McEwen Mining Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. The company explores, develops, and produces gold and silver in Argentina, Mexico, and the United States. Its operating assets include El Gallo 1 in Mexico and a 49% equity-method interest in the San José mine in Argentina.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Gold and silver sales | $11.1 million | $13.5 million |
| Operating loss | $0.6 million | $18.4 million |
| Net income (loss) | $17.9 million | ($11.0 million) |
| Basic and diluted earnings (loss) per share | $0.06 | ($0.04) |
| Adjusted net loss, non-GAAP | $6.2 million | $19.6 million |
| Cash used in operating activities | $3.9 million | $25.0 million |
| Cash and cash equivalents at period-end | $19.5 million | $45.1 million |
| Working capital at period-end | $30.3 million | $35.6 million at Dec. 31, 2013 |
| Total liabilities | $159.6 million | $176.3 million at Dec. 31, 2013 |
| Debt | None | None reported |
Net income was driven principally by a $19.0 million income tax recovery associated with Argentine peso devaluation, rather than by the quarter’s operating performance. The recovery included an $18.9 million effect from remeasuring a deferred tax liability. The company reported a $0.6 million foreign-currency loss. The filing does not provide a clear consolidated GAAP operating margin.
Operations and costs
- Consolidated attributable gold-equivalent production was 32,146 ounces and sales were 31,705 ounces. El Gallo 1 produced 9,365 gold-equivalent ounces, up 38%; San José production attributable to McEwen was 22,781 ounces.
- Consolidated gold-equivalent sales increased to 31,705 ounces from 22,893 ounces. However, reported gold and silver sales fell 18%, to $11.1 million, as lower realized metal prices more than offset higher El Gallo sales volumes. Consolidated realized prices were $1,319 per gold ounce and $20.15 per silver ounce.
- Non-GAAP consolidated total cash cost was $790 per gold-equivalent ounce, versus $953; all-in sustaining cost was $1,100, versus $1,649; and all-in cost was $1,312, versus $2,326. Management attributed lower costs mainly to reduced exploration, lower costs at San José following Argentine peso depreciation and cost savings, and improved El Gallo 1 grades and strip ratio. These measures are not standardized under U.S. GAAP.
- San José generated $56.9 million of mine-level sales and $6.2 million of net income on a 100% basis. McEwen recognized $7.0 million of income on its investment after fair-value amortization and related tax effects, compared with a $0.2 million loss in Q1 2013. McEwen received $3.9 million in dividends from MSC.
Material changes and financial position
Sales declined from $13.5 million to $11.1 million, while exploration expense fell from $14.6 million to $2.7 million as the company reduced exploration and drilling to conserve working capital amid lower metals prices. General and administrative expense declined to $3.2 million from $4.2 million. Cash declined $4.9 million during the quarter; operating cash use improved substantially from Q1 2013, partly due to lower supplier and employee payments and the MSC dividend. Current assets were $43.7 million and current liabilities $13.4 million. Restricted reclamation deposits were $5.2 million. No material off-balance-sheet arrangements were reported.
Outlook, risks, and unusual items
- El Gallo 1: The expansion from nominal capacity of 3,000 to 4,500 tonnes per day was completed in April 2014. Commissioning was expected in Q2, with full operation expected in Q4 2014. These are forward-looking expectations.
- El Gallo 2: No final construction decision had been made. Proceeding depends on silver prices and obtaining financing on more favorable terms. The company estimated approximately $150 million would be required to complete the project and said available working capital was insufficient; potential funding routes include debt, equity, and equipment leasing. Potential cost reductions had not yet been incorporated into an updated feasibility study.
- Other projects: The Gold Bar Plan of Operations application was deemed complete by the BLM in April 2014, but further environmental review remained. Additional El Gallo 2 permits were expected to be submitted in the second half of 2014.
- Liquidity and country risks: Management believed working capital could fund ongoing exploration and corporate activities for 12 months, but major project construction would require additional capital. Risks include metal-price volatility, further Argentine peso depreciation and inflation, foreign-country and regulatory conditions, and uncertainty over raising capital. The company identified collection timing and credit risk for $13.1 million of Mexican IVA tax receivables.
- Reclamation: The BLM was still reviewing the Tonkin property closure plan and had requested additional information; bonding and reclamation estimates could increase, though the company could not quantify a potential increase.
- Reporting caveat: MSC supplies the San José operating information, and the filing notes that its partner does not accept responsibility for the use or adequacy of project data. The filing also cautions that interim results may not indicate full-year results.
Most important facts for investors to verify
- How much of the $17.9 million GAAP net income reflects the peso-related tax recovery and other non-recurring or non-cash effects; compare it with the $6.2 million adjusted net loss.
- Whether El Gallo 1 expansion commissioning and the targeted Q4 2014 full-operation schedule were achieved, and whether operating costs and recoveries support reported production economics.
- Whether El Gallo 2 receives a construction decision, permits, and adequate financing; validate the estimated $150 million completion requirement and proposed savings.
- Cash runway, working-capital changes, and any capital raising or dilution needed to fund development.
- Exposure to Argentine currency depreciation and inflation, collection of Mexican IVA receivables, and potential Tonkin reclamation or bonding increases.
- Interpret the non-GAAP cost comparisons with care: the gold-to-silver equivalent ratio changed from 52:1 in 2013 to 60:1 in 2014, and the El Gallo operating-results table appears to label both comparison columns “2014.”