Over the last decade, Canadian gold explorer and producer Argonaut Gold has built a reputation for operating a cluster of simple, low risk gold assets across North America. The recent acquisition of NYSE-listed Alio Gold at the end of March has been a long time in the offing and adds a couple more attractive pearls to Argonaut’s ‘necklace’ of assets, to borrow a metaphor used by president and CEO Peter Dougherty. Talking to RGN, Argonaut’s chief describes the deal as typical of the current gold space, with momentum released from M&A activity among the majors gradually trickling down to the mid-tier and below during the last 18 months. Consolidation has been the name of the game in the gold sector and this is only likely to continue as the global economy prepares for a brutal downturn in the midst of the ongoing COVID-19 crisis.
“Consolidation is healthy for the sector because we’ll get better capitalisation, we’ll be able to coalesce the best talent in the industry and hopefully produce more vibrant companies that can survive challenging conditions,” says Dougherty.
“For Argonaut in particular, the Alio deal allows us to have another producing asset in a great jurisdiction,” he continues.
Alio’s only current producing gold asset is the Florida Canyon Mine in Nevada, which is located 200 km from Argonaut’s corporate office in Reno – a 1.5 hours’ drive on a good day. In comparison to the company’s other producing mines in Mexico, La Colorada is half a day of travel from Reno and the operations in Durango are four hours on top of La Colorada.
Besides Florida Canyon being right in Argonaut’s backyard, the deal was also attractive to both parties based on several natural synergies. Firstly, Florida Canyon is an open pit heap leach mine – the type of operation that Argonaut has excelled in previously, particularly at low grades.
Dougherty describes Florida Canyon as a low grade, 0.4 g/t operation, but notes that Argonaut has run 0.3 g/t orebodies and made money on them. “There are similarities between the two companies in the processes that we deploy and the way that we execute those, and we think we can add to and enhance those things at Florida Canyon.”
Secondly, Argonaut will use the acquisition to restructure its corporate departments. There will be a natural reduction in overall general and administrative (G&A) costs following the closure of the company’s Vancouver office. Instead Argonaut will pool its key talent in Reno, with the existing team in Mexico remaining in place and overseeing the integration of the Ana Paula development project in Guerrero from Alio’s portfolio.
From an operational perspective, Florida Canyon adds immediate long-life growth to the portfolio and will effectively replace the El Castillo mine in Durango when it reaches maturity in 2022. However, the asset will require some TLC from Argonaut in the short to mid-term.
“Florida Canyon has been starved of the proper cash investment and we think that because of the strength of the balance sheet we have, we can really bring to the forefront that ability. The first thing we will do is unlock the Sprott debt and replace it with our revolving credit facility which is carrying a 2.25% rate.
“Secondly, we will look to make a further investment in the crushing circuits of less than $10 million, something we can do out of the cash flows that we are generating as a strong company today. Those things all bode well and really set this project up to bloom from where it is now.”
Distinctly North American
Argonaut’s portfolio is now comprised of four producing assets in Mexico and the US and three development projects in Canada and Mexico. Dougherty describes the company’s model as North American-centric and is resolute in his belief of the world class nature of all three jurisdictions.
“We like to play in playgrounds where we think we can win. We think Mexico has an attractive profile for investors, but we were looking for diversification. The US happens to be one of the best jurisdictions in the world after you get your permits in and it’s the same in Canada. Once you overcome the infrastructure hurdle you have access to one of the best jurisdictions in the world.”
Turning Florida Canyon from a cash consumer to a cash producer will be a significant result for the company ahead of perhaps the steepest decline to the global economy in living memory, as the world slowly emerges out of lockdown to contain the spread of coronavirus.
Indeed, having diversified sources of gold production could provide unyielding value during a period of unprecedented government stimulus packages aimed at propping up groaning economies. The addition of more debt load will only have a positive impact on the gold market in the longer term, according to Dougherty.
“I expect to see gold rise over the next several years and also bring along with it the gold equities. It’s a matter of economics. If we continue to turn on the debt and printing presses as we have, at some point in time we are going to need that back–end commodity to shore up that currency we are printing. As we look over the long term, I am quite bullish about what this is going to do for gold.”
Coping with COVID-19
Following the outbreak of COVID-19 in Mexico earlier this year, mining was deemed a non-essential business by the Mexican federal government on March 31st and all operations were suspended at the beginning of April to prevent the spread of the virus.
Argonaut quickly complied with the mandate and ceased mining, crushing and stacking activities at its operations, but given that it operates heap leach mines, the company has been able to continue metal production and metal sales during the temporary suspension of mining activities.
In fact, the impact on actual metal production during the first 30 days of the suspension order was non-consequential, says Dougherty. “When we think about it over the next 30-60 days, I would expect us to recover 80% of what we normally would’ve seen.”
Fortunately, the areas in which Argonaut operates in Mexico have received only very small outbreaks of COVID-19 and on May 12th the government reclassified mining as an essential business, paving the way for Argonaut to recommence operations at La Colorada and El Castillo on May 18th.
At the time of writing, the region that hosts La Colorada has had 0 cases recorded in that small community, and in the state of Durango – where the El Castillo Complex is found – there have been two cases identified in the municipality of San Juan del Rio.
The company has gone above and beyond in its efforts to tackle coronavirus in the community surrounding La Colorada, offering sanitation services to 253 local homes and providing face masks and personal sanitiser to grateful residents.
“We also took it one step further and have acquired COVID-19 test kits for our people. We’ve done this because we think it’s important. If it turns out that we didn’t need the tests, then so be it. We decided to get out in front of this in our communities and whilst this doesn’t preclude you from having a case show up, we are now more prepared for when it does.”
A packed pipeline
Despite the incredibly difficult conditions that Argonaut (and the world) is navigating through, Dougherty remains content with the position the company currently finds itself in, chiefly due to the presence of three exploration projects in the portfolio.
“As a matter of fact, now is an amazing time for the company given we are still a relatively small junior with three development assets that are all poised by the end of the year to be in a decision–making process as to how we advance them,” he proclaims.
The Magino project in Ontario, Canada is envisioned to be built by an EPC contractor at a fixed construction cost expected to be close to the $320 million outlined in the Magino feasibility study, with the financing strategy set to be put in place by Q3 this year. Meanwhile, Argonaut is progressing through the final stages of securing an operating permit for Magino, having already received environmental permits.
“I think the unique thing about the EPC approach is that somebody else is building the car for you. They’re carrying out all those activities so we can leverage our team to work on more than one project. We are not overburdening our team and we’ve transferred the risk for overruns to the contractor.
“While overseeing the EPC contract at Magino in Canada, our team can also be working on Cerro del Gallo or Ana Paula in Mexico. We can now deploy the assets of the company in two different functions.”
Following the acquisition of Alio, Argonaut’s total gold production rate would be around 235-250,000 ounces (oz) per year at full capacity. While achieving this rate in 2020 may be difficult following the COVID-19 outbreak, clearly this is no longer a small fry gold firm.
In fact, Argonaut has the makings of a dynamic mid-tier North American producer and has set itself a transformation strategy with the goal of 300-500,000 oz per year, which will involve upgrades to both the production rate and cost profile.
Polishing the Argonaut necklace
“When I formed the company back in 2010, I had a simple concept in mind. Take these individual pearls (the smaller operations in Mexico) that are unique and unto themselves able generate some cash. But they’re relatively short life, with smaller production profiles and relatively high cost profiles.
“We add to it Florida Canyon. Here’s another mine that is going to be operating for at least the next eight to 10 years, one of our longest life operating mines. Then the big pendant in the Argonaut scenario is Magino. We’ve already identified 5 million oz and started underground exploration last year to expand the resource.
“Magino currently has a 17–year mine life based on the first two million oz, but it’s probably going to have a 30-year life. Then at Cerro del Gallo we have also identified a 14-year life that likely will extend to 20 years with further exploration. These longer life assets also have significantly lower operating costs and they are the pendants we are transitioning towards.”