Business context and reporting period
McEwen Mining Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company explores, develops and produces gold, silver and copper in Argentina, Mexico, Canada and the United States. Its operations include the Black Fox mine in Canada, residual leaching at El Gallo in Mexico, construction of the Gold Bar project in Nevada, and a 49% equity-method interest in Argentina’s San José mine (MSC).
Financial and operating highlights
Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $26.9 | $13.4 | $102.4 | $43.4 |
| Gross profit | $6.6 | $4.8 | $31.4 | $19.2 |
| Gross margin | 24.5% | 35.6% | 30.7% | 44.2% |
| Operating loss | $(15.2) | $(6.8) | $(28.3) | $(16.8) |
| Net loss | $(13.3) | $(8.1) | $(23.9) | $(12.8) |
| Net loss per share | $(0.04) | $(0.03) | $(0.07) | $(0.04) |
| Cash used in operating activities | Not presented quarterly | Not presented quarterly | $(0.8) | $(16.4) |
- Q3 consolidated gold-equivalent production was 43,742 ounces and sales were approximately 45,000 ounces, including McEwen’s attributable share of MSC.
- At September 30, cash and cash equivalents were $40.8 million; current assets were $77.8 million and current liabilities $39.9 million, yielding working capital of $37.9 million. Management’s non-GAAP measure of cash, investments and precious metals was $54.0 million.
- Total liabilities were $126.0 million. Long-term debt carrying value was $49.1 million, consisting of the $50 million term loan before unamortized fees and costs; capital lease liabilities totaled $4.1 million. Shareholders’ equity was $494.7 million.
- Gold Bar construction-in-progress reached $61.5 million. Nine-month investing cash outflow was $41.6 million, including $44.3 million of property and equipment additions, primarily for Gold Bar.
- Production costs applicable to sales were $20.3 million in Q3 and $71.0 million year to date. Company-reported non-GAAP Q3 all-in sustaining costs per gold-equivalent ounce were $696 at El Gallo, $1,285 at Black Fox and $1,028 for McEwen’s 49% share of San José.
Material changes versus prior comparable periods
- Revenue increased substantially, mainly because Black Fox was acquired in October 2017 and contributed $11.4 million in Q3 and $46.4 million year to date in 2018. El Gallo sales also rose, partly from residual leaching and bullion inventory sales.
- Gross profit rose in dollars, but gross margin declined in both the quarter and nine-month period as production costs grew faster than revenue.
- Net losses widened, reflecting sharply higher exploration expense, increased corporate costs, and a larger loss from MSC. Exploration expense was $8.2 million in Q3 and $28.7 million year to date, versus $2.4 million and $13.9 million, respectively.
- MSC’s net loss attributable through McEwen’s investment was $5.0 million in Q3 and $7.5 million year to date, versus $0.5 million in each 2017 comparative period. MSC’s lower realized metal prices contributed to weaker results.
- Cash and cash equivalents increased from $27.2 million at year-end 2017 to $40.8 million, while working capital declined from $49.2 million to $37.9 million. The company raised $50 million of term debt in August; cash flow from financing was $45.4 million for the nine months.
Outlook, commentary and risks
- Management said Gold Bar construction remained on schedule for completion by year-end 2018; major equipment and bulk materials were purchased or on site. The project’s projected gold production for its first three operating years, beginning in 2019, was approximately 55,000, 74,000 and 68,000 ounces, respectively. These are forward-looking estimates, not reported results.
- El Gallo mining, crushing and processing ceased in Q2 2018. Residual heap leaching and closure/reclamation activities were expected to continue through 2020. Management expected El Gallo cash costs to decline as residual leaching continued.
- Management believed available working capital and forecast cash generation would cover obligations and planned activity over the next 12 months, including Gold Bar construction. It cautioned that advancing Los Azules, Black Fox/Timmins and Fenix could require additional financing or deferral of projects.
- The $50 million senior secured term loan bears interest at 9.75% annually, matures in August 2021 and requires monthly interest payments. An affiliate of Chairman and CEO Robert McEwen provided $25 million of the loan. The filing describes prepayment fees and scheduled principal payments of $10 million in 2020 and $40 million in 2021.
- Reclamation obligations totaled $29.3 million. The company also had $35.8 million in surety bonds for reclamation; the bonds may need replacement with cash if no longer accepted by regulators. The Black Fox streaming agreement requires sales of specified portions of production at the lesser of market price or a contract price, subject to adjustments, through 2090.
- Risks highlighted include metal-price and foreign-exchange volatility, financing needs, permitting, operating and exploration uncertainty, and dependence on MSC, which McEwen does not control. The Argentine peso depreciated 121% against the U.S. dollar during the first nine months of 2018. Management also noted uncertainty in collection timing for $2.8 million of Mexican VAT receivables.
Important facts for investors to verify
- Gold Bar’s actual completion date, total construction cost, funding needs and ability to achieve projected production.
- Black Fox operating performance and whether its reported cash costs and sustaining costs are maintained or improve.
- MSC’s results, cash distributions and the assumptions underlying McEwen’s equity-method investment, given the substantial year-over-year increase in its reported loss.
- Whether operating cash generation and liquidity can fund construction, exploration, debt service and reclamation obligations without additional financing or project deferrals.
- The terms and related-party nature of the term loan, including interest, repayment and prepayment provisions, and the continuing impact of the Black Fox streaming agreement.
- Metal-price, Argentine currency, permitting, reclamation-bonding and Mexican VAT collection exposures. The filing states that results are unaudited and interim performance may not indicate full-year results.