GORO - AMEX

Good morning, and welcome to the Gold Resource Corporation Fourth Quarter 2023 Financial and Operating Results Conference Call. At this time, all participants are in listen-only mode. Following managements presentation, there will be a question-and-answer session. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, March 14, 2024 at 10:00 a.m. Eastern Time. I will now turn the conference over to Chet Holyoak, Gold Resource Corporation Chief Financial Officer. Mr. Holyoak, you may proceed.

Thank you, Joelle, and good morning to everyone. On behalf of the Gold Resource team, I would like to welcome you to our conference call covering our fourth 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 annual report on Form 10-K and other SEC filings. All financial measures are unaudited. Audited financial statements will be presented in our 2023 Form 10-K, which will be filed at a future date no later than April 1, 2024, once our external audit firm, BDO USA, LLP, completes their audit procedures. Please note, all amounts referenced during this presentation are in 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 that was issued following the close of the market has been filed with the SEC on EDGAR and is available on our website at www.goldresourcecorp.com. I will now turn the call over to Allen.

Thank you, Chet, and good morning, everyone. I'd like to thank you for joining our Q4 conference call. I'd like to address a few points first, and then Alberto will address operations, followed by Chet with the financial results. Following their remarks, I will then make a few closing comments, and we will take questions. The fourth quarter was another challenging one for us. As previously guided, mine sequencing resulted in lower ore grades. While this was always in the plan for the latter part of the year, the unexpected strengthening of the peso and the lower than forecast zinc -- price of zinc adversely affected our byproduct revenues. While commodity prices and foreign exchange rates are beyond our control, we are very focused on those factors that we can control, including costs and productivity. During 2023, we performed an assessment of our workforce in Mexico that ultimately resulted in a reduction of approximately 10%, and we will continue to evaluate for further reductions. Additionally, we renegotiated certain supply and service contracts that resulted in cost reductions. We obtained certain practices underground to reduce mining costs, reduce dilution and increase productivity. Concerning our processing plant, we are doing test work to attempt to improve recovery while maintain and concentrate quality. Cash continues to be tight and remains our primary focus. We published a preliminary economic analysis for the Back Forty Project last year, which demonstrated the robust nature of the project and confirmed our assumptions when we first acquired it. The project carries some life of mine NPV at a 6% discount rate of approximately $215 million with an initial capital requirement of $325 million. This study demonstrated the economic viability of the Back Forty Project. Now please turn to Slide 4, and I'll provide a brief update on our Q4 exploration results. Our exploration program continues to produce good results, which will result in higher grade material in our reserves and resources and will increase the mine life. In the past 1.5 years, we had discovered areas of mineralization knowing as of Three Sisters, Gloria, Marena and a continuation of Splay 31, which had been previously identified, all of which contain high grade intercepts and will be part of the future of Don David. As you know, exploration has been the major use of cash over the past two plus years, but the results are more than sufficient to justify the expense and point to the need and desirability of additional drilling in the future. I will now turn the call over to Alberto for an update on the operations.

Thank you, Allen, and good morning to everyone. I'm thrilled to share our latest achievements, indicative of our strong commitment to cultivating a mature health and safety culture. We're proud to announce that our leading indicators continue to surpass expectations, a testament to the dedication and outstanding participation from our leadership team. I'm pleased to report that our collective efforts have resulted in our lowest LTIFR yet, extending at a rate of 0.2, surpassing our yearly target of 0.25. This milestone underscores our relentless pursuit of safety excellence and the profound impact of our team's diligence and collaboration. The challenges persisted in the fourth quarter with inflationary pressure, fluctuating exchange rates and modifications to the operation procedures, posing ongoing obstacles. However, our proactive approach to cost saving initiatives remained pivotal in ensuring the continued success of our operations. Despite these challenges, we bolstered our resilience to endure inflationary pressures and exchange rate fluctuations more effectively this time around. In response to the prevailing conditions and with full support from the communities and suppliers, we successfully negotiated additional cost saving measures. These measures have helped alleviate financial strain and position us for greater stability in the face of economic uncertainties. Production for Q4 reached 111,000 tonnes. This figure is lower than Q3's achievements. Although, mine generated 118,000 tonnes, the processing plant faced a major change to the way we collect the water for the process. As of December, the TSF has been prepared for reclamation and no longer serves as a vast water storage reservoir where reagents can dilute quickly. As such, the optimization of the different flotation circuits was temporarily destabilized and a lower throughput was necessary to help keep consistency. Processing operated at an average of 1,380 tonnes per day, and our 2024 targets have been adjusted to reflect the change. I am pleased to report that we processed nearly 111,000 tonnes of ore, sold approximately 3,760 ounces of gold and 259,000 ounces of silver, equating to over 6,770 equivalent ounces. In addition, we sold 327 tonnes of copper, approximately 820 tonnes of lead and more than 2,180 tonnes of zinc. For the year-to-date through December 31, we processed nearly 460,000 tonnes of ore, sold approximately 18,500 ounces of gold and over 1 million ounces of silver, equating to over 31,000 gold equivalent ounces. We further sold over 1,230 tonnes of copper, approximately 4,500 tonnes of lead and close to 11,000 tonnes of zinc. Turning to Slide 6. DDGM's capital cost faced difficult obstacles during 2023, including but not limited to maintaining cash flow while introducing more development to target higher NSR stopes beyond 2023. This adjustment was iterated numerous times to ensure optimal returns on investment. The total underground development for the quarter was approximately $850,000 and $5.8 million for the year. As for the total sustaining capital amount, the company spent $1.6 million and approximately $11 million for the quarter and year, respectively. Promising near mine exploration results also influence capital growth expenditure. The team quickly shifted focus and prioritized the models to impact -- the impact of the new results and the signs required in 2024 to align exploration and development efforts to the right targets. Despite modifications, Q4's total capital and exploration investment came to $2.2 million and a total of $17.2 million for the entire year. This figure is within the range that was provided in guidance between $15 million and $18 million. In closing my update on operations, I'd like to acknowledge the resilience and determination of our team as we reflect on the challenges faced in Q4 2023. Despite the obstacles, we remained firm and emerged stronger, demonstrating our ability to adapt and persevere in the face of adversity. Looking ahead to 2024 and beyond, we have carefully accounted for the challenges that lie ahead in our strategic planning. We are confident that the measures we've implemented and the lessons we've learned will position us for success in the coming years. I'll now pass the presentation over to Chet to discuss the financial results.

Thank you, Alberto. Turning to Slide 7. During the fourth quarter, we realized a small decrease in our cash balance, and we ended the quarter with $6.3 million. The decline in cash is primarily due to increased cash costs at DDGM, which we will discuss in just a moment and to our exploration program, as was mentioned earlier by Allen. Cash used in operating activities was $5.2 million for the year and includes over $4.5 million spent on exploration in Mexico and over $1.5 million spent in Michigan related to the Back Forty studies. For the fourth quarter 2023, we reported net losses of $3.1 million or $0.03 per share. And for the full year, we reported net losses of $16 million or $0.18 per share. For the quarter, net sales of $21 million were 35% lower than the same period in 2022, due mainly to lower volumes of all metals sold. Year-to-date net sales of $97.7 million were 30% lower than the same period in 2022, also due to lower volumes of all metals sold and significantly lower zinc prices. The lower zinc prices are also impacting cash cost per ounce, which we discuss on the next page. While production costs for the quarter and year of approximately $17 million and $76 million, respectively, are slightly lower than the prior year, the significantly lower tonnes processed along with gold equivalent ounces sold resulted in an unfavorable impact on unit costs, such as cost per tonne processed and cost per gold equivalent ounce sold. We will discuss this in a bit more on the next page. 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 being proportionally offset by lower production costs. Turning to Slide 8. We will discuss cash costs for the quarter and year. For the quarter, Don David Gold Mine's total cash cost after co-product credit was $1,397 per gold equivalent ounce and total all-in sustaining cost per gold equivalent ounce sold was $1,664 per ounce. For the year, Don David Gold Mine's total cash cost after co-product credits was $1,250 per gold equivalent ounce sold and total all-in sustaining cost per gold equivalent ounces sold was $1,630 an ounce. There are five key drivers related to the increase in cash cost per gold equivalent ounce sold: the first reduction in gold equivalent ounces sold; second, a reduction in co-product credits; third, the strengthening of the Mexican peso; fourth, treatment charges; and fifth, other production cost increases such as power and transportation. The gold equivalent ounces are lower due to the lower grade ore and lower recoveries realized both during the quarter and year-to-date. The lower co-product credits were the result of lower copper, lead and zinc tonnes being sold as compared to the respective 2022 periods and the significantly lower realized metal price of zinc during the year. The Mexican peso has strengthened against the U.S. dollar in 2023. With approximately 60% of our production and capital costs originating in the peso, this has resulted in a larger-than-planned unfavorable impact on our costs. While the above-mentioned drivers have resulted in a negative impact, we have made positive strides in managing the costs that we can control, resulting in a decrease in total cash cost after co-product credits and total all-in sustaining cost per gold equivalent ounce sold from quarter three to quarter four. While the drivers above also resulted in the company missing guidance on several key performance measures, we were able to stay within or exceed guidance on other measures such as safety, production, mine development and exploration. Allen, back to you.

Thank you, Chet. Our share price, along with most of our peer group continues to languish. A producing mine in Mexico and a project having a $200 million NPV in Michigan are trading at prices that do not reflect the underlying value. We are not getting any recognition for the intrinsic value of our assets, relatively strong balance sheet and excellent technical and operating teams. The current environment has and will persist for an indeterminate period of time, and as previously announced, the Board of Directors and management engaged the services of Cormark Securities Inc. as a financial adviser to explore and evaluate strategic alternatives to unlock value for our shareholders. There is no certainty around the outcome, but we are confident that the process is necessary to ensure that we are acting in the best interest of all stakeholders. 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] Your first question comes from Heiko Ihle with H.C. Wainwright. Please go ahead.

Hello, there. Thanks for taking the questions. Sorry if there is some background noise on the road, as you can probably hear. During the year, your exploration program actually went quite well. Looking ahead a little bit, I mean, you focused on Switchback, Arista and the Three Sisters. Can you walk us through priorities by target for 2024 and maybe same question across your asset base?

Happy to, Heiko. And I'm glad you could take the time to call in while you're on the road. As you alluded to, our exploration program last year was very successful. We have begun to develop an area of mineralization known as Gloria and the Three Sisters. And to put it in context, historically, we've mined two separate vein swarms, Arista and Switchback. They are separated by a distance of about 500 meters. The Gloria and Three Sisters mineralization is midway between the two. So it's very close to existing infrastructure. We were not able to incorporate much of that material into our S-K 1300 that was -- will be filed in the next couple of weeks, the update as of 12/31/2023. But since our cutoff for data on that S-K 1300, we have an additional six months of drilling. That material -- the results of that drilling are leading us in a direction whereby we will continue to focus on those targets being Three Sisters and Gloria. And the trend is to the northwest. So we will be pushing out our drill stations as far as we can to extend the resource along strike. We continue to get good results in both Gloria and the Three Sisters, and more importantly, or equally as importantly, the thicknesses are such that it will allow for highly productive mining. It is not -- these areas of mineralization are not currently included in the life of mine plan incorporated the S-K 1300 because we just were unable to get sufficient information to enable us to include it in the resource. However, I can say unequivocally that we will be in those zones within the next two years, notwithstanding what the current life of mine plan states. They're relatively high up. They are very close to existing infrastructure. The grades are good. And as soon as we can develop sufficient data to support detailed mining plans, we will be incorporating those zones into a revised life of mine plan, hopefully, by the end of this year. It is the future of Don David. And we're very optimistic that the drill results are going to continue to be encouraging and so that Don David is not only blessed with a longer life, but higher grades going forward. Does that address it, Heiko?

It does. And you actually went as far as to start hinting at my next question here. Building on that last question, speaking of exploration, your expectations right now are $2 million to $3.5 million at Don David, an additional $700,000 to $900,000 in Michigan. I might sound like a bit of an in-house geologist right now, but I mean, assuming results continue to impress the way they have, is there a room in the budget to raise those numbers a little bit?

We're constrained right now by available cash. Let me address it in a different way. In Mexican, we're not going to be doing any drilling. The budgeted numbers for Michigan really are property maintenance and a little bit of technical work. Every spare dollar we can devote to exploration in Mexico, we will. We are actually looking at potentially arranging a bit of a debt facility for a couple of reasons. One, we'd like to update our mechanical -- our mining fleet. But two, we'd like to spend a little bit more money on exploration. And if we're successful in arranging that debt facility, a partial use of proceeds will be to increase our exploration budget, very much for the reasons that you just alluded to. It is the future of the mine.

Fair enough. Well, gold is at $21.60 right now. Hopefully, a couple of extra dollars can be found. And with that, I'll get back to you. Thank you very much.

Thanks, Heiko. I appreciate it. Gold at $21.60 is, by any measure, a wonderful price, and it's obviously going to help our cash flow above and beyond what we had budgeted. So if we get a corresponding break on the peso, we will be generating sufficient funds internally to expand that exploration program. Operator?

[Operator Instructions] Your next question comes from Jake Sekelsky with Alliance (ph) Global Partners. Please go ahead.

Hey, Allen, and team. Thanks for taking my questions.

Good morning, Jake. How are you doing?

Good. Thank you. So just starting with costs, I mean I think you just mentioned, obviously, the strength of the peso had an impact last year. And just looking at your cost guide for this year, can you remind us what FX rate are you assuming in that guide? And I guess how exposed are you to both further strength or even weakness in the peso going forward?

Chet, do you want to take this one?

Yeah. Currently, in the budget that we're using, we're using an exchange rate of 17.1. We are closely monitoring the movement in the peso. As I mentioned, we are 60% of our production capital costs in Mexico are in the Mexican peso. So there is quite a bit of exposure there.

Chet, what's the impact of a 100 basis point move in the peso on our cash flow?

I will get you that number in just one second.

I just want to elaborate a little bit, Jake. The peso right now is at about 16.8. As Chet indicated, we budgeted 17.1. The peso was being held up primarily by the carry trade. Prime rate in Mexico is north of 11%, the U.S. at 5%. Dollars flow to higher interest rate environments. There is an expectation in Mexico that the Central Bank will start easing the interest rate potentially as soon as this month. And the people who are far smarter that I am have led us to believe that once the Mexican Central Bank starts easing off on the interest rate, the carry trade will start to unwind and the peso will trend towards a more real -- trend towards a value that's based on economic fundamentals as opposed to bank rates. The expectation is that it will be 18.5 to19:1 (ph) by the end of the year.

And Allen, I can just add that if the peso were to go from our budget of 17.5 up to 18.5, it has about a $2 million impact.

So there's a high degree of sensitivity, Jake.

Okay. Yeah. That's helpful. That's helpful. And then just switching to exploration. Obviously, you announced some pretty strong results in December last year. It sounds like that drilling didn't make it into the updated resource. So I guess do you feel you need to bring Gloria and the Three Sisters into a particular resource category before bringing them into the mine plan going forward or do you think internally you can get to a level of comfort to start accessing that material over the next year or two as you mentioned?

I like that question, Jake, because what it doesn't reflect the operational reality as opposed to trying to work within the constraints of an S-K 1300. We are -- we already have developed some -- the term is DSO, Deswik stope optimizer. So we're already looking at developing mine plans for some of that material. As we drill it off hopefully by the end of the year, we will be able to incorporate some of that material into the mine plan for 2025. We won't get there this year. We need more information. But 2025, I think there's a very good chance that we will be incorporating some of that material into the 2025 mine plan as well as the life of mine plan.

Got it. Okay. Perfect. That’s all for me. Thanks again.

Thanks, Jake.

Your next question comes from Ron Gold with Heart (ph) of New York. Please go ahead.

Hi. How are you? I was just wondering, last time, you mentioned that you would not do reverse split as we know it's a kiss of death on any stock. However, at the price of $0.38, how do you propose to get the extension in order to maintain being on the NYSE?

Well, we're on the NYSE American. And to date, we've had no communication from the exchange about problem with our pricing. I will point out that we're up 25% in the last five days, and that is largely thanks to gold price. And the other factor to keep in mind is we do have a strategic process underway. That process, while I don't want to prejudge the outcome, could involve a merger of some sort. It could involve an outright sale of the company. It could result in almost any type of business combination. And that in itself, we would hope would give a fair amount of support to our stock price and address the issue that you've raised, Ron. Currently, we don't have any plans, and we haven't had any correspondence with the exchange.

Right. Understood. The exchange would not notify you until the year expires. So I would assume by about next month or so, they'll notify you of delisting unless you might be able to go for an extension. I'm not sure how that works. Would you -- what would you do at that point if you did not achieve in incorporating what you just stated? What would you do at that point? Could you go for an extension or would you continue just to delist the stock to a different outcome?

First alternative that's available to us would obviously be to obtain an extension.

Can you get an extension?

I can't answer that off the top of my head. I have not specifically explored that with legal counsel. So I'm sorry, but I will attempt to find out and revert to you -- revert back to you.

Great. Okay. What's the second?

I'm sorry.

You said that's the first. What's the second...

That's assuming we are not involved in a transaction and we don't have any other alternatives. So it's status quo and exchange came to us and said they wanted to delist, we would look at an alternative trading platform, a different exchange.

Right. So you would not do a reverse split, which would destroy everything that you have. So you wouldn't even consider...

No. I am very uncomfortable, and I mentioned this earlier. I'm very uncomfortable with the reverse split because they -- I've yet to see one that does anything other than destroy value.

Exactly. Okay. Thank you very much.

That would not be -- I'm speaking here without having Board approval of it, but I'm quite confident that the Board would agree with me in that it's not a solution that we would want to pursue.

Great. Okay. Wishing you good luck, hope things turn out the right way. Nice, talking to you.

Thank you. I appreciate it.

There are no further questions at this time. I will now turn the call over to Allen Palmiere. Please go ahead.

Thank you, operator, and thank you all for participating in our end of year and Q4 conference call. The world can change very quickly in the mining industry as evidenced by the fact that we are now seeing gold prices that are setting all-time highs. Our stock is beginning to respond to the higher price of gold. We do have the strategic initiative underway to identify a mechanism by which we can improve or increase shareholder value. We're very aware of the problem of a single mine asset. And in order to create value, we would like to see a merger or a transaction whereby there were two or three operating entities within the corporate umbrella. While that might not be the final stage, it would certainly get us well north of 100,000 ounces, and it would be a big step along the way to achieving the size necessary to enable us to start gaining some attention in the marketplace Again, I thank you all for participating, and we will be talking relatively soon when we have our first quarter of 2024 conference call. Thank you very much, and back to you, operator.