Business context and reporting period
McEwen Mining Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2022, comparing results with Q1 2021. The company explores, develops, produces and sells gold and silver, and explores for copper, operating in the U.S., Canada, Mexico and Argentina. It owns the Gold Bar mine, the Fox Complex, Mexican projects, an 82% interest in the Los Azules copper project and a 49% interest in the San José mine joint venture (MSC). MSC is accounted for using the equity method, so its sales are not included in McEwen’s reported revenue.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Gold and silver sales revenue | $25.5 million | $23.7 million |
| Production costs applicable to sales | $27.8 million | $23.6 million |
| Gross loss | $6.0 million | $5.0 million |
| Operating loss | $24.1 million | $15.4 million |
| Net loss attributable to McEwen shareholders | $19.3 million; $0.04 per share | $12.5 million; $0.03 per share |
| Cash used in operating activities | $15.6 million | $10.1 million |
| Capital additions to mineral properties and equipment | $4.0 million | $10.1 million |
At March 31, 2022, cash and cash equivalents were $63.8 million and restricted cash was $6.6 million, for combined cash, cash equivalents and restricted cash of $70.4 million. Management identified $35.6 million of cash as attributable to McEwen Copper and intended for Los Azules. Working capital was positive at $36.2 million. Total debt was $63.6 million, compared with $48.9 million at December 31, 2021; total liabilities were $156.4 million. Reclamation and remediation liabilities totaled $36.1 million. The filing reports no material impairment indicators in the quarter.
Consolidated production was 25,100 gold-equivalent ounces (GEOs), down from 30,600. McEwen’s wholly owned operations produced 14,400 GEOs, versus 13,900; its attributable share of San José production was 10,700 GEOs, versus 16,700. The average realized price for wholly owned operations was $1,895 per GEO, up from $1,763. The company reported a non-GAAP cash gross loss of $2.3 million, compared with cash gross profit of $0.2 million, and wholly owned AISC of $2,146 per GEO sold, compared with $1,777.
Material changes versus the prior comparable period
- Revenue rose 8%, primarily reflecting a higher realized gold price, but production costs rose 18%; gross and operating losses widened.
- Advanced-project spending increased to $11.1 million from $1.8 million, largely for Los Azules. Total exploration and advanced-project spending was reported as $14.4 million.
- Production at San José fell 35.7% year over year amid COVID-related staffing constraints. MSC recorded a loss of $1.1 million for McEwen, compared with $0.6 million.
- Gold Bar produced 6,274 GEOs, down 15%, with weather delays and mining of potentially preg-robbing material. Fox Complex production rose 47% to 7,667 GEOs, but was below plan after a crusher rebuild, workforce constraints and severe winter conditions.
- El Gallo continued residual leaching as the operation winds down; its inventory was written down by $3.4 million. Total inventory write-downs in Q1 2022 were $4.2 million, versus $2.1 million in Q1 2021.
- Operating cash use increased by $5.5 million. No MSC dividend was received, versus $5.0 million in Q1 2021.
Financing, outlook, commentary and risks
- McEwen amended its $50 million senior secured facility, extending scheduled principal payments and final maturity to March 31, 2025; monthly $2 million principal payments are scheduled to begin August 2023, followed by a $12 million final payment. The company said it was in compliance with covenants at quarter-end.
- On March 31, 2022, the company borrowed $15 million under an unsecured, subordinated related-party note controlled by Chairman and CEO Robert McEwen. It bears 8% annual interest, payable monthly, and is due by September 25, 2025.
- The company raised $15.1 million gross through Canadian exploration flow-through shares. It must use qualifying proceeds for Canadian exploration expenditures; management expected to meet the remaining commitments by the applicable deadlines.
- Management said liquidity, together with funds expected from ongoing operations, would be sufficient for anticipated operating, capital and working-capital needs over the next 12 months. This is a forward-looking assessment, not a guarantee.
- Management expected Gold Bar production to be in line with 2022 market guidance; the filing excerpt does not provide a numerical company-wide production guidance range. Gold Bar South received regulatory approval on April 1, with mining and production expected to begin in the second half of 2022.
- The Los Azules program was progressing toward an updated PEA and a pre-feasibility study; drilling was delayed by contractor, labor, equipment and COVID-related constraints. The Fox Complex PEA described an expansion concept, not a production guarantee: it estimated 80,800 ounces of annual gold production on average after Froome depletion over a further nine years, with stated economics based on assumed prices and costs.
- COVID-19, labor and supply availability, inflation, weather, commodity and currency prices, permitting, financing needs, and exploration and project-development uncertainty remain material risks. The company does not hedge gold and silver sales.
- NYSE notified the company that its average closing share price had remained below $1 for 30 consecutive trading days. The stated deadline to regain compliance was July 5, 2022; as of the filing date the company had not regained compliance and did not plan to seek shareholder approval for a reverse split. Delisting could impair share liquidity and access to equity financing.
- After quarter-end, the company announced that its CFO planned to retire and its COO planned to step down; interim successors were identified. These leadership changes may affect execution and oversight.
Important facts for investors to verify
- Whether the company regained NYSE minimum-price compliance by the stated deadline, and the subsequent listing status and financing implications.
- Whether operating cash burn, working capital and covenant headroom remain adequate, particularly as scheduled term-loan repayments approach.
- Whether mine production and unit costs improve after Q1 disruptions, and how actual results compare with any subsequently issued numerical guidance.
- Whether Los Azules drilling, studies and funding proceed on schedule, and how much of reported cash is available to the parent company versus restricted or attributable to McEwen Copper.
- Progress on required flow-through expenditures, reclamation bonding and liabilities, and collection of tax receivables, including Mexico’s VAT receivable.
- The terms, governance and repayment performance of the CEO-controlled subordinated note and other related-party arrangements.
- How much reported earnings and liquidity depend on nonrecurring or volatile items, including foreign-exchange and investment gains, inventory write-downs, and the absence of MSC dividends.