Gold Resource Corp Management Discusses Q4 2012 Results - Earnings Call Transcript

Mar.19.13 | About: Gold Resource (GORO)

Gold Resource Corp (NYSEMKT:GORO)

Q4 2012 Earnings Call

March 19, 2013 10:00 am ET


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

Jason D. Reid - President and Director

Bradley J. Blacketor - Chief Financial Officer


Thank you for joining Gold Resource Corporation's Fourth Quarter and Year-End 2012 Conference Call. Mr. William Reid, CEO; and Mr. Jason Reid, President, will be hosting today's call. This call will have a total duration of 45 minutes. Opening remarks regarding 2012 performance will be followed by an update on 2013 operations. [Operator Instructions]. One other note, today's call is being recorded. And at this time, I'd like to turn the call over to Bill Reid. Please go ahead.

William W. Reid

Thank you. Well, thank you for joining us this morning for the 2012 year end conference call. We apologize for such an early start time, but Jason Reid and Greg Patterson are in Hong Kong presenting at a Gold conference, and this is the time that allowed Jason to participate from halfway around the world. We also have our CFO, Brad Blacketor, on the call.

Before we get started, let me remind everybody that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued yesterday, along with the comments on this call, are made only as of today, March 19, 2013, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks in our Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission.

For the year ended December 31, 2012, our mill production was a record 90,432 gold equivalent ounces, a respectable increase of 37% over 2011. We sold 72,399 ounces gold equivalent at a total cash cost of $419 per gold equivalent ounce and generated revenues. And remember, our revenues are net of smaller charges of $131.8 million and had mine gross profit of $87.7 million.

We sold our gold for the year at an average price of $1676 per ounce gold equivalent. This is a cash margin of gold price relative to our cash cost of approximately 75%. We ended the period with approximately $36 million in cash.

We were profitable for the year with a net income of $36.5 million or $0.64 earnings per share even though, we must expense all of our construction and development cost as an expiration stage mining company for accounting purposes. Unlike most mining companies who can capitalize their construction and development cost. Because we cannot capitalize our construction and development cost, we will show lesser profits and greater losses than similar-producing companies.

We continued our monthly dividend in 2012, distributing approximately $36 million cashback to the owners of the company, its shareholders, or $0.69 per share. This means that we have now returned approximately $75 million to shareholders as we declared commercial production in July of 2010, a fact we are very proud of.

The $36 million distributed in 2012 back to the shareholders represents 39% of our cash flow from mine site operations for last year, which is a little higher than our stated 33% target. We will be evaluating the results of our cash flow distribution into '13 to see if we can more closely achieve our targeted 33%. In addition, our capital improvements and development needs must be met from our cash flow as well. So this year, as years prior, needs to be balanced in its approach to all the competing demands on our cash.

Having paid consecutive monthly dividend since commencing commercial production, an accomplishment achieved by few, if any, other mining companies, demonstrates this management's commitment to returning as much cash back to the shareholders as we can at any point in time.

Our dividend distribution is very important to our philosophy. We have stated our long-term target goal of $1 per share yearly dividend distributed some time in the future has been stated, and we believe very strongly in that. It is our purpose with the current capital improvements budget and our development schedule that these improvements will potentially allow us, of course, depending on metal prices, to achieve this goal earlier than without these accelerated mill and mine improvements, which are targeted to be completed this year. We believe the mill improvements, including an additional ball mill, float cells and thickener surge tanks, will provide a great return on investment with the ability to process up to 1,500 tonnes per day when the improvements are completed.

Our goal, and an important part of Gold Resource's strategy, is to have each mining unit we undertake and with our Oaxaca Mining Unit being our first, to have the ability to achieve $1 per share annual dividend distributions. So hypothetically, hypothetically, if we achieve that target and have 2 mining units someday, we would expect to target paying $2 per share annual dividend distributions and so on. We are currently looking for our second mining unit.

I am unaware of any other mining company that has such a model. We are unique in this regard and an important reason to make Gold Resource Corporation a part of your investment portfolio as we know and believe, first and foremost, the purpose of a public company is to create value for its owners and shareholders. And to us, that includes a meaningful return of cash in the form of dividends or even share buybacks. I must state that while this is our philosophy by which we run the company, nothing is guaranteed.

In 2012, we launched our gold and silver dividend program for shareholders who choose to participate. This was a long-standing goal of ours and now our shareholders can convert their cash dividends into gold and silver and take delivery of their precious metals. I believe we are the only company providing shareholders this option.

I want to take a minute and comment on our press release today, where we have now engaged 1 of the big 4 auditing firms, KPMG, to perform our 2013 audit. We look forward to working with them. This is an important transition on our journey from a mining junior to an intermediate producer.

We also want to thank StarkSchenkein, our auditor since the beginning of the company, for all their help in getting us to where we are today. I will now turn to Jason to discuss operations and exploration.

Jason D. Reid

Thank you, Bill. Good morning, everyone. Our Oaxaca Mining Unit's Arista mine completed its first full year of underground mining in 2012, but not without its share of challenges at the mine. Any new mine takes time to iron out issues as they materialize, and it takes time to address the idiosyncrasies particular to that specific mine. Several years of development work are often needed to achieve and stabilize the desired production levels.

For the first 9 months of 2012, the Arista underground mine averaged approximately 733 tonnes per day of ore shipped from the mine to the mill, below our targeted amount as we dealt with greater-than-expected water flows and unexpected and substantial CO2 gas inflow from this water that required increased ventilation for safe operations.

In the fourth quarter of 2012, we achieved record mine production of 828 tonnes per day. Also late in the fourth quarter, we acquired additional new mine equipment, which we believe will increase mine production and efficiency in 2013.

In addition, as we have stated before, we sustained excessive dilution in 2012, as we needed to become familiar with the specifics of mining these epithermal veins. These challenges and others were and continued to be systematically addressed through our new on-site management team's involvement.

Challenges in this industry are not dealt with overnight, and it takes time to retool to move operations in a smarter direction. Let me take a moment to give credit where credit is due for the improvements in the back half of 2012.

Mr. Rick Irvine, our Chief Operating Officer; and Mr. Jesus Rivera, our General Manager, in concert with our new mine superintendent, our new mill superintendent, our new maintenance superintendent, our new safety superintendent, including several other new team members as well, all joined our company in 2012. They have now overhauled and are optimizing our development with a new mine plan, and we continue to modify the budget to position the company for smarter growth. I believe it speaks volumes for the company and its potential when we are able to pull industry talent away from our competitors, which we have with this new management team. It took over a year for us to build this new team, and I want to thank them for their good work. I am proud and excited as they represent the company's future. We still have work to do as we believe our cash costs are presently too high, in part, a result of dealing with the challenges in 2012. But our first goal is to get our production up. And as we do, the cost per ounce should come down. Having said all that, we are still among the low-cost producers.

In addition, our new team acknowledges that expenditures can be reduced. For example, our previous management utilized too many expensive contractors, subcontractors and we are now bringing many of those functions in-house for better cost control. So we are very pleased to report our new on-site management team is in place, has taken these challenges head on and are turning around the issues from 2012. That does not mean that our underground mine will never have issues again, as it will. All mines and mining projects have their issues. But now we have the experienced team to anticipate and better handle future issues.

Having just toured the underground mine with Bill in February, we were impressed with the improvements we witnessed. Our team showed us 2 mining methods we are now perfecting on our veins, long-haul stoping and cut and fill with the associated extensive mine training, which is resulting in less dilution and the ability to possibly mine down to a minimum 1 meter wide vein. Ongoing mine optimization efforts are replacing the smaller locally-owned 10-ton on-the-road trucks with new larger Caterpillar 30-ton company mine trucks and corresponding company drivers that will transport both ore and waste out of the mine far more efficiently. These new trucks are also better geared to handle steeper decline grades, which should allow future mine development to use a steeper ramp system. This new ramp design should allow us to drive deeper in the deposit more efficiently and quicker, as well as allow better access to the veins at any given point in time. The current plan is to have approximately 1,300 to 1,500 tonnes of ore per day coming out of the mine by the end of the year. But of course, that is our target. It is not a guarantee.

Our new team revamped the mine plan, but we are still feeling the remnant effects from the old plan, which has us mining in areas of mineralization, which are not on some of the higher-grade trends and mining from half levels, where the development cost per tonne can be much higher and far more time-consuming.

We are also transitioning to the new mine team -- new team's mine plan to get our development moving to the South and Southeast to where we believe the much higher-grade areas are. This will take time and obviously, a lot of effort, but we intend to develop and mine better ore shoots in the future. We are targeting to reach these areas sometime mid-year. But again, this is our target. It is not a guarantee.

Looking back on 2012, we overcame many challenges that are common in the mining business while still achieving a 37% increase in production over 2011. Our new on-site management team delivered the needed turnaround that the Arista mine and the El Aguila Project needed, and we now look forward to our future.

Turning to our El Aguila flotation mill, we continue with its upgrades toward a nominal capacity of approximately 1,500 tonnes per day, as we believe the return on capital invested is quite attractive. We are targeting these upgrades to be complete by the end of 2013.

The concrete foundation for the additional ball mill, it's a new ball mill previously acquired, has been poured and the new flotation cells have been ordered. When you consider that for 2012, we averaged daily throughput of 773 ounce -- or tonnes per day only, and yet we produced 90,000 ounces of precious metal gold equivalent and paid $0.69 dividend for the year, there is potential, but not a guarantee of a significant increase in production coming in the future at the 1,500-tonne per day levels.

Our new Vice President of Exploration, Mr. Barry Devlin, recently joined our company from Endeavour Silver. He is now up to speed on our exploration potential, and he is bringing to bear his experience and knowledge of epithermal systems and Mexican deposits. Barry has been tasked, first and foremost, with expanding the Arista deposit, and we are focusing our drilling on expanding that vein system, and it is responding as you have seen recently in press releases.

Our exploration budget this year is approximately $10 million. We have discovered many additional veins or splays that are increasing significantly our ideas and the deposit's potential. We are drilling and finding ounces outside the July 2012 estimated third-party resource that was performed by Pincock Allen & Holt to Canadian NI 43-101 standards. A total of 4 surface and 2 underground exploration drills are active on the property. 5 of those rigs are drilling at the El Aguila Project and 1 surface drill rig is currently drilling at Las Margaritas.

Last week, we announced exciting step-out drill results 200 meters south of the Baja vein of the Arista deposit. This new mineralized zone included 2.9 meters down hole of 9.23 grams per tonne gold and 1,039 grams per tonne silver, currently referred to as splay #5. This is an expansion of the Arista vein system. In that press release, we also included a diagram of the location of splay 5, as well as several other new mineralized splays and vein extensions. This expansion of mineralization is exciting as it is confirming our belief that we are only beginning to tap this high-grade system.

One of the more perspective and extensive stepouts from the Arista deposit that we are currently focusing on is approximately 250 meters to the Northwest. This mineralization is located along the main structural corridor, the San Jose corridor between the Arista vein system to the Southeast and the El Aguila open pit mine, 2 kilometers to the northwest. High-grade mineralization in this area was previously drilled and announced back in June of 2010, included 0.73 meters of 9.9 grams gold and 598 grams silver. We have now finally gotten back to that area, where we are recently drilling a deeper hole that intercepted approximately 250 meters vertically deeper and hit 13 meters down hole, which a true width of 6.5 meters of what appears to be excellent mineralization and great-looking core. We are awaiting assay results. But importantly, this follows our knowledge and expectations that at the right depth, a lot of these smaller veins discovered higher up in the system open up into larger veins at depth. In addition, we will soon be drilling a target from the underground, we call the switch back. The switch back could be a parallel system to the Arista vein system about 300 meters to the Northeast and therefore, if it hits, could significantly increase our ounces, areas from which to mine and mine life.

We are also working on a target in the area below our known Arista mineralization that is potentially -- that has the potential to be a high-grade copper gold skarn. There are several differences between a skarn deposit and a vein deposit, but a significant one is the skarn can be more of a larger body in 3 dimensions with potentially greater tonnage than a vein system.

Our deepest drill hole in the area, but not directly under our known Arista mineralization, has definite skarn alteration and mineralogy. The area we will be drilling below our known mineralization once we vector in on the best locations is also associated with a magnetic high, which can be characteristic of a skarn potential or deposit. The possible closest hole in this target had 1.2-meter intercept of 4.5% copper and 83 grams per tonne gold, along with 2,340 gram per tonne silver, as well as 16% combined copper -- or excuse me, lead and zinc, but this was in a wider 51-meter intercept of lesser-grade values. This was a previously drilled and announced hole that is being revisited, remodeled and portends well for this very exciting target. So the Arista vein system continues to impress us in all those see it for -- see it firsthand. We are continuing to expand it beyond its initial area.

Turning to Las Margaritas, initial surface samples by the company identified mineralization containing up to 4,150 grams per tonne silver and 6.29 grams per tonne gold. In 2012, the company completed 15 surface diamond drill holes, totaling 5,002 meters into Las Margaritas. High-grade mineralization was encountered with drill intercepts, including 27.9 grams per tonne gold and 2,600 grams per tonne silver over a core length of 2.85 meters. In 2013, drilling will continue at Las Margaritas to test various structural and mineralized exploration targets. Las Margaritas has only seen historic small-scale artisanal mining, with silver grades reported as high as 18,000 ounces per tonne. We believe we are the first to ever drill this property, and we are excited to continue this exploration program.

We continue to be proactive on the social and communal front at El Rey with optimism that we may return to continue our drill program in shaft refurbishment soon. We opened up a small office, are helping community projects and demonstrating we can be a positive addition to the community.

The company discovered a high-grade gold vein system at El Rey in '08, averaging approximately 1 ounce per tonne, and hopes to be in the position to continue exploring this exciting property soon.

Last week, we announced the acquisition of an additional land along our North 70 West mineralized structural corridor. We purchased 2 properties from Almaden Minerals, a Canadian exploration company focused in the Americas. The addition of the El Fuego property adds a new property to our portfolio and the Cerro Colorado property fills a gap within our El Chamizo concession along the structural corridor. We chose to drop Solaga, a property much farther to the North and focus all our efforts along the exciting mineralized trend.

Our total property position in our Oaxaca Mining Unit is now over 220 square miles among 6 gold and silver properties, with over 48 kilometers directly along the structural corridor. With these recent acquisitions, our dominant land position along trend grows.

As time goes on, we see more and more of the potential of our 48 kilometers of a structural corridor. We, in fact, are completing as we speak an airborne geophysical survey along this corridor. The geological concepts, information and ideas that our geologic team are putting together are truly exciting.

We continue to utilize SRK Consulting for structural geology assistance as we have used experts in the past to help us with our model. These experts include Dr. Jeff Hedenquist, one of the foremost epithermal deposit geologists in the world; and Dr. Larry Meinert, considered one of the world's top skarn geologists. I'll now turn it back over to Bill.

William W. Reid

Thank you, Jason. We see 2013 as an important year of improvements, both at the mill and at the mine. Our target is to have the project in the position to nominally produce 1,500 tonnes per day in 2014. But to get there, 2013 is a building year. So we have set 80,000 to 100,000 gold equivalent ounces for our 2013 production target.

Development underground should position us for increasing head grades towards the end of the year and into 2014, and we are excited about the continuing discovery of a much more robust Arista vein system and the geologic potential of our 48-kilometer mineralized structural corridor that makes up our Oaxaca Mining Unit.

Let me take a minute to welcome our new Director, Dr. Gary Huber. Gary has extensive experience in the mining business. He was also the co-founder of Canyon Resources that operated successfully for many years. Gary is already contributing extensively on many fronts, so we welcome Gary to Gold Resource Corporation.

Let me wrap up by saying the mining industry of today is changing. We welcome that change, and it is changing in response to the demands of the investor. The mining industry of the last 2 decades focused on growth for simply growth's sake, and that is not acceptable today. The industry's legacy of maximizing resource ounces in the ground, which comes by way of continually lowering the cut-off grade, thereby lowering the average grade resulting in thin margin to be made up by larger projects that require inordinate amounts of capital employed inefficiently. The result, projects that don't generate much, if any, free cash flow to be shared with the owners of the company. Hence, a sector that is underperforming to the gold price.

You can read today where some fund managers, some analysts and even our industry leaders are calling for companies to, and I quote "seek out smaller high-margin projects with stronger cash flows." Well, that was our strategy from the beginning of the company in 2006. Or, "free cash flow is more highly valued than growth." Well, we certainly put a premium on the cash flow as opposed to growth. So that's part of our philosophy also. Or miners should be paying more of their free cash flows back as dividends. Once again, I don't think you'll find a company that is following a philosophy like ours that is our desire to pay as much back to the shareholders as we can -- as often as we can.

So the message is clear. The industry must chart a new path forward. While most mining companies are searching to adopt more relevant strategies, Gold Resource is ahead of the curve. We see investor demand and the industry moving toward our business model. That is, expect a high return on invested capital, and a more appropriate and disciplined allocation of cash flows that distributes meaningful cash back to the owners and shareholders.

Finally, these are challenging times for precious metal equities, and Gold Resource Corporation has not been immune to these challenges. The GDXJ index, which tracks approximately 80 junior gold miners, has lost more than 25% of its value just since the beginning of the year. If you look at the index performance over the past 12 months, you will find that it has lost more than 40% of its value. Remarkably, physical gold over the same 12 months period has dropped just over 7%.

We do not know where future markets will move, but it is very positive for Gold Resource Corporation to be in production and generating cash flow. We are profitably producing gold and silver. And we are using this year to strengthen our El Aguila Project's production profile so we can reap the benefits from Gold's next move up. And through our dividend distributions, we are paying our shareholders a return to wait during these mining equity downtimes, and those same dividends should significantly enhance our shareholders overall return in the up times.

So thank you very much. We'll now move forward with the questions that were emailed in. Jason?

Question-and-Answer Session

Jason D. Reid

Yes. The first question, Bill, I'll turn this to you, from John Doody of Gold Stock Analyst. He writes, "You have not reported proven and probable reserves for -- in 2012 even though GORO seems to meet the 3 standards of SEC's industry guide 7. Those being one. You have proven the El Aguila ore body economic with $34 million in profits in 2012. And two, you have measured and indicated ounce totals from the 2012 Pincock Allen & Holt study. And three, you presumably have a mining plan under which underground activities are conducted." So his question is, how does GORO not meet the SEC's test and what remains to be done to establish proven and probable reserves?

William W. Reid

Okay, John, thank you for the question. Actually I agree, we do meet the test for the SEC reserves, and I don't think there is anything else that has to be done other than to move forward with putting together a report to submit to them. However, it's a question of timing. We're very excited and have been this year by what we have been finding around the Arista deposit vein system and an expansion. It just seems to us that we want to move forward a little bit more in time and increase the resource. And if we are going to go to the trouble of getting SEC proven and probable reserves at some point in the future to make it a little bit more worth the effort with a larger resource base.

Jason D. Reid

Okay. The second portion of his question or the second question, he said, "Now that GORO has the necessary 43-101 report establishing a mineralization total for the El Aguila, when will the company apply for a Canadian listing and make itself easier to buy for the resource-oriented Canadian investors?"

William W. Reid

Okay, we actually had a study done by an independent party that -- with a question posed to them, what is the best secondary listing for us? And it came back with 2 potentials. One is the Toronto Stock Exchange, but the other is the London Stock Exchange the mainboard. As time allows, we are evaluating both of these and looking to which might be best for us. I mean I've talked to a lot of Canadians, and most of their stocks are traded. Their volume of the main stocks are traded on the New York Stock Exchange, their volume. So consequently, I don't know how much we would pick up in Toronto, but we're looking at that. Secondarily, the London Stock Exchange offers a lot more European interest, which we've gotten a lot of feedback that our -- with our dividend and with our approach that we could fit quite nicely over there. But in either one of these cases, we have a basic problem and that is a secondary listing really isn't much good without the stock in that particular venue. And what that solved mostly by companies doing an offering in that venue to establish the liquidity or stock available, be it the Toronto or the London Stock Exchange, we're not, at this point in time, interested in doing an offering. We've been very disciplined on our stock outstanding to keep it at a minimum. So we are evaluating all of these different aspects, and I'm sure at some point, we will look at the benefits of the secondary listing.

Jason D. Reid

Then the third question, "If the upside potential is so big on the 48-kilometer San Jose corridor in Mexico, why are you diverting $2 million to explore in Turkey in 2013 per the 10-Q filing, where GORO has no expertise or experience that might give it an advantage?"

William W. Reid

Okay, I kind of disagree with your premise. First, had we used that same argument that we had no experience or expertise in Mexico, we would not be where we are today with a significant project in Mexico. We do bring an expertise on how to build mines according to our approach and strategy, and we have done it 7 times before and we have no doubt that we'll be able to do it again. Venues across the world are getting fewer where it is -- that welcome the mining industry. One that simply been doing the work that really is supportive of the government supporting new businesses and in particular, the mining business is Turkey. So we are, at this point, have a very simple program over there. Whether it ends up to be $2 million this year or not, that's, we'll have to wait and see. But what is important is to get to the right people in the country that you're working in. And we have aligned ourselves with a very-experienced and well-respected individual who has been credit with several Turkish discoveries. Most recently, he discovered the -- was very much involved with the discovery of the Çöpler mine of Alacer in Turkey. And after that, he basically retired. He wants to come out of retirement because he's eager to find another mine. His career is a very impressive one. He set up Cominco's exploration in Turkey for all their properties in the '90s, and he is familiar with many, many properties and a lot of individuals, as well as able to work in the country. So from our standpoint, we're taking it slow, but we'll see what develops. It's not good to have all your eggs in 1 basket as they say, and venue diversification would be a very positive aspect for this company. And then probably the most important thing of all is the compounding effect of a second mine. So if we get the Oaxaca Mining Unit up to, hypothetically, 150,000-plus ounces a year and paying $1 share dividend, and then we come online with another 150,000 ounce produce, are also paying $1 share dividend, that is where real value is created.

Jason D. Reid

Yes, John, this is Jason. I'm going to jump in here, too, and say that all the mining equities right now are on for sale. They're offering deep discounts in their share prices right now as mining equities are currently out of favor. Now just like investors out there seeing equities on sale and opportunities out there because of the current markets, we as a company are seeing property opportunities because of this. Now we would be remiss not to, at least, look at these opportunities during this time. And if and when gold and silver take off, which I personally believe they ultimately will, many of these current opportunities that we're seeing will either be A, far more expensive; or B, be taken by other companies. So we see it as an opportune time as well. Do you have anything else you want to add to that, Bill, before I move on?

William W. Reid

No, it's fine. I appreciate the questions, John, and give me a call if you want more further answers. So go ahead.

Jason D. Reid

Okay, the next question is from Harvey Bowen [ph], an individual shareholder. "What is the status of El Rey? In the past, we have heard El Rey has significant gold. Then we heard that you want to proceed slowly to win local support. That was over a year ago. When will you move forward with El Rey?" Harvey, good to hear from you. We did mention some of that El Rey in the presentation. But I can't give you an exact date when we'll be working back at El Rey. I can tell you we're working very hard there to show the town that we can be a positive partner in their community unlike other mining companies have shown them. Now we've opened up a local office like I mentioned, started to support the community with medical and dental services, have regular meetings with locals to discuss the positive impacts Gold Resource can have on the local economy. The local town there at El Rey sees the strong economic impact that Gold Resource has had on the local town of the San Jose De Gracia, which is near our El Aguila project. I believe that most of the community there would like to enjoy the same positive economic influence. And again, we want to move forward as partners. We don't want to take the stance of a legal standpoint. We have the right to be here, move, kind of thing. So again, we're going to take our time with it. I can't give you an exact time, but we are working hard, moving in that direction. The next question comes from Olf Elias [ph], an individual shareholder. "The company said in its latest release that it has 5 drills going at Arista, which is great. 2 of those are for deep drilling. The company has in the past talked a lot about drilling deep at Arista. So my question is, are those deep drills turning as we speak, or will we have to wait much longer before they do?" Bill, you want to take this one?

William W. Reid

Sure. Well, with that question, most of our drilling has been in the upper 500 meters because that's where our more pressing issues of mine plans and mine development is. But we are very excited about that, the potential with depth and particularly the skarn situations. So let me just elaborate on that. The deepest hole we've ever drilled in the Arista area goes down 1,000 meters, a little over 1,000 meters. Now, it intersected the vein much higher up but what we did was just keep that drill drilling to see what was down there. This was drilled in the eastern direction, and we were very pleased and elated that we actually did enter skarn mineralization. Wollastonite and -- wollastonite, which is a skarn mineral, garnets, et cetera. So what it told us is in fact, below our El Aguila system, our vein system is skarn geology, and that's right along with Larry Meinert, who said -- who's the world's leading geologist in skarn geology, said that our Arista veins are probably like fingers on your hand, and the palm of your hand is where the best stuff will be, which will be the skarn situation. So even though it was not drilled below where we have to now target, we are going to be targeting that. In addition, I just want to mention, Jason mentioned about the magnetic highs. This is very significant because our rocks don't have magnetite. Magnetite is really the only thing that gives rise to magnetic anomalies. But that magnetite is formed when you have an intrusive into limestone, which is basically the skarn type of geology. And so it's just one more indicator that if we drill below our Arista vein system, we may well intersect a high-grade copper gold skarn with probably other metals. Okay. So now that we've established that as -- exists as a geologic situation, we are now working with the geologist to pick our best drill hole shot to drill 1,000 meters deep and see what we intersect. So we're going to be working on that over the next -- well, several months as to with -- to trying to drill deeper. So at this point in time, the one drill hole that we drilled deep is very exciting from a geologic point of view, and we're going to be dedicating probably one of those drills pretty soon to drilling a couple of more deep holes. So that was a long winded explanation, but I think it's very exciting.

Jason D. Reid

Okay, I'm going to move on and give Brad a couple of questions that relate to taxes, Joshua Elving of Dougherty & Company. "Brad, what is the anticipated tax rate going forward?"

Bradley J. Blacketor

We estimate a 40% effective tax rate for 2013. That will consist of approximately an effective rate of 31% to 32% for Mexico and an additional 8% to 9% for U.S. and Colorado. So 40% in 2013. That's our estimate.

Jason D. Reid

Okay, and then the second question, "Was there any unusual tax item in Q4 that resulted in a fourth quarter tax benefit?"

Bradley J. Blacketor

Yes, there was. The facts and circumstances changed regarding a valuation allowance that we set up in a prior year on certain Mexican tax loss carryforwards. We are now able to utilize that tax benefit, and that resulted in a $4.6 million reduction to income tax expense in the fourth quarter of 2012. So on an annual basis, our effective tax rate for 2012 was 28%. And had we not recognized the $4.6 million reduction in the valuation allowance, our effective tax rate for 2012 would have been 38%.

Jason D. Reid

Okay. Thank you, Brad. I'll take the next one where is -- another question where -- "What is the story with Solaga? Why did we let the concession go? Did the company ever drilled there? Was the release of the property based on drill results? It would appear, based on some of the samples, it was indeed a target." We let Solaga go for several reasons. First, it was a property outside and further north of our 48-kilometer mineralized trend. Second, some of the previous -- some previous company that was in there before us left a bad taste in the mouths of the locals, which made it difficult to get any work done there for us. Third, when we were presented with the opportunity to pick up 2 properties along our mineralized structural corridor from Almaden Minerals, which we announced last week, we jumped at that chance to consolidate further our land position along the mineralized structural corridor. It made more sense for us to focus on that corridor, which is now over 220 square miles. That is what we are doing. Rather than just sit on Solaga, we let it go. Moving on -- oh I guess, you've got one more question. "Do you anticipate" -- Bill, I'll give this into you. "Do you anticipate being able to maintain a dividend at a run rate of $0.72 for 2013?"

William W. Reid

It's certainly is our goal to continue that at the $0.06 per month rate. As I said, we have to look at our budget for this year and the cash that flows in and balance that against the improvements that we're making, capital improvements right now. I would say hypothetically, if we need a little of that money to continue with the improvements, we might be looking at $0.01 or $0.02 reduction, but we don't know that at this point in time, and it's something we're going to look at very carefully. But I can guarantee you, our intent is to continue to pay as much back to the shareholders as we can at any point in time. But if we need that money to expand, then we may have to use that. There's no decision on that yet, and we just have to see how things go.

Jason D. Reid

Yes. I'll add, too, Bill, like that is the spot gold pricing as well of gold and silver. Okay, we are running out -- we're out of time here. So the remaining questions we'll circle around with you individually. We appreciate everybody's time on this call today. Thank you for accommodating me across the globe here, and we ask you to please follow us and join us for the next conference call. Thank you, everyone.

William W. Reid

Thank you.


And that does conclude our conference today. Thank you all for your participation.

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