10-K 1 mux-20181231x10k.htm 10-K mux_Current folio_10K

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

 

 

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

For the fiscal year ended December 31, 2018

TRANSITION REPORT UNDER 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.

(Name of registrant as specified in its charter)

 

 

Colorado

84‑0796160

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer 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)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, no par value

    

NYSE

Title of each class

 

Name of each exchange on which registered

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 every Interactive Data File required to be submitted 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 such files). Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or 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 ☐

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 ☒

As of June 29, 2018 (the last business day of the registrant’s second fiscal quarter), the aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant was $538,621,522 based on the closing price of $2.07 per share as reported on the NYSE.  There were 344,929,723 shares of common stock outstanding on February 20, 2019.

DOCUMENTS INCORPORATED BY REFERENCE:  Portions of the Proxy Statement for the 2019 Annual Meeting of Shareholders are incorporated into Part III, Items 10 through 14 of this report.

 

 

 


 

TABLE OF CONTENTS

PART I 

ITEM 1. 

BUSINESS

3

ITEM 1A. 

RISK FACTORS

7

ITEM 1B. 

UNRESOLVED STAFF COMMENTS

19

ITEM 2. 

PROPERTIES

20

ITEM 3. 

LEGAL PROCEEDINGS

32

ITEM 4. 

MINE SAFETY DISCLOSURES

32

PART II 

ITEM 5. 

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

33

ITEM 6. 

SELECTED FINANCIAL DATA

34

ITEM 7. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

36

ITEM 7A. 

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

65

ITEM 8. 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

67

ITEM 9. 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

107

ITEM 9A. 

CONTROLS AND PROCEDURES

107

ITEM 9B. 

OTHER INFORMATION

107

PART III 

ITEM 10. 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

108

ITEM 11. 

EXECUTIVE COMPENSATION

108

ITEM 12. 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

108

ITEM 13. 

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

108

ITEM 14. 

PRINCIPAL ACCOUNTING FEES AND SERVICES

108

PART IV 

ITEM 15. 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

109

ITEM 16. 

FORM 10-K SUMMARY

110

SIGNATURES 

111

 

 

ADDITIONAL INFORMATION

Descriptions of agreements or other documents in this report are intended as summaries and are not necessarily complete. Please refer to the agreements or other documents filed or incorporated herein by reference as exhibits. Please see Item 15, Exhibits, and Financial Statement Schedules in this report for a complete list of those exhibits.

1


 

SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

Please see the note under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a description of special factors potentially affecting forward‑looking statements included in this report.

CAUTIONARY NOTE TO UNITED STATES INVESTORS—INFORMATION CONCERNING

PREPARATION OF RESOURCE AND RESERVE ESTIMATES

McEwen Mining Inc. (“McEwen Mining,” “we”, “our”, “us” or the “Company”) is required to prepare reports under the Securities Exchange Act of 1934 and the Canadian Securities Administrators’ National Instrument 43‑101 “Standards of Disclosure for Mineral Projects” (“NI 43‑101”), under the Canadian securities laws because we are listed on the Toronto Stock Exchange (“TSX”) and subject to Canadian securities laws. Standards under NI 43-101 are materially different than the standards generally permitted in reports filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”).

Definitions of terms under NI 43‑101 differ materially from the definitions of those and related terms in Industry Guide 7 (“Industry Guide 7”) promulgated by the SEC. Under U.S. standards, mineralization may not be classified as a “Reserve” unless a determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. Under Industry Guide 7 standards, a “Final” or “Bankable” feasibility study or other report is required to report reserves, the three-year historical average precious metals prices are used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with the appropriate government authority.

One consequence of these differences is that “reserves” calculated in accordance with Canadian standards may not be “Reserves” under Industry Guide 7 standards. U.S. investors should be aware that the McEwen Mining properties with reserves as defined by Industry Guide 7 are the Black Fox mine, the Gold Bar project and the San Jose mine. All other properties do not have “Reserves” as defined by Industry Guide 7 and Investors are cautioned not to assume that any part or all the disclosed mineralized material will be confirmed or converted into Industry Guide 7 compliant “Reserves”.

Further, since we have no reserves on some of our properties as defined in Industry Guide 7, we have in the past and will continue to expense substantially all design, construction and development costs with regard to those properties, even though these expenditures are expected to have a future economic benefit in excess of one year. Only certain types of property and equipment which have alternative uses or significant salvage value may be capitalized without proven and probable reserves. We also expense our asset retirement obligations on those properties. Companies that have reserves under Industry Guide 7 typically capitalize these costs, and subsequently depreciate or amortize them on a units‑of‑production basis as reserves are mined. Unlike these other companies, we depreciate or amortize any capitalized costs based on the most appropriate amortization method, which includes straight‑line or units-of-production method over the estimated life of the mine, as determined by our internal mine plans. Because of these and other differences, our financial statements may not be comparable to the financial statements of mining companies that have established reserves on all of their properties.

Under NI 43‑101, we report measured, indicated and inferred resources, which are measurements that are generally not permitted in filings made with the SEC. The estimation of measured resources and indicated resources involve greater uncertainty as to their existence and economic feasibility than the estimation of proven and probable reserves under Industry Guide 7. U.S. investors are cautioned not to assume that any part of measured or indicated resources will ever be converted into economically mineable reserves. The estimation of inferred resources involves far greater uncertainty as to their existence and economic viability than the estimation of other categories of resources. Inferred Mineral Resources could be upgraded to Indicated Mineral Resources with continued exploration. Therefore, U.S. investors are also cautioned not to assume that all or any part of inferred resources exist, or that they can be legally or economically mined.

Canadian regulations permit the disclosure of resources in terms of “contained ounces” provided that the tonnes and grade for each resource are also disclosed; however, the SEC only permits issuers to report “mineralized material” in tonnage and average grade without reference to contained ounces. Under U.S. regulations, the tonnage and average grade described herein disseminated by us would be characterized as mineralized material. We provide such disclosure about our properties to allow a means of comparing our projects to those of other companies in the mining industry, many of which are Canadian and report pursuant to NI 43‑101, and to comply with applicable disclosure requirements.

We also note that drill results are not indicative of mineralized material in other areas where we have mining interests. Furthermore, mineralized material identified on our properties does not and may never have demonstrated economic or legal viability.

RELIABILITY OF INFORMATION

Minera Santa Cruz S.A. (“MSC”), the owner of the San José mine, is responsible for and has supplied to us all reported results from the San José mine. The technical information contained herein with regard to the San José mine is, with few exceptions as noted, based entirely on information provided to us by MSC. Our joint venture partner, a subsidiary of Hochschild Mining plc, and its affiliates other than MSC do not accept responsibility for the use of project data or the adequacy or accuracy of this information.

 

2


 

PART I

ITEM 1.  BUSINESS

History and Organization

We are a mining and minerals production and exploration company focused on precious and base metals in Argentina, Mexico, Canada and the United States. We were incorporated under the laws of the state of Colorado in 1979. Our commencement of Canadian operations in 2017 was facilitated by the acquisition of Lexam VG Gold Inc. (“Lexam”) in April 2017 and the acquisition of the Black Fox Mine and Stock Mill in October 2017.  These two acquisitions provided us an operating mine, mill and significant land interests in the historic Timmins mining district of Ontario. 

In 2018, we invested significantly and continued with the development of the Gold Bar mine in Nevada.  During the year, we invested $66.4 million in the construction of the mine, process plant and related facilities and cumulative to date we spent $72.4 million.

We own 100% of the Black Fox Mine and Stock Mill in Ontario, Canada, a 100% interest in the Gold Bar mine in Nevada, 100% of the formerly-producing El Gallo Project in Sinaloa, Mexico, and a 49% interest in Minera Santa Cruz S.A. (“MSC”), the owner and operator of the San José mine in Santa Cruz, Argentina. MSC is controlled by the majority owner of the joint venture, Hochschild Mining plc (“Hochschild”). In addition to our operating properties, we hold interests in advanced-stage and exploration-stage properties and projects in Argentina, Mexico, Canada, and the United States, including the Los Azules (“Los Azules”) copper project in Argentina.

Our objective is to increase the value of our shares through the exploration and extraction of gold, silver and other valuable minerals. Other than the San José mine in Argentina, we generally conduct our activities as the sole operator, but we may enter into arrangements with other companies through joint venture or similar agreements in an effort to achieve our strategic objectives. We hold our mineral interests and property and operate our business through various subsidiary companies, each of which is owned directly, or indirectly, by us.

Our principal executive office is located at 150 King Street West, Suite 2800, Toronto, Ontario, Canada M5H 1J9 and our telephone number is (866) 441-0690. We also maintain offices in San Juan, Argentina; Guamuchil, Mexico, Elko, Nevada (U.S.), and Matheson, Canada. Our website is www.mcewenmining.com. We make available at no cost our periodic reports and news releases and certain of our corporate governance documents, including our Code of Ethics, on our website. Our common stock is listed on the New York Stock Exchange (“NYSE”) and on the Toronto Stock Exchange (“TSX”) under the symbol “MUX”.

In this report, “McEwen Mining”, the “Company”, “our” and “we” refer to McEwen Mining Inc. together with our subsidiaries, unless otherwise noted. “Au” represents gold; “Ag” represents silver; “Cu” represents copper, “oz” represents troy ounce; “gpt” represents grams per metric tonne; “ft.” represents feet; “m” represents meter; “km” represents kilometer; and “sq.” represents square, and C$ refers to Canadian dollars. All our financial information is reported in United States (U.S.) dollars, unless otherwise noted.

Segment Information

Our operating segments include Mexico, MSC, Nevada, Los Azules and Canada. Financial information for each of our reportable segments can be found under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8.  Financial Statements and Supplementary Data,  Note 15, Operating Segment Reporting.

Products

The end product at our gold and silver operations is either in the form of doré or concentrate. Doré is an alloy consisting primarily of gold and silver but also containing other impurity metals. Doré is sent to third party refiners to produce bullion that meets the required market standard of 99.95% gold and 99.9% silver. Ore concentrate, or simply concentrate, is raw mineralized material that has been ground finely to a powdery product from which gangue (waste) is removed, thus concentrating the metal component. Concentrate, as well as slag and fine carbons (by-products of the gold production process), are sent to third party smelters for further recovery of gold and silver.

 

3


 

During 2018, production from the El Gallo Project consisted of approximately 97% doré and 3% slag and fine carbon, and 99% production at the Black Fox mine was doré and 1% slag and fine carbon. Production from the San José mine consisted of approximately 47% doré and 53% concentrate. 

 

During 2018, we reported the following consolidated production attributable to us:

 

 

 

 

 

 

 

 

    

Gold

    

Silver

    

Gold equivalent

Consolidated Production

 

ounces

 

ounces

 

ounces(1)

 

 

 

 

 

 

 

El Gallo Project

 

38,983

 

9,147

 

39,105

Black Fox Mine

 

48,889

 

2,851

 

48,928

San José Mine (on 49% basis)

 

47,332

 

3,020,696

 

87,607

Total Production

 

135,203

 

3,032,694

 

175,640


(1)

Calculated using silver to gold ratio of 75:1

Gold and silver bullion obtained from the doré produced in Mexico and Canada is sold at the prevailing spot market price. Gold and silver doré produced from the San José mine is sold at the prevailing spot market price based on the London fix. Concentrates produced by the San Jose mine 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 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.

During 2018, total gold and silver sales were $66.2 million for the El Gallo Project, $62.0 million for the Black Fox mine, and $205.4 million for the San José mine on a 100% basis. Since we account for the San José mine using the equity method of accounting, we do not include revenue from the San José mine in the Consolidated Statements of Operations and Comprehensive (Loss) Income. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding production and operating results for our properties, and Item 8.  Financial Statements and Supplementary Data,  Note 2,  Summary of Significant Accounting Policies—Investments, for additional information regarding the equity method of accounting.

Like all metal producers, our operations are affected by fluctuations in metal prices. The following table presents the annual high, low and average daily London P.M. Fix prices per ounce for gold and London Fix prices per ounce for silver over the past three years and 2019 to the most recent practical date on the London Bullion Market:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gold

 

Silver

 

Year

 

High

 

Low

 

Average

 

High

 

Low

 

Average

 

 

 

(in dollars per ounce)

 

2016

    

$

1,366

    

$

1,077

    

$

1,251

    

$

20.71

    

$

13.58

    

$

17.14

 

2017

 

 

1,346

 

 

1,151

 

 

1,257

 

 

18.56

 

 

15.22

 

 

17.05

 

2018

 

 

1,355

 

 

1,178

 

 

1,268

 

 

17.52

 

 

13.97

 

 

15.71

 

2019 (through February 15, 2019)

 

 

1,323

 

 

1,280

 

 

1,299

 

 

16.08

 

 

15.26

 

 

15.65

 

 

On February 15, 2019 the London P.M. Fix for gold was $1,316 per ounce, and the London Fix for silver was $15.68 per ounce.

Mineralized Material Processing Methods

Gold and silver are extracted from mineralized material by either milling or heap leaching depending on, among other things, the amount of gold and silver contained in the material, whether the material is naturally oxidized or not, and the amenability of the material to treatment. At the El Gallo Project and Gold Bar mine, mineralized material is processed using heap leaching methods. Heap leaching consists of stacking crushed, oxidized material on impermeable pads, where a weak cyanide solution is applied to the surface of the heap to dissolve and leach the gold and silver. The gold and silver‑bearing solution is then collected and processed into doré bars.

At Black Fox, mineralized material is initially crushed on-site, transported to the mill site and fed to the mill’s crushing circuit. Following additional processing and refining, the mill produces doré bars.

4


 

At San José, mineralized material is processed at a mill site with half of the concentrate material being produced then being processed into doré, and the balance being filtered and shipped as concentrate.

Hedging Activities

Our strategy is to provide shareholders with exposure to gold and silver prices by selling our gold and silver ounces at spot market prices and consequently, we do not hedge our gold or silver sales. We may, however, from time to time, manage certain risks associated with fluctuations in foreign currencies using the derivatives market.

Gold and Silver Reserves

We have established gold and silver reserves at three of our properties, including San Jose, Black Fox and Gold Bar.  The following table summarizes the estimated portion of Proven and Probable gold and silver Reserves attributable to us for San Jose, Black Fox and Gold Bar as of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gold Reserves at December 31, 2018

 

Proven

 

Probable

 

Proven and probable

 

Tonnes (1)

Gold (gpt)

Gold ounces (1)

 

Tonnes (1)

Gold (gpt)

Gold ounces (1)

 

Tonnes (1)

Gold (gpt)

Gold ounces (1)

San José mine (3)

728

8.40

197

 

255

7.69

63

 

983

8.21

260

Gold Bar Project (4)

2,187

1.27

88

 

14,265

0.96

436

 

16,452

0.99

524

Black Fox Mine (5)

 -

 -

 -

 

437

6.33

89

 

437

6.33

89

Total Gold

2,915

 

285

 

14,957

 

588

 

17,872

 

873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Silver Reserves at December 31, 2018

 

Proven

 

Probable

 

Proven and probable

 

Tonnes (1)

Silver (gpt)

Silver ounces (2)

 

Tonnes (1)

Silver (gpt)

Silver ounces (2)

 

Tonnes (1)

Silver (gpt)

Silver ounces (2)

San José mine (3)

728

584

13.7

 

255

566

4.6

 

983

579

18.3

 

 

 

 

 

 

 

 

 

 

 

 

Total Silver

728

 

13.7

 

255

 

4.6

 

983

 

18.3


(1)

Measured in thousands.

(2)

Measured in millions.

(3)

The reserves information for the San José mine as at December 31, 2018, on a 100% basis, was prepared by Hochschild and audited by P&E Mining Consultants Inc. (“P&E”) whose audit letter dated February 7, 2019 concluded that the reserve estimates for the San José Mine, prepared by Hochschild, provide a reliable estimation of Mineral Reserves in accordance with the criteria of the Joint Ore Reserves Committee of the Australian Institute of Mining and Metallurgy (“JORC”), Canadian National Instrument 43-101 (“NI 43-101”), the Canadian Institute of Mining and Metallurgy (“CIM”) best practices and US SEC Guide 7 codes. The mineral reserves were estimated using metal prices of $1,150 per ounce of gold and $15.00 per ounce of silver. The reserves, as presented, are in place and include mining dilution and mining losses, but do not include allowances for mill or smelter recoveries.

(4)

Independent Mining Consultants, Inc. (“IMC”) developed the mineral reserve estimates for the Gold Bar project in accordance with US SEC Guide 7 codes and NI 43-101. The mineral reserves at the Gold Bar project were estimated using a gold price of $1,250 per ounce. The reserves, as presented, are in place and include mining dilution and mining losses, but do not include allowances for gold recovery from the process plant.

(5)

The reserves information for the Black Fox mine as at December 31, 2018 was prepared by Jacob Francoeur, P.Eng., Senior Mine Engineer and Patrick Lachapelle, P.Eng., Technical Services Manager, and reviewed by Chris Stewart, P.Eng., President and Chief Operating Officer. The mineral reserves were estimated using a gold price of $1,250 per ounce. Reserves are stated at a mill feed reference point and include for diluting materials and mining losses.

 

Competitive Business Conditions

We compete with many companies in the mining and mineral exploration and production industry, including large, established mining companies with substantial capabilities, personnel, and financial resources. There is a limited supply of desirable mineral lands available for claim‑staking, lease, or acquisition in Mexico, Argentina, Canada, or the United States, and other areas where we may conduct our mining or exploration activities. We may be at a competitive disadvantage in acquiring mineral properties, since we compete with these individuals and companies, many of which have greater financial resources and larger technical staffs than we do. From time to time, specific properties or areas which would otherwise be attractive to us for exploration or acquisition may be unavailable due to their previous acquisition by other companies or our lack of financial resources.

5


 

Competition in the industry is not limited to the acquisition of mineral properties, but also extends to the technical expertise to find, advance, and operate such properties; the labor to operate the properties; and the capital for the purpose of funding such exploration and development. Many competitors not only explore for and mine precious and base metals, but conduct refining and marketing operations on a world‑wide basis. Such competition may result in not only our company being unable to acquire desired properties, but to recruit or retain qualified employees or to acquire the capital necessary to fund our operation and advance our properties. Our inability to compete with other companies for these resources would have a material adverse effect on our results of operation, financial condition and cash flows.

General Government Regulations

In Mexico, Argentina, Canada and the United States, we are subject to various governmental laws and regulations, including environmental regulations. Other than operating licenses for our mining and processing facilities and concessions granted under contracts with the host government, there are no third party patents, licenses or franchises material to our business.  The applicable laws and regulations applicable to us include:

·

mineral concession rights;

·

surface rights;

·

water rights;

·

mining royalties;

·

environmental laws;

·

mining permits;

·

mining and income taxes; and

·

export regulations.

We believe that all of our properties are operated in compliance with all applicable governmental laws and regulations.

Reclamation Obligations

Under applicable laws in the jurisdictions where our properties are located, we are required to reclaim disturbances caused by our mining activities.  Accordingly, we have recorded estimates in our financial statements for our reclamation obligations, the most significant of which are related to our properties in Canada, Mexico and the U.S. 

Estimated future reclamation costs are based primarily on legal and regulatory requirements. At December 31, 2018, $29.4 million was accrued for reclamation costs relating to currently developed and producing properties. These amounts are included in Reclamation on the Consolidated Balance Sheet.

U.S. Environmental Laws

We are subject to extensive environmental regulation under the laws of the U.S. and the state where our U.S. operations are conducted.  For example, certain mining wastes from the extraction and processing of ores would be considered hazardous waste under the Resource Conservation and Recovery Act (“RCRA”) and state law equivalents, but are currently exempt from the extensive set of Environmental Protection Agency (“EPA”) regulations governing hazardous waste. If our mine wastes were treated as hazardous waste under RCRA or such wastes resulted in operations being designated as “Superfund” sites under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) or state law equivalents for cleanup, significant expenditures could be required for the construction of additional waste disposal facilities, for other remediation expenditures, or for natural resource damages. Under CERCLA, any present or past owners or operators of a Superfund site generally may be held liable and may be forced to undertake remedial cleanup action or to pay for the government’s cleanup efforts. Such owners or operators may also be liable to governmental entities for the cost of damages to natural resources, which may be substantial. Additional regulations or requirements may also be imposed upon our operations, tailings, and waste disposal areas, as well as upon mine closure under federal and state environmental laws and regulations, including, without limitation, CERCLA, the Clean Water Act, Clean Air Act, the Endangered Species Act and state law equivalents.

We have reviewed and considered current federal legislation relating to climate change and do not believe it to have a material effect on our operations. Future changes in U.S. federal or state laws or regulations could have a material adverse effect upon us and our results of operations.

 

6


 

Foreign Government Regulations

Mexico, where El Gallo 1 is located, and Canada, where the Black Fox mine and Stock mill are located, have both adopted laws and guidelines for environmental permitting that are similar to those in effect in the U.S. The permitting process requires a thorough study to determine the baseline condition of the mining site and surrounding area, an environmental impact analysis, and proposed mitigation measures to minimize and offset the environmental impact of mining operations. We have received all permits required to operate our properties in Mexico and Canada and have received all permits necessary for the exploration activities being conducted at our other non-U.S. properties.

Customers

Production from the El Gallo Project and Black Fox is sold as refined metal on the spot market or doré under the terms set out in a doré purchase agreement between us and the Bank of Nova Scotia (“Scotia”), a Canadian financial institution.  Under the terms of that agreement, dated July 2012, we have the option to sell approximately 90% of the gold and silver contained in doré bars produced at the El Gallo Project and Black Fox prior to the completion of refining by the third party refiner.  During the year ended December 31, 2018, 97% and 96% of the sales made by the El Gallo 1 Project and Black Fox mine were made to Scotia, respectively, with no sales made through the doré purchase agreement. We also have an agreement to sell refined metal to a second Canadian financial institution.

During the year ended December 31, 2018, 78% of total sales from the San José mine were made to three companies, Republic Metals, a Florida corporation, accounted for 18% of that amount, Argo-Heraeus, a Swiss company, accounted for 46% of such amount and LS Nikko Copper Inc., a South Korean company, accounted for 36% of that amount. MSC has sales agreements with each of these purchasers. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for information regarding the recent bankruptcy of Republic Metals.

In the event that our customer relationship or MSC’s customer relationships were interrupted for any reason, we believe that we or MSC could locate other purchasers for our products. However, any interruption would temporarily disrupt the sale of our products and could adversely affect our operating results.

Employees

As of December 31, 2018, we had 427 employees including 137 employees based in Mexico, 6 in Argentina, 50 in the United States, 27 in Toronto, Ontario, Canada, and 207 in Timmins, Ontario, Canada. All of our employees based in Toronto work in an executive, technical or administrative position, while our employees in Mexico, Argentina, the United States, and Timmins include laborers, craftsmen, mining, geology and environmental specialists, information technologists, and various other support roles. As of December 31, 2018, MSC had 1,279 employees in Argentina.

The majority of our employees in Mexico are covered by union labor contracts with whom we believe we have good relations. We also frequently engage independent contractors in connection with certain administrative matters and the exploration of our properties, such as drillers, geophysicists, geologists, and other specialty technical disciplines.

 

For Canada and United States, we engage independent contractors for extractive and exploration activities such as drilling, geophysics, hauling and crushing.

 

ITEM 1A.  RISK FACTORS

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward‑looking statements that may be affected by several risk factors. The following information summarizes all material risks known to us as of the date of filing this report:

 

Risks Relating to Our Company

Our results of operations, cash flows and the value of our properties are highly dependent on the market prices of gold, silver, and copper and these prices can be volatile.

The profitability of our gold and silver mining operations and the value of our mining properties, are directly related to the market price of gold, silver and copper. The price of gold, silver and copper may also have a significant influence on the market price of our common stock. Historically, the market price of gold and silver has fluctuated significantly and is affected by numerous factors beyond our control. These factors include supply and demand fundamentals, global or

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national political or economic conditions, expectations with respect to the rate of inflation, the relative strength of the U.S. dollar and other currencies, interest rates, gold and silver sales and loans by central banks, forward sales by metal producers, accumulation and divestiture by exchange traded funds, and a number of other factors such as industrial and commercial demand.

We derive all of our revenue from the sale of gold and silver and our results of operations will fluctuate as the prices of these metals change.  A period of significant and sustained lower gold and silver prices would materially and adversely affect our results of operations and cash flows. The volatility of mineral prices represents a substantial risk which no amount of planning or technical expertise can fully eliminate. In the event mineral prices decline or remain low for prolonged periods of time, we might be unable to develop our properties, which may adversely affect our results of operations, financial performance and cash flows. An asset impairment charge may result from the occurrence of unexpected adverse events that impact our estimates of expected cash flows generated from our producing properties or the market value of our non-producing properties, including a material diminution in the price of gold and/or silver. 

Our results of operations have been and could continue to be materially and adversely affected by the impairment of assets.

During 2018, the price of gold, as measured by the London PM fix, fluctuated between $1,178 and $1,355 per ounce. While the price of silver fluctuated between $13.97 and $17.52 per ounce.  As at February 15, 2019, gold, silver and copper prices were $1,316 per ounce, $15.68 per ounce, and $2.80 per pound, respectively.

Our Estimates of proven and probable reserves and mineralized material are based on interpretation and assumptions and may yield less mineral production under actual conditions than is currently estimated.

Unless otherwise indicated, proven and probable reserves and mineralization figures presented in our filings with securities regulatory authorities, including the SEC, news releases and other public statements that may be made from time to time, are based upon estimates made by both independent and our own internal professionals. Estimates of proven and probable reserves and mineralized material are subject to considerable uncertainty and are based, to a large extent, on the prices of gold and silver and interpretations of geologic data obtained from drill holes and other exploration techniques. These prices and interpretations are subject to change. If we determine that certain of our estimated reserves or mineralized material have become uneconomic, we may be forced to reduce our estimates.  Actual production may be significantly less than we expect.

When making determinations about whether to advance any of our projects to development, we rely upon such estimated calculations as to the mineralized material and grades of mineralization on our properties. Until ore is mined and processed, mineralized material and grades of mineralization must be considered as estimates only.  We cannot ensure that:

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these estimates will be accurate; or

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this mineralization can be mined or processed profitably.

 

Any material changes in mineral estimates and grades of mineralization may affect the economic viability of placing a property into production and such property’s return on capital. There can be no assurance that minerals recovered in small scale tests will be recovered in large‑scale tests under on‑site conditions or in production scale. Extended declines in market prices for gold and/or silver may render portions of our mineralization estimates uneconomic and result in reduced reported mineralization or adversely affect the commercial viability of one or more of our properties. Any material reductions in estimates of mineralization, or of our ability to extract this mineralization, could have a material adverse effect on our results of operations or financial condition.

Investors should also be aware that calculations of “Reserves” differ under SEC reporting standards and those under other international standards, such as Canada.  Investors should also be aware that mineralized material may never be converted into reserves.  See, CAUTIONARY NOTE TO UNITED STATES INVESTORS-INFORMATION CONCERNING PREPARATION OF RESOURCE AND RESERVE ESTIMATES

We may be unable to replace gold and silver reserves as they become depleted.

Like all metal producers, we must continually replace reserves depleted by production to maintain production levels over the long term and provide a return on invested capital. Depleted reserves can be replaced in several ways, including expanding known ore bodies, by locating new deposits or acquiring interests in reserves from third parties. Exploration is highly speculative in nature, involves many risks and uncertainties and is frequently unsuccessful in discovering significant mineralization. Accordingly, our current or future exploration programs may not result in new mineral producing

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operations. Even if significant mineralization is discovered, it will likely take many years from the initial phases of exploration until commencement of production, during which time the economic feasibility of production may change.

From time to time, we may acquire ore reserves from other parties, as we did in 2017. Such acquisitions are based on an analysis of a variety of factors including historical operating results, estimates of and assumptions regarding the extent of ore reserves, the timing of production from such reserves and cash and other operating costs. In addition, we may rely on data and reports prepared by third parties (including the ability to permit and comply with existing regulations) and which may contain information or data that we are unable to independently verify or confirm in advance. Other than historical operating results, all of these factors are uncertain and may have an impact on our revenue, our cash flow and other operating issues, as well as contributing to the uncertainties related to the process used to estimate ore reserves.

As a result of these uncertainties, our exploration programs and acquisitions may not result in the expansion or replacement of our current production with new ore reserves or operations, which could have a material adverse effect on our business, prospects, results of operations and financial position.

The recent Canadian acquisitions and any future acquisitions may not achieve their intended results and may lead to us assuming unanticipated liabilities.

The recent acquisitions completed in 2017 and any future acquisitions subject us to many risks.  We may discover title defects or adverse environmental or other conditions relating to the properties acquired in the transactions of which we are currently unaware. Environmental, title, and other problems could reduce the value of the properties to us, and, depending on the circumstances, we could have limited or no recourse to the sellers with respect to those problems. We have assumed substantially all of the liabilities associated with acquired properties and would be entitled to indemnification in connection with those liabilities in only limited circumstances, for limited periods and in limited amounts. Potential remedies may not be adequate to cover any liabilities we incur, and such liabilities could be significant. Also, it is uncertain whether our existing operations and the acquired properties and operations can be integrated in an efficient and effective manner. In addition, the success of the acquisitions depends on, among other things, the accuracy of our assessment of the reserves associated with the acquired properties and operating costs, among other factors. These assessments were based to a significant degree on information provided by the sellers and we cannot guarantee their accuracy. Although acquired properties are subject to many of the risks and uncertainties to which acquisitions we pursue are subject generally, risks include those associated with our ability to operate efficiently in a new area and the significant size of the transactions in the aggregate.

Our business requires substantial capital investment and we may be unable to raise additional funding on favorable terms to develop additional mining operations.

While we believe we have the necessary capital needed to complete the construction of Gold Bar, we may require significant capital beyond our existing resources to develop our other projects. We continue to evaluate capital and development expenditure requirements to advance Los Azules, Black Fox and Fenix Project. If we make a positive decision to develop one or more of these initiatives, the expenditures incurred may significantly exceed our working capital. Our ability to obtain necessary funding, in turn, depends upon a number of factors, including the state of the economy and applicable commodity prices. We may not be successful in obtaining the required financing to advance our projects or other purposes, on terms that are favorable to us or at all, in which case, our ability to replace reserves and continue operating would be adversely affected. Failure to obtain such additional financing could result in delay or indefinite postponement of further exploration or potential development and the possible partial or total loss of our interest in certain properties.

Our indebtedness adversely affects our cash flow and may adversely affect our ability to operate our business.

As of December 31, 2018, we had outstanding long term, secured debt of $50 million. Repayment of the loan is secured by a lien on certain of the Company’s and its subsidiaries’ assets. This debt requires us to make monthly interest payments and, beginning in 2020, to begin making monthly principal payments until the indebtedness is retired. We cannot be certain that our cash flow from operations will be sufficient to allow us to pay the principal and interest on our debt and meet our other obligations. Even if we have sufficient cash flow to retire the debt, those payments will affect the amount of cash we have available to invest in capital investment, exploration, ongoing operations and other purposes. Payments on our debt may also inhibit our ability to react to changing business conditions.

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Any failure to meet our debt obligations could harm our business and financial condition and may require us to sell assets or take other steps to satisfy the debt.

Our ability to make payments on and/or to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate sufficient cash flow from operations in the future. To a significant extent, this is subject to general economic, financial, competitive, legislative and regulatory conditions, and other factors that are beyond our control, including the prices that we receive for the sale of our metals.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay principal and interest on our indebtedness or to fund our other liquidity needs. Decreases in precious metal prices may adversely affected our ability to generate cash flow from operations. If our cash flow and existing capital resources are insufficient to fund our debt obligations, we may be forced to reduce our planned capital expenditures, sell assets, seek additional equity or debt capital, or restructure our debt, and any of these actions, if completed, could adversely affect our business and/or the holders of our securities. We cannot assure you that any of these remedies could, if necessary, be effected on commercially reasonable terms, in a timely manner or at all. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness could result in the immediate acceleration of the debt. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure such defaulted debt.

Restrictive debt covenants could limit our growth and our ability to finance our operations, fund our capital needs, respond to changing conditions, and engage in other business activities that may be in our best interests.

Our credit facility contains covenants that restrict or limit our ability to:

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Pay dividends or distributions on our capital stock;

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Borrow additional funds;

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Repurchase, redeem, or retire our capital stock;

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Make certain loans and investments;

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Sell assets;

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Enter into certain transactions with affiliates;

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Create or assume certain liens on our assets;

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Make certain acquisitions; or

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Engage in certain other corporate activities.

Our credit facility also requires us to satisfy certain financial tests on an ongoing basis. Our ability to comply with these requirements may be affected by events beyond our control, and we cannot assure you that we will satisfy them in the future. In addition, these requirements could limit our ability to obtain future financings, make needed capital expenditures, withstand a future downturn in our business or the economy in general, or otherwise conduct necessary corporate activities. We may also be prevented from taking advantage of business opportunities that arise because of the restrictive covenants under our debt agreement. A breach of any of the covenants in our debt agreements could result in a default under the agreement.

If we do not hedge our exposure to reductions in gold and silver prices, we may be subject to significant reductions in price.

We do not use hedging transactions with respect to any of our gold and silver production and we do not expect to do so in the future.  Accordingly, we may be exposed to more significant price fluctuations if gold and/or silver prices decline. While the use of hedging transactions limits the downside risk of price declines, their use also may limit future revenues from price increases. Hedging transactions also involve the risk that the counterparty may be unable to satisfy its obligations.

We own our 49% interest in the San José mine under the terms of an option and joint venture agreement (“OJVA”), and therefore we are unable to control all aspects of the exploration and development of, and production from, this property.

Our interest in the San José mine is subject to the risks normally associated with the conduct of joint ventures. A disagreement between joint venture partners on how to conduct business efficiently, the inability of joint venture partners

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to meet their obligations to the joint venture or third parties, or litigation arising between joint venture partners regarding joint venture matters could have a material adverse effect on the viability of our interests held through the joint venture.

We conduct operations in a number of foreign countries and are exposed to legal, political and social risks associated with those operations.

All of our revenue in 2018 was generated by operations outside the United States.  Exploration, development, production and closure activities in many countries are potentially subject to heightened political and social risks that are beyond our control and could result in increased costs, capacity constraints and potential disruptions to our business. These risks include the possible unilateral cancellation or forced renegotiation of contracts in which we may, directly or indirectly, have an interest, unfavorable changes in foreign laws and regulations, royalty and tax increases (including taxes associated with the import or export of goods), risks associated with consumption taxes in Mexico (VAT) and Canada (HST), income tax refund recovery and collection processes, changes in US legislation as applicable to foreign operations, claims by governmental entities or indigenous communities, expropriation or nationalization of property and other risks arising out of foreign sovereignty over areas in which our operations are conducted. The right to import and export gold and silver may depend on obtaining certain licenses and quotas, which could be delayed or denied at the discretion of the relevant regulatory authorities, or could become subject to new taxes or duties imposed by U.S. or foreign jurisdictions, which could have a material adverse effect on our business, financial condition, or future prospects. In addition, our rights under local law may be less secure in countries where the rule of law is less robust and judicial systems may be susceptible to manipulation or influence from government agencies, non-governmental organizations or civic groups.

Any of these developments could require us to curtail or terminate operations at our mines, incur significant costs to renegotiate contracts, meet newly-imposed environmental or other standards, pay greater royalties or higher prices for labor or services and recognize higher taxes, or experience significant delays or obstacles in the recovery of VAT/HST or income tax refunds owed, which could materially and adversely affect our financial condition, results of operations and cash flows.

Our ongoing and future success depends on developing and maintaining productive relationships with the communities, including indigenous peoples, and other stakeholders in our operating locations. Notwithstanding our ongoing efforts, local communities and stakeholders can become dissatisfied with our activities or the level of benefits provided, which may result in civil unrest, protests, direct action or campaigns against us. Any such occurrences could materially and adversely affect our financial condition, results of operations and cash flows.

Our operations in Argentina and Mexico are subject to political and social risks.

With respect to our San José mine, there are risks relating to an uncertain or unpredictable political and economic environment in Argentina. For instance, Argentina defaulted on foreign debt repayments and on the repayment on a number of official loans to multinational organizations in 2002 and 2003, and defaulted again on its bonds in 2014 after failing to reach an agreement with certain of its bondholders. In 2008, the Argentine government also reassessed its policy and practice in respect of export duties and began levying export duties on mining companies operating in the country. In 2012, Argentina’s President announced the nationalization of the majority stake of Yacimientos Petrolíferos Fiscales (YPF), Argentina’s largest oil company. In 2013, Argentina’s federal Income Tax Statute was amended to include a 10% income tax withholding on dividend distributions by Argentine corporations, and the capital gains exception for non‑resident taxpayers was repealed. In 2015, Argentina’s federal government removed export taxes for doré and concentrate products while the local authorities in the province of Santa Cruz substituted a provincial reserve tax with a lower provincial Corporate Social Responsibility (“CSR”) payment. In December 2017, Argentina enacted comprehensive tax reform (Law No. 27,430 (the Law)), through publication in the Official Gazette. The Law is generally effective 1 January 2018. Specifically, the Law introduces amendments to corporate income tax, personal income tax, value added tax (VAT), tax procedural law, criminal tax law, social security contributions, excise tax, tax on fuels, and tax on the transfer of real estate. It also establishes a special regime comprising an optional revaluation of assets for income tax purposes. The law gradually reduces the corporate tax rate to 25 % from 35 % by 2020. It also proposes to tax profits from financial investment for the first time, introducing a levy of 15 % for foreign currency-denominated and inflation-linked instruments and 5 % for peso-denominated debt. In 2018, Argentina’s federal government introduced a decree imposing a temporary tax on all exports from Argentina. The tax was introduced as an emergency measure due to the significant peso devaluation during the year. The estimated impact to MSC is a tax of approximately 7.5% of revenue.

With respect to the El Gallo Project in Mexico, there has been an ongoing level of violence and crime relating to drug cartels and gangs in Sinaloa State where we operate, and in other regions of Mexico. Our facility at the El Gallo was

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robbed in 2015.  On November 15, 2018 the US State Department issued a Level 4 (“do not travel”) warning with respect to five Mexican states, including Sinaloa State due to violence related to the drug cartels.  These events may disrupt our ability to carry out exploration and mining activities and affect the safety and security of our employees and contractors.

The Mexican Congress approved the provisions of the Tax Reform on October 31, 2013, that created new taxes for the mining industry on earnings before deductions of 7.5% and additional 0.5% on precious metals sales. We filed a Constitutional remedy Lawsuit (Amparo) before a Federal District Judge claiming the unconstitutionality of the tax reform.   After two appeals, on November 15, 2017, the Supreme Court ruled against in some arguments and remanded the case to a lower court, a Circuit Tribunal who will issue the final judgment. Our obligation to pay the tax is presently stayed pending a final ruling from the court. A ruling against us would result in an additional expense and may result in additional expenses in the future. As of December 31, 2018, we have not generated taxable income subject to the 7.5% mining royalty, and have accrued $1.5 million for the 0.5% precious metals royalty.

Estimates relating to new development projects such as our Gold Bar project and mine plans of existing operations are uncertain and we may incur higher costs and lower economic returns than estimated.

Mine development projects such as Gold Bar could experience unexpected problems and delays during mine start-up. Any problems or delays, in turn, could result in higher costs or reduced revenue while the problems are addressed.

Our decision to develop a project is typically based on the results of feasibility studies, which estimate the anticipated economic returns of a project. The actual project profitability or economic feasibility may differ from such estimates as a result of any of the following factors, among others:

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Changes in tonnage, grades and metallurgical characteristics of mineralized material to be mined and processed;

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Changes in input commodity and labor costs;

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The quality of the data on which engineering assumptions were made;

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Adverse geotechnical conditions;

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Availability of an adequate and skilled labor force;

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Availability, supply and cost of utilities such as water and power;

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Fluctuations in inflation and currency exchange rates;

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Changes in metals prices; or

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Changes in tax laws, the laws and/or regulations around royalties and other taxes due to the regional and national governments and royalty agreements.

 

 

 

 

Our development activities, including Gold Bar and Black Fox, may not result in the expansion or replacement of current production with new production, or one or more of these new production sites or facilities may be less profitable than currently anticipated or may not be profitable at all, any of which could have a material adverse effect on our results of operations and financial position.

For our existing operations, we base our mine plans on geological, metallurgical and engineering assumptions, financial projections and commodity price estimates. These estimates are periodically updated to reflect changes in our operations, including modifications to our proven and probable reserves and mineralized material, revisions to environmental obligations, changes in legislation and/or our political or economic environment, and other significant events associated with mining operations. There are numerous uncertainties inherent in estimating quantities and qualities of gold, silver and copper and costs to mine recoverable reserves, including many factors beyond our control, that could cause actual results to differ materially from expected financial and operating results or result in future impairment charges.

Our operations and properties in Canada expose us to additional political risks.

Our properties in Canada may be of particular interest or sensitivity to one or more interest groups, including aboriginal groups (which are generally referred to as "First Nations"). We have mineral projects in Ontario that are or may be in areas with a First Nations presence. It is our practice to work closely with and consult with First Nations in areas in which our projects are located or which could be impacted by our activities. However, there is no assurance that relationships with such groups will be positive. Accordingly, it is possible that our production, exploration or development activities on these properties could be interrupted or otherwise adversely affected in the future by political uncertainty, native land claims entitlements, expropriations of property, changes in applicable law, governmental policies and policies of relevant interest groups, including those of First Nations. Any changes in law or relations or shifts in political conditions may be beyond

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our control, or we may enter into agreements with First Nations, all of which may adversely affect our business and operations and if significant, may result in the impairment or loss of mineral concessions or other mineral rights, or may make it impossible to continue our mineral production, exploration or development activities in the applicable area, any of which could have an adverse effect on our financial conditions and results of operations.

Reform of the General Mining Law in the United States could adversely affect our results of operations.

Periodically, members of the U.S. Congress have introduced bills which would supplant or alter the provisions of the General Mining Law of 1872, which governs the unpatented claims that we control with respect to our U.S. properties. One such amendment has become law and has imposed a moratorium on the patenting of mining claims, which reduced the security of title provided by unpatented claims such as those on our U.S. properties. If additional legislation is enacted, it could substantially increase the cost of holding unpatented mining claims by requiring payment of royalties, and could significantly impair our ability to develop mineral estimates on unpatented mining claims. Such bills have proposed, among other things, to make permanent the patent moratorium, to impose a federal royalty on production from unpatented mining claims and to declare certain lands as unsuitable for mining. Although it is impossible to predict at this time what royalties may be imposed in the future, the imposition of such royalties could adversely affect the potential for development of such mining claims, and the economics of existing operating mines on federal unpatented mining claims. Passage of such legislation could adversely affect our business.

Our business is subject to the U.S. Foreign Corrupt Practices Act and similar worldwide anti‑bribery laws, a breach or violation of which could lead to civil and criminal fines and penalties, loss of licenses or permits and reputational harm.

We operate in certain jurisdictions that have experienced governmental and private sector corruption to some degree. The U.S. Foreign Corrupt Practices Act and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. Violations of these laws, or allegations of such violations, could lead to civil and criminal fines and penalties, litigation, and loss of operating licenses or permits, and may damage our reputation, which could have a material adverse effect on our business, financial position and results of operations. There can be no assurance that our internal control policies and procedures always will protect us from recklessness, fraudulent behavior, dishonesty or other inappropriate acts committed by our affiliates, employees or agents. As such, our corporate policies and processes may not prevent all potential breaches of law or other governance practices.

We are subject to foreign currency risk.

While we transact most of our business in U.S. dollars, certain expenses, such as labor, operating supplies, and property and equipment, may be denominated in Canadian dollars, Mexican pesos or Argentine pesos. As a result, currency exchange fluctuations may impact our operating costs. The appreciation of non‑U.S. dollar currencies against the U.S. dollar increases costs and the cost of purchasing property and equipment in U.S. dollar terms in Mexico, Argentina and Canada, which can adversely impact our operating results and cash flows. Conversely, a depreciation of non‑U.S. dollar currencies usually decreases operating costs and property and equipment purchases in U.S. dollar terms in foreign countries.

The value of cash and cash equivalents denominated in foreign currencies also fluctuates with changes in currency exchange rates. Appreciation of non‑U.S. dollar currencies results in a foreign currency gain on such investments and a depreciation in non‑U.S. dollar currencies results in a loss. We have not utilized market risk sensitive instruments to manage our exposure to foreign currency exchange rates but may in the future actively manage our exposure to foreign currency exchange rate risk. We also hold portions of our cash reserves in Canadian, Mexican and Argentine currency.

Development at Los Azules presents development challenges that may negatively affect, if not completely negate, the feasibility of development of the property.

The Los Azules property is located in a remote location that is accessed by 75 miles (120 kilometers) of unimproved dirt road with eight river crossings and two mountain passes above 13,451 feet (4,100 meters). Even assuming that technical difficulties associated with this remote location can be overcome, the significant capital costs required to develop the project may make the project uneconomical.  If the long term price of copper were to remain low or decrease significantly below the current price or capital cost estimates increase significantly, Los Azules may not be feasible for development, and we may have to write‑off the remaining carrying value of the asset. Furthermore, the project’s economic feasibility has not yet been demonstrated through a full feasibility study. The Preliminary Economic Assessment (“PEA”) is preliminary in nature, includes NI 43‑101 mineral resources that are considered too speculative geologically to have

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economic considerations applied to them that would allow them to be categorized as mineral reserves either under Industry Guide 7 or NI 43‑101, and there is no certainty that the PEA will be realized.

We may acquire additional exploration-stage properties on which, reserves may never be discovered.

We have in the past and may in the future acquire additional exploration-stage properties. There can be no assurance that we have or will be able to complete the acquisition of such properties at reasonable prices or on favorable terms and that reserves will be identified on any properties that we acquire. We may also experience negative reactions from the financial markets if we are unable to successfully complete acquisitions of additional properties or if reserves are not located on acquired properties. These factors may adversely affect the trading price of our common stock or our financial condition or results of operations.

The nature of mineral exploration and production activities involves a high degree of risk and the possibility of uninsured losses that could materially and adversely affect our operations.

Exploration for and production of minerals is highly speculative and involves greater risk than many other businesses. Many exploration programs do not result in the discovery of mineralization, and any mineralization discovered may not be of sufficient quantity or quality to be profitably mined. Few properties that are explored are ultimately advanced to production. Our current exploration efforts are, and future development and mining operations we conduct will be, subject to all of the operating hazards and risks normally incident to exploring for and developing mineral properties, such as, but not limited to:

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economically insufficient mineralized material;

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fluctuations in production costs that may make mining uneconomical;

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availability of labor, contractors, engineers, power, transportation and infrastructure;

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labor disputes;

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potential delays related to social, public health, and community issues;

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negotiations with aboriginal groups or local populations affecting our efforts to explore, develop or produce gold and silver deposits;

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unanticipated variations in grade and other geological problems;

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environmental hazards;

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water conditions;

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difficult surface or underground conditions;

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metallurgical and other processing problems;

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mechanical and equipment performance problems;

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industrial accidents, personal injury, fire, flooding, cave‑ins, landslides and other natural disasters; and

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decrease in reserves or mineralized material due to a lower silver, gold or copper price.

Any of these risks can materially and adversely affect, among other things, the development of properties, production quantities and rates, costs and expenditures, potential revenues and production dates. We currently have no insurance to guard against any of these risks, except in very limited circumstances. If we determine that capitalized costs associated with any of our mineral interests are not likely to be recovered, we would incur a write‑down of our investment in these interests. All of these factors may result in losses in relation to amounts spent which are not recoverable.

We do not insure against all risks to which we may be subject in our operations.

While we currently maintain insurance policies to insure against general commercial liability claims and physical assets at our properties in Argentina, Canada, Mexico, and the United States, we do not maintain insurance to cover all of the potential risks associated with our operations. Our other exploration projects have no existing infrastructure for which we insure. We may also be unable to obtain insurance to cover other risks at economically feasible premiums or at all. Insurance coverage may not continue to be available, or may not be adequate to cover liabilities. We might also become subject to liability for environmental, pollution or other hazards associated with mineral exploration and production including bankruptcy of our refiners or other third party contractors which may not be insured against, which may exceed the limits of our insurance coverage or which we may elect not to insure against because of premium costs or other reasons. Losses from these events may cause us to incur significant costs that could materially adversely affect our financial condition and our ability to fund activities on our property. A significant loss could force us to reduce or terminate our operations.

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Our operations are subject to permitting requirements which could require us to delay, suspend or terminate our operations on our mining properties.

Our mining operations, including ongoing exploration drilling programs, require permits from various state and federal governments, including permits for the use of water and for drilling wells for water. We may be unable to obtain these permits in a timely manner, on reasonable terms or on terms that provide us sufficient resources to develop our properties, or at all. Even if we are able to obtain such permits, the time required by the permitting process can be significant. If we cannot obtain or maintain the necessary permits, or if there is a delay in receiving these permits, our timetable and business plan for exploration of our properties will be adversely affected, which may in turn adversely affect our results of operations, financial condition, cash flows and market price of our securities.

Due to an increased level of non‑governmental organization and aboriginal and local group activity targeting the mining industry, the potential for the government or process instituted by non-governmental organizations, aboriginal and local, to delay the issuance of permits or impose new requirements or conditions upon mining operations may be increased. Any changes in government policies may be costly to comply with and may delay mining operations. Future changes in such laws and regulations, if any, may adversely affect our operations, make our operations prohibitively expensive, or prohibit them altogether. If our interests are materially adversely affected as a result of a violation of applicable laws, regulations, or permitting requirements or a change in applicable law or regulations, it would have a significant negative impact on the value of our company and could have a significant impact on our stock price.

Title to mineral properties can be uncertain, and we are at risk of loss of ownership of one or more of our properties.

Our ability to explore and operate our properties depends on the validity of our title to that property. Our U.S. mineral properties include leases of unpatented mining claims, as well as unpatented mining and mill site claims, which we control directly. Unpatented mining claims provide only possessory title and their validity is often subject to contest by third parties or the federal government, which makes the validity of unpatented mining claims uncertain and generally riskier.  Similarly, Canadian mineral properties consist of patented and unpatented claims which each have their respective risks and uncertainties.  Further, there may be title defects or additional rights which are not recorded on the title.  Our concessions in Mexico are subject to continuing government regulation and failure to adhere to such regulations will result in termination of the concession. Similarly, under Argentine Law, failure to comply with applicable conditions may result in the termination of the concession. Uncertainties inherent in mineral properties relate to such things as the sufficiency of mineral discovery, proper posting and marking of boundaries, assessment work and possible conflicts with other claims not determinable from public record. We have not obtained title opinions covering our entire property, with the attendant risk that title to some claims, particularly title to undeveloped property, may be defective. There may be valid challenges to the title to our property which, if successful, could impair development and/or operations.

We cannot ensure that we will have an adequate supply of water to complete desired exploration or development of our mining properties.

Our mining operations require significant quantities of water for mining, ore processing and related support facilities. Our operations in Argentina, Mexico, Canada and the United States are in areas where water is scarce and competition among users for continuing access to water is significant. Continuous production at our mines is dependent on our ability to maintain our water rights and claims and to defeat claims adverse to our current water uses in legal proceedings. Although each of our operations currently has sufficient water rights and claims to cover its operational demands, we cannot predict the potential outcome of pending or future legal proceedings relating to our water rights, claims and uses. Water shortages may also result from weather or environmental and climate impacts out of the Company’s control.

Our continuing reclamation obligations at Tonkin, Gold Bar, Black Fox, El Gallo, and other properties could require significant additional expenditures.

We are responsible for the reclamation obligations related to disturbances on all our properties. On February 10, 2014, we submitted to the BLM an amendment to the original Plan of operations for the Tonkin Complex that incorporated the final plan for permanent closure, which was approved by the BLM on September 21, 2015, including our $3.6 million estimate of anticipated reclamation requirements, for which a financial guarantee has been put in place. In order for the Company to commence construction at its Gold Bar project, a reclamation bond of $15.0 million was approved by the BLM on August 25, 2017, reflecting an estimate of the anticipated reclamation requirements, for which a financial guarantee has been put in place. As at December 31, 2018, the Company recognized a reclamation obligation of $3.7 million as a result of the disturbances associated with construction initiatives at the Gold Bar mine.

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Pursuant to the Black Fox acquisition, which closed in October 2017, we filed three updated closure plans with the Ministry of Northern Development and Mines (“MNDM”). The three updated closure plans included the Black Fox Mine, the Stock Mill, and the Grey Fox Advanced Exploration Project, which have closure costs of C$15.1 million, C$5.2 million, and C$0.4 million, respectively. The updated closure plans were received by the MNDM on September 27, 2017. These financial assurances were satisfied by us through financial guarantees. 

Regarding the El Gallo Project, we have not posted a bond in Mexico as none is required by the current legislation; however, we have recorded a liability based on the estimated amount of our reclamation obligations.

There is a risk that any surety bond or recorded liability, even if increased based on the analysis and work performed to update the reclamation obligations, could be inadequate to cover the actual costs of reclamation when carried out. The satisfaction of bonding requirements and continuing reclamation obligations will require a significant amount of capital. Further, it is possible that the BLM may request that the Company provides additional long-term financing supported by a long-term trust for an amount that cannot be determined at this point. There is a risk that we will be unable to fund any additional bonding requirements or that the surety bonds may no longer be accepted by the governmental agencies as satisfactory reclamation coverage, in which case we would be required to replace the surety bonding with cash, and further, that the regulatory authorities may increase reclamation and bonding requirements to such a degree that it would not be commercially reasonable to continue exploration activities, which may adversely affect our results of operations, financial performance and cash flows.

Our ongoing operations and past mining activities are subject to environmental risks, which could expose us to significant liability and delay, suspension or termination of our operations.

All aspects of our operations are subject to Argentine, Mexican, Canadian and American federal, state and local environmental regulation. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste, including cyanide. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non‑compliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for us and our officers, directors and employees. Future changes in environmental regulation, if any, may adversely affect our operations, make our operations prohibitively expensive, or prohibit them altogether. Environmental hazards may exist on our properties that are unknown to us at the present and that have been caused by us, or previous owners or operators, or that may have occurred naturally. We utilize explosives in our business, which could cause injury to our personnel, and damage to our equipment or assets. Mining properties from the companies we have acquired may cause us to be liable for remediating any damage that those companies may have caused. The liability could include response costs for removing or remediating the release and damage to natural resources, including ground water, as well as the payment of fines and penalties. Failure to comply with applicable environmental laws, regulations and permitting requirements may also result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities, causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions.

Our industry is highly competitive, attractive mineral lands are scarce, and we may not be able to obtain quality properties.

We compete with many companies in the mining industry, including large, established mining companies with substantial capabilities, personnel and financial resources. There is a limited supply of desirable mineral lands available for claim staking, lease or acquisition in Argentina, Mexico, Canada and the United States, and other areas where we may conduct exploration activities. We may be at a competitive disadvantage in acquiring mineral properties, since we compete with these individuals and companies, many of which have greater financial resources and larger technical staffs than we do. From time to time, specific properties or areas which would otherwise be attractive to us for exploration or acquisition may be unavailable to us due to their previous acquisition by other companies or our lack of financial resources. Competition in the industry is not limited to the acquisition of mineral properties but also extends to the technical expertise to find, advance, and operate such properties; the labor to operate the properties; and the capital for the purpose of funding such properties. Many competitors not only explore for and mine precious metals, but conduct refining and marketing operations on a world‑wide basis. Such competition may result in our Company being unable not only to acquire desired properties, but to recruit or retain qualified employees or to acquire the capital necessary to fund our operation and advance our properties. Our inability to compete with other companies for these resources would have a material adverse effect on our results of operation, financial condition and cash flows.

16


 

We rely on contractors to conduct a significant portion of our operations and construction projects.

A portion of our operations and construction projects are currently conducted in whole or in part by contractors, including specifically our operations at the El Gallo Project and Black Fox mine and the construction at the Gold Bar Project. As a result, our operations are subject to a number of risks, some of which are outside our control, including:

·

Negotiating agreements with contractors on acceptable terms;

·

The inability to replace a contractor and its operating equipment in the event that either party terminates the agreement;

·

Reduced control and oversight over those aspects of operations which are the responsibility of the contractor;

·

Failure of a contractor to perform under its agreement;

·

Interruption of operations or increased costs in the event that a contractor ceases its business due to insolvency or other unforeseen events;

·

Failure of a contractor to comply with our standards and policies, as well as with applicable legal and regulatory requirements, to the extent it is responsible for such compliance; and

·

Problems of a contractor with managing its workforce, labor unrest or other related employment issues.

In addition, we may incur liability to third parties as a result of the actions of our contractors. The occurrence of one or more of these risks could adversely affect our results of operations and financial position.

If our employees or contractors engage in a strike, work stoppage or other slowdown, we could experience business disruptions or increased costs.

As of December 31, 2018, a number of our employees were represented by different trade unions and work councils which subject us to employment arrangements very similar to collective bargaining agreements. Further, most of our employees are based in foreign locations. The laws of certain foreign countries may place restrictions on our ability to take certain employee-related actions or require that we conduct additional negotiations with trade unions, works councils or other governmental authorities before we can take such actions.

If the employees or contractors at the El Gallo Project, San José, or Black Fox mines were to engage in a strike, work stoppage, or other slowdown in the future, we could experience a significant disruption of our operations. Such disruption could interfere with our business operations and could lead to decreased productivity, increased labor costs, and lost revenue.

We may not be successful in negotiating new collective bargaining agreements or other employment arrangements when the current ones expire. Furthermore, future labor negotiations could result in significant increases in our labor costs. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition, and results of operations.

Our business could be negatively impacted by security threats, including cybersecurity threats, and other disruptions.

We face various security threats, including attempts by third parties to gain unauthorized access to sensitive information or to render data or systems unusable; threats to the safety of our employees; threats to the security of our infrastructure; and threats from terrorist acts. There can be no assurance that the procedures and controls we use to monitor these threats and mitigate our exposure to them will be sufficient in preventing them from materializing. If any of these events were to materialize, they could lead to losses of sensitive information, critical infrastructure, personnel or capabilities essential to our operations and could have a material adverse effect on our reputation, financial condition, results of operations, or cash flows.

Our technologies, systems and networks, and those of our business partners, may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, theft of property or other disruption of our business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. A cyber incident involving our information systems and related infrastructure, or that of our business partners, could disrupt our business plans and negatively impact our operations. Although to date we have not experienced any significant cyber-attacks, there can be no assurance that we will not be the target of such attacks in the future. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any security vulnerabilities.

17


 

The laws of the State of Colorado, our Articles of Incorporation and agreements with certain officers and directors may protect our directors from certain types of lawsuits.

The laws of the State of Colorado provide that our directors will not be liable to us or our shareholders for monetary damages for all but certain types of conduct as directors of the Company. Our Articles of Incorporation permit us to indemnify our directors and officers against all damages incurred in connection with our business to the fullest extent provided or allowed by law, including through stand‑alone indemnity agreements. We have also entered into indemnification agreements with our executive officers and directors which require that we indemnify them against certain liabilities incurred by them in their capacity as such. The exculpation provisions may have the effect of preventing shareholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our directors and officers against claims, including claims arising out of their negligence, poor judgment, or other circumstances.

Risks Relating to Our Common Stock

 

A small number of existing shareholders own a significant portion of McEwen Mining common stock, which could limit your ability to influence the outcome of any shareholder vote.

As of February 20, 2019, Mr. McEwen beneficially owned approximately 23% of our outstanding shares, or 79.2 million of the 344.9 million shares of McEwen Mining common stock. Van Eck Associates Corporation beneficially owns 11.9% of our outstanding common stock.  Under our Articles of Incorporation and the laws of the State of Colorado, the vote of the holders of a majority of the shares voting at a meeting at which a quorum is present is generally required to approve most shareholder action. As a result, Mr. McEwen and/or the other beneficial owner will be able to significantly influence the outcome of shareholder votes for the foreseeable future, including votes concerning the election of directors, amendments to our Articles of Incorporation or proposed mergers, acquisitions or other significant corporate transactions.

Our stock price may be volatile, and as a result you could lose all or part of your investment.

In addition to other risk factors identified herein and to volatility associated with equity securities in general, the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock:

·

Changes in the worldwide price for gold, silver and/or copper;

·

Disappointing results from our exploration or production efforts;

·

Producing at rates lower than those targeted;

·

Political and regulatory risks;

·

Weather conditions, including both unusually heavy rains and unusually light rains or drought;

·

Failure to meet our revenue or profit goals or operating budget;

·

Decline in demand for our common stock;

·

Downward revisions in securities analysts’ estimates or changes in general market conditions;

·

Technological innovations by competitors or in competing technologies;

·

Investor perception of our industry or our prospects;

·

Actions by government central banks; and

·

General economic trends.

Stock markets in general have in the past and may in the future experience extreme price and volume fluctuations. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. Adverse price fluctuations may lead to threatened or actual delisting of our common stock from the NYSE. As a result, you may be unable to resell your shares at a desired price.

There is no guarantee that the Company will continue to declare distributions to shareholders.

On June 18, 2015, the Board of Directors declared an annual distribution to shareholders of $0.01 per share of common stock, payable semi-annually.  The most recent dividend installment of $0.005 was paid on September 4, 2018. Any determination to continue this distribution on our common stock will be based primarily upon our financial condition, results of operations and capital requirements, including for capital expenditures and acquisitions, and our Board of Directors’ determination that the distribution to shareholders is in the best interest of our stockholders and in compliance with all laws and agreements applicable to the Company.   

18


 

Gains recognized by non‑U.S. holders and non‑U.S. persons holding any interest in the Company other than solely as a creditor (including, for example, interests in the form of our convertible debt, if any) on the sale or other disposition of our securities may be subject to U.S. federal income tax.

We believe that we currently are a “United States real property holding corporation” under section 897(c) of the Internal Revenue Code (the “Code”), or USRPHC, and that there is a substantial likelihood that we will continue to be a USRPHC in the future. Subject to certain exceptions, securities (other than securities that provide no interest in a corporation other than solely as a creditor) issued by a corporation that has been a USRPHC at any time during the preceding five years (or the non‑U.S. holder’s holding period for such securities, if shorter) are treated as U.S. real property interests, or USRPIs, and a gain recognized by a non‑U.S. holder on the sale or other disposition of a USRPI is subject to regular U.S. federal income tax, on a net basis at graduated rates, as if such gain were effectively connected with the conduct by such holder of a U.S. trade or business. If a gain recognized by a non‑U.S. holder from the sale or other disposition of our common stock or other securities is subject to regular net basis income tax under these rules, the transferee of such common stock or other securities may be required to deduct and withhold a tax equal to 10% of the gross amount paid to the non‑U.S. holder with respect to the sale or other disposition, unless certain exceptions apply. Any tax withheld may be credited against the U.S. federal income tax owed by the non‑U.S. holder for the year in which the sale or other disposition occurs.

The future issuances of our common stock will dilute current shareholders and may reduce the market price of our common stock.

Under certain circumstances, our board of directors has the authority to authorize the offer and sale of additional securities without the vote of or notice to existing shareholders. We may issue equity in the future in connection with acquisitions, strategic transactions or for other purposes. Based on the need for additional capital to fund expected growth, it is likely that we will issue additional securities to provide such capital and that such additional issuances may involve a significant number of shares of our common stock. Issuance of additional securities in the future will dilute the percentage interest of existing shareholders and may reduce the market price of our common stock and any other outstanding securities. Furthermore, the sale of a significant amount of our common stock by any selling security holders, including Mr. McEwen, may depress the price of our common stock. As a result, you may lose all or a portion of your investment.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

19


 

ITEM 2.  PROPERTIES

We classify our mineral properties into reportable segments consistent with the manner in which they are grouped in Item 8.  Financial Statements and Supplementary Data,  Note 15, Operating Segment Reporting and subdivide them within each segment by their respective stage of development: “production properties”, “advanced-stage properties” and “exploration properties”. Advanced-stage properties consist of properties for which advanced studies and reports have been completed indicating the presence of economically mineable mineralized material or in some cases, proven and probable reserves, and for which we have obtained or are in the process of obtaining the required permitting. Our designation of certain properties as “production properties” or “advanced-stage properties” should not suggest that we have proven or probable reserves at those properties as defined by the SEC Industry Guide 7.

The location of our significant production, advanced-stage and exploration properties is described below:

Picture 2

20


 

SEGMENT:  MEXICO

The following map depicts the location of our major properties included in the Mexico segment, of which the El Gallo Project (formerly “El Gallo 1” or “El Gallo Mine”) and the advanced-stage Fenix Project are described in the sections below:

Picture 6

The following table summarizes the Company’s land position in Mexico as of December 31, 2018:

 

 

 

 

 

 

 

Mexico Mineral Property Interest

 

Claims

 

Square Miles

 

Square  Kilometers

Fenix Project (including the El Gallo Project)

 

18

 

155

 

400

Other Mexico properties

 

32

 

280

 

726

Total Mexico Properties

 

50

 

435

 

1,126

Production Properties

El Gallo Project (formerly “El Gallo 1” or “El Gallo Mine”), Mexico (100% owned)

For detailed information on the El Gallo Project production statistics and financial results, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview and History

We own 100% of the El Gallo Project. The El Gallo Project was the open‑pit gold mine and heap leach operation originally known as the Magistral mine. We operated the mine from September 2012 to June 2018, when we ceased active mining. Present activities are limited to residual leaching production that will continue until the end of 2020, as part of the closure and reclamation requirements.

21


 

The El Gallo Project consists of 8 sq miles (20 sq km) of concessions. Concession titles are granted under Mexican mining law. Mining concessions are subject to annual work requirements and payment of annual surface taxes which are assessed and levied on a semi-annual basis in accordance with Mexican law. An annual lease agreement for surface access to the El Gallo Project is currently in place.

Location and Access

The El Gallo Project and the surrounding properties are in northwestern Mexico in the western foothills of the Sierra Madre Occidental mountain range, within the State of Sinaloa in the Mocorito Municipality, approximately 60 miles (100 km) by air northwest of Culiacan, the Sinaloa State capital city. The concessions are located approximately 2.5 miles (4.0 km) by road from the town of Mocorito. Access is by paved or well maintained, two-way dirt roads.

Facilities and Infrastructure

The El Gallo Project property has well‑developed infrastructure including electricity, roads, water supply and high-speed internet access. There is a truck shop, a warehouse, a fuel depot, core logging facilities, an explosives magazine, heap leach pads, process ponds, an assay laboratory, a three stage crushing plant, an ADR process plant with a sulfidation-acidification recovery (“SAR”) circuit added in the first quarter of 2018 and an administrative office. The laboratory is equipped to process all assay samples from the mine, core, chips and soil. The metallurgical lab is capable of determining cyanide leaching amenability and gold and silver recoveries of mineralized material amenable to cyanide leaching.

Advanced-Stage Properties

Fenix Project, Mexico (100% owned)

Overview and History

Five mineralized material areas located inside of our property position have been considered for the Fenix Project and are the basis of the resource estimate reported in the new Preliminary Economic Assessment (“PEA”) filed on July 9, 2018.

The Fenix Project contemplates a two-phase development process. Phase 1 includes the reprocessing of material on the gold heap leach pad at the existing El Gallo Project, and Phase 2 includes the processing of open pit gold and silver mineralization from El Gallo Silver, Palmarito, El Encuentro and Carrisalejo.

The process plant would use conventional and proven mineral processing and precious metals recovery technologies. Phase 1 would have a throughput rate of 5,000 tonnes per day (tpd). During Phase 2 fresh mineralized material from the higher grade silver deposits (El Gallo Silver primarily) would only be processed at a maximum of 3,250 tpd.

Tailings produced during the operation would be stored in a mined-out open pit at the El Gallo Project. As part of this process, tailings deposition would include a delivery system designed to maximize tailings consolidation and water recovery.

During 2019, we expect to complete the feasibility study, and work towards obtaining regulatory approval for a permit amendment to allow for in-pit tailings storage, which is a key feature of the proposed project implementation. A decision to pursue the project has not yet been made.

Access and Location

The Fenix Project is located adjacent to the El Gallo Project and is similarly accessible.

Facilities and Infrastructure

The El Gallo Project infrastructure is used to support current work on the Fenix Project.

In addition, the local power grid is situated approximately 15 km from the Fenix Project, and a new overhead power line would need to be installed to supply grid power to the Fenix Project.

22


 

SEGMENT: CANADA

 

The following map depicts the location of our major properties forming the Canada segment. The segment consists of the Black Fox Mine (which includes Black Fox North, Grey Fox, Froome and Tamarack properties) and the Black Fox Stock Mill (which includes Stock Mill and other exploration projects). Other major exploration properties in this segment include Fuller, Davidson-Tisdale, Buffalo Ankerite and Paymaster. The location of these properties is shown below:

Picture 7

The following table summarizes the Canada land position of our company as of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Number of

 

Square

 

Square

Canada Mineral Property Interest

 

PINs

 

Claims

 

Miles

 

Kilometers

Black Fox Mine

 

30

 

50

 

10

 

25

Black Fox Stock Mill

 

24

 

100

 

10

 

26

Davidson-Tisdale

 

14

 

 2

 

 2

 

 5

Fuller

 

 4

 

 —

 

 1

 

 2

Paymaster

 

15

 

 —

 

 1

 

 2

Buffalo Ankerite

 

 7

 

 —

 

 3

 

 7

Total Canada Properties

 

94

 

152

 

27

 

67

 

Production Properties

Black Fox Mine and Stock Mill, Canada (100% owned)

For detailed information on the Black Fox Mine production statistics and financial results, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

23


 

Overview and History

The Black Fox Mine refers to the current mining operation and is an underground gold mine. Modern exploration activities at the Black Fox Mine (formerly the Glimmer Mine) started in the late 1990’s, with production initiated by Exall Resources Limited, which operated the mine from 1997 to 2001. Renamed the Black Fox Mine in 2002, there was no gold production until Brigus Gold Corporation (“Brigus”) restarted the mine in early 2009. Primero Mining Corp. (“Primero”) acquired Brigus on March 5, 2014. During the period between 2014 and 2016, the mine produced 151,000 ounces of gold. We acquired the property on October 3, 2017 and continued the commercial operations.

The Black Fox Mine contains 30 mining right PIN’s and 50 unpatented claims totaling 10 sq miles (25 sq km) of mining land. The complex also includes 6 sq miles (16 sq km) of surface land. All land parcels are located within Beatty and Hislop townships in the municipality of Black-River Matheson.

Location and Access

The Black Fox Mine is located 7 miles (11 km) east of Matheson, Ontario, on Highway 101 East. Matheson, in turn, is located approximately 45 miles (72 km) from Timmins, which has a commercial airport. Timmins is approximately 342 miles (550 km) by air north of Toronto. Access to the mine is either by paved or well maintained, two‑way, dirt roads.

The Black Fox Stock Mill is located approximately 17 miles (27 km) from the Black Fox mine. Mineralized material is shipped to the mill from the Black Fox mine by truck.

Geology and Mineralization

The Black Fox Mine is located within the Abitibi greenstone belt. Gold mineralization at the Black Fox Mine occurs in several different geological environments within the main ankerite alteration zone, and generally occurs as: (1) Free gold associated with shallow dipping quartz veins and stockworks in green carbonate and ankerite-altered ultramafic rocks; (2) Gold-bearing pyrite; (3) Gold associated with fine-grained pyrite and (4) Free gold in steeply dipping sigmoidal quartz veins.

Facilities and Infrastructure

The Black Fox Mine property has well‑developed infrastructure including electricity, roads, water supply and high-speed internet access. There are seven fully-serviced modular buildings which support various functions of the underground mine. There is also a maintenance shop, warehouse, compressed air plant, backfill plant and water management facilities. Mineralized material from the Black Fox mine is transported to, and processed at, the Black Fox Stock Mill, which has a nominal processing capacity of 2,500 tpd.

The primary water supply for the Black Fox Mine comes from an on-site fresh water well and water produced from dewatering activities. Current water supplies are adequate to sustain current and planned future operations.

The Black Fox Stock Mill property has well‑developed infrastructure including electricity, roads, water supply and high-speed internet access. There are also two buildings that support security and administration of the Mill. There is an assay lab and several other buildings to support operations and milling, including a hoist house, warehouse and maintenance shop, mine dry building, crusher and conveyor systems and the mill building itself. The site also houses various support structures including storage and generator buildings.

Metal Streaming Agreement

We are obligated to sell 8% of current and future gold production from the Black Fox mine and 6.3% from the adjoining Pike River property (Black Fox Extension) to Sandstorm Gold Limited (“Sandstorm”) at the lesser of market price or $531 per oz (with inflation adjustments of up to 2% per year) until 2090. We assumed this obligation in connection with our acquisition of the Black Fox mine in 2017 and did not receive the proceeds from the sale of the stream. 

24


 

Advanced-Stage Properties

Grey Fox, Canada (100% owned)

The Grey Fox project is located 2.2 miles (3.5 km) south of Black Fox Mine, and is directly adjacent to Kirkland Lake Gold’s Hislop mine. Access is either by paved or well maintained, two‑way, dirt roads.

An internal feasibility-level study was completed on the Grey Fox project in early 2015 by Primero, which recommended further development of the deposit. Further advanced project work continued until 2016, when Primero ceased all non-essential expenditures. A final decision to proceed with development has not been made and would be dependent on gold price expectations and overall project economics. We continue examining alternatives to reduce capital and operating costs.

Froome and Tamarack, Canada (100% Owned)

The Froome deposit is located 0.5 miles (0.8 km) west of the Black Fox Mine, whereas the Tamarack deposit is located 0.2 miles (0.3 km) east of the Black Fox Mine. Both deposits are accessible by paved road.

Exploration Properties

Other exploration properties include Black Fox North and the Black Fox Stock Exploration Project, both acquired as part of the Black Fox Mine and the Stock Mill, respectively, in October 2017.

The Black Fox North property is located 2.5 miles (4 km) north of the Black Fox Mine and the Black Fox Stock property is also the site of the former Stock Mine, which produced 137,000 ounces of gold from an underground operation between 1989 and 2005.

Other exploration properties acquired in connection with our acquisition of Lexam in 2017 include Davidson-Tisdale, Fuller, Paymaster and Buffalo Ankerite.

 

25


 

SEGMENT: MINERA SANTA CRUZ (“MSC”)

The following map depicts the location of our major property included in the MSC segment which is the San José mine.

Picture 10

Production Properties

San José mine, Argentina (49% owned)

For detailed information on the San José mine production statistics and financial results, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview and History

The San Jose mine is an underground gold and silver mining operation.  We acquired our interest in the San José mine in connection with our acquisition of Minera Andes in January 2012. The property is owned and operated under an option and joint venture agreement (“OJVA”) between Minera Andes (49%) and Hochschild (51%) in the name of MSC. The property was acquired by Minera Andes in 1997, followed by an extensive exploration program from 1997 to 2001, leading to the discovery of the Huevos Verdes and Saavedra West Zones. A feasibility study was completed in October 2005 under the direction of MSC and, following construction, commercial production was declared on January 1, 2008.

The mine is part of a larger property which covers a total area of approximately 1,074 sq. miles. (2,781 sq. km) and consists of 135 mining concessions

Location and Access

The San José property is in the province of Santa Cruz, Argentina, lying approximately between latitude 46°41’S and 46°47’S and longitude 70°17’W and 70°00’W. The mine is 1,087 miles (1,750 km) south‑southwest of the city of Buenos Aires and 217 miles (350 km) southwest of the Atlantic port city of Comodoro Rivadavia. The principal access route to the San José property is a paved highway from Comodoro Rivadavia unto an unsealed 20 mile (32 km) two-lane dirt road

26


 

section to the mine. Comodoro Rivadavia has regularly-scheduled air services to Buenos Aires. The nearest town is Perito Moreno, which is approximately 19 miles (30 kilometers) west of the San José property.

Geology and Mineralization

The San José property is in the Deseado Massif, which consists of Paleozoic metamorphic basement rocks uncomfortably overlain by Middle to Upper Jurassic bimodal andesitic and rhyolitic volcanics and volcaniclastics. Cretaceous sediments and Tertiary to Quaternary basalts overlie the Jurassic volcanics. The Jurassic Bajo Pobre Formation is the main host of gold and silver vein mineralization at the mine. The formation is comprised of a lower andesite volcaniclastic unit and an upper andesite lava flow and has a maximum thickness of 394 ft. (120 meters). Mineralization in the San José area occurs as low sulfidation epithermal quartz veins, breccias and stockwork systems accompanying normal‑sinistral faults.

Facilities and Infrastructure

Infrastructure at the property consists of camp facilities that can accommodate up to approximately 1,100 personnel, a medical clinic, a security building, a maintenance shop, a laboratory, processing facilities, a mine and process facility warehouse, a surface tailings impoundment, support buildings and mine portals, a change house, a core warehouse, an administration building and offices. The laboratory is equipped to process all assays (core, chips and soil). MSC has installed a satellite‑based telephone/data/internet communication system.

Electricity is provided by an 81 mile (130 km) 132 kV electric transmission line, which connects the San José mine processing facility to the national power grid.

The San José mine is a ramp access underground mining operation.

Exploration Activities

MSC has purchased the land and corresponding occupation rights that are necessary to conduct its operations.

During 2018, exploration was focused on Aguas Vivas, Juanita NE , Candy, Scott 1,  Maia, Lita, Maura, Tensional Perla, Tensional EW, Manteca, Tornado, Rml Ayelen, Sigmoide Luli y Antonella SE. In 2019, MSC will continue their exploration efforts to increase their knowledge of the new veins and develop other new veins in the district.

27


 

SEGMENT: USA

The following map depicts the location of our major properties in the USA segment, including the Gold Bar project currently under construction and exploration properties which are fully owned by us or subject to joint venture agreements:

 

Picture 12

 

The following table summarizes the land position of our properties in Nevada as of December 31, 2018:

 

 

 

 

 

 

 

 

 

    

Number of

    

Square

    

Square

USA Mineral Property Interest

 

Claims

 

Miles

 

Kilometers

Gold Bar Complex

 

1,993

 

65

 

168

Tonkin Complex

 

1,390

 

45

 

116

Limo Complex

 

665

 

21

 

56

Battle Mountain Complex (“BMX”)

 

573

 

19

 

48

Other United States Properties

 

1,300

 

42

 

109

Total USA Properties

 

5,921

 

192

 

497

 

Advanced-Stage Properties

Gold Bar Project, Nevada (100% owned)

Overview and History

Gold Bar is located primarily on public lands managed by the Bureau of Land Management (“BLM”). On October 10, 2017, the Environmental Protection Agency published a Notice of Availability of the Final Environmental Impact Statement (“EIS”) in the Federal Register. After the required review period, the Company received the signed Record of Decision (“ROD”) on the final EIS on November 8, 2017.

The Gold Bar Project is an open pit oxide gold mine with a heap leach pad and gold recovery plant. Project Construction commenced in November 2017 following receipt of the signed ROD.

28


 

The property is located within the Battle Mountain-Eureka-Cortez gold trend in Eureka County, central Nevada. The property was previously mined from 1987 to 1994 by Atlas Precious Metals Inc.

On February 15, 2018, we announced the results of an updated Feasibility Study (“FS”). The complete FS is available electronically at our website at www.mcewenmining.com.

Location and Access

The Gold Bar Project is in the Roberts Creek Mountains, in Eureka County, Nevada, approximately 30 miles (48 km) northwest of the town of Eureka, Nevada, primarily in Township 22 North, Range 50 East (N39°48’16.5”; W116°21’09.65”).  The project site is accessed by traveling west on US Highway 50 from Eureka, then north on the Three Bars Road, a gravel, all-weather road maintained by Eureka County. The project area is approximately 15 miles (24 km) from the end of Three Bars Road, and is accessed through unimproved dirt roads that are maintained by the company.

Geology and Mineralization

The project is located in the Battle Mountain‑Eureka mineral belt in a large window of lower‑plate carbonate rocks surrounded by upper‑plate rocks. The lower‑plate carbonates consist of an east‑dipping section of Silurian Lone Mountain Dolomite, Devonian McColley Canyon Formation, Devonian Denay Formation, and Devonian Devils Gate Limestone (from oldest to youngest). Gold mineralization is hosted primarily in the Bartine Member of the McColley Canyon Formation, which consists of carbonate wackestones and packstones which are approximately 250 to 380 feet thick. Minor amounts of mineralization are found in the underlying dolomitic limestone Kobeh Member of the McColley Canyon Formation where it is adjacent to apparent feeder structures. The area where the project is located has “Carlin‑Type” sediment‑hosted gold mineralization characteristics with typical associated alteration (decalcification, silicification).

Facilities and Infrastructure

Construction of the Gold Bar site facilities and infrastructure was completed by year-end. These facilities include mine administration building, process plant support building, on-site power generation plant, and all required water supply equipment and transfer systems. Facilities are commissioned and occupied by operations team.

Gold Bar Project construction began in November 2017. Key completed activities in 2018 include:

·

Engineering and procurement of all materials and capital equipment;

·

Installation of crushing, conveying, and stacking system;

·

Heap leach pad;

·

Process and event ponds;

·

On-site power generation plant and transmission lines;

·

Required water, natural gas, and related supply utilities;

·

Substantial completion of gold process plant and refinery circuit.

 

Exploration Activities

In December 2017 and through early 2018, a series of near pit limit exploration holes were drilled at the Gold Bar project. We plan to continue with this type of exploration program in 2019.

Exploration Properties

Tonkin property (100% owned)

The Tonkin property represents our second largest holding within the Battle Mountain‑Eureka Trend in Eureka County, Nevada with approximately 45 sq. miles (116 sq. km). The Tonkin property consists of the Tonkin Springs deposit and the previously operating Tonkin mine.

From 1985 through 1989, the Tonkin mine produced approximately 30,000 ounces of gold utilizing an oxide heap leach and a separate ball mill involving bio oxidation to treat refractory sulphide mineralized material. Due to cost escalation and recovery issues, the operation was shut down. The mine site is currently on care-and-maintenance and we continue to advance the reclamation program. We also continue evaluation work with respect to the Tonkin Springs deposit.

29


 

SEGMENT: LOS AZULES

Exploration Properties

The following map depicts the location of our major exploration properties in the Los Azules segment in two distinct exploration projects at Los Azules and Chonchones, in the province of San Juan in Argentina.  Los Azules is the more advanced and significant project at this time.

Picture 14

The following table summarizes the land position related to Los Azules segment as of December 31, 2018:

 

 

 

 

 

 

 

 

    

Number of

    

Square

    

Square

Argentina Mineral Property Interest

 

Claims

 

Miles

 

Kilometers

Los Azules project

 

21

 

123

 

318

Chonchones project

 

 7

 

67

 

173

Lagañoso project

 

 2

 

19

 

49

La Cerrada project

 

 7

 

51

 

132

Other Argentina properties

 

 8

 

212

 

549

Total Argentina Properties

 

45

 

472

 

1,221

 

Los Azules Copper Project, Argentina (100% owned)

Overview and History

The Los Azules copper project is an advanced‑stage porphyry copper exploration project located in the cordilleran region in the province of San Juan, Argentina near the border with Chile. In 1994, Minera Andes acquired lands in the southern portion of the Los Azules area. Over the years there was additional exploration done by Minera Andes and other companies who owned adjacent properties around Los Azules. We acquired Minera Andes in January 2012.

30


 

In 2019, we will be completing environmental studies to gather the requested information to prepare the Environmental Impact Assessment for the next development phase. Previous activities performed were mainly technical site investigations and environmental base line monitoring work, to advance permitting efforts.

Location and Access

The project is located at approximately 31o 13’30” South latitude and 70o 13’50” West longitude and about 4 miles (6 km) east of the Chile‑Argentina border. It is accessible by unimproved dirt roads with seasonal closures in winter. The elevation at the site ranges between 11,500 feet to 14,750 feet (3,500 meters to 4,200 meters) above sea level.

Geology and Mineralization

The deposit is located within a copper porphyry belt that is host to some of the world’s largest copper mines. The upper part of the system consists of a barren leached cap, which is underlain by a high‑grade secondary enrichment blanket. Primary mineralization below the secondary enrichment zone has been intersected in drilling up to a depth of more than 3,280 feet (1,000 meters) below surface.

Exploration Activities

Drilling conditions in the area are difficult, especially due to the presence of highly faulted zones and areas of loose surface scree or talus. Due to snow conditions on two mountain passes on the access road to the site, seasonal exploration typically commences in December and extends into late April or early May. Drilling programs have been undertaken at Los Azules between 1998 and 2014 and in 2017 by four different mineral exploration companies: Battle Mountain Gold (now Newmont Mining Inc.), Mount Isa Mines S.A. (now Glencore Plc.), Minera Andes and McEwen Mining. Drilling, including early reverse circulation programs, focused initially on gold exploration and subsequently on diamond drilling for porphyry style copper mineralization. Drilling activities have been minimal since 2013 as we have focused on baseline studies regarding flora, fauna, water quality and other environmental compliance matters.

Facilities and Infrastructure

There are currently limited facilities or infrastructure located at the project site which mainly includes portable camp structures and drill platforms.

 

 

31


 

ITEM 3.  LEGAL PROCEEDINGS

We are not currently subject to any material legal proceedings, other than the tax matter described under the risk “Our operations in Argentina and Mexico are subject to political and social risks” included in Item 1A. Risk Factors.  To the best of our knowledge, no such proceeding is threatened, the results of which would have a material impact on our properties, results of operations, or financial condition. Nor, to the best of our knowledge, are any of our officers or directors involved in any legal proceedings in which we are an adverse party.

ITEM 4.  MINE SAFETY DISCLOSURES

At McEwen Mining, safety is a core value, and we strive for superior performance. Our health and safety management system, which includes detailed standards and procedures for safe production, addresses topics such as employee training, risk management, workplace inspection, emergency response, accident investigation and program auditing. In addition to strong leadership and involvement from all levels of the organization, these programs and procedures form the cornerstone of safety at McEwen Mining, ensuring that employees are provided a safe and healthy environment and are intended to reduce workplace accidents, incidents and losses, comply with all mining-related regulations and provide support for both regulators and the industry to improve mine safety.

   

The operation of our Gold Bar mine is subject to regulation by the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). MSHA inspects our Gold Bar mine on a regular basis and may issue citations and orders when it believes a violation has occurred under the Mine Act. While we contract a majority of the mining operations at Gold Bar to an independent contractor, we may be considered an “operator” for purposes of the Mine Act and may be issued notices or citations if MSHA believes that we are responsible for violations.

   

We are required to report certain mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K, and that required information is included in Exhibit 95 filed with this report.

 

32


 

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

On January 24, 2012, our common stock commenced trading on the NYSE and TSX under the symbol “MUX”, subsequent to the completion of the acquisition of Minera Andes. As of February 20, 2019, there were 344,929,723 shares of our common stock outstanding, which were held by approximately 4,219 stockholders of record.

Transfer Agent

Computershare Investor Services Inc. is the transfer agent for our common stock. The principal office of Computershare is 250 Royall Street, Canton, Massachusetts, 02021 and its telephone number is (303) 262‑0600. The transfer agent in Canada is Computershare Investor Services at 100 University Ave., 8th Floor, Toronto ON, M5J 2Y1 and its telephone number is 1‑800‑564‑6253.

Shareholder Distribution Policy

On June 18, 2015, our Board of Directors declared the first shareholder distribution, which at that time was characterized as a return of capital since we have accumulated losses from operations and did not have retained earnings. This was the first distribution since inception.  The distribution was declared as $0.01 per share of common stock, payable semi-annually.  Whether future distributions will be declared depends upon our future growth, results of operations and cash needs.

When we issued the semi-annual distributions in 2017, an assessment was made that the distribution would be treated as a return of capital for tax purposes, since we expected to report a net loss and did not have retained earnings. This assessment was the support required to characterize the distributions as return of capital. In light of the US Tax and Jobs Act, enacted on December 22, 2017, we incurred a one-time transition tax in 2017 on earnings of certain foreign subsidiaries that were previously tax-deferred. As a result these distributions in 2017 we recharacterized as dividends. Furthermore, in 2018 and beyond the US Tax and Jobs Act subjects a US shareholder to tax on global intangible low-taxed income (“GILTI”) earned by foreign subsidiaries.. As a result, we expect to report net income for US tax purposes in 2018, thus distributions have been treated as dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

Set out below is information as of December 31, 2018 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance. This information relates to our Amended and Restated Equity Incentive Plan and options assumed in connection with the acquisition of Lexam VG Gold (“Lexam”).

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted‑average

    

Number of securities

 

 

 

Number of securities to

 

exercise price per

 

remaining available for

 

 

 

be issued upon exercise

 

share of outstanding

 

future issuance under equity

 

Plan Category

 

of outstanding options

 

options

 

compensation plans

 

Equity compensation plans approved by security holders

 

4,242,633

 

$

2.33

 

5,776,483

 

Equity compensation plans not approved by security holders(1)

 

30,184

 

 

C$1.79

 

 

Total

 

4,272,817

 

 

 

 

5,776,483

 


(1)

In connection with the acquisition of Lexam, we assumed stock options covering 54,264 shares of our common stock which are exercisable at a price of C$1.79.  Since the acquisition, 12,811 options have been forfeited and 11,199 options have been exercised.

The options that we assumed in connection with the 2017 acquisition were not approved by our security holders. We are not authorized to issue any additional options under any of these plans.

33


 

Performance Graph

The following graph compares our cumulative total shareholder return for the five years ended December 31, 2018 with (i) the NYSE Arca Gold Bugs Index, which is an index of companies involved in the gold industry and (ii) the NYSE Composite Index, which is a performance indicator of the overall stock market. The graph assumes a $100 investment on December 31, 2013 in our common stock and the two other stock market indices, and assumes the reinvestment of dividends, if any.

 

Picture 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2013

    

2014

    

2015

    

2016

    

2017

    

2018

 

McEwen Mining (MUX)

 

$

100

 

$

57

 

$

55

 

$

151

 

$

118

 

$

95

 

NYSE Arca Gold Bugs Index

 

 

100

 

 

83

 

 

56

 

 

92

 

 

97

 

 

81

 

NYSE Composite Index

 

 

100

 

 

104

 

 

98

 

 

106

 

 

123

 

 

109

 

 

 

ITEM 6.  SELECTED FINANCIAL DATA

The following table summarizes certain selected historical financial data about our company for the last five years. The data has been derived from our audited consolidated financial statements for the years indicated. You should read this data in conjunction with the Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and our audited consolidated financial statements contained in this report. All amounts are stated in thousands of U.S. dollars unless otherwise indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

    

2018

    

2017

    

2016

    

2015

    

2014

 

 

 

(in thousands, except per share amounts)

 

Operating data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue(1)

 

$

128,822

 

$

67,724

 

$

60,388

 

$

72,956

 

$

45,303

 

(Loss) income on investment in Minera Santa Cruz S.A.

 

 

(11,865)

 

 

(44)

 

 

12,951

 

 

2,414

 

 

(5,284)

 

Operating (loss) income(2)

 

 

(46,542)

 

 

(26,027)

 

 

15,347

 

 

(49,333)

 

 

(410,191)

 

Other income (expenses)

 

 

(1,098)

 

 

24

 

 

1,959

 

 

4,323

 

 

(8,922)

 

Net (loss) income(2)

 

 

(44,870)

 

 

(10,634)

 

 

21,055

 

 

(20,450)

 

 

(311,943)

 

Basic and diluted (loss) income per share

 

$

(0.13)

 

$

(0.03)

 

$

0.07

 

$

(0.07)

 

$

(1.05)

 

Cash distributions per common share

 

 

0.010

 

 

0.010

 

 

0.005

 

 

0.010

 

 

 —

 

 

34


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at December 31,

 

 

    

2018

    

2017

    

2016

    

2015

    

2014

 

 

 

(in thousands)

 

Balance sheet data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,756

 

$

27,153

 

$

37,440

 

$

25,874

 

$

12,380

 

Investments

 

 

3,131

 

 

7,971

 

 

8,543

 

 

1,032

 

 

1,082

 

IVA taxes receivable

 

 

1,058

 

 

5,250

 

 

4,304

 

 

10,032

 

 

11,739

 

Inventories

 

 

22,039

 

 

31,951

 

 

26,620

 

 

14,975

 

 

12,404

 

Restricted cash

 

 

14,685

 

 

10,000

 

 

 —

 

 

 —

 

 

 —

 

Property and equipment, net

 

 

114,734

 

 

51,046

 

 

14,252

 

 

15,759

 

 

17,896

 

Mineral property interests

 

 

309,145

 

 

293,437

 

 

242,640

 

 

237,245

 

 

287,812

 

Investment in Minera Santa Cruz S.A.

 

 

127,814

 

 

150,064

 

 

162,320

 

 

167,107

 

 

177,018

 

Other assets

 

 

8,579

 

 

15,257

 

 

2,199

 

 

3,061

 

 

2,627

 

Total assets

 

$

616,941

 

$

592,129

 

$

498,318

 

$

475,085

 

$

522,958

 

Current liabilities

 

$

36,012

 

$

37,639

 

$

20,581

 

$

22,039

 

$

24,082

 

Deferred income and mining tax liability

 

 

6,426

 

 

8,430

 

 

23,665

 

 

26,899

 

 

51,899

 

Capital lease liabilities, less current portion

 

 

4,918

 

 

81

 

 

 —

 

 

 —

 

 

 —

 

Long-term debt

 

 

49,206

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other long‑term liabilities

 

 

34,433

 

 

24,706

 

 

11,033

 

 

7,855

 

 

5,763

 

Shareholders’ equity

 

 

485,946

 

 

521,273

 

 

443,039

 

 

418,292

 

 

441,214

 

Total liabilities and shareholders’ equity

 

$

616,941

 

$

592,129

 

$

498,318

 

$

475,085

 

$

522,958

 


(1)

Includes revenue from the sale of gold and silver from the Black Fox mine, part of the Black Fox Complex acquired in October 2017.

(2)

Includes a non‑cash expense of $711, $50,600, and $353,736 relating to the write‑downs of mineral property interests, and property and equipment in 2017, 2015, and 2014, respectively. Also includes a non‑cash expense of $11,777 and $21,162 relating to the write‑down of our investment in Minera Santa Cruz S.A. in 2015 and 2014 respectively.

35


 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The following discussion updates our plan of operations as of February 20, 2019 for the foreseeable future.  It also discusses our results of operations for the three fiscal years ended December 31, 2018, 2017 and 2016 and our financial condition as at December 31, 2018 and 2017, with a particular emphasis on the year ended December 31, 2018. With regard to properties or projects that are not in production, we provide some details of our plan of operation.

The discussion also presents certain non‑GAAP financial performance measures, such as earnings (loss) from mining operations, total cash costs, total cash cost per ounce, all‑in sustaining costs, all‑in sustaining cost per ounce, average realized price per ounce, and cash, investments and precious metals, that are important to management in its evaluation of our operating results and which are used by management to compare our performance to what we perceive to be peer group mining companies and relied on as part of management’s decision‑making process. Management believes these measures may also be important to investors in evaluating our performance. For a detailed description of each of the non‑GAAP financial performance measures and certain limitations inherent in such measures, please see the discussion under “Non‑GAAP Financial Performance Measures” below, on page 55.

The discussion also includes references to “advanced-stage properties”, which are defined as properties for which advanced studies and reports have been completed indicating the presence of mineralized material or proven and probable reserves, and that have obtained or are in the process of obtaining the required permitting. Our designation of certain properties as “advanced-stage properties” should not suggest that we have proven or probable reserves at those properties as defined by the SEC Industry Guide 7.

The information in this section should be read in conjunction with our consolidated financial statements and the notes thereto included in this annual report. 

Reliability of Information: MSC, the owner of the San José mine, is responsible for and has supplied to us all reported results from the San José mine. The technical information regarding the San José mine contained herein is, with few exceptions as noted, based entirely on information provided to us by MSC. Our joint venture partner, a subsidiary of Hochschild Mining plc, and its affiliates other than MSC do not accept responsibility for the use of project data or the adequacy or accuracy of this document.

 

36


 

Index to Management’s Discussion and Analysis:

 

I

 

Page

2018 Operating and Financial Highlights 

37

Selected Consolidated Production and Operating Results 

38

Consolidated Financial Performance 

38

Results of Consolidated Operations 

39

Liquidity and Capital Resources 

41

Results of Operations 

43

Mexico Segment 

43

El Gallo Project operating results 

43

Advanced-Stage Properties – Fenix Project 

45

Canada Segment 

46

Black Fox Mine operating results 

46

Exploration Activities - Timmins 

48

MSC Segment 

49

MSC operating results 

49

U.S.A Segment 

53

Development-Stage Properties – Gold Bar 

53

Exploration Activities - Nevada 

53

Los Azules Segment 

53

Los Azules Project 

53

Commitments and Contingencies 

54

Non-GAAP Financial Performance Measures 

55

Critical Accounting Estimates 

60

Forward Looking Statements 

62

Risk Factors Impacting Forward-Looking Statements 

63

 

2018 Operating and Financial Highlights

Highlights are included below and discussed further in Consolidated Financial Performance:

·

Construction at Gold Bar is near completion and on schedule for inaugural gold production in the first quarter of 2019. During 2018, construction activities at Gold Bar focused on completing the heap leach pad, the crushing and conveying system, and substantial completion of the gold processing plant and refinery circuit.

 

·

We completed two financings for total gross proceeds of $64.8 million, primarily to complete the construction of the Gold Bar mine in Nevada, and to continue our successful ongoing exploration program at our properties in the Timmins region of Ontario.

 

·

At year end, we reported $37.8 million in cash and restricted cash, investments and precious metals valued at the London P.M. Fix spot price(1). Restricted cash represents proceeds from a financing that is committed to the 2019 exploration program in Ontario.

 

·

Our consolidated production was 175,640 gold equivalent ounces, of which 48,928 gold equivalent ounces were produced by the Black Fox mine, 87,607 gold equivalent ounces were produced by the San Jose mine (on a 49% attributable basis), and 39,105 gold equivalent ounces were produced from the El Gallo Project, which included gold recovered from residual leaching.

 

·

Our consolidated gold and silver sales were $128.2 million, comprised of $62.0 million from the Black Fox mine and $66.2 from the El Gallo Project.

 

·

We realized average prices of $1,275 per ounce of gold sold by the Black Fox mine (excluding our stream obligations), and $1,279 per ounce of gold sold by the El Gallo Project.

 

·

The Black Fox mine realized total cash costs of $845 and all-in sustaining costs of $1,137 per gold equivalent ounce.

 

·

The El Gallo Project realized total cash costs of $733 and all-in sustaining costs of $771 per gold equivalent ounce.

37


 

·

The San José mine realized total cash costs of $851 and all-in sustaining costs of $1,061 per gold equivalent ounce.

 

·

Our investment in MSC yielded a net loss of $11.9 million but paid us $10.4 million in dividends.

 

·

We reported gross profit of $35.5 million, and a net loss of $44.9 million, or $0.13 per share for 2018.

 


(1)

For a reconciliation of precious metals valued at the London P.M. Fix spot price and cost, please see the discussion under “Non-GAAP Financial Performance Measures” below, on page 55. 

 

Selected Consolidated Production and Operating Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Year ended

 

 

 

December 31,

 

December 31,

 

 

    

2018

    

2017

    

2018

    

2017

  

2016

 

 

 

(in thousands, unless otherwise indicated)

 

Gold and silver sales El Gallo Project

 

$

10,852

 

$

12,472

 

$

66,151

 

$

55,845

 

$

60,388

 

Gold and silver sales Black Fox mine

 

$

15,581

 

$

11,620

 

$

62,024

 

$

11,620

 

$

 —

 

Income (loss) on investment in MSC, net of amortization

 

$

(4,415)

 

$

491

 

$

(11,865)

 

$

(44)

 

$

12,951

 

Net (loss) income

 

$

(20,989)

 

$

2,169

 

$

(44,870)

 

$

(10,634)

 

$

21,055

 

Net (loss) income per common share

 

$

(0.06)

 

$

0.01

 

$

(0.13)

 

$

(0.03)

 

$

0.07

 

Consolidated gold ounces(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Produced

 

 

29.4

 

 

48.6

 

 

135.2

 

 

109.9

 

 

101.5

 

Sold

 

 

34.4

 

 

33.3

 

 

149.6

 

 

102.4

 

 

97.6

 

Consolidated silver ounces(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Produced

 

 

820

 

 

927

 

 

3,033

 

 

3,179

 

 

3,304

 

Sold

 

 

812

 

 

906

 

 

3,039

 

 

3,209

 

 

3,487

 

Consolidated gold equivalent ounces(1)(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Produced

 

 

40.3

 

 

61.0

 

 

175.6

 

 

152.3

 

 

145.5

 

Sold

 

 

45.2

 

 

45.4

 

 

190.1

 

 

145.2

 

 

144.0

 

Silver : gold ratio(2)

 

 

75 : 1

 

 

75 : 1

 

 

75 : 1

 

 

75 : 1

 

 

75 : 1

 


(1)

Includes attributable production from our 49% owned San José mine.

(2)

Silver production is presented as a gold equivalent. Gold equivalent ounces calculations approximate prevailing spot prices at the beginning of the year.

 

Consolidated Financial Performance

 

Despite the 57% increase in operating profit obtained from Black Fox and residual leaching at the El Gallo Project, we reported a net loss of $44.9 million, or $0.13 per share in 2018, compared to a net loss of $10.6 million, or $0.03 per share, in 2017. The $44.9 million net loss was primarily the result of the following factors:

 

·

A significant increase in our exploration activities in Canada, coupled with higher exploration expenditures in the U.S.

 

·

A significant increase in net loss reported by MSC, due to 4% and 5% decreases in the number of ounces of gold and silver sold respectively, coupled with 1% and 10% decreases in the average realized prices of gold and silver, respectively, and the effect of the Argentine export tax implemented in the third quarter of 2018.

 

·

A decrease in our gross profit margin, from 33% in 2017 to 28% in 2018.

 

·

An increase of general and administrative expenses primarily due to higher overhead from the development of Gold Bar, partly offset by a reduction of costs associated with corporate initiatives.

 

·

A significant decrease in income and mining taxes recovery as a result of one time benefits resulting from the tax reforms put in place by the U.S. and Argentine governments in 2017.

 

Our cash, cash equivalents and restricted cash at year end 2018 was $30.5 million, which is a decrease from the $37.2 million at year end 2017.

38


 

Results of Consolidated Operations

 

Year ended December 31, 2018 compared to 2017

 

Revenue

 

Consolidated sales of gold and silver increased by 90%, from $67.5 million in 2017 to $128.2 million in 2018, due to $50.4 million in additional gold sales contributed by the Black Fox mine, coupled with a $10.3 million increase in gold and silver sales at the El Gallo Project. The Black Fox mine was acquired in October 2017 thus, only fourth quarter gold sales were included in the 2017 comparable period. The increase in gold and silver sales at the El Gallo Project was accomplished through the drawdown of the bullion inventory held at December 31, 2017.

 

Production costs applicable to sales

 

Consolidated production costs applicable to sales increased to $93.3 million in 2018, from $45.2 million in 2017, due to $46.0 million additional production costs reported by the Black Fox mine as a result of the higher number of ounces sold in 2018, as explained above, coupled with a $2.1 million increase in production costs reported by the El Gallo Project. The increase in production costs applicable to sales at the El Gallo Project was consistent with the higher sales volume.

 

Operating Income (Expenses)

 

Mine development costs, which relate to engineering and development expenditures incurred at our advanced-stage properties, changed slightly to $3.7 million in 2018 from $3.8 million in 2017. Mine development costs in 2018 were entirely comprised of $3.7 million incurred at the Fenix Project in Mexico, whereas in 2017 mine development costs were comprised of $3.1 million at the Gold Bar Project in Nevada, and $0.7 million at the Fenix Project in Mexico.

 

Exploration costs in 2018 increased to $34.8 million from $17.7 million in 2017. The increase is mainly due to a $19.8 million and $3.0 million increase in exploration expenditures incurred in Canada and the U.S., respectively; partly offset by a $3.4 million and $1.9 million decrease in exploration costs at Mexico and Argentina, respectively.

 

General and administrative expenses increased to $23.2 million in 2018, from $18.9 million in 2017, primarily due to higher overhead from the development of the Gold Bar Project, partly offset by a reduction of costs associated with corporate initiatives.

 

In 2018, we recognized a net loss of $11.9 million from our investment in MSC, compared to a net loss of $0.1 million in 2017. The higher net loss recorded during 2018 was driven primarily by a $21.7 million decrease in sales, due to 4% and 5% decreases in the number of ounces of gold and silver sold respectively, coupled with a 10% decrease in the average realized price of silver. Other significant items contributing to the increased net loss from MSC are the effect of Argentine export tax implemented in the third quarter of 2018, and the write-off of the receivables owed by Republic Metals, the U.S. gold refiner which filed for Chapter 11 bankruptcy in November 2018. Please refer to the section Results of Operations – MSC Segment below, for further details.

 

The revision of estimates and accretion of asset retirement obligations increased to $3.5 million in the 2018 period, from

$2.1 million in 2017, primarily due to a full year accretion expense from Black Fox, and an increase in the obligations for our other exploration properties in Canada and the U.S.

 

Other income (expense)

Other expense was $1.1 million in 2018, compared to other income of $0.1 in 2017. The increase in other expense was mainly due to $1.6 million in interest expense and a $3.3 million loss on investments, partly offset by a $3.9 million gain in foreign exchange reported in 2018.

Recovery of income taxes 

Recovery of income and mining taxes decreased from $15.4 million in 2017 to $2.8 million in 2018 as a result of one-time benefits recognized in 2017 resulting from the tax reforms put in place by the U.S. and Argentine governments.

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Year ended December 31, 2017 compared to 2016

Revenue

Consolidated gold and silver sales increased by $7.1 million, or 12%, to $67.5 million for the year ended December 31, 2017, from $60.4 million in 2016, mainly due to $11.6 million gold sales contributed by the Black Fox mine, which was acquired in October 2017, partially offset by a $4.5 million decrease in gold and silver sales reported by the El Gallo 1 mine, when compared to 2016, as a result of fewer ounces sold.

Production costs applicable to sales    

Consolidated production costs applicable to sales increased to $45.2 million in 2017 from $28.1 million in 2016, due to $9.9 million production costs attributable to the Black Fox mine, which as noted above was acquired in October 2017, and $7.2 million higher production costs reported by the El Gallo 1 mine.  The increase in production costs applicable to sales at the El Gallo 1 mine was due to the increase in the number of tonnes processed, coupled with higher number of waste tonnes removed in the year, as well as costs incurred due to the mechanical failure of the crushing circuit that occurred during the third quarter of 2017.

Operating Income (Expenses)

Mine development costs changed slightly to $3.8 million in 2017 from $3.9 million in 2016.

Exploration costs in 2017 increased to $17.7 million from $8.0 million in 2016, mainly due to the $6.3 million higher exploration expenditures incurred at the Los Azules project. These incremental costs for Los Azules were necessary to complete the PEA. In 2017, we also spent $5.6 million on exploration at our Mexican properties, $2.1 million in Nevada, $1.6 million in Timmins, and $0.5 million in corporate exploration charges.

Property holding costs increased to $3.9 million from $3.5 million year-over-year mainly as a result of higher costs for the Mexican properties, reflecting the Mexican peso appreciation against the U.S. dollar, partly offset by a decrease in property costs incurred in Argentina, compared to 2016

General and administrative expenses increased to $18.9 million in 2017, from $12.7 million in 2016, mainly as a result of acquisition and financing costs associated with our two acquisitions completed in the year, and higher personnel costs when compared to the 2016 period.

Income from our investment in MSC decreased significantly from $13.0 million in 2016 to a $0.1 million loss in 2017, primarily due to the loss of government tax incentives in late 2016.  MSC’s decrease in gold and silver sales, coupled with higher production costs applicable to sales, and the increase in exploration costs and capital expenditures, also contributed to the overall decrease in income.  Please refer to the section Results of Operations – MSC Segment below, for further details.  

An impairment charge of $0.7 million was recorded in 2017, to write-down property and equipment in Mexico.  

The revision of estimate and accretion of asset retirement obligation increased to $2.1 million in 2017, from $0.6 million in 2016 primarily from an increase in the revision of the Timmins obligation. 

Other income (expenses)

Other income decreased to $0.1 million in 2017 from $2.0 million in 2016, primarily due to higher interest expense recorded in 2017, coupled with the increase in unrealized loss on derivatives. These factors were partly offset by a $0.8 million increase in gain on sale of marketable securities reported during the year.

Recovery of income taxes    

Recovery of income taxes increased from $3.7 million in 2016 to $15.4 million in 2017,  as a result of the U.S. and Argentine Government tax reforms, which will significantly reduce future taxes so long as they remain in effect, along with fluctuations in tax benefits related to exploration spending at Los Azules, and the devaluation of the Argentina peso during the year.  Also contributing to the deferred tax recovery was the recognition of a deferred tax asset, to the extent of

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the deferred tax liability recognized on the acquired mineral property interests of the Gold Bar project, in the amount of $6.4 million.

Liquidity and Capital Resources

We had working capital of $23.4 million at December 31, 2018, which consisted of $59.4 million of current assets and $36.0 million of current liabilities, compared to $49.2 million working capital reported at year-end 2017. Within current assets we have $14.7 million of restricted cash, which represents funds committed to the exploration program in Ontario, as a result of completing our flow-through financing.

The $25.8 million decrease in working capital was the net result of increased cash used in operating activities, coupled with construction costs at Gold Bar, which were partly offset by proceeds from higher number of ounces of gold and silver sold, proceeds from the $50.0 million loan facility, and proceeds from the issuance of flow-through common shares. Overall, our cash balance (including restricted cash) decreased to $30.5 million at December 31, 2018, from $37.2 million at December 31, 2017.

We believe that our working capital at December 31, 2018, combined with forecasted working capital to be generated over the next 12 months, will be sufficient to satisfy our obligations due in the next 12 months, and to fund ongoing operations and corporate activities.

We continue to evaluate capital and development expenditure requirements to advance Los Azules, Black Fox, our other Timmins projects, and the Fenix Project in Mexico. If our working capital is not sufficient to advance these projects, we will defer one or more of these initiatives. Furthermore, if we make a positive decision to develop one or more of these initiatives, the expenditures incurred may significantly exceed our working capital. In such case, we would consider several financing methods, which may include incurring additional debt, issuing additional equity, equipment leasing, and other forms of financing.

Net cash provided by operations was $0.5 million for 2018, compared to net cash used in operations of $27.6 million for 2017, while net cash provided by operations was $7.4 million for 2016. The significant changes from one year to the next are summarized as follows:

·

$128.8 million cash received from revenues in 2018, compared to $67.7 million in 2017, and $59.5 million in 2016, as a result of increased sales from a full year of operations of the Black Fox mine, and higher number of ounces of gold sold at higher average realized price by the El Gallo Project in 2018;

·

$8.3 million VAT collected in Mexico in 2018, compared to $5.9 million collected in 2017, and $9.5 million collected in 2016;

·

$126.8 million cash paid to suppliers and employees in 2018, compared to $95.9 million in 2017 and $52.3 million in 2016, due to significantly higher production costs after the acquisition of Black Fox, construction at Gold Bar, and exploration expenses; and

·

$1.9 million cash paid in interests in 2018, compared to $nil in 2017 and 2016.

Cash used in investing activities was $69.3 million in 2018, compared to $22.3 million in 2017, while cash provided by investing activities was $7.6 million in 2016, primarily due to the following factors:

·

$19.0 million expenditures on mineral property interests in 2018 primarily related to underground development at the Black Fox complex, compared to $3.5 million in 2017 and $6.0 million in 2016;

·

$62.3 million expenditures on property and equipment, mostly at the Gold Bar project, compared to $5.1 million and $1.2 million in 2017 and 2016, respectively;

·

$1.4 million expenditures on investments in 2018, compared to $nil in 2017, and $4.4 million in 2016;

·

$2.9 million in proceeds from sale of investments in 2018, compared to $2.2 million and $0.5 million in 2017 and 2016, respectively.

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·

$10.4 million dividends received from MSC in 2018, compared to $12.2 million and $17.7 million in 2017 and 2016 respectively; and

·

No investments in business acquisitions in 2018, compared to $27.3 million incurred for the acquisition of Black Fox, and $0.8 million for the acquisition of Lexam VG Gold in 2017, and no investments in business acquisitions in 2016.

Financing activities provided $60.4 million in 2018, compared to $49.7 million provided in 2017, while cash used in financing activities was $3.2 million in 2016, primarily due to:

·

Net proceeds of $49.1 million from the issuance of a senior loan facility executed in August 2018, compared to $43.2 million of net proceeds from an equity issuance in 2017, while no similar financing transactions occurred in 2016. For detailed information on the senior loan facility executed in August 2018 re