Argonaut Gold Stock still offers a good value proposition (OTCMKTS:ARNGF)
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Investment thesis
Argonaut Gold (OTCPK:ARNGF) has released many updates over the past few months. the cost overrun at Magino, which was announced at the end of 2021, led to a substantial drop in the NPV of this project and a strong sale of inventory.
The company has since published forecasts for 2022 and financial for 2021. Although there were several disappointments in the press releases, Argonaut still offers an attractive risk-reward ratio at this level as the share price has fallen significantly.
Argonaut Gold’s 2021 figures
Argonaut had a strong 2021 from existing operations, where we are looking at a record number of ounces of gold produced and $437 million in revenue for the year, which was also a record high.
Figure 2 – Source: Q4-21 Financial Statements
Since the company recorded non-cash write-downs during the year, primarily at Florida Canyon. I will rely on the adjusted net income, which was very respectable at $57 million. The company also generated $125 million in operating cash flow before working capital changes, which will naturally be used to fund the Magino project.
Figure 3 – Source: Presentation Q4-21
Argonaut ended the year at the high end of the production forecast with 244,156 gold equivalent ounces in 2021 and in the middle of the cost forecast, where the cash cost was $1,006/oz. in 2021. The reason the costs were not lower was that the business experienced inflationary pressures especially in Q4-21.
Figure 4 – Source: Publication of Q4-21 results
Gold Argonaut Exploration results
A positive trend is that we continued to see very good underground drilling results at Magino and La Colorada, which could lead to production growth and cost reductions in the future. Note that there were also some very promising drill holes at Florida Canyon, which will be interesting to follow in the future.
Figure 5 – Source: press release
Magino
The Magino project continues to be on schedule after the cost overrun, where the company is currently focused on finding the additional capital needed to bring the project into production in the first half of 2023.
Argonaut expects to close a C$45 million equity financing round in the coming days and the remaining amount will hopefully be debt financed, as the company has indicated in recent press releases.
Even though we can expect around $100 million in operating cash flow in 2022 from the existing operation, and there is a substantial amount of cash on the books, Argonaut still needs to raise $100 million or more depending on how dependent on the price of gold Argonaut wants to be. The financial package should now be confirmed in Q2-22. If the remaining amount can be financed with debt, that would be very positive in my opinion.
Argonaut has also released a new technical report for Magino, with more realistic estimates following cost increases, where it can be seen that the cash cost is now estimated at $888/oz. and AISC at $963/oz. for the current mine plan. The mine plan does not include any underground results. Note that the NPV at $1,800/oz. the price of gold for Magino alone is higher than the current market capitalization of the entire company.
Figure 6 – Source: press release Figure 7 – Source: press release
Gold Argonaut Finance
Like most mining companies today, Argonaut sees higher costs across the board in 2022, primarily due to inflation. We also expect a slight drop in production compared to last year.
Figure 8- Source: Publication of Q4-21 results
2022 will be the last year of mining and stacking for El Castillo, so the cost increase is not that surprising or significant. However, Florida Canyon is probably the biggest disappointment. It hasn’t lived up to expectations so far. The mine barely contributes to cash flow due to high cash cost and a large amount of stripping required in 2022, even after a substantial amount of capital was spent in 2021 to optimize operations.
The charts below are based on the midpoint of the tips, these are my estimates based on historical trends and tips for Argonaut Gold.
Figure 9 – Source: My estimates
Even though production is expected to decline somewhat and costs increase in 2022, we can still expect a respectable operating cash flow of $100 million or more at the current gold price.
The chart below looks at the financials once Magino ramps up production, which is likely in the second half of 2023 at the earliest.
Figure 10 – Source: My estimates
With Magino, we can then see that net income and EBITDA are expected to double from 2022. We are also looking at around $100 million more in operating cash flow with Magino.
Conclusion
So while Argonaut has seen a lot of negative news lately with cost overruns and inflationary pressures affecting operations. The company is still a long way from being valued aggressively. It is also a company that is likely to see a revaluation once more production moves out of Canada and the US in 1-2 years as production increases and costs come down.
Figure 11 – Source: My estimates
I’ve owned Argonaut for about two years now and recent developments have been disappointing, but I still see a lot of value in the stock given the selloff as the price of gold continues to be strong.
A potential near-term catalyst would be the completion of the financing in Q2-22, which could alleviate some liquidity fears the market may have regarding Argonaut Gold. However, I view my investment in Argonaut as long term and patience will be needed in a build story.