GORO - AMEX

Good morning, and welcome to the Gold Resource Corporation Second Quarter 2023 Financial and Operating Results Conference Call. At this time, all participants are in a listen-only mode. Following Management's presentation, there will be a question-and-answer session. [Operator Instructions]. I'd like to remind everyone that this conference call is being recorded today, July 27, 2023 at 10:00 a.m. Mountain Time. I will now turn the conference over to Kim Perry, Gold Research Corporation Chief Financial Officer. Ms. Perry, you may proceed.

Thank you, Ina, and good morning to everyone. On behalf of the Gold Resource team, I would like to welcome you to our conference call covering our second quarter 2023 results. Before we begin the call, there are a couple of housekeeping matters I would like to address. Please note that certain statements to be made today are forward-looking in nature and, as such, are subject to numerous risks and uncertainties as described in our 2022 annual report on Form 10-K and other SEC filings. Please note, all amounts referenced during the presentation are U.S. dollars, unless otherwise stated. Joining me on the call today is Allen Palmiere, our President and CEO; and Alberto Reyes, our Chief Operating Officer. Following Allen, Alberto and my prepared remarks, we will be available to answer 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. 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 Form 10-Q have been filed with the SEC on EDGAR and are also available on our website at www.goldresourcecorp.com. I will now turn the call over to Allen.

Thank you, Kim, and good morning, everyone. I'd like to thank all of the listeners for taking the time to join us on this call, and I hope everyone is enjoying their summer. I'd like to start by addressing safety at the Don David Gold mine. Year-to-date, we have experienced only one lost time injury. This makes us one of the safest mines in Mexico when we are approaching North American safety standards. This is our highest priority, and our focus is beginning to show the results that we require. As I noted on both the 2022 year end and the first quarter earnings call, we continue to face several challenges impacting our Don David Gold mine. Some of these challenges were unanticipated and uncontrollable, such as declining base metal prices, the appreciation of the Peso against the U.S. dollar and persistent inflation in Mexico. As I previously indicated, the mining sequence for the year has resulted in lower metal grades and metal production. While the year-over-year comparison is negative, I have to point out that our production guidance remains intact. And so far this year, our costs are in line with forecast. Notwithstanding external pressures, the team has performed well and are achieving or surpassing all of their key operational objectives. To continue to address these challenges, we are identifying and implementing measures for cost reduction and operational efficiency. Concerning our operational results for both the quarter and year-to-date, tons mailed, or grades and metal produced and sold were lower than the respective 2022 period. However, they are in line with our 2023 mine plan in which this was anticipated. For the remainder of this year, our management team is focused on identifying opportunities to improve our production profile. Concerning leadership, I do want to stress that our new management team at the Don David Gold Mine has done an excellent job during the first half of this year in improving the safety culture, rolling out best practices and operational standards, along with identifying efficiencies that will ultimately increase productivity. With this team now in place, I'm confident that we will be able to continue to deliver positive results for our stakeholders well into the future. Moving into the remainder of the presentation, I will provide an update on our Q2 exploration results and then turn the presentation over to Alberto Reyes for an update of our Don David Gold operations and then to Kim for an update on our quarterly and year-to-date financial results. Following Kim's prepared remarks, I will then provide an update on our Back Forty Project. Lastly, we'll provide a few closing remarks, and then we'll take questions from participants. Now please turn to Slide 4, and I'll provide an update on our Q2 exploration results. During the quarter, our diamond drilling program progressed as per our plan and on two fronts. While the objective of exploration drilling to identify additional inferred resources and infill drilling with the objective of upgrading defined inferred resources into the indicated category. The results to date have been very encouraging with several new areas of mineralization being identified and targeted. Exploration efforts to date include 12 exploration holders drilling totaling more than 6,900 meters and 63 infill drill holes totaling nearly 10,700 meters. For the quarter, this included eight exploration drill holes totaling 4,425 meters and 37 infill drill holes totaling 5,700 meters. During the quarter, exploration was focused on the Northwest extension of the Switchback system, and we have confirmed the continuation of the system. Drilling was also performed in the Three Sisters and Gloria vein systems. In the second half of this year, we will continue to focus on these systems along with the down dip extensions of the Soledad South and the Marena zone. Infill drilling was focused on the recent Switchback vein systems, including defining mineralization along strike and down dip of existing workings. Infill drilling continues to firm zones of high-grade mineralization within the resource model as well as additional mineralized structures outside of the existing models, including Splay 31, Marena, and the Soledad South and Suzanna North Veins. I will now turn the call over to Alberto for an update on the operations.

Thank you, Allen, and also good morning to all. Getting your attention to Slide 5, please. Starting with safety at DDGM, I will take this opportunity to share our recent accomplishments and celebrate the solid dedication and discipline displayed by each member of our workforce towards safety. It is with immense pleasure that I announced a new lost-time injury frequency rate, LTIFR, of an impressive 0.32. This remarkable achievement is a testament to the outstanding effort put forth by every individual in the organization. By adhering to rigorous safety protocols and continuously seeking improvement, we have collectively cultivated a culture that prioritizes the well-being of our team members above all else. On a success in maintaining an impressive LTIFR of 0.32, as a reminder that with the right team, everything can be achieved. Despite all challenges, DDGM's team has once again achieved metal production targets of plan in Q2. Our business improvement initiatives, which started in Q1 continue to be integral to the team's success and a great effort to compensate for the stronger Peso and lower zinc prices. As an example, the processing plant initiated the testing of different reagents. We are glad to announce that the results were positive and that it hasn't improved the quality of the copper concentrate. This new reagent increases the grade of copper while reducing the lead content. During the quarter, I am pleased to report that we produced nearly 514,000 tons of ore, sold approximately 4,300 ounces of gold and 274,000 ounces of silver, equating to nearly 7,700 gold equivalent ounces. In addition, we sold nearly 330 tons of copper, approximately 1,300 tons of lead and more than 3,100 tons of

Thank you, Alberto. After our Q2 activities, our balance sheet remains solid with $18 million in cash. Our cash balance has declined approximately $5.7 million this year. Our working capital balance of $20.8 million has only declined 3% from year-end 2022. The decline in cash is primarily due to the cash spend on capital and exploration expenditures at DDGM. Cash from operating activities is $0.5 million year-to-date. This reflects $2.4 million spent on exploration in Mexico and nearly $1 million spend in Michigan related to the Back Forty studies. For the second quarter 2023, we reported net losses of $4.6 million or $0.05 per share. And for the full six months, we reported net losses of $5.6 million or $0.06 per share. For the quarter, net sales of $26 million were 33% lower than the same period in 2022 due to both lower volumes of all metal sold with the exception of silver and lower base metal prices. For the year, net sales of $56 million were 32% lower than the same period in 2022, also due to both lower volume of metals sold with the exception of silver and lower base metal prices. The lower base metal prices are also impacting cash cost per ounce, which we will discuss on the next slide. While production costs for the quarter and year-to-date of approximately $20 million and $40 million are in line with the production cost for the same period in 2022. This is resulting in an unfavorable impact on unit costs such as cost per ton process and cost per gold equivalent ounce sold. Again, we'll discuss a bit more on the next slide. Depreciation for the period is largely in line with the depreciation for the same period in 2022, Finally, mining gross profit is lower in 2023, primarily due to the lower sales, not offset by lower production costs. Turning to Slide 8, we'll discuss cash costs at Don David Gold Mine. For the quarter, DDGM's total cash cost after co-product credits was $1,333 per gold equivalent ounce sold and total on sustaining cost per gold equivalent ounce sold were $1,990 per ounce. For the year, DDGM's total GAAP cash cost after co-product credits was $9.79 per gold equivalent ounce sold and all-in sustaining costs were $15.51 per ounce. There are five key drivers related to the increase in cash costs: One, reduction of gold equivalent ounces sold; two, a reduction in co-product credits; three, the strengthening Mexican Peso; four, treatment charges; and five, other production cost increases driven by inflation such as power and transportation. Ounces sold were lower due to the lower ore tons processed, lower ore grade and lower recoveries realized both for the quarter and year-to-date. As Allen noted, this was an expected result of our current mine plan. For the lower co-product credits, the lower co-product credits were the results of lower copper, lead and zinc tons sold compared to the respective period in 2022 but more significantly, the result of the lower prices realized for base metals, especially zinc. The Mexican Peso has strengthened to the U.S. dollar in 2023 with approximately 60% of our production costs originating in Pesos, this is a larger-than-expected impact on our year-to-date costs. While year-to-date, we are within our guidance range of $1,000 to $1,050 per ounce. For cash costs, we are monitoring this closely for the impact co-product credits and the Peso may have on the outcome of this key performance measure for the full-year. Allen, back to you.

Thank you, Kim. With the Back Forty project, as I noted back in the first quarter earnings release, we remain optimistic. I'm very confident that there is an economically viable miner, and we are diligently working through the optimization work which resulted in a number of potential improvements. And once the engineering and testing is complete and the costs are finalized, we will incorporate the cost into the financial model. I do want to highlight that during the quarter, a few new developments rose relating to Back Forty, one being a ruling by the U.S. Supreme Court that limits the federal government's authority with regards to wet lands, and will likely result in not needing a dredge and fill wetland permit. The drawdown of wet lands will be regulated by Michigan State Authorities. The company has committed to designing the Back Forty mine with minimal environmental impact and to follow all state permitting requirements. The second being the nomination by the Menominee Tribe of Wisconsin, concerning a cultural landscape known as Anaem Omot to the National Register of Historic Places. I need to stress these cultural sites were initially identified in our baseline archeological studies, and we've reflected measures in our planning to ensure that these sites are projected and preserved. The company will continue to develop plans that avoid impact to these important cultural sites. As I indicated a month ago with our 2022 year-end results. Our team is progressing on safety and operational efficiencies to ensure the well-being of our employees and the optimal performance of the Don David Gold Mine. As previously discussed, our exploration program is ongoing, and the results continue to be very encouraging. Q2 was positive in that the results support our annual guidance and while we anticipate further challenges, we're confident we will make 2023 another successful year. Now with that, I'll turn the call over to the operator for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Heiko Ihle from H.C. Wainwright. Please go ahead.

Hey Allen, Kim and team. I appreciate you guys taking my questions. Let's talk about the infill drilling versus exploration drilling a little bit. Can you break that out in regards to how much spend on each and also like meters? And then maybe give some color on inflationary impacts and availability of rigs as well, please?

I don't think that's a split at my fingertips. Sorry, Kim, do you have that available?

Allen, I was going to just point back to the slide on the investment summary. And the split between exploration growth typically is your -- the exploration component and then the infill drilling is typically under your sustaining, Heiko. So this would be a good resource for you.

Fair enough.

Heiko, just in terms of -- I'd like to clarify infill versus exploration. Some of our listeners may not be completely familiar with it, but infill is dealing primarily with previously identified resources to gain more information to upgrade the resource potentially from inferred to indicated to measured, measured, proven and probables. It's to upgrade the quality of the information available. Some of our infill drilling has actually disclosed areas of mineralization that were not previously included in any of our models. So that's a big positive. Exploration drilling is step-out drilling targeting areas that are not included in any of our models, and that has resulted in very significant clients year-to-date.

It makes sense. Moving on to grades a little bit. I mean gold came in at 1.59 grams per ton. And I assume this is mostly a temporary thing, were essentially done with July at this point. Do you want to maybe just provide some color on the month if you'd be so kind. And then maybe also for the remainder of the year by quarter?

I would -- July -- early part of July was not -- it was consistent with what we saw in Q2. Latter part -- over the last couple of weeks, we've seen an uptick in base metal prices and a modest uptick in precious metal, zinc in particular has been quite strong for us. The balance of the year were -- we had predicted that the low grades would persist through the balance of the year. However, we have identified areas where we had underestimated the grades. So we are hopeful that we will see somewhat higher grades for the balance of the year. But Heiko, it's a bit premature for maybe tell you that definitively.

Understood. There's most interesting is a definite thing in mining, right?

Unfortunately, that's true.

Fair enough. No, I appreciate the color. I mean, keep up the good work. We're still very supportive for your company, and I hope that Michigan works well as well. And I appreciate that I will get back to queue.

Heiko, I appreciate the comments. And thank you. Just to follow-up a little bit. One of the things that I mentioned in my prepared remarks, but I do want to emphasize it. If you look at '22 versus '23, '23 is down. However, if you look at '23 relative to our guidance, we're on target. We had anticipated that we would be in an area of the mine with relatively low grades and that, in fact has proven somewhat to be true. We have had a positive reconciliation from model to mill in that the grade is going to the mill were higher than those anticipated in the models. Lastly, we would expect will continue for the balance of the year and the grades will not be quite as low as we had originally planned. We are in the process, as we speak, of redoing our models for the purposes of developing our 2024 budget and guidance, but that will take us realistically quite some time before we're finished all of that work. Operator, are there any more questions?

Thank you. And your next question comes from the line of Bradley Johnson, from private company. Please go ahead.

Thank you for taking my call. I've got a question. The EPA court ruling or the Supreme Court, I should say, it was reading the permit application and there was only 11.2 acres identified as judge and fill aspect to the mine according to the last permit application. In the scope of this mine site and being as large as it is, why is that a significant ruling? And I'll put myself on mute and listen.

Sure. No, I'm happy to address that, Bradley. The fact that there was dredge and fill inherent with the original mine plan necessitated the wet lands permit. Any time there is compromised to the preexisting wetlands, we had to have the permit. And that was driven by the interpretation by the EPA of contiguous wetlands. And they had interpreted the necessity for those permits to be anything that is contiguous, not necessarily part of but contiguous to any major waterway. What the ruling determined was that any wetlands captured by the EPA's regulations had to be part of or immediately adjoining identified drainage areas. The fact that they were in the general area no longer triggers the wetlands analysis. None of the wetlands in our mine site drained directly into the river. They are stand-alone wetlands without any direct relationship to the river. And as such, it's our view and the view of our consultants that we no longer are captured by the requirement for the wetlands permit. I'll go one step further. You alluded to the 11 acres that were going to be dredged and filled in the original permit application. We have gone to great lengths in our current mine planning exercise to minimize the impact on wetlands to the greatest extent possible. So much so that under the current plan, I'm going to be approximate here, but the total amount of wetlands impacted by our current plan, it's less than one-quarter of one acre. I want to say it's one-tenth of one acre, which is the size of the city -- a loss in the city. So we've managed to the greatest extent possible, eliminate any direct impact on wetlands completely. That in conjunction with the Supreme Court ruling in our mind, eliminates the necessity for the wetlands permit. This is yet to be confirmed. I will tell you that, but we're very confident in our interpretation. Does that address your question, Bradley?

Yes. Thank you.

Thank you. Mr. Palmiere, there are no further questions at this time. Please proceed.

Thank you, operator. Number one, I would like to thank everybody for taking the time to join us today. And number two, the message I would like to leave you with is, while the financial results are not what we would hope them to be, [indiscernible] zinc for most of the quarter did hit us hard. And the low grade that, unfortunately, we had anticipated and was included in the mine plan hit us hard. Depreciation of the Peso is something that we couldn't anticipate. And I'm very happy that the efforts at the mine have compensated in large part for the Peso and inflationary impacts on our operating costs. Profitability isn't where we want it to be, but we are doing everything in accordance with our plans. And hopefully, we will see some recovery in terms of base metal prices in the near-term.