ARNGF (ARNGF) 2020-02-13 Earnings Call Transcript

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to Argonaut's Q4 Year-End 2019 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, Amy, and welcome everyone to Argonaut’s Q4 and year-end financial and operating results conference call and webcast. I would like to thank everyone for taking the time to join us today. This morning, we will discuss Q4 and full year 2019 results; discuss some of our operational challenges and how we are overcoming those; our 2020 production cost and capital guidance, and what we are excited about as we look to the future. Please turn to the next slide, Forward-Looking Information. During this presentation, we will make several forward-looking statements based upon our best knowledge as of today. Please note that we are not able to predict with 100% the future, but we will do our best based upon the information that we have today. Please turn to Slide number 3, Q4 2019 Impairments. Right up front, I wanted to touch on the two impairments that we took this quarter. The first being the leach pad inventory and the second being the book value of the San Antonio project. I want to address this, because these impairments led to rather messy earnings and cost on an unadjusted basis. First off, for leach pad inventory, we had previously drilled the old El Castillo pads to determine how many ounces were still in the pad and then made some assumptions as to what we thought we could recover after running a small releach program, we now have a better idea of what we might recover in the near-term and therefore have written down the longer term pad inventory. At La Colorada, we conducted a similar review and have written down these ounces as well. I want to make for sure that we all understand that this is much more of a process than a direct science. Hence we have taken a rather conservative approach here to make sure that we take full advantage of the opportunity in front of us, we have initiated a direct injection leach program and recontoured the side slopes for releaching. We have adjusted our leach cycles and operating parameters to help better in achieving this recovery. We have lowered our lift heights and ensure that - which will ensure better percolation and solution to ore relationship, which will open improve recovery. Now for the write-down of the book value of San Antonio. As many of you know, we have tried for several years to permit this project, but we were denied the permits in December. We continue to work to unlock the value of this asset, but thought it appropriate to write-down the book value considering the permitting challenges. Now both of these write-downs are non-cash in nature and will not impact the financial well-being of the company. Quite the opposite, if we are successful in drawing down the leach pad inventory, we will add additional cash to the balance sheet and if we realize the permitting breakthrough, we would in turn have to write the value of San Antonio project back up again. That is why the team is working hard to unlock value here. As you can see from the table at the bottom of this slide, the impact of these impairments for the remainder of this presentation, we will be referring to adjusted cash cost, all-in sustaining cost, as we believe this best represents an accurate measure of the business for the three and twelve months ended December 31, 2019. Please turn to the next slide, 2019 Highlights. During 2019, we added over $26 million in net cash to the balance sheet and saw strong year-over-year increases in revenue and cash flow from operations. Production was up 13% year-over-year at 53% over the last three years. Two major accomplishments occurred during the year were the San Antonio - San Agustin crusher expansion and the filing of the Cerro del Gallo pre-feasibility study, which gave way to a 48% increase in our consolidated mineral reserve upon publishing of that maiden reserve. Looking at our development assets, at Magino, we completed both the Federal and Provincial Environmental Assessment processes; signed two more indigenous agreements, and we embarked upon an exploration program to target higher-grade mineralization at depth. I’ll talk more about this program a bit later in the presentation as it is something we are very excited about. At the Cerro del Gallo project, we completed and published a positive pre-feasibility study and are now working on the permitting for this project. Please turn to the next slide, Slide number 5, Recent CSR Highlights. I am pleased to report that we received the ESR recognition at our Mexican operations for the eighth consecutive year. This is the foundation of our business and shows our commitment to our four key pillars of health and safety of our people, our environment, and our communities. Please turn to the next slide, Slide number 6, Financial Performance. We saw large increases in revenue and cash flow from operations in 2019. But for me, the biggest item when gauging a company’s financial performance is looking at the piggy bank. What is a change in net cash year-over-year? We added over $26 million in cash during 2019 and it continues to show that these assets whilst low-grade can and do make money. Please turn to the next slide, Slide number 7, Operations Overview. We achieved record production of nearly 187,000 gold equivalent ounces, a 13% increase year-over-year. Our adjusted cash cost for the fourth quarter were comparable to the fourth quarter of 2018. The increase in adjusted top cost year-over-year is primarily due to the higher cost at our San Agustin mine from a higher strip ratio. Adjusted all-in sustaining costs were slightly higher due to the stripping impact, as well. Please turn to the next slide, Slide Number 8, 2019 Production Versus Guidance. We came in slightly below our production guidance for 2019 while experiencing multiple challenges at our operation. Here you can see some of these challenges and the actions we’ve taken to overcome that. The biggest challenge for us primarily was excessive water in both the pits at El Castillo and La Colorada, which slowed down our mining rates and led to sub-optimal crusher performance and throughput. Please turn to the next slide, Managing Pit De-Watering and Recent Improvements. They always say the adage is, a picture tells a thousand words. As you can see from these slides, the story of the water challenges that we are dealing with during the fourth quarter. At La Colorada, this was historically an underground mine in the early 1900s and reran into these old underground workings which were flooded, therefore, which led to excessive water in the pit. We have been working to dewater these old workings and as you can see from the pictures, the issue has been largely resolved. At the El Castillo operation, the pits have started to reach the water table in certain phases. We made an investment in pumping equipment and seem to have this under control more now as you can see from the current pictures. As we move to the future, we will be mining in areas that are up higher in the pit and therefore be out of the water. Please turn to the next slide, Slide Number 10, Q4 2019 Capital Spending and Cash Flow. We invested $11 million in capital during the fourth quarter and nearly $52 million throughout all of 2019. This puts us at the low-end of our capital cost guidance range of $50 million to $55 million. Of the $52 million spent for the year, $41 million was spent on our operating mines and $11 million was spent on advancing our development assets through and in exploration. It is important to note that while we spent $52 million in capital, we also added $26 million to the balance sheet. Hence we are not only funding for today, but building the cash position for the next wave of growth. Please turn to the next slide, 2020 GEO Production and Cost Guidance. We are guiding 2020 production between 175,000 and 185,000 gold equivalent ounces with a 115,000 to 120,000 of those coming from the El Castillo complex and 60,000 to 65,000 coming from La Colorada. While this is slightly lower than our 2019 GEO production of nearly 187,000 gold equivalent ounces, we have plans in place to reduce our unit operating cost and are focused on maximizing profitability and cash flow over production or production sake. I’ll go into this in further detail in a few moments. Our guidance call for cash cost is between $900 and $1,000 per ounce and $1,100 to $1,250 for all-in sustaining cost. Please turn to the next slide, 2020 Capital Guidance. Our capital guidance for 2020 is between $40 million and $50 million and we think we are much more likely to come closer to the $40 million and $50 million range. Here we provide a breakdown of the CapEx by project and also by type, whether that be sustaining or expansionary in nature. We are anticipating to coming in on the lower end of this spending and have potential to see a 20% reduction in our capital spending this year versus 2019. It is also important to note that we are investing approximately $4 million in exploration at Magino, which is why we are excited to talk and take a little more time about this in the future. Please turn to the next slide, Slide number 13, Transformation Strategy - Next Tier Producer. If you look at Argonaut today, we are a relatively high-cost junior producer. We have a vision and strategy to transform this company into a lower cost, intermediate producer. We have a goal of upgrading the operating assets portfolio by advancing our development portfolio. Both Cerro del Gallo and Magino are lower-cost, longer-life assets and we get little to no value for these assets in our share price today. While there is obviously a capital investment that goes along with this transformation, we believe it is manageable if we maximize profitability through and from our existing operating profile. Please turn to Slide number 14, 2020 Plans. To ensure that we maximize profitability and cash flow from our existing operations and harvest as much cash as possible, we are looking to simplify and reduce capital requirements. I challenged the team over the last couple of months to find ways to reduce our unit cost and get Argonaut back to where it has been historically. Our biggest opportunities for change that we saw came at El Castillo, where we are now going to run 100% run-of-mine or eliminating double-handling and reducing haul cost to the crushers and the running and maintaining of two additional crushers. When we analyze these costs versus a lower recovery with run-of-mine, we saw that it led to fewer ounces, but also higher profitability, which is our focus. At the end of the day, it’s about what makes the most amount of money. To this end, we should be saving more than $2 per ton at El Castillo from what we saw during 2019. At San Augustin, the 2020 plan also calls for reduction of $1 per ton versus where we were in 2019. At La Colorada, due to the softness of the ore in a phase of the El Creston pit that we have been mining, we have an opportunity to go to two-stage crushing on approximately 10% to 15% of the ore tons and a three-stage crushing for the remainder. That should lead to lower cost, as well as increasing our crushing capacity from roughly 12,300 tons per day in 2019 to 13,000 tons per day. This opportunity will lead to greater cash flow we believe and also provides us with the needed value growth that comes from permitting at Cerro del Gallo and funding exploration and advancement of the Magino project. Please turn to the next slide, Magino Expanding on the Goudreau Deformation District. I want to spend a few minutes on our exploration program at Magino, as we are really excited about what we are seeing so far. Through the most prolific underground mines in Canada are the Island Gold Mine, which is right next door to Magino and the Eagle River Mine, roughly around 50 to 60 kilometers away. The key is that, both sit within the Goudreau Deformation belt. These two mines have been around for a long time and it’s only recently that they have been processing some of the highest grade ore in Canada. Both discovered that grades improve dramatically at depth. Please turn to the next slide, Slide number 16, Potential to Add Mineral, Resources, and Reserves at Magino. Previously, nearly all of the drilling at Magino had been focused from the surface to 300 meters vertical depth to expand and optimize the open pit of the project. During the second half of 2019, we began a drill program starting to target higher-grade mineralization at depth and have nearly drilled 17,000 meters to-date. As you can see from these other slides, everybody’s mineral potential increases with depth along with grade at depth. Please turn to the next slide, Potential to Add Mineral Resources and Reserves Magino. This is our second slide depicting the Magino project. You can see how close the Island Gold Mine and the Magino projects are to one another. They are nearly right on top of each other. You can see how the Magino project lacks at deep drilling that Island is showing today. And we are now testing down to this 1,000 meter vertical depth. Please turn to the next slide, Slide number 18, Potential to Add Mineral Resources and Reserves Magino Long Section. When you look at this long section what we call the elbow zone, you can see from the results that we are seeing that these structures continue below the currently planned pit with much higher grades. As many of you know, the Magino project is roughly about a 1.4 gram deposit in the open pit. But we are seeing significantly higher grades as we start to extend some of these structures at depth. We are excited to continue this Phase 1 program and we will follow with up with a Phase 2 program during the second half of 2020. We feel the results of these programs should be really something to watch for our investors as 2020 unfolds. Please turn to Slide number 18, Building a Sustainable Business. To build a sustainable business, you need to cover all facets of the business, from discovery through operations. We have the assets to fulfill this within our existing portfolio and do not need to go out and acquire additional assets. If we take the current balance sheet position of $39 million in cash, and add to it $40 million to $50 million worth of free cash that we expect to be a little add to the balance sheet this from a - year from our operations, we are able to advance our future. When investing in Argonaut, you not only get this free unlevered cash flow, but you also receive an upside through our development assets. The current market valuation for the company is just north of $200 million and our development projects, based upon a $1500 gold price would yield north of $750 million worth of value from their respective pre-feasibility and feasibility studies. We truly have a company that is not only built for today, but built for the long-term and that’s who Argonaut is a company built to sustain - can expand from where we are today. Please turn to the next slide, Slide number 19, Our Focus. Clearly, and first and foremost, we are focused on maximizing cost efficiencies and profitability. This will help us build the balance sheet as we derisk development assets, allowing us to begin the transformation of the company from a high-cost, short mine life operating profile to a lower-cost, intermediate producer with long mine lives. This concludes today’s presentations and we would like to turn the time back over to Amy and you to conduct a brief question-and-answer session. Amy?

There are no further questions. I will turn the call back over to Pete Dougherty for closing remarks.

Thank you, Amy and thank you all who joined us this morning. We look forward to what 2020 has to offer us. And as I said, look forward to building a sustainable business that will withstand the ups and downs of what might happen within the gold price environment and look forward to additional drilling and highlights coming out of our Magino project. Once again, thank you and have a good week. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

[Operator Instructions] We do have a question comes from the line of John Sclodnick with National Bank Financial. John, your line is open.

Great. Thanks. Thanks for taking the call, Pete. And, yes, I guess, quickly on, at this gold price that we are seeing here. Just wondering if this changes your assessment of Magino and kind of your plans for development? I know you are kind of looking at a JV strategy and that was kind of the way to go. Just wondering with the 1,680 gold price, if this changes, how do you guys do your development projects?

I think, with the change in the gold price, everybody gets excited as to where we are, John, and what their projects could be worth and how to advance them. As you know, we are clearly focused at this time of moving Magino forward through acquiring the permits necessary and the social licenses necessary to bring that project into fruition. We have a great intention on doing so as a company today and expect to hear in the third quarter of this year, the latter part of the third quarter on that schedule to, which would be the last major permit requiring. So, we are still quite bullish and excited about advancing that project.

All right. Great. Yes me too and looking forward to seeing some of those more deep drill results.