Business context and reporting period
McEwen Mining Inc. filed an audited Form 10-K for the fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter report. The company explores for and produces precious metals in Argentina, Mexico and the United States.
Results include Minera Andes from January 25, 2012, following its acquisition. This added a 49% equity-method interest in Argentina’s operating San José mine and the Los Azules copper project; San José’s sales and expenses are not consolidated line by line. El Gallo Phase 1 in Mexico poured its first gold in September and was treated as commercially producing for accounting purposes from September 2012, but operational commercial production began January 1, 2013.
Financial and operating highlights
| Metric | FY 2012 | Comparison / context |
|---|---|---|
| Consolidated revenue | $26.8 million | $6.0 million gold and silver sales plus $20.8 million net equity income from San José; no consolidated revenue in 2011. |
| Operating loss | $91.4 million | 2011: $60.2 million loss; higher exploration, acquisition-related, construction and impairment costs. |
| Net loss / diluted loss per share | $66.7 million / $0.26 | 2011: $61.9 million / $0.42. Per-share comparisons reflect the rights-offering bonus-share adjustment. |
| Operating cash flow | $(71.5) million | 2011: $(59.0) million. |
| Investing cash flow | $65.1 million provided | Includes $36.3 million of cash and short-term investments acquired with Minera Andes and $23.8 million from bullion sales. |
| Financing cash flow | $64.3 million provided | Includes $60.4 million net proceeds from the rights offering. |
| Cash and liquidity | $70.9 million cash; $66.7 million working capital | Current assets $91.9 million; current liabilities $25.2 million. Management said working capital should fund ongoing exploration and corporate activities for 12 months. |
| Debt | No debt outstanding | The filing reports no debt and describes interest-rate exposure as insignificant. |
Margins are not particularly informative given substantial exploration and development spending and equity-method income. The company recorded a $27.2 million income-tax recovery, including a $21.1 million benefit from remeasurement of an Argentine-peso-denominated deferred tax liability and a $5.9 million reversal related to property write-downs. The balance-sheet deferred tax liability was $229.5 million.
Attributable 2012 production was 48,889 ounces of gold and approximately 2.9 million ounces of silver. El Gallo Phase 1 produced 6,863 ounces of gold and 4,492 ounces of silver during startup. San José’s 100% production was 85,768 ounces of gold and 5.95 million ounces of silver; McEwen’s interest is 49%. San José’s reported all-in sustaining cash cost was $1,208 per gold ounce and $22.11 per silver ounce on a co-product basis, up from $962 and $20.89, respectively, in 2011; these are non-GAAP measures.
Material changes versus prior periods
- The Minera Andes acquisition materially changed the company’s scale, asset base and reporting mix: total assets rose to $1.15 billion from $310.4 million, including $767.1 million of mineral property interests and a $273.9 million investment in San José.
- The company moved from no operating sales in 2011 to initial El Gallo sales in 2012 and equity-method income from San José. Reported loss per share narrowed, while the absolute net loss increased slightly.
- Cash rose by $57.5 million during 2012, mainly reflecting acquisition cash, bullion disposals and equity issuance; operating cash use also increased.
- Costs and expenses increased to $118.2 million from $60.2 million. This included $47.2 million of exploration costs, $14.3 million of mine construction costs, and $18.5 million of asset impairments, most of the latter relating to Nevada mineral interests.
- The company raised $60.4 million net in a discounted rights offering and issued 19.6 million common shares and 7.8 million exchangeable shares. The acquisition and offering materially increased the share count.
Outlook, risks and unusual items
- Management forecast 2013 El Gallo Phase 1 production of approximately 27,500 ounces of gold. For San José, management cited 2013 production of approximately 96,000 ounces of gold and 6.4 million ounces of silver on a 100% basis.
- El Gallo Phase 2 was projected to begin production in 2014, with estimated initial capital of $180 million. Management said additional capital would be needed; year-end working capital was not sufficient to fund Phase 2. Permits and construction approvals remained pending.
- Gold Bar was in permitting, with production targeted for 2015; timing depended on approvals and project financing. Management’s 2013 budgets included $1.2 million for Gold Bar permitting, $10.0 million for Mexico exploration and $26 million for the 2012–2013 Los Azules drilling season.
- Project estimates and schedules are uncertain. El Gallo Phase 2 and Gold Bar lack SEC Guide 7 proven and probable reserves; the filing cautions that Canadian resource estimates are not equivalent to SEC-compliant reserves. Los Azules development faces substantial capital, access, permitting and infrastructure challenges.
- Key exposures include volatile gold, silver and copper prices; inflation and operating costs; permitting, environmental and reclamation obligations; security conditions in Sinaloa, Mexico; and Argentine foreign-exchange, export-repatriation and policy risks. Argentine royalty payments at San José increased to 3% for all products after a provincial change.
- Unusual items included the $18.5 million impairment charge, the substantial tax recovery, a $3.8 million liability for shares due under the TNR Gold settlement, and a $3.7 million advance royalty payment by the San José operator. The TNR settlement resolved litigation but preserves a potential back-in right of up to 25% in specified properties after a feasibility study.
- The company had no common-stock dividend history and did not expect to pay dividends in the foreseeable future. Management and KPMG reported effective internal control over financial reporting; KPMG issued an unqualified audit opinion on the financial statements.
Important facts for investors to verify
- Whether El Gallo Phase 1 achieves forecast production and costs, and whether Phase 2 permits, financing and construction meet the stated timetable.
- San José production, costs, dividends and updated reserves; McEwen cautions that it does not operate the mine and has not independently verified operator-supplied data.
- Cash burn, remaining liquidity and the amount, terms and dilution of any financing needed for development projects.
- Progress on Gold Bar permitting and Los Azules technical, capital-cost and feasibility work, including the limits of resource estimates versus SEC reserve standards.
- Collection of Mexican IVA tax receivables, Argentine currency and repatriation restrictions, royalty changes, reclamation obligations and the effects of commodity-price movements.
- Share dilution from exchangeable shares, options or future equity issuance, and the final accounting or cash impact of significant impairments and tax items.