McEwen Mining Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; quarterly comparisons refer to the three months ended December 31. Amounts are U.S. dollars unless noted. The filing was signed March 16, 2020.
Business context
McEwen is a precious- and base-metals producer and explorer operating in the United States, Canada, Mexico and Argentina. It owns Gold Bar, Black Fox and El Gallo, and holds a 49% equity-method interest in MSC, which operates the San José mine. Gold Bar reached commercial production in May 2019; El Gallo ceased active mining in 2018 and continued residual leaching. San José revenue is not consolidated in McEwen’s gold and silver sales.
Key financial and operating metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Consolidated gold and silver sales | $117.0 million | $128.2 million |
| Gross profit | $9.0 million | $32.1 million |
| Operating loss | $63.9 million | $47.2 million |
| Net loss | $59.7 million ($0.17/share) | $44.9 million ($0.13/share) |
| Cash used in operating activities | $39.5 million | $0.5 million provided |
| Cash additions to mineral properties and equipment | $29.7 million | $81.3 million |
| Cash and cash equivalents at year-end | $46.5 million | $15.8 million |
| Working capital at year-end | $43.2 million | $23.4 million |
| Long-term debt carrying value | $49.5 million | $49.2 million |
- Attributable production was 174,420 gold-equivalent ounces, versus 175,640 in 2018; 2019 sales were 175,470 ounces. Production was within revised guidance of 169,000–176,000 ounces.
- Revenue from McEwen’s wholly owned operations was $117.0 million on 85,140 gold-equivalent ounces sold; average realized price was $1,403/oz. The non-GAAP cash gross profit was $33.7 million, down $13.5 million from 2018.
- For wholly owned operating mines, reported cash cost was $949/oz and all-in sustaining cost was $1,251/oz. These are non-GAAP measures. The company’s 49% share of San José production was 91,654 gold-equivalent ounces; its equity-method loss from MSC was $8.8 million.
- Year-end total assets were $631.2 million and shareholders’ equity was $499.5 million. Accrued asset-retirement obligations were $32.2 million; $31.6 million was covered by surety bonds.
Material changes versus 2018
- Sales revenue fell 9%, mainly because fewer ounces were sold from the wholly owned mines, partly offset by a higher realized gold price.
- Gross profit declined to $9.0 million from $32.1 million. Production costs rose 3% despite 17% fewer wholly owned gold-equivalent ounces sold, while depreciation and depletion increased $9.7 million, largely following Gold Bar’s start-up.
- Net loss widened by $14.9 million. Higher depreciation, interest expense and lower sales were partly offset by gains on investments, lower advanced-project spending and a smaller equity-method loss from MSC.
- Operating cash flow deteriorated to a $39.5 million outflow, reflecting lower cash gross profit, higher interest payments and a $23.1 million build-up of Gold Bar leach-pad inventory.
- Cash increased after two 2019 equity offerings generated $69.5 million net proceeds. Shares outstanding increased to 400.3 million at year-end from 344.6 million.
- Gold Bar contributed 30,712 gold-equivalent ounces, but the transition to a new pit produced less ore and lower grades than modeled. Black Fox output fell amid operational disruptions; El Gallo output declined as it moved to residual leaching. San José production increased.
Outlook, risks and unusual items
- Gold Bar reserve and outlook: The reserve and mine plan were under review after Gold Pick West mining showed lower ore tonnes, grades and contained ounces than the model. Preliminary revisions indicated a likely material reduction in contained ounces, but the company could not quantify it. Management said it lacked sufficient information to provide accurate 2020 production or cost guidance and warned that lower cash flow could require spending cuts or new financing.
- Projects: McEwen expected continued Timmins and Nevada exploration in 2020 and targeted Froome production in 2021. It continued Fenix feasibility work after receiving certain permits in 2019; no decision to develop had been made. Los Azules remained an exploration project without a full feasibility study, with environmental work planned to support a future assessment.
- Debt and liquidity: The secured $50 million term loan bears 9.75% interest. Principal payments of $2 million monthly were scheduled to begin in August 2020 for 12 months, followed by a $26 million payment in August 2021. Debt covenants restrict, among other things, borrowing, asset sales and shareholder distributions. Management believed available working capital and forecast operating cash would cover nondiscretionary needs for the next 12 months, but discretionary projects may require deferral or additional financing.
- Other risks and contingencies: The company does not hedge gold or silver sales and is exposed to metal-price volatility. It cited foreign-exchange, political and regulatory risks, particularly in Argentina and Mexico; permitting, water, labor, environmental and reclamation risks; and potential COVID-19-related workforce, supply and travel disruptions. No material legal proceedings were reported.
- Unusual items: 2019 included a $5.3 million gain on marketable securities and a $1.7 million inventory write-down. The filing also refers to a final ruling against the company in litigation concerning Mexico’s tax reform and precious-metals royalty. No 2019 impairment charge was recorded.
- Shareholder distributions were suspended in March 2019. McEwen reported a $1.0 billion accumulated deficit and pre-tax losses in each of the three years through 2019.
Important facts for investors to verify
- The final Gold Bar reserve estimate, revised mine plan, 2020 production and cost outlook, and potential impairment or cash-flow effects.
- Whether operating cash generation, equity financing or other funding will be sufficient for scheduled debt principal and interest payments and planned investment.
- Progress at Black Fox and Froome, including reserve replacement, mine-life extension and the stated 2021 production target.
- San José’s operating results, dividend capacity and cash repatriation in Argentina, where McEwen does not control day-to-day operations.
- The economics and financing requirements of Fenix and Los Azules, neither of which had a development decision in the filing.
- Cash-cost and AISC calculations, which are non-GAAP measures, and the effect of the changing silver-to-gold conversion ratio on comparisons.
- Customer concentration: 89% of consolidated 2019 sales were to Bank of Nova Scotia, and 79% of San José sales were to three purchasers.