Argonaut Gold Inc.
Q4 2021 Earnings Call Transcript

Published: 2 Mar 2022

[Operator:]

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Argonaut’s Q4 2021 Financial Results Conference Call and Webcast. Thank you. Mr. Symons, you may begin your conference.

[Dan Symons:]

Thank you, Chris and welcome everyone to Argonaut’s fourth quarter and year end financial and operating results conference call and webcast. I want to thank everyone for taking the time to join the call today. From the Argonaut team, this is Dan Symons, Vice President of Corporate Development and Investor Relations. And we also have Dave Ponczoch, Argonaut’s CFO; and Lowe Billingsley, the Argonaut’s COO on the call this morning. Today, we are going to walk through our Q4 and year end results, which yielded record annual production revenue and cash flow. We are also going to spend time providing you with an update on the Magino construction project and the updated technical information reported recently. Just before leaving this title slide, I’d like to draw your attention to the picture of the Magino process plant area. We continue to track towards first gold pour by the end of Q1 2023 and within our updated CAD800 million capital estimate completion provided in December. If you will turn with me to Slide 2, during this presentation, we will be making forward-looking statements based on our best knowledge available today. Please note that we cannot predict the future with 100% accuracy, but we will do our best here based on current information. If you flip with me to Slide 3, 2021 marked a record year for Argonaut in terms of production, revenue and cash flow. In the fourth quarter, earnings were impacted by non-cash impairments to mineral properties, plant and equipment that we will discuss in further detail in a moment. On an adjusted basis, we achieved earnings per share of $0.19 for the year. We achieved record production of over 244,000 gold equivalent ounces and either met or exceeded production guidance at each of our operations. We also finished the year very close to the midpoint of our cost guidance. For the year, we generated $125 million of cash flow, which well exceeded our goal of generating $100 million for 2021. Our short-term growth initiatives have been focused on the construction of Magino and bringing that new mine online and ramping up during 2023 as well as low-cost high-return initiatives to extend mine life at our existing operations such as increasing our mineral tenure in the San Agustin district by 400%. Longer term, we also see opportunity to extend and improve economics at our various assets through exploration initiatives undertaken this past year. We recently announced drill results at Magino, La Colorada and Florida Canyon as well as a maiden inferred sulfide mineral resource at San Agustin that we think has potential to extend San Agustin’s mine life between 6 to 10 years with more drilling and metallurgy cohorts. If you flip with me to Slide 4, just before we dive into our financial results in more detail, I believe it’s appropriate to update you on three parallel work streams that are the large focus for the company today. As previously disclosed, our board is conducting a CEO search. And while it’s difficult to comment in detail for obvious reasons, I will say this process is very well advanced. We are also continuing to evaluate financing alternatives to complete the Magino construction project. With the recent flow-through equity financing, which we expect to close tomorrow, our focus is now primarily on debt alternatives given our balance sheet has capacity guidance leverage. Our goal is to add debt financing in place in the second quarter. In parallel to our financing track, we are also evaluating strategic alternatives and whether there are opportunities to potentially create more value on a per share basis than what we feel is achievable within the context of our risk adjusted standalone business plan. It is our fiduciary duty to our shareholders to always be focused on what outcomes will ultimately create the most value and we are actively evaluating both self-funding options primarily in the form of debt financing, along with other strategic options. I’d now like to turn the call over to Dave Ponczoch, our Chief Financial Officer, to walk through Argonaut’s financial performance for the fourth quarter and 2021. Dave?

[Dave Ponczoch:]

Thanks, Dan and good morning, everyone. As Dan previously mentioned, we achieved record gold sales, which led to record revenue and cash flow for the company in 2021. And sorry, I’m on Slide 5, just for you to follow. For the fourth quarter, while we produced nearly 62,000 gold equivalent ounces due to the timing of sales, we sold closer to 57,000 gold equivalent ounces. The earnings were impacted during the fourth quarter due to a non-cash impairment to mineral properties, plant and equipment. This is primarily due to higher operating cost assumptions and lower recoveries at Florida Canyon as well as the non-cash impairment at Ana Paula. At December 31, 2021, we had a cash balance of $199 million, which included an $80 million draw on our existing revolving credit facility and we did this in December. With $199 million in cash and $45 million available on our revolver, we ended 2021 with $244 million in available liquidity. If you will turn to the next slide please, looking at our Q4 cash flow reconciliation, we ended Q3 with $168 million in cash. We generated approximately $18 million in cash flow and invested $83 million in capital programs, of which the bulk was for the Magino construction project. Including an $80 million draw on the revolver, we ended the year with $199 million in cash. Nearly, 75% of the capital spend during the quarter went towards the Magino construction project. During the fourth quarter and year ended December 31, 2021, we incurred $66 million and $237 million respectively in spending for the Magino construction project. I’d now like to turn the call over to Lowe Billingsley, our Chief Operating Officer, to walk through the operational highlights for the quarter and year. Lowe?

[Lowe Billingsley:]

Great. Thanks, Dave. On Slide 7, for 2021, we achieved a 36% increase in production and as previously noted by Dan as we set a record for the company with just over 244,000 gold equivalent ounces produced. We exceeded our 2021 production guidance at La Colorada, achieved near the top end of guidance at El Castillo and San Agustin and near the midpoint of guidance of Florida Canyon. On a consolidated basis, we achieved near the midpoint of cost guidance for the year, but we did see some meaningful cost increases during quarter four. We are experiencing cost inflation on key consumables and reagents across all operations, which we believe is very likely a trend that the entire industry is currently experiencing. On Slide 8, we have made sure to capture these cost pressures in our 2022 cost guidance that you see here. As operating costs rise, some of the marginal ounces fall out of the mine plan and convert to waste which is one of the drivers of lower anticipated gold equivalent ounce production in 2022 versus 2021. At La Colorada, we will see higher costs which are calculated on a per ounce sold basis due to lower expected production and a higher strip ratio as we transition from the higher grade El Creston pit to the lower grade and lower recovery ore from the Veta Madre pit. At El Castillo, we will process less oxide ore and more transitional and sulfide ores in 2022 versus 2021. These orders do yield a loan recovery, which means higher cost per ounce. In terms of our capital guidance for 2022, we plan to provide this after achieving financing to complete the Magino construction project with our goal of having this in place by the second quarter. Now turn with me to Slide 9, please. Of course, none of our operational and financial success would be possible without our cultural commitment to sustainability. We’re making investments into human resources to be in a position to deliver on our ESG strategy. We’re also very proud that for the tenth consecutive year. We have been recognized as an environmentally and socially responsible company and awarded the ESR designation in Mexico. We plan to publish our annual sustainability report in April, which is something to watch for. And with that, I’ll turn the call back to Dan.

[Dan Symons:]

Thanks, Lowe. If you could please turn with me to Slide #10, since we very recently reported updated results that will be included in a new technical report for the Magino project, I wanted to take a moment to walk through some of the highlights with you. Magino remains an economically robust asset in the Tier 1 jurisdiction of Ontario, Canada. At our base case at $1,600 gold, Magino posted an after-tax net present value, 5% discount of $421 million at an internal rate of return of 19.3%. At $1,900 gold, where we are today, Magino’s NPV 5% discount jumps to $722 million, and the IRR jumps to 2 – sorry, to 29.4%. And this economic analysis does not include future opportunities that we’ve identified, such as future processing expansion from 10,000 tons per day to 20,000 tons per day nor does it include future high-grade potential at depth. If you flip with me to Slide 11. Just looking at the base case 10,000 ton per day open pit project we’re building today, you can see how meaningful Magino is expected to be for Argonaut. In 2021, our four existing operating mines produced on average 58,000 ounces of gold, whereas Magino is expected to average 142,000 ounces during its first 5 years following its ramp-up period. Magino’s all-in sustaining cost is expected to be 27% lower than our 2021 consolidated all-in sustaining cost base. Our current mine plan shows a 19-year mine life and is focused on 2.4 million mineral reserve ounces within a $4 million measured and indicated mineral resource. And Magino, we will continue to diversify Argonaut geographically as the majority of our production will shift from Mexico to Canada. And again, this does not include any future processing expansion or underground mining opportunities, which we see as future opportunities for the project. If you please turn with me to Slide 12, we provided a very thorough update of Magino’s construction progress in mid-December, and we are tracking within that updated capital estimate and on schedule for first gold pour by the end of 2023. We’re making good progress, and we have 13 months to go. We also published a monthly Magino newsletter that you can sign up to receive via our website, and you can download also from our website, and I would encourage you to do so. If you move with me to Slide 13, just before we wrap up today, I want to take a moment to remind everybody exactly where Argonaut sits in the value cycle of a gold stock. Everyone on this call is very likely familiar with the Lassonde curve, and it is our belief that as we continue to advance the Magino through the construction and ramp-up as well as moving our exploration concepts at multiple assets further along, we have significant re-rate potential. If you flip to Slide 14, you’ll see that Argonaut is currently trading at a slight discount to its senior producer peers across several metrics. And when we think about Argonaut’s peer group once Magino is fully ramped up, you can see the extraordinary re-rate potential as we take Argonaut firmly into the intermediate producer class of company. With that, we have kept it pretty quick for you today and we would be happy to answer any questions. So I’ll turn the call back over to Chris who can initiate a brief question-and-answer period. Chris?

[Operator:]

Thank you. There are no questions at this time. Please proceed.

[Dan Symons:]

Thanks, Chris. And we – I’m currently – this is Dan. I’m currently down at the Bank of Montreal Metals and Mining Conference. So I’ve met quite a few people over the last few days and provide a very thorough update. So not a complete surprise that there is not a bunch of questions today because we have been keeping our shareholders and those that I can see have dialed into the call very well informed of what we’re – what’s going on within the company. So again, we thank you for your time today. Appreciate it. We know that we’re working through the Magino project, but we obviously see a tremendous re-rate potential as we can get through that. And the next key for us are securing the debt financing here. in the second quarter, and then we will be able to be off to the races and continue to move forward, bring the project online and deliver great value for our shareholders. So thank you again today and we will talk to you all later.

[Operator:]

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.