Golden Minerals Co (NYSE:AUMN) Q3 2021 Earnings Conference Call November 9, 2021 11:00 AM ET

Company Participants

Karen Winkler - Director, IR & Assistant Corporate Secretary
Robert Vogels - SVP, Corporate Secretary & CFO
Warren Rehn - President, CEO & Director

Conference Call Participants

Jacob Sekelsky - Alliance Global Partners
Heiko Ihle - H.C. Wainwright & Co.
Siddharth Rajeev - Fundamental Research Corp.

Operator

Greetings. Welcome to the Golden Minerals Company Third Quarter 2021 Earnings Webcast. [Operator Instructions].

Please note this conference is being recorded. I will now turn the conference over to your host, Karen Winkler, Director of Investor Relations. You may begin.

Karen Winkler

Thank you, operator. Good morning, everyone. On behalf of the Golden Minerals team, I'd like to welcome you to today's earnings call, during which we will be discussing operating and financial results for the third quarter 2021. Before we get started, please note that certain statements made by management today will be forward-looking within the meaning of applicable securities laws.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to be materially different from those expressed or implied by such statements. Please refer to our most recently filed Form 10-Q for details of risks and other important factors that could cause actual results to differ materially from those in our forward-looking statements.

On the call today are Golden Minerals' President and CEO, Warren Rehn; and our Chief Financial Officer, Bob Vogels. Following their prepared remarks, they will be available to answer questions. This webcast will also be available for replay on the company's website tomorrow and remain posted for approximately 30 days.

I will now turn the call over to Warren.

Warren Rehn

Thank you, Karen. I am pleased to report that Golden Minerals just completed its first ever profitable quarter from mine operating income. This is a great milestone and it is validation of successfully executing our plan to become a profitable producer. And this profitability is despite increased exploration spending in the quarter mostly focused on expanding the Rodeo resource and extending the life of mine, which I'm sure we can all agree, given the strong performance of Rodeo is a worthy goal.

Rodeo continues to perform well. Production and revenue from Rodeo were both strong in Q3 with a quarter-over-quarter gain of 38% in gold production and a 44% gain in revenue. Our cost per ounce of gold produced has improved significantly since Q2 and is now in the mid-$800 net of silver credits. We are on track to meet our annual guidance for gold production of between 12,000 and 14,000 ounces, and we have already exceeded guidance for silver production for the year.

Our guidance for net operating margin of $10 million to $11.5 million is also right on track. We are seeing increases in the metallurgical recovery of gold in our plants based on some adjustments we have made in improving the fineness of the grind by grinding a bit less material per day and grinding it longer. We are injecting more air into the tanks to increase the oxygen levels in the agitated leach train, which is also increasing the gold recovery. Given the recovery gains partly based on the finer grind, we plan to maintain daily production levels at about 500 dry metric tons per day as we have been since late September.

We completed our resource expansion drilling near the Rodeo pit, and we'll be releasing the complete results from the program this quarter. We have seen numerous mill grade gold intercepts that are outside of the current resource. We expect to see an increase in the size of the gold and silver resource, which should yield a modest extension of the mine life for Rodeo. We plan to have that information incorporated into our mine plan before the end of the year.

Our advancement of Velardena is continuing to progress through detailed selective mining studies and additional final testing to define the details of the proposed bio-oxidation or BIOX plant. We have determined that it is not in the company's best interest to start the mine until we have approved the construction of the BIOX plant and they're closer to the possible completion date.

The economics of operating without receiving good payables for the gold are simply not attractive enough to justify the risks. We will not get good payables for the gold until we have the BIOX plant operating and can extract the gold using our oxide plant. This pushes a possible restart date out into 2022.

Once we have the results from our current test work, now underway in South Africa, we will have a much more accurate estimate of the capital cost of the BIOX plant, and we will have a firm schedule for possible construction. With this information, we will be able to evaluate the restart proposal and assuming the economics are still favorable, approve the start-up plan. This could happen in the first half of 2022, which would potentially allow for a resumption of production at Velardena as soon as the second half of 2022 or early 2023.

We have finished the first phase of drilling at our Sarita Este project in Argentina, and we are waiting to drill results. This drill program and related expenditures were required to satisfy the terms of our earn-in option. The property is immediately adjacent to the giant Taca Taca copper porphyry deposit in the Western Salta Province, and excellent potential for copper deposits and also for high sulfidation epithermal gold-silver deposits. Once all results are received, we will release the results.

In mid-October, we started our second round of drilling at our Yoquivo project in Chihuahua, Mexico, designed to follow up on some excellent gold and silver intercepts that we released early this year. The project has district scale. We control about 5,000 hectares and continued positive drill results would be significant for the company. We should see assay results early next year.

Our plans for production growth and sustainable profitability are in place and advancing well with Velardena producing possibly as soon as next year, we will be on track with our initial plan and potentially be producing and selling silver lead and separately zinc concentrates in 2022, while we are constructing the bio-oxidation facility.

Once the bio-oxidation station plant is complete, our projections show annual production of 2 million silver equivalent ounces per year from the operation at excellent margins assuming continued strong gold and silver prices. Our production from Velardena, one in full swing, will be about twice the improvement of gold production for Rodeo and we'll have a projected mine life of a decade and possibly more with additional exploration success.

I will now hand the call to Bob Vogels, our Chief Financial Officer; to present the financial results for the third quarter 2021.

Robert Vogels

Thank you, Warren. For the third quarter, our operating margin at the Rodeo operation increased significantly over the second quarter as expected to about $4.2 million with throughput at the processing plant averaging over 530 tonnes per day. As Warren mentioned, we anticipate the plant will continue to operate at a rate of approximately 500 tonnes per day through the remainder of the year.

Cash operating cost, net of silver byproduct credits improved significantly in Q3, declining to about $865 per payable ounce of gold produced due primarily to the higher mill throughput level and higher grades. Cash operating costs, net of silver byproduct credits should remain at or below $900 per ounce for the rest of the year even as grades trend back to the deposit average in Q4.

At throughput levels of approximately 500 tonnes per day for the remainder of the year and given a continuation of current prices for gold and silver, operating margins at Rodeo in Q4 should be similar to Q3. As noted in our 10-Q filing, we are estimating an operating margin of between $10 million and $11.5 million for the full year 2021 consistent with prior guidance.

With the significantly improved operating margin from Rodeo, we reported positive after-tax net income of about $400,000 for Q3 even with increased exploration spending during Q3 as we advanced several projects, including drill programs at Rodeo and in Argentina Sarita Este property, as Warren mentioned.

Other levels of expenditures for El Quevar, G&A and Velardena care and maintenance were similar to prior quarters and are expected to continue at approximately those levels going forward.

With the expected continued high operating margin from Rodeo, the company is also anticipating positive net income in Q4. We ended the third quarter with about $9 million of cash. Net cash flow for Q3 was a positive $1.9 million due primarily to the increased operating margin at Rodeo. Net cash flow during the third quarter also benefited from a significant refund of prior VAT receivables, as noted in our 10-Q. The VAT receivable overall declined about $500,000 in Q3. It is difficult to predict the timing of our VAT receivables collection quarter-to-quarter, but we expect our level of VAT receivables to remain more or less the same over the coming quarters with new VAT from current operations being offset by refunds of prior VAT.

Now that we are in full operating mode at Rodeo and providing metals prices remain at current levels, we expect we will have positive net cash flow through the remainder of 2021 and 2022. As reported in the third quarter 10-Q, we expect our cash balance to grow to around $11 million to $12 million over the next 12 months through September 30, 2022, depending on metals prices and spending on exploration projects.

These projections include the $1.5 million we expect to receive from fabled silver gold in December 2021 according to the terms of our farm-out agreement for the Santa Maria property. The cash projection does not assume any other forms of debt or equity financing or costs that we may incur related to a potential restart of the Velardena mine.

I will now turn the call back over to the operator who will take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from the line of Jake Sekelsky with Alliance Global Partners.

Jacob Sekelsky

Just starting with Velardena. Should we still expect full sample results later this year followed by the feasibility early next year closer to a potential production decision? I'm just trying to wrap my head around the timing of some of these items.

Warren Rehn

Yes, Jake, good question. So we will be having information to report from the study, which won't technically be a full feasibility study, but it will be feasibility level work on the BIOX portion of the process. We should have that in the first quarter of next year. Though the exact date is a little bit unclear, depends on the batch processing schedule that is being used by Uzotech [ph] in South Africa. So we should be able to -- certainly in the first half of the year, next year, we would have that information to release along with some of the book sample results, the head grades and whatnot that we obtained from the test mining.

Jacob Sekelsky

Okay. That's helpful. And then just on Rodeo exploration results program wound down in October. Assuming they're positive, when we see those results come out, do you think that will trigger a formal mine plan update or will it be more of an internal mine plan update in corporate results?

Warren Rehn

I'm assuming we'll do it internally because of the cost of doing an independent or external update. However, we will also be seeing likely an update based on the SK-1300 rules early next year when we refile the technical report summary. So that information would be included in those updates as well.

Operator

Our next question comes from the line of Heiko Ihle with H.C. Wainwright.

Heiko Ihle

Just thinking I would allude here a little bit with the longer term. I mean you're clearly investing in the firm quite heavily, but thinking out a little bit longer, how do you stand with investments versus shorter-term cash flow performance for the firm? And I'm talking about this because earnings versus the revenues that are being spent -- versus the capital that's being spent in your future revenue inflow.

Warren Rehn

Yes. No, it's a good question, Heiko. So we're obviously reinvesting in exploration. We have a pipeline of projects that have the potential to have material change for the company to the better. And it's important to invest exploration dollars in those properties as we go along. The company needs to grow, obviously. And the most effective growth program is internally from exploration spending, and it's, obviously, much quicker if we were able to do some M&A, which we are continually looking at also. But in the meantime, investing -- reinvesting some of the revenues as exploration spending is really beneficial to the company and the shareholders, in my opinion.

Operator

[Operator Instructions]. Our next question comes from the line of Sid Rajeev with Fundamental Research.

Siddharth Rajeev

Yes, congratulations on the strong production performance, everyone. A few questions. One is a follow-up on a previous questions or deal. So is it better to assume that a formal resource update will come out year-end, early next year?

Warren Rehn

What we'll do, Sid, is we'll do an internal update this year, we'll incorporate that into the mine plan. And it will be published within the technical report summary update that we need to do for SK-1300 early next year as in the summary form is what I anticipate. So while we won't produce an independent 43-101 report this year, we will update based on SK-1300 next year.

Siddharth Rajeev

Okay. Now you have provided cash flow projections for the next 12 months. But I'm a bit greedy here, I was trying to see if you are able to provide any guidance for production and maybe cash cost.

Warren Rehn

Bob, do you want to take that? I -- let's see. I'm not sure what we have in the next 12 months forecast right now.

Robert Vogels

Well, we don't have anything published certainly with our 10-K filing for the end of this year. We will provide a forecast -- full year forecast for 2022. That's what I anticipate. This year, we only provided a forecast for this current year 2021, and we've been reporting against that all year. I would expect with the year-end financials and 10-K, we will provide a full year 2022 forecast, which presumably would include production as well.

Siddharth Rajeev

So it's fair to say that the cash costs might remain the same in Q4 as Q3?

Robert Vogels

Yes. So I think actually, we -- in the update I gave, I indicated that Q4, we expect costs to remain under $900 an ounce, which is in line with what we had in Q3, slightly higher as grades will -- are expected to be a little bit lower in Q4 than they were in Q3.

Siddharth Rajeev

With El Quevar, what's the plan there? Can we expect a made in resource estimate next year or...?

Warren Rehn

Yes. Sid, we're just doing the second phase of drilling there. So we're a long ways from the possible resource estimate. We're looking to define the extent of some of these mineralized drill holes that we reported early this year. So it's unknown whether this will become a resource or not. And certainly, based on the results of this drill program that we're currently undertaking, we'll have a much better idea of the extent of mineralization, and we can give an update after those results are out early next year.

Siddharth Rajeev

And just one more question on Barrick. What's your plan the spent 1 million on the property so far? Any color on what they spent on, what is their plans going forward?

Warren Rehn

So the company has put out for bid for exploration drilling starting late this year, early next year, Barrick has, as kind of a public bid process. So they are planning to drill within the next year, and I don't have much more details to offer at this point, but they're continuing their process of earning in and continuing with the option.

Siddharth Rajeev

Again, congratulations on the strong Q3.

Warren Rehn

Thank you, Sid.

Operator

Our next question comes from the line of Heiko Ihle with H.C. Wainwright.

Heiko Ihle

I just had one quick follow-up there. Sorry for jumping back in. Can you break down the $4.9 million in exploration costs and property holding costs between your assets, please?

Warren Rehn

Yes. Bob, do you want to take that one?

Robert Vogels

The $4.9 million, that was the full year number, correct, Heiko?

Heiko Ihle

Yes.

Robert Vogels

The majority of it was at Rodeo, a little over $1 million in total. There was about $700,000, $800,000 at Sarita Este in Argentina. We also had some costs in there associated with our studies for validating the restart we include in there. And our normal spend for base level exploration, which includes property holding costs and a number of exploration concessions that we have runs approximately $2 million a year, so about $1.5 million of costs associated with just general exploration.

We have an exploration staff in Mexico and Argentina that we pay, and we have roughly about $0.5 million to date in concession payments to various holdings that we have. That's more or less a breakdown of that expense.

Heiko Ihle

Got it. And it's going to be the same for the next 12 months, more or less?

Robert Vogels

Yes. Depending on drill programs, that's the most expensive aspect of that. So we've got Yoquivo where we're drilling, as Warren mentioned, and there could be further programs announced as we head into next year.

Heiko Ihle

Got it. I mean you seem to have the ultimate number down the $4.9 million.

Robert Vogels

I'm sorry, Heiko, I didn't hear that exactly.

Heiko Ihle

I said you seem to have the total number down the $4.9 million that are in your outlook, right?

Robert Vogels

Yes. I'm confused by the question.

Heiko Ihle

What I'm saying is like the past 12-month spend should be more or less the same as the next 12 months spent by asset.

Robert Vogels

It will, if we continue to be fairly aggressive in drilling some of these prospects. In past years where we haven't had cash flow available to us, we have cut back a long ways, and we've managed to keep exploration spending in the $2 million to $3 million annual range, which is base level concession payments, holding costs, salaries and just minimal exploration work. And so yes. That's why you've seen an uptick this year as we had the money to do some of these additional drill programs.

Warren Rehn

Just let me jump in a minute more on that, just to explain a bit further. I think we spent probably more exploration drill dollars this past year than we would plan on for next year, but we haven't made that final decision, but as we start gearing up on Velardena once that decision is made, I think, we will, by necessity, cutback on exploration spending next year. So just as an overall look.

Operator

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Karen Winkler for closing remarks.

Karen Winkler

Thanks, operator. This concludes today's call. Thanks for joining us, and we look forward to talking with you again next quarter. Have a good day.

Operator

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.