As 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, May 8, 2019, and we undertake no obligation 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 ks filed with the SEC for the year ended December 31, 2018. Q1 of 2019 was another good quarter for the company. Our Oaxaca Mining Unit produced 6,538 ounces of gold 300 and 64,000 ounces plus ounces of silver, which along with substantial base metals generated $26,800,000 in net revenue or $0.01 per share in net income for the quarter.
Significant announcements during the quarter from our Oaxaca Mining Unit included updating our proven and probable reserves, boosting our global tons by 16%, our gold ounces by 18% and silver ounces by 14%. We also announced connecting the power grid, thereby lowering our unit power costs and significantly reducing our local environmental emissions. On our Mirador mine, development crosscut 6 meters of 9.92 grams per tonne silver. It was a busy quarter for Oaxaca, and we remain on target for our Oaxaca Mining Unit annual production outlook. At our Nevada Mining Unit Isabella Pearl project, we announced on March 25, we commenced gold processing by circulating solution on the heap.
About 30 days later, after the Q1 ended, we announced a major milestone by producing our first gold from the project. We did well to have produced gold in just over 10 months from breaking ground. Building a project like this is so exciting. An incredible amount of planning, work and problem solving goes into bringing a project like this online. Our team is still working hard to complete the final portions of the ADR process facility, from which we expect to pour Dore A Bars on-site in the future.
But after evaluating the ease of delivery and reasonable cost to utilize a third party to process our gold infused carbon accumulating in the ADR plant, it was an easy decision to produce gold dore for sale sooner than anticipated. We believe this is just the beginning of a great gold project for Gold Resource Corporation shareholders. We remain focused on ADR construction completion over the next several months and now look toward the project production ramp up phase at Isabella Pearl. We are placing more ore on the pad, more panels under leach and increasing leach circulation flow. Next steps include commercial production and the Nevada Mining Unit 2019 gold production outlook.
During the quarter, we also announced our targets for Isabella Pearl pit expansion and additional pit discovery potential. As noted in the March 26 PR, we increased Isabella Pearl pit reserves by approximately 22,000 gold ounces with a modest 2018 drill program and look to possible further additions from the northern edge of the pit. We have also identified several high grade targets near Isabella Pearl with the Scarlet target close by to the west and the Civic Cat West target a bit further northwest. I encourage listeners to review that press release. East of Isabella Pearl were 5 historic open pits, with the closest producing about 300,000 ounces of gold.
Isabella Pearl is the next open pit to now produce gold on this trend. There is great potential that Scarlet and Civic Cat West and or any of the numerous additional targets west along trend could become open pits as well. We have consolidated over 6 miles of this mineralized trend to the West and look to produce from this area for a very long time. We had a very busy and great Q1. For perspective, last year at this time, I made the following statement during the 2018 Q1 conference call.
I said then that we are very excited at the prospect of receiving our EA permit and permission to begin construction at the Isabella Pearl mine. Shortly after I made that statement, we received the permit. We broke ground a month later. And a little over 10 months after that, we have successfully produced 1st gold from the Isabella Pearl Mine. And I am proud of our excellent team that makes all these accomplishments possible.
Few people will ever be part of a team that builds a mine from scratch that produces gold. Those accomplishments are not without overcoming many challenges along the way. In the mining industry, there will always be challenges. But the team of Gold Resource Corporation has now earned its place as the newest gold producer in Nevada. With that, I'd like to thank everyone for their time on the conference call.
Let's move on to the question and answer portion of the call. In an effort to efficiently address the Q and 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 on to the next productive caller's question. Operator, please open up the lines for the Q and A, and we'll take our first question if there is one.
And we'll take our first question. Caller, your line is open. Please go ahead. Caller, please check your mute function.
It's Heiko from Wainwright. How are you? Can you hear me?
I can now, Heiko. How are you?
Perfect. Excellent. Thank you. Congratulations on all that progress with Isabella Pearl and frankly, actually across your asset base. And on that same token, well done on turning a profit
and paying a dividend while expanding your asset base. Good job. Given how close we are
to develop Pearl being 100% done and specifically talk about the ADR plan here, Can you provide some color on the final steps and expenditures needed to get that thing 100% done, please? And maybe even a time line, if you could?
Sure. Well, we believe the you said the final time line for construction?
For the ADR. For the ADR? Yes. What's the revenue?
We're still targeting June like we originally targeted to be done with that. We still move forward. We're in the we have had to deal with a couple of final change orders, mostly having to do with electrical on it. We're dealing with those. But hopefully in the next couple of months, that is operating and we're pouring gold from our ADR.
As I noted in the press release and in the call today, we were accumulating carbon in fused gold. So we decided we had the option to start sooner than we did. So that's to me more important that we reached cash flow sooner than we originally thought. But having said that, we haven't taken our eye off the ball and in the next couple of months we should be done with the ADR and pouring gold dore on-site. But as with any project, that final stretch, there's a lot of tying up loose ends, and that's what we're doing right now.
For Arista, I noticed you had some meaningful increases in lead and zinc, 4 point compared with 4Q 'eighteen and also year over year, which is obviously less relevant. But it was somewhat offset by decreases in gold production both year over year and sequentially. And while solar was up a bit from 4Q 'eighteen, it's also down a little bit year over year. Just sort of conceptually in longer term, I mean, this current strength in lead and zinc, should we think of that as more of a temporary thing or you think those higher grades are here to stay?
As far as the base metals and the higher grades there, it's a function of where we are in the deposit. If we use the Arista vein system as a case study of what we've lived over the last 8 years plus, as we mine through this epithermal system, some of the higher grade gold and silver are in the upper portions of the system. That's congruent with an epithermal vein system. And we still have gold and silver at the deeper elevations where we're mining now. But what's also congruent with an epithermal system is your base metals increase with debt.
So the grade and the gradation of where we are right now is a function of being deep in this mine. Over time, as we now have drifted over to the switchback and we plan to mine laterally and more importantly up, over time, I expect this trend, if you will, to reverse itself. It will take time. It's not going happen over a quarter or even a year. But over time, we're going to see it reverse.
So regardless, we're happy that this is a polymetallic deposit. And it was great when zinc was hitting its 10 year highs not too long ago. And we got the benefit of that. But it's just a function of where we are and deep in the deposit. And that's what happens in an epithermal system, higher base metal grade with depth.
And as you go upwards, you're going to see higher precious metal grades. Does that answer your question?
Very much so, it does. Thank you, guys, and congratulations again.
Thanks, Heiko. Appreciate it. And
We'll take our next caller. Your line is open. Please go ahead.
Hi, Jason. Congratulations for your new mind.
Thank you. Who am I speaking with?
This is Chen Lin.
Hi, Chen. How are you?
Good. How are you? I just have a question. I noticed right now you're really at a crunch time, you're trying to start up the new mine to generate cash flow. On the balance sheet, I noticed this quarter you have about 10,000,000 ATM on that.
Is that what your plan? And then just basically the question is going forward, right, what kind of cash and the precious metal on your balance sheet will feel comfortable so that you can complete Isabelle, make it cash flow positive until you try or you plan to draw more ATM at your comfort level?
Sure. Well, I want to be clear. We made very clear in our quarter that the ATM obviously was previously announced. We announced that in the previous quarter. We did have the ATM from quarter end or excuse me, from the Q1 till the quarter end with $4,000,000 additional ATM.
So to be clear, we utilized an additional 4.1 percent, mostly for working capital and a few of these final change orders I mentioned having to do mostly with electrical, but primarily for working capital. But as far as the ATM goes, and I was just at a conference yesterday giving a presentation and I had this question, why did you even utilize the ATM? When we were we obviously set out to build this with cash flow. And in the volatile market, we couldn't get there. So we used $15,500,000 of our own cash.
And we looked elsewhere. We looked at debt. We looked at a typical equity deal. And the typical equity deal was looking at like 14% cost of capital. Debt deal was 20%.
They don't even get out of bed for 20% plus covenants and hooks. And so the ATM, I want everybody to know, the ATM is 3%. You cannot find, we could not find, and I thought, you can't find any cheaper cost of capital. So we have kept dilution down tremendously by utilizing the ATM and I'm very proud of that. And I'm a staunch supporter of the ATM now because we could not have we would have diluted substantially more if we had to raise money north of the 3%.
But what I also mentioned yesterday at the conference and I'll mention to everybody on the call today, as far as dilution is concerned, and everybody is focused on that in this company, and that's what I love about it. And so I love your question, Shannon, That if I told you that we were going to increase 100% production to 20%, 30%, you'd be like, hey, that sounds pretty good. If I said 20%, you'd be like, that's really good. If I said 10%, we'd say, that's excellent. We're at 7%.
So if we have to continue to tap the ATM a little bit, we will do it. But I put our track record for keeping dilution down against anybody in this space. We only have 62,000,000 shares outstanding more or less. And so we have done, I think, a really good job in putting ourselves in a position of 100% increase. So coming back to your ATM, to be clear, most of
the ATM you're seeing in the
quarter was old, previously done. We did tap an additional 4. If we don't have to use it going forward, we won't. If we need a little more, we will. But again, we're very focused on that type capital structure.
And I'm very pleased at where we sit today, where we're just toward gold. We're at the final stretch. Yes, things are tight, but we got it done and we poured our first gold. So now it's just a ramp up. We're racing to ramp up as fast as we can.
It will take a little bit of time, but again, that first bar is the most important thing. So hopefully, I've answered your question on the ATM. Do you want to ask an additional question regarding that 'eighteen? Did I get your question answered, Tim?
Yes, yes. I'm just curious because you have the cash at the beginning of the period $7,700,000 at the end is $8,500,000 So you have a little bit cash increase. So what kind of cash will you feel comfortable going forward? Or you or with the new mine coming, you're willing to let your cash balance dip further until or maybe Yes,
that's a great question. Yes, I understand what you're asking and that's a great question. We don't have a definitive, hey, this is what we go to. Having said that, in the past, we drew our cash balance down below $4,000,000 So we're not we don't object to the company to doing that. But we have a lot going on right now.
And we want to make sure that we see this thing successful. And we're there. And so I can't give you an exact amount because we don't have this, okay, this is where we won't allow the cash to go below because you can go back to history and look and we've let it go much lower than where it is today. But again, we're now a 2 jurisdiction operator. So we have to keep that in mind that now we're a company that has 2 mining units, not just 1.
So there's more balls and juggle, so to speak. And we're just doing what we believe is prudent and in the best interest of shareholders. So I can't give you an exact number because I don't have one as far as what we'll let our cash go through.
Okay. Thank you, Jason. Congratulations for your new mine.
Thank you. And I hope, Tim, you saw the picture in that press release of that dore bar. It's beautiful, absolutely beautiful. Some dore is there's a lot of silver in it. You just don't get that gold shine to it.
So hopefully you saw that.
Okay. Thank you. I'd like to touch it one day.
Yes. Well, at some point, we'll be maybe doing mine tours. And there's nothing better than holding gold. I mean, there's nothing. It puts a smile on everybody's face that I've ever seen that holds gold.
So thanks,
Jen. And we will take our next caller. Your line is open. Please go ahead.
Hi, Jason and Mark Smith. How are you? Well, I'm doing okay. This could be for you or for John, actually. I've been kind of just looking through this balance sheet, there's some things in there I just had some questions on.
Specifically, you got I understand accounts payable kind of clogs up sometimes and gets pretty large, but man, dollars 6,000,000 increase in accounts payable, if you could address that. What's this deal on the change in inventory up 40% as well? And then lastly, could you comment on the operating leases, both current long term increasing over $12,000,000 substantial changes in the balance sheet and just would like some comment on that, please?
Yes, I'm going to turn that over to John. I think he's better apt to answer those questions.
Kind of we accounting nerds stick together.
Well, as far as accounts payable, that's going to vary. And since we've been ramping up at Isabella Pearl and we don't yet have sufficient revenues, you're going to see that being up a little bit higher and now we're kicking into a full mining mode. So you'll see that. In terms of inventories, same thing. We added almost $5,000,000 of inventories, mainly at Isabella Pearl.
We also had about $1,500,000 of dore inventory in Mexico, which we're not likely to continue to have. That pretty much flowed all the way through to sales shortly after the end of the quarter. So that was more of a timing issue. But yes, inventories will be higher because we're going to have a lot of pad inventory and full sales get kicked into full mode in Bella Pearl. As far as operating leases, the lease accounting, basically all public companies have to pick up this new pronouncement.
As of January 1, we implemented it. Basically, we have to look at all operating leases that qualify and that's virtually anything a year or longer. As a lease that we have to put on the balance sheet, we had to determine basically the value of what they call a right of use asset. What it amounted to was about $13,000,000 and you will see that almost $13,000,000 on a line item in the asset section. Unfortunately, in the liability section, you've got to separate short versus long term.
And of that $13,000,000 $8,000,000 of that went as a current liability, which one might say it kind of distorts what we really owe because we don't owe it at this point in time. But we will pay out that over the course of the next year. So that's basically the operating lease explanation. It's virtually just an accounting matter. It doesn't change the cash that we'll put out under our contract mining agreement whatsoever.
But it does gross up our assets and liabilities. So it just makes the balance sheet look bigger, but not necessarily better.
Yes. Mark, I just might add that for those non accountants like myself listening to this, the primary driver of the $8,000,000 John referenced is the met Core mining contract. And that being that we have that contract that's over 12 months triggered this. So now we have to put that We have to now account for that up since this pronouncement of January 1. So the new regulation, so to speak.
Okay. I can get that. All right. That was good, John. Thank you.
That really made it a little bit clearer. And especially with the new mine, all those kinds of incidentals, lime and whatever all you're putting on that pad to have that inventory. AP, I understand that you want to space that out when paying that. So, okay. One other question pretty quick.
And I could be wrong, been a shareholder for quite a while, but I thought we were done with the Agua open pit mine turns. Apparently not?
Yes. The Agula is a gift the open pit is a gift that keeps on giving. Okay. We've been mining that on a small scale for a very long time on and off. And we think we're done and then we'll go in and do a little exploration, find some additional grade.
And so we are mining that now. So yes, it's a small amount, but technically we have 3 lines in Mexico and now one in Nevada.
And we'll take our next question. Caller, your line is open. Please go ahead. Hi, guys. Brian Savage, shareholder from Chicago, Illinois.
I just had one question.
Why was the production cost seemed a
lot higher as a percentage than it
was in the previous quarter? John, do you have an opinion on that?
Yes. Well, that's directly related to the increased throughput to get higher mill tons through the mill. And I think that was about a 17% increase and production and production cost increased above 14%. So it's fairly direct, directly related to our production. Now because we did lower grade that we were processing, production held pretty constant and cost did increase.
So there is quite an impact to the grades. And in terms of production costs, we'll continue to have higher costs as long as we have the higher throughput. But again, the grades, as Jason has already explained, will be changing over time.
Yes, Brian. Let me just add to that, Brian, that in the past, I don't get too focused on 1 quarter after as opposed to the other prediction and here's why. It was not too many quarters ago, we were in negative cost. And that was a function of the high grade base metals that we were in at that particular quarter and the fact zinc hit a 10 year high. So costs obviously vary, but on balance, we continue to be a low cost producer.
Yes. No, no, absolutely.
That's the only question. I appreciate it, guys. Thanks. Thanks, Brian. We'll take our next caller.
Your line is open. Please go ahead.
This is Bill Case, a shareholder in Tucson, Arizona. And first to say commendations
to you
for keeping on schedule and couldn't get in all the permits for the Damada mine. That's excellent good news to hear. My question is briefly looking at Q1 results compared to Q1 of last year, comparisons were not favorable. I didn't hear any comments on that. I would appreciate some comments and explanation of what accounted for that.
Thank you. Sure. Well, I think some of it we addressed in the previous caller's question, and they're saying what about costs. And any given quarter can drive those costs up or down. Like I mentioned just a moment ago, we used to be a negative several $100 cost.
So it's a function of where we are in the mine, not to regurgitate everything I said earlier in the call, but we are deep in an epithermal system with high grade base metals. And there's still precious metals there. But as we mine up and switch back, we're going to get into different grade, and that will change things over time. So I guess that would be my answer. It's just a function of where we're mining.
But I don't want to lose sight of the bigger picture. We're focused now on ramping up in Nevada. We're focused on announcing commercial production and we're focused on increasing our annual global gold production. That will be the catalyst when we show the market what we can do. And I think that's the growth catalyst I think everybody should be focused on.
Once we hit our stride there, it's not everybody expects the dividend to go up. And that will be the next catalyst beyond that. So yes, quarter on quarter, year on year, you'll have some variation, but we are in an exciting growth phase. And I don't want to have some quarter on quarter comparison shadow that, and that's the most important thing.
Jason, I might also add that the quarter last year was unusually favorable from a base metals point of view and that the prices were considerably higher. We had some positive adjustments that came into the Q1 of 2018 as well. And you'll see that was the quarter where we had negative costs per ounce sold. And as good as we are, that's not likely to continue.
Yes. And another thing with you said that, John, that triggered something that's important for everybody to hear, Last year, we had one of the most favorable concentrate buyers terms that we've ever had. And this year, the whole industry got beaten up. And we don't drive that discussion. The big base metal producers drive those negotiations and set the tone and set what we get paid basically.
And so we also went from last year getting paid some of the best terms we've ever seen with the Trafigura to this year where not so good. And on top of that, we actually moved our copper over to Glencore. So we're now selling to and Glencore. So we've got better terms of Glencore on the copper. So that's a big factor too.
The metal prices are less favorable this year to all mining companies
as far as sales go. Okay. Thank you. Just one follow-up point. With the good news and the good outlook for the company, any comment on why the stock price seems not to be reacting the way Q1 would expect?
That's a great question. And if you look at our news flow, tremendous news flow over the last month, a news flow that one would think would increase the share price. Having said that, my screen and I'm looking at it right now, miners are mostly red. Hecla was down 4%, Fortuna almost 3%, we're down 5% right now. Most of the miners are red.
This is a very unloved space right now. And you can't buck that trend no matter what kind of good news come up to some extent. So it just is what it is. I don't have the answer for you. I don't think anybody does.
I would have a crystal ball if I did, right? But the most important thing is that we are in production in Nevada and we're building a successful operation there. It will take care of itself. The share price will take care of itself. This space will ultimately get some attention at some point and onward and upward.
But yes, I can't answer that.
Yes, I understand. It is perplexing and I agree with you, hopefully, that starts happening soon. Thanks for the comments. I appreciate it.
You're welcome. Have a good day. Thanks for the call.
And we'll move to our next caller. Your line is open. Please go ahead.
Color for the electrification project. It seemed like that got done pretty late in the quarter. And just wondering if we got any contribution from that? And if not, with the increased throughput down in Mexico, what is the forecast for how much that might add to our earnings for the balance of the year? Yes.
We are very proud that after a 5 year arduous project being the grid power in Mexico, we finally hooked to the grid power in the Q1, which is monumental for us. The estimated savings at this point is looking like $1,000,000 to $2,000,000 To give you a sense for power on a $0.01 per kilowatt hour, the grid is $0.13 versus the diesel, which is at $0.24 There is a diesel tax credit that we are still currently able to utilize and we're utilizing and that put it at $0.16 per share or excuse me, per kilowatt hour. So there is talk that that diesel credit may go away. And if so, we'd be looking at the savings between the differential of $0.13 versus $0.24 But as it stands now, it's a difference from $0.13 to $0.16 It will add several million, we estimate. But we didn't over time, we'll see more of that impact.
Also, it's going to take time in that some of the cost savings that I mentioned, the $1,000,000 to $2,000,000 include the cost to replace generators. Generators only have a finite number of hours, you try to rebuild them, but they always have a finite number of hours. And we found ourselves obviously running on diesel for so long. We had to buy new generators on a consistent basis and rotate them in and replace the old ones. We don't have to do that anymore.
So those costs obviously will be seen over a longer term. But a couple of million is a good target, I think, as far as cost savings. Obviously, if they do away with the diesel, which the new President, they sure might, there's a good chance to do away with that diesel tax credit. Good for us to finally get into the power grid because we would have gone from $0.16 up to 0.24 dollars Now if they do away with it, it doesn't matter. We're at $0.13 Does that answer your question?
Yes. Given the state of the petroleum production down in Mexico, I think that's probably something that we're going to see as far as the increases. Another question, regarding the I'm trying to understand, is it ongoing process where we are doing the 3rd party refining? And is that what's the schedule for getting production out of that? Are we waiting for more to ship up there?
Is there a step in process now? Can you just kind of give us a little color on what you see as the procedures going forward as far as the 3rd party refiner? Sure. Every Tuesday, we have an Isabella Pearl conference call at 9 a. M.
And we when we just had we discussed this and we'd like to be in a position to ship 2 to 3 times a week. And once we get stable doing that, that would be good for us. Do they have anything of ours in process now or are they waiting for that? As far as light this second, I don't know. I can't answer that.
Whether it's being shipped, it's there, I don't know. But the goal is to have it 2 to 3 times a month. And it just ships to Utah. They process it. What's great about this group we're using is that we get the carbon back.
We've looked at other groups. And in their process, they destroy the carbon, which is quite expensive. And so it didn't really make that much sense. But this group, we actually get the carbon back. And so it ships back and goes back into the circuit.
So it's really reasonable. And it allows us to be producing gold now. And so great. And that's terrific. And then we ship it then we ship the dore to Johnson Matthey and what's now Assai.
And Assai has received our first gold. So money is coming in from that. That's great. Okay. Greg, you gave me a little color that you had optioned in Reno or going to Salt Lake and that the carbon was the hooker for that.
So I'm assuming that, that in addition to being ecologically been more friendly, is it net out on a cost basis? Do you need to be favorable to recover the carbon with the perhaps higher refining costs? Okay. I guess I'm not following you. Is it better just to stay with the carbon?
Is that what you're saying? No, no. I'm just saying you're retrieving the carbon with the process we're using now. And you do savings. You don't want to burn that carbon.
It's really expensive. It's very expensive. And so to have that destroyed, it just makes it far less attractive. But this group in Utah actually gives you the carbon back. So it made far more sense.
There was a no brainer at that point. And so go ahead. Yes, I just said, so the point was basically you get the carbon back and you get the gold refined and the net net is as good as it would have been if you would have just gotten the leach part process to the point that you would be shipping it on to the next to the actual guy that's punching out the gold. Okay. With the refinery, you mean?
Right. Yes. I guess I'm not 100% following you, but all I can say is it's very attractive to you as a third party. It's just a no brainer. Yes.
And that's what we're doing. Yes, sure. Okay. I do think we've done over time. So if you do have calls in here in the queue, I apologize, but I think we're 7 minutes over time.
Feel free to call the office here, and I will field any additional questions anybody has. But with that, thank you everybody for their time on the conference call. And for all the shareholders out there, it's a pretty fun time. We report our 1st Golden Nevada, pretty monumental. So we'll talk to you next quarter.
Thank you very much.
This does conclude today's conference. Thank you for your participation. You may now disconnect.