Argonaut Gold (TSX: AR; US-OTC: ARNGF) bought the San Agustin project, 10 km west of its producing El Castillo open-pit mine in Durango, Mexico, for $75 million in cash and shares in December 2013, and a recent preliminary economic assessment (PEA) suggests the acquisition was well worthwhile, even in today’s challenging environment, the company says.
The PEA outlines a 10.5-year mine life, with 50,400 equivalent oz. gold produced annually at cash costs of US$670 per GEO. Initial capital costs are projected to be US$67 million with life-of-mine sustaining capital of US$23.4 million. Payback would take just over four years.
Based on 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. At US$1,300 per oz. gold, the after-tax NPV climbs to US$93 million and the IRR to 27%, while at US$1,100 per oz. gold, the after-tax NPV falls to US$47.4 million and the IRR to 17%.
The PEA is based on just 22,000 metres of the 30,000 metres Argonaut has drilled at the project since it acquired the property from Silver Standard Resources (TSX: SSO; NASDAQ: SSRI). Argonaut plans to drill between 7,000 metres and 8,000 metres in 2015 in addition to some condemnation drilling in what it is calling its second-phase drill program.
“What we see from looking at the first phase of drilling is a project that is not only economic, but pays back the investment and pays a decent return,” Peter Dougherty, the company’s president and CEO, said in an interview. “It looks like there is great potential to expand this project … it’s still early days … through the drilling we do this year we’ll be able to identify where this orebody is going, and what the impacts might be.”
CIBC analysts Jeff Killeen and Jeff Jackson commented in a research note that incorporating more drill data into an updated resource could boost the size of the mineral resource and improve San Agustin’s economics.
The analysts note that with San Agustin’s “similarities and close proximity to the flagship El Castillo mine … the hurdle rate to develop San Agustin will be inherently lower.”
Killeen and Jackson point out that de-risking San Agustin is important for the company because it “could provide the near-term production growth Argonaut is lacking,” given that the junior producer’s San Antonio project, which is also in Mexico, “is hung up at the permitting stage,” and development of its Magino project in Ontario is “assumed to be longer-dated.”
San Agustin’s mineralization is hosted on the same geological setting as El Castillo, and Argonaut expects the assets’ closeness will bring a number of operational synergies, although San Agustin would have its own separate processing facilities.
“It’s low-grade,” Dougherty explains, “and you’d get better economics by processing at the site.”
The indicated resource at San Agustin on which the PEA is based (and which excludes thousands of metres of drilling completed last year) stands at 82.2 million 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 (1.28 million equivalent oz. gold). The inferred resource adds another 7 million tonnes grading 0.29 gram gold and 11 grams silver for 65,000 contained oz. gold and 2.5 million contained oz. silver (103,000 equivalent oz. gold).
The PEA outlines a low life-of-mine strip ratio of 0.4-to-1 mineralized material to waste, and envisioned a throughput rate of nearly 7 million tonnes per year from an open-pit operation.
Six million tonnes of that would be processed via two-stage crushing and 1 million tonnes via one-stage crushing, using cyanide heap-leaching and carbon adsorption recovery.
Dougherty expects that it may take as long as six to nine months to permit a project like San Agustin, with construction taking up to seven months. “That would be standard for heap leaching in Mexico,” he said.
Argonaut Gold forecasts its two producing mines in Mexico — El Castillo and La Colorada — will produce between 135,000 and 145,000 equivalent oz. gold in 2015 at a cash cost of US$700 to US$750 per equivalent oz. gold.
Over the last year Argonaut shares have traded in a range of $1.24 to $6.65 per share. At press time, Argonaut’s shares changed hands at $2.74 apiece.
The company has 154 million shares outstanding.
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