Gold Resource Corporation (GORO) Q3 2012 Earnings Report, Transcript and Summary

William W. Reid - Co-Founder, Chairman and Chief Executive Officer Jason D. Reid - President and Director Bradley J. Blacketor - Chief Financial Officer

Welcome to Gold Resource Corporation's Third Quarter Earnings Conference Call. Gold Resource's CEO, William W. Reid, will make a brief statement. Following Mr. Reid's opening remarks, there will be an email Q&A period. [Operator Instructions] This call will be recorded and posted to the company's website within 3 to 5 business days. Please go ahead, Mr. Reid.

Thank you. We also have Jason Reid, President; and Brad Blacketor, CFO, on the call today. So thank you for joining us this morning for the third quarter conference call. We have a lot to go over today. Let's start with positive results. I am pleased to report third quarter production was 22,336 gold equivalent ounces, up 54% from the previous quarter, which speaks to overcoming many of the issues and challenges of the second quarter. We sold 18,049 ounces gold equivalent at a total cash cost of $459 per ounce and generated revenues of $36.5 million and had mine gross profit of almost $24 million. We have been profitable every quarter this year, including this third quarter at $7.3 million even though we must expense all of our construction and development costs. We continued our $0.06 per month dividend, which means we have now paid shareholders $63 million and declared just over $66 million in dividends. We achieved all of this even when our production was less than we would like or expected to achieve, while encountering challenges common to the mining business. Mining is one of the most challenging businesses out there. It's all about solving problems posed by mother nature when developing mineral deposits. Drill core gives us a glimpse of the deposit by getting underground, and mining that deposit is where both mother nature's riches and her challenges come to bear. And that is what makes the world of hard rock mining so exciting. It's all about solving and overcoming challenges, and then reaping the rewards. In the third quarter, we continued to address many of the issues and hurdles that contributed to our less-than-targeted second quarter production. Challenges included the management of increasing water with depth, increasing CO2 gas coming from this water with depth…

Good morning, everyone, and thank you for joining the call. Our 54% increase in the third quarter production was the result of overcoming many challenges, including water, CO2 gas and mine development hurdles. We continue to upgrade our management team, which I believe was in large part the reason behind the increase in production. The positive takeaway from the quarter should include increased production, continued profitability, lowered total cash cost and returning $9.5 million in dividends to the owners of the company. I wanted to take some time and discuss the challenges and how we addressed them, the improvements we have made and our focus for the near future. I want to begin with our people, as people are the ultimate reason behind the success of any business. As you are all aware, we have added to and rebuilt our management team. We are very pleased with our Chief Operating Officer, Mr. Rick Irvine, who joined the team in March of this year. Rick was tasked with the evaluation of our then current team at the El Aguila project to best position the company for the future. His evaluation has led to the evolution of a new on-site management team. One recent addition to the team is our new General Manager, Mr. Jesus Rivera. Jesus joined us on October 18 from Yamana Gold's Mercedes underground mining operation. We are pleased to welcome Mr. Rivera and believe his underground mining experience and expertise is ideally suited for improving our Arista underground mine. He will be working closely with Rick to oversee our operations. Our on-site management evolution over the last several months also included a new mine manager, mill manager, safety superintendent, maintenance manager and community relations superintendent. Each individual was chosen based on their experience, capacity and ability to complement…

Okay. Thanks, Jason. The Arista deposit is to impress us. As a geologist, I was amazed on our last trip to the site when we were underground on level 13. The amount of base metals and also ruby, silver in places on that level was impressive and sure underscores for me that this is a very powerful mineralized system. It remains open, both in strike and dip. As you can see on our website's PowerPoint presentation of the Arista vein system, it has more than just the 2 Arista and Baja veins but many off-shooting veins, or splays as we will call them. Let me give you just one realized example of an additional vein or splay that we are mining. On level 11, we used our termite drill -- now that's just the name of the small drill that is easily moved and can drill about 50 to 100 meters out in the wall rock. So we used our termite drill to check for splay or parallel vein to the Arista vein for which we had an indication. The termite drill is one -- in one of its holes intersected this splay about 30 meters into the wall rock. At 2.4 meters with 14.5 grams of gold, that's almost 1/2 ounce gold and 1,752 grams of silver, 1.6% copper, 5.9% lead and 10% zinc was a very exciting grade. With this intersection, we drilled a crosscut over and have been successfully mining this additional high-grade zone by cut-and-fill methods. Another splay we call number 5 has an intersection around level 6 of 3.5 meters of 4.75 grams of gold and 1.2 kilos of silver per tonne. There are many others, and we are looking at mining each of these as soon as we can. As Jason said, our main…

Yes, let's start the question-and-answer period. We have a tremendous number of questions. We're going to get to as many as we can. Olf Oliason, [ph] an individual investor's question: "We desire an increase in production and for some time now, Arista has been a bit of a disappointment. What will it take, do you think, to get back to the same production levels as in Q1, and do you expect El Rey to contribute with cash flow during 2013, or is it a lost cause?" Hi Olf, thanks for your question. We want to get back to the 30,000 ounce per quarter level as well that we achieved during the first quarter and then grow production from there. But we lost some time in the mine development while dealing with water and CO2 after cutting the veins on deeper levels. We have dealt with and expect to continue to deal with those challenges. I don't believe that Arista deposit is a disappointment at all. I believe the issues we have had are typical underground mining issues as opposed to deposit issues regarding grade. As we said, the mining of the Arista high-grade veins have been hampered by excess dilution of past mining techniques. It has been our focus to put the right team in place to adequately mine the deposit. We believe we have assembled an excellent team of industry professionals to do so. Q3 production was a significant turnaround from Q2 production and moving in the right direction. As for El Rey, I don't believe El Rey is a lost cause either. The mining business is all about solving problems and overcoming challenges. As Bill says and as I state as well, it is a long lead time industry, where instant gratification is rare. We ramped up our community efforts at El Rey, as we mentioned, with a medical clinic, community relations office and are looking for ways to add value to their community and demonstrate to the local populations, as we did in San Jose de Gracia near our Arista mine, the benefits associated with a mining company supporting local economies. I don't expect El Rey to contribute cash flow in 2013, but we are working hard, and I'm optimistic we are making progress at El Rey. The second question is from Mike Dudas of Sterne Agee. The question is how long before your brand-new operating management team hits their stride and produces the results you and other executives expect. Bill, I'll turn this over to you.

Okay. Well, as we mentioned in our opening statement, Jason and I have been to the site the most recent time, and we saw significant improvements underground. And the ventilation is so much better now. The water has more control. And so our teams are really making significant progress. At the mill, I've been real impressed with our new mill superintendent. He has changed some additional reagent points and reagents, and he is moving the base metal recoveries from the 70%, 75% range up to the 80%, 85% range. And we've actually seen some days with zinc at 90% recovery, which is impressive. We're very pleased with our safety superintendent. So it does take a little time, but we see definite improvements, and I think it speaks to what we've seen that these people are making a big difference.

Okay. Pat Bryson [ph] asks that we comment on share price collapse, aftermarket wild share price swings, short trading effect on price, class action lawsuit. Thanks. I believe our stock is very oversold at this point. Having said that, if we're to achieve around a 90,000 ounce level by year end, and there's no guarantee of that, that would be about a 30% increase in production over last year. We pay a $0.06 -- we pay a dividend of $0.06 per share per month. We are the only company I'm aware of with a physical dividend conversion option. We buy back our stock. We hold a portion of our treasury in physical gold and silver. We have a profitable quarter every quarter this year. I mean, do these attributes justify the oversold condition of the stock right now? I don't believe so. I see this as an opportunity that I plan to take advantage of. As for wild share price swings in the market or the short effects on price, I don't know and can't comment on those issues. We made a few comments on the potential lawsuit. But as Bill mentioned, if it comes down to it, we plan to fight it if it comes. Leo, I apologize. I can't pronounce your last name. Brodeau? [ph] Asks what's happening with GORO stock exchange price, how do you see the evolution of your company and place in the market. Bill?

Okay. There's probably multiple reasons for the stock price going down, but one that I mentioned that I believe all these lawsuits are scaring a lot of people out in the market. But let me turn to a little bit more positive aspect of how our company is evolving in the place we think we fell in the marketplace. Essentially, the mining industry today is changing, and we welcome that change. And it is changing in response to the demands of the investor. The mining industry, in the last decade, was focused on growth, most often, growth simply for growth's sake. If you invested in a company and all you got was the anticipated -- anticipation of the growth curve, then that growth curve is very important. You can criticize for less production, and again, and if that is all you're getting, fair enough. Gold Resource's focus, however, is different. Our focus is on cash back to the owners. If we can pay to the owners $0.72 a share, which we are doing now, whether we produce 85,000 ounces, 95,000 ounces or 105,000 ounces, then the actual production number is less important. Our target is to build to $1 per share dividend, but this is not guaranteed nor is there a time frame associated with that at this time. But that's the target. That is what is important to us. Whether we do that, whether it takes 120,000 ounces or 130,000 ounces is somewhat secondary. Growth-only gold stocks could be out of favor. After all, without a cash return to the owners, new investment is just a derivative of the greater pool theory, and you need a broker or an analyst to tell you which companies are better than other companies. Gold equities are transitioning today from being seen primarily as growth stocks to having a much larger dividend component and income stock. If you are being paid a meaningful dividend when you can actually place a value, then you can actually place a value on that dividend yourself in much more transparent valuation. Today, investors in the market are demanding that mining companies have different allocation for cash flows. Simply growth for growth's sake, I don't believe, is any longer the most acceptable way to go. One must balance good projects with cash back to the owners in the form of meaningful dividends. Gold Resource Corporation engineered its business plan from day 1 that we believe aligns with today's investor demands. Gold Resource Corporation's philosophy to grow the company with the same principles that have gotten us to where we are today. That includes limiting shareholder dilution, focusing on high-margin, low-cost projects, returning a meaningful dividend to the owners of the company, remaining a low-cost producer and using the cash generated from the project to fund our company growth going forward. We believe the market will ultimately reward us for this business model.

Okay. The next question is from Jeff Wright of Global Hunter Securities. I'm going to send this one to you, Brad. "As a percentage of sales, smelting and refining charges and penalties are elevated. Can you break down reasons behind this?"

Thanks, Jason. Yes, we produce and sell 3 concentrates: copper, lead and zinc. The treatment and refining charges vary depending on the tonnage and metal content of those concentrates. And of those 3 concentrates, our zinc concentrate has the highest treatment and refining charges. And since we sold our zinc concentrate in 2012, our treatment and refining charges as a percent of sales are slightly higher for the 9 months ended September 30, 2012 when compared to 2011.

Okay. Thank you. The next -- his next question is "What do you estimate the approximate tonnage range and average gold and silver grades for Q4 2012 to be at the El Aguila? What efforts are being taken to lower the dilution in Q3, and how is this reflected in grades going to the mill in Q4?" Jeff, we make a practice not to discuss current quarter tonnages and grades, et cetera, until the quarter is finished, so we really aren't going to comment on that. And as we mentioned in our -- with our new team, it's very much focused on lowering dilution by modifying our blasting charges at the stopes and other techniques that we mentioned. So now the dilution is the big focus going forward. The next question is from Jerry Wolf. [ph] "I would like to know whether the production, water and concentrate buyer's problems are behind the company and now we will see true production and earning results." Bill?

Okay. Thanks, Jerry, for your question. Let me just say, again, as we said, this is the mining business, and we will always have issues to solve as we constantly open up new areas underground that could and will, at times, hold surprises, some good and some not so good. At the moment, we feel we do have a handle on the current water situation, but to be clear, we will always have challenges with water being underground. This is part of the operation of an underground mine. The dispute with the concentrate buyer has been settled. And again, as we stated earlier in the call, we have had no recent issues with the buyers since we implemented the new delivery procedures. Production has been ramping up, as we witnessed in Q3, and we believe our miners can become more efficient by lowering dilution going forward. And we believe we will be in a position to gradually ramp daily tonnage up from the mine quarter-on-quarter. This is the reason we are purchasing the 30-ton trucks. They will be very important as we ramp up our tonnage. But let us be perfectly clear. This is the mining business, and it is full of challenges that at times, will be under control and at other times, they may not be under control for a period of time that could affect production and our results.

Okay. Patrick Breitenbach [ph] asks how does the company plan to restore some credibility that it has lost over the past few months or years? Patrick, we have built a new team that we believe is better suited to execute our business plan. Execution of that plan is the answer to your question. Now if you've been with us for 2 years, you have seen us execute on our plan to get into production. You've seen us execute on our plan to pay a monthly dividend. You've seen us execute on our plan to increase that dividend and to distribute approximately 1/3 of our mine gross profit back to shareholders as we did in 2011. You've seen us execute on the physical dividend conversion, execute on doubling our land position. I could go on. You get the point. We tripped in the second quarter dealing with real world issues that were not anticipated but are part and parcel of the mining business. We got back up and are moving forward with a focus on continued execution of the business plan. The next question, what are your expectations -- this is from Ben Firth, [ph] Alameda Capital. "What are your expectations for the dividend in the next 12 months? The rumor on the street is the company is going to cut the dividend in half." Bill, you take this one.

Okay. Ben, thanks for your question. Just to be clear, the dividend has never been guaranteed. Our regulatory filings and risk factors say as much. We have also been very clear on how we calculate the dividend amount over the course of the year. Our continued goal is to continue to pay approximately 1/3 of the company's cash flow from mine site operations, which is the gross mine profit and adding back noncash items. Year-to-date, we have returned approximately 36% of cash flow from mine site operations back to the shareholders, pretty close to our targeted 1/3 payout. Based on this model, if production -- or metal prices were to drop significantly, the dividend would be lowered accordingly. If the metal prices hold or increase, the dividend could need to be increased. But there are no guarantees about the dividend.

Okay. The next question is Doug [indiscernible]. Several questions. I don't know if we can do all these, but with the recent hires, do you believe that the regular ongoing issues of underground mining will be properly addressed before they have a big impact on production, and who's going to be on-site day to day to make these decisions. Water, CO2, logistics, soil anomalies, all the time, these should not be surprises but planned for. Bill, do you want to take this one, or do you want me to take it?

Okay. Well, we have, as we just explained, what we believe is a really topnotch team with Rick and our new Project Manager, Jesus. They're there all the time, basically, and making these decisions, and they are solving the problems. So we feel very good about that, and we've already seen a little bit of that taking place in the third quarter. Let me just say surprises do happen in nature, and the mining business is susceptible to that. Cross-cutting a new vein could open up more water than you ever expected. Faults or weaknesses in the rock that were not apparent could cause real problems and more dilution. The mining business is all about solving problems as they come at you. Some can be anticipated, but many cannot. The best thing is to have experienced, competent people, which we believe we have.

Okay. The next question is Pat Mcdevitt. [ph] "Is your ore grade the quality initially represented, or have you discovered major degradations?" I don't know if it's -- the spelling or what have you, but I think I get his point. "Also, did you discover a crook in your operation?"

Okay. Let me answer that first one first. We did not discover a crook in our operation. Of course, we always have to be vigilant with -- at the site, as well as when we ship out the concentrates and watch the delivery and sampling of those concentrates, but we have not discovered a crook in our operations. Okay. As I mentioned, we're still very excited by this ore deposit. It's extremely exciting when you see it in place underground like I did last time, with a massive base metals and the high-grade ruby/ silver. And so we've not -- and I gave you a few of the drill intercepts, and we've got a lot of very good drill intercepts. We don't announce those because they're just having to do with development, but I gave you a couple with [indiscernible] play -- I think it was 31, where we're actually mining that now. And it's being mined cut and fill and we can keep a pretty good head grade off that. So I think as Jason adequately mentioned that we have seen our mining technique in the past has resulted in more dilution. So if you take a higher grade section and you add 30% to 40% waste rock, then the grade is going to be 30% or 40% less. And then you have to run that through the mill, and your production is going to be less. So as we've already mentioned, we think that with our new team and our continuing work on reducing the dilution, that the grades will go up. And at this point, we haven't seen, really, any reason to think that they're different than what we have felt they have been from our original drilling.

Yes, Pat, let me also just add to that nobody likes dilution, and we're working on fixing the dilution. The silver lining is that we can -- that's a problem that can be fixed as opposed to the alternate, which would be a deposit that you get underground and it's not the grade you think. And we don't have that, so no. I think we've addressed that question. Okay. Josh Elving of Dougherty and Company has a bunch of questions. We're not going to be able to get to every one. "Has the hiring of Mr. Devlin changed your approach towards exploration? What is the highest priority target?" Bill, you want to make a few brief comments? We've got a lot of questions we're going to try to get through here.

Yes, just briefly, the entire approach of what we have to do right now is to continue to support the mine planners and the mine developers with drilling out ahead so that they can adequately and appropriately mine this deposit. That's number one. And that's not going to change. Number two is to expand what we already know is there and either strike or depth along the Arista vein system. Now we're very excited to have Mr. Devlin come onboard. He's got a lot of underground experience, and we're pretty excited about the ideas he will be bringing on doing that. But the number one and number two have to be the continued drilling of the Arista vein system. So that won't change per se. However, as we get to the point where we're comfortable that we have enough drilled out and have some ideas for other ore shoots along that and actually intersect those ore shoots, then we will be looking at our long trend, which is like 45 kilometers of trend, where we think there'll be a lot more to be found. But right now, we're still sticking with La Arista.

Okay. Let me move on to his next question. "How much stock did the company repurchase in Q3 and at what price? How much stock has the company repurchased since the end of the Q?"

Well, I believe we purchased over 270,000 shares since the buyback began and continue to be active in the market in the fourth quarter. But I do not have the exact figures on the buybacks per quarter.

Yes, we don't have that in front of us. Let me move on. We got a lot of questions, and we're running out of time. Peter Brophy, [ph] private investor. "Since the company withdrew the annual production forecast last quarter or at least stepped back from saying the year in which the long-term forecast of 200,000 gold equivalent production would be reached, the question is what will it take and when will you feel sufficiently comfortable to state expected future production numbers so we can model out the next couple of years."

That's a really good question, Peter. And I think what we have to do is work with our new team here, particularly Jesus, who just more or less came online, and see what we can do by the end of this year and then, with them, plan for next year. I think we want to keep our target somewhat short for the moment until we can gain confidence in the predictions. We still believe that over time, we have the real possibility of achieving that target, but we're not going to, in our present position, be able to state when that might be.

Okay. The next question is from Scott. "Would you consider suspending the dividend then using the savings to buy back shares?" Let me take this one. No, not at this time, but things could change. Shareholders, like myself, appreciate the dividends. So I and I think all -- I speak for all shareholders, hope that the current dividend stays in place. But if the U.S. government changes its tax policies and moves its taxes on dividends to a ridiculous amount, we would consider taking $3.5 million approximately a month that we currently distribute in the dividends, and we could reallocate that amount as buybacks every single month. But that is just speculation at this point. I want to be very clear. Let's see. Next question. Jim Reams. GRC returned $26.5 million or approximately 30% of mine gross profit to shareholders as dividends in 2011. Prior to pending revisions, Q1, Q2, GRC paid approximately $16.6 million and $50.5 million of mine gross profit or 33% of dividends. Is GRC committed to returning approximately 1/3 of the mine gross profit to shareholders as dividends is the question. Jim, we target to distribute approximately 1/3 of our cash flow, yes, from our mine set operations, which you will see defined in our 10-Q, which is basically, as Bill mentioned, our mine gross profit and adding back noncash items. We did about 1/3 in 2011, and though there's no guarantee, that's what we want to do in 2012. And the second part is, "How long will the mill be closed for maintenance at the Christmas holiday in December? Will the mine be closed for any period of time in December?" Bill, you want to comment?

Okay. In the past, we've closed for about 2 weeks in December, but in talking with Rick, he thinks we should just continue to run all year. So I mean, we think we will do that. Most mines in Mexico don't shut down for the holiday season. So we'll see what develops with our situation at this point in time. So I would say at this point, we haven't [Audio Gap] have been subject to hostile takeover by larger, I suppose, companies or corporations. This often included them shorting the stocks so a lowball buyout price could be obtained. My question, do you think this could be happening to Gold Resource? I don't believe so or at least I don't know of any indication that that could be the case at this point. So let me close this up because we're out -- we'll try to get to others' questions. We'll respond to your emails. Again, we appreciate your participating. But in closing, I want to thank you for joining the third quarter conference call. Again, the positive takeaways in the quarter should include overcoming challenges, increasing production, continued profitability, lowered total cash cost, returning $9.5 million in dividends to the owners of the company. We think we have a great company, and we appreciate you guys joining us as shareholders and listening to the call. Thank you, everybody. We'll take everybody else's questions. Thanks.

Thank you.