Good day, ladies and gentlemen, and welcome to your Gold Resource Corporation Third Quarter 2020 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Jason Reid, CEO of Gold Resource Corporation. Sir, the floor is yours.

Thank you. Good morning, everyone, and thank you for joining Gold Resource Corporation's 2020 Third Quarter Conference Call. I expect my comments to run approximately 15 to 20 minutes, followed by a question-and-answer period. Joining me on the call today for the Q&A portion will be Ms. Kim Perry, our Chief Financial Officer. We welcomed Kim to the management team of Gold Resource Corporation. As you know, Kim transitioned from her Board seat with the company to join the management team, which I believe speaks volumes for the company and its future. 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 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, November 3, 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 and 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. We are very excited to embark on a new chapter of Gold Resource Corporation with our announcement to spin off our Nevada Mining Unit 100% to shareholders at a future date as Fortitude Gold Corporation. But before jumping into that exciting news, I will briefly summarize the third quarter results. With both mining units operating continuously during the third quarter, the…

[Operator Instructions] We'll take our first question from Heiko Ihle with H.C. Wainwright.

And thank you so much, by the way, for going through all that Q&A here on the call, Jason. I appreciate that.

Yes. Yes. Thanks, Heiko. I was just trying to get in front of it. It's amazing there's still the misconceptions as some shareholders, I guess, haven't read fully the press releases or what we've talked about. But I just wanted to get out in front of all of it, so maybe we could have additional new questions.

It blows my mind that people think that one asset just disappears with a spinco.

So many people were thinking that.

I also want to point out that -- sorry?

Heiko, we lost you. Yes, it kind of broke up. Say your question again.

I said I also want to point out that it's really nice to see you guys pay a dividend because, I mean, less than a handful of other companies we cover do. But anyways, off to my questions. Profitability going forward, I mean, you guys just put out an extremely strong quarter, how much of that can we trend line into Q4 and then also on a combined basis into next year?

Yes. I can't give you specific numbers, obviously. We don't even have an outlook for this year due to the COVID situation. But it is our goal to remain profitable every quarter. They all won't be. But going forward, we're -- we think we're out of the woods. At least for the COVID, we still have to fight it. We'll still have to be proactive. But out of the woods meaning I don't believe they'll do another shutdown. They might, and hence, we don't have an outlook for this year. But as we look at Q4, I'm optimistic it's going to be another good quarter and then I think 2021 is going to be an exciting year for Gold Resource. As I mentioned early in the call, the zinc price, I mean, we were just talking about it before this call, it was $1.15. We were in the $0.90 back last -- a year ago. $1.15 is incredible. That will add millions to the bottom line. Every half -- every penny is almost $0.5 million to the bottom line. So it's terrific on metal prices. We just need to stay vigilant on COVID, keeping it to the least impact it can possibly be on our operations, and I think we're going to have a good Q4 and a great year next year.

Fair enough. Speaking of next year and just general outlook, you answered my second question, but one more that I had, the regulatory environment in Mexico and Nevada, I mean post-COVID, do you anticipate any longer-term changes? Have you seen anything that people are trying to enact? Is there anything that maybe we wouldn't be as privy to as you?

Yes. No, it's a great question. I don't have any additional color that everybody else that's paying attention doesn't have. Governments are always x factors, whether it's in Mexico or the U.S., and this election will have a big impact on -- going forward on the U.S. for that matter, the election that's happening today. So I don't have any color on that. All we -- we can't worry too much about that. All we can do is do everything we can to make sure each operation is running as efficiently as possible, and we'll roll with any punch that's thrown our way in that regard. But yes, sorry, Heiko, I can't give you any additional color on that.

Fair enough. Well, keep doing what you're doing. I think you're doing a great job at it.

Thank you, Heiko.

We'll take our next question from [ James Adam ].

Jason and Kim, first, congratulations on an amazing quarter during a very difficult time.

Thank you.

No problem. I had a few questions. The first was related to the OMU. Obviously, it's a difficult time, and my thoughts are with the team there. But do you have any visibility on how production might ramp back up to normalized levels over the next few quarters, how quickly we could see that?

Yes. No, it's a great question. The impact of COVID is there. I mean, it ebbs and flows given on the week and how many cases we have, given on how many people go into quarantine because they were exposed to somebody. It's not fun. I mean it's not -- it's a challenge. So is that going to go away next quarter, this quarter? No. Is it going away next year, probably no. All we can do is stay vigilant and keep our protocols in place, and we've shown that we can operate with COVID at our site and still do good. That will be a challenge, and for every company. I mean it doesn't matter what industry you're in, that's life as we know it, I guess. But as far as other aspects. I mentioned it on the -- we mentioned it on the press release of the spinco, there's some optimization that we're targeting for the Oaxaca Mining Unit like an ore pass or a regrind circuit. That ore pass could help us not double-handle as much underground. It could save us in cost and be far more efficient miners. That is slated to happen next year. That's on the preliminary budget. The regrind circuit, we're evaluating that. That could have more gold mine recovery. So we're positioning ourselves by taking this approach where we're putting more money into the ground to optimize everything we can optimize. And just your question kind of underscores why the spin-off happens. The spin-off needs to happen because Mexico needs to put more money to work underground. Sure, we could continue down the same exact path, but people have to understand there's a push and a pull to everything. If you're going to pay outside dividends, you have to give up some projects. And taking this new strategy is very exciting because we're going to be able to take our exploration budgets that went from the last 7, 8 years from $10 million down to $2 million, back up towards $10 million. That's very exciting to me. That's finding additional ore. That's finding new deposits. That's adding tremendous value. So the new strategy, I think, is going to unlock a lot of value, not that our previous operations -- operating strategy was wrong. I'd do it all again in the exact same way, but now it's evolved to a point where it needs to go this way. And between the optimization programs, between our fervent health screenings, I think we're going to have a really good year 2021.

Great. Another question related to what you just mentioned. OMU has done extremely well in part because of the base metal prices and particularly zinc. One of the headwinds for this year and 2021 was related to the TC charges -- or treatment charges. Do you have any guidance on what kind of cost adjustment we can expect going into 2021 as you look at renewing that contract?

Yes. I can't speak to specifics until we're actually done with a contract. So I'm going to be really reserved on what I say here. What we are seeing is far more favorable TC terms. So that will have a big impact. If we can secure those favorable TCs, that will have a huge impact, not to mention what you meant -- what you just said with the higher zinc price. But I'm hesitant to go into specifics until we actually signed a contract. So I think that's probably best to flesh out in a future call. But point being -- I've mentioned this in previous calls. Years ago, when the zinc price was really dropping, we didn't know it was going to drop to the extent it did. And for other reasons, internally, we set a goal to lower our cost by $10 million. And so we did all these cost-cutting measures. We did it. And in one fell swoop, the TC charges eliminated that whole savings. And so what would be nice is to see that $10 million come back in. And we'll see -- we'll have to wait and see once we get the final -- a contract signed. But it's just too early to speak to specifics on that until we get something signed. But it's looking good.

And that's fair. And I've seen the current market price, it seemed to reflect a couple of hundred dollars potential in savings, which I just wanted to see if I can validate, but I understand. In terms of an update, looking at the exploration side, can you provide any update on the drilling that was done at either East Camp Douglas and/or the Golden Mile, and maybe any exploration efforts being done at the OMU as well?

Yes. As far as exploration in Nevada, we started our first East Camp Douglas program. So that's very exciting. We're only a couple of holes into it. And this is a really big property. It's going to take a while, but we are drilling it. So that's exciting. We don't have any results back yet. As far as Golden Mile goes, we are, I think, right now mobilizing a drill or soon to be mobilizing a drill there to drill it. So that's very exciting as well. We're going to go in -- there's 2 known areas of mineralization, and previous companies have put their own resource around it. We haven't come out with that number because we want to own it, meaning trust but verify. So we're going to go in and drill it, if you will, to confirm what they've drilled is there and try to delineate it and make it a little larger with an initial, just to get our arms around the resource, if you will. And how soon we can do that, it's still a little early to talk about timing, but the sooner the better. And for sure, by next year, I want to come out with the first resource there. So both of those properties are being explored as we speak and both soon to be drilled as we speak. As far as the Oaxaca Mining Unit, very exciting in putting out these exploration drifts. We as a company have never had the luxury of deploying capital for exploration drifts only. So what I mean by that is until we were able to be in this position, we always had to put a drill wherever the mining wasn't happening and they had space to put a drill, and that's commonplace for a mine, underground mines, and it's this push and pull between exploration and production. But we're pushing out these exploration drifts, which you can see the schematic on our website presentation of these exploration drifts, and you can see that we're going to be able to test new areas that have never been tested before around the Arista. Now the Arista is very structurally controlled. It's the Arista -- the Switchback has to do with ridges, you can see the surface expression with ridges on the surface. There's numerous other ridges that are parallel to these that make us think there are more Switchbacks out there, and these drifts are putting us in the position to find them. So not only do we expect to add to known vein systems, but finding new ones will be very exciting. So as I mentioned earlier in the call, this new strategy where we're not going to be a gating factor of, oh, we're pushing this out in dividends. No, we're pushing a lot of money back into exploration. It's very exciting. We're going to be able to expedite, I think, some of these expansions in discovery. So exploration is exciting on both fronts.

And Jason, and this may be a question for Kim as well. In looking and thinking about the CapEx requirements over the next year as you expand exploration and continue building out the dry stack, how should we model or think about the future CapEx over the next 4 or 5 quarters?

Yes. The biggest CapEx as we -- everybody here -- most people are aware, we've been through a lot of capital expenditure projects. The tailings lift. We had an electrical power grid brought in. We did a paste fill plant. All these are capital-intensive. But it's a good thing you're doing them. And what that means is the mine is growing, the mine -- and that's what's happening. We're currently doing a thickened tail. So that CapEx will continue on into next year. Before COVID, we had planned to be done with that project this year. But when we got shut down, nobody -- we didn't know how long you're going to get shut down. Obviously, you're shut down so you can't move projects forward. So the long and short of it is the -- that project got pushed into next year. So that CapEx project will continue. There are these optional CapEx projects that I've alluded to, this ore pass, this regrind, all these things we don't have to do but we were looking at them seriously in an effort to make our project more efficient down there. Those could potentially go into the CapEx budget. But then as this mine grows, which we expect it to keep growing and faster once we deploy more exploration capital, the infrastructure is going to be additional CapEx. I mean we're going to be -- obviously, you have to push air and power to all these new areas. So we don't have -- we're working as we speak on our budget for next year. So we don't have it all nailed down. But how you can model it -- I mean, we've spent $10 million a year on average on these CapEx projects. If we're not doing big CapEx projects, we're probably allocating that $10 million for mine development. So I'm not saying $10 million is the exact number. I'm just trying to give you something, and that's probably a number that's going to be deployed irrespective of whether you have CapEx projects or not. It's going to be put back into the ground.

No, that's fair, and that's helpful. The last question, and then I'll jump back in the queue is, as you mentioned, there are certain key milestones that you're going to be looking for as it relates to up-listing to the NYSE. Do you have a sense of what the time line that you might be examining the market cap and share price or any other milestones? Will it be -- are you looking at a 2-quarter process, a year? If you can give us some guidance before considering that up-list that would be great.

Yes. The market is going to tell us, I think, in large part. There's very little value in Gold Resource that represents Nevada. The market just isn't valuing it yet, so it's tough to put a number on it. When we do the spinco, the market will put a number on it, and we'll just see once we continue to execute on our production. And once we initiate the dividend -- and it won't happen right out of the gate, but once we do initiate a dividend and then do a dividend increases, the market, I believe, will respond quite favorably. And then that will dictate share price. That will dictate market cap. Those are some of the primary drivers for an up-listing. But yes, the market is going to tell us. It's not like we can force that. That's one of the issues. And then the heavy part of that portion of the due diligence of the spinco is do we try to stretch ourselves and go list on a major exchange? But the risk of failing and then getting delisted is a death spiral. You don't want that. You want to up-list when you're confident that the market is going grant the market cap and share price necessary to stay on. So could it happen in 6 months? Possibly, but I think that would be the most aggressive. Could it happen in a year? I wouldn't see why not if we execute on the plan. But again, we don't call those shots. All we can do is execute on the plan on production and then issue dividends and then increase dividends, and the market is going to tell us when we go.

Fair enough. And with the cash flows that I'm projecting out, you guys should have a very successful 2021. All right. I'll go ahead and jump off the questions and jump back in the queue. Good luck with the job and keep up with the good work.

Thanks, [ James ].

We'll take our next question from [ Ronald Brandstetter ].

Jason, great quarter and great job on the conference call kind of explaining the reasoning behind the spin-off transaction. And I guess my question, or I'll ask you to confirm this for me, it's my understanding that in a spin-off transaction there's a great deal more protocol and regulations in terms of -- the extent to which you're able to kind of promote or put out forecast for the entity being spun off. Is that accurate?

It is, but only for a certain amount of time. The SEC does not like you to what they call, I think, prepare the market. So we will, as I mentioned, be going into a 40-day quiet period. So the next steps are -- obviously, we turned in our S-1 to the SEC. They'll review it. A couple of outcomes could happen. A, they'll review it and give it back with no comments, which means it's declared effective and then we'll move forward to finalize the spinco and the quiet period starts. Or they come back and say, we have these questions, answer them, and you're good. And so we would do that. Or they come back and say, answer these questions and resubmit, and so then we set another 30 days. So we'll just wait and see what the SEC comes back with. We put a lot of time and effort into that document. We think it's a very good S-1 document. So I'm hopeful, I'm optimistic that it goes with no comment. We'll hear, I think, at the end of next week or the week after. That will be the 30 days. So it's coming up. Now once they declare it effective, then we'll move forward, give the 10-day record date, so -- with the SEC, that's a requirement with the SEC. And then effectuate the spin-off and then we go into a quiet period for 40 days. And you're not going to hear any talk on the company until we come out of that 40 -- until we come out of that. All we can speak to is what will be in the S-1. So -- yes. But after that, we will see...

So you're kind of limited in terms of your ability at this point to promote the spin-off, which is no fault of yours, it's just a function of the regulation surrounding that.

Those are rules and regulations, yes. Correct. We are limited on what we can say.

And the reason I bring that up is I sense that, that may have been a contributing factor to maybe a bit of the downdraft over the last 2 or 3 weeks in the stock price. And I imagine you're chomping at the bit, but if you're not allowed to be out there doing a roadshow or issuing projections or anything like that, that it might be a little frustrating.

Yes. It just is what it is. Just -- I don't view the world like so many shareholders on a quarter-by-quarter basis. I view the world long term, and so this is temporary. This pullback is temporary. It's like the example I gave in Nevada, right? Nobody wanted us to be in Nevada. Everybody thought it was a distraction. Now everybody loves it. Talk to me a year from now. Everybody is going to love this spinco. Mexico, who will have gone down an incredible path, and it's going to succeed. I'm confident. And Fortitude will do the same. And they'll look back and everybody will forget this noise. Everybody will forgive this pushback, and both companies will be better off for it and it's exciting. It's just an exciting time. So 40-day quiet period, no problem. I mean for the bigger picture, it means nothing to me. Yes.

Yes. Will that 40-day quiet period -- I mean, I would think that over the next couple of months, we're going to -- there'll be a good level of news coming out of the company, new CEO, those types of things. That won't -- I mean you'd still be able to do -- right.

For GORO, yes.

For GORO, correct. I mean but that won't -- well, I guess that wouldn't affect the spinco then, would it? So if you're going to announce a new CEO for GORO. But they're -- I'm anticipating -- go ahead.

Okay. No, sorry. I interrupted. Go ahead.

Well, I just -- it feels like there's going to be a decent amount of news flow coming out of the company over the next 2 to 3 months. And I was wondering to what extent the quiet period would affect the ability to release news items.

The quiet period only affects Fortitude Gold.

Got you. Right. And I...

Gold's Resource -- yes, Gold Resource will be able to -- it will be -- it will have news on the new Board member, on the new CEO. It will have additional news on like normal course. The quiet period only affects the spinco.

Okay. And one final comment. In my due diligence on the company, I've listened to 4 years' worth of conference calls and read through 4 years of your press releases. And one thing that struck me is that you have -- and I've heard other callers comment on this, that you always keep the long-term best interest of the company and the shareholders at heart. And I think you're, in my opinion, from having listened to hundreds of conference calls and talked to a lot of people in the industry, you're just a great honest leader and I appreciate all your work.

Yes. I appreciate the comments. Thank you very much. So with that, if you are in the queue for the question-and-answer period and that we didn't get to you, please call us. And we'll just -- we'll talk to you one-on-one. With that, I bid you farewell and look forward to hearing -- talking to you on another conference call down the road. Thank you.

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