Business context and reporting period
McEwen Mining Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company explores, develops and produces precious metals in Argentina, Mexico and the United States. Its producing assets were El Gallo 1 in Mexico and a 49% equity-method interest in the San José mine in Argentina, operated by Minera Santa Cruz S.A. (MSC). Dollar amounts below are U.S. dollars.
Key financial and operating metrics
| Metric | Q3 2013 | Nine months 2013 |
|---|---|---|
| Gold and silver sales | $11.8 million | $35.7 million |
| Income from MSC, net of amortization | $2.0 million | $0.3 million |
| Net income (loss) | $3.3 million | $(136.4) million |
| Basic and diluted earnings (loss) per share | $0.01 | $(0.46) |
| Gold-equivalent ounces produced | 36,494 | Approximately 102,000 |
| Gold-equivalent ounces sold | 36,512 | 101,854 |
| Consolidated cash costs per gold-equivalent ounce | $749 | $793 |
| Consolidated all-in sustaining costs per gold-equivalent ounce | $1,081 | $1,223 |
Cash used in operating activities was $36.8 million for the first nine months, compared with $39.6 million in the prior-year period. Cash and cash equivalents were $31.1 million at September 30, 2013, down from $70.9 million at December 31, 2012. Working capital was $39.5 million, versus $66.7 million at year-end. The company reported no debt. Gross margin is not separately presented in the filing.
Material changes versus prior comparable periods
- Q3 net income compared with a $2.7 million net loss in Q3 2012. Higher El Gallo 1 sales and a larger income-tax recovery were partly offset by lower MSC equity income.
- The nine-month net loss widened from $40.4 million in 2012, principally due to a $95.9 million impairment of the MSC investment, $27.7 million of impairment on Santa Cruz mineral properties, a $6.3 million Nevada claims write-off and a $6.4 million loss on sale of Nevada claims.
- El Gallo 1 contributed $35.7 million of sales in the nine-month period; comparable 2012 sales were only $0.5 million as the mine was newly entering production. MSC income, net of purchase-accounting amortization, fell to $0.3 million from $15.0 million.
- MSC’s Q3 sales were down 40% year over year to $69.7 million (100% basis), reflecting lower prices and fewer ounces sold; nine-month sales declined to $182.0 million from $232.4 million despite higher sales volumes.
- Cash costs and sustaining costs per gold-equivalent ounce improved year over year in Q3. Management cited Argentine peso depreciation and cost controls, while noting inflationary pressures in Argentina.
Outlook, commentary, risks and unusual items
- Management forecast 2013 El Gallo 1 production of 27,300 gold-equivalent ounces; the mine had produced 23,370 ounces through September. Its expansion was reported ahead of schedule, with completion expected by the end of Q1 2014 and estimated cost reduced to $3 million from $5 million.
- El Gallo 2 remained under evaluation: a heap-leach option was estimated at about $30 million, with expected silver recovery of 55–60% and further testing planned through Q4 2014. The conventional mill estimate was about $180 million before possible 10–15% design savings. The key construction/operations permit remained under review. Management said conventional-mill development would require additional financing; available working capital was considered sufficient for ongoing exploration and corporate needs over the next 12 months.
- Other initiatives included permitting work at Gold Bar, an updated Los Azules preliminary economic assessment, and an October agreement to contribute certain Santa Cruz exploration properties to MSC in exchange for a 2% net smelter return royalty on production from contributed properties. The transfer was subject to registration and expected in Q4 2013.
- Unusual items included the large non-cash impairments, a $31.0 million income-tax recovery for the nine-month period (including foreign-exchange remeasurement of deferred taxes), and a $0.6 million gain on settlement of the TNR Gold litigation.
- Key exposures include gold and silver prices, Argentine inflation, currency devaluation and restrictions, a new Santa Cruz mining-property tax, uncertain collection timing for Mexico IVA tax receivables, pending permits and financing needs. A proposed Mexican mining tax reform was approved by the Senate; the company was evaluating its prospective impact. Management also cautioned that San José operating data is supplied by MSC and was not independently verified.
- Cash costs, all-in sustaining costs and realized prices are non-GAAP measures and may not be comparable across companies. Resource and reserve disclosure is subject to U.S./Canadian reporting-standard differences and uncertainty.
Most important facts for investors to verify
- Whether El Gallo 1 meets the stated production forecast and completes its expansion on schedule and within the revised budget.
- El Gallo 2’s final processing choice, capital requirements, permitting timeline and financing plan.
- The assumptions and valuation inputs behind the $95.9 million MSC impairment and the Santa Cruz property impairments.
- Whether MSC earnings, distributions and operating results recover amid lower metal prices, Argentine inflation, currency and tax risks.
- Cash use, working-capital sufficiency, IVA receivable collection and any future equity or debt financing needs.
- The effective impact of Mexican tax reform and the outcome of the Santa Cruz mining-tax challenge and property-transfer agreement.