]

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 five 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.

[Unidentified Analyst:]

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

[Jason Reid:]

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…

[Unidentified Analyst:]

Okay. Okay. Now our next question is about your dividend. Maybe I shouldn’t – raise that until you finish with the mine in Nevada, get that operational, going [indiscernible]

[Jason Reid:]

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 pulling gold in Nevada, then Mexico could potentially kick in additional dividend. Because its 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 this. Maybe we can do more or maybe less. But regardless, that will be a driver for our share price.

[Unidentified Analyst:]

Nice. Yes, good. Okay. That’s what I want to know.

[Jason Reid:]

Thanks, Doug. I appreciate your call.

[Operator:]

Thank you. Our next question.

[Unidentified Analyst:]

This is Bill Pace [ph]. Yes, Am I on?

[Jason Reid:]

You are. How are you?

[Unidentified Analyst:]

Yes. Fine, thanks. 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. That 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 information on it?

[Jason Reid:]

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 about them. We haven’t heard from them much. I’m certain it’s dead. And secondly – and yes, whatever, I’ll leave that. I let that go. Do you have any more questions?

[Unidentified Analyst:]

No. Not for me.

[Jason Reid:]

You welcome Bill, have a good day.

[Operator:]

Thank you. Our next question.

[Unidentified Analyst:]

Hello, everyone. This is [indiscernible] 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.

[Jason Reid:]

Thank you.

[Unidentified Analyst:]

I am a little bit concerned about two things. Congratulations on the quarter. I thought the quarter was fine. But I have two concerns. One is, I’m a little concerned about the gold equivalent ounce silver – precious metal silver, 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 because 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.

[Jason Reid:]

That was a 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 reiterate this. This is a very important point. When we discovered Switchback, and we’re delineating Switchback, and we’re mine planning Switchback, we had a choice

[Unidentified Analyst:]

I’m not sure. That’s was a good answer to that though. That’s what I assumed. But I didn’t see – but basically, so know 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?

[Jason Reid:]

Well, it depends. 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 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 smoot 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 seven consecutive years, so I think the grade is more than adequate. We’ll have some quarters that 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.

[Unidentified Analyst:]

Sounds good. Again, congratulations on the steady progress. I appreciate it.

[Operator:]

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

[Jason Reid:]

Perfect. I do have one e-mail question, and this will be the final one. It’s from Joe Nordgard [ph]. Hi, Joe, I recognize your name from years ago. You have two 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’ve 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 tonnes, 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. That’ll give you a sense, Joe, that things are going quite well at Switchback. And that’s in large part because we took one 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 its doing. We’re making progress at Alta Gracia. Remember, we bootstrap 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.

[Operator:]

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