found the article
Long/short equity, value, debt, base metals
Summary
- Argonaut's financial results show a net profit and confirm the company is free cash flow positive.
- However, I think it will be very difficult for the company to reach its goal of becoming a 300,000-500,000 ounce producer.
- The San Agustin project very likely will go ahead, but I think the Magino project won't go anywhere until gold is trading at at least $1300/oz.
Introduction
I used to be a huge supporter of Argonaut Gold (OTCPK:ARNGF) before it made the stupid decision to buy Prodigy Gold to get its hands on the Magino project. Even though I actually was a shareholder of Prodigy Gold, I had the feeling Argonaut Gold was overpaying for the asset and whilst it definitely has its merits at a gold price of $1700/oz, the economics of the project don't look good at all when applying a gold price of $1200/oz.
Since that transaction, I have avoided Argonaut Gold but I have to confess I kept an eye on further developments as its two low-cost projects in Mexico could definitely keep the company afloat.
The Q1 Financials and balance sheet
Argonaut Gold produced just over 43,000 gold-equivalent ounces from its two Mexican mines. This resulted in a total revenue of $51M and a gross profit of $6.8M. The net income was just $1.5M due to the general and administrative expenses which were still relatively high, and a high (non-cash) tax bill. There was one other thing which drew my attention. In the next image, you can see Argonaut Gold only spent $162,000 on exploration, and I have two remarks about this. First of all, this is remarkably low and will undoubtedly increase in the future. Secondly, in its conference call, Argonaut CEO Pete Dougherty said the company drilled 9,000 meters at the Magino gold project in Canada. It's obvious this drill campaign wasn't included in the past quarter's exploration expenses as I estimate a 9,000 meter drill program to cost close to one million dollars.
(click to enlarge)
Source: Financial results
The balance sheet still looks extremely robust with a working capital position of approximately $122M, a small increase compared to the situation as of the end of last calendar year. With a current ratio of 3.70, Argonaut Gold definitely won't run into any short-term financing problems at all, especially not if you see the company was actually free cash flow positive (before taking changes in the working capital position into consideration).
Why I don't believe in the realization of the company's growth plans
One of the reasons why Argonaut Gold decided to acquire the Magino project was to reach its goal of being a 300,000-500,000 ounce gold producer as fast as possible. Unfortunately, the dropping gold price was a main negative, and even though Magino contains in excess of 4 million ounces of gold, I don't think the project will be developed anytime soon as the economics aren't really great at the current gold price of $1185/oz. An initial capex of $356M for Magino is okay-ish, but the after-tax IRR of 15-16% based on $1185 gold price isn't sufficient to convince lenders.
This doesn't mean Argonaut is a bad company at all, as you could consider it to be an interesting call option on the gold price. Should the gold price increase to $1500/oz, the Magino project will definitely be built. But I prefer to invest in companies based on fundamentals and not on expectations and dreams.
(click to enlarge)
Source: Company presentation
As such, I think the 300,000-500,000 ounce per year producer-dream should be put on the backburner as it's very likely only the San Agustin project (see the previous image) will be built in the near future and that project will only add an expected production of just 45,000 ounces per year. Granted, San Agustin's economics look nice, but it won't be sufficient for Argonaut Gold to be able to transform itself to a mid-tier producer, unless the gold price changes rather dramatically.
Investment thesis
Argonaut definitely means it well but the gold price isn't really cooperating. The company will need a gold price of approximately $1300/oz in order to get the after-tax IRR on the large Magino gold project above 20%.
Argonaut Gold should be considered to be a call on the gold price. At $1500 gold, not only will the existing operations provide for much more breathing room, the Magino project also surely would be built and this would be the missing step for Argonaut Gold to become a producer of half a million ounces of gold per year.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.