Argonaut Gold: Lower Cost, Longer Mine LifeBy Alejandro Ehrenberg | Mon, 10/19/2020 - 13:06
Q: What is Argonaut Gold’s strategy to consolidate itself as a leading producer?
A: We are transforming the company from a relatively high-cost, short-mine-life producer into a lower-cost, longer-mine-life producer. To bring that strategy to fruition, we are lowering our operational costs and investing in exploration. We are harvesting cash out of existing operations whenever possible, including our three Mexican operations and the one in the US. That cash will then be redeployed into exploration and drilling to extend the life of our operations.
Additionally, we will build two new projects, one in Canada and one in Mexico. The Cerro del Gallo project in Guanajuato is larger than those we are already running in Mexico. It sits with 3 million oz identified. The first chunk that we would take out is 1.6 million oz. It will take us 15 years to process that. It is a project with a very long life.
Q: Does Argonaut Gold plan to be in Mexico for the long-term?
A: Argonaut Gold believes in Mexico. We are excited about the prospect of building our fourth mine here soon. Mexico is a good mining jurisdiction. It has the five characteristics we look for: laws and regulations are in place, there is knowledgeable people and a mining culture, geology is propitious, investments are reasonably safe and the mining sector is important to Mexico’s overall economy. Mining is needed to develop remote areas and we hope Mexico will develop more policies to keep driving the mining industry forward.
Q: How will the merger between Argonaut Gold and Alio Gold benefit shareholders and other stakeholders?
A: Merging these companies was the best solution for shareholders. Alio was running one mine in Nevada and had an exploration project in Guerrero called Ana Paula. They were struggling financially to generate the returns to stay in business for the long term. Ana Paula was not moving forward and it became a struggle for the shareholders. It is also bad for other stakeholders, in particular the local community because it is not getting the economic benefits from an active project.
Both companies together produce synergies regarding management. Alio’s project in Nevada is very near to our headquarters in Reno. That is more efficient than the team located in Vancouver. The Nevada project will consequently be monitored more closely. In addition, another transaction saw the San Francisco asset spun out from Alio. Those shareholders also received benefits, as did the local stakeholders who will benefit from the project coming back into production. These transactions were well-received by the market.
Q: Why did you decide to sell the Ana Paula project after the merger with Alio?
A: We really liked the Ana Paula project and the project has great potential. Nevertheless, we decided to sell it because it did not fit well in our portfolio. For Ana Paula to fit well in our portfolio, we would have to drill it and with other growth projects ahead of Ana Paula in our pipeline, a realistic development timeline was likely five years away. We chose to take an asset that would not move in half a decade and give it to somebody that can put it into production without having to grow it to the extent that we would have needed to. It is a win-win for all shareholders. The new owners can put a project into production. Argonaut Gold’s shareholders are presented with an upfront payment and they also obtain a carry-along: US$30 million upfront, C$10 million for the when Ana Paula commences construction, 10 percent of the new company and 1 percent in NSR royalty. We have a large project in Canada, and our No. 2 project is Cerro del Gallo, which is in the permitting phase.
Q: What is the timeline for starting construction at Cerro del Gallo?
A: Cerro del Gallo is the cornerstone of our strategy in Mexico. Our in-house crew of engineers and constructors are completing a construction project at our San Agustin project and will be available in May 2021. It would be perfect if the permit we need for Cerro del Gallo came at that time. This crew understands how we work and we are aiming to start construction in 2H20. It will be an open-pit, heap-leach operation. We are experienced in that kind of operation and have the required know-how to build all environmental safeguards.
Q: How do you schedule construction work at your operating projects?
A: Our philosophy is to stay in front and build before you need to. In 2020, even with the pandemic, we implemented this philosophy. This proved to be prudent. If we had been behind on our building, when we started back up again after the shutdown, we would had struggled to get our ounces back up again. However, because we had recently built new leach pads, we were able to process the mineral in a timely manner.
When we plan, our horizon is at least three years down the road. When we go into construction at San Agustin next year, we will be building the fourth phase of the leach pad and this will carry us to the end of the operation, unless we find more ore. We are well-ahead. That property will not shut down at least until 2025. We are ahead of schedule at El Castillo, where all the leach pads are built for the next two years. La Colorada will be running for the next four years and all the leach pads are ready.
Q: How does Argonaut Gold share value with its local stakeholders?
A: Community engagement starts at the exploration phase. One of the first things our geologists do is to meet with the community. Community involvement has to start there. It grows over time, from just a few people working a few drill rigs to our current operations that require 600 workers, benefiting communities. Grocery stores, for example, see more business. Local suppliers of diesel see more business. A prime example is our El Castillo property. In 2010, the town of San Juan del Rio was a small village with not a lot of infrastructure. Ten years later, there are better schools, health programs, even two Oxxo’s, where previously there was nothing. This may not seem like much from the perspective of a big city but it is a big deal for a town like San Juan del Rio. The wealth does not just stay at the mine, it spreads throughout the region.
There is a natural development that begins when we start developing the project but we make sure to guide this development along three main points. First, health and welfare. Second, special support for the elderly and for people who are more vulnerable. Third, education. We provide scholarships from the elementary level to college.
Among the recent infrastructure works that we have done for our communities is a simple project that has obtained big results. The Otilio Montaño community has a system of small water dams for water harvesting. Over time, debris start to fall into the dams and water storage capacity goes down. We went in, re-dug and cleaned out the dams to a deeper level so they can gather more water. Moreover, we deployed an educational campaign about COVID-19. We complemented it by handing out masks and hand sanitizers. We also came into the communities and cleaned businesses, streets, houses and children’s playgrounds. The result is that the community feels safer about their environment. At the La Colorada community there has been only one COVID case registered. The outbreak has been contained in our communities.
Q: What are your expectations for the price of gold?
A: A few months ago, the industry thought that a US$1,300/oz gold price was great. We are now seeing US$2,000/oz. It is hard to say if this is sustainable. Looking at the world’s economic landscape, we do not know what the full economic impact of COVID-19 will be. Many sectors in the economy have been irreversibly impacted, while others will rebound soon. Pandemic-related economic instability coupled with massive monetary stimulus packages around the world mean that gold will be strong in the long term. But there are many factors in the economy that are looking weak. Gold cannot be going through the roof while there is hardship everywhere else. The industry should be happy with anything above US$1,200/oz and we should plan our businesses accordingly. We cannot count on extremely high prices in the long-term.
Argonaut Gold is a Canadian gold company engaged in exploration, mine development and production activities. Its primary assets are the production stage El Castillo mine and San Agustin mine, which together form the El Castillo Complex in Durango, Mexico, and the production stage La Colorada mine in Sonora, Mexico.