Argonaut Gold Inc

TSX:AR

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, everyone. And welcome to Argonaut Gold's First [Second] (sic) Quarter 2023 Financial and Operating Results Call and Webcast [Operator Instructions]. As a reminder, this conference call is being recorded on August 11, 2023, at 10 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. For each forward-looking statement speaks only as of the date of this call and actual results may differ materially from management 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 include Richard Young, Argonaut's President and CEO, who will discuss the company's new strategy; David Ponczoch, CFO, who will talk us through the financials; and Marc Laduc, Chief Operating Officer, who will review operating performance and progress at the Magino project. The financial statements, management's discussion and analysis and the slide presentation related to this call are available on the company's Web site at www.argonautgold.com for self advancing.

I will now hand the call over to Richard Young. Please go ahead, sir.

[Richard Young, President and CEO]

Sylvie, thank you very much, and hello, everyone. Let's start with Slide 3. During the second quarter, we began processing ore at Canada's newest gold mine, Magino, our flagship asset. The Magino mine is key to achieving our vision of becoming a low-cost, mid-tier North American gold producer that creates significant value for all of our stakeholders and proudly demonstrates responsible mining. To achieve this goal, we have shifted our focus and intent to allocate capital towards our high quality, longer life assets that have the potential for significant organic growth, free cash flow generation and per share growth, which are Magino and Florida Canyon. As part of this evolution, we'll build a team and a culture to support our commitment to operational excellence and responsible mining. With this transformation underway, we're pleased to report financial and operating results for the second quarter and half year that are on plan.

I'll now turn the call over to Dave for financial highlights, and then Marc for operating highlights and development updates from Magino and Florida Canyon. Dave?

[David Ponczoch, CFO]

Thank you, Richard. Please turn with me to Slide 4. Revenues for the quarter were $83.1 million or 25% lower than the $111.4 million from Q2 2022 due to lower planned production for the company's three Mexican mines, El Castillo, La Colorada and San Agustin, and this was partially offset by higher production from Florida Canyon. The revenues from the second quarter include the initial gold ounces sold from the Magino mine. As Magino ramps up to commercial production, which is expected in the third quarter, revenues are expected to increase accordingly. Gross profit for the quarter was $15.5 million and this was $4.3 million lower than the $19.8 million from Q2 2022, and this was due to lower revenues from the planned gold production. Argonaut generated cash flow from operating activities before changes in working capital and other items, totaling $17.4 million, a reduction of 25% from Q2 2022 due to lower gross profit. Net income of $21.2 million or $0.03 per basic share compared with net income of $18.4 million or $0.06 per share, a 15% increase and was largely due to a reduction in current income tax expense, partially offset by lower gross profit. Adjusted net income of $5.7 million or $0.01 per basic share compared to adjusted net income of $7.3 million or $0.02 per share a year ago. Argonaut faced many challenges in the recent history. So to end the second quarter with cash of $71.8 million and net debt of $151.6 million, while ramping up Magino feels really good.

Please turn to Slide 5. With construction of the Magino mine completed and the ramp up underway, we ended this quarter on strong financial footing. We had undrawn debt capacity of $20 million at the end of the quarter. During the quarter, we obtained a waiver on certain financial covenants related to our $250 million loan facilities. We'd anticipate that we would not be in compliance with certain financial covenants at the end of the second quarter and therefore obtained the waivers to prevent any default event. So the anticipated breaches were on two financial covenants that were due to an increase in the construction costs at Magino when we increased from CAD920 million to CAD980 million as well as a small delay in timing of achieving first gold, which was originally scheduled for March of 2023. Income tax for 2023 is lower than the comparable period from last year, primarily due to lower taxable income from the Mexican operations, which are winding down. The only significant change to guidance relates to exploration and reserve development programs at Magino and Florida Canyon, which are expected to be $10 million higher than planned. Overall, I'd like to reiterate that we're on track to achieve our full year production and cost guidance that we set out at the beginning of the year. Now I'd like to turn the call over to Marc to review our operating performance and growth highlights for the quarter.

[Marc Laduc, Chief Operating Officer]

Thank you very much, Dave. Now let's turn to Slide 6. Our operating mines are on track to achieve their plans. Consolidated production was 43,492 gold equivalent ounces or GEOs, including an initial 3,295 ounces of gold from the Magino mine. This was 27% lower compared to 59,190 GEOs for the second quarter of 2022 due to lower gold tons mined and processed at the company's three Mexican operations as a result of winding down those operations. This was partly offset by higher ore tons mined and processed at Florida Canyon, in which production was up 26%. Cost of sales per ounce was $1,590, cash costs per ounce were $1,304 and all-in sustaining cost per ounce was $1,594, were similar to the prior period and largely in line with 2023 full year guidance. With the expectation to achieve commercial production at Magino in the third quarter of 2023, cost of sales per ounce -- cash cost per ounce and ASIC per are expected to be in line with full year 2023 guidance.

Now let's move on to Slide 7. The ramp up at Magino is underway and we remain on track for commercial production in the third quarter of this year. During the second quarter, commissioning activities at the Magino mine were well underway with the introduction of ore into the crushing circuit in mid-May and then into the grinding circuit approximately a week later. As Richard mentioned, we achieved first gold pour in mid-June. During the month of June, the Magino mine produced an initial 3,295 ounces of gold and we sold 72 ounces for the period. These are all initial pre-commercial production gold ounces. At the end of the quarter, the company had incurred $730 million or CAD947 million in cost for the completion of the project. The initial results during commissioning indicated that throughput targets in the crushing and grinding circuit should easily be achieved and the team was focusing on achieving design parameters by working through instrumentation, electrical and communication issues that are common in the start-up phase of a process plant of this size and complexity. Permits have been received to operate the process plant in the tailing management facility. The workforce buildup of the permanent operating team is nearing completion but sourcing the remaining labor remains a challenge at the current economic environment.

So let's move on to Slide 8. With the first gold pour milestone behind us, we are now focused on completing commissioning and ramp up at the mill to bring it to steady state. In addition, we are looking to further grow our flagship gold mine as we move to commercial production with a reserve development drilling program intended to increase the reserves in combination with studies to expand and optimize the mill throughput. Both are scheduled to begin this quarter. The overall program at Magino is expected to cost CAD25 million and we are looking to convert open pit resources into reserve with the current reserve within the current resource pit column and determining the optimal processing rate at Magino. We also are going to be testing deep underground potential targets similar to our [indiscernible].

We're also going to be testing a number of open pit targets along strike to the west on our very significant property holdings in that area. The overall program is expected to take 12 to 15 months to complete. In parallel, we are beginning to review a mill optimization and expansion that combined could raise throughput in the range of 15,000 to 20,000 tons per day, which equates to an annual production of 200,000 gold ounces per year with higher production in the earlier years.

Now let's move on to Florida Canyon on Slide 9. In the short term, we expect Florida Canyon to meet full year 2023 guidance as we stabilize and optimize operations. In the long term, we see an opportunity to scale up production and increase mine life at Florida Canyon. To achieve this, we will be exploring the large sulfide potential just below our oxide deposit later this year following a geological update that we just finished. In a proof-of-concept program, if it is successful, we plan to prepare a preliminary economic assessment on the viability of the sulfides with an initial resource late next year 2024. Specifically, during the quarter, the company conducted drilling within the oxide resource. We also tested high grade targets in the West sulfide zone and completed regional exploration work. In the West sulfide zone, the company completed six diamond drill holes for a total of 1,258 meters and three separate drill fences. These holes were part of the company's proof-of-concept evaluation of that sulphide zone, all the drill holes intersected strong alteration for [indiscernible] and strong sulfide mineralization [Indiscernible] mineralization, which is inline with similar areas of that zone. The holes were drilled primarily to get metallurgical samples so we can send these to the test lab and evaluate different sulfide processing options in Florida Canyon. The development work we are completing at Florida Canyon supports our belief that this is a stable asset with minimal risk and large growth potential.

I will now turn the presentation back over to Rich who will provide closing remarks.

[Richard Young, President and CEO]

Thank you, Marc. Moving to Slide 10. In summary, we entered 2023 with a new vision, mission and values and we're confident that our company can deliver on our vision of becoming a low-cost, mid-tier North American gold company. In line with our vision, mission and values we’re focused on per share growth. As a result, strategic capital allocation, the high quality growth opportunities and operational excellence are key to delivering per share growth. We'll allocate capital to those assets, projects and activities that generate the highest potential per share return. To that end, we believe the following three activities provide the highest potential per share growth listed in order of per share value creation. They are; number one, developing the blue sky potential of Magino, as Marc just discussed; as well as, number two, redeveloping Florida Canyon; and third, is repaying our debt. While we have growth potential within our Mexican asset base, the returns on invested capital are significantly lower than the three activities we list here. As a result, we continue to work towards optimizing the value of our Mexican assets and we're evaluating the full spectrum of alternatives for this portfolio. This is part of our vision and strategy to transition from our low grade short mine life Mexican asset base to a long life low cost asset base in Canada and the United States. Sylvie, with that, we'd like to turn the call over to questions. Thank you.

[Richard Young, President and CEO]

Well, Sylvie, thank you. It's a Friday in the summer here in Toronto and the weather is beautiful. But I think what I would like to emphasize with the close out of the call that we're on plan, our Mexican operations are anticipated to generate about $50 million in free cash flow this year. Magino is ramping up. The mill is going through the normal ramp up process, but we're confident that we are going to meet or achieve nameplate capacity as we move through the balance of the year. We're going to begin putting high grade material through that mill this week with the commissioning of the gravity circuit. And we're on track for our organic growth programs, both at Magino and Florida Canyon as we enter the third quarter. So we think that we're going to have great news as we move into the second half of the year, higher production, lower unit cost and some development updates for the market. So I'd like to thank everybody for participating and enjoy your weekend. And if there are any questions, please feel free to reach out either to Joanna Longo or myself, and we're happy to answer those. Thank you.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.