10-Q 1 mux-20180630x10q.htm 10-Q mux_Current folio_10Q2_June

 

 

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, 2018

 

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, 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: 337,268,381 shares outstanding as of July 31, 2018.

 

 

 


 

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, 2018 and 2017 (unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2018 (unaudited) and December 31, 2017

 

4

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2018 and 2017 (unaudited)

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited)

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

 

Item 2. 

 

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

 

25

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosure about Market Risk

 

49

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

50

 

 

 

 

 

 

 

Part II        OTHER INFORMATION

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

52

 

 

 

 

 

Item 2 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

52

 

 

 

 

 

Item 5 

 

Other Information

 

52

 

 

 

 

 

Item 6. 

 

Exhibits

 

53

 

 

 

 

 

SIGNATURES 

 

 

54

 

 

 

 

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,

 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

REVENUE:

 

 

 

    

 

 

 

 

 

    

 

 

 

 

Gold and silver sales

 

$

33,806

 

$

15,110

 

$

74,847

 

$

29,943

 

 

Other revenue

 

 

373

 

 

 —

 

 

617

 

 

 —

 

 

Total revenue

 

 

34,179

 

 

15,110

 

 

75,464

 

 

29,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production costs applicable to sales

 

 

24,256

 

 

8,560

 

 

50,650

 

 

15,544

 

 

Gross profit

 

 

9,923

 

 

6,550

 

 

24,814

 

 

14,399

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mine development

 

 

710

 

 

720

 

 

1,090

 

 

1,835

 

 

Exploration

 

 

9,107

 

 

3,086

 

 

20,561

 

 

11,530

 

 

Property holding

 

 

189

 

 

423

 

 

1,600

 

 

1,611

 

 

General and administrative

 

 

5,814

 

 

4,078

 

 

11,001

 

 

8,371

 

 

Loss from investment in Minera Santa Cruz S.A. (note 5)

 

 

2,265

 

 

263

 

 

2,477

 

 

73

 

 

Depreciation

 

 

273

 

 

482

 

 

633

 

 

809

 

 

Accretion of asset reclamation obligations (note 6)

 

 

288

 

 

116

 

 

582

 

 

221

 

 

Total other operating expenses

 

 

18,646

 

 

9,168

 

 

37,944

 

 

24,450

 

 

Operating loss

 

 

(8,723)

 

 

(2,618)

 

 

(13,130)

 

 

(10,051)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other expense

 

 

354

 

 

(109)

 

 

220

 

 

(175)

 

 

(Loss) gain on sale of assets

 

 

(99)

 

 

 —

 

 

(99)

 

 

11

 

 

(Loss) gain on sale of marketable equity securities (note 2)

 

 

(33)

 

 

840

 

 

(767)

 

 

840

 

 

Unrealized fair value loss on marketable equity securities (note 2)

 

 

(500)

 

 

 —

 

 

(1,637)

 

 

 —

 

 

Unrealized (loss) gain on derivatives (note 2)

 

 

(1)

 

 

(722)

 

 

(865)

 

 

1,069

 

 

Foreign currency gain

 

 

1,482

 

 

1,050

 

 

2,409

 

 

1,075

 

 

Total other income (expense)

 

 

1,203

 

 

1,059

 

 

(739)

 

 

2,820

 

 

Loss before income and mining taxes

 

 

(7,520)

 

 

(1,559)

 

 

(13,869)

 

 

(7,231)

 

 

Deferred income and mining tax recovery (expense) (note 7)

 

 

2,140

 

 

(153)

 

 

3,278

 

 

2,503

 

 

Net loss

 

 

(5,380)

 

 

(1,712)

 

 

(10,591)

 

 

(4,728)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE (LOSS) INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of unrealized gain on marketable securities disposed of during the period, net of taxes (note 2)

 

 

 —

 

 

(840)

 

 

 —

 

 

(840)

 

 

Unrealized gain (loss) on marketable equity securities, net of taxes

 

 

 —

 

 

(236)

 

 

 —

 

 

3,639

 

 

Comprehensive (loss)

 

$

(5,380)

 

$

(2,788)

 

$

(10,591)

 

$

(1,929)

 

 

Net loss per share (note 10):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

$

(0.02)

 

$

(0.01)

 

$

(0.03)

 

$

(0.02)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

337,087

 

 

308,523

 

 

337,075

 

 

304,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' distribution declared per common share (note 8)

 

$

 —

 

$

 —

 

$

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,

 

 

    

2018

    

2017

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,028

 

$

27,153

 

Investments (note 2)

 

 

2,312

 

 

7,971

 

Value added taxes receivable

 

 

4,934

 

 

5,250

 

Inventories (note 3)

 

 

27,299

 

 

31,951

 

Restricted cash (note 8 and 16)

 

 

3,621

 

 

10,000

 

Other current assets

 

 

4,026

 

 

4,539

 

Total current assets

 

 

58,220

 

 

86,864

 

Mineral property interests, net (note 4)

 

 

302,540

 

 

293,437

 

Plant and equipment, mine development and construction in progress, net

 

 

74,187

 

 

51,046

 

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

 

 

140,356

 

 

150,064

 

Other assets (note 3 and note 14)

 

 

9,707

 

 

10,718

 

TOTAL ASSETS

 

$

585,010

 

$

592,129

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

37,637

 

$

34,880

 

Flow-through share premium (note 8)

 

 

301

 

 

1,643

 

Current portion of capital lease liabilities (note 15)

 

 

248

 

 

470

 

Current portion of asset retirement obligation (note 6)

 

 

834

 

 

646

 

Total current liabilities

 

 

39,020

 

 

37,639

 

Asset retirement obligation, less current portion (note 6)

 

 

28,824

 

 

24,076

 

Deferred income and mining tax liability (note 7)

 

 

6,744

 

 

8,430

 

Capital lease liabilities, less current portion (note 15)

 

 

 —

 

 

81

 

Other liabilities

 

 

593

 

 

630

 

Total liabilities

 

$

75,181

 

$

70,856

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Common: 337,268 as of June 30, 2018 and 337,051 as of December 31, 2017 issued and outstanding (in thousands) (note 8)

 

 

1,443,203

 

 

1,444,056

 

Warrants (note 8)

 

 

3,823

 

 

3,823

 

Accumulated deficit

 

 

(937,197)

 

 

(929,606)

 

Accumulated other comprehensive income

 

 

 —

 

 

3,000

 

Total shareholders’ equity

 

 

509,829

 

 

521,273

 

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

 

$

585,010

 

$

592,129

 

 

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

 

Warrants

 

Comprehensive

 

Accumulated

 

 

 

 

 

    

Shares

    

Amount

    

Amount

    

Income (Loss)

    

Deficit

    

Total

 

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 8)

 

12,687

 

 

38,141

 

 

 —

 

 

 

 

 

 

38,141

 

Shareholders' distribution (note 8)

 

 —

 

 

(1,498)

 

 

 —

 

 

 

 

 

 

(1,498)

 

Exercise of stock options (note 8)

 

20

 

 

47

 

 

 —

 

 

 

 

 

 

47

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

337,051

 

$

1,444,056

 

$

3,823

 

$

3,000

 

$

(929,606)

 

$

521,273

 

Adoption of ASU 2016-01 (note 2)

 

 —

 

 

 —

 

 

 —

 

 

(3,000)

 

 

3,000

 

 

 —

 

Balance, December 31, 2017

 

337,051

 

 

1,444,056

 

 

3,823

 

 

 —

 

 

(926,606)

 

 

521,273

 

Stock-based compensation (note 9)

 

 —

 

 

396

 

 

 —

 

 

 —

 

 

 —

 

 

396

 

Exercise of stock options (note 8)

 

39

 

 

45

 

 

 —

 

 

 —

 

 

 —

 

 

45

 

Shareholders' distribution (note 8)

 

 —

 

 

(1,685)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,685)

 

Shares issued in relation to acquisition of mineral property interests (note 8)

 

178

 

 

391

 

 

 —

 

 

 —

 

 

 —

 

 

391

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,591)

 

 

(10,591)

 

Balance, June 30, 2018

 

337,268

 

$

1,443,203

 

$

3,823

 

$

 —

 

$

(937,197)

 

$

509,829

 

 

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,

 

 

    

2018

    

2017

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Cash paid to suppliers and employees

 

$

(74,939)

 

$

(46,640)

 

Cash received from revenue

 

 

75,464

 

 

29,943

 

Interest received

 

 

96

 

 

118

 

Cash provided by (used in) operating activities

 

 

621

 

 

(16,579)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Additions to mineral property interests

 

 

(7,310)

 

 

 —

 

Additions to property and equipment

 

 

(20,095)

 

 

(938)

 

Investment in marketable equity securities (note 2)

 

 

(510)

 

 

 —

 

Proceeds from sale of investments (note 2)

 

 

3,667

 

 

2,155

 

Return of investment received from Minera Santa Cruz S.A. (note 1 and note 5)

 

 

7,231

 

 

4,927

 

Acquisition of Lexam VG Gold, net of cash and cash equivalents acquired (note 17)

 

 

 —

 

 

(840)

 

Proceeds from disposal of property and equipment

 

 

 —

 

 

33

 

Cash (used in) provided by investing activities

 

 

(17,017)

 

 

5,337

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Shareholders' distribution (note 8)

 

 

(1,685)

 

 

(1,498)

 

Proceeds from the exercise of stock options (note 8)

 

 

45

 

 

47

 

Cash (used) in financing activities

 

 

(1,640)

 

 

(1,451)

 

Effect of exchange rate change on cash and cash equivalents

 

 

580

 

 

34

 

(Decrease) in cash, cash equivalents and restricted cash

 

 

(17,456)

 

 

(12,659)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

37,153

 

 

37,440

 

Cash, cash equivalents and restricted cash, end of period (note 16)

 

$

19,697

 

$

24,781

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Net loss 

 

$

(10,591)

 

$

(4,728)

 

Adjustments to reconcile net (loss) from operating activities:

 

 

 

 

 

 

 

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

 

 

2,477

 

 

73

 

(Loss) gain on disposal of fixed assets

 

 

99

 

 

(11)

 

Recovery of deferred income taxes (note 7)

 

 

(3,278)

 

 

(2,503)

 

Gain (loss) on sale of marketable securities (note 2)

 

 

1,637

 

 

(840)

 

Stock-based compensation (note 9)

 

 

396

 

 

745

 

Depreciation

 

 

4,564

 

 

809

 

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

 

 

582

 

 

 —

 

Adjustment to the asset retirement obligation estimate (note 6)

 

 

(629)

 

 

221

 

Amortization of mineral property interests and asset retirement obligations

 

 

3,624

 

 

1,065

 

Foreign exchange gain

 

 

(580)

 

 

(34)

 

Unrealized loss (gain) on derivative investments (note 2)

 

 

865

 

 

(1,069)

 

Change in non-cash working capital items:

 

 

 

 

 

 

 

Decrease (increase) in VAT taxes receivable, net of collection of $2,937 (2017 - $448)

 

 

315

 

 

(3,979)

 

Decrease (increase) in other assets related to operations

 

 

6,177

 

 

(3,044)

 

Increase in liabilities related to operations

 

 

(5,037)

 

 

(3,284)

 

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

 

 

 —

 

 

 —

 

Cash provided by (used in) operating activities

 

$

621

 

$

(16,579)

 

 

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

 

6


 

Table of Contents

MCEWEN MINING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

(tabular amounts are in thousands of U.S. dollars, unless otherwise noted)

 

NOTE 1  NATURE OF OPERATIONS AND RECENT ACCOUNTING PRONOUNCEMENTS

 

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 for, development of, production and sale of gold, silver, and copper.

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 Black Fox gold mine in Timmins, Ontario, Canada, the formerly operating El Gallo 1 gold mine in Sinaloa, Mexico, and is constructing the Gold Bar gold mine in Nevada, USA. Finally, the Company owns the Los Azules copper deposit in San Juan, Argentina, the Fenix gold-silver project in Sinaloa, Mexico, and a portfolio of exploration properties in Argentina, Mexico, Nevada, and Timmins, Ontario in Canada.

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 (“Statement of Operations”) for the three and six months ended June 30, 2018 and 2017, the Consolidated Balance Sheet as at June 30, 2018 (unaudited) and December 31, 2017, the unaudited Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2018 and 2017, and the unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017, 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, 2017. 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, 2017. 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

 

Statement of Cash Flows – Restricted Cash: In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flow - Restricted Cash (ASU 2016-18). ASU 2016-18 requires that an entity's statement of cash flows explain the change during the period in that entity's total cash and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Therefore, changes in restricted cash and restricted cash equivalents will no longer be shown as specific line items within the statement of cash flows. Additionally, an entity is required to reconcile the cash and cash equivalents on its balance sheet to the cash and cash equivalent balances presented in its statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 with early adoption permitted. The Company early adopted the guidance within ASU 2016-18 as of December 31, 2017. The impact of ASU 2016-18 on its financial statements was as follows: (1) changes in restricted cash balances are no longer shown in the statements of cash flows, as these balances are included in the beginning and ending cash balances in the statements of cash flows; and (2) included within Note 16 is a reconciliation between cash balances presented on the

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MCEWEN MINING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

(tabular amounts are in thousands of U.S. dollars, unless otherwise noted)

 

balance sheets with the amounts presented in the statements of cash flows. The Company continued to hold material restricted cash during the three months ended June 30, 2018.

Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments: In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments in the statement of cash flows and amends certain disclosure requirements of ASC 230. The guidance will generally be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. The Company has elected to utilize the Cumulative Earnings Approach to classify distributions from equity method investees, which approach is recognized in ASU 2016-15 as an acceptable approach. Based on the Cumulative Earnings Approach, if the inception-to-date distributions are greater than the inception-to-date earnings, the cash flows from the equity method investee are recognized as a return of investment within cash flows from investing activities. Based on the Company’s analysis the inception-to-date distributions are greater than the inception-to-date earnings for 2017 (including all interim periods) and for the six months ended June 30, 2018 due to recurring losses at Minera Santa Cruz, an equity method investee. Therefore, distributions from Minera Santa Cruz have been recognized as a return of investment within cash flows from investing activities for the six months ended June 30, 2018 and June 30, 2017.

Revenue from Contracts with Customers: In 2016, the FASB issued four separate accounting standard updates regarding Topic 606: ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2017-13. These ASUs outline amendments to Topic 606, including reporting revenue gross versus net, identifying performance obligations and licensing and narrow-scope improvements and practical expedients. Adoption of this update by the Company, effective January 1, 2018, was completed using the modified retrospective approach. The modified retrospective method contemplates that comparative periods should not be restated and the cumulative impact of applying the standard should be recognized at the date of initial adoption, January 1, 2018. The Company has elected to apply the method only to new contracts and contracts that were not completed as of January 1, 2018. As expected, the Company did not have any cumulative effect of initially applying the standard for contracts not complete as of January 1, 2018. As a result, the Company has presented comparative periods under legacy GAAP and there has been no change to any line item as a result of adoption of the new standard. There was no material impact to revenue recognition.

 

Revenue Recognition Accounting Policy: Revenue consists of sales value received for the Company’s principal products, gold and silver. Revenue is recognized when title to gold and silver passes to the buyer and when collectability is reasonably assured. Title passes to the buyer based on terms of the sales contract, usually upon delivery of the product. Product pricing is determined under the sales agreements which are referenced against active and freely traded commodity markets, for example, the London Bullion Market for both gold and silver, in an identical form to the product sold. Gold and silver doré produced from the San José mine is sold based on the prevailing spot market price based on the London A.M. fix, while concentrates are sold based on the prevailing spot market price based on either the London P.M. fix or average of the London A.M. and London P.M. fix depending on the sales contract. Concentrates are provisionally priced, whereby the selling price is subject to final adjustments at the end of a period ranging from 30 to 90 days after delivery to the customer. The final price is based on the market price of the precious metal content at the relevant quotation point stipulated in the contract. Due to the time elapsed between shipment and the final settlement with the buyer, MSC must estimate the prices at which sales of metals will be settled. At the end of each financial reporting period, previously recorded provisional sales are adjusted to estimated settlement metals prices based on relevant forward market prices until final settlement with the buyer. Any material differences to these differences are separately disclosed.

 

The Company entered into a doré sales agreement with a Canadian financial institution in July 2012. Under that agreement, the Company has the option to sell to the institution approximately 90% of the gold and silver contained in doré bars prior to the completion of refining by the third party refiner, which normally takes approximately 10 business days. There is no judgement involved as revenue is recognized when the Company has provided irrevocable instructions to the refiner to transfer to the purchaser the refined ounces sold upon final processing outturn, and when payment of the purchase price for the purchased doré or bullion has been made in full by the purchaser.

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MCEWEN MINING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

(tabular amounts are in thousands of U.S. dollars, unless otherwise noted)

 

The Company also has a contract under which revenue is earned from a toll milling arrangement at the Black Fox Complex. Revenue is recognized when title to the product passes to the customer. This revenue is separately disclosed as Other revenue in the financial statements.

 

Revenue by operating segments is separately disclosed within Note 12 to the financial statements.

 

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 has adopted the update as of January 1, 2018 and adoption did not have any impact on the consolidated financial statements or disclosures.

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 has adopted the update as of January 1, 2018 and the adoption did not have any impact on the consolidated financial statements or disclosures.

 

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 was adopted by the Company beginning January 1, 2018 and adoption of the update did not have any impact on the consolidated financial statements or disclosures.

 

Financial Instruments - Recognition and Measurement of Financial Assets and Liabilities: In January 2016, the FASB issued ASU No. 2016-01, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The update to the standard was adopted by the Company beginning January 1, 2018. The new guidance requires entities to measure equity investments (except those accounted for under the equity method, those that result in consolidation of the investee and certain other investments) at fair value and recognize any changes in fair value in operations. Transitional guidance provided that entities with unrealized gains or losses on available for sale (“AFS”) equity  securities were required to reclassify those amounts to beginning retained earnings in the year  of adoption. As a result, the Company has reclassified the beginning amount of accumulated other comprehensive income related to AFS securities to accumulated deficit and all changes in fair values of these securities are now reflected in the Statement of Operations in the Company’s net loss for the period.

 

Recently Issued Accounting Pronouncements

 

Leases – Amendments: In February 2016, the FASB issued ASU 2016-02 “leases (ASC 842)” which provides 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

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MCEWEN MINING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

(tabular amounts are in thousands of U.S. dollars, unless otherwise noted)

 

expedients. There are three practical expedients for which an election must be made to apply and the election must be applied to all leases, as follows:

1.

Package of practical expedients – to permit an entity to a) not reassess whether expired or existing contracts contain leases, b) not reassess lease classification for existing or expired leases and c) not consider whether previously capitalized initial direct costs would be appropriate under the new standard.

2.

Hindsight practical expedient – to permit an entity to use hindsight in determining the lease term. 

3.

Easements practical expedient – to permit an entity to continue applying its current policy for accounting for land easements that existed as of, or expired before, the effective date of ASC 842 (ASU 2018-01).

 

The Company expects to elect to apply all of the practical expedients available. During the first half of the year the Company performed preliminary analysis of the effect of the standard on its financial statements as well as review of major contracts. Based on the Company’s preliminary analysis, it is not expected that the adoption of ASC 842 will result in significant changes to the financial statements. However, the analysis remains ongoing. A quantitative estimate of the effect is not reasonably available as of the date of this report.

 

NOTE 2   INVESTMENTS

 

The Company’s investment portfolio consists of marketable equity securities and warrants of certain publicly-traded companies. As at December 31, 2017, the Company classified the marketable equity securities as available-for-sale securities, which are recorded at fair value based upon quoted market prices with changes in fair value recorded in Other Comprehensive Income (Loss) (“OCI”). The gains and losses on available-for-sale securities are not reported in Net (Loss) in the Statement of Operations until the securities are sold or if there is an other-than-temporary decline in fair value below cost. 

 

The Company adopted ASU 2016-01 as of January 1, 2018 and as a result has reclassified the beginning accumulated OCI balance of $3.0 million related to marketable equity securities to beginning Accumulated Deficit (see Statement of Changes in Shareholders Equity). As a result of adoption of this guidance, the Company now recognizes changes in fair value of these securities in the Statement of Operations. During the three and six months ended June 30, 2018, the Company sold marketable equity securities for proceeds of $0.2 million and $3.7 million, respectively. The Company realized a loss of $0.03 million and $0.8 million on the sales for the three and six month periods ended June 30, 2018, which is included in the Statement of Operations. During the comparable period ended June 30, 2017, the Company sold $2.2 million of marketable equity securities resulting in a realized gain of $0.8 million. During the three and six months ended June 30, 2018, the Company had an unrealized loss on equity securities in the amount of $0.5 million and $1.6 million respectively, which is included in the Statement of Operations. This is compared to an unrealized loss of $0.7 million and an unrealized gain of $1.1 million in the three and six month periods in 2017.

 

The Company maintains a portfolio of warrants on equity interests in publicly-traded securities for investment purposes which are not used in any hedging activities. On May 30, 2018, the Company exercised on a portion of warrants and continues to hold certain warrants. The exercise price and the cost to purchase the warrants was capitalized to Marketable Equity Securities. As the warrants meet the definition of derivative instruments, unrealized gains or losses arising from

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MCEWEN MINING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

(tabular amounts are in thousands of U.S. dollars, unless otherwise noted)

 

their revaluation are recorded in the Statement of Operations. For the three and six months ended June 30, 2018, the Company recorded an unrealized loss of $nil and $0.9 million (June 30, 2017 – $0.7 million loss and $1.1 million gain).

 

The following is a summary of the balances of Investments as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Statement of

 

 

 

 

 

Opening

 

Additions

 

Disposals

 

Comprehensive

 

Operations

 

Fair Value

 

 

balance

 

during

 

during

 

Income (Loss)

 

(Loss)

 

end of the

As of June 30, 2018

    

(January 1)

    

period

    

period

    

(pre-tax)

    

Income

    

period

Marketable equity securities

 

$

6,404

 

$

1,211

 

$

(3,666)

 

$

 —

 

$

(1,637)

 

$

2,312

Warrants

 

 

1,567

 

 

 —

 

 

(704)

 

 

 —

 

 

(863)

 

 

 —

Investments

 

$

7,971

 

$

1,211

 

$

(4,370)

 

$

 —

 

$

(2,500)

 

$

2,312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Statement of

 

 

 

 

 

Opening

 

Additions

 

Disposals

 

Comprehensive

 

Operations

 

Fair Value

 

 

balance

 

during

 

during

 

Income (Loss)

 

(Loss)

 

end of the

As of December 31, 2017

    

(January 1)

    

year

    

year

    

(pre-tax)

    

Income

    

year

Marketable equity securities

 

$

6,749

 

$

 —

 

$

(2,163)

 

$

1,334

 

$

484

 

$

6,404

Warrants

 

 

1,794

 

 

 —

 

 

 —

 

 

 —

 

 

(227)

 

 

1,567

Investments

 

$

8,543

 

$

 —

 

$

(2,163)

 

$

1,334

 

$

257

 

$

7,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018, the cost of the marketable equity securities and warrants was approximately $2.0 million (December 31, 2017 - $3.3 million).

NOTE 3   INVENTORIES

 

Inventories at June 30, 2018 and December 31, 2017 consisted of the following:

 

 

 

 

 

 

 

 

 

 

    

June 30, 2018

    

December 31, 2017

 

Material on leach pads

    

$

10,891

    

$

9,188

 

In-process inventory

 

 

4,492

 

 

5,486

 

Stockpiles

 

 

1,957

 

 

1,168

 

Precious metals

 

 

6,922

 

 

12,902

 

Materials and supplies

 

 

3,037

 

 

3,207

 

Current Inventories

 

$

27,299

 

$

31,951

 

 

A portion of leach pad inventories at June 30, 2018 in the amount of $9.3 million (December 31, 2017 - $10.4 million) is expected to be recovered beyond twelve months, and has been included in other assets.

 

NOTE 4 MINERAL PROPERTY INTERESTS

 

The Company’s Mineral Property Interests include El Gallo 1 in Mexico, the Gold Bar project in Nevada, the Los Azules project in Argentina, the Black Fox mine and other properties in Timmins, Canada, and other properties located in Mexico and Nevada.

 

The Company conducts a review of potential triggering events for impairment on 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 these assets for impairment, in accordance with its accounting policy. During the six months ended June 30, 2018, no such triggering events were identified with respect to the carrying values of the Company’s Nevada, Argentina, Mexico, or Timmins properties.

 

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MCEWEN MINING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

(tabular amounts are in thousands of U.S. dollars, unless otherwise noted)

 

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. The Company’s Black Fox and Gold Bar properties have proven and probable reserves compliant with SEC Industry Guide 7.

 

While El Gallo 1 does not have proven and probable reserves compliant with SEC Industry Guide 7, the Company capitalized costs associated with the acquisition of the mineral property interests. These costs are being amortized using either the straight line or units-of-production methods over the stated mine life. For the three and six months ended June 30, 2018, the Company recorded $0.6 million and $1.4 million, respectively (June 30, 2017 - $0.6 million and $1.1 million, respectively) of amortization expense related to El Gallo 1, which is included in Production Costs Applicable to Sales in the Statement of Operations.

 

For the three and six months ended June 30, 2018, the Company recorded $1.2 million and $2.0 million (June 30, 2017 – $nil) of amortization expenses related to the Black Fox mine, which is included in Production Costs Applicable to Sales in the Statement of Operations.

 

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 under this heading is presented in accordance with U.S. GAAP.

 

The Company’s 49% attributable share of results of operations from its investment in MSC was a loss of $2.3 million and $2.5 million for the three and six months ended June 30, 2018 respectively (June 30, 2017 – loss of $0.3 million and $0.1 million, respectively). These amounts include the amortization of the fair value increments arising from the purchase price allocation and related income tax recovery. Included in the income tax recovery is the impact of fluctuations in the exchange rate between the Argentina peso and the U.S. dollar on the peso-denominated tax liability.     

 

During the period ended June 30, 2018, the Company did not identify any potential triggering events for impairment in relation to its investment in MSC, and consequently the Company did not record any impairment during the period.

 

During the three and six months ended June 30, 2018, the Company received $2.4 million and $7.2 million in dividends from MSC, compared to $2.4 million and $4.9 million during the same period in 2017.

 

Changes in the Company’s investment in MSC for the six months ended June 30, 2018 and year ended December 31, 2017 are as follows:

 

 

 

 

 

 

 

 

 

    

June 30, 2018

    

December 31, 2017

Investment in MSC, beginning of the period

 

$

150,064

 

$

162,320

Attributable net (loss) from MSC

 

 

(3,343)

 

 

(2,328)

Amortization of fair value increments

 

 

(4,597)

 

 

(9,632)

Income tax recovery

 

 

5,463

 

 

11,916

Distribution received

 

 

(7,231)

 

 

(12,212)

Investment in MSC, end of the period

 

$

140,356

 

$

150,064

 

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MCEWEN MINING INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

(tabular amounts are in thousands of U.S. dollars, unless otherwise noted)

 

A summary of the operating results from MSC for the three and six months ended June 30, 2018 and 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  June 30,

 

Six months ended June 30,

 

    

2018

    

2017

    

2018

    

2017

Minera Santa Cruz S.A. (100%)

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

52,272

 

$

60,835

 

$

102,934

 

$

109,178

Production costs applicable to sales

 

 

(43,346)

 

 

(52,415)

 

 

(86,814)

 

 

(89,114)

Net (loss) income

 

 

(7,700)

 

 

(1,126)

 

 

(6,822)

 

 

3,255

 

 

 

 

 

 

 

 

 

 

 

 

 

Portion attributable to McEwen Mining Inc. (49%)

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,773)

 

$

(553)

 

$

(3,343)

 

$

1,594

Amortization of fair value increments

 

 

(2,482)

 

 

(2,428)

 

 

(4,597)

 

 

(4,497)

Income tax recovery

 

 

3,990

 

 

2,718

 

 

5,463

 

 

2,830

(Loss) from investment in MSC, net of amortization

 

$

(2,265)

 

$

(263)

 

$

(2,477)

 

$

(73)

 

As of June 30, 2018, MSC had current assets of $80.2 million, total assets of $368.7 million, current liabilities of $37.4 million and total liabilities of $82.2 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, net of impairment charges, MSC had current assets of $79.8 million, total assets of $219.7 million, current liabilities of $37.4 million, and total liabilities of $65.3 million as at June 30, 2018.