McEwen Mining Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 10, 2021. This is an annual report, with selected fourth-quarter results also summarized below. Unless noted, financial figures are U.S. dollars. San José results are not consolidated because McEwen accounts for its 49% interest using the equity method.
Business context
McEwen explores for and produces precious metals in the United States, Canada, Mexico and Argentina, and explores for copper in Argentina. Its wholly owned operations include Gold Bar, Black Fox, and residual leaching at El Gallo; it also owns 49% of the San José mine, operated by joint-venture partner Hochschild. Froome was under development, while Fenix and Los Azules were development or exploration projects.
Key financial and operating metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue from gold and silver sales (excludes San José) | $104.8 million | $117.0 million |
| Gross profit (loss) | $(26.9) million | $9.0 million |
| Net loss | $(152.3) million; $(0.38) per share | $(59.7) million; $(0.17) per share |
| Cash used in operating activities | $27.9 million | $39.5 million |
| Cash additions to mineral property interests and plant and equipment | $13.4 million | $29.7 million |
| Cash and cash equivalents at year-end | $20.8 million | $46.5 million |
| Working capital at year-end | $7.9 million | $43.1 million |
The 2020 gross loss was about 25.7% of reported revenue. Management’s non-GAAP cash gross loss was $4.0 million, versus cash gross profit of $33.7 million in 2019. These non-GAAP figures should not be treated as substitutes for GAAP results.
- Production and sales: Attributable production was 114,844 gold-equivalent ounces (GEO), including 54,500 GEO from San José; sales were 115,662 GEO. Production was 174,400 GEO in 2019. The company’s 100%-owned mines produced 60,343 GEO, down 22,423 GEO year over year.
- Prices and costs: Average realized price for 100%-owned operations was $1,771 per GEO, versus $1,403 in 2019. Cash cost per GEO sold at those operations was $1,772, and all-in sustaining cost (AISC) was $2,077; both were above the realized price. These are non-GAAP measures.
- Liquidity and financing: Liquid assets, a company-defined non-GAAP measure, were $25.9 million at year-end, including restricted cash and precious-metal inventory. Financing activities provided $17.6 million in cash in 2020. The company raised $20.2 million gross ($19.6 million net) through 2020 flow-through financings and reported $64.4 million gross proceeds from equity financings during 2020 and subsequent to year-end.
- Debt: The senior secured facility had $50.0 million principal outstanding at year-end; its carrying value was $48.2 million. Monthly principal repayments of $2.0 million were scheduled to begin in August 2022 for 12 months, followed by a final $26.0 million payment on August 31, 2023. Lease liabilities were $5.5 million.
- Other balance-sheet items: Inventory was $31.7 million, including $15.6 million of Gold Bar leach-pad inventory. Reclamation obligations were $34.0 million; $31.8 million of surety bonds supported U.S. and Canadian reclamation requirements.
Fourth-quarter snapshot
Q4 2020 revenue was $27.7 million, net loss was $23.5 million, and production and sales were approximately 30,200 and 30,300 GEO, respectively. Q4 production included 14,805 attributable GEO from San José. The filing text does not provide a clear Q4 operating-cash-flow figure.
Material changes versus 2019
- Net loss increased by $92.6 million, primarily due to an $83.8 million non-cash Gold Bar impairment, lower sales volumes, and higher production costs. The company reported a $68.5 million net loss before the Gold Bar impairment.
- Revenue declined 10%, despite higher realized prices, as fewer ounces were sold. Production costs applicable to sales rose 31% to $108.8 million; the company attributed pressure to COVID-related interruptions, higher per-ounce costs, Gold Bar operating and grade-reconciliation issues, and inventory write-downs.
- Gold Bar’s 2020 production was 27,900 ounces versus 30,700 in 2019. Its cash cost and AISC were $2,106 and $2,459 per ounce, respectively. The company recorded a $12.4 million write-down of Gold Bar inventory in addition to the mine impairment.
- Black Fox production fell 32% to 24,400 GEO, mainly due to lower processed grades and COVID-related suspension. El Gallo production continued to decline as the former mine remained in residual leaching. San José’s attributable production fell to 54,500 GEO from 91,700 GEO, reflecting shutdowns and a restricted ramp-up.
- Cash used in operations improved to $27.9 million from $39.5 million, partly because exploration spending and corporate costs declined and government relief was received. Cash and working capital nevertheless fell substantially year over year.
- Reported shares outstanding increased to 416.6 million at year-end from 400.3 million a year earlier; subsequent financings added further shares.
Outlook, commentary and risks
- Liquidity outlook: Management said 2020 and subsequent equity financings, together with expected operating cash flows, were sufficient for anticipated operating, capital and working-capital needs, and removed the previously disclosed going-concern uncertainty. This assessment depends on operating performance, financing access and commodity prices.
- Froome: Development was 76% complete at year-end. The company expected to reach the deposit in Q2 2021 and commercial production in Q4 2021, targeting an annualized 40,000–45,000 GEO over an estimated 2.5-year mine life.
- Gold Bar: An updated feasibility study, filed in February 2021, estimated 302,000 recoverable gold ounces and a six-year mine life, a 16% reserve reduction from the 2018 estimate. Its base case at $1,500 gold estimated $55.2 million after-tax discounted value at an 8% discount rate. Gold Bar South mining could begin as early as Q1 2022, subject to permits.
- Fenix: The feasibility study described a two-phase project with an estimated 9.5-year mine life, 28% after-tax IRR, and initial capital of $42 million for Phase 1 and $24 million for Phase 2, using assumed prices of $1,500 gold and $17 silver. The company was evaluating financing alternatives, including a possible divestiture of its Mexican business unit.
- Other projects: A Fox Complex preliminary economic assessment was expected in Q2 2021. For Los Azules, the company was considering a joint venture or a spin-out and continued engineering and environmental work. These projects require further studies, financing and/or approvals; outcomes are uncertain.
- Key risks: COVID-19-related shutdowns, travel restrictions and supply availability; volatile gold and silver prices; operating and grade-estimation uncertainty, particularly at Gold Bar; reserve replacement and project execution; dependence on additional capital and potential dilution; secured debt and restrictive covenants; reclamation obligations; and political, currency, permitting, environmental and security risks in operating jurisdictions. The company does not hedge gold or silver sales.
- Unusual items: The company recognized $6.4 million of COVID-19 government relief income, including $1.9 million under the U.S. PPP program and $4.5 million under Canada’s CEWS program. It also recorded a $1.9 million Black Fox inventory write-down and a $1.7 million El Gallo inventory write-down. No material legal proceedings were reported.
Most important facts for investors to verify
- Whether Gold Bar’s updated reserve model and operating plan translate into improved production, costs and cash generation after the 2020 impairment and inventory write-downs.
- Whether Froome reaches commercial production on schedule and achieves its stated production and cost objectives.
- Current liquidity, covenant compliance and the company’s capacity to meet debt payments beginning in 2022 and the final 2023 payment.
- Progress on the $18.3 million Canadian exploration-spending commitment tied to flow-through financings, due by the end of 2022.
- Whether Fenix receives financing and proceeds to development, and whether the possible Mexican business-unit divestiture advances.
- Actual reserve replacement, project economics and permitting progress at Gold Bar South, the Fox Complex and Los Azules.
- The scale of share dilution from completed and potential future equity financings, and the effect of metal prices and COVID-related disruptions on cash flow.