Gold Resource Corporation

Jason Reid - CEO John Labate - CFO

Thank you. Good morning, everyone.

And thank you for joining Gold Resource Corporation’s 2016 third quarter conference call. I expect this to be a relatively short conference call with my comments running approximately 15 minutes followed by a Q&A.

Joining me on the call today for the Q&A portion will be Mr. John Labate, our Chief Financial Officer.

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 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, November 3, 2016, 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-Q filed with the SEC for the quarter ended September 30, 2016.

The third quarter of 2016 was another good quarter, operationally with net income of $1.6 million or $0.03 per share for the quarter, now totaling $0.15 for the first nine months of 2016. We added $4 million to our cash and cash equivalents account, now totaling over $17 million when compared to $13 million the previous quarter.

It was a very exciting and positive quarter regarding our M&A activity in which we acquired two, high-grade properties in Nevada’s Walker Lane mineral belt with the Isabela Pearl development project and the Mina Gold exploration property, both adding critical mass to our Nevada mining unit and both are viewed as potential open pit heap leach operations in the future. Isabela Pearl is an advanced stage design and engineering as an open pit heap leach project.

Depending on permit timing and if a few other gating factors, which I’ll discuss later on during the call, we may decide to put Isabela Pearl into production sometime in late 2017 or early 2018. This could potentially put us in a position to increase our future gold production by 100%.

With the first three quarters of 2016 behind us, we remain on track for our annual targeted production range. Let’s break down the quarterly production numbers.

Third quarter production from the Aguila project totaled 6,066 gold ounces, 413,335 silver ounces, 213 tonnes of copper, 1,000 tonnes of lead, and 3,232 tonnes of zinc before payable metal deductions. Calculating the gold and silver as precious metal gold equivalent, we produced 12,763 ounces at a realized 64.4:1 silver to gold ratio.

We milled an average of 1,278 tonnes per day or 113,945 total milled tonnes for the quarter. Our total cash cost after base metal byproduct credits per precious metal gold equivalent ounce sold and including royalties, totaled $623 per ounce.

Our all-in sustaining cash cost per ounce, also a non-GAAP measure, for Q3 totaled $907. During the quarter, we sold 6,683 gold ounces and 410,335 silver ounces, 213 tonnes of copper, 897 tonnes of lead, and 2,480 tonnes of zinc.

Average grades and recoveries for Q3 included gold grade at 1.86 grams per tonne with 89% recovery, silver grade at 128 grams per tonne with 92% recovery, copper grade at 0.24% with 78% recovery, lead grade at 1.18% with 74% recovery and zinc grade at 3.45% with 82% recovery. With regard to grade and dilution, during the third quarter, the Company processed approximately 11,459 tonnes of historic stockpiled open pit ore from which contained primarily gold, negligible silver and no base metals.

Though we may stop at anytime, we currently planned to continue to run the remaining lower grade open pit stockpiles and could finish processing the stockpiles by year-end. We may also run small amount of additionally mined open pit ore as well.

During any future quarter that we process open pit stockpiles and/or open pit ore, we expect to dilute the overall metal grade averages of the higher grade Arista underground polymetallic ore. We generated revenue.

Our revenues are net of smelter charges of $21.4 million, generated mine gross profit of $5.4 million, and a net income of $1.6 million, or $0.03 per share. Our Q3 average metal prices realized were $1,339 per ounce gold and $20.79 per ounce silver.

We distributed $271,000 in dividends to shareholders or $0.005 per share during the quarter. The Company remained debt free as well during the quarter.

Turning to our operations. During the quarter, approximately 60% of the Arista production came from the beta 1, beta 3 [ph] Viridiana veins.

The majority of the production stoping was below level 15 with the bulk coming from levels 20 and 21. A minor amount of pillars and remittance [ph] were recovered from the upper levels of the mine and accounted for approximately 10% of production.

Mine development and ore represented approximately 36% of total production and was focused on levels 21 and 22. Our mine contractor used exclusively for mining the narrow veins by manual method, contributed 20% of the precious metal production from Splay 05 and s Socorro veins between level 14 and 17.

The most exciting development news is the Switchback access ramp has reached the Silvia vein at the 460 elevation, 460 elevation being equivalent to the 24 level. This marks a major milestone for the Company as we have allocated time and capital over the last year to reach this new area of the Arista mine.

The first phase of a new ventilation system that will provide fresh air from surface to the Switchback zone has been started. A 3.1 meter diameter ventilation raise, part of three interconnected raises is scheduled to be completed in the fourth quarter to significantly improve air quality and working conditions in Switchback.

As previously mentioned, power and water, pumping upgrades for the mining of Switchback are now complete. Additionally, geotechnical drilling and rock mechanics work for the in-purpose of stope design data were initiated during the quarter.

We continue to encounter good rock competency and stable ground conditions coupled with minimal and manageable amounts of water and CO2 gas, which has enabled drift advancement and mine development thus far to progress as expected. We do expect to deal with challenging water flows and ground conditions at some point in the future.

As we have stated before, we continue to plan to develop multiple levels of the Switchback vein system during 2017 to put us in the position to mine bulk tonnage with long-hole open spacing starting in 2018. This is consistent with our long-established game plan whereby we are taking a development approach at Switchback to develop the long-term as opposed to developing and stoping a small area as soon as possible only to live with hand amount development and mill feed thereafter.

Any Switchback development ore during the fourth quarter of 2016 may be processed or stockpiled during the fourth quarter of 2016 in preparation for the 2017 production year. Turning to our Alta Gracia project, we have received our final permit to begin mining.

We’ve begun improving historic adits and old mine workings to access existing mineralized faces from which to further develop our first mine on the project called Mirador, when Mirador comes on line with supplemental ore feed, either late in the fourth quarter or the first quarter of next year, it will be exciting to have the additional optionality and flexibility of having multiple mines feeding a strategically located mill. Turning to exploration on our Oaxaca mining unit, we completed additional infill drilling for reserve definition and mine plan optimization at the Arista mines Switchback vein system.

Recent drill results announced on August 23, 2016 included 8.2 meters of 9 grams per tonne gold, 8 meters of 6.9 grams per tonne gold, plus 618 grams per tonne silver. Our second phase of exploration drilling on our Nevada mining unit's Gold Mesa property has now tested six target areas.

Recent drilling yielded 12.2 meters of 3.34 grams per tonne gold including 3.1 meters creating 12.78 grams per tonne gold. The property continues to demonstrate potential for a high-grade gold open pit or multiple gold open pits with mineralization beginning at only or near the surface.

A third phase drill program is currently underway, following up on these and other mineralized zones. During the quarter, we acquired 100% interest in two properties, which add to our Nevada mining unit, the Isabela Pearl project and the Mina Gold property.

Both are exciting, high-grade potential, open pit heap leach properties and they add critical mass to our growing Nevada mining unit. The Isabela Pearl is being designed and engineered as an open pit heap leach project and contains third party proven and probable reserve estimates of over 191,000 gold ounces at an average grade of 2.18 grams per tonne gold with additional upside potential in an exciting clean block along the structural trend included in the deal.

Isabela Pearl is in advanced stage design, engineering and mine permitting. Our goal is to put this project into production at the earliest possible point in time, subject to our engineering modifications, final permit timing and funding.

We have contracted several respected engineering firms with offices in Reno, Nevada to assist us in finalizing the design for final permit application and have met with both, the Bureaus of Land Management; and the Nevada Division of Environmental Protection to determine what the next steps are to advance the project into production. We were recently granted a drill permit at Isabela Pearl for reserve definition drilling and further metallurgical studies in addition to a water well permit to supply future mining operations.

We are currently drilling Isabela Pearl's main deposit for definition drilling and obtaining new drill core for metallurgical testing. The water well has been spudded and a drill rig is expected to be on site surely to complete the water well.

Looking forward, it is possible, though I cannot give you an exact timeframe, and assuming the Board of Directors approves the decision to move forward, 2017 constructing could take place with first production late 2017or early 2018, again dependent primarily on final permit timing and funding. Since the project has had years of permitting under its belt, we are optimistic the permitting process could be reasonably short.

We are evaluating all our funding options for this exciting project to include cash, debt, equity and/or a combination of these. If the gold price increases especially early next year, we could potentially fund the project with cash flow.

The acquisition of Isabela Pearl launches Gold Resource Corporation from 0 to 60 miles an hour along the path toward production for our Nevada mining unit. We are also building a growing pipeline of potential projects within our Nevada mining unit including our Gold Mesa property where we have drilled a high of 15 meters grading 6 grams per tonne gold just 9 meters downhole and our Mina Gold property where we have third party historic estimates of over 1.6 million tonnes grading 1.88 grams per tonne gold located on patented claims potentially shortening the permit timeframe toward future production at our Mina Gold property.

I want to draw your attention to the grades of all our Nevada mining unit properties. We are talking about an estimated plus 1 gram upwards of over 2 grams gold per tonne in potential open pit heap leach operations.

We are not chasing the often industry pursued 0.5 gram gold open pit heap leach operations. I can tell our high grade ounces are more valuable than much larger tonnage 0.5 gram deposits.

We are chasing after quality ounces in Nevada just as we do with our production from our Oxaca mining unit. Quality ounces are the starting point for profitability, as evidenced by our five consecutive years of profitability, which is no small feat in today's mining industry.

Looking back, we capitalized on the four-year downturn in the metals market to build our exciting new Nevada mining unit and are well-positioned to become one of the next gold producers in Nevada. It may also allow us to increase our gold production by up to 100% in the near future.

To wrap up, the third quarter of 2016 was another good one from operational, production, exploration and profitability perspective. It was an even better quarter on the acquisition front, and positions us for near-term Nevada gold production and future Company growth.

With that I would like to thank everyone for the time today on the conference call. Let's move on to the question and answer portion of the call.

In effort to efficiently address the Q&A portion of the call without wasting anyone's time and since we don’t screen filter or limit who can call in, any distracting or antagonistic calls will be terminated and we will simply move on to the next productive caller’s question. Operator, please open up the lines for Q&A and take our first question, if there is one.

While we are waiting, in case, there are calls, I would like to read a email question that came in from Robert Anderson. His question is, please explain while in Q2 GORO made $0.10 on $26.2 million in revenue, while in Q3 was $21.4 million, and we only made $0.03 a share.

In addition, the average price of the metals were up considerably, so the net per tonne should be up as well. Thank you, Robert.

Robert, thank you for you call. I’m going to return this question over to John and then, I’ll weigh in on it is well.

Thanks Jason. Q3 was a good quarter but Q2 was an extremely good quarter from an income statement point of view, and it benefited from a couple of things.

One, depending upon where we’re in deposit, grades can vary significantly. And in Q2 grades for gold and silver were up tremendously.

Gold was almost 3.5 grams. So, we benefited from significantly higher production.

Production of gold was 10,000 ounces in Q2 and 6,000 in Q3. And that additional production fell almost directly to the bottom line in Q2.

Additionally, Q2 production cost benefited from the recently enacted diesel credit in Mexico that contributed $1.7 million in Q2; in Q3, the associated number was 600,000. And that’s primarily because we had a catch-up in Q2, because it was recently enacted and the methodology had just been determined in Q2.

So, while Q3 was good, Q2 was unusually good because of those factors.

Thanks John. Yes, as he mentioned and I just want to reiterate as John mentioned, grade is the driver in large part on quarter-on-quarter variables.

And as John mentioned, the second quarter grade was better than the third. As has been the case and will always continue to be the case, grade will vary quarter-on-quarter, depending on where we are in the deposit.

It’s one of the reasons why we’re so excited to get the Switchback. Anybody who has looked at our corporate presentation and looked at the drill results slide or just being pay attention and watching our press releases, the gold grade at Switchback is great, not that the Arista isn’t but the gold by all indications could see a bump.

So, we’re very excited that A, we’re now developing a Switchback. And as we start over time pulling tonnes from there that will also impact the grade, which in turn impacts all these variables that address your question.

So hopefully, Robert, that answered your question. We appreciate you writing that in.

And operator, are there any questions on the line?

Hi, Jason. My name is Mark Smith.

I call into these pretty regularly and a shareholder. What a head spinner of a good quarter as far as the good news is coming out, appreciate your long, view vision for development and in this Company.

So, I have about three questions, should be pretty quick. Did I hear you say that you will likely finish the low grade stockpile open pit processing by the end of the year or somewhere there about?

That’s correct. Basically, what we’re doing is we’re pushing that to the flotation circuit.

So, we actually stop running Arista and then we only run open pit for a couple of days, the flotation circuit. And so, depending on how many days in the month we do that, dictates how quickly we’ll go to that open pit stockpile.

There is a chance we’ll be done with that open pit stockpile by year-end. The net effect, as I mentioned on this call and have mentioned in chat emphasized with our shareholders, that lowers the overall grade.

I mean we are dealing with a much higher graded ungrounded Arista and it’s a poly metallic situation with high grade gold, silver, copper, lead and zinc. The open pit is just gold, very little silver and no base metals.

So, it does degrade a bit the average grades anyway for the quarter . So, yes, there is a good chance we’ll be done, at the end of the quarter, with the stockpile.

Now, having said that too, we've gone back and we’re finding some extensions to the open pit. As we've mentioned in the past, we are considering chasing those but we've also been able to pull a little bit of tones from the bottom of the open pit, not a lot and it won't be a lot but those -- whenever we're running open pit though, it's going to lower the grade.

Okay. Secondly, the sale price for the silver was 20.79 that you indicated in your report.

Was that after the byproducts corrections?

Okay. Say that question again.

I believe...

The 20.79 sale price of silver, was that after byproduct credits?

No, I think you are referring -- that was just the average realized price of silver that we sold for the quarter, just silver, no credits in that. The credits kick in when you are talking about cash cost and we apply base metal credits to that number.

But the silver number I referred to, and John correct me if I'm wrong, but I believe that's just the average realized price.

That is. And part of that there was a very high price for the quarter.

We sell, as you know, our concentrates on a provisional basis, and some of the pricing goes out as far as two months. So, some of the second quarter sliver sales were finalized in Q3 and we got the benefit of the higher prices in early Q3.

And that's what has driven that higher average realized price.

Okay. So that drives me to my next question, which is the Shanghai Gold Exchange versus the COMEX selling endpoint.

I noticed that the Shanghai Gold Exchange price for silver was as high as $0.80 per ounce higher even last week and it was $0.59 yesterday. And does your end market -- is that, are you using the Shanghai Gold Exchange now?

No, we are not. The Shanghai Gold Exchange is fairly new and it is making waves.

And as you are referring to, the prices are higher. All we can hope for is they start pushing to true price discovery and we will see higher metal prices, which should translate into our benchmarks.

But no, our current contract does not account for the Shanghai Gold price.

I'd like to urge you then as a shareholder that to look into exploiting that up to $0.70 to $0.80 an ounce on silver. And then that leads me to my next question.

Is it still too early then to say what the estimate grade and tonnage will be for Alta Gracia, is that correct?

We have some initial grade estimates and it's on the presentation on our corporate website. But, keep in mind that the approach we have being trucking or to a strategically located mill, enables us to view all the rest of the properties in our 55-kilometer structural corridor with the lens of all we have to do is justify mining and trucking costs.

And as soon as we can do that and make money, we can move forward. So, we've taken a look at Alta Gracia and it’s got some old historic mine workings or quite a few actually, and the particular one we are chasing is called Mirador.

It's an old mine in which they’ve left a lot of pillars, lot of stopes and there some untouched mineral at back end of this mine. And again, you can see some of the sections, longitudinal sections of that on our corporate website.

So, we do have estimates but those estimates are just hey, we have reached the threshold to move forward and make money here. So, that’s what we are doing.

As we develop it, as we -- as it start spinning off cash flow, we want it to fund itself and help drill, exploration, drill itself, and further define the resource and hopefully expand upon that and doing so, see a higher grade as well. But we have some initial estimates on that.

Okay, I'll refer to your website then on that. But, keep going.

And you are doing a great job, Jason. I appreciate you.

Mark, I appreciate the call. And I just want to emphasize and I’ll try to make this short.

But you started out saying long-term development approach, and that absolutely is what we are doing at Switchback. It would be so easy to just go after the first stope we could get.

And we see a shot in the arm, I believe a big one doing that. But if we do that, then we limit the long-term approach of having a lot of development in front of us and a lot of working faces.

So, we are going to take the approach, again, to emphasize this hopefully over the next year, just take time to develop this whole thing. Excuse me, not the whole thing, but a portion of it, develop a large portion of it, so that the following year, we are going to have a lot of stopes ready to go.

And that’s going to make 2018 very exciting. That’s a conscious decision we are making today.

It would be so much easier if we were chasing, trying to impress everybody on a quarter-on-quarter-on-quarter basis to do that. But instead, we are going to back off as far as that goes and focus on development for the long-term of this Company.

Yes. I appreciated that as those metals really were in the doldrums of a very low point, you didn’t go high grading the mine.

So, thanks a lot.

Okay. Mark, I appreciate your questions.

Thank you very much.

Jason. Hi this is Harvey Walden.

[Ph] Certainly exciting news, a lot of things going on, on many different fronts. And what I am getting from that is there is going to be a lot of cost associated with all of these various exploratory and development projects going on.

So, I am wondering from a planning standpoint, how you are factoring in the potential for increased dividends into all of these cost equations.

Great question. Anybody who is been a shareholder for us for a while truly understands that we are very focused on the dividend, having returned $108 million back to the shareholders in dividends as a junior mining company.

The dividends are always in our discussions. As far as costs, yes, there are a lot of costs coming up.

If we are going to build a mine that has a cost associated with that. Now, the El Aguila project’s Arista mine has been able to absorb dividends, exploration, developing the mine at Alta Gracia, acquiring properties in Nevada, exploring properties in Nevada all in the back of the Arista.

Arista is bread and butter so to speak. Now, depending on where metal prices are, that will dictate how much revenue we are going to generate from the Arista.

If metal prices spike, I hope we can do everything we want to do from the revenue from Arista, including building the Isabela Pearl. Taking that approach is going to be difficult to substantially increase the dividend.

But having said that, we’re very motivated to increase this dividend. And for building a project and metal prices launch, we might have a capital to put the dividend back to $0.06 a share for instance, hypothetically, a month.

But we probably wouldn’t do that because we’re going to allocate that capital to build the project for the longer term. So, now we have a 100% increase to our gold, so now we can then go back to the $0.06.

So it’s a balancing act. I can’t give you any insight as to when we may plan to increase the dividend or not.

That’s always something we talk about at every Board meeting. But in large part, it’s going to be driven solely by the gold price.

So, if you have the opinion that the gold price is bottomed and it’s had a great run this year, thus far its’ pulled back a bit, but there is all sorts of reasons why the gold price could run. And that could enable us to pay for everything we want to do and pay a higher dividend.

So again, a large part would be dictated by that gold price. But hopefully that answers your question, Harvey.

But yes, it’s very complicated but it’s a lot of -- there is a lot of moving parts to that, but you get my point.

Sure, I do. And I understand the moving parts and certainly the metal prices are a very, very big moving part, which you have no control over.

However, I remember from the beginning of the Company, the mantra always was one-third, one-third, one-third. So, really the thrust of my question is are you sticking to that as you move into this phase of the Company’s development or are you moving away from that or more toward, I don’t know, some other balance?

Sure. No, it’s great question.

We’ve said it in the past that we’ve moved away from the third. And I’ll say it again to be clear here, we move away from the third, third, third for the time being.

It would be great to someday go back to a third, third, third. We’re going to be hopefully building a project that’s going to increase our gold production by 100%.

So that’s going to -- we’re not going to be able to do a third, third, third. After that, hey, that might be back on the table.

So, I think the clearest way I can answer your question is for now, we are returning as much back to the shareholders as we can, balancing the needs of the Company needs, as far as operations and growth, paying taxes and paying the dividend. So, we’re not doing the third, third, third yet but hey, in the future we might go back to that.

Got it. Okay.

Thanks for answering the question. And I hope things continue as they have been going.

Hey, thank you. It’s very exciting time for us.

We’re feeling pretty good that we’re poised to be the next gold producer in Nevada. And that could do really good things for all the shareholders.

So, thanks, Harvey.

Again, thank you everybody for joining the conference call. And we will talk to you next quarter.

Thank you.