McEwen Mining Inc. — Q1 2018 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017; balance-sheet comparisons are with December 31, 2017. The company operates mines and exploration projects in Mexico, Canada and the United States, and owns 49% of Minera Santa Cruz S.A. (MSC), which owns the San José mine in Argentina. Financial figures below are U.S. dollars unless otherwise stated.
Financial and operating performance
- Revenue: Gold and silver sales were $41.0 million, versus $14.8 million; other revenue was $0.2 million. The increase primarily reflects Black Fox, acquired in October 2017, and higher El Gallo 1 sales. MSC sales are not consolidated as revenue; McEwen accounts for its interest using the equity method.
- Profit and margins: Operating loss was $4.4 million, compared with $7.4 million. Net loss widened to $5.2 million ($0.02 per share) from $3.0 million ($0.01 per share). Management reported $14.6 million gross profit, or 36%, from the two wholly owned mines. Exploration expense rose to $11.5 million from $8.4 million, and general and administrative expense to $5.2 million from $4.3 million.
- Cash flow: Operating activities provided $11.1 million, versus $6.9 million used in Q1 2017. Investing activities used $8.2 million, including $6.7 million for property and equipment and $4.1 million for mineral properties, partly offset by $2.7 million from investment sales. Financing activities used $1.6 million, mainly for shareholder distributions. Cash, cash equivalents and restricted cash increased by $1.6 million to $38.7 million.
- Liquidity and debt: Working capital was $39.3 million, down from $49.2 million at year-end. Cash and cash equivalents were $29.9 million, restricted cash $8.8 million, and investments $2.6 million. The company reported no bank indebtedness; capital lease liabilities totaled $0.4 million. Total liabilities were $73.5 million, including $25.1 million of asset retirement obligations. Management said working capital should cover nondiscretionary obligations and ongoing operations for the next 12 months, but additional funds will be needed to complete Gold Bar construction.
- Production and costs: El Gallo 1 and Black Fox produced 24,295 gold-equivalent ounces combined. McEwen’s attributable share of San José production was approximately 20,049 gold-equivalent ounces. Reported all-in sustaining costs per gold-equivalent ounce were $753 at El Gallo 1, $1,188 at Black Fox and $1,148 for McEwen’s 49% share of San José. These are non-GAAP measures.
Changes versus Q1 2017
- Revenue increased by $26.2 million, principally because Black Fox contributed $15.6 million and El Gallo 1 sales rose by $10.6 million. Production costs applicable to sales increased to $26.4 million from $7.0 million, reflecting Black Fox and higher El Gallo 1 activity.
- Net loss increased despite improved operating results at El Gallo 1 and the addition of Black Fox. Management cited higher exploration and corporate costs, an MSC loss, and investment and derivative valuation losses.
- Other expense was $1.9 million, versus other income of $1.8 million. Q1 2018 included losses of $0.7 million on investment sales, $1.1 million from unrealized marketable-security value changes and $0.9 million from derivatives. The filing notes that new accounting rules moved changes in equity-security fair value into net income; Q1 2017 presentation is not directly comparable in this respect.
- Cash from operations improved from use of $6.9 million to generation of $11.1 million, supported by higher sales and MSC dividends of $4.9 million versus $2.5 million. Working capital nevertheless declined, reflecting operating, exploration and Gold Bar spending.
Outlook, risks and notable items
- Gold Bar: Construction was reported on schedule for completion by year-end 2018, with production expected in Q1 2019. The company projected production of approximately 55,000, 74,000 and 68,000 ounces in the first three operating years. It stated that further financing would be required to complete construction; possible sources include debt, equity and equipment leasing.
- El Gallo 1: Open-pit mining was expected to cease in Q2 2018; leaching was expected to continue through 2020 or later if economical. El Gallo 2 feasibility and development studies were underway, with an updated pre-feasibility study expected in Q2 2018.
- Exploration and development: The company budgeted $15.0 million for 2018 exploration at Black Fox and Timmins projects and had spent $5.3 million in Q1. It budgeted $5.3 million for the 2017–2018 Los Azules exploration season and had spent $3.2 million in Q1. Management cautioned that advancing projects could require spending well beyond available working capital.
- Commitments and contingencies: The company must spend $10.0 million raised through Canadian flow-through shares on eligible exploration expenditures and renounce the associated tax benefit by December 31, 2018; management expected to meet the commitment. Restricted cash related to this financing was $8.8 million. Surety bonds for reclamation totaled $36.5 million and could require cash replacement if no longer accepted by regulators. The Black Fox streaming agreement requires sales of specified production shares at the lesser of market price or $539 per ounce, subject to inflation adjustments, through 2090.
- Other risks and uncertainties: The filing identifies commodity-price, foreign-exchange, permitting, financing, operating, exploration, political and regulatory risks, as well as uncertainty around Mexican VAT recovery ($5.1 million receivable). MSC is operated by its majority-owner joint venture partner; McEwen does not control day-to-day decisions. Accounting for certain effects of the U.S. Tax Cuts and Jobs Act remained incomplete, and estimates could materially affect tax expense. Management stated that interim results may not indicate full-year results.
Important facts for investors to verify
- Gold Bar’s construction schedule, total remaining capital needs, financing plan and expected Q1 2019 start of production.
- Whether operating cash generation and available unrestricted liquidity can support construction, exploration and other commitments; distinguish restricted cash from cash available for general use.
- Black Fox and El Gallo 1 production, cost trends and the expected economic life of El Gallo 1 leaching.
- MSC’s operating performance, dividend capacity and the terms governing McEwen’s 49% interest.
- Progress on the flow-through expenditure and tax-renunciation commitment, and the status of the $5.1 million Mexican VAT receivable.
- Exposure to reclamation bonding, the Black Fox streaming agreement, and potential tax adjustments as the company completes its Tax Act analysis.