10-Q 1 a15-11902_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, 2015

 

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: 274,015,609 shares outstanding as of August 5, 2015 (and 26,514,565 exchangeable shares).

 

 

 



Table of Contents

 

MCEWEN MINING INC.

 

FORM 10-Q

 

Index

 

 

Part I     FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2015 and 2014 (unaudited)

3

 

 

 

 

Consolidated Balance Sheets at June 30, 2015 (unaudited) and December 31, 2014

4

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2015 and 2014 (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited)

6

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

7

 

 

 

Item 2.

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

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

39

 

 

 

Item 4.

Controls and Procedures

41

 

 

 

 

Part II        OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

41

 

 

 

Item 6.

Exhibits

43

 

 

 

SIGNATURES

44

 

2



Table of Contents

 

PART I

 

Item 1.  FINANCIAL STATEMENTS

 

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

(in thousands, except per share)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

REVENUE:

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

16,160

 

$

11,637

 

$

39,042

 

$

22,767

 

 

 

 

 

 

 

 

 

 

 

 

 

16,160

 

11,637

 

39,042

 

22,767

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

Production costs applicable to sales

 

7,288

 

10,900

 

17,742

 

19,427

 

Mine construction costs

 

 

217

 

 

1,156

 

Mine development costs

 

163

 

155

 

337

 

1,723

 

Exploration costs

 

3,080

 

2,637

 

5,422

 

5,317

 

Property holding costs

 

496

 

734

 

1,988

 

2,188

 

General and administrative

 

3,277

 

3,213

 

6,485

 

6,440

 

Depreciation

 

208

 

229

 

480

 

454

 

Accretion of asset retirement obligation (note 4)

 

131

 

108

 

232

 

209

 

Loss (income) from investment in Minera Santa Cruz S.A., net of amortization (note 5)

 

2,652

 

2,438

 

2,323

 

(4,591

)

Impairment of mineral property interests and property and equipment (note 4)

 

28,542

 

120,398

 

28,542

 

120,398

 

Gain on sale of assets

 

(4

)

(18

)

(4

)

(18

)

 

 

 

 

 

 

 

 

 

 

Total costs and expenses

 

45,833

 

141,011

 

63,547

 

152,703

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(29,673

)

(129,374

)

(24,505

)

(129,936

)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

Net interest and other income

 

3,228

 

34

 

3,130

 

109

 

Foreign currency gain (loss)

 

8

 

284

 

(204

)

(299

)

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

3,236

 

318

 

2,926

 

(190

)

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(26,437

)

(129,056

)

(21,579

)

(130,126

)

Income tax recovery (note 9)

 

12,321

 

25,034

 

13,484

 

43,991

 

Net loss

 

(14,116

)

(104,022

)

(8,095

)

(86,135

)

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE (LOSS) INCOME:

 

 

 

 

 

 

 

 

 

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

 

$

(482

)

$

2

 

(647

)

3

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(14,598

)

$

(104,020

)

$

(8,742

)

$

(86,132

)

Net loss per share (note 10):

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.05

)

$

(0.35

)

$

(0.03

)

$

(0.29

)

Weighted average common shares outstanding (thousands) (note 10):

 

 

 

 

 

 

 

 

 

Basic

 

300,530

 

297,164

 

300,364

 

297,162

 

 

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, 2015

 

December 31, 2014

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

22,371

 

$

12,380

 

Investments (note 2)

 

1,334

 

1,082

 

IVA taxes receivable

 

10,455

 

11,739

 

Inventories (note 3)

 

13,771

 

12,404

 

Other current assets

 

7,532

 

2,096

 

Total current assets

 

55,463

 

39,701

 

 

 

 

 

 

 

Mineral property interests (note 4)

 

258,625

 

287,812

 

Investment in Minera Santa Cruz S.A. (note 5)

 

174,147

 

177,018

 

Property and equipment, net

 

17,849

 

17,896

 

Other assets (note 14)

 

531

 

531

 

TOTAL ASSETS

 

$

506,615

 

$

522,958

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

20,219

 

$

21,654

 

Short-term bank indebtedness (note 6)

 

5,764

 

 

Current portion of asset retirement obligation (note 4)

 

2,485

 

2,427

 

Total current liabilities

 

28,468

 

24,081

 

 

 

 

 

 

 

Asset retirement obligation, less current portion (note 4)

 

5,572

 

5,044

 

Deferred income tax liability (note 9)

 

38,201

 

51,899

 

Deferred lease inducement

 

304

 

319

 

Other liabilities

 

400

 

400

 

Total liabilities

 

$

72,945

 

$

81,743

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

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

 

 

 

 

 

Common: 273,381 as of June 30, 2015 and 271,579 shares as of December 31, 2014 issued and outstanding

 

 

 

 

 

Exchangeable: 27,149 shares as of June 30, 2015 and 28,521 shares as of December 31, 2014 issued and outstanding (note 7)

 

1,361,865

 

1,360,668

 

Accumulated deficit

 

(927,672

)

(919,577

)

Accumulated other comprehensive (loss) income

 

(523

)

124

 

Total shareholders’ equity

 

433,670

 

441,215

 

 

 

 

 

 

 

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

 

$

506,615

 

$

522,958

 

 

Subsequent event (note 15)

 

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, 2013

 

297,159

 

$

1,354,696

 

$

(295

)

$

(607,634

)

$

746,767

 

Stock-based compensation

 

 

609

 

 

 

609

 

Exercise of stock options

 

61

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

300,100

 

$

1,360,668

 

$

124

 

$

(919,577

)

$

441,215

 

Shares issued for settlement of accounts payable

 

430

 

443

 

 

 

443

 

Stock-based compensation

 

 

754

 

 

 

754

 

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

 

 

 

(647

)

 

(647

)

Net loss

 

 

 

 

(8,095

)

(8,095

)

Balance, June 30, 2015

 

300,530

 

$

1,361,865

 

$

(523

)

$

(927,672

)

$

433,670

 

 

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,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Cash paid to suppliers and employees

 

$

(32,379

)

$

(37,085

)

Cash received from gold and silver sales

 

37,711

 

22,767

 

Dividends received from Minera Santa Cruz S.A. (note 5)

 

548

 

7,113

 

Interest received

 

87

 

109

 

Cash provided by (used in) operating activities

 

5,967

 

(7,096

)

Cash flows from investing activities:

 

 

 

 

 

Investment in available-for-sale securities (note 2)

 

(1,114

)

 

Additions to property and equipment

 

(433

)

(2,297

)

Decrease to restrictive time deposits for reclamation bonding

 

 

367

 

Proceeds from disposal of property and equipment

 

 

31

 

Cash used in investing activities

 

(1,547

)

(1,899

)

Cash flows from financing activities:

 

 

 

 

 

Short-term bank indebtedness (note 6)

 

5,764

 

 

Exercise of stock options

 

 

129

 

Cash provided by financing activities

 

5,764

 

129

 

Effect of exchange rate change on cash and cash equivalents

 

(193

)

(306

)

Increase (decrease) in cash and cash equivalents

 

9,991

 

(9,172

)

Cash and cash equivalents, beginning of period

 

12,380

 

24,321

 

Cash and cash equivalents, end of period

 

$

22,371

 

$

15,149

 

 

 

 

 

 

 

Reconciliation of net loss to cash used in operating activities:

 

 

 

 

 

Net loss

 

$

(8,095

)

$

(86,135

)

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

 

 

 

 

 

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

 

2,323

 

(4,591

)

Impairment of mineral property interests and property and equipment (note 4)

 

28,542

 

120,398

 

Gain on sale of assets

 

(4

)

(18

)

Recovery of income taxes

 

(13,484

)

(43,991

)

Stock-based compensation

 

754

 

609

 

Depreciation

 

480

 

454

 

Accretion of asset retirement obligation

 

591

 

209

 

Amortization of mineral property interests and asset retirement obligations

 

644

 

626

 

Foreign exchange loss

 

193

 

306

 

Change in non-cash working capital items:

 

 

 

 

 

Decrease (increase) in IVA taxes receivable, including collections of $4,062 (2014 - $nil)

 

1,284

 

(2,892

)

Increase in other assets related to operations

 

(6,802

)

(1,624

)

(Decrease) increase in liabilities related to operations

 

(1,007

)

2,440

 

Dividends received from Minera Santa Cruz S.A.

 

548

 

7,113

 

Cash provided by (used in) operating activities

 

$

5,967

 

$

(7,096

)

 

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

 

6



Table of Contents

 

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.

 

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. 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 Loss for the three and six months ended June 30, 2015 and 2014, the Consolidated Balance Sheets as at June 30, 2015 (unaudited) and December 31, 2014, the unaudited Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2015 and 2014, and the unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014, 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 annual report on Form 10-K for the year ended December 31, 2014.

 

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 Financial Statements and Property, Plant and Equipment — Reporting Discontinued Operations and Disclosures of Components of an Entity:  In April 2014, Accounting Standards Codification (“ASC”) 205 and ASC 360 guidance were 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; or (3) the component of an entity or group of components of an entity is disposed of other than by sale. The update is effective for the Company’s fiscal year beginning January 1, 2015. The new guidance did not have an impact on the Company’s consolidated financial statements.

 

7



Table of Contents

 

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

 

Recently Issued Accounting Pronouncements

 

Presentation of Financial Statements — Going Concern — Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern: In August 2014, ASC 205-40 guidance was amended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update shall be effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016, with early application permitted. The Company is evaluating the effect that the updated standard will have on its consolidated financial statements.

 

Revenue from Contracts with Customers: 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 U.S. 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 fiscal years beginning after December 15, 2017, including interim reporting periods within that year. The Company is evaluating the effect that the updated standard will have on its consolidated financial statements.

 

NOTE 2   INVESTMENTS

 

During the quarter ended June 30, 2015, the Company invested $1.1 million of cash in marketable equity securities.  As of June 30, 2015, total cost of all marketable equity securities was $1.9 million (December 31, 2014 - $0.7 million). These securities are classified as available-for-sale securities and are recorded at fair value. As at June 30, 2015, the fair value of these securities was $1.3 million, and as a result the Company recorded a loss, net of tax, of $0.5 million in other comprehensive income.  The loss is recorded to an unrealized income and loss account (accumulated other comprehensive income (loss)) that is reported as a separate line item in the shareholders’ equity section of the balance sheet. The gains and losses for available-for-sale securities are not reported on the statement of operations until the securities are sold or if there is an other than temporary decline in fair value below cost, for the three months ended June 30, 2015.

 

NOTE 3   INVENTORIES

 

Inventories at June 30, 2015 and December 31, 2014 consist of the following:

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

(in thousands)

 

Ore on leach pads

 

$

6,846

 

$

6,221

 

In-process inventory

 

3,051

 

2,302

 

Stockpiles

 

841

 

 

Precious metals

 

1,762

 

2,403

 

Materials and supplies

 

1,271

 

1,478

 

Inventories

 

$

13,771

 

$

12,404

 

 

8



Table of Contents

 

NOTE 4  MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS

 

Mineral Property Interests

 

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.  During the quarter ended June 30, 2015, the Company performed a strategic review of its mineral property interests in Nevada. A decision was made to allow certain non-essential claims and portions of claims, included within the Gold Bar Complex and Tonkin Complex, to lapse on the September 1, 2015 renewal date and therefore reduce property holding costs that otherwise would have been incurred in the third quarter of 2015. This resulted in a pre-tax impairment charge of $19.7 million for the Gold Bar project and $8.9 million for the Tonkin Project, and an income tax recovery of $10.0 million recognized in the Statement of Operations and Comprehensive Loss for the three and six months ended June 30, 2015.

 

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 triggering event identified was a recently announced acquisition of a copper project located in Argentina, which shared 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 Company’s Los Azules Project, 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 which determined 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, being recorded in the Statement of Operations and Comprehensive Loss for the three and six months ended June 30, 2014.

 

Based on the above, impairment changes were recorded on the following mineral property interests for the three and six months ended June 30, 2015 and 2014:

 

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

Name of Property/Complex

 

Segment

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

(in thousands)

 

Gold Bar Project

 

Nevada

 

$

19,686

 

$

 

$

19,686

 

$

 

Tonkin Project

 

Nevada

 

8,856

 

 

8,856

 

 

Los Azules Copper Project

 

Argentina

 

 

120,398

 

 

120,398

 

Total impairments

 

 

 

$

28,542

 

$

120,398

 

$

28,542

 

$

120,398

 

 

9



Table of Contents

 

NOTE 4  MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS (continued)

 

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.

 

A reconciliation of the Company’s asset retirement obligations for the six months ended June 30, 2015 and for the year ended December 31, 2014 are as follows:

 

 

 

Six months ended

 

Year ended

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

(in thousands)

 

Asset retirement obligation liability, beginning balance

 

$

7,471

 

$

7,247

 

Settlements

 

 

(52

)

Accretion of liability

 

232

 

407

 

Adjustment reflecting updated estimates

 

354

 

(131

)

Asset retirement obligation liability, ending balance

 

$

8,057

 

$

7,471

 

 

As at June 30, 2015, the current portion of the asset retirement obligation was $2.5 million (December 31, 2014 - $2.4 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, 2015, the Company recorded $0.3 million and $0.6 million, respectively (June 30, 2014 $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 Loss for the three and six months ended June 30, 2015, of which $0.1 million and $0.1 million, respectively, related to the amortization of capitalized asset retirement costs (June 30, 2014 $0.1 and $0.1 respectively).

 

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

 

The Company’s 49% attributable share of operations from its investment in MSC was a loss of $2.7 million and $2.3 million for the three and six months ended June 30, 2015, respectively. This compares to a loss of $2.4 million and income of $4.6 million for the three and six months ended June 30, 2014, respectively. 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 recovery 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 a reduction in the loss from its investment in MSC for the three and six months ended June 30, 2015.

 

During the three and six months ended June 30, 2015, the Company received $0.5 million in dividends from MSC, compared to $3.2 million and $7.1 million during the same period in 2014. 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.

 

10



Table of Contents

 

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

 

Changes in the Company’s investment in MSC for the six months ended June 30, 2015 and year ended December 31, 2014 are as follows:

 

 

 

Six months ended

 

Year ended

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

(in thousands)

 

Investment in MSC, beginning balance

 

$

177,018

 

$

212,947

 

Attributable net (loss) income from MSC

 

(887

)

(2,597

)

Amortization of fair value increments

 

(6,088

)

(13,190

)

Income tax recovery

 

4,652

 

10,503

 

Dividends received

 

(548

)

(9,483

)

Impairment of investment in MSC

 

 

(21,162

)

Investment in MSC, ending balance

 

$

174,147

 

$

177,018

 

 

A summary of the operating results from MSC for the three and six months ended June 30, 2015 and 2014 is as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in thousands)

 

(in thousands)

 

Minera Santa Cruz S.A. (100%)

 

 

 

 

 

 

 

 

 

Net sales

 

$

49,858

 

$

53,234

 

$

95,749

 

$

110,123

 

Production costs applicable to sales

 

(41,310

)

(41,847

)

(78,173

)

(81,484

)

Net (loss) income

 

(3,042

)

(390

)

(1,810

)

5,792

 

 

 

 

 

 

 

 

 

 

 

Portion attributable to McEwen Mining Inc. (49%)

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,491

)

$

(191

)

$

(887

)

$

2,838

 

Amortization of fair value increments

 

(3,401

)

(3,429

)

(6,088

)

(6,130

)

Income tax recovery

 

2,240

 

1,182

 

4,652

 

7,883

 

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

 

$

(2,652

)

$

(2,438

)

$

(2,323

)

$

4,591

 

 

As at June 30, 2015, MSC had current assets of $97.9 million, total assets of $509.5 million, current liabilities of $46.0 million and total liabilities of $154.0 million on an unaudited basis. These balances include the adjustments to fair value and amortization of the fair value increments arising from the purchase price allocation, net of impairment charges recorded in the second quarter of 2013 and fourth quarter of 2014. Excluding the fair value increments from the purchase price allocation, net of impairment charges, MSC had current assets of $96.5 million, total assets of $292.7 million, current liabilities of $48.4 million, and total liabilities of $85.7 million as at June 30, 2015.

 

NOTE 6   SHORT-TERM BANK INDEBTEDNESS

 

On May 29, 2015, Compañía Minera Pangea, a wholly-owned subsidiary of the Company (“CMP”), finalized a line of credit agreement with Banco Nacional de Comercio Exterior (“Banco Nacional”), for an amount up to 90,000,000 Mexican pesos (approximately $5.9 million as of May 29, 2015), which is secured by CMP’s IVA receivable balance. The line of credit was available for six (6) months starting April 17, 2015.  The applicable interest rate is equal to: (i) two and one-half percent (2.5%) per annum plus (ii) the 91 day TIIE (Interbank Equilibrium Interest Rate) rate, as published by the Bank of Mexico, payable quarterly.  As of June 30, 2015, the 91 day TIIE rate was 3.31%.  Upon signing the agreement, CMP paid a 1% commission on the total value of the simple credit agreement to Banco Nacional.  During the period ended June 30, 2015 CMP drew down the entire 90,000,000 Mexican pesos, equivalent to $5.8 million as of June 30, 2015 from the line of credit, and realized a foreign exchange gain of approximately $0.1 million during the period.  The Company has guaranteed CMP’s obligations under the line of credit.

 

11



Table of Contents

 

NOTE 7   SHAREHOLDERS’ EQUITY

 

During the six months ended June 30, 2015, 1.4 million exchangeable shares were converted into common stock (2014 – 1.2 million).  At June 30, 2015, total outstanding exchangeable shares not exchanged and not owned by the Company or its subsidiaries totaled 27.1 million (December 31, 2014 – 28.5 million).

 

During the six months ended June 30, 2015, there were no shares of common stock issued upon exercise of stock options under the Equity Incentive Plan.  This compares to approximately 60,300 shares of common stock issued upon exercise of stock options during the same period of 2014, at a weighted average exercise price of $2.14 per share for proceeds of $0.1 million.

 

During the six months ended June 30, 2015, the Company issued 430,295 shares of common stock under an agreement with one of its mining contractors to settle parts of its accounts payable for services rendered above a defined tonnage threshold. The fair value of the common stock at the time of issuance was $0.4 million. The agreement with this mining contractor expired and was renegotiated during the period. Under the revised agreement, the Company can no longer make share payments and instead is required to pay in cash.

 

On June 18, 2015, the Board of Directors declared an annual return of capital of $0.01 per share of common stock, payable semi-annually.  The first semi-annual return of capital payment of $0.005 is payable on August 17, 2015 to shareholders of record as of the close of business on July 31, 2015.  Return of capital will be paid to shareholders of the Company’s shares of common stock and to holders of exchangeable shares.  The second installment will occur in February 2016.

 

NOTE 8   STOCK-BASED COMPENSATION

 

During the six months ended June 30, 2015, the Company granted stock options to certain employees for an aggregate of 0.1 million shares of common stock at a weighted average exercise price of $1.07 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 comparable period in 2014, no stock options were granted to employees or directors. 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,

 

 

 

2015

 

2014

 

2015

 

2014

 

Risk-free interest rate

 

1.12

%

 

1.10

%

 

Dividend yield

 

0

%

 

0

%

 

Volatility factor of the expected market price of common stock

 

72.90

%

 

74.08

%

 

Weighted-average expected life of option

 

3.5

 

 

3.5

 

 

Weighted-average grant date fair value

 

$

0.58

 

 

$

0.56

 

 

 

During the three and six months ended June 30, 2015, the Company recorded stock option expense of $0.2 million and $0.8 million respectively. This compares to $0.2 million and $0.6 million for the three and six months ended June 30, 2014.

 

NOTE 9   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% to losses before taxes primarily as a result of valuation allowances being applied to losses, changes in the deferred tax liability associated with mineral property interests acquired in the Minera Andes acquisition and changes due to impairment of mineral property interests. The 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, 2015, the Company recorded an income tax recovery of $0.8 million and $2.0 million, respectively, as a result of the Argentine peso devaluation, compared to $2.5 million and $21.4 million for the three and six months ended June 30, 2014, respectively.  For the three and six months ended June 30, 2015, the Company recorded an income tax recovery of $10.0 million as a result of impairment of mineral property interests, described in Note 4, Mineral Property Interests and Asset Retirement Obligations.

 

12



Table of Contents

 

NOTE 10   LOSS PER SHARE

 

Basic net loss per share is computed by dividing the net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income 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 weighted average number of common shares and the computations for basic loss per share for the three and six months ended June 30, 2015 and 2014:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in thousands, except per share)

 

Net loss

 

$

(14,116

)

$

(104,022

)

$

(8,095

)

$

(86,135

)

Weighted average number of common shares

 

300,530

 

297,164

 

300,364

 

297,162

 

Loss per common share

 

$

(0.05

)

$

(0.35

)

$

(0.03

)

$

(0.29

)

 

For the three months ended June 30, 2015, options to purchase 4.4 million shares of common stock outstanding at June 30, 2015 at an average exercise price of $3.36 per share were not included in the computation of diluted weighted average shares because the exercise price exceeded the average price of the Company’s common stock for the three months ended June 30, 2015.  Outstanding options to purchase 0.05 million (June 30, 2014 – 0.9 million) shares of common stock were not included in the computation of diluted weighed average shares in the three months ended June 30, 2015 and 2014, respectively, because their effect would have been anti-dilutive.

 

For the six months ended June 30, 2015, options to purchase 4.4 million shares of common stock outstanding at June 30, 2015 at an average exercise price of $3.49 per share were not included in the computation of diluted weighted average shares because the exercise price exceeded the average price of the Company’s common stock for the six months ended June 30, 2015.  Other outstanding options to purchase 0.08 million (June 30, 2014 – 1.1 million) shares of common stock were not included in the computation of diluted weighed average shares in the three months ended June 30, 2015 and 2014, respectively, because their effect would have been anti-dilutive.

 

NOTE 11   RELATED PARTY TRANSACTIONS

 

For the three and six months ended June 30, 2015, the Company incurred and paid $nil and $16,137, respectively, to an entity affiliated with the Company’s Chairman and Chief Executive Officer for the use of an aircraft, compared to $18,038 and $38,518 for the three and six months ended June 30, 2014, respectively.

 

13



Table of Contents

 

NOTE 12   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, 2015 and 2014 is as follows:

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

Argentina

 

Mexico

 

U.S.

 

& Other

 

Total

 

 

 

(in thousands)

 

For the three months ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

 

$

16,160

 

$

 

$

 

$

16,160

 

Production costs applicable to sales

 

 

(7,288

)

 

 

(7,288

)

Mine construction costs

 

 

 

 

 

 

Mine development costs

 

 

(163

)

 

 

(163

)

Exploration costs

 

(659

)

(1,275

)

(1,065

)

(81

)

(3,080

)

Impairment of mineral property interests and property and equipment

 

 

 

(28,542

)

 

(28,542

)

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

 

(2,652

)

 

 

 

(2,652

)

Operating (loss) income

 

(3,634

)

5,863

 

(29,846

)

(2,056

)

(29,673

)

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

 

$

39,042

 

$

 

$

 

$

39,042

 

Production costs applicable to sales

 

 

(17,742

)

 

 

(17,742

)

Mine construction costs

 

 

 

 

 

 

Mine development costs

 

 

(337

)

 

 

(337

)

Exploration costs

 

(922

)

(2,874

)

(1,454

)

(172

)

(5,422

)

Impairment of mineral property interests and property and equipment

 

 

 

(28,542

)

 

(28,542

)

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

 

(2,323

)

 

 

 

(2,323

)

Operating (loss) income

 

(3,853

)

14,210

 

(30,527

)

(4,335

)

(24,505

)

 

 

 

 

 

 

 

 

 

 

 

 

As at June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Investment in Minera Santa Cruz S.A.

 

174,147

 

 

 

 

174,147

 

Mineral property interests

 

202,889

 

10,051

 

45,685

 

 

258,625

 

Total assets

 

379,987

 

67,946

 

46,435

 

12,247

 

506,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

14



Table of Contents

 

NOTE 13   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, 2015 and December 31, 2014 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, 2015

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Investments

 

$

1,334

 

$

1,334

 

$

 

$

 

 

 

$

1,334

 

$

1,334

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value as at December 31, 2014

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Investments

 

$

1,082

 

$

1,082

 

$

 

$

 

 

 

$

1,082

 

$

1,082

 

$

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

355

 

355

 

 

 

 

 

$

355

 

$

355

 

$

 

$

 

 

The Company’s investments are marketable equity securities which are exchange traded, and which are valued using quoted market prices in active markets and are classified within Level 1 of the fair value hierarchy. The fair value of the investments is calculated as the quoted market price of the marketable equity security multiplied by the number of shares held by the Company.

 

As at December 31, 2014, accounts payable included an accrual of $0.4 million for the fair value of accounts payable that were required to be settled with approximately 319,640 shares of the Company’s common stock.  The Company settled this payable during the six month period ended in June 30, 2015 as discussed in Note 7, Shareholders’ Equity.

 

The fair value of other financial assets and liabilities approximate their carrying values due to their short-term nature and historically negligible credit losses.

 

15



Table of Contents

 

NOTE 14   COMMITMENTS AND CONTINGENCIES

 

Surety Bonds

 

As part of its ongoing business and operations, the Company is required to provide bonding for its environmental reclamation obligations in the United States, as discussed in Note 4, Mineral Properties and Asset Retirement Obligations. These surety bonds are available for draw down in the event the Company does not perform its reclamation obligations. When the specific reclamation requirements are met, the beneficiary of the surety bonds will cancel and/or return the instrument to the issuing entity. The Company believes it is in compliance with all applicable bonding obligations and will be able to satisfy future bonding requirements, through existing or alternative means, as they arise. As at June 30, 2015, there were $4.8 million of outstanding surety bonds (December 31, 2014 - $4.8 million). The annual financing fees are 1.5% of the value of the surety bonds, with a required initial deposit of 10% ($0.5 million), which is included in Other Assets in the Consolidated Balance Sheet.

 

NOTE 15   SUBSEQUENT EVENT

 

On July 16, 2015, the Company received reimbursement for approximately 80% of the fair value of the loss due to the robbery of gold concentrate that occurred on April 7, 2015 at the El Gallo 1 Mine.  The amount of insurance proceeds receivable has been accrued at June 30, 2015 under Other Current Assets and recorded in the Consolidated Statements of Operations and Comprehensive Loss as a credit to cost of sales for the cost incurred in producing the ounces stolen, and the excess of the insurance proceeds over the cost of production has been recorded in Net Interest and Other Income.

 

16



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, 2015 for the foreseeable future. It also analyzes our financial condition at June 30, 2015 and compares it to our financial condition at December 31, 2014. Finally, the discussion analyzes our results of operations for the three and six months ended June 30, 2015 and compares those results to the three and six months ended June 30, 2014.  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, 2014.

 

The discussion also presents certain Non-GAAP financial performance measures, such as earnings from mining operations, adjusted net income (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, on page 32.

 

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.

 

17



Table of Contents

 

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

 

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

 

Definitions of terms under NI 43-101 differ materially from the definitions of those and related terms in Industry Guide 7 (“Industry 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 Industry Guide 7 standards, a “Final” or “Bankable” feasibility study or other report 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 Industry 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 Industry Guide 7 and are cautioned not to assume that any part or all of the disclosed mineralized material will be confirmed or converted into Industry Guide 7 compliant “reserves”.

 

Further, since we have not established reserves on some of our properties as defined in Industry Guide 7, we have in the past and will continue to expense substantially all design, construction and development costs with regard to those properties, even though these expenditures are expected to have a future economic benefit in excess of one year. Only certain types of property and equipment which have alternative uses or significant salvage value may be capitalized without proven and probable reserves. We also expense our asset retirement obligations on those properties. Companies that have reserves under Industry Guide 7 typically capitalize these costs, and subsequently depreciate or amortize them on a units-of-production basis as reserves are mined. Unlike these other companies, we depreciate or amortize any capitalized costs on a straight-line basis based on the estimated remaining useful life of the mine, as determined by our internal mine plans. As a result of these and other differences, our financial statements may not be comparable to the financial statements of mining companies that have established 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 involves greater uncertainty as to their existence and economic feasibility than the estimation of proven and probable reserves under Industry 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 sometimes disclosed by us 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 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.

 

18



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 consist 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.

 

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, 2015 and 2014:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in thousands, unless otherwise indicated)

 

Gold and silver sales

 

$

16,160

 

$

11,637

 

$

39,042

 

$

22,767

 

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

 

$

(2,652

)

$

(2,438

)

$

(2,323

)

$

4,591

 

Earnings from mining operations (1) (3)

 

$

13,382

 

$

6,639

 

$

30,556

 

$

18,017

 

Net loss

 

$

(14,116

)

$

(104,022

)

$

(8,095

)

$

(86,135

)

Net loss per common share - basic and diluted

 

$

(0.05

)

$

(0.35

)

$

(0.03

)

$

(0.29

)

Adjusted net income (loss) (3)

 

$

1,812

 

$

(8,613

)

$

3,695

 

$

(14,931

)

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

 

$

0.01

 

$

(0.03

)

$

0.01

 

$

(0.05

)

Consolidated gold ounces (1):

 

 

 

 

 

 

 

 

 

Produced (4)

 

28

 

19

 

53

 

39

 

Sold

 

25

 

19

 

53

 

39

 

Consolidated silver ounces (1):

 

 

 

 

 

 

 

 

 

Produced

 

801

 

740

 

1,456

 

1,465

 

Sold

 

830

 

747

 

1,552

 

1,480

 

Consolidated gold equivalent ounces (1) (2):

 

 

 

 

 

 

 

 

 

Produced

 

39

 

31

 

73

 

63

 

Sold

 

36

 

32

 

74

 

63

 

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

 

 

 

 

 

 

 

 

 

Gold

 

$

1,172

 

$

1,278

 

$

1,194

 

$

1,299

 

Silver

 

$

15.34

 

$

19.30

 

$

16.12

 

$

19.72

 

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

 

 

 

 

 

 

 

 

 

Total cash costs (3)

 

$

713

 

$

840

 

$

693

 

$

815

 

All-in sustaining costs (3)

 

$

1,048

 

$

1,283

 

$

997

 

$

1,191

 

All-in costs (3)

 

$

1,151

 

$

1,444

 

$

1,096

 

$

1,378

 

Silver : gold ratio (2)

 

75 : 1

 

60 : 1

 

75 : 1

 

60 : 1

 

 


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

(2)         Silver production is presented as a gold equivalent. Gold equivalent ounces calculations are based on prevailing spot prices at the beginning of the year. The silver to gold ratio used for 2014 was 60:1. For 2015, the silver to gold ratio has been set to 75:1.

(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” on page 32 for additional information, including definitions of these terms.

(4)         Gold ounces produced exclude the theft of approximately 6 thousand gold equivalent ounces reported in April 2015, at El Gallo 1 Mine.

 

Operating and Financial Highlights

 

·                  Gold equivalent production in the second quarter of 2015 totaled 39,164 ounces, which includes 21,839 gold equivalent ounces attributable to us from our 49% interest in the San José mine in Argentina, and 17,325 gold equivalent ounces from the El Gallo 1 Mine in Mexico. Production increased year-over-year by 26% due to higher grades and better recoveries mostly at the El Gallo 1 Mine, and excludes the theft of approximately 6,300 gold equivalent ounces reported in April 2015.

 

·                  Total cash costs, all-in sustaining costs and all-in costs per gold equivalent ounce sold for the second quarter of 2015 for our operations on a consolidated basis totaled $713, $1,048 and $1,151 per gold equivalent ounce, respectively. Total cash costs and all-in sustaining costs at the San José mine for the second quarter of 2015 totaled $933 and

 

19



Table of Contents

 

$1,215 per gold equivalent ounce, respectively. Total cash costs and all-in sustaining cash costs at our El Gallo 1 Mine totaled $351 and $546 per gold equivalent ounce, respectively. Total cash costs and all-in sustaining cash costs at our El Gallo 1 Mine include the cost of production of approximately 6,300 gold equivalent ounces stolen in April 2015, and are offset by the corresponding portion of insurance proceeds that approximated the actual cost to produce those ounces.  The year-over-year decrease in total cash costs per gold equivalent ounce reflects higher grades of ore processed, particularly at El Gallo 1 Mine.  All-in sustaining and all-in costs per gold equivalent ounce also reflect the impact of a greater number of ounces sold at the El Gallo 1 Mine, net of a slight decrease in ounces sold at the San José mine over which costs are spread.

 

·                  Gold equivalent ounces sold in the second quarter of 2015 totaled 36,016 ounces, which includes 22,439 gold equivalent ounces attributable to us from our 49% interest in the San José mine, and 13,577 gold equivalent ounces from El Gallo 1 Mine.

 

·                  The average realized price for our operations on a consolidated basis in the second quarter of 2015 was $1,172 and $15.34 per ounce of gold and silver sold, respectively. These compare to $1,278 and $19.30 per ounce of gold and silver sold in the second quarter of 2014.  The decrease year-over-year reflects the downward trend of gold and silver prices that continued through the second quarter of 2015. Average realized prices are presented net of adjustments of provisionally priced sales of concentrates.

 

·                  We maintain our original full year production guidance of 96,500 gold ounces and 3.1 million silver ounces for 2015.  The El Gallo 1 Mine continues to have strong performance with production 15% above guidance during the second quarter of 2015.  High performance has been the result of higher gold grade and improved processing efficiencies.  Target guidance of 50,000 gold ounces at El Gallo 1 Mine is expected to be met as a result of mining higher-grade ore. Production guidance for 2015 at San José Mine also remains unchanged at 46,500 gold ounces and 3.1 million silver ounces.  Therefore, consolidated production guidance remains at an estimated range of 135,000 to 140,000 gold equivalent ounces.

 

·                  We reported a consolidated net loss of $14.1 million, or $0.05 per share for the second quarter of 2015, compared to a net loss of $104.0 million, or $0.35 per share for the comparable period in 2014. The net loss for the second quarter of 2015 was the result of a $28.5 million pre-tax impairment recognized on our Nevada properties, which was reduced by a decrease in operating costs due to higher grades and improved efficiencies in the tonnes produced at the El Gallo 1 Mine, partially offset by decreases in gold and silver realized prices of 8% and 21% respectively, compared to the second quarter of 2014.  The net loss for the 2014 period was due in large part to a pre-tax impairment charge of $120.4 million related to the Los Azules Project.

 

·                  Our adjusted net income for the quarter ended June 30, 2015, which removes the impact of the impairment of mineral property interests recognized in the quarter, foreign currency fluctuations and income tax recoveries, both resulting from the devaluation of the Argentine peso relative to the U.S. dollar, was $1.8 million, or $0.01 per share. This compares to an adjusted net loss of $8.6 million or $(0.03) per share, for the comparable period in 2014.

 

·                  Consolidated earnings from mining operations for the quarter ended June 30, 2015 were $13.4 million, compared to $6.6 million for the comparable period in 2014.

 

·                  We ended the second quarter of 2015 with $28.9 million in cash, investments and precious metals and $5.8 million of outstanding debt.

 

·                  We declared an annual return of capital of $0.01 per share of common stock, payable semi-annually.  The first semi-annual return of capital payment of $0.005 will be made on August 17, 2015.

 

20



Table of Contents

 

Development and Exploration Activities

 

El Gallo, Sinaloa, Mexico

 

El Gallo 1

 

We completed the construction of the expansion of El Gallo 1 in April 2014 in order to increase capacity from a nominal 3,000 tonnes per day to 4,500 tonnes per day.  Commissioning commenced during the second quarter of 2014, with the expansion fully operational by the fourth quarter of 2014.  Increases in tonnes of ore mined and processed during the three and six months ended June 30, 2015 reflect this increased capacity.

 

Our budget for sustaining capital and capital expenditures for 2015 of $3.2 million includes an estimated $1.4 million to be spent in the expansion of our leach pads to accommodate the increased processing capacity at El Gallo 1, as well as an additional $1.3 million allocated to other projects to be completed by the end of 2015.  For the three and six months ended June 30, 2015, we spent $0.4 million on sustaining capital and capital expenditures at El Gallo 1.

 

El Gallo 2

 

No production decision has yet been made.

 

As a result of changes in commodity prices since the publication of the technical report titled “El Gallo Complex Phase II Project, NI 43-101 Technical Report, Feasibility Study, Mocorito Municipality, Sinaloa, Mexico” with an effective date of September 10, 2012 (the “2012 Report”), we are of the view that there is no current feasibility study in respect of the El Gallo 2 project. We believe that the figures set out in the 2012 Report are historical in nature and should not be relied on. We are currently evaluating such historical figures in contemplation of being able to produce an updated economic model for the El Gallo 2 project. The economic model presented in the 2012 Report is not current and should not be relied on.

 

For the three and six months ended June 30, 2015, we spent $0.2 million and $0.3 million, respectively, on mine development costs at El Gallo 2.  Expenditures for the remainder of 2015 are expected to total approximately $1.5 million, primarily consisting of the $1.0 million final payment for the construction of the ball mill and related storage costs.

 

Exploration

 

El Gallo, Sinaloa, Mexico

 

As of June 30, 2015, one core drill was operating at El Gallo, and a second core drill was on hold due to the permitting process. Our initial budget of $5.5 million was adjusted to $4.7 million for exploration activities, including approximately 22,000 ft. (6,660 m) of drilling, of which approximately 13,500 ft. (4,090 m.) was completed during the second half of 2015. The exploration program is focused on core drilling, blast hole drilling and surface mapping, which also includes rock and soil sampling.

 

During the three and six months period ended June 30, 2015, approximately $1.3 million and $2.9 million was spent in exploration expenditures, respectively.

 

Gold Bar Project, Nevada, U.S.

 

For 2015, we have budgeted $1.4 million for the Gold Bar project, primarily for the advancement of the EIS, as well as an infill drill program of approximately 13,300 ft. (4,000 m), now complete.  The 2015 Gold Bar drilling results will be incorporated into an updated Mineral Resource and Feasibility Study for the project which is expected to be released by the end of the third quarter of 2015.  For the three and six months ended June 30, 2015, expenditures on the Gold Bar project totaled $0.6 million and $0.7 million, respectively.

 

During the quarter ended June 30, 2015, we performed a strategic review of our mineral property interests in Nevada, including the Gold Bar Project. A decision was made to allow certain non-essential claims and portions of claims totalling

 

21



Table of Contents

 

1,940 acre, to lapse on the September 1, 2015 renewal date, which would allow us to reduce property holding costs that otherwise would have been incurred in the third quarter of 2015. This resulted in a pre-tax impairment charge of $19.7 million for the Gold Bar project recognized in the Statement of Operations and Comprehensive Loss for the three and six months ended June 30, 2015.

 

Los Azules Copper Project, Argentina

 

The 2014-2015 exploration season started in December 2014 and was completed in March 2015. While no significant exploration work or drilling program was undertaken, we have continued to advance the project with baseline environmental studies.  For the three and six months ended June 30, 2015, expenditures on the Los Azules project totaled $0.2 million and $0.3 million respectively.

 

22



Table of Contents

 

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

 

Overview

 

The following discussion relates only to MSC.  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, 2015 and 2014, presented on a 100% basis. 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,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in thousands, unless otherwise indicated)

 

San José Mine - 100%

 

 

 

 

 

 

 

 

 

Tonnes of ore mined

 

125

 

136

 

227

 

241

 

Average grade (gpt):

 

 

 

 

 

 

 

 

 

Gold

 

6.54

 

5.92

 

6.51

 

6.26

 

Silver

 

513

 

425

 

498

 

434

 

Tonnes of ore processed

 

124

 

142

 

233

 

277

 

Average grade (gpt):

 

 

 

 

 

 

 

 

 

Gold

 

6.47

 

5.48

 

6.34

 

5.60

 

Silver

 

466

 

378

 

448

 

385

 

Average recovery (%):

 

 

 

 

 

 

 

 

 

Gold

 

89.1

 

87.6

 

89.0

 

88.1

 

Silver

 

86.8

 

87.1

 

87.0

 

87.0

 

Gold ounces:

 

 

 

 

 

 

 

 

 

Produced

 

23

 

22

 

42

 

44

 

Sold

 

23

 

21

 

43

 

43

 

Silver ounces:

 

 

 

 

 

 

 

 

 

Produced

 

1,617

 

1,504

 

2,932

 

2,975

 

Sold

 

1,676

 

1,511

 

3,115

 

3,004

 

Gold equivalent ounces (1) :

 

 

 

 

 

 

 

 

 

Produced

 

45

 

47

 

81

 

93

 

Sold

 

46

 

46

 

84

 

93

 

Net sales

 

$

49,858

 

$

53,234

 

$

95,749

 

$

110,123

 

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

 

 

 

 

 

 

 

 

 

Gold

 

$

1,152

 

$

1,268

 

$

1,177

 

$

1,303

 

Silver

 

$

15.33

 

$

19.30

 

$

16.11

 

$

19.72

 

Total cash costs (2)

 

$

42,726

 

$

38,561

 

$

76,894

 

$

77,036

 

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

 

 

 

 

 

 

 

 

 

Gold

 

$

951

 

$

889

 

$

914

 

$

881

 

Silver

 

$

12.19

 

$

13.19

 

$

12.14

 

$

12.96

 

Gold equivalent (1)

 

$

933

 

$

836

 

$

912

 

$

826

 

All-in sustaining costs (2)

 

$

55,625

 

$

53,740

 

$

99,010

 

$

100,538

 

All-in sustaining costs per ounce sold ($/ounce) (2):

 

 

 

 

 

 

 

 

 

Gold

 

$

1,238

 

$

1,239

 

$

1,177

 

$

1,149

 

Silver

 

$

15.87

 

$

18.38

 

$

15.63

 

$

16.92

 

Gold equivalent (1)

 

$

1,215

 

$

1,165

 

$

1,175

 

$

1,077

 

Silver : gold ratio (1)

 

75 : 1

 

60 : 1

 

75 : 1

 

60 : 1

 

 

 

 

 

 

 

 

 

 

 

McEwen Mining - 49% attributable share

 

 

 

 

 

 

 

 

 

Ounces produced:

 

 

 

 

 

 

 

 

 

Gold

 

11

 

11

 

21

 

22

 

Silver

 

792

 

737

 

1,437

 

1,458

 

Gold equivalent (1)

 

22

 

23

 

40

 

46

 

 


(1)         Silver production is presented as a gold equivalent. Gold equivalent ounces calculations are based on prevailing spot prices at the beginning of the year. The silver to gold ratio being used for 2015 is 75:1, while the ratio for 2014 was 60:1.

(2)         Total cash costs, all-in sustaining 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”, on page 32 for additional information, including definitions of these terms.

 

Production

 

Gold production for the three months ended June 30, 2015 increased by 5% to 23,010 ounces and silver production by 8% to 1,617,029 ounces, from 21,938 ounces of gold and 1,504,084 ounces of silver in the same period in 2014. Production during the second quarter of 2015 was higher than in 2014 due to an increase in gold and silver grades, of 19% and 23%, respectively, which was partly offset by a 13% decrease in the number of tonnes processed.

 

23



Table of Contents

 

For the six months ended June 30, 2015, gold production decreased by 4% to 42,301 ounces from 43,912 ounces while silver production decreased by 1% to 2,931,836 from 2,975,165 ounces in the same period in 2014, as a result of a 16% decrease in tonnes processed.  The impact of the lower amount of tonnes processed during the first half of 2015 was offset by higher gold and silver grades obtained during the period, which increased by 13% and 17% respectively, compared to the same period in 2014.

 

Sales

 

At MSC for the first half of 2015, we, as well as the remainder of the industry, experienced the adverse effect of the continued erosion of precious metals prices compared to the 2014 period.  For the three months ended June 30, 2015, net sales realized by MSC from the sale of gold and silver decreased by 6% to $49.9 million compared to $53.2 million for the same period in 2014. The decrease was a result of lower average realized prices in the 2015 periods, partly offset by a greater number of ounces of gold and silver sold.  Sales volumes were 23,446 ounces of gold and 1,676,015 ounces of silver in the second quarter of 2015, compared to 20,954 ounces of gold and 1,511,314 ounces of silver in the comparable period in 2014.

 

The average gross sale price for gold sold, after mark-to-market provisional price adjustments, in the second quarter of 2015 was $1,152 per ounce, a decrease of 9% compared to $1,268 per ounce received in the same period in 2014. In comparison, the average London P.M. fix price for gold during the second quarter of 2015 was $1,206 per ounce, compared to $1,193 per ounce for the same period in 2014.

 

The average gross sale price for silver sold, after mark-to-market provisional price adjustments, in the second quarter of 2015 was $15.33 per ounce, a decrease of 21% compared to an average $19.30 per ounce received in the same period in 2014.  In comparison, the average London P.M. fix price for silver during the second quarter of 2015 was $16.41 per ounce, compared to $19.62 per ounce for the same period in 2014.

 

The difference between the average gross realized sale price per ounce of gold and silver sold by MSC and the average London fix prices noted above is due to adjustments of certain provisionally priced shipments of concentrates. Certain sales are ‘provisionally priced’ where the selling price is subject to final adjustment at the end of a period, normally ranging from 15 to 90 days after the start of the delivery process to the customer, based on the market price at the relevant quotation point stipulated in the contract. Sales revenue on provisionally priced sales of concentrates is recognized based on estimates of the final pricing receivable, in turn based on relevant forward market prices. At each reporting date, provisionally priced metal is marked to market based on the forward selling price for the quotational period of the sales contract.

 

For the six months ended June 30, 2015, net sales realized by MSC from the sale of gold and silver were lower than in the comparable period in 2014, totaling $95.7 million compared to $110.1 million. The decrease is primarily due to lower average realized gold and silver prices, as well as a slight decrease in the number of ounces of gold sold, offset by an increase in the number of silver ounces sold during the period.  Gold ounces sold decreased by 1%, while silver ounces sold increased by 4% in the 2015 period compared to 2014.  Average realized price of gold ounces sold in the six months ended June 30, 2015 decreased by 10%, while average realized price of silver sold decreased by 18%.

 

Total Cash Costs and All-In Sustaining Costs

 

Total cash costs for the San José mine per gold equivalent ounce sold for the quarter ended June 30, 2015 were $933 based on a 75:1 ratio, compared to $836 per gold equivalent ounce sold for the same period in 2014 based on a silver to gold ratio of 60:1, or $938 based on a 75:1 ratio. On a co-product basis (gold and silver), total cash cost for the quarter ended June 30, 2015 were $951 per ounce of gold and $12.19 per ounce of silver, compared to $889 per ounce of gold and $13.19 per ounce of silver for the same period in 2014. The increase in total cash costs is primarily a reflection of higher mining costs due to more days lost from labour stoppages in 2015 compared to the previous year, which led to rising operating costs despite lower number of tonnes processed, and the increase in gold and silver grades.

 

All-in sustaining cash costs for the quarter ended June 30, 2015 were $1,215 per gold equivalent ounce based on a 75:1 ratio, compared to $1,165 per gold equivalent ounce in the same period in 2014 based on a silver to gold ratio of 60:1, or

 

24



Table of Contents

 

$1,307 based on a 75:1 ratio. On a co-product basis, all-in sustaining costs were $1,238 per ounce of gold and $15.87 per ounce of silver, compared to $1,239 per ounce of gold and $18.38 per ounce of silver for the same period in 2014. The decrease in all-in sustaining costs for the six month ended June 30, 2015 was the result of a reduction of the stripping charges due to lower tonnes processed and higher silver and gold grades, in addition to the slightly higher number of ounces sold in 2015 when compared to 2014, therefore resulting in a lower cost per ounce. All-in sustaining costs on an aggregate basis slightly decreased year-over-year from $100.5 million to $99.0 million mainly due to the reduction in capital expenditures during 2015 compared to the prior year. While all-in sustaining costs of gold on a per ounce basis remained consistent with prior period, the all-in sustaining costs of silver on a per ounce basis was lower in 2015 than in 2014 due to a significantly higher number of ounces sold in the period.

 

For the six months ended June 30, 2015, total cash costs per gold equivalent ounce were $912 based on a 75:1 ratio, compared to $826 based on a silver to gold ratio of 60:1, or $925 based on a silver to gold ratio of 75:1. All-in sustaining costs were $1,175 per gold equivalent ounce for the first half of 2015 based on a 75:1 ratio, compared to $1,077 in 2014 based on a silver to gold ratio of 60:1, or $1,207 based on a silver to gold ratio of 75:1. On a year-to-date basis, the impact of higher gold and silver grades as well as higher number of ounces sold resulted in a decrease in operating costs for the six months ended June 30, 2015.

 

Investment in MSC

 

Our 49% attributable share of operations from our investment in MSC was a loss of $2.7 million and $2.3 million for the three and six months ended June 30, 2015.  This compares to a loss of $2.4 million and income of $4.6 million for the three and six months ended June 30, 2014. 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 improvement in operations from our investment in MSC for the three and six months ended June 30, 2015.

 

During the three and six months ended June 30, 2015, the Company received $0.5 million in dividends from MSC, respectively, compared to $3.2 million and $7.1 million during the same periods in 2014.

 

For more details on our Investment in MSC, refer to Note 5 to the Consolidated Financial Statements, Investment in Minera Santa Cruz S.A. (“MSC”) — San José Mine.

 

25



Table of Contents

 

Results of Operations — El Gallo 1

 

Overview

 

The following table sets out production totals, sales totals, total cash costs, and all-in sustaining cash costs (on a gold equivalent basis) for the El Gallo 1 Mine for the three and six month periods ended June 30, 2015 and 2014:

 

El Gallo 1 Mine Operating Results (100%)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(in thousands, unless otherwise indicated)

 

Tonnes of ore mined

 

358

 

328

 

678

 

651

 

Average grade gold (gpt)

 

4.16

 

1.06

 

3.54

 

1.10

 

Tonnes of ore processed

 

320

 

368

 

644

 

728

 

Average grade gold (gpt)

 

3.68

 

1.10

 

3.43

 

1.13

 

Gold ounces:

 

 

 

 

 

 

 

 

 

Produced (3)

 

17.2

 

8.1

 

32.5

 

17.4

 

Sold

 

13.5

 

8.9

 

32.1

 

17.5

 

Silver ounces:

 

 

 

 

 

 

 

 

 

Produced

 

8.8

 

3.3

 

19.9

 

7.5

 

Sold

 

8.5

 

6.8

 

25.4

 

8.4

 

Gold equivalent ounces (1) :

 

 

 

 

 

 

 

 

 

Produced

 

17.3

 

8.2

 

32.7

 

17.5

 

Sold

 

13.6

 

9.0

 

32.4

 

17.6

 

Net sales

 

$

16,160

 

$

11,637

 

$

39,042

 

$

22,767

 

Average realized price ($/ounce) (2) :

 

 

 

 

 

 

 

 

 

Gold

 

$

1,190

 

$

1,291

 

$

1,205

 

$

1,293

 

Silver

 

$

16.03

 

$

19.61

 

$

16.78

 

$

19.71

 

Total cash costs (2)

 

$

4,760

 

$

7,691

 

$

13,414

 

$

13,875

 

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

 

$

351

 

$

852

 

$

414

 

$

788

 

All-in sustaining costs (2)

 

$

7,418

 

$

11,346

 

$

18,907

 

$

20,331

 

All-in sustaining cost per gold equivalent ounce sold ($/ounce) (1) (2)

 

$

546

 

$

1,257

 

$

584

 

$

1,154

 

Silver : gold ratio (1)

 

75 : 1

 

60 : 1

 

75 : 1

 

60 : 1

 

 


(1)         Silver production is presented as a gold equivalent. Gold equivalent ounces calculations are based on prevailing spot prices at the beginning of the year. The silver to gold ratio used for 2014 was 60:1.  For 2015, the silver to gold ratio has been set to 75:1.

(2)         Total cash costs, all-in sustaining 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”, on page 32 for additional information, including definitions of these terms.

(3)         Gold ounces produced exclude the theft of approximately 6 thousand gold equivalent ounces reported in April 2015.

 

Production

 

Production at El Gallo 1 Mine for the quarter ended June 30, 2015 increased by 112% to 17,325 gold equivalent ounces, from 8,167 gold equivalent ounces in the comparable period in 2014. The increase is primarily a result of higher grades, from an average 1.10 g/t for the second quarter of 2014 to an average 3.68 g/t in 2015, an increase of 235%, partly offset by a 13% decrease in tonnes processed. While tonnes processed decreased year-over-year, tonnes mined increased by 9% compared to 2015 due to our plan to increase the stockpile of ore in the patio in preparation for the rainy season expected for the third quarter.

 

Tonnes mined represent tonnes of ore extracted, while tonnes processed represent tonnes of ore crushed and placed on the leach pads. The difference between tonnes mined of 358,157 and tonnes processed of 319,716 was, as previously mentioned, due to the ore added to the stock pile inventory. Due to long process cycles, actual recoveries from the heap are difficult to measure and may fluctuate significantly based on the timing, quantity and metallurgical attributes of new mineralized material placed on the leach pads, amongst other variables. The cumulative recovery rate for gold production from September 1, 2012 (start of production at the El Gallo 1 Mine) to June 30, 2015 is estimated at 55%.

 

For the six months ended June 30, 2015, production increased by 87% to 32,716 gold equivalent ounces, compared to 17,532 ounces in the first half of 2014. The increase in production was primarily due to 204% higher grades, partly offset by an 11% decrease in tonnes processed in the first half of 2015 compared to 2014.

 

26



Table of Contents

 

Sales

 

Mining of higher grades and improved operating efficiencies, among other factors, contributed to significant improvement in operations at El Gallo 1 Mine during the first half of 2015.  For the three months ended June 30, 2015, sales from El Gallo 1 Mine amounted to $16.2 million, compared to $11.6 million for the same period in 2014, an increase of 39%. The increase is mainly due to a 50% increase in the number of ounces of gold equivalent sold of 13,577 from 9,024, offset by an 8% decrease in the average realized prices during the second quarter of 2015 compared to 2014.

 

For the six months ended June 30, 2015, sales increased by 71% to $39.0 million from $22.8 million in 2014. This increase is primarily due to a 84% increase in the total number of ounces of gold equivalent sold, with 32,394 gold equivalent ounces sold in the first half of 2015 compared to 17,532 ounces in the 2014 period. This increase was offset by a decrease in the average realized prices, as average realized prices for gold equivalent decreased by 7% to $1,205 per ounce from $1,293 per ounce during the comparable period.

 

Total Cash Costs and All-In Sustaining Costs

 

Total cash costs for the El Gallo 1 Mine per gold equivalent ounce for the quarter ended June 30, 2015 were $351 per gold equivalent ounce sold, compared to $852 per gold equivalent ounce sold for the same period in 2014. The significant decrease in total cash costs is primarily due to an overall reduction in the cost per tonne mined during the period, coupled with higher grades obtained as well as a greater number of gold equivalent ounces sold.

 

All-in sustaining cash costs for the quarter ended June 30, 2015 were $546 per gold equivalent ounce, compared to $1,257 per gold equivalent ounce in the same period in 2014. The 57% lower all-in cash cost per gold equivalent ounce is attributable to higher average grades mined and processed during 2015 and higher number of gold equivalent ounces sold compared to the prior period.

 

For the six months ended June 30, 2015, total cash costs per gold equivalent ounce decreased year-over-year by 47% to $414 per gold equivalent ounce, compared to $788 in 2014. All-in sustaining costs per gold equivalent ounce decreased by 49%, to $584 per gold equivalent ounce in 2015 compared to $1,154 per ounce in 2014. The decrease in all-in sustaining costs was primarily due to higher average grades mined and processed and the increase in number of gold equivalent ounces sold which were offset by higher reclamation accretion due to an increase in the obligation estimated in 2015 compared to 2014. As previously mentioned, total cash costs and all-in sustaining costs at our El Gallo 1 Mine include the cost of production of approximately 6,300 gold equivalent ounces stolen in April 2015, and are offset by the corresponding portion of insurance proceeds that approximated the cost to produce those ounces.

 

Results of Consolidated Operations

 

Three months ended June 30, 2015 compared to three months ended June 30, 2014

 

General.  Our results of operations, net of impairment charges, improved significantly in the first three and six months of 2015, primarily based on the improvement in operations at El Gallo 1 Mine and despite the declining precious metals prices.  For the three months ended June 30, 2015, we reported a net loss of $14.1 million or $0.05 per share, compared to a net loss of $104.0 million or $0.35 per share for the same period in 2014.  The net loss for the second quarter of 2015 was the result of a $28.5 million impairment recorded on our Nevada projects, which impact was reduced by higher revenue from greater number of ounces sold and lower production costs due to higher average grades mined and produced during the quarter, compared to 2014.  Further, in the comparable period in 2014, we recorded a $120.4 million impairment of Los Azules, while there has been no impartment recognized during 2015.

 

Revenue.  Gold and silver sales in the three months ended June 30, 2015 totaled $16.2 million.  This compares to $11.6 million for the same period in 2014. Ounces of gold and silver sold from our El Gallo 1 Mine increased year-over-year, although the benefit from higher sales volume was partly offset by lower average sales prices realized in the three months ended June 30, 2015 compared to the same period in 2014.

 

Costs and Expenses.  Total costs and expenses, excluding impairment charges, in the three months ended June 30, 2015 totaled $17.3 million, compared to $20.6 million in the 2014 period. The decrease was primarily a result of lower

 

27



Table of Contents

 

production costs due to higher average grades mined and processed, slightly offset by higher exploration costs during the quarter.

 

Production costs applicable to sales at El Gallo 1 Mine were $7.3 million in the three months ended June 30, 2015, compared to $10.9 million for the same period in 2014. Production costs in the second quarter of 2015 were lower than those in the comparable quarter of 2014 due to a lower number of tonnes processed than in prior period.  Further, production costs at our El Gallo 1 Mine include the cost of production of approximately 6,300 gold equivalent ounces stolen in April 2015, and are offset by the corresponding portion of insurance proceeds that approximated the actual cost to produce those ounces.  In the same period of 2014, we spent $0.4 million to repair and improve the integrity of the solution pond liners and foundation of the ADR plant, as well as to provide a higher margin of safety in the event of extraordinary rainfall. Production costs consist of