McEwen Mining Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are U.S. dollars unless stated otherwise. The company explores, develops and produces gold and silver, and explores for copper, across the U.S., Canada, Mexico and Argentina. It owns the Gold Bar, Black Fox and El Gallo operations/projects and a 49% equity-method interest in the San José mine through Minera Santa Cruz (MSC).
Financial and operating performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Gold and silver sales revenue | $27.4 million | $32.7 million | $77.1 million | $84.7 million |
| Gross profit (loss) | ($0.7) million | $1.6 million | ($13.3) million | $7.7 million |
| Operating loss | ($10.1) million | ($17.8) million | ($130.6) million | ($39.5) million |
| Net loss | ($9.8) million | ($11.5) million | ($128.8) million | ($34.6) million |
| Net loss per share | ($0.02) | ($0.03) | ($0.32) | ($0.10) |
| Cash used in operating activities | ($5.2) million | ($12.8) million | ($25.3) million | ($21.9) million |
Reported sales revenue excludes MSC, which is accounted for using the equity method. Q3 production was 30,400 attributable gold-equivalent ounces, versus 45,900 a year earlier; sales were 30,500 ounces versus 45,800. For wholly owned operations, Q3 average realized price was $1,925 per ounce, while cash cost was $1,583 and all-in sustaining cost (AISC) was $1,713 per ounce. These cost and price measures are non-GAAP.
At September 30, cash and cash equivalents were $8.0 million, with restricted cash of $13.8 million; combined cash and restricted cash was $21.7 million. Working capital was $21.6 million. Restricted cash includes $10.2 million earmarked for Canadian exploration spending. Debt carrying value was approximately $48.0 million, compared with $49.5 million at year-end 2019. Total assets were $506.2 million and shareholders’ equity was $380.8 million.
Changes versus comparable periods
- Q3 revenue fell 16% year over year as fewer ounces were sold, partly offset by higher realized prices. Nine-month revenue declined 9%.
- Q3 net loss narrowed from $11.5 million to $9.8 million, helped by lower exploration expense and a $2.6 million contribution from MSC. Q3 gross results nevertheless shifted from profit to loss.
- Nine-month net loss widened substantially, principally due to an $83.8 million non-cash impairment of Gold Bar assets recorded in Q1. The charge reflected a revised resource outlook and expected lower future production.
- Production costs applicable to sales were nearly flat in Q3 despite fewer ounces, and rose 25% for the nine-month period as higher unit costs outweighed lower sales volumes. Nine-month production costs were $74.3 million versus $59.4 million.
- Operating cash use increased to $25.3 million for the first nine months. Capital additions fell to $9.3 million from $27.0 million, largely because Gold Bar construction had been completed in 2019.
- Gold Bar, Black Fox and San José operations were disrupted by COVID-19 shutdowns and subsequent ramp-ups. San José remained below normal capacity in Q3. The company recognized $5.3 million of U.S. and Canadian government relief as other income in the first nine months.
Outlook, risks and notable items
- Management expected San José to return toward normal operating capacity by year-end 2020, subject to COVID-related travel restrictions and personnel mobilization. All company operations had restarted, but pandemic impacts on production, costs, cash flow and liquidity continued.
- A revised Gold Bar reserve estimate and feasibility-study update were expected toward the end of Q4 2020. The company was reviewing Gold Bar’s mine plan following the resource reduction and impairment; Gold Bar South was expected to begin mining in the second half of 2021, subject to permitting and execution.
- Froome access development was 47% complete at quarter-end; the company expected to reach the deposit in Q2 2021 and begin production in Q4 2021. Black Fox had less than one year of expected mine life, with potential extension dependent on exploration and development. A Black Fox complex PEA was expected in Q4 2020.
- The Fenix feasibility study was expected in Q4 2020. The September flow-through share offering generated $10.4 million gross proceeds for eligible Canadian exploration, with the company expecting to meet spending commitments in 2021.
- The June 2020 debt amendment extended scheduled principal repayments by two years: monthly $2.0 million repayments were scheduled to begin in August 2022, followed by a $26.0 million final payment in August 2023. The company reported compliance with covenants at September 30, but warned that Gold Bar’s lower expected cash flow, Black Fox challenges, Froome development commitments and COVID-19 disruption could threaten future cash generation and covenant compliance.
- Management was evaluating capital markets access, asset sales and spending reductions to support liquidity. It concluded that no material uncertainty cast substantial doubt on going concern for the next 12 months, while noting that the conclusion depended on forecasts and successful execution of mitigating plans.
- Other risks include commodity-price and currency volatility, permitting and operating uncertainty, reclamation obligations, and reliance on MSC and its operating partner. The company does not hedge gold or silver sales. It also has a long-term Black Fox gold-stream agreement requiring delivery of a portion of production at a capped price.
Investor verification checklist
- Review the updated Gold Bar reserve, mine plan, feasibility study and assumptions underpinning the $83.8 million impairment.
- Track unrestricted liquidity separately from restricted cash, operating cash burn, and progress on proposed financing, asset sales or cost reductions.
- Verify debt covenant headroom and compliance as working-capital requirements rise, and assess repayment obligations under the amended facility.
- Monitor production, grades, unit costs and restart progress at Gold Bar, Black Fox and San José, including COVID-related constraints.
- Assess whether Froome and other development plans remain on schedule and within available funding, and whether exploration results can extend Black Fox mine life.
- Consider share dilution: common shares outstanding increased to 408.8 million from 400.3 million at December 31, 2019; the September flow-through financing also carries restricted spending requirements.