McEwen Mining Inc. — 2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2013, with quarterly results including the three months ended December 31, 2013. McEwen Mining operates in Argentina, Mexico and the United States. It owns 49% of Minera Santa Cruz (MSC), which operates the San José mine, and owns the El Gallo 1 mine in Mexico. MSC is accounted for using the equity method, so its mine sales are not consolidated as company revenue.
Key financial and operating metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Consolidated gold and silver sales | $46.0 million | $6.0 million |
| Income from investment in MSC, net of amortization | $0.8 million | $20.8 million |
| Net loss | $147.7 million; $0.50 per share | $66.7 million; $0.26 per share |
| Cash used in operating activities | $42.4 million | $47.7 million |
| Cash and cash equivalents at year-end | $24.3 million | $70.9 million |
| Working capital at year-end | $35.6 million | $66.7 million |
| Total assets | $923.1 million | $1,150.9 million |
| Total liabilities | $176.3 million | $261.3 million |
The company reported no debt outstanding. Year-end current assets were $46.8 million and current liabilities were $11.2 million. Cash fell by $46.6 million during 2013. Cash used in investing activities was $3.0 million and financing activities provided $0.2 million.
Attributable production was 79,158 ounces of gold and 3.14 million ounces of silver, or approximately 139,455 gold-equivalent ounces (using a 52:1 silver-to-gold ratio). Consolidated cash cost, all-in sustaining cost and all-in cost were $776, $1,178 and $1,412 per gold-equivalent ounce, respectively. These are non-GAAP measures. Average realized prices were $1,328 per gold ounce and $21.28 per silver ounce.
For Q4 2013, consolidated gold and silver sales were $10.2 million and net loss was $11.3 million, or $0.04 per share. Production was approximately 21,000 ounces of gold and 857,000 ounces of silver, equivalent to 37,000 gold-equivalent ounces.
Material changes versus the prior comparable period
- Annual sales increased from $6.0 million as El Gallo 1 entered its first full year of operational production; the 2012 comparison includes only a partial year after the Minera Andes acquisition.
- Net loss more than doubled, primarily due to a $95.9 million impairment of the MSC investment and $63.0 million of impairment charges on mineral properties and equipment. A $53.4 million income tax recovery partly offset the loss; it included a substantial benefit from peso depreciation and impairment-related tax effects.
- Despite higher production and sales volumes at MSC, its 2013 sales declined to $240.7 million from $310.4 million on a 100% basis. Lower realized metal prices and higher operating costs outweighed volume gains. McEwen’s net equity income from MSC declined to $0.8 million from $20.8 million.
- Exploration expense decreased to $24.8 million from $47.2 million as the company conserved working capital. General and administrative expense declined to $14.0 million from $16.8 million.
- Cash and working capital contracted materially. Operating cash use improved year over year, but cash was reduced by operating outflows and the absence of the prior year’s acquisition proceeds and equity financing.
Outlook, management commentary and risks
- Management forecast 2014 consolidated production of 135,000–140,000 gold-equivalent ounces, approximately in line with 2013, using a 60:1 silver-to-gold ratio. San José attributable guidance was 97,500 gold-equivalent ounces; El Gallo 1 guidance was 37,500 ounces.
- El Gallo 1’s capacity expansion from 3,000 to 4,500 tonnes per day was expected to be completed in April 2014 and fully operational in the second half of 2014. Estimated total cost was $3.0 million.
- El Gallo 2 had received its principal construction and operating permits, but the company had not made a final construction decision. Estimated remaining capital was approximately $150 million after proposed cost savings; management said development would depend on silver prices and obtaining financing on acceptable terms. The filing states current working capital was insufficient to fund the project.
- Gold Bar was in permitting; management’s preliminary target was production in 2016, subject to permitting, financing and project economics. Los Azules remained an early-stage, high-capital project: its preliminary economic assessment estimated initial capital of $3.9 billion and total life-of-mine capital of $5.5 billion, with no demonstrated reserve or full feasibility study.
- Key risks include metal-price declines, inflation and currency volatility, Argentina’s foreign-exchange and export-repatriation restrictions, political and regulatory uncertainty, Mexico’s new mining duties effective in 2014, permitting and water access, safety and security, and the need for external capital. The Argentine reserve tax is disputed: MSC challenged its legality and paid the initial installment under protest; the interpretation and final liability were unresolved.
- San José is controlled and operated by Hochschild, not McEwen. The company cautioned that its reported operating information for MSC was supplied by MSC and was not independently verified by McEwen. The 2012 San José reserve estimate was the most recent available in the filing and did not reflect 2013 production.
- The company reported no material legal proceedings. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether 2014 production and cost guidance was achieved, and whether the El Gallo 1 capacity expansion delivered the expected throughput and recovery.
- How El Gallo 2 was ultimately financed, its final capital requirements, and whether management proceeded with construction.
- Updated San José reserves and operating results, including the effect of metal prices, Argentine inflation, currency controls and the disputed provincial reserve tax.
- The assumptions and valuation sensitivity behind the $95.9 million MSC impairment and the $63.0 million property impairments; the filing’s MSC valuation used a 10% discount rate and long-term prices of $1,300 gold and $22.75 silver per ounce.
- Liquidity and funding needs against continuing operating cash outflows, $32.2 million of contractual obligations, project spending and potential equity issuance or dilution.
- Recovery and inventory assumptions at El Gallo 1: cumulative gold recovery from startup through year-end 2013 was 61%, and leach-pad recovery estimates are inherently uncertain.
- Distinguish the company’s NI 43-101 resource disclosures from SEC Guide 7 reserves: apart from its 49% interest in San José, the company reported no SEC-defined proven and probable reserves.