NOTE 7 INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) - SAN JOSÉ MINE

As noted in Note 2, Summary of Significant Accounting Policies - Investments, 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, have been adjusted to conform with U.S. GAAP. As such, the summarized financial data presented under this heading is in accordance with U.S. GAAP.

The Company’s 49% attributable share of operations from its investment in MSC was loss of $0.1 million for the year ended December 31, 2017, compared to an income of $13.0 million for the year ended December 31, 2016 and income of $2.4 million for the year ended December 31, 2015. These amounts are net of the amortization of the fair value increments arising from the Company’s purchase price allocation, net of impairment charges, and related income tax recovery.

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 decrease to the Company’s loss, or an increase to the Company’s income, from its investment in MSC. Furthermore, on December 29, 2017 the Senate of Argentina passed a significant tax reform to the Country’s tax system. The law changes the corporate tax rate from 35% to 25% by 2020. As a result of the tax reform, the Company recorded a $5.6 million deferred tax recovery corresponding to the deferred tax liability on the fair value increments arising from the Company’s purchase price allocation.

In 2015, the Company recorded an impairment charge of $11.8 million on its investment in MSC, primarily as a result of the significant decline in long-term estimated silver market prices, as well as in the observed market value of comparable transactions in South America, which indicated a likely significant decrease in the value of the exploration properties owned by MSC. These factors caused the Company to assess that there was a decline in fair value of its investment in MSC that was other than temporary. As the loss in value of the investment was considered other than temporary, an impairment of $11.8 million was recorded in the Company’s Consolidated Statement of Operations and Comprehensive (Loss) Income for the year ended December 31, 2015. No impairments were recorded to 2017 or 2016.

During the year ended December 31, 2017, the Company received $12.2 million in dividends from MSC, compared to $17.7 million in 2016.

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


	December 31, 2017		December 31, 2016
Investment in MSC, beginning of the period	$	162,320	$	167,107
Attributable net income from MSC		(2,328)		15,961
Amortization of fair value increments		(9,632)		(12,274)
Income tax recovery		11,916		9,264
Dividend distribution received		(12,212)		(17,738)
Investment in MSC, end of the period	$	150,064	$	162,320

A summary of the operating results from MSC for the year ended December 31, 2017, 2016, and 2015 is as follows:


	Year ended December 31,
	2017		2016			2015
Minera Santa Cruz S.A. (100%)
Net Sales	$	227,093	$	235,961	$	186,095
Production costs applicable to sales		(177,180)		(173,679)		(158,615)
Net (loss) income		(4,750)		32,574		(5,835)

Portion attributable to McEwen Mining Inc. (49%)
Net (loss) income	$	(2,328)	$	15,961	$	(2,859)
Amortization of fair value increments		(9,632)		(12,274)		(10,669)
Income tax recovery		11,916		9,264		15,942
(Loss) income from investment in MSC, net of amortization	$	(44)	$	12,951	$	2,414

As at December 31, 2017, MSC had current assets of $104.4 million, total assets of $406.5 million, current liabilities of $46.0 million and total liabilities of $100.3 million. These balances include the increase in fair value and amortization of the fair value increments arising from the Company’s purchase price allocation and are net of the impairment charges. Excluding the fair value increments from the purchase price allocation and impairment charges, MSC had current assets of $103.7 million, total assets of $248.3 million, current liabilities of $46.0 million, and total liabilities of $72.2 million as at December 31, 2017.