Argonaut Gold Inc

TSX:AR

Earnings Call Transcript 2020-Q4

[Operator]

Good morning. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to Argonaut's Q4 and Year-End 2020 Financial Results Conference Call and Webcast. [Operator Instructions] Mr. Dougherty, you may begin your conference.

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

Thank you, Mariama, and welcome, everyone, to Argonaut's Q4 and 2020 financial and operating results conference call and webcast. I want to thank everyone for taking the time this morning to join the call today. 2020 was a transformational year for Argonaut. We've set the company up nicely to transition from a high-cost, short mine life junior producer to a lower-cost intermediate producer with longer mine lives, and are on the cusp of this with the financing and construction activities beginning this quarter at our Magino project. This morning, we will discuss the Q4 and 2020 year-end results and also walk through our strategy and plan, specifically with our future flagship asset, Magino, since we've recently commenced site preparation work or construction. Please turn to Slide #2. During this presentation, we will be making 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 on the information that we have today. Please turn to Slide #3, 2020 and Recent Accomplishments. Before we get into the quarterly financial and operating results, I want to take a moment to highlight the outstanding efforts of our team over this past year, laying a solid foundation for Argonaut to transform the company from a high-cost junior producer with short mine lives to a lower-cost intermediate producer with longer mine lives. You will remember, those of you who have been with us before, that we have a 3-phase approach to execute on this strategy, and we have succeeded in all 3 phases this past year. We have harvested record cash flows from the existing operations, led by higher production, including our Florida Canyon operation, at lower operating cost. And we achieved this while managing through a 2-month suspension of all Mexican operations due to the COVID-19 restrictions and the pandemic. We acquired Florida Canyon to replace the short mine life at El Castillo mine, and we began implementing the necessary changes to allow this project to be the best that it can be. We put ourselves in an incredible position to unlock part of our growth assets in the business, while permitting, financing and exploration success at Magino took center stage, where we now have commenced construction. Please turn to the next slide, Slide #4, 2020 and Recent Highlights. It was a tremendous quarter and year from a financial perspective. We achieved record quarterly and annual revenue and cash flow. We reported adjusted net income of $0.07 per share for the quarter and $0.21 per share for the year and ended the year with 200 -- nearly $215 million in cash after spending $35 million in capital during the fourth quarter and paying down $22 million in debt, rendering the company debt-free. We also saw record gold equivalent ounce production in Q4 with 57,000 gold equivalent ounces produced. For the year, we produced 203 gold equivalent ounces when considering a full year of production at Florida Canyon. From a cost perspective, cash costs were 10% lower year-over-year, and all-in sustaining costs were 4% lower year-over-year. I'm happy to report that the cost per ton of ore processed was also reduced at all 3 mines in Mexico during 2020 when compared to 2019, leading to record cash flows from operations. In terms of short-term initiatives, we completed an at-market merger with Alio Gold, bringing us our fourth producing mine with the Florida Canyon mine in Nevada. We obtained key permits and authorizations required for the construction and operation of Magino as the Schedule 2 amendment, the Species at Risk Permit and the Magino Closure Plan filing, along with the approval of our Fish Habitat Compensation Plan from the Fisheries and Oceans of Canada. We believe we have a shareholder-friendly financing plan for Magino through equity, in convertible debenture and financings along with cash flow from our existing operations. And as a safety net, we extended and expanded our corporate revolver for up to $125 million, which is completely undrawn. To limit potential capital inflation during Magino's construction, we executed upon a fixed bid contract with Ausenco Engineering in Canada, covering approximately 40% of Magino's total capital and have recently commenced site preparation activities, such as logging and road building as the first phase of our construction schedule kicks off. When thinking longer-term on the future of Magino, we continue our exploration programs at Magino, where we are specifically targeting higher grade gold mineralization at depth below the pit and adjacent to the planned open pit. This program is showing promising continuity of high-grade gold mineralization in the Elbow and Central Zones. And we've continued to step out and test other structures on the property to the west of the Magino/Island Gold border. We have now discovered 4 new zones: the Scotland, 42, Sandy and South Zones. The South Zone, in particular, now extends for 1.5 kilometers in strike and remains open to the west and at depth. We also commenced the first real exploration program in earnest at the Florida Canyon operation. It's been since the 1990s, and we look forward to sharing results from this new program over the coming year. And not to be forgotten is our Cerro del Gallo property, which is currently in permitting, and processing remains a key growth asset for us. I'd like to now turn the call over to Mr. Dave Ponczoch, our CFO, and have him walk through the fourth quarter financial performance. Dave?

[David A. Ponczoch, CFO & Corporate Secretary]

Thanks, Pete. Please turn to Slide 5. In terms of financial performance, record fourth quarter gold equivalent ounce production led to record quarterly revenue of over $100 million and record quarterly cash flow from operating activities of nearly $40 million. Even with $35 million invested capital and $22 million in debt repayments during Q4, we still ended the year with $214 million in cash, which puts us at an extremely strong balance sheet position as we commenced at Magino's construction. Please turn to Slide 6. As I mentioned, we achieved record quarterly cash flow from operating activities of nearly $40 million and invested nearly $35 million in capital in the quarter. You can see that approximately $20 million of the $35 million capital spend was at Magino after we made the construction decision in October 2020. I'll now pass the call back to Pete to walk through our operating performance.

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

Thank you, Dave. Can we all please turn to Slide #7, Operations Overview. We achieved record quarterly gold equivalent ounce production in the fourth quarter of nearly 57,000 ounces produced, which is up 20% year-over-year. We saw meaningful reduction in cash costs at all of our Mexican operations. You'll remember that one of our stated goals for 2020 was to focus on reducing our cost per tonne of ore processed at all of our Mexican operations, and I'm happy to report that we achieved this in spade. On a cost per tonne processed basis, the El Castillo mine experienced a 34% reduction in cost; the San Agustin mine experienced a 10% reduction; and the La Colorada project, a 4% reduction when compared to 2019. This year, reducing the cost per tonne of ore processed at the Florida Canyon operation is a key priority for us. Please turn to the next slide. Slide #8, 2020 and Recent CSR Highlights. In 2020, our team did an excellent job from a corporate social responsibility perspective as well. We earned the Environmentally Socially Responsible company designation from the Mexican government at all of our Mexican operations for the ninth consecutive year. This means in general, that the Mexican government recognizes Argonaut is a company that is operating in an environmentally and socially responsible manner year-in and year-out. At our La Colorada operation, we were recognized again as a leader in social responsibility by the Sonora Mining Cluster. And I want to recognize and thank our team for the outstanding work this past year in assisting the Mexican government with outlining protocols and procedures in response to the COVID-19 pandemic. You'll remember that during 2020, the Mexican government issued a decree that all nonessential businesses including mining must cease operations for a period of 2 months. I believe our team's response greatly assisted in mining being recognized as an essential business, with operations restarting with strict protocols in place only 2 months later. And these protocols are working as evidenced to the very few COVID infections to date within our workforce in Mexico. And I'm happy to report today that if we look at the organization in Mexico, we have no active cases of COVID-19 in our nearly 2,000 employees and contractors working at our mine sites.Please turn to Slide #9, Three-Year Snapshot. For 2021, we have taken a conservative approach to our guidance due to the uncertainty surrounding COVID-19. While we believe it is at a low risk that we will see a mandated mine shutdown, there is definitely day-to-day a productivity risk through our contract tracing protocols. With these potential impacts in mind, we have widened the guidance for production to 210,000 to 250,000 ounces of gold at a cash cost between $950 and $1,050 and all-in sustaining costs between $1,250 and $1,350. But what I would like to draw your attention to is how Argonaut is making strides year-over-year. I believe this slide really illustrates our ability to not only grow production and cash flow while maintaining cost discipline and cash capital rationalization. And this is -- and this will improve across all 3 of these metrics as the Magino and Cerro del Gallo projects are brought online, as they will both be much lower cost operations with significantly longer mine lives. Please turn to the next slide, Slide #10, Argonaut's Vision and Strategy. In 2020, we put Argonaut in a tremendous position to achieve its vision and strategy of transforming from a high-cost junior producer with short mine lives to a lower-cost intermediate producer with longer mine lives. Magino is a big part of this, but so is Florida Canyon and Cerro del Gallo. We believe all 3 of these projects from -- form a foundation for a long-lived, highly successful diversified producer. The fact that we already own these growth assets in our development pipeline is a significant competitive advantage for Argonaut. And I'm going to take a few minutes to walk through our vision for Magino since we have completed the financing and have already commenced construction. Please turn to Slide #11, Introduction to Magino: The Future Flagship Asset. Just to remind you and perhaps to reintroduce you to Magino, I thought I'd take a moment to highlight what we are currently building. We have begun construction on a project that will host a 10,000-tonne per day processing facility and produce, on average, 150,000 ounces a year for the first 5 years at around $700 all-in sustaining cost. This investment to make this happen is estimated at between CAD 480 million and CAD 510 million. To mitigate some of the potential capital inflation risk, we have executed a fixed bid contract with Ausenco Engineering in Canada, the same group that built Moose River for the Atlantic Gold Group in Nova Scotia a few years back. This is clearly a game changer for Argonaut and our shareholders. But what really gets me excited about this project is its scalability. We'd like to think of this project as through an umbrella approach, where we can look at a small project today that can grow as we are building on a foundation permitted and a footprint for a 35,000-tonne per day operation. Please turn to Slide #12, Conceptual Magino Project Timeline. Given the substantial investment, I want to take a moment to further discuss Magino's construction schedule and our vision for the asset as the potential is enormous beyond the current project scope. We've already executed a fixed bid contract, covering approximately 40% of the initial capital spend at Magino, and the closure plan has been filed, so site activities have begun. We envision a 2-year construction phase with first gold to be poured during the beginning of 2023 with ramp-up in the first half of 2023. During this time, we will continue an aggressive exploration program, targeting higher grade gold mineralization below and adjacent to the planned open pit. We believe the open pittable ounces already support a much larger processing facility, and we will be looking at expansion studies for a 20,000 tonne per day facility this year. But that is not all. We are looking at the project with the potential or an eye towards a second life beyond the open pit. Our goal is to have enough information from our deep drilling exploration program by the end of this year to incorporate this into our future plans at Magino. This will be a big focus for us this year as we spend nearly $11.5 million on this front. Please turn to the next slide, Slide #13, Magino - Pathway to Expansion. Today, as I said before, we are building a 10,000-tonne per day facility, which will yield that 150,000 ounces a year at an all-in sustaining cost of $700. But this is not all that this project has to give. We see great potential to expand Magino out of the cash flow in the early years of the mine life. We've already permitted the project for up to 35,000-tonne per day and believe that 20,000 tonnes might make the most sense for this project, considering the potential to supplement higher grade feed from the underground and open-pit project. At the gold grades we are encountering at depth beneath the pit and adjacent, it doesn't take many tonnes to quickly change the production profile for Magino. When we think about 10,000-tonne per day and 150,000 ounces per year at $700 cost, this is very meaningful to a company of Argonaut size. However, if you consider an additional 2 million ounces in the measured and indicated category that falls within the pit shell and nearly an additional 1 million ounces of inferred mineralization within the pit shell you can see why we believe 20,000 tonnes per day is not out of the realm of possibility. And if we are successful in delineating an economic high-grade underground resource, we now can envision a scenario whereby we would mine 19,000 tonnes per day from the open pit and 1,000 tonne per day from our underground yielding a 300,000-ounce per year, low-cost production for a very long time. Now there are many steps that need to fall into place to get that larger production facility, but I submit the pieces are there, and we just need to execute on the plan. I like to say, stay the course and don't become distracted along the way. Please turn to the next slide, Slide #14, Potential to Add Mineral Resources and Reserves at Magino. When you look at this image, you can see why we are very excited by the possibility of a future higher-grade underground mine at Magino in addition to our existing open pit. This year, the majority of our exploration drilling at Magino will be focused on the Elbow and Central Zones below the eastern edge of the planned Magino open pit and near the border between Magino and the Island Gold mine. We will have 2 to 3 drill rigs working on this. Additionally, we have a drill dedicated for scout drilling around the project, hopefully finding more holes like hole number 57, which rendered our best drill hole to date on the project. Please turn to the next slide, Slide #15, Magino Plan View. But it's not just at the border between the 2 properties where we are encountering high-grade gold mineralization at depth. Our geology team outlined other structures that they wanted to test at depth below the middle of the pit towards the western edge of the pit as well. And it looks like our team has the geology correct as we have hit high-grade gold mineralization in all of our first drill holes into these new zones. You can see as you move west, away from the Island Gold mine, we have the Scotland, the 42, Sandy and South Zones, all that are exciting and require follow-up exploration. The South Zone alone is now showing a strike length of 1.5 kilometers from the Island Gold mine and remains open to the west and at depth. This could be a very large mineralization system. And what our geologists believe is that we are investing in the future as we unlock this potential. Please turn to the next slide, Slide #16, Drill Highlights Intercepts New South Zone. When you look at it from an underground perspective, this is a long section looking north. You can clearly see the potential here; however, it takes time to properly develop underground resources and reserves, and we are going to take the time necessary to do this correctly to derisk any potential at Magino. Needless to say, we are very excited by what we are seeing and believe the potential at Magino is tremendous. Please turn to the next slide, Slide #17, 2021 Catalysts. We expect lots of news flow this year through the exploration programs at Magino, where we will continue to target this high-grade gold mineralization at depth below and adjacent to the planned open pit. At Florida Canyon, where we are exploring a potential connection between the existing pits and at the past producing Standard Mine that has fallen off the radar screen, but came to us with the acquisition of Florida Canyon and sits 10 kilometers away. We already know something of what's there at the Standard Mine, and we'll be drilling there to see if there is a possibility to potentially restart the Standard Mine in the future and setting up Florida Canyon and Standard similar to what and how we run our El Castillo and San Agustin Complex with the shared synergies. We'll be providing regular construction updates so that you can see the progress at Magino. We are planning to add a conveying and stacking system at Florida Canyon, which we believe will significantly reduce operating costs and enhance productivity. We are expected to receive a decision on Cerro del Gallo's permit during the first half of this year. So lots of news flow to come. I think that Argonaut has the potential to sneak up on some investors with everything that we are doing to add value to the business. So I'd encourage all of you to follow us closely because as we execute, Argonaut will transform into a completely different and much more relevant company in terms of production, cost and cash flow profile in the precious metals sector. Please turn to Slide #18, Executing Our Strategy - Our 3-Phased Approach. We are on the cusp of achieving this transformation in the company. We must -- all we must do is follow our 3-phased approach of harvesting cash from existing operations, replacing depleted ounces through exploration and focusing on building out our pipeline of growth assets. We have the financial capacity today and have a strong team in place that now it comes down to execution. Thank you for your time today. This concludes our presentation formally. And now we'd like to open the floor back to questions, and I'll turn things back over to Mariama, our operator, as she will guide us through this question-and-answer period. Mariama?

[Operator]

[Operator Instructions] Your first question comes from Gabriel Gonzalez with Echelon Capital Market.

[Gabriel E. Gonzalez, Analyst]

Congratulations to the company for a really transformational 2020, really the outlook for the company is changing in an amazing fashion. My question is just on the cash costs for Florida Canyon in 2021, and I'm referencing the 2021 gold equivalent production cost guidance. I was just wondering between that $1,200 to $1,300 per ounce guidance, is there a little bit more granularity that you could give us in respect to what we could expect in the first half versus the second half?

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

Okay. Gabriel, thank you for recognizing the change, the teams have really done a fantastic job. And I would expect that as we look first half versus second half, from our perspective, we think the cost will be higher here in the first half than they will in the second. As we talked about before, one of the key focuses is going to be getting this overland conveying and stacking system in. And we think that should help reduce the cost significantly and allow us to ramp up additionally further in the production profile. So it's really the first half is going to be higher cost than we would see in the second half as we start to ramp up more in the second half of the year.

[Gabriel E. Gonzalez, Analyst]

So should we assume just given the slowdown in the Biden administration's take-up of BLM permitting, just to be conservative then, is it fair to say or to expect that the overland conveying and crushing improvements -- again, just to be conservative, should be completed by the end of the second half -- I apologize, by the second quarter, thereabout at the end of the second quarter?

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

Our expectation -- we've already gone out and started the work with the contractors in building the equipment that will be needed to put this overland conveying and stacking system in. That's already underway. Now right now, we cannot -- if that equipment were on site, we could not start construction as we are waiting for that air quality permit. We believe that this project is one of those ones that -- even though we've had a change in administration, this is one of those projects that really stands out because it really speaks to what we're trying to achieve and what the country is trying to achieve. We think from a perspective on this project that our carbon footprint will drive down significantly as we put this overland convenience stacking system in and won't need to run trucks and dozers and all the other pieces of equipment that would be burning diesel fuel, as we switch to a national grid power running out there, and running this overland stacking, and that really resonates with people. So now you have a green initiative type project that really resonates with this administration and what we're trying to accomplish as well. So we think that that really bodes well for us, and we think that there's a good opportunity to be starting this in the second half of the year.

[Gabriel E. Gonzalez, Analyst]

Great. And just one very last quick question, I hope. Assuming the Cerro del Gallo permits are received in the first half, just to refresh us about when would you be looking at a potential construction decision for the project?

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

Yes. That's a fantastic question, Gabriel, because it does -- again, Cerro del Gallo represents one of those pillars of strength for the company as we look to building out the future transforming of this company. From our perspective, I think it's important to understand that if we had the permit today, we would not be doing anything as said, because our first and primary focus today is on the Magino project. Should things start to ramp up and we're starting to hit our milestones, we feel very comfortable with how Magino is going. And should the cash flow in the company continue to come in and bolster the overall balance sheet of the company, remember, with that purely flexible revolving credit facility on hand, we could potentially take on the Cerro del Gallo project because our construction team for Cerro del Gallo would be freed up in the second half of this year. So if things are running well and the operations in Magino, then I believe we can be taking on a decision here in the second half of this year around the Cerro del Gallo project and timing to bring that online. Our team is not stretched and the construction team is not stretched.

[Operator]

Your next question comes from Eric Winmill with Scotiabank.

[Eric Winmill, Associate]

Perfect. Just 2 quick questions for me. Just wondering if you can give any further detail on some of the activities underway at Magino? And some of the critical path items or long lead time items there? And secondly, just on Standard mine, if you have any more detail on the plans for exploration? Or what you'd look at in terms of economic threshold for that project? Appreciate it.

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

Okay. Eric, well, thank you for taking the time this morning to join us. Let's talk about Magino at -- in high level, right? We're still in the middle of winter in Dubreuilville. Right now the activities that are taking place right now are the logging as we have to remove the stumpage in order to build the facilities up there. So that is underway right now and then some snow removal and early road pioneering in, so we can get to work. The real dirt work really kicks off in the March time frame, that's when we'll be stepping up those activities. We've hired in a group called [Sagersome] that if you're in Canada, you may know. They do a fair bit of dirt work, and they've already mobilized and are working strongly at the project, along with the logging company. So those activities are underway. The beginning of the camp to go into the project has already kicked off with some -- with a local group, actually, the namesake of Dubreuilville, [not] Dubreuilville and some of the First Nation groups there are working on the camp to get that up and going as well. So early days, early things are kicked off. Now when it comes to the long-lead equipment, I think this is key that we have chosen a talented group like Ausenco. They have already placed all the orders for the mills and all the running gear, the major long-lead gear items for the project, and that has already been placed. That was placed back in December. So that is well on its way. And they're just finalizing their teams and getting ready to start as they will be heading up to Magino in earnest here in the March, April time frame. We secured a large office building that used to belong to the logging operation in Dubreuilville, where they'll be taking over and running things from there as well. So it's early days. But a lot of work has already been assigned, most of the major contracts have already been signed up, and we're just starting to get going. But excited about how that looks forward. So that tells you about where we are with the Magino project. And your -- second part of your question was around, what are we doing with the Standard gold mine? Well, the Standard was a mine that was operated back in the Pegasus and Apollo Gold days. And when they started work on this project, they had run this project as a satellite operation, producing roughly 600,000 ounces out of the pit. We know today from the past history and the work that we have that there is roughly around 140,000 ounces already identified at the project. We are going to kick off our drilling program here of about 40,000 feet that will kick off at Standard during the April time frame. Right now, we are drilling at the Florida Canyon operation, as we talked about earlier, trying to connect those pits together. So in April, we'll kick off some drilling down at Standard. We believe that will finish up by the June time frame, and then we'll come back in to do some more work at Florida Canyon and then rotate potentially back to standard in the fourth quarter. So that's what we have planned for the Standard gold mine and where we are right now. Our threshold as a company, I would like to see at least 400,000 ounces identified before we look at kicking this back on. That would yield somewhere around a 50,000-ounce type year producer out of that mine and we think that would be a good size for that size property. But again, the future will tell us. The drilling is going to start here in April, and we'll see where that takes us in the future. Did that cover everything you were looking for, Eric?

[Eric Winmill, Associate]

Yes. That's really helpful. I appreciate it. It sounds like lots going on, so we look forward to hearing the updates.

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

Okay. Great. Yes, it is an exciting time, and the teams are stepping up and taking the lead in all these areas, and I couldn't be pleased -- more pleased with their efforts.

[Operator]

There are no further questions at this time. I will now turn the call back to the presenters.

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

Thank you, Mariama, and thank all of you who have joined us this morning. I have told our team that in 2020, we learned how to walk. And that in 2021, we'll learn how to step that up a little bit more as we have many exciting fronts that we are working towards. This is truly an exciting time to be part of what's happening here in Argonaut, and we look forward to talking to you more about things as we continue to advance the company and its various projects. Thank you again for your time this morning, and have a great day. Bye now.

[Operator]

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