Argonaut Gold Inc. (TSX: AR) announces its operating and financial results for the second quarter ended June 30, 2020.  The Company reports quarterly production of 31,531 gold equivalent ounces[1], $23.4 million of free cash flow[2] cash flow from operating activities before changes in operating working capital of $11.8 million, net loss of $7.7 million or loss per share of $0.04 and adjusted net income² of $8.5 million or adjusted earnings per basic share² of $0.05.  All dollar amounts are expressed in United States dollars, unless otherwise specified (C$ refers to Canadian dollars). 

Pete Dougherty, President and CEO stated: “We’ve completed major milestones for the Company over the past few months with the Alio merger, the completion of the Schedule 2 process at Magino and the recent equity financing.  The Company experienced a large cash increase of $23 million during the quarter amidst the two month shutdown of mining, crushing and stacking activities in Mexico due to COVID-19 restrictions.  While production dipped during this shutdown period, we saw significant cash flow, as the heap leach pad inventory was reduced at minimal cost.  We are in a position to deliver significant free cash flow through the remainder of the year, which bodes well for the execution of our transition strategy of developing our lower-cost, longer-life pipeline of growth assets.  At $1,900 gold, we expect to generate between $49 million and $79 million of free cash flow during the second half of 2020.”

Second Half 2020 FCF² Guidance

Argonaut is well positioned to generate significant FCF² in 2020.  The Company’s anticipated FCF² is highly leveraged to the gold price.  Between January 1, 2020 and June 30, 2020, Argonaut has generated approximately $29 million of FCF².  The table below outlines Argonaut’s FCF² leverage to the gold price during the second half of 2020, including the Florida Canyon mine following the merger with Alio Gold Inc. on July 1, 2020 (outside of a construction decision on a development stage project).

Second Half 2020 FCF² Guidance Sensitivity to Gold Price ($M)

Key operating and financial statistics for the second quarter of 2020 are outlined in the following table:

Second Quarter 2020 and Recent Company Highlights:

• Corporate
  • Closed Alio Gold Inc. transaction on July 1, 2020 to create a North American, diversified, intermediate gold producer.
  • In July, the Company completed an equity financing for gross proceeds of C$126.5 million.
• El Castillo Complex
  • Second quarter production of 23,662 GEOs.
    • El Castillo production of 9,394 GEOs.
    • San Agustin production of 14,268 GEOs.
  • Completed construction of LV North and East Crusher leach pads at El Castillo.
• La Colorada
  • Second quarter production of 7,869 GEOs.
  • Completed construction of 4B leach pad and overflow ponds.
• Florida Canyon
  • In early July, the Company completed and filed a technical report that included an updated life-of-mine plan demonstrating mine site after-tax free cash flow of approximately $133 million at $1,350 gold, $216 million at $1,500 gold, $326 million at $1,700 gold and $491 million at $2,000 gold.
• Magino
  • Received approval of Schedule 2 process from Canadian Federal government.
  • In late July, the Company provided a drill results updated from the Elbow Zone. These results showed high-grade continuity below the proposed pit (see press release dated July 28, 2020).
• Cerro del Gallo
  • At the end of June, the Company submitted a Unified Technical Document that includes an Environmental Impact Assessment, an Environmental Risk Assessment and the Justified Technical Study for a Change of Soil Use.
• Social Responsibility
  • Zero lost time accidents during the second quarter 2020.
  • Received nationally awarded Environmental Socially Responsible Company recognition at the El Castillo Complex for the eighth consecutive year.
  • Provided COVID-19 support to communities in Mexico by providing food baskets, sanitization of public spaces and streets, donation of masks, sanitizer and thermometers and hosted public health information sessions.
  • Participated in municipal meetings with health officials at La Colorada and the El Castillo Complex in sessions relating to “Safe Return to Work” procedures.
  • Provided equipment for the cleaning of dams for water harvesting in the communities of the Ejidos of Otilio Montaño and Atotonilco, near the El Castillo Complex.

Financial Results – Second Quarter 2020

Revenue for the three months ended June 30, 2020 was $58.0 million, an increase from $56.0 million for the three months ended June 30, 2019.  During the second quarter of 2020, gold ounces sold totaled 32,707 at an average realized price per ounce of $1,713, compared to 41,647 gold ounces sold at an average realized price per ounce of $1,303 during the same period of 2019.  Gold ounces sold for the three months ended June 30, 2020 decreased compared to the same period in 2019 primarily due to a decrease in gold ounces produced at the El Castillo and La Colorada mines mostly related to a large decrease in ore tonnes to leach pads as a result of the COVID-19 related suspension of mining, crushing and stacking activities in response to the Mexican Federal Government decree.  As of June 1, 2020, all mining, crushing and stacking activities had resumed at all Mexican operations.

Production costs for the second quarter of 2020 were $30.9 million, a decrease from $40.5 million in the second quarter of 2019, primarily due to a decrease in gold ounces sold.  Cash cost per gold ounce sold  was $885 in the second quarter of 2020, a decrease from $931 in the same period of 2019, primarily due to a decrease in cash cost per gold ounce sold at the El Castillo and San Agustin mines as discussed further in the discussion of operations for the respective mine.  The depreciation, depletion and amortization (“DD&A”) expense included in cost of sales for the second quarter of 2020 totaled $8.8 million, a decrease from $10.2 million in the second quarter of 2019, primarily due to a decrease in gold ounces sold, as many of the mining assets are amortized on a unit-of-production basis, partially offset by an increase in the average DD&A expense per ounce in work-in-process inventory, primarily due to significant capital additions during the second, third and fourth quarters of 2019.

General and administrative expenses for the second quarter of 2020 were $3.1 million, comparable to $3.4 million for the same period of 2019.

Losses on commodity derivatives for the second quarter of 2020 were $12.4 million, compared to gains of $0.2 million in the second quarter of 2019, primarily due to the large increase in unrealized losses on the Company’s zero-cost collar contracts. 

Care and maintenance expenses for the three months ended June 30, 2020 were $8.2 million compared to nil for the comparative period of 2019.  On April 1, 2020, the Company temporarily suspended all mining, crushing and stacking activities in Mexico due to COVID-19 in response to the Mexican Federal Government decree.  All activities resumed on June 1, 2020.  Costs incurred during the temporary suspension associated with the suspended activities that did not generate additional inventory have been separately identified and accounted for as care and maintenance expenses within operating income in the interim condensed consolidated statements of (loss) income.

Other income for the second quarter of 2020 was $1.0 million, a decrease from $1.3 million in the second quarter of 2019, primarily due to differences in foreign currency translation effects.

Income tax expense for the second quarter of 2020 was $2.2 million, compared to $1.3 million in the same period of 2019, primarily due to higher forecasted taxable income related to the increase in the price of gold, offset by a deferred income tax asset related to the unrealized loss on derivatives.

Net loss for the second quarter of 2020 was $7.7 million or $0.04 per share, a decrease from net income of $5.4 million or $0.03 per basic share for the second quarter of 2019.

Adjusted net income² for the second quarter of 2020 was $8.5 million or $0.05 per basic share, an increase from adjusted net income of $1.4 million or $0.01 per basic share for the second quarter of 2019.

Financial Results – First Half 2020

Revenue for the six months ended June 30, 2020 was $124.5 million, a decrease from $129.9 million for the six months ended June 30, 2019.  During the first half of 2020, gold ounces sold totaled 72,876 at an average realized price per ounce of $1,642, compared to 96,426 gold ounces sold at an average realized price per ounce of $1,306 during the same period of 2019. Gold ounces sold for the six months ended June 30, 2020 decreased compared to the same period in 2019 primarily due to a decrease in gold ounces sold at the El Castillo and La Colorada mines due to a large decrease in ore tonnes to leach pads as a result of the temporary suspension of mining, crushing and stacking activities in response to the Mexican Federal government decree related to COVID-19.

Production costs for the six months ended June 30, 2020 were $72.5 million, a decrease from $91.5 million in the first half of 2019 primarily due to a large decrease in gold ounces sold partially offset by a slight increase in cash cost per gold ounce sold.  Cash cost per gold ounce sold (see “Non-IFRS Measures” section) was $929 in the first half of 2020, an increase from $909 in the same period of 2019, primarily due to an increase in cash cost per gold ounce sold at the El Castillo and La Colorada mines, as disclosed further in the discussion of operations for the respective mine.  DD&A expense included in cost of sales for the six months ended June 30, 2020 totaled $19.9 million, a decrease from $22.1 million in the six months ended June 30, 2019, due to the decrease in gold ounces sold, as many of the mining assets are amortized on a unit-of-production basis.

General and administrative expenses for the six months ended June 30, 2020 were $7.2 million, comparable to $7.2 million in the same period of 2019.

Care and maintenance expenses for the six months ended June 30, 2020 were $8.2 million compared to nil for the comparative period of 2019.  On April 1, 2020, the Company temporarily suspended all mining, crushing and stacking activities in Mexico due to COVID-19 in response to the Mexican Federal Government decree.  All activities resumed on June 1, 2020.  Costs incurred during the temporary suspension associated with the suspended activities that did not generate additional inventory have been separately identified and accounted for as care and maintenance expenses within operating income in the interim condensed consolidated statements of (loss) income.

Losses on commodity derivatives during the first half of 2020 were $14.2 million, compared to gains of $0.5 million in the first half of 2019, primarily due to the large increase in unrealized losses on the Company’s zero-cost collar contracts. 

Other expenses for the six months ended June 30, 2020 was $4.9 million, a decrease from other income of $1.9 million in the same period of 2019, primarily related to differences in foreign currency translation effects.

Income tax expense for the six months ended June 30, 2020 was $13.4 million, compared to $5.2 million in the same period of 2019.  The change is primarily due to the foreign exchange effects of the weakening Mexican peso on the calculation of deferred taxes during the first half of 2020 and to higher forecasted taxable income related to the increase in the price of gold, offset by a deferred income tax asset related to the unrealized loss on derivatives.  

Net loss for the six months ended June 30, 2020 was $17.2 million or $0.10 per share, a decrease from net income of $9.5 million or $0.05 per basic share for the six months ended June 30, 2020. 

Adjusted net income² for the six months ended June 30, 2020 was $16.9 million or $0.09 per basic share, an increase from adjusted net income² of $3.8 million or $0.02 per basic share for the six months ended June 30, 2020.

Operational Results – Second Quarter 2020

During the second quarter 2020, the Company achieved production of 31,531 GEOs at a cash cost of $885 per gold ounce sold and all-in sustaining cost of $1,080 per gold ounce sold compared to 40,213 GEOs at a cash cost of $931 per gold ounce sold and an all-in sustaining cost of $1,264 per gold ounce sold during the second quarter 2019 (see “Non-IFRS Measures” section).  Lower production was primarily related to the temporary shutdown of mining, crushing and stacking activities during April and May due to COVID-19 restrictions in response to the Mexican Federal Government decree.  Lower costs are primarily due to the reduction in costs related to the temporary shutdown of mining, crushing and stacking activities during April and May while gold production and sales continued.     

Pete Dougherty commented: “I commend the team for their commitment to safety protocols and the new protocols that have been developed and implemented due to COVID-19 precautions.  It is not an easy undertaking to shutdown certain activities and ramp them back up as efficiently and with the additional health and safety protocols as we have done, and our operating team deserves full credit for this successful restart.  Mining, crushing and stacking activites have ramped up very well following the temporary shutdown of these activities due to COVID-19 during April and May.  We are getting the planned tonnes to the leach pads despite the heavy rains experienced recently in Mexico.  These rains have the potential to dilute the solution on the leach pads and slow third quarter recoveries, but any delay in recoveries is expected to be temporary and all operations are functioning to plan.”   

SECOND QUARTER 2020 EL CASTILLO COMPLEX OPERATING STATISTICS

Summary of Production Results at the El Castillo Complex

The El Castillo Complex produced 23,662 GEOs at a cash cost of $802 per gold ounce sold during the second quarter of 2020 versus 28,017 GEOs at a cash cost of $945 per gold ounce sold during the second quarter of 2019 (see “Non-IFRS Measures” section).  Lower costs are primarily due to the reduction in strip ratio at both mines and a weakening of the Mexican peso.  El Castillo costs were also lower due to the switch to processing run-of-mine ore and eliminating crushing and related costs.      

SECOND QUARTER 2020 LA COLORADA OPERATING STATISTICS

Summary of Production Results at La Colorada

La Colorada produced 7,869 GEOs at a cash cost of $1,169 per gold ounce sold during the second quarter of 2020 compared to 12,196 GEOs at a cash cost of $894 per gold ounce sold during the second quarter of 2019 (see “Non-IFRS Measures” section).  Higher costs are primarily due to lower gold grades and lower gold ounces sold, as cash cost is calculated on a per-ounce-sold basis.

Florida Canyon

While not attributed to Argonaut for the second quarter of 2020, as the Alio Gold Inc. transaction closed on July 1, 2020, during the second quarter of 2020, the Florida Canyon mine produced 13,215 GEOs at a cash cost per gold ounce sold of $1,240.

During the second half of 2020, Argonaut anticipates making a capital investment of approximately $10 million into the crushing and stacking circuit with the expectation that this investment will lower operating costs in 2021 onward.

For more information regarding plans at Florida Canyon, please refer to the updated life-of-mine plan detailed in the press release dated July 3, 2020 and the corresponding technical report, which is available on the Company’s website at www.argonautgold.com or at www.sedar.com. 

2020 Guidance

Since resuming mining, crushing and stacking activities on June 1, 2020, the Company has not experienced significant disruptions to production or its supply chain due to COVID-19.  However, the Company cautions that the global effects of COVID-19 are continuing to evolve and given the uncertainty of the duration and magnitude of the impact of COVID-19, the Company’s production and cash cost estimates are subject to a higher than normal degree of uncertainty.  The guidance discussed below does not reflect any potential for additional suspensions or other significant disruption to operations due to COVID-19.

On July 6, 2020, the Company provided updated production, cost and capital guidance following the re-instatement of mining, crushing and stacking activities on June 1, 2020 and the closing of the Alio Gold Inc. merger on July 1, 2020.  No changes have been made to that guidance (see July 6, 2020 press release). 

About Argonaut Gold

Argonaut Gold is a Canadian gold company engaged in exploration, mine development and production.  Its primary assets are the El Castillo mine and San Agustin mine, which together form the El Castillo Complex in Durango, Mexico, the La Colorada mine in Sonora, Mexico and the Florida Canyon mine in Nevada, USA.  Advanced exploration projects include the Magino project in Ontario, Canada, the Cerro del Gallo project in Guanajuato, Mexico and the Ana Paula project in Guerrero, Mexico.  The Company holds several other exploration stage projects, all of which are located in North America.