Mcewen Inc. quarterly report, Q2 FY2021

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McEwen Mining Inc. — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars unless noted; financial statements are unaudited. McEwen explores, develops and produces gold and silver, and explores for copper in the U.S., Canada, Mexico and Argentina. It owns the Gold Bar and Black Fox/Fox Complex operations and a 49% equity-method interest in Minera Santa Cruz, which owns the San José mine.

Financial performance and liquidity

  • Revenue: Gold and silver sales were $40.7 million in Q2, up 123% from $18.3 million; first-half revenue was $64.4 million, up 30% from $49.7 million. These consolidated revenue figures exclude San José sales, which are accounted for under the equity method.
  • Profit and margins: Q2 gross profit was $4.1 million versus a gross loss of $8.9 million a year earlier; net loss narrowed to $6.0 million ($0.01 per share) from $19.8 million ($0.05 per share). First-half gross loss was $0.9 million and net loss was $18.5 million ($0.04 per share), compared with losses of $12.6 million and $119.0 million ($0.30 per share) in H1 2020. The prior-year first-half loss included an $83.8 million impairment. Calculated gross margin was approximately 10.0% in Q2 and negative 1.4% for H1 2021.
  • Costs and production: Q2 production costs applicable to sales were $31.1 million; H1 costs were $54.7 million. Production totaled 40,700 gold-equivalent ounces in Q2, including 22,500 from wholly owned operations and 18,200 attributable ounces from San José. Management reported Q2 cash gross profit, a non-GAAP measure, of $9.6 million, versus a $4.1 million loss a year earlier. Wholly owned operations’ Q2 AISC was $1,447 per ounce sold, down from $2,719; San José’s attributable AISC was $1,500 per ounce.
  • Cash flow and capital spending: H1 cash used in operating activities was $8.1 million, versus $20.1 million used in H1 2020. Investing activities used $12.3 million, including $20.4 million of additions to mineral property, plant and equipment, partly offset by $7.6 million of MSC dividends. Financing activities provided $41.8 million. The MD&A separately reports Q2 operating cash provided of $7.6 million.
  • Liquidity: June 30 cash and cash equivalents were $42.2 million, compared with $20.8 million at year-end 2020; restricted cash was $3.6 million. Working capital was $30.0 million, up $22.0 million. Management’s non-GAAP liquid-assets measure was $48.9 million.
  • Debt and obligations: Debt was $48.5 million, including $24.25 million owed to an affiliate of CEO Robert McEwen; the company said it complied with all debt covenants. The facility requires monthly $2 million principal payments beginning August 2022, followed by a $26 million final payment due August 2023. Asset retirement obligations totaled $34.9 million.

Material changes from comparable periods

  • Q2 revenue and production improved substantially, driven by higher output at Gold Bar and the Fox Complex, and a higher realized price for wholly owned operations ($1,830 per gold-equivalent ounce versus $1,733).
  • Management attributed lower unit costs to improved Gold Bar efficiencies and higher Fox Complex grades and throughput. Q2 AISC for wholly owned operations fell from the unusually high prior-year level.
  • Exploration expense increased to $6.9 million in Q2 and $11.9 million in H1, from $3.5 million and $7.3 million, respectively. Advanced-project costs declined to $0.8 million in Q2 and $2.6 million in H1.
  • Shares outstanding increased to 459.2 million from 416.6 million at year-end, primarily following a February offering of 30.0 million shares and a January issuance of 12.6 million flow-through shares. Those financings generated net proceeds of approximately $29.9 million and $12.0 million, respectively.
  • No long-lived-asset impairment was recorded in H1 2021; H1 2020 included the $83.8 million Gold Bar impairment.

Outlook, commentary and risks

  • Management said operations were performing in line with expectations and that it expected to meet 2021 production guidance; specific annual production figures are not provided in the supplied filing text.
  • Froome underground development reached ore in Q2, with commercial production expected in Q4 2021. A Fox Complex expansion preliminary economic assessment was expected in H2 2021.
  • El Gallo residual heap leaching is expected to wind down in early 2022. McEwen was evaluating strategic alternatives, including possible divestiture of its Mexican business unit, and alternatives for its MSC investment.
  • After quarter-end, McEwen Copper announced a planned private financing of up to $80 million for Los Azules and Elder Creek; Robert McEwen committed the first $40 million. This was a subsequent event, not cash reported at June 30.
  • Key uncertainties include COVID-19 and operating interruptions, commodity-price and foreign-exchange volatility, access to capital, permitting, production and cost execution, exploration results, and reliance on the MSC joint venture partner. The company does not hedge gold or silver sales. A 10% metal-price change was estimated to affect H1 revenue by approximately $6.4 million.
  • The Black Fox streaming agreement requires delivery of specified portions of gold production through 2090 at a capped price. Reclamation bonding totaled $32.0 million, with an 11% deposit requirement; restricted cash was $3.6 million.
  • Management stated that available liquidity and expected operating funds were sufficient for anticipated operating, capital and working-capital needs over the next 12 months. This is a forward-looking assessment and depends on assumptions and conditions.

Important facts for investors to verify

  • Whether 2021 production guidance was achieved and Froome reached commercial production in Q4 as planned.
  • Actual financing terms, proceeds and dilution from the proposed McEwen Copper offering, including the CEO’s commitment.
  • Fox Complex PEA results, required capital, permitting and the assumptions behind projected production and mine life.
  • Cash use, working capital, covenant compliance and repayment capacity as debt amortization begins in 2022.
  • Progress on any strategic alternatives for Mexico and MSC, and the timing and reliability of MSC distributions.
  • Whether reported non-GAAP measures, including AISC and liquid assets, reconcile to GAAP figures as defined in the filing; definitions may differ from other companies’ measures.