Argonaut boosts San Agustin’s economics

Argonaut Gold (TSX: AR) shares gained 11% after an updated preliminary economic assessment (PEA) on the San Agustin gold-silver project in Mexico cut initial cost estimates 36% and improved returns.

The study envisions an open-pit heap-leach operation at San Agustin producing more than 80,000 equivalent oz. gold annually over 6.5 years. Expected start-up costs are US$42.6 million, down from the US$67-million estimate in the January 2015 PEA.

Argonaut’s president and CEO Peter Dougherty notes the cost reduction came from synergies with Argonaut’s producing El Castillo gold mine 10 km away, and higher throughputs over a shorter mine life.

The original study at San Agustin had outlined a 10.5-year operation, producing 50,400 equivalent oz. gold annually at cash costs of US$670 per oz. gold. Cash costs are now pegged at US$648 per oz. gold.

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

Daniel Symons, the company’s new vice-president of investor relations, says the operational synergies include using El Castillo’s excess equipment, while the original PEA examined building San Agustin as a stand-alone project.

“The previous PEA looked at it as if we sourced all brand-new equipment for the project,” Symons says.

Since the original study, Argonaut has completed additional exploration drilling, which has increased its confidence that it could expand the project’s existing resource. “We feel more comfortable with taking up the throughput,” Symons says.

Previously, the throughput was 7 million tonnes per year, including 6 million tonnes that would be processed through two-stage crushing and 1 million tonnes via one-stage crushing, using cyanide heap-leaching and carbon adsorption recovery.

“In the revised PEA we look to start at 6 million tonnes per annum, but partway through year two we bring in another crusher, and by the time we get to year three, we are running at 11 million tonnes per annum,” Symons says.

San Agustin’s second crusher would come from El Castillo, when mining there wraps up. The mine has a 3.5-year life.

Projected sustaining costs are now US$42.2 million, up from the previous US$23.4 million. Despite the increase, total life-of-mine capital has decreased 6% to US$84.4 million.

Argonaut Gold’s El Castillo gold mine, 10 km from the San Agustin property. Credit: Argonaut Gold.

The changes have led to improved economics. Based on metal prices of US$1,200 per oz. gold and US$15 per oz. silver, San Agustin has an after-tax net present value (NPV) of US$89.9 million at a 5% discount rate, and a 50% after-tax internal rate of return (IRR). This compares to a US$70.2-million NPV and 22% IRR in the previous study, which used a slightly higher silver price.

While the junior could likely cover San Agustin’s development with its current cash position ($46 million at the end of 2015) and projected 2016 cash flow, it has lined up a new US$30-million revolving credit facility.

Given the facility’s low holding costs, Symons describes it as a “safety net” for San Agustin, in case the gold price declines later in the year and the company does not hit its projected cash flows.

Argonaut has already received an approval for San Agustin’s environmental impact study. It intends to make a construction decision in the second half of 2016, after acquiring more land to build a leach pad and receiving the change-in-use soil permit.

“It’s less than a year from dropping a flag on construction to pouring gold, because all we are doing is building a leach pad and moving some equipment down the road,” Symons says, adding that he doesn’t expect the company will complete another economic study.

“It is very cookie cutter to what we are already doing, so that is what gives us a lot of confidence with the project, and why we wanted to acquire it in the first place.”

Argonaut picked up San Agustin from Silver Standard Resources (TSX: SSO; NASDAQ: SSRI) for $75 million in December 2013.

Based on a 2014 resource estimate, San Agustin has 82.2 million indicated tonnes grading 0.32 gram gold and 10.7 grams silver per tonne for 845,000 oz. gold and 28.3 million oz. silver. It has another 7 million inferred tonnes grading 0.29 gram gold and 11 grams silver for 65,000 oz. gold and 2.5 million oz. silver.

Both PEAs excluded the inferred resource. The revised study contemplates producing a total of 488,000 oz. gold and 3.8 million oz. silver from the indicated resource. The life-of-mine strip ratio is 0.4-to-1.

Argonaut closed April 29 up 30¢ at $2.94 per share.