10-Q 1 a13-19506_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 September 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: 264,295,775 shares outstanding as of November 4, 2013 (and 32,863,584 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 Income (Loss) for the three and nine months ended September 30, 2013 and 2012 (unaudited)

3

 

 

 

 

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

4

 

 

 

 

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

5

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

41

 

 

 

Item 4.

Controls and Procedures

43

 

 

 

Part II OTHER INFORMATION

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

 

Item 6.

Exhibits

44

 

 

 

SIGNATURES

45

 

2



Table of Contents

 

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands, except per share)

 

 

 

Three Months ended

 

Nine Months ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

Adjusted (note 6)

 

 

 

Adjusted (note 6)

 

REVENUE:

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

11,778

 

$

456

 

$

35,735

 

$

456

 

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

 

2,040

 

11,240

 

252

 

14,968

 

 

 

 

 

 

 

 

 

 

 

 

 

13,818

 

11,696

 

35,987

 

15,424

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

Production costs applicable to sales

 

7,907

 

119

 

26,778

 

119

 

Mine operating costs

 

 

2,406

 

 

8,622

 

Mine construction costs

 

 

4,671

 

 

13,306

 

Mine development costs

 

747

 

 

1,316

 

 

Exploration costs

 

2,575

 

6,708

 

22,064

 

28,565

 

Property holding costs

 

2,384

 

2,147

 

4,077

 

4,127

 

General and administrative

 

2,496

 

4,119

 

10,905

 

12,935

 

Acquisition costs

 

 

8

 

 

1,450

 

Accretion of asset retirement obligation (note 5)

 

113

 

110

 

347

 

342

 

Depreciation

 

204

 

266

 

731

 

750

 

Impairment of investment in Minera Santa Cruz S.A. (note 6)

 

 

 

95,878

 

 

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

 

6,287

 

2,902

 

34,016

 

3,081

 

(Gain) loss on sale of assets (note 5)

 

(50

)

(1,135

)

6,741

 

(1,265

)

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

22,663

 

22,321

 

202,853

 

72,032

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(8,845

)

(10,625

)

(166,866

)

(56,608

)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest income

 

60

 

16

 

199

 

198

 

Gain on litigation settlement (notes 7 and 12)

 

 

 

560

 

 

Loss on sale of marketable equity securities

 

 

(70

)

 

(70

)

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

 

51

 

1,233

 

(223

)

3,075

 

Unrealized loss on gold and silver bullion (note 4)

 

 

 

 

(359

)

Other-than-temporary impairment on marketable equity securities

 

 

 

 

(1,993

)

Foreign currency (loss) gain

 

(159

)

423

 

(1,094

)

469

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

(48

)

1,602

 

(558

)

1,320

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(8,893

)

(9,023

)

(167,424

)

(55,288

)

Recovery of income taxes

 

12,157

 

6,369

 

31,025

 

14,919

 

Net income (loss)

 

3,264

 

(2,654

)

(136,399

)

(40,369

)

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

Reclassification of unrealized gain on marketable securities disposed of during the period, net of taxes

 

 

 

 

1,000

 

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

 

 

(1

)

3

 

(2

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

3,264

 

$

(2,655

)

$

(136,396

)

$

(39,371

)

Net income (loss) per share (note 9):

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

$

(0.01

)

$

(0.46

)

$

(0.16

)

Diluted

 

$

0.01

 

$

(0.01

)

$

(0.46

)

$

(0.16

)

Weighted average common shares outstanding (thousands) (note 9):

 

 

 

 

 

 

 

 

 

Basic

 

297,125

 

268,373

 

297,001

 

256,834

 

Diluted

 

297,899

 

268,373

 

297,001

 

256,834

 

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

31,062

 

$

70,921

 

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

 

 

1,690

 

IVA taxes receivable

 

10,129

 

9,150

 

Inventories (note 3)

 

7,807

 

7,262

 

Other current assets

 

1,922

 

2,895

 

Total current assets

 

50,920

 

91,918

 

 

 

 

 

 

 

Mineral property interests (note 5)

 

724,841

 

767,067

 

Restrictive time deposits for reclamation bonding (note 5)

 

5,183

 

5,183

 

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

 

177,080

 

273,948

 

Property and equipment, net

 

15,143

 

12,767

 

Other assets

 

84

 

54

 

TOTAL ASSETS

 

$

973,251

 

$

1,150,937

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

10,041

 

$

21,235

 

Litigation settlement liability (notes 7 and 12)

 

 

3,830

 

Current portion of asset retirement obligation (note 5)

 

1,351

 

130

 

Total current liabilities

 

11,392

 

25,195

 

 

 

 

 

 

 

Asset retirement obligation, less current portion (note 5)

 

5,265

 

6,229

 

Deferred income tax liability (notes 2 and 5)

 

198,497

 

229,522

 

Other liabilities

 

400

 

400

 

Total liabilities

 

$

215,554

 

$

261,346

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, no par value, 500,000 shares authorized;
Common: 263,626 shares as of September 30, 2013 and 212,646 shares as of December 31, 2012 issued and outstanding Exchangeable: 33,533 shares as of September 30, 2013 and 83,379 shares as of December 31, 2012 issued and outstanding

 

1,354,279

 

1,349,777

 

Accumulated deficit

 

(596,291

)

(459,892

)

Accumulated other comprehensive loss

 

(291

)

(294

)

Total shareholders’ equity

 

757,697

 

889,591

 

 

 

 

 

 

 

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

 

$

973,251

 

$

1,150,937

 

 

Subsequent event - Note 6

 

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 NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(in thousands)

 

 

 

Common Stock

 

Accumulated
Other
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

 

 

2,845

 

 

 

2,845

 

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

 

387

 

721

 

 

 

721

 

Exercise of stock options assumed from Minera Andes Inc. acquisition

 

942

 

2,844

 

 

 

2,844

 

Shares issued for Mexico mining concessions

 

83

 

391

 

 

 

391

 

Unrealized loss on marketable securities

 

 

 

(2

)

 

(2

)

Reclassification of unrealized loss on marketable equity securities disposed of during the period, net of tax

 

 

 

(993

)

 

(993

)

Other-than-temporary impairment on marketable equity securities

 

 

 

1,993

 

 

1,993

 

Net loss (adjusted - note 6)

 

 

 

 

(40,369

)

(40,369

)

Balance, September 30, 2012

 

268,496

 

$

1,288,478

 

$

(291

)

$

(433,607

)

$

854,580

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

296,025

 

$

1,349,777

 

$

(294

)

$

(459,892

)

$

889,591

 

Stock-based compensation

 

 

965

 

 

 

965

 

Exercise of stock options

 

48

 

95

 

 

 

95

 

Exercise of stock options assumed from Minera Andes Inc. acquisition

 

45

 

76

 

 

 

76

 

Shares issued for litigation settlement

 

1,000

 

3,270

 

 

 

3,270

 

Shares issued for Mexico mining concessions

 

41

 

96

 

 

 

96

 

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

 

 

 

3

 

 

3

 

Net loss

 

 

 

 

(136,399

)

(136,399

)

Balance, September 30, 2013

 

297,159

 

$

1,354,279

 

$

(291

)

$

(596,291

)

$

757,697

 

 

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)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

 

 

Adjusted (note 6)

 

Cash flows (used in) from operating activities:

 

 

 

 

 

Cash paid to suppliers and employees

 

$

(74,359

)

$

(65,760

)

Cash received from gold and silver sales

 

34,711

 

 

Proceeds from sale of gold and silver bullion

 

1,467

 

23,836

 

Dividend received from Minera Santa Cruz S.A.

 

1,242

 

2,154

 

Interest received

 

139

 

125

 

Cash used in operating activities

 

(36,800

)

(39,645

)

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

)

(712

)

Additions to property and equipment

 

(3,710

)

(1,769

)

Proceeds from disposal of mineral property interests and property and equipment

 

1,449

 

3,143

 

Proceeds from sale of marketable securities

 

 

409

 

Cash provided by investing activities

 

(2,411

)

41,341

 

Cash flows from financing activities:

 

 

 

 

 

Exercise of stock options

 

171

 

3,564

 

Cash provided by financing activities

 

171

 

3,564

 

Effect of exchange rate change on cash and cash equivalents

 

(819

)

(156

)

(Decrease) increase in cash and cash equivalents

 

(39,859

)

5,104

 

Cash and cash equivalents, beginning of period

 

70,921

 

13,416

 

Cash and cash equivalents, end of period

 

$

31,062

 

$

18,520

 

 

 

 

 

 

 

Reconciliation of net loss to cash used in operating activities:

 

 

 

 

 

Net loss

 

$

(136,399

)

$

(40,369

)

Adjustments to reconcile net loss from operating activities:

 

 

 

 

 

Impairment of investment in Minera Santa Cruz S.A.

 

95,878

 

 

Impairment of mineral property interests and property and equipment

 

34,016

 

3,081

 

Loss (gain) on sale of assets

 

6,741

 

(1,265

)

Loss on sale of marketable securities

 

 

70

 

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

 

(252

)

(14,968

)

Recovery of income taxes

 

(31,025

)

(14,919

)

Gain on litigation settlement

 

(560

)

 

Loss (gain) on sale of gold and silver bullion

 

223

 

(3,075

)

Proceeds on sale of gold and silver bullion

 

1,467

 

23,836

 

Unrealized loss on silver bullion

 

 

359

 

Other-than-temporary impairment on marketable equity securities

 

 

1,993

 

Stock-based compensation

 

965

 

2,845

 

Accretion of asset retirement obligation

 

347

 

342

 

Depreciation

 

731

 

750

 

Amortization of mineral property interests and asset retirement obligations

 

1,244

 

 

Foreign exchange loss

 

819

 

156

 

Change in non-cash working capital items:

 

 

 

 

 

Increase in other assets related to operations

 

1,143

 

(6,680

)

Dividend receivable obtained from acquisition of Minera Andes Inc.

 

 

9,363

 

Dividend receivable from Minera Santa Cruz S.A

 

 

2,611

 

Decrease in liabilities related to operations

 

(12,138

)

(3,775

)

Cash used in operating activities

 

$

(36,800

)

$

(39,645

)

 

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)

September 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 of Minera Andes Inc. (“Minera Andes”) by way of a statutory plan of arrangement under the laws of the Province of Alberta, Canada.

 

The Company operates in Argentina, Mexico, and the United States.  It owns a 49% interest in Minera Santa Cruz S.A. (“MSC”), owner of the producing San José silver-gold mine in Santa Cruz, Argentina, which is operated by the majority owner of the joint venture, Hochschild Mining plc (‘‘Hochschild’’). It also owns the El Gallo 1 mine in Sinaloa, Mexico, where production began in September 2012, with a total of 30,319 gold equivalent ounces produced between commencement of production and September 30, 2013. Finally, the Company also own the Los Azules Copper Deposit in San Juan, Argentina, development projects including the El Gallo 2 project in Mexico and the Gold Bar project in Nevada, USA, and a large portfolio of exploration properties in Argentina, Nevada and Mexico.

 

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 income (loss) for the three and nine months ended September 30, 2013 and 2012, the consolidated balance sheets as at September 30, 2013 (unaudited) and December 31, 2012, the unaudited consolidated statement of changes in shareholders’ equity for the nine months ended September 30, 2013  and 2012, and the unaudited consolidated statements of cash flows for the nine months ended September 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



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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 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.  The 127,331,498 exchangeable shares issued are exchangeable for the Company’s common stock on a one-for-one basis.

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.  For the nine months ended September 30, 2013, the Company recorded an additional income tax recovery of $23.6 million as a result of the fluctuations in foreign exchange rates since December 31, 2012. Furthermore, in the second quarter of 2013, the Company also recorded an impairment of $27.7 million on certain of its Santa Cruz mineral property interests, as discussed in Note 5, along with an associated $2.3 million of income tax recovery. These resulted in a deferred income tax liability on these assets of $131.0 million, which is included in the deferred income tax liability balance of $198.5 million on the unaudited consolidated balance sheet as at September 30, 2013.

 

8



Table of Contents

 

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

 

NOTE 3   INVENTORIES

 

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

 

 

 

As at September 30, 2013

 

As at December 31, 2012

 

Ore on leach pads

 

$

2,795

 

$

685

 

In-process inventory

 

1,572

 

3,604

 

Stockpiles

 

462

 

308

 

Precious metals

 

1,501

 

1,322

 

Materials and supplies

 

1,477

 

1,343

 

Inventories

 

$

7,807

 

$

7,262

 

 

NOTE 4   GOLD AND SILVER BULLION

 

From time to time, the Company invests a portion of its cash in physical gold and silver bullion. Below is the balance of its holdings of gold and silver as at September 30, 2013 and December 31, 2012:

 

 

 

As at September 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

 

Average cost per ounce

 

n/a

 

n/a

 

$

1,278.63

 

$

27.08

 

Total cost

 

$

 

$

 

$

1,014

 

$

676

 

Fair value per ounce

 

n/a

 

n/a

 

$

1,657.50

 

$

29.95

 

Total fair value

 

$

 

$

 

$

1,314

 

$

748

 

 

The fair value of gold and silver was based on the daily London P.M. fix as at the reporting date. 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.

 

During the nine months ended September 30, 2013, the Company recorded a realized loss of $0.2 million on its gold and silver bullion, as a result of its average cost of $1,278.63 and $27.08 per ounce, respectively, being lower than its selling price of $1,245.70 per ounce of gold and $19.18 per ounce of silver in the third quarter of 2013.

 

Changes in the Company’s holdings of gold and silver for the nine months ended September 30, 2013 and year ended December 31, 2012 are as follows:

 

 

 

Nine months ended September 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

 

(988

)

(479

)

(1,467

)

(7,982

)

(15,854

)

(23,836

)

(Loss) gain on sale

 

(26

)

(197

)

(223

)

1,764

 

1,311

 

3,075

 

Unrealized loss

 

 

 

 

 

(359

)

(359

)

Ending Balance

 

$

 

$

 

$

 

$

1,014

 

$

676

 

$

1,690

 

 

9



Table of Contents

 

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

 

NOTE 5   MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS

 

Mineral Property Interests

 

At September 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 operational purposes, commercial production was effective as of January 1, 2013.  For the year ended December 31, 2012, a total of 6,949 gold equivalent ounces were produced at El Gallo. For the three and nine months ended September 30, 2013, a total of 8,027 and 23,370 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 sale 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, along with a resulting reduction in deferred tax liability and recovery of deferred income taxes of $2.5 million. This resulted in a net loss on disposal of $3.9 million which is included in the net loss for the nine months ended September 30, 2013. The Limo Complex is part of the “Nevada” segment, as shown in Note 11.

 

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, less certain deductions. Based on this development, along with a significant decline in gold and silver market prices during the year 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 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. As a result, the Company recorded an impairment of $27.7 million in the second quarter of 2013, along with a resulting reduction in deferred tax liability and recovery of future income taxes of $2.3 million, for a net impairment charge of $25.4 million for the nine months ended September 30, 2013. The Santa Cruz Province mineral property interests are part of the “Argentina” segment, as shown in Note 11.

 

During the third quarter of 2013, the Company rationalized its mineral property interests in Nevada in order to focus its exploration program on more prospective areas. As a result, the Company allowed certain claims from one of its Nevada properties in the West Battle Mountain Complex to lapse. These mineral property interests in question were acquired in 2007 and had a carrying value of $6.3 million, which was written off during the third quarter of 2013, along with a resulting reduction in deferred tax liability and recovery of future income taxes of $2.2 million. This resulted in a net write-off for the Company of $4.1 million which is included in the net income (loss) for the three and nine months ended September 30, 2013. The West Battle Mountain Complex is part of the “Nevada” segment, as shown in Note 11.

 

Based on the above, impairment charges were recorded on the following mineral property interests for the three and nine months ended September 30, 2013:

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

Name of Property/Complex

 

Segment

 

2013

 

2012

 

2013

 

2012

 

Telken Tenements

 

Argentina

 

$

 

$

 

$

13,792

 

$

 

Este Tenements

 

Argentina

 

 

 

2,784

 

 

Piramides Tenements

 

Argentina

 

 

 

5,079

 

 

Tobias Tenements

 

Argentina

 

 

 

6,074

 

 

West Battle Mountain Complex

 

Nevada

 

6,287

 

 

6,287

 

 

Other United States Properties

 

Nevada

 

 

2,902

 

 

2,902

 

Property, plant and equipment

 

Argentina

 

 

 

 

179

 

Total impairment

 

 

 

$

6,287

 

$

2,902

 

$

34,016

 

$

3,081

 

 

10



Table of Contents

 

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

 

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

 

Mineral Property Interests (Continued)

 

In October 2013, the Company and Hochschild entered into a vend-in agreement with MSC pursuant to which the Company and Hochschild agreed to contribute to MSC the mining rights of certain of Santa Cruz exploration properties. Refer to Note 6, Investment in Minera Santa Cruz S.A. (“MSC”) — San José Mine, for details.

 

Asset Retirement Obligation

 

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 mine in Mexico.  Reclamation expenditures are expected to be incurred between 2013 and 2040.

 

Changes in the Company’s asset retirement obligations for the nine months ended September 30, 2013 and year ended December 31, 2012 are as follows (in thousands):

 

 

 

Nine Months Ended

 

Year Ended

 

 

 

September 30, 2013

 

December 31, 2012

 

Asset retirement obligation liability - opening balance

 

$

6,359

 

$

6,253

 

Settlements

 

(56

)

(47

)

Accretion of liability

 

342

 

447

 

Adjustment reflecting updated estimates

 

(29

)

(294

)

Asset retirement obligation liability - ending balance

 

$

6,616

 

$

6,359

 

 

As at September 30, 2013, the current portion of the asset retirement obligation was $1.4 million (December 31, 2012 - $0.1 million).

 

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 September 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. For mineral properties in the United States, the Company maintains required reclamation bonding with various governmental agencies, and at September 30, 2013 and December 31, 2012, had cash bonding in place of $5.2 million.

 

The costs of undiscounted projected reclamation of El Gallo 1 are currently estimated at $4.6 million. Under Mexican regulations, surety bonding of projected reclamation costs is not required.

 

When proven and probable reserves exist at the Company’s properties, the relevant capitalized asset retirement costs and mineral property interests are to be charged to expense based on the units of production method and upon commencement of production. As previously discussed, El Gallo 1 began production in September 2012.  However, since El Gallo 1 does not contain mineralized material that satisfies 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 are charged to expense based on the straight-line method over the estimated useful life of the mine. For the three and nine months ended September 30, 2013, the Company recorded $0.3 million and $1.2 million of amortization expense related to El Gallo 1, respectively, which was reported in production cost applicable to sales on the unaudited statement of operations and comprehensive income (loss).

 

11



Table of Contents

 

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

 

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.

 

12



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 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 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.

 

13



Table of Contents

 

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

 

NOTE 7   SHAREHOLDERS’ EQUITY

 

During the nine months ended September 30, 2013, 49.9 million exchangeable shares were converted into common stock.  At September 30, 2013, total outstanding exchangeable shares not exchanged and not owned by the Company or its subsidiaries totaled 33.5 million.

 

During the nine months ended September 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. The Company also issued 45,000 shares of common stock upon exercise of certain stock options the Company assumed as part of the Minera Andes Inc. acquisition, at a weighted average exercise price of C$1.80 per share for proceeds of $76,926. 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. effective 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.

 

During the third quarter of 2013, the Company entered into an agreement with one of its mining contractors to settle parts of its expected future account payable with shares of common stock of the Company, up to a maximum of 2,500,000 common shares. The term of the agreement is six (6) months; provided, however, that the term may be extended by the parties. The number of shares to be issued will be determined monthly, based on the amount payable by the Company for services rendered above a certain production threshold, using the closing price quoted on active markets at the end of every month. As at September 30, 2013, the Company has agreed to issue approximately 15,800 common shares under this agreement. The fair value of this liability is included in accounts payable and accrued liabilities on the consolidated balance sheet as at September 30, 2013. The shares will be issued in the fourth quarter of 2013.

 

NOTE 8   STOCK-BASED COMPENSATION

 

During the nine months ended September 30, 2013, the Company granted stock options to certain employees and directors for an aggregate of 1.7 million shares of common stock at a weighted average exercise price of $2.26 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 same period in 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 nine months ended September 30, 2013, the Company recorded stock option expense of $0.3 million and $1.0 million, respectively. During the three and nine months ended September 30, 2012, the Company recorded stock option expense of $0.7 million and $2.8 million, respectively.

 

14



Table of Contents

 

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

 

NOTE 8   STOCK-BASED COMPENSATION (Continued)

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Risk-free interest rate

 

0.50% to 0.86%

 

 

0.50%

 

0.97%

 

Dividend yield

 

n/a

 

 

n/a

 

n/a

 

Volatility factor of the expected market price of common stock

 

66% to 69%

 

 

66%

 

75%

 

Weighted-average expected life of option

 

3.5 years

 

 

3.5 years

 

6.0 years

 

Weighted-average grant date fair value

 

$1.02

 

 

$1.01

 

$3.80

 

 

NOTE 9   INCOME (LOSS) PER COMMON SHARE

 

Basic net income (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed similarly except that the weighted average number of common shares is increased to reflect all dilutive instruments. Below is a reconciliation of the basic and diluted weighted average number of common shares.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income (loss)

 

$

3,264

 

$

(2,654

)

$

(136,399

)

$

(40,369

)

Weighted average common shares (thousands):

 

 

 

 

 

 

 

 

 

Basic

 

297,125

 

268,373

 

297,001

 

256,834

 

Effect of employee stock-based awards

 

774

 

 

 

 

Diluted

 

297,899

 

268,373

 

297,001

 

256,834

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

$

(0.01

)

$

(0.46

)

$

(0.16

)

Diluted

 

$

0.01

 

$

(0.01

)

$

(0.46

)

$

(0.16

)

 

Outstanding options to purchase 2 million shares of common stock with a weighted average exercise prices of $5.06 were outstanding at September 30, 2013 but were not included in the computation of diluted weighted average common shares for the three months ended September 30, 2013 because their exercise prices exceeded the average price of the Company’s common stock for the period presented.

 

Other outstanding options to purchase 4 million shares of common stock were not included in the computation of diluted weighted average shares in the nine months ended September 30, 2013 because their effect would have been anti-dilutive. For the three and nine months ended September 30, 2012, other outstanding options excluded from the computation of diluted weighted average shares because of their anti-dilutive effect were of 3 million shares.

 

15



Table of Contents

 

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

 

NOTE 10   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.

 

The Company 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 September 30, 2013, the Company incurred and paid $9,100 (2012 - $14,809) to Lexam L.P. for the use of this aircraft. For the nine months ended September 30, 2013, the Company incurred and paid $79,625 (2012 - $218,528) for the use of this aircraft.

 

NOTE 11   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.

 

The financial information relating to the Company’s segments is as follows:

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Argentina

 

Mexico

 

U.S.

 

& Other

 

Total

 

 

 

(in thousands)

 

For the three months ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

 

$

11,778

 

$

 

$

 

$

11,778

 

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

 

2,040

 

 

 

 

2,040

 

Production costs applicable to sales

 

 

7,907

 

 

 

7,907

 

Mine development costs

 

 

747

 

 

 

747

 

Exploration costs

 

631

 

1,148

 

634

 

162

 

2,575

 

Impairment of mineral property interests and property and equipment

 

 

 

6,287

 

 

6,287

 

Gain on sale of assets

 

(10

)

 

(40

)

 

(50

)

Operating income (loss)

 

1,131

 

393

 

(8,499

)

(1,870

)

(8,845

)

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

 

$

35,735

 

$

 

$

 

$

35,735

 

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

 

252

 

 

 

 

252

 

Production costs applicable to sales

 

 

26,778

 

 

 

26,778

 

Mine development costs

 

 

1,316

 

 

 

1,316

 

Exploration costs

 

14,110

 

5,582

 

2,084

 

288

 

22,064

 

Impairment of investment in MSC

 

95,878

 

 

 

 

95,878

 

Impairment of mineral property interests and property and equipment

 

27,729

 

 

6,287

 

 

34,016

 

Loss (gain) on sale of assets

 

316

 

 

6,428

 

(3

)

6,741

 

Operating income (loss)

 

(139,297

)

(2,627

)

(17,102

)

(7,840

)

(166,866

)

 

 

 

 

 

 

 

 

 

 

 

 

As at September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

Investment in Minera Santa Cruz S.A.

 

177,080

 

 

 

 

177,080

 

Mineral property interests

 

511,363

 

12,093

 

201,385

 

 

724,841

 

Total assets

 

691,579

 

51,272

 

205,457

 

24,943

 

973,251

 

 

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Table of Contents

 

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

 

NOTE 11   SEGMENTED INFORMATION (Continued)

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Argentina

 

Mexico

 

U.S.

 

& Other

 

Total

 

 

 

(in thousands)

 

For the three months ended September 2012

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

 

456

 

 

 

456

 

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

 

$

11,240

 

$

 

$

 

$

 

$

11,240

 

Production costs applicable to sales

 

 

119

 

 

 

119

 

Mine development and operating costs

 

 

2,406

 

 

 

2,406

 

Mine construction costs

 

 

4,671

 

 

 

4,671

 

Exploration costs

 

1,539

 

3,847

 

999

 

323

 

6,708

 

Operating income (loss) (adjusted - note 6)

 

9,129

 

(12,650

)

(4,234

)

(2,870

)

(10,625

)

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

 

456

 

 

 

456

 

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

 

$

14,968

 

$

 

$

 

$

 

$

14,968

 

Production costs applicable to sales

 

 

119

 

 

 

119

 

Mine development and operating costs

 

 

8,622

 

 

 

8,622

 

Mine construction costs

 

 

13,306

 

 

 

13,306

 

Exploration costs

 

11,369

 

12,394

 

3,905

 

897

 

28,565

 

Operating income (loss) (adjusted - note 6)

 

1,440

 

(38,733

)

(7,864

)

(11,451

)

(56,608

)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

NOTE 12   FAIR VALUE ACCOUNTING

 

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

 

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

 

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

 

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

 

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

 

NOTE 12   FAIR VALUE ACCOUNTING (Continued)

 

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 September 30, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,062

 

$

31,062

 

$

 

$

 

IVA taxes receivable

 

10,129

 

 

10,129

 

 

 

 

$

41,191

 

$

31,062

 

$

10,129

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

10,041

 

$

38

 

$

10,003

 

$

 

 

 

$

10,041

 

$

38

 

$

10,003

 

$

 

 

 

 

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.

 

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

 

As at September 30, 2013, accounts payable included an accrual for the fair value of approximately 15,800 shares of common stock that are required to be issued as part of the settlement of certain amounts due by the Company to one of its vendors, as discussed in Note 7, Shareholders’ Equity. As the Company’s stock is quoted on an active market, this liability is classified within Level 1 of the fair value hierarchy.

 

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.

 

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Table of Contents

 

NOTE 12   FAIR VALUE ACCOUNTING (Continued)

 

In the second quarter of 2013, the Company recorded impairment charges related to its mineral property interests in the Santa Cruz Province, Argentina and its investment in MSC, as discussed in Notes 5 and 6, respectively. 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 discounted cash flow model used significant unobservable inputs and is, therefore, considered within Level 3 of the fair value hierarchy.

 

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.

 

 

 

Valuation

 

Unobservable

 

Range /

 

 

 

Technique

 

Input

 

Weighted Average

 

Investment in MSC

 

Discounted cash flow

 

Discount Rate
Long Term Gold Price
Long Term Silver Price
Argentina Inflation Index
United States Inflation Index

 

10.0%
$1,300 per ounce

$22.75 per ounce
10.0%
1.7%

 

 

NOTE 13   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 November 7, 2013 for the foreseeable future. It also analyzes our financial condition at September 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 nine months ended September 30, 2013 and compares those results to the three and nine months ended September 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 35.  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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Table of Contents

 

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

 

We are 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 drill 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 of Minera Andes Inc. (“Minera Andes”) by way of a statutory plan of arrangement pursuant to the laws of the Province of Alberta, Canada.  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

 

Selected Financial and Operating Results

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

11,778

 

$

456

 

$

35,735

 

$

456

 

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

 

$

2,040

 

$

11,240

 

$

252

 

$

14,968

 

Net income (loss)

 

$

3,264

 

$

(2,654

)

$

(136,399

)

$

(40,369

)

Per common share - basic and diluted

 

$

0.01

 

$

(0.01

)

$

(0.46

)

$

(0.16

)

Consolidated gold ounces (thousands)

 

 

 

 

 

 

 

 

 

Produced

 

20

 

11

 

58

 

31

 

Sold

 

833

 

761

 

2,278

 

2,160

 

Consolidated silver ounces (thousands)

 

 

 

 

 

 

 

 

 

Produced

 

21

 

14

 

59

 

30

 

Sold

 

814

 

1,061

 

2,240

 

2,129

 

Consolidated gold equivalent ounces (thousands) (1)

 

 

 

 

 

 

 

 

 

Produced

 

36

 

25

 

102

 

73

 

Sold

 

37

 

35

 

102

 

71

 

Consolidated average realized price (2)

 

 

 

 

 

 

 

 

 

Gold

 

$

1,378

 

$

1,707

 

$

1,364

 

$

1,671

 

Silver

 

$

23.19

 

$

32.58

 

$

21.96

 

$

31.56

 

Consolidated total cash costs per gold equivalent ounce (2) (3) 

 

$

749

 

$

804

 

$

793

 

$

796

 

Consolidated all-in sustaining costs per gold equivalent ounce (2) (4)

 

$

1,081

 

$

1,245

 

$

1,223

 

$

1,367

 

Consolidated all-in costs per gold equivalent ounce (2) (4) 

 

$

1,245

 

$

1,715

 

$

1,490

 

$

2,178

 

 


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

(2)         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 35 for additional information, including definitions of these terms.

(3)         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.

(4)         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.

 

Operating and Financial Highlights

 

·                  Gold equivalent production in the third quarter of 2013 totaled 36,494 ounces, which includes 28,467 gold equivalent ounces attributable to us from our 49% owned San José mine in Argentina and 8,027 gold equivalent ounces from El Gallo 1 in Mexico.

·                  For the third quarter of 2013, total cash costs, all-in sustaining costs and all-in costs for all of our operations on a consolidated basis totaled $749, $1,081 and $1,245 per gold equivalent ounce, respectively. Total cash costs and all-in sustaining costs at the San José mine in Argentina totaled $749 and $1,003 per gold equivalent ounce, respectively. Total cash costs and all-in sustaining cash costs at our El Gallo 1 mine totaled $747 and $1,066 per gold equivalent ounce, respectively.

·                  Gold equivalent ounces sold in the third quarter of 2013 totaled 36,512 ounces, which includes 27,711 gold equivalent ounces attributable to us from our 49% owned San José mine in Argentina and 8,801 gold equivalent ounces from El Gallo 1 in Mexico.

·                  Average realized price for all of our operations on a consolidated basis in the third quarter of 2013 was $1,378 and $23.19 per ounce of gold and silver sold, respectively.

·                  The Company ended the quarter with $32.6 million in cash and precious metals and no debt.

 

Development and Exploration Activities

 

El Gallo Complex, Mexico

 

El Gallo 1

 

During the third quarter of 2013, we continued to work on the expansion of El Gallo 1. The expansion is ahead of schedule with completion expected at the end of the first quarter rather than the second quarter of 2014. In addition, the estimated cost has been reduced to $3 million from the previously stated $5 million. Key advancements in the quarter focused on heap leach pad construction, crushing and processing plant upgrades, and requisitions of long lead capital items, as these areas are critical for increased production at El Gallo 1.  For the nine months ended September 30, 2013, we have spent $0.5 million on the expansion.

 

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Table of Contents

 

Remaining equipment upgrades and development activities are summarized below:

 

·                  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.

 

El Gallo 2

 

During the third quarter, we continued to evaluate ways to optimize the project both by continuing the metallurgical testing for El Gallo 2 as a heap leach operation rather than a conventional milling process and also by looking to decrease the capital cost estimate should we proceed with development under a milling scenario. We expect that the capital cost requirements under a heap leach scenario would be much lower, approximately $30 million, versus the original estimate of $180 million under a milling scenario, with the primary tradeoff being lower silver production levels due to reduced recoveries. Follow-up tests confirm earlier tests which suggest silver recoveries through heap leaching would be between 55-60%. However more work is required on processing costs and permitting requirements before a final decision is made. The metallurgical testing of El Gallo 2 ore via heap leach is expected to be completed by the fourth quarter of 2014. Development under a heap leach scenario would require changes to the permits currently sought for El Gallo 2 described below.

 

Concurrently, we are reviewing the technical design of El Gallo 2 under the milling scenario and making modifications to the design which are expected to result in savings of 10-15% from the original project estimate of $180 million. The Company has continued to advance the construction of the El Gallo 2 ball mill to ensure both process alternatives remain viable without incurring unnecessary costs or delays. The construction of the ball mill is expected to be complete in Q3 2014. For the nine months ended September 30, 2013, we have made advances of $3.4 million for the ball mill and filter presses.

 

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. The final permit to begin construction and operations under the mill scenario is still under review by the Mexican government. The government has completed an initial review. We have since supplied the answers and supporting documentation. We are hoping to have approval by the end of 2013, but it could extend into early 2014, with the number of other projects within the country that are currently being reviewed.

 

The following table summarizes the status of our permits for El Gallo 2 as of November 7, 2013.

 

El Gallo 2: Permitting Schedule and Update

 

Key Environmental Permits

 

Permit

 

Purpose

 

Agency

 

Status

Environmental Impact Statement (MIA)

 

Construction/Operation

 

SEMARNAT

 

Approved

Land Use Change (ETJ)

 

Construction/Operation

 

SEMARNAT

 

Submitted

Risk Analysis (RA)

 

Construction/Operation

 

SEMARNAT

 

Approved

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

 

We would expect construction of the project to take approximately one year from the time permits are received and a construction decision is made.

 

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Table of Contents

 

Exploration

 

Drilling at El Gallo in the first nine months of 2013 was primarily focused on 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 of recent drilling have been three fold: 1) extend the mineralized zone to depth; 2) increase the 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 an updated NI 43-101 resource estimate for El Gallo 1, filed on SEDAR under the Company’s profile on August 29, 2013.

 

During the third quarter of 2013, we also announced core drill results from our Twin Domes discovery, previously announced in April 2013. Initial test results show that the gold mineralization at Twin Domes is potentially amenable to heap leaching, which would allow it to be processed at El Gallo 1. Ten additional core holes were completed in this recent drilling, including TDX015 which intersected 10.3 m averaging 9.7 g/t Au, and TDX018 which intersected 16.8 m averaging 5.0 g/t Au. To date, gold mineralization at Twin Domes has been identified from surface to a depth of 45 m. The known length (or strike) of the zone is approximately 275 m.

 

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 and testing exploration targets at the mine. In addition, several geotechnical drilling programs are ongoing relating to the El Gallo 1 heap leach pad expansion, pit design for Central and El Gallo 2 plant site civil development.

 

Gold Bar Project, Nevada, U.S.A.

 

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 fourth 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.

 

Grass Valley Exploration, Nevada, U.S.A.

 

In the third quarter additional geochemical sampling was completed at our Grass Valley exploration property in Nevada, USA. The goal of this test work includes mercury in soil, sagebrush sampling, water chemistry analysis, and was designed to better define the exploration area. Additional results are still pending and due in the fourth quarter. The Company expects a decision on drilling once all results have been received.

 

Los Azules Copper Project, Argentina

 

In September 2013, we announced the results of an updated Preliminary Economic Assessment (“PEA”) for the Los Azules Copper Project, located in Argentina. The PEA was based on the increased mineralized material estimate, 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 updated PEA contemplates the construction of a mine and process plant operating over a 35-year mine life at a throughput of 120,000 tonnes per day. The mine would produce a copper cathode via a pressure oxidative leach process, in addition to heap leaching the lower grade mineralized material. 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, reduce the applicable export tax from 10% on concentrate to 5% on cathode, and remove the treatment and refining charges from the smelting process. The complete technical report was filed on November 7, 2013. It is available on our website and on SEDAR under the Company’s profile, and is subject to the assumptions and conditions set forth therein.

 

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Table of Contents

 

Santa Cruz Exploration, Argentina

 

In October 2013, the Company and Hochschild entered into a vend-in agreement with MSC pursuant to which we agreed to contribute to MSC the mining rights of certain of our 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. We believe this agreement could create synergies through utilizing the operational and geological expertise of the San José mine’s management team, along with passing on the tax deductibility of all exploration expenditures to the mine. The agreement also 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 following maps illustrate the location of the respective Santa Cruz exploration properties to be contributed by the Company and Hochschild pursuant to the vend-in agreement, and the combined properties after completion of the vend-in agreement;

 

GRAPHIC

 

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Table of Contents

 

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.

 

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 nine month periods ended September 30, 2013 and 2012. Also included below are the production figures on a 49% attributable basis.

 

 

 

Nine months
ended
September 30,
2013

 

Q3 2013

 

Q2 2013

 

Q1 2013

 

Nine months
ended
September 30,
2012

 

Q3 2012

 

Q2 2012

 

Q1 2012

 

San José Mine - 100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tonnes processed (thousands)