McEwen Mining Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Financial statement amounts are in U.S. dollars. McEwen operates the El Gallo 1 mine in Mexico and owns 49% of Minera Santa Cruz (MSC), which owns the San José mine in Argentina; it also advances projects including Gold Bar, El Gallo 2 and Los Azules.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Gold and silver sales | $14.8 million | $21.2 million |
| Operating loss / income | $(7.4) million | $10.4 million |
| Net loss / income | $(3.0) million; $(0.01) per share | $13.0 million; $0.04 per share |
| Cash used in / provided by operating activities | $(6.9) million | $14.7 million |
| Cash and cash equivalents at period end | $28.9 million | $34.6 million |
At March 31, 2017, current assets were $81.7 million and current liabilities were $23.4 million, giving working capital of $58.3 million. Total assets were $499.4 million and total liabilities were $56.6 million. The balance sheet reports no bank indebtedness; management also reported no short-term bank debt. Cash, investments and precious metals at spot value—a company-defined non-GAAP measure—totaled $55.1 million.
- Gold and silver sales fell about 30%, principally because El Gallo 1 sold fewer gold-equivalent ounces. Consolidated gold-equivalent ounces sold, including McEwen’s attributable MSC share, declined to 31,136 from 40,578.
- Exploration expense increased to $8.4 million from $1.7 million, mainly reflecting $6.0 million of additional Los Azules spending. General and administrative expense rose to $4.3 million from $2.8 million.
- Income from the 49% MSC investment, net of amortization, fell to $0.2 million from $5.0 million. MSC paid McEwen $2.5 million in dividends in the quarter.
- El Gallo 1 produced 9,808 gold-equivalent ounces, down from 20,101; reported cash cost and all-in sustaining cost (AISC) were $564 and $668 per ounce sold, versus $432 and $532.
- San José produced 40,664 gold-equivalent ounces on a 100% basis, up from 36,443, but sales were disrupted by storms that damaged port facilities and delayed doré shipments. McEwen-attributable cash cost and AISC were $915 and $1,165 per gold-equivalent ounce, versus $762 and $936.
Management outlook, risks and notable items
- Management expects El Gallo 1 production to increase toward the second half of 2017 under its mine plan. The mine is mature, processes lower-grade material and is being explored to extend its life beyond 2018.
- Gold Bar construction could begin in the second half of 2017, with production potentially in late 2018, subject to permitting and other conditions. The company expected a Record of Decision and construction initiation in the second half of 2017; permits remained in process.
- Management said existing working capital was sufficient for obligations and planned activities over the next 12 months. A construction decision would require additional capital estimated at approximately $60 million for Gold Bar or $150 million for El Gallo 2; financing could include debt, equity or other sources.
- The company spent $6.3 million on Los Azules during the quarter and had budgeted $9.6 million for the 2016–2017 exploration season. Drilling results were expected in the second half of 2017.
- On April 26, 2017, after quarter-end, McEwen completed its acquisition of Lexam VG Gold. Consideration included 12.3 million McEwen shares and 405,740 subscription receipts, subject to shareholder approval for conversion of the receipts. The company expects the acquisition to add exploration assets in the Timmins district.
- Other notable items include a $1.8 million unrealized gain on warrants/derivatives and a $3.9 million after-tax unrealized gain on available-for-sale securities recorded in other comprehensive income. These investment-related gains did not represent mine operating cash generation.
- Key risks include commodity and foreign-exchange volatility, permitting and financing needs, mine production and grade variability, collection timing and credit risk on Mexico’s $6.3 million VAT receivable, and dependence on MSC, where McEwen does not control day-to-day operations. The filing states that interim results may not indicate full-year results.
Important facts for investors to verify
- Whether El Gallo 1 production and grades recover as management expects in the second half of 2017, and how the mine’s expected life beyond 2018 is supported.
- Progress on Gold Bar’s environmental and other permits, final construction costs, schedule and financing plan; updated feasibility and capital estimates for El Gallo 2.
- Whether the San José port disruption is resolved and whether delayed shipments and sales are reflected in subsequent results and cash receipts.
- Collection timing for the Mexican VAT receivable and the effect of peso appreciation on operating costs and liquidity.
- Shareholder approval and final conversion or cash settlement of Lexam-related subscription receipts, including the resulting dilution.