Gold Resource Corporation (GORO) Q1 2012 Earnings Report, Transcript and Summary

Welcome everyone to Gold Resource Corporation's First Quarter Earnings Conference Call. Gold Resource's CEO, William W. Reid, will make a brief statement. Following Mr. Ried's opening remarks, there will be an e-mail 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 very much. First of all, welcome to everybody, to this conference call. I also want to mention I have Jason Reid, President, with me. And he'll be making some comments in a few moments. Okay, to get started. We are pleased with the company's progress. In the first quarter of 2012, we've achieved record production of 30,528 precious metal gold equivalent ounces, record revenues of $40.6 million and record mine gross profit of $33.7 million. The significance of the mine gross profit is that we get to decide, in general, where that money is allocated, such as dividend. So that's the primary parameter that I personally look at. Our total cash operating cost was $101 -- $191 per ounce gold equivalent. I want to reiterate that I said total cash cost. At the suggestion of our new CFO, Mr. Brad Blacketor, we will be stating total cash cost, which includes royalty. If we exclude the royalty, our cash operating cost was $131 per gold equivalent ounce. We are ramping up our mill production rate from 2011's 600 tonnes per day average towards our 2012 target of 900 tonnes per day average. Q1, however, averaged 825 tonnes per day with the gold, silver, lead and zinc grades increasing from the fourth quarter of 2011. I expect, in general, this trend to continue, both for production rate and grades, but there will be times where both of these may temporarily be less. Though 89% recovery of the gold, and 94% recovery of the silver during Q1 are excellent, we feel we can do better. And we are continuing to optimize the mill to increase recoveries, while continuing to ramp up towards 900 tonnes per day. As we have said before, the mill is not our bottleneck, but development of our underground mine is a factor that determines our production rate. Though we are making progress, it is still a challenge. With depth and more development headings comes more water that has to be pumped out of the mine, and with more areas comes greater ventilation demands. The Arista mine decline is progressing towards Level 12, and we have crosscut to the veins on Level 11 and above. We have multiple working phases and are pushing for more long-hole stopes. Our additional development decline off the veins, but parallel to them from Level 7, is headed southwest to gain access to a different portion of the Arista deposit, and it is much deeper. This will enable us to develop and mine another area of the deposit independently of the current stopes and working phases and ultimately provide a source of additional tonnes out of the mine. Transporting more ore and waste out of the mine is an increasing challenge. One of the things we are proud of is working with the local truckers who, if you have seen our pictures, you know they have 10-tonne on-the-road trucks. They have done a really good job for us, but we are advancing mine development to the point at which we will begin to see the limitations of their trucks. We sat down with the truckers and explained the need for larger actual underground trucks. We have worked out an agreement with the union to now go to company-owned and operated large tonnage articulated underground haul trucks in the range of 35- to 40-tonne range trucks. We are in evaluation mode, but it appears we may only need 3 or 4 of these trucks. This will assist in our haulage requirements and lessen traffic congestion of the mine, particularly as we go deeper. Our trucks will bring the ore out of the mine and then the local truckers will haul the ore to the mill. So we are working hard to meet the challenges of the underground mine while continuing our commitment of hiring locally. The central focus of our exploration program is now to expand this La Arista vein system, both laterally and with depth. Underground drilling for mine development has and will continue to take precedent. But we are stepping up the expansion drilling, we have 3 drills underground and 2 surface drills testing the extensions. One of the surface drills will focus on extending the mineralization up the 2 kilometer important structural corridor between the La Arista mine to the open pit area, as we think this is highly prospective. Q1 also marks another record for the company regarding taxes paid. Though that record, if you will, is somewhat dubious. A downside to the efficient use of capital which we achieved, and of being a low-cost high-margin producer, which we are, is the fact that you rapidly utilize net operating losses and actually start paying income taxes. We paid the Mexican government, in this quarter, $17.3 million in income tax for taxes due in 2011. To be paying taxes this early in our company's evolution is a testament to our efficient use of shareholders' money. During the first quarter, we declared dividends totaling $7.9 million or $0.15 per share. In April, we increased our monthly dividend by 20% to $0.06 per share. This brings our total dividends declared and paid to shareholders since commercial production began in July of 2010 to $47 million. Our goal is to distribute 1/3 of mine gross profit as dividends. By the end of the year, but -- excuse me, by the end of the year, which remains intact. In 2011, we distributed 30.5% of our mine gross profit. The timing of any future dividend increases will depend on variables including, but not limited to, operational cash flows; company development requirements and strategies; spot gold and silver prices; taxation, which is a big one; and general market conditions. During the third quarter, we also added 2 key members to our team. Mr. Brad Blacketor, our full-time Chief Financial Officer; and Mr. Rick Irvine, our new Chief Operating Officer. Both these gentlemen have years of industry experience and we believe they will add tremendously to our team and the success of our operations. I will now turn the call over to Jason, who will discuss our new dividend program where you can receive gold and silver. Jason, go ahead.

Thank you, Bill, and thank you, everyone for your time today. Our physical gold and silver dividend program was successfully launched during the first quarter, which marked another major milestone for the company. I can tell you countless individuals told us we would never be able to overcome all the challenges with distributing a physical dividend. With over 180 shareholders with accounts already set up or in the process of being set up, we expect this number of participants to grow, as our office fields upwards of 15 calls a day recently, with eager participants learning about or signing up for the program. The exciting part of this is half of these callers are new potential shareholders. The early positive response has exceeded our expectations and we plan to continue to build our physical gold and silver treasury, not only for the company's own treasury diversification, but to facilitate our unique and, to my knowledge, one-of-a-kind gold and silver dividend program. We would like to thank Gold Bullion International for helping facilitate this dividend option, as well as our contracted mint that is producing beautiful 1-ounce gold and silver rounds. I'd like to thank all of them involved. With the preliminary third-party resource numbers compiled by Pincock, Allen & Holt, which were released recently to the market, and the closing-in on completion of their report, we are optimistic it we will be finalized and available in the near-term. As for a secondary listing, we are evaluating all of our options that will best facilitate new shareholders. Canada is one option, but we are also looking at Asia -- the Asian and the European markets. So to conclude the statement portion of this conference call, we made great progress in the first quarter and remain focused on the work ahead. So moving onto the Q&A.

The first question is from Jerry Wolf, an individual shareholder. Since your stock price has markedly outperformed almost all other mining companies, particularly this year, would you consider doing an accretive acquisition for stock? Jerry, the answer is yes. We are seeing some attractive potential opportunities, but we will remain focused on our Oaxaca mining unit. Having said that, we are open to opportunities that will fit our business model.

And might I just add that I think we know the difference between something that is truly accretive or dilutive. Most of the situations in merger and acquisitions don't turn out to be that accretive, but we certainly would not do one unless we consider it very accretive.

All right. The next question is from Josh Alban of Dougherty & Company. Do you have any color on, or can you help me understand how the resource gets divided among the classifications of measured, indicated and inferred?

Sure. This is Bill. I'll take this. There are certain definitions per measured, indicated and inferred. However, the reality is, it boils down to a lot of subjectivity with regards to the engineer that is actually doing the work. How he feels about projecting out the mineralization, its continuity, and I think, in this particular case, most of it was classified as inferred, which is the -- inferred, where most of the ounces were, and indicated with some of the ounces. Now I can certainly say that, to me, it might be more indicated, the way I see it. A little bit measured and a little bit of inferred. But that doesn't really make any difference at this point in time. This was our first resource report. We're going to build on this. And with a history of production, I think maybe next time around, we'll be able to move several of these criteria from indicated deferred, maybe up to measured indicated. So there's a lot of subjectivity in it, but that's the way it's classified at this point in time.

Yes. I might add that, for us -- or for me, the most important aspect of doing the 43-101 was third-party confirmation for the market that we have a very high grade deposit, and that's clearly the case. So moving on to a question by Ulf Aliesen, an individual shareholder. He has several questions. Have you drilled much step-out drilling since October 31 cutoff date? We all want the 43-101 to grow.

Okay. We've actually had a lot of drilling since October 31. Of course, a lot of that has been for mining development purposes. That's the #1 priority is for miners and the engineers need to know what's out ahead or needs to plan a raise or several other aspects of underground development, and they need some information, those drills will be used for that. When they are not being drilled for development and mining purposes, we have stepped out and we're starting to accumulate data and drilling on the expansion. And we may have some press releases, obviously, in the future relating to that. The way I look at it is, this first drilling, the first 500 meters and we didn't exactly drill completely in the whole 500 meters, is a start of this deposit. And even using Pincock, Allen & Holt, we've got 4 or 5 years, we think it's 7 years. But any way you look at it, we have the ability, at this point now, to be producing, generating cash flow and have time to expand this deposit, which we think will grow considerably. So we're very excited about getting to the point where we can really expand this deposit.

And I'll jump in here, too. To be clear, the deposit does remain open on striking depth. So we're very excited to continue to test the extensions. All right, the second question. I wonder when you expect to update your 43-101 again?

Well, let's get the first report out first. And then we'll be working with that over a period of time, with additional drilling as well as historical comparisons from drilling to the actual mining, which at this point, I think confirms to a large extent what we believe is there. So with that historical mining, and next time around, taking a look at that with regards to the resource report, we think we'll, of course, improve things and build on what we've had so far.

And any news on how negotiations are going in regards to El Rey? I'll take this one. We continue to work with those communities around El Rey to move that property forward, with the sensitivity of us being a visitor in their land. So we feel the best way forward is one of open communication, respect and patience, as opposed to pushing an agenda for immediate gain. We're optimistic we're making progress in that regard. Moving on to a question by Jay Sauder of Passel Limited. Could you please lay out a clear path of your target of 200,000 ounces for 2013? How many tonnes per day? What grades are you expecting? What are mill expansion milestones? Does reaching this target require further exploration success?

Okay. I'll take that. First of all, having additional further exploration success is not required for us to reach our targeted 200,000 ounces. As you've heard me say before, I believe the function of the mine, more than the mill, will determine whether when and where we reach the 200,000 ounces. In general terms, and because you can't pin down exact numbers, that we need to get 1,200 to 1,400 tonnes per day out of the mine. The reason I say 1,400 is you've got to always have the ability to have a little bit more than the amount you want to run through the mill so that you can build the stockpile. So now the mine's got to get up to 1,200 to 1,400 tonnes per day. There's still a lot of work to get to that. I think our development decline to the southwest, where we're putting ourselves in a different portion of the ore body, and once we can start developing that portion, that'll give us the ability to bring more tonnes out. But there's always a lot of infrastructure associated with the mine, like I had mentioned, the ventilation and many other things. So the real sensitivity, which I've stated clearly before, is the mine and not the mill. The mill that we have right now, the nominal numbers should be able to do 440,000 tonnes per year. The mill doesn't really need to be ramped up so much. In other words, last year, we were looking at 600 tonnes per day. This year, we're looking at 900 tonnes per day. Then of course it needs to go to 1,200 or so tonnes a day. But any time you reach or approach the limit of the mill, you start to lose efficiencies or whatever. And so what we've been doing over this period of time, which you're well aware of, is we've been upgrading pretty much all aspects of the mill. Not all of them are upgraded yet. But with the ability to have the flexibility of doing maybe a little bit more than 1,200 tonnes per day. But we increased the crushing plant, we increased the generator capacities, we've increased our cleaner floatation cells, we're in the process of looking at several other important parameters to increase the capacity of the mill. But once again, to me, the sensitivity of achieving that 200,000 tonnes a year is a function of how many tonnes we can get out of the mine. We believe the grades we have in our mine will give us that ability to reach the 200,000 ounce level.

Okay. We have several questions from various shareholders with the theme of the secondary listing, asking for additional color, and what are some of the company's considerations. So I'll speak to that. One of the considerations regarding the Canadian listing is the pushback we received with the idea of doing a listing, but not doing an equity offering in Canada. So the shares will be available to trade in Canada. Now, we worked hard to achieve a tight capital structure, enabling a meaningful dividend, and we're all enjoying that dividend. And we do not take lightly a possible compromise to our capital structure just for a new listing. So these are some of the considerations that we're looking at. If we move forward with the Canadian listing, without an equity offering, Canadian funds would have to buy shares from the New York Stock Exchange. They can do that right now. So and we're free to market in Canada to facilitate market interest from Canadian investors to buy in the New York Stock Exchange. Again, just trying to add some color to some of the considerations. So having said that, the Canadian listing is still very much in consideration. But we're also considering other markets. We believe in the benefit of a secondary listing and are evaluating all of our options. A question from Alan Picard, an individual investor. Please explain the recent disposal -- I guess, this is the U-Bill -- of 600,000 Gold Resource Corp. shares that was reported in the SEC Form 4, April 30.

Sure. I generally don't care to speak about my personal situation. However, this is not an issue. Everybody is aware of the lifetime gift for state planning purposes is this year, of $5 million per individual. That lifetime gift may not be at the $5 million level next year. So this disposition of these shares were gifts. I did not sell those shares, even though, I think there's some people that think that we did. If you look at the actual filing, you'll see that the nomenclature or the symbol is that these were gifted. So these are gifted shares for state planning purposes and they were not sold.

Arthur Robb asks, what is the current tonnage per day process of the mill? What is the expected tonnage per day by the end of the month?

Okay. We report quarterly. We're not going to be able to, and we won't give a day-by-day throughput or tonnage situation. We appreciate the interest, but we just have to really report by the quarter, because there are so many things involved other than just tonnes per day. So thank you, Arthur, but we just can only comment on it quarterly basis.

Okay. The next question from John Doody of Gold Stock Analysts. He says congratulations on a great quarter. Reaching the 1,200 tonne per day average milling target for 2013 requires continued ramp-up of the mill in 2012. Can you give the forecast milling rates for the next 3 quarters of 2012?

Sure. And I want to clarify, it is kind of like what I said before. We don't really have to ramp up the mail. For instance, last year, we ran at an average, but we ran at 600 tonnes per day. When it was time to go in January we, basically, could just jump to 900 tonnes, and the mill will do that in over a week or 10 days, got it all smoothed out. But we had to back off because the mine was not delivering the ability for us to do 900 tonnes a day. So once again, with regards to our production levels and achieving our targets, it's really a function of the mine. We don't need to ramp up the mill through 2012. As a matter fact, I would say our average for 2012 is our target which will be -- even our target is 900, we hope we achieve that. But we won't really take the mill above the 900 because we don't need to for 2012. And then we expect to -- you can almost think of it as flipping a switch, it's just all the equipment can take the higher tonnage. But once again, it falls back on the mine and its ability to deliver the tonnes. But as you can see, we're making progress. We're now being able to switch from the 10-tonne trucks to -- and it's not just a matter that they are 10 tonnes. Those trucks aren't really made for the hard work of climbing up a decline or incline. But once we get the actual underground mining trucks, then I think we will not have any issues with regards to trucking because they're made to go up such around and carry a lot more tonnage. So we'll continue to work away at each aspect of what it's going to take for us to achieve our 200,000 ounces in year 2013.

Okay. The next question, and I apologize if I get your last name wrong, [indiscernible] individual investor. Congratulations on a great quarter. As a long-time shareholder, thanks to Bill and Jason for an excellent stewardship of the company and regular growing monthly dividend. Did GORO buy back any shares during the first quarter? If yes, how many shares were purchased? Answer is no. As far as our buyback policy is concerned, we evaluate that when there's any retrenchment. And we'll go in and but at that point. The second question. There seems to be a discrepancy between the number of shares mentioned in the 10-Q filing on 5/10 of '12, and that mentioned in the current earnings press release. Which one is correct? I believe the discrepancy is due to an employee in Mexico that exercised options between those dates at the end of the quarter, March 31 and the filing of May 10, and therein lies that difference.

Okay, so let me just clarify, Jason. It's not a discrepancy. They're both correct, it's just the different point in time. So in other words, the filing of the 10-Q with regards to -- that has to be after the March 31. So as of March 31, that number of shares outstanding was correct. But the press release is as of our -- just filing the press release, day before yesterday, there were additional shares due to that exercise of option. So basically, they're both correct.

Okay. Then the second part, the average gold and silver grade continues to show a significant increase with the previous quarter and the year. Can you provide some color as to whether you're continuing to see the trends of increasing gold and silver grades as you go further into the ore body? Are grades increasing at the same rate or is the rate of increase leveling off?

Okay. This was an absolutely fascinating and exciting ore body, that it's truly -- every day we see grades that in certain places are pretty phenomenal. Just to give you a little color, the last couple of days, I saw that the zinc grade through the mill was, one day 7%, the other day, 8%. That's obviously above our average, and that's not going to be the average. But on those particular days -- excuse me, the zinc was quite high, and the lead, I think, was above 3%. So we do believe that as we go into the ore body, that it does get richer. Now I can't really comment on the rate of change but we've been mining some areas recently that seem to have more gold and a little less silver, but then there are other areas where the silver really was stand out. So it's a very exciting as a geologist to see the character of this ore body which is quite exciting. I might just mentioned that our cash cost is helped by our base metals. And because we can use the revenue from the base metals to offset our cost. I believe, when we -- like our last -- this first quarter reporting on, the zinc grade was like 3.59. I expect to see that get up to 4.5 or 5. If that is the case, then that's going to reduce, help reduce our cost. It's same thing with lead, it's 1.7 here. It could increase and so should the copper. As those base metals increase, that could help move our cost down. Equally, as the average grade of the gold increases, which looks like it's doing right now, and the silver is excellent also. So we do believe that we are going to reach a steady state that will be closer to the averages we stated in our mineralized material estimate. But it's an exciting ore body and it's amazing some of the grades that we get and see on a daily basis. But of course, at the end of the day, it's all about averages. But this is a high-grade deposit, and we expect those averages to be pretty good.

Okay. Next question from Peter Zihlmann of the Timeless Precious Metal Fund. In which countries would you look to add additional projects?

Okay. We are in the mode of evaluating of where we're going to look for our next project. And in today's world, the venues for successful mining or the places you want to be are becoming fewer and fewer. Certainly, a lot of Latin American countries are good, but then there's a couple that we would not go to. But Chile is excellent. Peru is good. We're also looking at and evaluating Turkey, because there's a couple of new mines that have come online in Turkey. The geology and exploration is tremendous and that country has a very good structure for mining and they want mines. They actually are promoting the mining business in Turkey. So we're evaluating that. Actually, Jason, I go to Turkey in June to look at some things. But are also looking at other areas. So it's hard to say at this point but we're only going to go where the venues basically promote mining and it's a good place to be.

Yes. Mining-friendly jurisdictions are going to be increasingly harder to find and those are the places that we focus going forward. The next question is from Bill Robertson. He says greetings, congratulations on a great Q1. I have been noticing that although management has discussed their desire for increasing stockpiles, the quarterly filings for the past 3 or 4 quarters show a gradual decrease in stockpiles. When does management feel very begin to increase in stockpile?

Okay, well, that's another function of this mine. We're not really able to build large -- increase our stockpile of ore to the mill over time, because we need to use that at some point. That's why I say we've got to get to the point where we're not just pulling 900 tonnes a day out of the mill, we've got to pull 1,000 to 1,200 in order to build a stockpile. But that's really just a function of the mine in its development. And we're continuing to work on the challenges associated with underground mine. But at this point, we want to give that mill fed and get the production for the quarter. And as the mine gets more developed, as I will reiterate that develop decline to the south, it could give us the ability to then start looking at doubling or at least increasing considerably the amount of ore that can come out of the mine. But it is point, yes, stockpiles did get built up a little and then we use them. If that's what you're referring to.

Yes. I might add to that we're transitioning into more long-haul open stoping, and the more we do of that, the greater tonnages we'll be able to pull. We actually have on order another long-haul stoper so to help us facilitate additional tonnages. Okay. The next question, from Sean. Are you selling all of the gold you produce or are you saving some for future sales at potentially higher prices?

Okay. We're basically selling all that we produce. We produce a concentrate, right now, and that concentrate has to be really processed in the smelter. And a concentrate is takes up a lot of volume relative to say a gold bar or something if we were producing El Rey. So, no, all the concentrate is being sold as we produce it. Now we do have an inventory of concentrate in the system and an event that we can't get out fast enough to sell by the end of the quarter but that's just simply inventory which we hope to, obviously, clear out as time goes on. But we are selling all the concentrate as we get it.

Okay. I believe we've addressed all the questions either in our comments or during the question-and-answer directly. If we left any out, we'll try to circle back with them individually. We'd like to thank everybody for their time on this call, and have a good day.

Thank you.

And that does conclude today's conference. We appreciate everyone's participation.