McEwen Mining Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company explores, develops and produces precious metals in Argentina, Mexico and the United States. It owns 100% of El Gallo 1 in Mexico and a 49% equity-method interest in Argentina’s San José mine, operated by Minera Santa Cruz S.A. (MSC). Figures are in U.S. dollars unless noted.
Financial and operating performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Gold and silver sales | $8.9 million | $11.8 million | $31.6 million | $35.7 million |
| Net income (loss) | $(13.0) million | $3.3 million | $(99.2) million | $(136.4) million |
| Basic and diluted earnings (loss) per share | $(0.04) | $0.01 | $(0.33) | $(0.46) |
| Cash used in operating activities | Not stated for quarter | Not stated for quarter | $9.4 million | $36.8 million |
| Cash and cash equivalents at period end | $17.6 million | — | $17.6 million | — |
Quarterly loss from mining operations, a non-GAAP measure, was $0.8 million versus earnings of $16.3 million. Consolidated non-GAAP costs per gold-equivalent ounce sold were $1,009 total cash costs, $1,448 all-in sustaining costs and $1,645 all-in costs. These measures are not standardized under U.S. GAAP.
At September 30, current assets were $39.7 million, current liabilities $19.8 million and working capital $19.9 million, down from $35.6 million at December 31, 2013. Total assets were $783.5 million, total liabilities $132.6 million and shareholders’ equity $650.8 million. The company reported no bank debt. Cash declined $6.7 million from year-end. IVA taxes receivable were $10.9 million.
Material changes and notable items
- Q3 sales fell 25% year over year; production fell at both mines. Lower grades, weaker realized metal prices and fewer ounces sold weighed on results. El Gallo 1 was disrupted by severe rainfall, reduced haulage and crusher throughput, and delayed access to higher-grade ore.
- MSC’s Q3 net sales declined 45% to $38.3 million on a 100% basis. Concentrate shipments were delayed by limited port availability; management expected the accumulated inventory to be sold in Q4. McEwen’s attributable share of MSC operations was a $4.4 million loss in Q3, versus $2.0 million income a year earlier.
- Production costs included a $1.7 million inventory write-down, attributed to waste extraction, higher costs and lower metal prices. A $6.7 million one-time registration tax related to intercompany financing agreements also reduced Q3 results; payment timing was undetermined.
- Nine-month results included a $120.4 million impairment of the Los Azules copper project, partly offset by a $22.5 million tax recovery. The impairment followed a valuation comparison with a similar Argentine copper project. No impairment was recorded in Q3.
- Operating cash use improved year over year, reflecting lower supplier and employee payments, reduced exploration activity, IVA tax collections and $9.5 million of MSC dividends. Investing cash inflow included release of $5.2 million in reclamation deposits, replaced with surety bonds.
Outlook, risks and contingencies
- Management maintained 2014 production guidance of 37,500 gold-equivalent ounces for El Gallo 1 and expected consolidated production of 135,000–140,000 ounces, at the lower end of the range. It cited added trucks, a second ramp, pumps, additional crushing capacity and access to higher-grade ore as measures to support production.
- 2014 cost guidance was raised. Consolidated total cash costs are now $850–$950 per ounce and all-in sustaining costs $1,225–$1,325. El Gallo 1 guidance rose to $950–$1,050 and $1,200–$1,300, respectively; MSC guidance was reiterated at $750–$850 and $1,100–$1,200.
- El Gallo 2 construction had not been approved. Management estimated approximately $150 million in financing would be needed if it proceeds, and said additional capital would likely be required sometime in 2015. The decision depends on silver-price expectations and securing favorable financing. Permits remained pending, and expected approval dates had slipped for the power-line right-of-way and Palmarito permits.
- Management believed working capital could fund ongoing exploration and corporate activities for 12 months, but funding El Gallo 2 would require additional capital. Key risks include metal prices, operating conditions, financing access, foreign exchange, permitting and political/economic conditions in Argentina and Mexico.
- The company disclosed an ongoing voluntary SEC Division of Enforcement inquiry concerning the accounting treatment of Los Azules in 2013. It had responded to a fourth document request; the outcome and potential consequences were uncertain and could include costs, restatement or other action.
- Argentina’s peso devalued 29% in the first nine months of 2014. The filing also warned that continued metal-price declines could prompt further impairment charges. Surety bonds of $4.8 million support U.S. reclamation obligations; the company said it believed it was meeting its bonding obligations.
- After quarter-end, TNR Gold’s Los Azules back-in right was terminated in exchange for a 0.4% net smelter royalty, 850,000 McEwen shares and a potential sale bonus. McEwen also invested approximately $0.4 million in Visible Gold Mines.
Important facts for investors to verify
- Whether El Gallo 1’s operational improvements deliver the maintained production target and revised cost guidance.
- Whether delayed MSC shipments were sold as expected and whether MSC dividends and operating performance remain adequate.
- Cash needs, financing availability and project economics before any El Gallo 2 construction decision.
- Progress and possible consequences of the SEC inquiry, and any further Los Azules valuation or impairment developments.
- Collection timing for the $10.9 million IVA receivable, pending project permits, and exposure to metal prices and Argentine currency and political risks.
- Comparability of reported non-GAAP cost and adjusted-loss measures; the filing cautions these measures may not be comparable across companies.