McEwen Mining Inc. — Form 10-Q summary
Reporting period: Quarter ended September 30, 2017; comparisons are with the three and nine months ended September 30, 2016. Unless noted otherwise, financial figures are in U.S. dollars. The filing is unaudited.
Business context
McEwen explores, develops, and produces gold and silver, and explores for copper. It operates the El Gallo 1 mine in Mexico and owns 49% of Minera Santa Cruz S.A. (MSC), which owns the San José mine in Argentina. Its development and exploration portfolio includes Gold Bar, Los Azules, and Timmins-area properties. MSC is accounted for under the equity method, so its mine sales are not included in McEwen’s reported revenue.
Key financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Gold and silver sales | $13.4 million | $13.4 million | $43.4 million | $49.2 million |
| Operating income (loss) | $(6.8) million | $3.0 million | $(16.8) million | $20.1 million |
| Net income (loss) | $(8.1) million | $4.2 million | $(12.8) million | $25.5 million |
| Net income (loss) per share | $(0.03) | $0.01 | $(0.04) | $0.09 |
| Cash from (used in) operations | Not presented for quarter | Not presented for quarter | $(9.2) million | $24.4 million |
- At September 30, cash was $69.0 million, investments $9.2 million, and working capital $82.7 million. Management’s non-GAAP measure of cash, investments, and precious metals was $82.3 million.
- Total liabilities were $59.8 million, including $10.7 million in asset retirement obligations. The company reported no indebtedness at quarter-end.
- Nine-month financing cash flow was $40.2 million, chiefly reflecting the September share-and-warrant offering. The offering generated $43.2 million net proceeds; 20.7 million shares and 10.35 million warrants were issued.
- McEwen declared return-of-capital distributions of $0.005 per share for the quarter and $0.01 per share for the nine-month period.
Operating performance and changes from prior periods
- Q3 sales were essentially unchanged year over year, but McEwen recorded a net loss versus net income in Q3 2016. The quarter’s deterioration reflected the swing in MSC equity-method results, higher El Gallo 1 production costs, increased general and administrative expense, and other expenses.
- For the first nine months, sales fell 12% and net income shifted to a loss. El Gallo 1’s lower ounces sold, higher production costs, increased exploration spending—particularly at Los Azules—and MSC’s weaker results contributed to the decline.
- El Gallo 1 produced 7,213 gold-equivalent ounces in Q3, down from 11,849 a year earlier. A crushing-circuit mechanical failure at the end of July disrupted operations for much of August. Q3 cash cost and all-in sustaining cost were $832 and $946 per gold-equivalent ounce, respectively, versus $598 and $680.
- For the first nine months, El Gallo 1 produced 26,800 gold-equivalent ounces versus 47,590; its cash cost was $695 per ounce and all-in sustaining cost was $813, versus $483 and $559.
- MSC produced 44,560 gold-equivalent ounces in Q3 on a 100% basis, down 11% year over year. McEwen’s 49% share of San José all-in sustaining cost was $1,065 per gold-equivalent ounce, versus $850. McEwen received $2.3 million in MSC dividends in Q3 and $7.2 million in the nine-month period.
- Q3 exploration expense was $2.4 million; nine-month exploration expense rose to $13.9 million from $5.6 million. General and administrative expense increased to $4.7 million for Q3 and $13.1 million for nine months, from $3.2 million and $8.6 million, respectively.
Outlook, material events, and risks
- Management expected El Gallo 1 production to increase in Q4 under the mine plan and added a portable crusher to help address the production shortfall. The mine was described as mature, with efforts underway to extend its life beyond 2018.
- Gold Bar permitting and development preparation continued. Management expected development to begin after the Record of Decision, anticipated in early Q4 2017; the filing does not establish that this approval had been received by the filing date.
- A revised El Gallo 2 feasibility study was expected by December 2017. The Los Azules PEA was completed in Q3; management described the project’s economics favorably, but the excerpt provides no specific PEA figures.
- On October 6, 2017, after quarter-end, McEwen completed its acquisition of Black Fox assets and assumed certain liabilities for $27.5 million cash. Purchase-price allocation was not final. The company also extended surety bonding for Black Fox, adding $16.5 million of bonding obligations.
- Management considered working capital sufficient for obligations and activities over the next 12 months, but said advancing development projects could require funding beyond available working capital. Potential sources included debt, equity, and equipment leasing.
- Key risks include commodity and foreign-exchange volatility, permitting and financing needs, operating and production variability, VAT-receivable collection in Mexico ($7.9 million outstanding), reclamation-bond requirements, and dependence on MSC and its operator. A 10% change in gold and silver spot prices would have affected nine-month sales by approximately $4.3 million, excluding MSC.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Q4 production recovery at El Gallo 1 materialized and whether the portable crusher resolved the crushing constraint.
- Gold Bar’s permitting status and the timing, cost, and financing plan for development.
- Black Fox’s final purchase-price allocation, operating performance, integration costs, and reclamation obligations.
- MSC’s subsequent operating results and dividend capacity, given the sharp year-over-year decline in attributable investment results.
- El Gallo 1’s remaining mine life and the results of exploration intended to extend it beyond 2018.
- Collection timing for the Mexican VAT receivable and the company’s future capital requirements relative to cash and working capital.