Gold Resource Corporation

Good day, ladies and gentlemen, and welcome to your Gold Resource Corporation first quarter conference call. Joining the call today are Mr. Jason Reed, CEO and President, and Mr. John Labate, CFO. As a reminder, today's call is being recorded. All lines have been placed in a listen-only mode, and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to Mr. Jason Reed, CEO and President. Sir, the floor is yours.

Thank you. Good morning, everyone, and thank you for joining Gold Resource Corporation's 2020 first quarter conference call. I expect my comments to run approximately five minutes, followed by a question and answer period. Joining me on the call today for the Q&A portion will be Mr. John Labate, our Chief Financial Officer. Let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K, the current quarterly report on 10-Q, and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued yesterday, along with the comments on this call, are made only as of today, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks in our Form 10-K filed with the SEC for the year ended December 31, 2019, as well as this current quarterly report on 10-Q. The first quarter production was within estimated production ranges at both our Oaxaca Mining Unit and Nevada Mining Unit. The company's Nevada Mining Unit production continues with the Isabella Pearl Mine ramp-up phase, which, as previously stated, requires us to move a lot of overburden to access the high-grade Pearl Zone while we mine the Isabella Zone's lower and varied gold grades. This lower-grade Isabella ore outcropped at the surface and was the first ore placed on the heap leach pad. As mining continues on schedule, the back half of 2020, we expect to see gold production ramp up as we mine deeper into the high-grade pearl zone. The model predicted the top of the pearl zone to have about a one and a half gram gold per ton. Mining has now progressed into the very top of the pearl zone, and the last few days of April, we have seen crusher grades of pearl ore at over two and a half grams per ton gold along with a few more tons than the model expected. This has exceeded our estimates this high up in the deposit. While the available mineralized tonnages of this high-grade ore is still limited at these higher elevations, as we continue to mine deeper into lower pearl benches in the future, we expect high-grade gold to continue, but with greater available tonnages as we ramp up production into the back half of the year. As this much higher-grade Pearl Zone is loaded on the pad and given time to leach, we expect to see, by the end of Q3 and more so in Q4, gold production to substantially increase in Nevada. The company recorded a net loss of $3.1 million, or $0.05 per share, because of lower revenues and higher non-cash depreciation and amortization. The company generated $5 million in operating cash flow and paid $0.7 million to its shareholders in dividends, or one cent per share during the quarter. Cash and cash equivalents at quarter end totaled $18.4 million. Lower revenues were directly tied to the steep base metal market price declines, particularly in zinc, along with the higher treatment charges, or TCs, for zinc as compared to years past. Two years ago, zinc TCs were at attractive multi-year record low levels. Last year, they rose substantially, and they again rose dramatically this year to record high TCs. This has led to numerous zinc mine closures, irrespective of the recent and compounding impact of the COVID-19 pandemic on suspensions to global mine production. When asked, our concentrate buyer acknowledged the record high TCs being imposed on the market at the time would likely put zinc exclusive mines out of business and potentially bring some semblance of balance back into the TC market for 2021. Subsequently, the COVID-19 global mine suspension has added to the impact of taking minerals, including zinc, out of the market, and TC charges are beginning to drop again, setting the stage for a much better 2021 year for the company's base metal TCs. To help counter the high 2020 zinc TCs and depress base metal prices, the company has revisited It's Oaxaca Mining Unit's mine plan to focus less on zinc areas and more on precious metal areas. While the rise in gold price has helped offset some of the base metal market fallout, it still had an impact on our bottom line. Unfortunately, the COVID-19 pandemic has impacted large percentages of the world's economy. The company strives to mitigate the spread of COVID-19 and protect the health and safety of our employees, contractors, and communities in which we operate. The company has taken precautionary measures, including specialized training, social distancing, a work from home mandate where possible, and close monitoring of national and regional COVID-19 impacts and government guidelines. To date, the company is not aware of any cases of COVID-19 at its operations. At the end of the first quarter, Mexico's health minister declared an emergency due to the COVID-19 pandemic, along with a 30-day suspension of non-essential businesses, including mining, until April 30th. In response to this, the company adhered to the mandatory suspension and sent its workforce home and placed its Oaxaca mining unit in care and maintenance. In addition, we withdrew our 2020 production outlook. Mexico recently extended the suspension for another 30 days until the end of May. The company has recently submitted its restart proposal to the federal government in hopes It will be granted an early startup based on Oaxaca being a low impacted COVID-19 zone and the staged reopening proposal focused on utilizing local workers to help mitigate potential COVID-19 infections to its workforce and local communities. Not knowing the full impact of the pandemic, how long the suspension in Mexico may last, if Nevada would be impacted by a similar work stoppage, and all the global uncertainty around the pandemic, We utilize the existing ATM to raise an additional capital just short of $12 million. If this money is not needed to combat the impacts from suspensions and operations, each use could include being deployed to existing CapEx plans for the year, like the thickened tailings plant or other capital needs. We believe this additional capital will help bridge the potential gap of a possible extended business interruption from COVID-19. and help ensure the company is poised to capitalize on the coming bull market in gold and silver. The unprecedented creation of trillions of dollars by the US government in a matter of weeks is a quintessential definition of inflation. Additional debt is being added to the already bloated global debt levels. Massive and unprecedented job losses, recently announced bankruptcies, oil turning negative, and shortages of goods and services add to the dramatic impact of the pandemic. All of this is a recipe for the next bull market in gold. The company is well positioned to emerge from the pandemic fallout and capitalize on a world awash in unsound and unprecedented fiat currencies by producing real money and producing real long-term stores of value, which are gold and silver. With that, I would like to thank everyone for their time today on this conference call. Let's move on to the question and answer portion of the call in an effort to efficiently address the Q&A portion of the call without wasting anyone's time. And since we don't screen filter or limit who can call in, any distracting and antagonistic calls will be terminated and I will simply move on to the next productive caller's question. Operator, please prepare to open up the lines for the Q&A and take our first question if there is one But before we do, I would like to get to the first write-in question, an email question, by Jurgen. It comes in three parts. They're all good questions. The first one is, is the loss in Q1 all attributed to Nevada, or is Mexico all in the red? The loss in Q1 is primarily driven by $7.5 million of non-cash dealing with amortization and depreciation. having to do with, from Mexico, we had three projects that we put into service. The tailings, new tailings lift, power generating, the power plant, and the paste plant. So all three of those are in some of the amortization and depreciation. And the ADR in Nevada, we put that in service and started accounting for that in January 1st. So that's being amortized. So that's been the primary drivers, the amortization and depreciation, non-cash items driving the loss. Number two, I think the ATM raise was a smart move, but it was unexpected and of course comes with dilution of existing shareholders. Assuming GRC sees better times again in this gold bull market, does the board consider reversing the ATM and buying back shares? I believe there's still a facility in existence for this. You are correct, there is a facility still in place to do this, but there are currently no plans to do that. Number three, the 6.9 million capex is higher than the 5 million cash flow from operations. Is this attributable to timing of the dry stack tailings facility capex in Mexico? There's a lot that goes into that number. Three million of that is per waste being capitalized. We are capitalizing this waste because we are not into a material amount of ore yet. We just reached the top of the ore body in the Pearl. We've been mining from Isabella. So we will probably, or more than likely, be not capitalizing that anymore in the second quarter. That will actually be an OPEX cost. But to put this in perspective, we've mined about one-half of 1% of the Pearl deposit That's basically $1 million worth of a $300 million value in the ground. So we are just at the very top of the Pearl ore body. And again, 80% of the ore in the Isabella Pearl deposit is in the Pearl. And what's really exciting, and that's why I led off with it in the conference call, is we've reached it now, and we're seeing it, and it actually is exceeding our expectations. I don't say that to try to raise expectations, but I'm just saying that as it's a fact that it's higher grade. So coming back to the question of the 6.9 million, 1.5 million of that is in development, mine development in Mexico. 1.5 million is payment of the dry stack tailings project for long lead time equipment. So hopefully that gives you some insight onto the 6.9 million capex. Okay, so with that, if there's any questions, For callers, operator, if you can open up the line, please.

Thank you. The floor is now open for questions. If you do have a question or comment, please press star 1 on your telephone keypad. If you're on a speakerphone, please pick up your handset for the best sound quality. Again, star 1 to signal for a question. And we will take our first question from Heiko Illa with HC Wainwright. Please go ahead.