Argonaut Gold to hedge gold from El Castillo

After a challenging second quarter at its El Castillo complex in Mexico, Argonaut Gold (TSX: AR) will hedge part of the operation’s remaining life-of-mine production.

The company told shareholders in late August that it had entered into a series of “zero-cost, collar option contracts” covering 145,500 oz. gold through mid-2022 from its El Castillo mine, which along with its San Agustin mine, makes up the El Castillo mining complex, 100 km north of Durango.

Argonaut has set the floor price of the monthly gold collars at US$1,450 per oz., and the ceiling price of the collars from US$1,630 per oz. in the fourth quarter of 2019 to US$1,760 per oz. for the first half of 2022. The company will realize the actual gold sales price if the gold price stays within the range of the collars.

Management said that the “price-protection program” on part of El Castillo’s remaining life-of-mine production would “ensure profitability” and “extend the mine life at our highest-cost operation.”

During the second quarter, the El Castillo mine produced 14,758 equivalent oz. gold at cash costs of US$976 per ounce. Costs were elevated due to higher waste-to-ore ratios, the company said.

The San Agustin mine produced 14,800 equivalent oz. gold at cash costs of US$910 per ounce. Higher waste-to-ore ratios were also a factor in San Agustin’s cash costs, but an underperforming third well also contributed.

Altogether, the El Castillo mine complex (El Castillo and San Agustin) produced 28,017 equivalent oz. gold at cash costs of US$945 per oz. sold, compared with 26,518 equivalent oz. gold at cash costs of US$638 per oz. gold sold during the second quarter of 2018.

“There is no doubt it was a challenging quarter operationally, particularly at our San Agustin mine, where we experienced a shortage of water that impacted our ability to get ounces under lease, and, therefore, forced us to slow down our crushing and stacking rates to avoid short cycling of the leach pad,” Pete Dougherty, the company’s president and CEO, told analysts and investors on an Aug. 7 conference call.

Argonaut Gold’s San Agustin gold project in Mexico’s Durango state. Credit: Argonaut Gold.

During the quarter, Argonaut completed two heap-leach expansions at El Castillo and a leach-pad expansion at San Agustin. It also finished a $15-million crushing and stacking expansion at San Agustin that will help the mine move from 20,000 tonnes per day to 30,000 tonnes per day.

“Last year, we drilled a third well to meet our solution flow-rate requirements for the increased crushing throughput of 30,000 tonnes per day. Although this well tested positive, after sustained pumping, it did not meet our requirements,” Bill Zisch, the company’s chief operating officer, said on the call. “Therefore, we incurred cost to drill, blast, mine, crush and stack ore on the leach pad, and have experienced a delay in recovering and selling the ounces.”

Zisch noted that the company was completing the drilling of a fourth water well (which was completed on Sept. 6), and that Argonaut should hit 30,000 tonnes per day at San Agustin before December — a three-month delay. With the additional water well, the company said it anticipates catching up on recovered ounces in the second half of the year.

Argonaut’s La Colorada mine in Mexico’s Sonora state produced 12,200 equivalent oz. gold at US$894 per oz., in a 7% increase from the year-earlier quarter, due to an increase in the waste-to-ore ratio. “At La Colorada during the first quarter of the year, we ran into a situation where we were struggling to strip waste fast enough to keep up with ore requirements to the crusher,” Zisch said. “To compensate for this, when we could, we supplemented with low-grade stockpile material — this led to less tonnes and a lower grade going to the pad during the first quarter, which meant lighter second-quarter production. We are now operating on wider laybacks, and have better access to ore.”

For the year, Argonaut expects to produce between 200,000 and 215,000 equivalent oz. gold at cash costs of between US$800 and US$900 per oz. sold — up from its previous estimate of US$775 to US$875 per oz. sold. All-in sustaining costs are forecast to rise from US$975 to US$1,075 per oz. gold sold to between US$1,025 and US$1,125 per oz. gold sold.

Argonaut said costs will trend lower in the second half of the year, with enough water at San Agustin to meet planned solution flow rates of the expanded 30,000-tonne-per-day crushing and stacking rate; lower crushing costs at El Castillo, due to run-of-mine ore available in phases nine and 10 of the pit; higher production from the lower-cost San Agustin mine, and lower production from the higher-cost El Castillo mine; and improved grades and a lower waste-to-ore ratio at La Colorada.

Argonaut’s El Castillo open-pit gold mine. Credit: Argonaut Gold.

The company said it expects to report significant free cash flow next year. “With approximately 60% of our 2019 capital spent through the first six months of the year, and next year’s capital reduction by approximately US$25 million, we are poised to generate significant additional free cash flow during 2020,” Dougherty said. “So while the second quarter was challenging, on a go-forward basis we are in a great position.”

The company’s development assets include the Magino project in Ontario and the San Antonio project in Baja California Sur, Mexico.

At the end of June, Argonaut had US$24 million in cash, with US$14 million drawn on its revolver, and US$23 million in value-added tax receivables.

Net income in the second quarter reached US$5.4 million, or 3¢ per basic share, in an increase from $0.4 million, or nil per share, in the second quarter of 2018.

Argonaut acquired El Castillo in December 2009. The open-pit gold and silver mine started commercial production in 2008. The San Agustin gold and silver open-pit mine was acquired in December 2013. Commercial production at San Agustin began in October 2017.

At press time, Argonaut traded at $2.42 per share in a 52-week range of $1.18 to $2.87. The company has 180 million common shares outstanding for a $434-million market capitalization.