Gold Resource Corporation
Q4 2019 Earnings Call Transcript

Published: 3 Mar 2020

[Operator:]

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.

[Jason 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 a 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 this 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 obligations 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 three very important highlights include the company delivering its ninth consecutive year of profitability.Secondly, we built commissioned and reached commercial production from our new Isabella Pearl mine in our Nevada Mine 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 from our new Nevada Mining Unit's Isabella Pearl mine commissioned during the year. We are very proud of the fact we produce first story 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 in 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 remained committed to the dividend with our 2019 monthly dividend distributions set at $0.02 per share and annually and tell our Isabella Pearl mine reach commercial production in October 2019, after which we increased the dividend by 100% to $0.04 cents per share on an annualized basis.As you all know, we pay out dividends on a monthly basis. As we continue to succeed, we look forward toward additional potential of 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 assets 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 dollar 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 with the known Isabella Pearl as well as deep Pearl drilling to help better define the sulfide oxide boundary in which we identified additional leachable ore.We had a great ounces into deposit, which offset ounces produced in 2019 and hold steady our mine life at four and a half years. We also recently announced 2019 Nevada exploration drill results and there's the near surface high grade gold at our Scarlet target, which is located directly adjacent to Isabella Pearl deposit being mined.Among numerous intercepts, we hit 24 meters of 1.03 grams per ton gold just one and a half meters down hole. 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 Isabella Pearl projects and analyze trend. Our first round of 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 four deals in 14 months during the bear market and metals Gold Resource Corporation has accumulated one of the most exciting land positions along the prolific Walker Lane Mineral Belt, and drill results like this strengthen our belief.Exploration in 2019 at the Oaxaca Mining Unit continued to expand the veins and vein system and use the mine as progress releases announced throughout the year. For 2020 we've commissioned an exciting exploration plan the likes of which we have never attempted before.We have always set up your pads and we leach the mine along the vein system where mine development access allowed. For 2020 we have designed and have already begun construction of what is to be at least two 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 eluded 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 these mine's known vein system, not tested before, but the 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 in the Arista Mine the recent Switchback vein systems, there is strong potential for other parallel vein systems located to the south west of the Arista Mine vein system and to the north east of the Switchback vein system.At surface, a ridge and small veins above both the Arista and Switchback vein systems. Both outcrop veins continued vertically underground and tell 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 outcrop 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 area has a much higher elevation of the mountain climbs in that direction.Testing for parallel vein systems at the depth is best done from underground, but we previously had no way to reach this new area, given long drill distances required to test it. As we complete portions of the new dedicated exploration drifts, which put us closer in that direction we plan to set up drill paths 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 driven off the veins will be the first of its kind for our company. And we are very excited to have evolved this advanced style underground exploration.Looking at our 2019 production cost. 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 costs 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 Oaxaca Mining Unit. And once the ramp of phase of our Nevada Mining Unit is behind us, we expect it 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 that not only saw the construction and commissioning of our new Nevada Mining Unit’s Isabella Pearl Mine, we also start a completion of three large and important CapEx projects at Oaxaca Mining Unit.These included the tailings down phase 3 list, the commissioning of the pay scale plan for the Arista underground mine and the Arista mines connection to the power grid. With these three projects successfully completed in 2019, we now look to the long term future tailing needs of the Aguila project by investing in a dry stack tailing storage project.Dry stack is more environmental friendly. Has greater optionality and storage area allocation. 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 in 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 to the dry stack is approximately $12 million. What is also great about the dry sack project is that the initial full years of stacking location is targeted for 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 as. Of this 27,000 gold ounces are targeted from Isabella Pearl during 2020 as we look to then ramp up to 40,000 gold ounces performance 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 grades exceeding 4 grams per ton. We expect to begin processing higher grade ore from Pearl approximately midyear 2020. We expect gold production increase and production costs to drop substantially.We accomplished a great deal in 2019, including the achievement of our 9th consecutive year profitability, offsetting a new gold production in the record. We built a new mine in Nevada completed numerous projects in Mexico and are building value for shareholders and 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 privileged position to exceed expectations. With that, I'd like to thank everyone for their time today on this conference call.

[Jason Reid:]

Let's move on to 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 that already can get in the queue. But before I jump to that, I would like to address several e-mail questions.The first is from [indiscernible]. He's asking can we please provide details of the expiration plans for the remainder of the year of both the Mexican and Nevada properties. If possible please include approximate dates with real 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 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, where we may have found an extra deposit at Scarlet. It's too early to call it but to have a first drill program hit high grade in meter a half down pole. That could become an economic deposit very soon, given the fact there's very little overburden to move, and it's a stone's 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 Camp is potentially being the Arista Mine equivalent in Nevada. It's a big property. It can take a long time to explore it. 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 the question. I can't give you the dates in which we're going to announce drill results. I don't know those dates yet. You have to wait and see how the expiration transpires.The second writing question was from Liam Striker. An obvious 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 will be welcome.Great question, Liam. We transact all our concentrate and ore 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 good question.Another question from Richard and he 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 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 at 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?

[John Labate:]

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 foreign affiliates. And Congress was concerned that there won't be income shifting because 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 to 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 with.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 us 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 $0.09 that we're showing in 2019. Hope that answers the question.

[Jason Reid:]

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

[Operator:]

Thank you. [Operator Instructions] We do have one question lined up already. Your line is open. Please go ahead.

[Unidentified Analyst:]

Hey, this is [indiscernible] on for Heiko. Thank you for taking our question and congrats on another year of profitability.

[Jason Reid:]

Thank you.

[Unidentified Analyst:]

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?

[Jason Reid:]

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 perceive the impact at this time from the corona virus. Now, obviously, if the corona virus spreads to an extent where everybody at site got it. And obviously our production would be impacted as with any operations, but as far as suppliers and 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.

[Unidentified Analyst:]

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

[Jason Reid:]

This company was founded to pay a dividend. And if you guys are fully aware, and most people on this call are fully aware how committed we are to them. We paid them all the way through the bear [ph] market, and you saw us increasing 100%.We absolutely want to remain consistent with focusing on dividends. Now, having said that, we also want to find another Switchback vein system. And you heard me talk about us putting out these explorations risk and stuff.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. We hope to find another Switchback. So, we'll try to do both, will continue to try to do both. And not a real big game plan change in that.

[Unidentified Analyst:]

That's all for us. Thanks.

[Jason Reid:]

Appreciated. Thanks for call.

[Operator:]

Thank you. We can move along to our next question. Please go ahead.

[Unidentified Analyst:]

Good morning, Jason. John, thank you for that discussion on that tax change. That was one of my questions. But jump into 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?

[John Labate:]

Yes, that's a great question. This deposit has been with that by almost a handful of metallurgist. McCollum looked at it. Cassie [ph] looked at it with numerous big name groups have looked at this. And we noticed when we first acquired the property that the deep transition zone, if you will, between oxide and sulfide had never really been defined to the point where we knew roughly where it was.But what we wanted to do was 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 deep leaching. So we can drill programs, we did just that.It was solely to better define the sulfur dioxide boundary. Every result we gave you in that press release is leachable ore. And we've had that question numerous times although high grade leachable ore. We didn't show you the deeper stuff that doesn't mean you can get leachable that 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, leachability test. And it's so high grade, you don't get quite the recovery put 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 it 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's some upside. We always knew there's going to be upside in the bottom of the pit. And we wanted to test that and we did it, and it worked out for us. Great question.

[Unidentified Analyst:]

And then one other question on Scarlet up there. A lot of that deposits inside of the permitted pit boundary? And at what point are you in the permitting process to expand that pit boundaries?

[Jason Reid:]

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 dominoes in the upper left. Where that's where we drill all these holes from 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 ore was.And it's only a meter and a half down hole. So if that mineralization continues, which we will know soon because we're going to drill it. That could be an x deposit. The fact that it's only a meter and a half deep is terrific. There's not a huge amount of overburden to access that. And obviously, couple stone throws away from our current operations.So we do have the [indiscernible]. We can test now new areas and couldn't test before. But the initial dill 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 in 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 North West we have numerous targets. They all will not be deposits, but I believe many of them will.And so I fully expect to be this in Isabella Pearl project mine for over 10 years. Not alone the other properties, not alone East Camp, which mentioned to be home run potential. So I think what this does? What the first drill program does? What the high grade and Isabella Pearl does? What this potential does, really emphasizes what I said in my conference call.We have the Pearl 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 in the bear market. It looks like now we're going into a bull market. And so 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 I recognize your voice. You know our story well enough to know that Scarlet could be our next one.

[Unidentified Analyst:]

Yeah. Thank you, Jason.

[Jason Reid:]

You're welcome. Any other questions?

[Operator:]

Thank you. We can move along to our next question. Please go ahead.

[Unidentified Analyst:]

Jason, this is Lee [indiscernible].

[Jason Reid:]

Hey, Lee. How are you?

[Unidentified Analyst:]

I'm fine. Thank you. I've got a question here on your Mexico operation. My understanding is the mill right now is running almost 100% capacity. Is there any plans to expand that mill operation to process more ore?

[Jason Reid:]

No, no. And that's just the long and short of it. There's several things. Yes, it could be possible. But where this most fits, we had to flatten the mountain top to actually put the snow here. And over time with cash flow, we've taken this mill from several hundred tons a day, all the way up to 2000 tons 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 2000 tons 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 mine down on the Arista vein system for over eight years now. And we know that the mineral in the deposit change in the higher grade precious metals are up toward the top half to two thirds.You still have precious metal deep at the base metals come in very strong deep. So then we drove 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 great increases.So I expect to see the reverse happen where we see our precious metals have gone down a bit over the years. And as a reset, they should go up a bit and 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 times.Now we did a really great thing and doing the pay scale plan. That allows us I mean, it's a safer to be limits. It lowers the amount of tailings you have to have on the surface because you're putting a lot back on the underground.It allows us to extract 100% of some of these valuable pillars which can be in excess of $1 million on occasion. Plus we are in those wide area, the Switchback vein system where we need it. And so right now we're going to be targeting the approximate 2,000 tons a day for the year, and probably next year as well. But yes, there's no reason to increase it at this point.

[Unidentified Analyst:]

Okay, thanks. I just wish thinking and ask that question. Appreciate the answer.

[Jason Reid:]

That's a great question. But right now that isn't in the plan. The plan is to perhaps the advantage we get into the higher grade precious metals mining up on the Switchback.

[Unidentified Analyst:]

Makes sense and thank you.

[Jason Reid:]

Very good question. Thank you.And operator, I do notice that we're out of time. And so with that 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 closing 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.

[Operator:]

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