Argonaut Gold Inc

TSX:AR

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is Kim, and I will be your conference operator today. At this time, I would like to welcome everyone to Argonaut Gold's first quarter results conference call. [Operator Instructions]Pete Dougherty, President and CEO of Argonaut Gold, you may begin your conference.

[Peter C. Dougherty, President, CEO & Director]

Thank you, Kim. I would like to begin first if we could all turn to the slide deck #2 and draw your attention to the forward-looking statements there. You'll hear today on this call management's best estimates and judgments as to what will and may occur over the next year, plus for the company.So if we can begin with that, we'll start with the Slide #3. We'll begin with a brief overview of Q1, followed by a deeper dive into our financial performance during the quarter. A review of our operations and walk through some of our plans for the balance of 2018.During 2017, we made significant investments into the business, with over $100 million of capital invested. These investments funded the purchase of the San Juan concessions, which extended the life at El Castillo, the construction of our newly acquired and running San Agustin project and the Cerro del Gallo project purchased at the end of the year as well as a feasibility study completed for the Magino project up in Canada.In 2018, we plan to reap the benefits of these investments, and I'm pleased to say that we are on track to do so as we presented a solid first quarter of production.For this year, our main focus is on ramping up production, building the balance sheet and derisking our development projects. 2017 was an investment year and 2018 is the time to harvest.Please turn to the next slide. Slide #4, achieving our objectives and delivering value. We had a solid quarter from a financial perspective and produced over 40,000 gold equivalent ounces.When we look at 2018 versus 2017 for the first quarter, we saw production up 8%, while cash costs fell 13% and all-in sustaining costs dropped 10%. This was due primarily to the ramp up of this low-cost operating project called San Agustin, which we just built last year at the El Castillo complex.When we think about financial performance, the company added $7 million to the balance sheet in the form of cash. When we look at how this was done, we generated nearly $12 million worth of net income and earnings of $0.07 per share back to our investors during the first quarter. We also made significant progress on both our short-term and long-term objectives.We continue to ramp-up San Agustin. As we look during this quarter, we will see that the throughput for the crusher at San Agustin is nearly 19,000 tonne per day versus a nameplate of 16,700 tonnes per day. That is a 15% improvement over what this was designed in order to be able to accomplish.We also completed the CR2 crusher expansion at the El Castillo mine, which should help us ramp our production from 20,000 tonnes per day to nearly 29,000 tonnes per day or a 45% increase. Therefore, as we look to the future, as we finish this project at the end of the quarter, we will begin to stack more ore during the second quarter onto the leach pads, which will in turn relate to greater production coming in the latter part of the second quarter and early part of the third quarter and throughout the year.It is anticipated that the life of mine plans and the new technical reports that were issued had significant impacts to the business. At the El Castillo mine, mineral reserves increased nearly 74%, primarily due to the new acquisition of San Juan concessions purchased from Fresnillo last year. We also provided maiden reserve reports for not only the San Agustin project, but also the La Colorada projects.On the long-term initiatives, we continue to advance the environmental assessment process at Magino, and we're happy to announce that on April 21, we signed our third indigenous agreement to date with the execution of a community engagement agreement with the Métis First Nation of Ontario. And when we look at our Cerro del Gallo project, we relogged the drill core and are updating our geologic model.If we could turn to the next slide. Slide #5, Q1 2018 financial performance. As I said, we had a fantastic first quarter. We generated $21 million in cash flow from the operations during Q1 and added $7 million of cash to the balance sheet. We had our highest quarterly revenue since Q3 of 2012 when gold was selling for nearly $1,700 per ounce. So quite pleased with what we were able to accomplish there.Can you please turn to the next slide. Slide #6, Q1 2018 capital spending, cash flow and liquidity. There's a lot going on this page, but I would like to draw your attention to a couple of key items. Q1 capital spend of $11 million or 20% of our 2018 budget was incurred, most of that going towards expansionary capital as we built and constructed and put into place the new crusher at El Castillo, ramping up that production, built new leach pads at El Castillo and at La Colorada. We also initiated an early drilling program at San Agustin, where we have 15,000 meters to drill this year.To me, the most important item on this slide is the cash balance. As I said earlier, we see 2018 as a strong free cash flow year for the company, and we believe that this will be second half weighted as we see our production climb during the second half of the year and our capital decline during the second half of the year. We had a solid first quarter and that makes me quite comfortable that we'll be able to achieve our goals.I'll now pass the call over to Bill Zisch, our Chief Operating Officer, and have him provide an overview of the operations during Q1. Bill?

[William M. Zisch, Chief Operating Officer]

Thanks, Pete, and good morning, everyone. Please turn to Slide 7, our operations overview. We had a strong operational performance at both San Agustin as we continue to ramp-up operations there and at La Colorada. At El Castillo, we didn't see the recoveries that we expected, primarily due to the height of the leach pads and a timing of ounces issues, which I'll discuss in a moment.But first, the benefits of bringing on a low-cost operation like San Agustin are clear. Overall, our production was up 8% versus Q1 last year, while our costs were down 13%. This is primarily due to the impact of San Agustin and the success we are seeing there early in its life.As Pete mentioned, we expect production to pick up as the year progresses due to the additional crushing capacity at the El Castillo complex and higher grades at La Colorada coming from the El Creston pit.Please turn to Slide 8. As mentioned, we did not see the El Castillo recoveries we have been accustomed to seeing. And therefore, it is substantial work to understand how the ore on the pad was leaching. The primary driver to the lower recovery this quarter at El Castillo is the timing of ounces. During the quarter and to end 2017, we were stacking tonnes near the top lists of both the East and West leach pads. This meant that it takes longer for the solution containing ounces to flow to the bottom of the heap. We fully expect that the bulk of the projected recoverable ounces will be realized in the future.During Q1, we completed the construction of the La Victoria pad and now have the ability to stack ore close to the plastic, which will improve leach timing. To a lesser extent, we also encountered a new lithology in Phases 9 and 10 of the pit, our hematitic oxide material. We're seeing initial indications that the recoveries of this material are 54% versus the 70% we have seen historically in general oxides.It's important to note that this lower recovery level for the hematitic oxide was modeled into our recent mineral reserve and mineral resource update in our technical report for the El Castillo complex. With the ounces previously stacked on the top lists, the improved crusher throughput and the fact that we are now placing ounces close to plastic on a new leach pad, we should see production increase at El Castillo as the year progresses.Please turn to Slide 9. Although more of an April issue and not a Q1 issue, it is also appropriate to spend a moment to touch on La Colorada, given we've had our explosives permit there temporarily suspended. This is a legal process with the court hearing scheduled for May 16. However, I think it's appropriate I provide you with information regarding what we are doing operationally to maintain operations without blasting. When we ceased blasting activities, we had quite a bit of blasted ore within the pit. This ore, along with stockpiled ore, has been keeping operations going without disruption.We also spent time evaluating a mine plan, whereby we can mine areas that do not require blasting, while ensuring we do not negatively affect our ore body longer term. We have been successful in this and now have a plan that will provide us sufficient ore to operate our budgeted crushing throughput of 12,000 tonnes per day until the end of July.With that, I'll now pass the call back to Pete, but I would be happy to answer any questions with respect to our operations during the Q&A session. Pete?

[Peter C. Dougherty, President, CEO & Director]

Thank you, Bill. I'd like to remind everybody that this legal action was filed against the Secretary of National Defense and the Municipality of La Colorada. We have a court hearing date scheduled for May 16 and are going through this legal process.Whilst we are not the named party in this court case, we are here to defend ourselves and that of the National Defense Secretary and also the Municipality of La Colorada. I would like to say that we are firmly in the belief that there is no merit whatsoever to the claim and that Argonaut as an effective party is taking every action possible to reactivate blasting activities as soon as possible.Please turn to Slide #10. Slide#10, 2018 focus. I want to take a few minutes now to discuss where we will be going and the company's focus for 2018 as we set up for this exciting year. The focus is threefold; first, ramping up production and preparing for that 200-plus thousand gold equivalent ounces coming in 2019; second, building cash on the balance through -- sheet through strong free cash flow; and third, derisking of our development assets.As I mentioned before, 2017 was about investing and this year is about harvesting.Please turn to the next slide. Slide #11, reiterate 2018 GEO production and guidance. We reiterate our 2018 production and cost guidance, and note that we expect production to increase quarter-over-quarter throughout the year as we see the benefits of this increased crushing throughput at El Castillo complex and an uptick in our grade coming at El Creston from the La Colorada property, assuming that all explosives permits stay in place in a relatively short order.Please turn to slide number 12. Achieving our objectives and delivering value, a 3-year outlook. As you can see on this slide, we are projecting a 65% growth in overall production from 2017 through 2019. We expect to achieve that, while also seeing operating costs fall. The first indication of that occurred during this first quarter with the full production coming from our San Agustin property.Please turn to the next slide. Slide #13, investing to the future, 2018 plans and capital estimates. As mentioned, we invested $110 million in capital during 2017 and this year capital -- our capital estimate is to be less than half of that. Our capital program is first half of the year weighted as we want to get the El Castillo crusher up and running and complete our leach pads before the rainy season comes.Lastly, as many of you know, we do a lot of our drilling during the first half of the year, so we can include that back into resources and update that for the fall. All of that work is well underway and you'll see that on the next slide.Lastly, as Q3 is the rainy season, we will also strive to get the majority of our leach pad work completed during the first half of the year. Therefore, with 20% of our capital estimate spent in Q1, we'll see a heavy capital quarter in Q2, then a significant fall off in capital during the second half of the year. Conversely, that's when we see production picking up, and we'll see stronger gains in production during the second half of the year, which should fuel significant cash build.Please turn to Slide #14. Slide #14, leach pad construction. On this slide, you'll see the 4 leach pads depicted. We completed the La Victoria pad at El Castillo. The Phase 8 pad at El Castillo is already underway and should be completed by June. The leach pad for San Agustin expansion, you can see we are already laying plastic and that should be completed in early June. And the La Colorada Phase 2 north expansion has already been completed. As I said, we are well ahead on our process. Please turn to the next slide. Slide #15, operations & actions, El Castillo crushing capacity changes. There have been a lot of changes over the last 2 years at El Castillo's crushing capacity. In a way, it's been a bit like a game of musical crushers with us bringing the original CR2 crusher from La Colorada during 2016 and then relocating the West crusher from El Castillo over to San Augustin last year. Following this relocation, we saw El Castillo's crushing capacity dropped by nearly 45%. We now have made changes to this crusher, CR2, which will enhance and ramp-up production yet again from 20,000 tonnes per day to nearly 29,000 tonnes per day at El Castillo. We did this through an investment of nearly $2 million to upgrade this crusher. Why are we doing this? Because we see significant yields. First of all, we see that if we can crush finer that we will get a better projected recovery. Not only we will get the throughput increase, which will help in reducing some of our fixed cost load but will also see a significant reduction in costs from not feeding by going to direct dump into the pressure. We think all these things will yield themselves a positive return within this year on this investment.Please turn to the next slide, Slide #16. At San Agustin, the crusher is performing very well and ahead of expectations. The nameplate capacity for this crusher was 16,700 tonne per day. And as you can see, through the first quarter and even into April, we have significantly exceeded that capacity. We've done that with little to any capital investment at this point in time. So I'm happy to see that the crusher is running 30% above nameplate and that yields greater returns coming back on this project and lower operating cost.Please turn to the next slide, Slide #17. We all know that we live in a world of depleting industry. Every day that we go to the mine, we mine out gold and we need to replace that year in year out. I want to touch on where we think our biggest resource gain is likely to come. We are currently in the middle of a 15,000-meter drill program along the northwest extension of our San Agustin ore body. Everything you see on this slide in orange represents what's known to us today of the 850,000 ounces of gold and the 28 million ounces of silver. In the pink area, what I'd like to highlight is a previously drilled area to the northwest, where we believe we had similar type of mineralization, but widely spaced drilling.As you can see on this slide, you'll see a number of blue dots. Those new blue dots will be completed this year. What our intent is to do is to tighten up the drilling to 50-meter spacing, which could then in turn roll into a reserve and resource in the future. We have always planned at this particular property, if we have success, to expand the crushing capacity and increase the production profile of this property. This drilling program will deliver on those results and help us determine what is the appropriate or right size for that next phase of crushing that we would undertake at this particular project. So we're hopeful to have positive results coming out here by the end of the second quarter and put that into a resource early in the third quarter.Please turn to the next slide, Slide #18. Shifting to La Colorada and assuming that we have the explosives permit resolved in short order, we see production here growing from 53,000 ounces last year produced to over 70,000 ounces next year, primarily driven by a grade increase that we are mining from the El Creston pit or the central pit on this slide.Another new development at La Colorada in recent times was an increase in our mineral concessions. We acquired what you see in orange or a yellowish color, which represents what we call the PIMA 3. It surrounds our Veta Madre pit. Previously, this pit was constrained because we did not own the concessions next to it. You can see from the yellow arrows that we see that once we take those boundaries off, we have an opportunity to increase the ounces that will come from that pit. We also see this pit being open for extensions to the South and also to the East. Slightly to the North, you'll see 2 yellow circles. Those represent targets that we have drilled on the northeast extension and now we have the North target that we will be able to look at. We think that this represents a significant opportunity to add additional ounces because as we unconstrained the Veta Madre pit, we should be able to gain additional ounces.Please turn to Slide 19. Derisking development projects. While we have a lot of exciting things happening in our operations and from an exploration standpoint, I think we also have a great position where we sit with not only short-term growth coming from operating assets, but longer-term growth coming from our development project pipeline.We recently held a productive session with SEMARNAT group to prepare a new MIA application for the San Antonio project.At the recently acquired Cerro del Gallo project, we spent Q1 relogging all of the drill core and developing our own geologic models. The next step at this project will be to conduct metallurgical test work and then perform an internally scoping level study to develop and find the best ways to maximize the economics of this project.At our Magino project, we continue to advance the environmental assessment process. We are hopeful that this will be achieved by the end of the year. At this time, we will be in a position to file the other key applications needed for this project. We're also very pleased to have recently signed a Community Engagement Agreement with the Métis First Nation of Ontario, our third indigenous agreement for this project. 2018, at Magino, is about permitting and continuing our indigenous and community consulting efforts as we derisk this project and move it for -- toward construction.Please turn to Slide #20. I would like to take a moment now to expand upon the Cerro del Gallo project, since it's our most recent project within the portfolio. When we look at Cerro del Gallo, we see a land package that is nearly 40x the size of that of El Castillo in terms of mineral concessions. We also see a project with a lower strip ratio and higher grades than El Castillo, and we feel like this project is right down the middle of our fairway. It was envisioned that this would be an open pit heap leach followed by a milling project later on, which could last for nearly 14 years, producing gold at a rate of 100,000 ounces per annum and a $700 all-in cost. Please turn to Slide #21. On this slide, you will see the exploration targets at the Cerro del Gallo project. The main focus for the pit is centered right in the center where the star is. We see this as a significant land package with many exploration targets and a key feature as we move forward.As I said before, the previous owners had envisioned this being a project where you could produce nearly 100,000 ounces a year over a 14-year life. Our program this year is to get in and understand what this project is and put our thoughts and our expectations around what could happen here. But we're hopeful that things look good and can be expanded upon.Please turn to Slide #22, summary of Investment Case. Many of you have seen this before and Argonaut is well known for its strong balance sheet, which provides the stability that fuels the growth. We have $21 million in cash and $8 million drawn on our revolver. That revolver has been extended to have an accordion feature to run up to $75 million, so we have significant flexibility within the company from a balance sheet perspective.We have proven that we can add cash to the balance sheet from our strong track record of profitable production, despite the fact that other mines with a very low-grade nature like this have been unable to achieve this. We have now close to 4 million ounces in mineral reserves and over 8 million ounces in measured and indicated resource, which all provide us tremendous leverage to this rising gold price as we continue to derisk our development assets.And importantly, as we look at our capital profile with the reduction of nearly 50% in capital year-over-year, we expect to add cash back to the balance sheet this year and have a strong free cash flow in year. By adding $7 million in the first quarter, we have proven that we're off to a good start and we expect that position to increase significantly during the second half of the year.Please turn to Slide # 23, our focus in 2018. As I said before and to wrap up this presentation today, Q1 was a good quarter for us financially and sets us on the front foot towards achieving this year's objectives of building the balance sheet, derisking our development projects and preparing for 200-plus thousand ounces of production next year.That concludes our presentation and we'll now turn things back over to Kim, our moderator, who will conduct a brief question-and-answer session. Kim?

[Operator]

[Operator Instructions] And your first question comes from the line of Rahul Paul from Canaccord Genuity.

[Rahul Thomas Paul, Director]

Pete and Bill, at La Colorada, you indicated that you have enough ore to continue operations till the end of July. Would that be lower grade or lower recovery material versus your original plan?

[Peter C. Dougherty, President, CEO & Director]

I'll turn things to Bill for this.

[William M. Zisch, Chief Operating Officer]

Yes, Rahul. Yes, your statement that it'll be lower grade is correct, plus what we'll be doing is going back into some stockpiled material. And it is stockpiled because it is lower grade than what we would have been mining out of the pit. So we will see a reduction in the grade for a portion of that material through the end of July, although in the very near term, about a third of that material will still be coming out of the pit.

[Rahul Thomas Paul, Director]

Fair enough. And then, hopefully, the blasting permit is reinstated soon. But if it takes longer, do you think you could temporarily increase crushing capacity at El Castillo, San Augustin to make up any shortfalls at La Colorada?

[William M. Zisch, Chief Operating Officer]

Yes, Rahul, we are doing -- our contingency planning right now, as we said, through the end of July. We'll see what happens after that. As far as increasing crushing capacity elsewhere to make up for some of those is something we certainly would consider. We're still looking at ramping up our CR2, and we have some other options perhaps at La Colorada that we would have to consider.

[Rahul Thomas Paul, Director]

Okay. So it looks like you've got a little bit of a cushion built in there. And then just -- on San Antonio, so I guess you spoke about technical sessions with the authorities in preparation of a new future environmental impact assessment. At this stage, do you think any changes need to be made to the project in terms of scope or anything else to be able to get this across the finish line versus just being able to resolve the old issues with the zoning?

[William M. Zisch, Chief Operating Officer]

Rahul, this is Bill. We don't see a need to make any changes to the project. We'll be submitting very similar project than we had previously. So from a technical standpoint, not a need to make any changes. What we are doing is reinforcing some of the reports of the studies that we have, making sure that we're able to answer the questions that would be coming forward. And with regard to the PTU and the zoning, I'll let Pete respond, but nothing has changed versus when we had the [ empado ] in our favor.

[Peter C. Dougherty, President, CEO & Director]

I think that's correct. And I don't know if everybody is aware of this, but we did have a legal process that we ran through regarding the zoning, stating that we believe the zoning was done incorrectly. That was settled in our favor at the Supreme Court level -- the tribunal level. And so the zoning is no longer an issue. So if we were to resubmit a MIA at this point in time, the zoning would not be an issue for denial of a permit at this time.

[Operator]

[Operator Instructions] And there are no further questions at this time.

[Peter C. Dougherty, President, CEO & Director]

Okay. Thank you all for joining us this morning. As I said, we are quite happy with how things have progressed here for the first quarter of the year. It's great to start off on a good foot forward for the first quarter. We look forward to the second and half of the year as we ramp-up this production and start to set the plan in place for 2019, which should be yet another exciting year for the company. Again, thank you all for your support, and have a great day.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call, and you may now disconnect.