McEwen Mining Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Financial amounts are in U.S. dollars. Comparisons are with Q1 2018 unless stated otherwise.
Business context
McEwen explores, develops, and produces gold and silver, and explores for copper, across the U.S., Canada, Mexico, and Argentina. It owns the Black Fox and Gold Bar mines, the El Gallo and Fenix projects, and the Los Azules copper project; it also holds a 49% equity-method interest in the San José mine, operated by its joint-venture partner. El Gallo active mining ended in Q2 2018, with residual leaching and reclamation continuing.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $15.6 million | $41.3 million; down 62% |
| Production costs applicable to sales | $13.2 million | $26.4 million |
| Gross profit and gross margin | $2.5 million; 15.8% | $14.9 million; 36.1% |
| Operating loss | $10.5 million | $4.4 million |
| Net loss / diluted loss per share | $10.1 million / $0.03 | $5.2 million / $0.02 |
| Cash used in operating activities | $10.8 million | Cash provided of $6.2 million |
| Cash used in investing activities | $14.5 million | $3.3 million |
| Cash provided by financing activities | $21.9 million | Cash used of $1.6 million |
Revenue fell mainly because fewer ounces were sold at El Gallo and Black Fox; initial Gold Bar sales partly offset the decline. Lower exploration and corporate G&A expenses partly offset weaker gross profit. The MSC investment generated a $2.3 million loss, versus $0.2 million a year earlier, and paid McEwen $2.0 million in dividends.
Attributable consolidated production was 36,315 gold-equivalent ounces, down from 44,300; sales were 31,673 ounces, down from 51,810. Black Fox production was disrupted by access difficulties and an eight-week crusher shutdown after a fire. El Gallo production reflected residual leaching. Gold Bar produced 2,030 ounces and sold 650 ounces. Reported non-GAAP all-in sustaining costs per gold-equivalent ounce were $1,454 at Black Fox, $989 at El Gallo, and $1,115 for McEwen’s 49% share of San José.
Liquidity, capital and debt
At March 31, 2019, current assets were $65.7 million and current liabilities were $33.0 million, giving reported working capital of $32.7 million. Cash and cash equivalents were $11.9 million; restricted cash was $14.8 million and committed to Canadian exploration. Investments were $4.2 million. Cash, restricted cash, investments, and precious metals valued at market were reported as $40.3 million in total. Cash, cash equivalents, and restricted cash together declined to $26.7 million from $30.5 million at year-end 2018.
Long-term debt was $49.3 million, comprising a $50 million senior secured term loan, with scheduled principal repayments of $10 million in 2020 and $40 million in 2021. The loan bears 9.75% annual interest; $1.2 million of interest was paid in Q1. The facility includes a $25 million participation by an affiliate of the CEO. Lease liabilities totaled $7.3 million. The company raised capital through a March registered offering and ATM share sales; the filing describes $25 million of gross registered-offering proceeds, including $3 million in insider subscription receipts subject to shareholder and NYSE approvals.
Capital investment was $16.5 million, principally for Gold Bar construction and pre-stripping and Black Fox underground development. Management believed working capital and forecast operating funds would cover obligations and operations for the next 12 months, but said development of projects could require additional financing or deferral.
Outlook, commentary and risks
- Gold Bar’s first gold pour was February 16; commercial production was expected in Q2 2019. Startup delays from severe winter conditions, labor shortages, and crushing and conveying design issues led the company to reduce 2019 production guidance by 10%; the filing does not provide a clear revised production target.
- Management expected Black Fox production to return to normal in Q2 after crusher repairs. El Gallo residual leaching was expected to continue through 2020.
- Fenix feasibility work was expected to finish in Q2 and permitting in Q3 2019. Los Azules environmental work continued; an environmental impact assessment submission was targeted within 12 months, with an environmental declaration expected in 2020.
- Exploration spending was reduced to conserve capital in Q1, with management expecting it to increase in Q2 and Q3. The company was evaluating a potential sale of its Mexican business unit; if pursued, management anticipated using half of net proceeds for development projects and half to repay debt.
- Reclamation obligations totaled $33.5 million. Surety bonds of $35.3 million supported U.S. and Canadian reclamation requirements; the company reported no liability for the bonds and said it believed it could meet future bonding requirements. Flow-through proceeds must be spent on eligible Canadian exploration by December 31, 2019; management expected to meet the commitment.
- Key exposures include gold and silver prices, foreign exchange and inflation, permitting and funding needs, operating and production risks, and reliance on the MSC joint-venture partner. The company does not hedge commodity sales. It reported no material change in risk factors and said disclosure controls were effective.
Most important facts for investors to verify
- Gold Bar’s ramp-up, commercial-production timing, and the impact of the 10% guidance reduction.
- Whether Black Fox operations and production recovered after the crusher fire and access disruptions.
- Cash burn, unrestricted liquidity, and funding needs for planned development and exploration, distinguishing restricted cash from available funds.
- Approval and conversion of the $3 million insider subscription receipts, and the resulting dilution from the offering, ATM sales, options, and warrants.
- Repayment capacity for the 9.75% secured term loan and the scheduled 2020–2021 principal payments.
- Performance and cash distributions from MSC, including exposure to Argentina’s export tax, currency movements, and partner decisions.
- Progress on the potential Mexican asset sale, Fenix feasibility and permits, and the Canadian flow-through spending commitment.