McEwen Mining Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 1, 2017. The filing also reports fourth-quarter results. All financial amounts are in U.S. dollars unless noted.
Business context
McEwen is a precious- and base-metals exploration, development and production company operating in Mexico, Argentina and the United States. It owns 100% of the El Gallo 1 mine in Mexico and 49% of Minera Santa Cruz (MSC), which owns and operates the San José mine in Argentina. San José is accounted for using the equity method, so its sales are not included in consolidated revenue; McEwen records its share of MSC’s earnings. Gold Bar in Nevada and El Gallo 2 in Mexico are development-stage projects, while Los Azules in Argentina is a copper exploration project.
Financial and operating performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Consolidated revenue (gold and silver sales) | $60.4 million | $73.0 million |
| Operating income (loss) | $15.3 million | $(49.3) million |
| Net income (loss) | $21.1 million | $(20.5) million |
| Net income (loss) per diluted share | $0.07 | $(0.07) |
| Cash provided by (used in) operating activities | $25.2 million | $15.6 million |
| Cash and cash equivalents at year-end | $37.4 million | $25.9 million |
| Working capital at year-end | $58.0 million | $32.4 million |
| Current liabilities | $20.6 million | $22.0 million |
| Short-term bank indebtedness | None | $3.4 million |
Consolidated revenue is principally El Gallo 1 sales. Its GAAP gross profit was $31.7 million, approximately 52.5% of sales. McEwen reported $12.95 million of income from its MSC investment and received $17.7 million in MSC dividends. MSC’s 100%-basis sales were $236.0 million; these are not consolidated revenue.
Attributable consolidated production was 145,530 gold-equivalent ounces, down from 154,500 in 2015. El Gallo 1 produced 55,266 gold-equivalent ounces; lower grades after the high-grade Samaniego pit was substantially mined out reduced production. San José produced 184,213 gold-equivalent ounces on a 100% basis and met guidance. Management-reported non-GAAP all-in sustaining costs were $610 per gold-equivalent ounce at El Gallo 1 and $954 at San José on a 100% basis; these measures are not standardized under GAAP.
Total assets were $498.3 million and total liabilities $55.3 million at year-end. Shareholders’ equity was $443.0 million. The company had no short-term bank debt after repaying its Mexican credit facility in January 2016; the filing does not establish that the company had no other forms of debt-like obligations. The accumulated deficit was $919.0 million.
Changes versus prior year and unusual items
- McEwen reported its first annual profit, compared with a 2015 net loss. The improvement reflected stronger MSC results, no 2016 impairment charges, and higher metal prices at MSC, despite lower El Gallo 1 sales.
- Consolidated sales fell 17%, primarily because El Gallo 1 gold-equivalent ounces sold declined 22%; higher realized gold and silver prices partly offset the volume decline.
- MSC’s 100%-basis sales rose 27% to $236.0 million, and its reported net income was $32.0 million, versus a $5.8 million loss in 2015. McEwen’s equity-method income from MSC was $13.0 million, after purchase-price-allocation amortization and tax effects.
- No impairment charges were recorded in 2016, compared with $62.4 million in 2015: $50.6 million for mineral properties and equipment and $11.8 million for the MSC investment.
- Operating cash flow included $17.7 million of MSC dividends and $9.5 million of Mexican VAT collections. Investing activities used $10.1 million, including $6.0 million to acquire the El Gallo royalty. Financing activities used $3.2 million, including debt repayment and shareholder returns of capital.
- The annual return of capital was $0.005 per share declared for 2016; the latest $0.005 installment was paid in February 2017. Future distributions are not assured.
Outlook, risks and contingencies
- Gold Bar: Management targeted final permitting in late 2017, potential construction in late 2017 and production in late 2018, subject to approvals and financing. The 2015 feasibility study estimated initial capital of $60.4 million. The project did not have SEC Industry Guide 7 reserves because it was not fully permitted.
- El Gallo 2: No decision to build had been made, and the company said its 2012 feasibility study was no longer current. The 2017 budget was approximately $6.0 million for exploration and development. Management cited improved silver-price expectations, better project economics and favorable financing as conditions for proceeding. Earlier capital estimates are not current; management estimated approximately $150 million of additional funding would be needed under existing estimates.
- Los Azules: The project’s preliminary economic assessment estimated initial capital of $3.9 billion and $5.5 billion over the mine life, with a stated accuracy target of plus or minus 35%. No full feasibility study had established economic feasibility, and the project faces substantial infrastructure, permitting, financing and copper-price risks.
- Except for McEwen’s 49% interest in San José, the company reported no SEC Industry Guide 7 proven and probable reserves at its properties. Resource estimates are uncertain and should not be treated as economically mineable reserves.
- Management said year-end working capital was sufficient for obligations and planned activities over the next 12 months, but developing either Gold Bar or El Gallo 2 would require additional capital. Funding may involve debt, equity or other financing; equity issuance could dilute shareholders.
- Key exposures include volatile gold, silver and copper prices; currency movements; political, regulatory and security conditions in Argentina and Mexico; permitting, water access, reclamation and environmental obligations; and dependence on contractors and the majority partner at San José. McEwen does not hedge gold or silver sales.
- Undiscounted contractual lease and reclamation payments totaled $26.9 million. The company had $4.8 million in U.S. reclamation surety bonds and reported no material legal proceedings or material off-balance-sheet arrangements.
- After year-end, McEwen agreed to acquire Lexam VG Gold in a share exchange expected to issue approximately 12.7 million shares, or about 4% of outstanding shares, subject to approvals and other closing conditions. Completion was expected by May 23, 2017.
Management and Ernst & Young concluded that internal control over financial reporting was effective as of December 31, 2016. The auditors issued an unqualified opinion on the 2016 financial statements and internal controls.
Most important facts for investors to verify
- Whether El Gallo 1 can sustain production and recoveries as grades decline, and how leach-pad inventory estimates develop.
- Whether Gold Bar receives permits on schedule and can be financed within the estimated capital budget.
- Whether El Gallo 2’s updated studies support a construction decision, and what its current capital and financing needs would be.
- The assumptions underlying MSC’s reported earnings, dividends and reserves, including the effects of tax benefits, currency changes and purchase-price-allocation adjustments.
- The collection timing and recoverability of Mexican VAT receivables, and the adequacy of reclamation liabilities and bonding.
- Final approval, dilution and related-party implications of the proposed Lexam acquisition, given CEO Robert McEwen’s ownership interest in Lexam.