INVESTMENT IN MINERA SANTA CRUZ S.A. ("MSC") - SAN JOSE MINE

3 Months Ended

Mar. 31, 2013

INVESTMENT IN MINERA SANTA CRUZ S.A. ("MSC") - SAN JOSE MINE

INVESTMENT IN MINERA SANTA CRUZ S.A. ("MSC") - SAN JOSE MINE

NOTE 5   INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) — SAN JOSÉ MINE

As discussed above in Note 1, 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 $1.2 million for the three months ended March 31, 2013.  For the three months ended March 31, 2012, MSC reported to the Company only its net income from January 25, 2012 to March 31, 2012 since the acquisition closed on January 24, 2012.

As at March 31, 2012, based on the preliminary purchase price allocation, the investment in MSC was originally allocated an estimated fair value of $225.0 million.  During the fourth quarter of 2012, the purchase price allocation was finalized and the estimated fair value of the investment in MSC was increased to $262.9 million.  The adjustment affected the composition of the fair value allocation to MSC’s assets, resulting in a reduction in the amortization previously reported for the first quarter of 2012.  Below is a reconciliation of the adjustment for the first quarter of 2012.

	For three months ended
	March 31, 2012
	(in thousands)
Amortization of fair value increments, as reported	$	2,804
Adjustment	(1,851		)
Amortization of fair value increments, as adjusted	$	953
Net loss, as reported	$	(19,202	)
Adjustment	1,851
Net loss, as adjusted	$	(17,351	)

During the quarter ended March 31, 2013, it was identified that the cost of sales reported by MSC under U.S. GAAP for the year and quarter ended December 31, 2012 was understated resulting in an overstatement of MSC’s after-tax net income of $3.9 million. As a result, the prior year income from the Company’s equity investment of 49% in MSC was overstated by $1.9 million. As the error is not material to the current or previously reported consolidated financial statements, the correction was recorded in the current period.

Changes in the Company’s investment in MSC for the three months ended March 31, 2013 and year ended December 31, 2012 are as follows:

	March 31, 2013			December 31, 2012
	(in thousands)
Investment in MSC, beginning of period	$	273,948		$	—
Fair value of investment in MSC from acquisition of Minera Andes	—			262,883
Income from equity investment	1,196			25,301
Amortization of fair value increments	(1,433		)	(4,466		)
Dividend distribution	—			(9,770		)
Investment in MSC, end of period	$	273,711		$	273,948

A summary of the results from MSC for the three months ended March 31, 2013 and the period from January 25, 2012 (after the closing of the acquisition of Minera Andes) to March 31, 2012 is as follows:

	Three Months Ended			Period Ended
	March 31, 2013			March 31, 2012
	(in thousands)
Summary of MSC’s financial information from operations
Sales - MSC 100%	$	43,813		$	40,228
Net income - MSC 100%	2,440			8,167
McEwen Mining’s portion - 49%	1,196			4,002
Net income on investment in MSC	$	1,196		$	4,002
Amortization of fair value increments	(1,433		)	(953		)
(Loss) income on investment in MSC, net of amortization	$	(237	)	$	3,049

As at March 31, 2013, MSC had current assets of $124.5 million, total assets of $791.4 million, current liabilities of $64.0 million and total liabilities of $247.6 million.  These balances include the increase in fair value and amortization of the fair value increments arising from the purchase price allocation.