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Executives

Nicole Cowles - IR

Pete Dougherty - President and CEO

Richard Rhoades - Chief Operating Officer

Analysts

Rahul Paul - Canaccord Genuity

Sam Crittenden - RBC Capital Markets

Ovais Habib - Scotia Bank

Argonaut Gold Inc. (OTCPK:ARNGF) Q3 2013 Earnings Conference Call November 12, 2013 8:30 AM ET

Operator

Good morning, ladies and gentlemen, welcome to the Argonaut Gold Q3 2013 Conference Call. I would 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 Q3 2013 financial results conference call. I would like to direct your attention to the forward looking statements within our presentation. Please take an opportunity to review that statement. I will now turn the call over to Pete Dougherty, President and CEO of Argonaut Gold.

Pete Dougherty

Good morning and thank you Nicole. Thank you all for joining us this morning for the third quarter conference call of 2013. I have with me on the phone via conference, Tom Burkhart, our Vice President Exploration; Richard Rhodes, our COO, Curtis Turner, our Corporate Development Officer and Barry Dahl our CFO for the company.

Please turn your deck to slide number 3, Argonaut Investments. Argonaut was formed nearly four years ago, with a goal to create value. At that time, gold was selling for $1,200. At all cost bases, we needed a $900 per ounce all in cost range in order to make money. We are so consistent to that belief, and at this time the company continues to generate cash flow and earnings as we move forward. As is with all gold equities we must provide leverage to gold for our investor that is the reason why investors are attracted to gold equities.

We do that through a very large resource base of now over 14 million gold of ounces in the measure to authenticated category. We deleverage or de-risk that side of the business which is a very risky business through low cost entry points and low operating costs. We are in favorable jurisdictions with the solid management team and $125 million in cash at this time.

Please turn to slide number 4. Slide number 4, growth to 300,000 to 500,000 ounces per year. Our goal from day one was to create a company that could produce 300,000 to 500,000 ounces a year. We have no desire to be bigger. We believe that this is a sustainable business size. While gold is very difficult to find, we think that 300,000 to 500,000 ounces per year is manageable and can be replicated year in, year out. The projects we hold, we believe can get us to this 300,000 to 500,000 ounces a year of production in the not too distant future.

The first two projects, El Castillo and La Colorada are up and operable today. And we'll produce between 120,000 to 130,000 ounces this year, greater than 10% growth year-over-year. Next year we expect that production to grow to over 150,000 ounces from those two individual projects. As we look to the future, the San Antonio project is expected to cost nearly $100 million to build and has a life of over 10 years and has the potential to produce north of 100,000 ounces per year. Life of mine, total capital costs for this particular project are $110 million.

The next possible project in Mexico could be the recently acquired San Agustin project located near the El Castillo mine. This would be tending positive drilled results during the 2014 drill campaign. This will be followed by the larger Magino project located in Canada, a foundational asset for the future of the company.

Please turn to the next slide, slide number five. Q3, 2013 operational highlights. Revenue for the quarter was $42 million with net income of $6.6 million or $0.04 per share. At the end of the quarter, the company held $125 million in cash and cash equivalents. For the quarter, we produced a little over 26,000 ounces to almost 27,000. Year-to-date we have produced roughly 89,000 ounces of gold, a 17% improvement year-over-year. Sales for the quarter were nearly 31,000 ounces and year-to-date roughly 88,000 ounces of gold being sold. Our cost of gold being sold for the company was $642 on a year-to-date basis.

When we look at the operations, it was a significant quarter for both El Castillo and La Colorada. As I said before these projects are up and operational but we're in a ramp up mode. At El Castillo, I am happy to report that we have the west overland crushing and conveying system in and fully functional today. We received permits to expand a new waste dump to the south which would allow lower operating costs as we move into the fourth quarter. And the West Side Pad 8 construction is advancing nicely. At La Colorada we continue to pre-strip as we open up the open pit at La Colorada and Gran Central. The new crushing circuit was completed during the quarter.

From an expansion side, the company had a significant quarter and milestones created as well. As we completed after the quarter end the Richmont transaction which allowed us to garner nearly 200 hectors of additional property along two kilometers in strike length. We've recently announced last week the San Agustin deal. It will allow us to expand that resource base significantly, in indicated resources there is 1.6 million ounces of gold and 48 million ounces of silver and on an inferred standpoint roughly 1.1 million ounces of gold and 37 million ounces of silver.

Please turn to the next slide, slide number six; progress 2013 versus 2012. As I talked about before production for the quarter was nearly 27,000 ounces that was down from last year by roughly 13%. Our sales ounces were at 31,000 ounces, down significantly from last year of 42,000 ounces. This was due to the fact that last year we had a onetime flush through the system of all our ounces in the in-process as we brought forward the new La Colorada plant and refining facility. Our average sales price realized was $1,331 per ounce. On a year-to-date basis we are ahead on production by 17% and ahead on sales by 9% while the gold price is still suffered as most have seen at $1,436 per ounce.

Financially, for the quarter, as I said before we had $42 million in revenue, earnings of $0.04 per share and gross profit of $13 million. Cash flow generated from the operations was $16.3 million and cash and cash equivalents were at $125 million.

Share price performance has been that of what we can see throughout the sector, for the year-to-date, we are now at down roughly 36% over year-end 2012 while gold lies down 20% and the GDXJ is down nearly 50% and the GDX is down 45%.

Please turn to the next slide, slide number seven; third quarter 2013 income statement. As we highlighted before, $42 million in revenue on 31,000 ounces being sold at a price of $1,331. This generated earnings of $6.6 million and a gross profit, [half our] sales of nearly $13 million. Today at the end of the quarter we had nearly 28,000 ounces of gold lying still within the pads. In process ore loaded to carbon roughly 16,000 ounces of gold and finished goods of 500 ounces of gold.

When we project where we will be at the end of the year, we are now expecting to come in roughly at $113 million worth of cash. This is reflective of where we are today at the $125 million adding to it 31,000 ounces of gold being sold in the fourth quarter at $1,275 per ounce with the cash cost of production of $660 per ounce, this nets an additional $19 million.

As you will notice there is a large working capital change, we expect to build inventory during the fourth quarter as the holidays will hit towards the end of the year and we expect we will probably not be able to sell all the gold produced during the fourth quarter. As we look to capital expansion programs during Q4, we see another $3 million for equipment at El Castillo, at La Colorada $5 million primarily for over burden stripping and $3 million at Magino for permitting to advance that project.

As we look forward, can you please turn to the next slide, slide number eight. Slide eight, El Castillo operating statistics. For the third quarter of 2013 that mine operated and mined 6.5 million tons of material that equates to roughly 71,000 tons per day. Our mining was impacted by heavy rains as Mexico has seen many tropical storms come through and hurricanes during this season of the year. Whilst that is important the company has been able to achieve roughly 23,000 ounces of gold being loaded to carbon at a cost of roughly $700 per ounce. On a unit basis our cost per ton of ore moved was $5.45 for the quarter. As to note, in September we achieved our target of $5 per ton that we have been guiding towards for the end of the year. So we are well on target for where we want to be. Again we reiterate that 100,000 ounces of production this year between $700 and $725 per ounce.

Please turn to the next slide, slide number 9; La Colorada operating statistics. At La Colorada, the company was able to achieve 3.3 million tons of material being moved, that roughly replicates to 37,000 tons per day versus a plan of 51,000 tons per day. We have been impacted again as with Castillo heavy rains during the quarter and equipment availability at this particular site. The contractor who does all the mining here, has recognized this short fall and has acquired four additional trucks, a 992 loader and a new drill during the month of October. They should be fully functional and operational in November picking up that tonnage. I am happy to report that during November we are over the 51,000 tons per day.

Production for the quarter was 4,200 ounces at a cost of $400 per ounce net of silver credits. We continue to capitalize the waste mining, during the third quarter and early into the fourth quarter. As we look to the latter part of the fourth quarter, we see production increasing and therefore that leads to that inventory builds that I talked about earlier.

Please turn to the next slide, slide number 10. Vision, when we created Argonaut, our goals were simple, create just 300,000 ounces to 500,000 ounce a year gold producer, keeping it our cost in the lower quadrant that should allow significant margins to build the business. Today, we have expanded the first two operations, El Castillo and La Colorada to their nameplate capacity. The next project targeted for production would be the San Antonio project.

We have re-engineered this project from a 4 million ton per year processing facility to a 6 million ton per year processing facility at an additional cost of roughly $10 million more. That should allow a significant improvement in the production rate and bring us closer to a 100,000 per year or greater in the near term future from this project.

As I talked about before we are happy to have announced the acquisition of the San Agustin project. It could represent the next mine, following San Antonio pending their positive drilling from early 2014. As we talked about last week, it represents a project very close to El Castillo and could be considered an [armor’s link] or an additional outline project.

Magino which represents the future of the company and a very large project host a significant resource base of over 6 million ounces of gold and a production base that could be in that 200,000 ounce a year range. We are excited about this project, but we are early days as discussed many times before, we are still in the early stages of permitting on this project. It will take anywhere from one to two years to permit this project and then an additional one to two years of construction time. So, Magino, while it represents a very large future for the company, lies out significantly into the future.

Please turn to the next slide, slide number 11. 2013 operations, at El Castillo our guidance for the year now is 100,000 ounces that’s up to the upper end of what we reported earlier in the year. We expect cash costs to come in at $700 to $725 per ounce. Through nine months we've produced almost 75,000 ounces of gold at $700 per ounce.

At La Colorada, the guidance now is for $24,000 ounces of gold to be produced between $450 and $475 per ounce. Through the first nine months we have produced 15,000 ounces of gold at roughly $310 per ounce. When we think about initiatives of both of these projects this year was a significant year in ramping up both projects to their ultimate capacity.

We see El Castillo doing 100,000 ounces of gold produce year-in year-out as we move to the future. As we look to next year we see relatively a miner capital investment year less than $10 million at El Castillo. At La Colorada we have made the capital investments to ramp up this production profile at the property. We would expect next year to produce somewhere in the neighborhood of 50,000 ounces. Next year our capital program will be very light coming in at less than $5 million.

Please turn to the next slide, slide number 12. 2013 development project pipeline, San Antonio as I talked about before we would expect to spend roughly $3 million this year, for that we are advancing permitting and have remodified the existing production profile and plan for the company to go from 4 million tons per year and a 60,000 ounce a year annualized production profile to 6 million tons per year and a production profile in the neighborhood of 100,000 ounces per year.

San Agustin we just recently acquired. The timing for this project couldn’t be better as it could follow behind San Antonio. We see this project roughly 10 kilometers from El Castillo. We see significant resource here and resource potential beyond what is known today.

Our final development project is the Magino project up in Canada. We expect to spend roughly $12 million this year advancing that project. We announced the new TD zone. We are in the process of permitting that particular project. And with the recent Richmont acquisition and 200 hectares along strike, it bodes well for the future. We anticipate performing a prefeasibility study on this project before the end of the year on the smaller constraints there.

Please turn to the next slide, slide number 13, future value drivers. I am happy to report that at all the projects we see significant upside. At El Castillo, we still have the large undisclosed mineralized body of sulfide that lies between 30 and 50 meters below the existing pit. This large ore body represents potential for the future should we be able to find metallurgical work that will coincide with the extraction of this mineralization.

At La Colorada, we announced the Veta Madre drilling early this year and are looking forward to the near future of looking at the underground exploration potential with historically over 3 million ounces were discovered. At San Antonia, we have significant exploration upside as every time we expand at this project, we continue to hit realization.

At the recently San Agustin project we have acquired nearly 600 hectares of mineral concessions in highly perspective ground. At the Magino project we just recently acquired the additional 200 hectares of Richmont ground. We see great flexibility within the cut-up in underground and other potential within this project.

Please turn to the next slide, slide number 14, the difference. We believe that Argonaut presents a nice leverage to gold for our investors. We believe that through low capital entry points and low operating cost, we have deleveraged this business model. It’s a model that can make money in this difficult and [tyranny] time for our sector.

We have assets that are located in very favorable jurisdictions with hidden value drivers within each of them. We are fully funded today to operational and future cash flow coming out of the projects with the $125 million sitting on the balance sheet today.

This concludes my portion of the presentation for today. I will now turn the time back to Donna, our operator to conduct a brief question-and-answer session. Donna?

Question-and-Answer Session

Operator

Thank you. 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

Hi everyone, hi Pete. At La Colorada you indicated that the contractor has added equipment to make up for the tonnage shortfall and the things seem to be looking up in November. Just wondering if you could comment a little more on that shortfall, was that solely to do with equipment or was it because of pit is not open up yet?

Pete Dougherty

Rahul, this is Pete. I actually have Dick on the phone, but at a high level, what I would say is that it's, the production shortfall is related to obviously getting the ounces out of the pit. But as far as the actual movement of material that comes down to an equipment availability and utilization of the equipment, which was the shortfall for the contractor. And therefore, he had added the additional equipment to try and step up that production base. Dick you have anything else you would like to add to that?

Rahul Paul - Canaccord Genuity

Yes, yes. So let me put it another way. You indicated that in the month of November, you were above budget in terms of tonnage both ore and waste. How about just about ore tonnage or how are you tracking versus budget and when do you expect to get back on plan in terms of access to the ounces?

Pete Dougherty

I’ll leave that one to, Dick could you respond to Rahul on that?

Richard Rhoades

Yes Rahul. The lack of tonnage by the contractor has prevented us from opening up the bottom of the ore body which in turn prevents us from shipping a higher grade ore out to the patch. We expect to have this opened up pretty much during the fourth quarter of this year.

Rahul Paul - Canaccord Genuity

Okay. Thank you. And that's helpful. And just moving on one more question, can you comment a little bit on the increasing your capital budget at El Castillo and La Colorada. How much of that was cost inflation, was it advancing spending on spending originally planned for future periods?

Pete Dougherty

Okay. Rahul, this is Pete. When we looked at the capital spending at El Castillo this year, a couple of items have been pulled forward some additional equipment that we have purchased in for the company that will advance things as we move forward. We've picked up new loader and some other ancillary type equipment for the project. But most of the money has been spent as many of you have noted on the construction of the heap leach pad out which we call cell number eight. And we have advanced forward that project significantly.

And I think the plans right now are to wrap up most of that cell number eight early next year. And as we look forward to capital spending for next year, most of the money is being spent either on the equipment rebuilds or on that cell number eight advancing that.

Rahul Paul - Canaccord Genuity

Okay. Thanks a lot. That’s it for me.

Pete Dougherty

Okay.

Operator

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

Sam Crittenden - RBC Capital Markets

Thanks. Hi, good morning everyone. Just another follow-up question on La Colorada, at one point you guys are talking about a potential expansion there and maybe getting into Veta Madre with an open pit scenario. And I also know you needed to acquire some more surface rights there, so just curious if you’ve made any progress on the surface rights? And then secondly at the current gold price you’re looking at more of an underground option at Veta Madre and that’s the expansion plans kind of been put on hold somewhat there just given the lower gold price?

Pete Dougherty

Sam, thank you. At La Colorada you are correct we do need some additional property there to be able to expand that from the resource that we talked about earlier in the year last year. As we've said we can announce basically 110,000 ounces there, but we showed, obviously where the drill showed there would be more ounces if we would have additional property. We have, at this time we are in negotiations and talking to people and that’s all I can share with you on that at that particular project. And we would look at that obviously towards the Eastern side as you know it comes to the surface, so we've looked at that more of an open pit preparation on the Eastern side.

Sam Crittenden - RBC Capital Markets

So that's still an option to you to potentially add a satellite pit there and tweak production level higher at La Colorada, is that still a focus within project pipeline or have you shifted to other opportunities?

Pete Dougherty

As we look at La Colorada as a whole, we believe Veta Madre can be an additional add for the company and it’s a timing issue. We've liked to get all the land acquired and decide where we’re going to move forward from there.

Sam Crittenden - RBC Capital Markets

Okay. All right thanks Pete. That's all I got.

Pete Dougherty

Okay. Thank you.

Operator

Thank you. The next question is from [Howard Flinker from Flinker and Company]. Please go ahead.

Unidentified Analyst

Hi Pete, hi Nicole.

Pete Dougherty

Hello, how are you today, Howard?

Unidentified Analyst

Good, how are you guys?

Pete Dougherty

Good.

Unidentified Analyst

I got two questions. How much short and long-term debt do you have on the balance?

Pete Dougherty

Well, we have as you could see from the balance sheet I don’t know if you’ve been able to get on and look at the financial statements, but you will notice that...

Unidentified Analyst

I didn’t see your balance sheet in the....

Pete Dougherty

It’s not in the press release, you could find it on the website or up on SEDAR, it should be up there later today.

Unidentified Analyst

Yeah. On the website it wasn’t there, I have to go SEDAR, right.

Pete Dougherty

Okay. So there is roughly $7 million of the current portion of debt. And then as we look at that debt, just understand this even though we call it debt and the longer term is about $9 million, but when we look at that what that really represents are the capital leases for the equipment. So those are, the way they are structured, they are operating leases with the ability to buy at the end.

Unidentified Analyst

Sure. I just didn’t see the number when I went to the site, so I have to look up.

Pete Dougherty

Right.

Unidentified Analyst

And what is again the CapEx [speed] for next year?

Pete Dougherty

Well, as we’ve talk about we would see that a very light year for the company, at the El Castillo property less than $10 million and then at the La Colorada property less than $5 million I think I said that before.

Unidentified Analyst

So $15 million or less…?

Pete Dougherty

How it depends on timing for permits on San Antonio, we hope to have those in hand and that's the case so we could be spending up to $90 million there.

Unidentified Analyst

San Antonio, wait, $90 million there, I thought it was $30 million CapEx project?

Pete Dougherty

The San Antonio project in the Baja is $90 million to get that project in an operational 110 over its entire life.

Unidentified Analyst

I was thinking of the acquisition from Silver Standard which would be $30 million?

Pete Dougherty

Right. That would be a latter, that's a drilling project next year and advancing it forward from there.

Unidentified Analyst

Okay. In any case, you will be able fund your needs next year even if the price of gold doesn’t go to $2,000?

Pete Dougherty

We hope we can do that.

Unidentified Analyst

Well, before long it will be there. Thanks guys.

Pete Dougherty

Okay. Thank you.

Unidentified Analyst

You’re welcome.

Operator

Thank you. The next question is from Ovais Habib from Scotia Bank. Please go ahead.

Ovais Habib - Scotia Bank

Hi everyone, good morning. Pete, just on San Antonio, you guys are, it looks like you guys have made a decision in terms of the 6 million tons per annum expansion. In terms of permitting now, are you looking to submit a 6 million per ton operation or is it just a 4 million ton and then you guys are going to be expanding to that 6 million ton over a couple of years?

Pete Dougherty

The permit application that you make is not much different than what you might see here in Canada. It’s four, a total of what you’re going to be over the life of the property. And so what we have prepared is that type of a permit that what we are going to do from the pit, how we are going to mine the pit, how many total tons, we’re going to be mining et cetera.

So this is more of a change in just what size of operation you are going to be running. The pads don’t change, what really changes for us are the size of ponds, the size of the crushing facility and the processing facility just because you are going to be adding obviously a little bit more material drilling through.

Ovais Habib - Scotia Bank

Right. So in terms of then, in terms of the CapEx there you are looking at around a $110 million, you said, it’s approximately $90 million to put the initial CapEx and I would say the remaining is for sustaining them?

Pete Dougherty

Yes, it’s for the pad expansion to build up the final part of the pad.

Ovais Habib - Scotia Bank

Okay. And would you be putting out a study on that or is it just basically you’ve done an internally study and if that's how you are going to go forward that?

Pete Dougherty

We have done an internal study on that and that's how we have moved forward. It hasn’t been a lot of significant change from it, you go back to the original [PA] that we submitted, if you look back to that it was $100 million. And the thesis to that for the make-up really haven’t changed all that much, you can imagine where they, the other $10 million went into the crushing and the ponds.

Ovais Habib - Scotia Bank

Got it. Okay, that's it for me. Thank you very much.

Pete Dougherty

Okay. Thank you.

Operator

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

Pete Dougherty

Thank you, Donna. Thank you all for participating in our Q3 2013 quarterly earnings conference call. And we look forward to the coming months and expanding and developing and we’ll be back with you in early in the year talking about our goals for 2014. Thank you again and have a good day.

Operator

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

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