Business context and reporting period
McEwen Mining Inc. filed its annual Form 10-K for the fiscal year ended December 31, 2015, with results presented in U.S. dollars. The company operates the wholly owned El Gallo 1 gold mine in Mexico and holds a 49% equity-method interest in the San José gold-silver mine in Argentina, operated by Hochschild. It also has development and exploration projects, including Gold Bar in Nevada, El Gallo 2 in Mexico and Los Azules in Argentina. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are identified where provided.
Financial and operating performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Consolidated gold and silver sales | $73.0 million | $45.3 million |
| Net loss | $20.5 million ($0.07 per share) | $311.9 million ($1.05 per share) |
| Adjusted net loss (non-GAAP) | $8.6 million ($0.03 per share) | $33.0 million ($0.11 per share) |
| Operating cash flow | $15.6 million provided | $14.9 million used |
| Cash and cash equivalents at year-end | $25.9 million | $12.4 million |
| Working capital at year-end | $32.4 million | $15.6 million |
| Current liabilities at year-end | $22.0 million | $24.1 million |
| Short-term bank indebtedness at year-end | $3.4 million | None reported |
Sales were up 61%, reflecting increased El Gallo 1 sales volumes, partly offset by lower realized metal prices. The company’s 49% share of San José is accounted for under the equity method: its reported FY 2015 equity-method income was $2.4 million, while the mine’s 100%-basis sales were $186.1 million. Consolidated figures therefore do not include San José sales as company revenue.
Attributable production was 110,320 ounces of gold and 3.32 million ounces of silver; production totaled 154,529 gold-equivalent ounces using the company’s 75:1 silver-to-gold conversion. Consolidated gold-equivalent ounces sold were 147,631. Gold and silver average realized prices were $1,146 per ounce and $15.06 per ounce, respectively, both below 2014.
Consolidated cash costs were $685 per gold-equivalent ounce sold; all-in sustaining costs were $962 and all-in costs were $1,055. These are non-GAAP measures and are affected by the conversion ratio used. The company reported FY 2015 gross profit from El Gallo 1 of $38.3 million; consolidated earnings from mining operations, a non-GAAP measure, were $53.1 million.
At December 31, 2015, total assets were $475.1 million, total liabilities $56.8 million and shareholders’ equity $418.3 million. There was no long-term borrowing balance reported. The Mexican subsidiary’s $3.4 million short-term credit balance was repaid on January 13, 2016. Cash, investments and doré valued at market were approximately $32.0 million at year-end; this is a non-GAAP liquidity measure, not cash alone.
Material changes versus the prior comparable period
- Revenue rose $27.7 million, or 61%, while production costs applicable to sales fell to $34.6 million from $40.6 million. Management attributed improved El Gallo 1 results to higher grades, improved recoveries, operating efficiencies and cost reductions.
- Net loss narrowed substantially from 2014, but FY 2015 still included $62.4 million in pre-tax impairment charges: $50.6 million for mineral property interests and property/equipment, plus $11.8 million for the MSC investment. The filing cites lower commodity prices, comparable transaction values and decisions to relinquish nonessential claims. FY 2014 impairment charges totaled $374.9 million.
- Operating cash flow improved by $30.5 million, to $15.6 million provided, supported by El Gallo 1 cash generation, lower supplier and employee payments, and collection of Mexican VAT receivables. MSC dividends received fell to $0.5 million from $9.5 million.
- Cash increased by $13.5 million during 2015. The company also made $1.5 million in return-of-capital payments and spent $1.8 million on share repurchases.
- Gold and silver prices weakened: average London prices cited by the company fell to $1,160 per ounce for gold and $15.68 for silver in 2015, from $1,266 and $19.08 in 2014.
Outlook, risks and unusual items
- 2016 production and cost outlook: Management forecast approximately 141,000 consolidated gold-equivalent ounces, comprising 51,500 gold ounces and 37,500 silver ounces from El Gallo 1, plus the company’s attributable share of San José production. Consolidated cash costs were forecast at $760–$800 per gold-equivalent ounce and all-in sustaining costs at $915–$955.
- Project funding: Management said current working capital and expected operating cash flows were not sufficient to develop major projects. Existing estimates indicate approximately $60 million of capital for Gold Bar and $150 million for El Gallo 2, requiring additional financing if approved. The El Gallo 2 decision was deferred while cost-saving studies and financing alternatives were assessed; its historical $180 million capital estimate has not been updated.
- Gold Bar: The 2015 feasibility study estimated $60.4 million initial capital and projected average annual gold production of 65,000 ounces. Production was expected in 2018, subject to financing, permits and construction. The company expected the BLM record of decision in January 2017; the schedule and project economics are not assured.
- Operating and market risks: Results are exposed to gold, silver and copper prices, foreign exchange movements, operating costs, water availability, labor disruptions, permitting, environmental obligations, political and security conditions in Mexico and Argentina, and the company’s ability to raise capital. Argentina’s peso devalued 35% during 2015, including a sharp decline in December. The company does not use derivatives to manage these market risks.
- Contingencies and unusual items: The company accrued $0.6 million for Mexico’s mining royalty/surcharge and was pursuing an appeal. Santa Cruz’s reserve tax was voided by provincial law, but a subsequent settlement concerning prior amounts still required Supreme Court approval as of the filing. U.S. reclamation surety bonds totaled $4.8 million; the filing reported no liability for the bonds themselves. The company reported no material legal proceedings in Item 3.
- Resource and reserve caveat: Except for its 49% interest in San José, the company reported no proven and probable reserves under SEC Industry Guide 7 at its properties. Canadian resource estimates, including measured, indicated and inferred resources, should not be treated as SEC reserves or assumed to be economically mineable.
- Quarterly context: In Q4 2015 the company reported $11.4 million of sales and a $15.0 million net loss; the quarterly loss included $32.6 million of impairment charges. A substantial portion of the loss was therefore impairment-related rather than a direct measure of mine operating performance.
KPMG issued unqualified opinions on the consolidated financial statements and on the effectiveness of internal control over financial reporting as of December 31, 2015. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile the reported production, sales and gold-equivalent figures, including the 49% equity-method treatment of San José and the conversion ratios used in non-GAAP cost measures.
- Assess whether El Gallo 1’s stronger grades and recoveries can be sustained and whether 2016 production and cost guidance is being met.
- Confirm Gold Bar permitting milestones, final project economics and the availability and terms of financing; separately assess whether El Gallo 2 proceeds and how its revised costs compare with the historical estimate.
- Review the assumptions behind the $62.4 million of 2015 impairments, remaining asset carrying values and potential for further impairment if metal prices or project assumptions weaken.
- Monitor cash generation, VAT refunds, reclamation and environmental obligations, and any effects of foreign-exchange or political developments in Argentina and Mexico.
- Check the status of the Mexican royalty appeal and Santa Cruz tax settlement approval, and distinguish mineral-resource disclosures from SEC-compliant reserves.