McEwen Mining Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Financial statements are unaudited; amounts below are U.S. dollars. The company explores, develops and produces precious metals, with El Gallo Phase 1 in Mexico and a 49% equity-method interest in Argentina’s San José Mine.
Financial and operating results
| Metric | Q1 2013 | Comparable period |
|---|---|---|
| Gold and silver sales | $13.5 million | None in Q1 2012 |
| Net loss | $11.0 million ($0.04 per share) | $17.4 million ($0.07 per share), adjusted |
| Operating loss | $18.4 million | $21.1 million |
| Cash used in operating activities | $25.0 million | $16.4 million |
| Cash and cash equivalents, quarter-end | $45.1 million | $70.9 million at December 31, 2012 |
| Working capital, quarter-end | $52.8 million | $66.7 million at December 31, 2012 |
| Total assets / total liabilities | $1,125 million / $243 million | $1,151 million / $261 million at December 31, 2012 |
| Debt | No debt outstanding | — |
Consolidated gold-equivalent production was 29,839 ounces, including 23,058 attributable ounces from San José and 6,781 ounces from El Gallo Phase 1. Management reported consolidated total cash costs of $885 and all-in sustaining cash costs of $1,507 per gold-equivalent ounce; both are non-GAAP measures.
El Gallo Phase 1 recorded $13.5 million in sales and $10.6 million in production costs applicable to sales. San José’s sales were $43.8 million on a 100% basis; McEwen’s 49% share of MSC earnings was $1.2 million before $1.4 million of purchase-accounting amortization, producing a net equity-investment loss of $0.2 million.
Changes versus the prior period
- The company began recording El Gallo Phase 1 sales and production costs; there were no comparable sales in Q1 2012 because production began in September 2012.
- Net loss narrowed by $6.4 million, helped by lower prior-year construction and acquisition costs and a larger income-tax recovery. Total costs and expenses nevertheless increased to $31.6 million from $24.2 million, including new production costs and higher exploration spending.
- Operating cash use rose by $8.6 million, mainly due to production and exploration payments. Cash declined $25.8 million during the quarter.
- San José’s MSC-reported sales decreased 27% year over year, primarily due to lower realized gold and silver prices and fewer silver ounces sold. A ten-day illness-related shutdown reduced treated tonnage.
- Q1 2012 comparatives were adjusted for finalization of the MSC acquisition purchase-price allocation. The company also corrected an immaterial prior-period MSC cost-of-sales error in the current quarter, reducing prior-year equity income by $1.9 million.
Outlook, risks and unusual items
- Management said working capital was sufficient for ongoing exploration and corporate activities over the next 12 months, but El Gallo Phase 2 is estimated to require approximately $180 million, substantially more than available working capital. Potential funding includes a Los Azules sale or joint venture, debt, equity issuance or equipment leasing; proceeding depends on securing one or more alternatives.
- All required El Gallo Phase 2 permits had been submitted or approved; remaining approvals were targeted by the end of Q3 2013, subject to government timing. The company had advanced funds for long-lead equipment.
- For the remainder of 2013, management lowered expected El Gallo Phase 1 cash costs to $700–$800 per ounce from $1,135–$1,235. Full-year all-in sustaining cost guidance was $1,200–$1,235 per ounce; Q1 was $1,483, reflecting exploration and pre-stripping costs.
- San José 2013 production was expected to be approximately 91,800 ounces of gold and 6.1 million ounces of silver on a 100% basis. McEwen cautioned that it does not operate the mine and has not independently verified MSC-supplied operating information.
- Exploration and development plans included an updated Los Azules resource estimate and preliminary economic assessment, and submission of the Gold Bar Plan of Operations application in the second half of 2013. These are forward-looking plans, not guarantees.
- The $6.5 million income-tax recovery primarily reflected foreign-exchange revaluation of deferred tax liabilities denominated in Argentine pesos. Key exposures include gold and silver prices, currency movements and Argentine peso devaluation, political and regulatory changes in Argentina and Mexico, permitting, water availability at Gold Bar, and security conditions in Sinaloa.
- The filing reports no material adverse off-balance-sheet arrangements. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether and on what terms McEwen secures funding for El Gallo Phase 2 and whether required permits are obtained on schedule.
- El Gallo Phase 1’s sustained production, cash costs and all-in sustaining costs against management’s revised guidance.
- San José production, sales, costs and any further MSC reporting corrections; reported mine data is supplied by the operator and not independently verified by McEwen.
- Cash use, working capital and liquidity as exploration and development spending continues.
- Changes in gold and silver prices, foreign-exchange rates, Argentine and Mexican policies, and the stated operating and permitting risks.