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

As discussed 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, in January 2012. The Company’s share of earnings and losses from its investment in MSC is included in the consolidated statement of operations and comprehensive income (loss), and amounted to $3.9 million for the nine months ended September 30, 2013, or 49% of MSC’s reported net income of $8.0 million. For the nine months ended September 30, 2012, MSC reported to the Company only its net income from January 25, 2012 to September 30, 2012 since the acquisition closed on January 24, 2012.

As at September 30, 2012, the investment in MSC was allocated an estimated fair value of $261.2 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 third quarter of 2012. Below is a reconciliation of the adjustment for the third quarter of 2012.

	For three months ended			For nine months ended
	September 30, 2012			September 30, 2012
	(in thousands)

Amortization of fair value increments, as reported	$	1,597		$	3,746
Adjustment	71			(209		)
Amortization of fair value increments, as adjusted	$	1,668		$	3,537

Net loss, as reported	$	(2,583	)	$	(40,578	)
Adjustment	(71		)	209
Net loss, as adjusted	$	(2,654	)	$	(40,369	)

During the first quarter of 2013, it was determined 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, 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, less certain deductions, and MSC has estimated that this would result in a tax payable amount ranging between $2.0 million and $3.0 million for the year 2013. Based on this development, along with a significant decline in gold and silver market prices and continued inflationary pressures, 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. The investment in MSC is part of the “Argentina” segment as shown in Note 11.

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

	Nine Months Ended			Year Ended
	September 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	3,914			25,301
Amortization of fair value increments	(3,662		)	(4,466		)
Dividend distribution	(1,242		)	(9,770		)
Impairment of investment in MSC	(95,878		)	—
Investment in MSC, end of period	$	177,080		$	273,948

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

	Three Months Ended			Three Months Ended			Nine Months Ended			Period ended
	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
	(in thousands)
Sales - MSC 100%	$	69,662		$	116,299		$	182,031		$	212,902
Net income - MSC 100%	5,424			26,343			7,988			37,765
McEwen Mining’s portion - 49%	2,658			12,908			3,914			18,505
Net income on investment in MSC	$	2,658		$	12,908		$	3,914		$	18,505
Amortization of fair value increments	(618		)	(1,668		)	(3,662		)	(3,537		)
Income on investment in MSC, net of amortization	$	2,040		$	11,240		$	252		$	14,968

As at September 30, 2013, MSC had current assets of $120.2 million, total assets of $522.4 million, current liabilities of $56.4 million and total liabilities of $166.8 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.

In October 2013, the Company and Hochschild entered into a vend-in agreement with MSC pursuant to which the Company agreed to contribute to MSC the mining rights of certain Santa Cruz exploration properties. The properties proposed to be transferred, totaling approximately 48,900 hectares, include amongst others the Telken, Piramides, Tobias, and Este tenements, and are in close proximity to or abutting the properties comprising the San José Mine. Hochschild will also contribute to MSC certain of their mineral properties located in the same region, totaling approximately 82,700 hectares. The agreement contains a 2% net smelter return royalty payable to the Company or Hochschild based on any of MSC’s production from the respective mineral properties contributed by each party. The vend-in agreement requires registration of title changes with the Argentinean government, which is expected to occur in the fourth quarter of 2013. The carrying value of these properties of $53.2 million, as well as the related deferred tax liability of $17.3 million, will be transferred to the Company’s investment in MSC, with no gain or loss expected to be recognized upon transfer in the fourth quarter of 2013. The mineral property interests are currently part of the “Argentina” segment in Note 11.