Gold Resource Corporation (GORO) Q2 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Gold Resource Corporation Second Quarter 2020 Earnings Call. [Operator Instructions] At this time, it's my pleasure to turn the floor over to Mr. Jason Reid, CEO and President of Gold Resource. Sir, the floor is yours.

Thank you. Good morning, everyone, and thank you for joining Gold Resource Corporation's 2020 second quarter conference call. I expect my comments to run approximately 10 minutes, followed by a brief 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, the current quarterly report on 10-Q and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued yesterday, along with the comments on this call are made only as of today, August 5, 2020, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of our 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, as well as this current quarterly report on 10-Q. During the second quarter, the global pandemic negatively impacted most businesses around the world to varying degrees. Our Nevada Mining Unit was less impacted, while our Oaxaca Mining Unit was shut down 2 of the 3 months of the quarter from the Mexican government's mandatory closure decree in response to the COVID-19 pandemic. We lost April and may production and associated revenue of approximately $15 million in revenues compared to the prior year, while sustaining most of the normal owners cost of a mining unit like overhead and payroll. A mining operation does not return to full production immediately upon start-up under normal circumstances. So you can imagine, when we were allowed to restart operations under our new COVID protocols that slowed the restart even more. We are happy to have kept 100% of our team on the payroll during the shutdown and also provided financial support to the local communities in which we operate to help offset the impacts of the pandemic, including food banks and children's charities. Our overall production, cost of production and financials suffered due to the shutdown. We applied for and were given regulatory permission to restart our operations with a limited number of employees, while focusing on the health and safety of our team, contractors and communities in which we operate. By the end of June, we were able to increase our workforce to 100%. We continue to ramp up production and barring another unforeseen governmental shutdown, we expect Q3 to resemble a normal operating quarter. During the quarter, strong health-screening protocols were put in place in response to the pandemic at both our Oaxaca and Nevada Mining Units. We have encountered a few positive COVID cases between both mining units. Our screening protocols and procedures were able to identify the affected individuals early enough to isolate them and restrict the spread of the virus throughout our operations by also identifying and quarantining others who may have come in contact with them. The cases thus far seem to have originated from family or others outside the operational team or acquaintances of employees and not from our site. Since we anticipate the presence of COVID-19 periodically in both Nevada and Oaxaca for the foreseeable future, we remain vigilant with the goal of keeping everyone safe and healthy as the top priority. During the quarter, the company's Nevada Mining Unit continued with its Isabella Pearl mine ramp-up phase, which resulted in gold production increase of 41% over the first quarter of 2020. As previously stated, the ramp-up has required us to move a significant amount of overburden to access the high-grade Pearl zone, while we mine the Isabella zone of lower and varied gold grades. During the quarter, we reached the top of the Pearl zone and have been mining and processing significantly higher-grade gold. Approximately 80% of this deposits gold is located in the Pearl zone. As mining continues, we expect our ramp-up to continue into the second half, targeting a bigger ramp-up focus during Q4. We've had some nice high-grade gold surprises to the upside in the initial Pearl benches. The model predicted about 1.5 grams gold per tonne, but the grade was closer to 2.5 grams. We have also seen some small areas of unexpected grades of over 7 grams gold. I am not mentioning this to increase shareholders' overall expectations of the project. As you know, exploration and delineation drilling allows for tonnes and grade estimation, while the ultimate sample is only known when mining the deposit. Some deposits disappoint when compared to the model. I think shareholders would appreciate knowing at this point at least, that the Pearl zone of the Isabella Pearl deposit has exceeded our expectations at the top of the deposit. We see this reflected in the crusher head grades of Pearl zone ore when we often experience 2 to 4 grams gold on days when we crush per ore. While the available mineralized tonnes of this high-grade ore is still limited at these higher elevations, we continue to mine deeper into lower Pearl benches in the future, we expect a continuation of not only high-grade, but gold with greater available tonnages helping us execute on our targeted production ramp-up at the back half of the year. During the quarter, the company announced its acquisition of the Golden Mile property in Nevada. Golden Mile is not only located along the Walker Lane mineral belt, but just off the road from our Isabella Pearl mine. We are very excited about this acquisition as it checks most all our required boxes as an acquisition target, including being located geographically within our mining unit, surface and near-surface high-grade gold, 100% ownership, large district size property, two known substantially drilled areas of mineralization completed by previous exploration companies, potential to become an open pit heap leach operation and a reasonable 3% NSR. Initial bottle roll tests commissioned during the due diligence process indicate mineralization is amicable to cyanide leaching with over 81% recovery. Patented ground encompassed the larger of the two known mineralized zones providing for potential permitting efficiency on both exploration and future development optionality in that portion of the property. We remain committed to continuing to explore our exciting 10 kilometers of Isabella Pearl trend and the numerous known exploration targets. We also are excited to commence the initial drill program in East Camp Douglas planned during the second half of 2020. The Golden Mile property is an advanced stage exploration property. With this acquisition, we are evaluating it to a resource confirmation and delineation stage. We are now targeting subject to drill permit timing, the initiation of a Golden Mile drill campaign later this year as well. Our focus is to confirm and delineate and expand on past exploration programs with the goal to define a maiden resource that ultimately warrants moving the project into a development stage project. Our full team of exploration managers, resource estimators, operation managers, environmental and permitting managers, engineers, finance executive team recently held our first Golden Mile conference call meeting to lay out strategy, optionality, time lines and next steps to move the Golden Mile property forward as -- on an expedited basis with the goal of making it our next mine. It's still early in the properties of this evolution. As we view it today, it has all the earmarks to become our next operating mine. And it is exciting to get the ball rolling to prove that to ourselves. We envision this project may have multiple open pits feeding ore to a strategically located heap leach and processing facility. At this point, we plan to only take gold to a carbon stage and then truck the carbon down the road to our Isabella Pearls ADR plant to be converted into doré. This is targeted to keep project capital cost to a minimum, permit a processing facility to only a carbon stage, which could dramatically shorten the permitting process time, which is often held up by the additional time trying to permit the ADR hot side and leverage our existing Isabella Pearl plant's ADR for operational longevity. Following up on last quarter's conference call regarding the depressed zinc market prices at that time, the high zinc treatment charge is experienced thus far in 2020. Zinc prices as of this morning have rebounded by 32% since the lows in the second quarter. Initial reads on potential 2021 zinc treatment charges or charge terms are looking to be far more favorable in 2021 than in 2020. These are good signs, not to mention the dramatic rise in precious metals since the last conference call with gold hitting new record highs. I mentioned on the last call to help counter the high 2020 zinc treatment charges and depressed metal -- base metal prices at that time. The company had revisited its Oaxaca Mining Unit's mine plan to focus on areas with less zinc. With zinc rising to $1.08 this morning, and if it looks like it will stay anywhere around there, we will be taking another look at mining optionality to potentially bring more zinc into the fold. While the pandemic has created various challenges, we have met the challenges head-on, and are well positioned to emerge from the pandemic fallout to capitalize on a world of wash in unsound and unprecedented currencies by producing real money and producing real long-term stores of value, gold and silver. And now with the prospect of doing so with this morning's new all-time record gold price high of $2,046 per ounce add leverage to the excitement of being a gold miner. With that, I would like to thank everyone for their time today on this conference call. Let's move on to the question-and-answer portion of the call in an effort to efficiently address the Q&A portion of the call without wasting anyone's time. Any antagonistic or distracting calls will be terminated, and I will simply move on to the next productive caller's questions. Operator, with that, if we do have any questions, let's open up the line.

Thank you. [Operator Instructions] We'll go first to Heiko Ihle with H.C. Wainwright.

Good morning, Heiko.

Can you hear me?

We can.

Perfect, perfect. Move of a [indiscernible] question, I thought you did a really good job with Mexico given the suspension, so well done on that. Thinking out loud with Golden Mile, I mean, clearly, the whole thing was quite a bargain and especially since one generally here is right now that prices for early-stage assets has just gone through the roof. But you frankly seem to have a knack for getting things done. And just thinking ahead a little bit, I mean, would you consider continuing acquiring more assets if you get the right price in the right locations?

Absolutely. Absolutely. It's all about timing on anything, in my opinion. Some properties look better at certain times than others. But obviously, the property has to check all the boxes we need to see. The Golden Mile is an incredible opportunity. I think the fact that we offer a reasonable NSR helps us acquire some of these properties where some of the bigger companies don't want to do that. And for instance, that's how I believe we got East Camp Douglas. I don't believe we ever would have got that had we not offered an NSR because I found it after the fact we were competing with two major gold mining companies for that property. And the differentiating factor with us being a junior and them being majors is we offered an NSR, and they didn't. And the people who have these properties want to be part of -- because they believe in their properties themselves, they want to be part of an operation, so to speak, going forward, and the NSR allows them to do that. So Golden Mile, exactly the same thing. The exciting thing about Golden Mile, it has over 200 drill holes in it. But to give you some perspective on that, Isabella Pearl had over 200 drill holes in it when we looked at it initially and got it. And we all know how that turned out. So we have confidence that there is a resource there. Now we don't want to rely on a third party. So we need to go in, not only confirm, but start delineating and expanding that, putting our arms around a resource, a maiden resource. And once we do that, we are off and running. This will be the next project. A lot of optionality with patented ground. It's a huge land position. We get ties, land all the way from Golden Mile, all the way up into our Mina Gold property. So this could be a situation where there could be at least now three open pits between all three of those and with a strategically located process facility and then truck carbon down the road and feed the ADR plant. So it's perfect. And now it's just a function of -- you heard me talk about the launch of this to be -- in my opinion, hopefully, to be mine. And now we just got to go prove it to ourselves and obviously, the shareholders. But I think it's going to be the next one, and it's really exciting.

Fair enough. Sound completely different. I mean, I'm just trying to weigh off two contrasting things. On the one-hand side, I heard you talk about expenses, precautionary COVID measures, specialized training, social distancing, governmental guidelines, all that stuff. And earlier on this call, you also mentioned this is going to continue for the foreseeable future. In contrast, can you provide a little bit of color on the expected impact on the second half? And this is just a quote from your release, you think precious metal production and cash costs are expected to improve the second half. How much of an impact really is from there? Is it fair to say the actual financial impact from COVID in the second half is going to be small given the higher grade ore from Pearl?

Well, the -- yes, good questions. Let me take the first one, and that's what is the impact of the precautionary -- extensive precautionary measures. And we, in my opinion, have done everything we possibly can to get in front of this, as evidenced by the fact, we've actually identified COVID situations very early and early enough to isolate that, not let any -- not allow anybody else to get it. And we've kept it off our operations in doing so, which is terrific. The impact of that going forward, I think, in large part is over. We have the precautionary measures in place. And as long as we can keep it off our site so that it doesn't -- we don't have enough critical mass to have to be shut down, either on our own accord or a governmental mandate, we should be fine moving forward. I want to caveat that, that we all know it's all around us, it's everywhere. And so it's just a function of -- we have to stay at a high elevated level as far as our protocols. Now obviously, the protocols impacted us starting back up. When we applied for the start-up back in Mexico, we weren't allowed to bring 100 people -- 100% of people on site. We had only local people could help at first, and then we had the quarantine people coming in. And so you can imagine that, it's not like a car you get in, turn the key, you drive. No, we had to build the cars, to some extent, at least maintain it before it could start going, and it took a while. But that's behind us. So the impact, I believe, is behind us, subject to us keeping it off our site. And that would be a different story. What was the second part? What was the second question?

Just contrasting the fact that you're -- sorry, just contrasting the fact that you're talking about lower costs. So I guess the impact can't be on an absolute basis, not that big, right?

Right. And the bigger picture. Now obviously, it hurts. I mean who wants to be shut down for 2 months. That doesn't help. But as long as we're not shut down again, we'll be off and running. I don't think anybody can actually look at our financials coming out of Mexico and think it's any semblance of what the future holds or what have you. How can you? I mean cost and an underground operating mine like that, you get your cost down by putting a lot of throughput through, that's part and parcel with it. So when you're shut down, yes, it affects everything. And like I said, when you shut down and then you start back up and you can't start with 100% of your team, that affects stuff. But we've -- we, in a large part, have bounced back completely from this. I expect Q3 to just be a normal operating quarter. We'll move on. Again, subject to keeping COVID off our site. So again, I don't think you can look at this quarter, and that's why I didn't even go. People who probably know will notice. I didn't go into any of the numbers. How can you -- this is an anomalous situation. And we'll just move on to the third quarter and keep COVID off our site, we should be fine.

I think you guys are doing a great job, just keep doing what you're doing. And thank you very much for taking my questions.

Good to talk to you, Heiko. Have a good day. Thank you, be safe.

And we'll take our next question from John Bower [ph] with Ascent Wealth Advisors.

Good morning, John.

Good morning. Thank you. First, I want to say, I think it's very commendable that you maintained your staff and continue paying them and supporting the workforce and your communities that you're involved in. And also I want to say that you covered a lot of the questions in general that I had. How you're handling the outbreak and evaluating the areas that you're working in and trying to mitigate and evaluate the folks ahead of time so that you're not bringing it into your operations. One of my questions was going to be about the outbreak within your operating areas, and I think you covered that very well.

Well, yes, I can give you some additional color. There hadn't been that many. It hadn't been that many people. We had a couple of people in Mexico and 1 in Nevada. And Nevada situation, it was either a relative or a family member came into that house with COVID. And then they came to work. Our screening process picked it up quickly. It was a night shift situation. So we didn't have a lot of people exposed and those who were worked on night shift next to him got quarantine, tested. You pull them off. You're not allowed to bring them back until they have a couple of negative tests. So does that have an impact in Nevada? Sure it does a little bit. You're having to pull people out during the quarantine. That's why I -- during that quarantine period, that's why I say as long as we can keep not have it come into our site in a material way to hurt us. But listen, this isn't just us. This is the world. I mean there's other mining companies where their whole operations are getting overrun with it. So our goal and task is to make sure that doesn't happen. In Mexico, we had some of the truckers union, small trucks, 10-tonne trucks, those -- some individuals tested positive. And again, it didn't come from site. It was outside area of people. So we are going above and beyond. If you want to come to site and you don't have an absolute reason to be there, you don't get to come to site. And that if you can work from home, you work from home. We are doing everything we possibly can in that regard. And that's what we have to do going forward. Does that make it easy? No. But it's not going to hinder us. And the big picture, as long as we can just keep it off our sites, so we don't have to shut down.

Right. That's good because I'm well aware of situations within the hospital setting because of family members. And very often have heard that health care workers that have been affected have not picked it up from being in units, treating patients. It's come from outside, which is very much in line with what you have expressed here. But nonetheless, the real question that I wanted to have put out here is with the Golden Mile acquisition you got, obviously, commodity prices going in the direction. And now it is about Pearl with increased production and higher grades. What are your plans as far as accelerating perhaps your exploration activity? I mean you did address that in your comments. So that's great. Do you think that accelerates the potential for bringing that property online further than what maybe you originally thought?

Yes. A couple of things on exploration. Obviously, exploration in Mexico has taken, I don't want to say back burner, but a back step to -- our primary focus has to be on keeping that operation COVID-free and operating. Are we still going to explore? Are we still exploring? Yes, from underground. But we're not going to be doing that. I mean that's not the focus for exploration in Mexico. Exploration in Nevada, you heard me talk about how we are drilling the trend where Isabella Pearl sits. We have locked up 10 kilometers of this trend. Off of our trend, there are 4 old historic open pit heap leaches on this trend. Isabella Pearl is the next one. And I believe, whether it's Scarlet or any of these others, at some point, we'll hit several more of these, I believe, because there is an obvious mineralized trend where the deposits are, and we haven't. So that is still at the top of our list, and we're exploring it as we speak. And as you heard me say, exploration in East Camp, we're so excited to drill East Camp. East Camp, as you've heard me maybe say in the other conference calls, it is a home run potential, massive lithocap with all this high-grade bleeding around the edges of this thing, it could be a big one. I see that as maybe being the Arista equivalent of the Nevada Mining Unit. It's a huge area. It's going to take a lot of time, a lot of money to explore it. But we're starting soon this year. So that's exciting. But the acquisition of Golden Mile has just elevated it into the fold to where it's now going to be with 200 holes in it, a delineation drilling program. I mean is advanced stage exploration. So obviously, can we ramp that up with gold at 2040? Absolutely. I mean more money is going to be coming in. We can allocate more exploration capital and off and running. So yes, all the metal prices this morning before I jumped on this call, zinc at $1.08, are you kidding? That adds $15 million to our bottom line in Mexico, all being equal with the crappy terms we used to have. $15 million. Every $0.01 in zinc is $0.5 million. And our -- and that's working off of last conference call, we were close to $0.90. Now we're at $1.08. That's $15 million. Let alone, the millions in gold and silver, all being equal. So if the metals -- this is where the metals are going to be next year, look out. Mexico is going to kill it. And obviously, Nevada is going to kill it to a lesser degree, but we're trying to position that to ultimately be as strong as Mexico. So yes, it's going to help, absolutely. Any other question, John?

I -- well, I do, but I'll do them off-line.

So yes, please call Greg. We're almost out of time. We're going to take one more call, please.

Yeah. I'll get up. Thank you very much and good luck.

Thank you, John.

We'll take our next question from Chen Lin with Lin Asset Management.

Hi Jason.

Good morning, Chen.

Well, good job with this difficult quarter. So actually, I want to ask a lot of those Golden Mile, but most has been answered. Can you give us a little bit update on this quarter? I know it's a very difficult quarter. Do you -- what kind of -- mostly on the balance sheet on the ATM side, are you comfortable? How much did you raise if you did? And then are you comfortable with what your money coming in with Mexican restarting that should generate more cash on your balance sheet, I assume, for the rest of the year?

Yes. As I believe previously mentioned from the last call, we raised $10 million as soon as we realized that this COVID pandemic is coming our way. And obviously, that was a good move. It gave us a little bit of a cushion because start-up, yes, you haven't lost any long-term production. We've obviously lost some revenue temporarily. So we're glad we did that. And that adds to the cushion. And if we have to tap it and then replace that, so to speak, of the $10 million that we did raise. Great, fine, we have it. But going forward, we should be fine, even at the previous metal prices. But these new metal prices, the sky is the limit, that -- there's recalibration by the minute lately -- at least this morning with gold being up $40 within like a 24-hour period. Obviously, there should be some healthy pullbacks in the metals prices. But I mean, as they continue to set higher highs and higher lows, then, yes, we're -- we should be fine. But caveating that, you never know what's going to happen. I mean if -- that's why I've emphasized so much that we have to keep COVID off our site. We don't want to be like one of the miners that I feel so bad for them. The whole operation effectively gets overtaken by and have to shut down, whether they choose to or they have to because the government forces them to. We don't want that. That's the last thing we need, having gotten our teeth kicked in, in that last quarter, having to shut down for 2 months. So that is the focus. And as long as we do that, we're fine, and this other metal price stuff is gravy.

Right. Thank you. Yes, that's mostly. So basically, from the $10 million you discussed, that's really, we fully understand the shareholder, the $10 million ATM you've done before, and then it's over, right? You don't need any more, and then we're looking for more -- actually accumulate money on the balance sheet going forward. Is that the message?

That's the goal. That is the goal. Yes, that is the goal.

Okay, great. Good job in this very difficult environment...

Listen, I appreciate that, Chen. I appreciate that. I appreciate your comments. Having said that, I feel really bad for some of -- my heart goes out to some of the other mining companies who I read about, where their whole operation has been overtaken. That I feel -- my heart goes out to them. So yes, it's been tough, but others have had a tougher, but you'll just stay focused. And like I said, we're going to emerge from this and capitalize on this next bull market that's absolutely taken hold. I mean look out -- we've had -- we had a great 7-year run bull market years ago and then a 7-year bear market. And now clearly, we're back into it. So let's hope this is another 7-year bull market. And boy, are we positioned to capitalize on it. So with that, if you have a question in the queue, please reach out to Greg Patterson and directly, and he'll get your questions answered. But with that, we need to close the call for today. And thank you very much. We look forward to updating you next quarter. Everybody, be safe. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.