McEwen Mining Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Amounts are U.S. dollars unless otherwise stated. The company produces gold and silver in Mexico and Canada and holds a 49% equity-method interest in Argentina’s San José mine, alongside development and exploration projects.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $67.7 million | $60.4 million |
| Net income (loss) | $(10.6) million; $(0.03) per share | $21.1 million; $0.07 per share |
| Operating income (loss) | $(26.0) million | $15.3 million |
| Cash provided by (used in) operations | $(15.4) million | $25.2 million |
| Cash, cash equivalents and restricted cash at year-end | $37.2 million | $37.4 million |
| Working capital | $49.2 million | $58.0 million |
Year-end cash and cash equivalents were $27.2 million; the additional $10.0 million of restricted cash came from flow-through financing and was committed to Canadian exploration. The company reported $68.1 million in cash, restricted cash, investments and precious metals at market value, and no bank debt. Black Fox-related capital lease obligations totaled $0.6 million.
- Gold and silver sales were $67.5 million; the company also reported $0.3 million of other revenue. San José’s sales are not consolidated because McEwen accounts for its 49% interest using the equity method.
- Consolidated production, including McEwen’s attributable San José share, was 152,330 gold-equivalent ounces versus 145,500 in 2016. Consolidated sales were 145,208 gold-equivalent ounces versus 144,050.
- El Gallo 1 sales declined 8% to $55.8 million; production was 46,694 gold-equivalent ounces. Its cash cost was $791 and all-in sustaining cost (AISC) was $909 per gold-equivalent ounce.
- Black Fox contributed $11.6 million of sales after its October acquisition, with 14,279 gold-equivalent ounces produced for the partial year. Reported cash cost was $865 and AISC $1,319 per gold-equivalent ounce; its costs were approximately equal to sales revenue, leaving a small profit.
- San José produced 186,443 gold-equivalent ounces on a 100% basis; McEwen’s 49% attributable share was 91,357 ounces. San José’s 100% sales were $227.1 million. Its 100% cash cost and AISC were $839 and $1,027 per gold-equivalent ounce, respectively—above management’s 2017 cost guidance of $780 and $990.
Changes, liquidity and financing
- Revenue rose 12% from 2016, primarily because Black Fox added $11.6 million of sales, partly offset by lower El Gallo 1 sales. Production costs applicable to sales increased from $28.1 million to $45.2 million, reflecting Black Fox and higher El Gallo 1 costs.
- The company moved from 2016 net income to a 2017 net loss. Management cited increased exploration, lower El Gallo 1 profitability, Black Fox’s slim margin, lower San José results, and higher corporate and acquisition-related costs. A $15.4 million income-tax recovery, including effects of U.S. and Argentine tax changes, partly offset the loss.
- Cash used in operations was $15.4 million, versus $25.2 million provided in 2016. Investing activities used $34.5 million, including $27.3 million for Black Fox and $0.8 million for Lexam. Financing activities provided $49.7 million, including net proceeds from equity and flow-through share offerings.
- Share issuance increased outstanding common shares from 299.6 million at year-end 2016 to 337.1 million at year-end 2017. The September offering included warrants to purchase 10.35 million shares at $2.70, exercisable through September 28, 2018.
- McEwen received $12.2 million in San José dividends in 2017, down from $17.7 million in 2016. Its reported equity-method result from MSC was a $0.04 million loss, compared with $13.0 million income in 2016.
Outlook, risks and unusual items
- Gold Bar: Construction began after final permitting in November 2017. Initial capital was estimated at $80.8 million; the 2018 construction budget was approximately $71.0 million. Management expected ore delivery to the leach pad in fourth-quarter 2018 and commercial production in first-quarter 2019. Required state operating permits were still expected before operations.
- El Gallo 1: Open-pit mining was expected to cease in second-quarter 2018, with leaching expected to continue through 2020 or later if economic. A crushing-circuit failure in third-quarter 2017 contributed to operating challenges. A new SAR circuit was expected to be commissioned in first-quarter 2018.
- Funding: Management said year-end working capital should cover nondiscretionary obligations and operations for the next 12 months, but would not suffice to fund Gold Bar construction or all potential development plans. Additional financing may be required; the company had a Mexican credit line of up to approximately $6.4 million, undrawn at year-end.
- Other projects: El Gallo 2 lacked a current feasibility study; a revised pre-feasibility study was expected in second-quarter 2018. Los Azules remained an early-stage copper project supported by a preliminary economic assessment, not a feasibility demonstration; its remote, high-altitude location and substantial capital needs present development risks.
- Tax and contingencies: A Mexican mining royalty challenge remained pending, with payment stayed; $1.2 million was accrued for the 0.5% precious-metals royalty. The U.S. and Argentine tax reforms generated significant deferred-tax effects, and the company said its accounting for the U.S. tax legislation was not yet complete.
- Reclamation: Asset retirement obligations were $24.7 million at year-end. Undiscounted future reclamation payments were estimated at $42.9 million. Surety-bond requirements included $19.9 million in Nevada and $16.5 million for Black Fox; authorities could require replacement funding or additional assurance.
- Principal risks include volatile metal prices, reserve and recovery uncertainty, foreign-exchange movements, permitting and environmental obligations, political and security risks in Mexico and Argentina, reliance on contractors, acquisition integration and liabilities, and the need for future capital. The company does not hedge gold or silver production.
- Auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management’s and the auditor’s internal-control assessments excluded Black Fox, which contributed 17% of 2017 revenue, because it had been recently acquired.
Important facts for investors to verify
- Gold Bar’s remaining construction funding, cost performance, permitting timetable and progress toward first-quarter 2019 commercial production.
- Whether El Gallo 1 can sustain economical leaching after mining ends, and whether exploration extends the mine’s life.
- Black Fox’s full-period production, operating margins, reserve review, integration progress and streaming obligation to Sandstorm (8% of Black Fox gold production at a contract price subject to stated terms, through 2090).
- San José’s cost trajectory, dividends to McEwen, and the effect of lost tax incentives and inflation on the 49% investment.
- Cash burn and financing needs relative to restricted funds, construction commitments, exploration obligations and potential equity dilution.
- Final U.S. and Argentine tax accounting, the outcome of the Mexican royalty dispute, and the adequacy of reclamation liabilities and bonding.
- Black Fox purchase-price allocation remained preliminary and could be materially adjusted; internal controls at the acquired operation were not included in the year-end assessment.