Argonaut Gold Inc

TSX:AR

Earnings Call Transcript 2017-Q4

[Operator]

Good morning. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Argonaut Gold's 2017 Fourth Quarter Financial Results Conference Call. [Operator Instructions] Mr. Pete Dougherty, President and CEO of Argonaut Gold, you may begin your conference, sir.

[Peter C. Dougherty, Chief Executive Officer, President and Director]

Good morning, and thank you, Krista, for that introduction. Welcome to the Argonaut Gold fourth quarter and full year conference call. Can you please turn to Slide #3? We'll begin today with a brief review of the 2017 outline and performance, followed by a deeper dive into the financial performance during the quarter and year-to-date. That will be followed by an operations review, and then I'll walk through what we feel will be our catalyst for driving the company over the next 6 to 12 months, of which we are both very excited and pleased to report on, as we begin our 2018. As I said, we'll start with Slide #3. We had a solid year, both operationally and financially. We produced nearly 127,000 gold equivalent ounces, which places us at the top end of our guidance. We generated net income of nearly $24 million and earnings of $0.14 per share. We completed the San Agustin construction 28% underneath budget. Stepping back and looking at the longer term business, we also made significant progress on both our short-term and longer-term growth initiatives during 2017. When we think about that from the left quadrant to the right quadrant, we acquired the San Juan mineral concessions from the Fresnillo group to extend the life of mine at our El Castillo mine. We constructed the newly commissioned San Agustin mine. We derisked that mine and brought it into full production. At the Magino project, we continue to derisk this project by the publication of a full feasibility study, and we advanced our environmental assessment process and negotiations with our indigenous communities. We executed on several impact benefit agreements, and we are happy to announce that we're moving that process forward. Finally, we acquired the Cerro del Gallo asset in Guanajuato, Mexico. This is the type of asset that we have been highly successful in the past, and we see the same opportunities here to improve the economics with our planned 2018 development work. In addition, we believe this property holds a number of favorable exploration targets that we think will pay dividends as we look longer-term. Please turn to Slide #4. Slide #4, 2017 additional operating highlights. We had several highlights during 2017 that we can look back on and be proud of as an organization. After acquiring the San Juan mineral concession from Fresnillo last February, we completed a successful 25,000-meter drill program, bringing our measured and indicated resource to 750,000 ounces and extending, we believe, the El Castillo mine life well beyond what was known to be 2019 prior. At the San Agustin project, we completed and constructed the mine at a 28% under-budget costing. I'll touch more on where those savings came later on in the presentation. We celebrated our first gold pour, as I said before, at the San Agustin project in September and declared commercial production by October. We also completed San Agustin's construction and operated the entire year at La Colorada without a lost time incident or injury. We received, I think, one of the most important pieces for our business. We received, yet again, recognition underneath the terms of ESR, or an environmentally socially responsible company, within Mexico for the 5th year at both of our operations. And our La Colorada operation received the highest level of distinction granted here for the third consecutive year in a row. It's those type of things that allow us to look for the future and provide the opportunity and the calling card to allow us to develop the next operation. Please turn to the next slide. Slide #5, Argonaut-supported community initiatives. We believe in being responsible citizens in the communities in which we operate. Our philosophy is to support local community projects and services versus straight-out cash donations. This is with a focus on children and projects that provide the greatest benefits back to the communities where we operate. From medical consultations to providing access to medicine and scholarships, food donations and projected enhancements for the community as well as agricultural investments, we strive to make a difference and give back to our communities we operate in that will not only benefit today, but benefit for the longer-term future. Please turn to the next slide. Slide #6, financial performance. We talked about the production earlier, so I'm not going to focus on that. However, I want to draw to your attention the generation of nearly $46 million in cash flow from operations during 2017. This cash helped fund us in investing and building the San Agustin mine, acquiring the San Juan mineral concessions from Fresnillo and has -- which has extended El Castillo's life, and the recently announced acquisition of the Cerro del Gallo project. As we look to 2018, we are now in a position to reap the benefits of those investments made during 2017 and expect this year, 2018, to be a solid free cash flow year and a cash-build year for the company. That places us in a great position, as we look to the future of building and delivering greater wealth back to our shareholders. I will now pass the call over to Bill Zisch, our Chief Operating Officer, who is on the line, and he can walk you through some of the operating results. Bill?

[William M. Zisch, Chief Operating Officer]

Thanks, Pete, and good morning to everyone on our call. Overall, we had a strong year of operating results at Argonaut. We saw improvements in our safety record and culture at all operations, including 0 loss time injuries during San Agustin's construction and for the entire year at our La Colorada mine. We produced nearly 127,000 gold equivalent ounces, which is near the top end of our guidance. Costs were slightly higher than anticipated on a consolidated basis due to the slower than anticipated ramp-up at San Agustin. Since San Agustin is our lowest-cost operation and production there was less than anticipated, our cost came in at about $787,000 (sic) [ $787 ] per ounce, slightly higher than guidance of $725 to $720 -- $775 per ounce. From an all-in sustaining cost basis, we finished at $922 per ounce, well within our stated corporate objective of all-in sustaining cost at or below $950 an ounce and slightly less than last year's cost. Looking at the contribution from each of our operations on Slide 8. During the year, relative to our guidance at El Castillo, we came in at the top end of guidance, benefiting from a strong front-end of the year and tonnage at the CR2 crusher exceeding planned levels. At La Colorada, we exceeded guidance, primarily due to our ability to selectively move run-of-mine material directly to the pad. While at San Agustin, we experienced slower than anticipated ramp-up, primarily due to a scaling issue that led to lower than anticipated solution flow rates to the leach pad. With the scaling issues accommodated, we continue to move the pad and plant up the production curve, as we balance and optimize this new facility. All totaled, strong results at El Castillo and La Colorada overcame San Agustin's shortfall, as we ended the year near the upper end of our production guidance. With that, I'll now pass the call back to Pete. Be happy to answer any questions with respect to our operations during the Q&A session. Pete?

[Peter C. Dougherty, Chief Executive Officer, President and Director]

Thank you, Bill. If we can have all the participants turn to Slide #9. Q4 2017 capital spending and cash flow. Investing towards the future. We made some significant investments during 2017, and 2 large capital items came during the fourth quarter. The second and final payment to Fresnillo for the San Juan concessions purchase of $13 million was included in the $16.3 million expansionary capital for El Castillo during the quarter. Additionally, the company acquired the Cerro del Gallo project from Primero Mining for $15 million, which we expect to receive back $1.5 million of VAT that was paid for this purchase, bringing our net purchase price to $13.5 million, you will see that underneath expansionary capital as well. I want to note that the negative capital of $4.6 million at San Agustin was due to reclassification of the opening inventory of $7.2 million from mineral properties to mineral inventories upon declaration of commercial production. This money represents dollars spent associated with the ounces loaded onto the leach pads at that time. I also want to note that with the Cerro del Gallo opportunity coming to us during a somewhat capital intensive period, coming off San Agustin's recent build and the San Juan concessions purchase, we drew $8 million on our corporate revolver, which we intend to repay during 2018 from the cash flow from our operations. Please turn to Slide # 10. San Agustin construction, 28% underneath its budget. One of our biggest successes during 2017 was that of San Agustin, which was completed at 28% underneath budget. Here we list where we make up the savings, from the original estimate of $43 million down to the final cost of $31 million. As you can see, the biggest area of savings was in the fact that we didn't really need to go into our contingency. It proves to the point that if you plan properly and execute succinctly that you can construct and build projects on time and on budget, as we did in this particular project. Now please turn to the next slide. Slide #11, checking the right boxes. Now that we've touched on our financial and operating results and highlights for the past quarter and year, I'd like to spend a few minutes discussing why we are excited for the year ahead. We feel like we are in a great position to add value to our shareholders, with a solid track record of maintaining a healthy balance sheet through market cycles and a focus on simple lower-risk projects that yield high returns and short paybacks in the Americas. We believe that we are leveraged not only through that, but also to provide additional growth leverage through our development projects, and most importantly, our projected 65% production growth rate and profile through 2019 from now, over the next 3 years, as we increase production in the short term at El Castillo, optimize out San Agustin, building up higher production and see higher grades coming from the La Colorada mine. All of which should yield a higher cash flow produced by the organization in 2018 and the years to come, as operating cost should begin to follow these operations. That will help build the cash balance and fuel the next level of growth for the company. Please turn to the next slide. Slide # 12, 2018 production and guidance. We expect during 2018 to produce between 165,000 to 180,000 gold equivalent ounces at a cash cost between $700 to $800 an ounce and all-in sustaining cost between $850 and $900 an ounce. All 3 will be an improvement over where we were in 2017. At El Castillo, we expect to produce between 60,000 and 65,000 gold equivalent ounces. At San Agustin, between 45,000 and 50,000, and La Colorada, between 60,000 and 65,000 ounces. If you assume our midpoint of production guidance for 2018, this equates to an estimated growth rate in production year-over-year of 35%. Very impressive. Please turn to the next slide. Slide # 13, achieving our objectives and delivering value. Now if we look towards the next couple of years to come after 2018, looking forward into 2019 and 2020, you will notice significant growth within the production profile. Just looking from 2017 to 2019, we see nearly a 65% increase in overall gold produced during that timeframe. I think what's also important to note is not only is this growth profile capturing our current operating assets, but it does not include any of our development assets, which provide further upside for our shareholders, as they look to the future, and exposure to a gold company run in the right direction. We would anticipate that our operating cost will also fall, as we continue to produce greater production and reduce our operating cost, as we bring on lower-cost operations such as San Agustin. Please turn to the next slide. Slide # 14, investing into the future, 2018 plans. The bulk of the capital to achieve the growth profiles we've outlined before is behind us and was invested during 2017. We expect to spend less than 50% on -- of the capital that we spent in 2017 during 2018. And of that 2017 -- as we look to 2018, approximately 45% of that capital is designed towards expansionary projects. With production rising and capital spending falling, we expect 2018 to be a strong free cash flow year, where we can add cash to our balance sheet. Please turn to the next slide. Slide # 15, 2018 capital estimates. Although the bulk of our growth capital was invested during 2017, there are some smaller investments that we are making into 2018 that we should all take note of. At the El Castillo mine, we are in the process of upgrading what we have titled our CR2 crusher. Once complete, we expect this will be done at the end of the first quarter and expect to see our crushing capacity grow from 20,000 tonnes per day to nearly 30,000 tonnes per day. We are also investing in meaningful exploration program at the San Agustin mine. This will be along strike into the northwest, and I'll touch on this in a moment. At the La Colorada project, we are transitioning our mining from the Gran Central and La Colorada pit to the newly opened El Creston pit by the end of the first quarter. At Magino, we anticipate the EA process to be completed during 2018. And at Cerro del Gallo, we plan on conducting metallurgical test work to evaluate our future exploration targets and have an internal project completed by the end of the year, where we'll know the costing for this particular project at the end of the year. Please turn to the next slide. Slide #16, El Castillo crushing capacity changes. On this slide, we depict the changes that have happened at the CR2 crusher from 2016 to today. As you may remember, we moved this portable crusher from the La Colorada operation mid-2016 to add approximately 5,000 tonnes per day of capacity. The big reason that we chose to do this was that we knew we'd be removing the 15,000 tonne per day West Crusher at El Castillo and installing it as part of the San Agustin construction plan. This was accomplished during the first quarter of 2017. For 2018, we saw significant results from the drilling on the Fresnillo ground, which enhanced our mineral reserves. That allowed us to step back and expand production at El Castillo back up from the 20,000 tonnes per day to a nearly 30,000 tonne per day operation. We expect that to be in place by the end of Q1 and are in the process right now of commissioning this crusher. Please turn to Slide #17. Exploration, San Agustin 2018 drill program. At the San Agustin mine, we are investing in a 15,000-meter drill program to start, which will work along strike to the northwest, moving towards the El Castillo project. As many of you know, the San Agustin project sits 10 kilometers away from the El Castillo project, and mineralization looks like it trends in that same direction. On this slide, we depict an orange area, or a lighter-colored orange, that represents the current mineralized resource of nearly 850,000 ounces of gold and 28 million ounces of silver. We outlined on this slide a pink or a salmon-colored area where we have a mineralized footprint that we have previously drilled on 200-plus meter centers, where we believe we have encountered similar mineralization to what we saw in the orange area. Now at this year, we are planning to change this drill spacing from this 200-meter type look down to a 50-meter spacing in the 2018 program. We believe that, that will bring that mineralization, hopefully, into a measured and indicated category and then into a proven profitable category over time. This is a significant program in which we believe is important for the company. First, it allows us to understand what the mineralized resource base might grow to in this area. Secondly, from coming up with that category of what we might be looking for, for total tonnes of mineralization, we can then rightsize the crushing additions that we would make to best extract this mineralization. So once we have determined the first phase of drilling, we will then be able to step back and look at what type of material we're looking at and what type of crushing capacity we will be installing for the next phase at San Agustin. We'll talk more about that as the year progresses. By the end of the third quarter, we should be in a good position to be able to discuss how this is turning out for us. Please turn to Slide #18. Achieving our objectives and delivering value. We have several upcoming catalysts in 2018 that we think can drive value. We intend to publish updated technical reports for El Castillo and San Agustin as part of the El Castillo complex as well as the La Colorada project. These reports will include updated mineral reserves for all operations. We expect to complete the CR2 crusher expansion by the end of the first quarter. I discussed that we are in the process of commissioning that right now. That should increase our capacity nearly 10,000 tonnes per day. As we drill along strike at the San Agustin project and tighten up that previously wide-space drilling that we saw covered in the pink or salmon area, we will be publishing those results. We should be having that completed early in the first half of 2018. We think there is potential to improve San Agustin from its current nameplate capacity of 17,000 tonnes per day through continued optimization of the crushing and conveying circuits. Please turn to the next slide. Slide #19, summary of investment case. I'd like to draw your attention to the strong balance sheet and flexibility contained within the company. At year-end, we had $14 million in cash, a $50 million revolver with an accordion feature up to $75 million. $8 million of this has been drawn. We have $20 million in value added tax, which we believe will be recovered during the coming year. And we have $74 million worth in inventory that we believe will be recovered off the pads here in the future. We believe this is a defensive stock, with a long track record of adding cash to the balance sheet through operations and a goal of drawing our all-in sustaining cost below $950 an ounce, which we achieved not only in 2017, but we see that dropping possibly below the $900 mark here in 2018. We have, what we believe, a highly levered company to any upside that we might see in gold, as we are derisking our development assets, which provide tremendous leverage. We are a proven operator, and we have, truly, production today and free cash flow growth that is unparalleled, we believe, out there. That completes our presentation for today. And now we will turn things back over to Krista, as she conducts a brief question-and-answer session. Krista?

[Operator]

[Operator Instructions] Your first question comes from the line of Matthew Macphail of Canaccord Genuity.

[Matthew Macphail, Associate]

Just wanted to ask about San Agustin. How it's been doing in the new year? I know you mentioned there was a little -- few ramp-up hiccups with some of the irrigation, the scaling. Just kind of looking for some more color on how that's been going into Q1 of this year.

[Peter C. Dougherty, Chief Executive Officer, President and Director]

Okay, well, Matthew, since we have Bill on the line, I'd like to turn that to him, and he can talk to you a little bit about how things are going at the -- at all the operations, not only San Agustin. Bill?

[William M. Zisch, Chief Operating Officer]

All right. Thanks, Pete. This year, what we see at San Agustin, as we continue to kind of balance everything from our crushing to the heap leach pad, the solution irrigation rate and to the plant, well, we're still kind of getting everything balanced out. We're ramping up towards our full capacity, things are going well at San Agustin. From a crusher throughput, we've been able to meet or exceed our expectations and deliver that material to the pad. During the -- some of the issues we had with scaling, we did have to slow down tonnes to the pad, but right now we are at or above our capacity there. It's still a little bit early to comment on total recovery there, because we built inventory of ounces, both on the pad and solution in the plant. But the early appearance in our laboratory is that our recoveries are meeting or exceeding our expectations there.

[Matthew Macphail, Associate]

Okay. That's great to hear. So it sounds like things are going according to plan. Just maybe a follow-up on San Agustin. Just remind me, how much sort of like lead -- constructed leach pads space do you have ahead of mining? I know -- just wondering kind of, yes, what sort of lead time you have and if there is any constraints or are you fully -- have enough space to continue unimpeded.

[William M. Zisch, Chief Operating Officer]

Yes. Matthew, as far as our leach pad area, we have enough to cover ourselves for this year. We're looking toward to build some more pad during the year, and right now, we're -- we have enough pad to cover our process moving forward. And we like to build pad, just we don't overbuild, so we're going to build about what we needed here, but we're still on schedule to have pad built and constructed to meet our needs this year and next year.

[Operator]

[Operator Instructions] And we have no further questions at this time, sir.

[Peter C. Dougherty, Chief Executive Officer, President and Director]

Okay. Well, I'd like to thank those who joined us this morning on the call. And look, as I said before, it was a great year during 2017. A lot of foundational key metrics were laid for this company, as we had a significant capital spend, nearly $130 million being spent last year. But as I said before, I believe that is laying the foundation, as we look to the future. We now have good runway in front of us at our El Castillo complex as well as improvements that we're seeing in the operations and lowering of operating and cash cost, which should all yield to a growing balance sheet of cash and the opportunity, as we look to the future of new projects, such as the Cerro del Gallo that we can look towards to build out a longer-term sustainable business. I'm happy where we are with the Magino project and how that feasibility came out and where that may take in the future as well. So we look forward to 2018, and we'll be talking to you in the future about how the drilling shows up this year at San Agustin and some of the enhancements that we're making into the operations that are nearing completion, as we look towards derisking and developing greater production profiles. Thank you again, and we look forward to 2018. Bye now.

[Operator]

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