McEwen Mining Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. Unaudited financial statements; amounts below are U.S. dollars unless noted.
Business context
McEwen explores for, develops and produces gold and silver in Argentina, Mexico and the United States. Its principal operating assets are El Gallo 1 in Mexico and a 49% interest in the San José mine in Argentina, which is operated by joint-venture partner Hochschild. Reported consolidated gold and silver sales principally reflect El Gallo 1; San José results are recorded through the equity-method investment.
Key financial and operating metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Gold and silver sales | $16.2m | $11.6m | $39.0m | $22.8m |
| Operating loss | $(29.7)m | $(129.4)m | $(24.5)m | $(129.9)m |
| Net loss | $(14.1)m | $(104.0)m | $(8.1)m | $(86.1)m |
| Basic loss per share | $(0.05) | $(0.35) | $(0.03) | $(0.29) |
| Adjusted net income (loss), non-GAAP | $1.8m | $(8.6)m | $3.7m | $(14.9)m |
| Earnings from mining operations, non-GAAP | $13.4m | $6.6m | $30.6m | $18.0m |
| Gold-equivalent ounces sold | 36,016 | 31,634 | 73,697 | 63,339 |
| Consolidated cash costs per gold-equivalent ounce | $713 | $840 | $693 | $815 |
| Consolidated all-in sustaining costs per gold-equivalent ounce | $1,048 | $1,283 | $997 | $1,191 |
Cash costs, all-in sustaining costs, adjusted earnings and earnings from mining operations are non-GAAP measures and may not be comparable across companies. Gold-equivalent calculations use a 75:1 silver-to-gold ratio for 2015 versus 60:1 for 2014.
- Cash flow: First-half operating cash flow was $6.0m, versus $7.1m used in the prior-year period. Investing activities used $1.5m; financing provided $5.8m, principally from the Mexican credit facility. Cash increased $10.0m to $22.4m.
- Liquidity and debt: Current assets were $55.5m and current liabilities $28.5m, giving reported working capital of $27.0m, up from $15.6m at year-end 2014. Management reported $28.9m in cash, investments and precious metals, alongside $5.8m of short-term bank debt. Total liabilities were $72.9m.
- Margins and mine performance: El Gallo 1 second-quarter gold-equivalent production rose 112% year over year to 17,325 ounces, driven mainly by higher grades; its cash cost and all-in sustaining cost were $351 and $546 per ounce. San José’s attributable operating contribution was weaker: the company recorded a $2.7m loss on its investment for the quarter, and the mine reported labor stoppages and higher costs.
Material changes versus prior period
- Sales increased 39% in Q2 and 71% in the first half, mainly on higher El Gallo 1 sales volumes. Lower realized prices partly offset volume growth: consolidated realized gold and silver prices in Q2 were $1,172/oz and $15.34/oz, versus $1,278/oz and $19.30/oz a year earlier.
- Net loss narrowed substantially, principally because the prior-year period included a $120.4m Los Azules impairment. Q2 2015 included a $28.5m impairment of the Gold Bar and Tonkin projects; the associated tax recovery was $10.0m.
- El Gallo 1 production costs and cost per ounce improved with higher grades and operating efficiencies. San José’s attributable results shifted from $4.6m income in first-half 2014 to a $2.3m loss in first-half 2015, reflecting lower precious-metal prices and higher costs, including labor disruption.
- First-half operating cash flow improved from a use of $7.1m to a source of $6.0m. Cash was also supported by a $5.8m draw on the Mexican credit line.
Outlook, risks and unusual items
- Guidance: Management maintained 2015 consolidated production guidance of 135,000–140,000 gold-equivalent ounces, comprising 50,000 gold ounces at El Gallo 1 and guidance at San José of 46,500 gold ounces and 3.1m silver ounces. El Gallo 1’s Q2 production was reported as 15% above guidance.
- Funding and development: Management said working capital was sufficient for ongoing exploration and corporate activities over the next 12 months. Additional capital would be required to develop Gold Bar or El Gallo 2; funding could involve debt, equity, leasing or other sources. No production decision had been made for El Gallo 2, and the company cautioned that the 2012 feasibility-study economics were historical and should not be relied upon.
- Robbery and insurance: Approximately 6,300 gold-equivalent ounces of concentrate were stolen from El Gallo 1 in April. The company accrued insurance proceeds at quarter-end and received reimbursement for approximately 80% of the loss’s fair value on July 16, 2015.
- Capital return: The board declared an annual return of capital of $0.01 per common or exchangeable share, payable in two installments. The first $0.005 payment was scheduled for August 17, 2015; future payments depend on cash needs and performance.
- Listing risk: The NYSE notified the company on July 1 that its average share price had been below $1 for 30 consecutive trading days. It had until January 4, 2016 to regain compliance; a reverse split or other shareholder-approved action might be needed, and failure could lead to delisting.
- Other risks: The filing highlights commodity-price and currency exposure, uncertainty and timing of Mexican IVA tax refunds ($10.5m receivable), permitting and financing needs, labor disruption, and the risks of exploration and project development. Outstanding U.S. reclamation surety bonds were $4.8m. No material off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether production guidance is achieved and whether El Gallo 1’s higher grades and cost performance persist.
- Collection timing and recoverability of the $10.5m Mexican IVA receivable, and repayment terms and currency exposure of the 90m-peso credit line.
- Final insurance proceeds and their accounting treatment for the El Gallo 1 concentrate theft.
- Funding requirements, updated economics and permitting progress for Gold Bar and El Gallo 2; confirm that historical El Gallo 2 study figures are not treated as current.
- NYSE minimum-price compliance status and any proposed actions, including a reverse stock split.
- San José operating results, labor conditions and dividends, given the 49% ownership interest and reliance on information supplied by the joint venture.