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Falcon
just three months ago, i wrote Argonaut Gold (OTCPK:ARNGF), Given that, further weakness in the stock will provide a buying opportunity. This is because its new Magino mine was nearing completion, and while the mine was a month behind schedule and ~100% over its initial budget, Magino would replace the low-cost company and move mostly to Tier-1. Will happen Jurisdiction Maker. Importantly, the previous management has been replaced with a highly successful leader in the form of Richard Young (ex Teranga). Since then, Argonaut has easily outperformed the Gold Juniors Index (GDXJ) with over 30% excess returns compared to its benchmark, and a solid asset in a tier-1 jurisdiction barely a month away from commercial production. With this, the future is very bright for the company. However, as I’ll detail in this update, some of this has been priced into the stock after its ~130% rally and headwinds remain, resulting in a more mixed outlook in the near term.
In this update, we’ll look at Q2 results, what’s changed, and why it’s time to consider taking some profits above US$0.54.
Unless otherwise noted, all figures are in United States dollars.
Q2 Production & Sales
Argonaut Gold released its Q2 results last month, reporting quarterly production of ~43,500 gold equivalent ounces. [GEOs], a decline of 27% from the year-ago period. The sharp decline in Argonaut’s consolidated production was related to lower production from its Mexican operations, including no production at the El Creston pit (La Colorado), fewer tonnage of ore mined and processed at San Agustin, and pad at El Castillo. That leaching was happening again. After the suspension of mining in December. This was offset by a better quarter at Florida Canyons and early contributions from the company’s new Magino mine in Ontario, Canada. While this headline production figure may sound disappointing, it was largely in line with plans, and year-to-date production will hit 215,000 ounces for FY2023 with a strong H2 (stable ramp-up at Magino, La Colorado) on deck. Monitoring the guidance of Commercial production expected by October).
Argonaut Gold – Quarterly GEO Production – Company Filing, Author’s Chart
Looking a little closer at the results, we can see that Magino produced ~3,300 ounces of gold in June (sold 72 ounces), and the company noted that the ramp-up is progressing well, with $755 million Of the estimated cost of $730 million, closing time was spent at Magino. That said, Argonaut said sourcing the remaining labor has been a challenge and vacant roles are being filled by contract workers, a negative development that will put pressure on mining costs until resolved. This is consistent with what we’re seeing across the sector, with many producers in the prolific sector commenting on the turnover and even larger producers like Gold Fields (GFI), Gold Fields noting that Mining costs continue to rise with wage increases and it is sticking to its ~6% inflation forecast in 2023 despite an adverse reaction to a weaker Australian dollar. Therefore, while Argonaut is also operating in prolific jurisdictions (Nevada and Ontario), this could further pressure operating costs on both of its assets, the $907/oz cash cost at Magino doesn’t seem conservative enough.
Argonaut Gold – Quarterly Revenue and Average Realized Gold Price – Company Filing, Author’s Chart
Meanwhile, at Florida Canyons, the company raised production levels to ~18,300 ounces versus ~14,500 ounces in the second quarter of 2022, an increase due to higher mine ore flows at its stack leach pads. However, while costs were declining year-on-year relative to easy culms ($2,063/oz), they remained high over this period at $1,662/oz, and given the low grade and lack of economies of scale, it was difficult to To imagine that this asset is consistently producing gold at a cost of less than $1,500 an ounce suggests it will struggle to generate any meaningful free cash flow. Lower year-over-year production and higher costs resulted in Argonaut generating $17.4 million in operating cash flow (down 25% year-over-year), ending the quarter with $72 million in cash and ~$152 million in net Did. loan. Meanwhile, revenue fell to $83.1 million, despite a near-record average gold price (lower sales and deliveries in gold futures contracts at $1,888 an ounce).
cost and margin
Moving to costs and margins, Argonaut reported total sustainable costs of $1,594/oz in the second quarter of 2023, up 2% from $1,553/oz in the year-ago period. The company’s overall perpetual costs have benefited from lower fixed capital, tracking at less than 20% of annual guidance ($50 – $55 million), indicating major holding in the second half, but good luck This will be offset by much higher production. Its Magino mine, which is expected to produce at least 70,000 ounces of gold in the second half of this year. Unfortunately, the record average realized gold price did not help from a margin perspective, given that ~32,400 oz were delivered at prices well below spot ($1,888/oz), resulting in AISC margin in Q2 2023. $309/oz, down from $331/oz. ounce in the second quarter of 2022, regardless of the average real gold price ($1,903/oz versus $1,884/oz). And this underperformance from a real price perspective will continue, with plenty of gold futures contracts locked in between now and 2027.
Argonaut Gold – Quarterly AISC – Company Filing, Author’s Chart
As far as inflationary pressures are concerned, Argonaut operates a number of high-volume and low-grade operations, which means that lower fuel prices in the first half of this year along with falling oil prices would be a good response. Was However, this has not happened so far in H2, with energy prices moving back in a near straight line from the June low to the May low. That’s not ideal, nor is the company’s disclosure that mining costs will exceed plan due to delays in expanding the mobile equipment fleet and staffing, with rental equipment and contract operators to be used for the remainder of 2023. In addition, mobile equipment maintenance is partly related to the lack of experienced operators and personnel from the above scheme. Therefore, with limited exposure to short-term headwinds due to surging energy prices, back-end loaded fixed capital spending, tighter labor conditions, and higher gold prices as an offset, I’m not sure H2 results will be nearly as strong. As much as some investors might expect from a margin perspective.
Brent Crude Prices – StockCharts.com
One positive is that Magino is expected to produce more than 140,000 ounces of gold next year at a cash cost of less than $870/oz, but with another year of inflationary pressures (many of the larger companies are in the mid- to single-digits). inflation is being observed), I am less convinced this cost profile is being realised. And while the cost profile of ~$950/oz is also exceptional compared to the company’s current cost profile at Ex-Magino, it will be important to look at labor conditions and energy prices at Magino as the combination of a lack of experienced operators is not ideal. During the start-up of a mine and rising fuel prices as a constraint. In addition, there will be similar negative dynamics at Florida Canyons, where labor is also tight in Nevada and fuel prices could hurt margins on this ultra low-grade operation (~0.33 g per ton reserve grade).
Evaluation
Based on ~886 million fully diluted shares and a share price of US$0.53, Argonaut Gold trades at a market capitalization of ~$470 million and an enterprise value of ~$620 million. That compares favorably to other junior producers, especially given Argonaut’s 300,000+ ounce production profile in 2024, versus similar 150,000 to 200,000 ounce producers Karora Resources (OTCQX:KRRGF) and Wesdom Gold Mines (OTCQX:WDOFF) or trade at higher valuation figures. , That said, Argonaut’s actual production profile looks closer to ~200,000 ounces (given plans to shut down its Mexican operations) and one-quarter of this production profile is relatively high-cost, with Florida Canyon still Unable to prove that it can operate consistently at less than $1,500/oz in all sustainable costs. So, if we adjust for the normalized production profile (excluding Mexican operations), Argonaut trades more in line with its peer group after its recent outperformance.
Argonaut Gold Share Count – Company Filing
Using a conservative net asset value estimate of I believe ~$640 million (Magino + Florida Canyons at 5% discount rate) [-] $330 million in combined corporate G&A and net debt) and applying a 1.0x P/NAV multiple, I see a fair value of $640 million for Argonaut Gold. If we divide this figure by the ~886 million fully diluted shares, this translates to a fair value of US$0.72 per share, indicating a 36% increase from current levels. However, although this is a solid takeaway, I believe it makes sense to demand a significant margin of safety when investing in small-cap gold producers, and especially single-asset producers, and I find the estimated price reasonable. A discount of 40% is required on the price. After applying this necessary discount, ARNGF’s updated buy zone comes in at or below US$0.43, which indicates that the stock is ~23% out of its risk-on buy zone following its recent rally. The technical picture confirms this outlook, with the stock rallying sharply on higher volume after testing resistance last week, and becoming short-term overbought above US$0.55.
ARNGF 3-Year Chart – StockCharts.com
Obviously, I could be wrong, and the stock could continue its rally and outperform compared to its peer group. However, while the stock was very cheap earlier this year and worth accumulating below US$0.27 as many investors gave up after its ~90% drop, I’ve seen almost the same reward/reward after its ~70% drop. Risk setup is not showing. Rally. Furthermore, in the same period that Argonaut has outperformed following the appointment of its new CEO, Richard Young, we’ve seen many other high-quality names continue to sell, from many higher-quality and more diverse producers. The number has decreased from 15-30. , Therefore, from a relative value perspective, I see this area as a far more attractive bet, and I would view any rally above US$0.54 on Argonaut Gold as an opportunity to book. Some? Profits, hence my neutral rating as the stock is approaching a potential resistance zone in the US$0.55 – US$0.60 range.
Argonaut Gold – December 2022 Update – Seeking Alpha Premium/Pro
Finally, it’s important to note that if one is bullish on gold, as I imagine is the case for most investors reading this because they are looking to profit from the metal using producers, Argonaut doesn’t provide the same benefits that many people expected 18 months ago. He invested in Maginot’s eventual first gold acquisition. This is because the company has forward sold more than 40% of its 2024-2026 gold production at an average price of ~$1,830/oz, meaning it is not benefiting from higher gold prices as much as some of its To the comrades It’s not a deal-breaker, but with nearly half of 205 and 2026 gold sales locked in at $1,821/oz, this could be a significant drag on profits if a new bull market emerges in gold, and it indeed will. That could lead to poor performance relative to peers, given that Argonaut is now one of the most heavily defended names in the entire region.
Summary
Argonaut Gold has finally crossed the much-anticipated finish line in Maginot, and the company’s strategy is solid, with plans to optimize its two Tier-1 jurisdiction operations, as well as considering a move away from Mexico. is an area where investment is declining. Attraction Profile. However, the stock is now up ~130% from its recent lows; It is far more hedged than its peer group, which minimizes its leverage (the primary reason anyone would own a gold producer) and while Magino is working toward commercial production, labor sector-wide and specialized remains an issue in relatively prolific mining jurisdictions (Ontario, Nevada, Canada) and energy prices are rising again, increasing the risk of margin erosion and Argonaut less able to benefit from higher gold exposure which can offset energy and labor inflation (a negative feature relative to peers). So, while Argonaut is largely risk-averse compared to nine months ago, I currently view reward/risk as more balanced, suggesting that the best course of action is to take some profits on the strength.
Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Please be aware of the risks associated with these shares.
Source: seekingalpha.com
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