McEwen Mining Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 8, 2023. Dollar amounts below are U.S. dollars. The company produces gold and silver in the U.S., Canada and Argentina and is developing copper assets, principally Los Azules in Argentina. At quarter-end, McEwen owned 51.9% of McEwen Copper and 49% of Minera Santa Cruz (MSC), which operates the San José mine with Hochschild Mining.
Financial and operating results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Gold and silver revenue | $38.4m | $26.0m | $107.6m | $82.2m |
| Gross profit (loss) | $3.8m | $1.5m | $4.1m | $(0.3)m |
| Operating loss | $(28.8)m | $(15.6)m | $(114.7)m | $(56.3)m |
| Net loss attributable to McEwen shareholders | $(18.5)m | $(10.5)m | $(83.2)m | $(43.7)m |
| Loss per share, basic and diluted | $(0.39) | $(0.22) | $(1.75) | $(0.93) |
| Cash used in operating activities | Not presented quarterly in the cash-flow statement | $(56.0)m | $(62.6)m |
Q3 gross margin was approximately 9.8%; nine-month gross margin was approximately 3.8%. Q3 revenue increased 48% year over year, supported by higher production and realized prices. Q3 average realized price for 100%-owned operations was $1,920 per GEO, versus $1,742 a year earlier. The company reported Q3 cash gross profit of $11.9m from wholly owned operations and $22.3m including its 49% attributable share of San José; these are non-GAAP measures.
Q3 attributable production was 38,478 GEOs, including 17,798 GEOs from San José. Nine-month production was 104,400 GEOs. Los Azules advanced-project spending was $18.5m in Q3 and $78.9m for the nine months, a major contributor to the increased reported losses. Q3 adjusted net loss, a non-GAAP measure excluding McEwen Copper and MSC results, was $4.2m, compared with adjusted net income of $6.4m in Q3 2022.
Liquidity, debt and cash flows
- At September 30, cash and cash equivalents were $49.1m, investments were $40.8m, and working capital was $72.3m, versus negative working capital of $2.5m at December 31, 2022. The company reported total assets of $572.7m and total liabilities of $138.7m.
- Cash used in operating activities for the first nine months was $56.0m; investing activities used $51.9m, including $33.9m invested in Argentine-listed securities; financing activities provided $158.9m, primarily from McEwen Copper financing, partly offset by $25.0m of debt repayment.
- Debt was $40.0m, down from $64.0m at year-end 2022. The loan bears 9.75% annual interest and is payable to an affiliate of CEO Robert McEwen. Monthly principal repayments of $1.0m are scheduled to begin in January 2025, followed by a final $21.0m payment in August 2026.
- Reclamation liabilities totaled $42.3m. The company also had $4.2m of restricted cash posted against reclamation surety facilities.
Management stated that available liquidity and expected operating cash flows should fund anticipated operating, capital and working-capital needs for the next 12 months. However, $45.2m of reported cash was held by McEwen Copper and identified for advancing Los Azules; cash availability and allocation should be considered alongside the company’s operating cash use.
Material changes and unusual items
- Revenue increased year over year, but operating and net losses widened, mainly as Los Azules advanced-project and exploration spending rose substantially. Depreciation and depletion also increased.
- Q3 net finance income was $10.3m, while other expense was $10.1m. For the nine months, finance income was $38.4m and other expense was $34.6m. These lines include substantial currency and investment effects, rather than representing recurring operating earnings alone.
- Argentina’s peso devaluation materially affected reported results. The company recorded $41.2m of foreign-exchange losses in the nine-month cash-flow reconciliation and reported a $58.8m foreign-currency loss in other expense for the period. It held $41.3m of cash denominated in Argentine pesos and $40.8m of Argentine-listed equity securities at quarter-end.
- McEwen Copper completed financings during the first nine months, reducing McEwen Mining’s ownership from 68.1% to 51.9%; the company recorded $75.5m of non-controlling interests and $109.9m of additional paid-in capital. Subsequent October transactions reduced its ownership to 47.7%. Management expected to deconsolidate McEwen Copper in Q4 2023 and account for the remaining interest using the equity method.
- Gold Bar and Fox Complex inventories were written down by $3.8m in the first nine months of 2023. The company also recorded a $2.7m Q3 loss from its MSC investment, compared with $0.8m income in Q3 2022.
Outlook, commentary and risks
- Management reiterated 2023 consolidated production guidance of 150,000–170,000 GEOs. Fox Complex guidance remained 42,000–48,000 GEOs; San José guidance remained 66,000–74,000 GEOs.
- Gold Bar guidance was reduced to 36,500–40,000 GEOs from 42,000–48,000 GEOs because of weather-related delays and labor constraints. Management expected the completed heap-leach expansion and additional crushing crews to accelerate production in Q4, with some production shifting into Q1 2024. Gold Bar full-year costs were expected to be about 10%–15% above guidance.
- Fox Complex year-to-date cash cost and AISC were $1,129 and $1,321 per GEO, respectively, against full-year guidance of $1,000 and $1,320. San José year-to-date cash cost and AISC were $1,505 and $1,971 per GEO, against guidance of $1,250 and $1,550; management expected costs to remain about 15% above guidance, partly due to additional development under the revised mine plan.
- For Los Azules, the company planned 157,000 feet of infill drilling in the 2023–2024 campaign and was pursuing a feasibility study. The filing gives differing feasibility-study timing: the Q3 highlights refer to delivery by the end of Q1 2025, while the project discussion refers to the end of 2024.
- Key risks include Argentine inflation and currency devaluation, commodity-price and equity-price volatility, permits and project execution, production and cost variability, funding needs, labor and equipment availability, and reliance on decisions by the MSC joint-venture partner. The company does not hedge gold or silver sales. It reported no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the filing’s cash-flow comparison: the consolidated cash-flow statement reports nine-month 2022 operating cash use of $62.6m, while the selected-results MD&A table reports $50.6m.
- Confirm the status and accounting treatment of the October McEwen Copper financings, the resulting 47.7% ownership, expected Q4 deconsolidation, and the effect on future reported revenue, expenses, cash and non-controlling interests.
- Track Gold Bar’s revised production outlook, the timing and results of the heap-leach expansion, and whether its costs moderate as management expected.
- Assess cash accessibility and exposure to Argentine peso devaluation, including the $41.3m peso cash balance, $40.8m investment portfolio, and cash designated for Los Azules.
- Monitor Los Azules spending, permitting, feasibility-study schedule and financing needs, as well as the project’s substantial contribution to reported losses.
- Review related-party loan terms and interest expense, and compare Fox Complex and San José cost performance with guidance.