Gold Resource Corporation

Thank you for standing by. This is the conference operator. Welcome to Gold Resource Corporation's third quarter 2021 conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the prepared remarks, there will be an opportunity to ask questions. If you have any questions or comments, please press star 1 to join the queue. I would now like to turn the conference over to Anne Wilkinson, Vice President, Investor Relations and Corporate Affairs. Please go ahead.

Thank you, Kate, and good morning, everyone. On behalf of the Gold Resource Team, I would like to welcome everyone to our conference call covering our third quarter 2021 results. Before we begin the call, there are certain housekeeping matters I would like to cover. Please note that certain statements to be made today by the management team are forward-looking in nature. and as such are subject to numerous risks and uncertainties as described in our quarterly report on Form 10Q and other SEC filings. On the call today, we have Alan Palmier, President and Chief Executive Officer, Kim Perry, Chief Financial Officer, and Alberto Reyes, Chief Operating Officer. Following Alan and Kim's prepared remarks, all three will be available to answer your 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 from the Materials tab under the Ask a Question tab. 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 financial statements and MD&A contained in our 10Q have been filed with the SEC on EDGAR and are available on our website at www.goldresourcecorp.com. Also, please note that all amounts mentioned in this call are in U.S. dollars unless otherwise stated. I will now turn the call over to Alan.

Thank you, Alan, and good morning, everyone. I want to thank the listeners for taking the time to join us on this call. Following my opening remarks concerning our Don David Goldmine, Kim Perry, our CFO, will describe our financial results. I will then provide to you our thinking on the timelines relating to the permitting and development of the Back 40 project, the principal asset we are acquiring as part of the acquisition of Aquila, followed by a few other closing remarks, and then we will take your questions. With the intention of delivering excellence and sustainability, Our team holds itself accountable to the highest environmental, social, and governance standards, which allows us to deliver benefits to all our stakeholders, including our employees and local communities. As part of our sustainability report issued September 24th, we showed significant progress in 2020 over 2019, including a 23% decline in tons of CO2 equivalent produced per ton of ore processed, a 15% decline in the fresh water withdrawn and a 31% decline in the fresh water consumed, both per tonne of ore processed. And finally, we increased the percentage of tailings recycled through the paste plant to 26% from 5.7%. The decline in tonnes of CO2 equivalent produced is largely due to the conversion to the electrical grid from using diesel gensets to generate electricity. We are focused on identifying additional opportunities to lower our power consumption and improve efficiency. The declines in water consumption were due to the installation of the paste tailings plant as water is recycled back to the processing plant from this process. As I indicated, I will provide some color on our plans for the Back Forty project, Aquila's principal asset, in my closing remarks. But I will note here that we've negotiated the arrangement agreement with AQUILA. The meeting materials for the special meeting of shareholders of AQUILA have been mailed and we look forward to the AQUILA shareholder vote on the acquisition to be held November 17th of this year. Working safely continues to underpin all that we do with our goal of developing a zero harm workplace for our employees, the environment and our local communities. As we noted previously, during the first half of the year, we initiated a global health and safety directive with an objective to lower first aid, medical aid, lost time accidents, and near misses. This program builds on the safety protocols already in place and provides our personnel with a common approach to achieving our safety objectives. On the right-hand side of this slide, you can see the 12 golden rules developed as part of the program. More recently, our safety program objectives have been focused on identification and monitoring of leading indicators of a safe workplace, such as leadership in the field, regular and consistent risk assessment, behavioral observations, training records, and department safety meetings. On our investments in infrastructure, construction of the water filtration plant and dry stack tailings facilities is 95% complete. Dry stack facilities will conserve water, accelerate reclamation of certain areas of the old open pit mine, as well as extend the life of tailing storage facilities, supporting our objectives of delivering excellence in sustainability. As we indicated previously, we are undertaking a comprehensive review of our geological database. Our geological interpretation of the mineralization, the block models derived from them, and ultimately the mine production models. The key objective of this initiative is to ensure reliable mine planning and forecasting. In addition, mining methods and ground control methods are being reviewed. During the first half of 2021, changes to the mine plan were made to allow management to put into effect more effective ground support measures in the switchback area of our underground mines. Accordingly, we changed our mining approach to ensure stability and to reduce dilution. During the third quarter, mining resumed in the Soledad vein of switchback, which improved our mining productivity due to wider mining widths at higher ore grades. We completed 10 holes totaling 3,800 meters in our underground drill program, as well as 38 infill and definition holes for another 3,800 meters in our arista and switchback areas. The results of drilling have confirmed mineralization below current mining levels in the southeastern switchback zone, particularly the presence of high-grade gold, silver, and zinc, which will enable us to advance development planning below current mine limits. There is excellent potential to add precious metal-bearing mineralization that is amenable to mining in the short term. Our geologists continue to focus on exploring new areas and identifying additional mineralization along strike as well as up and down dip of the current mine workings. Turning to the third quarter results of operations, I'm pleased to report that we sold approximately 5,800 ounces of gold, 255,000 ounces of silver, 270 tons of copper, over 1,500 tons of lead, and 3,100 tons of zinc. During the third quarter, we processed ore at an average rate of 1,350 tons per day compared with 1,700 tons per day in Q3 2020 due to the 12-day shutdown induced by our COVID outbreak and the related impact of enhanced safety and quarantine protocols. For the first nine months, we've averaged 1500 tons per day consistent with our mine plan, despite the disruptions earlier in the year with ground control and in August and September with cold. During the third quarter, the majority of the ore process came from the Arista underground with an average gold grade of 2.7 grams per ton and silver grade of 91 grams per ton. 114% and 20% higher respectively consistent with mine sequencing and the current year mine plan. Overall, base metal grades are consistent year over year and in line with the mine plan. With that, I'll turn the call over to Kim to discuss our financial results.

Thank you, Alan, and good morning, everyone. We closed the quarter with a strong balance sheet consisting of just over $29.5 million in cash and no debt. Cash from operating activities was $5.7 million for the third quarter, and working capital was $31 million at September 30. For the third quarter, we reported net income of $1.5 million. Revenues were in line with Q2 2021 and nearly $3 million higher than Q3 2020. Notwithstanding, we had fewer tons processed through the mill. Net sales also benefited from a 44 percent decrease in concentrate treatment charges per base metal ton sold. Treatment charges for the three months ended September 30 were 2.3 million or $473 per base metal ton sold compared with 5.9 million or $842 per ton of metal sold for the same period in 2020. This decrease is largely dependent on the spot treatment charge market for zinc. Total production costs of $17.2 million for the third quarter are slightly down from last quarter and 6% higher than the production costs of $16.3 million for the same period in 2020. The increase is primarily due to a $1.7 million increase in consumable chemicals used in the processing plant due to a 13% price increase offset by lower volumes processed. DDGM's total cash cost was $466 per gold equivalent ounce sold, and total all in sustaining costs were $1,031. These costs are down significantly quarter over quarter, and we expect these costs to be significantly lower again in the fourth quarter of 2021. Accordingly, we maintain our revised full-year guidance of total cash costs per gold equivalent ounce of between $250 and $290 per ounce and total all in sustaining costs of between 800 and 900 per gold equivalent ounce sold. During the first half of 2021, a new management team was assembled with a directive to unlock the value of the Mexican assets along with a mandate to grow the company. In the first nine months, management's investment in our Mexican assets totaled $18.9 million. We expect our spend on underground development in 2021 to be closer to 5 million rather than the 9.8 million originally guided due to a reallocation of resources early in the year to address ground support challenges. In Q3 2021, work began on the gold regrind project to repurpose the existing ball mill and refurbish certain flotation cells while new flotation cells are on order and expected onsite later this year. The zinc tailings will be reground and then leached to produce dory bars. This process is expected to increase gold recovery by 6 to 10 percent. Commissioning is expected prior to year end. As of September 30, 2021, half a million has been invested in this project and another 200,000 expected this year. Construction of the filtration plant and dry stack tailings project is 95 percent complete, as Alan mentioned earlier. Commissioning will commence next month in November with completion expected in December 2021. Delays were incurred during the temporary COVID shutdown in August and delivery of some of the materials being delayed. The work to prepare the open pit to receive the dry stack tailings is complete. Mine development during the quarter included ramps and accesses to different areas of the deposit and exploration development drifts. A total of 2,500 meters of underground and exploration development was completed during the first nine months, including access to new drilling platforms for exploration. With that, I will turn the call back over to Alan.

Thank you, Kim. As I noted in my opening comments, we are navigating the process of acquiring Aquila. Since the announcement in September of our agreement with Aquila to acquire them, the management team has been working to close the transaction with good progress made on all fronts, including the signing of the arrangement agreement on October 5th. Upon closing the transaction, we intend to finalize a new block model and resource study, develop a new mine plan, evaluate alternative process flow sheets, and complete a revised and optimized definitive feasibility study, which we expect to complete in the first half of 2022. Permitting and detailed engineering are expected to run in parallel into 2023. This is to ensure that we're approaching the development of the BAC 40 project in the most environmentally and economically advantageous manner. Production of BAC 40 is expected to produce gold and silver dore, as well as copper, lead, and zinc concentrates bearing gold and silver, and construction is expected to commence in early 2024. We feel the acquisition of the Back Forty project is an excellent opportunity for our shareholders as it will be immediately accretive on a net asset value basis. The combined company is expected to benefit from a peer leading growth profile, a robust balance sheet with no debt and free cash flow generation from its Don David gold mine. The company's position of financial strength is expected to result in an improved ability to access the debt financing required to fund the BAC40 project's capital expenditures. Through the acquisition, shareholders will have the opportunity to participate in the ongoing growth of a multi-jurisdictional diversified precious and base metal producer with exposure to gold, silver, zinc, copper, and lead through the Don David Gold Mine and the BAC40 project. In closing, we remain on track for full year guidance. We have already seen encouraging and affirming results in the third quarter and the early part of the fourth quarter. Thank you for taking your time to listen in. This concludes our prepared remarks and I will now turn the call back over to the operator for questions.

Thank you. We will now begin the question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. If you wish to withdraw your question, you may press star 2 to leave the queue. We do ask that if you are listening via speakerphone to please pick up your handset for optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone now. Please hold for a moment while we poll for questions. And our first question today is coming from Heiko Ehle at H.E. Wainwright. Your line is live. You may begin.

Hey there. Thanks for taking my questions. Morning, Heiko. Good to hear from you. Always a pleasure. Hey, for the dry-stick project, you state that some materials arrived late to site. Is everything now at site, or are there still things that are en route or not even shipped yet maybe? If so, what exactly are you waiting for? And I assume price-wise, this is a non-issue because pricing was locked in. So the large-scale inflation we've seen on everything from used cars to mining equipment won't be an issue on this one, right?

Speaking to the latter comment first, it's not going to be an impact. I will tell you that what we are waiting for is an embarrassingly small piece of equipment. We had some piping that was delayed. It is backordered and should be delivered sometime in the next month or two. Unfortunately, the supply chain issues are affecting us just like they're affecting everyone else. But that's all we're waiting for, Heiko. But that piping doesn't hold up construction of anything else. Construction is effectively complete. Literally, we're at the 95% level. We have to hook up some pipes. and we're into commissioning. That's where we are.

Okay. Got it. And then pricing, it doesn't make a difference either. Okay. Simple enough. And then just finally on the Aquila deal, Alan, you sort of went into this big level in your prepared remarks. In your release, you list late November closing dates, so we're looking at a month from now. Just out of curiosity, and I don't know how much color you're willing and able to provide in a public setting like this, but What other issues or steps still need to be finished before the closing gets done, please?

There are two or three conditions precedent to closing that we control. I'm not going to go into specific cycle, but they are well in hand. From a capital markets perspective, there will be a shareholders meeting on the 17th of November. followed shortly thereafter by a court hearing whereby with the benefit of a positive vote the court will approve the plan of arrangement closing would then follow two or three days later and we're currently planning on closing on the 23rd so if you look at the risks associated with closing number one obviously is going to be the shareholders vote We already have a preliminary order from the court, so we don't view that as being a significant risk element. And then we have these three conditions present, but all of which, based on progress to date, I'm very comfortable with. I think the likelihood of closing is very high. Excellent.

Terrific news. Wonderful. Thank you again. Congratulations and stay safe.

Thanks, Heiko. We'll be talking soon.

Thank you. Our next question today is coming from John Baer at Ascend Advisors. Your line is live. You may begin.

Thank you, and thank you for taking my questions. You touched a little bit in your prepared comments about encouraging results regarding the potential to increase higher-grade mineralized material in the switchback vein, and I was just wondering if you could expand on that a little bit more. Is it new, actually new veins that you've discovered there, or could you share a little bit more on that?

Sure. You may recall that Q1 we had some ground control problems in Soledad, and we have implemented new mining approaches in Soledad to reduce dilution, improve ground control techniques. But in addition to that, I indicated my remarks that we've undergone a, are in the process of undergoing a major review of all of our geological information leading up to block models and then to mine plants. That process has enabled us to develop a mine plan for the balance of this year plus next year with a high degree of confidence associated with our ability to produce. Where we are mining in Q4 of this year is in an area of switchback that does, in fact, and it's I'd love to take credit for it, but nature put good grades there, and the mine planning is enabling us to extract it with a high level of productivity. Does that address your question, Sean?

Yeah, yeah, that's good. And then secondly, I'm curious if you have a sense on what your budget outlook for 2022 might be regarding exploration efforts outside of the switchback vein system. In the press release, you've indicated spending roughly $6.6 million year-to-date, and I was just wondering if you're doing any or planning on doing any extra exploration efforts, and this in context with what you're going to be Focusing on assuming back 40 project gets done the the merger occurs You know what are your any of your Are you going to reduce any?

Exploration activities, I guess that's what I'm asking Book answer is no If anything we will expand our exploration efforts in Mexico the back 40 is a discrete project at this point and Because of the stage of development, we're into detailed engineering studies, meth studies, modeling, and working on the feasibility. So there will be no funds diverted from Mexico for exploration in the back 40. In terms of the quantum of the expenditure for next year, I cannot tell you at this point. We're in the process of developing those plans as we speak. In all likelihood, the constraint will not be available capital, but it will be available drilling sites, just as was the case this year. Our emphasis for next year will continue to be near mine and in mine exploration to expand our reserves and resources. We are going to be looking at a few greenfield sites, but that won't be our primary focus. primary focus is to maximize the value associated with our existing infrastructure. So we're going to be looking close to home to try and expand our resources and reserves.

Okay. Very good. And last quick one on the gold recovery project. Will the regrind help in zinc recovery as well as gold or is that completely separate?

That is completely separate. What we're going to be doing is we're going to be taking the reject from the zinc circuit. So effectively, you've got material going in, you've got the zinc concentrate produced, and you have tailings, which historically would go straight to the tailings facility. What we are going to be doing is we're going to be taking those tailings, subjecting them to another stage of very aggressive flotation to produce a form of concentrate that will then be reground and fed into the leach circuit. The sole objective of that exercise is to recover gold that would otherwise have gone out into the tailings. And it's significant. We're directionally looking at between 6% to 10% increase in gold recovery.

Right. So basically the initial processing of this ore has removed the majority of the zinc that you can on an economic basis. Is that right?

That's correct. So what we are treating is the reject from the zinc concentration process.

Right. Okay. Very good. Thank you for taking my questions and good luck moving forward.

Thanks, John. Appreciate you calling in.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone now. Our next question today is coming from James Fottom. Your line is live. You may begin.

Good morning, Alan and Kim, and congrats again on the quarter. Alan, the first question I had was related to the CapEx modifications that have been made. In thinking through the reduced 2021 CapEx forecast, can you elaborate on what's been deferred into 2022 versus what is simply reduced or eliminated?

We have not eliminated anything James. The major contribution to the shortfall on capital in the current year is because we are, to be very honest, behind in our development. You'll recall the ground control issues that we had in Q1. Those necessitated diverting development capabilities to bypass certain areas and develop new areas for mining. But the net result of that was overall, we got behind in our development. It's not canceled, it's deferred. And we are looking at various means of catching up on that development over the next six to 12 months.

Okay, fair enough. And then in regards to the BAC 40, do you have any updates, Alan, on the permitting application timelines? And also, do you anticipate any further need for dilutive financing take the project to construction at this time?

James, let me answer your questions in conjunction with some questions that were sent in. It all deals with the BAC 40. I'll deal with the latter point first. We are not anticipating any dilutive financings in order to build this project. Our estimates at this point with indicate that between cash flow from operations and normal project finance structure, we have no need to entertain any dilutive financing whatsoever. That was one of the attractions of this particular asset. Permitting timeline is unfortunately by definition somewhat flexible. In Michigan, The permitting process is controlled by the state. There's no direct federal involvement in the permitting process. And there's a department known as Environment Great Lakes. The acronym is EGLE, Environment Great Lakes and Energy. Thank you. I always stumble over it. That department controls the issuance of all of the permits necessary to move the project forward. As you may know, Aquila had a year ago all of their permits. But in the review, there's a period of time necessary post-issuance of permits whereby they can be challenged in an administrative court. One of the permits was the wetlands permit. It was challenged and it was overturned or it was revoked based on a technicality. Aquila decided not to pursue legal action to try and have that overturned, but they stepped back and they took a look at the way with which they were approaching mining of the deposit and all of the ancillary impacts on wetlands in particular, but environmental impacts broadly defined. That has resulted in the current process that's underway to produce a revised and optimized feasibility study. That study will be complete, as I indicated, second half of next year. Our timeline Our targets are a little bit more aggressive than the numbers I'm going to give you, but for reference, it'll give you an idea of what we're dealing with. If we can complete the feasibility by the end of Q2, the permitting timeline can be somewhere between eight and 12 months to receive the permits. After that, there is a six-month to eight month period whereby the permits are subject to challenge. Once we get through that challenge period, then you have effectively a court approved permit, which will allow us to move forward. When you put all the timelines together, I'm anticipating that by the end of 2023 at the latest, we will have all of the permits necessary for us to begin construction subsequent operations. It may be as soon as Q3 of 2023, but I'm being conservative because what can happen will happen. So I'm going to suggest that it might be the end of 2023 before we get permits. At that point, we would be in a position to start construction, James.

Okay, great, Alan. Thank you. And this next question may be for Kim. Do you have a sense, Kim, of what the new pro forma G&A expense will increase to or what level of increase we can expect post the acquisition of Acrela?

Yeah, James, thank you for that question. We've looked at it, and we actually feel strongly that we're going to have a lot of efficiencies and synergies that will develop. We don't have our budget for G&A next year. It will be a slight increase from our G&A this year. but we should be able to achieve a lot of efficiency, so maybe $7 million over our six and a half, seven to eight.

It's relatively minor. Okay, that's fair. Good to know. Two last quick questions. Alan, I apologize for taking up the call. I may have missed this on the regrind. Do you expect the gold regrind benefits to actually begin in Q4 of this year or Q1 of next year?

We will start seeing some initial benefits next month. There will be a commissioning period. So while we will see the impact in November and December, we will see the full impact beginning in Q1 of next year. Great.

And then last question is related to the tons milled. In terms of what we can expect in terms of Q4 and beyond, what should we anticipate the throughput rate to be

on a steady state basis going forward as you're aware james the budget rate or the planned rate for this year was 1500 tons that was done very consciously what i can tell you is it will not be less than 1500 tons and we are looking at the potential for increasing that next year beyond that i really can't comment because Honestly, I haven't seen the mine plan for next year yet. So it's in development, and I expect to see it next week. But right now it would be premature for me to give you any kind of directional tonnage. It won't be a decrease, and I'm expecting it.

Perfect. That's positive news, and I appreciate the time on this. So I'll jump back in the queue. Thanks, Alan.

Thanks, Jay.

Thank you. Our final question today is coming from Ron Aubrey at RJ Aubrey Investments Corp. Your line is live. You may begin.

Good morning, Alan. Good morning, Ron. How are you doing? Hey, terrific. How are you? All good.

It's a beautiful day in Denver.

A cold one in the Midwest. Hey, congratulations on a very, very strong third quarter. I mean, you were only... 1.8 million revenue less than Q2 despite this 12-day shutdown. So what do you attribute that to? And do you see this strong operating performance to actually continue this quarter and into next year?

Really, there's three factors. Commodity prices helped. We got back into... areas that have, as I indicated earlier, better grades, good widths, better grades, so higher productivity and more metal going to the mill. But the third factor, and realistically is by far the most important factor, is the operating team in Mexico has done an excellent job of recovering from the 12-day shutdown that we was imposed on. Well, it wasn't imposed. We took a 12-day shutdown because of the incidence of COVID that we were experiencing. Restarting after that, the team down in Mexico did an excellent job of getting back up to the normalized rate of productivity, and they did it very, very well. So those are the three drivers. Going forward, as I talked about earlier, we're in the same material, we're back up to full run rate, so I would expect Q4 is going to be a good quarter for us.

That's excellent. Do you think or still feel that you're on track to achieve your 40,000 to 42,000 gold equivalent ounces for this year?

We are. I'm comfortable with that guidance.

All right, fair enough. And then final question, more longer term, has to do with your drill results, and I thank you for the color in your 10Q. You're certainly showing a significant increase in high-grade mineralization and certainly down-dip extensions on the switchback main system. And I think you've called this now the three sisters. Could you maybe update us on what you think is there?

Okay, I'm going to address that question. But first, the down-dip to the southeast on switchbacks is just a continuation of the existing system. We've drilled down, we had significant intersections 80 meters below the existing workings. And what that potentially gives us, and I'm being very careful about the words I'm using, what that potentially gives us is four additional levels. There may be more below that, but four additional levels is a very significant increase to the mine life. What I'm calling the Three Sisters is actually to the northwest of Switchback, and it actually is located between Switchback and Arista, quite high up. We've got, as you know, we've had some very interesting intersections. We've just now... are in the process of finishing a underground drill station that will enable us to do a little bit more work in that area. Tonnage, I can't give you any idea. We're optimistic, but it's way too premature for me to even guess as to tonnage. I'm encouraged, but we need more information.

Okay. Well, fair enough. Well, congratulations on you and your team to navigate this difficult period. Looking forward then to the future results. Thank you.

Thank you. I appreciate the call. There was one call that came in over the web that I just wanted to address before we move on. And I'm not sure who it came from, but it was a question about energy at the Baccarati project. That is all electrical power off the grid at rates that are very attractive. I'm not in a position to disclose them at this stage, if ever, but I will say that they are better than the rates we're being charged in Mexico. Now, are there any more questions?

Not at this time. So I'd just like to thank, on behalf of our team, I'd like to thank everyone for attending our third quarter conference call, and we look forward to the opportunity to engage with our shareholders and other stakeholders over the next days and weeks. Thank you.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. We thank you for your participation.