Argonaut finds its golden fleece in Mexico

October was a busy month in Mexico for new Canadian producer Argonaut Gold (AR-V).

It turned out 16,884 oz. of the yellow metal this third quarter at its 100%-owned El Castillo gold mine in a 33% year-on-year increase, while expanding measured and indicated resources at its advanced-stage exploration La Colorada gold-silver property.

Third-quarter highlights at El Castillo included closing a deal with Argonaut’s mining contractor to expand the 100-tonne-truck mining fleet from 13 to 16, and putting the finishing touches on an agreement to extend surface rights by 1 sq. km on the property’s western side, 100 km north of Durango. This would bring El Castillo’s surface rights to nearly 14 sq. km. Argonaut also started an expansion program on the east side of the property. The west side crusher was disassembled and relocated to the east side,  creating a central crushing facility with a 500,000-tonne-per-month capacity. In October, Argonaut commissioned the east pad and the east side carbon plant. 

At La Colorada, a past-producing gold-silver mine property 40 km southeast of Hermosillo, Argonaut increased measured and indicated ounces by 76%, from 605,000 oz. gold to 1.1 million oz. gold at a 0.1 gram gold per tonne cut-off grade. The resource is contained within 50 million tonnes at an average grade of 0.66 gram gold per tonne and 8.7 grams silver.

Originally operated as a high-grade underground mine, La Colorada was closed in 1914 at the start of the Mexican Revolution. Between 1993 and 2000, Eldorado Gold (ELD-T, EGO-N, EGO-X) developed a bulk tonnage heap-leach operation there from several open pits. In late 2000 the operation was sold to a private owner in Mexico, who operated it until April 2002. 

Argonaut forecasts that this year’s gold production will reach between 70,000 oz. and 75,000 oz., at a cash cost of US$575 per oz. to US$600 per oz.

Canaccord Genuity initiated company coverage on Nov. 7, with a “buy” rating and a 12-month target price of $9.50 per share. At presstime Argonaut traded at $6.75 per share within a 52-week trading range of $3.70-$6.88.

Canaccord based its positive rating on a combination of factors, including the company’s management team, organic growth profile, asset portfolio and valuation.

Argonaut is headed by Peter Dougherty, who served as vice-president of finance and chief financial officer at Meridian Gold from 2002 to 2007, while Edgar Smith, Argonaut’s chief operating officer, was Meridian’s vice-president of operations between 2003 and 2007. Argonaut’s chairman, Brian Kennedy, was Meridian’s president and chief executive officer from June 1996 to December 2006.

“The management team is known for its successful track record with Meridian Gold, a stock that commanded one of the highest valuation premiums in the sector, before being sold to Yamana Gold for three-and-a-half billion dollars,” Canaccord wrote in its publication, Precious Metals Weekly. 

The brokerage also said Argonaut “offers one of the most attractive growth profiles in the sector, with an estimated two hundred fifty percent growth in production to two hundred fifty thousand ounces of gold by 2015, from seventy thousand ounces of gold this year, driven by the expansion at El Castillo . . . [and assumed 2012] production from La Colorada and [assumed 2014 production from] San Antonio.”

Canaccord added that the company’s relatively low-grade assets “have robust economics,” and that Argonaut “could exit 2016 with close to its current market capitalization in cash [while] operating three mines capable of generating one hundred fifty million dollars in annual sustainable free cash flow.”

This figure translates into a 23% sustainable net free cash flow yield at $1,500 per oz. gold.