LONDON (Alliance News) - Patagonia Gold PLC shares fell on Friday after it said it will be transitioning its focus from its sole-producing and soon-to-be-closed Lomada mine to its new development project during 2016 after reporting a wider loss in 2015 as its operations became unprofitable.
Patagonia shares were trading down 4.0% at 1.68 pence per share on Friday morning.
The miner operating within in the southern Patagonia region of Argentina, Chile and Uruguay said its pretax loss widened to USD18.5 million in 2015 from the USD6.8 million loss booked in 2014 as revenue dropped and costs increased.
Patagonia said revenue fell to USD26.1 million from the USD35.9 million generated a year earlier, which swung the company to a gross loss of USD3.6 million from a USD9.8 million gross profit.
Exploration costs and administrative expenses were slightly higher in the year, offset by higher finance income and lower finance costs.
The miner has a string of development and exploration projects but is currently only producing gold from the Lomada mine in Argentina, which produced 21,521 ounces of gold during the year sold at an average price of USD1,165 per ounce.
That production was just shy of its 21,542 ounce guidance target for the year after production in the first ten months of the year came in below expectations, which prompted Patagonia to lower its target in November from its original estimate of 31,000 ounces.
Last year, Patagonia produced 29,347 ounces of gold and the gold price achieved was considerably higher at USD1,251 per ounce.
Patagonia's all-in cash cost at Lomada averaged USD1,196 per ounce, meaning the miner's margin was almost touching the average gold price - providing an average margin of only USD55 per ounce in 2015.
However, Patagonia said the cash cost in the first quarter of 2016 had fallen to USD625 per ounce. In 2014, the average cash cost varied in the first to the second half but was in the region of USD655 to USD807 per ounce. Spot gold stood at USD1,231 per ounce early Friday in London.
"In terms of our operation, 2015 has been a challenging year for the mining sector generally, and our Lomada de Leiva gold mine has not been exempt from this. We experienced higher production costs due to an increase in local costs coupled with the fixed exchange rate, together with lower production," said Chairman Carlos Miguens.
"During the last quarter of the year, part of the operating difficulties were overcome and the Peso devaluation implemented by the new [Argentine] government has helped to lower our production costs," he added.
Lomada produced 9,000 ounces of gold in the first quarter of 2016, demonstrating an improvement since the year end. Based on that rate of production, Patagonia would be on track to deliver around 36,000 ounces of gold this year.
However, the asset is approaching the end of its current life and is likely to only be producing gold until the middle of 2017 unless the miner can find more gold in the area.
"Gold production from Lomada is expected to continue until the end of 2017 even though the mining operation will be suspended from the end of May 2016, as gold is expected to continue to be recovered from the heap leach for at least 12 months thereafter," said Miguens.
As it looks to counter the production that will be lost, Patagonia said it is looking to develop a small-scale heap leach operation at Cap-Oeste during 2016, but said this is subject to funding.
That decision to suspend production from Lomada and to move its focus to Cap-Oeste was unveiled in late February, as Patagonia struggled to find a viable mineable resource to extend the life of Lomada beyond its current estimates.
Patagonia said it is continuing to explore the La Paloma block within the project in the hope of finding more gold at Lomada, but said there has been "limited success" in finding a mineable resource so far. Patagonia said it plans on drilling near to the existing open pit at Lomada, and will start producing once again if a mineral resource can be found.
According to the miner's resource statement at the end of 2015, the Lomada mine has indicated resources totalling 61,919 ounces of gold left to extract. Notably, that gold is contained in over 4.0 million tonnes of ore, meaning the grade at the mine is very low at only 0.48 grammes of gold per tonne.
Lomada's inferred resource at the end of the year stood at 3.4 million tonnes of ore graded at 0.672 grammes of gold per tonne, containing a total of 73,726 ounces of gold.
To put that gold grade into perspective, the indicated resource at Cap-Oeste has a grade 1.82 grammes of gold per tonne, La Manchuria has a grade of 2.95 grammes of gold and Cose has a considerably higher grade at 27.8 grammes of gold.
Overall, Patagonia's indicated plus inferred resources across Lomada, Cap-Oeste, Cose and La Manchuria stood at 1.4 million ounces of gold and 34.1 million ounces of silver, providing a total gold equivalent resource of 2.1 million ounces.
Cap-Oeste lies south of the Lomada mine and is also surrounded by Patagonia's Cose and Monte Leon assets. Since the new government in Argentina was elected and sworn in late last year, which led to the tax on gold exports being removed, Patagonia has been trying to utilise the improved economics of both the Cap-Oeste open pit and underground operations and the Cap-Oeste south-east underground project to bring those assets into production.
"The construction of a heap leach project at Cap-Oeste, which is subject to funding, will provide a seamless transition from the company's current mining operation at Lomada, which, once completed will provide the company with the cash flow to meet its short-term financing commitments and at the same time allow the company to continue exploring identified targets in the region," said Patagonia.
Cap-Oeste is expected to begin producing gold in the third quarter of this year. However, the current resource there only provides a two-year mine life, meaning Patagonia will have to either quickly develop Cap-Oeste further, as is expected, or find another source of gold elsewhere.
Cap-Oeste is expected to produce around 82,000 ounces of gold over those 24 months of production, suggesting an average of 41,000 ounces per year - 91% higher than what was produced in 2015 from Lomada and 40% higher than what was produced in 2014.
Although the Lomada mine will be suspended from May, it will still be producing until the middle of 2017, suggesting Patagonia will have production coming from Lomada and Cap-Oeste between the third quarter of 2016 and the first two quarters of 2016.
Subsequent to that, Cap-Oeste becomes Patagonia's only producing project and would have just over a year of production left. However, Cap-Oeste has further potential and benefits from having other exploration targets nearby that Patagonia can try to exploit.
"Alternatives to treat the higher grade sulphide ore continue to be reviewed and if implemented, would result in increasing the [Cap-Oeste] project's mine life to six years with the development of the two underground projects at Cap-Oeste and Cose," said the miner.
Cap-Oeste and Cose will, ideally, be developed as one enlarged project and Patagonia said the La Manchuria block lying around 50.0 kilometres from those other two mines is being evaluated. The miner is hoping La Manchruia could supply heap leach feed for the Cap-Oeste project, extending the mine life even further.
However, funding will be key as Patagonia's cash balance fell to USD1.7 million at the end of 2015 from the USD5.6 million at the end of 2014. Although the miner has said all of its plans are subject to funding, it did not provide any guidance on where that funding would come from.
Patagonia has also signed an option agreement since the end of the year to potentially acquire the San Jose exploration gold project in Uruguay, and also struck a deal last year to earn a stake in the early-stage Carreta Quemada and Chamizo gold projects from Trilogy Mining Corp which has been hit by delays.
Patagonia is also on the prowl for further opportunities, particularly in Argentina.
"The gold price remained relatively steady throughout 2015 and has been showing signs of improvement since the beginning of 2016. Given the current low commodity prices and expectations for an improvement in the mining industry in the mid to long term, we believe that there will be numerous joint ventures and acquisition opportunities for the company to consider," said Miguens.
Patagonia said it made USD1.0 million worth of cost savings in 2015, and is keen on making more savings this year.
"In view of the current market conditions, the company continues to endeavour to achieve operating efficiencies and during 2015, Patagonia Gold adopted several measures aimed at achieving cost reductions and optimising its organisational structure," said Chief Executive Christopher van Tienhoven.
"Patagonia Gold retains its investment focus on Argentina and, for this reason, it continues to review opportunities to enhance its participation in the local mining business. The improved market sentiment coupled with the change in government in Argentina pose an excellent opportunity for Patagonia Gold to grow its business in the region," he added.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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