McEwen Mining Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unless otherwise noted, figures are U.S. dollars. The company explores, develops and produces gold and silver and explores for copper across the U.S., Canada, Mexico and Argentina. It owns producing operations and development projects, an 82% interest in Los Azules through McEwen Copper, and a 49% interest in the San José mine joint venture, accounted for using the equity method.
Financial and operating results
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Gold and silver sales revenue | $37.1m | $27.4m | $101.6m | $77.1m |
| Gross profit (loss) | $0.3m | $(0.7)m | $(0.6)m | $(13.3)m |
| Operating loss | $(17.4)m | $(10.1)m | $(41.8)m | $(130.6)m |
| Net loss | $(17.4)m | $(9.8)m | $(35.9)m | $(128.8)m |
| Net loss per share | $(0.04) | $(0.02) | $(0.08) | $(0.32) |
| Cash used in operating activities | Not clearly stated for the quarter | Not clearly stated for the quarter | $(19.1)m | $(25.3)m |
| Capital additions to mineral properties and equipment | $8.1m | $0.8m | $28.5m | $9.3m |
- Q3 gross margin was approximately 0.9%, compared with approximately negative 2.6% a year earlier; 9M gross margin was approximately negative 0.6%, compared with approximately negative 17.2%.
- Management reported Q3 non-GAAP cash gross profit of $6.4m, versus $3.9m, and 9M cash gross profit of $16.1m, versus $2.8m. These non-GAAP measures are not substitutes for GAAP results.
- Production was 42,900 gold-equivalent ounces (GEOs) in Q3 and 114,200 GEOs in 9M, including the company’s attributable share of San José. Sales were 42,400 GEOs and 113,200 GEOs, respectively. 100%-owned operations produced 21,300 GEOs in Q3 and 57,700 GEOs in 9M.
- For 100%-owned operations, management reported average realized prices of $1,793/GEO in Q3 and $1,802/GEO in 9M. Cash cost and all-in sustaining cost (AISC) per GEO were $1,390 and $1,539 in Q3, and $1,400 and $1,555 in 9M. These are non-GAAP measures.
Balance sheet, liquidity and debt
- At September 30, 2021, cash and cash equivalents were $63.1m; restricted cash was $6.2m; investments were $1.8m; and total assets were $539.8m. Total liabilities were $128.9m and shareholders’ equity was $410.9m.
- Working capital was $45.8m, according to management. The balance sheet reports $69.3m of cash, cash equivalents and restricted cash combined. Management separately cited $65.7m of cash, cash equivalents and restricted cash in its highlights, including $42.6m attributable to McEwen Copper financing; the filing does not clearly reconcile the differing cash figures.
- Debt was approximately $48.7m, including $4.0m current and $44.7m long-term. The senior secured facility bears interest at 9.75%; scheduled principal repayments begin August 2022, with a final payment due August 2023. The company reported compliance with all covenants at quarter-end.
- Cash from financing activities was $84.4m in 9M 2021, including net proceeds from equity and flow-through share offerings and $40.0m from McEwen Copper’s private placement. Cash used in investing activities was $20.4m, partly offset by $7.6m of MSC dividends.
Material changes versus comparable periods
- Q3 revenue rose 36% year over year, principally reflecting more ounces sold from Gold Bar and the Fox Complex. 9M revenue rose 32%, reflecting increased production and a higher average realized price than in 9M 2020.
- Q3 net loss widened to $17.4m from $9.8m. The filing attributes the change mainly to higher exploration expense and a $5.2m adverse year-over-year swing in the company’s share of MSC results. For 9M, net loss improved substantially from 2020, which included an $83.8m impairment charge.
- Gold Bar and Fox Complex production increased; Froome reached commercial production on September 19, three months ahead of schedule. El Gallo production and sales declined as residual leaching winds down.
- Exploration spending increased to $18.1m for 9M from $11.8m, while advanced-project costs decreased to $6.6m from $9.5m. Capital additions rose to $28.5m from $9.3m, mainly for Froome development.
- In August, McEwen Copper issued shares for $40.0m to an affiliate of the CEO. McEwen Mining’s ownership in the subsidiary fell to 81.6%; the transaction was recorded with $14.9m of non-controlling interests and $25.1m of additional paid-in capital.
Outlook, risks and unusual items
- Management said 2021 production was trending toward the midpoint of its guidance range and expected to meet full-year production guidance. The filing text provided here does not state the numerical guidance range.
- A Fox Complex expansion preliminary economic assessment (PEA) was expected in Q4 2021. Management was also advancing Los Azules toward a pre-feasibility study, planning a 174,000-foot drilling program and constructing a proposed year-round access road. McEwen Copper intended to pursue an initial public listing within 12 months.
- Management said available liquidity and expected operating funds were sufficient for anticipated operating, capital and working-capital needs over the next 12 months. This depends on forecasts and is subject to risks including commodity prices, production, costs, access to capital, permits, foreign exchange, COVID-19 effects and availability of labor, supplies and contractors.
- The company does not hedge gold or silver sales. It estimated that a 10% change in metal prices would have affected 9M 2021 revenue by approximately $10.2m. The filing also describes exposure to currency movements, uncertain collection timing for a Mexican VAT receivable, and dependence on MSC, whose operations McEwen does not control.
- COVID-19 relief income was $0.6m in Q3 and $3.4m in 9M. Q3 inventory write-downs and residual-leach costs affected performance; 9M inventory write-downs totaled approximately $4.3m. No long-lived-asset impairment was recorded in 9M 2021, compared with $83.8m in 9M 2020.
- Reclamation obligations totaled $34.6m. Required reclamation bonding was approximately $37.7m, with a surety facility requiring an 11% deposit and carrying an average annual fee of 2.3%. A Black Fox gold streaming contract requires specified production to be sold at the lesser of market price or $561 per ounce, subject to inflation adjustments, through 2090.
- The company received $2.3m of MSC dividends on October 19, 2021. Related-party matters include the CEO affiliate’s lending relationship and its purchase of the McEwen Copper private-placement shares.
Most important facts for investors to verify
- Reconcile the different reported cash and liquidity figures, including the funds restricted or earmarked for McEwen Copper.
- Track whether production meets full-year guidance and whether Froome’s commercial production and Fox Complex cost improvements persist.
- Review the Q4 Fox Complex PEA, Los Azules project funding and study milestones, and the status and terms of any McEwen Copper listing.
- Assess cash burn, capital spending, debt repayment requirements and covenant thresholds against the company’s liquidity outlook.
- Monitor MSC profitability and distributions, reclamation and bonding requirements, and metal-price, currency, permit and COVID-related risks.