10-Q 1 a12-13791_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from                to              

 

Commission File Number: 001-33190

 

MCEWEN MINING INC.

(Exact name of registrant as specified in its charter)

 

Colorado

 

84-0796160

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

Bay Wellington Tower, 181 Bay Street, Suite 4750, Toronto, Ontario Canada M5J 2T3

(Address of principal executive offices)  (Zip code)

 

(866) 441-0690

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 184,111,345 shares outstanding as of August 2, 2012 (and 84,183,039 exchangeable shares).

 

 

 



Table of Contents

 

MCEWEN MINING INC.

 

FORM 10-Q

 

Index

 

 

Part I      FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2012 and 2011 (unaudited)

3

 

 

 

 

Consolidated Balance Sheets at June 30, 2012 (unaudited) and December 31, 2011

4

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2012 and 2011 (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)

6

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

36

 

 

 

Item 4.

Controls and Procedures

37

 

 

 

 

Part II    OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

38

 

 

 

Item 6.

Exhibits

40

 

 

 

SIGNATURES

41

 

2



Table of Contents

 

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

(in thousands, except per share)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

REVENUE

 

 

 

 

 

 

 

 

 

Income on investment in Minera Santa Cruz S.A.

 

$

1,595

 

$

 

$

5,597

 

$

 

Amortization of fair value increments

 

(1,803

)

 

(4,607

)

 

 

 

(208

)

 

990

 

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

General and administrative

 

4,089

 

2,143

 

8,816

 

3,519

 

Acquisition costs

 

47

 

208

 

1,442

 

208

 

Property holding costs

 

407

 

155

 

1,980

 

1,108

 

Exploration costs

 

10,073

 

10,626

 

21,857

 

17,535

 

Mine construction costs

 

6,994

 

 

8,635

 

 

Mine operating costs

 

3,494

 

 

6,216

 

 

Accretion of asset retirement obligation

 

120

 

137

 

232

 

266

 

Depreciation

 

263

 

139

 

484

 

259

 

Gain on sale of assets

 

(128

)

 

(130

)

(10

)

Asset impairments

 

179

 

 

179

 

 

Total costs and expenses

 

25,538

 

13,408

 

49,711

 

22,885

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(25,746

)

(13,408

)

(48,721

)

(22,885

)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest income

 

57

 

22

 

182

 

31

 

Interest expense

 

 

(6

)

 

(17

)

Gain on sale of gold and silver bullion - note 4

 

434

 

 

1,842

 

524

 

Unrealized loss on silver bullion - note 4

 

(359

)

 

(359

)

 

Other-than-temporary impairment on marketable equity securities - note 3

 

(1,993

)

 

(1,993

)

 

Foreign currency gain

 

79

 

238

 

46

 

459

 

Total other (expense) income

 

(1,782

)

254

 

(282

)

997

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(27,528

)

(13,154

)

(49,003

)

(21,888

)

Recovery of income taxes - note 2

 

6,277

 

 

8,550

 

 

Net loss

 

(21,251

)

(13,154

)

(40,453

)

(21,888

)

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE LOSS

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities, net of taxes

 

1,375

 

(1,463

)

999

 

(866

)

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(19,876

)

$

(14,617

)

$

(39,454

)

$

(22,754

)

Basic and diluted per share data:

 

 

 

 

 

 

 

 

 

Net loss - basic and diluted

 

$

(0.08

)

$

(0.09

)

$

(0.16

)

$

(0.16

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

- basic and diluted

 

268,009

 

139,646

 

251,001

 

134,310

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

MCEWEN MINING INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

23,398

 

$

13,416

 

Short-term investments

 

 

3,933

 

Marketable equity securities - note 3

 

486

 

1,480

 

Gold and silver bullion (market value - 2012 - $13,994; 2011 - $24,483) - note 4

 

12,963

 

22,810

 

IVA taxes receivable

 

6,068

 

2,983

 

Other inventories

 

834

 

139

 

Prepaid and other current assets

 

2,967

 

3,122

 

Assets held for sale - note 7

 

1,763

 

 

Total current assets

 

48,479

 

47,883

 

 

 

 

 

 

 

Mineral property interests - note 5

 

843,764

 

245,454

 

Restrictive time deposits for reclamation bonding - note 5

 

5,190

 

5,190

 

Investment in Minera Santa Cruz S.A. - note 6

 

225,989

 

 

Property and equipment, net - note 7

 

13,742

 

11,772

 

Other assets

 

54

 

56

 

TOTAL ASSETS

 

$

1,137,218

 

$

310,355

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

8,223

 

$

5,612

 

Current portion of asset retirement obligation - note 5

 

510

 

512

 

Total current liabilities

 

8,733

 

6,124

 

 

 

 

 

 

 

Asset retirement obligation, less current portion - note 5

 

6,108

 

5,741

 

Deferred income tax liability - note 2

 

268,615

 

78,786

 

Other liabilities

 

400

 

400

 

Total liabilities

 

$

283,856

 

$

91,051

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, no par value, 500,000 shares authorized;

 

 

 

 

 

Common: 183,207 shares as of June 30, 2012 and 136,572 shares as of December 31, 2011 issued and outstanding

 

 

 

 

 

Exchangeable: 2012: 85,088 shares as of June 30, 2012 and nil shares as of December 31, 2011 issued and outstanding

 

 

 

 

 

Exchangeable: 2007: nil shares as of June 30, 2012 and 3,181 shares as of December 31, 2011 issued and outstanding

 

1,287,343

 

613,831

 

Accumulated deficit

 

(433,691

)

(393,238

)

Accumulated other comprehensive loss

 

(290

)

(1,289

)

Total shareholders’ equity

 

853,362

 

219,304

 

 

 

 

 

 

 

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

 

$

1,137,218

 

$

310,355

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands)

 

 

 

Common Stock

 

Accumulated
Other
Comprehensive

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Loss

 

Deficit

 

Total

 

 

 

 

 

Balance, December 31, 2010

 

122,186

 

$

504,389

 

$

257

 

$

(331,366

)

$

173,280

 

Stock-based compensation

 

 

1,222

 

 

 

1,222

 

Sale of shares for cash, net of issuance costs

 

17,250

 

105,415

 

 

 

105,415

 

Exercise of stock options

 

163

 

412

 

 

 

412

 

Exercise of stock options from 2007 acquisition

 

70

 

361

 

 

 

361

 

Shares issued for Mexico mining concessions

 

42

 

325

 

 

 

325

 

Unrealized loss on marketable equity securities

 

 

 

(866

)

 

(866

)

Net loss

 

 

 

 

(21,888

)

(21,888

)

Balance, June 30, 2011

 

139,711

 

$

612,124

 

$

(609

)

$

(353,254

)

$

258,261

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

139,753

 

$

613,831

 

$

(1,289

)

$

(393,238

)

$

219,304

 

Stock-based compensation

 

 

2,135

 

 

 

2,135

 

Issuance of exchangeable shares to acquire Minera Andes Inc.

 

127,331

 

664,671

 

 

 

664,671

 

Assumption of stock options in connection with the acquisition of Minera Andes Inc.

 

 

3,175

 

 

 

3,175

 

Exercise of stock options

 

317

 

594

 

 

 

594

 

Exercise of stock options from Minera Andes Inc.

 

852

 

2,710

 

 

 

2,710

 

Shares issued for Mexico mining concessions

 

42

 

227

 

 

 

227

 

Realized loss on marketable equity securities

 

 

 

(994

)

 

(994

)

Other-than-temporary impairment on marketable equity securities

 

 

 

1,993

 

 

1,993

 

Net loss

 

 

 

 

(40,453

)

(40,453

)

Balance, June 30, 2012

 

268,295

 

$

1,287,343

 

$

(290

)

$

(433,691

)

$

853,362

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

5



Table of Contents

 

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

For Six Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

Cash flows (used in) from operating activities:

 

 

 

 

 

Cash paid to suppliers and employees

 

$

(42,781

)

$

(22,372

)

Interest received

 

125

 

31

 

Cash used in operating activities

 

(42,656

)

(22,341

)

Cash flows (used in) provided by investing activities:

 

 

 

 

 

Cash and short-term investments received from acquisition of Minera Andes Inc.

 

36,337

 

 

Short-term investments (net)

 

3,933

 

 

Acquisition of mineral property interests

 

(563

)

(792

)

Additions to property and equipment

 

(1,658

)

(7,196

)

Proceeds from disposal of property and equipment

 

53

 

23

 

Investment in gold and silver bullion

 

 

(31,299

)

Proceeds from sale of gold and silver bullion

 

11,330

 

2,173

 

Increase in restricted investments securing reclamation

 

 

(413

)

Cash provided by (used in) investing activities

 

49,432

 

(37,504

)

Cash flows from financing activities:

 

 

 

 

 

Sale of common stock for cash, net of issuance costs

 

 

105,415

 

Exercise of stock options

 

3,304

 

773

 

Cash provided by financing activities

 

3,304

 

106,188

 

Effect of exchange rate change on cash and cash equivalents

 

(98

)

190

 

Increase in cash and cash equivalents

 

9,982

 

46,533

 

Cash and cash equivalents, beginning of period

 

13,416

 

6,818

 

Cash and cash equivalents, end of period

 

$

23,398

 

$

53,351

 

 

 

 

 

 

 

Reconciliation of net loss to cash used in operating activities:

 

 

 

 

 

Net loss

 

$

(40,453

)

$

(21,888

)

Adjustments to reconcile net loss from operating activities:

 

 

 

 

 

Income on investment in Minera Santa Cruz S.A. (net of amortization)

 

(990

)

 

Deferred income taxes

 

(8,550

)

 

Gain on sale of gold and silver bullion

 

(1,842

)

(524

)

Unrealized loss on silver bullion

 

359

 

 

Other-than-temporary impairment on marketable equity securities

 

1,993

 

 

Gain on sale of assets

 

(130

)

(10

)

Asset impairments

 

179

 

 

Stock-based compensation

 

2,135

 

1,222

 

Accretion of asset retirement obligation

 

232

 

266

 

Depreciation

 

484

 

259

 

Foreign exchange loss (gain)

 

98

 

(190

)

Change in non-cash working capital items:

 

 

 

 

 

Increase in other assets related to operations

 

(2,810

)

(2,311

)

Dividend receivable obtained from acquisition of Minera Andes Inc.

 

9,363

 

 

(Increase) decrease in liabilities related to operations

 

(2,724

)

835

 

Cash used in operating activities

 

$

(42,656

)

$

(22,341

)

 

The accompanying notes are an integral part of these consolidated financial statements

 

6



Table of Contents

 

MCEWEN MINING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2012

 

NOTE 1  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Basis of Presentation

 

McEwen Mining Inc. (the “Company” or “McEwen Mining”) was organized under the laws of the State of Colorado on July 24, 1979.  Since inception, the Company has been engaged in the exploration for, development of, production and sale of gold and silver. On January 24, 2012, the Company changed its name from US Gold Corporation to McEwen Mining Inc. after the completion of the acquisition, by way of a statutory plan of arrangement under the laws of the Province of Alberta, Canada, of Minera Andes Inc. (“Minera Andes”).

 

As a result of the acquisition of Minera Andes, the Company acquired a 49% interest in Minera Santa Cruz S.A. (“MSC”), owner of the producing San José Silver-Gold Mine in Santa Cruz, Argentina; a 100% interest in the Los Azules Copper Deposit in San Juan, Argentina, and a large portfolio of exploration properties in Santa Cruz, Argentina.  The San José Mine is operated by the majority owner of the joint venture, Hochschild Mining plc (‘‘Hochschild’’).

 

The Company is currently in its final stages of constructing Phase 1 of the El Gallo Complex in Mexico, with gold production scheduled to begin during the second half of 2012.

 

The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) has been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included are adequate to make the information presented not misleading.

 

In management’s opinion, the unaudited consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2012 and 2011, the consolidated balance sheets as at June 30, 2012 (unaudited) and December 31, 2011, the unaudited consolidated statement of changes in shareholders’ equity for the six months ended June 30, 2012 and 2011, and the unaudited consolidated statements of cash flows for the six months ended June 30, 2012 and 2011, contained herein, reflect all adjustments, consisting solely of normal recurring items, which are necessary for the fair presentation of the Company’s financial position, results of operations and cash flows on a basis consistent with that of the Company’s prior audited consolidated financial statements.  However, the results of operations for the interim periods may not be indicative of results to be expected for the full fiscal year.  Therefore these financial statements should be read in conjunction with the audited financial statements and notes thereto and summary of significant accounting policies included in the Company’s Form 10-K for the year ended December 31, 2011.  Except as noted below, there have been no material changes in the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s Form 10-K.

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All inter-company accounts and transactions have been eliminated.

 

Significant Accounting Policies

 

Business Combinations The Company accounts for business combinations using the acquisition method of accounting pursuant to Accounting Standards Codification (“ASC”) Topic 805 — Business Combinations.  The acquisition method requires the Company to determine the fair value of all acquired assets, including identifiable intangible assets, and all assumed liabilities.  The total cost of acquisitions is allocated to the underlying identifiable net assets, based on their respective estimated fair values.  Determining the fair value of assets acquired and liabilities assumed requires management’s judgment, and the utilization of independent valuation experts, and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, and asset lives, among other items.  Transaction costs are expensed as incurred and are reported on the acquisition costs line within the consolidated statements of operations and comprehensive loss.

 

7



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 1  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Investments — Equity Method and Joint Ventures - The Company accounts for investments over which the Company exerts significant influence using the equity method of accounting pursuant to ASC Topic 323 — Investments, Equity Method and Joint Ventures.  Under this method, the Company’s share of earnings and losses is included in the consolidated statement of operations and comprehensive loss and the balance of the investment is adjusted by a like amount.  Under the equity method, dividends received from an investee are recorded as decreases in the investment account, not as income.  Where there has been a loss in value that is other than a temporary decline, the carrying value is reduced to its fair value.

 

IVA taxes receivable — In Mexico, value added taxes (IVA) are assessed on purchases of materials and services and sales of products.  Businesses are generally entitled to recover the taxes they have paid related to purchases of materials and services, either as a refund or as a credit against future taxes payable.  In Argentina, except at the San José Mine, the Company expenses all IVA as their recoverability is uncertain.

 

Ore Stockpile Inventories Ore stockpile inventories are carried at the lower of average cost or net realizable value, if commercial production is achieved. Net realizable value represents the estimated future sales price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the product to sale. Write-downs of ore stockpiles and concentrate inventories, resulting from net realizable value impairments, are reported as a component of production costs applicable to sales. The current portion of ore stockpiles is determined based on the expected amounts to be processed within the next 12 months. Ore stockpile inventories not expected to be processed within the next 12 months, if any, are classified as long-term. At June 30, 2012, all ore stockpile inventories at El Gallo Phase 1 were expensed since commercial production has not yet been achieved. Ore stockpile inventories represent mineralized materials that have been mined and are available for further processing. Ore stockpiles are measured by estimating the number of tonnes added and removed from the stockpile, an estimate of the contained metals (based on assay data) and the estimated metallurgical recovery rates. Costs are allocated to ore stockpile inventories based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the ore. Material is removed from the stockpile at an average cost per tonne.

 

Other Inventories Other inventories include materials and supplies.  Materials and supplies inventories are comprised of chemicals, reagents and consumable parts used in drilling and other operating activities.  They are valued at the lower of average cost or net realizable value.  Cost includes applicable taxes and freight.

 

Revenue Recognition — Revenue includes sales value received for the Company’s principal products, gold and silver. Revenue is recognized when title to gold and silver passes to the buyer and when collectability is reasonably assured. Title passes to the buyer based on terms of the sales contract. Product pricing is determined at the point revenue is recognized by reference to active and freely traded commodity markets, for example, the London Bullion Market for both gold and silver, in an identical form to the product sold.  All sales prior to commercial production will be used to offset related mining costs.

 

Proven and Probable Reserves The definition of proven and probable reserves is set forth in the SEC Industry Guide 7. Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geological character is so well defined that size, shape, depth and mineral content of the reserves are well-established. Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observations.

 

8



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 1  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

As of June 30, 2012, except for the Company’s 49% interest in the San José Mine, none of the Company’s other mineralized properties contain resources that satisfy the definition of proven and probable reserves.

 

Design, Construction, and Development Costs Certain costs to design and construct mining and processing facilities may be incurred prior to establishing proven and probable reserves.  The Company classifies the Phase 1 development of the El Gallo Complex as an exploration stage project since no proven or probable reserves have been established, and accordingly, substantially all costs, including design, engineering, construction, and installation of equipment are expensed as incurred.

 

Certain types of equipment, which have alternative uses or significant salvage value, may be capitalized without proven and probable reserves.  If a project commences commercial production, amortization and depletion of capitalized costs for such equipment would be computed on a unit-of—production basis over the expected reserves of the project based on estimated recoverable ounces.

 

Mine development costs include engineering and metallurgical studies, drilling and other related costs to delineate an ore body, the removal of overburden to initially expose an ore body at open pit surface mines and the building of access ways, shafts, lateral access, drifts, ramps and other infrastructure at underground mines.  Development costs are capitalized when proven and probable reserves exist and the property is a commercially minable property.

 

Mine development costs incurred either to develop new ore deposits, expand the capacity of operating mines, or to develop mine areas substantially in advance of current production are capitalized.  Costs of start-up activities and costs incurred to maintain current production or to maintain assets on a standby basis are charged to operations as incurred.  Costs of abandoned projects are charged to operations upon abandonment.  All capitalized costs are amortized using the units of production method over the estimated life of the ore body based on recoverable ounces to be mined from proven and probable reserves.

 

As of June 30, 2012, except for the Company’s 49% interest in the San José Mine, development costs are not capitalized at any of the Company’s properties, as no proven and probable reserves exist.

 

Property and Equipment Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and recorded at cost.  Depreciation is computed using straight-line methods. Office furniture, equipment and light vehicles are being depreciated over the estimated economic lives ranging from 3 to 5 years.  Trailers, heavy vehicles and other site equipment are being depreciated over estimated economic lives from 5 to 15 years. Buildings are being depreciated over an estimated economic life of 20 years.  All mining equipment is depreciated using the units-of-production method based upon estimated proven and probable reserves.

 

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Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 1  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Impairment of Long-Lived Assets The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable.  Recoverability is measured by comparing the net book value to fair value. When the net book value exceeds fair value, an impairment loss is measured and recorded.  Mineral properties are monitored for impairment based on factors such as the Company’s continued right to explore the area, exploration reports, assays, technical reports, drill results and its continued plans to fund exploration programs on the property.  The Company uses the market approach to estimate the fair value of the properties by using a combination of the observed market value per square mile in the region and an observed market value per ounce of mineralized material.  The Company is unable to estimate undiscounted future net cash flows from its operations due to the absence of proven and probable reserves.  As such, the appropriate evidence to perform estimates of future cash flows is not available and may not be accurate in supporting the Company’s long-lived assets.  For purposes of recognition and measurement of an impairment loss, the Company groups its properties by geological mineral complex, as this represents the lowest level at which the Company allocates its exploration spending independent of other assets and liabilities.  For the recently acquired Santa Cruz exploration properties, the Company has separated its properties into two regions, due to their physical separation, for the purposes of impairment testing. The two regions are Cerro Negro and Other Santa Cruz exploration properties.

 

Recently Adopted Accounting Pronouncements

 

Comprehensive Income In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.  Under the updated guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The update does not change the items reported in other comprehensive income or when an item of other comprehensive income must be reclassified to income.  The update is effective for the Company’s fiscal year beginning January 1, 2012.  The adoption had no impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Fair Value Measurement In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The updated guidance clarifies different components of fair value accounting including the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity and disclosing quantitative information about the unobservable inputs used in a fair value measurement that is categorized in Level 3 of the fair value hierarchy.  The update is effective for the Company’s fiscal year beginning January 1, 2012.  The adoption had no impact on the Company’s consolidated financial position, results of operations or cash flows.

 

10



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 2   BUSINESS ACQUISITION

 

On January 24, 2012, the Company completed the acquisition of Minera Andes (“the Arrangement”) through a court-approved plan of arrangement under Alberta, Canada law, under which Minera Andes, a Canadian company, became an indirect wholly-owned subsidiary of the Company.

 

The Company’s management and Board of Directors believes that the combination with Minera Andes is in the best interests of the Company and its shareholders because the combined company is expected to have a stronger combined cash position and balance sheet, sources of revenue, active mining operations, enhanced trading liquidity, a significant growth profile, industry leading costs, an expanded exploration program and additional technical expertise.

 

On the closing date of the Arrangement, holders of Minera Andes’ common stock received a number of exchangeable shares of McEwen Mining Minera Andes Acquisition Corporation (“2012-Exchangeable Shares”), an indirect wholly-owned Canadian subsidiary of the Company, equal to the number of Minera Andes shares, multiplied by the exchange ratio of 0.45.  In the aggregate, former Minera Andes shareholders received 127,331,498 2012-Exchangeable Shares.  After closing of the Arrangement, the name of the Company was changed to McEwen Mining Inc.  The Company’s common stock began trading on the NYSE and TSX under the symbol “MUX” and the 2012-Exchangeable Shares began trading on the TSX under the symbol “MAQ” on January 27, 2012.

 

As a result of the Arrangement and on the date of closing, the combined company was held approximately 52% by then-existing McEwen Mining shareholders and 48% by former Minera Andes shareholders. On a diluted basis, the combined company was held approximately 53% by existing McEwen Mining shareholders and 47% by former Minera Andes shareholders.

 

In June 2011, Robert R. McEwen, the Company’s Chairman, President, Chief Executive Officer and largest shareholder and then also the Chairman, President, Chief Executive Officer and largest shareholder of Minera Andes, proposed the Arrangement.  In connection with the Arrangement, Mr. McEwen received approximately 38.7 million 2012 Exchangeable Shares.  Mr. McEwen owns approximately 25.1% of the shares of the Company.

 

The 2012-Exchangeable Shares are exchangeable for the Company’s common stock on a one-for-one basis.  Option holders of Minera Andes received replacement options entitling them to receive, upon exercise, shares of the Company’s common stock, reflecting the exchange ratio of 0.45 with the appropriate adjustment of the exercise price per share.  The option life and vesting period of the replacement options has not changed from the option life granted under the Minera Andes option plan.

 

The estimated fair value of the vested portion of the replacement options of $3.2 million have been included as part of the purchase price consideration at their fair values based on the Black-Scholes pricing model as illustrated below.

 

The principal assumptions used in applying the Black-Scholes option pricing model were as follows:

 

 

 

January 24, 2012

 

Risk-free interest rate

 

0.02% to 0.39%

 

Dividend yield

 

n/a

 

Volatility factor of the expected market price of common stock

 

46% to 77%

 

Weighted-average expected life of option

 

1.4 years

 

 

11



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 2   BUSINESS ACQUISITION (Continued)

 

The acquisition has been accounted for using the acquisition method in accordance with ASC Topic 805, Business Combinations, with the Company being identified as the acquirer.  The measurement of the purchase consideration was based on the market price of the Company’s common stock on January 24, 2012, which was $5.22 per share.  The total purchase price, including the fair value of the options, amounted to $667.8 million.  The total transaction costs incurred through June 30, 2012 by the Company was $5.3 million, of which $3.9 million was reported in the year ended December 31, 2011 in general and administrative expenses, and $1.4 million for the six months ended June 30, 2012 in acquisition costs in the consolidated statements of operations and comprehensive loss.

 

The allocation of the purchase price on a preliminary basis, based on the estimated fair value of assets acquired and liabilities assumed on January 24, 2012, is summarized in the following table (in thousands).

 

 

 

Fair Value

 

Purchase price:

 

 

 

Exchangeable shares of McEwen Mining Minera Andes Acquisition Corp. issued on acquisition

 

$

664,671

 

Stock options to be exchanged for options of McEwen Mining

 

3,175

 

 

 

$

667,846

 

 

 

 

 

Net assets acquired:

 

 

 

Cash and cash equivalents

 

$

31,385

 

Short-term investments

 

4,952

 

Other current assets

 

9,828

 

Inventories

 

1,362

 

Mineral property interests

 

597,374

 

Investment in Minera Santa Cruz S.A.

 

224,999

 

Equipment

 

1,647

 

Accounts payable

 

(5,323

)

Deferred income tax liability

 

(198,378

)

 

 

$

667,846

 

 

The purchase consideration for the mineral property interests exceeded the carrying value of the underlying assets for tax purposes by approximately $567.0 million.  This amount has been applied to increase the carrying value of mineral property interests for accounting purposes.  However, this did not increase the carrying value of the underlying assets for tax purposes and resulted in a temporary difference between accounting and tax value.  The resulting estimated deferred income tax liability originally associated with this temporary difference was approximately $198.4 million, which is included in the preliminary allocation of purchase price above.  For the three and six months ended June 30, 2012, the Company recorded a deferred income tax recovery of $6.3 million and $8.3 million, respectively, as a result of fluctuations in the foreign exchange rates between the Argentine pesos and U.S. dollar from January 24, 2012 to June 30, 2012.  As a result of the fluctuations in the foreign exchange rates from the two periods, the deferred income tax liability on these assets were reduced to $190.0 million, which is included in the deferred income tax liability balance of $268.6 million on the consolidated balance sheet as at June 30, 2012.

 

For the purposes of the Company’s financial statements, the purchase consideration has been allocated to the fair value of assets acquired and liabilities assumed, based on an independent valuation report and management’s best estimates and taking into account all available information at the time these consolidated financial statements were prepared.  The allocation is still preliminary and is subject to change.

 

12



Table of Contents

 

MCEWEN MINING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2012

 

NOTE 2   BUSINESS ACQUISITION (Continued)

 

Unaudited Pro Forma Results

 

ASC Topic 805 requires supplemental information on a pro forma basis to disclose the results of operations for the interim period as though the business combination had been completed as of the beginning of the periods being reported.

 

The following table sets forth on a pro forma basis, the results of operations for McEwen Mining, had the acquisition of Minera Andes been completed on January 1, 2012 and 2011 (in thousands):

 

Six months ended June 30, 2012

 

McEwen Mining

 

Minera Andes (a)

 

Combined

 

 

 

 

 

 

 

 

 

Revenue

 

$

990

 

$

4,979

 

$

5,969

 

Net (loss) income for the period

 

(40,453

)

3,498

 

(36,955

)

 

Six months ended June 30, 2011

 

McEwen Mining

 

Minera Andes

 

Combined

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

25,716

 

$

25,716

 

Net (loss) income for the period

 

(21,888

)

18,706

 

(3,182

)

 


(a)         Six months ended June 30, 2012 represents the results of Minera Andes’ operations from January 1, 2012 through January 24, 2012, closing date of the acquisition. Beginning January 25, 2012, the results of Minera Andes’ operations are included in McEwen Mining’s consolidated financial statements.

 

NOTE 3   MARKETABLE EQUITY SECURITIES

 

These securities are valued at fair value.  Any resulting gain or loss is recorded to an unrealized gain and loss account (accumulated other comprehensive (loss)) that is reported as a separate line item in the shareholders’ equity section of the balance sheet.  The gains and losses on available-for-sale securities are not reported on the statement of operations until the securities are sold or are other-than-temporarily impaired.  As at June 30, 2012, the Company deemed most of its available-for-sale securities to be other-than-temporarily impaired and as a result recorded an impairment of $2.0 million in the statement of operations and comprehensive loss for the three and six months ended June 30, 2012.  The Company does not intend to hold the securities for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Changes in the Company’s holdings of marketable securities for the six months ended June 30, 2012 and year ended December 31, 2011 are as follows (in thousands):

 

 

 

Six Months Ended June 30,

 

Year Ended December 31,

 

 

 

2012

 

2011

 

Opening Balance

 

$

1,480

 

$

4,576

 

Purchases

 

 

284

 

Proceeds from sale

 

 

(1,853

)

Gain on sale

 

 

19

 

Unrealized loss

 

 

(1,546

)

Realized loss

 

(994

)

 

Ending Balance

 

$

486

 

$

1,480

 

 

13



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 4   GOLD AND SILVER BULLION

 

The Company invested a portion of its cash in physical gold and silver bullion.  Below is the balance of its holdings of gold and silver as at June 30, 2012 and December 31, 2011.

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Gold

 

Silver

 

Gold

 

Silver

 

 

 

(dollars in thousands, except ounces and per ounce)

 

# of ounces

 

3,223

 

326,512

 

5,656

 

552,812

 

Average cost per ounce

 

$

1,278.63

 

$

27.08

 

$

1,278.63

 

$

28.18

 

Total cost

 

$

4,121

 

$

8,842

 

$

7,232

 

$

15,578

 

Fair value per ounce

 

$

1,598.50

 

$

27.08

 

$

1,574.50

 

$

28.18

 

Total fair value

 

$

5,152

 

$

8,842

 

$

8,905

 

$

15,578

 

 

The fair value of gold and silver was based on the daily London P.M. fix as at June 30, 2012 and December 31, 2011.  Since ASC Topic 815 does not consider gold and silver to be readily convertible to cash, the Company carries these assets at the lower of cost or market.

 

During the first half of 2012, the Company sold 2,433 ounces of gold and 226,299 ounces of silver with a cost of $3.1 million and $6.4 million, respectively.  As at June 30, 2012, the Company’s average cost per ounce for silver was $28.18 as compared to its fair value of $27.08.  As a result of the fair value being lower than the carrying value, the Company reduced its average cost per ounce to fair value and recorded an unrealized loss of $0.4 million in its statements of operations and comprehensive loss for the three and six month periods ended June 30, 2012.  Changes in the Company’s holdings of gold and silver for the six months ended June 30, 2012 and year ended December 31, 2011 are as follows (in thousands):

 

 

 

Six Months Ended June 30,

 

Year Ended December 31,

 

 

 

2012

 

2011

 

 

 

Gold

 

Silver

 

Total

 

Gold

 

Silver

 

Total

 

Opening Balance

 

$

7,232

 

$

15,578

 

$

22,810

 

$

4,569

 

$

 

$

4,569

 

Purchases

 

 

 

 

7,387

 

23,912

 

31,299

 

Proceeds from sale

 

(4,026

)

(7,304

)

(11,330

)

(6,218

)

(5,521

)

(11,739

)

Gain on sale

 

915

 

927

 

1,842

 

1,494

 

581

 

2,075

 

Unrealized loss

 

 

(359

)

(359

)

 

(3,394

)

(3,394

)

Ending Balance

 

$

4,121

 

$

8,842

 

$

12,963

 

$

7,232

 

$

15,578

 

$

22,810

 

 

NOTE 5   MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS

 

At June 30, 2012, the Company holds mineral interests in Nevada, mineral rights in Argentina and mineral concession rights in Mexico, including the El Gallo complex.  The Magistral Mine is a former producing gold mine located within the El Gallo complex which has been held on a care and maintenance basis since 2005.  In August 2011, the Company announced that it would put this mine back into production as Phase 1 of mining operations at the El Gallo complex, with production scheduled to begin during the second half of 2012.

 

The Company increased its mineral property interests by $598.3 million, of which $597.4 million was due to the acquisition of Minera Andes as discussed in Note 2 above, to $843.8 million as at June 30, 2012 from $245.5 million at the end of 2011.  The values for the mineral properties from Argentina noted below are on a preliminary basis.

 

14



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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 5   MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS (Continued)

 

The following table summarizes all of the Company’s mineral property interests in Nevada, Argentina and Mexico (in thousands):

 

Name of Property/Complex

 

State/Province

 

Country

 

Carrying Value

 

Tonkin Complex

 

Nevada

 

United States

 

$

52,430

 

Gold Bar Complex

 

Nevada

 

United States

 

$

77,012

 

Limo Complex

 

Nevada

 

United States

 

$

50,098

 

Battle Mountain Complex

 

Nevada

 

United States

 

$

31,106

 

Other United States Properties

 

Nevada

 

United States

 

$

22,009

 

Los Azules Copper Project

 

San Juan

 

Argentina

 

$

486,862

 

Other Argentina Exploration Properties

 

San Juan

 

Argentina

 

$

7,819

 

Cerro Negro Region

 

Santa Cruz

 

Argentina

 

$

80,889

 

Other Argentina Exploration Properties

 

Santa Cruz

 

Argentina

 

$

19,194

 

Other Argentina Exploration Properties

 

Catamarca

 

Argentina

 

$

2,362

 

Other Argentina Exploration Properties

 

Chubut

 

Argentina

 

$

248

 

El Gallo Complex

 

Sinaloa

 

Mexico

 

$

9,469

 

Other Mexico Exploration Properties

 

Sinaloa

 

Mexico

 

$

4,266

 

Total

 

 

 

 

 

$

843,764

 

 

The Company is responsible for reclamation of certain past and future disturbances at its properties.  The two most significant properties subject to these obligations are the historic Tonkin property in Nevada and the Magistral mine portion of the El Gallo Complex in Mexico.  The current undiscounted estimate of the reclamation costs for existing disturbances on the Tonkin property to the degree required by the U.S. Bureau of Land Management (“BLM”) and the Nevada Department of Environmental Protection (“NDEP”) is $3.8 million.  The Company submitted a mine closure plan to the NDEP and BLM for the Tonkin property during the fourth quarter of 2010.  Based on the Company’s estimate, the change in its bonding requirements was insignificant.  As at June 30, 2012, the closure plan has already been approved by the NDEP but is still currently under review by the BLM.  It is possible that reclamation plan cost estimates and bonding requirements may increase as a result of its review.  The Company, however, is unable to meaningfully estimate possible increases at this time. The costs of undiscounted projected reclamation of El Gallo Phase 1 are currently estimated at $4.6 million.

 

For mineral properties in the United States, the Company maintains required reclamation bonding with various governmental agencies, and at June 30, 2012 and December 31, 2011, had cash bonding in place of $5.2 million.  Under Mexican regulations, surety bonding of projected reclamation costs is not required.

 

Changes in the Company’s asset retirement obligations for the six months ended June 30, 2012 and year ended December 31, 2011 are as follows (in thousands):

 

 

 

Six Months Ended

 

Year Ended

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Asset retirement obligation liability- opening balance

 

$

6,253

 

$

6,153

 

Settlements

 

(14

)

(82

)

Accretion of liability

 

232

 

524

 

Adjustment reflecting updated estimates

 

147

 

(342

)

Asset retirement obligation liability - ending balance

 

$

6,618

 

$

6,253

 

 

15



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 5   MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS (Continued)

 

It is anticipated that the capitalized asset retirement costs will be charged to expense based on the units of production method commencing with gold and silver production at the Company’s properties, if any.  There was no amortization adjustment recorded during the three and six months ended June 30, 2012 or the year ended December 31, 2011 related to the capitalized asset retirement cost since the properties were not in operation.  Reclamation expenditures are expected to be incurred between 2012 and 2040.  As at June 30, 2012 and December 31, 2011, the current portion of the asset retirement obligation was $0.5 million.

 

NOTE 6   INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) — SAN JOSÉ MINE

 

As discussed above in Note 2, the Company acquired a 49% interest in MSC, owner and operator of the San José Silver-Gold Mine in Santa Cruz, Argentina.  The Company’s share of earnings and losses from its investment in MSC is included in the consolidated statement of operations and comprehensive loss and includes 49% of MSC’s net income of $5.6 million for the period ended June 30, 2012.  Since the acquisition closed on January 24, 2012, MSC reported to the Company only its net income from January 25, 2012 to June 30, 2012.

 

The change in the Company’s investment in MSC is summarized as follows:

 

 

 

As at

 

 

 

June 30, 2012

 

 

 

(in thousands)

 

Investment in MSC, beginning of period

 

$

 

Fair value of investment in MSC from acquisition of Minera Andes

 

224,999

 

Income from equity investment

 

5,597

 

Amortization of fair value increments

 

(4,607

)

Investment in MSC, end of period

 

$

225,989

 

 

 

 

Three Months Ended

 

Period Ended

 

 

 

June 30, 2012

 

June 30, 2012

 

 

 

(in thousands)

 

(in thousands)

 

Summary of MSC’s financial information from operations

 

 

 

 

 

Sales - MSC 100%

 

$

56,375

 

$

96,603

 

Net income - MSC 100%

 

3,255

 

11,422

 

McEwen Mining’s portion - 49%

 

1,595

 

5,597

 

Net income on investment in MSC

 

$

1,595

 

$

5,597

 

 

As at June 30, 2012, MSC had current assets of $131.2 million, total assets of $714.7 million, current liabilities of $94.1 million and total liabilities of $279.8 million.

 

On July 27, 2012, MSC declared a dividend of $20.0 million Argentine pesos ($4.4 million), of which $9.8 million Argentine pesos ($2.2 million) was payable to the Company, and was subsequently received on July 30, 2012.

 

16



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 7   PROPERTY AND EQUIPMENT

 

At June 30, 2012 and December 31, 2011, property and equipment consisted of the following (in thousands):

 

 

 

June 30, 2012

 

December 31, 2011

 

Trucks and trailers

 

$

1,468

 

$

1,247

 

Office furniture and equipment

 

1,012

 

638

 

Drill rigs

 

1,869

 

998

 

Building

 

1,469

 

853

 

Land

 

8,669

 

8,619

 

Mining equipment

 

956

 

956

 

Inactive milling equipment

 

749

 

778

 

Subtotal

 

$

16,192

 

$

14,089

 

Less: accumulated depreciation

 

(2,450

)

(2,317

)

Total

 

$

13,742

 

$

11,772

 

 

As a result of the acquisition of Minera Andes, the Company increased its net property and equipment by $1.6 million during the first quarter of 2012.  In addition, during the first quarter of 2012, the Company invested an additional $1.0 million in drill rigs and accessories in Argentina.

 

During the second quarter of 2012, the Company made a decision to sell four drill rigs and their related accessories, with a net realizable value of $1.8 million, net of impairment of $0.2 million, from its operations in Argentina since they no longer meet the Company’s needs.  The Company reported this balance as assets held for sale on the balance sheet as at June 30, 2012.  Subsequent to June 30, 2012, these assets were sold for $1.8 million.

 

NOTE 8   SHAREHOLDERS’ EQUITY

 

At the special meeting on January 19, 2012, the shareholders approved the Second Amended and Restated Articles of Incorporation which, among other things, increased the authorized capital of the Company to 500,000,000 shares of common stock, and added one share of Series B Special Voting Preferred Stock.

 

As discussed in Note 2 above, on January 24, 2012, the Company issued 127.3 million 2012-Exchangeable Shares in connection with the acquisition of Minera Andes.

 

During the six months ended June 30, 2012, 45.4 million exchangeable shares were converted into common stock, of which 42.2 million were related to the 2012-Exchangeable Shares.  At June 30, 2012, total outstanding exchangeable shares not exchanged totaled 85.1 million.

 

On March 26, 2012, the Company announced that its subsidiary, US Gold Canadian Acquisition Corporation, has established a redemption date of May 30, 2012, in respect of all of its outstanding exchangeable shares relating to the acquisitions from 2007 (“2007-Exchangeable Shares”).  As of May 30, 2012, 2.5 million of the remaining 2007-Exchangeable Shares were redeemed for issuance of 2.5 million shares of common stock and there were nil outstanding as at June 30, 2012.

 

During the six months ended June 30, 2012, the Company issued 1.2 million shares of common stock upon exercise of stock options under the Equity Incentive Plan as well as for exercise of stock options assumed by the Company in the acquisition of Minera Andes, at exercise prices ranging from $0.91 to $3.35 per share for proceeds of $3.3 million.  During the same period, the Company issued 41,500 shares of common stock as part payment for mining concessions in Mexico.

 

17



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 9   STOCK-BASED COMPENSATION

 

On January 19, 2012, at a special meeting of shareholders, the Company’s shareholders approved amendments to the Equity Incentive Plan to, among other things, increase the number of shares of common stock reserved for issuance thereunder from 9 million to 13.5 million shares.

 

During the first half of 2012, the Company granted 0.3 million of stock options to the Company’s Chief Operating Officer, as part of his employment contract, at an exercise price of $5.80 per share.  During the same period in 2011, the Company granted stock options to certain employees, directors and consultants for an aggregate of 0.9 million shares of common stock at an exercise price of $7.10 per share.  The options vest equally over a three year period if the individual remains affiliated with the Company (subject to acceleration of vesting in certain events) and are exercisable for a period of 10 years from the date of issue.

 

The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model.  During the three and six months ended June 30, 2012, the Company recorded stock option expense of $0.5 million and $2.1 million, respectively.  During the three and six months ended June 30, 2011, the Company recorded stock option expense of $0.7 million and $1.2 million, respectively.  The stock option expense reported during the three and six months ended June 30, 2012 also included $0.3 million and $1.0 million, respectively, resulting from stock options assumed by the Company in the acquisition of Minera Andes.

 

The principal assumptions used in applying the Black-Scholes option pricing model for the awards for the three and six months ended June 30, 2012 and 2011 were as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2012

 

June 30, 2011

 

June 30, 2012

 

June 30, 2011

 

Risk-free interest rate

 

 

 

0.97%

 

2.33% to 3.09%

 

Dividend yield

 

 

 

n/a

 

n/a

 

Volatility factor of the expected market price of common stock

 

 

 

75%

 

90% to 99%

 

Weighted-average expected life of option

 

 

 

6.0 years

 

6.6 years

 

Weighted-average grant date fair value

 

 

 

$3.80

 

$5.31

 

 

18



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 9   STOCK-BASED COMPENSATION (Continued)

 

The following tables summarize information about stock options outstanding and exercisable at June 30, 2012 for the Company’s Option Plan, the replacement options from the acquisition of Nevada Pacific Gold Ltd. in 2007, and the replacement options from the acquisition of Minera Andes in 2012. C$ refers to Canadian dollars.

 

McEwen Mining

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

Average

 

 

 

Weighted

 

Average

 

 

 

 

 

Average

 

Remaining

 

 

 

Average

 

Remaining

 

Range of

 

Number

 

Exercise

 

Contractual

 

Number

 

Exercise

 

Contractual

 

Exercise Price

 

Outstanding

 

Price

 

Life (Years)

 

Exercisable

 

Price

 

Life (Years)

 

$0.00-$2.00

 

1,389,000

 

$

1.07

 

6.43

 

1,389,000

 

$

1.07

 

6.43

 

$2.01-$4.00

 

1,054,000

 

$

2.57

 

6.33

 

847,334

 

$

2.59

 

6.02

 

$4.01-$6.00

 

366,500

 

$

5.66

 

8.75

 

66,500

 

$

5.01

 

4.95

 

$6.01-$8.31

 

925,166

 

$

7.20

 

8.32

 

363,830

 

$

7.35

 

7.72

 

 

Nevada Pacific Gold Ltd.

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

Average

 

 

 

Weighted

 

Average

 

 

 

 

 

Average

 

Remaining

 

 

 

Average

 

Remaining

 

Range of

 

Number

 

Exercise

 

Contractual

 

Number

 

Exercise

 

Contractual

 

Exercise Price

 

Outstanding

 

Price

 

Life (Years)

 

Exercisable

 

Price

 

Life (Years)

 

C$0.00-C$5.00

 

271,543

 

C$

4.54

 

3.76

 

271,543

 

C$

4.54

 

3.76

 

C$5.01-C$6.70

 

123,050

 

C$

5.96

 

2.51

 

123,050

 

C$

5.96

 

2.51

 

 

Minera Andes

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

Average

 

 

 

Weighted

 

Average

 

 

 

 

 

Average

 

Remaining

 

 

 

Average

 

Remaining

 

Range of

 

Number

 

Exercise

 

Contractual

 

Number

 

Exercise

 

Contractual

 

Exercise Price

 

Outstanding

 

Price

 

Life (Years)

 

Exercisable

 

Price

 

Life (Years)

 

C$0.00-C$2.22

 

310,500

 

C$

1.61

 

1.60

 

297,000

 

C$

1.62

 

1.57

 

C$2.23-C$3.02

 

525,150

 

C$

2.40

 

2.56

 

377,101

 

C$

2.45

 

2.44

 

 

19



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 10   RELATED PARTY TRANSACTIONS

 

Since the second quarter of 2010, an aircraft owned and operated by Lexam L.P. (of which Mr. McEwen is a limited partner and beneficiary) has been made available to the Company in order to expedite business travel. In his role as Chairman and Chief Executive Officer of the Company, Mr. McEwen must travel extensively and frequently on short notice.

 

Mr. McEwen is able to charter the aircraft from Lexam L.P. at a preferential rate. The Company’s independent board members have approved a policy whereby only the variable expenses of operating this aircraft for business related travel are eligible for reimbursement by the Company.  The hourly amount that the Company has agreed to reimburse Lexam L.P. is under half the full cost per hour of operating the aircraft or equivalent hourly charter cost and in any event less than even Mr. McEwen’s preferential charter rate. Where possible, trips also include other company personnel, both executives and non-executives, to maximize efficiency.

 

For the three and six months ended June 30, 2012, the Company incurred and paid $163,826 (2011 - $11,834) and $203,718 (2011 - $60,477), respectively, to Lexam L.P. for the use of this aircraft.

 

Ending in 2011, the Company had a management services agreement (“Services Agreement”) with 2083089 Ontario Inc. (“208”) pursuant to which the Company agreed to reimburse 208 for rent, personnel, office expenses and other administrative services on a cost recovery basis.  208 is owned by Robert McEwen, the Chairman and Chief Executive Officer of the Company and beneficial owner of more than 5% of its voting securities.  Mr. McEwen is also the Chief Executive Officer and Director of 208.   Effective January 2012, the Company no longer required the services agreement with 208 as those costs are now paid directly by the Company.  During the three and six months ended June 30, 2011, the Company incurred and paid $30,930 and $55,050, respectively under the agreement.

 

Each of the above agreements were approved or ratified by the independent members of the Company’s Board of Directors.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 11   OPERATING SEGMENT REPORTING

 

McEwen Mining is engaged in the exploration for and production of precious metals in the U.S., Mexico and Argentina. The Company identifies its reportable segments as those consolidated operations that are currently engaged in the exploration for and production of precious metals.  Operations not actively engaged in the exploration for, or production of precious metals, are aggregated at the corporate level for segment reporting purposes.

 

 

 

 

 

 

 

 

 

Corporate &

 

 

 

 

 

Argentina

 

Mexico

 

U.S.

 

Other

 

Total

 

 

 

(in thousands)

 

For the three months ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Income on investment in Minera Santa Cruz S.A. (net of amortization)

 

$

(208

)

$

 

$

 

$

 

$

(208

)

Exploration costs

 

5,025

 

3,792

 

1,092

 

164

 

10,073

 

Mine construction costs

 

 

6,994

 

 

 

6,994

 

Mine development and operating costs

 

 

3,494

 

 

 

3,494

 

Operating loss

 

(6,153

)

(15,268

)

(1,301

)

(3,024

)

(25,746

)

For the six months ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Income on investment in Minera Santa Cruz S.A. (net of amortization)

 

$

990

 

$

 

$

 

$

 

$

990

 

Exploration costs

 

9,830

 

8,547

 

2,906

 

574

 

21,857

 

Mine construction costs

 

 

8,635

 

 

 

8,635

 

Mine development and operating costs

 

 

6,216

 

 

 

6,216

 

Operating loss

 

(10,427

)

(26,083

)

(3,630

)

(8,581

)

(48,721

)

As at June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Investment in Minera Santa Cruz S.A.

 

$

225,989

 

$

 

$

 

$

 

$

225,989

 

Mineral property interests

 

597,374

 

13,735

 

232,655

 

 

843,764

 

Total assets

 

843,476

 

39,552

 

237,926

 

16,264

 

1,137,218

 

 

 

 

 

 

 

 

 

 

Corporate &

 

 

 

 

 

Argentina

 

Mexico

 

U.S.

 

Other

 

Total

 

 

 

(in thousands)

 

For the three months ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

Exploration costs

 

 

$

7,185

 

$

3,144

 

$

297

 

$

10,626

 

Operating loss

 

 

(7,639

)

(4,175

)

(1,594

)

(13,408

)

For the six months ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

Exploration costs

 

 

$

12,024

 

$

4,952

 

$

559

 

$

17,535

 

Operating loss

 

 

(13,532

)

(5,974

)

(3,379

)

(22,885

)

As at December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

Mineral property interests

 

 

$

12,750

 

$

232,704

 

$

 

$

245,454

 

Total assets

 

 

33,899

 

238,402

 

38,054

 

310,355

 

 

NOTE 12   FAIR VALUE ACCOUNTING

 

Fair value accounting establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are described below:

 

Level 1                    Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2                    Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

 

Level 3                    Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2012

 

NOTE 12   FAIR VALUE ACCOUNTING (Continued)

 

The following table identifies certain of the Company’s assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy.  As required by accounting guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

Fair Value as at June 30, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,398

 

$

23,398

 

$

 

$

 

Marketable equity securities

 

486

 

447

 

39

 

 

 

 

$

23,884

 

$

23,845

 

$

39

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

8,223

 

$

 

$

8,223

 

$

 

 

 

 

Fair Value as at December 31, 2011

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,416

 

$

13,416

 

$

 

$

 

Short-term investments

 

3,933

 

3,933

 

 

 

Marketable equity securities

 

1,480

 

897

 

583

 

 

 

 

$

18,829

 

$

18,246

 

$

583

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

5,612

 

$

 

$

5,612

 

$

 

 

 

The Company’s cash and cash equivalents is classified within Level 1 of the fair value hierarchy because it is valued using quoted market prices.  The fair value of this balance approximates the carrying amounts due to its short-term nature and historically negligible credit losses.  The cash equivalent instruments that are valued based on quoted market prices in active markets are primarily money market securities.

 

The Company’s marketable equity securities which are exchange traded are valued using quoted market prices in active markets and as such are classified within Level 1 of the fair value hierarchy.  The fair value of the marketable equity securities is calculated as the quoted market price of the marketable equity security multiplied by the quantity of shares held by the Company.  The other portion of the Company’s marketable equity securities, which are comprised of share purchase warrants not listed on a public exchange, are valued using option pricing models.  Valuation models require a variety of inputs, including strike price, contractual terms, market prices, measures of volatility and interest rate.  Because the inputs are derived from observable market data, the other portion of the marketable equity securities is classified within Level 2 of the fair value hierarchy.

 

The fair value of accounts payable and accrued liabilities approximates the carrying amounts due to their short-term nature.

 

NOTE 13   COMPARATIVE FIGURES

 

Certain prior year information was reclassified to conform with the current year’s presentation.

 

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Table of Contents

 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

In the following discussion, “McEwen Mining”, “we”, “our”, and “us” refers to McEwen Mining Inc. and as the context requires, its consolidated subsidiaries.

 

The following discussion updates our plan of operation as of August 2, 2012 for the foreseeable future. It also analyzes our financial condition at June 30, 2012 and compares it to our financial condition at December 31, 2011.  Finally, the discussion analyzes our results of our operations for the three and six months ended June 30, 2012 and compares those results to the three and six months ended June 30, 2011.  We suggest that you read this discussion in connection with the MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in our annual report on Form 10-K for the year ended December 31, 2011.

 

Reliability of Information: Minera Santa Cruz S.A., the owner of the San José Mine, is responsible for and has supplied to us all reported results from the San José Mine.  The technical information contained herein is, with few exceptions as noted, based entirely on information provided to us by Minera Santa Cruz S.A. (“MSC”).  Our joint venture partner, a subsidiary of Hochschild Mining plc, and its affiliates other than MSC do not accept responsibility for the use of project data or the adequacy or accuracy of this document.  As we are not the operator of the San José Mine, there can be no assurance that production information reported to us by MSC is accurate, we have not independently verified such information and readers are therefore cautioned regarding the extent to which they should rely upon such information.

 

Overview

 

Business

 

McEwen Mining Inc. was organized under the laws of the State of Colorado on July 24, 1979.  Since inception, the Company has been engaged in the exploration for, development of, production and sale of gold and silver.  On January 24, 2012, we changed our name from US Gold Corporation to McEwen Mining Inc. after the completion of the acquisition, by way of a statutory plan of arrangement pursuant to the laws of the Province of Alberta, Canada, of Minera Andes Inc. (“Minera Andes”).   Our principal assets consists of our 49% interest in the San José Mine in Santa Cruz, Argentina; the El Gallo Complex in Sinaloa, Mexico; the Gold Bar Project in Nevada, United States; the Los Azules Project in San Juan, Argentina, and a large portfolio of exploration properties in Argentina, Nevada and Mexico.

 

In this report, Au represents gold, Ag represents silver, oz represents ounce, opt represents troy ounces per short ton, gpt represents grams per metric tonne, ft. represents feet, m represents meters, km represents kilometer, and sq. represents square.  All of our financial information is reported in United States (“U.S.”) dollars, unless otherwise noted.

 

Argentina Update

 

During the second quarter of 2012, we did not receive any dividend payments from MSC.  Approximately 44% of second quarter gold and silver sales were delayed due to changes in the export revenue repatriation requirements in Argentina.  In April 2012, the Ministry of the Economy in Argentina announced rules which reduced the number of days mining companies have to repatriate funds back to the country to 15 days.  While MSC and other mining companies sought clarification and amendment to this policy, given the impracticality of meeting this requirement, doré and concentrate production continued at the mine but were not exported for refining and sale.  In May, this repatriation period was increased to 30 days which allowed MSC to resume a portion of silver and gold doré sales.  The repatriation period for doré was subsequently increased to 45 days.  For concentrate sales, MSC was granted an extension for repatriation to 120 days in June and finally in July to 180 days.  Concentrate exports resumed in June and the accumulated concentrate inventory at June 30, 2012 is expected to be sold in the third quarter of 2012.

 

Due to the disruption in cash flow, the long processing timeline for concentrates and other factors, we are not able to estimate the amount and timing of dividends we may receive during the remainder of 2012.  In July 2012, we received a dividend payment from MSC of $2.2 million.

 

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Table of Contents

 

Development and Exploration Activities

 

El Gallo Complex, Mexico

 

During the second quarter of 2012, development and construction continued at El Gallo Phase 1 and as of August 1, 2012, physical construction of the crushing plant and leach pad expansion were completed and startup procedures are currently underway.  Construction of the process plant should be completed in September 2012 with commercial production slated to begin October 1, 2012.  Phase 1 consists of a 3,000 tonne per day two stage crushing circuit, Adsorption-Desorption-Recovery (“ADR”) process plant, a new heap leach pad, expansion of an existing heap leach pad, and related infrastructure.  Total capital costs are expected to be slightly below the $15 million budget established for the project with the majority of the $1.8 million contingency unused when all final costs are determined.  Since December 2011, approximately 190,000 tonnes of mineralized material averaging 1.30 gpt gold has been stockpiled for future processing.  Approximately 3.8 million tonnes of waste and overburden have been removed during the same period.

 

During the first half of 2012, 70,713 ft. (21,552 m) of diamond drilling was completed at the El Gallo Complex.  The main areas of focus included the Palmarito and Mina Grande deposits.  Drilling results from Mina Grande showed a new gold vein that returned multiple intersections of high-grade gold over narrow intersections, although there has been limited drilling in the area.  Drilling is currently focused on extending the high-grade mineralization at depth and laterally.  Drilling results from Palmarito, which is located inside the Phase 1 production area, encountered wide intersections of low grade gold mineralization that could have a positive impact on the growth of the project should follow-up drilling be successful.  A 15-hole program is currently underway in an effort to expand the mineralization.

 

Gold Bar Project, Nevada

 

During the second quarter of 2012, baseline studies for the summer season began in support of the U.S. Bureau of Land Management and State of Nevada permitting required for mine development and construction.  Sites for constructing test wells for water supply were selected and plans are underway to drill and test these locations during the third quarter of 2012.  Two options for right of ways for road access and powerline/water pipeline corridors were also selected and baseline studies are underway in those areas.

 

Los Azules Copper Project, Argentina

 

During the first half of 2012, drilling at the project was slow due to difficult ground conditions and equipment problems.  A total of 9,301 ft. (2,835 m) was drilled during the field season in eight holes, which ran from early January to late April and fell short of the 26,247 ft. (8,000 m) originally planned.  Although significant intercepts of copper mineralization were encountered (summarized in our May 10, 2012 press release), most of the drill holes started were unable to reach their target depth due to difficult ground conditions.

 

In order to address the problems encountered during this past drilling season at Los Azules, we signed a contract with a drilling company to provide us with four core drills and one reverse-circulation drill for the upcoming 2012-2013 drill season which are considerably more powerful than the ones used this past season.  We anticipate commencing the upcoming drill season in November 2012, weather permitting.

 

In June 2012, we announced an updated resource estimate on the Los Azules project which showed that drilling has increased both the level of confidence associated with the mineralization and the estimated amount of the mineralized material.

 

Santa Cruz Exploration, Argentina

 

During the second quarter of 2012, a total of 26,903 ft. (8,200 m) of percussion drilling was completed on our Celestina project near Anglo Ashanti’s Cerro Vanguardia mine. Exploration work ceased towards the end of May 2012 with the onset of Argentinian winter.  We are currently evaluating the results of this exploration work to see if further drilling is justified at this project.

 

The drill permits for our 100% owned claim package adjacent to the San José Mine and Goldcorp’s Cerro Negro project are in review with the provincial government.  We have been notified that we should receive the approval of these permits

 

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Table of Contents

 

by the end of the third quarter of 2012.  We are planning to establish a diamond core drilling program to commence with the receipt of these permits

 

Corporate Development Activities

 

Business Acquisition

 

On January 24, 2012, we completed the acquisition of Minera Andes (“Arrangement”) through a court-approved plan of arrangement under Alberta, Canada law, under which Minera Andes, a Canadian company, became an indirect wholly-owned subsidiary of McEwen Mining.

 

Our management and Board of Directors believes that the combination with Minera Andes is in the best interests of our company and our shareholders because the combined company is expected to have a stronger combined cash position and balance sheet, sources of revenue, active mining operations, enhanced trading liquidity, a significant growth profile, industry leading costs, an expanded exploration program and additional technical expertise.

 

On the closing date of the Arrangement, holders of Minera Andes’ common stock received a number of exchangeable shares of McEwen Mining Minera Andes Acquisition Corporation (“2012-Exchangeable Shares”), an indirect wholly-owned Canadian subsidiary of McEwen Mining, equal to the number of Minera Andes shares, multiplied by the exchange ratio of 0.45.  In the aggregate, former Minera Andes shareholders received 127,331,498 2012-Exchangeable Shares.  Our common stock began trading on the NYSE and TSX under the symbol “MUX” and the 2012-Exchangeable Shares began trading on the TSX under the symbol “MAQ” on January 27, 2012.

 

In June 2011, Robert R. McEwen, our Chairman, President, Chief Executive Officer and largest shareholder and then also the Chairman, President, Chief Executive Officer and largest shareholder of Minera Andes, proposed the Arrangement.  In connection with the Arrangement, Mr. McEwen received approximately 38.7 million 2012 Exchangeable Shares.  Mr. McEwen owns approximately 25.1% of the shares of the Company.

 

As a result of the Arrangement and on the date of closing, the combined company was held approximately 52% by existing McEwen Mining shareholders and 48% by former Minera Andes shareholders. On a diluted basis, the combined company was held approximately 53% by then-existing McEwen Mining shareholders and 47% by former Minera Andes shareholders.

 

The 2012-Exchangeable Shares are exchangeable for our common stock on a one-for-one basis.  Option holders of Minera Andes received replacement options entitling them to receive, upon exercise, shares of our common stock, reflecting the exchange ratio of 0.45 with the appropriate adjustment of the exercise price per share.  The option life and vesting period of the replacement options has not changed from the option life granted under the Minera Andes option plan.

 

The estimated fair value of the vested portion of the replacement options of $3.2 million have been included as part of the purchase price consideration at their fair values based on the Black-Scholes pricing model as illustrated below.

 

The principal assumptions used in applying the Black-Scholes option pricing model were as follows:

 

 

 

January 24, 2012

 

Risk-free interest rate

 

0.02% to 0.39%

 

Dividend yield

 

n/a

 

Volatility factor of the expected market price of common stock

 

46% to 77%

 

Weighted-average expected life of option

 

1.4 years

 

 

The acquisition has been accounted for using the acquisition method in accordance with ASC Topic 805, Business Combinations, with McEwen Mining being identified as the acquirer.  The measurement of the purchase consideration was based on the market price of our common stock on January 24, 2012, which was $5.22 per share.  The total purchase price, including the fair value of the options, amounted to $667.8 million.  The total transaction costs incurred through June 30, 2012 by us was $5.3 million, of which $3.9 million was reported in the year ended December 31, 2011 in general and administrative expenses, and $1.4 million for the six months ended June 30, 2012 in acquisition costs in the consolidated statements of operations and comprehensive loss.

 

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Table of Contents

 

The allocation of the purchase price on a preliminary basis, based on the estimated fair value of assets acquired and liabilities assumed on January 24, 2012, is summarized in the following table (in thousands).

 

 

 

Fair Value

 

Purchase price:

 

 

 

Exchangeable shares of McEwen Mining Minera Andes Acquisition Corp. issued on acquisition

 

$

664,671

 

Stock options to be exchanged for options of McEwen Mining

 

3,175

 

 

 

$

667,846

 

 

 

 

 

Net assets acquired:

 

 

 

Cash and cash equivalents

 

$

31,385

 

Short-term investments

 

4,952

 

Other current assets

 

9,828

 

Inventories

 

1,362

 

Mineral property interests

 

597,374

 

Investment in Minera Santa Cruz S.A.

 

224,999

 

Equipment

 

1,647

 

Accounts payable

 

(5,323

)

Deferred income tax liability

 

(198,378

)

 

 

$

667,846

 

 

For the purposes of our financial statements, the purchase consideration has been allocated to the fair value of assets acquired and liabilities assumed, based on an independent valuation report and management’s best estimates and taking into account all available information at the time these consolidated financial statements were prepared.  The allocation is still preliminary and could be subject to change.  Mineral property interests acquired relate primarily to the Los Azules Copper Project while the Investment in Minera Santa Cruz S.A. reflects the 49% ownership of the San José Mine.  The deferred income tax liability arises due to the excess of the fair market values reflected herein compared to the underlying tax values of those assets.

 

Dividend Payment

 

As a result of the acquisition of Minera Andes, we also acquired a dividend receivable of $9.4 million reported by Minera Andes as at December 31, 2011.  On February 24, 2012, Minera Santa Cruz S.A. (“MSC”), owner of the San José Mine, made its first dividend payment in the company’s history; our portion of the dividend amounted to $9.4 million.

 

Results of Operations — MSC

 

Overview

 

The following discussion is related only to MSC and is disclosed on a 100% basis of which we indirectly own 49%.  We account for our investment in MSC using the equity method.  Furthermore, this discussion is based on the results for the first half of 2012 whereas we have only recorded income from our equity investment for the period from January 25, 2012 to June 30, 2012.  MSC, the entity which owns and operates the San José Mine, is responsible for and has supplied to us all reported results and operational updates from the San José Mine.

 

For the three and six months ended June 30, 2012, MSC reported net income of $3.3 million and $21.6 million, respectively.  The amortization of the fair value increments arising from the preliminary purchase price allocation reduced the current reported net income from MSC by $3.7 million and $9.4 million for the same respective periods.

 

During the three months ended June 30, 2012, production was 21,946 ounces of gold and 1,500,000 ounces of silver.  This represented an increase of 24% for gold production and 13% for silver production compared to production of 17,700 ounces of gold and 1,332,000 ounces of silver in the same period in 2011.  The increase was mainly attributable to an increase in tonnage of 31% processed through the mill in the second quarter of 2012 compared to the same period in 2011.  During the second quarter of 2011, mill throughput decreased due to a strike at the mine which resulted in the loss of 18 days of production.

 

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For the three months ended June 30, 2012, net sales decreased by 36% as compared to the same period in 2011, primarily due to changes in the export revenue repatriation requirements in Argentina.  Please refer to a more detailed discussion in the sales section below.

 

The following table sets out operating cash costs and total cash costs (on a co-product basis) of the San José Mine for the first half of 2012 and for the comparable period in 2011, and they are considered to be non-GAAP measures (see non-GAAP measures, page 30), as well as production totals and sales totals for the same periods.  Also included are the production figures on a 49% attributable basis

 

 

 

Q2 YTD 2012

 

Q2 2012

 

Q1 2012

 

Q2 YTD 2011

 

Q2 2011

 

Q1 2011

 

San José - 100%

 

 

 

 

 

 

 

 

 

 

 

 

 

Tonnes processed (‘000)

 

245

 

129

 

116

 

212

 

98

 

114

 

Ounces gold produced (‘000)

 

42

 

22

 

20

 

39

 

18

 

21

 

Ounces gold sold (‘000)

 

32

 

18

 

14

 

40

 

22

 

18

 

Ounces silver produced (‘000)

 

2,856

 

1,500

 

1,356

 

2,854

 

1,332

 

1,522

 

Ounces silver sold (‘000)

 

2,178

 

1,146

 

1,032

 

2,926

 

1,584

 

1,342

 

Net sales (‘000)

 

$

116,139

 

$

56,375

 

$

59,764

 

$

155,989

 

$

88,166

 

$

67,823

 

Operating cash cost (‘000)

 

48,793

 

25,535

 

23,258

 

39,001

 

18,382

 

20,619

 

Operating cash cost/tonne ($/t)

 

199

 

198

 

201

 

184

 

187

 

181

 

Total cash cost/oz Au ($/oz)

 

770

 

842

 

697

 

519

 

527

 

514

 

Total cash cost/oz Ag ($/oz)

 

14.67

 

15.32

 

13.90

 

12.60

 

13.56

 

11.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

McEwen Mining - 49% share

 

 

 

 

 

 

 

 

 

 

 

 

 

Ounces gold produced (‘000)

 

21

 

11

 

10

 

19

 

9

 

10

 

Ounces silver produced (‘000)

 

1,399

 

735

 

664

 

1,398

 

653

 

746

 

Ounces gold equivalent produced (‘000) (1)

 

48

 

25

 

23

 

46

 

22

 

24

 

 


(1) Gold equivalent calculated using an average silver:gold ratio of 52:1

 

Sales

 

Net sales realized by MSC from the sale of gold and silver for the quarter ended June 30, 2012 totaled $56.4 million as compared to $88.2 million for the same period in 2011, a decrease of $31.8 million or 36%.   During the first half of 2012, net sales totaled $116.1 million as compared to $156.0 million for the same period in 2011, a decrease of $39.9 million or 26%.  As noted previously, approximately 44% of gold and silver sales for the second quarter of 2012 were delayed due to changes in the export revenue repatriation requirements in Argentina.  As these issues appear to be resolved, the unsold inventory at June 30, 2012 is expected to be sold during the third quarter of 2012.

 

The average gross sale price for gold sold in the second quarter of 2012 was $1,559 per ounce, an increase of 4% compared to $1,496 per ounce received in the same period in 2011.  In comparison, the average London P.M. fix price for gold increased by 6% to $1,603 per ounce during the second quarter of 2012, as compared to $1,506 per ounce for the same period in 2011.

 

The average weighted gross sale price for silver sold in the second quarter of 2012 was $25.90 per ounce, a decrease of 28% compared to $36.18 per ounce received in the same period in 2011.  In comparison, the average London P.M. fix price for silver significantly decreased by 23% to $29.38 per ounce during the second quarter of 2012, as compared to $37.96 per ounce for the same period in 2011.

 

Operating and Total Costs

 

The terms operating cash cost or total cash cost used in this section are for the reporting of the MSC operations only and are considered to be non-GAAP measures (see non-GAAP measures, page 30). Operating cash cost per tonne consists of geology, mining, processing, general and administration, royalty costs and refining and treatment costs (for doré product only).  Total cash cost per ounce consists of geology, mining, processing, general and administration, royalty costs,

 

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refining and treatment charges (for both doré and concentrate products), sales costs and export taxes.  Depreciation is excluded from both operating cash costs and total cash costs.

 

Operating cash costs were $25.5 million for the three months ended June 30, 2012, as compared to $18.4 million for the same period in 2011. Average operating cash costs were $198 per tonne of processed ore for the second quarter of 2012 compared to $187 per tonne in 2011, an increase of 6% which is primarily due to an increase in costs in 2012 as a result of inflationary pressures on labor costs, materials and supplies within Argentina.

 

On a per-ounce co-product basis the average total cash cost was $842 per ounce of gold and $15.32 per ounce of silver for the three months ended June 30, 2012, as compared to $527 per ounce of gold and $13.56 per ounce of silver for the same period in 2011. Co-product average total costs are calculated by dividing the respective proportionate share of the total costs for each metal for the period by the ounces of each respective metal produced. The proportionate share of the total costs is calculated by multiplying the total operating cash costs by the percentage of total production value that the respective metal represents.  Accordingly, approximately 45% of the value of the 2012 production was derived from gold and 55% was derived from silver. The increase in per-ounce co-product costs for both gold and silver during the second quarter of 2012 compared to the prior year period is primarily related to higher labor costs, higher materials and supplies costs, inflationary pressures within Argentina, and a higher percentage of sales coming from concentrate sales versus doré.  Doré production was significantly reduced while modifications were made to the process plant and production of concentrate was temporarily increased during this time.  Concentrate sales carry higher refining, treatment and export taxes than doré.  The balance between concentrate and doré production returned to normal levels towards the end of the second quarter of 2012.

 

Investment in MSC

 

The following table shows the reconciliation of MSC’s net income, as reported under U.S. GAAP, compared to the equity pickup that is reported on our financial statements.  Since the acquisition of Minera Andes closed on January 24, 2012, MSC reported us only its net income from January 25, 2012 to June 30, 2012.

 

 

 

As at

 

 

 

June 30, 2012

 

 

 

(in thousands)

 

Investment in MSC, beginning of period

 

$

 

Fair value of investment in MSC from acquisition of Minera Andes

 

224,999

 

Income from equity investment

 

5,597

 

Amortization of fair value increments

 

(4,607

)

Investment in MSC, end of period

 

$