Argonaut Gold Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 14, 2023

There are 4 speakers on the call.

Operator

Good morning. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Argonaut's Q3 2023 Financial 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 Part 2.

Operator

Thank you. Mr. Yang, you may begin your conference.

Speaker 1

Well, thank you, John, and hello, everyone. Let's start with Slide 3. Florida Canyon and our Mexican mines performed above plan for the quarter, year to date and expected for the year. However, the slower than planned ramp up at Magino has put the balance sheet under pressure, a short term issue that we're working through with the help of Franco Nevada and our lenders. As a result, the focus of management's presentation today will be on the commissioning and ramp up of Magino, The company's new flagship operation as well as the state of our balance sheet.

Speaker 1

All the issues that have caused a slower than planned ramp up are fixable, as Mark will describe. I'll now turn the call over to Mark LaDuke, our Chief Operating Officer. Mark?

Speaker 2

Thank you, Rich. Turning to Slide 4. Consolidated production was just under 54,000 gold equivalent ounces, An increase of 17% over last year as a result of bringing Magino online as well as higher production from the Florida Canyon mine, partially offset by lower plant production from our Mexican operations. Magino contributed just over 10,000 ounces of total production lower than planned due to slower than planned ramp up. All cost per ounce metrics were lower than last year, last year's quarter as well as the year to date numbers.

Speaker 2

Turning to Slide 5 for the Magino mine update. Regino's production this quarter was impacted by slower than expected ramp up of both the mine and mill and significant unplanned downtime in September. I would like to emphasize that all these ramp up issues are flexible. First, let me speak to the slower than expected ramp up in the mine. We've been running behind our mining schedule since The Q1 has continued through Q3 and will continue through the year through at the end of the year.

Speaker 2

This is a result of 4 issues lower productivity and higher ore dilution in pioneering benches and mining around historic underground workings. The mine workforce buildup has been slower than planned, So we have been short staffed. 3rd, lower than planned haulage capacity to lower availability in the first half of the year and design issues with the truck beds and 4th, poor execution on short range plants, which has resulted in higher dilution and lower grades. With these four challenges, total material move for the quarter and year to date is about 50% lower than planned, while the average grade mined is about 15% lower year to date. Additionally to the challenges noted above, we have not been able to be as selective in the high grade areas of the ore body, resulting in process grades or the gold grade fed to the mill being about 40% lower than planned.

Speaker 2

Despite moving fewer tonnes year to date and through the balance of 2023, We will still end the year with a significant stockpile in front of the mill, allowing us to now focus on grade to the mill. We are addressing the issues that we faced during the commissioning phase with several initiatives. And because of these changes, We expect that over November December, mine grades to come closer in line with the reserve model with greater selectivity in the high grade areas, so higher grades are expected at the mill. These improvements include improved milling practices around the historic underground workings, manpower buildup in is approaching budgeted levels, Truck box modification to improve the truck carrying capacity, bringing them close to design capacity. We expect to have all these truck beds modified by the end of Q1 2024 at a minimal cost implement a modern computerized fleet management system to allow for lower solution by the loading equipment and more efficient placement and utilization of the mobile equipment.

Speaker 2

We are on track to have the first parts of this system operational by year end. Also, refine our operational block model to optimize it and bring it in line with the reserve model. Additionally, we expect mining productivity to increase as the operational team improves how they mine the ore body, especially around the old underground workings. We also expect to see cost structures improved over the next 6 months, moving closer to the technical report as we implement the changes noted and build out the mobile equivalent fleet in line with life of mine plans. Turning to Slide 6.

Speaker 2

During June, July August, the plant followed a normal commissioning ramp up schedule, putting the plant on track for commercial production in September. Tons per operating hour or TPOH ramped up well through Q3. The lower TPOH in August versus July was due to design modification to the crushing circuit that led to less consistent feed to the grinding circuit during August, which has now set up the mill to operate well above nameplate TPOH for times moving at times during the Q4. The downtime in September was essentially a result of issues related to the process control system. There is a lot of computer software in the mill and getting the different systems to talk together has been the root cause of much of the downtime in commissioning, not only in September, but through the entire commissioning phase.

Speaker 2

We have addressed these issues with our EPCM contractor, equipment suppliers and specialized contractors. However, issues with the process control system led to 20 days of unplanned downtime In September, we are working to better integrate the various process control systems and all the issues are very easily fixable. And since the system problems in September, the process plant has been running very well. The plant has been operating above nameplate TPOH since beginning of the quarter when operating, but we have had some downtime during the quarter as we complete the required modifications to the gravity circuit, which are now complete and the work through the process control issues. The graph demonstrates our progress in ramping up the mill tonnage.

Speaker 2

The grinding circuit has met and routinely exceeds the design throughput rate, while delivering design grind size. Given that we are seeing days of 12,000 tonnes per day without fully pushing the circuit, We do expect over the next few quarters to get the plant operating at 10% to 15% higher than the nameplate of 10,000 tonnes per day. Turning to Slide 7, the Magino Resource Expansion. While the number one short term priority is deliver grades to the mill now. Optimizing production at Magino is our near term focus.

Speaker 2

In the medium term, however, Reserve expansion will unlock further potential at Magino. We commenced a reserve development drilling program with the goal of increasing reserves in combination with studies to expand and optimize mill throughput. This is a 63,000 meter reserve development drill program expected to be completed in mid-twenty 24. We have 4 drill rigs on the property right now,

Speaker 3

and we are about

Speaker 2

25% through the program. The aim is to increase reserves by 500,000 to 1,000,000 ounces. In parallel, engineering work is underway to evaluate a potential mill expansion up to 17,500 to 20,000 tonnes per day, which at reserve grade would increase production to between 200,000 to 250,000 ounces per year. Turning to Slide 8. Florida Canyon reported its best quarter production in about 20 years.

Speaker 2

As a result of our new operating strategy to increase tonnage on the Heap leach pad and manage percolation issues with better pit planning and processing lower permeability material through the crusher where an agomarim polymer is added to ensure proper heap leach flows. The mine is on track to exceed the top end of its Production guidance by about 10% and generate free cash flow for the first time in several years. We are moving forward with building of the next leach pad and doubling pumping and solution treatment capacity and this will set the mine up for higher production and stronger free cash flow moving forward. In the long term, we see an opportunity to scale up production and increase mine life at Florida Canyon. To achieve this, we began a proof of concept drilling program targeting the large sulfide system that sits under the 5,000,000 ounce oxide system.

Speaker 2

The program is expected to be completed by mid November with analysis work expected through at the end of the year. I will now turn the presentation over to Dave, who will provide a brief overview of our financial results.

Speaker 3

Thank you, Mark. Please turn to Slide 9. Gold ounces sold for the quarter were up 41% from Q3 last year due to initial production at the Magino mine and the higher production from the Florida Canyon mine partially offset by lower plant production from the company's Mexican mines. Subsequent to the end of the Q3, the Magino mine achieved commercial production effective November 1, 2023. Cost of sales for Q3 were up 20 8% compared with the same period last year.

Speaker 3

The increase is primarily due to higher gold ounces sold, partially offset by lower DD and A expense. The higher roll downs sold and the lower DD and A expense were the primary drivers in the 146% increase in gross profit to 17,000,000 Argonaut generated cash flow from operating activities before changes in working capital and other items totaling $21,100,000 An increase of 55% from Q3 of last year due to the higher gross profit. In spite of the higher gross profit, net Loss per share was essentially flat at $0.00 per share due to $10,000,000 in other expense related to foreign exchange losses and unrealized losses on derivative instruments. Adjusted net income for Q3 2023 of $9,900,000 or $0.01 per basic share was up compared with the adjusted net income of $400,000 or $0.00 per share. I'll now turn the call back over to Richard.

Speaker 1

Well, thank you, Dave. Moving to Slide 10. As a result of the slower ramp up of Magino With principal repayments under the term loan commencing at the end of this year, we've taken action to strengthen the balance sheet. This includes working with our lenders to obtain waivers on certain financial covenants associated with our debt. These waivers include requirements for the company to maintain a minimum cash balance of $10,000,000 at all times through the end of this month while we raise additional funding.

Speaker 1

To that end, on November 1, we entered an agreement to sell Franco Nevada an additional 1% net spelter return, royalty on the Magino mine as well as non core royalty holdings in Canada and Mexico for an aggregate price of $29,500,000 We also negotiated the deferral of a repayment of $19,100,000 on the gold prepayment advance that was due at the end of the year to the end of the Q1. As part of our portfolio rebalance, the process of optimizing the value of our Mexican assets is underway. As we move through the Q4, we'll continue to focus on delivering on our operational targets and to review options to strengthen the balance sheet further. These actions will allow Argonaut the ability to unlock the value by executing on the growth initiatives as Mark has laid out. Argonaut ended the quarter With cash and cash equivalents of just under $45,000,000 net debt of $179,000,000 with $20,000,000 left undrawn under the facility at quarter end.

Speaker 1

The Magino mine is expected to produced below the 72,000 to 81,000 ounces as set out in our guidance at the beginning of the year. Cost of sales as well as cash costs and AISC cost per ounce are all expected to be higher than guidance due to lower production and higher unit costs. Florida Canyon is expected to ceded its production guidance range by about 10% due to in large part to the 30% increase in tonnage placed on leach pads in 2023. The mine is expected to be in line with per tonne and per ounce costs for 2023. The Mexican operations consolidated production is expected to exceed the top end of guidance by between 5% 10%.

Speaker 1

San Agustin and La Colorada pronounced costs are expected to exceed The higher end of guidance by between 5% 10%, while the Alcasiloparounce costs are expected to be lower than guidance by about 10%. Overall, as we look at the year, we expect our Florida Canyon and Mexican operations to produce between 160,000 and 165,000 ounces of gold, about 8% higher than the top end of their guidance ranges as set out at the beginning of the year. In addition, the mines collectively placed about 15,000 additional recoverable ounces on the leach pads that will benefit next year. Including Magino, we expect to achieve below end of our consolidated guidance range for the company of between 200,000,200 and 30,000 ounces of GEOs. For the year, cost of sales, cash costs and all in sustaining costs per ounce are expected to exceed the top end due to a stronger peso for our Mexican operations and lower production and plan from Gino.

Speaker 1

Turning to Slide 11. Coming into 2023, We as a company had 5 major objectives. 1st, complete construction of Magino on time and on forecast 2, Ramp up Magino to steady state and meet guidance. 3, stabilize Florida Canyon, which had been losing Significant amounts of money over the past several years. 4, begin drill programs at Magino and Florida Canyon to increase production and long term value of the mines and 5, optimize and review our Mexican operations.

Speaker 1

How we done as we approach the end of the year, starting at Magino? We updated the cost to complete Magino based on some of the challenges in 2020, 2022 in February to $755,000,000 for CAD 980. The project costs came in line with forecast and we had rocked through the mill beginning in mid May on schedule. Total capital, construction capital as well as sustaining costs and operating costs are within $10,000,000 of budget. They were increased largely due to higher costs for the next lift of the TMF.

Speaker 1

As Mark discussed, the ramp up

Speaker 2

of both the mine and

Speaker 1

the mill have been slower than planned. As a result, we will miss production guidance at Magino. However, as Mark discussed, All the issues are easily fixable and we have plans underway to fix them over the next 3 to 6 months. At Florida Canyon, the mine was producing about 100 ounces per day in January And losing a significant amount of money. The changes that we have made that Mark discussed to Push tonnage and fix the percolation issues have resulted in higher production and positive free cash flow generation.

Speaker 1

So rather than closing the mine, we're building the next leach pad and doubling plant capacity and have a new life of mine plan that generates significant free cash flow based on this new strategy. Our drill programs, so drill programs at both Magino and Florida Canyon began on schedule on August 1st And they're proceeding well. We believe these programs could add significant value to these two core assets. At Mexico, we expect by year end to have resolved the 2 land issues at the 2 mines that would have caused operations to have been pause at year end. Consolidated production for our Mexican operations is expected to be between 5% 10% higher while costs per ounce are marginally higher than guidance due to a non cash inventory adjustment and the stronger peso that had affected the mine.

Speaker 1

But so as we move forward, we've pertaining to financial advisor to review the best path forward for our employees in Mexico and the company. Overall, the slower than planned ramp up with the balance sheet under pressure, requiring additional capital, but we believe there is significant value to be realized at Argonaut. We believe the following three areas are the highest potential for per share growth. First, at Magino, ramping up production and lowering unit costs towards the TEC report and continuing with the infill drill program and expansion work to take Magino to 200,000 to 250,000 ounces per year. At Florida Canyon, Continue to optimize the current oxide reserves and resources and focus on the sulfide redevelopment opportunity.

Speaker 1

And 3rd, paying down our debt and potentially refinancing this facility to provide more balance sheet flexibility. This strategy is in line with our mission statement, which focused on asset growth and operational excellence. John, with that, I will now turn the call back to you for questions from our audience. Thank you.

Operator

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. One moment please for your first question. There are no further questions at this time. Please continue.

Speaker 1

John, thank you.

Operator

We do have one question.

Speaker 1

Okay.

Operator

We have your first question from Robert Molyneux. Your line is now open. Robert Molyneux, your line is now open.

Speaker 1

Well, John, Robert may have hit that by mistake. I'd like to thank everybody for their time and their patience As Mark walked everyone through, we have had a number of issues in the mine and mill, but They are fixable and we're working on that and we do expect the numbers to improve at Magino as we build out this flagship operation. We are available to answer any questions that any of our analysts or shareholders may have in the coming days. I do thank you again for your time this morning. Have a good day.

Operator

This concludes the conference for today. Thank you everyone. You may now disconnect.

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Earnings Conference Call
Argonaut Gold Q3 2023
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