Argonaut Gold Inc

TSX:AR

Earnings Call Transcript 2020-Q3

[Operator]

Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Argonaut Gold Inc.'s Third Quarter Conference Call and Webcast. [Operator Instructions] Thank you. Mr. Dougherty, you may begin your conference.

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

Thank you, Sharon, and welcome, everyone, to the Argonaut Q3 Financial and Operating Results Conference Call and Webcast. I want to thank everyone this morning for taking the time to join the call today. This morning, we will discuss the Q3 results and also walk through our strategy and plans, specifically with Magino, as we have been very busy lately between the Alio transaction, putting together the Magino financing plan and getting Magino ready to break ground on construction early in the coming year. 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. Q3 and recent CSR highlights. Before we get into the quarterly financial and operating results, I want to take a moment to highlight the excellent job our team has been doing in Mexico by earning the Environmentally Socially Responsible company designation from the Mexican government at our La Colorada mine for the ninth consecutive year. Last quarter, we received the same designation at our El Castillo complex for the eighth consecutive year and we are very proud of this recognition. It means the government recognizes that Argonaut is a company that is dedicated to operating in an environmentally and socially responsible manner, year in and year out. Please turn to the next slide, Slide #4. Q3 2020 and recent highlights. From a financial perspective, we had another great quarter of building cash. Excluding the $90 million equity financing in July, we saw an additional $23 million increase in cash during the quarter, and we are well on track to delivering that $50-plus million of cash billed in the second half of the year that we discussed earlier on, assuming that $1,900 gold price. It was a very active few months for the company between closing of the Alio Gold merger, coming to an agreement to sell the Ana Paula project, raising the equity and debt to finance Magino's construction, coupled with the flow-through to finance and fund Magino's continued exploration program. We were very busy during this last quarter. Magino's exploration, which is focused and targeted high-grade mineralization, continues to deliver positive results, and we provided 2 updates of these high-grade results during the third quarter. We also continued to advance our Cerro del Gallo project through the permitting during this last quarter. Please turn to Slide #5, financial performance. In terms of financial performance, we saw big increases across the board this quarter versus 2019, as you -- as one would expect in the current gold price environment. Revenue was up nearly 40% year-over-year, while net income was up an impressive 173%. After closing the Alio transaction, we took on just over $18 million in debt that was on Alio's balance sheet and then quickly paid off the first $3 million. The remaining $15 million, combined with the $7 million that we have drawn on our existing revolver, brings our total debt position to $22 million as of September 30. We intend to repay both the Alio facility and the revolver early here in the fourth quarter, so the only outstanding debt that we will have going forward will be the long-term debt in the form of the $57.5 million convertible bond that we issued subsequent to Q3. Please turn to the next slide, Slide #6. Q3 2020 capital spend and cash flow. It was quite a busy quarter with financing and cash generated from operations so I want to take a moment and walk through the cash flow reconciliation. We started Q3 with roughly $65 million in the bank and generated over $30 million from operations during this quarter. We raised $90 million with our July equity raise, which is earmarked for the Magino construction, and invested $10 million in capital across the asset base. We ended Q3 with $178 million in cash and $22 million in debt, as mentioned on the previous slide. We intend to replace this $22 million during the fourth quarter. Please turn to Slide #7. Year-end 2020 cash estimate. We expect to end the year at or above $220 million in cash. We should generate roughly $27-plus million in the fourth quarter assuming we remain in this $1,900 gold price environment. We also expect to receive $30 million upon the closing of the Ana Paula asset sale, which should take place sometime in December of this year. We added net proceeds of over $55 million through the convertible bond issuance that was done a couple of weeks ago and an additional $9 million through the flow-through financing for that Magino drilling program. We will be paying off the $15 million we inherited from Alio as well as the $7 million currently drawn on our revolver, along with some other lease payments and other items totaling up to a grand total of roughly $27 million. And with Magino entering construction in early 2021, we expect our fourth quarter capital to be somewhat in the range of $50 million, including this spending. This should leave us entering 2021 with a very healthy balance sheet to cover our needs with over $220 million in cash and nearly $57 million in long-term debt and $125 million of flexibility with our corporate revolver that was also extended during the quarter. Please turn to the next slide, Slide #8. Operations overview. In terms of production, it's really difficult to compare with previous periods due to our 2-month shutdown for COVID-19 in April and May and then getting everybody back to work in early June. Because we run heap leach operations and the recovery cycle is 9,220 days, we knew that Q3 production would be impacted as we are not able to get the ore tonnes to the heap leach pads during Q2 with this COVID shutdown. As well, we are typically experiencing a softer Q3 as the rainy season starts to dilute the solution in the leach pads, which usually leads to a much higher fourth quarter as things begin to dry out. Overall, we did a decent job of getting the tonnes to the leach pad during Q3, which should bode well for a strong Q4 as we have seen historically. I'd also like to point out that we've seen a 14% reduction in cost at the El Castillo mine year-over-year after having switched primarily to a run-of-mine processing and eliminated our crushing needs at this operation. Please turn to Slide #9. 2020 guidance. Today, we are tracking very close to the low end of our original production guidance of 210,000 to 230,000 ounces for the year. Therefore, we are lowering our 2020 production guidance range to 200,000 to 215,000 ounces. You can see the change is primarily due to the La Colorada and Florida Canyon mines. At La Colorada, we have been impacted by the mine sequencing which was impacted by water early in the year and then COVID-19. This is a sequencing issue. This has impacted our total ounces that we have stacked to the leach pad and, hence, production to date. I'm happy to report that during the latter part of this quarter and the early part of the current quarter we're in, the team has done a tremendous job of increasing stacking rates in an effort to aid production for the fourth quarter. Currently, we are stacking roughly 16,000 tonnes per day versus our budget of 13,500 tonnes per day. So we expect the fourth quarter will be our strongest of the year. At Florida Canyon, this was our first quarter as operators of the mine following closing the Alio transaction. And we've said from the beginning that the changes we want to implement will take time. Florida Canyon had just completed new leach pads earlier this year, but there was a delay in receiving the permits to allow us to use these new pads. We received the final permit needed in October and have now been stacking and applying solution on the new leach pads, which should aid and boost production here in the fourth quarter and going forward into the future where we'll be able to operate as projected with a full leach cycle. Our cash cost and all-in sustaining guidance is on track and well within the ranges that we outlined early in the year, so no changes to guidance here. In terms of capital spending, when we originally set the 2020 capital guidance of $64 million to $72 million, we didn't include any construction capital at Magino. Now that we've made a construction decision and are moving Magino forward, we plan to spend an additional $35 million to $40 million in the fourth quarter at the Magino project, primarily for the financial assurance bond with the province of Ontario and making down payments on long-lead order equipment items. This is partially offset by a reduction in capital in our 2020 operations as we expect to spend between $6 million to $8 million less this year, primarily due to less stripping at La Colorada and the finalization to the crushing and stacking circuit at Florida Canyon, both of which will be delayed into next year. Please turn to the next slide, Slide #10. Magino fully financed moving to construction. And now I'd like to spend a moment on Magino as we have just fully financed the project and announced a construction decision. The current capital estimate for Magino is between $360 million to $380 million. Here you can see that we will be funding Magino's construction through the $178 million of cash on hand, the additional $55-plus million in proceeds from the recently issued convertible bond, which yields a 4.6% rate and a conversion of up 35%. We will also be adding to this the $30 million worth of cash proceeds from the sale of the Ana Paula project and the balance of cash will come through cash flow from the operations. We expect to generate over $137 million of cash from the existing operations, at or above a $1,600 gold price through the next 9 fiscal quarters. Obviously, at current gold prices, we will generate this much faster. We also extended and expanded our revolving credit facility for up to $125 million. This provides a safety net to backstop Magino's construction and also provides the company with the flexibility should we have other uses of capital investments during the Magino construction period, such as a Cerro del Gallo decision. This $360 million to $380 million investment will yield us 150,000 ounce a year mine in Ontario, Canada, with all-in sustaining cost around $700 an ounce, which is very meaningful to a company our size. Please turn to the next slide, Slide #11. Conceptual Magino project time line. When we look at Magino's construction time line, we expect to finalize the contract for the fixed bid price proposal we received, covering roughly 50% of the initial capital this quarter. We expect to file the closure plan and post the financial assurance with the province of Ontario before the end of this year. This will allow us to embark upon our 2-year construction cycle. We would expect first gold and ramp-up of gold production during the first half of 2023. While all this is going on, we will continue our exploration efforts at the Magino project as the sooner we can reasonably understand the potential to complement open pit ore with higher-grade material from a potential underground operation. This will put us in a position to make expansion plans incorporating this into the profile of the new larger mine in the future. Therefore, we will begin looking at Magino's potential to expand to a 20,000-tonne per day process rate in 2021 and in 2022, look to see how this higher-grade material under the current pit could complement the open pit mine. If things work out, this could drastically change the outlook for the project. Please turn to Slide #12. We already know -- excuse me, pathway to expansion. We already know that the open pit resource at the Magino project supports a larger processing facility than what we are initially planning on building, and that is why we have permitted the project for up to 35,000 tonnes per day or 165 million tonnes of total material capacity. I'd like to tell people, we are buying the entire block but only building 1/4 of it to start with. So from a perspective of operational expansion, we have the ability to not only start but also take this project to a much larger size from day 1. We will start with a 10,000-tonne per day facility to keep the initial capital low but have left space in the footprint for future expansions and are building on that much larger footprint from day 1. From past work, we see that the open pit resource can support a much larger plant size. However, if we could add higher grade mineralization from these higher grades that we are seeing below the open pit, that's a game changer as it doesn't take a lot of tons at those type of grades to boost the production profile. If we are successful, Magino, doesn't just become a meaningful asset to Argonaut, it has the potential to become a meaningful asset in anyone's business.Please turn to the next slide, Slide #13. Argonaut's vision and strategy. It shouldn't be lost on anybody that this has been a very active year in Argonaut. This has been one of those years of setting the stage for transformation as we execute on our vision and strategy to transform the company from a short mine life, higher-cost junior producer to a longer mine life, lower-cost intermediate producer between 300,000 to 500,000 ounces per annum. We have the assets and the financing in place to take the first step towards achieving this. It now comes down to executing.Please turn to the next slide, Slide #14. Executing our strategy, our 3-phase approach. To achieve this transformation, we have had a 3-phase approach. We are harvesting cash from the existing operations and reinvesting in longer-life, lower-cost assets like Magino and Cerro del Gallo. We are replacing mineral reserves through exploration and also through the acquisition of the Florida Canyon mine and we are providing a platform for tremendous growth where we can transform Argonaut from 150,000 to 200,000 ounce a year producer to the 300,000 to 500,000 ounce a year producer with 15-plus year mine lives. As I said, we have the assets and the financing in place to take the first steps on executing this strategy and we are excited for the future of the company and what it means for our shareholders.Please turn to the next slide, Slide #15. Low-risk investment. Before I turn the call back over for a question-and-answer period, I would like to take a brief moment to bring to your attention to what we term the low-risk investment proposition that Argonaut is today. At the end of 2019, we had an enterprise value of roughly $235 million. At the end of Q3 2020, we are sitting with an enterprise value of roughly $430 million. Given the gold price has risen from $1,500 to over $1,900 during this stretch in time and the leverage in torque within a company like Argonaut which we have to the gold price, I would submit that we have lots of room to see our value increase here in the future. We've been very active in 2020 and I think that as the market fully digest everything we have done and begins to recognize where we are headed, we should see a substantial re-rate in our valuation. The analyst consensus value for the asset base that Argonaut holds is over $1 billion or more than double the current enterprise value. Our job is to unlock this while not putting the company in harm's way. We think we have a pathway defined for that. As we continue to execute on our strategy, I see excellent potential for the share price to catch up to everything we have done and where we are heading.I'd now like to open the floor to questions and answers, and I will turn things back over to Sharon, our operator, as she will guide you through this question-and-answer period. Sharon?

[Operator]

[Operator Instructions] First question comes from Gabriel Gonzalez with Echelon Capital Markets.

[Gabriel E. Gonzalez, Analyst]

Congratulations on executing what has been a really transformative quarter for the company. My first question is, in rough percentage terms, about how much of the low-grade backfill material in the Florida Canyon pit was mined in Q3? And about how much will have been moved or is expected to be moved in Q4 and Q1 of next year?

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

Okay. Gabriel, great question because it has impacted us here in Q3. I would say that it depends on what months we're looking at, but if we look year-to-date, we're anywhere in the 40% to 65% range of some of the material mined during this year. So overall, on average, somewhere around 45% to 50% of total material has been moved through this. Now when we step forward into Q4, I'm happy to tell you over the next couple of years that we have mined through this. And as we look to the future, that really gives us greater confidence because now we're into [ institute ] ore which we have drilled and understand where that material is and what can happen through the future. So for the next couple of years, it looks good as we have mined through this material now.

[Gabriel E. Gonzalez, Analyst]

Great. And just one last question. Can you -- if I understood correctly, can you also put a delay in the CapEx spend for completing the crushing and stacking modifications at Florida Canyon? Is there a sort of a number in terms of months that, that has been moved a little bit backwards because of that delay in the CapEx spend? When will we see the completion of those modifications versus what was previously expected?

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

Yes. So Gabriel, what we're looking at that particular project is a permitting need. The first phase -- we've broken it into 2 phases. The first phase, we believe we're in a position to have in place here by mid-month, which is to modify and change and create what we call a dump pocket, where the trucks will actually dump the material directly into the crusher. That should be in place here during November. The second phase, which would be our overland stacking campaign system, will not be allowed to be put into production until we receive some modifications to our air quality permits. Now we anticipate that those permits should be approved here early in the first half of next year. They've already been submitted and we've gone through that with the agencies, but obviously, as we all know, we don't control that process but we anticipate that, that could be approved here early in the first half of next year and put into production.

[Operator]

[Operator Instructions] And we do not have any telephone questions at this time. Mr. Dougherty, I will turn the call over to you.

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

Okay. We'd like to thank all of you again for taking the time this morning and joining us on this call. Again, we thank you for your support. We are excited as we look forward to maybe board our Magino project and the other projects as we head into a much stronger fourth quarter as things start to dry out down south and are grateful for all those at our mine sites who continue to deliver every day in a safe and efficient manner. Again, thank you again for your support, and have a great day. Bye now.

[Operator]

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