McEwen Mining Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 9, 2015. This is an annual report, not a standalone fourth-quarter filing. Financial amounts are U.S. dollars unless stated otherwise.
Business context and reporting period
McEwen explores for and produces precious metals in Argentina, Mexico and the United States. Its producing assets are El Gallo 1 in Mexico, wholly owned, and San José in Argentina, in which it owns 49% and shares control with Hochschild. San José is accounted for using the equity method, so its mine sales are not included in McEwen’s consolidated revenue. The company also holds development and exploration projects, notably El Gallo 2, Gold Bar and Los Azules.
Financial and operating highlights
| Metric | 2014 | 2013 |
|---|---|---|
| Consolidated revenue (El Gallo 1 gold and silver sales) | $45.3 million | $46.0 million |
| Net loss | $311.9 million; $1.05 per share | $147.7 million; $0.50 per share |
| Adjusted net loss (non-GAAP) | $33.0 million; $0.11 per share | $31.0 million; $0.10 per share |
| Cash used in operating activities | $14.9 million | $42.4 million |
| Cash and cash equivalents at year-end | $12.4 million | $24.3 million |
| Working capital at year-end | $15.6 million | $35.6 million |
| Total assets / total liabilities | $523.0 million / $81.7 million | $923.1 million / $176.3 million |
McEwen reported no bank debt. Year-end current assets were $39.7 million and current liabilities $24.1 million. VAT receivables were $11.7 million, a significant component of current assets. The company reported $15.9 million in cash, investments and precious metals in its operating highlights.
- Attributable production was 137,612 gold-equivalent ounces, versus 139,500 in 2013; sales were 132,228 gold-equivalent ounces. Gold and silver prices fell: consolidated realized prices averaged $1,248 per gold ounce and $17.68 per silver ounce.
- Consolidated cash cost, all-in sustaining cost and all-in cost were $817, $1,198 and $1,368 per gold-equivalent ounce, respectively. These are non-GAAP measures.
- El Gallo 1 sales declined slightly to $45.3 million despite higher sales volumes, as realized prices fell. Production costs applicable to sales rose to $40.6 million from $34.6 million; the operation recorded $2.0 million of inventory write-downs.
- San José’s 100%-basis sales were $213.0 million, down from $240.7 million. McEwen’s 49% share of the investment’s results was a $5.3 million loss, compared with $0.8 million income in 2013. McEwen received $9.5 million in San José dividends.
Material changes versus 2013
- Net loss more than doubled, principally due to $353.7 million of mineral-property and equipment impairments and a $21.2 million impairment of the San José investment. The 2013 figures included $63.0 million and $95.9 million of those respective impairments.
- The $353.7 million property impairment included $228.3 million for Los Azules, $98.4 million for Nevada properties and $27.0 million for other Argentina properties. Los Azules was impaired in both Q2 and Q4; its year-end carrying value was $202.9 million.
- Operating cash outflow improved from $42.4 million to $14.9 million, but cash declined by $11.9 million to $12.4 million. Working capital fell by about $20.0 million.
- Production increased at El Gallo 1, including after its processing capacity expansion from 3,000 to 4,500 tonnes per day. San José’s attributable gold-equivalent production declined, and lower metal prices weighed on sales and earnings.
- Exploration expense fell to $11.3 million from $24.8 million as the company cut spending and rationalized its property portfolio. Management focused on Los Azules, Gold Bar, Tonkin and North Battle Mountain.
Outlook, risks and unusual items
- 2015 guidance: Consolidated production of approximately 96,500 ounces of gold and 3.12 million ounces of silver, or 138,100 gold-equivalent ounces using a 75:1 silver-to-gold ratio. Consolidated cash-cost guidance is $675–$775 and all-in sustaining cost guidance is $1,075–$1,175 per gold-equivalent ounce.
- Project funding: El Gallo 2 had no final construction decision. Management estimated approximately $150 million of financing would be needed and was reviewing cost reductions and financing alternatives. Gold Bar permitting was delayed; final approval was expected in Q3 2016, and the project’s preliminary study estimated production could begin in 2016. Neither project’s production schedule is assured.
- Significant uncertainty: Except for McEwen’s San José interest, properties lacked proven and probable reserves under SEC Industry Guide 7. Resource estimates and project economics are uncertain; mineral-resource disclosure under Canadian NI 43-101 is not equivalent to SEC reserves.
- SEC inquiry: The SEC Division of Enforcement was investigating the accounting treatment of Los Azules, including its classification and impairment in 2013. The company said it was cooperating but could not predict the outcome; possible consequences include expense, penalties or restatement.
- Other exposures: Risks include falling gold, silver and copper prices; Argentine currency controls, peso devaluation and political/economic uncertainty; crime and operating conditions in Mexico; permitting, environmental and reclamation obligations; and reliance on the San José joint venture. MSC disputed a Santa Cruz reserve tax and paid installments under protest. McEwen’s challenge to Mexico’s mining-tax ruling was on appeal.
- Unusual charges: The company recorded $6.8 million of registration taxes on intercompany financing agreements; payment timing was undetermined. The Q4 net loss was $212.8 million, reflecting year-end impairment charges. Management stated that working capital should fund ongoing exploration and corporate activity for 12 months, but not El Gallo 2 development.
The financial statements received an unqualified KPMG audit opinion, and management and KPMG reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether the SEC inquiry results in further action, added costs or any change to prior financial reporting.
- Current liquidity and cash-generation capacity, including collection timing and recoverability of the $11.7 million Mexican VAT receivable and payment timing for accrued obligations.
- Whether 2015 production and cost guidance is achieved, and how the 75:1 silver-to-gold conversion assumption affects reported gold-equivalent measures.
- Whether El Gallo 2 financing and project economics support a construction decision, and whether Gold Bar receives permits on the stated timetable.
- Updated San José reserves and mine plans, plus the effect of metal prices, Argentine currency restrictions and the disputed reserve tax on McEwen’s attributable returns.
- The assumptions behind large impairment valuations, particularly comparable-transaction inputs for Los Azules and exploration properties.