10-Q 1 a13-13462_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, 2013

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIRES EXCHANGE ACT OF 1934

 

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.)

 

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 (Do not check if a smaller reporting company)

 

Smaller reporting company

o

 

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: 262,997,768 shares outstanding as of August 6, 2013 (and 34,116,591 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, 2013 and 2012 (unaudited)

3

 

 

 

 

Consolidated Balance Sheets at June 30, 2013 (unaudited) and December 31, 2012

4

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2013 and 2012 (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (unaudited)

6

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

7

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

38

 

 

 

Item 4.

Controls and Procedures

40

 

 

 

Part II   OTHER INFORMATION

 

 

 

Item 6.

Exhibits

41

 

 

 

SIGNATURES

42

 

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,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

Adjusted (note 6)

 

 

 

Adjusted (note 6)

 

REVENUE:

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

10,459

 

$

 

$

23,957

 

$

 

(Loss) income on investment in Minera Santa Cruz S.A., net of amortization (note 6)

 

(1,551

)

679

 

(1,788

)

3,728

 

 

 

8,908

 

679

 

22,169

 

3,728

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

Production costs applicable to sales

 

8,278

 

 

18,871

 

 

Mine operating costs

 

 

3,494

 

 

6,216

 

Mine construction costs

 

 

6,994

 

 

8,635

 

Mine development costs

 

98

 

 

569

 

 

Exploration costs

 

4,889

 

10,073

 

19,489

 

21,857

 

Property holding costs

 

316

 

407

 

1,693

 

1,980

 

General and administrative

 

4,217

 

4,089

 

8,409

 

8,816

 

Acquisition costs

 

 

47

 

 

1,442

 

Accretion of asset retirement obligation (note 5)

 

121

 

120

 

234

 

232

 

Depreciation

 

245

 

263

 

527

 

484

 

Impairment of investment in MSC (note 6)

 

95,878

 

 

95,878

 

 

Impairment of mineral property interests and property and equipment (note 5)

 

27,729

 

179

 

27,729

 

179

 

Loss (gain) on sale of assets (note 5)

 

6,791

 

(128

)

6,791

 

(130

)

Total costs and expenses

 

148,562

 

25,538

 

180,190

 

49,711

 

Operating loss

 

(139,654

)

(24,859

)

(158,021

)

(45,983

)

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest income

 

68

 

57

 

139

 

182

 

Gain on litigation settlement (notes 7 and 11)

 

 

 

560

 

 

Gain on sale of gold and silver bullion (note 4)

 

 

434

 

 

1,842

 

Unrealized loss on gold and silver bullion (note 4)

 

(274

)

(359

)

(274

)

(359

)

Other-than-temporary impairment on marketable equity securities

 

 

(1,993

)

 

(1,993

)

Foreign currency (loss) gain

 

(1,226

)

79

 

(935

)

46

 

Total other income (expense)

 

(1,432

)

(1,782

)

(510

)

(282

)

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(141,086

)

(26,641

)

(158,531

)

(46,265

)

Recovery of income taxes

 

12,405

 

6,277

 

18,868

 

8,550

 

Net loss

 

(128,681

)

(20,364

)

 (139,663

)

(37,715

)

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE LOSS:

 

 

 

 

 

 

 

 

 

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

 

 

1,375

 

 

999

 

Comprehensive loss

 

$

(128,681

)

$

(18,989

)

$

(139,663

)

$

(36,716

)

Basic and diluted per share data:

 

 

 

 

 

 

 

 

 

Net loss - basic and diluted

 

$

(0.43

)

$

(0.08

)

$

(0.47

)

$

(0.15

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

- basic and diluted

 

297,097

 

268,009

 

296,938

 

251,001

 

 

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

 

3



Table of Contents

 

MCEWEN MINING INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

As at

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

34,773

 

$

70,921

 

Investment in gold and silver bullion (market value - 2013 - $1,416; 2012 - $2,062) (note 4)

 

1,416

 

1,690

 

IVA taxes receivable

 

9,031

 

9,150

 

Inventories (note 3)

 

7,967

 

7,262

 

Other current assets

 

4,617

 

2,895

 

Total current assets

 

57,804

 

91,918

 

 

 

 

 

 

 

Mineral property interests (note 5)

 

731,449

 

767,067

 

Restrictive time deposits for reclamation bonding (note 5)

 

5,183

 

5,183

 

Investment in Minera Santa Cruz S.A. (note 6)

 

176,282

 

273,948

 

Property and equipment, net

 

11,599

 

12,767

 

Other assets

 

54

 

54

 

TOTAL ASSETS

 

$

982,371

 

$

1,150,937

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

10,694

 

$

21,235

 

Litigation settlement liability (notes 7 and 11)

 

 

3,830

 

Current portion of asset retirement obligation (note 5)

 

1,311

 

130

 

Total current liabilities

 

12,005

 

25,195

 

 

 

 

 

 

 

Asset retirement obligation, less current portion (note 5)

 

5,237

 

6,229

 

Deferred income tax liability (notes 2 and 5)

 

210,654

 

229,522

 

Other liabilities

 

400

 

400

 

Total liabilities

 

$

228,296

 

$

261,346

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

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

 

 

 

 

 

Common: 261,302 shares as of June 30, 2013 and 212,646 shares as of December 31, 2012
issued and outstanding

 

 

 

 

 

Exchangeable: 35,812 shares as of June 30, 2013 and 83,379 shares as of December 31, 2012
issued and outstanding

 

1,353,924

 

1,349,777

 

Accumulated deficit

 

(599,555

)

(459,892

)

Accumulated other comprehensive loss

 

(294

)

(294

)

Total shareholders’ equity

 

754,075

 

889,591

 

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

 

$

982,371

 

$

1,150,937

 

 

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)

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(in thousands)

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

Comprehensive

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

(Loss) Income

 

Deficit

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

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 assumed from Minera Andes Inc. acquisition

 

852

 

2,710

 

 

 

2,710

 

Shares issued for Mexico mining concessions

 

42

 

227

 

 

 

227

 

Realized loss on marketable securities

 

 

 

(994

)

 

(994

)

Other-than-temporary impairment on marketable equity securities

 

 

 

1,993

 

 

1,993

 

Net loss (adjusted - note 6)

 

 

 

 

(37,715

)

(37,715

)

Balance, June 30, 2012

 

268,295

 

$

1,287,343

 

$

(290

)

$

(430,953

)

$

856,100

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

296,025

 

$

1,349,777

 

$

(294

)

$

(459,892

)

$

889,591

 

Stock-based compensation

 

 

686

 

 

 

686

 

Exercise of stock options

 

48

 

95

 

 

 

95

 

Shares issued for litigation settlement

 

1,000

 

3,270

 

 

 

3,270

 

Shares issued for Mexico mining concessions

 

41

 

96

 

 

 

96

 

Net loss

 

 

 

 

(139,663

)

(139,663

)

Balance, June 30, 2013

 

297,114

 

$

1,353,924

 

$

(294

)

$

(599,555

)

$

754,075

 

 

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)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2013

 

2012

 

 

 

 

 

Adjusted (note 6)

 

Cash flows (used in) from operating activities:

 

 

 

 

 

Cash paid to suppliers and employees

 

$

(58,521

)

$

(42,781

)

Cash received from gold and silver sales

 

23,197

 

 

Interest received

 

139

 

125

 

Cash used in operating activities

 

(35,185

)

(42,656

)

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

 

(150

)

(563

)

Additions to property and equipment

 

(225

)

(1,658

)

Proceeds from disposal of property and equipment

 

510

 

53

 

Proceeds from sale of gold and silver bullion

 

 

11,330

 

Cash provided by investing activities

 

135

 

49,432

 

Cash flows from financing activities:

 

 

 

 

 

Exercise of stock options

 

95

 

3,304

 

Cash provided by financing activities

 

95

 

3,304

 

Effect of exchange rate change on cash and cash equivalents

 

(1,193

)

(98

)

(Decrease) increase in cash and cash equivalents

 

(36,148

)

9,982

 

Cash and cash equivalents, beginning of period

 

70,921

 

13,416

 

Cash and cash equivalents, end of period

 

$

34,773

 

$

23,398

 

 

 

 

 

 

 

Reconciliation of net loss to cash used in operating activities:

 

 

 

 

 

Net loss

 

$

(139,663

)

$

(37,715

)

Adjustments to reconcile net loss from operating activities:

 

 

 

 

 

Impairment of investment in MSC

 

95,878

 

 

Impairment of mineral property interests and property and equipment

 

27,729

 

179

 

Loss (gain) on sale of assets

 

6,791

 

(130

)

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

 

1,788

 

(3,728

)

Recovery of income taxes

 

(18,868

)

(8,550

)

Gain on litigation settlement

 

(560

)

 

Gain on sale of gold and silver bullion

 

 

(1,842

)

Unrealized loss on silver bullion

 

274

 

359

 

Other-than-temporary impairment on marketable equity securities

 

 

1,993

 

Stock-based compensation

 

686

 

2,135

 

Accretion of asset retirement obligation

 

234

 

232

 

Depreciation

 

527

 

484

 

Amortization of mineral property interests and asset retirement obligations

 

956

 

 

Foreign exchange loss

 

1,193

 

98

 

Change in non-cash working capital items:

 

 

 

 

 

Increase in other assets related to operations

 

(1,534

)

(2,810

)

Dividend receivable obtained from acquisition of Minera Andes Inc.

 

 

9,363

 

Decrease in liabilities related to operations

 

(10,616

)

(2,724

)

Cash used in operating activities

 

$

(35,185

)

$

(42,656

)

 

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, 2013

 

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’’).

 

In September 2012, the Company began production at the El Gallo 1 mine in Mexico, with a total of 15,342 gold equivalent ounces produced during the six months ended June 30, 2013 and 22,291 gold equivalent ounces since commencement of production.

 

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, 2013 and 2012, the consolidated balance sheets as at June 30, 2013 (unaudited) and December 31, 2012, the unaudited consolidated statement of changes in shareholders’ equity for the  six months ended June 30, 2013  and 2012, and the unaudited consolidated statements of cash flows for the six months ended June 30, 2013 and 2012, 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, 2012.  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 for the year ended December 31, 2012.

 

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

 

7



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

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

 

Recently Adopted Accounting Pronouncements

 

Comprehensive Income:  In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The updated guidance requires expanded disclosures for amounts reclassified out of accumulated other comprehensive income by component. The guidance requires the presentation of amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under GAAP to be reclassified in their entirety to net income, a cross-reference to other disclosures that provide additional detail about those amounts is required.  The guidance is to be applied prospectively for reporting periods beginning after December 15, 2012. The update is effective for the Company’s fiscal year beginning January 1, 2013.  The new guidance affects disclosures only and the adoption had no impact on the Company’s consolidated financial position, results of operations or cash flows.

 

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 pursuant to which Minera Andes, an Alberta (Canada) company, became an indirect wholly-owned subsidiary of the Company.

 

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, an indirect wholly-owned Canadian subsidiary of the Company, equal to the number of Minera Andes shares owned by the holder, multiplied by the exchange ratio of 0.45.  In the aggregate, former Minera Andes shareholders received 127,331,498 exchangeable shares.

 

The 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 has been included as part of the purchase price consideration at their fair values based on the Black-Scholes pricing model.

 

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 fair value of mineral property interests exceeded the carrying value of the underlying assets for tax purposes by approximately $508.5 million.  The resulting estimated deferred income tax liability originally associated with this temporary difference was approximately $178.0 million, which was included in the allocation of the purchase price above.  At the end of 2012, the Company reduced the deferred income tax liability from $178.0 million to $156.9 million, as a result of further fluctuations in the foreign exchange rates between the Argentine pesos and U.S. dollar from January 24, 2012 to December 31, 2012.  As at June 30, 2013, the Company recorded an additional income tax recovery of $13.7 million as a result of the fluctuations in foreign exchange rates since December 31, 2012.  The Company also recorded a $2.3 million recovery on impairment charges pertaining to its Santa Cruz mineral property interests.  This resulted in a reduction in the deferred income tax liability on these assets to $140.9 million, which is included in the deferred income tax liability balance of $210.7 million on the unaudited consolidated balance sheet as at June 30, 2013.

 

8



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 3   INVENTORIES

 

Inventories at June 30, 2013 and December 31, 2012 consist of the following (in thousands):

 

 

 

June 30, 2013

 

December 31, 2012

 

Ore on leach pads

 

$

2,769

 

$

685

 

In-process inventory

 

852

 

3,604

 

Stockpiles

 

133

 

308

 

Precious metals

 

2,492

 

1,322

 

Materials and supplies

 

1,721

 

1,343

 

Inventories

 

$

7,967

 

$

7,262

 

 

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, 2013 and December 31, 2012:

 

 

 

As at June 30, 2013

 

As at December 31, 2012

 

 

 

Gold

 

Silver

 

Gold

 

Silver

 

 

 

(dollars in thousands, except ounces and per ounce)

 

Number of ounces

 

793

 

24,969

 

793

 

24,969

 

Average cost per ounce

 

$

1,192.00

 

$

18.86

 

$

1,278.63

 

$

27.08

 

Total cost

 

$

945

 

$

471

 

$

1,014

 

$

676

 

Fair value per ounce

 

$

1,192.00

 

$

18.86

 

$

1,657.50

 

$

29.95

 

Total fair value

 

$

945

 

$

471

 

$

1,314

 

$

748

 

 

The fair value of gold and silver was based on the daily London P.M. fix as at June 30, 2013 and December 31, 2012. Since ASC Topic 815, Derivatives and Hedging, does not consider gold and silver to be readily convertible to cash, the Company carries these assets at the lower of cost or market.

 

As at June 30, 2013, the Company’s average cost was $1,278.63 and $27.08 per ounce of gold and silver, respectively, compared to its fair value of $1,192.00 and $18.86 per ounce, respectively. As a result of the fair value being lower than the carrying value, the Company reduced its average cost per ounce and recorded an unrealized loss of $0.1 million and $0.2 million on its gold and silver bullion, respectively, in its statements of operations and comprehensive loss for the three and six month periods ended June 30, 2013. Changes in the Company’s holdings of gold and silver for the six months ended June 30, 2013 and year ended December 31, 2012 are as follows:

 

 

 

Six months ended June 30, 2013

 

Year ended December 31, 2012

 

 

 

Gold

 

Silver

 

Total

 

Gold

 

Silver

 

Total

 

 

 

(in thousands)

 

Opening Balance

 

$

1,014

 

$

676

 

$

1,690

 

$

7,232

 

$

15,578

 

$

22,810

 

Proceeds from sale

 

 

 

 

(7,982

)

(15,854

)

(23,836

)

Gain on sale

 

 

 

 

1,764

 

1,311

 

3,075

 

Unrealized loss

 

(69

)

(205

)

(274

)

 

(359

)

(359

)

Ending Balance

 

$

945

 

$

471

 

$

1,416

 

$

1,014

 

$

676

 

$

1,690

 

 

Subsequent to the quarter ended June 30, 2013 the Company disposed of its remaining gold and silver bullion at a market price of $1,245.70 per ounce of gold and $19.18 per ounce of silver for net proceeds of approximately $1.5 million.

 

9



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 5   MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS

 

At June 30, 2013, the Company held mineral rights in Argentina, mineral concession rights in Mexico, including the El Gallo Complex, and mineral interests in Nevada.  The El Gallo 1 mine recommenced gold and silver production in September 2012. For accounting purposes, the mine achieved commercial production in September 2012.  For the year ended December 31, 2012, a total of 6,949 gold equivalent ounces were produced at El Gallo. For operational purposes, commercial production was effective as of January 1, 2013.  For the three and six months ended June 30, 2013, a total of 8,561 and 15,342 gold equivalent ounces were produced at El Gallo, respectively.

 

In May 2013, the Company entered into a sale agreement for certain mining claims in the Limo Complex, Nevada, for a sales price of $0.8 million. The claims had a carrying value of $7.2 million. As the carrying value exceeded the proceeds from the sales agreement, the Company recorded a loss on disposal of $6.4 million. The Limo Complex is part of the “Nevada” segment as shown in Note 10. At as June 30, 2013, the proceeds from the sale of these claims had not yet been collected, and are included as a receivable in other current assets on the Company’s balance sheets. The proceeds were subsequently collected on July 17, 2013.

 

During the second quarter of 2013, the Province of Santa Cruz, Argentina, passed amendments to the Provincial Tax Code and Provincial Tax Law, which imposes a new tax on mining real estate property in the Province. The tax will amount to 1% of the value of the economically viable reserves of mining projects. Although there are a number of uncertainties surrounding the scope, calculation and enforcement of the tax and the mining industry is waiting for publication of regulations detailing these matters, it is expected that the law will be onerous and may limit future exploration activities in the province. Based on this development, along with a significant decline in gold and silver market prices during the second quarter of 2013 and continued inflationary pressures resulting in a depressed market for exploration companies in Argentina, the Company concluded that there were indicators that the carrying value of the mineral property interests located in the Santa Cruz Province may not be recoverable. The Company engaged a third party valuator to test the recoverability and determine the fair value of these properties. The valuator used a market approach to estimate the fair value of the properties by using the observed market value per acre in the region. Refer to Note 11, Fair Value Accounting, for further details on the valuation technique used in the determination of the fair value of these assets.

 

Based on this approach, it was determined that the carrying values of these mineral property interests exceeded their fair value, and as result, an impairment was recorded on the following mineral property interests for the quarter ended June 30, 2013:

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Name of Property/Complex

 

Segment

 

2013

 

2012

 

2013

 

2012

 

Telken Tenements

 

Argentina

 

$

13,792

 

$

 

$

13,792

 

$

 

Este Tenements

 

Argentina

 

2,784

 

 

2,784

 

 

Piramides Tenements

 

Argentina

 

5,079

 

 

5,079

 

 

Tobias Tenements

 

Argentina

 

6,074

 

 

6,074

 

 

Property, plant and equipment

 

Argentina

 

 

179

 

 

179

 

Total impairment

 

 

 

$

27,729

 

$

179

 

$

27,729

 

$

179

 

 

10



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

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

 

The corresponding deferred income tax for the properties which were sold or impaired in the second quarter of 2013 was $4.8 million. This $4.8 million was recorded as a reduction to deferred income tax liability and a recovery of deferred income taxes on the statement of operations and comprehensive loss.

 

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 El Gallo 1 portion of the El Gallo Complex in Mexico.  The current undiscounted estimate of the reclamation costs for existing disturbances on the Tonkin property as 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, 2013, the closure plan has already been approved by the NDEP but is still 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 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, 2013 and December 31, 2012, 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, 2013 and year ended December 31, 2012 are as follows (in thousands):

 

 

 

Six Months Ended

 

Year Ended

 

 

 

June 30, 2013

 

December 31, 2012

 

Asset retirement obligation liability - opening balance

 

$

6,359

 

$

6,253

 

Settlements

 

(45

)

(47

)

Accretion of liability

 

234

 

447

 

Adjustment reflecting updated estimates

 

 

(294

)

Asset retirement obligation liability - ending balance

 

$

6,548

 

$

6,359

 

 

Reclamation expenditures are expected to be incurred between 2013 and 2040.  As at June 30, 2013, the current portion of the asset retirement obligation was $1.3 million (December 31, 2012 - $0.1 million).

 

If proven and probable reserves exist at the Company’s properties, and upon commencement of production, the relevant capitalized asset retirement costs and mineral property interests will be charged to expense based on the units of production method.  As previously discussed, Phase 1 of the El Gallo Complex began production in September 2012.  However, since Phase 1 of the El Gallo Complex does not contain mineralized material that satisfy the definition of proven and probable reserves under the SEC Industry Guide 7, the amortization of the capitalized asset retirement costs and mineral property interests will be charged to expense based on the straight line method over the estimated useful life of the mine.  For the three and six months ended June 30, 2013, the Company recorded $0.3 million and  $1.0 million of amortization expense related to Phase 1 of the El Gallo Complex, respectively, which was reported in production cost applicable to sales on the unaudited statement of operations and comprehensive loss.

 

11



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 6   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 $1.3 million for the six months ended June 30, 2013.  For the six months ended June 30, 2012, MSC reported to the Company only its net income from January 25, 2012 to June 30, 2012 since the acquisition closed on January 24, 2012.

 

As at June 30, 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 second quarter of 2012. Below is a reconciliation of the adjustment for the second quarter of 2012.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2012

 

June 30, 2012

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Amortization of fair value increments, as reported

 

$

1,803

 

$

4,607

 

Adjustment

 

(887

)

(2,738

)

Amortization of fair value increments, as adjusted

 

$

916

 

$

1,869

 

 

 

 

 

 

 

Net loss, as reported

 

$

(21,251

)

$

(40,453

)

Adjustment

 

887

 

2,738

 

Net loss, as adjusted

 

$

(20,364

)

$

(37,715

)

 

During the first quarter of 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 quarter ended March 31, 2013.

 

During the second quarter of 2013, as a result of the new tax on mining real estate property in the Province of Santa Cruz (discussed in Note 5), coupled with a significant decline in gold and silver market prices and rising operating costs, the Company concluded that there were indicators that there was a loss in value in its investment in MSC that was other than temporary. The Company engaged a third party valuator to test the recoverability and determine the fair value of its investment in MSC. The valuator used a discounted cash flow approach and determined that the carrying value of the Company’s investment in MSC exceeded its estimated fair value. As the loss in value of the investment was considered other than temporary, an impairment of $95.9 million was recorded in the second quarter of 2013. Refer to Note 11, Fair Value Accounting, for assumptions used in the determination of the fair value of this asset. The investment in MSC is part of the “Argentina” segment as shown in Note 10.

 

12



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

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

 

Changes in the Company’s investment in MSC for the six months ended June 30, 2013 and year ended December 31, 2012 are as follows:

 

 

 

Six Months Ended

 

Year Ended

 

 

 

June 30, 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

 

1,256

 

25,301

 

Amortization of fair value increments

 

(3,044

)

(4,466

)

Dividend distribution

 

 

(9,770

)

Impairment of investment in MSC

 

(95,878

)

 

Investment in MSC, end of period

 

$

176,282

 

$

273,948

 

 

A summary of the results from MSC for the three and six months ended June 30, 2013 and the period from January 25, 2012 (after the closing of the acquisition of Minera Andes) to June 30, 2012 is as follows:

 

 

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Period ended

 

 

 

June 30, 2013

 

June 30, 2012

 

June 30, 2013

 

June 30, 2012

 

 

 

(in thousands)

 

Sales - MSC 100%

 

$

68,556

 

$

56,375

 

$

112,369

 

$

96,603

 

Net income - MSC 100%

 

124

 

3,255

 

2,564

 

11,422

 

McEwen Mining’s portion - 49%

 

61

 

1,595

 

1,256

 

5,597

 

Net income on investment in MSC

 

$

61

 

$

1,595

 

$

1,256

 

$

5,597

 

Amortization of fair value increments

 

(1,612

)

(916

)

(3,044

)

(1,869

)

(Loss) income on investment in MSC, net of amortization

 

$

(1,551

)

$

679

 

$

(1,788

)

$

3,728

 

 

As at June 30, 2013, MSC had current assets of $124.3 million, total assets of $532.4 million, current liabilities of $61.6 million and total liabilities of $172.6 million on an unaudited basis. These balances include the increase in fair value and amortization of the fair value increments arising from the purchase price allocation and the impairment charge of $95.9 million recorded in the second quarter of 2013.

 

NOTE 7   SHAREHOLDERS’ EQUITY

 

During the six months ended June 30, 2013, 47.6 million exchangeable shares were converted into common stock.  At June 30, 2013, total outstanding exchangeable shares not exchanged and not owned by the Company or its subsidiaries totaled 35.8 million.

 

During the six months ended June 30, 2013, the Company issued 48,000 shares of common stock upon exercise of stock options under the Equity Incentive Plan at a weighted average exercise price of $1.97 per share for proceeds of $94,720.  During the same period, the Company issued the final installment of 41,500 shares of common stock as payment for mining concessions in Mexico.  In addition, the Company issued 1 million shares of common stock in January 2013, which was previously recorded as a liability of $3.8 million as at December 31, 2012, as part of the litigation settlement agreement with TNR Gold Corp. dated November 2012 with respect to the Los Azules Copper Project.  The issuance of the shares resulted in the elimination of the liability in the first quarter of 2013.

 

13



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 8   STOCK-BASED COMPENSATION

 

During the six months ended June 30, 2013, the Company granted stock options to certain employees and directors for an aggregate of 1.7 million shares of common stock at an exercise price of $2.25 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 5 years from the date of issue.  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.  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, 2013, the Company recorded stock option expense of $0.3 million and $0.7 million, respectively. 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.

 

The principal assumptions used in applying the Black-Scholes option pricing model for the awards for the three and six months ended June 30, 2013 and 2012 were as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Risk-free interest rate

 

0.50%

 

 

0.50%

 

0.97%

 

Dividend yield

 

n/a

 

 

n/a

 

n/a

 

Volatility factor of the expected market price of common stock

 

66%

 

 

66%

 

75%

 

Weighted-average expected life of option

 

3.5 years

 

 

3.5 years

 

6.0 years

 

Weighted-average grant date fair value

 

$1.01

 

 

$1.01

 

$3.80

 

 

NOTE 9   RELATED PARTY TRANSACTIONS

 

Since the second quarter of 2010, an aircraft owned and operated by Lexam L.P. (of which Robert R. 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.

 

The above agreement was approved by the independent members of the Company’s Board of Directors.

 

For the three months ended June 30, 2013, the Company incurred and paid no expenses (2012 - $163,826) to Lexam for the use of this aircraft. For the six months ended June 30, 2013, the Company incurred and paid $70,525 (2012 - $203,718) for the use of this aircraft.

 

14



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 10   SEGMENTED INFORMATION

 

McEwen Mining is a mining and minerals exploration, development and production company focused on precious metals in Argentina, Mexico and the United States.  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, 2013

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

 

$

10,459

 

$

 

$

 

$

10,459

 

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

 

(1,551

)

 

 

 

(1,551

)

Production costs applicable to sales

 

 

8,278

 

 

 

8,278

 

Mine development costs

 

 

98

 

 

 

98

 

Exploration costs

 

2,017

 

1,949

 

870

 

53

 

4,889

 

Impairment of investment in MSC

 

95,878

 

 

 

 

95,878

 

Impairment of mineral property interests and property and equipment

 

27,729

 

 

 

 

27,729

 

Loss (gain) on sale of assets

 

326

 

 

6,468

 

(3

)

6,791

 

Operating loss

 

(129,703

)

(970

)

(6,110

)

(2,871

)

(139,654

)

For the six months ended June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

 

$

23,957

 

$

 

$

 

$

23,957

 

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

 

(1,788

)

 

 

 

(1,788

)

Production costs applicable to sales

 

 

18,871

 

 

 

18,871

 

Mine development costs

 

 

569

 

 

 

569

 

Exploration costs

 

13,479

 

4,434

 

1,450

 

126

 

19,489

 

Impairment of investment in MSC

 

95,878

 

 

 

 

95,878

 

Impairment of mineral property interests and property and equipment

 

27,729

 

 

 

 

27,729

 

Loss (gain) on sale of assets

 

326

 

 

6,468

 

(3

)

6,791

 

Operating loss

 

(141,615

)

(3,020

)

(7,055

)

(6,331

)

(158,021

)

As at June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Investment in Minera Santa Cruz S.A.

 

176,282

 

 

 

 

176,282

 

Mineral property interests

 

511,363

 

12,187

 

207,899

 

 

731,449

 

Total assets

 

691,504

 

48,799

 

213,099

 

28,969

 

982,371

 

 

 

 

 

 

 

 

 

 

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) (adjusted - note 6)

 

$

679

 

$

 

$

 

$

 

$

679

 

Mine development and operating costs

 

 

3,494

 

 

 

3,494

 

Mine construction costs

 

 

6,994

 

 

 

6,994

 

Exploration costs

 

5,025

 

3,792

 

1,092

 

164

 

10,073

 

Operating loss (adjusted - note 6)

 

(5,266

)

(15,268

)

(1,301

)

(3,024

)

(24,859

)

For the six months ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Income on investment in Minera Santa Cruz S.A. (net of amortization) (adjusted - note 6)

 

$

3,728

 

$

 

$

 

$

 

$

3,728

 

Mine development and operating costs

 

 

6,216

 

 

 

6,216

 

Mine construction costs

 

 

8,635

 

 

 

8,635

 

Exploration costs

 

9,830

 

8,547

 

2,906

 

574

 

21,857

 

Operating loss (adjusted - note 6)

 

(7,689

)

(26,083

)

(3,630

)

(8,581

)

(45,983

)

As at December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Investment in Minera Santa Cruz S.A.

 

273,948

 

 

 

 

273,948

 

Mineral property interests

 

539,092

 

12,707

 

215,268

 

 

767,067

 

Total assets

 

825,047

 

47,359

 

220,148

 

58,383

 

1,150,937

 

 

15



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 11   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).

 

The following table identifies the fair value of the Company’s financial assets and liabilities 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 a June 30, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,773

 

$

34,773

 

$

 

$

 

IVA taxes receivable

 

9,031

 

 

9,031

 

 

 

 

$

43,804

 

$

34,773

 

$

9,031

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

10,694

 

$

 

$

10,694

 

$

 

 

 

$

10,694

 

$

 

$

10,694

 

$

 

 

 

 

Fair Value as at December 31, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,921

 

$

70,921

 

$

 

$

 

IVA taxes receivable

 

9,150

 

 

9,150

 

 

 

 

$

80,071

 

$

70,921

 

$

9,150

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

21,235

 

$

 

$

21,235

 

$

 

Litigation settlement liability

 

3,830

 

3,830

 

 

 

 

 

$

25,065

 

$

3,830

 

$

21,235

 

$

 

 

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 carrying value of this balance approximates its fair value 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.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 11   FAIR VALUE ACCOUNTING (Continued)

 

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

 

The litigation settlement liability at December 31, 2012 represented the fair value of the 1,000,000 shares of the Company’s common stock that were required to be issued as part of the settlement with TNR Gold Corp. Since the Company’s common stock is quoted on an active market, the liability was classified within Level 1 of the fair value hierarchy.

 

In the second quarter of 2013, the Company recorded impairment charges related to its investment in MSC and mineral property interests in the Santa Cruz Province, Argentina. The following provides information related to assets that were measured at fair value on a nonrecurring basis after initial recognition during the six months ended June 30, 2013.

 

 

 

Fair Value as a June 30, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total Loss

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mineral property interests

 

 

 

 

 

 

 

 

 

 

 

Telken Tenements

 

$

26,442

 

$

 

$

 

$

26,442

 

$

13,792

 

Este Tenements

 

5,337

 

 

 

5,337

 

2,784

 

Piramides Tenements

 

9,736

 

 

 

9,736

 

5,079

 

Tobias Tenements

 

11,645

 

 

 

11,645

 

6,074

 

Investment in MSC

 

176,282

 

 

 

176,282

 

95,878

 

 

 

$

229,442

 

$

 

$

 

$

229,442

 

$

123,607

 

 

The estimated fair values of the Santa Cruz mineral property interests were determined using observed market value per acre in the region. The estimated fair value of the Company’s investment in MSC was determined using a discounted cash flow approach. The following table sets forth a summary of the quantitative and qualitative information related to the unobservable inputs used in the calculation of the Company’s non-recurring Level 3 fair value measurements at June 30, 2013.

 

 

 

Fair Value At

 

Valuation

 

Unobservable

 

Range /

 

 

 

June 30, 2013

 

Technique

 

Input

 

Weighted Average

 

Investment in MSC

 

$

176,282

 

Discounted cash flow

 

Discount Rate

 

10.0%

 

 

 

 

 

 

 

Long Term Gold Price

 

$1,300 per ounce

 

 

 

 

 

 

 

Long Term Silver Price

 

$22.75 per ounce

 

 

 

 

 

 

 

Argentina Inflation Index

 

10.0%

 

 

 

 

 

 

 

United States Inflation Index

 

1.7%

 

 

NOTE 12   COMPARATIVE FIGURES

 

Certain prior year information was reclassified to conform to 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 6, 2013 for the foreseeable future. It also analyzes our financial condition at June 30, 2013 and compares it to our financial condition at December 31, 2012.  Finally, the discussion analyzes our results of our operations for the three and six months ended June 30, 2013 and compares those results to the three and six months ended June 30, 2012.  With regard to properties or projects that are not in production, we provide some details of our plan of operation.  The discussion also presents certain Non-GAAP financial performance measures, such as total cash costs, total cash cost per ounce, all-in sustaining costs, all-in sustaining cost per ounce, all-in costs, all-in cost per ounce, and average realized price, that are important to management in its evaluation of our operating results and which are used by management to compare our performance to what we perceive to be peer group mining companies and relied on as part of management’s decision-making process. Management believes these measures may also be important to investors in evaluating our performance. For a detailed description of each of the Non-GAAP financial performance measures, please see the discussion under “Non-GAAP Financial Performance Measures” below, beginning on page 33.  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, 2012.

 

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 information.  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.

 

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CAUTIONARY NOTE TO UNITED STATES INVESTORS – INFORMATION CONCERNING
PREPARATION OF RESOURCE AND RESERVE ESTIMATES

 

McEwen Mining Inc. (“McEwen Mining,” “we,” “us,” or the “Company”) is required to prepare reports under the Canadian Securities Administrators’ National Instrument 43-101 “Standards of Disclosure for Mineral Projects” (“NI 43-101”), under the Canadian securities laws because we are listed on the Toronto Stock Exchange (“TSX”) and subject to Canadian securities laws. These standards are materially different from the standards generally permitted in reports filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”).

 

Definitions of terms under NI 43-101 differ materially from the definitions of those and related terms in Industry Guide 7 (“Guide 7”) promulgated by the SEC.  Under U.S. standards, mineralization may not be classified as a “reserve” unless a determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made.  Under Guide 7 standards, a “Final” or “Bankable” feasibility study is required to report reserves, the three-year historical average precious metals prices are used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with the appropriate government authority.  One consequence of these differences is that “reserves” calculated in accordance with Canadian standards may not be “reserves” under Guide 7 standards.  U.S. investors should be aware that McEwen Mining’s properties located in the United States and Mexico do not have “reserves” as defined by Guide 7 and are cautioned not to assume that any part or all of the disclosed mineralized material will be confirmed or converted into Guide 7 compliant “reserves”.

 

Under NI 43-101, we report measured, indicated and inferred resources, which are measurements that are generally not permitted in filings made with the SEC. The estimation of measured resources and indicated resources involve greater uncertainty as to their existence and economic feasibility than the estimation of proven and probable reserves. U.S. investors are cautioned not to assume that any part of measured or indicated resources will ever be converted into economically mineable reserves. The estimation of inferred resources involves far greater uncertainty as to their existence and economic viability than the estimation of other categories of resources. It cannot be assumed that all or any part of inferred resources will ever be upgraded to a higher category. Therefore, U.S. investors are also cautioned not to assume that all or any part of inferred resources exist, or that they can be mined legally or economically.

 

Canadian regulations permit the disclosure of resources in terms of “contained ounces” provided that the tonnes and grade for each resource are also disclosed; however, the SEC only permits issuers to report “mineralized material” in tonnage and average grade without reference to contained ounces. Under U.S. regulations, the tonnage and average grade described herein would be characterized as mineralized material. We provide such disclosure about our exploration properties to allow a means of comparing our projects to those of other companies in the mining industry, many of which are Canadian and report pursuant to NI 43-101, and to comply with applicable disclosure requirements.

 

We also note that drilling results are not indicative of mineralized material in other areas where we have mining interests. Furthermore, mineralized material identified on our properties does not and may never have demonstrated economic or legal viability.

 

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Table of Contents

 

Overview

 

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.

 

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Table of Contents

 

Operating and Financial Highlights

 

·                  Gold equivalent production in the second quarter of 2013 totaled 35,955 ounces, which includes 27,394 gold equivalent ounces attributable to us from our 49% owned San José mine in Argentina and 8,561 gold equivalent ounces from El Gallo 1 in Mexico.

·                  For the second quarter of 2013, total cash costs (1), all-in sustaining costs (1) and all-in costs (1) for all of our operations on a consolidated basis totaled $744, $1,108 and $1,199 per gold equivalent ounce, respectively. Total cash costs and all-in sustaining costs at the San José mine in Argentina totaled $751 and $972 per gold equivalent ounce, respectively. Total cash costs and all-in sustaining cash costs at our El Gallo 1 mine totaled $713 and $1,183 per gold equivalent ounce, respectively.

·                  Gold equivalent ounces sold in the second quarter of 2013 totaled 42,449 ounces, which includes 34,429 gold equivalent ounces attributable to us from our 49% owned San José mine in Argentina and 8,020 gold equivalent ounces from El Gallo 1 in Mexico.

·                  Average realized price (1) for all of our operations on a consolidated basis in the second quarter of 2013 was $1,211 and $17.76 per ounce of gold and silver sold, respectively.

·                  All El Gallo 2 permits have either been submitted to or approved by the Mexican government.

·                  In the quarter ended June 30, 2013, we recorded impairment charges of $95.9 million and $27.7 million related to our investment in MSC and mineral property interests located in the Province of Santa Cruz, Argentina, as a result of the decline in metal prices during the second quarter of 2013 and costs associated with a proposed tax in the Province of Santa Cruz in Argentina.

·                  The Company ended the quarter with $38.7 million in cash and precious metals and no debt.

 

Development and Exploration Activities

 

El Gallo Complex, Mexico

 

El Gallo 1

 

In May 2013, we announced our plan to expand El Gallo 1. The expansion is estimated to cost $5 million and is expected to be completed by mid-2014.

 

Necessary upgrades for the mine expansion would include:

 

·                  Increasing crusher capacity from 3,000 to 4,500 tonnes per day.

·                  Installing a new series of pumps, generators and carbon columns.

·                  Upgrading the electro-winning cells at the ADR (adsorption-desorption-recovery) process plant.

·                  Expanding the heap leach pad to accommodate the increased throughput and subsequent ore delivery rate. This will require additional permit applications, which the Company expects to have submitted by the end of the fourth quarter of 2013.

 

On July 17 2013, we completed an updated NI 43-101 mineral resource estimate for El Gallo 1. Although not compliant with SEC Industry Guide 7, the estimate outlined 14.0 million tonnes of mineralized material with a weighted average grade of 1.54 gpt of gold, including measured and indicated resources only, and 0.4 million tonnes of mineralized material with a weighted average grade of 0.85 gpt of gold, including inferred resources only. This estimate incorporated the results of the drilling completed through mid-June 2013. The complete report is available on our website and is subject to the assumptions and conditions set forth therein.

 


(1)  Total cash costs, all-in sustaining costs, all-in costs, and average realized prices are non-GAAP financial performance measures with no standardized definition under U.S. GAAP. In the second quarter of 2013, the Company adopted the new guidance on all-in sustaining and all-in costs published by the World Gold Council on June 27, 2013. The Company also revised its allocation of general and administrative expenses to total cash costs to conform to the Gold Institute Production Cost standard. Prior period figures have been adjusted to conform to the current methodology. Refer to the Non-GAAP Financial Performance Measures section of our MD&A on page 33 for additional information, including definitions of these terms.

 

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Table of Contents

 

El Gallo 2

 

With the planned expansion at El Gallo 1, we have begun to re-evaluate El Gallo 2 as a heap leach operation rather than a conventional milling process. The review will focus on silver recoveries, transportation, crushing and processing costs. If test work and bulk sampling are positive, El Gallo 2 may be developed as a heap leach operation. Although this would reduce total recovered silver ounces, the capital cost requirements could decrease substantially from an estimated $180 million for a milling operation to a projected $30 million for a heap leach operation. The metallurgical testing of El Gallo 2 ore is expected to be completed by the fourth quarter of 2014. The expected production date for El Gallo 2, which was initially anticipated to be in 2015, will be revised depending on the results of this review.

 

El Gallo 2: Development and Permitting

 

As at the date of this filing, all required El Gallo 2 permits have been either submitted or approved. Although approval and timing are outside of our control, we are targeting the end of the third quarter of 2013 for the remaining approvals.

 

The following table summarizes the status of our permits for El Gallo 2 as of August 3, 2013.

 

El Gallo 2: Permitting Schedule and Update

 

Key Environmental Permits

 

Permit

 

Purpose

 

Agency

 

Status

Environmental Impact Statement (MIA)

 

Construction/Operation

 

SEMARNAT

 

Submitted

Land Use Change (ETJ)

 

Construction/Operation

 

SEMARNAT

 

Submitted

Risk Analysis (RA)

 

Construction/Operation

 

SEMARNAT

 

Submitted

Municipal Construction Permit

 

Construction

 

Municipality

 

Approved

Explosives & Storage Permit

 

Construction/Operation

 

SEDENA

 

Approved

Archeological Release

 

Construction

 

INAH

 

Approved

Water Use Permit

 

Construction/Operation

 

CONAGUA

 

Approved

 

Exploration

 

Drilling in the first half of 2013 was primarily completed at a new area discovered in April 2013 called “Central”, which is situated between two known deposits, Lupita and Sagrada Corazon, located at El Gallo 1. The key objectives to recent drilling have been three fold: 1) extend zone to depth; 2) increase strike length; and, 3) infill areas between the historic near-surface drilling and our recent discovery holes. Drilling was successful in each objective and expanded the Central area in several directions. The results of drilling in the Central area were included in the above noted updated NI 43-101 resource estimate for El Gallo 1, which was released July 17, 2013.

 

Drilling was also completed on the CSX Zone, located 2 km from El Gallo 2 and 7 km from the El Gallo 1 mine. New drilling tested further to the east, west and south of the existing mineralized area and revealed the presence of very high silver grades (hole CSX031 returned 1,849 gpt silver over 10.5 m, which included 3,425 gpt silver over 5.4 m, as disclosed in our June 12, 2013 news release). Currently, one core drill is operating at the El Gallo 1 mine. Drilling is focused on further expanding the Central area, identifying potential parallel zones, establishing an initial resource for the new Twin Domes discovery (announced in April 2013) and testing exploration targets at the mine.

 

We released an updated NI 43-101 resource estimate for El Gallo 2 on August 7, 2013. The complete report is available on our website and is subject to the assumptions and conditions set forth therein.

 

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Table of Contents

 

Gold Bar Project, Nevada

 

Baseline studies for the BLM and NDEP are ongoing for purposes of the permitting required for mine development and construction. We expect to submit our Plan of Operations permit application during the last quarter of 2013 or first quarter of 2014.  As the official permitting process has begun, we are unable to perform any further drilling activities at Gold Bar.

 

Los Azules Copper Project, Argentina

 

During the second quarter of 2013, we continued work on an updated Preliminary Economic Assessment (“PEA”) for the Los Azules Copper Project, located in Argentina. The PEA will be based on the increased mineralized material, which we announced in May 2013 when we released the results of an updated NI 43-101 mineral resource estimate, outlining 0.4 billion tonnes of mineralized material with a weighted average grade of 0.63 percent copper, including indicated measures only, and 1.4 billion tonnes of mineralized material with a weighted average grade of 0.46 percent copper, including inferred resources only. The PEA will among other things, evaluate the possibility of increasing the daily throughput, producing copper cathode instead of a concentrate, and processing low-grade mineralized material not previously considered, via a heap leach. The advantages of being able to produce a copper cathode rather than a copper concentrate would be to eliminate the capital intensive concentrate pipeline through Chile, and to reduce the applicable export tax by 50%.

 

In June 2013, we announced that the previously announced Los Azules sales process which had begun in January 2013 was being discontinued.

 

Santa Cruz Exploration, Argentina

 

In June 2013, the Province of Santa Cruz passed amendments to the Provincial Tax Code and Provincial Tax Law, which imposes a new tax on mining real estate property in the Province. The tax will amount to 1% of the value of the economically viable reserves of mining projects. The new law came into force on July 5, 2013. Although there are a number of uncertainties surrounding the scope, calculation and enforcement of the tax and the mining industry is waiting for publication of regulations detailing these matters, it is expected that the law will be onerous and may limit future exploration activities in the province. Based on this new development, along with a significant decline in gold and silver market prices during the second quarter of 2013 and continued inflationary pressures, resulting in a depressed market for exploration properties in Argentina, we tested the recoverability of these properties. We engaged a third party valuator to determine the fair value of these mineral property interests by using the observed market value per acre in the region. As the carrying value of these properties exceeded their estimated fair value, we recorded an impairment charge of $27.7 million during the second quarter of 2013.

 

This new tax has also impacted MSC, operator of the San José mine, also located in the Province of Santa Cruz. Numerous impacted mining companies, including MSC, have and are expected to continue to challenge the validity of the foregoing changes to legislation.

 

Results of Operations — MSC (on a 100% basis)

 

Overview

 

The following discussion relates 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.  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.

 

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Table of Contents

 

The following table sets out production totals, sales totals, total cash costs and all-in sustaining costs (on a co-product and gold equivalent basis) for the San José mine for the three and six month periods ended June 30, 2013 and 2012. Also included below are the production figures on a 49% attributable basis.

 

 

 

Six months
ended
June 30, 2013

 

Q2 2013

 

Q1 2013

 

Six months
ended
June 30, 2012

 

Q2 2012

 

Q1 2012

 

San José Mine - 100%

 

 

 

 

 

 

 

 

 

 

 

 

 

Tonnes processed ('000)

 

249

 

141

 

108

 

245

 

129

 

116

 

Average head grade gold (gpt)

 

6.57

 

6.34

 

6.87

 

5.98

 

5.98

 

5.98

 

Average head grade silver (gpt)

 

430

 

407

 

459

 

423

 

430

 

416

 

Average gold recovery (%)

 

88.7

 

89.3

 

88.1

 

90.1

 

88.6

 

91.6

 

Average silver recovery (%)

 

85.0

 

85.5

 

84.4

 

85.9

 

84.2

 

87.8

 

Gold ounces produced ('000)

 

47

 

26

 

21

 

42

 

22

 

20

 

Gold ounces sold ('000)

 

45

 

32

 

13

 

32

 

18

 

14

 

Silver ounces silver produced ('000)

 

2,926

 

1,575

 

1,351

 

2,855

 

1,500

 

1,356

 

Silver ounces sold ('000)

 

2,880

 

1,991

 

889

 

2,178

 

1,146

 

1,032

 

Net sales ('000)

 

$

112,368

 

$

68,555

 

$

43,813

 

$

116,139

 

$

56,375

 

$

59,764

 

Total cash costs ('000) (1) (2)

 

$

84,328

 

$

52,758

 

$

31,570

 

$

58,281

 

$

32,627

 

$

25,654

 

Total cash cost per gold ounce sold ($/oz) (1) (2)

 

$

936

 

$

878

 

$

1,089

 

$

816

 

$

887

 

$

748

 

Total cash cost per silver ounce sold ($/oz) (1) (2)

 

$

14.73

 

$

12.40

 

$

19.82

 

$

14.77

 

$

14.81

 

$

14.47

 

Total cash cost per gold equivalent ounce sold ($/oz) (1) (2) (4)

 

$

842

 

$

751

 

$

1,055

 

$

789

 

$

822

 

$

750

 

All-in sustaining costs ('000) (1) (3)

 

$

113,269

 

$

68,327

 

$

44,942

 

$

91,677

 

$

49,351

 

$

42,326

 

All-in sustaining cost per gold ounce sold ($/oz) (1) (3)

 

$

1,257

 

$

1,137

 

$

1,550

 

$

1,284

 

$

1,341

 

$

1,234

 

All-in sustaining cost per silver ounce sold ($/oz) (1) (3)

 

$

19.79

 

$

16.06

 

$

28.21

 

$

23.23

 

$

22.40

 

$

23.87

 

All-in sustaining cost per gold equivalent ounce sold ($/oz) (1) (3) (4)

 

$

1,131

 

$

972

 

$

1,502

 

$

1,241

 

$

1,243

 

$

1,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

McEwen Mining - 49% share

 

 

 

 

 

 

 

 

 

 

 

 

 

Gold ounces produced ('000)

 

23

 

13

 

10

 

21

 

11

 

10

 

Silver ounces produced ('000)

 

1,434

 

772

 

662

 

1,399

 

735

 

664

 

Gold equivalent ounces produced ('000) (4)

50

 

27

 

23

 

48

 

25

 

23

 


(1)         Total cash costs, all-in sustaining costs, all-in costs, and average realized prices are non-GAAP financial performance measures with no standardized definition under U.S. GAAP. See “Non-GAAP Financial Performance Measures” beginning on page 33 for additional information, including definitions of these terms.

(2)         In the second quarter of 2013, the Company revised its allocation of general and administrative expenses to total cash costs to conform to the Gold Institute Production Cost standard. Prior period figures have been adjusted to conform to the current methodology.

(3)         In the second quarter of 2013, the Company adopted the new guidance on all-in sustaining and all-in costs published by the World Gold Council on June 27, 2013. Prior period figures have been adjusted to conform to the current methodology.

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

 

Production

 

Production for the three months ended June 30, 2013 was 25,610 ounces of gold and 1,575,442 ounces of silver, compared to production of 21,946 ounces of gold and 1,499,580 ounces of silver in the same period in 2012.  Production during the second quarter of 2013 increased compared to the same period in 2012 as a result of increased treated tonnage, coupled with higher average gold grade.

 

Production for the six months ended June 30, 2013 was 46,688 ounces of gold and 2,926,289 ounces of silver, compared to production of 42,303 ounces of gold and 2,855,258 ounces of silver in the same period in 2012. The increase over the prior period production is also a result of increased tonnage. Average grades were also higher in 2013 than in 2012, for both gold and silver.

 

Sales

 

Net sales realized by MSC from the sale of gold and silver for the quarter ended June 30, 2013 totaled $68.6 million as compared to $56.4 million for the same period in 2012, an increase of $12.2 million or 22%. The increase was a result of the higher number of ounces sold in the quarter of 2013 compared to 2012, with 31,974 ounces of gold sold and 1,991,030 ounces of silver sold in the second quarter of 2013, compared to 17,661 ounces of gold and 1,146,187 ounces of silver sold in the same period in 2012. The sales volume increase was due to higher production in the second quarter of 2013 compared to the first quarter of 2013, as well as inventory built up in the first quarter of 2013 which was sold in the second quarter of 2013.

 

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Table of Contents

 

For the six months ended June 30, 2013, net sales totaled $112.4 million, compared to $116.1 million for the same period in 2012. The decrease in sales revenue in the 2013 period was due to lower average realized prices, which more than offset the higher sales volume. In the first six months of 2013, MSC sold 44,791 ounces of gold and 2,880,108 ounces of silver, compared to 32,001 ounces of gold and 2,178,232 ounces of silver in the same period in 2012. We would expect that, assuming sales volume in the remainder of 2013 was similar to 2012, the dollar value of sales will be reduced unless precious metal prices recover.

 

The average gross sale price for gold sold in the second quarter of 2013 was $1,162 per ounce, a decrease of 25% compared to $1,559 per ounce received in the same period in 2012. In comparison, the average London P.M. fix price for gold decreased by 12% to $1,415 per ounce during the second quarter of 2013, compared to $1,609 per ounce for the same period in 2012.

 

The average gross sale price for silver sold in the second of 2013 was $17.74 per ounce, a decrease of 32% compared to $25.90 per ounce received in the same period in 2012.  In comparison, the average London P.M. fix price for silver decreased by 21% to $23.14 per ounce during the second quarter of 2013, as compared to $29.38 per ounce for the same period in 2012.

 

The difference between the average gross realized price per ounce of gold and silver sold and the average London fix prices noted above is due to downward adjustments of provisionally priced shipments. Sales revenue on provisionally priced sales is recognized based on estimates of the final pricing receivable based on relevant forward market prices. At each reporting date, provisionally priced metal is marked to market based on the forward selling price for the quotational period of the sales contract.

 

Total Cash Costs and All-In Sustaining Costs

 

Total cash costs for the San José mine were $52.8 million for the quarter ended June 30, 2013, compared to $32.6 million for the same period in 2012. On a co-product basis, total cash cost for the quarter ended June 30, 2013 were $28.1 million for gold, or $878 per ounce of gold, and $24.7 million for silver, or $12.40 per ounce of silver, compared to $15.6 million for gold, $887 per ounce of gold, and $17.0 million for silver, or $14.81 per ounce of silver, for the same period in 2012. On a gold equivalent basis, total cash cost for the quarter ended June 30, 2013 were $751 per gold equivalent ounce sold, compared to $822 per gold equivalent ounce sold for the same period in 2012. The increase on a dollar basis is primarily a reflection of the significantly higher number of ounces sold in the current quarter compared to the same period in the prior year, as noted in the table above. On a per ounce basis, total cash costs decreased as a result of a reduction in labor costs as part of a cash flow optimization program implemented in the second quarter of 2013, offsetting continuing high inflationary pressures in Argentina which have generally led to rising operating costs.

 

All-in sustaining cash costs were $68.3 million for the quarter ended June 30, 2013, compared to $49.4 million for the same period in 2012, also due to the increase in number of ounces sold which resulted in an increase of cost of sales as well as rising operating costs. On a co-product basis, all-in sustaining costs were $36.3 million for gold, or $1,137 per ounce of gold, and $32.0 million for silver, or $16.06 per ounce of silver, compared to $23.7 million for gold, or $1,341 per ounce of gold, and $25.7 million for silver, or $22.40 per ounce of silver for the same period in 2012. On a gold equivalent basis, all-in sustaining cost for the quarter ended June 30, 2013 was $972 per gold equivalent ounce, compared to $1,243 per gold equivalent ounce in the same period in 2012. Although development costs and sustaining capital expenditures on a dollar basis have increased in the 2013 period over the second quarter of 2012, all-in sustaining costs on a per ounce basis decreased due to the higher number of ounces sold over which these costs are spread. Exploration costs in 2013, on a dollar and per ounce basis, have also significantly decreased compared to the second quarter of 2012.

 

Co-product total cash costs and all-in sustaining costs are calculated by dividing the respective proportionate share of the total cash costs and all-in sustaining costs for each metal for the period by the ounces of each respective metal sold.  The respective proportionate share of each metal sold is calculated based on their pro-rated sales value. Approximately 51% of the value of the sales in the second quarter of 2013 was derived from gold and 49% was derived from silver. This compares to 48% and 52% for gold and silver, respectively, for the same period in 2012.

 

 

 

25



Table of Contents

 

Investment in MSC

 

Changes in our investment in MSC for the six months ended June 30, 2013 and year ended December 31, 2012 are as follows:

 

 

 

 

Six Months Ended

 

Year Ended

 

 

 

June 30, 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

 

1,256

 

25,301

 

Amortization of fair value increments

 

(3,044

)

(4,466

)

Dividend distribution

 

 

(9,770

)

Impairment of investment in MSC

 

(95,878

)

 

Investment in MSC, end of period

 

$

176,282

 

$

273,948

 

 

The following table shows a summary of the results from MSC for the three and six months ended June 30, 2013 and 2012, and reconciles MSC’s net income, as reported under U.S. GAAP, to the equity pickup that is reported on our financial statements.  For the six months ended June 30, 2012, MSC reported to us only its net income from January 25, 2012 to June 30, 2012 since the acquisition closed on January 24, 2012.

 

 

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Period ended

 

 

 

June 30, 2013

 

June 30, 2012

 

June 30, 2013

 

June 30, 2012