Gold Resource Corporation

Good morning and welcome to the Gold Resource Corporation Full Year 2022 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. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded today, March 3rd, 2023, at 8 a.m. Mountain Time. I will now turn the conference over to Kim Perry, Gold Resource Corporation's Chief Financial Officer. Please go ahead.

Thank you, Julie. And good morning, everyone. On behalf of the Gold Resource team, I would like to welcome you to our conference call covering our full year 2022 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 2021 Annual Report on Form 10-K and other SEC filings. All financial measures are unaudited. Audited financial statements will be presented in our 2022 Form 10-K which will be filed at a future date, but no later than March 15th, once our audit firm 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 Alan Palmier, our President and CEO, and Alberto Reyes, our Chief Operating Officer. Following Alan, 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 updated technical summary report have been filed with the SEC and EDGAR and are also available on our website at www.goldresourcecorp.com. I will now turn the call over to Alan.

Thank you, Kim, and good morning, everyone. I want to thank the listeners for taking the time to join us on this call. While we exceeded production guidance in 2022, the expected production results for 2023 are expected to decline approximately 25%, driven almost entirely by grade. The forecast for 2023, while generating cash flow sufficient to main our capital needs, in Mexico and cover our anticipated expenditures elsewhere is tight. We took a very difficult decision to pause the dividend to protect our debt-free balance sheet. Admittedly, it is a conservative stance, but we are strongly of the belief the best way to create long-term value is to preserve our cash to ensure that we can unlock the value in the Don David gold mine. Our values underscore transparency, and as such, we strive to ensure we keep our investing community fully apprised of information as soon as it is available. Later in the call, Kim will share more details about our 2023 guidance. We are focused on improving our cash flow through productivity improvements, assessing our level of staffing, and hopefully through exploration success, which will be discussed in just a moment. A little teaser for the readers, we will publish our inaugural ESG report next week, which highlights the many ESG programs aimed at not only compliance, but also at maintaining our social license to operate by being a good neighbor to our host communities and steward of the environment. After an update on our Don David Gold operations by Alberto and prepared remarks by Kim on our financials, I'd like to provide an update on our Back 40 project. Lastly, we'll provide a few closing remarks and then we'll take questions from participants. Now, please turn to slide four and I'll provide an update on our Q4 exploration results. Our number one priority is to continue to fund the capital programs at DDGM, including our infill and expansion exploration programs in Mexico. These programs have only been constrained by available drill sites. and this remains true this year. We have never withheld capital for drilling. Unfortunately, we encountered delays in our exploration development during 2022, which resulted in being approximately six months behind in our drilling program. These delays involved ventilation and ground support, and as they impacted working conditions and the safety of our employees, they were not something that could be ignored and resulted in a delay. The technical issue is resolved in the fourth quarter, and we're currently drilling in the highly prospective areas to the southeast of Switchback, the Three Sisters, and the Morena target parallel to the Aresta Vane system. As you will have seen from our press release on Tuesday, the initial results are very encouraging and give us confidence in the potential for additional high-grade results. While it takes time to develop a resource from initial drilling, We're excited about the future, and it's our objective to increase our resources and reserves this year through exploration and infill drilling programs. On slide five, you can see that our commitment to exploration spending since 2021 has been significant. While 2023 appears to decline from 2022, this is largely due to the development work I mentioned earlier, largely conducted in 2022. We are now in a position with drill stations and drilling has commenced. We will still have additional development requirements in 2023. However, they are not as significant as 2022. As you can see from the graph, the significant spend in 2023 relates to underground exploration, expansion, and infill drilling. Turning to slide six, we are confident in the long term at DDGM as you will see in the updated technical summary report filed yesterday with R8K. In the 1231-22 resource model, excluding inferred material and not including the recent drill results represents more than a six-year mine life. We were able to replace 88% of our resources by performing infill drilling, a comprehensive view of our geological database and interpretation of the mineralization, and the block models derived from them. On slide 7, you'll see that we were able to replace reserves to the extent of 74%. The largest contributing factor to the 26% decline was the depletion of the reserves by half a million tonnes relating to 2022 mining activities, offset by additions due to the reclassification of measured and indicated material mineral resources to prove an improbable reserves as a result of detailed engineering. I'll now pass the presentation over to Alberto to discuss the Don David Gold's full year operational results.

Thank you, Alan, and also good morning to all. Starting with operational health and safety, I am pleased to report the significant progress the operations team has made in cultivating a mature safety culture. The team has surpassed its quota on leading indicators, and the results are reflected in an increased number of reports, while accidents and incidents continue to trend down. I am proud of the team for actively participating in identifying and correcting hazards in the workplace, while partaking in campaigns, committees, and the type of leadership that reinforces safety. The results and safety stats for 2023 have been impressive so far, and I'm confident that the team will continue improving the safety culture. Regarding the operations, the team was able to achieve production targets despite the ground support needed during the construction of the ventilation race between levels 22 and 27. Moreover, The completion of the last leg of the ventilation system has significantly improved working conditions, enabling the team to safely pursue new production targets and continue exploration from drilling stations at the lower levels. Production increased quarter over quarter. The changes made to the sequence in Q4 gave access to the higher-grade material obtained from a section in the upper part of northern switchback that was only identified in 2022 through infill drilling. I am pleased to report that we processed nearly half a million tons of ore and sold approximately 30,000 ounces of gold, 1 million ounces of silver, equating to a combined nearly 43,000 gold equivalent ounces. We further sold over 1,300 tons of copper, approximately 5,000 tons of lead, and more than 14,000 tons of zinc. Turning to slide nine, in 2022, our capital expenditure of $14.8 million paved the road for production in 2023. Some of the highlights include the completion of the gold regrind circuit, the dry stack facility, and approximately 4,100 meters of development for exploration purposes, as well as for access to other mining levels. In other sustaining capital, $3.2 million was invested in replacing some mining equipment, surface mine ventilation infrastructure, and an electrical substation for the lower levels. This investment is aligned with the company's vision of sustainably growing Don David Gold Mine. I'll now pass over the presentation to Kim to discuss the financial results.

Thank you, Alberto. As previously noted, our 2022 Form 10-K will be filed in a few days once our audit firm has an opportunity to wrap up the audit. Therefore, all financial measures are unaudited. We close the year with a strong balance sheet. consisting of nearly $24 million in cash at December 31, 2022. Cash in 2022 declined by $10 million due to nearly $19 million in tax payments made for both 2021 and 2022, a $22 million investment in DDGM exploration and capital projects, a nearly $9 million investment in the Back 40 project, a $1.7 million investment in Maritime Resource Corporation, and nearly $4 million distributed in dividends prior to suspension. For the full year 2022, we reported net losses of $6.3 million. These losses are primarily driven by an increase in depreciation expense and the back 40 project costs being reflected as an expense on the P&L. The increase in depreciation expense reflects the addition of the filtration plants, dry stack facilities, and the addition of the gold recline circuit offset by lower mineral reserve depreciation base. Net sales of nearly 140 million were 11% higher than the same period in 2021 due to both higher sales volumes and commodity prices for gold and zinc. Total production cost of approximately 81 million for the year are 12 percent higher than the production costs for the same period in 2021. The increase is largely related to increased costs across the board for the same period in 2021. Specifically, labor costs were higher due to both inflation and an increase in headcount as a result of the 2021 Mexican labor reform. However, in Q4 2022, we commenced the exercise of right-sizing our workforce for the future. Secondly, cost of materials consumed and transportation of concentrates were both higher due to inflation. We continue to work with our suppliers to manage this risk. As Alberto mentioned earlier, we incurred additional costs related to ground support and ventilation remediation that will also continue to benefit us in the future. Don David Goldmine's total cash cost after co-product credits was $458 per gold equivalent ounce sold. and total all-in-sustaining costs per gold equivalent ounce sold were $1,022 for the full year. These costs were slightly higher than 2021 costs related to the higher production costs just discussed. Moving on to slide 11, I'd like to discuss our 2023 guidance. The two headlines are the year-over-year reduction in gold equivalent ounces and the increase in cash costs and all-in-sustaining costs per gold equivalent ounce. The gold and silver production profile is primarily driven by expected decline in the metal grades, as Alan mentioned. However, as both Alan and Alberto mentioned, there are many productivity measures being taken to address this decline in both grade and the overall production profile. With regard to cash costs, you will notice significant increase from 2022. The unit cost increase is driven primarily by the decline in the gold equivalent ounces sold. As mentioned throughout this presentation, we are laser-focused on improving operating cash flows. The 2023 guidance further demonstrates the commitment to continue investing both capital and exploration in Mexico. And a final note on G&A is driven by the addition of highly skilled resources to our team. I think Alan might be on mute.

No, I'm here. I apologize. Sorry, operator, can everyone hear me?

Yes, this is Joe Turner. I can't hear you.

Okay. It was cutting out for some reason. Thanks, Kim. I apologize, everyone. With the Back 40 project, we remain optimistic. We made significant progress on the feasibility study. We've completed the mine and mill design as well as the site infrastructure layout that addressed previously raised environmental concerns. The initial capital and operating cost estimates were influenced by inflation and supply chain issues in 2021 and 2022 and resulted in higher costs than we felt were acceptable. We made a decision to slow down work on the study to evaluate alternative mining approaches and process flow sheets, as well as site infrastructure layouts, all in an effort to reduce capital and operating costs. This work has resulted in a number of potential improvements, and once the work is complete and the costs appear acceptable, we will incorporate them into the feasibility study and continue to advance the project. The timing of this work is difficult to predict, as it entails a substantial amount of engineering, which we are hoping we will conclude during the first half of this year. Upon completion of the feasibility study, we will present it to our board of directors for a production decision prior to preparing the permit applications for submittal to state agencies. Overall, 2022 was actually quite a good year. We had many accomplishments in both Mexico and Michigan while enduring and overcoming several challenges. As we enter 2023, we are aware that we will continue to face challenges that we are prepared to handle and have already started to realize improvements. This is made possible by the strength of the team in place, which is unusual for a company of our size. Our focus has been and remains, first off, to maximize value in Mexico, as is evidenced by our commitment to exploration, and the results are beginning to show that, as evidenced by Tuesday's press release, we are having some encouraging intersections. We will continue to share these results as they become available. We remain focused on engineering productivity improvements to offset the impacts of inflation to improve the overall economics of the Don David gold mine and the Back Forty project. While we have multiple potential opportunities, it's premature to talk about specifics. However, initial results are encouraging. Our target for 2023 is to beat guidance while expanding our resource and advancing accretive growth opportunities. With that, I'll turn the call over to the operator for questions.

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touch-tone phone. If you'd like to withdraw your question, please press the star followed by the two. Again, to ask a question, press star one. One moment, please. Again, ladies and gentlemen, if you'd like to ask a question, please press star one. Alan, there's no question at this time. Please proceed with your closing remarks.

Well, I am a little bit surprised. I will say that we try to be reasonably comprehensive in our formal remarks. If, in fact, anybody does have questions, we can always deal with them in person or over a specific phone call in the future. I thank you for your time and attention this morning, and I wish you all a good day. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.