McEwen Mining Inc. — Q2 2019 Form 10-Q
Business context and period. Unaudited results for the three and six months ended June 30, 2019; financial amounts are U.S. dollars unless noted. McEwen mines and explores for gold and silver in the U.S., Canada, and Mexico, explores for copper in Argentina, and owns 49% of the San José mine joint venture in Argentina. Gold Bar began commercial production on May 23, 2019.
Financial and operating highlights
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Gold and silver sales revenue | $36.4 million | $33.8 million | $52.0 million | $74.8 million |
| Gross profit | $4.7 million | $9.1 million | $6.1 million | $23.3 million |
| Gross margin | 12.9% | 26.9% | 11.7% | 31.2% |
| Net loss | $13.0 million | $5.4 million | $23.2 million | $10.6 million |
| Loss per share | $0.04 | $0.02 | $0.07 | $0.03 |
| Gold-equivalent ounces sold | 51,900 | 48,100 | 83,600 | 99,900 |
Q2 revenue rose 8%, reflecting more ounces sold and a slightly higher realized price ($1,318 per gold-equivalent ounce from wholly owned operations, excluding stream sales). However, production costs rose 20%, depreciation and depletion increased, and the loss from MSC widened. H1 revenue fell 31%, primarily as El Gallo moved to residual leaching and Black Fox production declined. Q2 operating cash flow was $1.7 million according to MD&A; H1 operating cash flow was negative $9.2 million, versus positive $0.6 million in H1 2018. H1 capital additions were $24.5 million.
Liquidity and debt. At June 30, cash and cash equivalents were $9.3 million, restricted cash $13.1 million, and investments $5.1 million. Working capital was $30.9 million, including restricted flow-through proceeds committed to Canadian exploration by December 31, 2019. Total cash, cash equivalents, and restricted cash were $22.5 million, down from $30.5 million at year-end 2018. Long-term debt was approximately $49.4 million, including $24.7 million owed to a related party; the secured term loan bears 9.75% interest, with scheduled principal repayments beginning in 2020. Lease liabilities totaled $8.0 million.
Management said working capital and forecast cash generation should cover obligations and operations for the next 12 months, but noted that project advancement or a production decision could require financing beyond available capital. It may defer initiatives or consider additional debt, equity, leasing, or other financing.
Operations, outlook, and risks
- Gold Bar: Ramp-up continued, but first-quarter delays reduced Q2 production; less ore was placed on the leach pad than planned. Management expected improved performance in H2 2019. Q2 sales were 8,700 gold-equivalent ounces; reported AISC was $1,088 per ounce.
- Black Fox: Spring-melt water flooded the western underground ramp, slowing production in April and May. A first-quarter crushing-plant fire also affected H1 output; repairs were complete, and management expected production to return to a normal pace in H2. Q2 AISC was $1,196 per ounce.
- El Gallo and projects: Active mining had ceased in 2018; residual leaching was expected to continue through end-2020. Fenix feasibility work and permitting continued, with study completion and mine permitting expected in Q3 2019. Los Azules permitting and access work advanced; the company anticipated an environmental permit application in Q4 2019 and an environmental declaration in 2020.
- MSC/San José: McEwen recorded a $4.1 million Q2 equity-method loss. Higher operating costs, including Argentina’s export tax, and lower deferred tax recovery contributed. McEwen relies substantially on information supplied by MSC, which is operated by its joint-venture partner.
- Portfolio and exploration: The board was evaluating a potential sale of the Mexican business unit; the company said half of potential proceeds could support development projects and the remainder debt reduction. Exploration spending was $10.0 million in H1; management expected it to increase in H2 after reducing Q1 spending to conserve capital.
- Material risks: The company does not hedge gold or silver sales and reported exposure to commodity prices, foreign exchange, inflation, permits, funding availability, operating costs, and production variability. Collection timing for Mexico VAT receivables was uncertain. Reclamation obligations were $35.0 million, supported by $35.7 million of surety bonds; the company also disclosed a long-term Black Fox gold streaming commitment through 2090.
Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2018 Form 10-K. Cash costs, AISC, realized prices, and liquid assets are non-GAAP measures and may not be comparable across companies.
Investor verification priorities
- Track Gold Bar’s leach-pad placement, recovery, ramp-up, and H2 production against management’s expectations.
- Confirm whether Black Fox output recovered after flooding and the crushing-plant disruption, and assess the effect on unit costs.
- Review cash burn, capital spending, restricted-cash availability, and funding needs against the 12-month liquidity assessment.
- Check debt service and related-party loan terms, including the 2020–2021 principal schedule and interest costs.
- Monitor MSC operating results, dividends, export-tax effects, and the assumptions behind McEwen’s equity-method loss.
- Verify progress on Fenix and Los Azules studies, permits, and any Mexican-business sale; these remain forward-looking plans, not completed outcomes.