Argonaut Gold's CEO Discusses Q1 2013 Results - Earnings Call Transcript

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Argonaut Gold (OTCPK:ARNGF) Q1 2013 Results Earnings Call May 14, 2013 8:30 AM ET


Nicole Cowles - IR

Pete Dougherty - President and CEO

Barry Dahl - CFO

Richard Rhodes - COO

Curtis Turner - Chief Development Officer

Tom Burkhart - VP, Exploration


Rahul Paul - Canaccord Genuity

Sam Crittenden - RBC Capital Markets

Andrew Mikitchook - GMP Securities

[unintelligible] [Musanda] - CIBC

Andrew Kaip - BMO Capital Markets

Ovais Habib - Scotiabank


Good morning, ladies and gentlemen. Welcome to the Argonaut Gold Q1 2013 conference call. I would now like to the meeting over to Ms. Nicole Cowles, investor relations. Please go ahead, Ms. Cowles.

Nicole Cowles

Good morning everyone, and thank you for joining us for Argonaut Gold’s Q1 2013 financial conference call. I would like to direct everyone to the forward looking statement page. Please be sure to review this information. I will now turn the call over to Pete Dougherty, president and CEO for Argonaut Gold.

Pete Dougherty

Good morning, and thank you, Nicole. Thank you all for joining us this morning. Today I have on the phone connected with me Barry Dahl, our CFO; Richard Rhodes, our COO; Curtis Turner, our chief development officer; and Tom Burkhart, our vice president of exploration.

Please turn to slide number three, Argonaut Investments. When we created Argonaut nearly three years ago, we did so with an idea of value creation in mind. Today, I believe we have three exceptional assets in Mexico and one prominent asset up in Canada that we’ve recently acquired.

Throughout the company, we have together roughly 12.5 million ounces of reserves and resources. We have deleveraged or derisked our investment portfolio through lower operating cost and lower capital expenditure interest to get into these projects.

We believe that we are operating in favorable jurisdictions with hidden potential value drivers within all of the projects, and we are funded today with nearly $170 million worth of cash on the books. We have a proven track record and are gaining on our production profile towards a goal of 300,000 to 500,000 ounces per year.

Please turn to slide number four: Growth to 300,000 to 500,000 Ounces Per Year. This slide depicts the company’s projections and that of the Street over the ensuing years. If we look today, from where we have been over the last three years, it has been a significant growth profile.

As we looked three years ago, we started the company with the El Castillo mine, which was running at a lot of 25,000 ounces annual run rate. Last year, the company produced nearly 110,000 ounces.

We are now at that same crossroads that we found ourselves nearly three years ago: today, looking at 110,000 ounces produced last year, going to a production profile of 300,000 to 500,000 ounces by the timeframe of 2017. Our cash position is a key driver. This, coupled with cash from operations will help build this pipeline and our goals to achieving this through 300,000 to 500,000 ounces a year of production.

As we look at the various projects today, at the La Colorada and El Castillo mines, we are producing somewhere north of 100,000 ounces. 2013 looks between 130,000 and 140,000 ounces to be produced. That’s slightly up from the earlier guidance given in the year of 120,000 to 140,000 ounces.

At San Antonio, we are still in the permitting process. We expect to have this project into production by late 2014, early 2015. And that could bring another 70,000 to 100,000-plus ounces per year.

Then, finally, capping off the production growth is our Magino project in northern Ontario. We expect this project to be into production by late 2016, early 2017, and that should bring a substantial increase to the overall production profile, rendering the company with nearly 500,000 ounces per year of production.

This, coupled with lower operating costs coming online as we move to the San Antonio and Magino projects, poises the company well-positioned for the future. Please turn to the next slide, slide number five.

Slide number five, Q1 2013 operational highlights. Q1 was yet another significant milestone in the company’s history. As you can see, revenues were up nearly 77% at $43 million. This represents sales of 25,000 ounces versus 15,000 ounces in the year prior.

Net income was nearly $12 million, or a 60% rise year over year. Income per share was $0.08. Cash on hand at nearly $170 million at the end of March. When we look to production, production for the quarter was nearly 29,000 ounces and you will note that we only sold roughly 25,000 ounces of that.

Our cash cost of gold sold on a per-ounce basis was nearly $600 per ounce, coming in at $594 per ounce. Our full year estimate, again, was 120,000 to 140,000 ounces of production at $630 to $660 per ounce. We are well on our way towards achieving that goal as we have noted many times that we expect production to increase on the second half of the year as we bring on higher grade material and the new pressure at the La Colorada facility.

From an expiration standpoint, the company was pleased to announce an addition of 110,000 ounces of mineralization identified at the Veta Madre project along with increased potential in that area for expansion.

From an operating side, at the La Colorada project, we continued to add construction and have nearly completed all adds that need to be placed for us at this point in time, completing nearly 17 million tons worth of storage capacity at this site. We have started on the crushing circuit expansion and should have that into product by early or late in the third quarter.

At the El Castillo mine, we have ramped up our production on pad number eight by stacking ore early, and now have commenced leaching on this particular new construction area. Many of you will remember that we are to construct nearly 30 million tons worth of pads for storage at the El Castillo project this year.

All mining has now been assumed by Argonaut Gold as we have taken over mining from the mining contractor during the end of the first quarter. Please turn to the next slide, slide number six.

Slide number six, Progress 2013 versus 2012. Production growth was significant, nearly 38% increase quarter over quarter at nearly 29,000 ounces versus 21,000 ounces in the prior year. As I noted before, I guidance for the full year was 120,000 to 140,000 ounces. As of now, we are signaling toward the higher end of that production profile. And, as we look at resource growth, we are now with 12.5 million ounces in resources since the acquisition of Prodigy Gold and the Magino project, which brought nearly 6.3 million ounces.

As we look to the financial position of the company, which is what we are in business to do, looking quarter over quarter, you see a significant rise in our revenue while our earnings held constant, even with the additional shares issued from the acquisition of Prodigy and the warrants coming due at the end of the year.

Our gross profit from operations increased to $21 million and our cash flow from operating activities increased to $20 million from $8 million. Cash and cash equivalents at the end of the quarter were nearly $170 million.

Share price performance has been a challenge for many of us in the gold business. Argonaut has been plagued with this, as many others have seen. We see our share price today, at $6.38, down from a price of $9.47 at the year end. We compare that with gold being down slightly and the GDX also being down significantly.

All in all, we believe Argonaut is poised to take those next steps as we continue to expand our project and move in the right direction. We do not control the markets, but we do see great things on the horizon for Argonaut.

Please turn to the next slide, slide number seven: First Quarter 2013 Income Statement. As we look through the financial statements of the company, as I said earlier, when we look at where we came out for the first quarter, revenue was up significantly at $43 million.

This is reflective of nearly 25,000 ounces of gold being sold, up significantly over the 15,000 ounces being sold in the prior year. This, while the market price received was down slightly, at $1,622 versus $1,672 over the prior year.

As we look to the future, and our projected sources and uses. I draw your attention to the graphics on the bottom part of the slide. You’ll see today we have nearly $170 million in cash. We project the cash to be generated from the sales of additional ounces produced throughout the remainder of the year to be nearly $86 million.

Our working capital changes are expected to be in the positive, of roughly $5 million. Our capital expenditures and expiration program for the remainder of the year looks to be in the $45 million to $55 million range, pending approval of some of the projects.

Our projected G&A is about $7 million, and our royalty and taxes are around $13 million. That should leave the company with nearly $185 million to $195 million worth of cash in the books at the end of the year.

As we look full year over full year, our capital spending from earlier projections was to be $55 million to $75 million. We are now seeing that come in at $64 million to $74 million. The difference is in the IFRS requirement for capitalized stripping of $5 million at the La Colorada project.

Please turn to the next slide, slide number eight: 2013 Operations. At El Castillo, our capital initiatives are for $28 million, the majority of this going towards expanding the facilities. As we look to our capital expenditures at this particular project, we didn’t need to make additional investments if we wanted to hold or maintain the existing production profile, but as many of you know, we are looking towards the future.

We are constructing a new pad called Cell Number 8, which should hold roughly 30 million tons of capacity. That should be complete by the end of 2013. We have taken over the mining operations from our former contractor, and we are installing a new crushing and overland conveying system for this west pad that is being added.

Overall, we see this operation moving forward in a significant way. Today the guidance is between 90,000 and 100,000 ounces at $725 per ounce. At the La Colorada facility, we expect our initiatives this year to run roughly $19 million, with $10 million of this being classified as pre-stripping underneath the IFRS requirements.

The other $9 million will be spent on equipment and pad construction. The pad construction is nearly complete, and the equipment should, as I said before, be in and operational by late or early in the third quarter.

This will enable the company to step up its production. At the end of this year, we should have constructed nearly 17 million tons of pad capacity, and at a run rate of 4 million tons per year, we should be in good shape as we look to the future.

Please turn to the next slide, slide number nine: 2013 Development Projects. At the San Antonio project, we see a great deal of positive chatter out there, but bear in mind that we need the permits in our hands before we can really talk much about this project.

What we envision during 2013 is expanding this project from a 4 million ton per year processing facility to a facility with the capability of moving and processing nearly 6 million tons per year. We expect the cost to be similar to that $100 million expenditure that we told you all about just last year. Spending there this year will be between $4 million and $10 million, pending the approval of the permits.

At the Magino project, it is early days. We have just taken over this project. The goals this year are simply around getting get a pre-feasibility study completed mid-summer and then submittal of an EIS to be filed in the early fall.

Please turn to slide number ten: Expiration Programs. Expiration is about expansion on existing projects and land holdings. We expect to spend somewhere around $7 million this year on our land holdings and expiration that we have committed to to date. Should we have success, we will increase that budget over time. We have just begun expiration drilling on multiple projects at multiple sites within our operations.

Please turn to slide number eleven: Future Value Drivers. Last year, we at the company brought to you, the shareholders, three distinct improvements year over year, and this is where we are paid as management to deliver.

At El Castillo, we delivered 360,000 ounces into the sulfide resource within the pit. At La Colorada, we added over 110,000 ounces with the Veta Madre discovery, and there shows support for a greater number than that. At the San Antonio project, we increased the resource from 1.2 million ounces on acquisition to over 1.7 million ounces last year. And as we discussed, we just recently acquired the Magino project and just released nearly [90,000 years’ worth] of drilling and a new zone discovered in what we call the PD Zone.

Please turn to the next slide, slide number 12: The Difference. We believe that Argonaut is in the business of creating value. As you can see, we actually generate earnings for the company. We are building a company which we believe will be sustainable, which had a valuable cash cost profile and a growth profile second to none.

We believe we provide great leverage to gold, with over 12.5 million ounces in resource, while derisking this leverage through low capex and low operating cost. We are operating in favorable jurisdictions with a team that has been there and has the successful track record and is dedicated towards leading this company into the future.

One thing that separates us from many others is our ability to generate cash at these projects. This, coupled with the existing cash balance will allow the self-sustaining funding of these future projects.

This completes my formal presentation, and we’ll now turn the time back to our moderator for further question and answer.

Question-and-Answer Session


[Operator instructions.] The first question is from Rahul Paul of Canaccord Genuity. Please go ahead.

Rahul Paul - Canaccord Genuity

Can you tell me what your per-ton costs were at El Castillo?

Pete Dougherty

We were looking at $5.40 per ton.

Rahul Paul - Canaccord Genuity

Okay, so it came down a little bit.

Pete Dougherty

It did. We expect that to drop. By year-end, we expect that to drop even further.

Rahul Paul - Canaccord Genuity

And then were most of the savings expected to come from mining costs?

Pete Dougherty

A couple of areas. Yes, mining costs we expect to drop as we move forward into the third and fourth quarters as we bring online that new crushing and overland conveying. That should have an impact on mining costs. But we’re also seeing a reduction in our leaching costs and our processing cost.


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

Sam Crittenden - RBC Capital Markets

Just a couple of questions on the potential expansion at La Colorada, and adding 10,000 to 20,000 ounces there. Curious what would need to happen there. Is it just a case of putting down some new leach pads and then a portable crusher? Just wondering if you could elaborate on what would need to happen to get that into production.

Pete Dougherty

First, we’d have to file for what we call a [MIA], or our EIS, for that area, because it is not in the current plan of operations for processing those materials. So we’d have to file for that. We are looking to acquire some further ground in the area to be able to expand that even further, as we showed earlier, on some of the slides, when we announced that resource that we had discovered in that area.

Then, at that point in time, it would be simply laying down some new pad. As many of you may know, we already have a portable crusher that we have installed at La Colorada right now that is currently operating until the new crusher comes online here late second, early third quarter. So that crusher should be available to be used should we need it for crushing of material.

So I think from our perspective, right now it’s about land acquisition and also about getting the environmental statement filed for this particular area, and then pad expansion.

Sam Crittenden - RBC Capital Markets

And then is there good space for the leach pad? There’s no big earth works or anything like that?

Pete Dougherty

Yes, if you look at some of the presentations on the website, you’ll see where we have the future pad space to be constructed on the site. There are some good areas. One would be connecting right into where the old pad number nine was placed earlier, and that’s where we’d first go to build pad.

Sam Crittenden - RBC Capital Markets

So do you think this could be a late 2014 or early 2015 sort of timeframe?

Pete Dougherty

It’s hard to say, because obviously we don’t control when we can get land negotiated, and we don’t control when a [MIA] might be granted on this particular project. We would be hopeful that we could move those things through the process fairly quickly, but we don’t control that process. But I would expect roughly a year from now you possibly could be there, but maybe a little bit later.

Sam Crittenden - RBC Capital Markets

And then just a question on this accounting standard, IFRIC 20, some of the other gold companies have seen sort of a reduction in cash cost. Did that impact your results in Q1 at all?

Pete Dougherty

No, that did not. As many of you know, we have been capitalizing up our costs associated with that, because we really have been just mining mineralized material as the grades are around 0.2 grams per ton, 0.27 grams per ton versus this ore body is roughly around a 0.87 grams per ton. So we’re still in the pre-stripping mode, so we would have capitalized that material anyway, from our perspective.

Sam Crittenden - RBC Capital Markets

And then just curious if you’ve seen any changes at El Castillo. You’ve been operating the mine yourselves now for a couple of months and I know you touched on it earlier, but what sort of operational efficiencies do you have planned for the back half of the year?

Pete Dougherty

We have just taken over mining operations, so you should be aware of that. It all occurred mid to late March. So we have just recently taken over. So it’s just been a month and a half of operations underneath our tutelage.

At this point in time, we see great potential as we look towards the second half of the year, just because we’re going to be making some substantial changes by putting in an in-pit crusher and then also looking to try to change the cycle time on the equipment by changing the way that we operate, whether it be [hot] shift changes or whether it be going from 8-hour shifts more towards a 12-hour shift to get a little more efficient there. So various things that we’re looking at to try and get a little more efficient on the equipment. But still very early days.


The next question is from Andrew Mikitchook of GMP Securities. Please go ahead.

Andrew Mikitchook - GMP Securities

Can you just walk us through maybe the capex remaining in the year and try and give us any guidance you can in terms of a quarterly breakdown on that? Obviously some of these operations are, like San Antonio is permit pending. That would be [ERNs] I would assume, and some of this will be done earlier in the year.

Pete Dougherty

Right. As we look to the capital [audio drops out] … get to all of that capital out of the way hopefully by the end of the second quarter, early third quarter. So we should see most of that capital to be spent by the company here by the end of the June, early August/September timeframe.

So at those two projects. At the Magino, that’s kind of a constant. We’re still trying to get those studies completed, and as it all gets completed and ready for filing here in the fall, then spending will fall off a bit in the fall.

As far as the San Antonio, there are studies being done right now to move things from 4 million tons per year to 6 million tons per year. But yes, you are right, that has potential spending coming in in the December timeframe for early placement of orders on things should the permits be granted.


The next question is from [unintelligible] [Musanda] of CIBC. Please go ahead.

[unintelligible] [Musanda] - CIBC

Could you remind us what your unit costs for La Colorada were in the first quarter, and how that’s likely to unfold over the remainder of the year?

Pete Dougherty

As we look to the first quarter of La Colorada, it’s somewhat difficult to say how this is going to play out for the whole entire year. As we look to the first quarter, we were significantly less in our cost as we look at that.

I would say that as we look to the full year, we’re looking somewhere around $9 to $10 a ton full-in cost, as we pull in the stripping that will come later on in the life of the mine, stripping as we get into the ore body. We’re still early days just exposing that ore body, and that’s why the costs are so low right now, because we really aren’t exposing any true mineralization yet for that mine.

So the costs were significantly lower. They were down in the $5 to $6 range. But I think it’s more realistic to look towards a $9-10 range as we look towards full scale, when we’re fully operating at this particular project.


The next question is from Andrew Kaip of BMO Capital Markets. Please go ahead.

Andrew Kaip - BMO Capital Markets

With regard to the timing of when you’re going to move out of the pre-stripping stage at La Colorada and we should expect costs to come up to that $9 to $10 range, when are you forecasting that that transition is going to take place?

Pete Dougherty

We’re hopeful that’s going to start to take place in the June-July timeframe. As you look at the project today, and you look at where we were 3-6 months ago, you’ll see dramatic changes in the pit. It’s really starting to open up at this point in time. And we would expect to see those grades start to rise as we finish off this pre-stripping and really move forward.

If you look at the numbers for the quarter, you can clearly see we definitely are in a pre-stripping mode, and still moving quite a bit of waste material with nearly 3.8 million tons of waste material being moved versus a half million tons of low grade mineralization being found.

Which has been positive for the company. We did not expect to see this mineralization at all during this phase of the project. We had expected to see this all being waste material being moved. So we’ve had what some people would call ore, but I would call it mineralized material being moved, about a half million tons so far, while we were pre-stripping.

Andrew Kaip - BMO Capital Markets

And then with respect to the timing of the satellite pit at La Colorada, when do you expect to be submitting the documentation to the authorities?

Pete Dougherty

It all depends on when you can lock up some of the land agreements. And when those can get locked up, you’ll go forward and file for that. So that’s really what we need to focus on at this point in time, is obviously getting those land agreements and then stepping back and taking a look at how we move forward with permitting. But as I said earlier, when that was asked by Sam, we see that project being a 2014-2015 timeframe. It’s not tomorrow, by any means.

Andrew Kaip - BMO Capital Markets

And then can you give us an update on San Antonio? Are you communicating with the government officials at this point in time? Is the municipality of La Paz moving towards amending their municipal plan to be able to change the land use of that ground that needs to be changed?

Pete Dougherty

What I can tell you is that we are in active discussions with all parties on this particular project. And we obviously don’t control the outcome of that, but we are actively engaged in conversations there. We still are hopeful that everything will come together, and that we can have production here at this particular site late next year, early 2015. And if we haven’t completed things by the end of the first quarter next year and have permits, then we’re in jeopardy of missing that timeframe.

Andrew Kaip - BMO Capital Markets

With respect to the municipality, they were recently elected, and came into office at the beginning of the year. Do you get the sense that they’re actually engaged in the process now?

Pete Dougherty

What I can tell you and the listeners is the municipality, there haven’t been changes at the municipality per se at La Paz. But at the state level, the new head of what we call seminar, or the environmental body, that is a new person in that position. We have heard positive things from not only there but also from the municipality towards mining. And also from the state government.

But as I have said many times before, just because we hear positive things, it does not mean anything until we actually have the permits in our hands and we’re moving forward with the particular project. So while it’s very exciting to hear a change and it’s exciting to see movement and progress, we are still far away from completing things on that particular project.


[Operator instructions.] The next question is from Ovais Habib of Scotiabank. Please go ahead.

Ovais Habib - Scotiabank

Just on El Castillo, you guys will have significant capacity in terms of pad space. Are you looking to add for the pad space in 2014-2015, or are you done for El Castillo at this point?

Pete Dougherty

Obviously by building 30 million tons worth of capacity this year we’re going to be in a position that we can sit back and wait for a while. And that was the real goal this year. If we can take construction projects off the load in 2014, instead of trying to complete construction at La Colorada and at El Castillo, and at San Antonio in 2014, we wanted to try and pull all of that forward.

So we believe we’re going to be in a situation where those construction projects will be wrapped up this year. It may roll over slightly into the first part of next year. But we’re going to try and wrap up a lot of that this year and that frees us up to really focus on San Antonio in the following year. So from that perspective, I see us in a position where we don’t need to construct any additional pad space next year should we get all that done this year.


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

Pete Dougherty

Thank you, operator, and thank you for your support, our various shareholders who are on the line. As I look to 2013, it’s been an exciting year so far. We see great things happening with the projects. It’s a time that is very challenging for us in the business, as many of you have followed what’s happening with the gold market as a whole.

But I think we are well poised to take advantage of this at this point in time for the company. I see good things happening at El Castillo with great production coming, good things happening in the mine, with changing production schedules and looking towards the future there and being able to plan for where we can take that project as we step up to that next level.

At La Colorada, the installation of this new crushing circuit will tremendously change the future of that project. We’ll be going from a project that right now is crushing at somewhere around 250 to 300 tons an hour to a project that will do nearly 11,000 to 13,000 tons per day. So a significant improvement there as well.

So, looking forward to the future, really see a lot of bright things coming, and we’re well poised to take advantage of investment opportunities as we grow out this company towards the near term.

As I’ve said many times, this is a reflection point for many of our investors. Three years ago, we looked at an operation that was producing at 25,000 ounces a year. Three years later, you have 100,000 ounces a year production. Hence, three years from now, we expect to have operations in production that can generate nearly 300,000 to 500,000 ounces of gold per year. We look at lower-cost operations coming online from what we are currently operating, and I believe the future is bright for Argonaut Gold as we look towards the future. Again, we thank you for your support and thank you for your time this morning. This concludes our presentation.

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