McEwen Mining Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. McEwen explores, develops and produces gold and silver, and explores for copper, across the U.S., Canada, Mexico and Argentina. It owns the Gold Bar and Black Fox mines, the El Gallo and Fenix projects, Los Azules, and a 49% interest in MSC, owner of the San José mine.
Financial and operating results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Gold and silver sales revenue | $31.4 million | $15.6 million |
| Gross profit (loss) | ($3.7 million) | $1.4 million |
| Operating loss | ($99.3 million) | ($10.6 million) |
| Net loss | ($99.2 million), or ($0.25) per share | ($10.1 million), or ($0.03) per share |
| Cash used in operating activities | $11.9 million | $10.8 million |
| Cash used in investing activities | $5.4 million | $14.5 million |
| Cash and cash equivalents at period end | $28.8 million | $46.5 million at Dec. 31, 2019 |
| Working capital | $25.3 million | $43.2 million at Dec. 31, 2019 |
- The $83.8 million non-cash impairment charge at Gold Bar was the principal driver of the quarterly net loss. Excluding that charge, the company reported a net loss of $15.4 million.
- Cash gross profit, a non-GAAP measure, was $3.0 million versus $4.4 million. Gross margin was negative; the filing does not state a consolidated margin percentage.
- Total debt was approximately $49.6 million, including $16.0 million current and $33.6 million long-term. The three-year secured loan bears 9.75% interest and is scheduled to begin monthly principal payments of $2.0 million in August 2020, with a final $26.0 million payment in August 2021. An affiliate of the CEO provided half of the original loan.
- Revenue rose 102%, reflecting higher realized gold prices and more sales from wholly owned mines, including a full quarter of Gold Bar production versus a start-up month in Q1 2019. Production costs rose 155%, and depreciation and depletion increased $3.7 million.
- Production was 35,100 gold-equivalent ounces, including 14,900 attributable ounces from San José; sales were 32,500 ounces. Wholly owned operations sold 20,300 ounces at an average realized price of $1,591 per ounce. These operating measures include non-GAAP definitions.
Material changes and operating developments
- Gold Bar operating results and revised preliminary resource estimates prompted an impairment review. Management indicated a likely 25–35% reduction in contained ounces compared with the 2018 reserve estimate. The mine’s carrying value was reduced by $83.8 million.
- Gold Bar produced 9,100 ounces but incurred high unit costs, including $4.5 million of expensed pre-stripping and an inventory write-down. Management said it lacked sufficient information to provide accurate production or cost guidance for the rest of 2020.
- Black Fox production was broadly comparable with the prior year. Management reported approximately one year of reserves remaining and expects Froome to begin producing in late 2021, subject to development plans.
- El Gallo continued residual leaching during reclamation; production and revenue declined as recoveries decreased. Fenix permitting and feasibility work continued. Los Azules environmental baseline work continued.
- MSC’s Q1 revenue fell 22% year over year, and its attributable loss recorded by McEwen was $2.7 million. COVID-related shutdowns and shipping delays left metal inventory unsold at quarter end; most of the affected gold-equivalent ounces were sold subsequently, according to management.
Outlook, risks and contingencies
- COVID-19 disrupted operations in late March and early April. Black Fox suspended operations March 26 and resumed April 13; Gold Bar mining was suspended April 1, with limited processing of stockpiled material and waste mining later resumed; San José reopened at scaled operations April 14. The company warned that interruptions would adversely affect Q2 and later cash flow and liquidity, with the full impact uncertain.
- Management expected a revised Gold Bar resource and mine plan by the end of Q2 or early Q3 2020. Gold Bar South could begin mining in 2021, subject to permitting. Froome production was expected in late 2021.
- The company was compliant with financial covenants at March 31, but warned that Gold Bar’s lower expected cash flow and COVID-19 disruptions could put covenant compliance at risk over the following 12 months. It was negotiating covenant relief and evaluating refinancing, equity issuance and discretionary-spending reductions.
- Management stated it believed its plans mitigated substantial doubt about going concern for 12 months. However, the risk-factor disclosure also says the circumstances raise substantial doubt and notes there is no assurance the mitigation plans will succeed. Covenant breach could permit lenders to accelerate debt and foreclose on assets.
- Other material exposures include metal-price and foreign-exchange volatility, permitting and reserve-estimate uncertainty, operating and supply interruptions, reclamation obligations, and the possibility of additional funding needs at MSC. Reclamation surety bonds totaled $30.6 million; the company reported $31.9 million in asset retirement obligations.
Investor verification points
- Track the revised Gold Bar resource, reserve estimate, mine plan, operating costs and cash-flow implications against the preliminary 25–35% contained-ounce reduction.
- Confirm whether lenders granted covenant relief or the company refinanced, raised equity, or otherwise maintained covenant compliance and adequate liquidity.
- Assess the duration and financial effect of COVID-related operating constraints, including production, costs, supply availability and sales timing at MSC.
- Reconcile future production and cost expectations with the company’s explicit statement that it could not provide accurate Gold Bar guidance for the remainder of 2020.
- Review the assumptions underlying the $83.8 million impairment, including the 9% discount rate and $1,430-per-ounce long-term gold price used in the valuation.