Argonaut Gold's (ARNGF) CEO Pete Dougherty on Q2 2014 Results - Earnings Call Transcript

Aug.14.14 | About: Argonaut Gold (ARNGF)

Argonaut Gold Inc (OTCPK:ARNGF) Q2 2014 Earnings Conference Call August 14, 2014 8:30 AM ET

Executives

Nicole Cowles - IR

Pete Dougherty - President and CEO

Tom Burkhart - VP, Exploration

Rich Rhoades - Chief Operating Officer

Analysts

Rahul Paul - Canaccord Genuity

Ovais Habib - Scotia Capital

Operator

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

Nicole Cowles

Good morning, everyone. And thank you for joining us for Argonaut Gold's second quarter results call. I would like to pull your attention to the forward-looking statements in our presentation. Now I would like to turn the call over to Peter Dougherty, CEO and President for Argonaut Gold.

Pete Dougherty

Good morning and thank you, Nicole. Today I have with me our entire management team here in Reno. If you could please turn to Slide 3. Who is Argonaut? Argonaut was formed with a goal of creating real value for our shareholders. Today, we have five projects, four which reside in Mexico and one in Canada. Roughly two thirds of the overall company profile sits within Mexico. And one third sitting within Canada. Today we have two projects operating. That has the ability to produce upwards of 150,000 ounces today with four of the five projects in full potential of production of nearly 450,000 ounces per annum when all four will be running. We are low risk investments with quality management, no hedging on our work send over 12 million ounces of gold resources and a proven track record of building and operating mines. We believe Argonaut represents a unique investment opportunity here in the America.

Please turn to the next slide, Slide 4. 2014 versus 2013 statistics. Production for the quarter up 30,000 ounces was in line with what we saw at the beginning of the year and in line with the first quarter's production. But 12% below last year's due to the average gold rate been mined at the El Castillo Mine. Sales were close to last year and slightly above Q1, 2014 at nearly 32,000 ounces of gold equivalent production being sold. Cash cost is $756 was at the low end of our guidance of $750 to $775 per ounce. We have revised our target for the full year to be in the range of $740 to $760 per ounce for the combined company for the full year. Revenue up $40.9 million was 9% below last year's due to lower sales price. Earnings were lower due to higher cost associated with the lower gold trade and lower sales price coupled with the incurrence of actual mining tasks at the La Colorada operation where previously they have all been capitalized. Our stock performance this year down 17% was not what we had expected. We have underperformed the gold market that many-- and many of our peers at this time. However, we are pleased to have a very strong second half of the year as we had outlined further in the year.

Please turn to the next slide. Slide 5. 2nd Quarter Income Statement. Earnings per share of $0.01 were generated on $2 million worth of earnings for the company. Our cash flow of $13.5 million was roughly $0.09 per share. Our capital spent for the second quarter of 2014 was $13 million; roughly $9 million of this $13 million was spent on the existing operations for capitalized stripping and pad expansion accounting for the majority of the spent. Any cash balance of nearly $53 million was a reduction of $7 million reflecting the $11.6 million payment for the San Agustin project and the earnings that came in from the operations. At quarter end, we have roughly 40,000 ounces sitting in inventory on the heap leach pad, 15,000 ounces inserted loaded to carbon or in the process circuit and 85 ounces in finished goods.

Please turn to the next slide, Slide 6. Full year projected sources and uses. This slide depicts our best estimate of the yearend cash position. We anticipate starting with the $53 million that from operations we will generate another $41 million worth of cash that is projected of a 76,000 gold equivalent ounces yet to be produce and sold at a price of $1,300 per ounce net of $760 cash cost per ounce. We see future capital spending of somewhere in the range of $23 million to $43 million pending the permit at San Antonio with that delta. We hope to recover nearly $20 million in prepaid income tax and EBIT. As depicted on the prior slide our EBIT balance today is roughly $35 million. And we have been starting to recover this back from the Mexican government. We anticipate that the yearend cash balance will be somewhere between $62 million to $82 million pending those permits at the San Antonio project.

Please turn to the next slide, Slide 7. El Castillo, operating statistics. Q2 saw record high at the El Castillo project, record tonnes been mined over last quarter and over last year. Record tonnes been crushed and placed on the pads and construction ahead of schedule. This was offset by lower grades mine process and process which were at 0.31 grams per tonne versus 0.38 grams per tonne last year. We anticipate this grade increasing during the second half of the year as we outlined earlier in the year. Construction as I said before is well ahead of schedule with the west pad 2b complete and in production now. And the west pad 3b ahead of schedule with completion at the end of this quarter or early into the fourth quarter. The cash cost to production for the quarter were $790 per ounce in line with the full year expectations for this property.

Please turn to the next slide. Slide 8. La Colorada, operating Statistics. As with El Castillo, we set new records. However, we haven't met our goal yet. We had record tonnes placed on the pad of nearly 890,000 tonnes of material, an improvement year-over-year of 82% and versus Q1 we are up nearly 40% from where we were in the first quarter. We now have the capacity in place to reach our stated operating goals throughout the remainder of the year. Our grade mine increased significantly this quarter to 0.68 grams per tonne versus the first quarter of 0.57 grams per tonne in the prior year of 0.27 grams per tonne. Cash cost were in line with expectations at $666 per ounce. We anticipate higher gold and silver output throughout the second half of this year as depicted in our earlier presentation.

Please turn to the next slide, Slide 9. I would like to now turn -- hand over to Tom Burkhart, our Vice President of the Exploration to talk about the San Agustin project and our expectations for this year. Tom?

Tom Burkhart

Thank you, Pete, and good morning. What you see here is a drill holes map and all those drill holes have been color coded to show the thing of gold mineralization above 0.15 grams per tonne, and I will point out that this is all oxide mineralization, San Agustin is a big sulphide system and we are mainly focused on the oxide cap of that system. The triangles are all previously drilled by other most of the silver standard and geologic and the round dots are all drilled by Argonaut. Studying this map you can see that the continuity of mineralization within system is excellent. And that the system still remains open especially to the north and North West. Argonaut has completed 22,000 meters of RC drilling and what we call the main zone or the resource area. This has been drilled on pretty much 50 meter center this will give us close enough spacing where we can within indicated category of resource cap classification. We do expect a new resource number for gold and silver in the year third quarter. Company has commenced the Phase II drill program and has completed approximately 3,000 meters of a planned 15,000 meters drill program. The Phase II program will finish wide space drilling to help to find the overall size of the mineral system. Most of the drilling will be facing to the Northwest of the resource area. That drilling is underway and to be done this year. So to sum it up, we are happy with what we see in the resource area. The continuity of mineralization is excellent; it's still open, large mineral system that we will continue to test for the rest of the year. And we expect this system to grow significantly.

With that I'll turn that back over to Pete.

Pete Dougherty

Thank you, Tom. Please turn to the next slide, Slide 10. 2014 agenda. The second quarter of 2014 has brought new operating record at both mines. We anticipate medium guidance of 135,000 to 150,000 gold equivalent ounces that being towards our lower end of that production estimate. We have lowered our cash operating costs per ounce from $750 to $775 per ounce to a new range of $740 to $760 per ounce reflecting the lower first half operating cost performance. We are pleased with the result from the drilling at San Agustin and have high hopes for this project. As Tom has predicated today and before we anticipate releasing a resource on a main zone of mineralization here represented by the first 22,000 meters worth of drilling. This should be ready here shortly which will be followed by preliminary economic assessment for this project by yearend. We continue to move the Magino and San Antonio project forward through the permitting process and look forward to seeing progress in those areas here during the end of the third quarter early fourth quarter.

Please turn to the next slide, Slide 11. Growth to 300,000 to 500,000 ounces per year. Argonaut was created with the goal of creating the company with sustainable, 300,000 to 500,000 ounces per year of production. Argonaut has a superior growth profile within our sector with five exciting projects. All projects are built on the premise of maximizing our investment or reducing our risk profile. We think the unique locations and metallurgy within this project help by reducing this risk profile and creating superior projects. Today, we have two of those projects operating. The expectations for this year is between 135,000 to 150,000 ounces, there is one additional step up that we can take at those two projects to expand that production profile one step further. We see the San Antonio project been able to add nearly 100,000 ounces a year of production, and then with Magino we see the upside to go over 450,000 ounces per annum of production. Our teams have done particularly well in expanding projects and production profile over time while enhancing the operations. This quarter we saw record set at the production movement perspective with more material being moved and placed on the pads. This will set us up nicely for the second half of the year. And bodes well as our team look towards the future.

Please turn to the next slide, Slide 12. This completes our presentation for today. Thank you all for your time today. And now we would like to turn some time back over to Charlie, our operator to conduct a brief question-and-answer session. Charlie?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Rahul Paul from Canaccord Genuity. Your line is open.

Rahul Paul - Canaccord Genuity

Hi, everyone. At La Colorada, they are well into August now. Are mine grades now tracking in line with your budget or do you think it will take longer i.e. in to Q4 or early next year?

Pete Dougherty

Good morning, Rahul. And thank you for the question. I'll turn that over to Rich Rhodes, our COO, and he is here and he can talk to you about what's happening within the mine. And as we talked about we see things starting to pick up at that project through the second half of the year.

Rich Rhodes

Good morning. So far this year we have now stripped the La Colorada pit and we are down into the main part of the ore body and answer to your question, yes, we are up to the grades we are expecting.

Rahul Paul - Canaccord Genuity

Okay. That's good to hear. Then how about the crush at La Colorada. Is it fully ramped up now and operating at the run which I believe is 12,000 tonnes a day.

Rich Rhodes

Yes. The crusher continues to ramp up, we are around in excess of 10,000 tonnes per day and we continue to make improvement operating -- improvements every month. So we are added up.

Rahul Paul - Canaccord Genuity

Do you think you will need -- will you need any additional equipment to sort of get to 12,000 tonnes a day or/and do you think you can get there with what you have?

Rich Rhodes

No. We have the equipment in place and everything we need to get to 12,000 and we expect to be there eminently.

Rahul Paul - Canaccord Genuity

Okay, thanks. And then just moving on to San Agustin, I understand that you will be releasing a PA by yearend. Would you follow that up with the full feasibility study before the construction duration or will you make a decision based on the PA?

Pete Dougherty

Paul, this is Pete again. I think first stage is just to get the PA out. I don't know if we move forward to a full feasibility on this particular project. Remember, we are going to try and harness the resources right next door at El Castillo. So we believe this would be a small capital investment to get started here again with this project. So we are looking at -- and this more like as you have been into the operation, it is more like an external bargain site kind of similar to how we are running the east pad which is just about 4 kilometers away from the west pad. This project was distance about 10 kilometers away. So we have to build pads and a little plant for recovery. But we are trying to leverage our existing operations as much as we can.

Rahul Paul - Canaccord Genuity

Okay, thanks, Pete. And it also looks like some of the drilling that you are doing this year may not make into the PA, is that correct? So there might be another resource to update next year.

Pete Dougherty

Yes. What we will be looking at or this first stage of drilling of 30,000 meters, that will be what makes into the PA. The other mineralization that is starting to be drilled here through the second phase of drilling will not be included in this first round.

Operator

The next question comes from the line of Ovais Habib form Scotia Capital. Your line is open.

Ovais Habib - Scotia Capital

Hi, Pete, hi, everyone. Just a question on El Castillo cost per tonne. They were down significantly down to -- I would say $4.77 per tonne, do you expect this to be sustainable going forward or do you expect this cost to kind of stay around the $5 level?

Pete Dougherty

Thank you, Ovais. It was a good quarter for El Castillo as you know. We had anticipated all along that the cost would drop to low $5 per tonne. I will turn things over to Rich Rhodes again since he is here and he can talk to you about where he expect things as we move forward to the future but some of these capital investments and things we have been making over this timeframe have been leading up towards this so Rich?

Rich Rhodes

Yes, thank you. As Pete mentioned earlier we have hit record at both the West crushing system and East crushing system at El Castillo. We still feel there is a room to improve there and we are continuing with those improvements. Therefore we expect the cost to stay in line and below $5 per tonne.

Ovais Habib - Scotia Capital

That's great. And in terms of La Colorada again, do you see cost per tonne then coming down from I would say around $8.50 level? Or this is kind of where you kind of see cost kind of remaining in line?

Rich Rhodes

No, we expect to see those costs continue to drop as we increase our crusher throughput.

Ovais Habib - Scotia Capital

Okay. That's great. Just moving on to San Agustin. I remember when we were at site, you guys were talking about I believe it was on the north side I believe there was an anomaly or meganomaly that had not been drilled asset, have you guys started drilling there or are there any results expected from that area?

Pete Dougherty

I will turn it over to Tom. Okay, Ovais, since we have him here. Tom?

Tom Burkhart

Sure. There are meganomaly [ph] --we certainly are aware of it. This Phase II drilling there will be some holes over the year, core of that meganomaly and addition to the meganomaly we do have some resistivity anomalies that coincident with that so both of those point towards a sulphide system adopting, we will be testing, doing some preliminary testing of that as we go forward in our Phase II drilling.

Operator

(Operator Instructions) There are no further questions. Thank you. I'll turn the call back over to the presenter.

Pete Dougherty

Okay. Thank you, Charlie. This is Pete Dougherty once again. Thank you all for joining with us this morning. As I said we had a very productive second quarter with $2 million of earnings for the company. Nearly 30,000 ounces of gold being produced on a gold equivalent basis. As we look forward to the second half of the year, we see good things happening at both operations. As we talked about records are being set and tonnes being moved and processed at both locations. This coupled with the anticipation of grades rising for the second half of the year should bolster the production to meet our low end of our guidance of 135,000 to 150,000 ounces. We have lowered our expectations on our operating cost down to $740 to $760 per ounce which should yield greater margins for the company as we move forward. We are very pleased with what has occurred through the drilling at San Agustin this year. We will be putting at our resource shortly including the 22,000 meters of drilling in the main resource zone area. We have continue to drill as Tom has spoke about on our Phase II drilling program at this particular project to see the extent and test the full extent of this project in the outer limit to our contained areas here. We've recently completed the acquisition of two additional parcels and roughly 500 hectares of additional land through the El Castillo and La Colorada acquisition. We are excited about this project and look forward to yearend and our first preliminary economic assessment for the development of this project and the potential economic impact that will come from this project. We thank you again for your support and thank our employees for their effort in hitting new records this quarter after projects. And look forward to talking to you again in the November timeframe when we release our Q3 production and financial results. Thank you again and have a good day.

Operator

This concludes today's conference call. You may now disconnect.

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