McEwen Mining Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statements are unaudited and reported in U.S. dollars. The company operates the El Gallo 1 mine in Mexico and holds a 49% equity-method interest in Minera Santa Cruz S.A. (MSC), operator of the San José mine in Argentina.
Key financial and operating metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Gold and silver sales | $14.6 million | $16.2 million | $35.8 million | $39.0 million |
| Net income (loss) | $8.4 million | $(14.1) million | $21.3 million | $(8.1) million |
| Net income (loss) per share | $0.03 | $(0.05) | $0.07 | $(0.03) |
| Cash provided by operating activities | Six-month figure: $19.6 million | Prior-year six-month figure: $6.0 million |
- Q2 operating income was $6.7 million, versus an operating loss of $29.7 million a year earlier. The prior-year result included a $28.5 million impairment charge. Q2 2016 also benefited from $4.1 million income from the MSC investment, compared with a $2.7 million loss in Q2 2015. Six-month MSC investment income was $9.1 million, versus a $2.3 million loss.
- Q2 production costs applicable to sales were $5.8 million; the corresponding six-month amount was $14.8 million. Consolidated non-GAAP earnings from mining operations were $19.3 million for Q2 and $38.8 million for the first half, versus $13.4 million and $30.6 million, respectively, in 2015.
- Consolidated non-GAAP cash costs per gold-equivalent ounce sold were $719 in Q2 and $663 for the first half; all-in sustaining costs were $942 and $873, respectively. Q2 all-in costs were $1,201 per ounce, including the El Gallo royalty acquisition. These non-GAAP measures are not standardized under U.S. GAAP.
- Gold and silver sales are principally from El Gallo 1; MSC’s mine sales are not consolidated as revenue. McEwen records its share of MSC results as investment income.
- At June 30, cash and cash equivalents were $36.7 million, investments were $4.7 million, and working capital was $47.6 million, up from $32.4 million at year-end 2015. The company reported no outstanding debt after repaying its $3.4 million Mexican bank balance in January. Total liabilities were $50.8 million and shareholders’ equity was $442.3 million.
- Cash rose $10.9 million in the first half. Operating cash flow benefited from $9.5 million of Mexican VAT collections and $5.4 million of MSC dividends; investing cash use was $5.2 million, including the royalty purchase, and financing cash use was $3.6 million.
Changes versus the prior comparable period
- First-half sales declined 8%, while first-half gold-equivalent ounces sold rose slightly to 75.0 thousand from 73.7 thousand; the filing cites lower El Gallo sales and a different mine mix as factors. Q2 sales fell about 10%, principally due to fewer El Gallo ounces sold, partly offset by higher realized metal prices.
- El Gallo Q2 production declined 11% to 15.6 thousand gold-equivalent ounces as processed tonnes and grades fell after mining shifted from the higher-grade Samaniego pit to the lower-grade Lupita pit. First-half consolidated gold and silver production increased compared with 2015, supported by higher San José output.
- MSC’s stronger performance was a major earnings improvement: its Q2 net sales rose to $58.6 million from $49.9 million, and its six-month net income was $19.2 million versus a net loss of $1.8 million on a 100% basis.
- Exploration and general and administrative spending declined, while mine-development expense rose to $1.3 million in Q2, mainly for Gold Bar and El Gallo 2. The company acquired the El Gallo 1/El Gallo 2 royalty for $5.3 million upfront, with a conditional $1.0 million deferred payment.
Outlook, commentary, risks and unusual items
- Management maintained 2016 guidance of 99,500 gold ounces and 3.3 million silver ounces; consolidated production guidance was 140,000–150,000 gold-equivalent ounces. El Gallo 1 guidance was 54,500 gold ounces; McEwen’s San José attributable guidance was 45,000 gold ounces and 3.3 million silver ounces.
- Gold Bar was targeted for construction in 2017 and production in 2018, subject to permitting. The company budgeted about $3.5 million for Gold Bar in 2016 and had spent $1.2 million by June 30. El Gallo 2 had a $1.5 million 2016 budget, primarily for feasibility and metallurgical work.
- Management estimated additional capital needs of approximately $60 million for Gold Bar or $150 million for El Gallo 2 if either project receives a positive development decision. Funding could require debt, equity, equipment leasing or other financing; available working capital alone is insufficient for either project. Management believed existing working capital would fund ongoing operations and activities for the next 12 months.
- Notable non-operating items included a $1.7 million unrealized gain on newly acquired Golden Predator warrants and a $0.9 million first-half impairment of marketable securities. First-half income tax recovery was $2.7 million, including effects of Argentine peso devaluation. The 2015 comparison included a $10.0 million tax recovery associated with the Nevada impairment.
- Key risks include metal-price and foreign-exchange volatility, permitting and development execution, ability to raise project capital, uncertainty around mineral resources and reserve conversion, and reliance on MSC data and decisions. McEwen does not control MSC’s day-to-day operations. The filing cautions that most company properties do not have SEC Industry Guide 7 reserves; resources should not be assumed to be economically mineable reserves.
- The company disclosed $2.6 million of Mexican VAT receivables and stated that collection timing is uncertain. It also had environmental reclamation surety bonds of approximately $4.8–$4.9 million. No material change to previously disclosed risk factors was reported.
- After quarter-end, the company announced plans to redeem outstanding exchangeable shares for common shares, with the expected acquisition date of August 22, 2016. This would increase common shares outstanding through conversion.
Important facts for investors to verify
- Progress against production guidance, especially grade, recovery and cost trends at the lower-grade Lupita pit and operating performance at San José.
- Gold Bar permitting, feasibility and engineering progress, project capital estimates, and whether financing can be obtained on acceptable terms; also verify El Gallo 2 feasibility and capital assumptions.
- Composition and sustainability of reported earnings, including MSC equity-method income, foreign-exchange-related tax recoveries, warrant valuation gains and investment impairments.
- Timing and recoverability of Mexican VAT receivables, and the status and adequacy of reclamation bonding.
- Conversion of exchangeable shares and resulting dilution; separately assess non-GAAP cost and earnings measures alongside the GAAP statements.