McEwen Mining Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unless otherwise noted, financial amounts are U.S. dollars. The interim financial statements are unaudited.
Business context
McEwen explores, develops and produces gold, silver and copper. Its operations include the Black Fox gold mine in Canada and El Gallo 1 in Mexico; it also owns 49% of Minera Santa Cruz (MSC), which operates Argentina’s San José mine, and was constructing the Gold Bar mine in Nevada. MSC is accounted for using the equity method, so its sales are not consolidated as McEwen revenue.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $34.2m | $15.1m | $75.5m | $29.9m |
| Gross profit | $9.9m | $6.6m | $24.8m | $14.4m |
| Gross margin | 29.0% | 43.4% | 32.9% | 48.1% |
| Operating loss | $8.7m | $2.6m | $13.1m | $10.1m |
| Net loss | $5.4m | $1.7m | $10.6m | $4.7m |
| Net loss per share | $0.02 | $0.01 | $0.03 | $0.02 |
- Q2 gold and silver sales rose largely because Black Fox, acquired in October 2017, contributed $19.4m. El Gallo 1 contributed $14.4m. For the six months, Black Fox contributed $35.0m and El Gallo 1 $39.8m.
- Higher exploration spending, increased general and administrative costs, and a larger loss from MSC contributed to the increased net loss. Six-month other expense also included realized and unrealized investment and derivative losses.
- Q2 consolidated production was 47,258 gold-equivalent ounces, including McEwen’s attributable share of San José. Q2 sales were $33.8m. Management reported mine-level non-GAAP all-in sustaining costs per gold-equivalent ounce of $816 at El Gallo 1, $1,056 at Black Fox and $1,065 for McEwen’s 49% share of San José.
- Six-month cash provided by operating activities was $0.6m, versus $16.6m used in the prior-year period. Investing activities used $17.0m, principally for $20.1m of property and equipment and $7.3m of mineral-property additions, partly offset by MSC dividends and investment-sale proceeds. Financing activities used $1.6m, mainly for shareholder distributions.
- At June 30, cash and cash equivalents were $16.0m; restricted cash was $3.6m; investments were $2.3m; and precious metals were carried at $6.9m in inventory. Management’s non-GAAP measure of cash, investments and precious metals at market value was $34.5m.
- Working capital was $19.2m, down from $49.2m at December 31, 2017. Total liabilities were $75.2m. There was no bank indebtedness; capital-lease liabilities were $0.2m, all current. Asset retirement obligations totaled $29.7m. Outstanding reclamation surety bonds were $35.6m.
Material changes and unusual items
- Black Fox added substantial production and sales compared with the 2017 periods, when McEwen did not yet own the mine.
- El Gallo 1 mining ended in May and crushing and processing ended in late June 2018. Residual leaching and closure work are expected to continue, with residual leaching through 2020.
- Exploration expense was $9.1m in Q2 and $20.6m for the six months, compared with $3.1m and $11.5m in 2017. Q2 spending included $5.8m in Timmins, $1.9m at Los Azules and $1.2m in Nevada.
- Gold Bar construction was reported on schedule, with completion targeted by year-end 2018 and production expected in Q1 2019. The company had capitalized $33.0m of construction costs cumulatively by June 30.
- McEwen adopted new financial-instrument accounting that records changes in equity-security fair values in earnings. It reported a $1.6m unrealized loss on marketable equity securities for the first half of 2018. The filing states revenue-standard adoption had no material impact.
- The company recorded a $5.0m upward estimate adjustment to asset retirement obligations, primarily related to Gold Bar disturbance, in addition to accretion and other changes.
Outlook, funding and risks
- Management said working capital and forecast operating cash generation were expected to cover nondiscretionary obligations over the next 12 months, including certain near-term Gold Bar commitments, but additional funding was required to complete and commission Gold Bar.
- On May 31, 2018, the company signed a non-binding term sheet for $50m of senior secured notes. Proposed terms included 9.75% annual interest and a three-year maturity. Closing depended on definitive documentation, diligence and customary conditions. The CEO and chairman, beneficial owner of 24% of common shares, was expected to purchase 50% of the notes.
- The company expected to spend $1.9m on Fenix work in the second half of 2018. It budgeted $18.4m for 2018 Black Fox sustaining and capital expenditures and had spent $7.6m in the first half. Management said other development initiatives could be deferred if funding was insufficient.
- Key disclosed exposures include gold and silver price volatility, foreign exchange and inflation—particularly Argentina’s peso, which depreciated 55% against the U.S. dollar in the first half—uncertain collection of Mexico’s $4.9m VAT receivable, permitting and funding needs, and reliance on MSC’s operating results. McEwen does not control MSC’s day-to-day operations.
- Management stated disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Investor facts to verify
- Whether the proposed $50m note financing closed, its final terms, and the related-party participation and use of proceeds.
- Gold Bar’s remaining construction and commissioning costs, schedule, funding sufficiency and progress toward the Q1 2019 production target.
- El Gallo 1’s closure and residual-leaching performance, including the expected production and cost profile after mining ceased.
- Black Fox and San José production, realized prices and non-GAAP cost measures; MSC’s results are supplied by the joint venture and are not controlled by McEwen.
- Collection of the Mexican VAT receivable, reclamation obligations and surety-bond requirements, and the company’s ability to fund exploration and development plans.