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Gold Resource Corporation (NYSEMKT:GORO)

Wall Street Analyst Forum

February 14, 2007 9:10 am ET


Gerry Scott - President of Wall Street Analyst Forum

William Reid - President and CEO


Gerry Scott

Good morning ladies and gentleman. Again, our ongoing attempt to adhere to the published schedule, I would like to introduce the next company in this morning's program. And we do once or twice a day welcome -- I don't have physical attendees, but for those attendees who attend the webcast live and those who had attended on a retrieval basis or for those of you that are physically here. If you want to re-attend the meeting, you can. You can most easily access the webcast by going to our website, because the entire conference schedule is there, and we hyperlink directly to the webcast. And our website, as many of you know, is All these presentations will be retrievable for a full month following today's live event.

The next company in this morning's program is Gold Resource Corporation. They are a production company focused on gold and silver mining, with high-grade gold and silver properties in the State of Oaxaca, Mexico. Exploration and definition drilling are underway at its El Aguila project, where an independent scoping study has indicated cash production costs per an ounce of gold that is more or less $100 per ounce. Their best 2-meter intercept drilled to date is at 101 grams of gold per ton and 1,040 grams of silver per ton. Gold Resource Corporation is targeting a production date or a production decision in early 2007.

So, without any further introduction, I would like to introduce William Reid, President and Chief Executive Officer and he is accompanied by Jason Reid of Corporate Development.


The Wall Street Analyst Forum, a leading conference host for public corporations to address analysts/portfolio managers and professional investors, sponsors four annual conferences in NYC for large, mid and small-cap companies. Seeking Alpha readers may attend Wall Street Analyst Forum conferences free of charge if you pre-register. See the full conference schedule and attendance information.

Read all Wall Street Analyst Forum conference presentation transcripts here.

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William Reid

Thank you. It's my pleasure to be here this morning and tell you about Gold Resource Corporation. Before I get started, I would like to give you a little bit about my history, because that's important for you to understand where we are headed.

My brother and I founded our first company US Gold Corporation in 1977. We ran that company for 28 years. More important than our longevity is the fact that we put six mines into production during that period. But a year and a half ago, Rob McEwen, one of the most successful mining men of our era purchased controlling interest in US Gold. That freed us up to then pursue Gold Resource Corporation. And what we have done is build down our 28-30 years of experience into maximizing the value for Gold Resource Corporation shareholders with its company.

The forward-looking statement, you'll be familiar with that. Now in our business, not all ounces are created equal. Low cost ounces actually command a premium in the marketplace. Our strategy targets these low cost ounces. But there are two things I would like for you to takeaway today. It's one, the exceptional nature of our property; and two, our strategy for bringing exceptional value to the shareholders. This first point is key. We're going to position ourselves in the low-cost peer group of gold producers. You will see the importance of this towards the end of the presentation. But if you're going to put yourself in the low-cost peer group, you have to be a producer. So you have to know how to put mines into production. So, we have the experience of putting six mines into production.

Our flagship property, El Aguila, which we will be talking about in detail, we already had scoping study that says we can produce gold for plus or minus $100 an ounce, and the CapEx payback is less than a year or one year at that project. We also have been very disciplined in our capital structure, and we have a goal of paying a meaningful dividend.

We operated this company as a private company for about three years and I was not going to take it public until we knew we really had something. We had two rounds of drilling prior to going public, and we're going to look at that information. But we went public in September 14, with our IPO at $1 a share, then we followed that on with the private placement. So, since we have gone public, we have raised about $10 million.

We are very pleased with the caliber of our investors in our company. HEEMSKIRK, which we will talk more about a little bit later, is an Australian global mining house. They have their own mines, they invest in mining companies, and they have been very supportive. RANGE CAPITAL out of London, which is a resource fund, we have many resource funds out of Europe. But we are also very proud of the fact, GOLD 2000, which is Europe's largest gold fund, a $1 billion gold fund, purchased $1.5 million in our IPO.

The point here is that these are companies look at gold mining companies and properties everyday and they feel like we have something special, and we are very pleased to have them as shareholders.

We have 27.8 million shares outstanding. We have no warrants and fully diluted to be 30 million.

Now this is what we target. We are targeting a production decision by the end of this first quarter. This production decision really to me is not whether we go into production or not, it's what level we begin our production with. We are targeting 100,000 ounces per year. But whether we start with a little bit lower, 70,000, we believe we can ultimately move up to this 100,000 ounce a year level, which is our target.

We are looking at the capital costs to put this project into production. We have about 20 million and we hope to have no more than 35 million shares outstanding as a target when we'll have this mine operating.

We have three properties in the Southern state of Oaxaca, Mexico. Oaxaca is a beautiful place, very nice people. We are very pleased to be there. Our El Aguila property is our flagship property, which we will talk about in more detail. We also have Las Margaritas and El Rey, which are both high-grade properties, and these are properties you might consider in the pipeline that ultimately what El Aguila is operating, we will put those into production. But the concept here is they are close enough to truck the high-grade ore to the El Aguila mill once it's built. In addition, we own these properties 100%.

One of the most distinguishing first-pass features about our property, which all geologists get excited about, is the fact that we have over 8 kilometers of high-grade surface samples and we're going to show you some of those. This map simply shows you these 8 kilometers of high-grade surface samples along this North 70 trends in red there. And then all the colored properties we own, so we essentially have 100% of this very significant trend. We're going to be looking at primarily though, the 2 kilometers between the El Aguila mine and the El Aire mine, that's where we're focused today.

This map shows some of these high-grade surface samples. They are represented by the letters; we're going to see a table in a moment. These high-grade surface samples extend all the way from El Aire mine, which is on the right there all the way through Andesite Hill, then El Aguila, all the way to La Tehuana or Las Margaritas.

You can see through the blue lines, these basically represent geologic structures and without getting into the geology that's a very important structural corridor through here. But the one thing I want to point out is the Pan American Highway at the bottom. If you're going to put a mine into production, you have to have the infrastructure. The Pan American Highway is within two to three kilometers of our deposits, it possesses the Federal Power Grid, goes down that highway as well as a major river. So, we have power, water and access, which is very important for production.

Now this is a list of just the surface samples for gold which is Au, the symbol Au. If you have a gram sample that's 5, 6 or 7 grams, that's very -- 7 grams is a very high-grade or above. For silver, which is Ag; if you have 300 grams or 400 grams, that's also very exciting. So, if you just take a look at El Aire mine, at the silver column, you could see we have surface samples of 600 grams, 700 grams, even 1.4 kilos of silver. That's extremely high to be sticking out at the surface.

Andesite Hill in the gold column, 35 grams, that's over an ounce of gold and in the silver column, 3 kilos. So you can go through these and you can see, but the main point here is we have some very high-grade surface samples over a long distance and that's very, very impressive.

The El Aguila samples there, 20 grams gold and 8.7, you'll see on a map here in a moment. The insert box at the top, if you can see the white, that's coarse that sticks out at the surface. That's what's running, and so whenever there is a high-grade surface sample because we sample that coarse, it sticks out through volcanic rocks that don't run, but that white coarse goes down that ridge, which is kind of a turquoise color there. And you can see where we've got 20 grams surface sample, 8.7 grams surface sample of gold, and this is the first area we came in to drill. We drilled one small area of these high-grade surface samples.

We're going to look at the cross section, a typical cross section A-A' in a moment. I also want to point out on this map, that's pictured at the bottom, we had a drill intercept of 4 meters, which is an excellent mineable underground mining worth of 55 grams gold and 700 grams silver. That is, we believe, the high-grade vein feeding this low-grade or not the low grade, but the manto open-pit. So, this 4 meter vein material, we will take a look at a little bit later also.

I never get tired of this cross section, because it's a very exciting cross section. Our very first drill hole was 301 and we intercepted 60 meters of 6.5 grams gold. Our second drill hole was 302, where we intercepted 6 meters of 16.6 grams, which is over a half ounce of gold and 303 we intersected 6 meters of 18 grams gold. So, we were very excited. To this point, we improved the continuity. We went on drill these other holes. But if you look on the right side, there is the surface sample, so the deposit outcrosses the surface 8.7 grams of gold. It's what we call this slope, it's going right under the slope there, which is excellent, and then it disappears under the ground, but that's not very deep. These white contours are only 10 meters, so its 30 meters to 40 meters. So, what we have is almost an ideal open pit, that's high grade and very shallow.

So, we'd like to say with our first round of drilling, which was reverse circulation where you grind up the rock, and we just picked one small area that's 8 kilometer long structure. We discovered a deposit with our first drill hole and that deposit right now is running 7.45 grams gold per ton as an open pit. That's about a quarter of an ounce gold, so it's very good. And in addition, we possibly discovered the feeder vein for this manto deposit.

We came back as a private company with a second round of drilling. This time we used core. And we tested the open pit deposit again and I want to point out the confirmation, of the hole 511, 12 meters of 10 grams of gold. That's very good for an open pit. We have additional assets, but these are the only one I am showing at this point in time.

And then I would also want to point out that we moved two kilometers down the structure to the El Aire mine and we intercepted in 530, 4 meters of 1.9 grams of gold and 755 grams of silver. On a gold equivalent basis, that's like a half ounce of gold. We also readdressed this four meters of the potential vein a high-grade vein layer.

Now, that we could actually see the rock with the core, we could as geologists figure out what type of classification for this ore deposit and it comes out to be a Low Sulfidation Epithermal Vein Systems, which I know is a mouthful, but what it means is these are some of the highest grade gold deposits in the world, these type of deposits, and the most sought after deposits. So, I have listed several Meridian's El Penon mine, etcetera. The one I want to mention very briefly is Pajingo in Australia. That was originally discovered by Normandy, the Vice President of Exploration at the time was a guy named Bruce Kay. He then retired. Bruce Kay is now the non-Executive Chairman of HEEMSKIRK, the company I mentioned a moment ago. So, here is a guy who discovered a world class epithermal deposit. HEEMSKIRK has been on our property many times and helped us fund actually our second round of drilling. So, they have not only funded as a private company, but also participated in the IPO.

The reason I am showing this satellite imagery here is to show you that we are going to connect a few dots the distance between El Aire mine and the El Aguila mine, but that is actually a steep canyon, you can kind of see it there on the picture. At the El Aguila mine, you can see there are drill roads from where we drilled out the open pit. The El Aire mine is where we drill those other holes. But we have a belief that this structure, this North 70 structure that connects these two, the entire structure could be mineralized.

In addition, without going into the geologic model, we're blessed with both these mantos which are the open pits, low-grade which I showed you on the cross section, but we also have veins. So we have both types of mineralization.

Now this map has the same coordinates as that previous photo, you can see the El Aguila mine and the El Aire mine. The diamonds represent high-grade surface samples, and you can see they are in clusters. At the El Aguila mine, that stippled area is where we drilled out the first deposit. We believe that each one of these clusters of high-grade surface samples has the potential to be a high-grade open pit. We have one drilled rig that's continuing to drill the El Aguila open pit at this point in time and expanding that into these other areas and we will test these other sets of diamonds for additional surface samples, for additional possible open pits.

But, now let me just turn to the potential for vein mining a moment. A little bit later you're going to hear me talk about, what's the minimum number of ounces to put this mine into production? And I don't want you to think that just because we are going to get started with the minimum number of ounces that the potential is limited. The potential is quite large.

In this particular case down at the El Aire mine, which was an old mine. It was mined over a 200 meter vertical extent. So, if we kind of do a little bit of arm waving here and say that at the El Aire mine, you can see we did a hole 530. Our best 2 meter intercept was a 1,000 grams or 1,100 grams of silver. Two kilometers away, at drill hole 331 our best 2-meter intercept was 100 grams gold and 1,000 grams silver. Both of these are out of a four meter vein width, but these are the highest samples.

Now, if we just say, for speculative purposes, that we have 200 meter vertical extent, four meter vein width and two kilometers long, that would be 4 million tons and if they were to average a 0.5 ounce gold equivalent, that could be 2 million ounces. Now I am not saying we have 2 million ounces at this point in time, but we have another drill rig that is drilling down at the El Aire mine and we'll be drilling these vein potential deposits. So, the potential here is quite large, especially when you consider this is only two meters or two kilometers that we are focused on over the eight kilometer high-grade structure.

Very briefly we've done a Geochem survey that basically shows that this structure could well be mineralized, based on Geochem analysis. You can see the antimony, which is a pathfinder on these types. It's very easy to see the anomalous nature of it.

Okay, my brother and I are both exploration geologists and we certainly focus on helping with the exploration. We have two drill rigs drilling 24/7 and they'll probably be drilling the rest of the year, but we expect to make a production decision by the end of this first quarter, because we're more than just explorationists. We are focused on getting this mine into production.

Right after the very first round of drilling, when we saw we had something pretty exciting, I wanted to make sure there were no fatal flaws, so I had some studies done. Environmental Study, to make sure we are working in a sensitive area. A scoping study to make sure the metallurgical recovery was positive, and also to tell us what it might cost to put this mine into production. The way we look at it, we'll go on with the scoping study results.

The first thing I want to point out is, up in the right top is the Metallurgical Recovery Curve. Essentially, this may not mean anything to you, but it shows that we have a beautiful recovery with this ore in 72 hours with a simple grind of 100 mesh we get 95% of the gold and 90% recovery of the silver. The main aspect of this Scoping Study however, that we want to focus on is that, it showed us we could produce gold for a plus or minus $100 an ounce, and the capital payback was less than a year. So, the way we think is that, if we can payback the capital in one year, then I am willing to put this property into production as soon as we have four years. And that's a decision that's going to be made at the end of this quarter, is what rate are we going to put this mine into production? 70,000 or 100,000 ounces and get started.

We're a firm believer and that if you're going to really build value for the shareholders', you can do that much better by building the company with cash flow instead of continually issuing equity. And so that's why we're looking to make a decision to put this mine into production at the end of this quarter and then try to put it into production as quickly as possible thereafter. We're targeting 100,000 ounces a year. We believe we'll produce gold in the $100 an ounce range, I might have just mentioned this $100 an ounce range will put us in the low-cost producers to average cost of gold production today at somewhere between $300 and $350 per ounce.

Okay. What might all these mean? And to me this is the fun part, what might this mean if we actually achieve this? Now, we have to look though at the fact that we're going to enter the realm of hypothetical speculation and I would want each of you to read our risk factors in the prospectus dated May 14, 2006, so that you could get a balanced perspective. But having said, that let me say this. I am a firm believer that you got to know where you want to end up, or you will never get there. So, this is where we would like to end up.

Okay, there are many ways that gold analysts value gold companies, many different metrics. We're only going to look at two. The one I really like is market cap or annual ounce of production. Every public company has a market cap and if you're a gold producer, you produced so many ounces last year. You divide the two together, it's a simple exercise, and you come up with a ratio or a number. That number is very easy to arrive at, but however, that number actually represents every single thing that the market understands and believes about your company. And it's a very good way to compare mining companies; market cap or annual ounce, and we will look at that in a moment. And then we are also going to look at dividend payout ratio.

So what if we produce 100,000 ounces a year; and I believe we will get to that level. What if we produce gold at $100 an ounce and our scoping study shows that we can do that. So what if we position ourselves in that low-cost peer group, what might we expect?

Here are four companies that I consider are in the low-cost peer group. I want to point out in the upper right hand of this table, that these numbers Market Cap or Annual Ounce, were run in January 2006, when the gold price was $500. I am not going to update that because this provides a certain amount of conservatism. But these four companies, you can see what they produced and at what cost and you divide that into their market cap and you get the market cap or annual ounce. So, the average for these low cost producers was $6,700 per annual ounce.

So, we want to put ourselves in this peer group and if we are able to do that, what might the stock be. At 100,000 ounces with that peer group market cap if we could achieve that, 6,700, that makes us a $670 million market cap and with 35 million shares outstanding if we achieve that target that would be $19 stock.

Now, its my job to get us to the point where we are producing this low cost ounces and its my job then to get the company in a position where we can achieve this market cap. So that's what we are going to try to do. However, market forces are at work here, we have less control than possibly this way. I have a personal desire to pay a meaningful dividend and you'll see why in a moment, but let's look at the cash flows from the same hypothetical.

If we produced 100,000 ounces at $100 cost, and the gold price is $500, that's a $400 margin, so it would be $40 million a year in margin. Now we would be profitable at this point, so one-third goes for taxes. We are going to build the company, we've other mines in the pipeline, one-third of that would go for growth and ultimately we will also be in a growth premium, but at this point one-third of that money is for the growth and then one-third to payback the shareholders.

Now, once again we position our company to have the right characteristics like no debt, low cost, the right reserve base, the market might assimilate our company to a 2% payout rate. Most gold companies are at 1% to 2% payout rate. If they assimilate it to a 2% payout rate, then we would be at $19 stock.

Now, at $600 gold, that potential dividend could be $0.50. So, the question is asked, well if we get ourselves into position to pay $0.30, $0.40, $0.50 a share dividend. Are we going to do that? And the answer is yes. And why is that, because management owns 9 million shares of this company, and that's a difference between owner management and caretaker management. Most caretaker managements would never consider paying back a meaningful dividend to the shareholders. So, we plan to go forward making every decision for this company to maximize the value for the shareholders.

So, in conclusion, let me just say we're very excited about Gold Resource Corporation, we're engineering every aspect of this company as we move forward to get it into production. We are very excited about our high grade gold and silver properties. These will be low cost ounces and we believe we will garner our market premium in the marketplace and we intend to distinguish our small company by paying a meaningful dividend when we get to that point. So, thank you very much.

Okay. So, any questions? Yes.

Question-and-Answer Session

Unidentified Audience Member

Do you intend to produce silver as well?

William Reid

Yes. The initial deposit that we're looking at is primarily gold with minor silver. But down at El Aire and elsewhere on the property, we have areas that are mostly silver. So, we will be both a gold and silver producer. The initial open pits appear to be mostly gold but the byproduct is silver, but there will be some times, with a high grade vein that silver will be our highest component.

Unidentified Audience Member

One more question. When do you think you will be in a position to estimate your total reserve?

William Reid

At the end of this quarter, we will make the decision and make an announcement relative to our resource base and that will determine whether we are going to go with 70,000 ounces or 100,000 ounces. And as I said we only need four years and I am ready to put this into production. We will then go forward to get the third party reports, etcetera, to substantiate that as we move forward towards production. So, at this point in time we are looking at that resource number to be given at the time of our announcement for production.

Unidentified Audience Member

Thank you.

William Reid


Unidentified Audience Member

Do you see a secondary coming in the second quarter?

William Reid

Okay. Yes. The question was, do we see our secondary coming in the second quarter? I would say sometime towards the middle of this year. Yes, for the additional funding to put the mine into production.

Unidentified Audience Member

That's great.

William Reid


Unidentified Audience Member

Could you clarify how much you need to get the first ounce of gold out of the ground --

William Reid


Unidentified Audience Member

Yes, and the timeframe?

William Reid

Okay the question was --

Unidentified Audience Member

And I assume you got a buildup processing plant?

William Reid

The time schedule and the costs involved. What's beautiful about the way we operate and the niche we feel is its small okay, but they are quality ounces. So we are a firm believer in the financial performances which should be driving the company and not necessarily just the number of ounces, the quality is important. And so this will be a mill that we have to build is relatively small for the mining business. Whether its 850 tons a day or 1,000 a day, we haven't made that decision yet. The equipment is much more readily available for small mining operations than the big ones that have a long lead time. So, we are looking at, number one, all estimates at this point its going to be about 20 million to put this mine into production. That includes building the mill and the open pit mine. So we're looking at making that decision by the end of the first quarter.

Now, we expect to be in production in 2008, if I could do it in 2007, I'd try, but I don't think with the delivery equipment that might not happen. So, we are going to do it as quickly as possible. I can't give you a date today because my engineering firm is going through all the details of what's the lead time on the Ball Mill, etcetera. So, our schedule looks to be going into production as quickly as possible. Yes?

Unidentified Audience Member

How are you going to find miners to work for you? Do you want me to repeat the question?

William Reid

Yeah, the question was, how we are going to find miners to work for us? We're very pleased to be in Mexico. Mexico has a 500 year history of mining. I believe they probably graduate more people in mining than the United States does. And so, we believe that we have the ability, especially as a low cost producer to pay as well as anybody and we believe we will be able to get those people in Mexico.

Unidentified Audience Member

But you are down in Oaxaca, the most of the mining is up North.

William Reid

The question was, we're down in Oaxaca, whereas most of the mining is up North. A lot of those mines are bigger mines, and yes there is a lot of mining up there, but there is mining elsewhere in Mexico. There is some small mining going on in Oaxaca today.

Unidentified Audience Member

[Question Inaudible]

William Reid

We believe so, yes.

Unidentified Audience Member

What has been your cost per round of drilling?

William Reid

The question is, what is our cost per round of drilling? We pay approximately $100 per meter per core, core drilling which is what we are doing. We have let out a 10,000 meter contract. That's going to be $1 million contract. That will be at least six months if not a longer timeframe. So in this particular contract we have is $1 million contract of 10,000 meters.

Okay, well, thank you very much.


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