McEwen Mining Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
McEwen explores, develops and produces gold and silver in the United States, Canada and Mexico, and holds a 49% interest in Argentina’s San José mine through Minera Santa Cruz (MSC). It also explores for copper. El Gallo is in residual leaching and reclamation; the San José mine is operated by its joint-venture partner.
Key financial results
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Gold and silver sales revenue | $18.3 | $36.4 | $49.7 | $52.0 |
| Gross profit (loss) | $(8.9) | $4.7 | $(12.6) | $6.1 |
| Operating loss | $(21.1) | $(11.2) | $(120.5) | $(21.7) |
| Net loss | $(19.8) | $(13.0) | $(119.0) | $(23.2) |
| Net loss per share | $(0.05) | $(0.04) | $(0.30) | $(0.07) |
| Cash used in operating activities | $(8.2) | Cash provided: $1.7 | $(20.1) | $(9.2) |
H1 2020 net loss included an $83.8 million non-cash impairment charge at Gold Bar. Q2 sales revenue fell 50% year over year, while H1 revenue declined 4%. Higher realized prices partly offset fewer ounces sold: average realized price for wholly owned operations was $1,733 per gold-equivalent ounce in Q2 and $1,641 in H1, versus $1,318 and $1,313, respectively. Production costs were $22.4 million in Q2 and $50.7 million in H1; the company reported a $4.1 million Q2 cash gross loss and a $1.1 million H1 cash gross loss, both non-GAAP measures.
Cash, debt and liquidity
- Cash and cash equivalents were $18.4 million at June 30, down from $46.5 million at December 31, 2019. Working capital was $25.5 million, down $17.7 million.
- H1 operating cash use was $20.1 million; investing cash use was $7.9 million, including $8.5 million of capital additions. Financing used $1.0 million. Cash, cash equivalents and restricted cash decreased by $28.0 million.
- Debt was $47.8 million at June 30, with no current portion reported; lease liabilities were $6.1 million. The June refinancing extended scheduled principal repayments by two years: monthly $2 million payments begin August 2022, followed by a $26 million final payment in August 2023. The company issued 2.09 million shares valued at $1.875 million to lenders.
- The amended loan reduced working-capital covenant thresholds through 2021, then steps them up to $10 million from September 2022. The company was covenant-compliant at June 30.
Material changes and operating performance
- COVID-19 disruptions reduced Q2 production and sales. Companywide production was 19,200 gold-equivalent ounces and sales were 22,400 ounces, including McEwen’s attributable share of San José. Wholly owned operations produced 10,200 ounces and sold 10,800.
- Gold Bar and Black Fox temporarily suspended operations; Gold Bar also operated on day shift during its ramp-up and mine-plan review. San José restarted at reduced capacity but remained constrained by travel restrictions and personnel mobilization.
- Wholly owned cash cost per ounce rose to $2,170 in Q2 from $863 a year earlier; all-in sustaining cost per ounce rose to $2,719 from $1,152. These are non-GAAP measures. Low production and shutdowns drove the increase.
- Gold Bar’s carrying value was impaired by $83.8 million following a resource and mine-plan review that indicated lower estimated resources and expected production. Black Fox inventory was written down by $1.9 million; Gold Bar inventory was written down by $1.2 million in Q1.
- Exploration spending fell year over year, while advanced-project costs increased. General and administrative costs declined. MSC’s attributable loss improved to $1.0 million in Q2 from $4.1 million, but its operations incurred COVID-related shutdown costs.
Outlook, risks and unusual items
- Management expected to finalize a revised Gold Bar resource estimate and mine plan in Q3 2020 and a new reserve estimate in Q4. Full Gold Bar day-and-night shifts were scheduled to resume in September; Gold Bar South mining could begin in H2 2021, subject to permitting. Froome production was targeted for Q4 2021, and a Fenix feasibility study was expected in Q4 2020.
- Management identified uncertainty about generating sufficient cash to fund operations and development while remaining within financial covenants over the following 12 months, citing the Gold Bar resource reduction, Black Fox challenges and COVID-19 disruption. It was evaluating additional equity and spending reductions. Management concluded there was no material going-concern uncertainty, but that conclusion depended on its plans and cash-flow forecasts.
- The company received $1.9 million under the U.S. Paycheck Protection Program and $1.5 million through Canada’s wage subsidy program. It expected PPP forgiveness if eligible spending requirements were met; $1.2 million of PPP assistance had been recognized as income by June 30.
- Further COVID-related shutdowns, travel or supply constraints, lower production, commodity-price and currency movements, permit delays, and difficulty raising capital could affect results and liquidity. The company does not hedge gold and silver sales. It also reported $31.3 million of reclamation surety bonds and posted $2.8 million of collateral after quarter-end.
Most important facts for investors to verify
- Whether Gold Bar’s updated resource, mine plan and reserve estimates support the projected operating and cash-flow recovery after the $83.8 million impairment.
- Whether operations, especially at San José and Black Fox, recover as assumed and whether COVID-related constraints recur.
- Cash runway, planned expenditure reductions or equity financing, and compliance with the amended loan’s future covenant thresholds and repayment terms.
- Progress and permitting for Gold Bar South, Froome and Fenix, including whether stated development timelines remain achievable.
- Reconciliation of non-GAAP cost and cash-gross-profit measures to GAAP results, and the eligibility and ultimate forgiveness of PPP assistance.