Argonaut Gold’s Magino is Canada’s newest producer despite soaring costs, delay

After it poured first gold at Magino on June 15, production was delayed by a month while a mill was repaired.

Argonaut Gold (TSX: AR) has achieved commercial production at its Magino mine in northern Ontario after construction costs almost doubled to nearly C$1 billion and a mill problem postponed output by over a month.

The Reno, Nev.-based company estimated the mine, northeast of Lake Superior, would cost C$510 million to build in 2020 but inflation and other challenges increased the final tally to C$980 million.

After it poured first gold at Magino on June 15, production was delayed by a month while a mill was repaired, causing Argonaut to miss this year’s guidance. It also forced it to sell another output stream to Franco-Nevada (TSX: FNV; NYSE: FNV), which now holds a 3% net smelter return royalty.

BMO Capital Markets said Argonaut stock has near-term positivity as production ramps up although Argonaut will miss BMO’s estimate of producing 57,000 gold-equivalent oz. this year.

The mine, which started commercial production on Wednesday, achieves Argonaut’s vision of “becoming a low-cost, mid-tier North American gold producer that delivers value to all stakeholders,” president and CEO Richard Young said in a news release on Thursday. He told The Northern Miner in September that production was targeted for the end of the third quarter.

Long road to production

The project has overcome a series of setbacks related to inflation and supply issues since it acquired Magino in 2012. It began building the mine in 2020, when development costs were pegged around $510 million. Capex rose three more times until 2023, including in December 2021, prompting the ouster of Argonaut’s founder, president and CEO Peter Dougherty.

In June 2022, Argonaut closed an offering of 434 million common shares at C$0.45 apiece, giving it gross cash of C$195.3 million for financing construction at Magino. It also inked a $250 million debt financing agreement with a syndicate of lenders to help it refinance its existing debt and pay for Magino’s development and expansion.

The final estimate for Magino currently sits at C$980 million, according to Argonaut’s first quarter financial results, in May. But Young said he doesn’t expect costs to go up again and that the capital inflation risk is “now behind us.”

Despite its delays, Argonaut aims to take Magino through an expansion plan that it hopes will make it the lowest-cost producer in Canada within three years, as it targets $576 per oz. in all-in sustaining costs, doubling milling capacity to 2,400 tonnes per day and more than doubling annual production to 287,000 ounces. It has a mine life of 19 years.

Argonaut’s looking at Alamos Gold‘s (TSX: AGI; NYSE: AGI) neighbouring Island Gold mine to see what it can learn for its expansion, Young said. Located just east of Magino, and inside the prospective Archean Greenstone Belt, Island hosts 4.2 million proven and probable tonnes grading 10.8 grams gold per tonne for 1.5 million oz. contained metal, with a mine life of 17 years.

Sale to boost balance sheet

As a result of the delay, Argonaut plans to sell to Franco-Nevada its non-core royalty holdings in Canada and Mexico for an aggregate price of $29.5 million, as well as an additional 1% net smelter return royalty (NSR) on Magino. After that transaction closes, Franco-Nevada will hold an aggregate 3% NSR on Magino.

Argonaut has been considering selling its Mexican assets, due to their high costs and short mine lives, Young said. Those projects, which have been the company’s production mainstay since 2009 include three producing gold-silver mines and one exploration project. Young declined to give a price estimate for the assets.

Third quarter consolidated production at Magino came to 53,911 gold-equivalent oz., including pre-commercial production of 10,693 gold-equivalent ounces. Full year production for Magino won’t meet the guidance laid out at the beginning of the year due to the delayed ramp-up to commercial production.

20-day delay

Plant commissioning and ramp-up had risen from 50% to 80% of nameplate capacity during the summer, putting the schedule on track for commercial production by September.

However, the ramp-up was delayed by 20 days due to unplanned downtime related to issues with the ball and SAG mills, which contractors and suppliers helped resolve, said chief operating officer Marc Leduc. “We are systematically centralizing all control functionality,” he said. “The plant has been largely operating at nameplate capacity since the beginning of the quarter.”

Argonaut said it’s on track to meet its full year consolidated production of 200,000 to 230,000 gold-equivalent oz. and all in sustaining cost guidance of $1,625-1,725 per oz. set at the start of the year.

BMO Capital Markets gold analyst Brian Quast said in a note on Friday that the third quarter total production at Magino fell short of BMO’s estimate of 57,000 gold-equivalent oz. and consensus of 59,000 gold-equivalent ounces. Argonaut’s pre-commercial production was also below BMO’s estimate of 24,000 gold-equivalent ounces.

With Argonaut’s guidance at Magino, Quast said his updated estimate forecasts annual gold-equivalent production of 202,000 ounces. Quast said he sees positive stock upside in the near term as production ramps up and he maintains an outperform rating and a C$1.00 target price. The shares were down 3.7% to C$0.52 apiece on Friday at mid-day in Toronto, valuing the company at C$449.6 million. Its shares traded in a 52-week range of C$0.32 and C$0.77.

Magino hosts proven and probable reserves of 63.3 million tonnes grading 1.16 grams gold per tonne for 2.4 million oz. gold, according to a resource update in March. Measured and indicated resources total 150.8 million tonnes grading 0.94 gram gold per tonne for 4.5 million ounces, inclusive of reserves.

It had been mined periodically since the mid-1920s, producing 114,319 oz. metal from 803,135 tonnes of ore that graded 4.43 grams gold per tonne.