Argonaut Gold widens analyst coverage

October was a busy month in Mexico for new Canadian producer Argonaut Gold (AR-T), which turned out 16,884 ounces of the yellow metal during the third quarter ended Sept. 30 at its 100%-owned El Castillo mine, a 33% year-on-year increase, while expanding measured and indicated resources at its advanced-stage exploration property La Colorada.

Third-quarter highlights at El Castillo included finalizing an agreement with Argonaut’s mining contractor to expand the mining fleet to sixteen 100-tonne trucks from thirteen and putting the finishing touches on an agreement to expand surface rights by 100 hectares on the western side of the property, 100 km north of Durango. That brings El Castillo’s overall surface rights to 1,385 hectares. Argonaut also started an expansion program on the East side of the property. The west side crusher was disassembled and relocated to the east side for a centralized crushing facility with a capacity of 500,000 tonnes per month.) In October, Argonaut commissioned the east pad and the east side carbon plant.

At La Colorada, a past-producing gold-silver mine property about 40 km southeast of Hermosillo, Argonaut increased measured and indicated ounces by 76% from 605,000 ounces of gold to 1.1 million ounces of gold at a 0.1 gram gold per tonne cut off grade. The resource is contained within 50 million tonnes at an average grade of 0.66 gram gold per tonne and 8.7 grams silver. 

Originally operated as a high-grade underground mine, La Colorada was closed in 1914 at the start of the Mexican Revolution. Between 1993 and 2000 Eldorado Gold (ELD-T, EGO-N) developed a bulk tonnage heap leach operation there from several open pits. In late 2000 the operation was sold to a private owner in Mexico, who operated it until April 2002.

Argonaut forecasts total gold production this year will reach between 70,000 ounces and 75,000 ounces at a cash cost of US$575-600 per oz.

Canaccord Genuity initiated coverage of the company on Nov. 7 with a buy rating and a 12-month target price of $9.50 per share. At presstime in Toronto Argonaut was trading at $6.75 per share within a 52-week trading range of $3.70-$6.88.

Canaccord based its buy rating on a combination of factors including the company’s management team, organic growth profile, asset portfolio and valuation.

Argonaut is headed by Peter Dougherty, who served as vice president of finance and chief financial officer at Meridian Gold from 2002-2007, while Argonaut’s chief operating officer, Edgar Smith, was Meridian’s vice president of operations between 2003 and 2007. Argonaut’s chairman, Brian Kennedy, was Meridian’s president and chief executive officer from June 1996 to December 2006.

“The management team is known for its successful track record with Meridian Gold, a stock that commanded one of the highest valuation premiums in the sector, before being sold to Yamana Gold for $3.5 billion,” Canaccord wrote in its publication, Precious Metals Weekly.

The brokerage also said Argonaut “offers one of the most attractive growth profiles in the sector, with an estimated 250% growth in production to approximately 250,000 oz. gold by 2015 from 70,000 oz. in 2011, driven by the expansion (ramp up) at El Castillo, in addition to the commencement of production from La Colorada (assumed in the first half of 2012) and San Antonio (assumed in the first half of 2014).”

“While relatively low grade,” Canaccord continued, the company’s assets “have robust economics” and Argonaut “could exit 2016 with close to its current market capitalization in cash, operating three mines capable of generating approximately $150 million in annual sustainable free cash flow (translating into a 23% sustainable net free cash flow yield @ $1,500 per oz. gold).”