Gold Resource Corporation (AMEX:GORO) Q3 2023 Earnings Call Transcript

Gold Resource Corporation (AMEX:GORO) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Good morning, and welcome to the Gold Resource Corporation Third Quarter 2023 Financial and Operating Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, today, Tuesday, November 7, 2023. I will now turn the conference over to Chet Holyoak, Gold Resource Corporation Chief Financial Officer. Mr. Holyoak, you may proceed.

Chet Holyoak: 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 third 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 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 and the accompanying Form 10-K have been filed with the SEC on EDGAR and are also available on our website at www.goldresource.com. I will now turn the call over to Allen.

Allen Palmiere: Thank you, Chet, and good morning, everyone. I’d like to thank you for joining us on our third quarter conference call. I would like to address the two points first, and then Alberto will address operations followed by Chet’s with the financial results. Following their remarks, I will then make a few closing comments and we will take questions. The third quarter, as you’ve observed, was a difficult 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 this year, the unexpected strengthening of the Mexican peso hurt us, and the lower-than-forecast price of zinc adversely affected our byproduct revenues. While commodity prices and foreign exchange rates are beyond our control, we’re very focused on those factors we can control, cost and productivity.

We have reduced our workforce by 10% and are looking at further reductions. We have renegotiated certain supply and service contracts that will have a material impact next year. We have changed certain practices underground to reduce cost, reduce dilution and increase productivity. We are also doing test work to attempt to improve recovery while maintaining concentrate quality. That being said, cash continues to be tight and remains our primary focus. We published a preliminary economic analysis for the Back Forty Project, which demonstrates the robust nature of the project and confirming our assumptions when we first acquired it. Net present value using a 6% discount rate of $215 million and an initial capital requirement of $325 million demonstrate economic viability, and we have identified additional opportunities to further reduce capital and improve capital intensity.

This was a result of a great deal of hard and creative work by our technical team over the past year. The new approach to the project eliminates any direct impact on wet lands, utilized as dry stacking as opposed to conventional tailings dam, decreases the size of the open pit, and increases the amount of underground mining. Due to the use of cemented tailings as backfill underground, the quantity of tailings surfaced is significantly reduced. All of these changes should make the project easier to permit than the original concept. It needs to be noted that VMS deposits, VMS stands for volcanic massive sulfide, of which the Back Forty a classic example, typically extend at depths. We believe, based on a few deep drill intercepts, that there is significant potential for the deposit to increase in terms of quantity and thus increasing the mine life and economics.

Now if you would turn to Slide 7, I will provide an update on our Q3 exploration results. Our exploration program, which has been our primary use of cash over the last 2.5 years, continues to produce good results, which will result in a growth in reserves and resources increasing the mine life. In the past 1.5 years, we have discovered areas of mineralization known as the Three Sisters, Gloria, Marena, and a continuation of Splay 31, which was hitherto unknown, all of which contain high grade intercepts and will be part of the future of Don David. As I said, exploration has been a major use of cash over the past 2-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.

Alberto Reyes: Thank you, Allen, and also good morning to all. In keeping with our long-standing tradition, I would like to begin by addressing the importance of our team’s safety. Our collective dedication has led to a commendable achievement with DDGM successfully reaching over 1 million work hours with zero LTIs complemented by a low LTIFR of 0.11. This reflects our team’s solid commitment to enhancing our safety practices, fostering discipline, and integrating a culture of safety that adheres to the highest international standards. The third quarter presented a share of challenges exacerbated by the prevailing inflationary pressures, volatile change rates and increasing labor costs. In response, we have strategically reduced our headcount by an additional 10% while implementing various cost savings measures to alleviate the financial strain.

On a positive note, we are actively exploring technological solutions at our processing plant to adapt to the shift in ore type. Preliminary results from our study on the copper concentrate have shown promise, particularly in improving gold recoveries. Rest assured, we are diligently following our management of change protocols to seamlessly integrate this fine leads and capitalize on the potential benefits. As for production results, I am pleased to report that production for Q3 reached approximately 117,000 tonnes of ore, sold approximately 4,000 ounces of gold and 209,000 ounces of silver, equating to over 6,500 gold ounces. In addition, we sold 245 tonnes of copper, approximately 947 tonnes of lead and more than 2,500 tonnes of zinc. For the year-to-date through September 30, we processed nearly 347,000 tonnes of ore, sold approximately 14,800 ounces of gold and 778,000 ounces of silver equating to over 24,300 gold ounces.

We further sold over 900 tonnes of copper, approximately 3,700 tonnes of lead and over 8,700 tonnes of zinc. Turning to Slide 5. DDGM’s strategic cost revision has led to adjustments in our underground capital development and sustaining CapEx, resulting in a reduction to approximately 460 meters of development. This adjustment is strategic and ensures that our production remains on target, adhering to our guidance. We have integrated promising near-mine development exploration result into operational plan, effectively replacing ore zones that initially require extensive development work. In the third quarter, our exploration initiatives yielded impressive results. However, we enter the fourth quarter, we will be scaling back these exploration efforts.

Our financial commitment to exploration nonsustaining capital expenditures is now approximately $300,000, while our sustaining CapEx is around $460,000. This, in addition to underground development brings our total CapEx for Q4 to an estimated $1.8 million. This reflects a judicious allocation of resources, allowing us to operate below our initial budget of $2.3 million for the same quarter. These changes have necessitated significant adjustments within our team and operational processes, showcasing the remarkable resilience and adaptability of the DDGM workforce. Our employees have demonstrated a sound commitment to excellence, ensuring the continued success and sustainability of our operations. I’ll now pass the presentation over to Chet to discuss the financial results.

Chet Holyoak: Thank you, Alberto. If we go to Slide 8, the third quarter has seen a decrease in our cash balance, and we ended the quarter with $6.7 million. The decline in cash is primarily due to increased cash costs at DDGM, which we’ll discuss in just a moment, and to our exploration program. Cash used in operating activities of $7 million year-to-date, and this includes $4 million spent on exploration in Mexico and over $1 million spent in Michigan related to the Back Forty studies. For the third quarter 2023, we reported net losses of $7.3 million or $0.08 per share, and for the full nine months, we reported net losses of $13 million or $0.15 per share. For the quarter, net sales of $21 million were 14% lower than the same period in 2022 due to both lower volumes of all metals sold and significantly lower metal price for zinc.

Year-to-date, net sales of $76.6 million were 20% lower than the same period in 2022, also due to both lower volumes of all 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 discuss on the next page. While production costs for the quarter and year-to-date of approximately $19 million and $59 million are in line with the production costs for the same period in 2022, this is resulting in an unfavorable impact on unit costs, such as cost per tonne processed and cost per gold equivalent ounce sold. We will discuss this a bit 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 offset by lower production costs.

Turning to Slide 9, we will discuss cash costs for the quarter and year-to-date. For the quarter, Don David Gold Mine’s total cash cost after product credits was $1,839 per gold equivalent ounce, and total all-in sustaining costs per gold equivalent ounce sold were $2,669 per ounce. For the year-to-date, Don David Gold Mine’s total cash cost after co-product credit was $1,210 per gold equivalent ounce, and total all-in sustaining costs per gold equivalent ounce sold were $1,852 per ounce. There are five key drivers related to the increase in cash costs: first, reduction in gold equivalent ounces sold; second, a reduction in co-product credits; third, the strengthening 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 during the quarter and year-to-date. The lower co-product credits were the result of lower copper, lead and zinc tons being sold as compared to their respective 2022 periods, the lower realized mill price of zinc during the quarter and lower base metal prices for the concentrates year-to-date. The Mexican peso has strengthened in 2023 with approximately 60% of our production costs originating in the peso. This has had a larger-than-planned impact on our year-to-date costs. While the above-mentioned drivers have had a negative impact and have resulted in the company’s missing guidance on several key performance measures, we have made good strides in managing the costs that we can control and stay within guidance on other measures such as safety, production, mine development and exploration.

Allen, back to you.

Allen Palmiere: Thank you, Chet. Our share price, along with most of our peer group, continues to languish. Our producing mine in Mexico, which should have better operating results next year and a project having a $200-plus million NPV in Michigan are trading at what we consider to be totally unacceptable values. We aren’t getting any market recognition for the intrinsic value of our assets, relatively strong balance sheet, we have no debt, and excellent technical and operating teams. The current market environment has and likely will persist for an indeterminate period of time. The Board of Directors and management have decided to be proactive and engaged the services of Cormark Securities Inc. as a financial adviser to explore and evaluate strategic alternatives to unlock value for our shareholders.

This process will begin immediately, and while there’s no certainty around the outcome, we’re confident that the process is in the best interest of all stakeholders. With that, I’ll turn the call over to the operator for questions.

Operator: [Operator Instructions] Your first question comes from Jake Sekelsky with Alliance Global Partners. Please go ahead.

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Q&A Session

Jake Sekelsky: Hi Allen, and team. Thanks for taking my questions.

Allen Palmiere: Good morning, Jake.

Jake Sekelsky: So you mentioned that costs were impacted by a variety of factors, mainly lower byproduct credits and the strengthening peso. Can you just touch a bit on your exposure to both of those going forward? Do you expect to remain fully exposed or do you have any plans for hedging programs? Any color there would be helpful.

Allen Palmiere: Well, in terms of the peso, about 60% of our operating costs are denominated in Mexican peso. So as the peso fluctuates against the U.S. dollar, we will have fairly significant impact. Put it in context, the peso about a year ago was 20:1. Right now, it’s 18:1. That’s almost a 20% swing in – if my math’s right, a 10% swing in the value of the peso increasing our operating cost by 10% and it’s totally noncontrollable. The ability to hedge the peso at these prices is there, but these are certainly not exchange rates that we would want to lock in. In terms of the other major impacts, again, zinc a year ago, it was sitting at $1.45. Today, it’s $1.17, $1.18. But in Q3, it went down as low as $1.05. And again, at the bottom, well, what we hope is the bottom of the market is not an appropriate time to look at hedging.

We are, in fact, continually evaluating the potential for hedges in a stronger environment. As we have done in the past, we would definitely hedge some of our byproduct revenues, copper and zinc. In terms of the peso, if it moves back up towards 20:1, we would consider putting in a hedge there. But at the current time, we don’t have any plans to do so, Jake.

Jake Sekelsky: Okay, that’s helpful. And then just from a near-term capital standpoint, you touched on scaling back some sustaining capital items a bit in Q4. I’m just curious, was most of this related to exploration work? Or were there some development dollars thrown into that scaleback as well?

Allen Palmiere: Primarily what we call exploration. We’re continuing with infill and definition drilling, but it’s a step-out drilling for long-dated resource expansion that we’ve cut back on. In terms of our sustaining CapEx, most of it relates to the underground development costs and we haven’t touched those. That would not be productive. You’ve got to maintain your development ahead of your working areas. Otherwise, you’re not going to be in operation very long.

Jake Sekelsky: Fair enough. Okay. That’s all for me. Thanks again.

Allen Palmiere: Thanks Jacob. Appreciate it.

Operator: Your next question comes from Heiko Ihle with H.C. Wainwright. Please go ahead.

Heiko Ihle: Yes. Apologies if you hinted at anything. I have a lot to ask. I was about three or four minutes late for the call. I’m going to build on Jake’s question here a little bit. Some of the challenges you’re facing are obviously completely out of your control. Though some can also be hedged, albeit at unfavorable rates as you already pointed out in your answer to the last question. However, having some longer-term fixed fees would provide certainty, right? So maybe not hedging, but have you considered entering some longer-term contracts for things like treatment charges, power supply fees, et cetera? I mean, from what I hear is some treatment charges have finally started to actually improve a little bit, depending on the counterparty. But any consideration of doing longer-term agreements with counterparties?

Allen Palmiere: Quick answer, Jake – Heiko is that we are, in fact, looking at a number of things. If I can address some of the measures that we have already achieved, ,we’ve negotiated significant reductions with some of our major suppliers, and that will have a fairly significant – it will have a material impact going forward into next year. That’s for things like concentrate haulage, ore haulage, cement supply, camp services. When it comes to things like power, unfortunately, our energy is provided by a Mexican utility and there’s no ability to fix those rates. So I wish there were, but because they have been a source of very significant cost increase. In terms of – well, the other thing I should touch on, I indicated my initial remarks, you may not have been on the call, but in September, we actually took a 10% reduction in our total workforce in Mexico.

That, after severance costs, will start to show up in decreased operating costs in Q1 of next year. And we are evaluating the remaining workforce to determine whether it’s rightsized. There may, in fact, be potential for further reductions without compromising our ability to produce. In terms of TCs, all of our contracts are up this year, copper, lead and zinc. Copper and lead were one year contracts last year. Zinc was 2023 was the last year but 3-year contract entered into with – by prior management. And as a result, we are looking at and are going out for tender within the next few weeks for new contracts in all of our TCs. I will tell you that one of the things we’re looking at is not only the TCs but what kind of participation can we get on transport charges, what can we get in terms of advanced payments with respect to take, et cetera.

We’re evaluating all of it. The market currently does not allow you to lock in at TC. The best you’re going to do is get something that would lock into a benchmark for directionally anywhere from 40% to 60% of your production, and then the balance would float a spot. So we’re always going to be, to a fair degree, exposed to spot prices for our TCs. That’s a long-winded answer, Heiko, but I think I covered most of your question.

Heiko Ihle: No, you did. I appreciate it. And then just as a clarification and to confirm something that I’m pretty sure I know the answer, but I’m asking this in part because of the share price performance today. Initiation of your strategic review process is not an indicator of what you’ve seen in Q4 thus far, right? It’s just a general statement as to what you feel the year and its challenges have been like thus far, correct?

Allen Palmiere: Heiko, I will tell you that Q4, my expectation of Q4 will be an improvement over Q3. It’s not a function of what we anticipate Q4 are for next year. It really is a function of our inability to unlock value or our apparent inability to unlock value for our shareholders. If you throw a reasonable valuation for Don David, add it to what we brought for Back Forty, we’re trading at 10% of NAV as a producing company, which makes no sense whatsoever from a fundamental point of view. Now we recognize that we’re not being treated any differently than a lot of our peers. But at the same time, we can’t be complacent and say just because everybody else is suffering, we should be happy with what we’re doing. So we’ve entered into this engagement with Cormark with a view to trying to unlock value what the possible outcomes are.

You know as well as I do, there’s mergers, there’s outright sale, there’s acquisitions. It’s the entire gamut that we’re looking at. You would normally assume that a company with a market cap like ours can’t be acquisitive, but the reality is the entire sector are trading at multiples that make absolutely no sense, at least to me. So there’s a lot of very, very undervalued assets out there. So when I say we don’t have any idea what the outcome is, we’re just exploring the entire range of potential alternatives to determine what would be, if anything, would be the best for us to pursue to create value for our shareholders.