Argonaut Gold Inc

TSX:AR

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to the Argonaut Gold Inc. Q2 conference call and webcast. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the call over to Pete Dougherty, President and CEO. Please begin.

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

Thank you, Denise. And welcome everyone to Argonaut Gold's Q2 financial and operating results conference call and webcast. I want to thank everyone for taking the time to join the call today. I have with me on the line the entire management team. So during Q&A, you will be able to ask them various questions. This morning, we will discuss the Q2 results and also walk through our strategy and plans, specifically around the Magino project as we've been very busy as of late. We also completed the Alio transaction and recent equity financing. And I think that it is important that we outline the way that we are thinking about the direction of the company moving forward and look forward to sharing with you this today. Please turn to Slide #2. 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 the next slide, Slide #4, Q2 and recent milestones. Before we dive into the quarterly financial and operating results, I want to highlight what we've been able to accomplish in the past 4 months. We've announced and completed the merger with Alio Gold and subsequently issued an updated technical report for the Florida Canyon mine with an updated life-of-mine plan. We received our Schedule 2 approval for the Magino project, the last major federal approval required for the project as well as announced additional exciting high-grade drill results. We have added $23 million to the balance sheet during the second quarter and then completed an equity raise that brought in nearly CAD 126 million of cash on a Canadian basis or USD 90 million on a U.S. basis. Each of these activities have helped us outperform our benchmark by a wide margin over the last few months, and we have several exciting milestones coming in the second half of the year that I'll walk through later in the presentation. Please turn to Slide #4, Q2 2020 and recent highlights. It was a great quarter for building cash on the balance sheet. In Q2, we generated $23 million worth of free cash flow and increased our cash balance to $60 million (sic) [ $65 million ]. With only $7 million drawn on the revolver and the recent equity raise that brought in nearly $90 million, we are in a very strong financial position to move forward on executing our transition strategy, which I will speak to later in the presentation. In spite of the shutdown of mining, crushing and stacking activities during the months of April and May, and because we were able to continue processing operations and recover metal from our heap leach pads, we still managed to produce just over 31,500 gold equivalent ounces during Q2. Since we are running heap leach operations where the recovery cycle is longer than a milling operation, the bulk of the impacts on production related to the COVID-19 restrictions were felt during June and July, and we are now seeing operations normalize, albeit with strict protocols in place, which I will touch on momentarily. As discussed, it's been a very busy few months for the company as we put ourselves in a position to execute on both our short-term and long-term initiatives. Fortunately, we were able to complete the construction of new leach pads at both El Castillo and La Colorada. This should help aid in production ramp up as we will receive material directly to plastic and on lower lifts at the projects. We completed the merger with Alio Gold, bringing us the Florida Canyon mine in Nevada and the Ana Paula project in Mexico. At Florida Canyon, we provided an updated life-of-mine plan that shows how we view this asset and the value we saw when pursuing the merger with Alio Gold. For instance, at $1,900 gold, the new life-of-mine plan yields $435 million of mine site free cash flow and an NPV 5% discounted, net present value of nearly $350 million. After receiving the Schedule II permit, the last major federal permit required for the Magino project in July, we completed a CAD 126 million equity raise, which brought us approximately USD 90 million net of fees. These proceeds are specifically earmarked for the advancement of our Magino project, and I'll discuss this in detail a little bit later. With the Mexican government reopening in June, we submitted the permit applications for our Cerro del Gallo project and expect to hear on this application by the end of the year. And not to be forgotten amongst all that went on this quarter, we received recognition from the Mexican government for the eighth consecutive year as environmentally and socially responsible company, something that we are very proud of and sets the tone for how we run our operations. Please turn to the next slide, Slide #5. COVID-19 protocols. We have received a lot of questions about what we are doing to limit our risk during this COVID-19 transition amongst our employees and our communities in which we operate. So I want to take a moment to outline what we are doing. We have several protocols in place and actually assisted the Mexican government in developing the required protocols in advance of mining being deemed an essential business in Mexico and starting back up. Some of the protocols include distancing measures; sanitation protocols; proper PPE such as face shields and masks; and importantly, frequently testing. This means that all 1,500 of our employees and contractors must receive a negative test before they are allowed to enter the property. This is a very cumbersome, but very helpful procedure and keeps not only ourselves, but our communities clear and in check with this disease running. We have spent tireless hours with our communities performing sanitization programs, awareness programs and preparedness programs. So far, we have been lucky. The community of La Colorada has only seen 1 case and the community surrounding our Durango operations have seen 7 cases. All these cases are asymptomatic, and I'm happy to report that everyone is doing well in those areas. Please turn to the next slide, Slide #6, financial performance. And now to discuss the financial and operating performance during the quarter. As discussed earlier, we generated $23 million in free cash flow and increased our cash position to $65 million during the quarter. To me, this is the most important takeaway during the last quarter. On an adjusted basis, we reported net income of $8.5 million or $0.05 per share. Looking forward, and now the operations are back up and running at planned rates, we expect to generate significant free cash flow during the second half of 2020 as most of the capital has already been spent, and we expect operations to ramp up. We believe this will help Argonaut transition towards building out our longer-life, lower-cost growth profile as we see this cash flow increase. Please turn to Slide # 7, operations overview. In terms of production, it's really difficult to compare with previous periods due to our 2-month shutdown for COVID-19. But despite this, we did produce nearly 32,000 ounces of gold at lower operating costs. We did see cost savings at both El Castillo and San Agustin due to lower strip ratios and also saw cost benefits at El Castillo from our switching from a 100% crush operation to run-of-mine operations. Please turn to Slide #8. Q2 2020 capital spending and cash flow. As discussed earlier, we really had a tremendous quarter in terms of cash flow with $23 million being added to the balance sheet. While capital was slightly lower due to COVID-19 restrictions for much of the quarter, we still managed to get the leach pads at El Castillo and La Colorada and the expansion projects completed on time and ahead of schedule. Please turn to the next slide, Slide #9, 2020 guidance. We recently provided updated production cost and capital guidance using the ranges for each provided additional free cash flow guidance at various gold prices to demonstrate the leverage that Argonaut provides to the gold price sensitivity. Including Florida Canyon for the full year, we expect to produce between 210,000 to 230,000 gold equivalent ounces, and we expect to generate between $49 million and $79 million worth of free cash flow during the second half of 2020 assuming a $1,900 gold price. These growth assets also provide -- excuse me, provides opportunity to generate future cash flow as we look to next year. For this quarter, this added to the $65 million cash balance that we ended the quarter with, with this $90 million bought deal from our recent equity financing begins to paint the picture of how we will unlock the value in our development portfolio as we move to the future. Please turn to Slide #10, Argonaut's vision and strategy. Now I want to shift gears from discussing the quarter and looking forward at what we are aiming to accomplish with Argonaut and its strategy to get there. We have a vision and strategy in place to transition the company from a high cost 150,000 to 200,000 ounce a year producer to a low cost, 300,000 to 500,000 ounce a year producer, and we have the assets we believe in place already to execute on this in our existing portfolio. Please turn to the next slide, Slide #11, executing our strategy. To execute on this strategy, we have a 3-phase approach: harvest cash from the existing operations, replace short-term mine lives through the addition of Florida Canyon and exploration and grow through our development project pipeline. Please turn to the next slide, Slide #12. Phase 1 harvest. Phase 1 of this strategy is to harvest the cash out of the existing operations portfolio. These are not the sexiest assets out there, but we have proven time and time again that they do make money. As you can see, the leverage that these assets provide to the gold price in our second half of 2020 free cash flow guidance as illustrated at the bottom of the slide. Clearly, at $1,900 gold, we can put significant cash back to the balance sheet. Please turn to the next slide, Slide #13, Phase 2 replace. Phase 2 of our strategy is to replace production by merging with Alio Gold we brought on the Florida Canyon mine. We brought this into our operating portfolio, and it immediately became our longest-life asset with the greatest exploration potential upside. With the El Castillo project, we currently expect to wind down operations mid-2022. So it was imperative that we replace this production, and Florida Canyon is the type of operation that we have lots of experience running. Florida Canyon can provide a lot of leverage to the gold price as demonstrated by the NPV at a 5% discount rate and the free cash flow sensitivity to the gold price shown in the graphic next door. At $1,900 gold, Florida Canyon is expected to generate over $435 million worth of mine free cash flow. And over the next 9.5 years, that turns into a respectable $350 million worth of net present value back to this company. Please turn to the next slide. Slide #14, Phase 3 growth. Phase 3 of our strategy is growth, and we have the assets in place to execute upon this already within our portfolio. The most important items that I would like you to take away from this slide is the lower all-in sustaining cost profile of each of these growth development assets compared to our existing operating base. And then secondly, the longer mine lives associated with each of these growth assets. These assets also provide significant leverage to the gold price. For instance, at $1,900 gold and based on the assumptions and parameters outlined in each of the respective technical reports, the combined net present value at a 5% discount for these projects is greater than $1.5 billion. Today, we have a market capitalization of nearly $575 million. So the really tremendous value here is yet to be unlocked, which is why we are anxious to move forward on this exciting 3-phase strategy. Please turn to the next slide, Slide #15, path to financing. And now let's take some time to discuss the Magino project, which is likely the first of our 3 development assets that we will move forward. The question surrounding Magino for a long time has been, how will we be able to finance it? If we look at our cash at the end of Q2, combined with the proceeds from our recent equity raise, we are sitting with nearly $155 million worth of cash. At $1,900 gold, we expect to generate between $49 million and $79 million worth of free cash flow during the second half of this year. We know that approximately $30 million worth of the project capital is eligible for what we call CDE flow through. And we have been very good in finding [ homes ] for this and have a line of sight on debt available to us. As you know, we would expect for a multi-asset producer with a clean balance sheet, such as Argonaut, the ability to execute on both of these highly probable. This should have us sitting with around $320 million to $350 million of cash available by the end of the year for the project, that our feasibility outlined with an initial capital of approximately $320 million. It is important to note that the sources and uses of capital to finance the Magino project does not include any cash flow for 2021 or beyond, which is why we are in a position that we are. And we know that we believe we should be in a very strong gold environment as we look to the future. Because of this, we feel we are in excellent position to finance the Magino project and envision making a formal decision to move the project -- move forward with this project later in the year. Please turn to Slide #16, conceptual Magino project time line. If we make a formal decision this year, here is a conceptual outline for the project. We are in the final stages of receiving a fixed bid price for a significant portion of the capital from Ausenco as they are the same group that built the Moose River project for Atlantic Gold, which was subsequently acquired by St Barbara. This would give us a CapEx certainly heading into what we think would be a 2-year construction window, followed by a 6-month commissioning ramp-up period. With the environmental assessment complete at both the federal and provincial levels and the Schedule 2 already in place, we expect the closure plan to be filed by the fourth quarter of this year. As Magino is already permitted for up to 35,000 tonnes per day, and we are envisioning starting the project at 10,000 tonnes per day, we have room to grow. Therefore, we will be looking at expansion studies at various run rates between 10,000 tonnes and 35,000 tonnes per day. We have been pleased with the deep drilling results to date and envision working towards a maiden underground resource and determining how this addition of potential underground mine to supplement the open pit project through the construction of this project. The idea here is that we want to get far enough along on the expansion and underground studies that once we have the initial payback period of capital in hand, we can decide on the best way to maximize the full potential of the asset. And by doing additional expansion studies and underground resource work, we will be in a position to make such decisions. Please turn to the next slide, Slide #17, potential to add mineral resource and reserve. We are starting to see that the Magino project has exciting potential at depth. Magino sits immediately adjacent to the Island Gold Mine, one of the best underground mines in all of Canada. About a year ago, we began testing higher-grade structures at depth, and we are very encouraged by what we have seen thus far. Please turn to the next slide, Slide #18, Phase 2 drilling update. Our most recent results from this drilling tested the continuity of mineralization in the upper and lower portions of what we call the Elbow Zone as seen here on this plan view map, relatively close to our next-door neighbor, Island Gold, less than 250 meters away. Please turn to the next slide, Slide #19. Phase 2 drilling program shows promising continuity between high-grade intercepts. The first phase of this deeper drilling program that we executed on we were focused on testing these higher-grade structures down to a depth of approximately 1,000 meters vertical. The second phase of this program, we've been focused on testing the continuity of these higher-grade mineralized hits that we had from Phase 1 drilling. Here, you can see 2 major areas: the upper and the lower portions of the Elbow Zone. Now we'll dial in a little deeper on the next slide. Please turn to Slide #20. Phase 2 drill program shows promising continuity between high-grade intercepts. As we zoom in on these 2 areas, you can see the previously drilled information from Phase 1 in purple and the recently announced results in red. We've now tightened the drill spacing in these 2 areas to an average of 40 meters and are seeing very good continuity of high-grade mineralization in this zone -- in each of these 2 zones. We are currently testing the continuity of the central zone and had several other high-grade structures on the property that we are yet to test at depth. So we envision a strong exploration program at Magino in the years to come. The goal being to tighten up drilling around these high-grade intercepts that we have already identified through our Phase 1 drilling. Please turn to the next slide, Slide #21, upcoming milestones. Along with Magino drill results, we have several other newsworthy items and major milestones to watch for during the coming months. We'd like you to focus on a few of these. First, watch for the fixed bid pricing that will be coming on the Magino initial capital; secondly, the closure plan filing; third, the expectation of permitting decision around the Cerro del Gallo project. All of these should happen before the end of the year. Please turn to Slide #22, our focus. I know we went through a lot today, but we have been putting the pieces in place to significantly transform this company and through it to appropriately walk you through how we are thinking about the business going forward. We have the assets in place and with our 3-phase approach to executing this transition strategy, we feel we have the opportunity to significantly transform the company over the next few years from a high cost, short mine life producer to a low-cost, intermediate, long-life mine producer. Now I'd like to turn this time back over to our operator, Denise, as she will answer and take all questions during a brief question-and-answer session. Denise?

[Operator]

[Operator Instructions] Your first question comes from Ryan Hanley with Laurentian Bank.

[Ryan Hanley, VP & Mining Analyst]

I guess, Pete, maybe the first one for you, just on the operating side. So it sounds like you've managed to get those leach pads done at El Castillo and La Colorada before the COVID shutdowns came into place. Are you seeing gold now coming off the pads at a rate similar to, I guess, what you'd call maybe pre-COVID levels?

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

Yes. We're actually today starting to see gold starting to return back to pre-COVID eras, and we're starting to ramp up the operations at La Colorada and El Castillo to take advantage of having that plastic fully exposed today.

[Ryan Hanley, VP & Mining Analyst]

Okay. And is it fair to assume that, I guess, as you're playing a little bit of catch-up here in Q3 that we'll see some higher unit costs pretty much, I guess, across the board at all 3 assets?

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

I would not say that we're going to see higher unit costs. I think you're going to see us start to ramp up. You're going to see production start to come up a bit higher here in Q3 and in Q4 take the real push as we're starting to -- our goal is to try at our El Castillo and La Colorada operations to make up for that shortfall of 2 months. And we're pushing all operations towards trying to get there. So you're going to see us push a little harder, and the real impact is going to really show in the fourth quarter, just as you know, as we stack, you usually have a delay in when you receive all those ounces back out.

[Ryan Hanley, VP & Mining Analyst]

Okay. Perfect. And then I guess maybe just on San Agustin, I think in the last technical report, you had a big CapEx year coming up in 2021 for another leach pad expansion. Is that all still expected to fall, I guess, in next year? Is there a chance that might get spaced out over future years to come?

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

No. We expect to put a lease pad in next year. I think the number is not going to be quite what you saw in the technical report. Our number is significantly less as we look to the next phase of leach pad expansion at San Agustin. I think Bob is here. I think, Bob, can you give us kind of a range? Is it in that $7 million to $10 million range maximum for San Agustin capital next year?

[W. Robert Rose, Vice President of Technical Services]

Yes, I think that's a good estimate. We've been able to reduce the size of the pad we require for next year. And then we'll have one other expansion we think 1 to 2 years after that, and that should give us capacity for the resource we know of right now.

[Ryan Hanley, VP & Mining Analyst]

Okay. Perfect. Super helpful. And then maybe just one last one here on Magino as that's becoming obviously, a bit more of a focus. You've had quite a bit of exploration success over the last couple of months here. Is there a chance that we might see that drill program grow a little bit more over the second half of the year, whether you call it, I guess, a larger Phase 2 or maybe a Phase 3 program?

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

Yes, Ryan. So I have with me the mastermind of all this, Brian Arkell, and I'm going to turn this to him and let him talk to you about it because, as you know, the geologists get a little more excited about this than I do. I'm really looking for continuity. They're excited by what they're seeing. But Brian, go ahead. Take it.

[Brian W. Arkell, Vice President of Exploration]

Ryan, yes, definitely, this year, we're going to stay at the same pace we are right now. But next year, we're looking to ramp up. And we're currently working on plans for next year, but we'll plan to significantly ramp up.

[Operator]

[Operator Instructions] Your next question comes from Gabriel Gonzalez with Echelon Capital Partners.

[Gabriel E. Gonzalez, Analyst]

Could you please quantify the amount of -- or if some sustaining capital was deferred from Q2 because of the COVID lockdown into Q3 and Q4.

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

So if I understand your question, are you asking are we going to be able to make up the difference in the loss in production from Q2 into Q3, Q4? Is that your question?

[Gabriel E. Gonzalez, Analyst]

No, no. Sorry. Sorry about that. To clarify, I'm just wondering if you had to spend a little bit less than you had previously anticipated in sustaining capital in Q2 as a result of the COVID lockdowns and is that sustaining capital expenditure, if there was such a deferral, will be spent in Q3 and Q4. Just what the dollar amount would have been around that.

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

Okay. So when we look at our sustained capital, it's really spent in and around the leach pads and the equipment that we would operate. For us, we were actually a bit ahead on both of those projects. As we talked about, we finalized the leach pads at El Castillo and La Colorada for the remainder of the life of the mine early on this year and so completed that work all in the first and second quarter. So we didn't have a real fall back in sustaining-type capital for those type projects. Where we did see some impacts would have been maybe on some of the equipment repairs that would have been done, but it would have been minor for us during the quarter from a sustaining perspective.

[Gabriel E. Gonzalez, Analyst]

Okay. Perfect. And just one last question. I was just wondering if there was any sustaining capital investment at El Castillo and La Colorada that was reduced for the full year in order to accommodate the capital expenditure plans at Florida Canyon. Just thinking about money that may have been moved from 1 bucket to another -- to Florida Canyon post the acquisition.

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

Absolutely no changes as we look at the capital that was allotted for the Mexican operations, no changes there. We have continued to move forward. We've actually been fortunate to be able to reduce some of the operating costs that we thought would be involved in building some of these pads. Bob and his team have done a good job, and we've actually seen some savings out of Mexico.

[Operator]

There are no further questions queued up at this time. I'll turn the call back over to Pete Dougherty for closing remarks.

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

Okay. Again, thank you all for joining us this morning. I'm really happy with how this quarter turned out for the company and look forward to third quarter as we begin to ramp back up things, excited for where the market is taking us and what's happening with the exploration results at Magino as you have seen the most recent press release talking about this Elbow Zone. We look forward to coming out here in the near future with similar results, hopefully, coming from our central zone, where we're doing that continuity-type drilling there as well. So pay attention as shortly we'll be coming out with some more information regarding that and as the third quarter unveils heading into the fourth quarter. Again, thank you all for your time and your energy this morning, and have a great week, and be safe out there.

[Operator]

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