McEwen Mining Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited. The company changed its name from US Gold Corporation after acquiring Minera Andes on January 24, 2012. Unless noted otherwise, financial figures below are in U.S. dollars.
Business context
The combined company holds a 49% interest in the San José silver-gold mine in Argentina, operated by its joint-venture partner, and projects and exploration properties in Argentina, Mexico and Nevada. El Gallo Phase 1 in Mexico was nearing startup; the company’s other major development asset is the Los Azules copper project in Argentina. Most properties other than San José had no proven or probable reserves at June 30.
Financial and operating results
| Metric | Q2 2012 | Six months 2012 |
|---|---|---|
| Equity-method income from MSC, net of fair-value amortization | $(0.2) million | $1.0 million |
| Operating loss | $25.7 million | $48.7 million |
| Net loss | $21.3 million; $0.08 per share | $40.5 million; $0.16 per share |
| Cash used in operating activities | Not separately presented in the supplied cash-flow statement | $42.7 million |
- The company reported no consolidated mine-sales revenue in these periods; its reported income was principally its equity-method interest in MSC. MSC recorded sales of $56.4 million in Q2 and $116.1 million for the period it reported to McEwen after the acquisition. Consolidated product margins therefore are not meaningfully presented.
- Cash and cash equivalents were $23.4 million, working capital was $39.7 million, and current liabilities were $8.7 million at June 30. The company reported no debt outstanding. Current assets included $13.0 million of gold and silver bullion.
- Total assets were $1.14 billion, including $843.8 million of mineral property interests and a $226.0 million investment in MSC. Total liabilities were $283.9 million, including a $268.6 million deferred tax liability. The liability largely reflects acquisition-date fair-value adjustments.
- Six-month investing cash inflow was $49.4 million, mainly from cash acquired with Minera Andes and bullion sales. Financing cash inflow was $3.3 million, principally option exercises. Cash increased by $10.0 million to $23.4 million.
- MSC’s Q2 production was 21,946 ounces of gold and 1.5 million ounces of silver (100% basis). Its reported non-GAAP co-product cash costs were $842 per gold ounce and $15.32 per silver ounce, up from $527 and $13.56, respectively, in Q2 2011.
Changes versus prior comparable periods
- Six-month net loss increased from $21.9 million in 2011 to $40.5 million in 2012; Q2 net loss increased from $13.2 million to $21.3 million. The 2012 results include Minera Andes from January 25 and reflect El Gallo construction and operating costs; 2011 did not include the acquired operations.
- Six-month operating cash use rose from $22.3 million to $42.7 million, largely due to the expanded business and El Gallo activity.
- MSC’s Q2 sales fell 36% year over year despite higher gold and silver production. Argentina export-repatriation restrictions delayed sales, while lower silver prices and increased cash costs also affected the comparison.
- Working capital declined from $41.7 million at December 31, 2011 to $39.7 million at June 30, 2012. The acquisition substantially expanded assets, liabilities and shareholders’ equity.
Outlook, risks and unusual items
- El Gallo: Management said construction was close to completion and targeted commercial production for October 1, 2012; elsewhere it expected production to commence in Q3. The company forecast approximately 10,000 ounces of gold in 2012 and an annualized rate of 30,000 ounces. Phase 1 costs were expected to be slightly below the $15 million budget. Management cautioned it could not assure the timing or quantity of sales or provide projected mine profitability.
- Other plans: Management planned Los Azules drilling to resume around November 2012, subject to weather and access, and continued Gold Bar permitting and exploration. San José’s 2012 production outlook was approximately 85,000 ounces of gold and 5.7 million ounces of silver on a 100% basis.
- Argentina: Export and repatriation restrictions delayed an estimated 44% of Q2 gold and silver sales at MSC. Concentrate exports resumed in June; accumulated concentrate inventory was expected to sell in Q3. The timing and amount of future MSC dividends remained uncertain. McEwen received a $2.2 million dividend in July.
- Liquidity and funding: Management said available working capital could fund the remaining approximately $2 million of El Gallo Phase 1 budget and ongoing exploration and corporate activity over the next 12 months. Additional capital might be sought if the company proceeded with El Gallo Phase 2.
- Unusual items: The company recorded a $2.0 million impairment of marketable equity securities, a $0.4 million unrealized loss on silver bullion and an $8.6 million deferred-tax recovery for the six months. El Gallo construction costs were expensed because the project lacked proven and probable reserves.
- Contingency: Litigation over Los Azules property rights could materially impair the company’s ability to develop the project if the opposing parties prevail. The case was consolidated, with a case-management hearing anticipated in November 2012.
- Other risks: The filing highlights commodity and currency volatility, Argentine government and export-policy actions, Mexican security and political risks, permitting and exploration uncertainty, and reliance on MSC-supplied operating information that McEwen had not independently verified. The company used no derivatives to manage market risk.
Key facts for investors to verify
- Whether El Gallo achieved startup on the stated timetable and met its production and cost expectations.
- Whether delayed MSC concentrate and doré sales were completed, and how export rules and dividend capacity affected cash received by McEwen.
- Whether San José production, cash costs and exploration spending tracked management’s 2012 outlook.
- The outcome and potential financial or ownership impact of the Los Azules litigation.
- Final purchase-price allocation for Minera Andes and the assumptions underlying the acquired mineral-property values and deferred tax liability.
- Future funding requirements, including any decision to proceed with El Gallo Phase 2 or raise additional equity.