Argonaut Gold Q2 2023 Earnings Call Transcript

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August 11, 2023

There are 3 speakers on the call.

Operator

Good morning, everyone, and welcome to Arcadot Gold's First Quarter 2023 Financial and Operating Results Call and Webcast. For today's call, phone participants are in a listen only mode. Following the presentation, we will open the call to your questions and provide instructions at that time. As a reminder, this conference call is being recorded on August 11, 2023 at 10 am Eastern Standard Time and is being broadcast live via the Internet. During today's call, management will make statements regarding their expectations for the company's future financial and operating performance.

Operator

These statements are considered forward looking statements. For each forward looking statement speaks only as of the date of this call and actual results may differ materially from management expectations for a variety of reasons, including market and general economic conditions and the risks and uncertainties detailed from time to time in the company's SEDAR's filings. Today's presenters include Richard Young, are Gounot's President and CEO, who will discuss the company's new strategies David Ponczak, CFO, who will talk us through the financials and Marc Lejuk, Chief Operating Officer, who will review operating performance and progress at the Maguire project, the financial statements, management's discussion and analysis and the slide presentation related to this call are available on the company's website at www.argonautco.com for self advancing. I will now hand the call over to Richard Young. Please go ahead, sir.

Speaker 1

Sylvie, thank you very much, and hello, everyone. Let's start with Slide 3. During the Q2, we began processing ore at Canada's newest gold mine, Magino, our flagship asset. The Magino mine is key to achieving our vision of becoming a low cost mid tier North American gold producer that creates significant value for all of our stakeholders And proudly demonstrates responsible mining. To achieve this goal, we have shifted our focus an intent to allocate capital towards our high quality, longer life assets that have the potential for significant organic growth, free cash flow generation and per share growth, which are Magino and Florida Canyon.

Speaker 1

As part of this evolution, we'll build a team and a culture to support our commitment to operational excellence and responsible mining. With this transformation underway, we're pleased to report financial and operating results for the second quarter and half year that are on plan. I'll now turn the call over to Dave for financial highlights and then Mark for operating highlights and development updates are Magino and Florida Canada. Dave?

Speaker 2

Thank you, Richard. Please turn with me to Slide 4. Revenues for the quarter were $83,100,000 or 25 percent lower than the $111,400,000 from Q2 2022 Due to lower planned production of the company's 3 Mexican mines, El Castillo, La Colorada and San Agustin, this was partially offset The revenues from the Q2 include the initial gold ounces sold from the Magino mine. As Magino ramps up to Commercial production, which is expected in the Q3, revenues are expected to increase accordingly. Gross profit for the quarter was $15,500,000 and this was $4,300,000 lower than the $19,800,000 from Q2 2022 and this was due to lower revenues from the planned lower production.

Speaker 2

Argonaut generated cash flow from operating activities before changes in working capital and other items totaling $17,400,000 a reduction 25% from Q2 2022 due to lower gross profits net income of $21,200,000 or $0.03 per basic share compared with net income of $18,400,000 or $0.06 per share, a 15% increase was largely due to a reduction in current income tax That's partially offset by lower gross profit. Adjusted net income of $5,700,000 or $0.01 per basic share compared to adjusted net income of $7,300,000 or $0.02 per share a year ago. Arnaud has faced many challenges in the recent history, so to end the 2nd quarter With cash of $71,800,000 and net debt of $151,600,000 while ramping up the Gino feels really good. Please turn to Slide 5. With construction of the Magento mine completed and the ramp up underway, we ended this quarter on strong financial footing.

Speaker 2

We had undrawn debt capacity of $20,000,000 at the end of the quarter. During the quarter, we obtained a waiver on certain financial covenants related to our $250,000,000 loan facility. We'd anticipated that we would not be in compliance with certain financial covenants at the end of the second quarter And therefore, obtain the waivers to prevent any default event. So the anticipated breaches were on 2 financial covenants That were due to an increase in the construction cost at Magino, where we increased from CAD920 1,000,000 to CAD 980 1,000,000 as well as a small delay in timing of achieving First Goal, which was originally scheduled for March of 2023. Income tax for 2023 is lower than the comparable period from last year, primarily due to lower taxable income from the Mexican operations, which are winding down.

Speaker 2

The only significant change to guidance relates to exploration and reserve development programs at Magino's Florida Canyon, which are expected to be $10,000,000 higher than planned. Overall, I'd like to reiterate that we're on track we will now begin to achieve our full year production and cost guidance that we set out at the beginning of the year. Now I'd like to turn the call over to Mark to review our operating performance and growth highlights for the quarter. Thank you very much, Dave. Now let's turn to Slide 6.

Speaker 2

Our operating mines are on track to achieve their plans. Consolidated production was 43,492 gold equivalent ounces or GEOs, including an initial 3,295 ounces This was 27% lower compared to 59,190 Geos for the Q2 of 2022. Due to lower gold tons mined and processed at the company's Canyon, in which production was up 26%. Cost of sales per ounce was 15.90 cash The dollars cash costs per ounce were $1304 and all in sustaining costs per ounce was 1594 we're similar to the prior period and largely in line with 2023 full year guidance. With the expectation to achieve commercial production of Magino in the Q3 of 2023, cost of sales per ounce, cash costs per ounce and AISC, perhaps, are expected to be in line with full year 2023 guidance.

Speaker 2

Now let's move on to Slide 7. The ramp up at Magino is underway and we remain on track for commercial production in the Q3 of this year. During the Q2, commissioning activities at the Magino mine were well underway with the introduction of ore into the crushing circuit in mid May and then into the grinding circuit approximately a week later. As Richard mentioned, we achieved 1st gold pour in mid June. During the month of June, the Magino mine produced an initial 3,295 ounces of gold and we sold 72 ounces for the period.

Speaker 2

These are all initial pre commercial production gold ounces. At the end of the quarter, the company had incurred US730 $1,000,000 or US947 million dollars in cost for the completion of the project. The initial results during commissioning indicated that throughput targets in the crushing and grinding circuit should easily be achieved and the team was focusing on achieving design parameters by working through instrumentation, electrical and communication issues that are common in the startup base of a process plant of this size and complexity. Permits have been received to operate the process plant and the tailing management facility. Workforce buildup of the permanent operating team is nearing completion, but sourcing the remaining labor remains a challenge at the current economic environment.

Speaker 2

Let's move on to Slide 8. With the 1st Gulf 4 milestone behind us, We are now focused on completing commissioning and ramp up at the mill to bring it to steady state. In addition, we are looking to further grow our flagship gold mine as we move to commercial production with a reserve development drilling program intended to increase reserves in combination with studies to expand and optimize the mill throughput. Both are scheduled to begin this quarter. The overall program at Bagena is expected to cost CAD25 1,000,000 We're looking to convert open pit resources into reserve within the current resource pit cone And determine the optimal processing rate at Magino.

Speaker 2

We also are going to be testing deep underground potential targets similar to our neighbor, Iron Gold owned by Alamos. We're also going to be testing a number of open pit targets along strike to the west on our very significant property holdings in that area. The overall program is expected to take 12 to 15 months to complete. In parallel, we are beginning to review a mill optimization and expansion that combined could raise throughput in the range of 15,000 to 200,000 tons per day, which equates to an annual production of 200,000 gold ounces per year with higher production in the earlier years. Now let's move on to Florida Canyon on Slide 9.

Speaker 2

In the short term, we expect Florida Canyon to meet full year 2023 guidance as we stabilize and optimize operations. In the long term, we see an opportunity to scale up production And increased mine life at Florida Canyon. To achieve this, we will be exploring the large sulfide potential just below our oxide deposit later this year following the geological update that we just finished and a proof of concept program, if it is successful, we plan to prepare a preliminary economic assessment on the viability of the sulfides with an initial resource late next year 2024. Specifically during the quarter, the company conducted drilling within the Oxide Resource, we also tested high grade targets in the West Sulfide Zone and completed regional exploration work. In the West South White zone, the company completed 6 diamond drill holes for a total of 12.58 meters we have a number of

Operator

drill holes in 3

Speaker 2

separate drill fences. These holes were part of the company's proof of concept evaluation of that sulfide zone. All the drill holes intersected strong alteration, poured stock work painting and strong salt mineralization, an accounted mineralization, which is in line with similar areas of that zone. The holes were drilled primarily to get metallurgical samples, so we can send these to the test lab and evaluate different sulfide processing options The development work we are completing at Florida Canyon supports our belief Jefferies is a stable asset with minimal risk and large growth potential. I will now turn the presentation back over to Rich, who will provide closing remarks.

Speaker 1

Thank you, Mark. Moving to Slide 10. In summary, we entered 2023 with a new vision, mission and values, and we're confident that our company can deliver on our vision our mission and values were focused on per share growth. As a result, strategic capital allocation the high quality growth opportunities and operational excellence are key to delivering per share growth. We'll allocate capital to those assets, projects and activities that generate the highest potential Per share return.

Speaker 1

To that end, we believe the following three activities provide the highest potential Per Share Growth listed in order of per share value creation. They are number 1, Developing the Blue Sky potential of Magino, as Mark just discussed, as well as number 2, redeveloping Florida Canyon and third, is repaying our debt. While we have growth potential within our Mexican asset base, the returns on invested capital are significantly lower Then the 3 activities we list here. As a result, we continue to work towards optimizing the value of our Mexican assets and we're evaluating the full spectrum of alternatives for this portfolio. This is part of our vision and strategy to transition from our low grade, short mine life Mexican asset base to a long life, Sylvie, with that, we'd like to turn the call over to questions.

Operator

Thank you. Thank you, sir. And if you would like to withdraw from the question you will need to lift the handset before pressing any one moment please while we compile the questions. And at this time, sir, it appears that we have no questions registered.

Speaker 1

Well, Sylvie, thank you. It's a Friday in the summer here in Toronto and the weather is beautiful. But I think what I would like to emphasize with the closeout of the call that we're on Our Mexican operations are anticipated to generate about $50,000,000 in free cash flow this year. Magino is ramping up. The mill is going through the normal ramp up process, but we're Confident that we are going to meet or achieve nameplate capacity as we move through the balance of the year.

Speaker 1

We're going to begin putting high grade material through that mill This week with the commissioning of the gravity circuit and we're on track for our organic growth programs both at Machino And Florida Canyon as we enter the Q3. So we think that we're going to have great news as we move into the second half of the year, higher production, lower unit costs and some development updates for the market. So I'd like to thank everybody for participating And enjoy your weekend. And if there are any questions, please feel free to reach out either to Joanna Longo or Marcel, and we're happy to answer those.

Speaker 2

Thank you.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.

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Argonaut Gold Q2 2023
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