- Argonaut Gold released its Q4 and FY2020 results last week, reporting a new quarterly record for gold-equivalent ounce production.
- This sharp increase in production combined with higher metal prices translated to 19% revenue growth year-over-year.
- While Argonaut continues to be an unattractive high-cost producer with FY2021 guidance forecasting costs of $1,300/oz, the story going forward is Magino which provides significant organic growth.
- At a current market cap of ~$494 million, the stock looks very reasonably valued here at just ~$92.00/oz, so I see the stock as a Speculative Buy here at US$1.63.
We're more than two-thirds of the way through the Q4 Earnings Season for the Gold Miners Index (GDX), and one of the most recent names to report is Argonaut Gold (OTCPK:ARNGF). While most of the Mexican gold producers saw a sharp decline in output year-over-year, Argonaut saw only a marginal decline in production, thanks to the timely acquisition of Alio Gold.
This deal padded what was an otherwise difficult year due to temporary COVID-19 related shutdowns, helping Argonaut report record revenue in FY2020. However, with sentiment surrounding miners in the gutter, Argonaut has sold off again, despite a strong organic growth profile. With Argonaut now trading at below ~$100.00 per reserve ounce, I see the stock as a Speculative Buy here at US$1.63.
Argonaut Gold released its Q4 and FY2020 results last week and reported record quarterly production of 57,000 gold-equivalent ounces [GEOs], a 20% increase from the same period last year. This strong finish to FY2020 helped the company to report a multi-year high for annual GEO production, with production coming in at 203,500~ GEOs (including Alio Gold output). If we adjust for production under Argonaut's ownership, annual production came in at 179,200~ GEOs, down 8% year-over-year.
While the year-over-year decline is not ideal, it's actually a solid result given that Mexico issued a nearly two-month government-mandated shutdown related to COVID-19 before mining was declared essential. Let's take a closer look at the results below:
(Source: Company Filings, Author's Chart)As shown in the chart above, it was a solid finish to the year for San Augustin, with ~18,600 GEOs produced, pushing annual production to ~63,900 GEOs. This figure was just shy of the ~64,800 GEOs produced in FY2019, driven by higher mining rates, with ~9.3 million tonnes of ore mined in FY2020. Meanwhile, El Castillo had a weaker year due to a shift to run of mine ore vs. crushed ore, which translated to lower recovery rates and lower grades.
This led to a 31% drop in production year-over-year, with just ~46,200 GEOs produced in FY2020. Fortunately, the company's newest Florida Canyon Mine (acquired from Alio Gold) picked up the slack in H2 2020, with more than ~22,000 GEOs produced.
Fortunately, while gold sales were down year-over-year (~179,200 vs. ~194,300), all-in sustaining costs [AISC] dropped on a year-over-year basis. During FY2020, AISC came in at $1,244/oz, down from $1,299/oz in FY2019, a 4% improvement year-over-year. Meanwhile, Argonaut's average realized gold (GLD) price increased from $1,390/oz to $1,789/oz, translating to a massive boost for AISC margins. So, while costs are still nowhere near attractive levels and 20% above the industry average, investors can at least take solace in the fact that AISC margins rose from $91/oz to $545/oz, or a 400% plus improvement year-over-year. Let's take a look at the financial results:
Based on the much higher gold price in FY2020, Argonaut managed to generate record annual revenue of $319.7 million, a 19% improvement year-over-year. Meanwhile, annual earnings per share increased to $0.21, up from $0.07 in the year-ago period, driven by higher margins but slightly offset by lower gold ounces sold. This leaves Argonaut trading at less than 10x earnings at current levels and less than 1.6x trailing-twelve-month revenue. Let's look at Argonaut's long-term trend in annual GEO production.
As shown in the chart above, Argonaut has seen a rather tepid growth rate in terms of production over the past several years, despite the fact that it's aimed to grow through acquisition. This is because production has averaged a compound annual growth rate of just 4.7% since FY2014 (~179,000 ounces vs. ~135,900 ounces), which pales in comparison to miners like Kirkland Lake Gold (KL) that have seen production grow more than 800% in the same period (~150,000 ounces to ~1.37 million ounces). Argonaut's inferior growth relative to other mid-tier peers is due to its major acquisition of Prodigy Gold, which sat dormant for several years. Meanwhile, many other acquisitions in the space made by other miners were already in production, and immediately accretive.
(Source: Company Presentation)Fortunately, Magino construction has finally begun, which should vault Argonaut from an underperformed back to a performer if it results look like the mine plan. Argonaut is currently sitting on more than ~$230 million in cash with another ~$125 million on its revolving credit facility, which means that the project is now fully funded, a very exciting milestone for investors. For those unfamiliar, Magino is expected to produce 150,000 ounces for its first five years at an AISC of $711/oz, making it one of the lowest-cost projects in Ontario.
When combined with Argonaut's higher-cost production profile, this should help the company transition from a 250,000-ounce producer at $1,250/oz AISC to a 400,000-ounce producer at costs below $1,075/oz; a major improvement. While this would still lead to a lower multiple relative to most other mid-tier and intermediate producers, given that Argonaut would still have ~50% of its production coming from Mexico and industry-lagging costs, this still leaves room for an upside re-rating for the stock.
I believe that a fair value for Argonaut's ounces currently is $135.00/oz, which is significantly higher than the current valuation of $92.16/oz. Once Magino achieves commercial production, this valuation could improve closer to $175.00/oz. This suggests significant upside from current levels if we can see Magino built on time and on budget, and moderate upside in the meantime.
Based on the most recent timeline, commercial production is expected in Q3 2023. Assuming reserves stay stable at ~5.36 million ounces, this translates to a fair value market cap of ~$723.6 million. If we divide this by the 303 million shares outstanding, this translates to a conservative fair value for Argonaut of US$2.38.
Argonaut had a satisfactory year from existing operations, but the highlight was its timely acquisition of Alio Gold which should allow Argonaut to grow production by more than 25% year-over-year (~230,000 ounces vs. ~179,000 ounces). While costs are expected to remain high with FY2021 guidance of $1,300/oz, Argonaut's real investment case is Magino, which could be a game-changer for the company by H2 2023.
With Argonaut currently valued below $100.00 per reserve ounce based on a market cap of ~$494 million and 5.36 million ounces of gold reserves, the stock looks very reasonably priced here, and there's material upside if Magino can deliver on expectations. Therefore, I see the stock as a Speculative Buy here at US$1.63.
This article was written by
Analyst’s Disclosure: I am/we are long GLD, KL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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