McEwen Mining Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 20, 2019. The filing also reports fourth-quarter results. McEwen operates gold and silver mines in Mexico and Canada and owns 49% of Argentina’s San José mine, accounted for using the equity method; it was building Gold Bar in Nevada and exploring other projects.
Financial and operating performance
- Revenue: GAAP revenue was $128.8 million, up 90% from $67.7 million in 2017. Gold and silver sales were $128.2 million, primarily from El Gallo ($66.2 million) and Black Fox ($62.0 million). San José’s sales are not consolidated as revenue; McEwen’s attributable share is reflected in its equity-method investment result.
- Profitability: Gross profit was $35.5 million, with a 28% gross margin versus 33% in 2017. Operating loss was $46.5 million and net loss was $44.9 million, or $0.13 per share, compared with a $10.6 million net loss, or $0.03 per share, in 2017. Fourth-quarter 2018 net loss was $21.0 million versus net income of $2.2 million in fourth-quarter 2017.
- Key drivers: Exploration expense rose to $34.8 million from $17.7 million, and general and administrative expense increased to $23.2 million from $18.9 million. McEwen recorded an $11.9 million loss on its MSC investment, compared with a $44,000 loss in 2017. Tax recovery fell to $2.8 million from $15.4 million, largely because of one-time tax benefits in 2017.
- Production: Attributable production was 175,640 gold-equivalent ounces, up from 152,300 in 2017. Black Fox contributed 48,928 ounces and El Gallo 39,105 ounces; McEwen’s 49% share of San José was 87,607 ounces. Consolidated gold-equivalent ounces sold were 190,095.
- Mine costs: Reported all-in sustaining costs per gold-equivalent ounce were $1,137 at Black Fox, $771 at El Gallo, and $1,061 for McEwen’s 49% share of San José. These are non-GAAP measures and may not be directly comparable across companies.
- Cash flow: Operating cash flow was positive $0.5 million, versus negative $27.6 million in 2017. Investing activities used $69.3 million, including $62.3 million in property and equipment spending, primarily Gold Bar. Financing activities provided $60.4 million.
- Liquidity: Working capital was $23.4 million, down from $49.2 million. Cash and cash equivalents were $15.8 million; restricted cash was $14.7 million and primarily committed to Canadian exploration. Cash, restricted cash, investments and precious metals at market value totaled $37.8 million, versus $68.1 million a year earlier.
- Debt and obligations: The company drew a $50 million, three-year senior secured loan at 9.75% interest; the balance-sheet carrying value was $49.2 million at year-end. Half the loan was provided by an affiliate of CEO Robert McEwen. Principal payments are scheduled to begin in 2020. Asset retirement obligations totaled $29.4 million.
Material changes and management commentary
- Black Fox, acquired in October 2017, contributed a full year of production in 2018; it had contributed only fourth-quarter sales in the 2017 comparison. Its 2018 sales were $62.0 million.
- El Gallo ceased active mining in June 2018 after pit depletion. Residual heap leaching is expected to continue through 2020; 2018 sales exceeded production as bullion inventory was drawn down.
- Gold Bar construction was described as near completion and on schedule for first-quarter 2019 production. The company reported $72.4 million cumulatively spent on construction and $66.4 million invested during 2018.
- Management said year-end working capital, together with forecast operating working capital, should cover obligations and operations for the next 12 months. Further development of projects could require financing beyond available working capital; projects may be deferred if funding is insufficient.
- The board approved evaluation of a potential sale of the Mexican business, with proceeds, if realized, intended for other assets and partial debt repayment. No sale decision or proceeds were assured.
Risks, contingencies and unusual items
- McEwen does not hedge gold or silver sales, leaving revenue and cash flow exposed to metal-price changes. A 10% change in gold and silver prices would have affected 2018 sales revenue by approximately $12.8 million, based on the company’s sensitivity disclosure.
- Argentina imposed an export tax in the third quarter of 2018; management estimated an impact to MSC of approximately 7.5% of revenue. The Argentine peso also depreciated 53% against the U.S. dollar during 2018.
- MSC wrote off a receivable from U.S. refiner Republic Metals after it filed for Chapter 11 bankruptcy in November 2018. McEwen identifies this as a contributor to MSC’s weaker result.
- A Mexican mining-tax challenge remains unresolved; payment of the disputed 7.5% tax is stayed pending a final court ruling. The company reported a $1.5 million accrual for the separate 0.5% precious-metals royalty.
- Reclamation, permitting, operational, political, currency, water, community, reserve-estimation and financing risks are material. Surety bonds of $35.8 million support reclamation obligations; the filing says no liability was recognized for the bonds themselves.
- The company reported no material legal proceedings other than the tax matter described above. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether Gold Bar achieved commercial production as planned, and its actual production, recovery, costs and remaining capital needs.
- Whether operating cash flow and liquidity can sustain debt service, exploration commitments and project development; review loan covenants and the 2020 principal-payment schedule.
- How El Gallo’s residual leaching performs through the expected 2020 end date, including recoverable inventory and closure costs.
- MSC’s subsequent operating results, export-tax burden, Republic Metals recovery and dividend capacity, noting McEwen does not control MSC.
- Progress and terms, if any, of the proposed Mexican business sale and the outcome of the Mexican mining-tax litigation.
- Reconcile GAAP results with management’s non-GAAP cash-cost and all-in-sustaining-cost measures, and assess the effect of the stream agreement and share dilution.