ARNGF (ARNGF) 2019-02-14 Earnings Call Transcript

Good morning. My name is Denise, and I will be your conference operator today. At this time, I'd like to welcome everyone to Argonaut Q4 and Year End Financial Results Conference Call and Webcast. [Operator Instructions] After the speakers’ remarks there’ll be a question-and-answer session. [Operator Instructions] Thank you and Mr. Pete Dougherty, President and CEO of Argonaut Gold, you may begin your conference.

Thank you, Denise, and good morning everyone from Vancouver this morning. I have with me today Bill Zisch, our COO and David 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. The review of the operations and a walk through the capital investments we are making in 2019 that we feel could be catalyst for the company over the next six to 12 months. If you could please turn to Slide number 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 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 Augustine mine which exceeded nameplate crushing pricing capacity by nearly 22% during 2018 which led to outperformance at that mine. This benefitted 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 tons per day to 29,000 tons per day. On a longer-term look of things we derisked 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 Ferro de Gayo project in 2017 we re-logged all the course built our own geologic model, completed a drill program, provided 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 number 4. 2018 CSR highlights. Our success doesn't happen without the support of our four key pillars that form the foundation of our business, open 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 aids and the care of our communities through revegetation programs as well. These aid us in our forming a philosophy to run the company and support the local community 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, 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 pave the outlook and 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 rooted 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 non-cash impairment writedown due to the Republic bankruptcy and also moving some of our cad inventory at our test deal from current to long-term. I will ask Bill now to provide few details around this impairment. Bill.

Thanks, Pete, and good morning all. You will recall that during the first half of 2017 we were recycling ore on the upper lifts of both the East and the West fleet pads and our recovery model could not sufficiently predict leach cycle or timing to break through. With new leach pad built by mid 2017, we began placing ore on the new pad, next to plastics where the recoveries are much quicker. We’re didn't let the leach cycle go long enough on the upper lift of the leach pad so ounces remain in the pad, we have confirmed this through drilling and sampling of the pads. However, we currently do not have excess solutions capacity at our plant and therefore continuing to leach the fresh ore placed on the lower rib of the newly constructed pad. We know we will get to the other ounces in the future but due to client capacity constraints it maybe some time before we do so. Therefore we made the decision to move some of the El Castillo work in process inventory to noncurrent assets and appropriately discounted future cash with respect to the impairment. Please turn to Slide 6. As Pete mentioned the team really pulled together to deliver our annual guidance of 165,000 GDO, which led to a record in Q4 as the record annual production for the company. I’m proud of the operations team for safely achieving this accomplishment, particularly since we recall, we went about four-and-a-half months self blasting at our La Colorada mine. We experienced higher costs 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 while Colorado experienced a shortfall due to the four and half month period where we were not blasting. Despite this the team hit our consolidated guidance of 165,000 GDOs I actually believe if we have not had the blasting permit issue at La Colorado we very likely would've met or exceeded the 2018 guidance above 180,000 GDO. With that I'll pass the call back to Pete, I'll be available question at the end of this discussion.

Thank you, Bill. Please turn to Slide number 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’re already beginning pads instruction at San Agustin and the crusher expansion project. Please turn to the next slide, Slide number 9. Achieving our objectives and delivering value, three year production outlook. We achieved a 30% increase in production growth year-over-year and are on track to meet our three 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 number 10, 2019 BEO 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’re 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 costs. We reported guidance in January between $875 and $975 an ounce. Fits 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 $1075 the difference coming in a reallocation of certain capital items such as capitals turbine and leach pad expansion. No longer included in expansionary but now included in sustaining cost. Please turn to the next slide, slide number 11. Best into the future 2019 plans, we have a lot going on in 2019 at the El Castillo complex we are constructing three leach pad expansions, two at El Castillo and one at San Agustin. At San Agustin we are expecting the crushing capacity to expand from 20,000 tons a day to 30,000 tons 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 Q4 and heading into 2020. At the La Colorada operations. We are building two new phases of leach pad and also upgrading our recovery plans. When we look at our development assets the capital investments this year is about the derisking these projects, at the Geno 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, find closure plan and schedule two authorizations. These authorizations form the level of detailed engineering other items needed in order to advance this project to a construction decision in the future. For the foundation for that mines future. At Ferro de Gayo we’re advancing work towards a prefeasibility study that we anticipate will be published during the second half of the year. At our San Antonio project after nearly two years of consulting with stakeholders we have resubmitted a new application for our environmental impact assessment and will strive to advance the permitting on this project during 2019. Please turn to the next slide, Slide number 12. In 2019 capital estimates 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 doing somewhere around $15 million, the remaining money being spent on the development assets. The single largest contributors to the El Castillo $30 million budget is $15 million for the expansion of the San Agustin crushing and stacking capacity from 20,000 tons a day to 30,000 tons a day. Please turn to the next slide, Slide number 13. Summary of investment case. We continue to make 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 action building balance sheet throughout our nine 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 strong indicated resource models through our development projects we should be able to outperform during a rising gold price environment because we’re highly leveraged to grow and resource expansion. Please turn to the next slide, Slide number 14. Our focus, we’re on track to meet our three-year 65% growth rate goal which we set back in 2017 to build our balance sheet and focus the company through derisking of our development projects. I am happy with the performance that we have seen to date and as we look at the current operations today while 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.

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’m very pleased with the results that we had here during the fourth quarter as a cumulation of a lot of efforts from everybody to achieve those milestones in production and guidance. As I have said we’re on track actually ahead right now from what we have budgeted in 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.

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

[Operator Instructions] Your first question comes from Ryan Hanley with Laurentian Bank. Your line is now open.

I guess the first one you mentioned that you saw slightly higher cost in the consumables so maybe the limes line things like that. Is much of that baked into your guidance for cash cost for 2019?

Brian this is Pete, I will take that. Yes in fact when we started to look at 2019 we saw our core commodities increasing and our budgeted impact to those we’re 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 this will be in the main driver upon that. But right now we’re looking a little favorable to what you have in the original budget but we baked in considerably higher cost.

Okay that’s good and then I guess maybe just on the capital spending for the year. Is it fair to say it's probably a little bit more first half weighted just with the San Agustin expansion in there.

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 here in the fourth quarter. Yes, we will have higher spending here in the first part of the year that $15 million of the spending alone.

And then just one last one here just that at El Castillo given the success you have with going over name plate capacity at San Agustin do you see any translation over to El Castillo in terms of being able to maybe do that little bit over there as well.

Bill is here so I will pass that to him and let me answer Ryan.

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 tons per day and the East crusher at the same I think that’s probably where we were going to stay at with regard to throughput. I don’t think we will be doing any other expansion on a capital standpoint. We will continue to try and improve the up time and efficiency and throughput of those crushers but I don't see us expanding those in the near future.

Without the expansion do you see much of an ability to exceed I mean just given your 20% of name plate capacity at Augustine is there any kind of the potential of exceeding name plate capacity at El Castillo.

Ryan I think we will be able to lead 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 level our entire net I think we will be able to get to the name plate and maintain that and that’s what our target is right now, we’re always looking to improve efficiencies.

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