Mcewen Inc. annual report, FY2011

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Business context and reporting period

McEwen Mining Inc. (formerly US Gold Corporation) filed its annual report for the fiscal year ended December 31, 2011. The results below are for the pre-acquisition company and do not include Minera Andes, acquired on January 24, 2012. The company was primarily an exploration and development-stage precious-metals business in the U.S. and Mexico; it had not generated operating revenue since 1990. Its 49% interest in Argentina’s operating San José mine was acquired with Minera Andes after year-end.

Financial performance and position

  • Revenue and profitability: No operating revenue was reported. Net loss was $61.9 million, or $0.45 per share, compared with a $33.1 million loss, or $0.27 per share, in 2010. Operating loss was $60.2 million. Fourth-quarter 2011 net loss was $16.3 million, or $0.12 per share, versus $7.3 million, or $0.05 per share, in fourth-quarter 2010. Operating margins are not meaningful without operating revenue.
  • Costs and unusual items: Exploration expense rose to $43.0 million from $19.2 million; general and administrative expense increased to $10.9 million from $5.4 million. The 2011 loss included a $3.4 million unrealized silver-bullion loss and a $0.8 million foreign-exchange loss, partly offset by a $2.1 million realized gain on bullion sales. Minera Andes transaction costs contributed $3.9 million to the increase in general and administrative expense.
  • Cash flow: Cash used in operations was $59.0 million, versus $25.9 million in 2010. Investing activities used $40.3 million, including $31.3 million of bullion purchases, $10.1 million for mineral interests, and $8.0 million for property and equipment, partly offset by asset-sale proceeds. Financing activities provided $106.2 million, primarily from a February 2011 share offering.
  • Liquidity and debt: Year-end cash and cash equivalents were $13.4 million; working capital was $41.8 million, including $22.8 million of bullion. Total current assets were $47.9 million and current liabilities $6.1 million. The company reported no debt outstanding. Total liabilities were $91.1 million, including a $78.8 million deferred tax liability and $6.3 million asset-retirement obligation.
  • Assets and equity: Total assets were $310.4 million and shareholders’ equity $219.3 million. Accumulated deficit was $393.2 million. The company recorded no impairment of mineral interests in 2011.

Material changes versus the prior comparable period

  • Net loss increased by $28.8 million from 2010, mainly reflecting the accelerated exploration program and higher corporate and development costs.
  • Exploration spending increased by $23.8 million, driven by work at El Gallo in Mexico and Gold Bar and Limo in Nevada, and initial work at Richardson, Alaska.
  • Working capital improved by approximately $28.3 million from year-end 2010, supported by the 2011 equity offering, despite higher cash use.
  • On January 24, 2012, the company acquired Minera Andes, changed its name to McEwen Mining, and issued 127.3 million exchangeable shares to Minera Andes shareholders. The combined company acquired a 49% interest in San José, 100% of the Los Azules copper project, and other Argentine exploration properties. This transaction is subsequent to the reported balance-sheet date.

Guidance, outlook, risks and contingencies

  • 2012 plans: Management planned to start El Gallo Phase 1 production around the end of the second quarter, with approximately 10,000 ounces of gold forecast for 2012 and an expected ongoing rate of 30,000 ounces annually. The remaining Phase 1 budget was $11.9 million. Management estimated 2012 company-attributable production of 2.6 million ounces of silver and 49,000 ounces of gold, excluding San José production for the 24 days before the acquisition closed.
  • Projects: Management expected to advance permitting at Gold Bar and continue exploration in Nevada and Argentina. Gold Bar’s preliminary feasibility study estimated about 50,000 ounces of annual gold production over eight years, at a $700-per-ounce cash cost and $53.1 million initial capital; production is contingent on permits and project development. Management forecast Phase 2 El Gallo production in 2014 and Gold Bar production in 2015, but emphasized that schedules and preliminary economics are uncertain.
  • Capital and execution: The company cautioned that substantial additional capital may be needed for development and exploration. Resource estimates and preliminary studies are not guarantees of economic reserves or production. As of December 31, 2011, none of its properties had proven or probable reserves under SEC Guide 7; Canadian NI 43-101 resource and reserve terminology differs from SEC standards.
  • Legal and regulatory: Litigation over Los Azules could result in loss of some or all of the project, a 25% back-in interest claimed by TNR Gold, or damages; the potential financial impact was not estimable in the filing. Permitting, environmental and reclamation obligations, possible changes to mining royalties, and political, security and foreign-exchange risks in Mexico and Argentina could affect operations and liquidity. Argentine rules requiring mining revenues to be repatriated through local currency and possible delays in VAT refunds were identified as risks.
  • Other risks and controls: Commodity-price and currency volatility, limited insurance for mining risks, and potential shareholder dilution were disclosed. Management and KPMG reported effective internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  • Whether El Gallo Phase 1 reached production on schedule, met its cost budget, and achieved expected output and recovery rates.
  • Post-acquisition cash, working capital, debt, and actual cash distributions from the San José joint venture; the 2011 financial statements exclude Minera Andes.
  • Updates to the Los Azules litigation, including potential effects on project ownership, value, and development plans.
  • Progress on permits, feasibility work, capital needs, and timelines for El Gallo Phase 2 and Gold Bar.
  • Whether resource estimates convert to economically mineable reserves under applicable U.S. standards, and how actual metal prices, costs, and reclamation requirements affect project economics.