Gold Resource Corp Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: Gold Resource (GORO)

Gold Resource Corp (NYSEMKT:GORO)

Q3 2012 Earnings Call

November 15, 2012 11:00 am ET


William W. Reid - Co-Founder, Chairman and Chief Executive Officer

Jason D. Reid - President and Director

Bradley J. Blacketor - Chief Financial Officer


Welcome to Gold Resource Corporation's Third Quarter Earnings Conference Call. Gold Resource's CEO, William W. Reid, will make a brief statement. Following Mr. Reid's opening remarks, there will be an email Q&A period. [Operator Instructions] This call will be recorded and posted to the company's website within 3 to 5 business days. Please go ahead, Mr. Reid.

William W. Reid

Thank you. We also have Jason Reid, President; and Brad Blacketor, CFO, on the call today. So thank you for joining us this morning for the third quarter conference call. We have a lot to go over today. Let's start with positive results. I am pleased to report third quarter production was 22,336 gold equivalent ounces, up 54% from the previous quarter, which speaks to overcoming many of the issues and challenges of the second quarter. We sold 18,049 ounces gold equivalent at a total cash cost of $459 per ounce and generated revenues of $36.5 million and had mine gross profit of almost $24 million. We have been profitable every quarter this year, including this third quarter at $7.3 million even though we must expense all of our construction and development costs. We continued our $0.06 per month dividend, which means we have now paid shareholders $63 million and declared just over $66 million in dividends. We achieved all of this even when our production was less than we would like or expected to achieve, while encountering challenges common to the mining business.

Mining is one of the most challenging businesses out there. It's all about solving problems posed by mother nature when developing mineral deposits. Drill core gives us a glimpse of the deposit by getting underground, and mining that deposit is where both mother nature's riches and her challenges come to bear. And that is what makes the world of hard rock mining so exciting. It's all about solving and overcoming challenges, and then reaping the rewards.

In the third quarter, we continued to address many of the issues and hurdles that contributed to our less-than-targeted second quarter production. Challenges included the management of increasing water with depth, increasing CO2 gas coming from this water with depth and understanding how these veins need to be mined and developed to keep dilution of the ore grade to a minimum. We will expand upon each of these items later during the call.

Our cash costs came down, but they are still too high. We believe that they will come down further as production goes up. We also know that we can reduce some of the operating expenses we have and are focused on increasing production first. We continue to address these issues, but we expect to have these and other challenges for the life of the Arista mine or any underground mine as part and parcel of the mining business and underground mining.

Though we made good progress on addressing many of our challenges, we needed to modify our production targets downward for the year, which was received poorly by the market, which punished the stock price. Nobody likes to miss targets and goals. But as we work hard to achieve the new ones, we are building the mine for increased production over time. I believe, however, the market lost sight of the actual advances we have made as a company. We have demonstrated 3 straight years of increased production. The first 6 months of commercial production from July of 2010, we produced 10,400 ounces. In 2011, we achieved 66,100 gold equivalent ounces. And as of the third quarter, we are at approximately 66,700 gold equivalent ounces, with 1 quarter of production left to add to that total. Increasing production year-over-year for 3 years straight is a very positive accomplishment. Jason will provide a description of the progress made at Arista in a moment, but now I want to turn to our settlement dispute with our concentrate buyer that arose in the third quarter.

I want to describe to you how the concentrate buying process works so you can better understand the issue. First and foremost, we know what we send to the buyer. We have metallurgical control samples from the mill, as well as an extensive sampling and laying of the concentrates once in transport trucks before leaving the mine site. We inform the buyer at the time we ship the concentrates what the value is in those trucks based on our assay lab sampling and information. And the buyer pays us 90% of this number, which is called a provisional invoice, in about 10 days after the trucks unload. Since our business relationship began in July of 2010, the buyer developed a level of confidence in our numbers and our provisional invoice, and that is what is initially paid. Once the shipment arrives at the buyer's warehouse, another sample is obtained and according to our sales contract, this is the sample that actually counts as the final determination of value. If the final sample comes back higher than the provisional sample, the buyer owes us the difference, provided the prices are the same. If final sample comes back lower than the provisional sample, we owe the buyer the difference. This warehouse sample is also the sample that is provided for the independent third-party umpire assay if there is a dispute between us and the buyer concerning the concentrate values. It is important to understand that we were contractually obligated to accept the results of the third-party umpire assays despite what our internal assays show, which is why we believe a recovery of any amounts we were in dispute with the buyer without litigation was positive for us.

Our relationship with the buyer from July of 2010 to January of 2012 was one where there were no significant variances between what we said the concentrates contain versus what the warehouse sample said they contain, with exception of 1 month in late of 2011. A confidence based on 19 months of experience had developed regarding our statement of what the concentrates contain and what the buyer's sample contained. Essentially, no issue or significant problems existed 18 out of 19 initial months of our business relationship up to February of 2012.

One other thing I want to explain is that the assays of these samples for final invoice, even when just normal variations occur and an umpire assay is required, it can take 3 to 5 months to determine and finalize. We had no problem with January 2012 concentrate shipments, and they were closed out with a final payment as usual. Because of our good history with the buyer and our knowledge of what we actually send to the buyer, when our project people in Oaxaca first saw significant variances in the February numbers, they immediately felt there was a definite mistake in those numbers. They then proceeded with the umpire assays, which required additional time, in the belief that this would demonstrate an error. So management in Denver was not notified of these issues regarding significant variances for February and later months until the third quarter when the umpire assay results had come back, and we could see that a pattern of large variances had developed. Though some of our people in Oaxaca were aware of the variances within a month or 2 following shipment, they didn't communicate that up the ladder to us at that time as they were proceeding with the view that those numbers were wrong and would ultimately be corrected through the umpire assay process. But the accounting rules takes a different perspective on this situation, and had we, executive management, known of the magnitude of this variance, it is possible we would have provided a reserve against revenues in the first quarter. Because the issue was not communicated up the chain, it was identified as a material weakness for financial reporting purposes. This material weakness has now been addressed and corrected, but it is the reason for the restatement of the first and second quarters as opposed to simply making adjustments in the third quarter.

Once our people did communicate to us that we were consistently experiencing significant variances between the preliminary samples we were obtaining and samples being provided at the warehouse, management conducted an investigation to determine the cause of the discrepancies and disputed any payment adjustments that were due from the final invoices where these large variances have been identified. The results of the investigation showed us that there were significant issues and deficiencies with controls and security at the buyer's concentrate yard that we believe could have compromised and affected various concentrate samples. To make a long story short, a critical mass of information built up in the third quarter that convinced us that the buyer had issues with its yard and the handling and sampling of our concentrates in their possession. The buyer, however, took the position that even though we may know what we shipped from our site, we could not know what arrived at the yard. In other words, the concentrates could have been compromised in transit. Although we did not believe that to be the case, it was a possibility. Consequently, we could not recover the entire amount. Our alternative was to take legal action, but we made the decision to settle. Our settlement with the buyer requires the buyer to accept our provisional invoices for April, May and June, but we must accept their assays for February and March, which translates to a $3 million reduction in what our provisional invoice stated or approximately 1,800 gold equivalent less ounces for our sales. We have been working with our buyer to mitigate any potential future issues with the sampling and assaying process of our concentrate shipments. The buyer has demonstrated to us that it has improved its controls concerning security, handling and sampling of our concentrates. And we have also instituted additional security measures by having our own representatives of the company remain with the shipment until samples of concentrate are obtained at the warehouse. Since implementing these additional measures, we have had no variances between our preliminary assays and the buyer's final assays for August and September. Reconciliation of October is not yet calculated.

Our contract with the buyer expires soon, and we'll be evaluating all of our options right now with respect to our concentrate sales and potential alternative buyers. I will now turn this conference call over to Jason to discuss the operational aspects of the quarter.

Jason D. Reid

Good morning, everyone, and thank you for joining the call. Our 54% increase in the third quarter production was the result of overcoming many challenges, including water, CO2 gas and mine development hurdles. We continue to upgrade our management team, which I believe was in large part the reason behind the increase in production. The positive takeaway from the quarter should include increased production, continued profitability, lowered total cash cost and returning $9.5 million in dividends to the owners of the company. I wanted to take some time and discuss the challenges and how we addressed them, the improvements we have made and our focus for the near future.

I want to begin with our people, as people are the ultimate reason behind the success of any business. As you are all aware, we have added to and rebuilt our management team. We are very pleased with our Chief Operating Officer, Mr. Rick Irvine, who joined the team in March of this year. Rick was tasked with the evaluation of our then current team at the El Aguila project to best position the company for the future. His evaluation has led to the evolution of a new on-site management team. One recent addition to the team is our new General Manager, Mr. Jesus Rivera. Jesus joined us on October 18 from Yamana Gold's Mercedes underground mining operation. We are pleased to welcome Mr. Rivera and believe his underground mining experience and expertise is ideally suited for improving our Arista underground mine. He will be working closely with Rick to oversee our operations. Our on-site management evolution over the last several months also included a new mine manager, mill manager, safety superintendent, maintenance manager and community relations superintendent. Each individual was chosen based on their experience, capacity and ability to complement our overall team. We believe these individuals are well-suited for safely, consistently and professionally reaching our production targets.

I'm pleased to mention the most recent addition to our team which was announced publicly this Monday in Mr. Barry Devlin. Barry is expected to join our team January 5, 2013, or sooner if possible, as our new Vice President of Exploration. Barry's 31 years of industry experience focusing on epithermal and skarn systems is uniquely suited to take the reins of our exploration program beginning in 2013. He joined us from his previous 6-year tenure at Endeavour Silver and 17-year tenure at Hecla Mining Company prior to Endeavour.

Mr. David Reid, our current Vice President of Exploration and Co-Founder of the company, whose discovery of the Arista epithermal deposit, our largest deposit discovered to date, set the company on its way towards becoming an underground mining operation, wants to take a less active role in the company on a day-to-day basis and will step down as Vice President upon Mr. Devlin's arrival. He will help in the transition, and we expect to utilize his input going forward. We see this as a natural succession of building this company for the next decade.

Early on and in the beginning of a project, it is often hard to pull industry talent away from the established and larger mining companies. As our Arista mine has progressed and developed, we have been able to pull talent from a very competitive industry, we believe, based on the merit and potential of our project. I believe each of these individuals that recently joined our new management team, all of them joined us from other well-respected mining companies, sees and understands the potential of our exciting high-grade deposit and the potential for continued optimization of our El Aguila project's operations. In addition to their professional track record, they are incentivized through stock options to achieve company goals and benefit from company successes. With our new on-site management team in place, I personally feel a sense of excitement and rejuvenation at our operations. Having recently come back from the mine and having seen firsthand the progress being made on many fronts, I believe everyone on-site sees and feels the positive changes as well.

Though the process of team building has taken months, we believe the turnaround in the third quarter production of 54% from the second quarter shortfall is in large part a credit to these individuals, and we look forward to their continued optimization.

Now let's drill down, no pun intended, on the issues we confronted in the second quarter. Water issues are part of underground mining when development goes below the water table. In the third quarter, we made progress on most of the water issues that impacted us negatively during the second quarter, where we encountered stronger-than-expected watercourses not previously encountered by our exploration drilling while piercing the veins with mine development at deeper levels. To address excess water, we installed both temporary pump stations, additional pump stations, and designed and are constructing new larger pump stations with increased holding and pumping capacities. We grouted many of the watercourses to slow the water to manageable levels. We also brought in SRK Consulting, a well-respected natural resource-focused engineering firm to assist us with water issues by evaluating known watercourses and planning for future ones. Our long-term management objective -- water management objective may include setting pumping stations in multiple levels below our working phases and ore development levels to assist in the dewatering of the mine prior to ore extraction on upper levels. Our team has done a good job in the third quarter addressing water issues as evidenced by our production increases. Dewatering, in like most underground mines below the water table, will be an ongoing part of mine development for the life of the Arista mine.

The next challenge we addressed was CO2 gas. We never had this issue on the upper levels, but at deeper levels, some of the watercourses had significant CO2 gas associated with them. This posed a new challenge for us. CO2, though not poisonous, does displace oxygen, so additional care and planning and development was needed. We had to focus on expanding ventilation to deal with this challenge. We continue to develop additional ventilation raises, which provide air access to the surface or to above levels for better air circulation. We moved to install more and larger vent fans for increased fresh air in the mine. Rick just informed us that on October 30, that the first of 2 new 120,000 CFM exhaust fans went into operation, further increasing our mine ventilation. The second one is expected to be installed by the end of this month. Additional safety training and personal handheld air-quality sensors have been implemented into the mine's safety program as well. Mine development is an ongoing part of the business, and we have always made it clear that our production would be directly related to sufficient development ahead of mining. We made progress in our mine development and the challenges we overcame, which resulted in increased production from stopes in the third quarter, generally speaking, between level 7 through 10. Specifically, our level 7 where we were previously using the areas of pump sumps for water extraction, the water was drained, and we are preparing that level to stope additional ore zones. We are currently pulling ore for the mill from stopes on level 8 from the Arista vein, we're pulling ore from level 9 in the Baja by cut-and-fill, we're pulling development ore in level 12, we're developing level 11, and have progressed the circular decline ramp 130 meters last month and are now down to level 13. On 13, we're setting up a temporary drill pad for our small termite drill to test and extract -- to test the exact vein locations, as well as test for potential high-pressure watercourses. A footwall drift on this level developed off the veins is planned to assist us in our long-term access routes. By not developing crosscuts immediately to the veins on 13, we plan to optimize our development while addressing potential excess watercourses before they become a concern. At present, we have 16 distinct mining areas. They are not all simultaneously active, but that should give you a sense that a great deal of activity is being coordinated and executed underground. Currently, 50% of our mine tonnes come from stoping, 50% by development on veins. 37% of our tonnes are coming from above level 10 and the remaining tonnes from below level 10. These ratios will vary depending on the development at any point in time. We were focused on dewatering, managing CO2 gas, overall mine safety and development during the third quarter, and had success addressing those challenges. Our current and future focus will be on reducing our dilution, as well as mining not only the primary veins but the many vein splays or off-shooting veins in the Arista deposit. It takes time to work with the character of the veins to see how they can and need to be effectively mined and what techniques to use to achieve the least amount of dilution. Dilution is a waste rock, a non-ore bearing rock that gets included during the mining process which dilutes and lowers the head grade of the ore when it is processed in the mill. Since we channel sample across the veins after every blast, we can estimate the difference between the channel sample assays and the head grade assays delivered to the mill to help calculate and estimate an estimate of dilution from mining. Dilution of 10% to 20% depending on mining method and vein character would be an acceptable dilution percentage at this point and is our dilution target. Rick has analyzed our dilution factor over -- during the third quarter. His analysis showed the estimated dilution we sustained to have averaged 32% during the third quarter. In some areas where a portion of the hanging wall fell in with the ore during the blast, we estimated dilution to be upwards of 40% in those areas. We can now estimate we sustained equally significant dilution during the second quarter as well. This is an unacceptable dilution percentage and one reason for the recent managerial changes that have transpired at the mine. Previous mining techniques of our early long-haul stoping method sometimes blasted excessive waste rock from the walls that added to the dilution of the ore, which when we then had to process in the mill as lower head grades with the result of lower-than-targeted production. We are improving our long-haul stoping techniques to include modified explosive charges that transfer less energy into the wall rock and provide less waste rock dilution during blasting. Bill and I were in the mine a few weeks ago and were given a tour by our team, including our new mine manager. There have been and continue to be dramatic changes. We were shown the nonuniform blasted walls of past stoping where excessive non-mineralized wall rock was included in the blast, which ultimately reduces the head grade through dilution. We were then shown by comparison the most recent blast of the stope, which was a result of our new mine manager's techniques. There were notable differences. We witnessed a much cleaner and uniform contact of the wall rock. The blasted veins sustained much less dilution in the bottom of the stope below. Though we cannot guarantee ultimate production based on these recent optimization efforts, we did see a correlation with increased head grades through the mill after this time frame of the modified blasting techniques. We believe it was the beginning transition to these improved techniques as a result of our new mine manager and others on our team that contributed to the third quarter increase in production.

We have confidence in our new team's ability to lower dilution long-term, which should result in higher grades processed through the mill if successful. Though we have some work to do to bring the entire mine up to these elevated standards, the progress is visible not only in seeing the positive differences in the underground mine but seeing the positive results in head grade delivered to the mill in the example I just gave. It is our task to implement the best mining techniques so we process less rock, waste rock, and higher grades on a more consistent basis. The challenge of dilution speaks to the overall potential of this deposit. We are profitable, paying our dividend thus far while sustaining what we recently confirmed to be heavy dilution. We look forward to the potential results of increased head grades after we optimize the mining of our high-grade La Arista deposit with our new team and techniques.

Our ongoing mine development is allowing for and warrants additional equipment. We are in the process of acquiring an additional Caterpillar 6-yard scoop, a Sandvik Jumbo and expect to obtain 3 Caterpillar 730 articulated 30-ton underground mine haulage trucks. Caterpillar brought several models of articulated haulage trucks to test in the mine, and we have chosen the 30-ton model. One of the trucks is currently on site and you can see a picture of the truck on the company's presentation in the website. We are finishing the design and plan to soon begin construction of the concrete and steel hydraulic copper that will act as a transfer point for ore from the 30-ton underground mine trucks to the smaller 10-ton trucks owned by the locals for ore transport from the mine to the mill. The transition of the 30-ton articulated trucks will happen when the hopper construction is complete and all the trucks are on site. The current 10-ton trucks are adequate for our ore and waste hauling needs until the transition is made. At this point, there is not a critical deadline for the transition to take place. So when all the pieces for the transition are in place, we will make the switch. The double handling of the ore at surface, frowned upon in the industry, underscores our commitment to hiring locally and supporting the economy as part of our corporate citizenship.

Our primary construction focus is on the Arista mine. The secondary construction at the El Aguila project includes the planning of a large new maintenance shop near the Arista mine. The location for the new shop has been bulldozed and leveled. We also just signed the contract with the engineering firm Ausenco Vector for the detailed engineering design of the El Aguila phase 3 tailings storage facility. Our current tailings facility was constructed in 2 phases, totaling an approximate 7 years storage capacity. Though we are not pressured to begin phase 3 construction, we want to make sure we allow for enough time for design, permit and construction so we are not pressured in the future. This third phase is currently estimated to add another approximate 7 years to our tailings impoundment facility depending on the yearly tonnage through the mill. Other construction included the completion of 2 additional apartment houses at our Tres Palmas mine camp. And construction is being planned on our newest and very large addition to our mine camp, a large apartment complex has been designed and will house 36 to 68 people depending on single or double occupancy, providing additional quality living quarters for our employees as we grow. We are working on a budget, and construction of the apartment is estimated to begin in the first half of next year. We are also continuing on our ongoing improvements at the mill. Our new mill manager has been improving the base metal recoveries recently, and we expect to optimize both recoveries and tonnage through the mill with the improvements planned over the next year. We have been and expect to address our construction needs with cash generated by operations.

Turning to exploration, the bulk of our recent drilling focus is on the Arista deposit. This will be the case going forward as our mine plan is our first priority for the development of the mine. Many infilled holes within the company's internal materialized envelope have been drilled for mine development and exploration purposes. Let me turn it back over to Bill to talk a little more about the exploration.

William W. Reid

Okay. Thanks, Jason. The Arista deposit is to impress us. As a geologist, I was amazed on our last trip to the site when we were underground on level 13. The amount of base metals and also ruby, silver in places on that level was impressive and sure underscores for me that this is a very powerful mineralized system. It remains open, both in strike and dip. As you can see on our website's PowerPoint presentation of the Arista vein system, it has more than just the 2 Arista and Baja veins but many off-shooting veins, or splays as we will call them.

Let me give you just one realized example of an additional vein or splay that we are mining. On level 11, we used our termite drill -- now that's just the name of the small drill that is easily moved and can drill about 50 to 100 meters out in the wall rock. So we used our termite drill to check for splay or parallel vein to the Arista vein for which we had an indication. The termite drill is one -- in one of its holes intersected this splay about 30 meters into the wall rock. At 2.4 meters with 14.5 grams of gold, that's almost 1/2 ounce gold and 1,752 grams of silver, 1.6% copper, 5.9% lead and 10% zinc was a very exciting grade. With this intersection, we drilled a crosscut over and have been successfully mining this additional high-grade zone by cut-and-fill methods. Another splay we call number 5 has an intersection around level 6 of 3.5 meters of 4.75 grams of gold and 1.2 kilos of silver per tonne. There are many others, and we are looking at mining each of these as soon as we can. As Jason said, our main focus at the Arista mine is and has to be, for now, drilling to develop the mine properly. And it is also giving us additional ore from the many splays and offshoots that can add to our mining now. This drilling is also improving our understanding of the deposit, and all these will help us when we begin to make a concerted effort to expand the deposit outside of what is now.

Let me turn for a minute to Las Margaritas. After completion of the primary access road to the Las Margaritas, we cut drill roads and the first 2 drill pads for the drill to begin to test our initial targets. A core drill rig was mobilized to the site, and we are currently drilling at Las Margaritas. During drill target generation and analysis, our -- generated multiple drill targets and structures we are now testing. Our exploration teams have never found any evidence on the property that there has been any drilling in the past. Las Margaritas was mined pre-Mexican Revolution time frame [indiscernible] miners, as mentioned in the Mexican government publication called The Mines of Mexico, where some of the highest gold and silver grades at the time were being mined. We are excited to be the first to drill this historic high-grade area. It is our expectation to someday discover a deposit here and then to mine ore and truck it to the mill at the El Aguila project. We have the same goal of trucking ore from the El Rey property to the mill in the future as well. We have been very proactive with communities at El Rey. We have opened up a community office to educate and answer questions about the mining industry. We opened a medical clinic to assist in local health and plan to assist in the cultivation of greenhouses as part of being a positive part of the community and to demonstrate the benefits of having a mining company working in the area at El Rey. We feel we are making good progress in obtaining additional approvals from local community agencies to resume exploration efforts, but we, at present, cannot give a time frame.

One final comment on another topic. As we continue to receive many inquiries concerning all of the press releases issued lately that are related to lawsuits, generally, we will not be commenting on any pending litigation. However, I will say that a lawsuit has been filed against us in the federal court in Denver, and we are waiting to see if it is certified by the court as a class action suit. We believe the claims are without merit and intend to vigorously defend against it. As you know, in this great country we live in, anybody can sue anybody over anything anytime. However, just filing a lawsuit does not make the charges true. It is a fact that for class action lawsuits, a certain percentage are dismissed, a certain percentage are settled and a smaller number go to trial. The tragic thing is that the mere filing of these lawsuits has panicked many shareholders, I believe. All these various lawsuits, which appear to be piling on, are by law firms that make a living doing this and want to be part of it. But most likely, all these suits will be combined into one class action lawsuit, and we will then deal with it at that time.

So let me wrap up. Even though the stock price is down considerably, that does not change the project potential as we have always believed it to be. All signs still validate our high-grade deposit from which all value will flow. Even though it takes time to develop an underground mine and to efficiently mine it in spite of our less-than-optimal dilution up to this point, we have remained profitable every quarter this year and comfortably pay our dividend. With our new management team, we are stronger than ever and poised to continue to address challenges in front of us and expect to stabilize and grow our production and operations. We appreciate the support of our fellow shareholders as we steadfastly build the company. So Jason, I'll turn it back over to you with the questions now.

Question-and-Answer Session

Jason D. Reid

Yes, let's start the question-and-answer period. We have a tremendous number of questions. We're going to get to as many as we can. Olf Oliason, [ph] an individual investor's question: "We desire an increase in production and for some time now, Arista has been a bit of a disappointment. What will it take, do you think, to get back to the same production levels as in Q1, and do you expect El Rey to contribute with cash flow during 2013, or is it a lost cause?"

Hi Olf, thanks for your question. We want to get back to the 30,000 ounce per quarter level as well that we achieved during the first quarter and then grow production from there. But we lost some time in the mine development while dealing with water and CO2 after cutting the veins on deeper levels. We have dealt with and expect to continue to deal with those challenges. I don't believe that Arista deposit is a disappointment at all. I believe the issues we have had are typical underground mining issues as opposed to deposit issues regarding grade. As we said, the mining of the Arista high-grade veins have been hampered by excess dilution of past mining techniques. It has been our focus to put the right team in place to adequately mine the deposit. We believe we have assembled an excellent team of industry professionals to do so. Q3 production was a significant turnaround from Q2 production and moving in the right direction. As for El Rey, I don't believe El Rey is a lost cause either. The mining business is all about solving problems and overcoming challenges. As Bill says and as I state as well, it is a long lead time industry, where instant gratification is rare. We ramped up our community efforts at El Rey, as we mentioned, with a medical clinic, community relations office and are looking for ways to add value to their community and demonstrate to the local populations, as we did in San Jose de Gracia near our Arista mine, the benefits associated with a mining company supporting local economies. I don't expect El Rey to contribute cash flow in 2013, but we are working hard, and I'm optimistic we are making progress at El Rey.

The second question is from Mike Dudas of Sterne Agee. The question is how long before your brand-new operating management team hits their stride and produces the results you and other executives expect. Bill, I'll turn this over to you.

William W. Reid

Okay. Well, as we mentioned in our opening statement, Jason and I have been to the site the most recent time, and we saw significant improvements underground. And the ventilation is so much better now. The water has more control. And so our teams are really making significant progress. At the mill, I've been real impressed with our new mill superintendent. He has changed some additional reagent points and reagents, and he is moving the base metal recoveries from the 70%, 75% range up to the 80%, 85% range. And we've actually seen some days with zinc at 90% recovery, which is impressive. We're very pleased with our safety superintendent. So it does take a little time, but we see definite improvements, and I think it speaks to what we've seen that these people are making a big difference.

Jason D. Reid

Okay. Pat Bryson [ph] asks that we comment on share price collapse, aftermarket wild share price swings, short trading effect on price, class action lawsuit. Thanks.

I believe our stock is very oversold at this point. Having said that, if we're to achieve around a 90,000 ounce level by year end, and there's no guarantee of that, that would be about a 30% increase in production over last year. We pay a $0.06 -- we pay a dividend of $0.06 per share per month. We are the only company I'm aware of with a physical dividend conversion option. We buy back our stock. We hold a portion of our treasury in physical gold and silver. We have a profitable quarter every quarter this year. I mean, do these attributes justify the oversold condition of the stock right now? I don't believe so. I see this as an opportunity that I plan to take advantage of. As for wild share price swings in the market or the short effects on price, I don't know and can't comment on those issues. We made a few comments on the potential lawsuit. But as Bill mentioned, if it comes down to it, we plan to fight it if it comes.

Leo, I apologize. I can't pronounce your last name. Brodeau? [ph] Asks what's happening with GORO stock exchange price, how do you see the evolution of your company and place in the market. Bill?

William W. Reid

Okay. There's probably multiple reasons for the stock price going down, but one that I mentioned that I believe all these lawsuits are scaring a lot of people out in the market. But let me turn to a little bit more positive aspect of how our company is evolving in the place we think we fell in the marketplace. Essentially, the mining industry today is changing, and we welcome that change. And it is changing in response to the demands of the investor. The mining industry, in the last decade, was focused on growth, most often, growth simply for growth's sake. If you invested in a company and all you got was the anticipated -- anticipation of the growth curve, then that growth curve is very important. You can criticize for less production, and again, and if that is all you're getting, fair enough. Gold Resource's focus, however, is different. Our focus is on cash back to the owners. If we can pay to the owners $0.72 a share, which we are doing now, whether we produce 85,000 ounces, 95,000 ounces or 105,000 ounces, then the actual production number is less important. Our target is to build to $1 per share dividend, but this is not guaranteed nor is there a time frame associated with that at this time. But that's the target. That is what is important to us. Whether we do that, whether it takes 120,000 ounces or 130,000 ounces is somewhat secondary. Growth-only gold stocks could be out of favor. After all, without a cash return to the owners, new investment is just a derivative of the greater pool theory, and you need a broker or an analyst to tell you which companies are better than other companies. Gold equities are transitioning today from being seen primarily as growth stocks to having a much larger dividend component and income stock. If you are being paid a meaningful dividend when you can actually place a value, then you can actually place a value on that dividend yourself in much more transparent valuation. Today, investors in the market are demanding that mining companies have different allocation for cash flows. Simply growth for growth's sake, I don't believe, is any longer the most acceptable way to go. One must balance good projects with cash back to the owners in the form of meaningful dividends. Gold Resource Corporation engineered its business plan from day 1 that we believe aligns with today's investor demands. Gold Resource Corporation's philosophy to grow the company with the same principles that have gotten us to where we are today. That includes limiting shareholder dilution, focusing on high-margin, low-cost projects, returning a meaningful dividend to the owners of the company, remaining a low-cost producer and using the cash generated from the project to fund our company growth going forward. We believe the market will ultimately reward us for this business model.

Jason D. Reid

Okay. The next question is from Jeff Wright of Global Hunter Securities. I'm going to send this one to you, Brad. "As a percentage of sales, smelting and refining charges and penalties are elevated. Can you break down reasons behind this?"

Bradley J. Blacketor

Thanks, Jason. Yes, we produce and sell 3 concentrates: copper, lead and zinc. The treatment and refining charges vary depending on the tonnage and metal content of those concentrates. And of those 3 concentrates, our zinc concentrate has the highest treatment and refining charges. And since we sold our zinc concentrate in 2012, our treatment and refining charges as a percent of sales are slightly higher for the 9 months ended September 30, 2012 when compared to 2011.

Jason D. Reid

Okay. Thank you. The next -- his next question is "What do you estimate the approximate tonnage range and average gold and silver grades for Q4 2012 to be at the El Aguila? What efforts are being taken to lower the dilution in Q3, and how is this reflected in grades going to the mill in Q4?"

Jeff, we make a practice not to discuss current quarter tonnages and grades, et cetera, until the quarter is finished, so we really aren't going to comment on that. And as we mentioned in our -- with our new team, it's very much focused on lowering dilution by modifying our blasting charges at the stopes and other techniques that we mentioned. So now the dilution is the big focus going forward.

The next question is from Jerry Wolf. [ph] "I would like to know whether the production, water and concentrate buyer's problems are behind the company and now we will see true production and earning results." Bill?

William W. Reid

Okay. Thanks, Jerry, for your question. Let me just say, again, as we said, this is the mining business, and we will always have issues to solve as we constantly open up new areas underground that could and will, at times, hold surprises, some good and some not so good. At the moment, we feel we do have a handle on the current water situation, but to be clear, we will always have challenges with water being underground. This is part of the operation of an underground mine. The dispute with the concentrate buyer has been settled. And again, as we stated earlier in the call, we have had no recent issues with the buyers since we implemented the new delivery procedures. Production has been ramping up, as we witnessed in Q3, and we believe our miners can become more efficient by lowering dilution going forward. And we believe we will be in a position to gradually ramp daily tonnage up from the mine quarter-on-quarter. This is the reason we are purchasing the 30-ton trucks. They will be very important as we ramp up our tonnage. But let us be perfectly clear. This is the mining business, and it is full of challenges that at times, will be under control and at other times, they may not be under control for a period of time that could affect production and our results.

Jason D. Reid

Okay. Patrick Breitenbach [ph] asks how does the company plan to restore some credibility that it has lost over the past few months or years?

Patrick, we have built a new team that we believe is better suited to execute our business plan. Execution of that plan is the answer to your question. Now if you've been with us for 2 years, you have seen us execute on our plan to get into production. You've seen us execute on our plan to pay a monthly dividend. You've seen us execute on our plan to increase that dividend and to distribute approximately 1/3 of our mine gross profit back to shareholders as we did in 2011. You've seen us execute on the physical dividend conversion, execute on doubling our land position. I could go on. You get the point. We tripped in the second quarter dealing with real world issues that were not anticipated but are part and parcel of the mining business. We got back up and are moving forward with a focus on continued execution of the business plan.

The next question, what are your expectations -- this is from Ben Firth, [ph] Alameda Capital. "What are your expectations for the dividend in the next 12 months? The rumor on the street is the company is going to cut the dividend in half." Bill, you take this one.

William W. Reid

Okay. Ben, thanks for your question. Just to be clear, the dividend has never been guaranteed. Our regulatory filings and risk factors say as much. We have also been very clear on how we calculate the dividend amount over the course of the year. Our continued goal is to continue to pay approximately 1/3 of the company's cash flow from mine site operations, which is the gross mine profit and adding back noncash items. Year-to-date, we have returned approximately 36% of cash flow from mine site operations back to the shareholders, pretty close to our targeted 1/3 payout. Based on this model, if production -- or metal prices were to drop significantly, the dividend would be lowered accordingly. If the metal prices hold or increase, the dividend could need to be increased. But there are no guarantees about the dividend.

Jason D. Reid

Okay. The next question is Doug [indiscernible]. Several questions. I don't know if we can do all these, but with the recent hires, do you believe that the regular ongoing issues of underground mining will be properly addressed before they have a big impact on production, and who's going to be on-site day to day to make these decisions. Water, CO2, logistics, soil anomalies, all the time, these should not be surprises but planned for. Bill, do you want to take this one, or do you want me to take it?

William W. Reid

Okay. Well, we have, as we just explained, what we believe is a really topnotch team with Rick and our new Project Manager, Jesus. They're there all the time, basically, and making these decisions, and they are solving the problems. So we feel very good about that, and we've already seen a little bit of that taking place in the third quarter. Let me just say surprises do happen in nature, and the mining business is susceptible to that. Cross-cutting a new vein could open up more water than you ever expected. Faults or weaknesses in the rock that were not apparent could cause real problems and more dilution. The mining business is all about solving problems as they come at you. Some can be anticipated, but many cannot. The best thing is to have experienced, competent people, which we believe we have.

Jason D. Reid

Okay. The next question is Pat Mcdevitt. [ph] "Is your ore grade the quality initially represented, or have you discovered major degradations?" I don't know if it's -- the spelling or what have you, but I think I get his point. "Also, did you discover a crook in your operation?"

William W. Reid

Okay. Let me answer that first one first. We did not discover a crook in our operation. Of course, we always have to be vigilant with -- at the site, as well as when we ship out the concentrates and watch the delivery and sampling of those concentrates, but we have not discovered a crook in our operations. Okay. As I mentioned, we're still very excited by this ore deposit. It's extremely exciting when you see it in place underground like I did last time, with a massive base metals and the high-grade ruby/ silver. And so we've not -- and I gave you a few of the drill intercepts, and we've got a lot of very good drill intercepts. We don't announce those because they're just having to do with development, but I gave you a couple with [indiscernible] play -- I think it was 31, where we're actually mining that now. And it's being mined cut and fill and we can keep a pretty good head grade off that. So I think as Jason adequately mentioned that we have seen our mining technique in the past has resulted in more dilution. So if you take a higher grade section and you add 30% to 40% waste rock, then the grade is going to be 30% or 40% less. And then you have to run that through the mill, and your production is going to be less. So as we've already mentioned, we think that with our new team and our continuing work on reducing the dilution, that the grades will go up. And at this point, we haven't seen, really, any reason to think that they're different than what we have felt they have been from our original drilling.

Jason D. Reid

Yes, Pat, let me also just add to that nobody likes dilution, and we're working on fixing the dilution. The silver lining is that we can -- that's a problem that can be fixed as opposed to the alternate, which would be a deposit that you get underground and it's not the grade you think. And we don't have that, so no. I think we've addressed that question.

Okay. Josh Elving of Dougherty and Company has a bunch of questions. We're not going to be able to get to every one. "Has the hiring of Mr. Devlin changed your approach towards exploration? What is the highest priority target?" Bill, you want to make a few brief comments? We've got a lot of questions we're going to try to get through here.

William W. Reid

Yes, just briefly, the entire approach of what we have to do right now is to continue to support the mine planners and the mine developers with drilling out ahead so that they can adequately and appropriately mine this deposit. That's number one. And that's not going to change. Number two is to expand what we already know is there and either strike or depth along the Arista vein system. Now we're very excited to have Mr. Devlin come onboard. He's got a lot of underground experience, and we're pretty excited about the ideas he will be bringing on doing that. But the number one and number two have to be the continued drilling of the Arista vein system. So that won't change per se. However, as we get to the point where we're comfortable that we have enough drilled out and have some ideas for other ore shoots along that and actually intersect those ore shoots, then we will be looking at our long trend, which is like 45 kilometers of trend, where we think there'll be a lot more to be found. But right now, we're still sticking with La Arista.

Jason D. Reid

Okay. Let me move on to his next question. "How much stock did the company repurchase in Q3 and at what price? How much stock has the company repurchased since the end of the Q?"

William W. Reid

Well, I believe we purchased over 270,000 shares since the buyback began and continue to be active in the market in the fourth quarter. But I do not have the exact figures on the buybacks per quarter.

Jason D. Reid

Yes, we don't have that in front of us. Let me move on. We got a lot of questions, and we're running out of time. Peter Brophy, [ph] private investor. "Since the company withdrew the annual production forecast last quarter or at least stepped back from saying the year in which the long-term forecast of 200,000 gold equivalent production would be reached, the question is what will it take and when will you feel sufficiently comfortable to state expected future production numbers so we can model out the next couple of years."

William W. Reid

That's a really good question, Peter. And I think what we have to do is work with our new team here, particularly Jesus, who just more or less came online, and see what we can do by the end of this year and then, with them, plan for next year. I think we want to keep our target somewhat short for the moment until we can gain confidence in the predictions. We still believe that over time, we have the real possibility of achieving that target, but we're not going to, in our present position, be able to state when that might be.

Jason D. Reid

Okay. The next question is from Scott. "Would you consider suspending the dividend then using the savings to buy back shares?" Let me take this one. No, not at this time, but things could change. Shareholders, like myself, appreciate the dividends. So I and I think all -- I speak for all shareholders, hope that the current dividend stays in place. But if the U.S. government changes its tax policies and moves its taxes on dividends to a ridiculous amount, we would consider taking $3.5 million approximately a month that we currently distribute in the dividends, and we could reallocate that amount as buybacks every single month. But that is just speculation at this point. I want to be very clear.

Let's see. Next question. Jim Reams. GRC returned $26.5 million or approximately 30% of mine gross profit to shareholders as dividends in 2011. Prior to pending revisions, Q1, Q2, GRC paid approximately $16.6 million and $50.5 million of mine gross profit or 33% of dividends. Is GRC committed to returning approximately 1/3 of the mine gross profit to shareholders as dividends is the question.

Jim, we target to distribute approximately 1/3 of our cash flow, yes, from our mine set operations, which you will see defined in our 10-Q, which is basically, as Bill mentioned, our mine gross profit and adding back noncash items. We did about 1/3 in 2011, and though there's no guarantee, that's what we want to do in 2012.

And the second part is, "How long will the mill be closed for maintenance at the Christmas holiday in December? Will the mine be closed for any period of time in December?" Bill, you want to comment?

William W. Reid

Okay. In the past, we've closed for about 2 weeks in December, but in talking with Rick, he thinks we should just continue to run all year. So I mean, we think we will do that. Most mines in Mexico don't shut down for the holiday season. So we'll see what develops with our situation at this point in time. So I would say at this point, we haven't

[Audio Gap]

have been subject to hostile takeover by larger, I suppose, companies or corporations. This often included them shorting the stocks so a lowball buyout price could be obtained. My question, do you think this could be happening to Gold Resource?

I don't believe so or at least I don't know of any indication that that could be the case at this point.

So let me close this up because we're out -- we'll try to get to others' questions. We'll respond to your emails. Again, we appreciate your participating. But in closing, I want to thank you for joining the third quarter conference call. Again, the positive takeaways in the quarter should include overcoming challenges, increasing production, continued profitability, lowered total cash cost, returning $9.5 million in dividends to the owners of the company. We think we have a great company, and we appreciate you guys joining us as shareholders and listening to the call. Thank you, everybody. We'll take everybody else's questions. Thanks.

William W. Reid

Thank you.

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