McEwen Mining Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated financial statements; amounts below are U.S. dollars. McEwen produces gold and silver at El Gallo 1 in Mexico and holds a 49% equity-method interest in MSC, which owns and operates the San José mine in Argentina.
Financial and operating highlights
| Metric | Q2 2013 | Six months 2013 | Prior comparable period |
|---|---|---|---|
| Gold and silver sales (El Gallo 1) | $10.5 million | $24.0 million | No comparable sales; El Gallo had not yet reached accounting commercial production |
| Loss on MSC investment, net of amortization | $1.6 million | $1.8 million | Income of $0.7 million and $3.7 million, respectively, in 2012 |
| Operating loss | $139.7 million | $158.0 million | $24.9 million and $46.0 million, respectively, in 2012 |
| Net loss | $128.7 million ($0.43/share) | $139.7 million ($0.47/share) | $20.4 million ($0.08/share) and $37.7 million ($0.15/share), respectively |
| Cash used in operating activities | Not provided for the quarter | $35.2 million | $42.7 million used in first-half 2012 |
| Cash and cash equivalents | $34.8 million at June 30, 2013 | $70.9 million at December 31, 2012 | |
| Working capital | $45.8 million at June 30, 2013 | $66.7 million at December 31, 2012 |
Q2 consolidated production was 35,955 gold-equivalent ounces, including 27,394 attributable ounces from San José and 8,561 from El Gallo 1. Consolidated ounces sold were 42,449. Management-reported non-GAAP consolidated costs were $744 per gold-equivalent ounce for total cash costs, $1,108 for all-in sustaining costs, and $1,199 for all-in costs. These measures are not GAAP-standardized and may not be comparable across companies.
At June 30, total assets were $982.4 million, total liabilities $228.3 million, and shareholders’ equity $754.1 million. The company reported no debt. Current assets were $57.8 million and current liabilities $12.0 million. The balance sheet included a $210.7 million deferred tax liability.
Material changes and unusual items
- Net loss increased sharply, primarily due to a $95.9 million impairment of the MSC investment and $27.7 million impairment of Santa Cruz mineral properties. Both impairments followed lower metal prices, inflationary pressures, and the new provincial mining-property tax.
- The MSC investment was written down to $176.3 million. Its fair value was estimated using a discounted cash flow model with a 10% discount rate, long-term gold and silver prices of $1,300 and $22.75 per ounce, and specified inflation assumptions. The company said it would continue assessing impairment as tax details become clearer.
- A $6.8 million loss on asset disposals mainly reflected Nevada claims with a $7.2 million carrying value sold for $0.8 million. The proceeds were collected July 17, 2013.
- Income-tax recovery was $12.4 million in Q2 and $18.9 million for the first half, including foreign-exchange remeasurement and recoveries associated with impairments and the Nevada sale.
- Cash declined by $36.1 million in the first half. Operating cash use was partly offset by cash received from El Gallo sales; investing activities provided $0.1 million and financing activities provided $0.1 million.
- San José production rose versus Q2 2012, but MSC’s first-half sales fell to $112.4 million from $116.1 million as lower realized prices more than offset higher sales volumes. MSC’s Q2 2013 net income was only $0.1 million on a 100% basis. Management cited inflation and a ten-day first-quarter production stoppage related to a food-borne viral illness.
Outlook, risks, and contingencies
- Management forecast 2013 El Gallo 1 production of 27,300 gold-equivalent ounces; first-half production was 15,342 ounces. The company planned an approximately $5 million El Gallo 1 expansion, targeted for completion by mid-2014.
- El Gallo 2’s development approach was under review: heap leach could reduce estimated capital needs from about $180 million for conventional milling to a projected $30 million, but could also reduce recovered silver. Metallurgical testing was expected to finish by Q4 2014; the production schedule would be revised based on results. Remaining permits were targeted for Q3 2013, subject to government approval.
- Management believed available working capital was sufficient for ongoing exploration and corporate activities over the next 12 months. Conventional El Gallo 2 development would require additional capital, potentially through debt, equity, or equipment leasing. No assurance of financing or approvals was given.
- Santa Cruz’s new tax is 1% of the value of economically viable reserves, effective July 5, 2013. Scope, calculation, and enforcement were unclear; management expected it to be onerous and potentially constrain exploration. MSC and other companies were challenging the legislation.
- Other material risks include metal-price volatility, Argentine inflation and currency devaluation or transfer restrictions, Mexican security and political risks, permit timing, access to financing, and uncertainty in exploration and resource estimates. The company cautioned that San José operating information was supplied by MSC and was not independently verified.
- For reclamation, the company estimated undiscounted costs of $3.8 million at Tonkin and $4.6 million for El Gallo 1. The Tonkin closure plan had NDEP approval but remained under BLM review; bonding requirements could increase.
Important facts for investors to verify
- How the Santa Cruz tax will be calculated and applied, and whether it will lead to additional impairment of MSC or mineral properties.
- Whether San José production, costs, realized prices, and sales reported by MSC are accurate; McEwen is not the operator and did not independently verify them.
- El Gallo 1 production against the 27,300-ounce annual forecast, expansion cost and schedule, and the status of El Gallo 2 testing, permits, and financing.
- Cash runway and funding needs, particularly if El Gallo 2 proceeds as a conventional mill; cash fell by $36.1 million in the first half.
- Exposure to gold and silver prices, Argentine inflation and foreign-exchange restrictions, and the collectability and timing of the $9.0 million Mexican IVA tax receivable.
- The assumptions behind the $95.9 million MSC impairment and $27.7 million property impairment, including sensitivity to metal prices, tax outcomes, and operating costs.