ARNGF (ARNGF) 2021-04-29 Earnings Call Transcript

Morning. My name is Christie and I will be your conference operator today. At this time, I would like to welcome everyone to the Argonaut’s Q1 2021 Financial Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Dougherty, you may begin your conference.

Thank you, Christie and welcome everyone to Argonaut’s Q1 financial and operating results conference call and webcast. I want to thank everyone for taking the time to join the call today. Today we are going to walk through the Q1 results which yielded record production and revenue. We will also spend time providing you with an update on the Magino Project construction, as well as some of the exciting exploration results at both Magino and our La Colorada facility. Please turn to Slide number 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'll do our best based upon the information that we have today. Please turn to the next slide, Slide number 3, Q2 2021 and recent highlights. What makes Argonaut unique is that we are a one stop shop, checking all the boxes whether you're looking for operations that provide cash flow, or you are seeking a growth-oriented story through development of a new mine, or you are focused on the exploration sizzle. Argonaut provides all of the above in one complete package through a low-risk approach. Please turn to the next slide. Slide number 4, Magino construction update. Before we go into the Q1 results, I'll give you a brief update on our Magino Project construction. Construction is tracking on to slightly ahead of schedule and has been advancing well. We've completed four months of a 24-month schedule program and these next 20 months will fly by quickly. We received or completed key milestones this past quarter with the login for the year completed to-date and have begun early earthworks which are underway. We have also mobilized teams to the site and have set up an initial 144-person camp at the site. There will be another 450-person camp set up near the town of Dubreuilville, as activities on site begin to ramp up. We executed in agreement with the Garden River First Nation and held a ground blessing ceremony with the Métis First Nation of Ontario to bless the ground before construction activities commenced. We have launched a monthly newsletter and have published our second newsletter just this last Monday. In these monthly newsletters, we intend to provide a regular updated on the project and pictures of construction. Please note that you can find these updates on our website. Please turn to the next slide. Slide number 5, Magino construction update continued. As discussed, the project is tracking on schedule. In terms of budget, it is no secret that there is an R cost inflation all around us. Pretty much any raw material, our end costs are moving as we've seen from the area of diesel. We have been fortunate to lock in a large portion of this build to a fixed price bid, but we still have other cost pressures. Today, we are currently reviewing potential cost inflation to certain inputs, impacts of FX rates and changes in project scope while this review is ongoing and not yet complete. Based upon the best information we have available as of today, we believe the initial capital remains within a 15% of the previously guided estimate of CAD$480 million to CAD$510 million. When we think about the project timeline, we are about to get into the areas of the project in late Q2 and early Q3 that will increase the pace of capital spending, such as pre-production mining and the start of construction of both the process plant and tails facility. We anticipate first gold pour during Q1 of 2023, followed by a short ramp up to commercial production. This chart outlines the key critical milestones as we march towards this production date. Please turn to the next slide. Slide number 6, Q1 2021 and recent highlights. Now let's talk about the Q1 results. Because we had another outstanding quarter, we delivered record quarterly revenue on the back of a record quarterly production and earnings of $0.09 per share. It was a terrific quarter for delivering on our initiatives, both short term and long term. The Magino closure plan was filed and we completed the fixed bid contract with Ausenco for the construction of the process facility at the Magino project. We then embarked upon construction. We also recently announced that Ausenco has made a CAD$10 million investment into Argonaut, which we believe aligns our partnership and gives Ausenco additional skin within the game. We also recently announced we've received the permit required to install and operate a new convenience stacking system at Florida Canyon, which will lower our operating cost once in place and ramped up. Looking at longer term growth initiatives, we continue to have success in targeting high grade mineralization at Magino, and during the first quarter, we announced that the South Zone strike length had now extended to 1.5 kilometers westward from the border of the Island Gold project. And we have hit one of our best ever drill holes on the property with over 10 meters at 19 grams at nearly 450 meters of depth. So, very shallow within the system and very high grade with nice width. We also drilled some of the best holes in the industry that I have seen at our La Colorada project below the El Crestón Pit, where we saw 12 meters at 99 grams and 30 grams of silver and 21 meters at 45 grams gold with 275 grams silver. These are extremely exciting results and I'll discuss our view around these in a few moments. But first, I'd like to pass the call to Dave Ponczock, our CFO and have him walk through our Q1 financial performance. Dave?

Thanks Pete. Please turn to the next slide Financial Performance. During the first quarter, we sold 59,116 gold equivalent ounces, leading to record quarterly revenue of $105 million. We generated a net income of $27 million or $0.09 per share and had a strong cash flow of nearly $28 million. We ended Q1 with $227 million in cash and cash equivalents. Please turn the next slide. Q1 2021 our capital spending in cash flow. Looking at Q1 cash flow, we began the quarter with $214 million and generated close to $26 million in cash flow after working capital changes. We added $28 million through the CD flow through financing and the single private placement while investing just over $38 million in capital. Therefore, our cash position ended with $227 million at the end of the quarter. In terms of capital spend $26 million of the $38 million around 68% of the capital spend for the quarter was related to the Magino construction project. I want to note that as pre-production binding ramps up and the process plant and tailings facility construction demands, we expect the pace of Magino construction capital to increase in late second quarter early third quarter. I’ll now pass the call back to Pete to walk through the operating performance for the quarter. Pete?

Thank you, Dave. As we look back over the past year, it has been an amazing year for the company. We have been able to achieve last year record production for the company, record quarterly production in the fourth quarter and now here again in the first quarter, another record quarter for production, with nearly 60,000 gold equivalent ounces produced. Overall, production was up 44% over Q1 of 2020, with all-in sustaining costs falling 1%. The three mines in Mexico are meeting or exceeding expectations at this time. Our Florida Canyon project had a tough start to the quarter. And has shown month over month improvement throughout the quarter and into April. In early Q1, we were coming off the holiday season and to begin this quarter, we were at times without 10% of our workforce due to COVID contact tracing here in Nevada. This meant that we didn't have the people necessary to run all the equipment to move the material, we would have liked to have moved and get the production out of Florida Canyon, we were hoping for. We recognize that we need a big step change at Florida Canyon. And this will come once we have the convenience stacking system in place and ramped up. I'll talk about this a little bit more shortly. Let's please turn to Slide number 10, if we can. Slide number 10, Q1 2021 and recent CSR highlights. I want to take a moment and recognize the hard work that our team has done and continues to do with respect to our environmental and social responsibility initiatives. On this slide, you can see examples of some of the initiatives, whether it be the new solar farm at La Colorada or the other community initiatives that we are embracing. In April, we published our Annual Sustainability Report. In this report, which is available on our website, you will find many of the things that we have done to hit on ESG criteria as we move forward. I encourage all of you to take a moment and read through the document and learn about some of these positive initiatives that we have embarked upon with our employees and our communities where we operate. Please turn to the next slide. Slide number 11, high grade results at La Colorada. Now let's walk through some of the best drill hole results I've seen in the sector in my history. Here you see a plan view of the El Crestón Pit at our La Colorada mine. We recently announced the results from the first round of drilling to test down dip extension of the veins where we are mining within the pit today. The drilling program’s goal was to first see if we could find grade that might support an underground mining operation once the open pit had been exhausted in the next two years. And grade, we did. We did find at this particular project. Let's turn to Slide number 12, high grade results at La Colorada. Here are two cross sections taken from the El Crestón deposit where we are actively open tip mining today. The dark gray line that you might be able to see that is thinly placed on these slides represents the current topography at the site. The blue line represents the ultimate pit as designed today for this facility. And the red line represents what would happen if we used a $1600 gold price. Now just below this red line, you will see two sets of Bonanza grade drill intercepts. And maybe just as exciting as the grade look at these true widths that you see here. These are extremely encouraging results for the first holes ever drill below this pit, to find widths of 21 and 12 meters at this project is amazing. And to find these kinds of grades is spectacular. As we mined down through the El Crestón Pit, it is not uncommon for us to come across historical underground workings. After all this was an underground mine during the late 1800s and early 1900s before the Mexican Revolution. Today, we are essentially mining the halo around those old underground workings and processing the material that we are mining today which runs between 0.5 and 0.6 grams as an open pit, keep leach processing method. Now, when we contrast this, where the historical miners had previously been working, we're finding that this higher-grade core extends deeper. But we seem to have discovered areas where the miners didn't quite get down deep enough to find all the mineralization as they chased these down these veins deeper. We didn't know what the grades would be, as a historical mining records were not there from the 1800s but 21 meters at 45 grams gold and 275 grams silver and 12 meters at 99 grams gold and 30 grams silver are some of the best drill holes this sector has seen over the past year. We are very excited to continue drilling to test the down dip, dip extensions of these veins. But because we are actively mining in the pit, this is going to take some time. 100% of our ore supporting the La Colorada project is currently coming from the El Crestón Pit. And as I said before, this operation needs to continue forward for the next two years. Last year, this operation generated $25 million to the balance sheet and this year is expected to do considerably more. So, we don't want to slow down that mining. That means we need to do a bit of planning around drilling. We will drill a bit on one side of the pit while mining on the other side and then do a dance, switching the rigs back and forth in order to advance this drilling. Needless to say, we are excited about what we have discovered. And hope to know much more about this and what it could mean to La Colorada’s future later in this year. But clearly very exciting. Please turn to the next slide, Slide number 13, optimizing Florida Canyon. Some other very good news that we received recently was a permitting required to install and operate a conveying and stacking system at the Florida Canyon project, which are now in place. When we acquired Florida Canyon mine last summer, we saw an opportunity to eliminate multiple re-handling of ore and reduced operating cost and gain efficiencies. Previously ore was hauled out of the pit and then dumped on the ground near the crusher, then a dozer would push it into a pile and a loader would feed it into the crusher. And after being crushed, the ore would go back onto the ground, picked up with the loader loaded into haul trucks and move to the leech pad, dumped out on the leach pad, then dozed with the dozer to set up before operating the leech pad. During the fourth quarter, we installed a dropbox or dump pocket so that the trucks coming directly from the pit can now dump directly into the crusher, thus eliminating the first set of re-handle. Secondly, and where we find ourselves today is that now that the requirements and the permits are in place, we are ready to now install a conveying and stacking system on the back end of the crusher, which will then in turn lower operating cost. And secondly an advantage out of this system will be that we can repurpose the trucks that were hauling ore from the crusher to the leach pad back into the mining pit to deliver an increased tonnage that we'll be able to mine and delivered to the crusher. All the equipment necessary to install this overlying conveying and crushing system is expected to start to arrive on site during this month with installation in the coming month and ramp up to begin during the July through September timeframe. This should lower our operating cost and lift our production at Florida Canyon in the latter part of ’21 and into ’22 going forward. Please turn to the next slide. Slide number 14, Magino plan view. And just before wrapping up our call today, I wanted to take a moment to discuss our exploration program at Magino. Because it is no longer just about the border between the Magino and Island Gold where we are finding encouraging high grade gold mineralization at depth. Our geological team has outlined other structures that they want to test at depth below the middle of the pit and towards the western edge of the pit, as well. And our team has the geology correct as we hit multiple high grade gold mineralized veins on each of our drill holes as we move towards the west. Last fall, we announced the discovery of the Scotland 42, Sandy and South zones in the center of the pit. And then again, this year in the first quarter, we drilled further west where we extended the South Zone to a strike length of more than a kilometer and half. And we've found the best drill holes that we have seen on this project as represented by Hole number 57 and 424 on the western edge of this map. This would be just off of where the open pit would run to. We are in our early days of this drilling, but over the past year and a half, we have drilled over 50,000 meters and have shown promise in delivering Phase II of Magino which could potentially be an underground operation. Please turn to Slide number 15, drill highlights intercepting New South Zone. This is a long section looking north on the project. When we look at this, from an underground perspective in this long section, one can clearly see the potential that we see. Our main focus this year will be tightening up the drill spacing in the elbow and central zones, where we hope to come up with a mineralized inventory by the end of the year. But that's not all that will be happening. We will be following up on other zones, particularly the far west where Hole number 57 hit that 3 meters of 50 grams and 10 meters at 19 grams, and 424 where we hit 7.5 meters of 29 grams gold, very important drill holes. The distance between these holes number 57 and 424 is roughly 275 meters. So very widely spaced today. But also, very encouraging and this is why we plan to do more drilling. Needless to say, we are very excited about what we are starting to see and believe in the potential of Magino as an underground operation in the future is tremendous. We have a targeted $11.5 million drill program this year focused on as I said, defining better this underground Phase II for Magino. Please turn to the next slide. Slide number 16, Magino upcoming construction milestones. And just before we wrap up today, I want to leave you with some of the upcoming milestones from Magino construction project. Things are happening quite rapidly. The first four months have flown by and before we know that we will be commissioning Canada's next goldmine, I encourage you to visit our website and subscribe to our monthly newsletter and see some of the pictures and the progress. While the first four months have gone very fast, I'm sure the next 20 will as well. Before you know it, Magino will be pouring gold in early 2023. And we'll have become Argonaut’s flagship operation. Please turn to the next slide, Slide number 17, potential near-term catalyst. We expect to have a lot of news flow and catalyst upcoming. We are committed to providing you with regular information on Magino’s construction progress. We will continue to test the high-grade mineralization at depth at Magino, as well as part of the potential for Phase II of this project. And with the Bonanza grade intercepts at La Colorada, we are excited to have future announcements on the follow up of these drill results as we expand the drilling there. We are also drilling at both Florida Canyon and the standard mine here in Nevada. And with all three of our Mexican assets performing extremely well and permits in hand to change the future Florida Canyon, we are provided with the cash to fuel our transformation from a high cost junior producer with short mine lives to a low cost intermediate producer with longer mine lives. This concludes our presentation today. And now I'd like to pass the call back to our operator, Christie, who will set up a brief Q&A session. Christie?

Eric, and as you know, with the Ausenco contract, that is a fixed price bid, so they have locked most of that those longer lead items in and it's now setting up the shipping times to coordinate that within the time and scope and frame that they have to deliver. Because as you're aware with these fixed price bids, there is requirements for them to hit various milestones. And if they delayed, there are also penalties associated with that getting this completed on time.

Gabriel, the interesting thing with this project is, it is a Canadian project in every sense, where out of that $480 million to $510 million that we're looking at Canadian, over 85% of this project looks to be in Canadian dollars. Okay. The biggest U.S. dollar impact here that we're looking at would be for the mining fleet itself. So that FX trade, I'm sure that Ausenco has an FX trade issue for themselves. But that being a fixed bid contract in Canadian dollar terms to us, really locks in this as a Canadian dollar denominated project.

Okay, perfect. Sounds good. And actually, that's it for me questions. Pardon me. That's it for me for my questions. Thank you very much Pete. Really appreciate the answer.

All right. Okay, thank you.

Okay, thank you, Christie. And thank you all of those who have joined us with this morning or those who may listen in the future that have been supporting us here at Argonaut. We appreciate your support. We look forward to Q2 as we continue to ramp up the operations and push forward on these initiatives that we're seeing with the construction happening at Magino. And the exciting things that will be occurring there as we head into Q2 where we're actually starting to pour cement and starting to see buildings start to come to life. And then with the exciting drill results that will be coming out of the drill programs that Brian and the teams are leading as we continue to explore and understand better, not only La Colorada, but Florida Canyon, Standard mine and then also at Magino. So again, thank you for all your support. And we look forward to talking to you in the upcoming quarter. Thank you.

Thank you. This does conclude today's conference call. You may now disconnect.

Thank you. [Operator Instructions] And you have a question from Eric Winmill of Scotiabank.

Morning Eric.

Morning, guys. Thanks for taking my question. Just quick question. There's obviously lots of chatter about inflation these days. I appreciate the comments in the presentation, but just wondering if you can touch on any sort of supply constraints, you're seeing in Magino, or any sort of cost pressures in particular that you're especially concerned about or tracking closely?

Yeah, Eric, as we stated, we think we're within that 15%. But I actually have with me this morning, Bob Rose, our Vice President Technical Services, who's over the construction and management of this. So, lets him answer what we're starting to see. But I think things are tracking nicely. Bob?

Thank you, Pete. Certainly, there are some inflationary pressures. I think one of the advantages that we've got at the moment is that with our fixed price contract with Ausenco, they are actually managing much of the purchasing of the items that potentially have that problem. We're certainly seeing fuel prices that move around. And some of the movement of materials is certainly becoming more difficult. So, it's certainly there. And that's part of what we're planning around right at the moment, we can see that you need to look ahead. Shipping times are extended, obviously, costs are going up. But again, much of that is within Ausenco’s ballpark. And they're very much on top of it right now.

Okay, that's great. Thank you, really appreciate the added color. Maybe longer a similar sort of vein, just quickly on exploration. How are you seeing your turnaround time on the assay labs? And are you seeing any pressures there as well, in terms of getting quick turnaround?

Well, Eric, again, I have the resident expert on this here and Brian Arkell, our Vice President Exploration. He's been in this business for nearly 40 years. So, if anybody knows what's happening, and how to get things lined up, drills, and assays, et cetera he's the man. So, let's turn it over to him. Brian?

Yeah, hi, Eric. We're seeing some pressure, but it's not bad at all. We have about a one month turnaround time up in Canada, with our SA lab and we get priority there because we have a pretty long standing relationship with those guys. And down in Mexico, we're seeing a three-week turnaround. So, Mexico is not bad at all and Canada is about down normal one month.

Okay, great stuff. Again, appreciate that. That's it for me. Thanks a lot, everyone. Cheers.

Thank you.

Thank you. Your next question is from Gabriel Gonzalez of Echelon Capital.

Good morning, everyone. Good morning. Congratulations on another fun quarter. I wanted to ask, just following up a little bit on the question about the cost pressures. Just wondering and bearing in mind that the review that is ongoing with respect to costs is not completed and an ongoing process. But I was just wondering, is there any thought to the potential impact of a rising Canadian dollar in offsetting -- potentially offsetting some cost inflation? Is there a Delta or a sensitivity around that, that you'd be able to speak to?

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