Gold Resource Corporation (GORO) Q1 2021 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Gold Resource Corporation's First Quarter 2021 Conference Call. [Operator Instructions] I would now like to turn the conference call over to Ann Wilkinson, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

Thank you, Holly, and good morning, everyone. On behalf of the Gold Resource team, I would like to welcome everyone to our first quarter 2021 results conference call. Before we begin the call, there are certain housekeeping matters I would like to cover. Please note that certain statements to be made today by the management team are forward-looking in nature, and as such, are subject to numerous risks and uncertainties as described in our quarterly report on Form 10-Q and other SEC filings. On the call today, we have Allen Palmiere, President and Chief Executive Officer; as well as Kim Perry, our Chief Financial Officer. Following their prepared remarks, they will be available to answer your questions. This conference call is being webcast. For those of you joining us on the webcast, you can download a PDF copy of the conference call slides from the Materials tab under the ask-a-question tab. The event will also be available for replay on our website later today. Yesterday's news release issued following the close of the market and the accompanying financial statements and MD&A contained in our 10-Q have been filed with the SEC on EDGAR. Also, please note that all amounts mentioned in this call are in U.S. dollars unless otherwise stated. I will now turn the call over to Allen.

Thank you, Ann, and good morning, everyone. We'd like to thank our listeners for taking the time to join us. I look forward to discussing our first quarter 2021 operating results. Following my opening remarks, Kim Perry, our Chief Financial Officer, will describe our financial results. I will then provide you with a picture of our plans for the balance of 2021 and a few closing remarks, and then we'll take your questions. As you're all aware by now, I took over as CEO on January 1, following Jason Reed's departure to run Fortitude Gold Corporation, the company created to receive a spin-off of the Nevada Mining Unit. Early in the New Year, we had 3 new independent directors: Ms. Lila Manassa Murphy, Mr. Joe Driscoll and Mr. Ron Little to the Board of Directors and created a technical advisory committee, whose first members who were Dale Finn and Joe Spiteri. The new leadership all possess the expertise necessary to assist management and unlocking the value of our Mexican assets, while implementing best-in-class governance. Before discussing the operating results, I want to congratulate our team in Mexico for being the recipients of a seventh annual social responsible enterprise, or ESR award. This award is truly a testament to our team and they're focused not only on efficient operations, but on being good corporate citizens and neighbors. Additionally, it's important to note that the operations had no lost-time accidents in the first quarter of this year. Turning to the first quarter results of operations. I'm pleased to report that Gold Resource produced approximately 6,100 ounces of gold, 308,000 ounces of silver, about 440 tonnes of copper, 1,700 tonnes of lead and 4,400 tonnes of zinc. During the first quarter, we processed ore at a daily rate of 1,600 tonnes per day compared with 2,000 tonnes per day in 2020, about 20% lower, but consistent with our mine plan for the year, as we focus more on narrow vein mineralization. Our tonnage was according to plan, but the ore grade differed. We encountered poor ground conditions requiring a revision to our mining sequence, as we pumped in additional paste fill for ground support. The area is currently being mined as slightly lower grades of zinc and silver, while the gold grade is modestly higher. Ore grades and recoveries are very depending on the areas of the mine being worked at any given time. The fluctuation in grades and recoveries with depth is a function of the way the deposit was created. As mining progresses at higher levels in future years of Switchback, precious metal grades are expected to increase and base metal grades to decline. During the first quarter, we processed ore with an average gold grade at about 10% higher than the same period last year, while silver grades were about 4% lower. The paste fill plan has now processed just under 200,000 tonnes of tailings. Paste tailings are an effective method of reducing surface tailings and providing ground support to ensure future mining occurs in a safe and uninterrupted manner and to allow for more complete mining of mineral resources. In addition, the paste plant reduces overall wastewater by 17%. We made significant construction progress to our filtration plant and dry stack tailings project, which is targeted for completion early in Q3 of this year. The dry stack tailings will accelerate reclamation of the old open pit mine, provide efficient storage of tailings and reduce water consumption as approximately 80% of the processed water will be available for reuse. With that, I'm going to turn the call over to Kim.

Thank you, Allen, and good morning, everyone. We closed the quarter with a strong balance sheet, consisting of just over $27 million cash and no debt. Cash from operating activities at our Don David Gold Mine were $6.8 million and working capital was nearly $32.5 million at March 31, 2021, an increase of 5% from year-end. For the first quarter, we reported net income of $2.5 million. Net income is a result of just over $27 million in revenue and mining gross profit of approximately $8.6 million. Contributing to the higher net sales was a nearly 30% decrease in concentrate treatment charges, which are netted against concentrate sales in revenue. Treatment charges for the first quarter of 2021 were just under $3 million or $618 per tonne of base metals sold compared with $5.8 million or $860 per tonne of base metals sold in the first quarter of 2020. This decrease was expected because of the recent negotiations of new treatment charge agreements. And these costs are expected to trend even lower with the 2021 zinc treatment charge benchmark set at $159 per tonne of zinc concentrate sold. Don David Gold Mine's total cash cost after co-product credits was $408 per ounce, down 48% from 2020 full year costs. In total, all-in sustaining costs per gold ounce equivalent was $937 per ounce, down 31% from year-end. We expect these costs to continue to trend lower in 2021 and maintain our full year guidance of total cash cost after co-product credits of between $210 and $225 per gold equivalent ounce and total all in-sustaining costs of between $800 and $900 per gold equivalent ounce. During the quarter, we distributed nearly $750,000 in dividends to shareholders, which since 2010 have totaled over $117 million. With that, I will turn the call back over to Allen.

Thanks, Kim. As I indicated last call, management's focus is unlocking the value of the mine, existing infrastructure and large property position and providing growth to shareholders. Accordingly, we invested $3.6 million of a planned $22 million in infrastructure and spent $1.9 million of the $7 million we planned to spend in exploration in the Don David Gold Mine area. I touched on our investments in our filtration plant and dry stack tailings project earlier and note that it is but one of the initiatives underway. Our underground mine development and construction during the quarter included ramps and access ways to new areas of the deposit. The development completed in the quarter included access to new exploration diamond drilling platforms on Level 17. In our process plant, we completed metallurgical testing and initiated design and engineering of a tailings regrind circuit, including procuring certain parts and equipment. The project is expected to be completed and commissioned by the end of September of this year. The new circuit is expected to increase gold recovery by between 6% and 10%. In closing, our Don David Gold Mine located in Oaxaca, Mexico, continues to deliver solid production results during a demanding time. While COVID-19 is expected to remain a challenge, as we monitor the emergence of variant strains of the virus, it is important to stress the truly excellent job managing the situation our team has accomplished. Their hard work and resilience keep our people safe. I also want to repeat Kim's comment that the company has a strong balance sheet, which provides us with the flexibility as we move to reinvest capital in Mexico to increase the mine's productivity and the life of the operations. Thank you for taking your time to listen in. This concludes our prepared remarks. And I will now turn the call back over to the operator for questions.

[Operator Instructions] Your first question for today is coming from Heiko Ihle. Please announce your affiliation then pose your question.

It's Heiko Ihle with H.C. Wainwright. You mentioned in your release that you plan to invest a total of $9.8 million in mine development during the year. Obviously, the $1.1 million that was spent in the quarter don't really trendline that. So is this more of a second half thing? Or what have you seen in the first 30 days of the second quarter? Have you been trending above that?

We're trending above it. We were a little bit behind in Q1 because I placed a great deal of emphasis on doing development for underground exploration. It seems -- we're pretty much on track. That amount will be spent by the end of the year. It's fundamental to our mine plan, Heiko.

Fair. I figured you'd say something like that, especially given it was in the same paragraph of the press release. Completely different question. First of all, congratulations on your focus on ESG. I mean, I think it just helps your social license and likely will for a long time to come. But the building on that and purely out of curiosity, and I don't know how much of this you can actually share, but what specific recommendations has your technical advisory committee made thus far? What should be changed? When do you think that will be enacted and what was missed?

The focus of the technical advisory committee to date has been on geology, and that is ongoing. It's bringing a fresh set of eyes to regional and local geology to assist in identifying potential areas for drilling. That's been a primary focus. Dale Finn has been very involved there now. The other aspect is operational. Joe Spiteri will be involved in an operational view, but travel -- he's Canadian and the travel for him right now is a little bit complicated. We also have a member of our board, Joe Driscoll, who is very operational focused, and the 2 of them will be spending time at the mine. Joe has been down there once -- Joe Driscoll has been down there once already and made some observations about equipment sizing and observations about looking at alternative mining methods. It's too early to say whether or not the recommendations will be adopted, but they are things that we are looking at. We're gaining, I believe, significant value from the inputs of all of the members of the board and our advisory committee.

Your next question is coming from [ Ron Aubrey. ]

You've been very open as to why late in your 35-year mining career, why you joined GORO as CEO and with really the one exciting mandate to grow the company. So I have 2 questions regarding your long-term growth plan. The first one is really tied to exploration. To date, less than 2% of the company's significant 216 square mile land package has been explored, and certainly with this year's emphasis of tripling exploration budget, hopefully, to expand reserves and mine life. So could you walk us through your plans for this organic path to future growth? And then I have a follow-on question.

Sure. I'd be happy, Ron. As you indicated, very little of our property position has been explored. The company acquired most of these properties 10, 12 years ago. There was a little bit of work done on each one of them, effectively proving that there is potential. There were ore grade intercepts pulled on almost all of the properties. But the company's focus at that point wasn't on exploration so much as it was on being a very consistent dividend player, so a payer. So the money was never available to adequately explore these areas. Now the process of drilling this will take time because we need to obtain permits. We need to gain access from private owners, in many cases, are [indiscernible]. But that work is underway in about 3 different areas currently, and we will be expanding that significantly next year. As you said, I have increased the exploration budget significantly this year. However, the constraints on our expenditures was not cash, it was availability of drill sites. We are already working on obtaining additional drill sites for next year, and I would anticipate that we will increase the budget again next year, directionally, probably in the area of about $10 million. That will continue until such time as we feel that we understand exactly what we've got in our additional properties, and we will pursue those areas that are the most attractive.

Excellent. Second question really is tied to your guidance. 2021 guidance to produce 40 to 43 ounces of -- gold equivalent ounces. And based on the Q1 results of 10,750 is already at the upper end of this range. During your BMO Capital Market's presentation, you stated, "Single mine companies are not favored." And then you had a company goal to reach 100,000 ounces, which is more than doubling gold equivalent ounce production. So could you please provide us some color on this longer-term strategy and maybe including possible M&A opportunities for future growth?

We've -- I think I've been quite consistent in saying that our primary focus is trying to unlock the value associated with these properties we have in Mexico. Reality is if we -- unless we find something very, very close to our existing operation, we effectively have to develop a new mine, and that takes time. I believe the potential for organic growth is very significant, but I also think that in order to effectively eliminate the single-mind focus or discount, we need to look at potentially acquiring something within the next 12 to 18 months perhaps. I can't give time lines on acquisitions. Anybody suggest that they've got a strategy to grow strictly by that, I think it's being a bit duplicitous because it's opportunistic. And if we are presented with opportunities that make sense, we will become acquisitive. Directionally, the size that we would be looking at is not the size that the majors are looking at. If we can acquire something that produces 50,000 or 60,000 ounces a year, that I guess is up over 100,000. Ideally, it would be in a different jurisdiction because I would like to diversify the political risk and be operating in multiple jurisdictions. I do not want to undertake any acquisition that would risk the company. And I would like to identify a potential acquisition that levers off of our strengths. Our strengths really are twofold in this area. We've got a very strong technical team in Mexico, and they have additional bandwidth. We also have a strong balance sheet. And by year-end, I think the cash position is going to be significantly higher, which would allow us to put that to work in any acquisition. Does that answer your question, Rob?

Yes, it is. I appreciate that perspective. I'll get back in the queue and let others ask some questions.

Your next question is coming from John Blair.

It's Bair, B-A-I-R, Ascend Wealth Advisors. Congratulations on a safety first quarter and your ESR award. I've got 2 questions. One in your press release, you indicated that your production was 6,097 ounces of gold and "payable or sold was 5,019 ounces." So is the difference of 1,078 ounces, is that in held in treasury and not sold? And likewise, with your silver production? And then I have a follow-up.

John, it's in inventory. We've got concentrate in transit at all times. And until the concentrate is delivered and ownership passes to the purchaser, it's still in our inventory. So we do not hold inventory in our precious metals. We will, on occasion, have a couple of kilograms, a few kilograms of dore awaiting shipment, but that is as much as we would ever accumulate.

Okay. So that difference in ounces is ultimately to be sold in a short period of time, then...

It probably already -- it has been by now because the numbers you're looking at, at March 31, and we're late in April. So it's been converted.

Okay. Very good. And then kind of a follow-up on the exploration aspect. A lot of what I wanted to ask is -- was covered there previous question. But more specifically, have you proceeded to either permits and drill sites to potentially test or delineate the concept of an offset -- fault offset of the recent mine. I think it's to the northwest of the operations or kind of where are you kind of focusing more? Is it more close to the existing operations or a little bit more of a step out along your acreage holdings and session holdings?

John, thank you for that question. I need to clarify that. The bulk of our exploration this year is near mine. So we're exploring both from surface and underground. Underground, we're driving drifts to the northwest and to the southeast. The intent of the drift to the northwest is to look for a long strike extensions of Arista and Switchback as well as a new area that we've been trying to get a drill into for many years further to the north. The objective of the holes or the drift to the southeast is to, again, test for the long strike extensions of both of our mineralized areas. From surface, we're drilling literally just outside the mine gates. You could probably throw a rock from the mine gate to our drill site. And we're drilling to the -- effectively, it's almost to west. There is a structure there that we have identified in the past, and we're testing it. They are long holes. We've only got one completed. We're starting the second one now. But the focus this year is near-mine because I would like to build up our reserves and resources ahead of us. The common question by a lot of investors is, you've only got 3 or 4 years ahead of you. This mine has been operating for 11 years, and it's never had more than 3 or 4 years ahead of it. But -- and the nature of the mineralization is such that oftentimes, you will continually keep 3 to 4 years ahead. But I would, if I could possible, like to build that up to 6 or 7 years, just really to ensure that the investing public recognizes that this mine is not going to be going away. So that's why our focus is primarily in mine. There is going to be 4 or 5 holes drilled on some of the other properties, but that's not our focus this year.

Okay. Very good. One last quick one. With the extensive amount of land concession that you currently hold, but haven't really had the opportunity to fully explore, let's say, or even get into it. Do you have any kind of exploration time -- is there a clock ticking on the concession period that you have to hold those concessions in that acreage? Or you had any risk of that going away?

No. I've looked at all of the expiry dates on the concessions. We have absolutely no issues. There is one small concession that I think is up for renewal as we speak. But that's sort of the bureaucratic process. There's virtually no likelihood that we're going to lose any of those concessions, John.

So do you have essentially a right of first -- if there is an expiration date on any of these things, do you get the right of first refusal on it, so to speak? And begin something and...

It's almost an automatic rollover. Nobody else can come in and take it. If we drop the concession, then obviously, somebody else could. But as long as we keep it in good standing, nobody can touch it.

[Operator Instructions] Your next question is coming from [ Harvey Volen. ]

I'm a long time investor in Gold Resource Corporation. And frankly, it's hard to recognize the company I see now from the company that it was a year ago and before. I don't say that as a critique, but merely as an observation. So I'm wondering, in addition to all of the change of management, which is very obvious, how about the people, the technical people that are on the ground in Mexico, is this the same team pretty much that has been there for the last number of years? Or have you made changes on the ground?

Harvey, the team in Mexico has not changed at all. It is the same team that was put in place, has been developed over many years. And I am very happy to tell you that I think it is an extremely strong team. And there are plans only to provide them the resources they need. We're not making any changes.

Okay. Good to know. Well, I guess the proof is in the pudding, obviously, as the old cliché goes. So with the exploration plans that you have, hopefully, some of the -- as you put it, unlocked value can, in fact, be unlocked, and we see some progress moving forward, it's no secret that the stock has languished and the growth of the company has also languished for whatever reason, but we look forward to better times ahead.

John (sic) [ Harvey ], I understand your perspective. I think that you will observe over the next period of time that there will be opportunities for growth that present themselves. And it is certainly my intent and the intent of the entire management team and the Board to grow this company and unlock the value inherent in it. You're right, it is a different company today than it was at least at the corporate level. It's very different. But the commitment that the Board and the management team make is that we will operate and disclose things in a very transparent manner continually, and we will be aggressive in trying to grow the company.

There are no further questions.

As there are no further questions that lend themselves to easy answers. There are questions on the website but quite technical ones. We would like to thank you again for attending the call, and we look forward to talking to you again next quarter.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.