Argonaut Gold Inc

TSX:AR

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Argonaut's Q4 and year-end financial results conference call and webcast. [Operator Instructions] Thank you. Mr. Pete Dougherty, President and CEO of Argonaut Gold, you may begin your conference.

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

Thank you, Denise, and good morning, everyone, from Vancouver this morning. I have with me today Bill Zisch, our COO; and Dave Ponczoch, our CFO, here with me on the call today. We will begin today with a brief overview of 2018 followed by a deeper dive into the financial performance during the quarter and year, a review of the operations and a walk-through of the capital investments we are making in 2019 that we feel could be catalyst for the company over the next 6 to 12 months.If you could all please turn to Slide #3, 2018 highlights. We showed incredible resilience in growing our production in 2018 in spite of some of the operational challenges we experienced during the year. We achieved record quarterly production of over 51,000 ounces in Q4, record annual production of 165,000 gold equivalent ounces in 2018 and achieved a significant milestone of over 1 million gold equivalent ounces being produced since we founded the company back in 2010.We also made significant progress on both our short-term and long-term growth initiatives during 2018. First, we experienced our first full year of production at the San Agustin mine, which exceeded nameplate crushing capacity by nearly 22% during 2018, which led to outperformance at that mine. This benefited the El Castillo complex which had production up over nearly 60% and cost down 14%, with the introduction of the San Agustin mine into the complex. We successfully ramped up the El Castillo mine's crushing capacity and throughput from 20,000 tonnes per day to 29,000 tonnes per day. On a longer-term look of things, we de-risk the Magino project with the announcement of the approval of the Federal EA this January. We expect the provincial approval to come during the first half of 2019. That marks a significant milestone for that project.After acquiring the Cerro del Gallo project in 2017, we relogged all the core, built our own geologic model, completed a drill program to provide metallurgical samples and completed our first phase of metallurgical test work. We are currently working towards a prefeasibility study on this particular project and anticipate that, that will be available during the second half of 2019.Please turn to Slide #4. 2018 CSR highlights. Our success doesn't happen without the support of our 4 key pillars that form the foundation of our business: health and safety, our people, our environment and our communities. We had the best safety performance in the history of the company during 2018, clearly exceeding national and world standards for safety performance. We also had several initiatives throughout 2018 from scholarship programs and medical aid and the care of our communities through revegetation programs as well. These aid us in our forming of philosophy to run the company and support the local communities and their projects and services that benefit them the greatest.I'm very pleased to report, as a highlight of this work, we received our Environmentally and Socially Responsible designation for the seventh year in a row. This designation shows that we are conducting our business in an environmentally and socially responsible way and paves the outlook in the future as we look to develop more operations.Please turn to the next slide, financial performance. As discussed earlier, we delivered record quarterly and annual production during 2018. Given the big push to hit our guidance of 165,000 ounces and the fact that we always report production as ounces loaded to carbon, the timing of sales, coupled with the previously disclosed Republic Metals' bankruptcy filing impacted our cash flow during the quarter. Without that, we would have had significant cash flow for the quarter. Earnings and income were also impacted by a noncash impairment write-downs due to the Republic bankruptcy and also moving some of our pad inventory at El Castillo from current to long term.And I'll ask Bill now to provide a few details around this impairment. Bill?

[William M. Zisch, Chief Operating Officer]

Thanks, Pete, and good morning, all. You'll recall that during the first half of 2017, we were stacking ore on the upper lifts of both the east and the west leach pads and our recovery model did not sufficiently predict the leach cycle or timing to breakthrough. With new leach pad built by mid-2017, we began placing ore on the new pad next to plastic, where the recoveries are much quicker.We didn't lift the leach cycle go long enough on the upper lifts of the leach pads, so ounces remained in the pads. We have confirmed this through drilling and sampling of the pads. However, we currently do not have excess solution capacity at our plant and therefore, are continuing to leach the fresh ore placed on the lower lifts of the newly constructed pad. We know we will get to the other ounces in the future, but due to plagued capacity constraints, it may be some time before we do so. Therefore, we made the decision to move some of the El Castillo working processing inventory, noncurrent assets and appropriately discount this future cash which led to the impairment.Please turn to Slide 6. As Pete mentioned, the team really pulled together to deliver our annual guidance of 165,000 GEOs, which led to a record in Q4 and record annual production for the company. I'm proud of the operations team for safely achieving this accomplishment, particularly since you would recall we went about 4.5 months without blasting at our La Colorada mine. We experienced higher cost during Q4 than earlier in the year, primarily driven by the price of our key consumables, diesel, cyanide and lime.Please turn to Slide 7. You can see that we exceeded expectations at the El Castillo Complex in 2018, which was primarily driven by San Agustin's outperformance throughout the year. La Colorada experienced a shortfall due to the 4.5 months period where we not blasting. Despite this, the team hit our consolidated guidance of 165,000 GEOs. And as an aside, I actually believe if we have not had the blasting permit issue at La Colorada, we very likely would have met or exceeded the 2018 guidance above 180,000 GEOs.With that, I'll pass the call back to Pete and be available for questions at the end of the discussion.

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

Thank you, Bill. Please turn to Slide #8. Q4 2018 capital spending and cash flow. We invested $6.2 million in capital expenditures during Q4. Primarily due to changes in working capital, we drew an additional $5 million on our corporate revolver during Q4, but are now poised to start to expand and grow as we look towards 2019, as we are already beginning pad construction at San Agustin and the crusher expansion project.Please turn to the next slide, Slide #9. Achieving our objectives and delivering value, 3-year production outlook. We achieved a 30% increase in production growth year-over-year and are on track to meet our 3-year guidance of 65% growth rate between 2017 and 2019, as is shown through our Q4 production of over 50,000 ounces. As we deliver on this growth plan with the leverage to our development assets, we have positioned the company incredibly well to outperform in a rising gold price environment as we are seeing today.Please turn to the next slide, Slide #10, 2019 GEO production and guidance. For 2019, we plan to produce between 200,000 and 215,000 gold equivalent ounces, with 140,000 to 150,000 ounces coming from the El Castillo Complex and 60,000 to 65,000 ounces coming from the La Colorada mine. We are guiding to a cash cost between $775 and $875 per ounce for 2019.The other item I want to address on this slide is our all-in sustaining cost. We reported guidance in January between $875 and $975 an ounce. Since that time, the World Gold Council has provided new guidance for all-in sustaining cost. As we look forward to make that change, we now see our all-in sustaining cost between $975 and $1,075, the difference coming in a reallocation of certain capital items such as capital stripping and leach pad expansion, no longer included in expansionary, but now included in sustaining cost.Please turn to the next slide, Slide #11. Investing to the future, 2019 plans. We have a lot going on in 2019. At the El Castillo Complex, we are constructing 3 leach pad expansions: 2 at El Castillo and 1 at San Agustin. At San Agustin, we are expecting the current crushing capacity to expand from 20,000 tonnes a day to 30,000 tonnes a day. We expect that to be completed in Q3 of this year and will start to ramp up during Q4 and provide a nice boost in Q4 and heading into 2020. At the La Colorada operation, we are building 2 new phases of leach pad and also upgrading our recovery plant.When we look at our development assets, the capital investment this year is about derisking these projects. At Magino, after receiving our Federal EA approval, we expect to complete the provincial EA, as I said earlier in the first half of the year, but as well, advance our construction permit, mine closure plan and schedule 2 authorizations. These authorizations form the level of detailed engineering and other items needed in order to advance this project to a construction decision in the future and form the foundation for that mine's future.At Cerro del Gallo, we are advancing work towards a prefeasibility study that we anticipate will be published during the second half of the year. And at our San Antonio project, after nearly 2 years of consulting with stakeholders, we have resubmitted a new application for our environmental impact assessment, and we'll strive to advance the permitting on this project during 2019.Please turn to the next slide, Slide #12. 2019 capital estimate. To deliver upon all these projects, capital budget is set at $50 million to $60 million, with the El Castillo Complex consuming roughly $25 million to $30 million and the La Colorada Complex consuming somewhere around $15 million. The remaining money being spent on the development assets. The single largest contributor to the El Castillo's $30 million budget is $15 million for the expansion of the San Agustin crushing and stacking capacity from 20,000 tonnes a day to 30,000 tonnes a day.Please turn to the next slide, Slide #13. Summary of investment case. We continue to remain a strong -- contain and maintain a strong balance sheet with positive net cash position. We ended 2018 with $15 million in cash. We have a reputation of developing and forming a consistent cash building balance sheet throughout our 9 years of running the company and expect to do so in a bigger way during 2019.I believe with our growth profile and now with our production expected to be over 200,000 ounces this year and going forward with this combined leverage our production, growth profile and a strong measured and indicated resource level through our development projects, we should be able to outperform during a rising gold price environment because we are highly leveraged to grow and resource expansion.Please turn to the next slide, Slide #14, our focus. We are on track to meet our 3-year 65% growth rate goal, which as we set back in 2017, should build our balance sheet and focus the company through derisking of our development projects. I'm happy with the performance that we have seen to date. And as we look at the current operations today, whilst only midway through February, we are ahead of expectations for production and guidance during this year.I'm happy now to open the call to any questions and turn the call back over to our operator, Denise, who will take your questions, which we will strive to answer during the brief question-and-answer session. Denise?

[Operator]

[Operator Instructions] Your first question comes from Ryan Hanley from Laurentian Bank.

[Ryan Hanley, Mining Analyst of Institutional Equity Research]

I guess, just the first one, you mentioned that you saw slightly higher cost in the consumable, so maybe the lime, cyanide, things like that. Is much of that baked into your guidance for cash costs for 2019?

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

Ryan, this is Pete. I will take that. Yes, we -- in fact, when we started to look at 2019, we saw our core commodities increasing and our budgeted impacts to those were going to be pretty significant as we look to 2019. So we built in a significant rise. Now so far in the year and it's only through February, we have not seen that increase come through in all of those consumables. Diesel being the main driver upon that. But -- so right now, we're looking a little favorable to what we've had in the original budget, so we have baked in considerably higher cost.

[Ryan Hanley, Mining Analyst of Institutional Equity Research]

Okay. Fair enough. That's good. And then, I guess, maybe just on the capital spending for the year. Is it fair to say, it's probably going to be a little bit more first half weighted just with the San Agustin expansion in there?

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

Yes, clearly, it will be. We're making very good progress on that construction and that project. It is slated, as I said, to be in place here in the third quarter and really start to benefit us here in the fourth quarter. So yes, we will have higher spending here in the first part of the year. That's $15 million of the spending alone.

[Ryan Hanley, Mining Analyst of Institutional Equity Research]

Perfect. All right. And then just maybe one last one here, just at El Castillo. Given the success you've had with going over nameplate capacity at San Agustin, do you see any kind of translation over to El Castillo in terms of being able to maybe do that a little bit over there as well?

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

Bill's here. So I'll pass that to him and let him answer for you, Ryan.

[William M. Zisch, Chief Operating Officer]

I think right now with the expansion that we did last year at El Castillo, where we took our CR2 crusher up to 15,000 tonnes per day and the east crusher at the same, I think that that's probably where we're going to stay at with regard to throughputs. I don't think we'll be doing any other expansion on a capital standpoint. We will continue to try and improve the uptime and efficiency and throughput of those crushers, but I don't see us expanding those in the near future.

[Ryan Hanley, Mining Analyst of Institutional Equity Research]

Without the expansion, do you see much of an ability to exceed. I mean, just given that you're over 20% of nameplate capacity at San Agustin, is there any kind of read through to the potential of exceeding nameplate capacity at El Castillo?

[William M. Zisch, Chief Operating Officer]

Ryan, I think we'll be able to meet it. Whether we can exceed it, will be a function of the amount of time and experience we have with the ore and the new system. And then the other question is, can we sustain a level that's higher than that? I think we'll be able to get to the nameplate and maintain that. And that's what our target is right now. We're always looking to improve efficiencies.

[Operator]

[Operator Instructions] And there are no further questions queued up at this time. I'll turn the call back over to management for closing remarks.

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

Thank you, Denise, and thank you all of you who took the time this morning to join us to go through this Q4 and full year earnings and financial release call. Again, I am very pleased with the results that we had here during the fourth quarter. It's accumulation of a lot of efforts from everybody to achieve those milestones and production and guidance. As I said, we're on track, actually ahead right now from what we had budgeted on our outlook for 2019, being driven by that same performance that we saw during Q4, and we look forward to talking to you in May as we talk about Q1 production, financial results and operating highlights. Again, thank you for your support, and we wish you all a good day.

[Operator]

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