McEwen Mining Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited consolidated financial statements; amounts are U.S. dollars unless noted. McEwen explores, develops and produces gold and silver, and explores for copper, across the U.S., Canada, Mexico and Argentina. Its 49% interest in Argentina’s San José mine is accounted for using the equity method.
Financial and operating results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Gold and silver sales revenue | $23.7 million | $31.4 million |
| Production costs applicable to sales | $23.6 million | $28.4 million |
| Gross loss | $5.0 million | $3.7 million |
| Operating loss | $15.4 million | $99.3 million |
| Net loss | $12.5 million; $0.03 per share | $99.2 million; $0.25 per share |
| Cash used in operating activities | $10.1 million | $11.9 million |
| Cash additions to mineral property and equipment | $10.1 million | $5.5 million |
| Gold-equivalent ounces produced / sold | 30,600 / 30,200 | 35,100 / 32,500 |
Q1 2021 GAAP gross margin was approximately negative 21% (gross loss divided by revenue). Management reported non-GAAP cash gross profit of $0.2 million for wholly owned operations, down from $3.0 million; these measures are not standardized and should not be viewed as substitutes for GAAP results. Average realized price for sales from wholly owned operations was $1,763 per gold-equivalent ounce, versus $1,591. The 2021 net loss included $6.8 million in exploration and advanced-project spending.
Balance sheet and liquidity
- Cash and cash equivalents were $47.4 million at March 31, 2021, up from $20.8 million at year-end; cash, cash equivalents and restricted cash totaled $51.0 million.
- Working capital was $35.3 million, up $27.4 million from December 31, 2020. Management said available liquidity and expected operating funds were sufficient for anticipated needs over the next 12 months.
- Total liabilities were $134.4 million and shareholders’ equity was $393.7 million. Debt was $48.3 million in total, comprising $24.2 million reported as debt and $24.2 million as debt to a related party. The term loan carries fixed interest; scheduled monthly principal payments begin August 2022, with a $26 million final payment due August 2023. The company reported compliance with its working-capital covenant.
- Operating cash outflow of $10.1 million and investing cash outflow of $5.1 million were more than offset by $41.8 million of financing cash inflows, primarily from equity and flow-through share offerings.
Changes versus the prior comparable period
- Revenue fell 24%, reflecting fewer ounces sold from wholly owned operations, partly offset by higher realized gold prices. Total production declined to 30,600 gold-equivalent ounces, primarily due to lower output at Gold Bar, Black Fox and El Gallo; San José attributable production increased.
- The net loss improved substantially from Q1 2020, which included an $83.8 million non-cash impairment at Gold Bar. The improvement does not indicate a return to GAAP profitability: Q1 2021 still recorded a $5.0 million gross loss and $15.4 million operating loss.
- Cash used in operations narrowed by $1.8 million. Capital additions rose by $4.6 million, largely for Froome development.
- Cash increased following a February registered direct offering that raised $31.5 million gross ($29.9 million net) and a January flow-through offering that raised $12.7 million gross ($12.0 million net). Shares outstanding increased to 459.2 million from 416.6 million at year-end.
- The equity-method loss from MSC fell to $0.6 million from $2.7 million; McEwen received $5.0 million in MSC dividends during the quarter.
Outlook, commentary and risks
- Management expected 2021 production to increase through the year and be 20%–40% greater than 2020. This is forward-looking guidance, not a reported result.
- Black Fox mining was transitioning to the Froome deposit; commercial production at Froome was expected in Q4 2021. Development reached first ore in late Q1, and management targeted a Fox Complex expansion preliminary economic assessment by the end of Q2 2021.
- El Gallo residual leaching was expected to wind down during 2021. A two-week disruption from a community blockade was resolved with a new 10-year agreement. Fenix development financing alternatives were under evaluation, including potential divestiture of the Mexican business unit.
- Management was evaluating strategic alternatives for Los Azules, including a joint venture or a spinout, and was also evaluating potential divestiture of its MSC investment.
- COVID-19 remained a source of uncertainty, although no government-mandated shutdowns or legally required temporary suspensions occurred in Q1 2021. The company recognized $1.1 million of Canadian COVID-related subsidies.
- Key exposures include gold and silver price volatility, foreign exchange movements, permitting and funding availability, mine performance and cost changes, community relations, COVID-19 developments, and dependence on MSC’s operator and joint-venture partner. The company does not hedge its metal sales. A 10% change in gold and silver prices would have affected Q1 revenue by approximately $2.4 million, based on the filing’s sensitivity estimate.
- Unusual items included $1.1 million of COVID-19 relief income, a $1.0 million benefit from expiration of an Argentine stamp-tax contingency within finance expense, and inventory write-downs of approximately $2.2 million at Gold Bar and El Gallo.
Important facts for investors to verify
- Whether the projected 2021 production increase and Froome’s Q4 commercial-production target were achieved, and what costs or funding needs accompanied the transition.
- Whether the Fox Complex assessment supported expansion economics, and whether Fenix, Los Azules or MSC strategic alternatives resulted in financing, partnership or sale transactions.
- How production, cash costs and all-in sustaining costs developed at Gold Bar and Black Fox, given lower Q1 output and the reported gross loss.
- Progress on flow-through spending commitments: $7.9 million of CDE incurred by March 31, 2021, with commitments expected to be fulfilled by the end of 2022.
- Liquidity and covenant headroom, future equity dilution, debt repayment requirements, and any changes in commodity prices, exchange rates, permits or community conditions.