McEwen Mining Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Financial statements are unaudited and reported in U.S. dollars. The company operates the El Gallo 1 mine in Mexico and owns a 49% equity-method interest in Argentina’s San José mine through Minera Santa Cruz S.A. (MSC).
Financial and operating metrics
| Metric | Q2 2014 | First half 2014 |
|---|---|---|
| Gold and silver sales | $11.6 million | $22.8 million |
| Net loss | $104.0 million | $86.1 million |
| Net loss per share | $0.35 | $0.29 |
| Adjusted net loss (non-GAAP) | $8.6 million | $14.9 million |
| Earnings from mining operations (non-GAAP) | $6.6 million | $18.0 million |
| Consolidated cash cost per gold-equivalent ounce (non-GAAP) | $840 | $815 |
| Consolidated all-in sustaining cost per gold-equivalent ounce (non-GAAP) | $1,283 | $1,191 |
Q2 gold-equivalent production was 31,200 ounces and sales were 31,634 ounces. The company reported Q2 realized prices of $1,278 per gold ounce and $19.30 per silver ounce. Its cost and adjusted earnings measures are non-GAAP and may not be comparable with similarly named measures at other companies.
For the six months, operating cash use was $7.1 million, investing cash use was $1.9 million, and financing provided $0.1 million. Cash declined $9.2 million to $15.1 million. Working capital was $28.4 million, down from $35.6 million at year-end 2013. Total liabilities were $134.9 million; the company reported no bank debt. Management separately described quarter-end cash and precious metals of $16.6 million.
Changes versus comparable periods
- Q2 sales rose 11% year over year, but first-half sales fell 5%. Q2 El Gallo 1 sales increased, while first-half sales were lower mainly because realized gold and silver prices declined.
- Q2 net loss narrowed from $128.7 million to $104.0 million, primarily reflecting a smaller impairment burden than in 2013. The 2014 quarter included a $120.4 million Los Azules impairment; Q2 2013 included $95.9 million for MSC and $27.7 million for Argentine exploration properties.
- First-half net loss improved from $139.7 million to $86.1 million. Exploration expense decreased to $5.3 million from $19.5 million, and G&A fell to $6.4 million from $8.4 million.
- Q2 consolidated cash cost and all-in sustaining cost per gold-equivalent ounce increased from the comparable period on a consistent 60:1 silver-to-gold ratio, reflecting lower grades and mine-specific cost pressures. First-half costs improved on a comparable-ratio basis, aided by Argentine-peso devaluation and lower exploration spending.
- MSC’s attributable earnings were a $2.4 million loss in Q2 but $4.6 million income for the first half, versus losses in both comparable 2013 periods. McEwen received $7.1 million in MSC dividends during the first half.
Outlook, commentary and risks
- Management believed working capital could fund ongoing exploration and corporate activity for the next 12 months, but anticipated needing additional capital in 2015. El Gallo 2 would require approximately $150 million in financing; no final construction decision had been made, and proceeding depends on silver-price expectations and obtaining more favorable financing.
- The El Gallo 1 expansion to nominal capacity of 4,500 tonnes per day was constructed and commissioning had begun. Management expected it to be fully operational in Q4 2014.
- Management expected approximately $0.8 million of remaining-2014 Gold Bar spending and $0.7 million for Los Azules; final Gold Bar permit approval was scheduled for Q1 2016. A South Roberts drilling program produced no significant results.
- The Los Azules impairment followed a comparable Argentine copper-project transaction that indicated a lower market value for the project. A third-party valuation estimated its fair value at $310.8 million. The impairment generated a $22.5 million deferred tax recovery.
- The SEC had an ongoing voluntary inquiry concerning the accounting treatment of Los Azules in 2013, including impairment and held-for-sale considerations. The company said it was cooperating; the inquiry’s outcome and potential consequences were uncertain and could entail legal costs, management distraction, penalties, or restatement.
- Argentina’s peso devalued 25% in the first half of 2014. The filing highlights currency, commodity-price, political, regulatory, operating, and funding risks. Argentina’s July 2014 bond default added uncertainty; management said its consequences remained unclear.
- Other exposures include uncertain collection timing for Mexico’s IVA tax receivable ($14.5 million at June 30), reclamation obligations, permitting, labor and weather disruptions, and the possibility that El Gallo 2 cannot be financed. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and outcome of the SEC inquiry into Los Azules, including any accounting or disclosure consequences.
- Whether El Gallo 1 expansion reaches full operation as expected and how grades, recoveries, production, and costs develop.
- El Gallo 2’s updated capital requirements, financing terms, permits, construction decision, and exposure to silver prices.
- Liquidity and funding needs, including the timing and amount of any 2015 capital raise and the distinction between reported cash and cash plus precious metals.
- MSC’s operating performance and distributions, and the effects of Argentine currency, economic, political, and regulatory conditions.
- Assumptions and valuation inputs behind the $120.4 million Los Azules impairment, and the reliability of mineral resource disclosures, which the filing cautions are not necessarily SEC-defined reserves.