Argonaut Gold Inc

TSX:AR

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Grant, and I will be the conference operator today. At this time, I would like to welcome everyone to the Argonaut's Quarter 2 2022 Financial Results Conference Call and Webcast. [Operator Instructions] Thank you. Larry Radford, you may now begin the conference.

[Lawrence Radford, executive]

Thank you, Grant, and welcome, everyone, to Argonaut's Q2 2022 Financial and Operating Results Conference Call and Webcast. I want to thank everyone for taking the time to join the call today. From the Argonaut team, I have Dave Ponczoch, CFO; and Lowe Billingsley, COO, with me today. We will be making forward-looking statements, so please read our cautionary note on Slide 2.

Moving to Slide 3. Shortly after the second quarter, Argonaut announced our fully financed solution for the Magino project. We have committed to a USD 250 million debt facility, which is subject to certain gating tasks, principally the bank's technical due diligence which is expected to be completed this quarter. Additionally, USD 142 million of equity was raised net of estimated fees. With the debt facility and equity raise, the Magino project is now expected to be fully financed to the CAD 920 million estimated completion. Although highly dilutive, the combination of equity raise and project financing debt was the best available alternative for the financing needs of the company.

I'll now run through the slide showing the construction progress. On Slide 4, you can see the SAG shell half inside the mill building. In all slides, you can see the progress with tank erection expected to be completed in September.

On Slide 5, you can see progress in the owner scope. In the top right corner is a photo of the first phase of the tailings embankment. If you look closely, you can see the filter material being dosed under the embankment phase. This progress is critical to have the facility complete before the weather precludes further construction.

In the bottom-right photo, please note the HDPE covering being installed on the water containment embankment. Completion of the water containment is critical to begin storing water for plant startup.

On Slide 6, good progress on the LNG power plant can be seen. Although there have been supply chain issues that have delayed first plant power by a month, we have rented temporary power to ensure that we have power for the startup. Progress on the fish habitat facility is evident in the photo. In the lodge photo, we have expanded the camp to accommodate peak construction manpower.

Slide 7 shows key milestones for the construction and commissioning schedule. The Magino project continues to progress, although the EPC contractor, Ausenco, has presented to Argonaut a 23-day delay claim, reflecting potential scheduled losses due to a provincial wide trade strike that lasted a 23-day period. This strike was covered in the Q1 press release. Argonaut has neither accepted this claim or incorporated it into the master schedule. However, the best indications are that the first gold pour will be delayed from March to April 2023.

You can see that we are now about 8 months away from the first gold. I was at Magino this week and each visit, I'm able to see Magino getting closer to completion. We are tracking towards our estimated completion. We are tracking towards the project schedule with the adjustments I just noted. Our operations readiness initiative is tracking well. I look forward to commissioning the plant and working towards exceeding the nameplate throughput.

Team-wise, we continue to strengthen the project team at Magino. I want to thank the project team for persevering through long days and hard work. I've worked through a number of construction and commissioning projects and appreciate how hard the work that this is. I also want to thank the entire Argonaut team for continuing to deliver expected production as we saw in the second quarter.

I'll now hand off to Dave to walk through Argonaut's financial performance for Q2. Dave?

[DavidPonczoch, executive]

Thanks, Larry.

I'm on Slide 8, financial performance. Revenue for the second quarter 2022 was down 7% as compared with the prior -- the same period last year and this is due to fewer ounces sold. Looking at net income for second quarter 2022, it was $18.4 million, down slightly from the $21.8 million from a year ago. On an adjusted basis, net income was $7.3 million for the quarter, which is down from $22.7 million from the same period last year. The reason for the decrease in adjusted net income was primarily due to removing an $11.5 million gain on the change of the fair value of the derivative liability component of the convertible debentures. For the quarter, Argonaut delivered $23 million in cash flow from operating activities and ended the quarter with $76 million in cash.

If you'll turn to the next slide, please, 2022 capital spending and cash flow. Looking at our second quarter cash flow reconciliation, we started the quarter with $166 million, we generated $23 million in cash flow, used $10 million in working capital and invested $97 million in capital programs, of which the bulk was for the Magino construction project. Looking at the quarter, approximately 81% of the capital spend went towards the Magino construction project.

Now just as a reminder, as Larry mentioned, the equity raise was completed in early July. So you'll see the impact of that raise in the Q3 cash flow.

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

[Lowe Billingsley, executive]

Great. Thanks, Dave.

I'm on Slide 10. Operationally, Q2 was generally in line with budget. We produced 59,000 ounces in the quarter, 6% above budget at a cash cost of $1,248 per ounce and an all-in sustaining cost of on $1,474. While Q2 was generally in line with our expectations, the ounce production was lower than Q2 of last year, primarily due to lower tons mined, lower grades in both gold and silver and lower gold recoveries at La Colorada as mining transitions from the El Creston pit to the Veta Madre pit.

On the cost side, higher cash costs were primarily related to higher mining rates at El Castillo, La Colorada and Florida Canyon due to higher stripping ratios, higher consumables -- key consumables costs across all operations and lower gold ounces sold.

Moving to Slide 11. It has been a solid first half of the year for us versus guidance, and we're maintaining our full year production guidance. In light of the inflationary environment during the past 6 months and considering current projections, we have adjusted our guidance for cash costs and AISC costs up by $100 per ounce.

Following the Magino construction project financing, we're now providing 2022 capital guidance. Through June 30 of this year, Argonaut had invested approximately $207 million in capital expenditures or approximately 46% of its estimated 2022 capital spend.

On Slide 12, we'd like to take a moment to highlight and recognize personal safety accomplishments at our Florida Canyon Mine. 3 employees will receive safety awards from the Nevada Mining Association for their achievements in safety. 2 will be recognized for a Supervisor Safety Leadership and a third will receive a Safety Champion Award. All of the recipients note that their individual recognition is a function of the support and commitment of the teams that they lead.

In addition, we'd like to highlight that our operations in Mexico were again awarded Socially Responsible Company designations for the 10th year in a row. With that, I will turn the call back to Larry.

[Lawrence Radford, executive]

Thanks, Lowe.

Slide 13. We have worked tirelessly to put Argonaut on a solid financial footing to complete the construction of Magino. Magino's importance to Argonaut cannot be overstated. The mine is planned to lower our cost per ounce to provide a long life mine to our operating portfolio to provide cash flow from a Tier 1 jurisdiction and to provide upside in converting and adding both open pit and underground resource.

As we approach commissioning of this project in the next few months, we believe there is a potential opportunity for patient investors willing to see Magino through to completion and to see a rerating in the stock price.

I will now turn the call back to the operator for a brief Q&A. Grant?

[Operator]

[Operator Instructions] Your first question comes from Gabriel Gonzalez from Echelon Capital Markets.

[Gabriel Gonzalez, analyst]

I just wanted to ask if you could provide any additional commentary on how you see costs trending at Florida Canyon, just in light of fluctuating energy prices, in particular, noting the change in the cost guidance. Are you optimistic that there's a possibility that with lower energy prices, perhaps cost may come down in Q3 versus Q2? Just any additional commentary or color that you might have would be appreciated.

[Lawrence Radford, executive]

Yes. As with all of our mines, they're levered to oil prices and natural gas prices and line. And I believe we've seen peak prices in diesel in particular, but I'll ask Lowe to comment further.

[Lowe Billingsley, executive]

I think the -- that's a good question. The situation with costs, I think Florida Canyon is largely what the rest of the industry is seeing in Nevada. I mean, in particular, we've seen higher costs in the first 6 months of the year on the key consumable inputs. Certainly, the energy components of that have been important as well as reagent costs. We do see, I think, a trend that those are flattening and with -- we'll have to see how the markets go, just in terms of what the overall impact is. But certainly, any pullback in input costs will help improve the cost profile of Florida Canyon.

[Operator]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Lawrence Radford, executive]

Thanks, everyone, for attending today. And if you have any further questions, feel free to contact Joanna Longo or myself. Thank you.

[Operator]

This concludes the conference. Thank you, everyone. You may now disconnect.