ARNGF (ARNGF) 2019-10-30 Earnings Call Transcript

Good morning. My name is Kensie, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Argonaut's Q3 Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Pete Dougherty, President and CEO of Argonaut Gold, you may begin your conference.

Thank you, Kensie, and welcome, everyone, to Argonaut Gold's Q3 financial and operating results conference call and webcast. I want to thank everyone for taking the time to join us today this morning on this call. This morning, we will be discussing our decision to restructure the organization to minimize cost and improve upon efficiencies and profitability, provide an overview of the quarter and then take a deeper dive into some of the financial and operational highlights. Could you please turn to Slide 2? Forward-looking information. During this presentation, we will be making several forward-looking statements based upon our best knowledge as of today. Please note that we are not 100% perfect in predicting the future with accuracy, but we do our best based upon the information we have to provide you with our thoughts and insights into the business as we look to the future. Please turn to Slide 3. Restructuring operations to maximize cost efficiencies. Before we dive into the quarterly results, it's important that I discuss our decision to restructure the organization to maximize costs efficiencies and profitability. Over the past couple years, we have experienced very strong production growth, but I've also seen our cost climb along with this growth. And that had built up in an organization to a level that I believe was not warranted at this time. We have made a decision to eliminate positions within the organization where we see redundancy. As an example, we feel the roles of COO and Vice President of Operations, Mexico are duplicated and that both positions are not warranted at this time. This is one example that we will be looking at. We are looking at restructuring and right sizing the organization to suit the operations that we run today. We are not a big company and run very low-grade mines and our operating assets do not have the longest lives. We need to ensure that we are maximizing the profitability of our operating asset base in order to be in a position to execute upon our transformation strategy that I will discuss a bit later in the presentation. With that I will now provide an overview of the quarter. Please turn to Slide 4. Q3, 2019 and recent highlights. During Q3, we added $11.7 million in cash to the balance sheet and saw strong year-over-year increases in revenue and cash flow from operations. Production was up nearly 31% year-over-year through the first nine months. And during Q3, we saw daily production trend in the right direction during the second half of Q3 and here early into Q4 as we brought on new water well at San Agustin that allowed for higher solution flow rates. With this new water well, we are on our way towards ramping up to 30,000 tons per day at our San Agustin operation and expect to achieve this run rate during the fourth quarter of this year. At our La Colorada operation, we successfully increase the crushing capacity and stacking capacity to over 14,000 tons per day during the quarter, which should bode well for us in the fourth quarter, as many of you know, what we stack during the third quarter we will typically reap during the fourth quarter, so that bodes well for us as we look forward. In terms of long-term growth initiatives, we started a drill program at our Magino project targeting deep high-grade structures. This is our first exploration on the property of this nature. Based on the early success of this program, we have increased the overall drill meterage from 6,000 meters to 20,000 meters due to the results that we saw early on. We continue to advance environmental permitting at our San Agustin and Cerro del Gallo projects and also expect to publish a pre-feasibility study at our Cerro del Gallo project before the end of this year. Can you please turn to the next slide, Slide 5? Financial performance. We will now turn the call over to Mr. Dave Ponczoch, our CFO to talk through the next couple of slides. Dave?

Thank you, Pete. Good morning, everyone. As Pete mentioned, slide 5, financial performance. Taking a look at our financial performance for the quarter, we had $66.8 million in revenue during the quarter. And this generated $17.2 million in cash flow leading to $4.9 million in net income or earnings of $0.03 per share or $6.5 million or $0.04 per share on an adjusted basis. Production was 31% higher during that same period, compared with the same period last year and sales were 33% higher. Most importantly, we increased our net cash position by $11.7 million and now sit with $35.6 million in cash and cash equivalents at the end of the quarter. Turn with me to slide 6. Capital spending and cash flow. Capital spent for this quarter was approximately $11 million and should be in a similar range for the fourth quarter this year, making the full year slightly over $50 million or at the low end of our guidance range. Therefore, we are in position to generate free cash flow as we expect production to increase, cost to come down and capital to remain relatively flat during the fourth quarter. With that I'll turn it back to Pete Dougherty.

Thank you, Dave. Can you all please turn to Slide 7? Before I begin this, I want to share with you where we have been for capital this year. We started the year with a budget of $55 million to $60 million. We made a reduction in that down to the $50 million to $55 million range. Through the cost savings that we have been able to achieve, we've now advanced some of the projects that we're going to be incorporated next year into this year's $55 million worth of capital spend this year. So quite happy with what the team has done there. We will now turn to Slide 7, operations overview. I will now share some of the details on each of our operations during the quarter and the full year. As previously reported, we drilled new water well at San Agustin in August and we're able to have sufficient water to meet planned solution flow rates to date and we saw that production rate at our San Agustin operation increased during the latter part of September and into October as we saw those solution flows start to come forward. At our El Castillo project, we experienced some productivity challenges with water in the pit, as well as unexpected downtime at one of our crushers for maintenance. Those two issues which are now mostly resolved should bode well for us as we move to the fourth quarter. At the La Colorada project, we achieved a crushing and stacking rate of over 14,000 tons per day. That put a lot of ounces out on the leach pad during the quarter. We expect to see the benefit of those during the fourth quarter and into the first quarter of 2020. From a cost perspective, El Castillo was relatively flat year-over-year while we saw an increase at San Agustin and a decrease of La Colorada for operating cost. The increase at San Agustin was driven primarily due to higher waste of ore mining ratios. At the La Colorada project, this last time this last year or previous year we were processing still ore from lower grade stockpiles and this has changed now that we are mining directly from the pit with much higher grades. Please turn to Slide 8. Updated 2019 guidance. Given the challenges in the second quarter at San Agustin and the productivity challenges experienced during the third quarter at El Castillo, we are tracking near or slightly below the low end of our annual guidance of 200,000 gold equivalent ounces. Therefore, we have revised the guidance to be between to 190,000 to 200,000 gold equivalent ounces for 2019. And based upon this, we see our cash cost guidance rising to $900 to $925 at our all on sustaining cost guidance to be $1,125 to $1,150 per ounce. As I said before, we have already reduced our capital spending guidance here this year once and we now expect to be closer toward the low end of that with already $41 million being spent and invested through the first nine months of the year. Can you please turn with me to Slide 9? Recent quarterly GEO production profile. I think this slide depicts nicely for us what we have been able to achieve as a company over the most recent history. You'll see we're on our way back to returning to our prior quarterly production rates, now that the water issue at San Agustin has been resolved and we are ramping up tonnages at both San Agustin and La Colorada. We saw an approximate 10% increase Q3 over Q4 and have already seen November increasing yet again from that September production rate that we saw. The Q4, we expect to be back on to the prior targeted production rates that we had seen earlier in the year. And expect between 50,000 and 60,000 ounces to be produced during the fourth quarter. Please turn to the next slide, Slide 10. Looking ahead - poised for a strong Q4, 2019. Looking ahead this means we are forecasting between 50,000 and 60,000 gold equivalent ounces for Q4. During Q3, we stacked nearly 55,000 gold recoverable ounces on the leach pads. And as you saw from production recovered roughly around 45,000 ounces. That means we built up an additional 10,000 ounces that we expect to be coming here in the fourth quarter and early into next year, given that we have seen in terms of daily production trending much higher and stronger here in the second half and early into the fourth quarter. We believe that we are on track to finish the year strong as noted before and return to that quarterly production rate that we saw in Q4 of 2018 and early into this year, leading to a strong finish to 2019. Please turn to the next slide, Slide 11. Argonaut's vision and strategy. Early on in our call, I referenced our desire to right-size and restructure the organization to maximize profitability from our operating assets, so that we can execute upon a transformative strategy. Today, we are a relatively high cost producer of about 200,000 gold equivalent ounces per year. We have a vision and a strategy to transform this company and its production and cost profile over time, while minimizing equity dilution into a 300,000 to 350,000 ounce a year producer at a much lower cost profile. I will now explain some of the steps we are taking to achieve that. And how we think we have the assets to get there. Please turn to the next slide, Slide 12. Locking in cash flow. Early in the quarter, we executed upon a strategy to lock in cash flow for one of our higher cost operations. This was a key driver in locking in those future cash flows with a zero cost collar for roughly 145,000 ounces for production from now to mid 2022 with a $1,450 as a price and a weighted average ceiling price of a little over $1,700. This was done at our El Castillo project, one of our higher cost operations with one of our shorter lives where we wanted to lock in and ensure profitability, extend the mine life for this project as we move towards the end of its operating days. And it is critical that we secure the cash flow to execute upon this transformation strategy that I'll share with you next. Please turn to Slide 13. Transformation strategy next tier producer. As you can see on this slide, if you haven't remembered from the past, we are running portfolio assets producing around 200,000 ounces per annum and their cost base is around $900 to $925 an ounce. They have relatively short life and high cost. When we look at the development assets within the company, we believe we are nearing permitting decisions on all three of these projects. And as you can see from these development assets, we're looking at a production range from all of these between 300,000 and 350,000 ounces per year at much lower operating cost than what we are seeing today. Now when we think long term, there's obviously a big capital investment that needs to go along with this. We believe that it is manageable if we maximize our profitability from our existing operating profile. And to reasonably take this time frame overtime, there in creating real shareholder value and increasing and building the old-fashioned way as we did with San Agustin building up our cash and then redeploy in it into the next asset base. Please turn to the next slide, Slide 14. Development assets provide optionality. When investing in Argonaut, I think it's always keen to look at what you are buying. When we think about our current valuation, we are currently around US $300 million market cap. If you look at the consensus value of just our operating assets in the eyes of the eight analysts covering us, and add our net cash position, it equates to roughly $360 million worth of value. And now looking at our three development assets based upon the most recent technical reports. And I caution you that the Cerro del Gallo technical report was done by the previous owner of the asset. And that we will be publishing a tech report on this asset by the end of the year. But looking at those technical reports, we see roughly $675 million worth of value yet to be unlocked. This is why we are so focused on maximizing profitability from the existing profile to help fund this transformational strategy. And to unlock significant value for our shareholders. And it shouldn't be left unsaid that for every $100 move in the gold price, we add nearly a $140 million in development asset net present value. So you can see what gets us so excited about this opportunity and optionality within these assets. Please turn to the next slide, Slide 15. Near-term catalyst. Now that I've walked through our longer-term strategy, I want to take a moment to also highlight some of the near-term catalyst. We expect to hear back on environmental permitting at both of our San Antonio and Cerro del Gallo projects before the end of the year. We also expect to publish a pre-feasibility study at our Cerro del Gallo project before the end of the year. We will also be reporting a new mineral reserve and resource on this property. It will be our first reported on this property and add nearly 20% to our resources and into our reserve base nearly 45% growth in where we stand today. At our Magino project, exploration program is well underway. At this time, we have drilled roughly 14 holes and we will be looking forward to sharing those results with you here in the near future. We are excited about that program and what the potential holds for that particular project as we look to the future. Please turn to the next slide, Slide 16. Our focus. Our focus over the next year is quite clear. We are looking to restructure and maximize cost efficiencies and drive profitability throughout the organization and its asset portfolio. This will allow us our ability to build the balance sheet and still de-risk our development projects and execute upon that transformation strategy over time as discussed earlier. Please turn to the next slide, Slide 17. This concludes this morning's presentation. And I will be happy to take any questions during a brief question-and-answer session that will be led by Kensie, our operator. Kensie, will you please conduct the question-and-answer period at this time.

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

Okay. Thank you, Kensie. And thank you all for joining us this morning. We appreciate your support and we look forward to a strong fourth quarter and a strong finish to the year and an exciting start to 2020 as we look to reset the organization. And move forward in the right direction. So once again thank you and I hope you all have a great day. Bye now.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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

Hi. Thanks for taking the call. Yes, I just got a quick question on the inventory, saw it grew there and assumed that kind of ounces on the leach pad there, just wondering expectations for that reversal going forward. And it's been a bit of a climb there consistently and just kind of wondering your thoughts on that going forward yes.

Yes. John, this is Pete. Thanks for taking the call this morning. Really when we look at the inventory balance, we would expect it to increase as we increase the crusher capacity, put more tons out there. We would always see that, but then there hits a stabilization point right. And as you hit that stabilization point, you start to draw that back down a bit. And so as we think about La Colorada for instance as you rise from a 10,000 to 14,000 ton per year, if you follow this year, you would see a rise in that inventory balance but then as you stabilized out 14,000, you're now going to start to see that constant starting to come back down a bit. It's all about managing solution closes and getting that to move in your direction. So we start to see that come down. We believe here in the fourth quarter not only there but also at El Castillo and a bit that San Agustin even though we're still ramping up.

Perfect, that's great. And yes just a little further to that at San Agustin, just wondered if you can give a little color on the throughput levels that you're seeing at the moment?

Well, we have it -- the goal is to get to an average 30,000 ton per day. We clearly didn't get that in Q2 or Q3 as we talked about the shortage of water. And now what I can tell you is here, October, we had an improvement over where we were during Q3. We haven't consistently held at that 30,000 ton a day. I could talk to last week, it was a good week but one week can be good, but I'm not going to like to hold all my hats on one week. But I can say that we're having an improvement over where we were. End of Q&A