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Good morning. My name is Pam, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Argonaut's Q3 2021 Financial Results Conference Call and Webcast. [Operator Instructions] Thank you. Mr. Dougherty, you may begin your conference.
Thank you, Pam, and welcome, everyone, to Argonaut Gold's Q3 financial and operating results conference call and webcast. I want to thank everyone for taking the time to join the call today. We had another strong quarter, both operationally and financially. Today, we're going to walk through the Q3 results, which yielded very strong cash flow and earnings. And we are also going to spend some time providing you with an update on our Magino construction project and our recent increases in mineral tenure at San Agustin District and our exploration initiatives, which are providing terrific results. Just before leaving this introductory slide, I want to draw your attention picture of the Magino process plant area. The project is tracking on schedule, and we are in the process of finishing a review of the capital. I know everyone is anxious to receive this update, and we fully intend to provide you with an update as soon as we can, which will be before the end of this year. However, we are still working on this. And as you can imagine, there are thousands of line items to go into a true bottoms-up estimate. We will discuss this further a bit later in today's call. But first, let's move forward and go through the Q3 results. Slide #2. During this presentation, we will be making forward-looking statements based upon our best knowledge as of today. Please note that we cannot predict the future with 100% accuracy, but we will do our best based upon the information we have today. Slide #3, Q3 2021 and recent highlights. It was another strong quarter, both financially and operationally for Argonaut. We produced nearly 59,000 gold equivalent ounces at an all-in sustaining cost just a little over $1,200 per ounce. We generated cash flow from the projects of nearly $40 million despite the unusual productivity challenges that we typically experienced during the rainy season in Mexico. We saw increases in the net income of 12% and adjusted net income of 43% when compared to Q3 of 2020. This was a tremendous achievement when you consider that the realized gold price dropped 7% this quarter versus a year ago. Thinking about short-term growth initiatives, we made great strides with respect to the Magino construction project, which remains on schedule. If you are not already signed up for a monthly newsletter to track this progress, I encourage you to do so, and we'll walk through some of the progress at this particular project in a few moments. This quarter, we also quadrupled our mineral tenure at our San Agustin project, creating one of the biggest areas in that district, something that the market could be sleeping on today, but given that Magino is at the top of mine for most of our investors today, we think this project has great potential. I'll discuss what this means to Argonaut shortly here after. Thinking about our longer-term growth initiatives, we had a fantastic quarter in terms of exploration results, both at Magino and the La Colorada project. I'll spend a bit of time on each of these programs today as well. Now I'll turn the call over to Dave Ponczoch, our CFO, to walk through the Q3 financial highlights. Dave?
Thanks, Pete. If you'll join me on Slide 4, financial performance. With sales of nearly 61,000 gold equivalent ounces for Q3, which led to revenue of approximately $109 million. As Pete mentioned, this drove very strong cash flow of nearly $40 million for the quarter. Net income increased 12%, and adjusted net income increased 43%. One of the items which we are really proud of, is we set out the goal to generate $100 million cash flow this year, which is obviously very important as we are reinvesting into the Magino construction project to grow and diversify our business. Through the first 9 months, we've now generated $107 million and have already achieved this goal, and we still have 3 months to go to add to that total for the year. If you'll turn to the next slide, Q3 2021 capital spending and cash flow. Looking at our Q3 cash flow reconciliation, we have ended Q2 -- we had ended Q2 with $216 million in cash. We generated $40 million in cash flow and invested $73 million in capital programs. So that leaves us with $168 million in cash at the end of Q3. More than 80% of the capital spend during the quarter went towards the Magino construction project, as you might expect. During the 3 and 9 months ended September 30, 2021, we incurred $68 million and $171 million, respectively, towards the Magino construction project. I'll now turn over the call to Lowe Billingsley, our Senior Vice President of Operations, to walk through the operational highlights for the quarter. Lowe?
Great. Thanks, Dave. The operations overview for the quarter, we saw a 20% increase in production and a 14% reduction in all-in sustaining costs compared to quarter 3 last year. The increase in gold equivalent ounce production was primarily due to the lower production in Q3 of 2020 as we were ramping back up from the temporary suspension of mining in Mexico during the onset of the pandemic, higher grade at La Colorada as we mine deeper in the El Creston pit and a combination of higher grade and productivity and operational improvements at Florida Canyon since acquiring the mine July 1, 2020. On the cost side, El Castillo and San Agustin saw increases in cost compared to quarter 3 last year, primarily related to increased mobile equipment maintenance costs and also we tend to use higher levels of reagents during the rainy season. In Durango this year, it was a well above average rainy season. Costs were significantly lower than Q3 2020 at both La Colorada and Florida Canyon. At La Colorada, this was primarily driven by higher gold grades and a lower strip ratio as we go deeper into the El Creston pit. At Florida Canyon, higher grade was also the driver of lower costs, but we have had productivity and operational improvements that led to more tons to the leach pads in prior months. Overall, it was a strong quarter operationally considering the seasonal impacts associated with quarter 3 in Mexico. Regarding 2021 guidance, on Slide 7, we're tracking very well compared to our 2021 production and cost guidance. Mill size is well positioned to reach the upper half of production guidance and the lower half of cost guidance, which bodes well for our cash flow, particularly at current gold prices. I'll now turn the call back over to Pete.
Thank you, Lowe. I'm on Slide #8. Of course, none of our operating or financial success would be possible without our cultural commitment to sustainability. We are making investments into human resources to be in a position to deliver on our ESG strategy. We just recently appointed Alfredo Phillips as Vice President of Corporate Affairs and Country Manager for Mexico and welcome his wealth of experience from Torex Goldcorp and ArcelorMittal. As we see and feel he is the right person to continue to lead our team in Mexico with respect to government and community relations as well as executing on our ESG strategy. Slide #9. This quarter, we had several initiatives underway at our various mines and projects. This slide shows just the tip of the iceberg, but gives you a glimpse of some of the corporate social responsibility initiatives that we are very proud of here at Argonaut. Slide #10. Magino construction capital estimates. Now I'd like to spend a few moments providing an update on the Magino construction project. We typically speak in Canadian dollars when we were discussing Magino's construction capital as about 85% of the capital is in Canadian dollars. When we approved the project, we made our construction decision on an estimate between CAD 480 million and CAD 510 million, so using round numbers roughly around CAD 500 million. When we took a look at this construction estimate in the first quarter of this year, we had a few months of site preparation under our belts and in May, guided to the potential increase of up to 15% from the original estimate back in October or roughly $575 million using that original starting point of $500 million approximately. Then during Q2, reporting period in August, we saw other companies in our industry with very large capital projects, providing updates that were well above the 15% increase. At that time, we hadn't done a new capital estimate. However, we felt we could not say that we would be within the 15% increase signaled in May. Additionally, we were seeing cost increases just like others, and we announced spending would be trending above -- potentially above that 15%. As you can imagine, a true bottoms-up estimate takes months to do properly with all the moving pieces. We are working to provide a new bottoms-up estimate before the end of the year, and we'll provide more information as soon as we have it, but we have been experiencing cost pressures like everyone else in the current environment. We do believe that we will be above that 15% previously outlined in May. Since we are close to providing this new estimate, we felt it appropriate to withdraw our 2021 capital guidance until we have this update completed. We have incurred $171 million or about CAD 213 million through September 30 of this year out of the original guidance, which was $235 million to $250 million. So you can see we're well within line of where we expected. Again, we are working diligently to complete this CapEx review and provide an update and should be able to do so in the coming weeks. Please turn to Slide #11. And the good news is that we are tracking on schedule. We are pouring concrete and have completed so in many areas and have begun construction on the tailings facility. We are still currently on track for first gold by the end of Q1 of 2023. I again encourage all of you to sign up on our website for our monthly newsletter construction project that's going on. Slide #12. You can see from these pictures that the project is progressing well. The open pit is starting to be opened up. The plant site is coming along and the tails impoundment area work is undergoing today. Steel is arriving at site and building construction is up next. Please turn to the next slide, 13. We get a lot of questions about supply chain due to COVID-19 and whether this is an issue for us. As many of you know, we have partnered with the Ausenco Group, and they are staying on target for that Q1 2023 pour. I'm very happy to report that we are one of the first projects out of the gate. And because of this, it has allowed us to get our orders in the front of the line. We are hearing that lead times on several key pieces of equipment such as mills are really starting to stretch up. But as you can see, we are in good position with our major process plant components and expect delivery of these items during the first quarter of 2022. Please turn to Slide #14. Now switching gears from Magino construction, I wanted to spend a moment discussing our latest acquisition. I felt like it is slowing a bit under the radar since the focus for most of us is on the Magino construction project. We did a deal this quarter where we quadrupled our mineral tenure at our San Agustin District for about $6 million. You can see our previous mineral claims in the blue color and our pit outlined in the red dash oval right in the center of the page. What excites us about this deal is twofold. We feel like this deal more than paid for itself as it allows us to push back the pit walls into those 4 small yellow areas, expanding the pit. This allows us to capture what we call wedge ounces or ounces that are on our side of the property boundary but could not be mined because of the angle of the pit wall. Now we can. The second benefit of this deal that is also very exciting is the acquisition of the massive yellow block that surround all of San Agustin. This increases our potential for exploration by over 400% in mineral tenure. I really think the market is focused on other things happening in the company right now from Magino's construction to our exploration successes at both Magino and La Colorada, and we understand it. That's normal. But we are very pleased to get this deal done and what it could mean for the company in the future. These near mine acquisitions are usually the type of deals with the highest rate of return since you already have the infrastructure and equipment and team in place to mine and process ounces. It is now about pulling more into the mine plan and the best place to find new gold is where you found it before. I will now turn things over to Brian Arkell, our Vice President of Exploration, and he will walk you through some of the recent exploration results. Brian?
Yes. Thanks, Pete, and good morning, everyone. If you'll turn to Slide 15, I'll take a moment to update you on our high-grade discovery at La Colorada. During Q2, we announced some of the best drill results we've seen from the entire precious metals industry this -- in recent memory. And during Q3, we followed up with some impressive results from our Phase 2 program below the El Creston pit. The deposit was mined underground in the 1800s and 1900s -- early 1900s, we're now finding the down dip extension of what the old-timers were mining back in the day. There were no records of the grades at that time that we knew that we would find high-grade continuing a depth below the pit. We now believe we've discovered the down dip extension of these high-grade veins and the early results you can see speak for themselves. We've hit several 20-meter width, wide widths of high-grade gold and some fantastic widths 5 to 10 meters of 40 to 100 grams per ton of gold. If you'll turn to Slide 16, that is a cross section of the deposit. You can see that we're targeting 3 very distinct veins and following the downdip extension, needless to say, we're very excited what this could mean for the future of La Colorada and something certainly to keep your eyes on. Right now, we're doing some modeling on this -- these veins, and we're looking to do some underground scoping work here in the very near future. So if you'll turn to Slide 17, please. Can't talk exploration without mentioning Magino's high-grade potential at depth below the pit. There are some very early results of the high -- numerous high-grade zones that were found on the property. But I want to take a moment to go over the elbow and central zones as you can see in the red box on this slide. When we began drill testing for high-grade mineralization at depth over the last couple of years. Initially it was wide space drilling across 6 distinct targets, and we hit high grade in each single one of them. Recently, though, we've turned our focus back to the first high-grade discoveries, the elbow and central zone to focus on an early-stage resource definition drilling. If you'll turn to Slide 18, you can -- this is a long section of the elbow zone, you can clearly see the potential. The red area shows areas where we are hitting greater than 30 grams per ton gold in our drilling. We're testing the zone now down to 1,000 meters vertical depth. And while I say results are taking longer to get back these days, these holes take some time to drill. Keep your eyes open. We'll be continuing to put out results. We have 4 drills turning there, and we'll begin to see results in the near future. And with that, I'll turn it back over to Pete.
Thank you, Brian. If you could all join me on Slide #19. Thank you for your patience as we continue to work to get that Magino CapEx estimate nailed down as disclosed earlier before the end of the year. With each passing month, Magino becomes more and more derisked and as we move it closer and closer to our first gold pour in 2023. Also, keep a look and eye out looking for exploration updates, both at La Colorada and Magino as we continue to develop these high-grade targets. With that, I'll turn the call back over to our operator, and for a brief question-and-answer session. Pam?
[Operator Instructions] Your first question comes from [ Neri ], a private Investor.
Can you hear me?
Yes, we can.
Good. Been an investor since Alio Gold days with you guys. So very pleased with what's going on. Just had few questions. The first one is regarding Ana Paula. What's happening with it? Because I don't see any mention about it in the presentation or the website? So just wondering what's going on with Ana Paula right now?
Okay. I'll take that question. Ana Paula is an interesting project. It's a project that is permanent today, a project that's in the Alio Gold days was going to be their flagship as they move forward. As we saw this project, we thought it was an exciting project but one that we would not be able to move towards until a later point in time as we see in our portfolio today, Magino is the #1 construction project first. Secondly, we think that our Cerro del Gallo would be our #2 project. Both of these projects host nearly 5 million ounces on a gold equivalent basis or more. And so they are much larger than an Ana Paula project. And therefore, that means Ana Paula doesn't get moved into our time frame, sitting in the third slot until a much later point in time for development. We always have felt that Ana Paula is an exciting project, one that can generate significant cash flow for somebody, but it's a bit on the small side being about 1.2 million ounces as we understand it today. So we were looking for a deal where we thought we could receive some compensation today and then a longer-term investment on that project over time via a deferred payment scheme or a royalty scheme. And so we're still holding that asset as available for sale, if somebody might be interested. But from our perspective, it really is the third project in the line, not the #1, #2, so it will be coming later in this -- in the line of projects that we'd be looking to develop.
One more question. So in Mexico, right, there's a permitting issue going on. Have you guys felt it? Because I see Fortuna had an issue getting the permits, and it's been a while for Argonaut to get the permits for Cerro del Gallo. So I'm just wondering what's going on? How do you feel about it? I mean, for Fortuna, I understand the community were against them, but for Argonaut, not sure what's going on because we are supposed to get the permit by now, but still, we haven't received it. So just wondering what's going on over there?
Right. When we look at Mexico, I can give you a little color around permitting. Permitting is moving very slowly in Mexico, and it's not just us, it's everybody. And it's not just mining. I mean, in Mexico, it doesn't matter whether we're talking about infrastructure projects like roadways or airports or even electricity-type facilities trying to be permitted and put in place. Everything is moving slowly from everything we have heard and a lot of things are being canceled. We think there have been 2 distinct issues with this. One, there has been a change in government. And then secondly and the more point in part is COVID. As you know, many of the federal agencies in Mexico are all centralized in Mexico City. And that is a very densely populated area and things are very strict in Mexico City right now as far as getting around and people coming to work or not. And have not, at this time, really opened up from a government perspective. Now that slows things down in a very tight fashion. And what happens is that all permitting, as I said before, has been coming to a very slow movement process in Mexico. With that being said, we think we have great support for our projects, especially the Cerro del Gallo project in Guanajuato. And as we look at that, even if we had permits today, we would not be moving that project forward as our efforts today are all focused at the Magino project, but it would be our next project that we'd be moving forward on. So I think we need to just remain calm on this and watch as hopefully COVID starts to take a turn the other way here and hopefully, that Mexico opens up a bit more, and we can start to see some advances in the government areas and start to move forward projects such as Cerro del Gallo. Hopefully that answers your question?
Yes. One more question, then I'll get back online, if there is any. So regarding Magino construction, right, previously, you've been saying at 1,600 gold that you don't have any more dilution like you're going to do the construction with the cash flow generated from the mine. Is that still valid? Or you think you're going to need a higher gold price than 1,600?
Well, when we looked at the Magino construction originally, we outlined a capital program that would get us there. We needed roughly around USD 135 million coming out of the business over the 2 consecutive years, 2021 and 2022 in order to support that at a $1,600 environment with the things that we had in place at the time. Now if capital construction goes above this, and if we are unable to generate that $135 million from the existing operations, well, then there might be a need to draw either on our revolver or to find funds elsewhere. Right now, it's too early to be able to say what Magino's true capital might be at the end of the day. We're working on that bottoms-up approach and we hope by the end of the year to be able to come out and share that with you in what our program might be as how we would attempt funding that.
[Operator Instructions] Your next question comes from Terence Ortslan with TSO & Associates.
Terry Ortslan from TSO & Associates. Couples of questions, guys. A lot of details here, that's good. I understand that you need some time to get this capital budgeting appropriately done. What's off the table in terms of -- has been accomplished in terms of engineering equipment procurement. What's -- like I see the slide number, was it 13? How much of the equipment has been procured and dealt with? How much engineering has been completed so far? Things like the typical breakdown of the project, where are we on that before the year-end final number we hear from you guys?
Right. Okay. So Terry, this is Pete Dougherty. When we look at the project today, I think it's important to understand, whenever you start a project like we did when we put out our first announcement of a bottom-up approach that was early in the year. We really didn't know a lot about the site because we're just getting into tree clearing and trying to figure things out at the site. What I tell a lot of people today is we know now what we didn't know when we first started. You just saw a lot of trees and stuff out in areas. Today, if you look over the site, you'll see that many of the -- most of the site has already been cleared. A lot of the foundational work has been done. And we have completed the original 11 copper dams that would need to be put in place before we could start on the main tails impoundment facility. So what we know today is what we didn't know before, right? All the clearing has been done, all the foundational work has been done. I liken it a lot to a house. When you're building a house today, and you look at your contractor and you go month after month after month, and you really don't see a lot of advancement because he's putting in the sewer lines or putting in the power or the water lines coming into the house. He's building that foundational before you can start to erect the actual building itself. That's really all the work that has been completed to date. As far as the engineering and design work, well, obviously, you cannot go forward and start ordering mills and building cyclones and building thickener tanks and leach tanks and all these other pieces to it if you haven't done the engineering. So clearly, the facility itself, the engineering has been done. And you can see the pictures of the equipment that has been completed and is getting ready for shipment. We're already starting to receive part of that. The steel has already arrived on site part of the steel and they're going to start erection of that facility as we speak. So things are advancing a long term quite well on the project. But there are still more things to be done. We still have to finalize the tails empowerment. We're about -- just a rough guess, somewhere around 15% of the way through on the build of the dam right now that we need to build. So a lot of preparation work has been done. Now it's about the execution and erection of building it up from this point in time.
Got it. I mean I'm not undermining by any means, it's all like projects like this. Doesn't matter if it's midsize or big always take a lot of details and a lot of execution risks. Just seasonally, before the winter settles in are you -- in your mind, you schedule before the winter months kind of come in and slow you down?
I would expect that when we look at this, and I met with the Ausenco management last weekend, actually. And when I talk to them about how they're going to execute over the winter. The game plan from them is to continue moving forward over the winter. So to continue with the buildings, continue with getting all the foundational pieces, the pouring of concrete, all that through the December time frame, take a couple of months off in January, February and hit it back again in March really hard. But in the meantime, equipment is going to start to arrive. One of the things that we have at our disposal right now is that there is an old abandoned mill site there in the town of Duberville that we have acquired the right to be able to place the equipment in those buildings, et cetera. So we'll have it as the equipment arrives in under cover and safe for when it needs to start to go in to be placed here early first quarter -- or late first quarter next year.
Okay. Got it. On the mineral tenures, I'll come back to Slide 14. Okay, you got about close to 40, 50 square kilometers of land position here. Am I right, approximately?
It's a large land package.
Have you done any -- just save me time for me. mapping, any geophysics on those properties that you acquired?
Yes. I'll turn this over to Brian Arkell, our Vice President of Exploration, because we know a little bit about this property. So Brian, would you take this?
Yes. No, we haven't, Terry. We haven't done it internally. We would long to Fresnillo before, as you know. And what we do have is we have their database that we obtained a while back. So we have that knowledge by ourselves. We haven't been on the ground. We do have quite a bit of drilling on the edges of it. And so we're quite familiar with it. But no, we haven't done the work internally.
And who's the light green spot, third-party claims, who are they, sorry?
Yes, it's a small junior -- yes, rather not talk the name there, but yes, it's not us.
Okay. Okay. And look forward maybe should have an Analyst Day or something like that when you get the project numbers kind of more fixed in terms of possibility of sharing with us, if you don't mind, sometime later in the year or early next year, it is up to you but I'll leave it on the table.
Okay. All right. Thank you, Terry.
Your next question comes from Wayne Lam with RBC.
Just a question on the optimizations at Florida Canyon. Just wondering if you had any commentary on how the ramp-up has gone with the new conveyance stacking system? And should we be anticipating further cost savings into Q4?
Wayne, this is Pete. Since we have Lowe here with us today, I'll transfer this over to him. As you probably noticed that production moved up slightly quarter-over-quarter, again, obviously, a big pickup from first quarter to second quarter, a little bit of improvement here in third quarter. But as we told you, we thought this was fourth quarter into next year. So go ahead, Lowe.
Yes, sure. Thanks for the question. Just the status of the overland conveyor project. We are in the process and we have that commissioned and are in the process of ramping that up at the operation. The team is fully engaged in terms of making that operational and getting it to be as efficient and effective as it can be. Probably the largest component of not seeing the big tons coming up, maybe that we had talked about on that. We did have a lot of benefit of tons of backfills sent through the crushing facility early in the year, and those historic backfill tons are becoming less and less in the pit as we continue mining. And so that is impacting our throughput rates, but we'll continue to push those productivities up and we should expect to see those coming up over the course of the next couple of quarters.
Okay. Perfect. And then maybe just at Magino, on the CapEx review, does that impact the timing of the spend at all or just the quantum of spend on the individual items? And will any of the operating costs be reviewed as well?
Wayne, so obviously, if we change the capital costs that could impact on that timing. I don't have that right now today. As far as looking at the overall operation, yes, we've been doing a fair bit of drilling on the project, some infill drilling, et cetera, all of that, that we will be including into a new revised 43-101 to come out sometime during Q1 of next year on that project, and all that will be taken into account. So a new model, new drilling, new mine plans, the whole entire package.
Okay. Got it. And then maybe just last one. Kind of related to on the permitting side in Mexico. Just wondering on the new concessions adjacent to San Agustin, what kind of needs to be done there on the permitting side? And how are you guys thinking about that in terms of time line?
Okay. In terms of permitting, if we wanted to conduct new drill programs, as you know, Fresnillo had done some work here before. But if we wanted to conduct any new drill programs ourselves, we need to go through and get the permitting in place there. That's usually done under what we call an IP and usually takes anywhere from 30 to 60 days to accomplish that to get any drilling. Now if we wanted to move to an expansion where we're actually mining or producing out of there, that would require an adjustment to MIA, which could take 6, 9 months in timing in today's world, the way things are working. In the old terms, it could have been 4 months. But today, I think we're looking more closer to 6 to 9 months on a MIA. Is that correct, Brian?
Yes, except for that 1 block to the north in right on the edge of our pit, that's already in the permitted zone.
Right. Those are already permitted zones, so the yellow areas.
That's right. It's fully permitted, and we're drilling on it right now.
So that larger -- we're talking about that larger area where we'd have to go get new permits and MIAs and those things. But the little fourth quadrant is right close into next to the pit are already within our existing permits, and he's drilling today.
Okay. And so sorry, just to clarify on Cerro del Gallo with the resubmission. Is that also kind of a 6- to 9-month time line that you guys are looking at now?
Yes. We're in the process of preparing a new permit application, that'll go in sometime next year. And then I would think you're looking at a 6- to 9-month time frame after it's the middle of it, Wayne.
There are no further questions at this time. Please proceed.
Pam, thank you very much, and thank you all for joining us this morning with the Q3 results and conference call. Again, we couldn't accomplish what we have without our people on the site, and they have done a tremendous job in delivering. Very pleased that the operations have already put $100 million back onto the balance sheet through cash generation, which is well ahead of our target for the year. And we look forward to talking with you all again at the end of the year or later on as we discuss results from exploration drilling to the new capital estimate at Magino. Again, thank you for your time this morning, and have a great day. Bye now.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.