10-Q 1 a14-14042_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, 2014

 

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.)

 

150 King Street West, Suite 2800, Toronto, Ontario Canada M5H 1J9

(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: 267,344,048 shares outstanding as of August 4, 2014 (and 30,073,043 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 six months ended June 30, 2014 and 2013 (unaudited)

3

 

 

 

 

Consolidated Balance Sheets at June 30, 2014 (unaudited) and December 31, 2013

4

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2014 and 2013 (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (unaudited)

6

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

7

 

 

 

Item 2.

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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

43

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

Part II    OTHER INFORMATION

 

 

 

Item 1A.

Risk Factors

45

 

 

 

Item 6.

Exhibits

47

 

 

 

SIGNATURES

48

 

2



Table of Contents

 

MCEWEN MINING INC.

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

(in thousands, except per share)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

REVENUE:

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

11,637

 

$

10,459

 

$

22,767

 

$

23,957

 

 

 

 

 

 

 

 

 

 

 

 

 

11,637

 

10,459

 

22,767

 

23,957

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

Production costs applicable to sales

 

10,900

 

8,278

 

19,427

 

18,871

 

Mine construction costs

 

217

 

 

1,156

 

 

Mine development costs

 

155

 

98

 

1,723

 

569

 

Exploration costs

 

2,637

 

4,889

 

5,317

 

19,489

 

Property holding costs

 

734

 

316

 

2,188

 

1,693

 

General and administrative

 

3,213

 

4,217

 

6,440

 

8,409

 

Depreciation

 

229

 

245

 

454

 

527

 

Accretion of asset retirement obligation (note 3)

 

108

 

121

 

209

 

234

 

(Income) loss on investment in Minera Santa Cruz S.A., net of amortization (note 4)

 

2,438

 

1,551

 

(4,591

)

1,788

 

Impairment of investment in MSC (note 4)

 

 

95,878

 

 

95,878

 

Impairment of mineral property interests and property and equipment (note 3)

 

120,398

 

27,729

 

120,398

 

27,729

 

(Gain) loss on sale of assets

 

(18

)

6,791

 

(18

)

6,791

 

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

141,011

 

150,113

 

152,703

 

181,978

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(129,374

)

(139,654

)

(129,936

)

(158,021

)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Interest income

 

34

 

68

 

109

 

139

 

Gain on litigation settlement

 

 

 

 

560

 

Unrealized loss on gold and silver bullion

 

 

(274

)

 

(274

)

Foreign currency gain (loss)

 

284

 

(1,226

)

(299

)

(935

)

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

318

 

(1,432

)

(190

)

(510

)

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(129,056

)

(141,086

)

(130,126

)

(158,531

)

Income tax recovery (note 8)

 

25,034

 

12,405

 

43,991

 

18,868

 

Net loss

 

(104,022

)

(128,681

)

(86,135

)

(139,663

)

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

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

 

2

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(104,020

)

$

(128,681

)

$

(86,132

)

$

(139,663

)

Net loss per share (note 9):

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.35

)

$

(0.43

)

$

(0.29

)

$

(0.47

)

Diluted

 

$

(0.35

)

$

(0.43

)

$

(0.29

)

$

(0.47

)

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

 

 

 

 

 

 

 

 

 

Basic

 

297,164

 

297,097

 

297,162

 

296,938

 

Diluted

 

297,164

 

297,097

 

297,162

 

296,938

 

 

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

 

3



Table of Contents

 

MCEWEN MINING INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

15,149

 

$

24,321

 

IVA taxes receivable

 

14,483

 

11,591

 

Inventories (note 2)

 

10,170

 

8,800

 

Other current assets

 

2,279

 

2,059

 

Total current assets

 

42,081

 

46,771

 

 

 

 

 

 

 

Mineral property interests (note 3)

 

521,884

 

642,968

 

Restrictive time deposits for reclamation bonding (note 3)

 

4,817

 

5,183

 

Investment in Minera Santa Cruz S.A. (note 4)

 

210,425

 

212,947

 

Property and equipment, net (note 5)

 

16,972

 

15,143

 

Other assets

 

91

 

54

 

TOTAL ASSETS

 

$

796,270

 

$

923,066

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

12,238

 

$

9,797

 

Current portion of asset retirement obligation (note 3)

 

1,455

 

1,392

 

Total current liabilities

 

13,693

 

11,189

 

 

 

 

 

 

 

Asset retirement obligation, less current portion (note 3)

 

5,940

 

5,855

 

Deferred income tax liability (note 8)

 

114,864

 

158,855

 

Other liabilities

 

400

 

400

 

Total liabilities

 

$

134,897

 

$

176,299

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, no par value, 500,000 shares authorized; Common: 266,597 as of June 30, 2014 and 264,913 shares as of December 31, 2013 issued and outstanding

 

 

 

 

 

Exchangeable: 30,623 shares as of June 30, 2014 and 32,246 shares as of December 31, 2013 issued and outstanding

 

1,355,434

 

1,354,696

 

Accumulated deficit

 

(693,769

)

(607,634

)

Accumulated other comprehensive loss

 

(292

)

(295

)

Total shareholders’ equity

 

661,373

 

746,767

 

 

 

 

 

 

 

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

 

$

796,270

 

$

923,066

 

 

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

 

4



Table of Contents

 

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands)

 

 

 

Common Stock

 

Accumulated
Other
Comprehensive

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

(Loss) Income

 

Deficit

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

297,159

 

$

1,354,696

 

$

(295

)

$

(607,634

)

$

746,767

 

Stock-based compensation

 

 

609

 

 

 

609

 

Exercise of stock options

 

60

 

129

 

 

 

129

 

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

 

 

 

3

 

 

3

 

Net loss

 

 

 

 

(86,135

)

(86,135

)

Balance, June 30, 2014

 

297,220

 

$

1,355,434

 

$

(292

)

$

(693,769

)

$

661,373

 

 

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,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Cash paid to suppliers and employees

 

$

(37,085

)

$

(58,521

)

Cash received from gold and silver sales

 

22,767

 

23,197

 

Dividends received from Minera Santa Cruz S.A.

 

7,113

 

 

Proceeds from sale of gold and silver bullion

 

 

510

 

Interest received

 

109

 

139

 

Cash used in operating activities

 

(7,096

)

(34,675

)

Cash flows from investing activities:

 

 

 

 

 

Acquisition of mineral property interests

 

 

(150

)

Additions to property and equipment

 

(2,297

)

(225

)

Decrease to restrictive time deposits for reclamation bonding

 

367

 

 

Proceeds from disposal of property and equipment

 

31

 

 

Cash used in investing activities

 

(1,899

)

(375

)

Cash flows from financing activities:

 

 

 

 

 

Exercise of stock options

 

129

 

95

 

Cash provided by financing activities

 

129

 

95

 

Effect of exchange rate change on cash and cash equivalents

 

(306

)

(1,193

)

Decrease in cash and cash equivalents

 

(9,172

)

(36,148

)

Cash and cash equivalents, beginning of period

 

24,321

 

70,921

 

Cash and cash equivalents, end of period

 

$

15,149

 

$

34,773

 

 

 

 

 

 

 

Reconciliation of net loss to cash used in operating activities:

 

 

 

 

 

Net loss

 

$

(86,135

)

$

(139,663

)

Adjustments to reconcile net income (loss) from operating activities:

 

 

 

 

 

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

 

(4,591

)

1,788

 

Impairment of investment in MSC

 

 

95,878

 

Impairment of mineral property interests and property and equipment

 

120,398

 

27,729

 

(Gain) loss on sale of assets

 

(18

)

6,791

 

Income tax recovery

 

(43,991

)

(18,868

)

Gain on litigation settlement

 

 

(560

)

Unrealized loss on gold and silver bullion

 

 

274

 

Stock-based compensation

 

609

 

686

 

Depreciation

 

454

 

527

 

Accretion of asset retirement obligation

 

209

 

234

 

Amortization of mineral property interests and asset retirement obligations

 

626

 

956

 

Foreign exchange loss

 

306

 

1,193

 

Change in non-cash working capital items:

 

 

 

 

 

Increase in other assets related to operations

 

(4,516

)

(1,534

)

Increase (decrease) in liabilities related to operations

 

2,440

 

(10,616

)

Dividends received from Minera Santa Cruz S.A.

 

7,113

 

 

Cash used in operating activities

 

$

(7,096

)

$

(35,185

)

 

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, 2014

 

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 and operator of the producing San José mine in Santa Cruz, Argentina, which is controlled 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 resumed in September 2012. In addition to its operating properties, the Company also holds interests in numerous exploration stage properties and projects in Argentina, Mexico and the United States.

 

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 six months ended June 30, 2014 and 2013, the Consolidated Balance Sheets as at June 30, 2014 (unaudited) and December 31, 2013, the unaudited Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2014  and 2013, and the unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013, 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, 2013.  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, 2013.

 

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

 

Recently Adopted Accounting Pronouncements

 

Presentation of an Unrecognized Tax Benefit:  In July 2013, ASC guidance was issued related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The updated guidance requires an entity to net its unrecognized tax benefits against the deferred tax assets for the same jurisdiction’s net operating loss carryforward, a similar tax loss, or tax credit carryforwards. A gross presentation will be required only if such carryforwards are not available or would not be used by the entity to settle any additional income taxes resulting from disallowance of the uncertain tax position. The update was effective prospectively for the Company’s fiscal year beginning January 1, 2014. 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.

 

7



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014

 

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

 

Foreign Currency Matters: In March 2013, ASC guidance was issued related to Foreign Currency Matters to clarify the treatment of cumulative translation adjustments when a parent sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. The updated guidance also resolves the diversity in practice for the treatment of business combinations achieved in stages in a foreign entity. The update was effective prospectively for the Company’s fiscal year beginning January 1, 2014. The updated guidance had no impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Recently Issued Accounting Pronouncements

 

Presentation of Financial Statements (ASC 205) and Property, Plant and Equipment (ASC 360) — Reporting Discontinued Operations and Disclosures of Components of an Entity:  In April 2014, ASC guidance was amended to change the requirements for reporting discontinued operations in ASC 205-20. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results when any of the following occurs: (1) the component of an entity or group of components of an entity meets the criteria in ASC 205-20-45-1E to be classified as held for sale; (2) the component of an entity or group of components of an entity is disposed of by sale; (3) the component of an entity or group of components of an entity is disposed of other than by sale. The update is effective prospectively for the Company’s fiscal year beginning January 1, 2015. The new guidance is not expected to have an impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Revenue from Contracts with Customers (ASC 606): In May 2014, ASC 606 was issued related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The standard will be effective for the Company’s fiscal year beginning January 1, 2017, including interim reporting periods within that year. The Company is evaluating the effect that the updated standard will have on its consolidated financial position, results of operations or cash flows.

 

NOTE 2   INVENTORIES

 

Inventories at June 30, 2014 and December 31, 2013 consist of the following:

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

(in thousands)

 

Ore on leach pads

 

$

4,133

 

$

2,749

 

In-process inventory

 

3,185

 

2,681

 

Stockpiles

 

 

778

 

Precious metals

 

1,438

 

1,300

 

Materials and supplies

 

1,414

 

1,292

 

Inventories

 

$

10,170

 

$

8,800

 

 

8



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014

 

NOTE 3   MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS

 

Mineral Property Interests

 

During the second quarter of 2014, the Company recorded an impairment charge of $120.4 million relating to its Los Azules copper exploration project (“Los Azules Project”). The Company conducts a review of potential triggering events for all its mineral projects on a quarterly basis. When events or changes in circumstances indicate that the related carrying amounts may not be recoverable, the Company carries out a review and evaluation of its long-lived assets for impairment, in accordance with its accounting policy. Such a triggering event was identified in the second quarter of 2014 with respect to the Company’s Los Azules Project. The triggering event identified was a recently announced acquisition of a copper project located in Argentina, which shares similarities with the Los Azules Project due to its scale, location, and stage of development. Based on the announcement day value of the similar project, the estimated market value per pound of copper equivalent mineralized material from this transaction was below the carrying value per pound of copper equivalent mineralized material of the Los Azules Project, indicating a potential significant decrease in the market price of its Los Azules Project, in accordance with ASC 360-35-21-a, and therefore a requirement to test the Los Azules Project for recoverability. To assist in performing a recoverability test, the Company engaged a third-party valuation firm who used the observed market value per pound of copper equivalent mineralized material based on this recent and other comparable transactions to estimate the fair value of the Los Azules Project. The carrying value of the property exceeded its estimated fair value, resulting in an impairment charge of $120.4 million, along with a resulting deferred income tax recovery of $22.5 million, being recorded in the Statement of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2014.

 

Impairments recorded in the second quarter of 2013 related to the Company’s exploration properties in Santa Cruz, Argentina. The impairments were primarily due to an unexpected significant decline in gold and silver market prices, continued inflationary pressures and a new tax on mining reserves in the Province, resulting in a depressed market for exploration properties in Argentina. An impairment charge of $27.7 million, along with a resulting reduction in deferred tax liability and recovery of deferred income taxes of $2.3 million, were included in the Statement of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2013.

 

Based on the above, impairment charges were recorded on the following mineral property interests for the three and six months ended June 30, 2014 and 2013.

 

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

Name of Property/Complex

 

Segment

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

(in thousands)

 

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

 

Los Azules Copper Project

 

Argentina

 

120,398

 

 

120,398

 

 

Total impairments

 

 

 

$

120,398

 

$

27,729

 

$

120,398

 

$

27,729

 

 

Asset Retirement Obligations

 

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.

 

The current undiscounted estimate of the reclamation costs for existing disturbances on the Tonkin property to the degree required by the U.S. Bureau of Land Management (“BLM”) and the Nevada Department of Environmental Protection (“NDEP”) was $2.7 million as of June 30, 2014. Expenses are expected to be incurred between the years 2014 and 2040. The Company submitted a mine closure plan to the NDEP and BLM for the Tonkin property during the fourth quarter of 2010.  As at June 30, 2014, the closure plan has already been approved by the NDEP but is still under review by the BLM pursuant to the National Environmental Policy Act. It is possible that reclamation plan cost estimates and bonding requirements may increase as a result of this review. The Company, however, is unable to meaningfully estimate possible increases at this time.

 

9



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014

 

NOTE 3   MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS (Continued)

 

Asset Retirement Obligations (Continued)

 

For mineral properties in the United States, the Company maintains required reclamation bonding with various governmental agencies. At December 31, 2013, the Company had cash bonding in place of $5.2 million.  During the second quarter of 2014, cash bonding requirements were reduced by $0.4 million, to $4.8 million at June 30, 2014. Subsequent to June 30, 2014, the Company replaced its cash bonding with surety bonds of the same amounts. The annual fees are 1.5% of the value of the surety bonds, with an upfront 10% deposit.

 

The current undiscounted estimate of the reclamation costs for existing disturbances at the El Gallo 1 mine was $4.6 million as of June 30, 2014. Expenses are expected to be incurred between the years 2014 and 2018. Under Mexican regulations, surety bonding of projected reclamation costs is not required.

 

A reconciliation of the Company’s asset retirement obligations for the six months ended June 30, 2014 and for the year ended December 31, 2013 are as follows:

 

 

 

Six months ended

 

Year Ended

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

(in thousands)

 

Asset retirement obligation liability, beginning balance

 

$

7,247

 

$

6,359

 

Settlements

 

(18

)

(60

)

Accretion of liability

 

209

 

461

 

Adjustment reflecting updated estimates

 

(42

)

487

 

Asset retirement obligation liability, ending balance

 

$

7,396

 

$

7,247

 

 

As at June 30, 2014, the current portion of the asset retirement obligation was $1.5 million (December 31, 2013 - $1.4 million).

 

Amortization of Mineral Property Interests and Asset Retirement Costs

 

The definition of proven and probable reserves is set forth in the SEC Industry Guide 7. If proven and probable reserves exist at the Company’s properties, the relevant capitalized mineral property interests and asset retirement costs are to be charged to expense based on the units of production method and upon commencement of production. Since the Company has not completed feasibility or other studies sufficient to characterize the mineralized material at El Gallo 1 as proven or probable reserves, the amortization of the capitalized mineral property interests and asset retirement costs are 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, 2014, the Company recorded $0.3 million and $0.6 million, respectively, of amortization expense related to El Gallo 1, which is included in Production Costs Applicable to Sales in the Statement of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2014, of which $0.1 million and $0.1 million, respectively, related to the amortization of capitalized asset retirement costs.

 

10



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014

 

NOTE 4   INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) — SAN JOSÉ MINE

 

The Company’s 49% attributable share of earnings from its investment in MSC was a loss of $2.4 million for the three months ended June 30, 2014,  and income of $4.6 million for the six months ended June 30, 2014. This compares to losses of $1.6 million and $1.8 million for the three and six months ended June 30, 2013. These amounts are net of the amortization of the fair value increments arising from the purchase price allocation and related income tax expense. Included in the income tax expense is the impact of fluctuations in the exchange rate between the Argentine peso and the U.S. dollar on the peso-denominated deferred tax liability associated with the investment in MSC recorded as part of the acquisition of Minera Andes. As a devaluation of the Argentine peso relative to the U.S. dollar results in a recovery of deferred income taxes, the impact has been an increase to the Company’s income from its investment in MSC for the three and six months ended June 30, 2014.

 

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 three months ended December 31, 2012 was understated, resulting in an overstatement of MSC’s after-tax net income of $3.9 million. As the error was not material to previously-reported consolidated financial statements, the correction was recorded in the three months ended March 31, 2013. As a result, the income from the Company’s equity investment of 49% in MSC includes an adjustment of $1.9 million, resulting in a reduction of the Company’s Income from Investment in MSC for the six months ended June 30, 2013.

 

During the second quarter of 2013, the Company recorded an impairment charge of $95.9 million on its investment in MSC, primarily as a result of an unexpected and significant decline in gold and silver market prices, continued inflationary pressures during the year, and amendments to the Santa Cruz Provincial Tax Code and Provincial Tax Law, which imposed a new tax on mining reserves in the Province of Santa Cruz. As the loss in value of the investment was considered other than temporary, an impairment of $95.9 million was recorded in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2013.

 

During the fourth quarter of 2013, the Company entered into a vend-in agreement with MSC and subsidiaries of Hochschild pursuant to which both parties agreed to contribute to MSC the mining rights of certain Santa Cruz exploration properties. The carrying value of the Company’s properties of $35.9 million, net of the related deferred tax liability of $17.3 million, was transferred to the Company’s investment in MSC, with no gain or loss recognized upon transfer.

 

During the three and six months ended June 30, 2014, the Company received $3.2 million and $7.1 million in dividends from MSC, respectively, compared to $nil during the same period in 2013. The Company received an additional dividend payment of 8.1 million Argentine pesos in July 2014, equivalent to approximately $1.0 million based on foreign exchange rates at the date of the dividend receipt, and expects another payment of 8.1 million pesos in the third quarter of 2014, equivalent to approximately $1.0 million based on foreign exchange rates as at June 30, 2014.

 

Changes in the Company’s investment in MSC for the six months ended June 30, 2014 and year ended December 31, 2013 are as follows:

 

 

 

Six months ended

 

Year ended

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

(in thousands)

 

Investment in MSC, beginning balance

 

$

212,947

 

$

273,948

 

Income from equity investment

 

2,838

 

2,126

 

Amortization of fair value increments

 

(6,130

)

(18,425

)

Income tax recovery

 

7,883

 

17,145

 

Dividend distribution

 

(7,113

)

(1,826

)

Impairment of investment in MSC

 

 

(95,878

)

Contribution of Santa Cruz exploration properties, net of tax

 

 

35,857

 

Investment in MSC, ending balance

 

$

210,425

 

$

212,947

 

 

11



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014

 

NOTE 4   INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) — SAN JOSÉ MINE (Continued)

 

A summary of the operating results from MSC for the three and six months ended June 30, 2014 and 2013 is as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(in thousands)

 

(in thousands)

 

Minera Santa Cruz S.A. (100%)

 

 

 

 

 

 

 

 

 

Net sales

 

$

53,234

 

$

68,556

 

$

110,123

 

$

112,369

 

Production costs applicable to sales

 

(41,847

)

(57,606

)

(81,484

)

(94,409

)

(Loss) income from operations before extraordinary items

 

(390

)

124

 

5,792

 

2,564

 

Net (loss) income

 

(390

)

124

 

5,792

 

2,564

 

 

 

 

 

 

 

 

 

 

 

Portion attributable to McEwen Mining Inc. (49%)

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(191

)

$

61

 

$

2,838

 

$

1,256

 

Amortization of fair value increments

 

(3,429

)

(6,710

)

(6,130

)

(12,003

)

Income tax recovery

 

1,182

 

5,098

 

7,883

 

8,959

 

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

 

$

(2,438

)

$

(1,551

)

$

4,591

 

$

(1,788

)

 

As at June 30, 2014, MSC had current assets of $100.0 million, total assets of $529.5 million, current liabilities of $48.1 million and total liabilities of $140.0 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 are net of the impairment charge of $95.9 million recorded in the second quarter of 2013. Excluding the fair value increments from the purchase price allocation and the impairment charge recorded in the second quarter of 2013, MSC had current assets of $102.7 million, total assets of $312.7 million, current liabilities of $48.1 million, and total liabilities of $89.2 million as at June 30, 2014.

 

NOTE 5   PROPERTY AND EQUIPMENT

 

As at June 30, 2014 and December 31, 2013, property and equipment consisted of the following:

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

(in thousands)

 

Trucks and trailers

 

$

1,012

 

$

1,041

 

Office furniture and equipment

 

1,756

 

1,163

 

Drill rigs

 

998

 

998

 

Building

 

1,469

 

1,469

 

Land

 

8,699

 

8,672

 

Mining equipment

 

1,409

 

1,206

 

Construction-in-progress

 

5,329

 

3,894

 

Subtotal

 

$

20,672

 

$

18,443

 

Less: accumulated depreciation

 

(3,700

)

(3,300

)

Total

 

$

16,972

 

$

15,143

 

 

The increase in property and equipment from December 31, 2013 to June 30, 2014 was mainly in relation to construction-in-progress assets, which include advances the Company made to a supplier for long-lead items for its El Gallo 2 project, as well as leasehold improvements as a result of the Company’s relocation of its corporate office.

 

Depreciation expense for the three and six months ended June 30, 2014 was $0.2 million and $0.5 million, respectively (2013 - $0.2 million and $0.5 million, respectively).

 

12



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014

 

NOTE 6   SHAREHOLDERS’ EQUITY

 

During the six months ended June 30, 2014, 1.2 million exchangeable shares were converted into common stock.  At June 30, 2014, total outstanding exchangeable shares not exchanged and not owned by the Company or its subsidiaries totaled 30.6 million.

 

During the six months ended June 30, 2014, the Company issued approximately 60,300 shares of common stock upon exercise of stock options under the Equity Incentive Plan at a weighted average exercise price of $2.14 per share for proceeds of $0.1 million.

 

In 2013, the Company entered into an agreement with one of its mining contractors to settle parts of its account payables with shares of common stock of the Company, up to a maximum of 2,500,000 shares. The number of shares to be issued is determined monthly, based on the amount payable by the Company for services rendered above a defined tonnage threshold, using the closing price of the common stock quoted on active markets at the end of every month. As at June 30, 2014, the Company was required to issue a cumulative total of approximately 379,400 common shares under this agreement. The fair value of this liability of $1.1 million is included in accounts payable and accrued liabilities on the Consolidated Balance Sheet as at June 30, 2014. Approximately 107,400 shares were issued in July 2014, with the remainder to be issued later in 2014.

 

NOTE 7   STOCK-BASED COMPENSATION

 

During the three and six months ended June 30, 2014, no stock options were granted to employees or directors. For the comparable periods in 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 of $2.25 per share. The principal assumptions used in applying the Black-Scholes option pricing model for these awards were as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Risk-free interest rate

 

 

0.50

%

 

0.50

%

Dividend yield

 

 

n/a

 

 

n/a

 

Volatility factor of the expected market price of common stock

 

 

66

%

 

66

%

Weighted-average expected life of option

 

 

3.5 years

 

 

3.5 years

 

Weighted-average grant date fair value

 

 

$

1.01

 

 

$

1.01

 

 

During the three and six months ended June 30, 2014, the Company recorded stock option expense of $0.2 million and $0.6 million, respectively. This compares to $0.3 million and $0.7 million for the three and six months ended June 30, 2013.

 

NOTE 8   INCOME TAXES

 

The Company’s income tax expense differs from the amount computed by applying the U.S. federal and state statutory corporate income tax rate of 35% primarily as a result of the tax benefit of losses not being recognized and due to changes in the deferred tax liability associated with mineral property interests acquired with the Minera Andes acquisition. This deferred tax liability is impacted by fluctuations in the foreign exchange rate between the Argentine peso and U.S. dollar. For the three and six months ended June 30, 2014, the Company recorded an income tax recovery of $2.5 million and $21.4 million, respectively, as a result of the Argentine peso devaluation, compared to $7.5 million and $13.7 million for the three and six months ended June 30, 2013, respectively. Further, the income tax recovery for the three and six months ended June 30, 2014 includes $22.5 million associated with the impairment of the Los Azules Project, discussed in Note 3, Mineral Property Interests and Asset Retirement Obligations. This compares to an income tax recovery of $4.8 million related to mineral property interests sold or impaired in the three and six months ended June 30, 2013.

 

13



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014

 

NOTE 9   INCOME (LOSS) PER SHARE

 

Basic net income (loss) per share is computed by dividing the net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per 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 and the computations for basic income (loss) per share for the three and six months ended June 30, 2014 and 2013:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(in thousands, except per share)

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(104,022

)

$

(128,681

)

$

(86,135

)

$

(139,663

)

Weighted average number of common shares

 

297,164

 

297,097

 

297,162

 

296,938

 

Loss per common share

 

$

(0.35

)

$

(0.43

)

$

(0.29

)

$

(0.47

)

 

For the three months ended June 30, 2014, options to purchase 2.0 million shares of common stock outstanding at June 30, 2014 (June 30, 2013 — 3.8 million) at an average exercise price of $5.03 per share (June 30, 2013 — $3.90) were not included in the computation of diluted weighted average shares because their exercise price exceeded the average price of the Company’s common stock for the three months ended June 30, 2014 and 2013, respectively. Other outstanding options to purchase 0.9 million (June 30, 2013 — 0.8 million) shares of common stock were not included in the computation of diluted weighted average shares in the three  months ended June 30, 2014 and 2013, respectively, because their effect would have been anti-dilutive.

 

For the six months ended June 30, 2014, options to purchase 1.4 million shares of common stock outstanding at June 30, 2014 (June 30, 2013 — 1.6 million) at an average exercise price of $5.96 per share (June 30, 2013 — $5.98) were not included in the computation of diluted weighted average shares because their exercise price exceeded the average price of the Company’s common stock for the three months ended June 30, 2014 and 2013, respectively. Other outstanding options to purchase 1.1 million shares of common stock (June 30, 2013 — 1.0 million) were not included in the computation of diluted weighted average shares in the six  months ended June 30, 2014 and 2013, respectively, because their effect would have been anti-dilutive.

 

NOTE 10   RELATED PARTY TRANSACTIONS

 

For the three and six months ended June 30, 2014, the Company incurred and paid $18,038 and $38,518, respectively, to an entity affiliated with the Company’s Chairman and Chief Executive Officer for the use of an aircraft, compared to nil and $70,525 for the three and six months ended June 30, 2013, respectively.

 

14



Table of Contents

 

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

June 30, 2014

 

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 operating segments as of, and for the three and six months ended June 30, 2014 and 2013 is as follows:

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Argentina

 

Mexico

 

U.S.

 

& Other

 

Total

 

 

 

(in thousands)

 

For the three months ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

 

$

11,637

 

$

 

$

 

$

11,637

 

Production costs applicable to sales

 

 

(10,900

)

 

 

(10,900

)

Mine construction costs

 

 

(217

)

 

 

(217

)

Mine development costs

 

 

(155

)

 

 

(155

)

Exploration costs

 

(249

)

(1,488

)

(831

)

(69

)

(2,637

)

Impairment of mineral property interests and property and equipment

 

(120,398

)

 

 

 

(120,398

)

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

 

(2,438

)

 

 

 

(2,438

)

Operating loss

 

(123,817

)

(2,150

)

(1,025

)

(2,382

)

(129,374

)

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

 

$

22,767

 

$

 

$

 

$

22,767

 

Production costs applicable to sales

 

 

(19,427

)

 

 

(19,427

)

Mine construction costs

 

 

(1,156

)

 

 

(1,156

)

Mine development costs

 

 

(1,723

)

 

 

(1,723

)

Exploration costs

 

(750

)

(2,876

)

(1,517

)

(174

)

(5,317

)

Impairment of mineral property interests and property and equipment

 

(120,398

)

 

 

 

(120,398

)

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

 

4,591

 

 

 

 

4,591

 

Operating loss

 

(117,559

)

(5,198

)

(2,454

)

(4,725

)

(129,936

)

 

 

 

 

 

 

 

 

 

 

 

 

As at June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Investment in Minera Santa Cruz S.A.

 

210,425

 

 

 

 

210,425

 

Mineral property interests

 

337,805

 

11,341

 

172,738

 

 

521,884

 

Total assets

 

551,324

 

59,649

 

176,415

 

8,882

 

796,270

 

 

15



Table of Contents

 

MCEWEN MINING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2014

 

NOTE 11   SEGMENTED INFORMATION (Continued)

 

 

 

 

 

 

 

 

 

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

 

Production costs applicable to sales

 

 

(8,278

)

 

 

(8,278

)

Mine development costs

 

 

(98

)

 

 

(98

)

Exploration costs

 

(2,017

)

(1,949

)

(870

)

(53

)

(4,889

)

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

 

(1,551

)

 

 

 

(1,551

)

Impairment of investment in MSC

 

(95,878

)

 

 

 

(95,878

)

Impairment of mineral property interests and property and equipment

 

(27,729

)

 

 

 

(27,729

)

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

 

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

)

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

 

(1,788

)

 

 

 

(1,788

)

Impairment of investment in MSC

 

(95,878

)

 

 

 

(95,878

)

Impairment of mineral property interests and property and equipment

 

(27,729

)

 

 

 

(27,729

)

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 December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Investment in Minera Santa Cruz S.A.

 

212,947

 

 

 

 

212,947

 

Mineral property interests

 

458,203

 

11,984

 

172,781

 

 

642,968

 

Total assets

 

674,269

 

54,131

 

177,248

 

17,418

 

923,066

 

 

16



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014

 

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).

 

Assets and liabilities measured at fair value on a recurring basis

 

The following table identifies the fair value of the Company’s financial assets and liabilities as reported in the Consolidated Balance Sheets at June 30, 2014 and December 31, 2013 by level within the fair value hierarchy.  As required by accounting guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

Fair Value as at June 30, 2014

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,149

 

$

15,149

 

$

 

$

 

 

 

$

15,149

 

$

15,149

 

$

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

1,093

 

$

1,093

 

$

 

$

 

 

 

$

1,093

 

$

1,093

 

$

 

$

 

 

 

 

Fair Value as at December 31, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,321

 

$

24,321

 

$

 

$

 

 

 

$

24,321

 

$

24,321

 

$

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

177

 

177

 

 

 

 

 

$

177

 

$

177

 

$

 

$

 

 

17



Table of Contents

 

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014

 

NOTE 12   FAIR VALUE ACCOUNTING (Continued)

 

The Company’s cash and cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The cash equivalent instruments that are valued based on quoted market prices in active markets are primarily money market securities.

 

As at June 30, 2014, accounts payable included an accrual of $1.1 million for the fair value of approximately 379,400 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 6, 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 fair value of other financial assets and liabilities approximate their carrying values due to their short-term nature and historically negligible credit losses.

 

Assets and liabilities measured at fair value on a non-recurring basis

 

In the second quarter of 2014, the Company recorded impairment charges related to the Los Azules Project in Argentina, as discussed in Note 3, Mineral Property Interests and Asset Retirement Obligations. The estimated fair value of the Los Azules Project was determined using the observed market value per pound of copper equivalent for recent comparable transactions.

 

The following table summarizes non-financial assets measured at fair value on a non-recurring basis as part of the Company’s impairment assessments during the three and six months ended June 30, 2014, and for the year ended December 31, 2013.

 

 

 

Date of Fair Value

 

Fair Value Measurements for the Six Months Ended June 30, 2014

 

 

 

Measurement

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total Loss

 

 

 

 

 

(in thousands)

 

Mineral property interests

 

 

 

 

 

 

 

 

 

 

 

 

 

Los Azules Copper Project

 

June 30, 2014

 

310,792

 

 

 

310,792

 

120,398

 

 

 

 

 

$

310,792

 

$

 

$

 

$

310,792

 

$

120,398

 

 

 

 

Date of Fair Value

 

Fair Value Measurements for the Year Ended December 31, 2013

 

 

 

Measurement

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total Loss

 

 

 

 

 

(in thousands)

 

Mineral property interests

 

 

 

 

 

 

 

 

 

 

 

 

 

Telken Tenements

 

June 30, 2013

 

$

26,442

 

$

 

$

 

$

26,442

 

$

13,792

 

Este Tenements

 

June 30, 2013

 

5,337

 

 

 

5,337

 

2,784

 

Piramides Tenements

 

June 30, 2013

 

9,736

 

 

 

9,736

 

5,079

 

Tobias Tenements

 

June 30, 2013

 

11,645

 

 

 

11,645

 

6,074

 

Limo Complex

 

December 31, 2013

 

23,438

 

 

 

23,438

 

19,450

 

Other United States Properties

 

December 31, 2013

 

9,610

 

 

 

9,610

 

9,497

 

Investment in MSC

 

June 30, 2013

 

176,282

 

 

 

176,282

 

95,878

 

 

 

 

 

$

262,490

 

$

 

$

 

$

262,490

 

$

152,554

 

 

18



Table of Contents

 

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

 

In the following discussion, “McEwen Mining”, the “Company”, “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, 2014 for the foreseeable future. It also analyzes our financial condition at June 30, 2014 and compares it to our financial condition at December 31, 2013. Finally, the discussion analyzes our results of our operations for the three and six months ended June 30, 2014 and compares those results to the three and six months ended June 30, 2013.  With regard to properties or projects that are not in production, we provide some details of our plan of operation. We suggest that you read this discussion in conjunction with 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, 2013.

 

The discussion also presents certain Non-GAAP financial performance measures, such as earnings from mining operations, adjusted net loss, 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 per ounce, 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 and certain limitations inherent in such measures, please see the discussion under “Non-GAAP Financial Performance Measures” below, beginning on page 35.

 

Reliability of Information: Minera Santa Cruz S.A. (“MSC”), the owner of the San José mine, is responsible for and has supplied to us all reported results from the San José mine.  The financial and technical information contained herein is, with few exceptions as noted, based entirely on information provided to us by 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.

 

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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 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 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 or other 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 Argentina (with the exception of the San José mine), Mexico and the United States 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 and indicated resources involve greater uncertainty as to their existence and economic feasibility than the estimation of proven and probable reserves under Guide 7. 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 in our reports, news releases and other various publications would be characterized as mineralized material. We provide such disclosure about our 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 in one area 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.

 

20



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, production of, and sale of gold and silver.  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; “gpt” represents grams per metric tonne; “ft.” represents feet; “m” represents meter; “km” represents kilometer; “sq.” represents square; and C$ refers to Canadian dollars. All of our financial information is reported in United States (U.S.) dollars, unless otherwise noted.

 

21



Table of Contents

 

Selected Financial and Operating Results

 

The following table summarizes selected financial and operating results of our Company for the three and six months ended June 30, 2014 and 2013:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(in thousands, unless otherwise indicated)

 

Gold and silver sales

 

$

11,637

 

$

10,459

 

$

22,767

 

$

23,957

 

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

 

$

(2,438

)

$

(1,551

)

$

4,591

 

$

(1,788

)

Earnings from mining operations (1) (3)

 

$

6,639

 

$

7,833

 

$

18,017

 

$

14,843

 

Net loss

 

$

(104,022

)

$

(128,681

)

$

(86,135

)

$

(139,663

)

Net loss per common share - basic and diluted

 

$

(0.35

)

$

(0.43

)

$

(0.29

)

$

(0.47

)

Adjusted net loss (3)

 

$

(8,613

)

$

(11,735

)

$

(14,931

)

$

(31,197

)

Adjusted net loss per common share - basic and diluted (3)

 

$

(0.03

)

$

(0.04

)

$

(0.05

)

$

(0.11

)

Consolidated gold ounces (1):

 

 

 

 

 

 

 

 

 

Produced

 

19

 

21

 

39

 

38

 

Sold

 

19

 

24

 

39

 

38

 

Consolidated silver ounces (1):

 

 

 

 

 

 

 

 

 

Produced

 

740

 

778

 

1,465

 

1,446

 

Sold

 

747

 

982

 

1,480

 

1,425

 

Consolidated gold equivalent ounces (1) (2):

 

 

 

 

 

 

 

 

 

Produced

 

31

 

36

 

63

 

66

 

Sold

 

32

 

42

 

63

 

65

 

Consolidated average realized price ($/ounce) (1) (3):

 

 

 

 

 

 

 

 

 

Gold

 

$

1,278

 

$

1,211

 

$

1,299

 

$

1,357

 

Silver

 

$

19.30

 

$

17.76

 

$

19.72

 

$

21.25

 

Consolidated costs per gold equivalent ounce sold ($/ounce) (1) (2):

 

 

 

 

 

 

 

 

 

Total cash costs (3)

 

$

840

 

$

744

 

$

815

 

$

817

 

All-in sustaining costs (3) (4)

 

$

1,283

 

$

1,111

 

$

1,191

 

$

1,300

 

All-in costs (3)

 

$

1,444

 

$

1,202

 

$

1,378

 

$

1,630

 

Silver : gold ratio (2)

 

60 : 1

 

52 : 1

 

60 : 1

 

52 : 1

 

 


1.              Includes portion attributable to us from our 49% interest in the San José mine.

2.              Gold equivalent ounces and costs per gold equivalent ounce for 2014 are calculated using an average silver to gold ratio of 60:1. Prior to 2014, the silver to gold ratio was 52:1.

3.              Earnings from mining operations, adjusted net loss, 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.

4.              In the fourth quarter of 2013, the Company revised its allocation of exploration expenses to all-in sustaining costs. Prior period figures have been adjusted to conform to the current methodology.

 

22



Table of Contents

 

Operating and Financial Highlights

 

·                  Gold equivalent production in the second quarter of 2014 totaled 31,200 ounces, which includes 23,033 gold equivalent ounces attributable to us from our 49% interest in the San José mine in Argentina, and 8,167 gold equivalent ounces from the El Gallo 1 mine in Mexico.

·                  Total cash costs, all-in sustaining costs and all-in costs for the second quarter of 2014 for all of our operations on a consolidated basis totaled $840, $1,283 and $1,444 per gold equivalent ounce, respectively. Total cash costs and all-in sustaining costs at the San José mine for the second quarter of 2014 totaled $836 and $1,165 per gold equivalent ounce, respectively. Total cash costs and all-in sustaining cash costs at our El Gallo 1 mine totaled $852 and $1,257 per gold equivalent ounce, respectively.

·                  Gold equivalent ounces sold in the second quarter of 2014 totaled 31,634 ounces, which includes 22,610 gold equivalent ounces attributable to us from our 49% interest in the San José mine, and 9,024 gold equivalent ounces from El Gallo 1.

·                  The average realized price for all of our operations on a consolidated basis in the second quarter of 2014 was $1,278 and $19.30 per ounce of gold and silver sold, respectively.

·                  We reported consolidated net loss of $104.0 million, or $0.35 per share for the second quarter of 2014, compared to $128.7 million, or $0.43 per share for the comparable period in 2013. The net loss for the 2014 period is due in large part to a pre-tax impairment charge of $120.4 million related to the Los Azules Project. We conduct a review of potential triggering events for all our mineral projects on a quarterly basis. When events or changes in circumstances indicate that the related carrying amounts may not be recoverable, we carry out a review and evaluation of our long-lived assets for impairment, in accordance with our accounting policy. Such a triggering event was identified in the second quarter of 2014 with respect to the Los Azules Project. The triggering event identified was a recently announced acquisition of a copper project located in Argentina, which shares similarities with the Los Azules Project due to its scale, location, and stage of development. Based on the announcement day value of the similar project, the estimated market value per pound of copper equivalent mineralized material from this transaction was below the carrying value per pound of copper equivalent mineralized material of the Los Azules Project, indicating a potential significant decrease in the market price of the Los Azules Project and therefore a requirement to test the Los Azules Project for recoverability. Based on the results of this impairment assessment, carried out by a third-party valuation firm, we concluded that the carrying value of the property exceeded its estimated fair value, resulting in an impairment charge of $120.4 million, along with a resulting deferred income tax recovery of $22.5 million.

·                  Removing the impact of the impairment on the Los Azules Project, net of related deferred income taxes, as well as the impact of foreign exchange fluctuations, the adjusted net loss for the quarter ended June 30, 2014 was $8.6 million, compared to $11.7 million for the comparable period in 2013.

·                  Earnings from mining operations for the quarter ended June 30, 2014 were $6.6 million, compared to $7.8 million for the comparable period in 2013.

·                  We ended the quarter with $16.6 million in cash and precious metals and no bank debt.

 

Development and Exploration Activities

 

El Gallo, Sinaloa, Mexico

 

El Gallo 1

 

We completed the construction of the expansion of El Gallo 1 in order to increase capacity from a nominal 3,000 tonnes per day to 4,500 tonnes per day in April 2014. Commissioning has commenced, with the expansion expected to be fully operational during the fourth quarter of 2014. For the three and six months ended June 30, 2014, we spent $0.2 million and $1.2 million on the expansion, respectively, for a total of $2.5 million spent to that date on the expansion.

 

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Table of Contents

 

El Gallo 2

 

A final decision to proceed with the construction of El Gallo 2 has not been made. Any decision to proceed would be based on silver price expectations and securing financing on terms that are more favorable than those that were available to us at the time of filing this report. In order to prepare for a possible construction decision later this year, we have been evaluating possible debt financing alternatives and advancing the construction of the ball mill, which is the longest lead time item associated with the mine. The ball mill is 75% complete and would be ready for delivery in the fourth quarter of 2014. We disbursed an additional $1.4 million for the ball mill in the second quarter of 2014, and expect to disburse an additional $1.0 million for the ball mill in the third quarter of 2014.

 

For the three and six months ended June 30, 2014, we spent $0.2 million and $1.7 million, respectively, on mine development costs, which includes $1.4 million for the Land Use Change permit in January 2014.

 

One of the two additional permits associated with El Gallo 2 was submitted in the second quarter of 2014. This permit would allow the mining of a satellite deposit, Palmarito. This deposit represents approximately 15% of the projected annual silver production at El Gallo 2. We expect a decision on this permit in the fourth quarter of 2014. The second and final permit is for a right-of-way that will connect the El Gallo 2 operation to the Mexican power grid, and is expected to be submitted in the third quarter of 2014. However, construction of the mine could begin with power provided by generators with the option of later connecting to the grid. Neither the Palmarito or the power line right-of-way permit will prevent construction from proceeding.

 

Based on on-going cost savings studies, we believe approximately $150 million in financing would be required in order to complete the mine. The El Gallo 2 feasibility study has not been updated to reflect these possible changes.

 

24



Table of Contents

 

Exploration

 

El Gallo, Sinaloa, Mexico

 

Currently, one core drill is operating in the El Gallo 1 region.  A first phase of drilling was completed on a target in the immediate El Gallo 1 mine area called Veta Nueva with the goal of expanding the existing resource. In addition, infill and extensional drilling is taking place at San Jose del Alamo, a satellite deposit located about 14 km north of El Gallo 1.  Future plans include additional drilling at Twin Domes, another satellite deposit located 11 miles (17 km) west of El Gallo 1.

 

Gold Bar Project, Nevada, U.S.

 

Gold Bar is located primarily on public lands managed by the BLM. We submitted our Plan of Operations (“POO”) permit application during the fourth quarter of 2013. The POO was determined complete and the BLM has determined that an Environmental Impact Statement (“EIS”) is necessary to fulfill the requirements under the National Environmental Policy Act (“NEPA”). Upon completion of the EIS, the BLM will be able to proceed with the approval determination of the POO.

 

A Request for Proposal has been issued to select a third-party contractor to assist the BLM in the preparation of an EIS for the Gold Bar project. Final permit approval is scheduled for first quarter of 2016.

 

Expenditures for the remainder of 2014 are expected to be approximately $0.8 million.

 

South Roberts Project, Nevada, U.S.

 

During the first quarter of 2014, we entered into a Joint Venture Agreement (“JVA”) with partner, Kinetic Gold Inc. (“Kinetic”) for the South Roberts project in Nevada. South Roberts is located in the Cortez trend 10 miles (16 km) south-east of the Gold Bar deposit and has never been drilled. Recent and historical geochemical work had identified a number of potential near surface targets. Drilling has begun on this project. Pursuant to our obligations under the JVA, we completed a four-hole drill program in the second quarter totaling 4,560 ft. (1,390 m) of reverse-circulation drilling with no significant results. We will continue to evaluate this property and are planning additional exploration work in the third quarter at an estimated cost of approximately $0.4 million.

 

Los Azules Copper Project, Argentina

 

The 2013-2014 exploration season started in December 2013 and was completed in March 2014.  We completed baseline studies regarding flora, fauna, water quality and glaciers. No significant exploration work was conducted during this 2013-2014 season. Expenditures for the remainder of 2014 for the Los Azules Project are budgeted to be approximately $0.7 million.

 

Santa Cruz Exploration, Argentina

 

We are continuing with our review of our 100% owned properties in the province of Santa Cruz, Argentina with sampling and mapping taking place. We do not expect to complete any significant drilling in 2014. Expenditures for the remainder of 2014 for the Santa Cruz properties are budgeted to be approximately $0.1 million.

 

25



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 six month periods ended June 30, 2014 and 2013. Also included below are the production figures on a 49% attributable basis.

 

San José Mine Operating Results (100%)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(in thousands, unless otherwise indicated)

 

San José Mine - 100%

 

 

 

 

 

 

 

 

 

Tonnes of ore mined

 

136

 

144

 

241

 

252

 

Average grade (gpt):

 

 

 

 

 

 

 

 

 

Gold

 

5.92

 

6.33

 

6.26

 

6.20

 

Silver

 

425

 

459

 

434

 

451

 

Tonnes of ore processed

 

142

 

141

 

277

 

249

 

Average grade (gpt):

 

 

 

 

 

 

 

 

 

Gold

 

5.48

 

6.34

 

5.60

 

6.57

 

Silver

 

378

 

407

 

385

 

430

 

Average recovery (%):

 

 

 

 

 

 

 

 

 

Gold

 

87.6

 

89.3

 

88.1

 

88.7

 

Silver

 

87.1

 

85.5

 

87.0

 

85.0

 

Gold ounces:

 

 

 

 

 

 

 

 

 

Produced

 

22

 

26

 

44

 

47

 

Sold

 

21

 

32

 

43

 

45

 

Silver ounces:

 

 

 

 

 

 

 

 

 

Produced

 

1,504

 

1,575

 

2,975

 

2,926

 

Sold

 

1,511

 

1,991

 

3,004

 

2,880

 

Gold equivalent ounces (1) :

 

 

 

 

 

 

 

 

 

Produced

 

47

 

56

 

93

 

103

 

Sold

 

46

 

70

 

93

 

100

 

Net sales

 

$

53,234

 

$

68,555

 

$

110,123

 

$

112,368

 

Gross average realized price ($/ounce) (2) :

 

 

 

 

 

 

 

 

 

Gold

 

$

1,268

 

$

1,162

 

$

1,303

 

$

1,269

 

Silver

 

$

19.30

 

$

17.74

 

$

19.72

 

$

21.21

 

Total cash costs (2)

 

$

38,561

 

$

52,758

 

$

77,036

 

$

84,328

 

Total cash costs per ounce sold ($/ounce) (2):

 

 

 

 

 

 

 

 

 

Gold

 

$

889

 

$

878

 

$