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Edited Transcript of GORO earnings conference call or presentation 30-Oct-19 3:00pm GMT

Q3 2019 Gold Resource Corp Earnings Call

COLORADO SPRINGS Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Gold Resource Corp earnings conference call or presentation Wednesday, October 30, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jason D. Reid

Gold Resource Corporation - President, CEO & Director

* John A. Labate

Gold Resource Corporation - CFO

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Conference Call Participants

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* Chen Lin

* Heiko Felix Ihle

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst

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Presentation

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Operator [1]

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Thank you for joining Gold Resource Corporation Third Quarter Earnings Conference Call. Mr. Jason Reid, President and Chief Executive Officer, will be hosting today's call. Following Mr. Reid's opening remarks, there will be a question-and-answer period. As a reminder, today's call is being recorded. Please go ahead, Mr. Reid.

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [2]

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Thank you. Good morning, everyone, and thank you for joining Gold Resource Corporation's 2019 Third Quarter Conference Call. I expect my comments to run just a few 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 this earnings release that we issued yesterday, along with the comments on this call, are made only as of today, 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, 2018.

The third quarter of 2019 was an excellent quarter on numerous fronts for Gold Resource Corporation. It marked a record gold production quarter for the company to position the company to increase its 2019 global gold production outlook by 42% and put the company in a position to increase its dividend by 100% starting this month. Our global production for the quarter totaled 11,165 ounces of gold, 477,297 ounces of silver, along with substantial base metals generated over $40 million in net revenue, mine gross profit of $9.3 million and $3 million net income or $0.05 per share for the quarter.

The third quarter ramp-up at our Nevada Mining Unit's Isabella Pearl project allowed us to announce commercial production October 7. The commercial production announcement was based on mining rates or placement on the heap leach pad, mining and processing costs, production ramp-up and reaching positive operation -- operational cash flow during the month of September. Our team has worked extremely hard these past few months, navigating the challenges of mine commissioning and the typical production ramp-up of a new mining operation.

While the largest challenge proved to be dealing with construction contractor issues, the Isabella Pearl project's ADR process facility is now effectively complete. The Nevada Department of Environmental Protection recently visited the project to inspect the ADR facility, and we look forward and towards plant commissioning in the near future to enable on-site dore production. Off-site processing of gold-infused carbon into dore will continue until on-site dore facility is fully optimized.

There is no rush for this transition to take place. But when it does, we expect to lower our cost a bit and see some additional revenue by stripping our own gold-infused carbon and pouring dore on site. There will most likely be unforeseen additional challenges as there always are in the mining industry, especially in a recently commissioned project in a ramp-up phase. But given where we were just 16 months ago, putting the first shovel in the ground to where we are today, loading the pad at Isabella -- with Isabella ore and having reached positive cash flow in September, I am very pleased and excited on our progress at the Isabella Pearl mine. The at-the-market or ATM facility used to help finance the project's completion is still in place and expected to remain in place going forward as optionality for the company if and when needed. I am pleased to report the company has not used the ATM since July 30, 2019. While the company reserves the right to further utilize the ATM, we currently do not foresee the need to do so. The company's Oaxaca Mining Unit posted another solid quarter of production and maintains its 2019 annual production outlook of 27,000 gold ounces and 1.7 million silver ounces, plus or minus 10%. In addition, the company's Nevada Mining Unit targets 6,000 ounces of gold production, plus or minus 10% for the fourth quarter of 2019. This fourth quarter production target, coupled with the 5,381 gold ounces produced since April in Nevada, increases the company's global 2019 annual gold production outlook by 42% to 38,400 ounces, plus or minus 10%.

While we are fortunate to produce gold, silver, copper, lead and zinc, our global revenue distribution is on a solid trajectory of becoming predominantly from gold with continued excellent silver and base metal revenue exposure. Dividends have always been an important component of Gold Resource Corporation's philosophy. In July of 2010, the company declared its first monthly dividend distribution, the same month our Oaxaca Mining Unit reached commercial production. The Board of Directors was very pleased to recently approve a dividend increase the same month our Nevada Mining Unit declared commercial production as well. These are dividend milestones few, if any, other mining companies ever achieved.

Earnings are opinion, cash is fact. Having returned over $112 million cash in consecutive monthly dividends to our shareholders speaks volumes to our shareholder-friendly philosophy. The company is now a multi-jurisdictional mining company with 2 producing mining units, each poised to distribute dividends to our shareholders.

As we look forward into the future, we plan to continue to allocate capital for the growth of the company as we have with our past projects financed with cash flow, including the Oaxaca Mining Unit's tailings lift, electrical power grid project and paste fill, which are all operational. Future projects in Oaxaca include a tailings thickener plant, which is a positive on several fronts, including the environment, water savings and future tailings storage optionality.

At our Nevada Mining Unit, our plans of capital allocation includes exploration of numerous targets along the same structural trend with the Isabella Pearl mine as well as East Camp Douglas, which is targeted for drilling in 2020. East Camp Douglas property is what we refer to as home run potential. And the sooner we begin to drill this large district-scale property, the better we can position the company for a potential large-scale gold discovery.

With that, I would like to thank everyone for their time today on this conference call. Let's move to 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 on to the next productive caller's question.

Operator, if there are any questions, can you please open up the lines for our Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We will now take our first question. Caller, please go ahead.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [2]

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Can you hear me all right?

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [3]

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We can hear you now, what is your name, please?

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [4]

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Yes, this is Heiko with H.C. Wainwright.

Congratulations on the dividend increase. I mean I was just sort of been thinking earlier, it's been quite a while since I got the comment that -- column on dividend increase for a junior miner. So congratulations to that. Going to Isabella Pearl, can you just sort of go into a little bit more detail on things that still need to get done? I mean, I guess, in other words, what aspects of the operations should we expect to be different between now and the end of Q4 and possibly more efficient for the remainder of the year?

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [5]

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Yes. As far as the project is concerned, and let's start with the process plant in the ADR. We are technically commissioning portions of that and when that gets fully commissioned, we will be pouring dore on site. And as I mentioned, we're going to see a little bit bump in revenue, a little less cost because we'll be doing that in-house. So that will be good. As we move to the operations of the mine, in general, Ledcor has been doing a really good job right now keeping to schedule, which is very important. Because we are -- if you'll remember, the Isabella, while being great that its outcrops at the surface with mineral, it only averages about a gram. What we're really chasing is the deep high-grade in the Pearl. And as soon as we start to get into the Pearl, which could happen as early as mid-next year or potentially sooner, our lives are going to change tremendously, Heiko. This is great that we're -- we made money in September off of what I consider fairly low-grade in Isabella.

When we get into the Pearl at 4 or 5 grams, we're going to be a different company. So we just need to stay focused. We need to have Ledcor continue to execute, and we're going to, over time, see increased grade go on the heap leach pad, and we're going to be putting some more gold. Does that answer your question?

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [6]

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Yes. So there's really nothing besides the ADR?

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [7]

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No, there's not. No, there's not. We, as everybody knows, drilled the second well. Both wells are producing great. We have our primary focus right now just being mining. The ADR will come online. We're not pressed for time because we're producing revenue, having our carbon stripped off-site. But again, once we do have bring that in-house, that's just a little bit additional revenue for us. But no, the focus needs to be putting grade on the heap leach pad and getting to the Pearl.

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Heiko Felix Ihle, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research and Senior Metals & Mining Analyst [8]

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Got it. Next one, maybe a little bit more of a question for John. But I mean, feel free both of you guys pitch in here.

I mean so as you increased both your cash equivalent balance and also your gold and silver volume balance when you compare to December 31, and this will just be going for the Q, can you just sort of walk us through the minimum levels of cash that you feel the company needs to have to operate properly? And then maybe also just sort of walk us through at what pricing, additional cash has diminishing marginal utility and you'd be looking for alternate uses besides maybe keeping it on the balance sheet? And obviously, we've talked about the dividend increase. So that's one logical place where it could go.

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [9]

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Sure, sure. Just high level, we don't have a minimum per se. As a company, our shareholders in the past have seen us dropped to a $4 million cash balance. So depending on the situation, and I'm not saying we're going to there. But depending on the situation, we've done that in the past. We've -- you've watched us quarter-over-quarter hold about $7 million to $8 million. We're doing well with that. And the fact that we're holding right now where we are, and we're no longer in near the ATM because the project's done, basically. We are going to -- or I expect to, I should say, I fully expect to see our cash balance start to grow. And how great will that be because we're going to deploy in several different places. So I can't -- I don't want to be nailed down to a hard and fast x-million cycle for cash balance because that's just not how we operate. There's too many variables. There's too many things going on at each mining unit and it may fluctuate, but I think the long and short answer is you guys have watched us hold about around $7 million, $8 million recently.

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Operator [10]

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(Operator Instructions)

Our next question, caller your line is open.

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Chen Lin, [11]

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Jason, this is Chen Lin. Congratulations for the good quarter. Some of my questions already been answered by Heiko. Just a quick one. One thing, it's also about Isabella. You're right on mining Isabella. The grade is about 1 gram. I noticed in the last quarter, you have the 0.7 gram. Is that a -- you intentionally put a lower grade there to fix any variations of the mine, to test it? Or it's just -- or this is just part of the mine that's having a lower grade than Isabella?

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [12]

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Thanks, Chen. That's a good question. No, the average in Isabella just globally is 1. But obviously, we have to start with the first benches. And you're going to see great variations in that regard. We expect, at the end of the day, when we look back at what Isabella ran, it should average 1. But there'll be pockets in which it's higher and areas in which it's lower. So there is always going to be a great variability. There's not much we can do about that. Again, because you start with the first benches and you mine down. So does that answer your question?

It's not a function of anything, but the way the deposit situates.

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Chen Lin, [13]

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Okay, great. I don't know whether you did, if you separate any cash cost or all-in sustainable in Isabella or you put it just the company together, all the 2 mines together?

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [14]

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Are you asking if we separated the cash cost out from Isabella versus the Oaxaca Mine Unit?

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Chen Lin, [15]

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Right.

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [16]

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John, did we separate it in the Q?

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John A. Labate, Gold Resource Corporation - CFO [17]

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Yes. The cash cost for each mining units are separate in the Q. There's about 3 or 4 pages of statistics and everything is in there.

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Chen Lin, [18]

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Okay. Okay. I probably missed that part. Sorry about that. So what you forecast ongoing for Isabella for next year, especially if you start to mine Pearl?

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [19]

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Yes. Well, we're still getting a handle on our costs. We've stated earlier on before we even started this project, the early estimates were about $600 cash cost. But we're now in the thick of it, and it's too early to really tell, we're starting to see cost develop as far as just ongoing operational costs. But as this deposit evolves, we're moving the most tonnes now in these early years, the first couple of years. And as we get into the later years, we're moving far less tonnes and the grade goes way up. So you're going to see over time, especially the last 2 years of this deposit, our cost should go way down, and our revenue is going to go way up. And that's just a function of what tonnes need to be moved. So I'm a little hesitant to be real specific on what we think our costs are because we're just not quite there yet, but you're seeing the cost in the Q. John, do you have -- do you have any input on this? If you want to add anything to this as far as where you see costs going?

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John A. Labate, Gold Resource Corporation - CFO [20]

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Well, as we reported, we're averaging about 0.7 grams per tonne right now for Isabella Pearl, and we will be looking to slightly in excess of 1 gram per tonne, in fact, doing some of that right now and into next year. So the cost per ounce is purely a function right now of grade because the costs are pretty stable at this point. So as you can imagine, the cost should be coming down on a per ounce basis.

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Chen Lin, [21]

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Okay. Got it. You're -- last quarter you're [11] and [25]. So you should see that's all-in sustainable, so you see -- should see coming down below 1,000, I assume, when you get to 1 gram and then even much lower when you start mining.

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [22]

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Yes, much lower to that. And just to reiterate that point, Isabella, again, averages 1 gram, sometimes it may be higher, some lower, but averages globally. We're not -- it's not about Isabella.

This whole deposit is about the Pearl, which is 4 to 5 grams. So you can imagine what that will do to our cost once we're moving less tonnes at a much higher grade. Our costs are going to really drop, but that's later.

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Chen Lin, [23]

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Okay. Final question is what's -- when you start ADR plan, how much lower do you expect the cost will drop? How much reduce your cost? Cash cost or...

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [24]

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Yes, it'll be some -- and that's why I say a bit, and I'm not -- the stripping of the carbon doesn't cost us that much, Chen. John, what's our average stripping costs? Do you happen to know that off the top of your head?

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John A. Labate, Gold Resource Corporation - CFO [25]

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It runs probably about $4,000 to $5,000 per shipment. So it's not real significant.

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [26]

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Yes, it's not like a material amount, but it is going to save us a little money. So yes, that's not going to be a big driver, Chen, to try to address your question. That's not going to be a big driver, pushing down our costs so to speak. It's just -- it's going to be nice to be producing dore on-site for a number of different reasons.

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Chen Lin, [27]

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Okay. Great. Congratulations for a great quarter.

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [28]

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Thanks, Chen.

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Operator [29]

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We'll now take our next question. Caller, please go ahead.

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Unidentified Analyst, [30]

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This is [Ron Aubrey]. Congratulations to you and your team on reaching commercial production. That's a very significant milestone very few companies achieve, especially with so few shares outstanding and no long-term debt. So congratulations to you and your team.

Some of the questions have already been asked and answered. Just switching to CapEx. You touched on having most of your significant CapEx growth projects for both Mexico and Nevada now completed, so the company is positioned now to generate significant free cash flow. So one way to continue maximizing shareholder value is exploring the ongoing company's vast property portfolio. So could you kind of give us a feel over the next few years, what that looks like from an exploration resource expansion perspective? And what these properties that investors should focus on in both jurisdictions?

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [31]

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Right. Well, let's start with Oaxaca Mining Unit first. Our primary focus is always going to be around our largest mine, the Arista Mine. So that will be the lion's share of where we explore because you obviously want to drill where you know has gold and you obviously want to be drilling and adding where you can that you can produce from. And so that will be our primary focus in Mexico. As we move to Nevada, we are going to be focused on this trend, this 6 miles of trend we've locked up that if you're off of our claim boundaries on the 6-mile trend, there's about 5 other open pit heap leach historic mines. Right across the highway from us is the Santa Fe, old Santa Fe mine, and they produce 300,000 ounces of gold. So we're on the same trend. Isabella is going to do over 200,000 at least.

There's a property in our PowerPoint deck on our website that talks about Scarlet. I hope Scarlet is our next deposit. If not, we have numerous other targets where we've identified mineral and a lot of good structure where there could be potential targets for additional open-pit heap leaches. But as a priority in Nevada, obviously, we're trying to add any that we can at Isabella Pearl, then we're going to focus on Scarlet, but then we are going to move to East Camp. East Camp is a huge district-scale play. I think we did really well to pick this up during the bear market. There's -- you can see the assays on the PowerPoint deck on our website, and all those assays that you see, all that high grade, we didn't drill any of it. These are all past companies who were on this large district-scale property focused on these exciting high-grade veins to the north. But what we've identified is this major lithocap to the south. And this is game-changing kind of potential for us. So we're going to swing for the fences, see if we can hit a home run. And when I say game-changing, these kind of deposits could be north of 1 million ounces. So why shouldn't we be focusing on that, and that's what we're going to do.

Now it's going to take a long time to drill this. We spent over a year, taking thousands of surface samples on a grid pattern. We've identified over 6 targets. Again, it's going to take a lot of capital, a lot of time. But if we hit over here, that could take us as a company to the next level. And so yes, you're absolutely right. We always have, and we will continue to allocate our cash flow back into the company for growth.

And I think East Camp though could be the game-changer. And I'm very excited about East Camp. There's all sorts of reasons why that could change the pace of this company. Does that answer your question, Ron?

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Unidentified Analyst, [32]

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Yes, very good. One final question. You mentioned on the last conference call, the lesion curve and the potential for a re-rating of the company shares based on Nevada reaching commercial production. And now that this significant milestone has been achieved, reoccurring future sales and cash flow are more predictable. So in your opinion, what does reaching this significant milestone mean to the company's share price going forward?

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [33]

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Well, I think we've seen it in our outperformance over the last several weeks to our peers.

We have been an anomaly in this space, and the market is finally stepping up and saying, hey, these guys did it.

To your comment earlier on, congratulations for making commercial production, there are plenty of institutions who have told me they're waiting from us to prove to them that we can do it because they have been involved in too many failures in the past. So as we continue to prove to them, and commercial production being one of those, increasing the dividend, I think, speaks volumes. But as we continue to prove to them, they've said they're coming in. So I think, yes, as we continue to execute, we will continue to be on this lesion curve, which we're on our way, in my opinion, again, from the outperformance to our peers.

Having said that, it's a volatile metal market, it always -- it has been for the last several years, and I expect that, too, but -- yes, I guess, long and short of it is, when we come out with a 42% increase to our gold production target for this year, when we announced commercial production, increased gold and our dividend by 100%. These are kind of things that you get a re-rating from. And I think we'll continue to see that. Does that answer your question on that one?

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Unidentified Analyst, [34]

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Yes, and I appreciate your expectation as to what the future might bring. So thanks for sharing. Just wanted to have question on Walker Lane, just the minimum trend. I mean, historically, numerous gold, silver mines in aggregate, producing over 40 million ounces of gold, 445 million ounces of silver. Some of them are in your own backyard. The company is like first-mover advantage, pole position in this emerging Walker Lane mineral district. You've got a strong balance sheet, open ATM, cost of generating significant cash flow. Are there any accretive like tuck-in acquisitions, possibly to significantly add to your reserves, extend mine life, leverage or scale your Isabella operations?

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [35]

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Yes. Yes, there are, and we were looking at some. But M&A, it has to fit. We don't just do M&A to do M&A. We're very specific. We have to check out our boxes or we walk away. But are we looking at things? Absolutely. And the reason we are is it's very much in our memory that during the last bull market, we couldn't play in the M&A space at all. And mining companies were taking over and doing M&A 2x to 3x valuation. And it just didn't make sense. Well then the bear market hits, and that's when we went to work, and we look for 4.5 years during the bear market. It's countercyclical, but it actually what you should do. That's what we did do when we closed 4 deals in 14 months. This window is still open. It's not going to be open for too much longer, I don't believe. Once the world shakes and gold takes off, I don't know when that will be. That could be next month, it could be next year. But when it happens, we won't be in the M&A space at all. So we've already shown that we're in the M&A space by these 4 acquisitions in 14 months to secure our pole position in the Walker Lane.

There is no reason why we shouldn't still look for opportunities because things are still relatively cheap. But once the bull market takes hold and gold will be out, and we'll just focus on what we have. It could take off right now, and I'd be happy because we don't really need anything else. But to your point, we should -- yes, we are looking, we should look. And if there's some sort of acquisition that's accretive, we'll do it.

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Operator [36]

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We'll now take our next question. Caller, please go ahead.

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Unidentified Participant, [37]

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Jason, [Mark Smith], private investor. I've been with you for nearly 10 years, and you've also always delivered on what you've said. So I'm just looking at this waste-to-ore ratio, it seems to have gone up in the last 3 months there at Isabella Pearl. And you said that you really like the results from Ledcor. So would you make a comment with regard to how well you've actually modeled that deposit. And that these stripping ratios are in line with what you thought or not?

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [38]

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Sure. No, great question. When we had our model going into this. And the model is just that. You don't really know until you mine it. And so as we've been mining it, we've found more ore than we expected. And so we've had to tweak our model. The waste-to-ore ratio went down substantially in Isabella because we found more ore than we expected.

So I don't think that will continue when we get over to the Pearl because just structurally, it looks like the Pearl, we call this high-grade finger that comes up out of the Pearl. We think we have a handle on that. We won't really know until we mine it, though, but just to come back and reiterate to try to address your question. There's been less waste than we thought. So that's good. That's good. That's a positive. It doesn't always happen. Sometimes you have a model and you think you have an understanding and you go into a deposit, it could be less. But in this case, it was a little more, which really helped. So that's positive. But again, I'm so excited to get to the Pearl. I mean this is great. I mean to actually make $1 million in September off of Isabella is great. Therefore, we're going to make incredible amount of money. So the sooner we can get to the Pearl, we're just going to be off and running, and these quarters are going to be great. They're going to be fun. And we're going to make a lot of money. So the whole focus, again -- and it takes time. We always knew it because there is a lot of overburden to get down to the Pearl mineralization but we've been happy with what we've seen thus far.

It's gone a little better than our estimates in model. And so as we move into the Pearl, we'll see how that goes, but that grade is going to change our lives.

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Unidentified Participant, [39]

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And when do you target that Pearl land actually hitting the top of that thing?

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Jason D. Reid, Gold Resource Corporation - President, CEO & Director [40]

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Well, I refer to it as a finger because there's -- 80% of the ore in this deposit is in that finger, is in the Pearl, 80%. So it's basically most all of it is there. Now most all of it is deep. But there's this finger that comes up. And we've modeled the finger to the best of our ability. Having said that, we're going to get into that finger in not too far down the road, not to mean more months, but it's small at that point. It hasn't widened out. So we're going to start to see some of that but we don't really know yet, and we won't know till we mine it on how much of it we're going to have in that finger. I mean this deposit has been drilled a lot, but you can't drill it 100%, obviously. So again, mining it is the ultimate test on what it -- what the deposit situates like. But coming back to it, we'll get into that finger. The very tip of it, not materially, but the very tip of it in a handful of months from now, that's going to happen. And we'll just kind of have to see at that point what kind of impact it has. But as we go deeper, that's when the material impact happens. So I mean we're still several months out, Mark.

Okay. I think we've run out of time. So with that, I will conclude the conference call. If you're in the queue, and you didn't have your question answered. Greg and I are both in the office, call us, we'll be happy to answer any question anybody may have. And we'll be around to take those calls.

So with that, I'd like to thank everybody for the time. We look forward to updating you on the next conference call. Thank you.

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Operator [41]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.