Argonaut Gold Inc

TSX:AR

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, everyone, and welcome to Argonaut Gold's First Quarter 2023 Financial and Operating Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference call is being recorded today, May 5, 2023, at 10:00 a.m. Eastern Standard Time and is being broadcast live via the Internet.

During today's call, management will make statements regarding their expectations for the company's future financial and operating performance. These statements are considered forward-looking statements.

Each forward-looking statement speaks only as of the date of this call, and actual results may differ materially from management's expectations for a variety of reasons, including market and general economic conditions and the risks and uncertainties detailed from time to time in the company's SEDAR filings.

Today's presenters will include Richard Young, Argonaut's President and Chief Executive Officer; Marc Leduc, Chief Operating Officer; and Dan (sic) [ Dave ] Ponczoch, Chief Financial Officer.

The financial statements, management's discussion and analysis and the slide presentation related to this call are available on the company's website at www.argonautgold.com for self advancing.

It is now my pleasure to hand the call over to Mr. Richard Jones. Please go ahead, sir.

[Richard Young, executive]

Thank you, Michelle, and hello, everyone.

Let's start with Slide 3. In the first quarter, we continued to invest in transforming Argonaut guided by a new mission, vision and values. Our mission is to deliver asset growth and operational excellence while protecting our people and the environment and being a good partner to our communities.

We will accomplish our mission by following our 6 core values of integrity, respect, communication, collaboration, care and performance. Our vision is to become a low-cost, mid-tier North American gold producer with a track record of responsible mining.

We'll achieve this by building a team and a culture to support operational excellence and our ESG commitments and rebalancing our portfolio to allocate capital towards our higher quality, longer life assets that have the potential for significant organic growth and free cash flow generation.

With plans well underway, we are pleased to report a solid start to the year.

Let's review Slide 4. Our operating mines are on track, are tracking well to plan, and the construction of our newest and lowest cost mine, the Magino project is on track for first pour this month.

As we mentioned last quarter, Magino is the future of Argonaut Gold. By unlocking further value, we believe Magino has the potential to be one of the largest and lowest cost gold mines here in Canada.

We're focused on completing construction, commissioning the mill this quarter and ramping up to full operations in the third quarter. Commissioning Magino will be the first step in transforming the company during this pivotal growth stage.

There's a significant exploration upside at Magino to add near-term value. This is why subsequent to the end of the quarter, we announced a Canadian flow-through equity raise in the amount of CAD 17.5 million. That will fund a portion of the planned expiration and reserve development program that we have planned.

The overall program is expected to cost about CAD 25 million. It will have 3 objectives: the first being to convert open pit resources to reserves within the current resource pit that allow us to optimize the processing rate for the mill.

We'll also test deeper underground high-grade targets similar to our neighbor. And the third objective is to test a number of open pit targets along strike to the west of the current deposit. This program is expected to take between 12 and 15 months to complete.

In parallel, we'll begin to review a mill optimization and expansion that combined could raise throughput into the range of 15,000 to 20,000 tonnes per day, up from the current nameplate capacity of 10. And that could equate to annual production north of 200,000 ounces per year life of mine with expected higher production in the earlier years.

At Florida Canyon mine in Nevada. We have begun stabilizing and optimizing the current oxide operations, along with the proof-of-concept program on the sulfide material. We'll be exploring the larger sulfide potential just below the oxide deposits later this year, following completion of an updated geologic model.

If that proof-of-concept program is successful, we would then move into a PEE stage of development next year for the sulfides.

As part of our portfolio rebalance, we closed the sale of Ana Paula project in Mexico during the first quarter. While we believe our Mexican asset base has growth potential, the current challenges in country both from a land access and permitting perspective, will make it difficult to allocate any significant capital to the region in the near term.

I'll now turn the call over to Marc for an operating highlights and a development update for Magino. Marc?

[Marc Paul Leduc, executive]

Thanks, Rich. Let's review Slide 5. For the first quarter, consolidated production totaled 38,585 gold equivalent ounces, which was 30% lower compared to the period last year. This is due to lower ore tonnes mined and lower grades placed on the leach pads at our 3 Mexican mines as part of the scheduled wind down of operations there.

Production from our 3 Mexican mines was in line with our plan for Q1. Production from Florida Canyon in Nevada was 25% higher compared to the period last year, however, marginally below our plan.

Operational improvements by the site personnel and our new team during the quarter delivered improved gold production through March, and we expect Florida Canyon to be back on plan by the end of the second quarter.

Turning to Slide 6 for Magino's development update. We are pleased to report that major components critical to commissioning the mill are coming together for first gold pour, which is expected in the second half of this month. Operational readiness activities continue to advance construction activities under the company's scope, such as earthworks, on-site infrastructure and site power are on schedule.

Our engineering contractor, Ausenco, is also on track to complete the process plant and related infrastructure. And in March, commissioning started at the grinding, carbon in pulp and reagent areas.

Ore mining at Magino also commenced during the quarter, where 103,000 ore tonnes have been stockpiled as of March 31, and we have approximately 200,000 tonnes of ore in the stockpile as of today.

Stockpile buildup was lower than planned due to temporary challenges with pioneering work on initial benches and larger-than-expected oversized material from blasting. We have since revised certain practices to manage these challenges and now are seeing improvements to mine productivity.

Additional resources have also been allocated to improve drilling and blasting performance, which should also benefit the mining rate going forward.

Most of the required operational permits are in hand. We are awaiting only 1 operational permit, which we expect in due course. A number of construction-related permits and approvals must be amended or replaced with operational ones.

While most of the required operational permits are already in hand, the company is awaiting only 1 operational permit. We expect to receive this permit, however, in any prolonged delay in the approval of that permit could impact the company's ability to achieve anticipated first full pour in the second half of May.

Project capital costs of USD 755 million remain unchanged from our year-end update with approximately $652 million incurred to date, including $68.8 million invested in the first quarter.

We believe Magino is well positioned to complete construction and ramp up over the second quarter of 2023 to achieve commercial production rates anticipated during the third quarter, both in line with previous guidance.

Turning now to Slide 7. During the first quarter, we announced updated company-wide mineral resources and mineral reserve estimates. I'm really excited by the potential of our 2 key mines, Magino and Florida Canyon. At Magino, measured and indicated resources increased by 13% to 2.6 million ounces; inferred resources increased to 843,000 ounces and mineral reserves were largely unchanged from prior years as we applied a lower long-range gold price of $1,350 compared to the previous $1,600 in our prior estimates.

Nearly all the measured indicated in inferred resources fall into a large open pit cone. The deeper high-grade drilling results from last year's exploration program, which targeted potential underground material ended up pulling into the deeper open pit cone.

Magino has the potential to be one of the largest and lowest cost gold mines in Canada. To achieve this goal, we are initiating a 12- to 15-month long drill program. The majority of the drill program is designed to convert open pit resources to reserve by drilling between existing drill holes and infilling the block model.

With these results, we will recast our block model and then perform an engineering analysis to determine the optimal processing rate for the mine based on an expected larger reserve base.

The rest of the drill program will focus on defining underground potential below the 700-meter level and district potential adjacent to Magino and to the west along the belt.

Moving now to Slide 8 to look at our second core asset, Florida Canyon. I'm very excited about the future potential of Florida Canyon. We recently announced a large increase in inferred mineral resources at Florida Canyon to 2.1 million gold ounces from 2,000 ounces -- sorry, 20,000 ounces as the 700,000 sulfide ounces were able to help bring in well over 1 million ounces of oxide mineralization into a large economic pit shell.

In the short term, we expect Florida Canyon to meet full year 2023 guidance, and things are tracking very well there. In the long term, we see the opportunity to scale up production and increase mine life at Florida Canyon.

To achieve this, we have assembled an internal team to review the long-term viability of the significant sulfide potential that exist below the large oxide deposit. Our goal is to look for -- look through our vast historic information we have on the sulfides and the geological controls of mineralization then development in an initial drilling plan for late 2023, targeting the sulfide resources and then prepare a preliminary economic assessment on the viability of the sulfides with an updated resource in late 2024.

As mentioned, the next phase of redevelopment at Florida Canyon will include additional drilling and better understanding of the mineralization and an update to the resource model.

Moving to Slide 9 to review the Mexican operations, production at the company's Mexican mine, La Colorada, San Agustin and El Castillo were in line with our first quarter plan. At this point, all 3 mines are expected to meet full year production guidance. At El Castillo, we ceased mining operations in December of last year and is now in residual leaching and reclamation.

The 2 remaining operating mines, San Agustin and La Colorada are currently expecting to complete their final phases of mining by the end of 2023 and are expected to complete the majority of their residual leaching in 2024.

At which point in time, it will be placed in care and maintenance, while management works to secure land access and permits in order to complete mining and mining the remaining reserves and resources.

We are working to secure land permits, which would allow us to extend the mine life, but approvals are uncertain.

I will now pass this over to Dave to review the financials.

[DavidPonczoch, executive]

Thank you, Marc. Let's turn to Slide 10. Argonaut's first quarter financial results were on plan. While lower than the prior first quarter 2022 period, our financial performance reflects the current transformation phase of our production base as we continue winding down our high-cost low-grade Mexican mines and prepare for commercial production at Argonaut's new flagship operation in Canada.

On a per ounce sold basis, cost of sales, cash costs and all-in sustaining costs were between 27% and 44% higher. First quarter costs were impacted by a total write-down of $9.4 million due to inventory impairment related to the inability to apply fuel tax credits in Mexico, net realizable value adjustment and inventory obsolescence write-downs. These noncash inventory impairments led to a cost increase of approximately $259 per gold ounce.

With Magino's first gold pour plan for later this month, the cost of sales, cash costs and all-in sustaining costs are expected to be in line with full year 2023 guidance. First quarter revenue was $69 million, a decrease of 35% from the prior period due to the cessation of mining activities at El Castillo and lower production at our La Colorada and San Agustin mines in Mexico.

Production costs declined 22% to $52.4 million, which increased cash cost per gold ounce sold by 44% to $1,660 per ounce.

First quarter gross loss was 112% lower year-over-year due to planned lower revenues from lower production and higher costs from our Mexican operations.

There was a net loss of $10.4 million in the quarter compared to net income of $5.6 million in the same period of 2022, largely due to lower gross profit resulting in earnings per share loss of $0.01 compared to earnings of $0.02 per share the year earlier.

Adjusted net loss was $2.8 million compared to adjusted net earnings of $8.2 million in the prior period year resulting in an adjusted net loss per share of $0.00 compared to adjusted earnings per share of $0.03 in 2022.

We -- we generated $10.5 million in cash flow from operations before changes in noncash operating working capital and other items, a reduction of 58% year-over-year due to lower gross profit.

Please turn to the next slide. On Slide 11, we provide a brief snapshot of our liquidity. We ended the quarter with $58.4 million in cash on the balance sheet and a total of $104 million available to draw. Subsequent to the quarter, $30 million was drawn on the term loan for a new balance of $74 million available to draw from our total loan facilities.

Based on the current project capital costs and assuming our first gold is achieved in the second half of May, the remaining balance of the total loan facilities is expected to cover Magino's remaining project costs.

This concludes the financial portion. I'll now turn the call back to Richard for closing remarks.

[Richard Young, executive]

Well, thank you, David. In summary, we entered 2023 with a clear vision and confidence that our company can deliver on our strategy of building a low-cost North American gold company focused on generating free cash flow. We believe that we have significant growth opportunities at both Magino and Florida Canyon and we'll continue to pursue our Mexican asset base growth potential when appropriate.

Operator, you may now open the call to questions.

[Operator]

[Operator Instructions] Your first question comes from Michael Fairbairn at Canaccord.

[Michael Fairbairn, analyst]

Two for me. I wanted to start with Magino. Wondering if you can provide a little bit more color around the permit that you're waiting on there? And if there are any key areas of pushback that you're getting or on your way to getting that permit?

[Richard Young, executive]

I'll turn that over to Marc.

[Marc Paul Leduc, executive]

Yes. Thanks for the question, Michael. Marc here. Yes, the permit we're looking at there is -- it's the discharge of industrial waste permit. We're converting a construction permit into an operating permit. So effectively, this is the permit that allows us to discharge in production into the tailings impoundment.

So if we've had it in, in front of the ministry for a while, there's just taking a little longer than we had expected. We do expect it in the next week or 2 to flow out of there. So we just -- as a kind of abundance of caution, we wanted to bring it up to people in case there was any delays associated. We don't anticipate anything, but that's the permit that we're looking to get. And we're working very closely with the folks over the ministry to see how we can expedite it.

[Michael Fairbairn, analyst]

Okay. Perfect. Really good color there. And then one more for me, just around La Colorada cash costs -- in the quarter, they were fairly high, a fair bit above your guided range for the year. Wondering if you can provide a little bit of color about the expected cost profile at La Colorada over the balance of the year. If you're expecting it to drop off quite dramatically to bring you down within that original guidance range? Or if it might be more realistic to just expect cash costs at La Colorada to come down within the guided range for the balance of the year?

[Richard Young, executive]

I'll turn that over to Dave.

[DavidPonczoch, executive]

Yes, Michael. So first, when you take out the inventory impairment, that's kind of a special item. We're not expecting that again through the rest of the year. In the first quarter, we had -- the plan was to do additional waste development. And so that is a first quarter. We expect that to -- for the remaining 3 quarters to change. And so as we forecasted out, we will be back within the original guidance for 2023.

[Richard Young, executive]

And Mike, if I could just add, I mean, the strip ratio basically doubled as we start that layback. So as we move through the balance of the year, strip ratio declines and we'll be back on track within both the production and the cost guidance range given at the beginning of the year.

[Michael Fairbairn, analyst]

Okay. Perfect. Really good color on that one as well. That's it for me. And yes, looking forward to hearing about Magino's first gold production in a couple of weeks here.

[Marc Paul Leduc, executive]

Absolutely.

[Operator]

Your next question comes from Lawrence Lepard at EMA.

[Lawrence Lepard, analyst]

You had some high grade at the bottom of one of the pits in Mexico. Are we going to abandon that? Or is that what you're talking about getting permits for? Can you talk about any prospectivity there?

[Marc Paul Leduc, executive]

Yes. Thanks, Larry. Marc here. So I think you're probably referring to the La Colorada mine, the Creston pit or deposit. Yes, we drilled there last year and did find some extremely high grade that bumped up the reserves and resource grade quite a bit, not unexpectedly because we actually got below the old underground mining areas. So we're now getting into the part of the deposit that we've mined up from people hundreds of years ago.

We are looking at that right now to evaluate the best way to go down into that. We actually have a drill -- we didn't highlight that. We do have a drill program down there, we have a geological theory on the offset of the ore body. There's a big flat fall to the bottom of that deposit that cuts it off right at the best high grade.

And based on how there's an offset over at the Veta Madre zone. Our geos are all pointing towards, hey, this is where we think there could be an offset. So we're planning on testing that in the next few weeks to see what's going on there.

So that will really help us evaluate what the future is at Creston. If we can encounter that higher-grade material, it would be kind of game-changing there. It's potentially moving to an underground scenario because there could be good potential. So we want to test that before we commit to a pretty big layback situation.

We have to do a lot of stripping to get into Creston. So we're kind of evaluating what we're doing there, and see what...

[Lawrence Lepard, analyst]

If you did hit there, would that be the permitting on an underground there would be particularly difficult, would it? Or am I misreading that?

[Marc Paul Leduc, executive]

No, it wouldn't be. You're absolutely right. We would -- it would kind of completely change. It'd go from a low-grade open pit heap leach to probably significantly high-grade mine.

Just to put some color on that. This was mined by the [Indiscernible] 200 years ago when the underground mining area was knocked out by a [Indiscernible] when he came rolling through the place in the revolution.

So -- it's an interesting concept there. I have high hopes for what we can do there. La Colorada has got some life to it, but we just -- we have to get our arms around and figure out what the best way forward is.

[Lawrence Lepard, analyst]

In terms of getting that data on that, is that 1 or 2 quarters out in your sense.

[Marc Paul Leduc, executive]

Yes. Probably 3 or 4 months that we haven't even drilled the hole yet. So we'd have to look at it as say it, we'd want to put together. We have 3 holes planned for it right now.

[Richard Young, executive]

And that's supposed to start in the next couple of...

[Marc Paul Leduc, executive]

Yes. Probably next week, we'll be starting those holes. So yes, 3 or 4 week months out, I would assume before we could be able to release anything.

[Operator]

[Operator Instructions] Mr. Young, there are no other questions. So I will hand the conference back to you, sir, for any closing remarks.

[Richard Young, executive]

Well, thank you, Michelle, and I'd like to thank everybody for joining us on the sunny Friday. The next news you'll hear from us will be a press release on first pour in the next few weeks. And we look forward to adding Magino to our production profile. And the path forward is we believe that mine is going to get larger in the coming years as we move forward.

So -- thank you all for attending the call today. And if you've got any further questions, please reach out to Joanna, Marc, Dave or myself, and be happy to answer those. So thank you very much. Have a great weekend.

[Operator]

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.