NOTE 7 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, 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 a loss of $11.9 million for the year ended December 31, 2018, compared to a loss of $0.1 million for the year ended December 31, 2017 and income of $13.0 million for the year ended December 31, 2016. 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 in 2012. 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 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 in 2017, the Company recorded a $5.6 million deferred tax recovery in 2017 corresponding to the deferred tax liability on the fair value increments arising from the Company’s purchase price allocation.

During the year ended December 31, 2018, the Company received $10.4 million in dividends from MSC, compared to $12.2 million in 2017.

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


	December 31, 2018		December 31, 2017
Investment in MSC, beginning of the period	$	150,064	$	162,320
Attributable net (loss) from MSC		(10,065)		(2,328)
Amortization of fair value increments		(9,730)		(9,632)
Income tax recovery		7,930		11,916
Dividend distribution received		(10,385)		(12,212)
Investment in MSC, end of the period	$	127,814	$	150,064

A summary of the operating results from MSC for the year ended December 31, 2018, 2017, and 2016 is as follows:


	Year ended December 31,
	2018		2017			2016
Minera Santa Cruz S.A. (100%)
Net sales	$	205,366	$	227,093	$	235,961
Production costs applicable to sales		(178,089)		(177,180)		(173,679)
Other operating expenses		(21,083)		(20,956)		(21,770)
Other (expenses) income		(15,801)		(15,657)		10,425
Net (loss) income before tax	$	(9,607)	$	13,300	$	50,937
Current and deferred taxes		(10,934)		(18,050)		(18,363)
Net (loss) income	$	(20,541)	$	(4,750)	$	32,574

Portion attributable to McEwen Mining Inc. (49%)
Net (loss) income	$	(10,065)	$	(2,328)	$	15,961
Amortization of fair value increments		(9,730)		(9,632)		(12,274)
Income tax recovery		7,930		11,916		9,264
(Loss) income from investment in MSC, net of amortization	$	(11,865)	$	(44)	$	12,951

As at December 31, 2018, MSC had current assets of $67.6 million, total assets of $336.3 million, current liabilities of $37.5 million and total liabilities of $75.5 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 $67.5 million, total assets of $197.4 million, current liabilities of $42.0 million, and total liabilities of $68.1 million as at December 31, 2018.