McEwen Mining Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results are in U.S. dollars; financial statement amounts below are converted from thousands to millions where indicated.
Business context
McEwen explores, develops and produces gold and silver in the U.S., Canada and Mexico, and explores copper in Argentina. It owns the Gold Bar mine, the operating Froome mine and other Fox Complex properties, and holds a 76% interest in the Los Azules copper project and a 49% equity-method interest in the producing San José mine, operated by Hochschild Mining.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Gold and silver sales revenue | $30.6m | $40.7m | $56.2m | $64.4m |
| Gross profit (loss) | $4.2m | $4.1m | ($1.8m) | ($0.9m) |
| Net loss attributable to McEwen shareholders | ($12.5m) | ($6.0m) | ($33.2m) | ($18.5m) |
| Loss per share | ($0.26) | ($0.13) | ($0.71) | ($0.41) |
| Cash used in operating activities | Not stated in the cash flow statement for the quarter | Not stated in the cash flow statement for the quarter | ($44.4m) | ($8.1m) |
Q2 cash gross profit, a non-GAAP measure, was $7.7m versus $9.6m. Q2 revenue declined 25%, principally due to lower ounces sold; the average realized price for wholly owned operations rose to $1,865 per gold-equivalent ounce from $1,830. Q2 production was 36,218 GEOs, including 16,565 from wholly owned operations and 19,653 attributable to McEwen’s 49% San José interest. Wholly owned production was down year over year, while attributable San José production increased.
At June 30, cash and cash equivalents were $44.0m; cash plus restricted cash was $47.8m, down from $60.6m at year-end. Working capital was $28.1m. Current assets were $72.3m and current liabilities $44.2m. Debt was $63.7m, up from $48.9m at December 31, 2021; it included a $15.0m related-party subordinated note. Total liabilities were $138.7m. H1 investing cash use was $8.0m and financing cash inflow was $39.5m.
The company reported Q2 average cash costs and AISC per ounce of $1,169 and $1,549 for wholly owned operations, and $1,144 and $1,468 for San José on a 49% attributable basis. These are non-GAAP metrics; definitions and reconciliations are in the filing.
Material changes and developments
- Q2 operating loss was $16.6m versus $8.9m a year earlier. Los Azules advanced-project expense was $14.1m in Q2 and $23.8m in H1, driving much of the increased loss and spending.
- Gold Bar produced 5,109 GEOs in Q2, down 64% year over year, amid carbonaceous material and mining-contractor staffing constraints. Froome/Fox Complex production rose 59% as Froome ramped up; mill maintenance and COVID-related personnel costs pressured costs.
- Q2 other income included a $6.1m foreign-currency gain, principally related to funding transfers to Argentina using marketable securities. The company reported $5.8m total other income for the quarter. Such gains may fluctuate.
- McEwen Copper completed a $15.0m second-tranche private placement in June; the company’s ownership in McEwen Copper was 76% at June 30. The subsidiary’s equity issuance increased non-controlling interests.
- The company issued a $15.0m unsecured subordinated note to an entity controlled by Chairman and CEO Robert McEwen, bearing 8% interest and due by September 25, 2025. The senior secured facility was amended: scheduled principal repayments now begin August 2023, with final payment due March 2025. The company said it was compliant with its covenants at quarter-end.
- After quarter-end, the company effected a one-for-ten reverse stock split, effective for trading July 28, 2022, to address NYSE minimum-price requirements. The filing reports 47,427,325 shares outstanding as of August 10; share amounts in the financial statements were retroactively restated for the split.
Outlook, risks and contingencies
- Management said available liquidity and expected operating funds should cover anticipated operating, capital and working-capital needs for the next 12 months. This is management’s assessment, not a guarantee; H1 operating cash use was $44.4m.
- Gold Bar South received regulatory approval on April 1, with development and production expected to begin in H2 2022. The filing also anticipated an updated Los Azules PEA and continued work toward feasibility-study detail; the drilling program was affected by contractor, labor and equipment constraints and weather. Management’s timing and project expectations are forward-looking.
- The Fox Complex PEA described a potential 12-year mine life and peak annual production of 100,000 ounces in years 6–10. These are study estimates, not production guidance. The company was evaluating strategic alternatives for Fenix, including potential divestiture of its Mexican business unit.
- Key risks include commodity-price and currency volatility, inflation and operating-cost pressures, access to labor, supplies and capital, permitting, COVID-19 effects, and reliance on the majority partner’s decisions at San José. McEwen does not hedge gold and silver sales. A 10% change in gold and silver prices was estimated to affect Q2 revenue by approximately $3.0m.
- Reclamation and remediation liabilities totaled $38.3m, including $11.2m current; the company also had $37.7m of surety bonding for reclamation obligations. It disclosed a long-term Black Fox gold stream requiring delivery of 8% of mine production and 6.3% from adjoining Pike River claims at a contract price subject to stated terms.
- A July 27 subsequent-event agreement provides for up to $10m, or 5,000 ounces of gold, in prepayment for future production. Repayment of principal and interest is in bullion; interest is SOFR plus 5%, and the revolving facility runs to February 2023, with an option to renew.
- The CFO and COO left during the quarter; interim responsibilities were assigned to Perry Ing and director William Shaver, respectively. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the reported Q2 net loss: the financial statements show $12.4m net loss after tax and $12.5m attributable to McEwen shareholders, while one MD&A highlights passage states a $6.4m loss. The filing does not explain this discrepancy.
- Confirm the effect of the reverse split on the trading price, listing compliance, and reported share counts; the risk discussion describes the pre-split listing concern, while the split was completed after quarter-end.
- Track cash burn, funding needs, debt repayments and covenant headroom, including the related-party note and the bullion prepayment facility.
- Monitor Gold Bar recovery, mining rates and Gold Bar South start-up; Froome operating costs and resource updates; and progress, financing and study timing at Los Azules.
- Assess the quality and repeatability of Q2 earnings and liquidity, including foreign-exchange gains, non-GAAP cost measures, San José distributions, and the company’s ability to meet flow-through exploration-spending commitments.