Insight into Argonaut Gold’s Q4’23 and Year-End Performance This is a summary and analysis by Wolseley Fund of the operating and financial results of Argonaut Gold for Q4’23 and the year end. All amounts are expressed in thousands of USD unless stated otherwise.
In the year concluding on December 31, 2023, the Company reported a net income of $38.3 million, generated $43.3 million in cash from operating activities, and garnered $153.2 million in net cash from financing activities. The cash flows from operations and financing were primarily allocated to meet the remaining capital needs for the Magino project, leading to a net increase in cash and cash equivalents by $9.1 million. As of December 31, 2023, the Company’s cash and cash equivalents stood at $83.8 million, with a working capital surplus (current assets minus current liabilities) of $58.2 million. The Company had utilized $200 million from the Term Loan and $30 million from the Revolving Credit Facility, leaving $20 million untouched.
The equity offering in the last quarter of 2023 and an anticipated refinancing of the existing Loan Facilities aim to provide the liquidity necessary to continue the expansion of the Magino mine to its planned production level, increase the Magino mill’s capacity from 10,000 to a target of 15,000 tonnes per day, and build a leach pad, solution pumping, and carbon expansion at the Florida Canyon mine. The refinancing plan is progressing well. Multiple potential lenders have proposed term sheets that cater to our liquidity requirements, which are currently under review. The Company aims to finalize the refinancing by April 2024. Management is confident that a successful refinancing, coupled with the projected cash flows from operations, should adequately fund the Company for the next 12 months and beyond. In case of any funding deficit, management has the option to modify discretionary expenditures, like planned capital or exploration projects, by delaying or slowing their progress.
The investor relations team confirmed via a phone call that the current Magino operation fleet can sustain a production rate of 15,000 tonnes per day.
Disposal of The Ana Puala Project: Following the closing, an extra cash consideration of $0.3 million was received. The Company assessed the fair value of the outstanding consideration receivable at $2.9 million, and as of December 31, 2023, the fair value of the consideration receivable was $3.1 million, recorded under other non-current assets.
The changes in right-of-use assets recorded in plant and equipment: The net book value as of December 31, 2022, was 60,555. Additions totaling 30,252 and an impairment reversal of 8,060 were made. Disposals led to a decrease of 2,175, and depreciation further diminished the value by 14,107. As a result, the net book value as of December 31, 2023, was 82,585.
To sum up, the company’s net book value witnessed a substantial rise from 60,555 on December 31, 2022, to 82,585 on December 31, 2023. This increase was attributed to new additions and an impairment reversal, despite disposals and depreciation. The company’s financial management seems to be effective, as evidenced by the positive shift in net book value over the year.
Between December 31, 2022, and December 31, 2023, the company experienced a reduction in its total liabilities. The trade accounts payable rose from 33,294 to 40,025, while accrued liabilities and others significantly dropped from 61,655 to 47,880. Consequently, the total liabilities decreased from 94,949 to 87,905. This indicates that the company has been successful in managing and reducing its liabilities during this period.
From December 31, 2022, to December 31, 2023, there has been a net increase in the company’s non-current assets. The reclamation deposits have risen from 2,792 to 3,220. A new contingent consideration of 3,074 has been introduced (which was not present earlier). However, the ‘Other’ category saw a decrease from 2,145 to 1,754. As a result, the total non-current assets have risen from 4,937 to 8,048. This suggests that the company has augmented its long-term investments and other non-current assets during this period.
This data is a financial summary of the company’s operations for the years 2022 and 2023. Here’s an explanation and conclusion:
Revenues: This is the income generated from the mines. In 2023, the total revenue was 372,457, an decrease from 388,341 in 2022.
Production Costs: These are the costs associated with producing the goods or services that the company sells. In 2023, the total production cost was 283,766, a decrease from 301,172 in 2022.
Depreciation, Depletion and Amortization: These are non-cash expenses that reduce the value of an asset over time. In 2023, these costs totaled 48,528, a decrease from 63,341 in 2022.
Total Cost of Sales: This is the total cost of producing the goods sold and is calculated as the sum of production costs and depreciation, depletion, and amortization. In 2023, the total cost of sales was 332,294, a decrease from 364,513 in 2022.
Gross Profit: This is calculated as revenues minus the total cost of sales. In 2023, the gross profit was 40,163, an increase from 23,828 in 2022.
General and Administrative Expenses: These are the overhead costs not directly tied to a specific function within the company, such as manufacturing, production, or sales. In 2023, these expenses were 17,786, an increase from 14,684 in 2022.
Exploration Expenses: These are costs associated with exploring for new minerals or mineral deposits. In 2023, these expenses were 7,568, an increase from 3,904 in 2022.
Share-based Compensation: This is a way of paying employees which includes giving them rights to acquire shares of the company. In 2023, this compensation was 2,433, a decrease from 3,104 in 2022.
Impairment Reversal/Expense: This is a reduction/increase in the value of a company’s long-term assets when the actual market value of the assets drops below the book value. In 2023, there was an impairment reversal of 24,031, while in 2022, there was an impairment expense of 135,547.
Profit/Loss from Operations: This is calculated as gross profit minus operating expenses. In 2023, the profit from operations was 36,407, a significant increase from the loss of 133,411 in 2022.
Capital Expenditures: This is the money spent by the company to buy, maintain, or improve its fixed assets. In 2023, the capital expenditures were 315,002, a decrease from 403,664 in 2022.
Mineral Properties, Plant, and Equipment: These are long-term assets essential to business operations and not easily converted into cash. The total value of these assets increased from 1,018,328 in 2022 to 1,315,727 in 2023.
Total Assets: These are the resources owned by the company. The total assets increased from 1,259,395 in 2022 to 1,579,677 in 2023.
In conclusion, the company seems to have improved its profitability in 2023 compared to 2022. Despite a slight decrease in revenue, the company significantly reduced its costs, resulting in a higher gross profit. The company also managed to reverse its operational losses from 2022, reporting a profit in 2023. The increase in total assets suggests growth or expansion in the company’s operations.
This data is a summary of the company’s cash flows for the years 2022 and 2023:
Operating Activities: This includes the cash generated from the company’s core business operations. In 2023, the net cash provided by operating activities was 43,345, a significant improvement from a net cash used of (3,749) in 2022.
Investing Activities: This includes the cash used for investments like capital expenditures. In 2023, the net cash used in investing activities was (191,027), a decrease from (297,986) in 2022, indicating less investment activity.
Financing Activities: This includes the cash generated from or used for financing activities like issuing debt or equity. In 2023, the net cash provided by financing activities was 153,244, a decrease from 170,147 in 2022.
Effects of Exchange Rate Changes: This is the impact of changes in exchange rates on the company’s cash and cash equivalents. In 2023, the effect was 3,502, a decrease from 7,074 in 2022.
Net Increase/Decrease in Cash and Cash Equivalents: This is the overall increase or decrease in the company’s cash and cash equivalents during the year. In 2023, there was a net increase of 9,064, a significant improvement from a net decrease of (124,514) in 2022.
Cash and Cash Equivalents, Beginning of Period: This is the amount of cash and cash equivalents the company had at the beginning of the year. It was 73,254 in 2023, a significant decrease from 199,235 in 2022.
Cash Derecognized from Assets Held for Sale: This is the cash removed from the balance sheet due to the sale of assets. In 2023, the amount was 1,467, an increase from (1,467) in 2022.
In conclusion, the company improved its cash position in 2023 compared to 2022. It generated more cash from its operating activities and reduced its investment activities, leading to a net increase in cash and cash equivalents. However, it also saw a decrease in cash provided by financing activities and the effects of exchange rate changes.
In 2022, the company started with 4,325,066 options, each with an average exercise price of CA$2.46. Throughout the year, 100,000 new options were granted at an exercise price of CA$1.15, and 839,347 options were exercised at an average price of CA$1.21. In addition, 892,948 options were forfeited at an average price of CA$3.46, and 105,254 options expired at an average price of CA$8.53. By the end of 2022, the company retained 2,587,517 options with a weighted average exercise price of CA$2.22.
In 2023, the company underwent further changes. 413,930 options were forfeited at an average price of CA$2.13, and 116,192 options expired at an average price of CA$8.32. By the end of 2023, the company had 2,057,395 options remaining with a weighted average exercise price of CA$1.90.
Regarding the company’s Restricted Stock Units (RSUs), at the beginning of 2022, the company held 1,423,379 RSUs with a weighted average fair value of CA$1.95. During the year, they granted 2,472,237 new RSUs at an average fair value of CA$1.50, and 704,173 RSUs vested at an average fair value of CA$1.83. Additionally, 398,931 RSUs were forfeited at an average fair value of CA$2.19. By the end of 2022, the company had 2,792,512 RSUs remaining with a weighted average fair value of CA$1.55.
In 2023, the company saw additional changes. They granted a significant number of new RSUs, 10,471,933, at an average fair value of CA$0.51. 1,716,460 RSUs vested at an average fair value of CA$1.32, and 1,921,960 RSUs were forfeited at an average fair value of CA$1.02. By the end of 2023, the company had 9,626,025 RSUs remaining with a weighted average fair value of CA$0.56.
As for the company’s Performance Stock Units (PSUs), at the beginning of 2022, the company held 1,495,926 PSUs with a weighted average fair value of CA$1.96. Over the year, they granted 1,373,072 new PSUs at an average fair value of CA$1.78, and 612,149 PSUs vested at an average fair value of CA$2.11. Additionally, 316,914 PSUs were forfeited at an average fair value of CA$4.00. By the end of 2022, the company had 1,939,935 PSUs remaining with a weighted average fair value of CA$1.45.
In 2023, the company saw more changes. They granted a significant number of new PSUs, 5,504,918, at an average fair value of CA$0.62. 120,741 PSUs vested at an average fair value of CA$1.68, and 1,197,312 PSUs were forfeited at an average fair value of CA$1.00. By the end of 2023, the company had 6,126,800 PSUs remaining with a weighted average fair value of CA$0.79.
Regarding the company’s Deferred Share Units (DSUs), at the start of 2022, the company had 323,512 DSUs with a weighted average exercise price of CA$2.35. Over the year, they granted 327,462 new DSUs at an average exercise price of CA$2.32, and 87,014 DSUs were released at an average exercise price of CA$2.33. By the end of 2022, the company had 563,960 DSUs remaining with a weighted average exercise price of CA$2.34.
In 2023, the company granted a significant number of new DSUs, 1,943,812, at an average exercise price of CA$0.48. By the end of 2023, the company had 2,507,772 DSUs remaining with a weighted average exercise price of CA$0.90.
Following the acquisition of Alio Gold Inc (“Alio”) on July 1, 2020, the Company converted Alio options into Argonaut options, referred to as “Alio Replacement Options”. As of December 31, 2023, the Company had 76,868 Alio Replacement Options in circulation, with an average lifespan of 2.3 years and a weighted average exercise price of CA$4.12 per share.
As of December 31, 2023, the balance of the outstanding Convertible Debentures was $57.5 million. These Convertible Debentures are due on November 30, 2025, with a conversion price of $2.86 per common share.
Key assumptions used to determine the Fair Value Less Costs of Disposal (FVLCD) for the company’s assets:
Gold Price: The company assumes that the long-term price of gold will be $1,650 per ounce and the short-term price will be $1,730 per ounce.
Exchange Rates: The company uses an exchange rate of $1.35 Canadian dollars per US dollar and $20.00 Mexican pesos per US dollar.
Operating and Capital Costs: The company estimates its future costs based on its budget and Life of Mine (LOM) costs.
Production Volume and Metallurgical Recovery: The company estimates its future production volume and the percentage of metal extracted from the ore based on its LOM plans.
In-situ Value: The company estimates the value of gold in the ground (in-situ value) to be $76 per ounce for the Magino project and $38 per ounce for the Florida Canyon mine.
Discount Rate: The company uses a real after-tax discount rate of 5.0% for the El Castillo, San Agustin, and Florida Canyon Cash Generating Units (CGUs), 6.0% for the Magino project CGU, and 7% for the La Colorada CGU.
In conclusion, these assumptions are used to estimate the value of the company’s assets and the costs associated with their disposal.
The funds raised for the project Magino: Magino Construction and Magino Exploration, and how much of those funds have been spent up to December 31, 2023.
Magino Construction: The company raised CA$70.1 million for construction. As of December 31, 2023, all of these funds (CA$70.1 million) have been spent, leaving no remaining funds for this project.
Magino Exploration: The company raised CA$16.5 million for exploration. As of December 31, 2023, they have spent CA$13.0 million, leaving a remaining balance of CA$3.5 million for future use.
In conclusion, the company has fully utilized the funds raised for the Magino Construction and has a portion of the funds raised for the Magino Exploration remaining to be used in the future.
