McEwen Mining Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited financial amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise stated. McEwen operates the El Gallo 1 mine in Mexico and owns 49% of Minera Santa Cruz (MSC), which operates the San José mine in Argentina.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Gold and silver sales | $13.4 | $22.5 | $49.2 | $61.5 |
| Operating income (loss) | $3.0 | $1.9 | $20.1 | $(22.6) |
| Net income (loss) | $4.2 | $2.6 | $25.5 | $(5.5) |
| Net income (loss) per share | $0.01 | $0.01 | $0.09 | $(0.02) |
| Operating cash flow | Not presented quarterly | $24.4 | $16.6 |
Q3 GAAP gross profit was $7.0 million, approximately 52% of sales, versus $11.3 million, approximately 50%, a year earlier. Sales are primarily from El Gallo 1; MSC results are reported as equity-method income, not consolidated sales. McEwen recorded $4.7 million of MSC investment income in Q3 and $13.8 million year to date, compared with losses of $1.6 million and $4.0 million in the comparable 2015 periods.
Consolidated production was 36,496 gold-equivalent ounces in Q3 and 114,000 year to date. Q3 gold production fell to 24,281 ounces from 31,689, chiefly because El Gallo 1 moved from the higher-grade Samaniego pit to lower-grade Lupita. The average realized gold price rose to $1,328/oz from $1,106/oz in Q3; silver was $20.13/oz versus $14.05/oz. Company-reported non-GAAP consolidated costs per gold-equivalent ounce sold were $677 cash costs, $884 all-in sustaining costs and $1,023 all-in costs in Q3; year-to-date figures were $667, $876 and $1,042, respectively.
Liquidity, debt and capital
At September 30, cash was $38.8 million, investments $7.1 million, working capital $55.6 million, total assets $499.8 million and total liabilities $52.6 million. Cash increased $12.9 million from year-end 2015. The company had no bank debt at quarter-end after repaying a Mexican subsidiary’s remaining $3.4 million facility in January 2016. Operating cash flow benefited from $13.3 million in MSC dividends and Mexican VAT collections; investing activities used $8.1 million, including the El Gallo royalty acquisition.
Management’s non-GAAP measure of cash, investments and precious metals was $62.5 million, compared with $36.2 million at September 30, 2015. It includes doré valued at market ($16.6 million), although precious metals were carried in inventory at $5.0 million cost. The company declared a $0.005-per-share return of capital during the quarter and repurchased 558,000 shares for $0.6 million during the first nine months; the repurchase program expired September 30.
Changes, outlook and risks
- Year-to-date net income improved from a $5.5 million loss to $25.5 million income. Key factors included stronger MSC results and no mineral-property impairment in 2016, versus $29.7 million of impairment charges in 2015. Tax recoveries were $3.3 million in 2016 versus $15.1 million in 2015, so the comparison also reflects different tax effects.
- Management maintained 2016 production guidance of 99,500 gold ounces and 3.3 million silver ounces, with consolidated gold-equivalent production estimated at 140,000–150,000 ounces. Guidance depends on grades, recoveries, mine conditions, labor and equipment availability, weather, and other assumptions.
- Gold Bar permitting was delayed: management moved the estimated BLM Record of Decision from Q1 to Q3 2017. Construction was targeted to potentially begin in late 2017 and production in late 2018, subject to permitting. Management budgeted about $3.5 million for 2016 Gold Bar permitting and engineering. El Gallo 2 spending was budgeted at $1.5 million for feasibility and metallurgical work.
- Management said working capital should fund operations and development over the next 12 months. A positive development decision would require additional estimated capital of about $60 million for Gold Bar or $150 million for El Gallo 2; financing is not assured and could involve debt, equity or other means.
- Other notable items: the company acquired the El Gallo 1/El Gallo 2 sliding-scale royalty for $5.3 million upfront plus a conditional $1.0 million payment in 2018; it received $13.3 million in MSC dividends year to date. Peso devaluation affected operating costs and deferred taxes, and certain marketable securities incurred a $0.9 million impairment year to date.
- Risks include commodity and currency volatility, permitting and financing needs, uncertain VAT-refund timing ($3.3 million receivable), reclamation obligations and reliance on MSC information and decisions. The company reported $4.8 million of U.S. reclamation surety bonds and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether production and sales at El Gallo 1, particularly under lower-grade Lupita conditions, support full-year guidance and the reported cost trends.
- MSC’s operating results, dividend capacity, and the effects of Argentine currency movements; McEwen has a 49% interest and does not control day-to-day operations.
- Gold Bar permitting milestones and project financing requirements, as well as the feasibility, permitting and funding status of El Gallo 2.
- Composition and valuation of reported liquidity, including market-valued doré, investments, and collection timing for Mexican VAT receivables.
- How recurring earnings compare with results affected by equity-method income, foreign-exchange-related tax recoveries, investment valuation changes and other non-GAAP measures.