Gold Resource Corporation
Q3 2013 Earnings Call Transcript

Published: 8 Nov 2013

[Operator:]

Thank you for joining Gold Resource Corporation's Third Quarter Earnings Conference Call. Mr. Jason Reid, CEO, will be hosting today's call. Following Mr. Reed's opening remarks, there will be a question and answer period. As a reminder, today's call is being recorded and will be posted to the company's website within 3 to 5 business days. Please go ahead, Mr. Reid.

[Jason D. Reid:]

Thank you. Good morning, and thank you for joining Gold Resource Corporation's third quarter conference call. I'm pleased to address you today as CEO and President. And as you will see in my comments during the conference call, the course that was set for the company by Bill, Dave and me in 2006, when Gold Resource Corporation was a private company, is the same course I will chart going forward. I will continue to focus on building shareholder value, return on capital and return on investment to include dividends as we grow the company, not by growth-for-growth sake but smart growth for value creation during this volatile precious metals market. Joining me on the call today for the Q&A portion would be Chairman of the Board, Mr. Bill Reid, and Mr. Joe Rodriguez, our new Chief Financial Officer. Before we get started, 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 that we issued yesterday, along with comments on this call, are made only as of today, November 8, 2013, and we undertake no obligation to publicly update any of those forward-looking statements as actual events unfold. You can find reconciliation of non-GAAP financial measures referred to in our remarks in our third quarter Form 10-Q just filed with the SEC for the quarter ended September 30, 2013. For the third quarter of 2013, our mill production was 21,244 ounces of precious metal gold equivalent increasing production totals to approximately 64,148 ounces for the first three quarters, which is in line with our 2013 annual target of 80,000 to 100,000 precious metal gold equivalent ounces. This target may change in the future depending on items including mine development and mill upgrade expansion construction. We are attempting to minimize mill shutdown days during the construction process, but there is no assurance that it won't impact our production for the year. Our team at the El Aguila Project, led by our Chief Operating Officer, Rick Irvine, and our General Manager, Mr. Jesus Rivera, are doing a great job. These professionals continue to achieve production results in line with the company's stated year end goals. On track production is no small achievement in the midst of significant engineering and no construction taking place at the El Aguila Project, and the weaker silver-to-gold ratio during 2013. And we have had several questions related to this silver-to-gold ratio, and this is a market metal price ratio, not a ratio referring to the metals in our Arista mine. We are closing in on mill expansion completion, which I will go into later on during the call. We sold 19,033 ounces gold equivalent at total cash cost of $756 per equivalent ounce. We generated revenues -- remember our revenues are net of smelter charges of $29.4 million and had mine gross profit of $11.4 million. Our average metal price realized for gold was $1,240 per ounce, and for silver, was $19 per ounce. I want to take a minute and go over 2 topics that are cause for questions as it relates to the aforementioned ounces sold and average metal prices realized. As for ounces sold and produced, relating to inventory, our mill production ounces and our ounces sold are not the same and will not be the same when we are selling concentrates. Mill production is straightforward and that is the estimate of what the mill actually produces in the form of concentrates and is what we ship to the buyer. However, based on U.S. GAAP, our sales of concentrates are net or after smelter charges. So the ounces sold may be less than the ounces produced due to being unable to ship all our finished concentrates in our inventory stockpile. In other events, the ounces produced maybe less than the ounces sold due to finished concentrate inventory carried over from the previous periods. As for ounces sold and produced relating to revenue, we deliver 100% of our concentrates to the buyer, but will only be paid approximately 90% due to the payable metal deductions from the buyer. Our footnotes 3 and 4 in the MD&A below, production and sales statistics table, further clarified this common question. Now, as for average metal prices realized in our statistics table in the MD&A, the operative word is realized price. These prices are not exclusively related to current spot market metal prices. For instance, our realized silver price for Q3 was $19 per ounce. The reason for this goes back to the fact that we are selling concentrates on a provisional basis and the fact that our concentrate contracts provide for final settlements on a future date. We are paid a provisional invoice at the time of delivery from the buyer based on estimated pricing and assays. The final invoice and settlement price will be set based on the average monthly spot price for the month following delivery. We refer to it as M+1, and the final assays. Invoices do not always settle within the M+1 quotational period due to certain provisional invoices going into the Empire or third parties. The net effect of this is as follows

[Operator:]

[Operator Instructions] We will take our first response today.

[Charlie Fitzgerald:]

Jason, it's Charlie Fitzgerald from Regal Point Capital. [indiscernible] explanation of the events last quarter was very helpful. My question is you mentioned that total capacity would be 1,500 tonnes at the beginning of Q1 2014. I was wondering if you could shed some light on what you expect throughput to be in Q1. And then also, do you expect throughput to catch up to the 1,500 capacity figure? At what point do you expect that to catch up for the capacity figure in 2014?

[Joe Rodriguez:]

Sure. No, thanks for the question, Charlie. I'm going to take a bit of a conservative approach here. I'm not going to give you a quarter-by-quarter blow on this. We have yet to come out with our 2014 production range, but I will say that we expect these 1,500 tonnes next year. Exactly when? I don't have -- I'm not going to comment on that at this point. But, as you said, by the end of this year, the mill should be delivered with the capacity to go to 1,500 tonnes then it's a function of the ramp up of the underground mine and when can we get to those levels. Now, the exact timing though, Charlie, I can't give you.

[William W. Reid:]

This is Bill. Let me just also emphasize that we won't be giving our '14 projection targets until the end of the year. So we need to get the -- see the mill up and running at the expanded capacity and look at our mine plant. So we don't have those numbers for you know, but we will and should have by the end of the year.

[Operator:]

[Operator Instructions] We'll take our next.

[Unknown Attendee:]

My name is Sam Johnson [ph], I'm a private investor. I wanted to ask if you can comment on the recent tax changes in Mexico and how that will impact GORO. And if you can specifically comment on the depreciation that will -- that was just as announced.

[Jason D. Reid:]

Okay, Sam [ph], thanks for the question. I'll comment on the first half, and then depreciation I'll refer to Joe on this. Now, this has yet to be signed by the President, but I believe the senate has voted in what effectively will be an 8% tax. It's actually a 7.5% tax. And if you're a precious metal producer, you get another 0.5%. So it's an 8% royalty tax, if you will, to be imposed on us. That, obviously, will hurt us and will hurt the entire industry or those who work in Mexico but there are some silver linings in that. For instance, it will encourage the communities that want to tap in to getting a piece of that royalty because right now, the indications of that royalty are 50% will go back to the communities. So, I think the communities will be looking at this and saying, "Wow, I want a piece of that mining company, so please come into this area." So what I'm hoping is that we make greater headway, for instance, at El Rey, where -- we've had some pushback there. Those communities may turn and encourage us to come in. But the net effect of this royalty has yet to be fully digested, I mean, this thing -- this is happening as we speak. So we are dealing with limited information yet. And again, it has to be signed by the President, but I presume it will be. Joe, I will refer to you as far as the rest of that.

[Joe Rodriguez:]

Okay, sure. So your second part of question, Sam [ph], is depreciation expense? Have we anticipated to have more depreciation expense?

[Unknown Attendee:]

Yes.

[Joe Rodriguez:]

Yes. Well, we have incurred several capital expenditures in this quarter, and we've probably forecast to have a little bit more in the second quarter. But you have to understand for the purpose of book, we do calculate depreciation a little differently. On certain assets, we have to totally dispense those because we don't have proven and probable reserves, and those assets pertain to plant assets and buildings. Rolling stocks, I think, normally does get capitalized and does get depreciated, so we don't anticipate a lot of increase in depreciation. For example, the mill expansion, because we would expense all that in the period.

[Operator:]

[Operator Instructions] We'll take our next.

[Unknown Attendee:]

My name is Jonah Schnel [ph], private investor. I just have a quick question about -- and you may have covered this early and I missed it, but the -- kind of the cash cost, $756 per gold equivalent ounce, is -- with the efficiency that you're talking about driving into the operations, do you have any revised guidance in kind of where you think that number is going to trend down to?

[Jason D. Reid:]

I don't want to be specific on that. Look at the -- I'm not really focused on that number being around for very long. It's my goal to get that number down to $756. And our largest expense is employees. Second largest is fuel. Those are the first 2 things I'm attacking to get those costs down. But it was more -- it was very important for us to make sure that we execute on getting the mill into a position of delivery by year end. And so, like I mentioned, we aired on the side of caution of maybe hiring a few too many people. And again, that being our largest cost, we recently did a 60 manpower reduction. So I'm hesitant to give you any guidance per se, I mean, we're a young company. I don't like to give guidance anyway, we give targets and projections, where not like a multi-mining company that can -- that gives guidance. But I want to ultimately be a low-cost producer in the long run and I see this is as a build year where, obviously, like I mentioned, we're sustaining all of the cost associated with no expansion yet -- we've yet to see the mill expansion lower, to come to fruition yet. So we're in flux this year, but next year is where I'm really going to be focusing on looking at cost and I just look both long and short of it, is I'm going to drive those costs down. That's my focus. So, I'm sorry, I can't give you an exact number or any guidance on that.

[William W. Reid:]

Yes. This is Bill. And I might just add a couple of other comments. As Jason mentioned, we're incurring all the pretty much fixed cost of larger operation. But since the mill is not processing the larger tonnage, we don't get the benefit for that. But what we're going to find -- and once again, we can't give you numbers, but what we're going to find is, okay, we did 900 something tonnes a day this quarter. But at some point, we're going to be at 1,500 tonnes per day. And if we pretty much have similar fixed cost, that's going to reduce the cost considerably. But -- so we're optimistic that once we get this project the way we wanted to, that we will be a low-cost producer again, as we were before.

[Operator:]

Currently, we have no questions in the queue. [Operator Instructions] And we have one that just came in, we'll take it at this time.

[Unknown Attendee:]

This is John Sabor [ph]. I'm a private investor. And I was wondering if you could comment on the decline in grade this quarter and whether you expect it to increase in the future?

[Jason D. Reid:]

Sure. Thanks for the question John [ph]. First of all, in an epithermal vein system, it's not a homogeneous deposit where grade is just consistent through the whole thing. You have pockets of higher grade and lower grade. So the grade will continue to fluctuate throughout the whole life of this mine, depending on, in large part, the specific area that we're in. We know of multiple higher grade areas that we are targeting in the future. So, as for grade, it will fluctuate, and that's probably the long and short of it. We're still fortunate though that even on the lower grade, it's still nice. It's nice to be working in overall high-grade epithermal system and that also should give us some flexibility, too, if the metal prices pull back substantially. And as I mentioned, in some analysis, many mining companies aren't profitable with -- even in these levels. But if the metal prices pull back, we could modify potentially our business plan and our mine plan to go after the higher grade to make sure we're the ones left standing after this market volatility. So the long and short of the grade, though, is that it will vary depending on month-to-month and quarter-to-quarter.

[Unknown Attendee:]

Okay. Could I ask another question?

[Jason D. Reid:]

Sure, go ahead.

[Unknown Attendee:]

I believe the number was given at a $5.1 million that was expense that would normally be capitalized if you want a exploration company?

[Jason D. Reid:]

Right.

[Unknown Attendee:]

So going forward, could we take $5 million divided by your roughly 20,000 ounces of production, and say that we'd expect a $250 announced drop in your cost going forward? Just the magnitude to look at?

[William W. Reid:]

The cash is -- when you go to the cash cost, it doesn't include those. What we have, it's not part of our -- the number you quoted having to do with the expansion. It's not part of our direct operating cost. Isn't that right, Joe?

[Joe Rodriguez:]

That's correct. Those capital expenditures are noted on the line item on -- where we address facility and mine construction. And that's what -- we expense those so they're not impacting the production cost. So those would not play a role in that calculation.

[Operator:]

At this time, we have no questions in the queue. I will turn the call back over to our host for any closing or additional remarks.

[Jason D. Reid:]

Thank you, everyone, for joining this conference call. And if you have any questions after listening to this on the recorded version on our website, feel free to reach out to us at any time. Thank you very much.

[Operator:]

And that does conclude today's conference call. Thank you for your participation.