Argonaut Gold (TSX: AR) has revised its full-year production guidance after missing its second-quarter output goal, and gold analysts have responded by lowering their expectations on the stock.
On July 14, the miner reported delivering 29,237 equivalent oz. gold during the second quarter. This came below the expected 34,500 to 36,500 equivalent oz. gold.
Argonaut attributes the miss to lower grades at its Mexican mines: El Castillo in Durango and La Colorada in Sonora. It says it discovered more lower-grade areas, which delayed it from mining higher-grade areas at both operations.
Quarterly gold-equivalent production dropped 38% to 15,358 oz. at El Castillo, and fell 7% to 13,819 oz. at La Colorada, despite the mining of higher gold grades than the same period last year.
Desjardins analyst Michael Parkin says the higher gold grade at El Castillo came from more high-grade sulphide and transitional ore. These ores have a lower recovery rate compared to oxide ore, which contributed to the weak quarterly output. (The mine reported a gold grade of 0.41 gram per tonne, up from last year’s 0.31 gram.)
To boost throughput at El Castillo, Argonaut has relocated an idle crusher from La Colorada to El Castillo, with commissioning expected in August, Mackie Research analyst Ryan Hanley writes.
This should increase El Castillo’s crushing capacity to 6,000 tonnes per day from 5,000 tonnes per day. Argonaut says the higher crushing capacity, coupled with mining higher grades, should set El Castillo up for a stronger second half this year.
But Hanley is skeptical, based on the operation’s prior performance.
He notes that given the company ended June with US$54.1 million in cash, it should have enough funds to cover San Agustin’s US$42.6-million start-up costs.
In the third quarter Argonaut expects to receive a permitting decision for the project, which sits 10 km from the El Castillo mine.
After a soft second quarter, Argonaut has tightened its 2016 gold-equivalent production to 130,000 to 135,000 oz., from 130,000 to 140,000 oz. previously.
Hanley has downgraded his “hold” rating on the stock to “sell,” with a $3 target. He says that since the stock’s recent price run-up, it has traded above its peer group average on a price to net asset value basis.
He points out that El Castillo has a short mine life, and most cash the company has will help build San Agustin.
BMO analyst Brian Quast writes that “given the strong run-up and therefore shrinking return to our target price, we are downgrading AR to ‘market perform’ from ‘outperform,’ and keeping our $4.75 target price.”
Desjardins’ Parkin has trimmed his $4.40 target to $4 per share, reiterating a “hold-speculative” rating.
The stock closed July 18 at $3.63, up 198%, or $2.41, year-to-date. Argonaut will release its second-quarter financials on Aug. 11.
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