Operator: Thank you for joining Gold Resource Corporation 2017 Q3 Earnings Conference Call. Mr. Jason Reid, President and Chief Executive Officer, will be hosting today's call. [Operator Instructions] As a reminder, today's call is being recorded. Please go ahead, Mr.

Reid.

Jason Reid: Thank you. Good morning, everyone, and thank you for joining Gold Resource Corporation's 2017 Third Quarter Conference Call. I expect my brief comments to run approximately 10 minutes, followed by a question-and-answer period. 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 1, 2017, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks in our Form 10-K filed with the SEC for the year ended December 31, 2016.

Third quarter highlights include net income of $4.6 million or earnings of $0.08 per share. Our Oaxaca Mining Unit generated net sales of $31.1 million and mine gross profit of $11.2 million. Our cash cost per ounce produced was $2 per ounce after base metal by-product credits. And our cash balance in the third quarter held steady as it did the first 2 quarters at $15.8 million. Overall, it was a solid quarter.

Third quarter production from our Oaxaca Mining Unit totaled 6,465 gold ounces, 392,153 silver ounces, 291 tonnes of copper, 1,449 tonnes of lead and 4,628 tonnes of zinc before payable metal deductions.
Calculating the gold and silver as a precious metal gold equivalent, we produced 11,637 ounces at a realized 75.8:1 silver-to-gold ratio. We milled an average of 1,346 tonnes per day, or 114,678 total milled tonnes for the quarter.
Our total cash cost after base metal by-product credits per precious metal gold equivalent ounce sold and including royalties during the quarter, totaled $2 per ounce. We continue to see the positive impact of strong base metal prices, including zinc prices at record highs and our significant base metal production, which lowered our cash cost to $2.

Average metal prices realized of copper, lead and zinc were all up on a quarterly and 9-month basis over the same periods in 2016.
Our all-in sustaining cash cost per ounce, a non-GAAP measure for the third quarter, totaled $639, down from $770 in the second quarter. During the quarter, we sold 5,672 gold ounces, 371,754 silver ounces, 328 tonnes of copper, 1,389 tonnes of lead and 4,326 tonnes of zinc.
Average grade and recoveries at the Oaxaca Mining Unit for Q3 included gold grade at 2.09 grams per tonne with 84% recovery, silver grade at 117 grams per tonne, with 91% recovery; copper grade at 0.35% with 72% recovery; lead grade at 1.73% with 73% recovery and a zinc grade of 5.04% with an 80% recovery. During the quarter, gold and base metal grades increased while silver grades stayed the same.

As is the case quarter-on-quarter, great variations are due primarily to the specific areas of the Arista deposit being mined during that quarter.
For the third quarter, we generated revenues, which are net of smelter charges of $31.1 million, generated mine gross profit of $11.2 million and a net income of $4.6 million, or $0.08 per share. Q3 average metal prices realized were $1,289 per ounce gold and $17 per ounce silver. Please note, because our metal sales include an embedded derivative, quarterly realized sales prices may be higher or lower than average quarterly metal prices.
The company maintains its 2017 outlook range, which range is based on a plus or minus 5% of approximately 27,500 gold ounces and 1.85 million silver ounces, along with significant base metal production.

We continue to focus on margin while mining tonnes based on net smelter return, or NSR values per tonne of all the metals to maximize cash flow.
Base metal production generally results in lower production cost per tonne and per ounce when used as a credit against precious metal production cost. Base metal sales were the primary driver in lowering our cash cost and all-in sustaining costs per ounce for the quarter.
During the third quarter, Arista Mine development ore from the Switchback vein system accounted for approximately 48.5% of ore feed to the Aguila mill, the remainder coming from production stopes in the Arista Mine. Production areas from Arista were split evenly between levels 4 to 6 and levels 18 to 22.

The new ventilation fans servicing Switchback are being installed and completed.
We have successfully reached our goal of approximately 1 full year of Switchback mine development prior to implementing both tonnage mining methods. Having taken a full year to develop this area of the Arista Mine, we now have close to an estimated 2 years of production development at Switchback for future mining, run rate dependent. We plan to begin bulk tonnage stope mining methods at Switchback using both long haul and cut-and-fill by the end of 2017 or early 2018.
Turning to the Mirador Mine.

We have fully undercut the targeted mineralized zone with development on the 1470 level, which is estimated to be the bottom of the Mirador vein mineralization in this area. We have started the ramp to reach upper levels. We're past the new definition drilling -- has intercepted higher grade silver. While the mine has had its share of development challenges, first with the past contractor we terminated and then with tough ground, during the quarter, it also saw signs of success with 3,500 tonnes of development ore being extracted averaging 1 gram per tonne gold and 146 grams per tonne silver.
Ramping up the agitated leach plant for Mirador ore processing has also presented a few challenges as well as we continue to work through mill optimizations.

The agitated leach portions of the mill was originally designed and built for processing open pit gold ore at a 300-tonne-per-day nominal capacity. Some adjustments and modifications to the mill had been necessary for the Mirador ore type, which is predominantly a silver ore.
Throughput maximums of Mirador silver ore through the agitated leach are estimated to be less than the nominal gold or rate of 300-tonne-per-day capacity. Exact throughput amounts have yet to be determined with the governing factors for throughput being the sizing of the Merrill Crowe precipitation circuit and slightly higher retention time frames in the leach tanks for the Mirador's high-grade silver ore. We still target to exit this year with 150-tonne-per-day average throughput goal, mine development and mill optimization dependent.

Operations in our Nevada mining unit during the quarter included taking delivery of the conveyors and radial stackers made by Superior and the crushing plant made by Telsmith for the Isabella Pearl Project. It is also exciting to see all this beautiful new equipment in our laydown yard ready to be installed and go to work producing gold for our Isabella Pearl Project. In addition, all this quality equipment was proudly made in America. We paid $1.7 million for the stackers during the second and third quarters and secured equipment financing for the crusher in the third quarter in the amount of $2.4 million. We continue to make progress payments on the project's ADR process plant, which is the final process of the plant where gold doré bars are poured.

The ADR construction is nearing completion.
We are still working and waiting on final BLM permit approval for the project, but remain optimistic and comfortable having ordered the key pieces of long lead time equipment so that we may transition from the permitting phase to the construction phase as soon as possible upon final permit approval.
Turning to exploration. Our Oaxaca Mining Unit's exploration focus continues to be on expansion efforts of the Arista Mines, Arista and Switchback vein systems. Additional underground drilling and drill pad construction continue to better test for deposit expansion.

The Switchback vein system continues to grow and has potential to become as large or larger than the Arista vein system. It's exciting to watch our Arista Mine grow and expand after 7 years of production. We hope to have additional drill results from Switchback before year-end.
Exploration at our Nevada mining unit focused on Gold Mesa with drill intercepts including 9.14 meters of 1.59-grams-per-tonne gold starting from surface.
With surface and near surface high-grade gold on all 4 of our properties in the pipeline of projects, Nevada, our mining unit there is very exciting.

With that, I would like to thank everyone for their time today on the conference call. Let's move onto the question-and-answer portion of the call. [Operator Instructions] Operator, please open up the lines for a Q&A and take a question if there is one. Thank you.

Operator: [Operator Instructions] We have our first question.

Unknown Analyst: It's [ Harvey Vollen ]. Congratulations on a really good third quarter. Jason, as I run the numbers myself, if you guys are still holding to your 27,500 gold and 1,850,000 ounces silver, it seems to me that fourth quarter is going to have to be a knockout compared to what's happened year-to-date. And I understand that you're moving into an area of the mine where the grades are expected to be higher. So assuming what I'm saying is true, does that -- will that have any effect on the base metal grades that you will encounter while you're mining during fourth quarter?

Jason Reid: Listen, the base metal grades vary depending on what stopes we choose to take.

And we always go into a quarter with a plan and then probably 9 times out of 10, that plan has changed depending on what we run into, and modified to a small extent, but we don't always take the stopes we target. So could they be higher or lower? Sure, they could. But we absolutely expect a solid fourth quarter. And at this point, there's no reason to think we're not going to have one. And therefore, we're holding our outlook as it's been.

But we love the fact that the base metal prices are hitting highs, like in some instances, 5-year highs. And that additional revenue is great right now, especially given the fact we're building plan -- in the process of building another mine in Nevada. So as far as grade though, Harvey, just depends on what we ultimately take as far as stoping. I mean we've been very focused on not doing any long-hole, open stoping or cut-and-fill over at Switchback yet. We wanted to take the entire year to develop so that we had this -- a lot of development in front of us, and we've done that.

So it just depends on what we ultimately take. But the grade varies from quarter-to-quarter, we all see that. Sometimes, it's up, sometimes it's down. So it's hard to speak exactly the grade of base metals.

Unknown Analyst: Sure.

But on the other hand, you're very comfortable that you're going to get a higher grade of precious metals during fourth quarter. So the first of my question is that if I look at third quarter, of the $31 million in revenues, $18 million-or-so came from base metals, overwhelming almost the amount of money that came from precious metals. So if precious metal production is going to be up in fourth quarter, which is what you're implying by staying with your original projections, then will base metals kind of stay the same as third quarter? Or when you're looking at higher grades in the mine, does that necessarily mean lower grades of base metals? Or is that totally independent?

Jason Reid: No, that doesn't mean that. It's really -- the grade fluctuates. It's not uniform by any means.

I mean there's a overall average grade, but quarter-on-quarter, you can't predict it like that. So there's no -- at this point, there's no reason to think we're not going to have a solid Q4. I mean things could change, we can run into challenges and not, but have a solid quarter. But at this point, we believe we're going to have a solid quarter, reach our numbers. And we'll just have to see how the chips fall out as far as where the revenue comes from.

To me, I don't really care as long as our production is on and to a point where revenue not only keeps operations going, keeps the dividend going, keeps taxes paid. And we're able to allocate some cash in Nevada. That -- I'll be happy if that takes place.

Unknown Analyst: I hear you. Can I ask one more follow-up unrelated question?

Jason Reid: Sure.

Unknown Analyst: So in Nevada, how much more capitalization costs do you expect? And have you decided on how you're going pay for it, i.e., out of overall company cash flow or finance like you did this one piece of equipment?

Jason Reid: No, it's a great question. We've allocated about $10 million, both through cash and through financing for the crusher and the ADR, the conveyors, the generators. So these long lead-time items, we needed to get in our hands. And we have them or soon to have them once the ADR is done. But the remainder, we'll just have to see.

I mean we are financing some equipment. We'll see where the metal prices go, whether we think we can bootstrap this thing through to the end or whether we think we need to evaluate other funding options, which as we've always said, could include cash, equity debt or a combination of those. But as you heard me reference in the conference call, we allocated almost $2 million in the quarter for equipment. So we are bootstrapping to some extent as we speak. But the ultimate outcome is yet to be known.

I mean we're just going to have to see what happens with the metals, if they stay here or if they pull back in the barrel market or they keep running in a bull market, we'll just have to see. But I can't answer that yet. We don't know. But what we have been doing is bootstrapping thus far. It's tough, but we're doing it.

Unknown Analyst: So are you saying there's another $10 million-or-so in capitalization costs?

Jason Reid: Yes, at least, yes. More or less, let's say, this takes $25 million, plus or minus. We still have $10 million to $15 million. And most of that goes into dirt work in building the heap and mining. So there's still capital needed.

But so far, so good. I mean we've done quite well, I think, to have allocated $10 million, basically, to the long lead-time equipment.

Unknown Analyst: How does the dividend question play into all of this?

Jason Reid: As it relates to whether it gets moved or not, upward, no, we're not going to move it at this point. We have a mine to build. I don't think it's prudent to increase the dividend when we have cash needs to build a mine.

But what I like to see is basically, we're leaning on Mexico to help build this mine in Nevada. Nevada gets up and running and the cash flow we expect from Nevada, plus the fact we won't have to lean on Mexico, perhaps Mexico can kick into the dividend and obviously, we want Nevada to kick into a dividend. Once we get Nevada up and running, I really want this dividend to go up. So I wouldn't expect it to move until we get Nevada up [running].

Operator: [Operator Instructions] We have our next question.

Unknown Attendee: Jason, [ Mark Smith ], just private investor. Harvey really delved into a lot of what I had to question you on. And my numbers were the same as his. I mean I'm getting 7,200 in gold -- just gold ounces just to make that quarter 4 and year, complete year forecast in gold, and 539,000 silver. Those are my numbers.

But I wanted to ask you specifically on the grade at Mirador, and perhaps, you touched on that already. I was late getting on the call. But is the grade at Mirador coming along? And you certainly have some good drill results there.

Jason Reid: Right. Yes, Mirador -- just to take a step back, Mirador had some old workings in it.

And we utilized those old workings to keep capital load to access this mineral and really start on a shoestring budget. And that's what we've done. But in doing that, too, we've also had the growing pains of putting a mine into production on a shoestring budget. We -- as I referenced earlier in the year, we had a contractor that wasn't executing and was delaying us, so we terminated them and brought the development in-house. Then we ran across some bad ground and some of the development which delayed us.

So we've had -- its had its year of challenges. We're starting to gain some ground. Now where we've come in on this mineral, historically, it's in an elevation, where they were not mining any deeper than this. And the point being is we have to mine up, but that's what you want to do as a miner. You want to come in as deep as you can and mine up from there and let gravity help you mine.

But we've done that, and so now, we're working a ramp up to what we believe will be the higher silver grades in this particular ore shoot that we're chasing. So it was nice to see that some of the tonnages I referenced that were coming out of there were over 1 gram gold and 150 silver. It's just part of getting a mine up and running. I mean nothing ever is perfect. You go in with a plan, and you deal with the reality once reality hits you in the face and you modify as you need to.

But we are -- we have modified and same thing with the mill. So we're still very optimistic with Mirador. And it will be nice once we get our feet under us a little more to have a consistent ore feed to -- to feed to the mill, to help supplement...

Unknown Attendee: Now over there in general, do you see some development similar to what you're doing for Switchback? Or are you just going be kind of a straight to the mill feed with that more so?

Jason Reid: Yes, we'll just hand-to-mouth over there. This is like us early on with the Arista.

I mean, we're going straight in to get to the ore shoots as soon as we can and mine hand-to-mouth. Again, with the overview that when we originally made the decision to move forward on this, we didn't allocate a whole lot of capital to do it. And so shoestring budgets are tough, but we've done that and we're there and with the goal that it starts making money to pay for itself. And that's the whole point to keep capital down and doing it organically. So we just need more time.

That's the way I see it. It's going to take time. This is a long lead-time industry, and Mirador's no different. But in the grand scheme of things, we've moved Mirador quite quickly, being able to leverage the historic workings that were there, cut down on a lot of development to access or get closer to the ore shoots.

Unknown Attendee: Right.

And you, thankfully, you've got a track record of actually doing these shoestring projects and that is much appreciated because just having the experience, it helps a lot. So that was my [ comment ]. As I said, I was late on the call. I'll listen to it when it gets posted and correspond more accordingly.

Jason Reid: Mark, I appreciate you listening to the call and for your continued support.

Have a good day.

Operator: [Operator Instructions] We have our next question.

Unknown Analyst: Jason, this is [ Lee Pigorsch ]. I've got a question that pertains to a subject talked about many, many months ago, and that is how is the power line progressing into the mine site in Mexico?

Jason Reid: Right. No, great question.

We absolutely have remained focused on getting this power line in, and we are gaining some serious ground on doing so. We have made dramatic headway with the Federal Power Commission, and we've rerouted the power line to a different direction, and we've received approval from all the communities that the power line, it goes through, many of which don't have electricity so this is actually bringing electricity to them. So they very much want it, whereas in the other direction, we had a couple holdouts -- so were creating problems for us. We are moving forward on it as we speak. So what do I mean by that? We're putting money down on it.

We're very optimistic it's going to happen. We've been reserved on comments in large part because we've been chasing this for 4 years now, almost 5 years, but it's big. And what do I mean by that? It's big, because it's really going to lower our cost, we believe. And we've been talking about it for so long that I'm just taking a conservative approach. But we are closer than we've ever been, and we're putting money down on the construction of it, and that's where we are.

So it's happening. I don't want to say it's a foregone conclusion until it's actually finished. But it's pretty exciting for us because...

Unknown Analyst: Well, let's keep our fingers crossed on this thing, and hopefully -- and get done here fairly quickly because I think it'd be a meaningful addition to this whole site.

Jason Reid: Absolutely.

It could lower our cost dramatically, not having to rely so much on diesel. And then if we can work the diesel, generate our power plants to do peak and off-peak hours for electricity and really optimize it going forward, I think we can lower our costs. But just by the very fact of getting on the electrical power grid, by all indications is going to lower our costs. And the payback on this project, which is about $4 million -- a little over $4 million, the payback on it is very good. I think it's less than 2 years.

But Lee, it's happening is the point, it's happening. But having gone...

Unknown Analyst: [indiscernible] going up so...

Jason Reid: Yes, having gone through so many battles and hurdles and struggles to get this thing in, I'm just taking a very conservative approach. I mean, I look forward to the day when we can come out and say, " the power line is done!" And at that point, our costs drop and that's...

Unknown Analyst: Well, good luck on that.

Operator: At this time, there are no further questions in the queue. I would like to turn it back over to you, Mr. Reid, for closing remarks.

Jason Reid: Great.

Thank you, everyone, for participating in the call, and look forward to the fourth quarter conference call. Have a good day.