Operator: Thank you for joining Gold Resource Corporation's 2017 Year-End 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. Thank you for joining Gold Resource Corporation's 2017 Fourth Quarter and Year-End Conference Call. I expect my 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, March 9, 2018, 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, 2017. In an effort to streamline quarterly conference calls, while still being available to take shareholder questions, I'm going to take a different approach to conference calls this year. I'm not going to just [ regularly take ] the quarterly numbers than anyone can read in the 10-K or quarterly reports. I'm going to hit the highlights, give color to updates and address problems or issues that may need to be addressed, and then turn the call over for questions. This hopefully will benefit everyone attending the call by making them shorter and more efficient.

2017 was another great year for Gold Resource Corporation. I am very proud that the company delivered its seventh consecutive year of profitability. We increased our cash balance by $8.2 million to $22.4 million and ended the year with $27.5 million in working capital. In addition to being profitable and adding to our cash balances and working capital, we succeeded on numerous fronts, including the following.
We reached the high end of our annual gold production outlook range with 28,117 gold ounces.

We achieved our annual silver production outlook range with 1.77 million ounces. We significantly expanded the strike length of our Oaxaca Mining Unit's Arista Mine Switchback vein system from about 300 meters on strike length to now over 900 meters of strike, an increase of 600 meters or 200% in about 12 months. As part of the Arista mine's development, we successfully developed 5 levels at the Switchback vein system prior to commencing bulk tonnage mining methods in February of this year. Our Alta Gracia project's Mirador Mine development is now gaining more momentum, developing the mineralized veins. We continue to develop upwards, which what we believe will get us into higher grade zones in the mine.

This is after overcoming challenges of ground stability issues early on and transitioning away from a mine contractor during 2017, which initially slowed our progress. At our Nevada mining unit, we acquired an additional 153 claims to add to our Isabella Pearl project, now totaling 494 claims covering 9,000 acres with over 6 miles of structural trend for exploration upside. We optimized and finalized the Isabella Pearl mine plan, purchased and took delivery of both the new crushing plant and new conveyor stacking system and have made significant milestone payments of about $3.1 million of the $4.1 million ADR plan, which is the final process in the Isabella Pearl operation in order to produce dore. The ADR plant construction is about 95% complete, being built modularly and will be moved to site for setup once we are permitted to begin mining. We continue to pursue the final permit for the Isabella Pearl project from the Bureau of Land Management and are optimistic, we may receive approval in the near future.

We also acquired East Camp Douglas property during 2017, which has many historic high-grade gold surface samples and high-grade gold drill results. But we believe the property has not been tested in its most prospective areas, which we plan to do over time. East Camp provides exciting exploration potential for the company as a large district scale exploration play and a great addition to the Nevada mining unit. Our total cash cost for precious metal gold equivalent ounce sold for 2017 was $75, a decrease of $473 from $548 the prior year. Our total all-in sustaining costs for precious metal gold equivalent ounces sold was $590, a decrease of $380 from $970 the prior year.

A large part of the cost decrease was due to our significant base metal production and sales. We are mining higher base metal grades at the depths in both the Arista and Switchback vein systems. During 2018, we were able to capitalize on 10-year highs and zinc prices and other strong market prices for copper and lead by mining areas of the mine with high base metal grades, which lowered our cost per ounce when used as a byproduct credit, and ultimately, generates additional revenue.
We've been mining the Arista mines, Arista vein system for approximately 8 years now, expanding underground operations not only along strike, but also mining significantly deeper into the lower levels of the deposit. A parallel system within the Arista mine called Switchback was accessed in late 2016, when we drilled ramps above 500 meters to the east.

We entered the Switchback vein system at its current known deepest elevation in this area and plan to mine upwards to higher elevations where we expect to see increases in precious metal grades and lower base metal grades over time. The 2017 low production costs driven from base metal byproduct credits may not last forever, as we mine upwards at the Switchback vein system. If the typical gradation of the Switchback vein system comports with both the neighboring Arista vein system and the typical epithermal vein system models. We may ultimately, see a future reduction in base metal production offset by higher precious metal production as Switchback, but time will tell.
Regardless, it's great to have the additional revenue from high-grade base metals from this deep portion of the Arista mine, substantially adding to our annual net sales and net income.

We posted annual net income of $4.2 million or $0.07 per share. That number factors in the $7.3 million in noncash new tax law adjustments that lowered our annual earnings by 13%. We had annual net sales of $110.2 million, a $26.9 million increase over the prior year. We had mine gross profit of $42.1 million, and $19.7 million increase over the prior year. We remain committed to shareholder dividends, returning $1.1 million back to the owners of the company, the shareholders, in consecutive monthly dividends.

The company produced 28,117 gold ounces, 1,773,263 silver ounces, 1,141 tonnes of copper, 5,365 tonnes of lead and 16,301 tonnes of zinc.
We successfully reached our production outlook target for 2017. And for 2018, our target is a similar outlook of 27,000 ounces of gold and 1.7 million ounces of silver with a plus or minus 10% range. In addition to our precious metal production targets, we expect to produce substantial base metals, again, in 2018 for additional revenue. We continue to focus on margin, while mining tonnes based on Net Smelter Return, NSR, values per tonne of all 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. The company's 2018 production outlook targets efficient, precious and base metal production during the year to support our budget plans for 3 substantial capital expenditure projects as well as our ordinary CapEx requirements. The 3 large CapEx spends targeted in 2018, include a Phase 4 raise to our tailing facility, raising the dam height by approximately 10 meters.
The second is the power line project, where we hope to be on power grid by late this year, if the power commission continues to move forward on their current plans. I caveat that with the if, as we are not in control of this project's construction and time lines.

But as of now, things are moving forward and connecting to the power grid as expected to save millions per year on power costs. The third project is a [ Paceville ] project where we plan to construct a pace plant to utilize [ Paceville ] in the Arista mine for 3 primary reasons. The first reason is safety. We want to limit the number of stopes left open at Switchback and elsewhere in the Arista mine for greater ground stability. The second reason is to increase total tailings storage capacity and extend the overall tailings facility life.

The third reason is the ability to recover more mining pillars for additional ore recovery at Switchback.
The Board of Directors would have approved the [ Paceville ] project based on its increased safety factors alone, but the additional benefits of tailings capacity and pillar recovery make the projects over $5 million CapEx, a great project to undertake this year with the goal of having the plant operational by the end of 2018. The remaining CapEx is on all 3 projects total about $10 million, an additional CapEx spending for 2018 above and beyond the normal CapEx. In addition to this long list of 2017 accomplishments, we just announced the company's strongest tonnage and a proven and probable reserve report to date, increasing our mine life by approximately one year over the prior year's reserve report. We converted a large portion of mineralized material into proven and probable reserves, while generating additional mineralized material targeting future conversion.

Please see the reserve report press release issued yesterday for more details and watch for the full report to be posted on our website in the near future. On a related note, the proven and probable gold ounces and mineralized material in the reserve report do not include mineralization from our Nevada, Isabella Pearl project. We are currently finalizing the reserve report for Isabella Pearl and plan to publicly update those reserves in the near future, which will add to the company-wide reserves.
We accomplished all of this, along with many other successes without raising money and without going into long-term corporate debt. 2017 was another great year for the company.

I want to, again, highlight the fact, 2017 marked our seventh consecutive year of profitability, which few -- if any other mining companies can show such a track record. This fact, not only differentiates Gold Resource Corporation within our industry, but boldly speaks to the fact we have and continue to run this company like a profitable business. We have not relied, as many in the industry often do, on equity sales or long-term debt to keep the company going by topping off the treasury or by bailing management out of bad business decisions. We make money and have grown organically with that money for over 7 years now. Well, that may not always be the case.

Seven consecutive profitable years is a great track record, so far, and a track record that stands out within the mining industry. I am proud of our excellent team that makes that accomplishment possible. With that, I would like to thank you, everyone, for their time today on this conference call. Let's move onto the question-and-answer portion of the call in an 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 I will simply move onto the next productive caller.

Operator, please open up the lines for the Q&A and take our first question, if there is one.

Operator: [Operator Instructions] We will take our first question.

Unknown Shareholder: Mark Smith, personal investor. You might recall, I was a little bit skeptical of your attaining your production goals. But bravo, and thank you for a really great job of getting those production goals met.

That was astonishing in the fourth quarter, the way it all came together. Having said that, I have about 4 different questions. Some of them might take a little longer than others. But the first one is, how much development or are you running through the plant down there from the development of the Switchback? And do you have any more to go?

Jason Reid: Well, yes, we'll always have a certain percentage of development arcs. We're going to continue the development.

And we spent over a year developing this. So that we could move away from the hand-to-mouth mining that we have been doing up until this point. Now you may have caught in my comments that yes, we did reach our goal of an entire year, it's over a year of development. But we did start in February, and we are currently stoping the Switchback. So going forward, you're going to see a lot more stoped ore coming out of the Switchback.

You'll always see a certain percentage of development. And I can't give you the exact amount of development tonnage we are going to be pushing through in any given month. But what you are going to see, and more importantly, is you are going to see cut-and-fill and open stope ore throughput. So it's an exciting time for us because we've worked really hard, been very diligent to not do this until we're ready to pull the trigger, and we did that this year. So -- yes.

Unknown Shareholder: Okay. Secondly, you guys had an earthquake down there. And was the ground -- what did the miners report that happened or maybe being the mine? Is the ground good there? And was that -- was the earthquake all that close to your operation?

Jason Reid: Well, first of all, this area has numerous earthquakes. And they're small and it's going on all the time and actually, that's what you want. You want very small ones happening on a regular basis.

What you don't want is hiatus, because that's when you typically get a bigger one. The bigger earthquake that recently hit, we were not impacted at all. In fact, there are many of the operation that didn't feel it. There was a earthquake prior, several months prior where we did feel it, but it didn't impact anything. In fact, the ball mill kept running and nothing -- things shook, but nothing -- there is no impact.

And I credit that to the fact that going into this, we built this with the -- that in mind and the amount of rebar that went into our steel foundations where one could accuse us of being overkilled when you look at it while it was built. But we are glad we did that because we've sustained it. So we haven't been impacted by them. If we are in an earthquake area that's why these deposits are there because there is so much activity in. But yes, people have noticed in the last -- people...

Unknown Shareholder: Excellent. Now regarding the actual ground on there, do you guys employ a lot of short creeks as in some underground operations? Or is that rock, that stable, in general, down there?

Jason Reid: Now it's a good question. We do and we are doing more of that. We are doing a lot more ground support. So yes, we are very diligent about that and increasing the ground support just out of an additional safety level.

Unknown Shareholder: Now you've got another quarter and period of time under your belt with regard to the Isabella Pearl. You've been deploying capital toward those big lead time items, et cetera. How much in a range, and I won't hold you to the penny, obviously, how much in a range do you have to go to bring that onto production now do you think, in capital?

Jason Reid: Yes. Now that's a good question. I mean you have your CapEx and then your working capital.

And we -- let's just say for the time being, say, it's $30 million. We've deployed either through short-term equipment loans or using our own cash like with the ADR committed to about $10 million of that. So that gives you a range of $15 million to $20 million is what we have to go, depending on all that you throw at that number. Having said that, it's like, I've said in the past, it's always been Plan A to do it with cash flow, if we can. And what's very positive is you're seeing our cash balance increase.

You're seeing this huge cash to -- for instance, like the ADR. If we can bootstrap this thing, that would be great. If we can pay to the whole thing. May not be able to -- and if we can't, then we'll consider other means, whether that's debt, whether that's equity combination of that or what, but Plan A would be great if we could pull it off, but it's a tough road to hold.

Unknown Shareholder: Absolutely.

And you've indicated that on numerous occasions going back on these calls, it could be any combination of things. I was thinking about this last night. And I wanted to encourage you to, if you decide to do an equity offering to offer it to existing shareholders first, and see how many of us would like to participate directly, thereby not directly diluting shareholders. Do you understand? I just like that, encourage you on that front.

Jason Reid: No, I understand.

I understand what you're saying. And yes that is a very shareholder friendly approach. That can add tremendous overhang on your stock, if you're coming out there [indiscernible] saying here who wants to put money to work here in short interest come out pummel you and then you're diluting even more than when you move forward. In the past, we've done mostly private placements and in that situation, the private placement hits and the market digest it moves on. As opposed to more a shopping as if -- from what you're suggesting.

I get it. That's I'm not saying, we won't consider that approach. We are considering everything. Right now, we're looking at -- I'm working with a group, looking at debt. I'm working with 2 groups, looking at equity, I'm looking at mainly trying to do this with cash.

And right now, we had a really good year and if these base metal prices hold up in the particular area in the mine that we are in now. We are producing a lot of base metals and that's why you are seeing this revenue exceed our expectations. And I can't tell you we're ahead on revenue budget-wise already this year. So if that trend continues, if that trend continues, there is a chance and it's just a chance, but it's a chance we could do with cash flow.

Unknown Shareholder: Yes.

Well, I really do appreciate the management, the style you have employed. I have been a shareholder for quite a little while not from the beginning, but -- and just go forward.

Operator: [Operator Instructions] We'll take our next question.

Unknown Analyst: This is [indiscernible] Advisers. Had the opportunity to being introduced to your company here at a recent conference.

Greg, you're probably listening or there, so hello. I was just wondering if you could address at all any issues you might have down in the Oaxaca area. I know the labor, Greg had indicated that labor relations are very good. Is there anything down there that is developing or not developing, as far as any problems with the local populations?

Jason Reid: Yes, no. Not at this time.

We've been down there a lot of years. And over the years, we do occasionally have pushback from the union and we pushback on them and that can have short-term effects on us. But right now, we don't have anything as far as the local population. So I'm not sure that -- I guess, that answers your question.

Unknown Analyst: Yes, yes, yes.

I mean, I'm familiar with that area. I know that, that could be an issue from time to time. So...

Jason Reid: What is your point -- to your point, the lot of the questions we get from the industry is, how do you guys operate in Southern Mexico, it's so hard down there. And from other industry associates that have worked down there have tried.

And I think in large part because we don't treat them like "Hey, we are the mining company. We are here, and you're going to do what we say." We treat them like they're our true partners because they are. We need them. We are in the middle of nowhere in Mexico. And we need these people.

They need our jobs. We brought a lot of people, especially years ago, when the housing bubble is going on in the U.S., and there is a lot of people from the little town that we operate in that we're building houses up in the U.S. and we brought them back. So I mean, we are very much the economy down there and they need us, but we also very much need them. And we treat them with utmost respect.

And I think that's why, yes, you always have issues, but why we haven't had major ones.

Unknown Analyst: Right. That's always a good policy to treat people the way you want to be treated yourself. So I commend you on that. Looking forward to continuing to follow and good luck this year in your efforts.

Operator: And at this time, we have no further questions in the queue. I would like to turn the call back to over to Jason Reid for any additional or closing remarks.

Jason Reid: Well, thank you, everybody, who joined the call. Thanks for the questions. And we'll talk to you next quarter.

Have a good day.

Operator: This does conclude today's conference. We thank you for your participation. You may now disconnect.