Mcewen Inc. quarterly report, Q3 FY2015

McEwen Mining Inc. — Q3 2015 Form 10-Q

Reporting period: Three and nine months ended September 30, 2015. Unaudited; amounts below are U.S. dollars unless stated otherwise. McEwen operates the El Gallo 1 mine in Mexico, holds a 49% interest in Argentina’s San José mine through MSC, and has exploration and development projects in the U.S., Argentina, and Mexico.

Financial and operating performance

Metric	Q3 2015	Q3 2014	Nine months 2015	Nine months 2014
Gold and silver sales	$22.5m	$8.9m	$61.5m	$31.6m
Operating income (loss)	$1.9m	($14.7m)	($22.6m)	($144.7m)
Net income (loss)	$2.6m	($13.0m)	($5.5m)	($99.2m)
Operating cash flow	Not presented quarterly	$16.6m	($9.4m)

Reported sales are principally from El Gallo 1; McEwen accounts for MSC using the equity method, so its share of San José sales is not included in consolidated revenue. El Gallo 1 gross profit, calculated as sales less production costs applicable to sales, was $11.3m in Q3 (about 50%) and $32.6m for the nine months (about 53%). These are mine-level calculations, not consolidated net margins.

Consolidated production was 43,400 gold-equivalent ounces in Q3 and 115,900 for the nine months; ounces sold were 41,800 and 115,500, respectively. Q3 production increased 34% year over year, largely on higher grades and improved recoveries at El Gallo 1.
Average realized gold and silver prices were $1,106/oz and $14.05/oz in Q3, down from $1,231 and $16.48 a year earlier. Consolidated cash costs, all-in sustaining costs, and all-in costs were $674, $914, and $1,008 per gold-equivalent ounce sold in Q3; the corresponding nine-month figures were $686, $967, and $1,064. These are non-GAAP measures.
At September 30, cash and cash equivalents were $30.9m; current assets were $56.9m and current liabilities $26.9m, producing reported working capital of $30.0m. The company separately cited $36.2m in cash, investments, and precious metals. Short-term bank debt was $5.2m; the filing reports no other conventional borrowings in the balance sheet.
Total assets were $504.8m, total liabilities $70.1m, and shareholders’ equity $434.6m. Nine-month investing cash outflow was $1.6m and financing cash inflow $3.7m.

Changes versus the prior comparable period

Q3 revenue rose 154% and the company moved from a $13.0m net loss to $2.6m net income. Nine-month revenue rose 95%; the net loss narrowed from $99.2m to $5.5m.
Improved El Gallo 1 grades and output contributed to lower unit costs. The company reported nine-month operating cash flow of $16.6m versus cash used of $9.4m in 2014, mainly reflecting higher mine sales receipts and lower supplier and employee payments.
The 2014 nine-month loss included a $120.4m Los Azules impairment. In 2015, McEwen recorded a $29.7m impairment, mainly after allowing non-essential Gold Bar and Tonkin claims to lapse; the related tax recovery was $10.4m. The 2015 charge included $1.2m in Q3.
McEwen’s share of MSC results was a $1.6m loss in Q3 and a $4.0m loss for the nine months, versus a $4.4m Q3 loss and $0.2m nine-month income in 2014. MSC’s nine-month sales declined 5%, and a longer labor stoppage affected output.

Outlook, commentary, risks, and unusual items

Management raised 2015 gold production guidance from 96,500 to 108,500 ounces, including 62,000 ounces at El Gallo 1 and 46,500 ounces attributable to San José; silver guidance remained 3.1m ounces. Consolidated gold-equivalent production guidance was 140,000–150,000 ounces.
Management said available working capital was sufficient for ongoing exploration and corporate activity over the next 12 months, but additional capital would be required to develop Gold Bar or El Gallo 2. El Gallo 2’s 2012 feasibility figures were described as historical and not reliable for current decisions. The El Gallo 1 leach-pad expansion was deferred to Q1 2016.
A Gold Bar resource update and feasibility study released October 21, 2015 cited estimated initial capital of $60m, a 20% IRR at the then-current gold price, average annual production of 65,000 ounces, and average cash costs of $728/oz; the complete report was expected in early December. These were project estimates, not company guidance.
Approximately 6,300 gold-equivalent ounces were stolen from the Mexican refinery in April. The company said insurance proceeds approximated the cost of producing the stolen ounces; verify the claim and accounting treatment.
Mexican VAT receivables were $10.9m, with collection timing uncertain. The Mexican peso-denominated credit line was secured by the VAT receivable and guaranteed by McEwen. Argentine peso devaluation, commodity prices, permitting, labor disruptions, and access to project financing were identified risks.
NYSE notified McEwen in July that its share price had been below the $1 minimum for 30 consecutive trading days. The stated cure period ran to January 4, 2016; a reverse split might be considered if needed. After quarter-end, the board authorized a share-repurchase plan of up to $15m (up to about 5% of outstanding common shares); no shares had been repurchased by November 5. The company also paid a $1.5m return-of-capital distribution in August.
The SEC informed McEwen in August that it had concluded its Los Azules investigation and did not intend to recommend enforcement action based on the information available.

Most important facts for investors to verify

Whether 2015 production guidance was achieved, including the effect of the 6,300-ounce theft and related insurance proceeds.
Actual unit costs and realized prices, noting the non-GAAP definitions and the differing silver-to-gold conversion ratios used in comparisons.
Collection and recoverability of the $10.9m Mexican VAT receivable, and repayment terms and currency exposure on the credit line.
Funding requirements, permitting, and updated economic assumptions for Gold Bar and El Gallo 2; the Gold Bar estimates are project-level forecasts.
NYSE minimum-price compliance, any reverse-split action, and whether the post-quarter repurchase plan is consistent with development funding needs.