US Gold Corporation (now identified in the request as McEwen Inc.) — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. The filing is for US Gold Corporation and contains unaudited interim financial statements. The company was an exploration-stage gold and silver company, with major operations in Nevada and Mexico; it reported that it was not generating revenue.
Financial results and position
Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | No production revenue reported | No production revenue reported | No production revenue reported | No production revenue reported |
| Exploration costs | $10.6 | $4.2 | $17.5 | $8.4 |
| Operating loss | $(13.4) | $(12.0) | $(22.9) | $(19.4) |
| Net loss | $(13.2) | $(10.7) | $(21.9) | $(17.6) |
| Net loss per share | $(0.09) | $(0.09) | $(0.16) | $(0.14) |
| Comprehensive loss | $(14.6) | $(10.7) | $(22.8) | $(17.6) |
Margins are not meaningful because the company had no production revenue. Q2 costs and expenses were $13.4 million. The six-month loss increase was attributed primarily to accelerated exploration in Mexico and Nevada. General and administrative expense for the first half rose to $3.7 million from $2.6 million, including $0.4 million of costs related to the proposed Minera Andes combination.
- Liquidity: At June 30, cash and cash equivalents were $53.4 million; marketable equity securities were $3.7 million; gold and silver bullion was carried at $34.2 million (fair value $36.8 million). Working capital was $90.3 million, versus $13.5 million at December 31, 2010.
- Cash flow, first half: Operating cash use was $22.3 million, investing cash use was $37.5 million, and financing provided $106.2 million. Cash ended the period at $53.4 million, up from $6.8 million at year-end 2010.
- Funding: A February public offering of 17.25 million shares at $6.50 per share generated net proceeds of approximately $105.4 million. The company expected existing cash, securities and bullion to fund operations until the first quarter of 2013, based on current spending projections.
- Debt and liabilities: The company reported no debt outstanding. Total liabilities were $89.4 million, including $78.6 million in deferred tax liabilities and $6.3 million in asset retirement obligations. Reclamation bonding cash was $5.2 million.
- Other financial items: First-half results included a $0.5 million gain on gold bullion sales and a $0.5 million foreign-exchange gain. Available-for-sale securities produced a $0.9 million after-tax unrealized loss for the first half.
Material changes versus prior comparable periods
- First-half exploration expense more than doubled, rising $9.1 million to $17.5 million; drilling activity increased in both Mexico and Nevada.
- First-half operating cash use increased from $12.3 million to $22.3 million, mainly reflecting higher payments to suppliers and employees as exploration expanded.
- Cash and working capital increased substantially following the February equity offering. The company also invested $31.3 million in bullion during the first half.
- Property holding costs declined to $1.1 million from $2.1 million for the first half, mainly because lease payments on the Tonkin North claims were no longer required while a purchase was pending.
- Shares issued and outstanding increased; the balance sheet reported 136.3 million common shares and 3.4 million exchangeable shares at June 30.
Outlook, commentary, risks and unusual items
- The 2011 exploration budget was approximately $36 million: $25 million for Mexico, $10 million for Nevada and $1 million for Alaska. Planned work included advancing the El Gallo feasibility study, expected to be completed in Q1 2012, and a Gold Bar pre-feasibility study.
- In July 2011, the company signed a definitive agreement and paid CDN$8.4 million (approximately $8.7 million) for the Tonkin North claims. The sellers also receive a 2% net smelter return royalty on gold produced above 682,000 ounces.
- A proposed combination with Minera Andes was under review by a special committee of independent directors. The proposal contemplated 0.4 US Gold share for each Minera Andes share; it was not a completed transaction at the filing date.
- A July 1, 2011 Alaska agreement granted an exploration lease and an option to acquire a 60% interest in the Richardson project, subject to spending and drilling requirements. The agreement requires at least $2.2 million of exploration and 15,000 feet of core drilling during the first two years; the full option requires $5 million and 30,000 feet during its term.
- Key risks include exploration and feasibility outcomes, permitting, commodity-price and foreign-exchange movements, funding through future equity sales, and political, security and operating risks in Mexico. The filing cited ongoing violence and crime in Sinaloa, where the company operated. A 10% decline in bullion prices was estimated to reduce working capital by about $3.4 million.
- The Tonkin closure plan was under review by the U.S. Bureau of Land Management; the company said reclamation estimates and bonding requirements could increase but could not quantify any increase.
Important facts for investors to verify
- Whether exploration and feasibility work supports development, permitting and eventual production, and whether the stated Q1 2012 El Gallo study timing is achieved.
- Whether the projected funding runway through Q1 2013 remains realistic given exploration spending, bullion holdings and subsequent commitments, including the Tonkin payment.
- The status, terms and approvals of the proposed Minera Andes combination, including any changes to the exchange ratio or transaction structure.
- Tonkin North acquisition completion, royalty terms and any updated reclamation or bonding obligations; and progress toward the Richardson option requirements.
- Current share count and dilution exposure from options, exchangeable shares or future equity financing.