Argonaut Gold's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug.13.13 | About: Argonaut Gold (ARNGF)

Argonaut Gold Inc. (OTCPK:ARNGF) Q2 2013 Earnings Call August 13, 2013 8:30 AM ET

Executives

Nicole Cowles - IR

Pete Dougherty - President and CEO

Analysts

Rahul Paul - Canaccord Genuity

Sam Crittenden - RBC Capital Markets

Christos Doulis - Stonecap Securities

Andrew Kaip - BMO

Operator

Good morning, ladies and gentlemen, and welcome to the Argonaut Gold Q2 2013 Conference Call. I would now like to turn the meeting over to Ms. Nicole Cowles, Investor Relations Manager. Please go ahead, Ms. Cowles.

Nicole Cowles

Good morning, everyone, and thank you for joining us for Argonaut Gold’s Q2 2013 financial conference call. I would like to forward your attention to the forward looking statements in our presentation. And now, I will now turn the call over to Pete Dougherty, President and CEO for Argonaut Gold.

Pete Dougherty

Thank you, Nicole. If we could all turn to slide number three, Argonaut Investments. I have with me today all the members of our executive management team. Argonaut Gold is a small gold miner with deep roots in this business and a portfolio of assets to propel it into the mid tier producer range. Our game plan is simple, put the right people with the right assets and let them go to work and see what they can do.

We have four main assets, which contain over 12.5 million ounces of gold. We are fortunate that our Mexican heap leach assets are low risk and high return projects in favorable jurisdictions, which provide future cash flow to grow the business to the next level.

Please turn to the next slide, slide number four. As I said before, our production profile is second to none. This year we expect a 20% improvement in production year-over-year as we ramp up our two main projects to date El Castillo and La Colorada. The future looks bright as we have the potential to grow production further to the 300,000 to 500,000 ounces per year of forecasted production over time.

Please turn to the next slide, slide number five; Q2 2013 highlights. We experienced excellent production which led to higher sales volumes. However, as may have experienced, we saw a sharp decline in the metal price. We were able to maintain production cost on a quarter-over-quarter basis and on a year-over-year basis, we are doing quite well at under $700 per annum at nearly $620 per ounce produced. We were able to carry a cash balance at the end of the quarter of $140 million as we proceed forward into the coming quarters.

Our projects are advancing nicely. At El Castillo the pad is moving forward and the overlaying crushing and conveying system is now in place, and we will begin testing this new unit in early August to late September. We expect to have this in full production swing. At the La Colorada project, the crusher is now in place and we are fine tuning it and are advancing this towards full cycle production here early in the third quarter.

Please turn to the next page. Page number six, progress 2013 versus 2012. Production was up as were sales, while prices declined 13%. We are maintaining our guidance for the year. Financially, operations generated nearly $17 million worth of cash flow during the quarter. Share performance show there was a pull back as did many. Gold was down nearly 30% and the company 40% during this time frame.

However, since this time frame, gold has closed the gap up to $1,340 yesterday, down 20% since year end. Our stock has also closed that gap and closed yesterday at $7.80 per share, in other words, 18% down since year end. So we have closed that gap year-over-year.

Please turn to the next page. Slide number seven, second quarter 2013 income statement. We talked about earnings earlier with $0.04 per share. Quarterly earnings were $6.5 million or $0.04 per share. This compares to $11.3 million or $0.12 per share in 2012. Earnings were impacted by greater taxes coming now from La Colorada.

Year-to-date the company has made $18.1 million or $0.12 per share versus $18.5 million or $0.20 per share in the earlier year. Year-over-year pad inventory is reducing. We see overall ounces within the circuit dropping from 51,000 ounces to 46,000 ounces. We see that the in-process inventory is climbing and finished goods has risen a little bit. All this is very healthy as we now shift the risk from ounces to be recovered from the pad to ounces within the circuit, which means it is a timing to when they come out.

As we look to the cash position in the future, we expect to end the year with roughly $140 million worth of cash. Future capital for 2013 revolves around the El Castillo Overland crusher pad and equipment purchases and upgrades. At La Colorada, the future capital is related to the stripping. All other capital are minor in relation and are mainly for sustaining ore progress towards permits in advancing on feasibility studies.

As we look to the whole year, we anticipate full year capital to be nearly $80 million. This had gone up $4 million from the earlier quarter. It relates to a royalty that we are purchasing on the La Colorada property for $3.6 million. This royalty had a value identified and assessed in the earlier PEA in December 2010 of roughly $10.3 million. We are fortunate enough to be able to negotiate a purchase price a little over $3 million for the said royalty.

Please turn to the next slide; slide number eight, capital aimed at future improvement. As we have seen the decline in gold prices, many have focused their efforts on reducing operating and capital improvements within their projects. We have focused a great deal of our capital in 2013 towards future benefits. We expect to see operating costs fall at the El Castillo mine from fourth quarter of last year at $5.67 a ton to close the year this year at nearly $5 per ton by yearend.

As you look to how this might translate into savings and benefits back to company, as we look at that change at the $1200 gold price, you can see the increase in cash flow coming while we see a decrease in overall operating cost.

At the La Colorada facility, the new crusher in fresh ore mining will commence here in the third quarter. This will allow us to increase our overall production range from 20,000 ounces last year from reprocessing the old heap leaches to 60,000 ounces in the future generating nearly $33 million a year in cash flow at $1200 price. These are the type of investments that we are focused on, investments where we can reduce operating cost and we can generate paybacks within 18 months of operation.

Please turn to the next slide, slide number nine. At El Castillo, we had another solid quarter. It’s something we have come to be known for and it’s noted because of the people that we have in place at the operations group. They are excellent in their jobs and look for ways to improve each day they arrive at the site. We have been able to maintain our cost guidance coming in at $690 per ounce for the quarter versus our forecast of $700 to $725. For six months ended June 30, 2013, we are $695 at per ounce.

I am proud to say that the group has been able to reduce the operating cost per ton from that $5.67 in the fourth quarter of last year to $5.16 per ton, nearly $0.50 reduction. This is about finding the pennies and adding them up overtime. Our group has made substantial strides in their cost reductions and we expect to see this decline even further as we move to the future.

Please turn to the next slide. Slide number 10, La Colorada operating statistics. At La Colorada, the goal for the first half of the year was 9000 ounces. We recorded slightly over 11,000 ounces of production while achieving very low operating cost of $390 per ounce after the silver credit for the full year, $309 per ounce. As we look to the future, we expect cost to rise closer to be 43-101 PEA that was filed in December of 2010 at $650 and $10 per ton.

As we look towards the third quarter, we expect the mine to now begin to four grades. We expect the crushing circuit to ramp up further and we expect production to start to increase quarter-over-quarter as we move through quarter three and the into quarter four as we start to hit our stride at La Colorada project. Our goal for the year is 30,000 ounces at La Colorada. To date we have 11,000 ounces recorded in the bank. So you can see the production is second-half loaded.

Please turn to the next slide, slide number 11; 2013 operations. At Castillo, we anticipate spending $30 million. The majority of that money as I said early in the year would be for pad 8, which has the capacity to expand overall storage of nearly 30,000 tons to 30 million tons this year and over the like somewhere closer to 40 million tons of material storage.

We also anticipated building the overland crushing and conveying system, and then we incurred the purchase of our mining contractor and his equipment. Our target for the year is 90,000 to 100,000 ounces at $700 to $725 per ounce. For the first half of the year to date we are in with production at nearly 50,000 ounces. So, we are well on our way towards achieving those targets.

At La Colorada, we anticipate spending $22 million. The majority of that money will go into the capitalized stripping. This followed by adding of the new crushing circuit and then new leach pads. When we complete things this year, we will have enough leach pad capacity to carry us for several years at both facilities. Our target at La Colorada is 30,000 ounces in the $450 to $475 an ounce range. That is down slightly from our last estimation to you.

Please turn to the next slide; slide number 12, Development Projects. We have two highly prospective and interesting projects that can advance our company into mid-tier producer range. At San Antonio we continue to work with the regulatory agencies. We have yet to receive the permits but we hope to receive them by Q2 of 2014 in order to meet our production guidelines of late 2014, early 2015 production at this time. At the Magino property, we are working on a pre-feasibility study. We expect news to come late this summer. We are advancing this project through the permitting at the middle of our EIS this fall.

Please turn to the next slide, slide number 13. In exploration we have had a history of successful exploration programs. Since starting the company, we have been able to increase our resources over 300%. We anticipate spending somewhere between $8 million and $10 million this year. We are drilling some conceptual targets and early stage projects near to our existing lines, El Castillo and La Colorada at this time.

Please turn to slide number 14. Slide number 14, future value drivers. We are paid for results and we have delivered nicely upon production and operating cost and that's what we are known for. As we look to the future, as I said before we've had an impeccable track record of developing our resources. As I said before since 2009 we have grown that base by nearly 320%. At El Castillo we continue to work on the sulfides. Many of you will remember early in the year we have a resource gain of roughly 360,000 ounces within the pit that we could mine of sulfides.

At La Colorado we provided the debt-to-moderate resource of an 110,000 ounces and said there was potential still at this site to increase ounces. At San Antonio we saw the resource grow from 1.2 million ounces to 1.7 million ounces, a 42% increase and at Magino we've announced the PEA zone (ph) and nearly 90,000 years (ph) worth of drilling this year. In this business we are asked to lead our teams by creating value and I submit that we are beginning to unlock real value at all our locations.

Please turn to the next slide, slide number 15. /in conclusion we are dedicated towards creating value. We have achieved much but have significant potential and have long ways to go. We have four significant projects in our portfolio. Two of them are nearing steady level production states. The others have a large ramp up that will need to be created.

We are developing these projects. We believe in providing great leverage to the gold market which we do through that large resource base. We deleverage that risk through low operating inputs through our heap leach projects in Mexico, by reducing upfront capital and operating risk as we look to the future.

As we look at how we performed quarter-over-quarter and where we continue to go in the future, I am happy to say that the company is on the right track. We are developing the projects in an appropriate and timely manner. We are conserving and putting our cash to good use. As we look towards the future we'll continue to look for value in all that we do in a safe conscientious manner through our employees, the environment and all our stake holders, always remembering we have been entrusted with your support.

We thank you for your time this morning, and this concludes my presentation, we'll now turn the time back over to Donna, our operator for further questions and answers.

Question-and-Answer Session

Operator

Thank you, Mr. Dougherty. We will now take questions from the telephone lines. (Operator Instructions). And the first question is from Rahul Paul from Canaccord Genuity. Please go ahead.

Rahul Paul - Canaccord Genuity

I understand you're working on the PFS at Magino, but given the decline of the gold price over the last few months, I'm wondering if anything has changed with respect to how you see the project compared to what you indicated previously, especially in terms of the size of that operation.

Pete Dougherty

Rahul this is Pete. The PFS is moving forward we still see this as a smaller project not a very large project that was being envisioned before by the previous owners. As you know they were looking at 30,000, maybe 40,000 ton a day. As we said we were looking for a much smaller project to focus more on the high grade nature of this deposit. We continue to advance the studies on this project and that will be forthcoming.

Rahul Paul - Canaccord Genuity

Okay, everything seems to be mostly as expected. Nothing seems to have changed.

Pete Dougherty

This is a difficult gold environment for many right now and we have always taken the approach that we needed to look at projects a bit differently in order to be able to conceptually provide returns and that's why you might see our resources valued at the $1,300 to $1,500 range, but the operating that we are running at is anywhere from $750 to a $1,000 today. So you can see that the pits that we start with are much smaller and we look at this from an economic perspective.

Rahul Paul - Canaccord Genuity

Okay. And then one more question, I see that you've increased your CapEx budget slightly at El Castillo and La Colorada. Have you advanced some spending that was previously planned for 2014? Or are there some other items that you have included in this?

Pete Dougherty

As we talked about La Colorada spending has gone up a bit because of the capitalized stripping that's required underneath the IFRS standards. That's a new accounting standard that everybody has followed this year and that’s why you see a slight change in the way many people statements are being run this year. So that’s the largest impact at La Colorada.

As far as El Castillo and La Colorada, as we talked about many times before, the goal heading into 2013 was to try and look at the advancing forward capital that could be delayed into 2014, 2015 because we felt the need to really focus in 2014, 2015 a development of the St. Antonio project and didn’t want to have too many things running at the same time. So therefore we have advanced forward some of the pad development at Castillo, as you know and then we are going to be in a position at the end of this year really to step back and not having to do anything at La Colorada for several years, from a pad construction; and from Castillo it’s look like 2014 we shouldn’t have to make additional investments in pad construction there as well next year.

Operator

The next question is from Sam Crittenden from RBC Capital Markets. Please go ahead.

Sam Crittenden - RBC Capital Markets

Just as a follow-on on Magino, I noticed in the presentation there's a slight change for the timeline there to assets future versus late '16, '17. Is that just being more cautious due to the gold price? Or is there something changed in terms of the permitting timeline? I was just wondered if you could explain that, the slight change there?

Pete Dougherty

Once again, we don’t control that permitting timeframe and what I can tell you is that we have already submitted our PDR, which is basically the project description and that has been accepted and we are moving through that process but we don’t control that permitting timeframe. As you know and so we are moving forward. The expectation from the groups that we have working for us, we are trying to put together this fall, DGIS (ph) to be submitted and then we will look through that process and we are cautious of that. We have said that process could be two year process and then a couple of year for construction. So, that’s why we are hesitant to really put dates on that at this time.

Sam Crittenden - RBC Capital Markets

No, that make sense. I'm just curious, though, does the gold price impact your decision in terms of having liquidity to build it at all or if you had the permits next year, would you get going?

Pete Dougherty

I think you can we all look at our cash position. If we get the permits next year, the answer would be we don’t have the funding in place. As many have known, this is what was projected by the former holders of this project as a $400 million project. So we do not have the cash on hand right now for a 400 million-type project.

So if permits were received next year that would be incomprehensible to build. But we are cautious as to what might happen. We don’t know what’s going to happen with the gold price. We could be back in $1900 tomorrow. I can’t say which way we are going to for sure but we do know that it's been a choppy market as many of you guys have experienced as well.

Sam Crittenden - RBC Capital Markets

Absolutely. And then just a question on what you're seeing in terms of input costs? Have you seen any improvements in quotations for equipment or other contractors? Have things eased off a little bit on the capital side? Are you seeing any of that?

Pete Dougherty

What we are seeing from a capital prospective is yes there has been an easing on some of the pricing and I think that’s natural, whenever you look at what happens with some of our large buyers whether it would be Caterpillar or whoever. We all know what's happening. There are large inventories at end they have had some pullbacks. But as far as our capital prospective as we move forward, we look at La Colorada and El Castillo, it has been a lot of pad construction and those kind of things really don’t – that's a lot of earth (ph) maybe. So you don’t really see a lot of changes there. We would expect at Magino you are going to see some changes.

Operator

The next question is from Christos Doulis from Stonecap Securities. Please go ahead.

Christos Doulis - Stonecap Securities

Some quick questions for you here. Just noticing, on the last page here, you talk about $100 per ounce CapEx. Is that the kind of sustaining number we can assume for both El Castillo and La Colorada, going forward? I.e. that would put Castillo in the $10 million and La Colorada and the, call it, $5 million of sustaining capital per year?

Pete Dougherty

Well Christos, as you know we think that pad construction costs around $0.50 a ton. So if you do that math, I am going to rate El Castillo as probably around 60 bucks an ounce. Right?

Christos Doulis - Stonecap Securities

Yes.

Pete Dougherty

Did you do that math on Colorada which has closer to 1 gram, you can see that number drop a bit. So at Colorada, what do we really need to do from this point forward? As I said, we pull forward our pad construction for several years. We don’t need new pads till 2017, 2018 type range. So we have pads build for that a period of time. So it’s a kind of one of those things, you build pads ahead of schedule and then you can live for a few years before you need to build any new pads. So when I look at sustaining for our operations, I think our sustaining CapEx is more around those pad constructions. It's not about adding new pressures or those kind of things.

Christos Doulis - Stonecap Securities

Okay, so that $100 on page 15 is a high number?

Pete Dougherty

That's the original investment.

Christos Doulis - Stonecap Securities

I mean on an ongoing, sustaining basis, really, because you're talking about pad expansion. You're not talking about buying new crushers, et cetera.

Pete Dougherty

We're basically there on crushers at this point in time.

Christos Doulis - Stonecap Securities

Next question, guys. Notice on the balance sheet here; inventory, very large number and continuing to rise here. I'm assuming that this is associated with the fact that you guys are continuing to increase your quarterly production. But I just wanted to confirm that? Is that what this is a function of or is there anything else going on there?

Pete Dougherty

As I kind of talked a little bit about, we have actually seen the ounces that we're carrying on the pads, some sales actually dropped back fall back Christos, which is a good thing for us. It means we're pushing the risk out of will it be recovered from the pad to okay, now it's in the circuit and that's a good thing for us as we look to the future. So I think that's been positive and as we have increased production, now we have both operations rising, you are going to see some builds there.

Christos Doulis - Stonecap Securities

It sounds to me like you are saying yes the rise in inventory is generally associated with the increased quarter-over-quarter production and the fact you have lots of work in progress.

Pete Dougherty

It is, but as I said the risk has been pushed from recovery out of the pads to, now it's within the circuit.

Christos Doulis - Stonecap Securities

And then finally, guys, I know I've harped on this a few times, and I'm going to continue to harp on it, because I'm the kind of guy who likes to harp on things. But San Antonio, any sort of response yet from the regulators, from Semernat or anyone else that you have had to submit permits to in terms of a change of land use or anything else that, have you guys had dialogue with the regulatory agencies? Or where do you stand there?

Pete Dougherty

Christos, I think this is a fluid process as we have talked about many times. We see our new people in place. We are now having discussions with those new people on what is the best approach towards moving this project forward. There is a great excitement within Mexico to try and bring back the investment in mining. I am sure you have read some of the articles about some of the investment that has fallen away and there is a great excitement within Mexico to bring back some of that investment. So it's clear to say that one could surmise that this is a project that came to a lot of people.

Operator

(Operator Instructions). And the next question is from Andrew Kaip from BMO. Please go ahead.

Andrew Kaip - BMO

I've just got a couple follow-up questions. Most of our queries have been already asked. First of all, can you just confirm, you're looking at spending about $30 million in the remainder of this year. Is that correct?

Pete Dougherty

That's what it looks like right now Andrew.

Andrew Kaip - BMO

And then I just have a P&L question. I'm interested in understanding what this other expense was of $1.244 million?

Pete Dougherty

That is really what we call an FX adjustment that's happening on the P&L. So we carry a lot of our cash as you probably know, because we exercise the warrants in Canadian dollars and we've had the changes in the Canadian versus the U.S. dollars.

Andrew Kaip - BMO

So we should treat that largely as an FX adjustment then?

Pete Dougherty

That's really an FX adjustment.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Dougherty.

Nicole Cowles

Guys if I can just add one thing for you, I would like to point out on the adjustment for the CapEx, please note that we had that royalty in there as well for that $3.6 million. So that's a large portion of that increase that we have put into the CapEx for you guys.

I will turn it over to Pete now.

Pete Dougherty

Okay. Thank you Nicole. And thank you for those of you who have been on the call with us this morning. Again we had a very interesting quarter for the company. We had record gold production, record sales, all of the things going in the right direction. However we find ourselves in the market that has been somewhat challenging.

As we look to the future I see some tremendous activities taking place at both of the operations today. At the La Colorada facility we're now entering into the mine and seeing some higher grades starting to come out. We're also seeing the crusher come up online and we're looking to de-model that debt and bring that on full scale.

At El Castillo as many of you know, we had record production and we saw a substantial decrease in cost on a per ton basis. As we look to the third and fourth quarter, it is all going to be about reducing those costs even further closer to that $5 per ton range.

We're well on our way towards that with the improvement we've seen to date. As we look forward there we see a large debt improvement coming from the addition of this crushing and convenience system and that is nearly in place and ready to press the green button for startup. So we're excited about that coming forward too.

As we look to the future, as you know, the San Antonio projects are exciting for us, Magino obviously being the larger of the two projects. We're early stages on that project, pushing it towards to middle of an EIS this year hopefully. And at the San Antonio project we are working with the people involved to bring that project into construction phase, once we receive the permits.

And we thank you for your support and look forward to talking with you again in November for the third quarter results. Thank you again and have a good day.

Operator

Thank you Mr. Dougherty. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.

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