McEwen Mining Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited; amounts below are U.S. dollars. McEwen explores, develops and produces gold and silver, explores for copper, and owns 49% of Minera Santa Cruz S.A. (MSC), operator of Argentina’s San José mine.
Financial and operating performance
- Q3 revenue: $32.7 million, up 22% from $26.9 million, primarily reflecting a 21% increase in realized price to $1,478 per gold-equivalent ounce; ounces sold were broadly similar. Nine-month revenue was $84.7 million, down 17% from $101.7 million.
- Profitability: Q3 gross profit was $1.6 million (about 5% gross margin), versus $6.0 million (22%) a year earlier. Net loss narrowed to $11.5 million, or $0.03 per share, from $13.3 million, or $0.04. Nine-month net loss widened to $34.6 million, or $0.10 per share, from $23.9 million, or $0.07.
- Costs and margins: Q3 production costs rose 33% to $23.6 million; depreciation and depletion increased to $7.5 million from $3.1 million. Nine-month production costs fell 4% to $59.4 million, while depreciation and depletion rose to $17.5 million from $10.3 million. The company’s non-GAAP cash cost and AISC for 100%-owned operations were $1,046 and $1,272 per gold-equivalent ounce sold in Q3, respectively.
- Production: Q3 production was 45,930 gold-equivalent ounces, including 24,415 attributable ounces from San José. Gold Bar produced 11,029 ounces after achieving commercial production in May; Black Fox produced 7,421 ounces and fell short of expectations amid underground-development delays. El Gallo’s residual leaching produced 3,018 ounces.
- Cash flow and liquidity: Cash used in operating activities was $21.9 million for nine months, compared with $0.8 million in 2018. Investing used $18.8 million, including $27.0 million of mineral-property and equipment additions; financing provided $23.6 million, principally from equity issuance. September 30 cash and cash equivalents were $4.3 million and restricted cash was $8.8 million, versus combined cash and restricted cash of $30.4 million at year-end 2018. Working capital was $16.5 million; management cited $18.5 million of non-GAAP liquid assets.
- Debt and obligations: Long-term debt was approximately $49.4 million, including $4.0 million current, and lease liabilities totaled $7.5 million. The secured term loan bears 9.75% interest and is due in 2021. An October 28 amendment reduced the minimum working-capital covenant to zero at December 31, 2019 and September 30, 2020. Asset-retirement obligations were $29.8 million.
Material changes, outlook and risks
- Gold Bar’s ramp-up had earlier delays, but management reported improved Q3 operating benchmarks and September production in line with plan and designed plant capacity. The filing says the delays adversely affected 2019 production guidance but does not provide a clear revised guidance figure.
- Black Fox production was impaired by insufficient working areas and delays in underground development; earlier in 2019, a crushing-plant fire and unusually heavy spring runoff also affected operations.
- Exploration expense was $13.7 million in Q3 and $23.7 million year to date. Fenix feasibility work continued, and the company received environmental permits for phase-one process-plant development and in-pit tailings storage. The board was evaluating a potential sale of the Mexican business; no decision had been made.
- Management believed working capital and forecast cash generation would cover non-discretionary obligations for the next 12 months. Advancing development projects may require additional financing; the company said it could defer initiatives or seek debt or equity financing.
- Q3 other income included investment gains, notably a $3.4 million realized gain on securities sales, and foreign-currency gains. The company does not hedge gold or silver sales. Risks include commodity and currency volatility, permitting and operating uncertainty, capital needs, and dependence on MSC results. Argentina’s peso devalued 52% against the U.S. dollar in the first nine months of 2019.
Most important facts for investors to verify
- Gold Bar’s sustained production, recovery and costs against plan, and whether the company later issued quantified production guidance.
- Black Fox development progress and whether production and unit costs recovered after the reported delays.
- Cash generation, working-capital covenant compliance, debt service, and funding requirements for planned projects.
- Completion of the remaining flow-through exploration spending by December 31, 2019, and any decision on the Mexican business or Fenix development.
- Q3 production, cash-cost and AISC figures use non-GAAP measures and a variable silver-to-gold conversion ratio; compare definitions and assumptions when assessing trends.