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Gold Resource Corp (NYSEMKT:GORO)

Q2 2013 Earnings Call

August 09, 2013 11:00 am ET

Executives

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

Jason D. Reid - President and Director

Analysts

Joshua Elving

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Gerard Hallaren - Janco Partners, Inc., Research Division

Peter John Norton - Envestnet Portfolio Solutions, Inc.

Operator

Well, ladies and gentlemen, thank you for joining Gold Resource Corporation Second Quarter Earnings Conference Call. Mr. William Reid, CEO, and Mr. Jason Reid, President, will be hosting today's conference. Gold Resource's CEO, William Reid, will make a brief statement. Following Mr. Reid's opening remarks, there will be a live Q&A session. [Operator Instructions] As a reminder, today's conference is being recorded and will be posted to the company's website within 3 to 5 business days.

Please go ahead, Mr. Reid.

William W. Reid

Thank you. Good morning, everyone, and thank you for joining Gold Resource Corporation's second quarter conference call. Joining me today on the call is our President, Mr. Jason Reid.

Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K and other SEC filings, which could cause our actual results to differ materially from those expressed 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, August 9, 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 second quarter Form 10-Q just filed with the SEC for the quarter ended June 30, 2013.

Before the call, I would like to take a moment to acknowledge with much sadness the loss of a colleague 2 weeks ago. We are all working together to overcome this devastating blow to our team. Safety of our people is priority #1. Our thoughts and prayers go out to the family and friends of the deceased.

Having investigated the accident, we have determined our safety measures were in place, but 9 individuals working in the area, one of which was a rock competency specialist, did not identify the potential threat. It has been determined that a rare set of circumstances culminated, and a portion of the wall rock sliding into the workings, critically injuring 1 individual, who passed away after being transported to the hospital. No one else was injured in the accident.

The company will continue to focus on health and safety, including its use of third-party safety specialist to audit the company's ongoing safety measures, as we have done since 2011.

Turning to the second quarter. For the second quarter of 2013, our mill production was 20,574 precious metal gold equivalent ounces, increasing production totals to approximately 43,000 ounces gold equivalent for the first half, which is in line with our 2013 annual target of 80,000 to 100,000 precious metal gold equivalent ounces.

This target may change in the future depending on items, including mine development and mill expansion construction. We are attempting to minimize mill shutdown days during the construction process, but there is no assurance that it won't impact our production for the year.

We sold 19,992 ounces of gold equivalent at a total cash cost of $645 per gold equivalent ounce and generated revenues, and our revenues are net of smelter charges, of $26.6 million. We sold our gold for the quarter at an effective average price of $1,386 per gold equivalent ounce.

The company paid $6.4 million in dividends during the second quarter.

We showed a net loss for the quarter approximately $1.4 million or approximately $0.03 per share. Remember, as an expiration stage mining company, for accounting purposes, we must expense all of these construction and development costs, including our mill capital expense, which is the main reason for the loss. Because we cannot capitalize our construction and development cost, we show lesser profits for the period than similar producing companies who can capitalize their construction and development cost.

With a net loss for the quarter of $1.4 million, but with construction and development expenses of $5.6 million, had those expenses been capitalized for the period and adding back some depreciation expense, we would have shown a profit for the quarter. Our financials show lesser gains and greater losses due to the expiration stage category that the SEC rules placed us in.

With regards to our total cash cost of $645 per ounce, we understand those are unacceptably high. But in our move to get the mine up to the 1,500-tonne per day level, we have stepped up and increased our expenses, such as the use of electricity, et cetera, to build to the 1,500-tonne per day level. Yet we won't see the true effect of the benefit until we are able to run the mill at the 1,500-tonne per day rate. In other words, we are incurring higher operating costs now, but don't yet get the benefit of that future higher rate of production.

We expect to see the cost per ounce go down as the rate through the mill goes up. In addition, like all other companies, we are looking at places where we can actually reduce our overall cost.

Tonnes milled per day averaged 808 for the quarter, with the following average head grades and recoveries: gold was 3.83, with 90% recovery; silver was 349 grams per tonne at 92% recovery; copper was 0.3%, with 72% recovery; lead, 1.12%, with 70% recovery; and zinc, 2.61%, with 74% recovery.

I will now turn the call over to Jason for an update.

Jason D. Reid

Thank you, Bill. Good morning, everyone. Let's start with our mill expansion. We are targeting the mill to have a nominal 1,500 tonnes per day throughput capacity by the end of the year. The new feed conveyor was installed during the quarter and the second ball mill flotation circuit was recently placed on its foundation. The cyclone tower for this new ball mill is currently under construction.

Several mill modernization projects were completed during the quarter as well, which included the installation of flotation cell leveler and pH PLC controllers to aid in mill operation and metal recovery. Concrete work is finished, and we have installed the 3 new surge thickener tank, and we are preparing for the installation of the new flotation cells. Overall, the plant-to-mill expansion progressed well during the quarter and most all equipment is on-site or is scheduled to be on site by the end of the month.

Having recently been to the project, I'm impressed with the simultaneous production and construction activities at the mill. The mill is looking great.

Underground mine development at Arista continues to target increased production levels in anticipation of increased milling capacity later this year and early next year. The primary decline approaches Level 16. Material moved in the mine increased in the second quarter as compared to Q1. This increase was made possible, in part, by our 3 new Cat 430 haul trucks and 2 20-tonne low profile mine trucks. Horizontal mine development meters have increased with the previous quarter. Nonetheless, we have recently acquired the services of a new mining contractor to complement our mine development group.

In addition to production from the primary Arista and Baja veins, the development of several new production areas in the mine include the Candelaria larger veins, the Luz vein and Splay 5 vein. We are pleased with these new areas' initial grades in the vein continuity.

The mine has continued to improve in its efforts to increase both the number of working areas presently at 14 in production and the percentage of highly productive mechanized long haul mining methods. Both increases add confidence at this point in time to the mine ramping up to 1,500 tonnes per day, which is our target next year.

The Level 11 pumping station was commissioned in late Q2, and is now fully operational, handling mine water inflows in a more efficient and cost-effective manner. This is a major water pumping station, which took over 1 year of construction to complete. Its capacity to handle 1,500 gallons per minute is expected to drastically improve our water pumping needs.

The mine ventilation system, by way of an additional 8-foot diameter Robbins raise bore, was expanded to add additional airflow volumes the Level 15 in the Arista and the southeast zone close to the new Splay 5 vein.

The 4 new 1-megawatt Cat diesel gen sets have been installed and are in the process of being connected to the new 13.2 KB switchgear and mine and mill power grid. This new 4-megawatt diesel generation power plant is on schedule for completion in Q3. This second power plant should not only give us greater flexibility and additional safety, but should adequately cover our power needs at the mill and mine for the foreseeable future. We provide no guarantee as to the exact timing of these forward-looking statements.

I turn the call back over to Bill to review the exploration during the quarter.

William W. Reid

In 2013, we anticipate spending approximately $7.6 million for surface exploration at El Aguila. Approximately $3.4 million is also budgeted for underground exploration diamond drilling on the El Aguila Project.

Underground drilling is also looking for extensions to the Arista Baja veins and other parallel subsidiary veins that lie to the northwest and southeast of the mine.

At the end of the second quarter, surface exploration diamond drilling was being conducted with 3 rigs provided by Geodrill, 2 of these surface drills were working at the Arista El Aguila mine corridor. The third rig was exploring the promising new Selina Blanca prospect.

At the end of the second quarter, underground exploration diamond drilling was being conducted with 1 rig provided by Major Drilling of Mexico, plus underground development diamond drilling using 1 termite drill in and 1 Sandvik 130 drill owned by the company. We are evaluating reducing our exploration drilling as a cost-cutting measure, except in the Arista vein system at the El Aguila Project.

Our exploration activities during the second quarter of 2013 at El Aguila continue to focus on development of the Arista vein system. 38 diamond drill holes totaling 19,449 meters were completed during the second quarter of 2013. 62 diamond drill holes totaling 33,079 meters have been completed year-to-date, drilling principally targeted location -- locating extensions of Arista and Baja veins, which are currently in production and then discovering additional veins.

During the quarter, new mineralized discoveries included the Switchback area, approximately 500 meters to the northeast of the Arista deposit. A step-out hole cut 2.2 meters of 12.9 grams per tonne gold and 410 grams per tonne silver. This intercept was included in a strongly mineralized vein measuring over 15 meters wide.

The discovery of the Switchback mineralization is some of the best exploration news we have had, but that news was lost completely in the volatile market downturn. Implications of this new area could mean an expansion of the Arista vein system approximately 500 meters to the northeast. Initial high-grade drill intercepts in the 14- and 15-meter wide -- that's downhole, it's not true width -- veins add to the overall potential of the Arista deposit at the El Aguila Project and our 48-kilometer mineralized trend.

We also continue to explore Splay 5 vein located to the southwest of the Arista vein. During the second quarter, we intercepted 4.7 meters of 3.1 grams per tonne gold and 2,658 grams per tonne silver in vein Splay 5. Splay 5 has now drilled over 250 meters of vertical extent with mineralization open in both strike and at depth. Development drifting had just reached Splay 5 at the end of the second quarter, and mining this mineralization will commence during the third quarter of 2013.

Other activities at El Aguila during the second quarter of 2013 include surface structural mapping, alteration mapping, geochemical sampling and condemnation drilling for the Phase 3 proposed tailings dam, where mineralization was intercepted and is being evaluated. The results of these activities have generated various exploration targets that are marked for future drilling.

At Las Margaritas, 1 diamond drill hole was completed in the second quarter of 2013 totaling 414 meters and 5 diamond drill holes totaling 3,345 meters have been completed year-to-date. This hole was targeted to test below a historic mining area at Las Margaritas called La Tapada. Structural mapping, alteration mapping and geochemical sampling are ongoing at the property, focusing mainly in this historic mine area. Additional exploration drilling at Las Margaritas property will be planned for next year.

At Cerro Colorado and El Fuego properties, in early 2013, we acquired 2 gold and silver properties in our area from Almaden Minerals. The properties are subject to a 2% net smelter return royalty on any future production. The properties are along the same mineralized trend in a geologic structural corridor as our other properties in Mexico. The Cerro Colorado concessions were contiguous to and enlarged the area of our existing El Chamizo property. And while the El Fuego concessions remain a separate property, we will continue to explore both of those. Geologic mapping and surface sampling of these properties is planned for 2013.

At the El Rey property, during the second quarter, discussions with local communities around the El Rey property continued, with the company's goal to return to its exploration program in the future. I might just mention that in July, the local community had their election, and so we're optimistic now that we'll be able to work with the new people who were elected.

So now, I'll turn the conference call back over to Jason for a macro market update.

Jason D. Reid

As an industry, the precious metal mining space is and must adjust to the current gold and silver metal price reductions. The industry, as a whole, which is often poor on return on capital and return on investment, has seen exploding CapEx projects, marginal deposits being put into production, production of ounces for ounce's sake, lack of project returns and the overly weighted and touted Gold Institute's definition of total cash cost per ounce produced metric.

Gold Resource Corporation approaches the industry differently, having focused on a return on capital, focused on a return on investment and the distribution of a meaningful dividend. But just as a following tide lowers all boats, Gold Resource is among most all mining equities which became unbalanced, a space now disliked by investors during Q2. But what is important is that during this time of investor apathy, we are moving the company forward, expanding our production capabilities to take us to a new level of production and has paid a meaningful monthly dividend along the way.

Moving on to other company matters. We are pleased to recently announce the class action lawsuit filed against the company was dismissed with prejudice, a most favorable and expected ruling on the case. "With prejudice" means the plaintiff cannot allege the same claims against the company in a new suit. It is unfortunate we lost so many longtime GORO shareholders due to the law firm driven class action lawsuit, which caused the company a great deal of time, a great deal of money and a great deal of distraction.

To be proactive to our many potential conference call questions, we have had numerous shareholder inquiries regarding the recent GORO stock sale by our largest shareholder, Hochschild Mining. First of all, I do not speak for Hochschild in my comments or my following analysis. Hochschild has been a long-term shareholder and supporter of our projects since 2008.

As can be seen with their recent public announcements of pay cuts going as high as Chairman and CEO level, numerous employee layoffs, Hochschild board seat terminations without replacement and cost-cutting measures both announced and to be announced, Hochschild, as all mining companies in the industry are going through to various degrees, are tightening their belt after the precious metal price downturn. Liquidity issues, coupled with the fact Hochschild does not have "clear path of control" of Gold Resource Corporation, are the primary reasons I believe they are selling GORO.

I would encourage additional inquiries on potential future sale to be taken up directly with Hochschild, but as far as I am concerned, it is clear they need liquidity in this volatile market to focus on their own operations and their own issues.

In our strategic alliance agreement between the company and Hochschild, Hochschild's recent sale of 20% of their stockholding triggered the loss of their board seat representation. We accepted the resignation of Mr. Robert Muffly, and I would like to thank him on behalf of the entire GORO board for his contribution. I would also like to take the time to again thank, again on behalf of the entire board, his predecessor, Mr. Isac Burstein, for his years of positive contribution to our GORO board. We wish them both well in their future endeavors.

There are no immediate plans to replace the Hochschild board seat forfeiture. Our current board is not only qualified but meets all New York Stock Exchange requirements as well.

Last month marked a major milestone for the company's dividend, with the payment of the 36th consecutive monthly dividend. The company has now paid shareholders over $86 million or $1.64 per share over the past 3 years since production on July of 2010. We hope to continue the dividend and one day, again, raise it, but potential circumstances, including another major downturn in precious metal prices from here, could necessitate additional cost-saving measures. The board would consider lowering the dividend under those circumstances. Other cost-saving measures in another metal market downturn could include additional cuts to our exploration budget.

Now we are also opening back up our live Q&A during the call today. We previously turned toward an e-mail Q&A format to eliminate calls that aimed at distracting the conference with off-topic items or tangents, which wasted everyone's time. Due to the disruptive calls, we found the e-mail Q&A far more efficient at addressing many more questions during the call than live Q&A. And I appreciate all the e-mails and feedback I received that stated as much. However, today we will again try, and I emphasize, try, the live Q&A. Any questions I deem off-topic, misleading, hostile or antagonistic, I will not respond to, and we will simply move on to the next caller. I ask all callers to respect everyone's time here today while keeping your comments concise and your questions on topics of operations, exploration, production, pertinent business-related matters. If we waste time returning to the live Q&A today, we will revert back to the previous e-mail Q&A format for everyone's sake. We appreciate all your help, in advance, in making the best use of all our time.

Now before I open up the lines, I would like to reiterate that during these challenging times, the company's business model has not only stood the test of time, but was beneficial in reaching production at the earliest point in time for the company, generating cash flow sooner, and therefore, better equipped to deal with the volatile market that we are in now, becoming profitable in short order, having a quality return on capital and a fiscal discipline of a substantial monthly dividend.

Our business model has positioned Gold Resource better than most to weather the current market volatility. We do not have to change our business model like many other mining companies are currently doing in the industry as a flight to quality ounces, not quantity, is taking place to accommodate the current environment and shareholder demands. We believe it will be the same business model that will allow us to not only weather the storm but prosper after the storm passes.

So operator, please open up the lines to take our first caller. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]

Joshua Elving

This is Josh Elving from Dougherty. 2 questions. You -- Bill, did I hear you right that you were going to slow down on exploration away from Arista over the back half, did I hear that right?

William W. Reid

Yes, or let's put it another way, we're going to focus on the Arista vein system. As you've seen and we've been extremely pleased and impressed, we continue to find more high-grade veins in the system, and they certainly have a greater impact to us in the near-term, especially as we ramp up to 1,500 tonnes a day. So we are looking at reducing the exploration outside of the immediate mine corridor that represents the Arista vein system to save a little bit of money, as well as the fact that it doesn't hurt for our geologists to analyze over a period of time here all the work that we have done.

Joshua Elving

Okay. And then just, I guess, from a high-level perspective, the 1/3, 1/3, 1/3 policy that you've had, has anything changed there? Is that still an appropriate policy going forward?

William W. Reid

That certainly is our target, and we consider it an appropriate policy. As I mentioned, our costs are a little higher right now, but we understand why. We're looking at those being reduced with the increase in production, as well as some cost cutting. So right now, we certainly plan to continue with the 1/3, 1/3, 1/3.

Jason D. Reid

Josh, this is Jason, I want to add to that, that I don't want people to look at on a quarter-by-quarter basis that -- because we get the pushback all the time. "Oh, this quarter, you were under 1/3. Oh, this next quarter, you're over 1/3." For instance, we had 36% this last quarter. We look at it more on a yearly basis. That's what we want to average. And it won't be exactly 1/3 every quarter. So again, have a longer-term perspective, everybody listening to the call. So we have less pushback on quarter-by-quarter 1/3, 1/3, 1/3 basis.

William W. Reid

And let me just also mention, a lot of companies have cut back on their dividend and some of them eliminated their dividend. We certainly had to cut back. That dividend, we feel like, is very important in creating our discipline. Sure, it might be easy just to cut it out and we'd have more cash, but that's not our philosophy and that's not how we built this company. It's very important for us to continue that dividend. Now that doesn't mean circumstance might require us to us to reduce it. But I just wanted to point out, philosophically, that's a very important part of our company.

Joshua Elving

That's very helpful. I guess, just one last quick one, and that is, it looks like there's a new balance sheet item, I think, there's about $4.5 million for capital lease obligation. Could you help me understand what that is?

William W. Reid

Sure. We're balancing right now, and we think we're doing a good job of balancing our needs for capital with regards to the expansion of the mill and like the power plant and things that we're doing that will take us to a new level of production next year, which we're very excited about. We have to balance that capital with the continued exploration, with the continued dividend. And we paid cash for our -- like the brand-new trucks that we acquired from Caterpillar and a couple of other trucks and other equipment, and it just made sense from an operating or capital management point of view. We basically sold and leased back those from -- to Caterpillar, et cetera to -- just to give us a little bit of flexibility in our cash management situation. So it's equivalent, we owed at one time -- I mean, owned at one time and we have now released it so that we get this -- it's like $4.5 million, I think, that just helps us with our cash flow.

Operator

And we'll move to our next question.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Mike Dudas from Sterne Agee. First question, could you just characterize the grades from -- in -- across-the-board in the second quarter? How it relates relative to your plan into the roots of the resource of grade that you have out? And is there going to be much variation as we move through the second half of the year?

William W. Reid

Okay. We basically -- our team has been doing a good job of blending the ore that's going through the mill. So we do have some higher grade that we pull down. We have some lower grade that we're working with and we blend it to these grades. These grades tend to be what they were last quarter, pretty close. And we expect it to be this way for a while until we get farther south, which we're working on. Farther south, the grades are higher. So really, they're kind of like what we're planning for at this point in time.

Jason D. Reid

Yes, I also might interject, Mike, that we've been discovering a lot of new vein splays. And our mine team is doing a really good job of pulling that into the mine plan on a very short-term basis and -- which should add to our overall longevity of operations in general, but -- so in a sense, some of this is an audible call midstream by pulling these new veins and splays in. We've been happy with those grades. As Bill mentioned, we're taking those grades to the pad and we're doing a blending program to try to optimize that. But I see that as a very good thing that they are able to bring these new veins splays on. But generally speaking, yes, I mean, we're happy to have the grade that we have in this deposit.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

I understand that. I appreciate that. And my follow-up is, it sounds like, with so many equipment deliveries and old stuff you have on-site now, would it be fair to say that even if metal prices were to get impacted much greater to the downside in the next few months or whatever, that you're pretty much on track to get this mill up and running and built by January of 2014, does it seem to be the case?

William W. Reid

Yes. I would say, as I speak today -- things can always change, but as I speak today, our team and the construction people have been doing a good job, and I've not been told by anybody that we're behind in a sense that we are looking at being able to have our additional production, the capability, the mill up to 1,500 tonnes a day starting next year. So that's what we're shooting for, and I think this will -- we have a lot of fixed costs, we have other costs, and I think that when we get to the 1,500 tonnes per day, no longer will we have a capital of like putting the expansion to the mill, but we'll also have greater cash flow. So we think we're in a pretty solid position.

Jason D. Reid

Yes, and to add to that, having just been to the site not too long ago, very impressed to see all the construction that's going on side-by-side with the production and them being able to balance that and try to keep our down days to a minimum. And so, our team is doing a great job, and again, led by Rick Irvine and Jesus Rivera. So yes, we're excited. And at this point, to be clear, we are on track to hit next year with a fully-expanded mill.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Sounds very encouraging, guys. 1 final thought, so again, in the case of cost-saving and you're preparing for the downside and hoping for the best. Can you shape up on locking in your base metal revenue? Also, where do you stand on the agreements relative to your smelter contracts that opted for a renewal? Has that changed much? Is it something that you might think about as you get back up to this 1,500 tonnes a day that you'll have some more revenue to protect and maybe offset some of the volatility?

Jason D. Reid

Okay. Let me jump in here first. Generally speaking, Mike, I think in the future, we may consider hedging our base metals. I don't believe we'll ever do that with gold and silver, just to be clear. I don't think that will happen any time soon. Yes, it would have to wait until we can renegotiate with our current contractual obligations. But I'll let you weigh in on this, Bill, whether we would ever hedge base metals.

William W. Reid

Yes, certainly it's a concept or philosophy that we are aware of. At this point, I don't think we want to do that. It's something we may look at in the future, but we are going to be -- our smaller contracts go through the end of this year, and we've been continuing to work with different groups to look at next year. But at this point, we don't see us doing that hedging of our base metals, although it might be done in the future. That's all I can say.

Operator

Caller, please go ahead good with your question.

Gerard Hallaren - Janco Partners, Inc., Research Division

Gerard Hallaren from Janco Partners. I missed some of this on the call because I was interrupted by my boss while I was listening. Could you talk a little bit about the mix between gold and silver production, and how that is looking in the new properties going forward?

William W. Reid

Okay. The press release we came out with, it shows the 10-K, basically -- I mean for the 10-Q, rather. It give our grades. And our grades are -- I'm happy with 350 grams silver and 3.84 grams gold. Those numbers, once we get up to the 150 -- excuse me, 1,500-tonne per day level, will be very positive. That's the kind of a range that we're looking at right now, however, as I mentioned, as we go south, we have some ore shoots that are higher and at times, we'll get higher grades. But -- so 3.5 to 4 grams gold and 350, maybe up to 400 grams silver. Those are the numbers we're going to be dealing with for the foreseeable future here.

Jason D. Reid

As for other properties, I'll jump in here, some of the other properties have just gold, like El Rey, Las Margaritas and the early discovery that we just had recently there has high-grade gold and silver. So long-term, it will vary, Gerard, whether it's gold or silver depending on where and -- for instance, the Arista deposit we're mining, as well as what other property projects come online first. But we have excellent exposure to both gold and silver, and that's important to us. The ratio will always change.

William W. Reid

And that's a good point that Jason points out, and I will -- I wanted to just reiterate that. We have, at our mill, a whole different circuit, and that's the agitated leach circuit, which we have never run. That circuit is waiting for the deposits that we have that don't have base metals associated with them, and the key one, of course, is El Rey...

Jason D. Reid

And Las Margaritas, but both of those.

William W. Reid

And Las Margaritas. But once we are in a position to mine this higher-grade gold, and it's just gold, from El Rey and run it through that agitated leach plant, that will certainly change our mix on gold and silver as a company on a quarterly basis. So we're hoping to get there sooner rather than later, but our whole 48 kilometers, with our structural corridor and mineralized corridor, is just exciting as can be with its potentials for numerous deposits and some with base metals and some with just precious metals.

Gerard Hallaren - Janco Partners, Inc., Research Division

So basically, what you're saying is you've had a line sitting idle for quite a while, and you hope to employ that in the coming year, 18 months?

William W. Reid

Yes, as soon as we can, we're going to get that operational, and, like I said, we continue to work with the local people. And in Mexico, you've got to work with the local people, and that's what we're doing. So at some point, we're really looking forward to that agitated leach plant coming online because that will add to our numbers.

Operator

Caller, please go ahead.

Peter John Norton - Envestnet Portfolio Solutions, Inc.

Peter Norton. I just -- on the production end, I just want to make sure I understand how this all works. I understand from the questions that have just been responded to that your grade looking forward, at least for the short-term, should be fairly consistent with what you've experienced up until now and if anything, maybe a little bit better as you begin to move south. And on top of that, you're increasing your capacity at the mill by something like 76%, if my numbers are correct. So is it...

William W. Reid

Yes, that number you want to use, yes. Going from -- like last year, we averaged 775 tonnes per day. And we hope in 2014 to start, and no guarantee, but to start and maintain a 1,500-tonne per day rate.

Peter John Norton - Envestnet Portfolio Solutions, Inc.

Right. I was using 850 as my denominator. But anyway, so at least 75% to 80% more throughput. So is it purely arithmetic to assume that if those 2 variables are correct that the mill throughput is at least 75% more and the grade stays the same that your production ounces should be up by at least 75% to 80% next year, or is there some other variable I'm not considering?

William W. Reid

Well, I'm going to have to say that's speculative. Numerically, maybe it does work that way. But we will make our production outlook for 2014 when we get there, so I'm not going to agree that those would be the numbers. But conceptually, if you put more tonnes through a mill at the same grade, you're going to end up with more ounces. And I'm not trying to skirt the question, but I'm not going to go out on a limb either at this point. And we're going to 1,500 tonnes a day for a reason, and that is to produce more gold and silver. So that's the...

Peter John Norton - Envestnet Portfolio Solutions, Inc.

I understand, for sure. So if -- without using a number, if directionally, we're correct and the numbers do move up by at least 75%, just curious on, looking at Arista now and your expansion at Arista, what do you see at this point as the mine life of Arista with this higher level of production?

William W. Reid

Well, we've discovered many more veins, and I think it's at 9 now, Jason, something like that as opposed to the original 2. And these are all going to add, I can't sit here and say how much they're going to add, but let me just -- we're in a very exciting, geologically speaking, and ore deposit speaking, system here, okay? That is, as we've said, we're already discovering more and more veins and possibly, like the Switchback, a whole new parallel system. So let me just answer that with this, that, it's common for underground mines to only have 4 years of -- I'll just use the term, not that we have it, but just use the term proven and probable reserves. 4 years of proven and probable reserves, but they operate for 20 years. Now that's common in our business, okay? Because it's difficult to prove things out way ahead in an underground mine, but we are going to be updating, at some point, our model and our resources. And so, we may have more to say on that later, but at this point in time, everything is, in my opinion, is pointing up.

Jason D. Reid

Yes, with our new VP of Exploration, Mr. Barry Devlin, he's working on this as we speak. A lot of this in flux because we find these new veins and splays, and so they're trying to not only be brought into our understanding of the deposit but into production as well. But for instance, the new Switchback area could change the face of the company if that is, for instance, a parallel Arista system or if it just expands it by 500 meters. So I think coming full circle, Peter, we're being far more conservative as you can hear by our answers as it relates to production out in front of us. We're only going to give the target of the year we're in, not forecasts. We just get nothing but beat up for forecasts. We're also going to be very conservative on mine life issues, et cetera. And at some point, as Bill mentioned, we will shed some light on that. And we're working on it as we speak, trying to get our head around it as we find more veins and splays. But yes, we're just taking a bit different approach having executed everything we've ever said we were going to do and yet beaten up in the market because we set higher targets than we were able to achieve. So a far more conservative approach, you can tell.

Operator

And ladies and gentlemen, unfortunately, that is all the time we have for questions. Gentlemen, I'll turn the conference back to you for closing or additional remarks.

Jason D. Reid

Perfect. All right. Thank you, everyone, for attending the conference call. I want to say I appreciate the fact that we didn't have any calls that were distracting or tried to push the conference in wrong direction. I think it was a good use of time. We will do this live Q&A next time. So again, thank you, everyone, for your questions and your participation. That's all I have to say. Thank you very much. Have a good day.

William W. Reid

Thank you.

Operator

And again, ladies and gentlemen, that does conclude our conference for today. We do appreciate your participation. Enjoy the rest of your day.

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