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TABLE OF CONTENTS Apr 28 - May 4, 2014 Volume 100 Number 11 - 0 comments

Argonaut dips despite good Q1 production results

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Toronto-based Argonaut Gold (TSX: AR; US-OTC: ARNGF) reported slightly higher first-quarter production from its two gold–silver mines in northern Mexico, but that wasn’t enough to pick up the junior’s recently declining stock, which has lost nearly 26% since April 9.

The junior producer churned out 30,963 equivalent oz. gold in the quarter, up 4% from a year ago.

More specifically, its flagship El Castillo mine in Durango produced 21,976 oz. gold and 10,373 oz. silver, and its La Colorada mine in Sonora produced 7,563 oz. gold and 67,579 oz. silver. Both are heap-leach operations.

The company says El Castillo saw dipping gold production and grades compared to a year ago, while the waste-to-ore strip ratio increased 20% to 1.14, as it pushed back the north side of the pit. The gold recovery should improve as it shifts from mining transitional ore to more oxidized material. and Argonaut expects that 90% of the material it mines this year will come from oxides, while 10% will be transitional, down from 20% in the first quarter.

To help boost production, Argonaut has bought new mining equipment to bump up El Castillo’s capacity from 69,000 tonnes per day to 87,000 tonnes per day. 

The La Colorada mine has performed fairly well, with gold-equivalent production increasing by a third to 8,792 oz., as gold grades more than doubled to 0.57 gram gold per tonne, compared to the same period last year. Argonaut expects improvement at La Colorada since installing a fifth cone crusher in March, which has increased the mill’s crushing capacity by 25%.

The junior has also finished a positive internal assessment for reprocessing 4 million tonnes of old heap-leach material, grading 0.35 gram gold and 11.2 grams silver. The company estimates half of the gold and less than a third of the silver could be recovered. It intends to add the material to La Colorada’s mine plan.

At its recently acquired San Agustin gold–silver project, located 10 km from El Castillo, Argonaut has completed 11,200 metres of drilling to date. “Our goal is to provide the results from over 15,000 metres of drilling by the late second quarter or early third quarter,” Peter Dougherty, the company’s president and CEO, said in a statement.

The junior has started metallurgical testing on San Agustin, and by year-end plans to publish a resource estimate and preliminary economic assessment.

Along with San Agustin, Argonaut has two advanced exploration projects, including the Magino gold project near Wawa, Ont., and the San Antonio gold project in Baja California Sur, Mexico.

At Magino the company is testing the heap-leach potential of lower-grade material, while at San Antonio it is continuing its court battle to obtain approval for the project’s environmental-impact assessment, or MIA.

In August 2012 Mexican authorities refused to approve San Antonia’s MIA because part of the project fell under municipal zoning. The company appealed the decision, which the Mexican Federal Court denied on April 10, 2014. The company intends to re-appeal.

BMO analyst Andrew Kaip notes that first-quarter production and sales were in line with his estimates. But he describes the MIA ruling as a “minor setback,” with an appeal to the decision expected by October.

“The legal challenge by Argonaut is running in parallel with legal proceedings by the ejido of San Antonio regarding the legality of the municipality zoning over a part of the land covering the San Antonio project that is in opposition to ejido interests and state land-use zoning,” he adds in a note to clients.

Kaip has a $7 target price and an “outperform” rating on the stock.

Argonaut ended April 17 down 6% at $3.80, and over the last week has lost 26%, or 97¢ per share.

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