Argonaut Gold Inc

TSX:AR

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. My name is Miranda, and I will be your conference operator today. At this time, I would like to welcome everyone to Argonaut's Q1 2022 Financial Results Conference Call and Webcast. [Operator Instructions]

You may now begin your conference.

[Lawrence Radford, executive]

Thank you, Miranda, and welcome, everyone, to Argonaut's Q1 Financial and Operating Results Conference Call and Webcast. I want to thank everyone for taking time to join the call today. From the Argonaut team, I have Dave Ponczoch, CFO; Lowe Billingsley, COO; and Dan Symons, VP, Corporate Development and Investor Relations with me today.

Today, we're going to walk through the Q1 results, which were generally in line with our budget for the quarter. We're also going to spend time providing you with an update on the Magino construction project, which currently remains on track for first gold by end of Q1 2023. But before we go through the slides we prepared this morning, and Id' like to share a bit of my background since this is the first time many of you are hearing from me since I joined Argonaut as the new President and CEO on March 21.

The situation that Argonaut is currently in partway through a build of a new mine that has experienced a significant capital is not new to me. And frankly, the reason that the Board felt that I was the right person for the job. I should start by saying that I'm a second-generation miner, and I'm passionate about mining. I'm a mining engineer by background and put myself through school working as an underground miner.

While I have nearly 40 years of experience in the last 15 to 20 years of my career have been fixing situations that have gone off the rails for 1 reason or another. I didn't intend my career to evolve in that way, but that's how it turned out. After 16 years with Barrick and Nevada and Chile, I was sent to Australia when the Cal gold mine was $300 million over budget and 6 months behind schedule. I saw that project through to completion and commissioning and has been a great mine ever since.

I then joined Kinross first at Fortnox, overseeing the operations and also the construction of the heap leach project and then later as the person sent to Paracatu in Brazil, the largest gold processing plant in the world, as the commissioning wasn't going well. From there, Kinross had me working on turning around a Chilean assets until I ended up taking the COO role at Hecla, which has a complicated portfolio of underground mines. I see tremendous potential for Argonaut, which is what attracted me to the leadership role.

Magino is a game-changing asset for a company of Argonaut's size and scale. And while the open pit project is a big needle mover on its own, the underground potential cannot be ignored. I've managed combination open pit and underground mines multiple times in my career. And I can tell you, when you have this combination, these can be a very powerful assets.

Just before leaving this first slide, I want to draw your attention to the picture of the Magino process plant area. As you can see, we are making very good progress at the project. And while we are not immune to the extraordinary challenges facing large projects in the current environment, we remain on schedule.

Slide 2. During this presentation, we will be making forward-looking statements based on our best knowledge available today. Please note that we cannot be -- we cannot predict the future with 100% accuracy, but we will do our best based on current information.

Slide 3. As you might expect, the first thing I wanted to do after my appointment as President and CEO was to get a thorough review of Magino's project capital and make sure that we have an up-to-date estimate. We are reviewing this internally, and I've also brought in external review, in particular, project experts that I've worked with previously in my career. This review should finalize the updated EAC.

While this update is not quite finalized, we believe the updated EAC will be approximately 50% higher than the CAD 800 million cost previously announced in mid-December. We currently have approximately CAD 605 million committed.

The project remains on schedule for first gold for in Q1 of 2023, as I mentioned. We are currently watching the schedule closely due to certain subcontractors exposed to current and threatened labor actions, and we'll continue to monitor this situation. But at this point, there has been no change to the overall project schedule.

To be clear, this is not an Argonaut-only issue, but a province-wide issue for certain trades in Ontario. Our contractor who has informed us of labor actions is very likely looking in the nonunion trades people for the jobs needed.

Slide 4. I'm impressed with what the Board and management team were able to accomplish during the 3-month period absent of CEO, which really speaks to the quality of the individuals in the organization. During the first quarter, Argonaut filed updated technical reports for all Mexican operations and the Magino project. The company also provided exploration updates at Magino, La Colorada and Florida Canyon, that all point to future upside potential of these assets.

The company successfully raised CAD 52 million in an equity financing and also entered into gold price protection program, which runs through the capital-intensive phase we are in for the next 12 months as we complete the Magino build. We have forward sales contracts in place for 7,500 ounces per month between April 2022 to March 2023 for a total of 90,000 ounces at $1,916 per ounce.

As you can see, a lot of good work was accomplished in a short period of time before I joined. Our near-term focus is on financing the previously announced shortfall to complete the Magino construction project. We have different paths that we're pursuing in parallel between financing alternatives and strategic alternatives. It is our fiduciary duty to our shareholders to always be focused on what outcomes will ultimately create the most value, and we are actively evaluating both self-funding options primarily in the form of debt financing and other strategic options.

As both financing and strategic options are fairly well advanced, we anticipate selecting the best option for the company in the near term with the goal of having Magino financing in place by the end of June. I can certainly detect and also appreciate the level of anxiousness around financing. However, before putting financing in place, it's important to fully flesh out the strategic alternatives.

As I said, both financing and strategic alternatives are well advanced at this stage, and we are cautiously optimistic that we will have a solution in place by the end of the second quarter.

I'd now like to turn the call over to Dave Ponczoch, our Chief Financial Officer, to walk through Argonaut's financial performance for Q1 of 2022. Dave?

[DavidPonczoch, executive]

Thanks, Larry. Please turn to Slide 5, financial performance. Q1 2022 revenue was in line with the same period last year. Net income for first quarter 2022 was lower than first quarter 2021, primarily due to a $2.5 million loss on derivatives this year compared with an $18.8 million gain on derivatives during the same period last year. On an adjusted basis, net income was slightly higher than Q1 2021.

In the quarter, we delivered $25 million in cash flow and ended with $166 million in cash. With $80 million drawn on our existing revolving credit facility, we ended Q1 with a net cash position of $86 million. At the end of the quarter, between $166 million in cash and another $45 million available to draw on our revolver, we have $211 million of available liquidity.

Next slide, please. Q1 2022 capital spending and cash flow. Looking at our Q1 cash flow reconciliation, we've ended 2021 with $199 million in cash, generated approximately $25 million in cash flow for Q1, invested $75 million in capital programs, of which the bulk was for the Magino construction project. We also added approximately $39 million through a flow-through equity financing.

Approximately 84% of the capital spend during the first quarter went towards the Magino construction project. During the quarter, we incurred approximately $75 million in costs related to Magino.

I'd now like to turn the call over to Lowe Billingsley, our Chief Operating Officer, to walk through the operational highlights for the quarter. Lowe?

[Lowe Billingsley, executive]

Great. Thanks, Dave. Please turn to Slide 7, the operations overview. Operationally, Q1 was generally in line with budget. We produced north of 55,000 GEOs in the quarter at a cash cost of $1,153 per ounce, and an all-in sustaining cost of $1,430.

While Q1 2022 was generally in line with our expectations for the quarter, GEO production was lower than Q1 last year, primarily due to lower grades processed at La Colorada, as mining transitions from the El Creston pit to the Veta Madre pit, and lower recoveries of Florida Canyon as we process more run-of-mine ore in Q1 of 2022 than Q1 of 2021, which yields a lower recovery than crushed ore.

On the cost side, we experienced higher costs due to higher mining rates at both El Castillo and La Colorada due to planned mine sequencing being at phases of higher strip ratios on both of these mines as well as higher reagent costs across all operations versus a year ago.

Slide 8, 2022 guidance. It has been a solid start to the year for us versus our guidance. We're maintaining both our production and cost guidance. However, we are monitoring our cost guidance closely due to the current inflationary environment and we'll make any adjustments to guidance if or when needed. We have not provided capital guidance for 2022, but plan to do so once we have financing in place for the Magino construction project, which is by far the biggest driver of our capital spend this year.

Slide 9, Argonaut's commitment to sustainability. I'd like to take a moment to highlight something we are proud of at Argonaut. For the tenth consecutive year, in Mexico, we've been recognized as an environmentally and socially responsible company and awarded the ESR designation. We also published our annual sustainability report on April 6. This report is available on our website with lots of good information on both our ESG and CSR initiatives.

With that, I'll turn the call back to Larry.

[Lawrence Radford, executive]

Thanks, Lowe. Slide 10. I know the focus is on Magino's construction progress and the capital required to complete the project and the associated financing plan to get to the finish line, and rightly so. I've been through these builds multiple times, and people tend to lose track of the value creation opportunity once the project gets to the finish line.

Magino remains an economically robust asset in the Tier 1 jurisdiction of Ontario, Canada. We see a long life mine with expansion potential in the future and through the potential development of a concurrent underground mine. If you assume 15% higher capital cost to completion, the Magino project is worth more than the current market capitalization of the entire company at spot gold price. So a tremendous value creation opportunity can be unlocked as we persevere and get the project up and running.

Slide 11. Just looking at the base case 10,000 tonne per day open pit project we are building today. You can see how meaningful Magino is expected to be for Argonaut. In 2021, our 4 existing operating mines produced 58,000 gold ounces, on average, whereas Magino is expected to average 142,000 ounces during its first 5 years following its ramp-up period.

Magino's all-in sustaining cost is expected to be 28% lower than our 2021 consolidated AISC base. Our current plan shows a 19-year mine life and is focused on a 2.4 million mineral reserve ounce within a 4 million M&I mineral resource. As you know, we'll diversify Argonaut geographically as the majority of our production will shift from Mexico to Canada. And again, this does not include any future processing expansion or underground mining opportunities, which we see as future opportunities for the project.

Slide 12. Just before we wrap up today, I want to remind everybody of exactly where Argonaut sits in the value cycle of a gold stock. We are all likely familiar with the Lassonde Curve, and is our belief that as we continue to advance Magino through a construction and ramp-up as well as moving exploration concepts as multiple assets further along, we will have a significant re-rate potential.

With that, I'll turn the call back over to Miranda for a brief Q&A.

[Operator]

[Operator Instructions] Your first question will be coming from Gabriel Gonzalez with Echelon Capital Markets.

[Gabriel Gonzalez, analyst]

I'd like to ask if the potential labor action and the related subcontractors are mainly related to earthworks and tailings facility constructions? Or would it be related to the processing plant construction?

[Lawrence Radford, executive]

It's more of the processing plant. This is the International Union of Operating Engineers, crane operators and carpenters at this time. We haven't seen an effect on our schedule at this time. But if this goes on indefinitely, we certainly will.

[Gabriel Gonzalez, analyst]

Okay. And given that it is predominantly then related to the processing plant construction, does the company believe that any force majeure can be invoked should there be any labor action?

[Lawrence Radford, executive]

Yes, it can be by our contractors.

[Gabriel Gonzalez, analyst]

Okay. Perfect. And so then just if you'd be able to potentially quantify of the current $200 million in committed capital and the remaining estimated CapEx. Approximately how much of that would be subject to that force majeure if a labor situation does strike? In other words, about how much of the remaining CapEx would you be able to effectively delay if force majeure was invoked?

[Lawrence Radford, executive]

It's a little premature to put out numbers such as that. Dan, any comments?

[Daniel Symons, executive]

Yes. Gabriel, this is Dan. We're going through this in real time. With Sanko, everyone knows is our EPC contractor, and this -- we just received notice of this a couple of days ago. So this is, again, not an Argonaut-only issue. This is province-wide. I'm sure that our main contractors looking into subcontractors who are nonunion members. In our specific area, the feedback we're getting is people doing the work for us to -- don't want to be involved in a labor action, but the -- unfortunately, the majority of the -- those votes come actually out of the Toronto area for that union, and that's what's happened.

[Gabriel Gonzalez, analyst]

Okay. Okay. No, perfect. I definitely appreciate that this is sort of a, as you put it, happening in real time. And the -- I guess the estimations are forthcoming as the situation permits.

[Operator]

Your next question comes from Michael Fairbairn with Canaccord.

[Michael Fairbairn, analyst]

Just wanted to start with the equity raise that you referenced in your press release or potential equity raise. Wondering if you're able to give us a sense of how substantial the raise might be to supplement any other project financing?

[Lawrence Radford, executive]

Go ahead, Dan.

[Daniel Symons, executive]

Michael, this is Dan. We're looking at different financing options. I don't recall referencing an equity raise in the press release, specifically. So we're primarily focused on debt options right now. With the increase, there may be some equity component, but that's still being sorted out. So it's a little premature to talk about exact size or timing.

[Michael Fairbairn, analyst]

Okay. Got you. And then maybe just on the -- I think there was also a note about possible -- a possible curtailment of capital spending at Magino if financing is not in place by the end of Q2. Just wondering if you have any sense of how quickly you could curb spending at Magino, if it did come to that?

[Lawrence Radford, executive]

Many of the contracts have a pretty short fuse on them. But obviously, you have to wind it down and close out contracts. But let me be clear that that's the last resort, and we haven't got there yet.

[Michael Fairbairn, analyst]

Okay. Perfect. And just one more for me. Just wondering if you can provide a status on the power plant. I remember that was an item that was raised as a potential risk to the project schedule previously. Is that still progressing according to plan?

[Lawrence Radford, executive]

It is progressing according to plan. It was -- as many of you will know, it's a late addition to the project scope, and we've identified it as a potential risk to the ramp-up and start-up. We do have a contingency plan in place to rent generators should we get there. We're not there yet.

[Operator]

[Operator Instructions] The next question will be coming from John with Desjardins.

[John Sclodnick, analyst]

I think the last one touched on it. So not to dwell on this funding gap, I guess, just higher level, it looks like CapEx went up about CAD 120 million. Would it be fair to model a roughly USD 100 million increase to a potential financing package?

[Lawrence Radford, executive]

I think you're in the right ballpark, it's 15% on CAD 800 million.

[John Sclodnick, analyst]

Yes. Fair enough. Yes. Okay. And I guess the other route that you're progressing is kind of the strategic alternatives, and I appreciate you can only disclose so much. But are those conversations more surrounding potentially an outright sale? Or is there conversations around potentially divesting assets? Or is there still a conversation around an MOE?

[Lawrence Radford, executive]

There are conversations of the whole universe of strategic options.

[Operator]

There are no further questions at this time. Larry, you can please proceed.

[Lawrence Radford, executive]

Thank you. I appreciate everybody joining the call today. If there are more questions, feel free to contact me or Dan Symons. Thank you, operator. That's the end of the call.

[Operator]

This concludes the conference for today. We'd like to thank everyone. You may now disconnect.