Exploration at Argonaut’s Magino project yields exciting results

About four months into the planned two-year construction of Argonaut Gold’s (TSX: AR) new cornerstone Magino project in northeastern Ontario, smooth progress and encouraging new exploration results have CEO Peter Dougherty in a forward-thinking mood.

While Argonaut is crossing off early construction milestones at the $480 to $510 million mine build, the company continues to report high-grade gold intercepts from ongoing exploration initiatives below and next to the project’s defined open-pit boundaries.

Dougherty says the deeper the company drills at Magino, the better the grades get. Ongoing drilling at the 2.14 million oz. proven and probable reserve property is increasingly finding evidence of shared characteristics with the deposit’s closest analogues, Alamos Gold’s (TSX: AGI) Island Gold mine immediately next door (1.35 million oz. in proven and probable reserves), and Wesdome Gold Mines’ (TSX: WDO) Eagle River Complex (581,000 oz. in proven and provbable reserves), about 70 km on strike to the west.

The Magino property is in the Goudreau-Lochalsh gold district of the Wawa gold camp, which itself sits within the Michipicoten greenstone belt of the Archean Superior Province. The Michipicoten greenstone belt is described as a structurally and stratigraphically complex collection of volcanic, sedimentary and intrusive rocks that were metamorphosed to greenschist and amphibolite facies.

The near-pit Elbow and Central zones are emerging as priority new exploration areas showing promising high-grade gold continuity.

“In a perfect world, we want to continue to undertake infill drilling at denser fences on these deposits to incorporate them in any conceptual economic study considering a 20,000 tonne per day scenario as soon as possible,” Dougherty says in an interview. “By the time we press the green button on Magino production, we want to press go on the expansion feasibility study simultaneously.”

The company is working towards pulling together initial resource estimates for the Central and Elbow zones by year-end.

The Central and Elbow deposits are at the closest point, only 120 metres away from Island Gold workings. The critical difference is that where the previous exploration only went as deep as 300 metres at Magino, Alamos and Wesdome are now drilling at depths of 1,500 metres, approaching 2,000 metres. “The proximity to the analogues and the shallow drilling to date bodes exceptionally well for the value opportunity that continued drilling at Magino could unlock. We want to put a mineralised envelope around the open pits, and that can give us confidence that maybe someday we’ll be looking at an underground mine,” says Dougherty.

“We already see a clear pathway to double throughput at Magino to 20,000 tonnes per day, which equates to about 300,000 oz. per year. It has company maker potential for us,” Dougherty says. “Magino is truly a valuable and strategic asset. By moving Magino forward, we are executing on our vision to transform Argonaut.”

Meanwhile, on the back of the company’s exploration success at the Elbow and Central zones last summer, the exploration team petitioned management for more funding to follow up on exciting results to the west. “In all my years in this business, I’ve never seen something happen like what happened with our geologists. We gave them additional funding, and they drilled and hit the new Scotland, 42, Sandy and South zones,” says Dougherty.

In the March quarter, the company has completed another 4,895 metres of drilling at Magino and 936 metres of first-pass scout drilling on these newly defined district targets.

Recent drilling at the South zone has returned compelling intercepts such as 10 metres grading on average 19 grams gold per tonne, including 6.3 metres at 30.2 grams gold per tonne and 3.1 metres at 47.1 grams gold per tonne, which itself includes a higher grade interval of 1.3 metres at 112 grams gold, all from a depth of 634 metres in hole MA20-057.

“We’re very pleased with the grades, and when we look at our neighbours, we realise those are the kinds of grades they see at depth. So, considering we have not even gotten close to those depths makes us extremely excited to get back out there for follow-up work,” he says.

The exploration work has succeeded in extending the South zone strike length to 1.5 km, and it remains wide open to the west and at depth.

Argonaut has budgeted $11.5 million for Magino exploration this year. It expects four drill rigs to target the deeper horizons, with another working in the open pit.

The Argonaut board approved construction in October last year, followed by filing the first phase of financial assurance with the province of Ontario and the Magino project Closure Plan in January.

The company has awarded a fixed bid engineering, procurement, construction and commissioning contract (EPC contract) to Ausenco, an engineering and construction management company. The EPC contract covers the construction of the Magino processing facility and other parts of the pre-development project. It also covers about 40% of the 10,000 tonne-per-day carbon-in-pulp project’s capital outlay.

The open-pit Magino milling operation is expected to achieve first production on time and within budget early in 2023 at a rate of 150,000 oz. per year at all-in sustaining costs (AISCs) of US$711 per oz. for 17 years. Total production is expected to come in at about 2 million oz. out of the entire current measured and indicated resource base of about 658.9 million tonnes grading 0.62 grams per tonne for 5 million oz. gold.

Calculated at an assumed gold price of US$1,250 per oz., a 2017 feasibility study estimated Magino’s after-tax net present value of US$288 million and an internal rate of return of 19.5%.

Dougherty emphasizes the massive exploration potential at the brownfields project underpins Argonaut’s strategic ascension to the coveted mid-tier status.

The company is emerging following a three-year metamorphosis from a junior, relatively high-cost producer with short mine lives to an intermediate, lower-cost producer with long mine lives. And given its strong results in the March quarter, Argonaut is charging ahead towards achieving those strategic goals.

The company has recently posted record quarterly gold-equivalent production of 59,704 oz., thanks mainly to successful turnarounds at its Mexico-based El Castilo Complex and La Colorada mines. Combined, the record output and high gold and silver prices delivered an operating cash flow of US$27.7 million and net income of US$27 million, the latter up from a US$9.5 million loss a year ago.

The performance is evidence of successful execution on the three-pronged corporate turnaround strategy, with the first being to harvest cash from existing, improved operations.

The company has also announced a resource and reserve update in March. Total proven and probable reserves rose 43% to 323.4 million tonnes grading 0.66 gram gold per tonne for 6.8 million oz. gold, mainly the function of its July 2020 acquisition of Alio Gold and the Ana Paula project, in Guerrero Mexico. With that, management crossed off the second item on the turnaround to-do list, which was to replace depleted ounces.

The third prong of the plan is to grow the development pipeline, hence the continued exploration investment in Magino and La Colorada in Sonora, Mexico, where the Canadian company is also enjoying exploration success.

Recent drilling has targeted high-grade gold veins below the El Crestón pit, producing “off-the-charts” results. Highlights included intercepts of 12.2 metres grading 98.9 grams gold and 30.3 grams silver starting from 185.9 metres in hole 20-LCRC-592, and another of 21.3 metres at 44.6 grams gold and 274.9 grams silver.

“It has always been our intention to drill test below the El Crestón pit to determine whether the La Colorada mine has the potential to transition from an open-pit mine to an underground mine in the future. These high-grade gold and silver results vastly exceeded our expectations and obviously warrant follow up drilling,” he says.

The results could help Argonaut chart a route to extend the mine life.

Cerro del Gallo in Guanajuato, Mexico, is Argonaut’s next development project and is undergoing permitting. The project hosts an estimated proven and probable reserve of 91.8 million tonnes at 0.56 gram gold per tonne for 1.64 million oz. gold, as well as 39.1 million oz. silver at 13.3 grams silver per tonne.

Dougherty expects the low-cost project to achieve the critical milestone any time now, followed by a development decision in short order. The prefeasibility stage project’s mine plan currently captures about 1.6 million oz. of the almost 3 million oz. measured and indicated resource (201.9 million tonnes grading 0.44 gram per tonne gold and 12.2 grams per tonne silver) and adds approximately 77,000 oz. per year at an AISC of about US$667 per oz. over a 15-year mine life to the overall production profile.

“These projects maintain strong leverage to the rising gold price. Magino and Cerro del Gallo deliver a combined NPV (at a 5% discount rate) of more than $1.2 billion at US$1,900 gold,” says Dougherty. “I’m here to tell you I think we have the opportunity to go even much longer in lives on both.”

Management is also assessing other opportunities to bring value forward from the early stage Ana Paula asset after a deal to sell it fell through late in March.

Argonaut shares trading in Toronto have gained about 4% so far this year and closed at $2.85 per share on May 14. With nearly 295 million common shares outstanding, the company has a market capitalization of $884 million.