McEwen Mining Inc. — Q1 2012 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011. On January 24, 2012, the company (formerly US Gold Corporation) completed its acquisition of Minera Andes, adding a 49% interest in the San José silver-gold mine, the Los Azules copper project and Argentine exploration properties. Accordingly, consolidated results include Minera Andes from January 25 onward and are not directly comparable with the prior year.
Key financial results and position
| Metric | Q1 2012 / March 31, 2012 | Q1 2011 / December 31, 2011 |
|---|---|---|
| Revenue | $1.2 million, net equity income from MSC after $2.8 million fair-value amortization | None |
| Operating loss | $23.0 million | $9.5 million |
| Net loss | $19.2 million; $0.08 per share | $8.7 million; $0.07 per share |
| Cash used in operations | $16.4 million | $9.2 million |
| Cash and cash equivalents | $41.1 million | $13.4 million |
| Working capital | $64.2 million | $41.8 million |
| Total liabilities | $290.1 million, including $274.6 million deferred tax liability | $91.1 million |
| Debt | No debt outstanding | No debt outstanding |
Current assets were $73.3 million and current liabilities $9.1 million. Cash rose by $27.7 million during the quarter, including $36.3 million cash and short-term investments acquired with Minera Andes, $6.3 million bullion-sale proceeds, and $2.5 million from option exercises; operating cash use partly offset these sources. Cash flow from investing was $41.8 million, versus $28.6 million used in Q1 2011. No consolidated operating margin is meaningful given the limited reported revenue and exploration-stage spending.
Material changes and operating performance
- Costs and expenses increased to $24.2 million from $9.5 million, reflecting the acquisition, higher exploration spending ($11.8 million versus $6.9 million), $4.4 million of El Gallo construction and development expense, and $1.4 million of acquisition costs.
- Mineral property interests increased to $842.7 million from $245.5 million, principally from acquisition accounting. The preliminary purchase price was $667.8 million; the allocation remains subject to change. A related deferred tax liability was recognized.
- MSC’s San José mine, reported on a 100% basis in operating commentary, produced 20,357 ounces of gold and 1.356 million ounces of silver. Production fell 5% and 11%, respectively, year over year. Cash costs increased: $697 per gold ounce and $13.90 per silver ounce, versus $514 and $11.70 in Q1 2011. These are non-GAAP measures.
- MSC’s full-quarter sales were $59.8 million, down 12% year over year, partly because refinery-contract renegotiations delayed doré shipments representing about 30% of Q1 production. Sales resumed in April. McEwen recognized only its share of MSC earnings for January 25–March 31: $4.0 million before $2.8 million purchase-accounting amortization.
Outlook, risks and unusual items
- Management expected El Gallo Phase 1 to begin operating around the end of Q2 2012, with first gold sales in Q3. Guidance was approximately 30,000 ounces annual production and 10,000 ounces in 2012; management cautioned that timing was not assured and did not provide projected profitability. The Phase 1 budget was $15 million, with $6 million spent by May 2012 and approximately $9 million remaining.
- Other 2012 plans included $8 million for El Gallo Phase 2 work, $6 million for Los Azules exploration in Q4, $5.6 million for Santa Cruz exploration, and $2 million for Nevada exploration. Management forecast San José 100%-basis production of approximately 5.7 million ounces of silver and 85,000 ounces of gold for 2012, and more than $14 million of joint-venture exploration drilling.
- Los Azules drilling was substantially below plan: 2,835 meters completed versus 8,000 planned, due to difficult ground and equipment problems. TNR Gold litigation raises claims over property rights, expenditures and a potential 25% back-in right; an adverse outcome could materially impair development of Los Azules.
- Risks include commodity and currency volatility, permitting and exploration uncertainty, rising operating costs, Mexican security conditions, and Argentine government actions. New Argentine repatriation rules shortened the required period to 15 days; MSC was evaluating possible effects. The filing reports no derivatives used to manage market risk.
- Management said current working capital was sufficient for the remaining Phase 1 budget and ongoing exploration and corporate activities over the next 12 months, but results remain dependent on production ramp-up, MSC dividends and external factors. Management expects continued losses unless production increases significantly.
Investor facts to verify
- Whether El Gallo commissioning, first sales and stated production targets were achieved, and whether remaining construction costs stayed within budget.
- Subsequent San José production, costs, refinery shipments and dividends to McEwen; cash distributions depend on operating and market conditions.
- The final Minera Andes purchase-price allocation, including acquired mineral-property values and deferred tax liabilities.
- Developments and potential consequences of the TNR Gold dispute for Los Azules, together with updated resource estimates and drilling results.
- Exposure to Argentine repatriation rules, Mexican operating security, permitting, currency movements and metal prices.