Argonaut Gold Inc

TSX:AR

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon. My name is Robert, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Argonaut's Q2 Results Conference Call and Webcast. [Operator Instructions] Mr. Pete Dougherty, President and CEO of Argonaut Gold, you may begin your conference.

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

Thank you, Robert, and welcome, everyone, to Argonaut's Q2 Financial and Operating Results Conference Call and Webcast. I want to thank everyone for taking the time to join the call today. This isn't our regular time for our quarterly call, so we appreciate you taking the time out of your schedules. Tomorrow morning, we would have normally held our call, but we are all scheduled on a flight with our Board of Directors to visit one of our sites. So thank you for making the adjustments with us today to be on this call. I have with me tonight Bill Zisch, our COO; Dave Ponczoch, our CFO; and Dan Symons, our Vice President of Investor Relations. Before we get into the presentation, I want to start by saying that we recognize this was a challenging quarter operationally, and we are taking corrective actions. Despite our challenges this quarter, we remain on track to achieve our full year production guidance, albeit at slightly higher cost. This afternoon, we will provide an overview of the quarter and then take a deeper dive into some of the financial and operating highlights. It was a challenging quarter operationally and we will provide color on this and why this is turning around. Now looking forward, the big takeaways from this presentation should be as follows: we are entering a period of reduced capital and we expect this to translate into additional free cash flow for the company. Please turn to Slide #2, forward-looking information. During this presentation, we will be making forward-looking statements based upon our best knowledge as of today. Please note that we cannot predict the future with 100% accuracy, but we will do our best based upon the information we have today. Please turn to Slide #3. Looking ahead, increased cash flow. There is no doubt it was a challenging quarter operationally, particularly at our San Agustin mine where we experienced a shortage of water that impacted our ability to get ounces under lease and therefore, forced us to slow down our crushing and stacking rates to avoid short cycling of the leach pad. We will discuss this in detail later in the presentation, but first I want to make sure everyone is aware of how we are lined up to significantly increase our cash flow through 2020. We expect similar production profile of over 200,000 ounces in 2020, coupled with a lower operating cost and a significant reduction in our capital programs as we do not have any planned heap leach pad expansions for 2020, and we have completed recently the $15 million San Agustin crusher expansion. With approximately 60% of our 2019 capital spent through the first 6 months of the year and next year's capital reduction by approximately $25 million, we are poised to generate significant additional free cash flow during 2020. So while Q2 was challenging and on a go-forward basis, we are in a great position, we believe. Please turn to Slide #4. Q2 2019 and recent highlights. For a quick overview of the quarter, we generated $5.4 million of net income and produced over 40,000 ounces. Despite this softer quickly production, we remain on track to achieve our full 2019 production guidance of between 200,000 to 215,000 ounces. To date, we have banked over 94,000 ounces of production. We will go into detail about this a little later in the presentation. During the quarter, we completed 2 leach pad expansions at El Castillo and a leach pad expansion at San Agustin and the San Agustin crushing and stacking expansion from 20,000 tonne per day to 30,000 tonne per day. I want to commend our projects team for delivering this project on time and slightly under budget for costing purposes. We will also continue to advance the remaining federal and provincial authorizations for our Magino project. After we received our environmental assessment approval from both the federal and provincial governments during the first quarter of this year, we continued to advance environmental permitting for our San Antonio project and participated in a public information meeting during the month of April. We are advancing work towards a pre-feasibility study of our Cerro del Gallo project, which we will expect will be available before the end of the year and believe this could be a significant catalyst for the company. Please turn to Slide #5. Recent CSR highlights. Before we move into the financial and operating results in greater detail, I think it's important that we take a few minutes to highlight some of our social responsibility initiatives during the quarter. After receiving the ESR, or environmentally socially responsible company, from the Mexican government, Argonaut continues to be a socially responsible company. During the quarter, at our El Castillo complex, we received this ESR recognition as well. This marks the seventh consecutive year of recognition across all our operations and speaks to our key values of health and safety, our people, our environment and our communities. Some of the other highlights in the quarter include celebrating the inauguration of our plant nursery at San Agustin, sponsoring a children's music program and sponsoring the magpie fishing derby up in Durango. Please turn to Slide #6. Financial performance. During the quarter, we generated $56 million in revenue, leading to $5.4 million of net income or earnings per share of $0.03. Production was 5% higher than the same period last year and sales were 11% higher. Over the first 6 months, revenue has increased 26% year-over-year on 27% higher sales. Please turn to Slide #7. Q2 2019 capital spend and cash flow. Due to a high capital quarter of $14 million, as we completed the San Agustin crusher expansion, leach pad expansions, this coupled with a delay in recovering ounces at San Agustin due to the shortage of water, we experienced a slight dip in our net cash balance quarter-over-quarter of $4 million. However, as discussed earlier, with the leach pad expansions and the San Agustin crusher expansion now behind us, looking forward, we are poised to generate free cash flow over the next several quarters. I will now pass the call to Bill Zisch, our Chief Operating Officer, who will provide more color on our operations this quarter. Bill?

[William M. Zisch, Chief Operating Officer]

Thanks, Pete, and good afternoon to everyone on the call. I'll be starting with the operations overview on Slide 8. As Pete mentioned, it was a challenging quarter for the operations, primarily due to a shortage of water at our San Agustin mine, which impacted our ability to meet planned solution flow rates. Last year, we drilled a third well to meet our solution flow rate requirements for the increased crushing throughput of 30,000 tonnes per day. Although this well tested positive, after sustained pumping, it did not meet our requirements. Therefore, we incurred cost to drill, blast, mine, crush and stack ore on leach pad and have experienced a delay in recovering and selling the ounces. We are currently completing the drilling of a fourth water well and expect to bring it online this month. As we ramp up our solution flow rates, we will be able to increase our crushing and stacking rates. We estimate that we should hit 30,000 tonnes per day at San Agustin during the fourth quarter this year, which is a one quarter delay from our original plan. While the team did a good job of completing this expansion project on time and within budget and safely, we have the ability to run at 30,000 tonnes per day, but we cannot currently do so without short-cycling our leach times, which would lead to a deferred metallurgical recovery. Therefore, we will ramp up to 30,000 tonnes per day as our solution capacity allows, which we anticipate will happen during the fourth quarter. At La Colorada, during the first quarter of the year, we ran into a situation where we were struggling to strip waste fast enough to keep up with ore requirements to the crusher. Compensate for this, when we could, we supplemented the low-grade -- with low-grade stockpile material. This led to less tonnes and a lower grade going to the pad during the first quarter, which meant lighter Q2 production. We are now operating on wider laybacks and have better access to ore. Also, the characteristics of the ore in this phase of the pit allows us to target 14,000 tonnes per day versus our original budget of 13,000 tonnes per day. Therefore, we should catch this up by the end of the year. Also at San Agustin, we were in a phase of our mine sequencing of a higher strip ratio at 0.8:1 versus the 0.2:1 during Q1 of 2018. Costs were higher in Q1, and we expect costs to trend lower during 2019. I will walk through this with you on the next slide. Slide 9. In the top image, you can see the San Agustin crushing circuit post-expansion, it's poised and ready to deliver 30,000 tonnes per day. Unfortunately, due to the failure of our third well, we became short on water, which meant we do not have the additional solution capacity we had expected. On the bottom image, you can see a picture of our San Agustin heap leach pad. I would note this image is just for illustrative purposes, but it should help explain the situation graphically. Basically the options are to stack ore at the higher rate but shorten the leach cycle or slow down the stacking rate to maintain the leach cycle. In order to achieve targeted metal recoveries, we have slowed down the stacking rate in order to meet and reach our full leach cycle. This means once we have adequate solution capacity, we can ramp up ore stacking, but until we do, we're letting solution flows determine our stacking rate. We expect the fourth water well, which is being finished and is expected to be online this month, will provide sufficient water to meet planned solution flow rates for the increased crushing and stacking of 30,000 tonnes per day. We estimate this should happen during the fourth quarter. I'll now turn the call back to Pete, but will be happy to answer questions during the Q&A portion of the call. Pete?

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

Thank you, Bill. I think it should be noted that this water shortage has not caused a reduction from our 20,000 tonne per day rate. We are actually stacking at a greater rate than that today, but has hampered our ability to go to the full 30,000 tonne per day crushing and stacking rate. So we would expect production to rise from where we were over the last quarter. Please turn to Slide #10. Updated 2019 guidance. Primarily due to increased costs on a per ounce basis at San Agustin for the reasons previously discussed, we are increasing our cash cost and all-in sustaining cost guidance by $25 an ounce. We are still on track, as I said before, to reach the original production guidance of between 200,000 to 215,000 gold equivalent ounces. Also due to savings experienced during the San Agustin expansion and the leach pad projects, we are narrowing our capital guidance to the low end of the original guidance. We now estimate we will be spending between $50 million and $55 million, of which approximately $30 million has already been invested during the first 6 months of the year. Please turn to the next slide, Slide #11. Development assets provide optimality. Our market capitalization has been sitting between $300 million and $350 million over the past month or so. Of the 8 analysts currently covering Argonaut, the consensus value of our operating mines and development assets fits close to $490 million or roughly $150 million more than the current market value today. If we simply take the analysts' consensus value for the operating assets, add our cash net of debt, we get $350 million of value or about the same value we are getting in the market today. Therefore, someone making an investment in Argonaut today is getting an option on all 3 of our development assets for free and then when stepping back and considering the value of these 3 development assets based upon the most recent technical reports, and I caution you that the Cerro del Gallo value was not produced by Argonaut, but will be published later this year. The potential lies to unlock over $600 million of additional value in a $1,250 environment and clearly, where we are today with today's price, significantly more value. Please turn to Slide #12. Development asset catalysts. So what are the upcoming catalysts within our development portfolio to unlock that trapped value. At San Antonio, we expect to receive a decision with respect to the environmental permit by the end of the year. At the Cerro del Gallo project, we expect to deliver a pre-feasibility study and expect to receive a decision on our key permits for this project also by the end of the year. At our Magino project, we see tremendous value and tremendous leverage through a rising gold price. At a $1,250 gold price and a $0.78 exchange rate, our feasibility study showed an after-tax NPV at 5% discount of $288 million, as shown on the previous slide. At a $1,400 gold environment and a $0.76 exchange rate, the NPV at 5% jumps to $432 million, a significant leverage to the gold price exists within this project. Please turn to Slide #13. Summary of investment case. Argonaut is well known for maintaining a strong balance sheet throughout the market cycles, which proves stability and fuels growth. We have $24 million in cash with $14 million drawn on our revolver and $23 million in VAT receivables. All of this is current and can be recovered in a quick period of time. Despite the short-term impact of the water at San Agustin project, we've proven that we can add cash to the balance sheet from our existing operations and our strong record of profitable production. With close to 8 million ounces of measured and indicated resource, not including any ounces accounted for our Cerro del Gallo project, which we should see a maiden resource coming by the end of the year with our pre-feasibility study, we provide tremendous leverage to a rising gold price. And as we continue to derisk our development assets, we should see more value in the market for these assets over time. And importantly, we have a 9-year track record as a proven operator and remain on track to deliver our 65% annual growth production plan this year. Please turn to Slide #14. Our focus. When we look forward, the way to add shareholder value is pretty clear, which is why we have made it the company's focus. Build our balance sheet which we are poised to do now that the majority of our capital spend is behind us and next year's capital spend should be significantly reduced. Continue to derisk our development portfolio, which we have discussed the catalyst earlier today and expect to hear on those projects by the end of this year. And then finally, continue to deliver on our new production growth rate to meet our 3-year 65% growth target of over 200,000 ounces this year, which would be an annual record for the company. This completes our formal presentation portion of the call today. I will be on the call and be happy to take any questions that you may have. We will now turn the call back over to Robert, our moderator, who you can direct your questions for a brief question-and-answer session. Robert?

[Operator]

[Operator Instructions] There are no questions at this time. I will -- my apologies, we do have one question. And your first question comes from the line of John Sclodnick with National Bank Financial.

[John Sclodnick, Mining Associate]

John Sclodnick here. Just wanted to check in on San Agustin, obviously, those temporary issues there. Just wondering about the strip ratio, it seems a little bit higher at San Agustin and El Castillo. Do you expect that to normalize in the back half of the year?

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

John, I will turn this over to Bill as we have him here and he is in charge of operations. In short, the answer is yes, we expect that to normalize back, but Bill, please share with John what's occurred and where we're driving today.

[William M. Zisch, Chief Operating Officer]

Yes. Thanks, Pete. John, yes, the strip ratio increase is a function of running into waste where we had expected ore, so we had to move at a higher ratio to get the same ore. That was in the Phase 1 of our pit, we're now moving into Phase 2 of the pit and we will see how that performs. We do expect it to normalize through the end of the year at San Agustin.And you also mentioned El Castillo -- sorry. Yes, El Castillo was slightly out of line with our expectations in the model. On a year-to-date basis, it's looking reasonably good and we do expect that strip ratio to be at planned levels through the remainder of the year.

[John Sclodnick, Mining Associate]

Okay, and then at La Colorada, you guys had -- benefited from a lower strip ratio and that was due to, I guess, you're mentioning that you had trouble sourcing the fresh ore so were using a bit of stockpile material and is that the reason for the nice strip ratio there this quarter?

[William M. Zisch, Chief Operating Officer]

The primary thing is we're actually seeing in our model at La Colorada, we're seeing more tonnes than we had expected that are slightly lower grade, but we're seeing more tonnes. So that's why we've seen the benefit in the strip ratio at La Colorada.

[John Sclodnick, Mining Associate]

Right, okay, perfect. Just -- in previous quarters, there was kind of an -- bit of a jump in the input prices and some of the cyanide and consumables in Mexico. Did you guys see that reverse at all in the quarter?

[William M. Zisch, Chief Operating Officer]

John, Bill again. Basically, our commodities have been reasonably flat for cyanide and lime at our Mexican operations.

[John Sclodnick, Mining Associate]

Okay. And just finally, I mean the typical M&A question, are you guys looking at things? Or you guys having people look at you? And then obviously, in this very nice gold pay pair with Canadian dollar, that is being supportive as well, any new ideas on Magino or increased interest recently?

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

John, this is Pete. Yes, we're seeing obviously a nice change in the gold price environment here today. It's been very short-lived here, it's just been a couple of weeks. Has that changed the level of interest? As we've always shared before in the past, we really can't talk about others interest in the project, but as we have shared before, there is renewed interest as we drive above $1,300 price. So you can imagine seeing a $1,500 price today that there is clearly going to be a renewed interest in a very nice project within Canada.

[John Sclodnick, Mining Associate]

Definitely, I know this environment seems to suit you very well.

[Operator]

They are no further questions at this time. I now turn the call over -- back over to the presenters.

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

Thank you, Robert, and thank you all for attending today and taking the time to join us. As I said before, this is not our normal time that we would have this conference call. So thank you for taking the time, and we look forward to talking to you about the third quarter as we can share with you the turnaround that we're starting to see already within the operations. Once again, thank you for your support, and we look forward to talking to you in the fall.

[Operator]

This concludes today's conference call. You may now disconnect.