Argonaut Gold: Digging Into The FY2020 Reserve Update
Summary
- Argonaut Gold released its updated Reserves & Resource statement this week, finishing the year with significant growth in reserves from the Florida Canyon acquisition.
- Excluding Ana Paula, which remains under conditional sale, the company's mineral reserve base stands at 5.83 million ounces of gold.
- Based on a market cap of ~$528 million, Argonaut is being valued at just $90.51/oz, which is a valuation per ounce that is typically reserved for developers, not producers.
- I continue to see Argonaut Gold as a solid organic growth play in the mid-tier space, and I would expect any dips below US$1.63 to provide low-risk buying opportunities.
The Q4 Earnings Season for the Gold Juniors Index (GDXJ) is nearing its close, which means that several miners are busy reporting their year-end Reserve & Resource statements to underpin their future production. The most recent name to release its report is Argonaut Gold (OTCPK:ARNGF), with the company seeing solid growth in reserves, which translates to roughly a 9-year mine life on producing assets. Based on a market cap of ~$528 million, Argonaut is sitting at a valuation per ounce typically reserved for developers, not producers. Therefore, I would expect any dips below US$1.63 to provide low-risk buying opportunities.
(Source: Company Presentation)
Argonaut Gold released its FY2020 Reserves & Resource statement this week and reported strong mineral reserves growth, with mineral reserves coming in at 6.85 million ounces at an average grade of 0.66 grams per tonne gold. Of this 6.85 million ounces, roughly 30% of the reserves are at producing assets (2.06 million ounces), which translates to a roughly 9-year mine life based on FY2021 gold production estimates of ~220,000 ounces. However, the company also has a 17-year mine life at its construction-stage Magino Project, which could be in production as early as Q1 2023. Let's take a closer look at the results below:
(Source: Company News Release)
As shown in the table above, Argonaut Gold has a total of 6.85 million ounces of gold reserves, which was up 43% from its most recent update. This was driven by the addition of new ounces at Florida Canyon following the acquisition of Alio Gold last year, drilling/modeling & mine plan changes, and an increase in its gold reserve price assumption. If not for the increase in Argonaut's reserve price assumption from $1,200/oz to $1,500/oz, the company would have seen a decline in reserves, with just 206,000 ounces added through drilling/modeling & mine plan changes at its Mexican producing assets and depletion of 245,000 ounces from production. However, given the challenges posed by COVID-19 and smaller exploration programs last year, the reserve & resource update is satisfactory, even if the gold price assumption is well above the industry average.
(Source: Company Filings, Author's Chart)
If we look at the chart above, we can see that ounces declined slightly at Argonaut's El Castillo Mine, with the smallest asset seeing a 16% decrease. However, San Agustin saw a 7% increase which picked up the slack at the El Castillo Complex (El Castillo + San Agustin), and La Colorada saw a 21% increase to 455,000 ounces. The increase in the reserve at San Agustin was mostly driven by drilling/modeling and mine plan changes which added 117,000 ounces, with the higher gold price adding another 16,000 ounces. However, the biggest change year-over-year, as noted, was Florida Canyon. As shown on the right of the chart (green bar), the acquisition of the U.S. mine added 954,000 ounces to Argonaut's reserve base.
Though it's not confirmed, the one major change is that Argonaut's Ana Paula asset remains under conditional sale to AP Mining, which is why I have shaded it differently on the right side of the chart. Argonaut recently extended the closing to meet regulatory and government approvals, and closing was expected in the first quarter. Assuming the deal goes through, which seems likely at this point, this would decrease Argonaut's total reserve base from 6.85 million ounces to 5.83 million ounces. I don't see this as a negative for the investment thesis because Argonaut has its hands full with Magino, and that is a much more impressive project than Ana Paula with a much longer mine life. Moving ahead with Magino vs. Ana Paula also allows Argonaut to improve its jurisdictional profile, with more than 50% of production coming from Tier-1 jurisdictions post 2023 (Florida Canyon & Magino).
(Source: Company Presentation)Based on solely producing assets, Argonaut has a 9-year mine life, with FY2021 estimates of 220,000 ounces of gold and a reserve base at producing assets of ~2.06 million ounces. Ideally, we will want to see some reserve growth at the El Castillo Complex, given that the reserve life here is down to less than seven years based on annual production estimates of 110,000 ounces and a gold reserve base of 651,000 ounces. With Argonaut using a gold price of $1,500/oz to calculate its reserves, it doesn't have a ton of wiggle room to add new ounces through higher reserve price assumptions. So, ounces will need to be added through drilling and changes to the mine plan going forward. Having said that, I don't see this as an issue to the thesis, given that the company is already heavily discounted for a producer.
So, how's the valuation look?
If Argonaut were a predominantly Mexican gold producer with ~2.0 million ounces of gold reserves and a ~230,000 ounce per year production profile, the stock would not be cheap at current levels with a market cap of ~$528 million. However, if we factor in potential upside from Cerro del Gallo over the long run, a stronger balance sheet following the Ana Paula sale, and massive organic growth from Magino, this a compelling story. This is because Magino has the potential to increase Argonaut's production by more than 60%, with ~150,000 ounces of gold production in its first five years starting in 2024. Besides, the company's margins should improve considerably, with all-in sustaining costs estimated at $711/oz, much better than Argonaut's current cost profile that's closer to $1,200/oz. So, while production is growing, which is great, it's also much higher-quality ounces with 50% plus margins.
(Source: Company Presentation)
Even if we use a conservative $1,400/oz gold price, the After-Tax NPV (5%) for Magino comes in at $422 million at a 0.78 US Dollar to Canadian Dollar exchange rate. It's worth noting that the Magino reserves are based on a $1,200/oz gold price and were not updated in the FY2020 Reserves & Resources update, so there is upside here to the mine life if the company were to use a $1,300/oz to $1,400/oz gold price. If we value Magino at even 0.80x its NPV, we come up with a value of $338 million, which means that investors are getting Argonaut as a high-cost ~230,000 producer for just $190 million. This is very reasonable, given that the company is generating over ~$360 million in revenue per year, even if we assume a $1,600/oz gold price. This calculation is based on subtracting the $338 million 0.80x NPV for Magino from the current market cap of $528 million.
On a per-ounce basis ounce and after excluding Ana Paula and assuming a sale, Argonaut is valued at just $90.51/oz based on a $528 million market cap and 5.83 million ounces of gold reserves. There are currently explorers and developers out there trading at a higher per-ounce basis on resources, not reserves, which suggests that Argonaut is very reasonably valued among its peer group. Obviously, the high-cost of Argonaut's operations and its heavy reliance on Mexico leads to a sharp discount, but for investors looking at the Argonaut of 2024 vs. the Argonaut of today, we should see an upside re-rating with costs dropping below $1,050/oz on a consolidated basis, and the jurisdictional profile moving from 75% Mexican production to less than 50% Mexican production.
In summary, I continue to stand by my Speculative Buy rating on Argonaut at US$1.63, and I see considerable upside if construction remains on time and budget for Q1 2023. Argonaut was previously on my Avoid list for good reasons given its high-cost Tier-2 production profile, but the Magino funding and construction decision has changed the story, and the company's brilliant acquisition of Alio Gold during the panic selling last March has improved the investment thesis with more Tier-1 production. Therefore, I see the stock as a Hold here but would view any dips below US$1.63 as low-risk buying opportunities.
This article was written by
Analyst’s Disclosure: I am/we are long GLD. 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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Comments (15)
I agree and it’s good to point out the Problems in México. But the people there are don’t really like the actually politic of the left president. So with next election this could be change. And also like your discount - the 0.4x multiple. If it’s $80MM (At Gold at $1250 - could be increase with higher price) - this is much more then the Deal about $35MM. And i think too, we will see increase on R&R also for Magino. Would you agree?
