ARNGF (ARNGF) 2020-04-30 Earnings Call Transcript

Good morning. My name is Denise and I'll be your conference operator today. At this time, I would like to welcome everyone to the Argonaut Gold Q1 Conference Call and Webcast. [Operator Instructions]. Thank you. Mr. Pete Dougherty, President and CEO, you may begin your conference.

Thank you, Denise. And welcome everyone to Argonaut Q1 financial and operating results conference call and webcast. I want to thank everyone for taking the time to join the call today. This morning we will discuss Q1 results, provide an update on the previously announced merger with Alio Gold, and also give an update on our plans to restart full operations at our mines in Mexico. Please turn to Slide number 2, forward looking information. During this presentation we will be making forward looking statements based on our best knowledge as of today. Please note that we do not predict the future with 100% accuracy, but we'll do our best based on the information we have today. Please turn to Slide number 3, why an at-market merger makes sense. Before we get into the quarterly financial and operating results, I want to highlight our views of the friendly at-market merger with Alio Gold. We are excited about the transaction and what it means for both sets of shareholders. Argonaut shareholders get an operating mine in Nevada, one of the top gold mining jurisdictions in the world. That said, the operation we believe is within our proven area of expertise as it is very similar to the operations or the mines that we run in Mexico. Florida Canyon adds immediate growth and then replaces our El Castillo mine, which is scheduled to close in 2022. For Alio shareholders, this merger provides operational diversification and eliminates single mine company risk. This transaction creates a company with a much stronger cash flow profile so that it is in a better position to unlock value from its combined development asset portfolio. Both companies are holding their respective meetings on May 20 and we expect the transaction to close sometime in June. Once combined, the new Argonaut will be in a position to produce 235,000 ounces of gold with an enviable growth profile with a development pipeline second to none. We expect to publish updated guidance for the new Argonaut shortly after the deal closes. Please turn to the next slide, Slide number 4, COVID-19 update. Another curios item that we should discuss before getting into the financial and operating results is the unprecedented COVID-19 pandemic and the impacts that it has, and specifically to Argonaut. On April 1, we received a decree from the Mexican federal government requesting that all non-essential businesses including mining cease operations until April 30 to help prevent the spread and transmission of COVID-19. We immediately began putting actions into place bringing about an orderly shutdown of our mining, crushing, and stacking operations, as well as our construction activities while continuing to run our heap leach pads and process and sell gold. On April 23, we provided an update that the Mexican government had indeed extended its closure of non-essential businesses until May 30, but gave exemptions to businesses operating in areas of the country with little or no COVID-19 transmission reported whereby these businesses can reopen on May 18. We are fortunate that all three of our mines operate in areas with little to no COVID-19 transmission and, therefore, we are preparing to restart mining, crushing, and stacking operations, as well as construction activities on May 18. The government has provided strict hygiene and distancing measures that must be taken in order to keep its citizens safe as a business reopens. And I'm pleased to report that we have gone above and beyond these measures as health and safety of our workforce and communities in which we operate is paramount. It is important to recognize that during the entire shutdown, leaching and metal sales have continued. Please turn to Slide number 5, recent CSR highlights. We, as all of us, should take the prevention of COVID-19 transmission very seriously. That's why we quickly responded by donating mask, infrared thermometers, and sanitization materials to various organizations that can pass these on to the most in need. We also initiated a campaign within our communities near the mines for cleaning and sanitizing of homes, public spaces, and playgrounds and parks and roads. It is Argonaut's ability to quickly respond in these times of need that has allowed us to be recognized as a socially, environmentally responsible company for over eight years. Please turn to the next slide, Slide number 6, Q1 2020 highlights. And now to discuss our financial and operating performance during the quarter. I think it's really important to recognize the uses of cash during the quarter to be fully aware of the cash flow generated. We reduced our accounts payable balance by $10 million and our debt by $3 million, invested nearly $13 million into capital projects and still increased our cash balance by $3 million. Overall, a very strong financial quarter. We produced over 41,000 gold equivalent ounces during the quarter with El Castillo production, outperforming expectations, La Colorada production in-line with expectations, and the San Agustin project slightly behind expectations. I'll touch more on these reasons for this momentarily. In terms of growth initiatives, as previously discussed, we announced the merger with Alio Gold, which truly is an opportunity to bring together two undervalued companies and become a stronger more relevant company. We also reduced our unit operating cost per ton processed at El Castillo and San Agustin by nearly 15% over Q1 of the prior year, a dramatic improvement quarter-over-quarter with El Castillo dropping nearly $3.30 or 30-some%. As we ramped up San Agustin's crushing capacity to nearly 30,000 tonnes per day during the quarter, we saw a dramatic improvement in ounces loaded to the pad. At our development assets, we continue to deliver positive high-grade results from ongoing exploration programs at the Magino project. I'll talk to this in more detail later on in the presentation. At Cerro del Gallo, we are prepared and are ready to submit the permit application once the regulatory administrative offices for these documents to be submitted returns to operations after temporary closure from COVID-19. And under the current defined terms from the Mexican government, it means we would be submitting these applications we believe in June. Please turn to the next slide, Slide number 7, financial performance. In terms of financial performance what really stands out is that we've increased our cash balance, reduced our debt over the last year leading to a net cash increase of over $20 million. We had a net loss of $0.05 per share and an adjusted net income of $0.05 per share after accounting for a large increase in deferred taxes due to a positive change in the foreign currency translation based on our taxes something I'm sure many of you are familiar with this quarter as you follow other mining companies operating in Mexico. Please turn to Slide number 8, operations overview. In terms of production while El Castillo's Q1 production is down from the same period last year, it is ahead of expectations given we are mining 35% of our ore in the transitional and sulfides this year, and that we had switched from crushing all our ore to go into run-of-mine at our operations. While those yield a lower planned metal recovery, it saves on cost as is evidenced by the change from Q4 to Q1 of nearly $3.40 a ton. At San Agustin, we had a great quarter of getting tonnes to the pad, as I said earlier, during the ramp up of our crushing and stacking operations to 30,000 tonnes per day. This increases mineralized inventory to the pad during this ramp up and we expect to draw down these ounces in inventory during Q2 of this year. We have already seen that taking place during the month of April and the first part of May. At La Colorada, production was in line with our expectations. However, we expected to take a dip in Q2. I'll discuss this in a little more detail later on. In terms of all-in sustaining cost, we were ahead of schedule on leach pad construction of which capital falls right into the all-in sustaining capital cost calculations. So we fully expect to see our all-in sustaining costs reduce as we go through the upcoming quarters. Please turn to the next slide, Slide number 9, operations update. I'll take a moment now to dig deeper into each operation and let you know how we see things going forward. At El Castillo, we have successfully lowered our unit operating cost per ton process by 14% over Q1 of 2019 and think we still have room in this regard for opportunities in the future. We made the switch from running our operations all crushed material to run-of-mine in the first quarter and I'm happy to report that run-of-mine ore is leaching well. Production is ahead of our estimates at this point. And more importantly, leach pad construction is also ahead of schedule. I'll touch on this a little bit more and the significance that means to us. At San Agustin, we have successfully lowered our unit operating cost per tonne by 15% over the same quarter last year. We achieve nearly 30,000 tonne per day of crushing and stacking during the quarter, which naturally leads to an inventory build any time we ramp up our production tonnage to the pad. We thought we might see more of these ounces report toward the end of Q1, but what we are seeing is that these ounces have trickled into Q2. And based on what we have experienced during April and May, therefore, we expect to draw down this inventory build at the San Agustin project and have a stronger Q2 than we had here in Q1. At La Colorada, while production was in line with our expectations, we experienced difficulty in achieving our planned mining rates from Phase 2 of the El Creston pit, which is where we see our highest grade material at the bottom of the pit. This delay in getting ore from Phase 2 is primarily due to water that we incurred during the first half -- first quarter of Q1. We increased our pumping capacity and, as you can see from this picture, the bottom of the pit is relatively dry now. This means that we should be able to access this base of the pit and bring higher grade material to the pads in the future. But it means that this tonnage did not make it to the leach pad as we wanted in Q1, which will lead to a softer Q2 at La Colorada. Our mine plan that we are working on to finish right now as the majority of Phase 2 or the bottom of the pit being mined out before the rainy season hits in Q3 and we plan on mining Phase 3 or the upper benches of the pit once the second half of the year arises. This should keep us high and dry during the rainy season. Therefore, we expect La Colorada's production to dip lower in the second quarter and rebound in the second half of the year as we catch up on tonnes placed on the path. Please turn to the next slide, Slide number 10, Q1 2020 capital spend and cash flow. As discussed earlier, we had a tremendous quarter in terms of cash flow. We invested nearly $13 million in capital, lowered our debt balance by $3 million and lowered our accounts payable balance by $10 million and still added $3 million in cash. And a significant portion of the capital invested there in Q1 was for leach pad construction of which we are ahead of schedule. If you turn to the next slide, I'll share with you the importance of being ahead on these type of projects. Slide number 11, leach pad construction ahead of schedule. Here you can see the three leach pad construction projects that were underway ahead of schedule before the COVID-19 shutdown. At El Castillo, the northeast pad is nearly 90% complete with overliner already in place than most -- on most of the pad. And the east crusher pad is 40% complete. At La Colorada pad 4b is 80% complete. The significance of this is that with new leach pad space available, we will be able to stack or closer to the plastic. This reduces the time that it takes to recover the ounces. When near the plastic or on the pads, we see recovery come very quickly. Because we have lots of time left in this year, we think we'll be able to partially make up or offset the production loss impact from COVID-19 because we have plastic available to us to start stacking on here as we begin to start up operations, which yields a quicker recovery. Please turn to Slide number 12, potential to add mineral resource and reserves, Magino. Before we close out the call today, I want to take a moment to remind you of something that we are very excited about internally here at Argonaut. Our exploration program at Magino has remained ongoing and we have now drilled over 24,000 meters. When we look at other mines on the same gold belt, grades have dramatically improved at depth. And at Magino we feel that we could be scratching the surface of the same high-grade mineral potential at depth. Please turn to the next slide, Slide number 13, potential to add mineral resources and reserves, Magino. If we look at where Magino sits in relation to Alamos Gold Island Gold mine, we are right next to one another. We actually share property boundary. So far we have reported results from the first 20 drill holes of this program. Results have been impressive. We will provide continuous news flow from this program throughout 2020. However, due to COVID-19, the assay labs have been shut down and are now just ramping up, but at a reduced capacity. This has created a backlog of assays, but we are just beginning to start to see results trickle in and hope to be in a position to provide another update from this program soon. I want to draw your attention to the -- before we leave this slide, I want to draw your attention to the orientation of the mineralized structures on the Island Gold deposits. Remember this orientation as we flip to the next slide. Please turn to Slide number 14, potential to add mineral resources and reserves, Magino long section. This is a long section of the Elbow Zone, one of several high-grade structures identified on the Magino property. As you can see from the orientation of this mineralization structure, it is very similar as that that you would see at the Island Gold mine. You can also see that the proposed property pit boundary as the high-grade intercepts now start to appear below that pit. I truly believe we are just beginning to scratch the surface on an exploration potential at Magino based on our geological understanding of these mineralized structures. From the success of the program to-date, we feel like we have the model correct and are excited to keep drilling and continue to explore this high-grade mineral potential at depth. Please turn to the next slide, Slide number 15, potential to add mineral resource and reserves, Magino exploration targets. And if you look at this site, we see multiple exploration targets that we've begun to test in the area. We look forward to reporting on these results as soon as the current backlog at the assay labs clear. Please turn to the next slide, Slide number 16, transformation strategy next to your producer. With Magino and Cerro del Gallo, we have a tremendous opportunity to transform Argonaut from a high-cost short life -- mine life producer to a low-cost intermediate producer. And once we close the Alio transaction, Ana Paula will add to this impressive growth project pipeline. Even just looking at Magino and Cerro del Gallo today, when you look at the NPV of these assets at 5% discount rate and $1,700 gold, the combined value jumps to approximately $940 million. This adds to the significant leverage that Argonaut provides to the gold price. Please turn to the next slide, Slide number 17, upcoming milestones. So what's upcoming for Argonaut for the remainder of the year? We have several milestones that we think will add value throughout the year. We will continue to focus on unit cost reductions at our operations and feel like there is more that we can do in this department. We look forward to closing the Alio transaction and adding Florida Canyon to our operating profile and Ana Paula to our development asset portfolio. We are preparing to restart mining, crushing, and stacking operations, as well as resume leach pad construction next week. We should have continuous results from the ongoing Magino exploration program and also expect to receive the final major permit for the Magino project, the Schedule 2 permit this fall. Once Mexico opens back up next month, we will be submitting the Cerro del Gallo permit applications and would expect to hear on those permits before the end of the year. So lots going on, which should mean lots of exciting news flow throughout the year. Please turn to the next slide, Slide number 18, our focus. To conclude today's presentation, I want to stress our key focuses as a company. Safety is first and we will work to keep everyone safe as we start back up operations. We will continue to seek cost efficiencies and boost our profitability at our operations. We expect to significantly add to the balance sheet through free cash flow generation this year, as well we continue to de-risk the development asset portfolio and put ourselves in a position to begin our transformation strategy from our current higher-cost, shorter mine-life operation to lower-cost, longer life development asset portfolio. That concludes our presentation or today's portion of the call. I would be happy to turn things over to our Operator Denise for a brief question and answer session. Denise, can you take our questions and answers today?

There are no further questions queued up at this time. I'll turn the call back over to Pete Dougherty for closing remarks.

Thank you, Denise. And thank you everybody for taking the time this morning out of your day to join us. We had a tremendous quarter from a cash flow generation for the company. We are excited about where 2020 is leading us. I would remind everybody that we have a vote on the Alio transaction coming up this week here on the 20th. Votes need to be in by this Friday. And we're excited about having the Alio group and the Florida Canyon team join us as a company as we move forward. I'm very grateful for the efforts of our team in helping with the COVID-19 in cleaning up their neighborhoods and sanitizing and stopping the spread of this before it got started and being a lead for us in that arena. And we look forward to starting up here in the coming week and the impact says we start to see production rise again for the company to another level. Again, thank you all for your time this morning. And have a great day.

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

Certainly. [Operator Instructions]. Your first question comes from John Sclodnick with National Bank Financial. Your line is open.

Just had a question on, I guess, the run-of-mine at El Castillo and just kind of trying to figure what would be a good forward run rate for recoveries to expect once things stabilize after the COVID resumption?

John, well, thank you for being on the call this morning. Yes, at El Castillo, I think the best to use is what we've put in currently right in the press release. So when we think about run-of-mine, historically we've seen somewhere in the neighborhood of 30%. And when we're thinking about our overall average, we get 50% on our oxides, but we'll see as low as 17% on some of our materials to somewhere in the 20s on some of the other material. So I think we're looking mid-30s probably overall average. It just depends from where we're mining at. Sulfides, clearly we have a much lower recovery. But please refer to the press release, that's the best we can do at this point in time.

Sure. Yes. Fair enough. And just at La Colorada, one more operating question though. Just curious on your timing and expectation for getting towards reserve grades, I know you had, obviously, some water in the pit that restricted to this quarter, but just kind of looking a little further out.

Yes. Our Phase 2 part of the pit really runs close to one gram and we'd be excited to get back into that material and that's going to obviously raise the overall grade. As you heard during Q1, we ran some of the low-grade stockpile as well as more of the Phase 3 material. So I think we're going to start to see that as soon as we start to run back up.

Your next question comes from Ryan Hanley with Laurentian Bank. Your line is open.

Hi. Good morning, guys. I think John touched on my first question there just in reference to El Castillo on the recoveries, but maybe switching over a little bit looking at grade. Grade has been quite good I'm guessing because you're stacking more transitional and sulfide material given the grade of 0.55 grams versus the reserve grade of 0.32. For the balance of the year, should we expect that that grade should continue?

Well, I'll tell you we had a tremendous first quarter actually from Phase 11 and so the sulfide outperforming what we had expected to see. So the model is up close to 20% as performance level right now. I don't think we should count on that going forward. We have been pleasantly surprised, as I said, during the first quarter, but I don't think we count on that going forward, Ryan, as we look at things, but, yes, the model has been outperforming right now.

Okay. Perfect. That's helpful. And then switching over to San Agustin, obviously, really good ramp up in throughput there. Back in September I think you completed the last water well. Are you getting enough water at this point to be able to sustain 30,000 tonnes a day? And I guess maybe the second part of that question being, would you be able to -- do you have the water capacity or the flow rate to be able to exceed 30,000 tonnes per day if it's -- the crushing and stacking to do that?

Well, where we are today is that the water is sufficient for the 30,000 tonnes per day and that's where I'm holding things right now due to leach pad space and ability because I don't want to see the operations just stacking ounces higher than we can actually process today. So right now, we're dialed in for 30,000 tonne per day. We're looking at making some modifications yet to the project, so we'll see what the future brings. But right now let's hold it in at 30,000 tonne per day, okay?

Perfect, okay. Thanks very much. That's it for me.

Okay.

[Operator Instructions]. Your first question comes from Tom Gallo with Canaccord Genuity. Your line is open.

Hey, good morning, everybody. Congrats on a good quarter. On the exploration side of Magino, Pete, you were talking about the depth potential and having some good success there. As a geologist, that's what gets me super excited and I don't think the market has fully appreciated what's going on at Magino. Just a little bit more commentary on the size of the program going forward. You've completed 24,000 meters. Any indication of how big this program is?

Well, thank you for being on the call this morning, Tom. Yes, we are excited. And I said that earlier on about what's happening at Magino. We see light structures moving across to right from next door of Island Gold and as you know we share that border. So less than 100 meters away there they have been mining on these various structures. So our expectation is those continue with parallel structures, just continue across, just like they're seeing at their property. To-date 24,000 meters have been completed. We are embarking on another 20,000 meters again this year in our programs to carry out additional exploration of the project. And as I said, we have not stopped drilling, continue to drill. We have quite a backlog at the labs right now and we expect those to start -- the results to start to come in here shortly.

And those are mostly deeper holes, correct?

We're doing both. If you'll recall back to the exploration slide that I showed, Slide number 15, the exploration targets, we're also looking at some of the targets out to the west, so moving towards west zone to the west side of the property.

Very good.

So you'll see some results that come in from the west as well.

And then just quickly on the permit. That's a full permit, that's from an open pit and tailings perspective, is that correct?

Yes. So we would have -- this project would be permitted for 30,000 tonnes per day, the natural footprint would be set up for that larger scale project. So we could start it smaller, grow it to larger. So we'd be looking at the full open pit.

So would there be any additional permits required if one decided to go underground as opposed to doing an open pit?

There's always going to be additional carry on permits that go with that, but they're going to be relatively minor in nature.

Very good. Thank you very much.