Business context and reporting period
McEwen Mining Inc. (formerly US Gold Corporation) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. On January 24, 2012, it acquired Minera Andes, adding a 49% interest in the producing San José silver-gold mine in Argentina, the Los Azules copper project, and other exploration properties. The company also began production at El Gallo Phase 1 in Mexico, with its first gold pour in September. Because the acquisition closed during the year, 2012 results include Minera Andes from January 25 onward; 2011 comparisons do not.
Financial and operating highlights
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q3 2012 | Nine months 2012 | Comparable 2011 |
|---|---|---|---|
| Revenue | $11.8 | $15.2 | $0 |
| Operating loss | $(10.6) | $(56.8) | $(21.2) / $(44.1) |
| Net loss | $(2.6) | $(40.6) | $(23.7) / $(45.6) |
| Net loss per share | $(0.01) | $(0.16) | $(0.17) / $(0.33) |
| Cash used in operations | Not presented for quarter | $(63.5) | $(40.2) |
Revenue comprised equity-method income from McEwen’s 49% investment in Minera Santa Cruz (MSC), net of amortization, of $11.3 million in Q3 and $14.8 million year to date, plus $0.5 million of El Gallo gold and silver sales. The filing does not provide a meaningful consolidated operating margin; exploration, mine construction and operating costs were significant, while El Gallo was at an early production stage. Q3 results included a $6.4 million income-tax recovery; the nine-month recovery was $14.9 million, principally reflecting foreign-exchange changes affecting acquisition-related deferred taxes.
At September 30, cash and cash equivalents were $18.5 million, current assets $36.0 million, current liabilities $7.5 million and working capital $28.5 million, down from $41.7 million at year-end 2011. Total assets were $1.11 billion and total liabilities $256.8 million, including a $242.8 million deferred-tax liability. The company reported no debt outstanding. Nine-month cash from investing was $65.2 million, largely from cash acquired with Minera Andes and bullion sales; financing cash flow was $3.6 million, mainly option exercises. No dividends were paid by McEwen Mining in the period; MSC dividends received were $2.2 million, with a further $2.6 million received after quarter-end.
At San José, Q3 production was 20,967 ounces of gold and 1.552 million ounces of silver (100% mine basis), broadly comparable with Q3 2011. MSC’s Q3 sales rose 45% to $116.3 million, partly because accumulated concentrate inventory was sold after export restrictions eased. Q3 cash costs, a non-GAAP measure reported by MSC, were $755 per gold ounce and $13.60 per silver ounce, versus $622 and $14.00, respectively, a year earlier. The company cautions that it does not operate San José and has not independently verified the operating information supplied by MSC.
Material changes versus prior periods
- The Minera Andes acquisition substantially expanded assets, operations and share count. The preliminary purchase price was $667.8 million; acquired mineral properties and the MSC investment materially increased the balance sheet.
- Despite lower reported net losses, nine-month operating cash use rose to $63.5 million from $40.2 million, reflecting the acquisition, El Gallo development and higher supplier and employee payments.
- Nine-month exploration expense declined to $28.6 million from $32.7 million, while $13.3 million of El Gallo construction expense and $8.6 million of mine operating expense were recorded; comparable 2011 costs were nil.
- The company recorded a $2.0 million impairment of marketable securities and a $1.9 million net write-off after allowing certain Nevada claims to lapse. It also recognized a $1.3 million gain on property and equipment disposals.
- Acquisition-related issuance increased equity substantially. At September 30, 2012, the balance sheet showed 189.6 million common shares and 78.9 million exchangeable shares outstanding; the filing reported 190.8 million common shares and 77.7 million exchangeable shares as of November 2.
Outlook, risks and unusual items
- Management expected San José 2012 production to remain on track at approximately 85,000 ounces of gold and 5.7 million ounces of silver (100% basis). Its 2012 exploration drilling target was reduced from 110,500 metres to about 90,000 metres.
- El Gallo Phase 1 construction was complete and the first pour produced 298 ounces of gold and 129 ounces of silver. Management expected operational commercial production in late 2012, subject to sustaining at least 80% of design capacity across mining, crushing and processing for 30 days. Phase 1 construction costs totaled $13.5 million and were expensed because qualifying reserves had not been established.
- For El Gallo Phase 2, management planned to submit construction permit applications in Q1 2013 and expected approvals by Q3 2013. The feasibility study described mineralized material, not SEC Guide 7 reserves. Management budgeted $16 million for the 2012–2013 Los Azules drilling season; difficult ground conditions and equipment problems had constrained earlier drilling.
- Management said working capital was sufficient for ongoing exploration and corporate activities over the next 12 months, with Los Azules drilling expected to be funded primarily from MSC dividends. A rights offering announced October 29, after quarter-end, was expected to raise about $60 million gross at $2.25 per share, a stated 50% discount to the pre-announcement closing price; it was backstopped by CEO Robert McEwen.
- Argentina’s changing export-repatriation rules disrupted MSC sales in Q2. Restrictions were later relaxed, enabling accumulated concentrate sales in Q3, but government action, currency controls, export taxes and the timing and amount of future dividends remain risks. The filing also cites Mexican security and political risks, commodity and currency volatility, permitting, cost inflation and exploration uncertainty.
- Litigation over the Solitario Properties could materially impair development or value of Los Azules if the opposing claims succeed. The purchase-price allocation remained preliminary. Except for McEwen’s San José interest, the company’s other mineralized properties had no resources meeting the filing’s definition of proven and probable reserves.
Important facts for investors to verify
- Whether the rights offering closed as planned, its proceeds and resulting dilution.
- El Gallo’s production ramp, recoveries, costs and achievement of management’s operational commercial-production target.
- San José production, cost and dividend performance, bearing in mind McEwen is not the mine operator and relies on MSC-provided data.
- Developments in the Los Azules litigation, permitting and drilling results, and whether any project resources progress to qualifying reserves.
- The sustainability of cash resources given operating cash use, exploration plans and dependence on MSC dividends.
- Changes to Argentina’s export and currency rules, and any revisions to the preliminary acquisition valuations and deferred-tax balances.