McEwen Mining Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Amounts are U.S. dollars unless stated otherwise. McEwen operates El Gallo 1 in Mexico and holds a 49% equity-method interest in the San José mine in Argentina through Minera Santa Cruz S.A. (MSC). Consolidated revenue reflects El Gallo 1 sales; MSC results are recorded as investment income.
Financial and operating performance
- Revenue: Gold and silver sales were $22.9 million, up 106% from $11.1 million. Higher El Gallo 1 sales volumes drove the increase; realized metal prices were lower year over year.
- Profit: Operating income was $5.2 million versus an operating loss of $0.6 million. Net income was $6.0 million ($0.02 per share), compared with $17.9 million ($0.06 per share). The 2014 comparison included a much larger Argentine-peso-related income tax recovery. Adjusted net income, a non-GAAP measure excluding foreign-currency effects and related tax impacts, was $1.9 million versus an adjusted net loss of $6.2 million.
- Mining performance and costs: Consolidated earnings from mining operations, a non-GAAP measure, were $17.2 million versus $11.4 million. Gold-equivalent ounces sold rose to 37,682 from 31,705. Consolidated cash costs were $674 per ounce, all-in sustaining costs $948, and all-in costs $1,044. These non-GAAP per-ounce comparisons are affected by the change in the silver-to-gold conversion ratio used (75:1 in 2015; 60:1 in 2014).
- Cash flow: Operating activities provided $5.6 million, versus $3.9 million used in Q1 2014. Investing activities used $1.3 million, primarily for marketable securities; financing cash flow was nil. Cash increased $4.2 million to $16.6 million.
- Liquidity and debt: Working capital was $21.2 million, versus $15.6 million at year-end 2014. Cash, investments and precious metals totaled $19.3 million at quarter-end; the company reported no bank debt. Current assets were $43.5 million and current liabilities $22.3 million. IVA taxes receivable were $10.4 million.
- Balance sheet: Total assets were $526.7 million, total liabilities $78.8 million, and shareholders’ equity $447.9 million. No clear consolidated gross-margin percentage is provided; the filing reports operating results and non-GAAP mining-cost measures.
Changes versus Q1 2014
- El Gallo 1 gold-equivalent production increased 64% to 15,243 ounces, principally because of substantially higher ore grades and improved efficiencies. Consolidated production was 33,434 gold-equivalent ounces.
- At San José, production and sales were lower; MSC net sales declined 19% to $45.9 million. McEwen’s reported income from MSC, net of amortization, fell to $0.3 million from $7.0 million, in part because the prior-year period had a larger tax recovery. No MSC dividend was received in Q1 2015, compared with $3.9 million in Q1 2014.
- Consolidated exploration expense declined to $2.3 million from $2.7 million; mine development expense declined to $0.2 million from $1.6 million, and mine construction expense was nil versus $0.9 million.
- Gold and silver realized prices were $1,213 per ounce and $17.02 per ounce, respectively, versus $1,319 and $20.15. Consolidated net income fell despite improved operating income, largely reflecting the much smaller tax recovery and MSC investment contribution.
Outlook, commentary and material risks
- Production outlook: Management maintained 2015 guidance of 50,000 gold-equivalent ounces for El Gallo 1 and estimated consolidated guidance of 135,000–140,000 ounces, citing planned higher-grade mining. Results are not assured.
- El Gallo 2: No construction decision had been made. Proceeding depends on silver-price expectations and financing on acceptable terms; the company estimated it would need about $150 million in additional capital. The feasibility study estimated $180 million of initial capital, and potential cost reductions had not been incorporated into an updated study.
- Other projects: Gold Bar permitting was delayed, with final approval expected in Q3 2016 following preparation of an environmental impact statement. The company budgeted $1.4 million for the project in 2015. El Gallo 1 heap-leach capacity was expected to accommodate ore deliveries through December 2016.
- Theft after quarter-end: Approximately 6,350 gold-equivalent ounces of concentrate were stolen from a Mexican refinery in April. Its estimated cost, about $2.8 million, was included in March 31 in-process inventory; the company later estimated fair value at about $7.7 million. Insurance proceedings were ongoing and recovery was uncertain. Management said production guidance remained unchanged.
- Credit facility: On April 17, the company entered into an agreement for up to 90 million Mexican pesos (about $5.9 million), secured by its IVA receivable. It was subject to final registration and administrative procedures; no funds had been drawn by the filing date.
- Risks and contingencies: The filing identifies political, regulatory, currency, commodity-price, permitting, funding and operating risks in Argentina and Mexico, including crime and theft. Collection timing for the $10.4 million Mexican IVA receivable was uncertain. The company had $4.8 million of U.S. reclamation surety bonds outstanding.
- SEC inquiry: The SEC Division of Enforcement was conducting an inquiry concerning the accounting treatment of the Los Azules project. The company said it was cooperating and could not predict the outcome; possible consequences include legal costs, penalties or required financial-statement restatements.
- Accounting and controls: Interim results may not indicate full-year results. Management concluded disclosure controls were effective as of March 31, 2015, and reported no materially affecting change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the theft insurance claim results in a recovery, and the resulting impact on revenue, inventory and cash flow.
- Whether El Gallo 1 achieves production guidance and whether higher grades and recoveries persist.
- El Gallo 2’s financing requirements, any construction decision and updated project capital estimates.
- Progress in collecting IVA receivables and the status, conditions and potential use of the Banco Nacional credit facility.
- Developments in the SEC inquiry, including any financial-reporting or legal consequences.
- San José operating performance, MSC dividend capacity and the effects of Argentine inflation, currency movements and policy changes.
- Gold Bar permitting milestones and the timing of environmental review and final approval.