Golden Minerals Company (NYSE:AUMN) Q2 2022 Earnings Conference Call August 15, 2022 11:00 AM ET

Company Participants

Karen Winkler - Director, Investor Relations

Warren Rehn - President and Chief Executive Officer

Julie Weedman - Chief Financial Officer

John Galassini - Chief Operating Officer

Conference Call Participants

Jacob Sekelsky - Alliance Global Partners

Sid Rajeev - Fundamental Research Corp

Operator

Greetings. Welcome to the Golden Minerals Company Second Quarter 2022 Quarterly Conference Call and 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

Thanks, operator. Welcome to Golden Minerals Company’s second quarter 2022 earnings call. On today’s call are our President and CEO, Warren Rehn; our Chief Financial Officer, Julie Weedman; and our Chief Operating Officer, John Galassini. Following their prepared remarks, they will be available to answer questions.

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.

I will now turn the call over to Warren.

Warren Rehn

Thank you, Karen. Good morning to all and thanks for joining us. I will begin today’s call by providing a brief overview of the company’s second quarter performance followed by our 2022 guidance and several project updates. I will then hand the call over to John who will take you through the quarter’s operating highlights, followed by Julie who will discuss second quarter financial results. Afterwards, we will open up the call to questions from our analysts and anyone else who has sent in questions.

As you all know, the U.S. and Mexico are facing macroeconomic headwinds, including decades’ high inflation rates and continued supply chain challenges. And these headwinds have affected our operations to some degree driving up the cost of production. Our Rodeo mine produced approximately 3,000 payable ounces of gold and 12,800 payable ounces of silver in the second quarter 2022, generating approximately $1.3 million in net operating margin. Higher cash costs at Rodeo are due in part to the inflationary pressures on basic materials, but also in primarily due to the lower head grade from mine material that we encountered at Rodeo this past quarter as we near the bottom of the Phase 1 pit. Grades in the remaining Phase 1 pit and the current Phase 2 pit are higher than what we encountered this last quarter. Expenditures for exploration at Yoquivo and our new discovery at Sarita Este as well as cost of test mining at Velardena have also increased our net loss for the quarter to just under $0.02 per share.

Our full year 2022 production guidance for Rodeo remains unchanged. Payable production for 2022 is estimated at 12,000 ounces to 14,000 ounces of gold and 42,000 to 47,000 ounces of silver, with estimated average grades of 2.9 grams per ton gold and 9.4 grams per ton silver. Our plans to start mining at Velardena have been once again delayed, while we work through a modified mine plan and mining methods to counteract excess dilution we observed from some of the veins in our recent test mining. One vein in particular, the San Mateo vein yielded results exceeding the range of dilution that we anticipated.

We are looking at options to modify the mined plan by replacing the San Mateo vein in the plan with other veins that would not have the same characteristics that caused the extra dilution. We are also looking at the possibility of ore sorting to upgrade the deleted material. Investigating these alternatives will take several months. During this time, since silver prices have also dipped and have not yet returned to expected higher long-term values, we are better off not producing until we have reworked our mine plan and mining methods. John will provide additional information about the details of our Rodeo production and our recent work at Velardena later in the call.

Moving to the exploration side of our business, last month, we completed a third drill program of about 5,700 meters in 24 holes at our Yoquivo gold silver project located in Chihuahua, Mexico. The drill program was designed to further delineate vein hosted mineralized intervals that were identified during 2021 drilling The first 9 holes of the 2022 program, as reported last month, showed continued strong gold silver grades and identified multiple new and previously unknown high grade gold silver structures. Complete assay results haven’t yet been received. However, we expect this third round of drilling will give us sufficient information to estimate a maiden gold silver resource later this year.

At our Sarita Este prospect in Salta Province, Argentina, we completed a second drill program in June that was designed to offset and delineate an oxide gold interval that we encountered in an initial 2021 drilling program. We are very pleased with recently received assay results that point to a potentially economic shallow oxide gold system. We are planning further drilling at Sarita Este to begin in the current quarter. In April of 2020, you will recall we entered into an earning agreement with Barrick Gold at our El Quevar project located also in Salta Province, Argentina. This past June, Barrick completed a 5-hole 1,300 meter initial diamond drill program to test the highest priority targets on the property. Barrick reported vuggy silica alteration which is commonly associated with high sulphidation epithermal gold and silver deposits in all of the drill holes. Final assay results from the program are pending.

I will now hand the call over to John to talk in more detail about the operation.

John Galassini

Thank you, Warren. At our Rodeo operations, we produced approximately 3,000 ounces payable gold and 12,800 announces payable silver during the second quarter ending June 30, 2022. Year-to-date, we have produced over 6,600 payable gold ounces at cash cost per payable gold ounce net of silver credits of $1,283 and since Rodeo’s inception in January 2021, we have produced in excess of 21,000 ounces of gold and 77,000 ounces of silver at cash costs averaging $1,046 per payable gold ounce net of silver credits.

We are producing just over 500 metric tons per day and achieving around 75% recovery for gold and 82% for silver, levels which we see as sustainable through 2022. Cash costs per payable gold ounce net of silver byproduct credits were higher at $1,426 during the second quarter as a result of several items. First, lower grade material was mined during the quarter as modeled and as we expected – as we transitioned from our initial higher grade Phase 1 material to a mix of high and medium grade and Phase 2 of the pit. We anticipate about the same grade material for the remainder of the year as we have seen in the second quarter. In addition, we saw increased drilling and blasting costs incurred during the second quarter for the benefit of third quarter production. And we saw a spike in the cost of explosives related to the onset of the conflict in Ukraine and related supply chain issues.

While we continue to estimate full year average realized prices of $1,825 per ounce gold and silver respectively, we have lowered Rodeo’s 2022 operating margin estimates of between $6 million and $8 million from between $7 million and $9 million. During the third quarter 2022, we intend to begin expanding the tailing capacity of dockside plants that currently processes Rodeo material. The expansion was originally expected to take place in 2023, but is being moved forward due to higher than initially planned plant throughput at Rodeo in 2022. This work is estimated to cost around $2.1 million, most of which is anticipated to be spent in 2022.

We began limited scale mining activities at our Velardena underground silver gold mines in June 2021 to obtain bulk samples for use in our final optimization of a bio-oxidation or BIOX plant designed for future use and additional flotation studies that would indicate how we can effectively separate the gold bearing minerals into a pyrite concentrate that is proposed for processing at the BIOX circuit. Test results using the BIOX pretreatment oxidation process continue to fully support the use of the technology and future processing of Velardena.

This past May, we began additional test mining activities using a new contractor to evaluate productivity and dilution of resue mining on the principal veins that are accessible from the San Mateo decline. Although results of the test mining met expected productivity metrics, they did not meet anticipated dilution metrics on some of the veins mined. We are therefore electing to continue evaluating modified mine plans and mining techniques and address dilution issues. During the current downturn in precious metal prices, our plans to restart production at Velardena are temporarily delayed.

Before we proceed further with development work, we want to see test mining activity produce results that are consistent with the initial PEA. We would like to demonstrate the ability to fully achieve our mining dilution targets given minimal dilution is critical to the ultimate financial success of the project. In the coming 3 months, we intend to evaluate the results of the test mining and explore other methods that will maximize the value of Velardena. In addition to test mining techniques, we have also begun evaluation of ore sorting and an additional step in processing to further minimize dilution. Rock and ore samples have been sent to the ore sorter manufacturer for preliminary testing, with detailed testing scheduled for later this quarter.

I will now hand the call over to Julie to present the financial results.

Julie Weedman

Thank you, John. For the second quarter 2022, our operating margin at the Rodeo operation was approximately $1.3 million from revenue of $5.9 million received from the sale of approximately 3,060 ounces of gold in dore. The plant operated at a rate of just under 525 tons per day and the average gold grade of material processed was 2.6 grams per ton. While the operating margin from Rodeo in the second quarter 2022 was positive, we reported negative after-tax income of about $2.8 million. Exploration expenses were approximately $2.8 million, which included $0.8 million on test mining for the potential restart of Velardena, $0.6 million on drilling at Yoquivo, $0.5 million on drilling at Sarita Este, $0.1 million on drilling at Rodeo, and $0.6 million on general exploration. This is higher than the first quarter’s $1.7 million. G&A costs of $1.3 million for the second quarter remain the same as the first quarter of 2022.

Expenditures in Q2 2022 for El Quevar were $0.2 million similar to the first quarter of 2022 and are expected to continue at approximately that level going forward. Care and maintenance expense at Velardena was approximately $0.1 million, which was lower than the first quarter of 2022. We expect continued positive operating margin from Rodeo throughout 2022 and are now estimating an operating margin of between $6 million and $8 million for the full year, which is below the $7 million to $9 million we previously estimated due mainly to costs anticipated to be incurred in 2022 to increase the tailing capacity. These costs are occurring sooner than anticipated due to the higher than anticipated processing rate at the plant. This assumes full year 2022 plant throughput levels of around 510 tons per day, with lower grades compared to 2021 of approximately 2.9 grams per ton for gold and 9.4 grams per ton for silver. This operating margin estimate assumes a future gold price of $1,800 per ounce and a silver price of $25 per ounce.

We ended the quarter with about $9.5 million of cash. Net cash flow for the quarter was a negative $2.7 million due primarily to cash used in operating activities partially offset by $1 million received from the exercise of warrants. Spending on capital items has significantly dropped off compared to last year with only 27,000 spent during the first half of 2022 compared to $1.4 million spent in the first half of 2021. The higher 2021 figure included construction of the second ball mill added to our oxide plant.

Assuming metals prices average $1,800 per ounce for gold and $25 per ounce for silver, we expect our cash balance to remain around $5 million to $6 million over the next 12 months through June 30, 2023 depending on spending on exploration projects and cost associated with the potential restart of the Velardena mine. These projections include the $1.5 million of payments scheduled to be received from payable through June 30, 2023. The cash projection does not assume any other forms of debt or equity financing.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Jacob Sekelsky with Alliance Global Partners. Please proceed with your question.

Jacob Sekelsky

Hey, guys. Thanks for taking my questions. Can you maybe just touch on the remaining mine life at Rodeo? I mean, I know you have extended it already, do you think there is any low hanging fruit there extended by a few more quarters?

Warren Rehn

Yes. Good morning, Jake. Yes, this is Warren. Let me just take that one. We see the higher grade material lasting into October of 2023. So that is more or less where we were as of our last updates, I think in March. We do have quite a bit of lower grade material that depending on the gold price could continue the operation profitably. It’s fairly distinctly lower than the current average grade that’s I think it would probably average about 1.5 grams, which does make money, but just not the same profit margin. And that material could last another 2 years after the 2023 and of the higher grade material. So there is extended life, we are not seeing the higher grade material, expanding much more in the current center in the mineralization, but we do have an opportunity elsewhere in the property to continue exploration which we are looking at.

Jacob Sekelsky

Okay, that’s helpful. And then just looking at Velardena, were the dilution issues specific to the San Mateo vein. Can you just remind us how important that, that vein is to the mine plane is early in the mine plan or if the plan to sort of re-sequence to bring in other areas?

Warren Rehn

Yes, let me carry on with that. The San Mateo is fairly important to the overall resource or it was initially – it’s less important. Now that we have gotten through some of the wider parts of the San Mateo at the higher levels, but it still makes up about a third or so of the overall resource. And much of the vein is fine in this particular area where we are doing the test mining, there was jointing in the direct parallel to the vein structure that tend to just fall off as we are mining. So it over-diluted based on that geologic feature. It’s not present in that same manner. That characteristic isn’t present in that same manner in the San Mateo vein everywhere. But in those particular stopes on the San Mateo East, I believe it was – it wasn’t maybe, John, you want to comment any further on that?

John Galassini

I think you characterized it really well. And it’s – as you mentioned, just a difference in the rock type and it didn’t break as other parts of the mine that we tested did and so we had higher dilution.

Jacob Sekelsky

Got it. Okay. And then just lastly, on CapEx for the restart at Velardena, obviously, as you mentioned, Warren, we are seeing cost inflation across the board. Are you still comfortable with those figures for the BIOX circuit and restart capital or is that something that you think you go back and take a look at over the next quarter as test work continues?

Warren Rehn

Well, we are in the process, Jake of completing our detailed bids. So, specific bids from specific providers, we haven’t quite completed that. So far it’s in line with the overall $16 million cost of the BIOX plant that we had anticipated. And so I think that’s still going to be okay. Now, there is a chance that some materials will surprise us. As we have all been aware of it, the costs are going up, not down. But I don’t think it’s going to be substantial. So, that’s where I am so far. I really don’t have an answer to that until we finish the detailed estimates on the costs, but it’s not looking like it’s way out of range of what we had planned.

Jacob Sekelsky

Okay. It’s very good. That’s all for me. Thanks again.

Warren Rehn

Thanks Jake.

Operator

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

Sid Rajeev

Alright. Good morning everyone and thanks for your time. So, so pleased to hear that grades are going to improve in the second half, any guidance with cash costs, it definitely seems like cash costs might trend lower the second half, but any guidance on what the range might be?

Warren Rehn

Hi Sid. We are not really predicting that level of detail. I do expect them to come back down from what we saw in Q2. And we did some additional work in Q2 that is going to benefit production in Q3, some additional blasting and drilling. And so the costs accrued to Q2, but they benefit Q3 which will drive that cost per ounce down a bit. And April, I think was our lowest grade production month, that’s still within the – in the average grades that we are seeing at 2.6 grams per ton. But no, the month of April was quite a bit lower, almost as low as around 2 grams per ton. So, I think we won’t see quite that lower grade in the next quarter – this quarter. So, we should – based on that also, we are seeing the cost per ounce move down a bit.

Sid Rajeev

Okay. Thank you, Warren. In Q2 are you able to give some color on what percent of the increase in cash costs came from project specific versus macro, supply chain inflation, those stuff, so are you able to give a kind of a segmented percentage increase?

Julie Weedman

So, we did look at the difference in the cash cost, and it is pretty difficult to split out the exact portion related to inflation. Especially, a lot of our costs come through contractors. So, no, I don’t have a specific percentage on what portion of it was related to inflation. And as we mentioned the bigger contributor to the increase in cash cost of the quarter was the lower grade.

Sid Rajeev

Lower grades. Yes. Okay. Thank you. And Yoquivo, enough drilling has been done for resource estimates coming out later this year. Any preliminary guidance estimates on what the size could be? Any range we could work with?

Operator

It sounds like we may have lost Warren.

John Galassini

Yes, unfortunately, we have lost Warren line.

Sid Rajeev

Maybe then just final question, Yoquivo or Velardena, already mentioned that things got pushed out a bit any guidance and timelines. Previously, we were expecting some kind of production later in 2023? Is it fair to say that everything got pushed out by six months-ish, or will not be too aggressive?

John Galassini

So, the test work that we did, there were a lot of bright spots in the test work actually. With the resume mining technique that we tested, many of the veins met up to the productivity standards to get us to the throughputs that we wanted. But the dilution factor was still higher, which is we have mentioned previously that it is critical for the Velardena mine to have low dilution. What we are doing right now, Sid, is taking a look at not only the resume method, but also a couple of other methodologies like a modified long hole. And even cut and fill, where you can take more tons and have higher dilution. But you will have make up for it with your volume. That’s going to take another month or so to evaluate. And in addition, we will be looking at resume mining with – in combination with an ore sorter. So, with those tests in line, we are probably looking at a three-month to six-month delay in the restart to Velardena is an estimate.

Sid Rajeev

That’s good. Thank you so much. Appreciate your time.

John Galassini

You bet. Thank you.

Operator

And our next question comes from the line of John Finnick with Finnick Consulting [ph]. Please proceed with your question.

Unidentified Analyst

Thanks for taking my call. Is Warren back on the line, or is he still dropped?

Warren Rehn

I am back on John. I got dropped off.

Unidentified Analyst

Hey Warren. Hey. I had a two-part question, please. First is, congratulations on we are having some activity from Barrick, El Quevar and just wanted to find out from you and the team if you could update us on when assays may be expected?

Warren Rehn

Yes. I expect that Barrick will have their essays in sometime this month. They are not required to report to us until a month after the end of this next quarter. However, we may get that information sooner than that. But at latest that would be in October when we get those assays and when we would have a more clear idea of what their plans are going forward. But my feeling is that they had enough success, geologic success, and potentially assay success to carry on with at least another phase of drilling to see what this looks like.

Unidentified Analyst

Okay. Great. Thanks. And secondly, when you look at your most recent presentation deck online, there is Slide #4, which is a pie chart discussing different metrics and what is the value of the different projects, specifically, Rodeo, Velardena and Quevar in terms of NPV, net present value. So, looking at that it shows $187 million NPV. Yet the most recent Seeking Alpha article out there written by Taylor Dart is showing a much, considerably lower NPV when looking at those three projects. So, could you inform investors a little bit about what you think the value is? Is that value accurate in your deck? Is he pulling information from an old source, etcetera?

Warren Rehn

Yes. John, let me try to address that. So, from what I understand of Dart’s models, he is not getting any value at all, for example, to the Ek Quevar resource, which is in our NPV value. He hasn’t updated any of the NPV values and net present values of the projects for current metals prices. And most of our analyses were done at much lower than current metal prices. So, those are the two main areas where he is losing value in his analysis compared to what’s real. So, I agree with you, our company value based on the projects that we have, and the published reports that we have is far, far greater than what Dart is considering, and that leads to the error in his analysis.

Unidentified Analyst

Okay. Thank you.

Warren Rehn

Thank you, John.

Operator

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

Karen Winkler

Thanks operator and thanks to everyone for joining the call today. We look forward to seeing you again next quarter. You all 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.