Argonaut Gold Inc

TSX:AR

Earnings Call Transcript 2018-Q3

[Operator]

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

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

Thank you, everybody, and welcome to Argonaut's Q3 financial and operating results conference call and webcast. Before we get going today on the formal presentation, I'd like to draw your attention to the photo on our title page of the presentation. This is the photo of a coin we recently had minted to celebrate an important milestone in Argonaut's history.During the quarter, we produced our millionth ounce of gold, which is a testimony to our ability to operate profitably through various market cycles.Since launching the company at the end of 2009, we have now produced over 1 million gold equivalent ounces at a cash cost of $720 per ounce.Such an accomplishment is impossible without the commitment from our entire organization to health and safety, our people, our environment and our communities. I want to recognize these 4 pillars from which we have built a successful and sustainable business, and we look forward to the next million ounces of production.Please turn to Slide #2. Forward-looking information. During this presentation, we will be making several forward-looking statements based on our best knowledge as of today. Please note that we cannot predict the future with 100% accuracy, but we will do our best based on the information that we know and have today.Please turn to the next slide, Slide #3. Q3 2018 results conference call. This morning, we will provide an overview of the quarter, and then take a deeper dive into some of the financial and operating highlights for the quarter.Towards the end of the presentation, we will also spend some time looking ahead to the balance of this year and beyond. The big takeaways from this presentation should be as follows: One, we experienced operational challenges this year, namely, at La Colorada with the suspension of the explosives permit. However, I'm happy to report that these are behind us, and we are tracking a very strong fourth quarter to date.Two, looking forward, we are on track to meet the low end of our annual production guidance of 165,000 gold equivalent ounces, which means record quarterly production for the fourth quarter and Bill Zisch, our COO, will touch on this later in the presentation as he walks us from where we are today and how we're going to achieve this very strong fourth quarter. Number three, we expect a strong fourth quarter now that all operations are performing well, which should set the stage for us to achieve our 3-year guidance of 65% production growth objective that we set back in 2017.Please turn to the next slide, Slide #4. Q3 2018 and recent highlights. We produced just over 34,000 gold equivalent ounces during the quarter at a cash cost of $867 per ounce and an all-in sustaining cost of $988 an ounce.As we were not blasting at La Colorada for essentially the entire second quarter and the beginning of the third quarter, we were utilizing low-grade stockpiles, and we saw the impact of this during the third quarter in the form of lower production. After the reinstatement of the explosive permit and the recommencement of blasting at La Colorada in late July, we saw our unit cost normalize as we ramp back up to production. The culmination of lower production with normalizing cost impacted our cash flows during the quarter. Given the circumstances, we had a very solid quarter and produced more than 34,000 gold equivalent ounces.When we do a comparison of Q3 of 2017 to Q3 of 2018, we see the improvements in the company with production up 40%, cash cost down 3% and all-in sustaining cost down 7%, primarily driven by the addition of our lower-cost San Agustin mine within the El Castillo complex.We also made solid progress on both of our short-term and longer-term growth initiatives during the recent quarter. At the El Castillo mine, we achieved our primary production targets given the rainy season, and at both San Agustin and La Colorada, we exceeded productivity target in placing additional material to the pads.We also continue to de-risk our development projects. At Magino, we continue to advance the environmental assessment process. At this process, we are currently tracking to complete during Q1 of 2019, that will be a major milestone for that particular project, receiving the environment assessment permit. At our Cerro del Gallo project, we completed the drilling program for metallurgical test samples and are working our way through this metallurgical test sampling process right now, and we should have those results at the end of the year.Please turn to the next slide, Slide #5. Financial performance. Despite our impact at La Colorada that led to lower production and higher cost, impacting our quarterly cash flow, and despite a 5% average realized drop in gold price year-over-year, we saw cash flow from operations rise by 91% to $11 million during the quarter.During the first 9 months, we have generated nearly $50 million in cash flow from operations, up 43% versus 2017 with operations at La Colorada now back to normal, coupled with the increased production and lower cost coming from the El Castillo complex with the addition of San Agustin this year, that sets the stage for a very strong fourth quarter both operationally and financially.Please turn to the next slide, Slide #6. Q3 2018 capital spending, cash flow and liquidity. We invested just under $10 million during the quarter. After reviewing our remaining capital projects to spend for 2018, we have revised our 2018 capital estimate down to between $37 million and $40 million total for the year. This is a reduction from the opening outset of the year of $50 million to $55 million. This was primarily reduction due to spending moving from deferred stripping at our La Colorada facility out of capital spending and moving it into operating cost, hence an impact on our overall cash operating cost.Additionally, we saw reductions from efficiencies gained in building pads at both the El Castillo, La Colorada and San Agustin facilities. With $30 million of capital spend year-to-date, we expect to spend between $7 million and $10 million during the fourth quarter.I'll now pass the call to Bill Zisch, our Chief Operating Officer, and have him provide an overview of the operations during the quarter. Bill?

[William M. Zisch, Chief Operating Officer]

Thanks, Pete, and hello to everyone on the call today. The third quarter is typically a challenging quarter for us given the rainy season, so we always consistently budget for a decrease in productivity and an increase in the cost for this period. We were able to meet our productivity target at El Castillo and exceed these targets at both San Agustin and La Colorada, which means we stacked more tonnes and ounces than we expect to recover in Q4.At La Colorada, we exceeded our crusher throughput expectations and yielded over 13,000 tonnes per day during the quarter. At El Castillo, we saw a solid quarter-over-quarter productivity improvements and are continuing to see these improvements carry over so far into this quarter.Our strip ratio at El Castillo was 1.71 during the quarter as we opened the south pit, Phase 11 pit. We expect the strip ratio to reduce by 30% to 35% in Q4 now that this pit is opened up.Our primary source of ore is from the south pit, which is generally oxide, where we typically see about 68% recoveries, so we also expect recoveries to improve in Q4.At San Agustin, we continue to see crusher throughput levels ahead of budget and had another strong quarter here despite the rainy season.Please go to Slide 8. As we look ahead to where we are today, I'm sure the question everyone has is our ability to meet guidance. As of today, with what we have yielded through the first 9 months of the year and what we are seeing so far in the fourth quarter, we are on track to meet the low end of guidance at 165,000 gold equivalent ounces and the upper end of cost. I'd like to take a moment to walk you through how we'd get there, and I think the easiest way to do so is perhaps to compare our Q4 expectations to our first quarter, where we yielded about 41,000 GEOs.First, let's start with El Castillo. During Q1, El Castillo crusher throughput was about 18,000 tonnes per day. Today, it is running at about 29,000 tonnes per day or up by about 60% from Q1. In fact, we are currently seeing higher throughput rates at all operations this quarter versus Q1. During the first quarter, you'll remember we were stacking ore on the upper lifts of our leach pads, which delays the timing of recovery. Today, we are stacking ore on lower lifts at all operations, which we expect to accelerate the timing of recovery.In Q1, we are mining in an area where we encountered hematitic ore that yields a lower recovery than our general oxides do. Today, we are mining in an area where no hematitic ores are and primarily sourcing material that is oxide ore.Looking at La Colorada, we also see improvement this quarter versus Q1. At La Colorada, we expect the grade to increase by about 20% this quarter versus the first quarter.We also expect about a 15% increase in crusher throughput and have been seeing this so far during the quarter.At San Agustin, we have consistently yielded higher crusher throughputs than budgeted and expect this to continue. We also have the opportunity at San Agustin to produce some other mine ore. When you combine these improvements across all operations, you can see how we expect Q4 to provide a record production. I can also report that all operations are performing well to kick off the fourth quarter and our current estimates show us meeting the low end of guidance.I'll now turn the call back to Pete, but will be happy to answer any questions during the Q&A portion of the call.

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

Thank you, Bill. And as Bill said, we expect over 50,000 gold equivalent ounces in the fourth quarter now that La Colorada is back to normal operations and El Castillo is performing to a nameplate and San Agustin continues to outperform expectations. As stated in Slide #8, we are on the track and on the path to returning towards operational excellence and I'm quite pleased with what the operations have been able to do.If you will please turn to Slide #9. Achieving our objectives and delivering value.As I said before, looking at this 50,000-ounce quarter, that sets up nicely for us and puts us on track to deliver greater than 200,000 ounces next year as anticipated in this slide and we have been talking about since 2017.In 2017, we challenged ourselves to grow production by 65%, while maintaining all-in sustaining cost below $950 an ounce. And halfway through this program, we are on track to deliver on those promises.Please turn to Slide #10. Slide #10. Development assets. Beyond our operating assets, it is important to remind you that we also have a very strong pipeline of 3 development assets that I would argue are not receiving any value in this market environment that we're in today.At Magino, the EA process, as I said earlier, is advancing very well, and we are currently on track to conclude this process in Q1 of 2019, a major milestone for this project and for the Ontario area as this will be a new mine permitted in that area.Secondly, at our Cerro del Gallo project, since acquiring the project late last year, we have re-logged the core, built our own geologic models and are currently conducting metallurgical test work. We expect to have the results of this by the end of this year, which will put us in a position to scope out the cost and how we will take this project forward. We hope to be in a position to talk more about this during the latter part of the first half of this year coming up in 2019, and we'll be happy to share with you how we see this project could move forward into the production profile of this company.At our San Antonio project, we continue to meet and communicate regularly with the regulation -- regulating agency with a plan of resubmitting our MIA application at the appropriate time in the future. Between these 3 assets, there is a combined nearly 6 million ounces of measured and indicated gold that could provide and will provide tremendous leverage in a rising gold price environment. This, I believe, separates us from many of our peers within the industry.Please turn to the next slide, Slide #11. Summary of investment case. Argonaut is well known for maintaining a strong balance sheet throughout the market cycles, which provides not only security, but stability and fuels growth. We have $21 million in cash with $8 million drawn on our revolver and $20 million in VAT receivables. We've proven that we can add cash to the balance sheet from our strong track record of profitable production despite the fact that our mines are very low grade in nature as demonstrated by our millionth ounce produced this quarter at a cash cost of $720 per ounce.With close to 4 million ounces in mineral reserves and over 8 million ounces of measured and indicated resources, we provide tremendous leverage to the rising gold price environment, and as we continue to de-risk our development assets, we should see more value in the market for these assets. And importantly, as we discussed our 65% growth target objective that we laid out back in 2017, we are achieving this. We're on track to meeting the low end of guidance this year despite the disruptions that we experienced at La Colorada, and this fourth quarter is ramping up to take us to that 200-plus thousand ounces of production next year.Please turn to the next slide, Slide #12. Our focus. We must always be sure that we are executing day in and day out that no matter what the challenges we encounter, we can be prepared to take them on. We must also remain focused on our goals and objectives.Our focus is quite simple in a threefold objective of building our balance sheet, de-risking our development projects and preparing and continuing to ramp the production profile up to over 200,000 ounces next year.Thank you all for coming on this morning and hearing our third quarter conference call. This concludes our formal presentation of today's call. We will now turn the time back over to James, our operator, who will take any questions or calls that you may have at this time, and Bill and I will be happy to answer any questions that you may have. James?

[Operator]

[Operator Instructions] And we do have a question from the line of Humphrey Carey from Chrysos Fund.

[Humphrey Carey]

Can I just ask two questions on your development projects. At Cerro del Gallo, can you give indication what sort of metallurgy results you'd like to be able to see for the project to be viable? And then the -- for the other project, San Antonio, can you say whether -- what the chances are of that going ahead given the disappointment last time?

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

Okay, this is Pete. I'll take the first item there, which is Cerro del Gallo and the metallurgical results. Where we are at right now with that project is, we are just starting the metallurgical column test work that we have just started. It is early days. We have now run the columns for roughly around 45 to 55 days. We typically like to run a column out as far as 90 days, just to have a full range of recovery on that. What we can see from the past work that was done by the former owner, Primero Mining, it seems that it would appear that the recoveries are slightly higher for the oxide mineralization than what we see at our El Castillo operation. So, as Bill talked about, we see somewhere in the high 60s for recovery at our El Castillo operation. From the work that was done in the past by Primero Gold that they had released on this project, they saw recovery north of 70% in the oxide mineralization. In the transition ore, the mix, the mineralization, recoveries can vary quite a bit. We see that as well at our El Castillo operation. We see recoveries at that particular operation ranging between 50% and 60% when we are processing at our El Castillo operation within that transitional-type ore. Now when we look at this particular project, Primero Gold had seen recoveries being in that 50% to mid-60-type percent range. So a little bit better than what we'd experienced at our El Castillo operation. I think it's important to note at this particular project that we are just kicking off our own metallurgical work today. So I'm not at liberty to speak about those results as of yet, but what I can tell you is this, when we looked at this project, we saw a gold grade that was nearly double at 0.6 grams per tonne versus El Castillo that's running between 0.3 and 0.35 grams per tonne. We see a strip ratio, as identified by the Primero study, of about 0.7:1. At El Castillo, we experienced about a 1.1:1 strip ratio. So we see that the economic factors for this project look to be a little bit stronger than El Castillo with slightly better recoveries, slightly lower strip ratios and significantly better grades. This project also has with it a component of silver, which our El Castillo project does not have. The silver component here is around 14 grams to 15 grams per tonne. So it's hard to say how this all sorts itself out, Humphrey, we're just in early days. We are reworking the whole entire process. But as I said on the call, we think, late first quarter, early second quarter, we will have the information to sit down and talk to our investors about how we would plan on bringing this project forward. Your second question comes around San Antonio. And as Bill is managing the San Antonio process, I'm going to turn the line over to Bill to answer and respond on San Antonio.

[William M. Zisch, Chief Operating Officer]

Thanks, Humphrey. With regard to San Antonio, and the chances of the project going forward, we continue to be in dialogue, continue to be looking at the permitting and looking at the technical aspects of the project. So it's difficult to predict the timing of the permitting process, and we'll continue to work that process and overcome any challenges as we move forward. We have continued in dialogues with our local stakeholders, and we maintain a very strong local support for the project. And at the same time, we had and are continuing in dialogues with the regulators. So that's kind of the background of where we're at with San Antonio and how the process is progressing.

[Operator]

And there are no further questions at this time. I turn the call back -- oh, looks like we do have a question. We have a question from the line of Ryan Hanley from Laurentian Bank.

[Ryan Hanley, Mining Analyst of Institutional Equity Research]

Just a couple of quick questions for you. The first one. In Q4, it looks like you've had maybe a little bit of rainfall, maybe a bit more than usual, especially with the hurricane going through there a couple of weeks ago. I'm assuming that you've kind of taken that into account, just kind of wondering if I can get a rough idea as what the impact of the weather has been so far through the quarter. And then the second question is on La Colorada. Looks like you've switched from capitalizing the stripping there to expensing it, just kind of wondering what the rationale is and if that's going to be the case for, I guess, going forward.

[William M. Zisch, Chief Operating Officer]

Well, Ryan, this is Bill. I'll take the first one on the impact of rainfall. When we do our planning, we always account for a third quarter when we're going to have rain and we reduce our production by about 10% normally. This year, that's about where we ended up. There were a couple very significant storms and the rainfall was higher for the quarter but it was a few storms. So we don't see -- in Q4, right now we don't see a real impact -- continuing impact of adverse rainfall.

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

I will note, Ryan, that last hurricane that came through, we were supposed to be right directly in the path of it, actually moved a little bit to the north of us, so we were very fortunate didn't have any damage associated from that last hurricane that came through. And we kind of got lucky there. We were, I don't know, was it 50 kilometers away where the center was going through. So that helped us out quite a bit. I'll turn the other question over to Dave Ponczoch, our CFO, who is with us here on the capitalized stripping, okay, Ryan?

[David A. Ponczoch, CFO & Corporate Secretary]

Yes. Ryan, so with this, we follow the IFRS guidance for deferred stripping and what happened was when we did our budget, our initial guidance, we had it built on a mine plan, and then subsequent to that, we changed the mine plan where we combined a couple of the phases. By combining the phases, that changed the strip ratio for that area. And so then, rather than capitalizing that, because it would have -- the work we were planning to do would have exceeded certain of the initial phases, the new combined strip ratio was lower, so it essentially made it operating expense rather than capital. So, in general -- well, not in general. We follow all the IFRS guidance on deferred stripping. It was just a change in mine plan for this year and that's why a change from capital cost to operating cost.

[Operator]

And there are no further questions at this time. I'd like to turn the call back over to our presenters.

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

Thank you, James, and thank you all for taking the time this morning to listen in or those who will listen in later. We appreciate your support, and we look forward to, as I said, a very strong fourth quarter, very excited about what we're seeing so far, as we're not quite halfway through the quarter yet, but so far I'm pleased with the results coming from the operations and quite excited by what they have done to turn things around and move us towards that next phase and next level for the organization. Again, thank you for your support, and we look forward to talking to you in the new year. Bye now.

[Operator]

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