McEwen Mining Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited; financial amounts are in U.S. dollars. The company explores, develops and produces precious metals, operating El Gallo 1 in Mexico and holding a 49% interest in Argentina’s San José mine through Minera Santa Cruz (MSC). It also has development and exploration properties in the U.S., Argentina, Mexico and Canada.
Financial and operating highlights
- Q2 revenue: Gold and silver sales were $15.1 million, up from $14.6 million a year earlier. First-half sales: $29.9 million, down from $35.8 million.
- Profitability: Q2 net loss was $1.7 million, or $0.01 per share, versus net income of $8.4 million, or $0.03 per share, in Q2 2016. First-half net loss was $4.7 million, or $0.02 per share, versus net income of $21.3 million, or $0.07 per share. First-half operating loss was $10.1 million, compared with operating income of $17.1 million.
- Cash flow: First-half operating cash use was $11.7 million, versus $19.6 million provided in 2016. Cash declined to $24.8 million from $37.4 million at December 31, 2016.
- Liquidity and debt: Working capital was $47.0 million; current assets were $66.1 million and current liabilities $19.1 million. The company reported no indebtedness. Cash, investments and precious metals at market value totaled approximately $44.0 million.
- Balance sheet: Total assets were $531.3 million and total liabilities $52.7 million at June 30. Investments were $11.1 million; the 49% MSC investment was carried at $157.3 million. No material off-balance-sheet arrangements were reported.
- Mine costs: El Gallo 1 Q2 total cash cost was $706 per gold-equivalent ounce and all-in sustaining cost (AISC) was $843, versus $465 and $495, respectively, in Q2 2016. San José’s attributable Q2 cash cost was $921 per gold-equivalent ounce and AISC was $1,102, versus $849 and $1,075.
Changes versus comparable periods
- Q2 consolidated production was 32,600 gold-equivalent ounces, down from 39,600; sales were 37,000 ounces, up from 34,400. First-half production fell to 62,300 from 77,500 ounces, and sales declined to 68,100 from 75,000.
- El Gallo 1 Q2 production declined to 9,780 gold-equivalent ounces from 15,640, primarily because average processed gold grade fell to 1.61 g/t from 2.32 g/t. Lower grades, more tonnes processed and Mexican-peso appreciation raised costs. Management described the lower production as expected under the mine plan.
- Exploration expense rose to $11.5 million for the first half from $3.4 million, mainly reflecting increased Los Azules and Mexico spending. General and administrative expense rose to $8.4 million from $5.4 million.
- MSC reported a Q2 net loss of $1.1 million on a 100% basis, compared with net income of $11.0 million in Q2 2016. McEwen’s reported share of MSC results, after purchase-accounting amortization and tax effects, was a $0.3 million loss, versus $4.1 million income. McEwen received $2.4 million in Q2 dividends from MSC.
- On April 26, 2017, McEwen acquired Lexam VG Gold for a reported purchase price of $39.2 million, primarily through issuing 12.7 million shares. The asset acquisition added Timmins-area properties and increased shares outstanding to 312.3 million at June 30.
Outlook, commentary and risks
- Management expected El Gallo 1 production to increase in the second half of 2017 under its mine plan. The mature mine was producing from lower-grade deposits; exploration was intended to extend mine life beyond 2018.
- Management said June 30 working capital was sufficient for obligations, operations and corporate activities over the next 12 months. Developing Gold Bar or El Gallo 2 would require additional estimated capital of approximately $60 million or $150 million, respectively; financing could involve debt, equity, leasing or other sources.
- Gold Bar permitting and engineering continued. Management expected a Record of Decision in the second half of 2017 and said it would decide whether to proceed with construction after a positive decision. Los Azules’ updated preliminary economic assessment was expected in Q3 2017; updated Timmins resource estimates were expected toward year-end.
- Risks include lower grades and variable recoveries, commodity-price and foreign-exchange movements, inflation and operating costs, permit and funding availability, and uncertainty in exploration and project studies. El Gallo 1’s long heap-leach cycles make recoveries difficult to measure. The company also disclosed an $8.3 million Mexican VAT receivable with uncertain collection timing and $4.9 million of reclamation surety bonds outstanding.
- A new $20 million surety facility was entered into in June 2017, with a 2% annual financing fee and no initial deposit requirement. Management reported disclosure controls were effective and no material changes to internal control during the quarter.
- The company had not completed its assessment of the forthcoming revenue-recognition standard, but did not then expect a material effect on revenue timing; it anticipated increased disclosures.
Key facts for investors to verify
- Whether second-half production at El Gallo 1 increased as management expected, and whether exploration extended the mine’s operating life.
- Progress and actual funding requirements for Gold Bar and El Gallo 2, including permitting, construction decisions and financing terms.
- Collection timing and recoverability of the Mexican VAT receivable, and developments in the $20 million surety facility and reclamation obligations.
- Subsequent MSC operating results, dividend capacity and the effect of labor costs, inflation, metal prices and Argentine currency movements.
- Results of the Los Azules assessment and Timmins resource updates, plus any changes to the company’s revenue-recognition assessment.