Argonaut Gold Inc

TSX:AR

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Argonaut's Q3 2023 Financial Results Conference Call and Webcast. [Operator Instructions]

Mr. Young, you may begin your conference.

[Richard Young, executive]

Well, thank you, John, and hello, everyone. Let's start with Slide 3. Florida Canyon and our Mexican mines performed above plan for the quarter, year-to-date and expected for the year. However, the slower-than-planned ramp-up at Magino has put the balance sheet under pressure, a short-term issue that we're working through with the help of Franco-Nevada and our lenders.

As a result, the focus of management's presentation today will be on the commissioning and ramp-up of Magino, the company's new flagship operation as well as the state of our balance sheet. All the issues that have caused the slower-than-planned ramp-up are fixable, as Marc will describe.

I'll now turn the call over to Marc Leduc, our Chief Operating Officer. Marc?

[Marc Paul Leduc, executive]

Thank you, Rich. Turning to Slide 4. Consolidated production was just under 54,000 gold equivalent ounces, an increase of 17% over last year as a result of bringing Magino online as well as higher production from the Florida Canyon mine, partially offset by lower planned production from our Mexican operations. Magino contributed just over 10,000 ounces of total production, lower than planned due to slower-than-planned ramp up. All cost per ounce metrics were lower than last year -- last year's quarter, as well as the year-to-date numbers.

Turning to Slide 5 for the Magino mine update. Magino's production this quarter was impacted by slower-than-expected ramp-up of both the mine and mill, and significant unplanned downtime in September. I would like to emphasize that all these ramp-up issues are fixable. First, let me speak to the slower-than-expected ramp-up in the mine. We've been running behind our mining schedule since the first quarter and has continued through Q3 and will continue through the year -- through the end of the year.

This was a result of 4 issues. Lower productivity and higher ore dilution in pioneering benches and mining around historic underground workings. The mine workforce buildup has been slower than planned, so we have been short-staffed. Third, lower-than-planned haulage capacity due to lower availability in the first half of the year and design issues with the truck beds. And fourth, poor execution on short-range plans, which has resulted in higher dilution and lower grades.

With these 4 challenges, total material moved for the quarter and year-to-date is about 50% lower than planned, while the average grade mined is about 15% lower year-to-date. Additionally to the challenges noted above, we have not been able to be as selective in the high-grade areas of the ore body, resulting in processed grades -- or the gold grade fed to the mill being about 40% lower than planned.

Despite moving fewer tonnes year-to-date and through the balance of 2023, we will still end the year with a significant stockpile in front of the mill, allowing us to now focus on grade to the mill. We are addressing the issues that we faced during the commissioning phase with several initiatives. And because of these changes, we expect that, over November and December, mine grades to come closer in line with the reserve model with greater selectivity in the high-grade areas. So higher grades are expected at the mill.

These improvements include improved milling practices around the historic underground workings. Manpower buildup in -- is approaching budgeted levels. Truck box modification to improve the truck carrying capacity, bringing them close to design capacity. We expect to have all these truck beds modified by the end of Q1 2024 at a minimal cost. Implement a modern computerized fleet management system to allow for lower dilution by the loading equipment. And more efficient placement and utilization of the mobile equipment. We are on track to have the first parts of the system operational by year end. Also, refine our operational block model to optimize it and bring it in line with the reserve model.

Additionally, we expect mining productivity to increase as the operational team improves how they mine this ore body, especially around the old underground workings. We also expect to see cost structures improve over the next 6 months, moving closer to the technical report as we implement the changes noted above and build out the mobile equipment fleet in line with life of mine plans.

Turning to Slide 6. During June, July and August, the plant followed a normal commissioning ramp-up schedule, putting the plant on track for commercial production in September. Tonnes per operating hour, or TPOH, ramped up well through Q3. The lower TPOH in August versus July was due to design moderation to the crushing circuit that led to less consistent feed to the grinding circuit during August, which has now set up the mill to operate well above nameplate TPOH for times moving -- times during the fourth quarter.

The downtime in September was essentially a result of issues related to the process control system. There is a lot of computer software in the mill, and getting the different systems to talk together has been the root cause of much of the downtime in commissioning, not only in September but through the entire commissioning phase.

We have addressed these issues with our EPCM contractor, equipment suppliers and specialized contractors. However, issues with the process control system led to 20 days of unplanned downtime in September. We are working to better integrate the various process control systems and all the issues are very easily fixable. And since the system problems in September, the process plant has been running very well.

The plant has been operating above nameplate TPOH since the beginning of the quarter when operating, but we have had some downtime during the quarter as we complete the required modifications to the gravity circuit, which are now complete, and worked through the process control issues.

The graph demonstrates our progress in ramping up the mill tonnage. The grinding circuit has met and routinely exceeds the design throughput rate, while delivering design grind size. Given that we are seeing days of 12,000 tonnes per day without fully pushing the circuit, we do expect over the next few quarters to get the plant operating at 10% to 15% higher than the nameplate of 10,000 tonnes per day.

Turning to Slide 7, the Magino resource expansion. While the #1 short-term priority is to deliver grades to the mill now, optimizing production at Magino is our near-term focus. In the medium term, however, reserve expansion will unlock further potential at Magino. We commenced a reserve development drilling program with the goal of increasing reserves in combination with studies to expand and optimize mill throughput.

This is a 63,000-meter reserve development drill program expected to be completed in mid-2024. We have 4 drill rigs on the property right now, and we're about 25% through the program. The aim is to increase reserves by 0.5 million to 1 million ounces. In parallel, engineering work is underway to evaluate a potential mill expansion up to 17,500 to 20,000 tonnes per day, which at reserve grade would increase production to between 200,000 to 250,000 ounces per year.

Turning to Slide 8. Florida Canyon reported its best quarter production in about 20 years as a result of our new operating strategy to increase tonnage on the heap leach pad and manage percolation issues with better pit planning and processing lower permeability material through the crusher, where an agglomerating polymer is added to ensure proper heat leach flows.

The mine is on track to exceed the top end of its production guidance by about 10% and generate free cash flow for the first time in several years. We are moving forward with building the next leach pad and doubling pumping and solution treatment capacity, and this will set the mine up for higher production and stronger free cash flow moving forward.

In the long term, we see an opportunity to scale up production and increase mine life at Florida Canyon. To achieve this, we began a proof-of-concept drilling program targeting the large sulfide system that sits under the 5 million-ounce oxide system. The program is expected to be completed by mid-November, with analysis work expected through the end of the year.

I will now turn the presentation over to Dave, who will provide a brief overview of our financial results.

[DavidPonczoch, executive]

Thank you, Marc. Please turn to Slide 9. Gold ounces sold for the quarter were up 41% from Q3 last year due to initial production at the Magino mine and the higher production from the Florida Canyon mine, partially offset by lower planned production in the company's Mexican mines. Subsequent to the end of the third quarter, the Magino mine achieved commercial production effective November 1, 2023.

Cost of sales for Q3 were up 28% compared with the same period last year. The increase is primarily due to higher gold ounces sold, partially offset by lower DD&A expense. The higher gold ounces sold and the lower DD&A expense were the primary drivers in the 146% increase in gross profit to $17 million. Argonaut generated cash flow from operating activities before changes in working capital and other items totaling $21.1 million an increase of 55% from Q3 of last year due to the higher gross profit.

In spite of the higher gross profit, net loss per share was essentially flat at $0.00 per share due to $10 million in other expense related to foreign exchange losses and unrealized losses on derivative instruments. Adjusted net income for Q3 2023 of $9.9 million or $0.01 per basic share was up compared with the adjusted net income of $0.4 million or $0.00 per share.

I'll turn the call back over to Richard.

[Richard Young, executive]

Well, thank you, Dave. Moving to Slide 10. As a result of the slower ramp-up of Magino, with principal repayments under the term loan commencing at the end of this year, we've taken action to strengthen the balance sheet. This includes working with our lenders to obtain waivers on certain financial covenants associated with our debt. These waivers include requirements for the company to maintain a minimum cash balance of $10 million at all times through the end of this month while we raised additional funding.

To that end, on November 1, we entered in an agreement to sell Franco-Nevada an additional 1% net smelter return royalty on the Magino mine, as well as noncore royalty holdings in Canada and Mexico for an aggregate price of $29.5 million. We also negotiated the deferral of a repayment of $19.1 million on the gold prepayment advance that was due at the end of the year to the end of the first quarter. As part of our portfolio rebalance, the process of optimizing the value of our Mexican assets is underway.

As we move through the fourth quarter, we'll continue to focus on delivering on our operational targets and to review options to strengthen the balance sheet further. These actions will allow Argonaut the ability to unlock the value by executing on the growth initiatives, as Marc has laid out.

Argonaut ended the quarter with cash and cash equivalents of just under $45 million, net debt of $179 million, with $20 million left undrawn under the facility at quarter end. The Magino mine is expected to produce below the 72,000 to 81,000 ounces as set out in our guidance at the beginning of the year. Cost of sales as well as cash costs and AISC cost per ounce are all expected to be higher than guidance due to lower production and higher unit costs.

Florida Canyon is expected to exceed its production guidance range by about 10% due to -- in large part, to the 30% increase in tonnage placed on the leach pads in 2023. The mine is expected to be in line with per tonne and per ounce cost for 2023. The Mexican operations' consolidated production is expected to exceed the top end of guidance by between 5% and 10%. San Agustin and La Colorada per ounce costs are expected to exceed the higher end of guidance by between 5% and 10%, while the El Castillo per ounce cost are expected to be lower than guidance by about 10%.

Overall, as we look at the year, we expect our Florida Canyon and Mexican operations to produce between 160,000 and 165,000 ounces of gold, about 8% higher than the top end of their guidance ranges as set out at the beginning of the year. In addition, the mines collectively placed about 15,000 additional recoverable ounces on the leach pads that will benefit next year.

Including Magino, we expect to achieve the low end of our consolidated guidance range for the company of between 200,000 and 230,000 ounces of GEOs. For the year, cost of sales, cash costs and all-in sustaining cost per ounce are expected to exceed the top end due to a stronger peso for our Mexican operations and lower production than planned from Magino.

Turning to Slide 11. Coming into 2023, we as a company have 5 major objective. First, complete construction of Magino, on time and on forecast. Two, ramp up Magino to steady state and meet guidance. Three, stabilize Florida Canyon, which had been losing significant amounts of money over the past several years. Four, begin drill programs at Magino and Florida Canyon to increase production and long-term value of the mines. And five, optimize and review our Mexican operations.

How have we done as we approach the end of the year? Starting at Magino, we updated the cost complete Magino based on some of the challenges in 2022 in February to $755 million or CAD 980 million. The project cost came in line with forecasts, and we had [ worked ] through the mill beginning in mid-May on schedule. Total capital -- construction capital as well as sustaining costs and operating costs are within $10 million of budget. They increased largely due to higher costs for the next lift of the TMF.

As Marc discussed, the ramp-up of both the mine and the mill have been slower than planned. As a result, we will miss production guidance at Magino. However, as Marc discussed, all the issues are easily fixable, and we have plans underway to fix them over the next 3 to 6 months. At Florida Canyon, the mine was producing about 100 ounces per day in January and losing a significant amount of money. The changes that we have made that Marc discussed to push tonnage and fix the percolation issues, have resulted in higher production and positive free cash flow generation.

So rather than closing the mine, we're building the next leach pad and doubling plant capacity, and have a new life of mine plan that generates significant free cash flow based on this new strategy. Our drill programs, so drill programs at both Magino and Florida Canyon, began on schedule on August 1 and they're proceeding well. We believe these programs could add significant value to these 2 core assets.

At Mexico, we expect by year-end to have resolved the 2 land issues at the 2 mines that would have caused operations to have been paused at year-end. Consolidated production for our Mexican operations is expected to be between 5% and 10% higher, while cost per ounce are marginally higher than guidance due to a noncash inventory adjustment and the stronger peso that had affected the mine. But so as we move forward, we've retained a financial adviser to review the best path forward for our employees in Mexico and the company.

Overall, the slower-than-planned ramp up with the balance sheet under pressure, requiring additional capital, but we believe there is significant value to be realized at Argonaut. We believe the following 3 areas are the highest potential for per share growth. First, at Magino, ramping up production and lowering unit costs towards the tech report and continuing with the infill drill program and expansion work to take Magino to 200,000 to 250,000 ounces per year.

At Florida Canyon, continue to optimize the current oxide reserves and resources, and focus on the sulfide redevelopment opportunity. And third, paying down our debt and potentially refinancing this facility to provide more balance sheet flexibility. This strategy is in line with our mission statement, which focus on asset growth and operational excellence.

John, with that, I will now turn the call back to you for questions from our audience. Thank you.

[Operator]

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

[Richard Young, executive]

John, thank you.

[Operator]

We do have one question.

[Richard Young, executive]

Okay.

[Operator]

We have your first question from [ Robert Molyneux ].

[Richard Young, executive]

Well, John, Robert may have hit that by mistake. I'd like to thank everybody for their time and their patience. As Marc walked everyone through, we have had a number of issues in the mine and mill, but they are fixable and we're working on that. And we do expect numbers to improve at Magino as we build out this flagship operation. We are available to answer any questions that any of our analysts or shareholders may have in the coming days. But I do thank you again for your time this morning. Have a good day.

[Operator]

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