VANCOUVER — Argonaut Gold (TSX: AR; US-OTC: ARNGF) is walking a fine line by expanding its gold and silver production while controlling operating costs to maximize its free cash flow. The company’s long-term goal is to boost its annual gold output to between 300,000 and 500,000 equivalent oz. gold.
During the second quarter from its two Mexican mines, Argonaut cranked out 37,000 equivalent oz. gold at overall cash costs of US$779 per oz. The result marks a 21% production improvement compared to the same period in 2014, though quarterly cash costs rose US$20 to US$756 per oz. The company’s producing mines are the wholly owned El Castillo open-pit gold mine in Durango State and La Colorada underground gold-silver operation in Sonora State.
The company registered quarterly cash flow from operations of US$11.4 million before changes in non-cash working capital, and a net increase in cash balance of US$2.8 million to bring the total to US$43.7 million.
“The increased costs were due to lower grades at El Castillo and higher cyanide consumption,” president and CEO Pete Dougherty explained during a conference call. “We expect our all-in sustaining cost to drop further as we lower our capital spending throughout the remainder of the year, and into next year we should see a significant reduction in our capital spending.”
Argonaut is taking steps to cut costs, including layoffs at El Castillo and La Colorada, contract renegotiations with major suppliers and operational adjustments, in case gold drops for some time below US$1,100 per oz..
Argonaut spent US$22 million of its US$37-million annual capital-expenditure budget through the end of June, including US$16 million at El Castillo where it built a heap-leach pad, and US$11 million at La Colorada where it installed an overland conveying system and heap-leach pads.
“I’m happy to report that the heap-leach pad at El Castillo has been complete, which was the major capital undertaking for the project this year,” Dougherty elaborated. “At La Colorado we have completed the 6A and 9A leach pads, and the conveyor. We are well under way with our construction projects for this latter part of the year, when we see the rain starting to influence production and construction ability.”
Argonaut’s next development project appears to be the San Agustin satellite deposit, which sits 10 km west of the El Castillo complex. The company picked up the asset for $75 million in cash and shares in late 2013, and figures it can get it into production for US$67 million.
According to a preliminary economic assessment released in early 2015, San Agustin would produce 50,400 equivalent oz. gold annually over a 10.5-year mine life at cash costs of US$670 per oz.
Assuming metal prices of US$1,200 per oz. gold and US$17 per oz. silver, San Agustin has an after-tax net present value of US$70.2 million at a 5% discount rate, and is projected to have a 22% after-tax internal rate of return.
“Recent drilling has increased the footprint of the San Agustin property, while land negotiations and permits are moving forward,” Dougherty said. “We’re quite excited by the project and see advancements and a potential to increase resources even further. When we look at upcoming catalysts for the company it’s definitely San Agustin, and we’ll have a drilling update in the third quarter and hopefully a construction decision by [year-end].”
San Agustin hosts 82 million indicated tonnes grading 0.32 gram gold per tonne and 10.7 grams silver per tonne for 845,000 contained oz. gold and 28.3 million contained oz. silver.
Argonaut remains on track to meet its annual guidance of between 135,000 and 145,000 equivalent oz. gold at cash costs ranging from US$700 to US$750 per oz., and expects to have US$46 million in cash at year-end.
The company’s shares have traded within a 52-week range of $1.18 to $4.88, and last closed at $1.30 per share. Argonaut has 155 million shares outstanding for a $205-million market capitalization.
“We’re taking some actions right now that we think will strengthen the company from an operating perspective as we move forward in terms of reducing some significant operating costs. So we’re hopeful that, even in the lower environment, we’ll still be generating cash and putting that back into the balance sheet,” Dougherty said.
BMO Capital Markets analyst Brian Quast has an “outperform” rating on Argonaut stock, but lowered his price target by $1 after the second-quarter results to $3 per share. BMO Research noted on Aug. 16 that the company’s earnings per share were below expectations following an inventory writedown and higher-than-expected cash costs.
“Higher cash costs at El Castillo are due primarily to higher reagent consumption and a decrease in gold delivered to the leach pad,” Quast wrote. “Construction permits for San Agustin have been submitted and a construction decision is expected at the end of the year. Production and cash-cost guidance was maintained for the year, although the company is expecting to come in at the higher end of cost guidance.”