Argonaut Gold announces Review of Constuction & Change of Leadership

Argonaut Gold Inc. announces that it has completed a review of the estimated construction capital at completion (“EAC”) of its 100%-owned Magino project in Ontario, Canada. The Company also announces a change in leadership. All dollar amounts are expressed in Canadian dollars, unless otherwise specified. “US$” refers to United States dollars.

Leadership Change

The Company announces that Pete Dougherty has ceased to be the President and Chief Executive Officer of Argonaut Gold effective immediately. The Board of Directors has commenced a search to replace these roles and is working in real-time to put interim leadership in place. The Board of Directors believes the existing executive team, with the support and guidance of the Board, is well suited to continue to run the business while a lasting leadership decision is being made.

Argonaut would like to thank Mr. Dougherty for his contributions during his tenure as President and Chief Executive Officer.

James Kofman, Chair of the Board, commented: “Pete Dougherty was the founder of the Company and has taken Argonaut from a small Company to a diversified gold producer operating in three countries. The Board of Directors intends to work actively with and be available to the executive leadership team.  Our Board consists of four members with mining CEO experience and a wealth of knowledge in both financing and strategic alternatives. We have full confidence in the existing executive team to step up during this interim period.”

Magino Construction Capital Estimate

After a review of the impacts of cost increases, inflation, COVID-19, adjustments to the development plans and contingencies, the updated Magino EAC is approximately $800 million. It is forecasted that through December 31, 2021, approximately $342 million will have been invested into the Project, leaving approximately $459 million remaining to be invested to complete the Project.

Magino EAC Variance – October 2020 Construction Decision vs. Current (CAD $M)

While the Project has experienced capital increases in several areas, the largest increases have been related to cost increases, inflation and COVID-19 impacts as well as changes in scope for site development, the TMF and permanent power.

In this press release and the subsequent conference call and webcast, Argonaut aims to walk through the main areas of the Project in detail to provide an understanding of where and why capital has increased in those areas.

EAC Variances by Category (CAD $M)

There are several areas that have led to the increase in the Project capital estimate. The Company estimates impacts from cost increases, inflation and COVID-19 account for approximately 32% of the capital increase. Changes in scope account for approximately 28% of the capital increase and primarily relate to site development, the TMF and permanent power. Approximately 20% of the increase in capital is related to increases in quantities, primarily in site development and project indirects areas. Due to the initial challenges in civil works, primarily at the process facilities site, this area of the Project is currently behind schedule. Argonaut is able to recover the schedule in this area due to schedule compression where multiple trades will work in parallel; however, there is a cost associated with compressing the schedule. When the Company examined the cost of schedule recovery compared to delaying the entire project, it was more economic to compress and recover the schedule than delay the overall Project. The Company estimates 8% of the increase in capital for the Project is due to schedule recovery to meet first gold pour by the end of March 2023.  Each of these areas are discuss in detail below.

Process Facilities (CAD $M)

Argonaut has been largely shielded from cost increases and inflation in the area of process facilities due to its EPC contract with Ausenco Engineering Canada Inc. (“Ausenco”). The largest increases associated with process facilities capital are related to an increase in earthwork quantities and previously unbudgeted lean concrete and aggregate in order to prepare the foundation for the plant site. The uneven nature of the surface bedrock, once exposed below the glacial till, required much more time and capital to create a suitable foundation area than originally estimated. The additional work to prepare this area led to delays in delivering the plant site to Ausenco. Argonaut and Ausenco have worked together to finalize a recovery schedule for the plant site, and the overall Project remains on schedule for first gold pour by the end of March 2023. Increases in plant and facilities costs are primarily related to the late delivery of the plant site to Ausenco, which required schedule compression and investment into operational readiness.

TMF (CAD $M)

Increases in capital for the TMF are primarily related to a change in scope to include bedrock cleaning and slush grout and increased quantities along with higher unit cost for sand cement bentonite. There were also increases in both unit cost and quantities for the embankment filter, which was partially offset by a reduction in embankment mine rock fill due to a lower dam elevation plan at construction completion. The remaining embankment mine rock fill to reach the required dam elevation has been reallocated to sustaining capital, as this work can be completed after start up of operations.

Site Development (CAD $M)

The largest increases in capital associated with site development were driven by the construction environmental management plan (“CEMP”) and permit requirements with respect to site access. As part of the CEMP, the Company was required to construct 11 water dams for water management that were not estimated in the October 2020 EAC. Dewatering costs were also not included in the October 2020 EAC.

Site Infrastructure (CAD $M)

The Company has deferred capital associated with the truck shop and site office complex to sustaining capital. Argonaut has instead purchased and renovated a building in the town of Dubreuilville, Ontario near the Magino site that serves as offices. Cost increases and inflation are primarily related to the costs associated with the main camp, plant maintenance building and warehouse.

Permanent Power (CAD $M)

After further study, there was significant risk to the Project on timing and cost for delivery of line power by upgrading the existing system. Therefore, there was a scope change from the October 2020 EAC, and the Company now envisions having a liquefied natural gas power plant on site.

Owner Pre-Production G&A (CAD $M)

The largest increase in owner pre-production G&A is primarily related to increased labour cost and cost associated with Argonaut’s COVID-19 testing programs. Also, in order to maintain Project schedule, additional headcount is required during construction.

Project Indirects (CAD $M)

The increase in capital in Project indirects is primarily due to additional services required for the main camp and associated with offsite accommodations such as the temporary camp for Argonaut’s earthworks contractor as well as housing in both Dubreuilville and Wawa, Ontario. There were also increases in third-party engineering costs as well as construction management costs.

Magino Technical Report

Argonaut is in the process of preparing an updated National Instrument (“NI”) 43-101 Technical Report for the Magino project, which it expects will be published during the first quarter of 2022.  In the interest of finalizing the updated technical report in a timely manner, this updated report will be focused on the Project currently under construction and will not include expansion opportunities, including future potential underground mining. The updated report will include the current EAC and other items including, but not limited to, revised gold price assumptions, an updated mineral resource model which includes all grade control drilling data to date, optimizations to equipment sizing and the processing facilities, updated operating cost and sustaining capital.  While the updated report will not contemplate expansion potential and future potential underground mining, Argonaut believes that these are future opportunities for Magino.

Remaining Required Investment to Project Completion (CAD $M)

Argonaut forecasts it will have invested $342 million into the Project at the end of 2021.  The Company estimates it will invest $424 million in 2022 and $35 million during the first half of 2023 to complete the Project.

Liquidity Outlook

The Company forecasts it will end 2021 with approximately US$230 million (~$290 million CAD) available between its cash and existing revolving credit facility. As well, Argonaut’s existing consolidated operating portfolio is expected to generate positive cash flow throughout the remainder of the Project at the current gold price. However, at the current gold price, the Company expects there to be a funding shortfall to complete the Project. Therefore, Argonaut is conducting a review of its financing and strategic alternatives.

Level of Confidence Going Forward

Argonaut has a much higher level of confidence in the current EAC now that it is a year into the Project, has worked through the process facilities’ foundational preparation challenges that were encountered due to rock unevenness, stripped approximately 75% of the TMF area and completed construction of approximately 20% of the TMF. Going forward, many of the unknowns when the Project commenced were in the area of civil works and are now very well known. The bulk of the remaining work is primarily construction-related (i.e. bolting items together). With the remaining civil work is better defined and understood, the Company believes the risk of further significant increases to the EAC are low with a significant contingency in place.

When evaluating the remaining investment required to complete the Project that are critical to schedule and undertaking a detailed risk assessment of all areas that make up the EAC, there were seven areas that accounted for 90% of the risk for variance. It is estimated that these seven areas account for approximately 60% of the remaining capital. Within these seven areas, as detailed below, all have a reasonably high level of confidence after a detailed risk assessment given either the high level of engineering for these Project areas or the low level of complexity for the remaining work.

Critical Areas of Remaining Investment to Project Completion and Level of Engineering

Dan Symons, Vice President, Corporate Development and Investor Relations stated: “We are all seeing cost increases, inflation and the impacts of COVID-19 in our everyday lives and the Magino construction project is no exception.  However, we have a much higher degree of confidence in the updated Magino capital estimate now that we are nearly a year into the Project and have vastly reduced the unknowns around civil works both at the plant site and TMF. We anticipate ending the year with approximately $290 million (US$230 million) in liquidity between our cash and existing revolving credit facility, and we also anticipate positive cash flow from the existing operating portfolio through the remainder of the Magino construction project. Yet given the substantial increase in the Magino construction capital estimate, we now expect a funding shortfall to see the Project through to completion, and we are conducting an immediate review of both financing and strategic alternatives.”

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