10-Q 1 mux-20170630x10q.htm 10-Q mux_Current folio_10Q2_10Q3

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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 ☒  No ☐

 

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 ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer                 ☒

Accelerated filer                                                          ☐

 

Non-accelerated filer                   ☐

(Do not check if a smaller reporting company)

 

 

Smaller reporting company                                         ☐

 

 

Emerging growth company                                         ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 312,276,861 shares outstanding as of August 1, 2017.

 

 

 


 

MCEWEN MINING INC.

 

FORM 10-Q

 

Index

 

 

 

 

 

 

 

 

Part I        FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. 

    

Financial Statements

    

3

 

 

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive (Loss) Income for the three and six months ended June 30, 2017 and 2016 (unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2017 (unaudited) and December 31, 2016

 

4

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2017 and 2016 (unaudited)

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 (unaudited)

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

 

Item 2. 

 

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

 

20

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosure about Market Risk

 

39

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

42

 

 

 

 

 

 

 

Part II        OTHER INFORMATION

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

42

 

 

 

 

 

Item 6. 

 

Exhibits

 

43

 

 

 

 

 

SIGNATURES 

 

 

44

 

 

 

 

2


 

PART I

Item 1.  FINANCIAL STATEMENTS

 

MCEWEN MINING INC.

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

(in thousands of U.S. dollars, except per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  June 30,

 

Six months ended June 30,

 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

REVENUE:

 

 

 

    

 

 

 

 

 

    

 

 

 

 

Gold and silver sales

 

$

15,110

 

$

14,613

 

$

29,943

 

$

35,803

 

 

 

 

 

15,110

 

 

14,613

 

 

29,943

 

 

35,803

 

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production costs applicable to sales

 

 

8,560

 

 

5,763

 

 

15,544

 

 

14,830

 

 

Mine development costs

 

 

720

 

 

1,316

 

 

1,835

 

 

2,014

 

 

Exploration costs

 

 

3,086

 

 

1,689

 

 

11,530

 

 

3,429

 

 

Property holding costs

 

 

423

 

 

258

 

 

1,611

 

 

1,405

 

 

General and administrative

 

 

4,078

 

 

2,600

 

 

8,371

 

 

5,368

 

 

Depreciation

 

 

482

 

 

258

 

 

809

 

 

497

 

 

Revision of estimates and accretion of asset reclamation obligations (note 6)

 

 

116

 

 

133

 

 

221

 

 

257

 

 

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

 

 

263

 

 

(4,133)

 

 

73

 

 

(9,096)

 

 

Total costs and expenses

 

 

17,728

 

 

7,884

 

 

39,994

 

 

18,704

 

 

Operating (loss) income

 

 

(2,618)

 

 

6,729

 

 

(10,051)

 

 

17,099

 

 

OTHER (EXPENSE) INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other (expense) income:

 

 

(109)

 

 

(73)

 

 

(175)

 

 

155

 

 

Gain on sale of assets

 

 

 —

 

 

 —

 

 

11

 

 

 —

 

 

Gain on sale of marketable equity securities (note 2)

 

 

840

 

 

 —

 

 

840

 

 

22

 

 

Other-than-temporary impairment on marketable equity securities (note 2)

 

 

 —

 

 

(597)

 

 

 —

 

 

(882)

 

 

Unrealized (loss) gain on derivatives (note 2)

 

 

(722)

 

 

1,719

 

 

1,069

 

 

1,719

 

 

Foreign currency gain (loss)

 

 

1,050

 

 

(281)

 

 

1,075

 

 

502

 

 

Total other income

 

 

1,059

 

 

768

 

 

2,820

 

 

1,516

 

 

(Loss) Income before income taxes

 

 

(1,559)

 

 

7,497

 

 

(7,231)

 

 

18,615

 

 

Income tax (expense) recovery (note 7)

 

 

(153)

 

 

856

 

 

2,503

 

 

2,723

 

 

Net (loss) income

 

 

(1,712)

 

 

8,353

 

 

(4,728)

 

 

21,338

 

 

OTHER COMPREHENSIVE (LOSS) INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(840)

 

 

 —

 

 

(840)

 

 

 —

 

 

Other-than-temporary impairment on marketable equity securities (note 2)

 

 

 —

 

 

597

 

 

 —

 

 

882

 

 

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

 

 

(236)

 

 

1,624

 

 

3,639

 

 

1,500

 

 

Comprehensive (loss) income

 

$

(2,788)

 

$

10,574

 

$

(1,929)

 

$

23,720

 

 

Net (loss) income per share (note 10):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.01)

 

$

0.03

 

$

(0.02)

 

$

0.07

 

 

Diluted

 

$

(0.01)

 

$

0.03

 

$

(0.02)

 

$

0.07

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

308,523

 

 

298,237

 

 

304,074

 

 

298,239

 

 

Diluted

 

 

308,523

 

 

299,791

 

 

304,074

 

 

299,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return of capital distribution declared per common share (note 8)

 

$

0.005

 

$

0.005

 

 

0.005

 

$

0.005

 

 

 

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

 

 

3


 

 

 

 

 

MCEWEN MINING INC.

CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,781

 

$

37,440

 

Investments (note 2)

 

 

11,096

 

 

8,543

 

Value added taxes receivable

 

 

8,283

 

 

4,304

 

Inventories (note 3)

 

 

20,018

 

 

26,620

 

Other current assets (note 14)

 

 

1,896

 

 

1,667

 

Total current assets

 

 

66,074

 

 

78,574

 

Mineral property interests (note 4)

 

 

283,170

 

 

242,640

 

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

 

 

157,320

 

 

162,320

 

Property and equipment, net

 

 

14,360

 

 

14,252

 

Other assets (note 3, 14)

 

 

10,348

 

 

532

 

TOTAL ASSETS

 

$

531,272

 

$

498,318

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

18,388

 

$

20,044

 

Current portion of asset retirement obligation (note 6)

 

 

689

 

 

537

 

Total current liabilities

 

 

19,077

 

 

20,581

 

Asset retirement obligation, less current portion (note 6)

 

 

9,663

 

 

9,306

 

Deferred income tax liability (note 7)

 

 

23,301

 

 

23,665

 

Other liabilities

 

 

686

 

 

1,727

 

Total liabilities

 

$

52,727

 

$

55,279

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock, no par value, 500,000 shares authorized (in thousands);

 

 

 

 

 

 

 

312,277 as of June 30, 2017 and 299,570 as of December 31, 2016 issued and outstanding (in thousands)

 

 

1,397,780

 

 

1,360,345

 

Accumulated deficit

 

 

(923,700)

 

 

(918,972)

 

Accumulated other comprehensive income

 

 

4,465

 

 

1,666

 

Total shareholders’ equity

 

 

478,545

 

 

443,039

 

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

 

$

531,272

 

$

498,318

 

 

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

 

Commitments and contingencies, note 14.

4


 

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands of U.S. dollars and shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common Stock

 

Comprehensive

 

Accumulated

 

 

 

 

 

    

Shares

    

Amount

    

(Loss) Income

    

Deficit

    

Total

 

Balance, December 31, 2015

 

298,634

 

$

1,359,144

 

$

(825)

 

$

(940,027)

 

$

418,292

 

Stock-based compensation (note 9)

 

 —

 

 

491

 

 

 

 

 

 

491

 

Return of capital distribution (note 8)

 

 —

 

 

(1,491)

 

 

 

 

 

 

(1,491)

 

Share repurchase

 

(558)

 

 

(582)

 

 

 

 

 

 

(582)

 

Exercise of stock options (note 8)

 

812

 

 

1,873

 

 

 

 

 

 

1,873

 

Other comprehensive income (note 2)

 

 —

 

 

 —

 

 

2,382

 

 

 

 

2,382

 

Net income

 

 —

 

 

 —

 

 

 

 

21,338

 

 

21,338

 

Balance, June 30, 2016

 

298,888

 

$

1,359,435

 

$

1,557

 

$

(918,689)

 

$

442,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

299,570

 

$

1,360,345

 

$

1,666

 

$

(918,972)

 

$

443,039

 

Stock-based compensation (note 9)

 

 —

 

 

745

 

 

 

 

 —

 

 

745

 

Shares issued in connection with the acquisition of Lexam VG Gold (note 15)

 

12,687

 

 

38,141

 

 

 —

 

 

 —

 

 

38,141

 

Exercise of stock options (note 8)

 

20

 

 

47

 

 

 —

 

 

 —

 

 

47

 

Return of capital distribution (note 8)

 

 —

 

 

(1,498)

 

 

 

 

 —

 

 

(1,498)

 

Other comprehensive income (note 2)

 

 —

 

 

 

 

2,799

 

 

 —

 

 

2,799

 

Net loss

 

 —

 

 

 

 

 

 

(4,728)

 

 

(4,728)

 

Balance, June 30, 2017

 

312,277

 

$

1,397,780

 

$

4,465

 

$

(923,700)

 

$

478,545

 

 

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

5


 

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands of U.S. dollars)

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

 

    

2017

    

2016

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Cash paid to suppliers and employees

 

$

(46,640)

 

$

(20,996)

 

Cash received from gold and silver sales

 

 

29,943

 

 

34,932

 

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

 

 

4,927

 

 

5,396

 

Interest received

 

 

118

 

 

221

 

Cash (used in) provided by operating activities

 

 

(11,652)

 

 

19,553

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisition of mineral property interests

 

 

 —

 

 

(5,950)

 

Additions to property and equipment

 

 

(938)

 

 

(252)

 

Proceeds from reimbursement of equipment deposit

 

 

 —

 

 

961

 

Proceeds from sale of investments (note 2)

 

 

2,155

 

 

470

 

Acquisition costs of Lexam VG Gold, net of cash and cash equivalents acquired (note 15)

 

 

(840)

 

 

 —

 

Proceeds from disposal of property and equipment

 

 

33

 

 

 —

 

Acquisition of investments

 

 

 —

 

 

(398)

 

Cash provided by (used in) investing activities

 

 

410

 

 

(5,169)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Repayment of short-term bank indebtedness

 

 

 —

 

 

(3,395)

 

Return of capital distribution (note 8)

 

 

(1,498)

 

 

(1,489)

 

Share repurchase

 

 

 —

 

 

(582)

 

Proceeds from the exercise of stock options

 

 

47

 

 

1,873

 

Cash used in financing activities

 

 

(1,451)

 

 

(3,593)

 

Effect of exchange rate change on cash and cash equivalents

 

 

34

 

 

84

 

(Decrease) increase in cash and cash equivalents

 

 

(12,659)

 

 

10,875

 

Cash and cash equivalents, beginning of period

 

 

37,440

 

 

25,874

 

Cash and cash equivalents, end of period

 

$

24,781

 

$

36,749

 

 

 

 

 

 

 

 

 

Reconciliation of net (loss) income to cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Net (loss) income

 

$

(4,728)

 

$

21,338

 

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

 

 

 

 

 

 

 

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

 

 

73

 

 

(9,096)

 

Loss on reimbursement of equipment deposit

 

 

 —

 

 

541

 

Other-than-temporary impairment on marketable equity securities (note 2)

 

 

 —

 

 

882

 

Gain on disposal of fixed assets

 

 

(11)

 

 

 —

 

Recovery of deferred income taxes (note 7)

 

 

(2,503)

 

 

(2,723)

 

Gain on sale of marketable securities (note 2)

 

 

(840)

 

 

(22)

 

Stock-based compensation (note 9)

 

 

745

 

 

491

 

Depreciation

 

 

809

 

 

497

 

Accretion of asset retirement obligation

 

 

221

 

 

257

 

Amortization of mineral property interests and asset retirement obligations

 

 

1,065

 

 

1,144

 

Foreign exchange gain

 

 

(34)

 

 

(84)

 

Unrealized gain on derivative investments (note 2)

 

 

(1,069)

 

 

(1,719)

 

Change in non-cash working capital items:

 

 

 

 

 

 

 

(Increase) decrease in VAT taxes receivable, net of collection of $448 (2016 - $9,523)

 

 

(3,979)

 

 

7,577

 

Increase in other assets related to operations

 

 

(3,044)

 

 

(3,304)

 

Decrease in liabilities related to operations

 

 

(3,284)

 

 

(1,622)

 

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

 

 

4,927

 

 

5,396

 

Cash (used in) provided by operating activities

 

$

(11,652)

 

$

19,553

 

 

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

 

6


 

NOTE 1  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Basis of Presentation

 

McEwen Mining Inc. (the “Company”) was organized under the laws of the State of Colorado on July 24, 1979. The Company is engaged in the exploration, development, production and sale of gold, silver and copper. On January 24, 2012, the Company changed its name from U.S. Gold Corporation to McEwen Mining Inc. after the completion of the acquisition of Minera Andes Inc. by way of a statutory plan of arrangement under the laws of the Province of Alberta, Canada.

 

The Company operates in Argentina, Mexico, Canada and the United States. It owns a 49% interest in Minera Santa Cruz S.A. (“MSC”), owner of the producing San José silver-gold mine in Santa Cruz, Argentina, which is operated by the joint venture majority owner, Hochschild Mining plc. It also owns and operates the El Gallo 1 mine in Sinaloa, Mexico. Finally, the Company owns the Los Azules copper deposit in San Juan, Argentina, the El Gallo 2 project in Sinaloa, Mexico, the Gold Bar project in Nevada in the United States, portfolio of exploration projects around Timmins, Ontario in Canada and a portfolio of exploration properties in Argentina, Mexico and Nevada.

 

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”) have 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) Income for the three and six months ended June 30, 2017 and 2016, the Consolidated Balance Sheets as at June 30, 2017 (unaudited) and December 31, 2016, the unaudited Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2017 and 2016, and the unaudited Consolidated Statements of Cash Flows for the six months ended June  30, 2017 and 2016, 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, 2016.  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, 2016.  The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Inter-company accounts and transactions have been eliminated.

 

Recently Adopted Accounting Pronouncements

 

Compensation – Stock Compensation – Improvements to Employee Share-Based Payment Accounting: In March 2016, the FASB issued ASU No. 2016-09, which changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update to the standard is effective for the Company for fiscal years beginning after December 5, 2016, with early adoption permitted. Adoption of this guidance by the Company, effective January 1, 2017, had no impact on the consolidated financial statements or disclosures.

 

Recently Issued Accounting Pronouncements

 

Compensation – Stock Compensation – Scope of Modification Accounting: In May 2017, the FASB issued ASU No. 2017-09 which provides clarity and reduces diversity in practice with respect to the modification of terms or conditions of a share-based payment award. The update to the standard is effective for the Company for fiscal years beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the effect of this amendment and the impact it may have on the Company’s consolidated financial statements.

 

7


 

Business Combinations: Definition of a business: In January 2017, the FASB issued ASU No. 2017-01 which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The update to the standard is effective for the Company beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the effect of this amendment and the impact it may have on the Company’s consolidated financial statements.

 

Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory: In October 2016, the FASB issued ASU No. 2016-16, to modify the current exception to income tax accounting that required companies to defer the income tax effect of certain intercompany transactions. ASU No. 2016-16 only allows companies to defer the income tax effect of intercompany inventory transactions under an exception to the guidance on income taxes that currently applies to intercompany sales and transfers of all assets. The update to the standard is effective for the Company beginning after December 5, 2016, with early application permitted as of the beginning of an annual period. The Company is currently evaluating the effect of this amendment and the impact it may have on the Company’s consolidated financial statements.

 

Revenue from Contracts with Customers: In 2016, the FASB issued three separate accounting standard updates regarding Topic 606: ASU 2016-08, ASU 2016-10 and ASU 2016-12. These ASUs outline amendments to Topic 606 which is not yet effective, including reporting revenue gross versus net, identifying performance obligations and licensing and narrow-scope improvements and practical expedients. The effective date and transition requirements for the amendments listed in these updates are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09) which is January 1, 2018, with earlier application permitted. The Company will not be early adopting Topic 606.

 

The new guidance permits two methods of adoption: (i) the full retrospective method, under which comparative periods would be restated, and the cumulative impact of applying the standard would be recognized as at January 1, 2017, the earliest period presented; and (ii) the modified retrospective method, under which comparative periods would not be restated and the cumulative impact of applying the standard would be recognized at the date of initial adoption, January 1, 2018. The Company expects to use the modified retrospective approach; however, it continues to monitor industry developments. Any significant industry developments could change the Company’s expected method of adoption.

 

As of June 30, 2017, the Company performed a comprehensive analysis of all sales contracts, including those contracts of MSC, to determine the effect of this amendment and the impact it will have on the Company’s consolidated financial statements. In the case of revenue recognized by the Company in its consolidated financial statements, some of the items subject to the evaluation included timing of revenue recognition, insurance and shipping services arranged by the Company on behalf of its customers, and refining and treatment costs classification. In the case of revenue recognized by MSC, additional items included variable consideration on concentrate sales and take-or-pay contract considerations. The Company is still in the process of completing the assessment of the impact; however, based on the analysis completed thus far, the Company does not expect that the adoption of the standard will materially affect the timing of recognition of revenue in the Company’s consolidated financial statements at the transition date or prospectively, and the overall impact will be limited to increased disclosure requirements. The Company will continue monitoring industry developments and assessing the new revenue recognition policy and any related impact on its internal controls with an expectation of having an update to the impact of the standard in the third quarter of 2017.

 

Leases – Amendments: In February 2016, the FASB issued ASU 2016-02 “leases (Topic 842)” which core principle is that a lessee should recognize the assets and the liabilities that arise from leases, including operating leases. Under the new requirements, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and the right-of-use asset representing the right to the underlying asset for the lease term. For leases with a term of twelve months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from the previous GAAP. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal year, with early adoption permitted. The ASU requires a modified retrospective transition method with the option to elect a package of practical expedients. The Company is evaluating the effect of this amendment and the impact it may have on the Company’s consolidated financial statements.

 

8


 

Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities: In January 2016, the FASB issued ASU No. 2016-01, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for the Company beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effect of this amendment and the impact it may have on the Company’s consolidated financial statements.

 

NOTE 2   INVESTMENTS

 

The Company’s investment portfolio consists of marketable equity securities and warrants of certain publicly-traded companies. The Company classifies marketable equity securities as available-for-sale securities and warrants on equity interest in publicly traded securities as held for trading securities. Marketable equity securities are recorded at fair value based upon quoted market prices, and warrants are recorded at fair value using the Black-Scholes option pricing model. The following is a summary of the balances of investments as of June 30, 2017, and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Statement of

 

 

 

 

 

Opening

 

Additions

 

Disposals

 

Comprehensive

 

Operations

 

Fair Value

 

 

balance

 

during

 

during

 

Income (Loss)

 

(Loss)

 

end of the

As of June 30, 2017

    

(January 1)

 

period

 

period

 

(pre-tax)

 

Income

 

period

Marketable equity securities

 

$

6,749

 

$

 —

 

$

(2,155)

 

$

2,799

 

$

840

 

$

8,233

Warrants

 

 

1,794

 

 

 —

 

 

 —

 

 

 —

 

 

1,069

 

 

2,863

Investments

 

$

8,543

 

$

 —

 

$

(2,155)

 

$

2,799

 

$

1,909

 

$

11,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Statement of

 

 

 

 

 

Opening

 

Additions

 

Disposals

 

Comprehensive

 

Operations

 

Fair Value

 

 

balance

 

during

 

during

 

Income (Loss)

 

(Loss)

 

end of the

As of December 31, 2016

    

(January 1)

 

year

 

year

 

(pre-tax)

 

Income

 

year

Marketable equity securities

 

$

1,032

 

$

4,004

 

$

(470)

 

$

3,043

 

$

(860)

 

$

6,749

Warrants

 

 

 —

 

 

415

 

 

 —

 

 

 —

 

 

1,379

 

 

1,794

Investments

 

$

1,032

 

$

4,419

 

$

(470)

 

$

3,043

 

$

519

 

$

8,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017, the cost of the marketable equity securities and warrants was approximately $3.6 million (December 31, 2016 - $4.9 million).

 

The Company maintains a portfolio of warrants on equity interests in publicly traded securities for investment purposes. As the warrants meet the definition of derivative instruments, unrealized gains or losses arising from their revaluation are recorded in the Consolidated Statement of Operations and Comprehensive (Loss) Income. During the three and six months ended June 30, 2017, the Company recorded an unrealized loss of $0.7 million and an unrealized gain of $1.1 million, respectively compared to an unrealized gain of $1.7 million for the three and six months ended June 30, 2016.

 

In addition, during the three and six months ended June 30, 2017, the Company sold marketable equity securities for proceeds of $2.2 million.  The Company realized a gain of $0.8 million, which is included in the Consolidated Statement of Operations and Comprehensive (Loss) Income. In the comparative three and six months ended June 30, 2016, the Company realized a gain of $0.1 million on marketable equity securities sold. 

 

Gains and losses for available-for-sale securities are included in other comprehensive income and not reported in Net (Loss) Income unless the securities are sold or if there is an other-than- temporary decline in fair value below cost.

 

The Company recorded other comprehensive loss, net of tax, of $1.1 million and other comprehensive income, net of tax, of $2.8 million for the three and six months ended June 30, 2017, respectively. During the three and six months ended June 30, 2016, the Company recognized other comprehensive income of $2.2 million and $2.4 million, respectively, net of taxes.

 

During the period ended June 30, 2017, the Company reviewed its investment portfolio to determine if any security was other-than-temporarily impaired (“OTTI”). An OTTI security would require the Company to record an impairment charge in the statement of operations in the period any such determination is made. In making this determination, the Company evaluated, among other things, the duration and extent to which the fair value of a security was less than its cost; the financial condition of the issuer and any changes thereto; and the Company’s intent to sell, or whether it will more likely

9


 

than not be required to sell, the security before recovery of its amortized cost basis. As of June 30, 2017, the Company concluded that none of its marketable equity securities were considered OTTI. By comparison, the Company recognized an OTTI impairment loss of $0.6 million and $0.9 million for the three and six months ended June 30, 2016. 

 

NOTE 3   INVENTORIES

 

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

 

Material on leach pads

    

$

9,568

    

$

14,267

 

In-process inventory

 

 

2,117

 

 

4,953

 

Stockpiles

 

 

2,068

 

 

1,102

 

Precious metals

 

 

4,652

 

 

5,035

 

Materials and supplies

 

 

1,613

 

 

1,263

 

Current Inventories

 

$

20,018

 

$

26,620

 

 

A portion of leach pad inventories in the amount of $10.0 million (December 31, 2016 – $nil) expected to be recovered after twelve months is included in the Other assets.

 

 

NOTE 4 MINERAL PROPERTY INTERESTS

 

The Company’s Mineral Property Interests include the El Gallo 1 mine in Mexico, the Gold Bar project in Nevada, the Los Azules project in Argentina and other properties located in Mexico and Nevada. On April 26, 2017, the Company also acquired Lexam VG Gold Inc. (“Lexam”) which included mineral property interests of $41.6 million relating to the Timmins properties in Canada. Refer to Note 15 Acquisition of Lexam for further discussion.

 

The Company conducts a review of potential triggering events for impairment for all its mineral property interests 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 six months ended June 30, 2017, the Company did not identify events or changes in circumstances affecting the carrying values of its long-lived assets.

 

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 charged to expense based on the units of production method upon commencement of production. Since the Company has not completed feasibility or other studies sufficient to characterize the mineralized material at the El Gallo 1 mine as proven or probable reserves, the amortization of the capitalized mineral property interests and asset retirement costs are charged to expense based on the most appropriate amortization method which includes straight-line method or units-of-production method over the estimated useful life of the mine.

 

For the three and six months ended June 30, 2017, the Company recorded $0.6 million and $1.1 million, respectively (June 30, 2016, $0.8 million and $1.1 million, respectively), of amortization expense related to the El Gallo 1 mine, which is included in Production Costs Applicable to Sales in the Consolidated Statement of Operations and Comprehensive (Loss) Income.

 

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

 

The Company accounts for investments over which it exerts significant influence but does not control through majority ownership using the equity method of accounting. In applying the equity method of accounting to the Company’s investment in MSC, MSC’s financial statements, which are originally prepared by MSC in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, are translated into U.S. GAAP by MSC’s management. As such, the summarized financial data presented under this heading is in accordance with U.S. GAAP.

 

10


 

The Company’s 49% attributable share of results of operations from its investment in MSC was a loss of $0.3 million and $0.1 million for the three and six months ended June 30, 2017, respectively (June 30, 2016 – income of $4.1 million and $9.1 million, respectively). These amounts include the amortization of the fair value increments arising from the purchase price allocation and related income tax recovery associated with the investment in MSC recorded as part of the acquisition of Minera Andes.

 

During the three and six months ended June 30, 2017, the Company received $2.4 million and $4.9 million in dividends from MSC, respectively.  This compares to $2.8 million and $5.4 million received during the three and six months ended June 30, 2016, respectively.

 

Changes in the Company’s investment in MSC for the six months ended June 30, 2017 and year ended December 31, 2016 are as follows:

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

Investment in MSC, beginning of the period

 

$

162,320

 

$

167,107

Attributable net income from MSC

 

 

1,594

 

 

15,961

Amortization of fair value increments

 

 

(4,497)

 

 

(12,274)

Income tax recovery

 

 

2,830

 

 

9,264

Dividend distribution received

 

 

(4,927)

 

 

(17,738)

Investment in MSC, end of the period

 

$

157,320

 

$

162,320

 

A summary of the operating results from MSC for the three and six months ended June 30, 2017 and 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  June 30,

 

Six months ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

    

Minera Santa Cruz S.A. (100%)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

60,835

 

$

58,581

 

$

109,178

 

$

110,653

 

Production costs applicable to sales

 

 

(52,415)

 

 

(38,832)

 

 

(89,114)

 

 

(76,559)

 

Net (loss) income

 

 

(1,126)

 

 

10,973

 

 

3,255

 

 

19,221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portion attributable to McEwen Mining Inc. (49%)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(553)

 

$

5,377

 

$

1,594

 

$

9,418

 

Amortization of fair value increments

 

 

(2,428)

 

 

(2,774)

 

 

(4,497)

 

 

(6,456)

 

Income tax recovery

 

 

2,718

 

 

1,530

 

 

2,830

 

 

6,134

 

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

 

$

(263)

 

$

4,133

 

$

(73)

 

$

9,096

 

 

As of June 30, 2017, MSC had current assets of $101.4 million, total assets of $430.1 million, current liabilities of $37.1 million and total liabilities of $109.1 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. Excluding the fair value increments from the purchase price allocation and other adjustments, MSC had current assets of $100.7 million, total assets of $261.3 million, current liabilities of $47.1 million, and total liabilities of $72.5 million as at June 30, 2017.

 

NOTE 6   RECLAMATION OBLIGATIONS

 

The Company is responsible for the reclamation of certain past and future disturbances at its properties. The most significant properties subject to these obligations are the Tonkin property in the state of Nevada, the El Gallo 1 mine in Mexico, and the Timmins properties in the province of Ontario which were acquired through the transaction with Lexam in April 2017. Refer to Note 15 Acquisition of Lexam.

 

A reconciliation of the Company’s asset retirement obligations for the six months ended June 30, 2017 and for the year ended December 31, 2016 are as follows:

 

11


 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

Asset retirement obligation liability, beginning of the period

 

$

9,843

 

$

7,784

Settlements

 

 

(61)

 

 

(66)

Accretion of liability

 

 

221

 

 

506

Adjustment reflecting updated estimates

 

 

349

 

 

1,619

Asset retirement obligation liability, ending balance

 

$

10,352

 

$

9,843

Current portion

 

 

(689)

 

 

(537)

Non-current portion

 

$

9,663

 

$

9,306

 

 

NOTE 7   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 income before taxes primarily as a result of valuation allowances being applied to losses, changes in the deferred tax asset associated with marketable securities and changes in the deferred tax liabilities associated with mineral property interests acquired in the Minera Andes and Lexam acquisitions. The deferred tax liability is primarily impacted by fluctuations in the foreign exchange rate between the Argentine peso and the U.S. dollar.

 

For the three and six months ended June 30, 2017, the Company recorded a deferred income tax expense of $0.2 million and a deferred income tax recovery of $2.5 million. The deferred income tax expense and recovery are the result of changes in the recognition of tax benefits related to exploration spending at Los Azules, the Argentine peso devaluation and the unrealized gains (losses) in the value of our investments recorded through Other Comprehensive (Loss) Income. In comparison, for the three and six months ended June 30, 2016, the Company recorded an income tax recovery of $0.9 million, and $2.7 million respectively, primarily resulting from the Argentine peso devaluation.

 

NOTE 8   SHAREHOLDERS’ EQUITY

 

During the six months ended June 30, 2017, 20,000 shares of common stock were issued upon the exercise of stock options under the Company’s Equity Incentive Plan, at the weighted average exercise price of $2.34 per share for proceeds of $0.1 million. This compares to 811,334 shares of common stock issued upon exercise of stock options during the same period of 2016, at a weighted average exercise price of $2.33 per share for proceeds of $1.9 million.

 

During the six months ended June 30, 2017, the Company paid a semi-annual return of capital distribution of $0.005 (June 30, 2016 - $0.005), per share of common stock, for a total of $1.5 million (June 30, 2016 - $1.5 million).

 

During the three months ended June 30, 2017, the Company issued 12,687,035 shares of common stock as part of the Lexam acquisition completed on April 26, 2017. Refer to Note 15 Acquisition of Lexam.

 

NOTE 9   STOCK-BASED COMPENSATION

 

During the six months ended June 30, 2017, 0.2 million stock options were granted to certain employees at a weighted average exercise price of $3.11 per share.  In comparison, during the six months ended June 30, 2016, the Company granted no stock options to employees or directors. The options vest equally over a three-year period (subject to acceleration of vesting in certain events) if the individual remains affiliated with the Company and are exercisable for a period of 5 years from the date of issue.

 

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,

 

 

    

2017

  

  

2016

  

  

2017

  

   

2016

  

Risk-free interest rate

 

1.51

%

 

 —

%

 

1.51

%

 

 —

%

Dividend yield

 

0.32

%

 

 —

%

 

0.32

%

 

 —

%

Volatility factor of the expected market price of common stock

 

73

%

 

 —

%

 

73

%

 

 —

%

Weighted-average expected life of option

 

3.5 years

 

 

 —

 

 

3.5 years

 

 

 —

 

Weighted-average grant date fair value

 

1.59

 

 

 —

 

 

1.60

 

 

 —

 

12


 

 

During the three and six months ended June 30, 2017, the Company recorded stock option expense of $0.4 million and $0.7 million respectively.  This compares to $0.1 million and $0.5 million for the three and six months ended June 30, 2016.

 

NOTE 10   INCOME (LOSS) PER SHARE

 

Basic net income (loss) per share is computed by dividing the net (loss) income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net (loss) 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 and diluted weighted average number of common shares and exchangeable shares outstanding and the computations for basic and diluted net (loss) income per share for the three and six months ended June 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  June 30,

 

Six months ended June 30,

 

 

    

 

2017

    

2016

    

2017

    

2016

 

 

 

 

(amounts in thousands, except net income per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,712)

 

$

8,353

 

$

(4,728)

 

$

21,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

308,523

 

 

298,237

 

 

304,074

 

 

298,239

 

Effect of employee stock-based awards

 

 

 —

 

 

1,554