UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from to
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Emerging growth company | ||||
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MCEWEN MINING INC.
FORM 10-Q
Index
2
PART I
Item 1. FINANCIAL STATEMENTS
MCEWEN MINING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
(in thousands of U.S. dollars, except per share)
Three months ended June 30, | Six months ended June 30, | ||||||||||
2020 |
| 2019 |
| 2020 |
| 2019 | |||||
Revenue from gold and silver sales | $ | | $ | | $ | | $ | | |||
Production costs applicable to sales |
| ( |
| ( |
| ( |
| ( | |||
Depreciation and depletion | ( | ( | ( | ( | |||||||
Gross (loss) profit | ( | | ( | | |||||||
OTHER OPERATING EXPENSES: | |||||||||||
Advanced projects |
| ( |
| ( |
| ( |
| ( | |||
Exploration |
| ( |
| ( |
| ( |
| ( | |||
General and administrative |
| ( |
| ( |
| ( |
| ( | |||
Loss from investment in Minera Santa Cruz S.A. (note 10) |
| ( |
| ( |
| ( |
| ( | |||
Depreciation |
| ( |
| ( |
| ( |
| ( | |||
Revision of estimates and accretion of asset retirement obligations (note 12) |
| ( |
| ( |
| ( |
| ( | |||
Impairment of mineral property interests and plant and equipment (note 9) | — | — | ( | — | |||||||
Other operating (note 4) | ( | — | ( | — | |||||||
| ( |
| ( |
| ( |
| ( | ||||
Operating loss |
| ( |
| ( |
| ( |
| ( | |||
OTHER INCOME (EXPENSE): | |||||||||||
Interest and other finance expense, net |
| ( |
| ( |
| ( |
| ( | |||
Other income (note 5) | |
| |
| |
| | ||||
Total other income (expense) |
| |
| ( |
| |
| ( | |||
Loss before income and mining taxes | ( | ( | ( | ( | |||||||
Income and mining tax recovery | | | | | |||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||
Net loss per share (note 14): | |||||||||||
Basic and Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||
Weighted average common shares outstanding (thousands) (note 14): | |||||||||||
Basic and Diluted |
| |
| |
| |
| | |||
The accompanying notes are an integral part of these consolidated financial statements.
3
MCEWEN MINING INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands of U.S. dollars)
June 30, | December 31, | |||||
| 2020 |
| 2019 | |||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Investments (note 6) |
| — |
| | ||
Receivables, prepaids and other assets (note 7) |
| |
| | ||
Inventories (note 8) |
| |
| | ||
Total current assets |
| |
| | ||
Mineral property interests and plant and equipment, net (note 9) |
| |
| | ||
Investment in Minera Santa Cruz S.A. (note 10) |
| |
| | ||
Inventories, long-term (note 8) | | | ||||
Other assets |
| |
| | ||
TOTAL ASSETS | $ | | $ | | ||
LIABILITIES & SHAREHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable and accrued liabilities | $ | | $ | | ||
Debt, current portion (note 11) | — | | ||||
Debt to related party, current portion (note 11) | — | | ||||
Lease liabilities, current portion | | | ||||
Asset retirement obligation, current portion (note 12) |
| |
| | ||
Total current liabilities |
| |
| | ||
Lease liabilities, long-term | | | ||||
Debt (note 11) | | | ||||
Debt to related party (note 11) | | | ||||
Asset retirement obligation, long-term (note 12) |
| |
| | ||
Other liabilities | | | ||||
Deferred income and mining tax liability |
| |
| | ||
Total liabilities | $ | | $ | | ||
Shareholders’ equity: | ||||||
Common shares: | $ | | $ | | ||
Accumulated deficit |
| ( |
| ( | ||
Total shareholders’ equity |
| |
| | ||
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY | $ | | $ | | ||
The accompanying notes are an integral part of these consolidated financial statements.
4
MCEWEN MINING INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
(in thousands of U.S. dollars and shares)
Common Stock | |||||||||||
and Additional | |||||||||||
Paid-in Capital | Accumulated | ||||||||||
Three months ended June 30, 2019 and 2020: |
| Shares |
| Amount | Deficit | Total | |||||
Balance, March 31, 2019 |
| | $ | | $ | ( | $ | | |||
Stock-based compensation |
| — | | — | | ||||||
Exercise of stock options |
| | | — | | ||||||
Units issued in connection with registered direct offering , net of share issue costs | | | — | | |||||||
Net loss | — | — | ( | ( | |||||||
Balance, June 30, 2019 |
| | $ | | $ | ( | $ | | |||
Balance, March 31, 2020 | | $ | | $ | ( | $ | | ||||
Stock-based compensation |
| — | | — | | ||||||
Shares issued for debt refinancing | | | — | | |||||||
Net loss |
| — | — | ( | ( | ||||||
Balance, June 30, 2020 |
| | $ | | $ | ( | $ | | |||
Common Stock |
| |||||||||||
and Additional |
| |||||||||||
Paid-in Capital | Accumulated |
| ||||||||||
Six months ended June 30, 2019 and 2020: |
| Shares |
| Amount | Deficit | Total |
| |||||
Balance, December 31, 2018 |
| | $ | | $ | ( | $ | | ||||
Stock-based compensation |
| — |
| |
| — |
| | ||||
Exercise of stock options |
| |
| |
| — |
| | ||||
Units issued in connection with registered direct offering , net of share issue costs | | | — | | ||||||||
Sale of common stock in ATM offering | | | — | | ||||||||
Net loss | — | — | ( | ( | ||||||||
Balance, June 30, 2019 |
| | $ | | $ | ( | $ | | ||||
Balance, December 31, 2019 | | $ | | $ | ( | $ | | |||||
Stock-based compensation |
| — | | — | | |||||||
Exercise of stock options | | | — | | ||||||||
Shares issued for debt refinancing | | | — | | ||||||||
Net loss |
| — | — | ( | ( | |||||||
Balance, June 30, 2020 |
| | $ | | $ | ( | $ | | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
MCEWEN MINING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands of U.S. dollars)
Six months ended June 30, | |||||||
| 2020 |
| 2019 | ||||
Cash flows from operating activities: | |||||||
Net loss | $ | ( | $ | ( | |||
Adjustments to reconcile net loss from operating activities: | |||||||
Impairment of mineral property interests and plant and equipment (note 9) |
| |
| — | |||
Loss from investment in Minera Santa Cruz S.A., net of amortization (note 10) |
| |
| | |||
Depreciation and amortization |
| |
| | |||
Loss (gain) on investments (note 6) | | ( | |||||
Income and mining tax (recovery) |
| ( |
| ( | |||
Stock-based compensation |
| |
| | |||
Revision of estimates and accretion of asset retirement obligations (note 12) | | | |||||
Foreign exchange (gain) loss | ( | | |||||
Decrease (increase) in other assets related to operations |
| |
| ( | |||
(Decrease) increase in liabilities related to operations | ( | | |||||
Cash used in operating activities | $ | ( | $ | ( | |||
Cash flows from investing activities: | |||||||
Additions to mineral property interests and plant and equipment | $ | ( | $ | ( | |||
Proceeds from sale of investments (note 6) |
| |
| — | |||
Dividends received from Minera Santa Cruz S.A. (note 10) |
| |
| | |||
Cash used in investing activities | $ | ( | $ | ( | |||
Cash flows from financing activities: | |||||||
Proceeds from sale of units, net of share issue costs (note 13) | $ | — | $ | | |||
Proceeds of at-the-market common stock sale (note 13) | — | | |||||
Proceeds of exercise of stock options | | | |||||
Payment of finance lease obligations | ( | ( | |||||
Cash (used in) provided by financing activities | $ | ( | $ | | |||
Effect of exchange rate change on cash and cash equivalents | |
| ( | ||||
(Decrease) in cash, cash equivalents and restricted cash |
| ( |
| ( | |||
Cash, cash equivalents and restricted cash, beginning of period |
| |
| | |||
Cash, cash equivalents and restricted cash, end of period (note 18) | $ | | $ | | |||
Supplemental disclosure of cash flow information: | |||||||
Cash received (paid) during year for: | |||||||
Interest paid | $ | ( | $ | ( | |||
Interest received | | | |||||
The accompanying notes are an integral part of these consolidated financial statements.
6
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted)
NOTE 1 NATURE OF OPERATIONS AND BASIS OF PRESENTATION
McEwen Mining Inc. (the “Company”) was organized under the laws of the State of Colorado on July 24, 1979. The Company is engaged in the exploration, development, production and sale of gold and silver and exploration for copper.
The Company operates in the United States, Canada, Mexico and Argentina. The Company owns a
The interim consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are unaudited. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included are adequate to make the information presented not misleading.
In management’s opinion, the unaudited Consolidated Statements of Operations and Comprehensive Loss (“Statement of Operations”) for the three and six months ended June 30, 2020 and 2019, the unaudited Consolidated Balance Sheets as at June 30, 2020 and December 31, 2019, the unaudited Consolidated Statement of Changes in Shareholders’ Equity for the three and six months ended June 30, 2020 and 2019, and the unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019, contained herein, reflect all adjustments, consisting solely of normal recurring items, which are necessary for the fair presentation of the Company’s financial position, results of operations and cash flows on a basis consistent with that of the Company’s prior audited consolidated financial statements. However, the results of operations for the interim periods may not be indicative of results to be expected for the full fiscal year. Therefore, these financial statements should be read in conjunction with the audited financial statements and notes thereto and summary of significant accounting policies included in the Company’s annual report on Form 10-K for the year ended December 31, 2019. Except as noted below, there have been no material changes in the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s Form 10-K for the year ended December 31, 2019. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Inter-company accounts and transactions have been eliminated.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Risks and Uncertainties
COVID-19
On March 11, the World Health Organization (“WHO”) declared the COVID-19 virus a global pandemic. As a result of the pandemic, many jurisdictions, including the United States, Canada, Mexico and Argentina, instituted restrictions on travel, public gatherings, and certain business operations. Even absent government-mandated shut-downs, we were required to suspend operations at our mines to protect the health and safety of our employees and contractors. This resulted in temporary shutdowns of all or a portion of our operations at all our mine sites at the start of Q2. Since that date, all operations at all of our operating mines and at El Gallo in Mexico have recommenced following a ramp-up period, with operations at the San Jose mine in Argentina still compromised due to travel restrictions which affect mobilization of personnel.
The temporary shutdowns adversely impacted the Company’s operations, cash flow, and liquidity in the second quarter of 2020. In addition to the adverse effect on revenue, we have incurred costs in connection with the shutdowns and subsequent ramp-up. However, the long-term impact of the COVID-19 outbreak on the Company’s results of operations, financial
7
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
position and cash flows will depend on future developments, including the duration and spread of the outbreak and related advisories and restrictions. These developments and the impact of COVID-19 on the financial markets and the overall economy are highly uncertain and cannot be predicted. Achieving normal operating capacity is also dependant on the continued availability of supplies, which is out of the Company’s control. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s results of operations, financial position and cash flows may be further affected.
The Company is not able to estimate the duration of the pandemic and potential impact on its business if disruptions or delays in business developments and shipments of product occur. In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including a decreased ability to raise additional capital when needed on acceptable terms, if at all. As the situation continues to evolve, the Company will continue to closely monitor market conditions and respond accordingly.The Company has completed various scenario planning analyses to consider potential impacts of COVID-19 on its business, including volatility in commodity prices, temporary disruptions and/or curtailments of operating activities (voluntary or involuntary).
As of the date of the issuance of these unaudited Condensed Consolidated Financial Statements, there have been no other significant impacts, including impairments, to the Company’s operations and financial statements.
Going Concern
In the preparation of the interim financial statements, management is required to identify when events or conditions indicate that substantial doubt may exist about the Company’s ability to continue as a going concern. Substantial doubt about the Company’s ability to continue as a going concern would exist when relevant conditions and events, considered in aggregate, indicate that the Company will not be able to meet its obligations as they become due for a period of at least, but not limited to, 12 months from the balance sheet date. When the Company identifies conditions or events that raise potential for substantial doubt about its ability to continue as a going concern, the Company considers whether its plans that are intended to mitigate those relevant conditions or events will alleviate the potential substantial doubt.
In June 2020, the Company refinanced its senior secured term loan facility (see note 11) and was in full compliance with financial covenants as at June 30, 2020. However, as a result of the significant expected resource reduction at the Gold Bar mine, resulting in an initial revised mine plan which yields less cash flow coupled with, operational challenges at Black Fox, and the disruptions to the Company’s operations caused by the COVID-19 pandemic, there is uncertainty about the Company’s ability to generate sufficient operating cash flow to both conduct further operation, exploration and development of its mineral properties and to remain in compliance with certain of its financial covenants, over the next 12 months. Non-compliance with these covenants would result in a breach under the Company’s debt agreement.
In response to this uncertainty, the Company is evaluating options to raise additional equity, and curtail expenditures. The Company’s ability to continue as a going concern is dependent on the successful completion of one or both of these initiatives to ensure that the Company has sufficient liquidity in order to fund its operations and remain in compliance with its debt covenants. After considering its plans, management has concluded that there are no material uncertainties relating to events or conditions that may cast substantial doubt upon the Company’s ability to continue as a going concern for a period of 12 months from the consolidated balance sheet date. The estimates used by management in reaching this conclusion are based on information available as at the date these financial statements were authorized for issuance and include internally generated cash flow forecasts. Accordingly, actual results could differ from these estimates and resulting variances may be material to management’s assessment.
8
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
Recently Adopted Accounting Pronouncements
Accounting for Government Assistance: In June 2020, the Company analogized guidance to account for the COVID relief funds received from the Small Business Administration (SBA) and the Canada Revenue Agency (“CRA”). The ability to analogize standards from other GAAP sources is provisioned under ASC 105-05-2 when guidance is not provided for certain transactions under US GAAP. The adoption of the standard had a material impact on the financial statements as of June 30, 2020. Under this policy, the Company has recognized a deferred government assistance liability in the consolidated balance sheets with regards to the funds received and will recognize the income from the funds in the Statement of Operations as the criteria for recognition of the relief funds are met.
Changes to the Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued ASU 2018- 13, “Fair Value Measurement (ASC 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. This update modifies the disclosure requirements for fair value measurements by removing, modifying, or adding disclosures. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019. The adoption of ASU 2018-13 did not have a material impact on the Company’s financial statements and related disclosures.
Recently Issued Accounting Pronouncements
Income Taxes: In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740).” ASU 2019-12 simplifies the accounting for income taxes by reducing existing complexity in accounting standards. The update to the accounting standards is effective for the Company for the fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the effect of this amendment and the impact it may have on the Company’s consolidated financial statements.
NOTE 3 OPERATING SEGMENT REPORTING
McEwen Mining Inc. is engaged in the exploration, development, production and sale of gold and silver and exploration for copper, with operations located in the United States, Canada, Mexico, and Argentina. The Company’s chief operating decisions maker (“CODM”) reviews the operating results, assesses performance and makes decisions about allocation of resources to these segments at the geographic region level or major mine/project where the economic characteristics of the individual mines or projects are not alike. As a result, these operating segments also represent the Company’s reportable segments. The Company’s business activities that are not considered operating segments are included in General and Administrative and other and are provided in this note for reconciliation purposes.
The CODM reviews segment income (loss), defined as gold and silver sales less production costs applicable to sales, depreciation and depletion, advanced projects and exploration costs for all segments except for the MSC segment which is evaluated based on the attributable equity income or loss. Gold and silver sales and production costs applicable to sales for the reportable segments are reported net of intercompany transactions.
Production costs applicable to sales for the El Gallo project of $
Capital expenditures include costs capitalized in mineral property interests and plant and equipment in the respective periods.
9
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
Significant information relating to the Company’s reportable operating segments is summarized in the tables below:
Three months ended June 30, 2020 |
| USA |
| Canada |
| Mexico |
| MSC |
| Los Azules |
| Total | ||||||
Revenue from gold and silver sales | $ | | $ | | $ | | $ | — | $ | — | $ | | ||||||
Production costs applicable to sales | ( | ( | ( | — | — |
| ( | |||||||||||
Depreciation and depletion | ( | ( | ( | — | — | ( | ||||||||||||
Gross (loss) profit | ( | ( | | — | — | ( | ||||||||||||
Advanced projects | ( | ( | ( | — | — |
| ( | |||||||||||
Exploration | ( | ( | ( | — | ( | ( | ||||||||||||
Loss from investment in Minera Santa Cruz S.A. | — | — | — | ( | — |
| ( | |||||||||||
Other operating | ( | ( | — | — | — | ( | ||||||||||||
Segment loss | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
General and Administrative and other | ( | |||||||||||||||||
Loss before income and mining taxes | $ | ( | ||||||||||||||||
Capital expenditures | $ | | | — | — | — | $ | | ||||||||||
Six months ended June 30, 2020 |
| USA |
| Canada | Mexico | MSC |
| Los Azules |
| Total | ||||||||
Revenue from gold and silver sales | $ | | $ | | $ | | $ | — | $ | — | $ | | ||||||
Production costs applicable to sales | ( | ( | ( | — | — |
| ( | |||||||||||
Depreciation and depletion | ( | ( | ( | — | — | ( | ||||||||||||
Gross (loss) profit | ( | ( | | — | — | ( | ||||||||||||
Advanced projects | ( | ( | ( | — | — |
| ( | |||||||||||
Exploration | ( | ( | ( | — | ( |
| ( | |||||||||||
Impairment of mineral property interests and plant and equipment (note 9) | ( | — | — | — | — | ( | ||||||||||||
Loss from investment in Minera Santa Cruz S.A. | — | — | — | ( | — |
| ( | |||||||||||
Other operating | ( | ( | — | — | — | ( | ||||||||||||
Segment loss | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
General and Administrative and other | ( | |||||||||||||||||
Loss before income and mining taxes | $ | ( | ||||||||||||||||
Capital expenditures | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||
Three months ended June 30, 2019 |
| USA |
| Canada |
| Mexico |
| MSC |
| Los Azules |
| Total | ||||||
Revenue from gold and silver sales | $ | | $ | | $ | | $ | — | $ | — | $ | | ||||||
Production costs applicable to sales | ( | ( | ( | — | — | ( | ||||||||||||
Depreciation and depletion | ( | ( | ( | — | — | ( | ||||||||||||
Gross profit | | | | — | — | | ||||||||||||
Advanced projects | ( | — | ( | — | — | ( | ||||||||||||
Exploration | ( | ( | — | — | ( | ( | ||||||||||||
Loss from investment in Minera Santa Cruz S.A. | — | — | — | ( | — | ( | ||||||||||||
Segment (loss) income | $ | ( | $ | ( | $ | | $ | ( | $ | ( | $ | ( | ||||||
General and Administrative and other | ( | |||||||||||||||||
Loss before income and mining taxes | $ | ( | ||||||||||||||||
Capital expenditures | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||
10
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
Six months ended June 30, 2019 |
| USA |
| Canada |
| Mexico |
| MSC |
| Los Azules |
| Total | ||||||
Revenue from gold and silver sales | $ | | $ | | $ | | $ | — | $ | — | $ | | ||||||
Production costs applicable to sales | ( | ( | ( | — | — | ( | ||||||||||||
Depreciation and depletion | ( | ( | ( | — | — | ( | ||||||||||||
Gross profit | | | | — | — | | ||||||||||||
Advanced projects | ( | — | ( | — | — | ( | ||||||||||||
Exploration | ( | ( | — | — | ( | ( | ||||||||||||
Loss from investment in Minera Santa Cruz S.A. | — | — | — | ( | — | ( | ||||||||||||
Segment loss | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
General and Administrative and other | ( | |||||||||||||||||
Loss before income and mining taxes | $ | ( | ||||||||||||||||
Capital expenditures | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||
Geographic information
Geographic information includes the long-lived assets balance and revenues presented for the Company’s operating segments, as follows:
Long-lived Assets | Revenue (1) | |||||||||||||||||
June 30, | December 31, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2020 | 2019 | ||||||||
USA | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Canada | | | | | | | ||||||||||||
Mexico | | | | | | | ||||||||||||
Argentina (2) | | | — | — | — | — | ||||||||||||
Total consolidated (3) | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
| (1) | Presented based on the location from which the product originated. |
| (2) | Includes Investment in MSC of $ |
| (3) | Total excludes $ |
NOTE 4 OTHER OPERATING
During Q2 2020, the Company temporarily suspended operations at its Gold Bar and Black Fox mine sites as measures to combat COVID-19. Costs incurred while operations were suspended total $
.
11
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
NOTE 5 OTHER INCOME
The following is a summary of other income for the three and six months ended June 30, 2020 and 2019:
Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | |||||
COVID Relief | $ | | $ | — | $ | | $ | — | ||||
Unrealized and realized (loss) gain on investments (note 5) | | | ( | | ||||||||
Foreign currency gain (loss) | | ( | | ( | ||||||||
Other income, net | | | | | ||||||||
Total other income | $ | | $ | | $ | | $ | | ||||
In response to COVID-19, the United States and Canadian governments enacted significant relief measures to support businesses directly and adversely impacted by the pandemic. During Q2 2020, the Company secured $
NOTE 6 INVESTMENTS
The following is a summary of the activity in investments for the six months ended June 30, 2020 and 2019:
As at | Additions/ | Disposals/ | Unrealized | Fair value | ||||||||||||||
December 31, | transfers during | Net (loss) on | transfers during | (loss) on | June 30, | |||||||||||||
| 2019 |
| period |
| securities sold |
| period |
| securities held |
| 2020 | |||||||
Marketable equity securities | $ | | $ | — | $ | ( | $ | ( | $ | — | $ | — | ||||||
As at | Additions/ | Net gain | Disposals/ | Unrealized | Fair value | |||||||||||||
December 31, | transfers during | (loss) on | transfers during | gain on | June 30, | |||||||||||||
| 2018 |
| period |
| securities sold | period | securities held | 2019 | ||||||||||
Marketable equity securities | $ | | $ | | $ | — | $ | — | $ | | $ | | ||||||
Warrants |
| | — | — | — | | | |||||||||||
Investments | $ | | $ | | $ | — | $ | — | $ | | $ | | ||||||
During the six months ended June 30, 2020, the Company sold marketable equity securities for proceeds of $
During the three months ended June 30, 2020, the Company sold marketable equity securities for proceeds of $
The cost of marketable equity securities at June 30, 2020 was $nil (December 31, 2019 – $
12
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
NOTE 7 RECEIVABLES, PREPAIDS AND OTHER ASSETS
The following is a breakdown of balances in receivables, prepaids and other assets as at June 30, 2020 and December 31, 2019:
| June 30, 2020 |
| December 31, 2019 | |||
Trade and other receivables | $ | | $ | — | ||
Government sales tax receivable | | | ||||
Prepaids and other assets | | | ||||
Receivables and other current assets | $ | | $ | | ||
Government sales tax receivable includes $
Trade and other receivables includes $
NOTE 8 INVENTORIES
Inventories at June 30, 2020 and December 31, 2019 consisted of the following:
| June 30, 2020 |
| December 31, 2019 | |||
Material on leach pads | $ | | $ | | ||
In-process inventory |
| |
| | ||
Stockpiles |
| |
| | ||
Precious metals |
| |
| | ||
Materials and supplies |
| |
| | ||
Inventories | $ | | $ | | ||
Less current portion | | | ||||
Long-term portion | $ | | $ | | ||
During the three and six months ended June 30, 2020, the inventory of the Black Fox Mine was written down to its net realizable value. The write-down was $
NOTE 9 MINERAL PROPERTY INTERESTS AND PLANT AND EQUIPMENT
The definition of proven and probable reserves is set forth in the SEC Industry Guide 7. If proven and probable reserves exist at the Company’s properties, the relevant capitalized mineral property interests and asset retirement costs are charged to expense based on the units of production method upon commencement of production. The Company’s Gold Bar, Black Fox and San José properties have proven and probable reserves estimated in accordance with SEC Industry Guide 7.
The Company reviews and evaluates its long-lived assets for impairment on a quarterly basis or when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Once it is determined that impairment exists, an impairment loss is measured as the amount by which the asset carrying value exceeds its fair value.
As part of the analysis conducted in Q1 2020, the Company determined that indicators of impairment existed for the long-lived assets at the Gold Bar mine and that the long-lived assets at the Gold Bar mine were not recoverable on an undiscounted basis. The fair value of the Gold Bar mine was determined using the discounted cash flow method, coupled
13
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
with an in-situ resource multiple for mineralized material not included in the life of mine plan. Future cash flows were estimated based on estimated quantities of recoverable mineralized material, expected gold prices, estimated production levels, operating costs, capital requirements and reclamation costs, all based on the life-of-mine plan using the preliminary estimated resources. The in-situ resource multiple applied to the mineralized material not included in the life-of-mine plan was estimated by evaluating observable market transactions. The Company concluded that the carrying value of the long-lived assets at the Gold Bar mine was impaired and recorded a non-cash impairment charge reducing plant and equipment and mineral property interests by the amount of $
The following table sets forth a summary of the quantitative and qualitative information related to the unobservable inputs used in the calculation of the Company’s non-recurring Level 3 fair value measurement of the Gold Bar mine:
Date of Fair Value Measurement | Valuation Technique | Unobservable Input | Range/ Weighted Average | |||||
Gold Bar Mine | March 31, 2020 | Discounted Cash Flow | Discount Rate | |||||
Long Term Gold Price | $ | |||||||
United States Inflation Index | ||||||||
The estimated future cash flows are based on numerous assumptions and uncertainties. It is possible that actual future cash flows will be significantly different than the estimates, as actual future quantities of recoverable minerals, gold prices, production levels and costs of capital are each subject to significant risks and uncertainties.
NOTE 10 INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) – SAN JOSÉ MINE
The Company accounts for investments over which it exerts significant influence but does not control through majority ownership using the equity method of accounting. In applying the equity method of accounting to the Company’s investment in MSC, MSC’s financial statements, which are originally prepared by MSC in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, have been adjusted to conform with U.S. GAAP. As such, the summarized financial data presented under this heading is in accordance with U.S. GAAP.
A summary of the operating results for MSC for the three and six months ended June 30, 2020 and 2019 is as follows:
Three months ended June 30, | Six months ended June 30, | ||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||
Minera Santa Cruz S.A. ( | |||||||||||||
Revenue from gold and silver sales | $ | | $ | | $ | | $ | | |||||
Production costs applicable to sales | ( | ( | ( | ( | |||||||||
Depreciation and depletion | ( | ( | ( | ( | |||||||||
Gross profit | | | | | |||||||||
Exploration | ( | ( | ( | ( | |||||||||
Other expenses | ( | ( | ( | ( | |||||||||
Net (loss) before tax | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Current and deferred tax recovery/(expense) | | ( | | ( | |||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Portion attributable to McEwen Mining Inc. ( | |||||||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Amortization of fair value increments |
| ( |
| ( |
| ( |
| ( | |||||
Income tax recovery | | | | | |||||||||
Loss from investment in MSC, net of amortization | $ | ( | $ | ( | $ | ( | $ | ( | |||||
14
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
Shutdown costs related to the COVID-19 pandemic were recognized in other expenses and totaled $
The loss from investment in MSC attributable to the Company includes the amortization of the fair value increments arising from the initial purchase price allocation and related income tax recovery. The income tax recovery reflects the impact of devaluation of the Argentine peso against the U.S. dollar on the peso-denominated deferred tax liability recognized at the time of acquisition.
Changes in the Company’s investment in MSC for the six months ended June 30, 2020 and year ended December 31, 2019 are as follows:
| June 30, 2020 |
| December 31, 2019 | |||
Investment in MSC, beginning of period | $ | | $ | | ||
Attributable net loss from MSC | ( | ( | ||||
Amortization of fair value increments |
| ( |
| ( | ||
Income tax recovery | | | ||||
Dividend distribution received |
| ( |
| ( | ||
Investment in MSC, end of period | $ | | $ | | ||
During the three and six months ended June 30, 2020, the Company received $
A summary of the key assets and liabilities of MSC as at June 30, 2020, before and after adjustments to fair value on acquisition and amortization of the fair value increments arising from the purchase price allocation, are as follows:
As at June 30, 2020 | Balance excluding FV increments | Adjustments | Balance including FV increments | ||||||
Current assets | $ | | $ | | $ | | |||
Total assets | $ | | $ | | $ | | |||
Current liabilities | $ | ( | $ | — | $ | ( | |||
Total liabilities | $ | ( | $ | ( | $ | ( | |||
NOTE 11 DEBT
On August 10, 2018, the Company finalized a $
On June 25, 2020, the Company entered into an Amended and Restated Credit Agreement (“ARCA”) which refinanced the outstanding $
| ● | Sprott Private Resource Lending II (Collector), LP replaced Royal Capital Management Corp. as a lender and the administrative agent and an affiliate of Robert McEwen remains as a lender. |
| ● | Scheduled repayments of the principal are extended by |
| ● | The minimum working capital maintenance requirement was reduced from $ |
15
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
| ● | The Company issued |
The remaining principal terms of the original agreement remain unchanged.
A reconciliation of the Company’s long-term debt for the six months ended June 30, 2020 and for the year ended December 31, 2019 is as follows:
| Six months ending June 30, 2020 |
| Year ending December 31, 2019 | ||||
Balance, beginning of period | $ | | $ | | |||
Interest expense |
| |
| | |||
Interest payments |
| ( |
| ( | |||
Debt amendment fee | ( | — | |||||
Balance, end of period | $ | | $ | | |||
Less current portion | — | | |||||
Long-term portion | $ | | $ | | |||
During the six months ended June 30, 2020, $nil of interest was capitalized in plant and equipment (six months ended June 30, 2019 – $
NOTE 12 ASSET RETIREMENT OBLIGATIONS
The Company is responsible for reclamation of certain past and future disturbances at its properties. The most significant properties subject to these obligations are the Gold Bar and Tonkin properties in Nevada, the Timmins properties in Canada and the El Gallo Project in Mexico.
A reconciliation of the Company’s asset retirement obligations for the six months ended June 30, 2020 and for the year ended December 31, 2019 are as follows:
| June 30, 2020 |
| December 31, 2019 | |||
Asset retirement obligation liability, beginning balance | $ | | $ | | ||
Settlements |
| ( |
| ( | ||
Accretion of liability |
| |
| | ||
Adjustment reflecting updated estimates |
| |
| | ||
Foreign exchange revaluation | ( | | ||||
Asset retirement obligation liability, ending balance | $ | | $ | | ||
Less current portion | | | ||||
Long-term portion | $ | | $ | | ||
The Company’s reclamation expenses consisted of the following:
Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2020 |
| 2019 | 2020 | 2019 | |||||||
Reclamation adjustment reflecting updated estimates | $ | — | $ | | $ | | $ | | ||||
Reclamation accretion | | | | | ||||||||
Total | $ | | $ | | $ | | | |||||
16
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
NOTE 13 SHAREHOLDERS’ EQUITY
Equity Issuances
June 2020 Amended and Restated Credit Agreement
Pursuant to the ARCA executed on June 25, 2020, the Company issued
March 2019 Registered Offering
On March 29, 2019, the Company issued
On March 29, 2019, the Company also issued
At-the-market (“ATM”) Offering
Pursuant to an equity distribution agreement dated November 8, 2018, the Company was permitted to offer and sell from time to time shares of its common stock having an aggregate offering price of up to $
Stock Options
During the six months ended June 30, 2020, the Company issued
Shareholders’ Distributions
Pursuant to the ARCA (Note 11), the Company is prevented from paying any dividends on its common stock, so long as the loan is outstanding.
NOTE 14 NET LOSS PER SHARE
Basic net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted average number of common shares outstanding during the period. Potentially dilutive instruments are not included in the calculation of diluted net loss per share for the three and six months ended June 30, 2020 and 2019, as they would be anti-dilutive.
For the six months ended June 30, 2020, all of the outstanding options (
17
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
NOTE 15 RELATED PARTY TRANSACTIONS
The Company recorded the following expense in respect to the related parties outlined below during the periods presented:
| Three months ended June 30, |
| Six months ended June 30, | |||||||||
2020 |
| 2019 | 2020 |
| 2019 | |||||||
Lexam L.P. | $ | — | $ | | $ | | $ | | ||||
REVlaw | | | | | ||||||||
The Company has the following outstanding accounts payable balances in respect to the related parties outlined below:
June 30, 2020 | December 31, 2019 | |||||||||||
Lexam L.P. | $ | | $ | | ||||||||
REVlaw | $ | | $ | | ||||||||
An affiliate of Mr. McEwen participated as a lender in the $
NOTE 16 FAIR VALUE ACCOUNTING
As required by accounting guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Assets and liabilities measured at fair value on a recurring basis.
The following table identifies the Company’s assets and liabilities measured at fair value on a recurring basis (at least annually) by level within the fair value hierarchy as at June 30, 2020 and December 31, 2019, as reported in the Consolidated Balance Sheets:
Fair value as at June 30, 2020 |
| Fair value as at December 31, 2019 | ||||||||||||||||
| Level 1 |
| Level 2 |
| Total |
| Level 1 |
| Level 2 |
| Total | |||||||
Marketable equity securities | $ | — | $ | — | $ | — | $ | | $ | — | $ | | ||||||
The Company’s investments consisted of marketable equity securities which were exchange-traded and valued using quoted market prices in active markets and as such were classified within Level 1 of the fair value hierarchy. The fair value of the investments was calculated as the quoted market price of the marketable equity security multiplied by the quantity of shares held by the Company.
During the six months ended June 30, 2020, the Company recorded an impairment of long-lived assets at the Gold Bar Mine totaling $
Debt is recorded at amortized cost of $
The fair value of other financial assets and liabilities were assumed to approximate their carrying values due to their historically negligible credit losses.
18
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
NOTE 17 COMMITMENTS AND CONTINGENCIES
In addition to the commitments for payments on operating and finance leases and the repayment of long-term debt (Note 11), as at June 30, 2020, the Company has the following commitments and contingencies:
Reclamation Obligations
As part of its ongoing business and operations, the Company is required to provide bonding for its environmental reclamation obligations of $
Surety Bonds
As at June 30, 2020, the Company has a surety facility in place to cover all its bonding obligations, which include $
Streaming Agreement
As part of the acquisition of the Black Fox Complex in 2017, the Company assumed a gold purchase agreement (streaming contract) related to production from certain land claims. The Company is obligated to sell
The Company records the revenue from these shipments based on the contract price at the time of delivery to the customer. During the three and six months ended June 30, 2020, the Company recorded revenue of $
NOTE 18 CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the Consolidated Balance Sheets to the amounts disclosed in the Consolidated Statements of Cash flows:
June 30, 2020 | December 31, 2019 | |||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash included in other assets | | | ||||
Total cash, cash equivalents, and restricted cash | $ | | $ | | ||
19
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the following discussion, “McEwen Mining”, the “Company”, “we”, “our”, and “us” refers to McEwen Mining Inc. and as the context requires, its consolidated subsidiaries.
The following discussion updates our plan of operation for the foreseeable future. It also analyzes our financial condition at June 30, 2020 and compares it to our financial condition at December 31, 2019. Finally, the discussion analyzes our results of operations for the three and six months ended June 30, 2020 and compares those to the results for the three and six months ended June 30, 2019. With regard to properties or projects that are not in production, we provide some details of our plan of operation. We suggest that you read this discussion in conjunction with MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and our audited consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2019.
The discussion contains financial performance measures that are not prepared in accordance with United States Generally Accepted Accounting Principles (“US GAAP” or “GAAP”). Each of the following is a non-GAAP measure: cash gross profit, cash costs, cash cost per ounce, all-in sustaining costs, all-in sustaining cost per ounce, average realized price per ounce, and liquid assets. These non-GAAP measures are used by management in running the business and we believe they provide useful information that can be used by investors to evaluate our performance and our ability to generate cash flows. These measures do not have standardized definitions and should not be relied upon in isolation or as a substitute for measures prepared in accordance with GAAP. Cash Costs equals Production Costs Applicable to Sales and is used interchangeably throughout the document.
For a reconciliation of these non-GAAP measures to the amounts included in our Statements of Operations for the three and six months ended June 30, 2020 and 2019 and to our Balance Sheets as of June 30, 2020 and December 31, 2019 and certain limitations inherent in such measures, please see the discussion under “Non-GAAP Financial Performance Measures”, on page 36.
This 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, or 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 or will have proven or probable reserves at those properties as defined by the Guide 7.
OVERVIEW
We were organized under the laws of the State of Colorado on July 24, 1979. We are engaged in the exploration, development, production and sale of gold and silver and exploration for copper.
We operate in the United States, Canada, Mexico and Argentina. We own a 100% interest in the Gold Bar mine in Nevada, the Black Fox gold mine in Ontario, Canada, the El Gallo Project and the Fenix silver-gold project in Sinaloa, Mexico, the Los Azules copper deposit in San Juan, Argentina, and a portfolio of exploration properties in Nevada, Canada, Mexico and Argentina. We also own a 49% interest in Minera Santa Cruz S.A. (“MSC”), owner of the producing San José silver-gold mine in Santa Cruz, Argentina, which is operated by the joint venture majority owner, Hochschild Mining plc.
In this report, “Au” represents gold; “Ag” represents silver; “oz” represents troy ounce; “t” represents metric tonne; “gpt” represents grams per metric tonne; “ft.” represents feet; “m” represents meter; “sq.” represents square; and C$ refers to Canadian dollars. All of our financial information is reported in United States (U.S.) dollars, unless otherwise noted. Throughout this Management’s Discussion and Analysis (“MDA”), the reporting periods for the three months ended June 30, 2020 and 2019 are abbreviated as Q2/20 and Q2/19, respectively, and the reporting periods for the six months ended June 30, 2020 and 2019 are abbreviated as H1/20 and H1/19, respectively.
In addition, in this report, gold equivalent ounces (“Au Eq. oz”) includes gold and silver ounces calculated based on a 94:1 silver to gold ratio for the first quarter of 2020, 104:1 silver to gold ratio for the second quarter of 2020, 75:1 silver to gold
20
ratio for the first quarter of 2019 and 88:1 for the second quarter of 2019. Beginning with the second quarter of 2019, we adopted a variable silver:gold ratio for reporting that approximates the average price during each fiscal quarter.
Note: We ceased active mining and processing at the El Gallo mine in the second quarter of 2018. We use the term “El Gallo Project” to refer to the ongoing reclamation and residual heap-leaching that is taking place at the formerly-producing mine.
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.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 virus a global pandemic. During late March and early April, our operations were disrupted by temporary shutdowns to protect our workforce from the spread of the virus, as described below:
| ● | All operations at Black Fox were temporarily suspended on March 26 and resumed on April 13; |
| ● | Mining operations at the Gold Bar mine were suspended on April 1 and resumed on May 4, while leaching activities continued during the period. |
| ● | Operating activities at the El Gallo Project were suspended on April 1, while leaching activities continued. Operations resumed June 1. |
| ● | Operations at the San José mine owned by MSC (operated by our joint venture partner) closed March 20 and resumed with scaled back operations by the end of April. As of the date of this quarterly report, operations at the San Jose Mine are still curtailed due to travel restrictions which affect mobilization of personnel; and |
| ● | Our head office in Toronto, Canada was shut down effective March 13 and all employees are performing their functions remotely. |
During the shutdown periods, rigorous policies and procedures have been implemented at each site to minimize potential health and safety risks to our workforce.
The temporary shutdowns adversely impacted our mine operations, cash flow, and liquidity during the second quarter of 2020, and are expected to continue to have adverse consequences to us beyond Q2/20. In addition to the adverse effect on production and revenue, we have incurred costs in connection with the shutdowns and subsequent ramp-up. The long-term impact of the COVID-19 outbreak on our results of operations, financial position and cash flows will depend on future developments, including the duration and spread of the outbreak and related advisories and restrictions. Our liquidity and financial condition has been adversely affected and we are at an increased risk of not having sufficient cash flow to fund our operations and an increased risk of default under our debt agreement. Achieving and maintaining normal operating capacity is also dependent on the continued availability of supplies, which is out of our control. Management is actively monitoring the global situation on our financial condition, liquidity, operations, suppliers, industry and workforce.
During Q2/20, we incurred expenditures of $0.9 million and $0.6 million, respectively, resulting from temporarily suspending operations at the Gold Bar and Black Fox mines. Suspension costs include labor, contractors and other costs.
The governments of the United States, Canada, Mexico and Argentina have enacted or proposed legislation to provide relief to companies and/or individuals affected by the enforced reduction in operations. During Q2/20, we secured $1.9 million of relief from the US government under the paycheck protection program (“PPP”). The funds are fully forgivable so long as eligible expenditures are incurred in a 24-week period. We expect to comply with the forgiveness criteria. We also secured $1.5 million of government relief in Canada through the Canadian Emergency Wage Subsidy (“CEWS”) program.
21
Index to Management’s Discussion and Analysis:
22 | |
24 | |
24 | |
25 | |
26 | |
28 | |
28 | |
28 | |
29 | |
30 | |
30 | |
31 | |
32 | |
32 | |
32 | |
33 | |
33 | |
35 | |
35 | |
36 | |
40 | |
40 | |
41 |
OPERATING AND FINANCIAL HIGHLIGHTS
Highlights for Q2/20 are included below and discussed further under Consolidated Financial Performance:
COVID-19 shutdowns
| ● | During Q2/20, our operations were disrupted by the COVID-19 global pandemic, which resulted in temporary shutdowns of all our operations aimed to protect our workforce from the spread of the virus. All operations at our operating mines and at the El Gallo Project have recommenced following a ramp-up period, with operations at the San Jose Mine still curtailed due to travel restrictions which affect mobilization of the personnel. |
Performance
| ● | Production of 19,200 gold equivalent ounces, including 9,000 attributable gold equivalent ounces from the San José mine(1). |
| ● | Sales of 22,400 gold equivalent ounces, including 11,600 attributable gold equivalent ounces from the San José mine. |
Results of Operations
| ● | Revenue from gold and silver sales of $18.3 million from the sale of 10,800 gold equivalent ounces from our 100% owned properties at an average realized price(2) of $1,733 per gold equivalent ounce. |
| ● | Cash gross loss(2) of $4.1 million; gross loss of $8.9 million on a US GAAP basis. |
22
| ● | Net loss of $19.8 million, primarily due to a gross loss of $8.9 million, $6.4 million spent on exploration and advanced projects and $2.0 million of shutdown costs related to the temporary suspension of operations at the Gold Bar and Black Fox mine sites. |
| ● | Cash and cash equivalents of $18.4 million at June 30, 2020. |
Exploration and Reserves
| ● | Completed 45,000 feet (14,000 meters) of underground diamond drilling in the Black Fox Complex focused on identifying and building additional underground gold resources adjacent to the existing Black Fox ore body. |
| ● | Continued drilling at Gold Bar South and verified extended mineralization towards the south of the deposit. Subject to permitting advancing as planned, the mining of Gold Bar South could begin in the second half of 2021. |
| ● | Continued the review of our Gold Bar mine reserve. Completion of a new resource estimate and mine plan are being finalized in the third quarter of 2020. A new reserve estimate is expected in the fourth quarter of 2020. |
| (1) | At our 49% attributable interest. |
| (2) | As used here and elsewhere in this report, this is a Non-GAAP financial performance measure. See “Non-GAAP Financial Performance Measures” beginning on page 36. |
23
SELECTED CONSOLIDATED FINANCIAL AND OPERATING RESULTS
The following tables present select financial and operating results of our company for the three and six months ended June 30, 2020 and 2019:
Three months ended June 30, | Six months ended June 30, | |||||||||||
2020 |
| 2019 |
| 2020 |
| 2019 | ||||||
(in thousands, except per share) | ||||||||||||
Revenue from gold and silver sales(1) | $ | 18,291 | $ | 36,383 | $ | 49,691 | $ | 51,966 | ||||
Production costs applicable to sales | $ | (22,354) | $ | (24,699) | $ | (50,741) | $ | (35,848) | ||||
Loss before income and mining taxes | $ | (19,844) | $ | (13,515) | $ | (120,129) | $ | (23,533) | ||||
Net loss(2) | $ | (19,814) | $ | (13,014) | $ | (119,005) | $ | (23,150) | ||||
Net loss per share(2) | $ | (0.05) | $ | (0.04) | $ | (0.30) | $ | (0.07) | ||||
Cash (used in) provided by operating activities | $ | (8,191) | $ | 1,669 | $ | (20,099) | $ | (9,152) | ||||
Cash additions to mineral property interests and plant and equipment | $ | 3,000 | $ | 7,972 | $ | 8,503 | $ | 24,484 | ||||
| (1) | Excludes revenue from the San José mine, which is accounted for under the equity method. |
| (2) | Results for the six months ended June 30, 2020 include an impairment charge of $83.8 million, or $0.21 per share. |
Three months ended June 30, | Six months ended June 30, | |||||||||||
2020 |
| 2019 |
| 2020 |
| 2019 | ||||||
(in thousands, except per ounce) | ||||||||||||
Produced - gold equivalent ounces(1) | 19.2 | 45.9 | 54.2 | 82.2 | ||||||||
100% owned operations | 10.2 | 22.7 | 30.4 | 39.1 | ||||||||
San José mine (49% attributable) | 9.0 | 23.2 | 23.8 | 43.1 | ||||||||
Sold - gold equivalent ounces(1) | 22.4 | 51.9 | 54.9 | 83.5 | ||||||||
100% owned operations | 10.8 | 28.1 | 31.1 | 40.5 | ||||||||
San José mine (49% attributable) | 11.6 | 23.8 | 23.8 | 43.0 | ||||||||
Average realized price ($/Au Eq. oz)(2)(3) | $ | 1,733 | $ | 1,318 | $ | 1,641 | $ | 1,313 | ||||
P.M. Fix Gold ($/oz) | $ | 1,711 | $ | 1,309 | $ | 1,645 | $ | 1,307 | ||||
Cash cost per ounce ($/Au Eq. oz sold):(2) | ||||||||||||
100% owned operations | $ | 2,170 | $ | 863 | $ | 1,641 | $ | 857 | ||||
San José mine (49% attributable) | $ | 1,280 | $ | 960 | $ | 1,207 | $ | 865 | ||||
AISC per ounce ($/Au Eq. oz sold):(2) | ||||||||||||
100% owned operations | $ | 2,719 | $ | 1,152 | $ | 2,086 | $ | 1,262 | ||||
San José mine (49% attributable) | $ | 1,476 | $ | 1,207 | $ | 1,535 | $ | 1,165 | ||||
Cash gross (loss) profit(2) | $ | (4,063) | $ | 11,684 | $ | (1,050) | 16,118 | |||||
Silver : Gold ratio(1) | 104:1 | 88:1 | 100:1 | 82:1 | ||||||||
| (1) | Silver production is presented as a gold equivalent; silver:gold ratio of 104:1 for Q2/20 and 88:1 for Q2/19. See page 20. |
| (2) | As used here and elsewhere in this report, this is a Non-GAAP financial performance measure. See “Non-GAAP Financial Performance Measures” beginning on page 36. |
| (3) | On sales from 100% owned operations only, excluding sales from our stream. |
CONSOLIDATED PERFORMANCE
For Q2/20, we reported a net loss of $19.8 million (or $0.05 per share) compared to $13.0 million in Q2/19 (or $0.04 per share), with the increase in 2020 reflecting a $15.7 million decrease in cash gross profit as a result of less gold and silver ounces produced and sold, significantly higher cash cost per ounce, partially offset by higher realized gold prices. Higher cash cost per ounce was mainly due to fewer gold equivalent ounces produced and sold, with production significantly impacted by temporary mine suspensions at all of our operations as a result of steps taken to stop the spread of COVID-19, along with operational issues at several mines.
Cash gross loss in Q2/20 was partially offset by $2.2 million lower depreciation and depletion expenses, reflecting fewer gold equivalent ounces produced and sold, $2.4 million lower exploration expenditures, a $3.1 million decrease in loss from investment in Minera Santa Cruz S.A., and a $2.6 million increase in other income, all compared to Q2/19.
24
Starting in Q2/19, we adopted a variable silver:gold ratio for reporting gold equivalent ounces produced and sold, which approximates the average market ratio during the period; previously we used a fixed 75:1 silver:gold ratio. The change in the silver:gold ratio primarily impacts gold equivalent ounces produced and sold as well as cash cost and all-in sustaining cost per gold equivalent ounce for the San José mine.
Production from our 100% owned mines were 10,200 gold equivalent ounces in Q2/20, which decreased by 12,500 gold equivalent ounces, or 55%, compared to Q2/19. The decline reflects the temporary shutdown of operations at our sites as a result of steps taken to stop the spread of COVID-19, coupled with the expected lower production at the El Gallo Project (3,500 fewer ounces), as the El Gallo Project has been in residual leaching since June 2018.
Our share of the San José mine production was 9,000 gold equivalent ounces in Q2/20, which was 14,200 ounces, or 61%, lower than in Q2/19 mainly due to a nationwide mandatory quarantine imposed in Argentina to combat the spread of COVID-19. Although the mine was able to restart operations in late April, the operations remain below capacity due to government imposed travel restrictions that continue to pose significant challenges in mobilizing personnel to the site.
CONSOLIDATED FINANCIAL REVIEW
Revenue from gold and silver sales in Q2/20 decreased by 50% to $18.3 million compared to Q2/19, reflecting 17,300, or 62%, fewer gold equivalent ounces sold from our 100% owned mines, partly offset by a higher average realized price per ounce compared to same period in 2019 ($1,733/oz in Q2/20 or $415/oz higher). The decrease in gold equivalent ounces sold in Q2/20 is due to lower production reflecting the adverse effects of the temporary suspension of operations at all of our operations, the subsequent ramp-up period in which we operated below normal capacity and other operational issues affecting our Gold Bar and Black Fox mine sites.
Revenue from gold and silver sales in H1/20 decreased by 4% to $49.7 million compared to H1/19, reflecting 9,400, or 23%, fewer gold equivalent ounces sold from our 100% owned mines, which was almost totally offset by a higher average realized price per ounce compared to same period in 2019 ($1,641/oz in H1/20 or $328/oz higher). In addition, reduced production in Q2/20 due to the pandemic was partially offset by increased production at the Gold Bar mine in the first quarter of 2020 compared to the first quarter of 2019. The decrease in gold equivalent ounces sold in H1/20 is mainly due to lower production in Q2/20 as noted above.
Production Costs applicable to sales in Q2/20 decreased by 9% to $22.4 million compared to Q2/19, reflecting 62% less gold equivalent ounces sold at a significantly higher cost per ounce at all our operations (details in the “Operations Review” section).
Production Costs applicable to sales in H1/20 increased by 42% to $50.7 million compared to H1/19, despite 23% less gold equivalent ounces sold, which was more than offset by a significantly higher cost per ounce at all our operations (details in the “Operations Review” section).
Depreciation and depletion for Q2/20 decreased by 31% ($2.2 million) to $4.8 million compared to Q2/19, reflecting fewer gold ounces sold from all our sites.
Depreciation and depletion for H1/20 increased by 15% ($1.5 million) to $11.5 million compared to H1/19, despite 23% fewer gold ounces sold, reflecting more gold ounces sold from the Gold Bar mine in H1/20 at a higher depreciation and depletion per ounce sold which more than offset the impact of fewer ounces sold from El Gallo and Black Fox. Both El Gallo and Black Fox have a lower depreciation and depletion per ounce than the Gold Bar mine.
Advanced projects costs for Q2/20 and H1/20 increased to $2.9 million and $5.4 million, or 38% and 15% higher, respectively, compared to the same periods of 2019. Advanced projects in Q2/20 and H1/20 included spending for advancing the Froome project in Timmins, Ontario, expenditures related to property holding payments and other spending for the Fenix project in Mexico and engineering and permit work at the Gold Bar South property in Nevada.
Exploration costs of $3.5 million and $7.3 million, respectively for Q2/20 and H1/20, decreased by 40% and 27%, compared to the same periods of 2019. Exploration activities decreased since we did not have any flow-through spending
25
requirements to satisfy in 2020. During H1/19, $3.4 million of flow-through qualifying exploration expenditures were incurred.
General and administrative expenses of $2.2 million and $4.3 million in Q2/20 and H1/20, respectively, decreased by 29% and 21% compared to 2019 as a result of the reduction of corporate activities in 2020.
Loss from investment in MSC of $1.0 million and $3.7 million in Q2/20 and H1/20, decreased by 75% and 42% compared to the same periods of 2019, reflecting significantly higher gross profit of $9.0 million and $10.8 million in Q2/20 and H1/20, respectively, compared to $2.9 million and $6.8 million in Q2/19 and H1/19; and $1.9 million current and deferred income and mining tax recovery for Q2/20 and H1/20 compared to $3.0 million and $3.8 million current and deferred income and mining tax expense in 2019. Both higher gross profit and current and deferred income and mining tax recovery in 2020 were partially offset by $5.9 million and $7.2 million of other expenses incurred during the shutdown of operations in Q2/20 and H1/20, respectively. Higher gross profit in 2020 was mainly due to higher average realized gold and silver prices (36% and 32% higher gold price and 32% and 10% higher silver price in Q2/20 and H1/20, respectively), despite fewer gold equivalent ounces sold and $5.3 million operating costs due to the COVID-19 pandemic (labor costs for idle employees, additional transportation and accommodation costs to maintain social distancing and additional personal protective equipment).
Revision of estimates and accretion of asset retirement obligations of $0.5 million in Q2/20 remained consistent with Q2/19, whereas the expense increased slightly by $0.2 million in H1/20 compared to H1/19.
Impairment of Gold Bar mine mineral property interests and plant and equipment carrying value for H1/20 was $83.8 million. During H1/20, we performed a comprehensive review of our Gold Bar mine and determined that indicators of impairment existed. A recoverability test was performed and we concluded that the carrying value of the long-lived assets for the Gold Bar mine was impaired based on a reduction in preliminary estimated resources and expected future production.
Other operating of $2.0 million in Q2/20 and H1/20 compared to $nil in the same periods of 2019. Other operating relate to the temporary suspension or curtailment of our operations at the Gold Bar and Black Fox mines.
Interest and other finance expense, net was $1.8 million and $3.6 million in Q2/20 and H1/20 compared to $2.8 million and $3.3 million in Q2/19 and H1/19. Expenses for Q2/19 included interest and other charges associated with the final ruling against the Company in relation to our lawsuit filed in respect of the constitutional validity of the Mexican Tax Reform issued on October 31, 2013. The Tax Reform included a 0.5% precious metals royalty applicable to the Company.
Other income of $3.0 million and $4.0 million for Q2/20 and H1/20, respectively, increased by $2.5 million when compared to Q2/19 and H1/19, mainly due to the $1.9 million and $1.5 million of COVID-19 relief payments received from the US paycheck protection program and the Canadian Emergency Wage Subsidy program, respectively.
Income and mining tax recovery of $0.1 million and $1.1 million, respectively, for Q2/20 and H1/20, compared to $0.5 million and $0.4 million in the same periods of 2019. The changes in the income and mining tax recovery primarily reflect the fluctuations of the Argentine and Mexican pesos against the U.S. dollar, causing fluctuations to the Company’s deferred tax liabilities denominated in the respective foreign currency.
LIQUIDITY AND CAPITAL RESOURCES
Our cash balance at June 30, 2020 of $18.4 million decreased from $46.5 million at December 31, 2019, reflecting $8.5 million invested in mineral property interests and plant and equipment and $20.1 million cash used in operations, including a $5.9 million reduction in accounts payable and accrued liabilities.
Working capital at June 30, 2020 of $25.5 million decreased by $17.7 million from December 31, 2019, reflecting the decrease in cash and cash equivalents of $28.1 million, which was partly offset by $10.0 million of current debt as of December 31, 2019 reclassified to non-current liabilities due to the two-year extension of the principal repayments under the Amended and Restated Credit Agreement (“ARCA”) closed on June 25, 2020 and the $5.9 million reduction in
26
accounts payable and accrued liabilities mentioned above. For more details on ARCA, refer to Note 11 to the Consolidated Financial Statements, Debt.
Cash used in operations of $20.1 million in H1/20 compared to $9.2 million cash used in operations in H1/19, with the change reflecting $17.2 million lower cash gross profit mainly due to lower revenue and higher costs, from the sale of fewer ounces. The lower cash gross margin was partially offset by less exploration spending due to not having any flow-through spending commitments and an increase in other income as a result of COVID-19 relief funds received.
Cash used in investing activities of $7.9 million in H1/20 decreased significantly compared to $22.5 million in H1/19, with the reduction primarily due to $16.0 million less spending for mineral property interests and plant and equipment as the construction of the Gold Bar mine was completed in May 2019. This decrease was partially offset by lower dividends received from MSC in H1/20 ($0.3 million in 2020 compared to $2.0 million in 2019).
During H1/20, we spent $8.5 million on mineral property and plant and equipment, predominately for capital development at the Black Fox mine and infill drilling at the Gold Bar mine.
Financing activities used $1.0 million in cash in H1/20 compared to generating cash of $24.0 million in H1/19, the significant difference being the equity financings of $24.8 completed in H1/19.
Going concern
In the preparation of the interim financial statements, management is required to identify when events or conditions indicate that substantial doubt may exist about the Company’s ability to continue as a going concern. Substantial doubt about the Company’s ability to continue as a going concern would exist when relevant conditions and events, considered in aggregate, indicate that the Company will not be able to meet its obligations as they become due for a period of at least, but not limited to, 12 months from the balance sheet date. When the Company identifies conditions or events that raise potential for substantial doubt about its ability to continue as a going concern, the Company considers whether its plans that are intended to mitigate those relevant conditions or events will alleviate the potential substantial doubt.
In June 2020, the Company refinanced its senior secured term loan facility (for more refer to Note 11 to the Consolidated Financial Statements, Debt) and was in full compliance with financial covenants as at June 30, 2020. However, as a result of the significant expected resource reduction at the Gold Bar mine, resulting in an initial revised mine plan which yields less cash flow, coupled with operational challenges at Black Fox, and the disruptions to the Company’s operations caused by the COVID-19 pandemic, there is uncertainty about our ability to both generate sufficient operating cash flow to conduct further operation, exploration and development of our mineral properties and to remain in compliance with certain of our financial covenants over the next 12 months. Non-compliance with these covenants would result in a breach under the Company’s debt agreement.
In response to this uncertainty, we are evaluating options to raise additional equity and curtail expenditures. Our ability to continue as a going concern is dependent on the successful completion of one or both of these initiatives to ensure that we have sufficient liquidity in order to fund our operations and remain in compliance with our debt covenants. After considering these plans, management has concluded that there are no material uncertainties relating to events or conditions that may cast substantial doubt upon the our ability to continue as a going concern for a period of 12 months from the consolidated balance sheet date. The estimates used by management in reaching this conclusion are based on information available as at the date these financial statements were authorized for issuance, and include internally generated cash flow forecasts. Accordingly, actual results could differ from these estimates and resulting variances may be material to management’s assessment.
27
OPERATIONS REVIEW
U.S.A. Segment
The U.S.A. segment is comprised of the Gold Bar mine and certain exploration properties.
Gold Bar Mine
The following table sets out certain operating results for the Gold Bar mine for the three and six months ended June 30, 2020 and 2019. As the Gold Bar mine achieved commercial production on May 23, 2019, the comparatives for cash costs, cash cost per ounce, all-in sustaining costs and all-in sustaining costs per ounce for the three and six months ended June 30, 2019 include sales and costs from pre-commercial production during the first months of 2019:
Three months ended June 30, | Six months ended June 30, | ||||||||||
| 2020 | 2019 |
| 2020 |
| 2019 | |||||
Operating Results | (in thousands, unless otherwise indicated) | ||||||||||
Mined mineralized material (t) |
| 65 | 404 |
| 492 |
| 670 | ||||
Average grade (gpt Au) |
| 0.82 | 0.98 |
| 0.69 |
| 0.98 | ||||
Processed mineralized material (t) |
| 108 | 474 |
| 583 |
| 823 | ||||
Average grade (gpt Au) |
| 0.77 | 0.99 |
| 0.66 |
| 0.91 | ||||
Gold ounces: | |||||||||||
Produced |
| 6.1 | 7.9 |
| 15.2 |
| 10.0 | ||||
Sold |
| 6.2 | 8.7 |
| 15.3 |
| 9.4 | ||||
Silver ounces: | |||||||||||
Produced |
| 0.1 | 0.1 |
| 0.3 |
| 0.2 | ||||
Sold |
| 0.6 | — |
| 0.6 |
| — | ||||
Gold equivalent ounces: | |||||||||||
Produced |
| 6.1 | 7.9 |
| 15.2 |
| 10.0 | ||||
Sold |
| 6.2 | 8.7 |
| 15.3 |
| 9.4 | ||||
Revenue from gold and silver sales | $ | 10,770 | $ | 11,522 | $ | 25,088 | $ | 12,364 | |||
Cash costs(1) | $ | 11,039 | $ | 7,835 | $ | 28,071 | $ | 8,643 | |||
Cash cost per ounce ($/Au Eq. oz sold)(1) | $ | 1,772 | $ | 901 | $ | 1,840 | $ | 924 | |||
All‑in sustaining costs(1) | $ | 15,336 | $ | 9,466 | $ | 34,985 | $ | 10,821 | |||
AISC per ounce ($/Au Eq. oz sold)(1) | $ | 2,462 | $ | 1,088 | $ | 2,293 | $ | 1,157 | |||
Silver : gold ratio |
| 104 : 1 |
| 88 : 1 |
| 100 : 1 |
| 88 : 1 | |||
| (1) | As used here and elsewhere in this report, this is a Non-GAAP financial performance measure. Cash costs for the Company’s 100% owned operations equal Production costs applicable to sales. See “Non-GAAP Financial Performance Measures” beginning on page 36 for additional information. |
In Q2/20, Gold Bar produced 6,100 gold equivalent ounces. We decided to cease mining on April 1st due to concerns about the COVID-19 pandemic, and commenced the ramping up of production on May 4th with significant safety measures in place to combat spread of COVID-19. Throughout May and June, the mine only operated on day shift as work progressed for the updated resource model, new mine plan and to address engineering design deficiencies. Full operations with day and night shifts are scheduled to resume in September with ramp up of production and the anticipated implementation of mining cycle improvements.
Production costs applicable to sales were $11.0 million in Q2/20, compared to $7.8 million in Q2/19, reflecting a higher drawdown of gold ounces from our heap leach and in-circuit inventory balances. Production costs applicable to sales was $28.1 million in H1/20, compared to $8.6 million in H1/19, reflecting 63% more gold equivalent ounces sold in H1/20 and higher drawdown of gold ounces from our inventories as noted above.
Cash cost and AISC per gold equivalent ounce of $1,772 and $2,462 in Q2/20 were negatively impacted by lower tonnes mined and placed on the heap leach pad due to the COVID-19 temporary suspensions and slower ramp up, which resulted in fewer gold ounces produced and sold.
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Cash cost and AISC per gold equivalent ounce of $1,840 and $2,293 in H1/20 were also significantly impacted by $4.5 million of pre-strip costs and a $1.0 million write-down of the stockpile, heap leach and in-circuit inventory balances.
Gold Bar mine impairment
In Q1/20, we recorded an impairment charge of $83.8 million as a result of the preliminary revised mine plan iterations, which indicated a significant reduction in contained ounces relative to the 2018 reserve estimate. The impairment charge reduced the carrying value of the Gold Bar mine mineral property interests and plant and equipment.
Evaluation of the resource estimate continued in the second quarter of 2020. New drilling information is being incorporated into a revised resource model. Completion of a new resource estimate, mine plan and 2020 forecast are being finalized in the third quarter of 2020. A new reserve estimate is expected in the fourth quarter of 2020.
Exploration Activities – Nevada
In Q2/20 and H1/20, we spent $1.6 million and $2.0 million, respectively, on exploration activities in and around the Gold Bar mine, compared to $1.2 million and $1.7 million spent on same activities in Q2/19 and H1/19.
Exploration drilling was conducted in and around the Pick West pit in Q2/20 and has increased our confidence in the revised geologic model and demonstrated potential near mine exploration opportunities.
Drilling at the Gold Bar South satellite deposit continued in Q2/20 and we verified extended mineralization toward the south of the deposit. Permitting for development and production from Gold Bar South is also in progress and we expect to start mining this satellite deposit in the second half of 2021.
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Canada Segment
The Canada segment is comprised of the Black Fox Complex, which includes the Black Fox gold mine and the Grey Fox, Stock and Froome advanced-stage projects, the Stock mill, and other gold exploration properties located in Timmins, Ontario, Canada.
Black Fox Mine
The Black Fox mine currently has less than one year remaining in its expected mine life. We continue our near-mine exploration efforts with the goal of increasing resources, converting resources to reserves and extending the mine life.
We commenced the development of the access to the Froome underground deposit in late February 2020 and advanced 30% of the way to the orebody as of June 30, 2020. The plan is to reach the orebody in the second quarter of 2021, complete the necessary development and start production from Froome in the fourth quarter of 2021.
The following table sets out certain operating results for the Black Fox mine for the three and six months ended June 30, 2020 and 2019:
Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | |||||
Operating Results | (in thousands, unless otherwise indicated) | |||||||||||
Mined mineralized material (t) |
| 32 |
| 47 |
| 72 |
| 97 | ||||
Average grade (gpt Au) |
| 2.25 |
| 3.81 |
| 3.55 |
| 5.17 | ||||
Processed mineralized material (t) |
| 41 |
| 52 |
| 97 |
| 106 | ||||
Average grade (gpt Au) |
| 2.15 |
| 4.29 |
| 2.95 |
| 5.51 | ||||
Gold equivalent ounces: | ||||||||||||
Produced |
| 2.2 |
| 9.4 |
| 10.5 |
| 18.4 | ||||
Sold | 2.6 | 12.7 | 11.2 | 20.0 | ||||||||
Revenue from gold and silver sales | $ | 4,166 | $ | 16,049 | $ | 16,905 | $ | 24,992 | ||||
Cash costs | $ | 8,150 | $ | 10,639 | $ | 15,357 | $ | 16,475 | ||||
Cash cost per ounce ($/Au Eq. oz sold) | $ | 3,121 | $ | 837 | $ | 1,369 | $ | 826 | ||||
All‑in sustaining costs | $ | 8,700 | $ | 15,192 | $ | 20,219 | $ | 26,158 | ||||
AISC per ounce ($/Au Eq. oz sold) | $ | 3,332 | $ | 1,196 | $ | 1,803 | $ | 1,311 | ||||
Silver : gold ratio |
| 104 : 1 |
| 88: 1 |
| 100 : 1 |
| 82 : 1 | ||||
Production in Q2/20 and H1/20 was significantly impacted by the suspension of mining activities from March 26th to April 13th to protect our workers from COVID-19, coupled with the staged ramp-up back into production. A progressive return to work was completed by the end of April and for the remainder of the quarter, production was lower due to lower than expected grade and prioritization of development work to establish a greater number of mining areas in order to improve future operational flexibility. This resulted in 76% and 43% decreases in gold equivalent ounces produced in Q2/20 and H1/20, respectively, when compared to the same periods of 2019.
Revenue from gold and silver sales decreased in Q2/20 and H1/20 by $11.8 million and $8.1 million, respectively, compared to Q2/19 and H1/19, reflecting the decrease in gold equivalent ounces produced and sold, which was partially offset by higher average realized gold prices in 2020.
Production costs applicable to sales decreased by $2.5 million or 23% in Q2/20 compared to Q2/19, reflecting a 79% decrease in gold equivalent ounces sold, partly offset by a 273% increase in cash cost per gold equivalent ounce, the latter mainly due to the impact of 50% lower average grade of processed mineralized material in Q2/20 as compared to Q2/19. In addition, production costs applicable to sales in Q2/10 included $1.7 million of underground development that was not capitalized given the mine life is less than one year.
30
Production costs applicable to sales decreased by $1.1 million or 7% in H1/20 compared to H1/19, reflecting a 44% decrease in gold equivalent ounces sold, partly offset by a 66% increase in cash cost per gold equivalent ounce, the latter mainly due to the impact of 47% lower average grade of processed mineralized material in H1/20 compared to H1/19, along with the $1.7 million of underground development costs, discussed above, included in production costs applicable to sales in H1/20.
All-in sustaining costs decreased by $6.5 million or 43% and $6.0 million or 23% in Q2/20 and H1/20, respectively, compared to Q2/19 and H1/19, mainly due to significantly fewer gold equivalent ounces produced and sold as a result of the temporary suspension of mining activities and the progressive return back into production noted above.
Exploration Activities – Timmins
In 2020, we continued to focus on the primary goal of growing the resources and reserves adjacent to our existing operations in order to contribute to near-term gold production. We incurred $0.8 million and $3.2 million in Q2/20 and H1/20, respectively for exploration initiatives, compared to $4.1 million and $6.5 million of exploration expenditures in Q2/19 and H1/19. Drilling was suspended on March 26th as part of the suspension of mining operations due to the COVID-19 pandemic and resumed on April 13th. We also had flow-through exploration commitments to satisfy in 2019, which resulted in a larger drill program for 2019, including H1/19.
Black Fox Mine
A total of 44,800 feet (13,650 meters) of underground diamond drilling was completed during the second quarter of 2020, focusing on identifying and building additional underground resources adjacent to the Black Fox ore body.
Drilling during the quarter included the delineation and expansion of the mine’s western mineralization, with 70% devoted to closely spaced definition drilling of gold mineralization within or adjacent to upcoming mining blocks. Exploration is continuing on the upper west flank of the mine, which delivered high-grade results that are now being further defined.
Grey Fox and Stock exploration projects
No drilling activities were conducted during Q2/20 as our technical team focused their efforts and expenditures toward advancing the economic potential of the Black Fox deposit. Environmental field studies have been initiated to assist with the permitting application process. Grey Fox’s scoping study is expected to be issued by end of year.
A three-phase program of surface drilling has been designed for advancing our Stock West discovery target located 1,000 feet (300 meters) west from the historic Stock mine workings.
Froome
Excavation of the 800-metre access ramp, into the base of the Froome Deposit, is now proceeding as scheduled. A total of 1,765 feet (538 metres) of advance was completed by the end of Q2/20. We expect to achieve commercial production from the Froome Deposit in the fourth quarter of 2021.
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Mexico Segment
The Mexico segment includes the El Gallo Project (formerly “El Gallo 1” or “El Gallo Mine”) and the advanced-stage Fenix Project, located in Sinaloa.
El Gallo Project
Current activities at the El Gallo Project are limited to residual leaching as part of closure and reclamation plans.
The economics of residual leaching are measured by incremental revenues exceeding incremental costs. Residual leaching is expected to continue as long as incremental revenues exceed incremental costs. Incremental residual leaching costs for the three and six months ended June 30, 2020 were $2.4 million or $1,262 per gold equivalent ounce sold and $5.2 million or $1,124 per gold equivalent ounce sold, respectively, compared to $2.8 million or $412 and $5.6 million or $506 per gold equivalent ounce sold in the same periods of 2019.
The following table summarizes certain operating results at the El Gallo Project for the three and six months ended June 30, 2020 and 2019:
Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | |||||
Operating Results | (in thousands, unless otherwise indicated) | |||||||||||
Gold ounces: | ||||||||||||
Produced |
| 1.9 |
| 5.3 |
| 4.6 |
| 10.8 | ||||
Sold |
| 1.9 |
| 6.7 |
| 4.6 |
| 11.2 | ||||
Silver ounces: | ||||||||||||
Produced |
| 0.5 |
| 1.2 |
| 1.2 |
| 2.6 | ||||
Sold |
| 1.9 |
| 0.2 |
| 1.9 |
| 0.2 | ||||
Gold equivalent ounces: | ||||||||||||
Produced |
| 1.9 |
| 5.4 |
| 4.6 |
| 10.8 | ||||
Sold |
| 1.9 |
| 6.7 |
| 4.6 |
| 11.2 | ||||
Revenue from gold and silver sales | $ | 3,355 | $ | 8,812 | $ | 7,698 | $ | 14,610 | ||||
Silver : gold ratio |
| 104 : 1 |
| 88 : 1 |
| 100 : 1 | 82 : 1 | |||||
Production and revenue decreased in Q2/20 and H1/20, compared to Q2/19 and H1/19, reflecting decreasing recoveries, as expected, as the El Gallo Project has been in residual leaching since mid-2018.
The decrease in revenue, due to decrease in production, was partially offset by a significantly higher average realized gold price during Q2/20 and H1/20, compared to the same periods of 2019.
Advanced-Stage Properties – Fenix Project
Strengthening gold and silver prices have renewed our focus on advancing the Fenix Project and the Feasibility Study is expected to be published in the fourth quarter of 2020.
Mine permitting continued to progress during 2020, building upon the environmental permit approval for in-pit tailings storage in the Samaniego pit and the additional approval for the process plant for phase 1 received in September 2019.
We incurred $0.5 million and $1.2 million in Q2/20 and H1/20, respectively, on activities required to advance the Fenix Project as well as property holding payments for land titles. This compares to $0.8 million and $1.6 million spent during Q2/19 and H1/19. The Fenix Project PEA is available for review on our website and SEDAR (www.sedar.com).
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MSC Segment, Argentina
The MSC segment is comprised of the San José mine, located in Argentina.
MSC – Operating Results
The following table sets out certain operating results for the San José mine for the three and six months ended June 30, 2020 and 2019 on a 100% basis:
Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | |||||
Operating Results | (in thousands, except otherwise indicated) | |||||||||||
San José Mine—100% basis | ||||||||||||
Mined mineralized material (t) |
| 73 |
| 131 |
| 179 |
| 259 | ||||
Average grade mined (gpt) | ||||||||||||
Gold |
| 5.3 |
| 6.5 |
| 6.6 |
| 6.8 | ||||
Silver |
| 370 |
| 428 |
| 449 |
| 464 | ||||
Processed mineralized material (t) |
| 77 |
| 142 |
| 162 |
| 252 | ||||
Average grade processed (gpt) | ||||||||||||
Gold |
| 5.0 |
| 6.9 |
| 6.4 |
| 6.9 | ||||
Silver |
| 329 |
| 436 |
| 401 |
| 446 | ||||
Average recovery (%): | ||||||||||||
Gold |
| 89.8 |
| 88.0 |
| 89.2 |
| 88.1 | ||||
Silver |
| 89.2 |
| 87.3 |
| 88.8 |
| 87.5 | ||||
Gold ounces: | ||||||||||||
Produced |
| 11.3 |
| 27.6 |
| 29.6 |
| 49.1 | ||||
Sold |
| 15.1 |
| 28.2 |
| 29.7 |
| 48.9 | ||||
Silver ounces: | ||||||||||||
Produced |
| 732 |
| 1,731 |
| 1,858 |
| 3,162 | ||||
Sold |
| 904 |
| 1,785 |
| 1,868 |
| 3,189 | ||||
Gold equivalent ounces: | ||||||||||||
Produced |
| 18.3 |
| 47.3 |
| 48.6 |
| 87.9 | ||||
Sold |
| 23.8 |
| 48.5 |
| 48.6 |
| 87.9 | ||||
Revenue from gold and silver sales | $ | 47,081 | $ | 65,997 | $ | 84,471 | $ | 114,818 | ||||
Average realized price: | ||||||||||||
Gold ($/Au oz) | $ | 1,893 | $ | 1,392 | $ | 1,796 | $ | 1,361 | ||||
Silver ($/Ag oz) | $ | 20.55 | $ | 15.01 | $ | 16.67 | $ | 15.14 | ||||
Cash costs | $ | 30,402 | $ | 46,514 | $ | 58,718 | $ | 76,047 | ||||
All‑in sustaining costs | $ | 35,046 | $ | 58,477 | $ | 74,657 | $ | 102,433 | ||||
Cash cost per ounce ($/Au Eq. oz sold) | $ | 1,280 | $ | 960 | $ | 1,207 | $ | 865 | ||||
AISC per ounce ($/Au Eq. oz sold) | $ | 1,476 | $ | 1,207 | $ | 1,535 | $ | 1,165 | ||||
Silver : gold ratio | 104 : 1 |
| 88 : 1 |
| 98 : 1 |
| 82 : 1 | |||||
The analysis below compares the operating and financial results of MSC on a 100% basis.
Q2/20 compared to Q2/19
Gold and silver production decreased by 59% and 58%, respectively, in Q2/20 compared to Q2/19 as a result of a 45% decrease in processed mineralized material, coupled with 27% and 24% decreases in the average grades of gold and silver, respectively, of the mineralized material processed in Q2/20. The decrease in processed mineralized material reflected the temporary shutdown due to the pandemic and the fact that the San Jose Mine operated below capacity for the remainder of Q2/20 due to the COVID-19 related government imposed travel restrictions that pose significant challenges in mobilizing personnel to the site. As a result of labor challenges, mining activities focused on more mechanized, and less labor intensive, extractive methods resulting in mining from certain lower grade stopes and higher dilution.
Gold and silver production decreased by 40% and 41%, respectively, in H1/20 compared to H1/19 due to a 35% decrease in processed mineralized material and 8% and 10% decreases in the average grades of gold and silver of the mineralized material processed in H1/20, mainly due to the operational and labor challenges experienced in Q2/20.
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Revenue from gold and silver sales decreased by 29% and 26% in Q2/20 and H1/20 respectively, compared to Q2/19 and H1/19, reflecting fewer gold equivalent ounces sold (51% and 45% fewer gold equivalent ounces sold, respectively), due to lower production as noted above, partly offset by higher average realized price of gold (36% and 32% higher in Q2/20 and H1/20, respectively, compared to the same periods of 2019) and silver (37% and 10% higher in Q2/20 and H1/20, respectively, compared to 2019).
Cash costs in Q2/20 and H1/20 decreased by $16.1 million, or 35%, and $17.3 million, or 23%, respectively, compared to Q2/19 and H1/19, reflecting lower tonnes of mineralized material processed and fewer ounces produced and sold. All-in sustaining costs for Q1/20 and H1/20 decreased by $23.5 million or 40% and $27.7 million or 27%, compared to the same periods of 2019, mainly due to lower cash costs, coupled with lower site exploration expenses, capitalized underground mine development and sustaining capital investment in plant and equipment.
Cash cost and All-in sustaining cost per gold equivalent ounce sold were higher for Q2/20 and H1/20 compared to the same periods in 2019, as lower aggregate cash costs and AISC were spread over 51% and 45% fewer gold equivalent ounces sold, respectively, as noted above.
Investment in MSC
Our 49% attributable share of operations from our investment in MSC was a loss of $1.0 million and $3.7 million in Q2/20 and H1/20, compared to a loss of $4.1 million and $6.4 million in Q2/19 and H1/19, reflecting significantly higher gross profit of $9.0 million and $10.8 million in Q2/20 and H1/20, respectively, compared to $2.9 million and $6.8 million in Q2/19 and H1/19; and $1.9 million current and deferred income and mining tax recovery for Q2/20 and H1/20 compared to $3.0 million and $3.8 million current and deferred income and mining tax expense in 2019. Both higher gross profit and current and deferred income and mining tax recovery in 2020 were partially offset by $5.9 million and $7.2 million of other expenses incurred during the shutdown of operations in Q2/20 and H1/20, respectively.
Higher gross profit in 2020 was mainly due to higher average realized gold and silver prices, despite fewer gold equivalent ounces sold and $5.3 million operating costs due to the COVID-19 pandemic (labor costs for idle employees, additional transportation and accommodation costs to maintain social distancing and additional personal protective equipment).
In Q2/20, on a 100% basis, MSC generated a cash gross profit of $16.7 million and incurred $4.0 million of development and other capital expenditures, $2.2 million of exploration spending and $8.9 million of other expenditures, with the latter primarily including $5.9 million related to costs of suspending activities in connection with the COVID-19 pandemic and foreign exchange losses.
In H1/20, on a 100% basis, MSC generated a cash gross profit of $25.8 million and incurred $12.6 million of development and other capital expenditures, $5.0 million of exploration spending and $11.1 million of other expenditures, with the latter primarily including $7.2 million related to costs of suspending activities in connection with the COVID-19 pandemic and foreign exchange losses.
MSC Dividend Distribution (49%)
We received $0.3 million in dividends from MSC in Q2/20 and H1/20, compared to $nil and $2.0 million in dividends received during the same periods in 2019. For more details on our Investment in MSC, refer to Note 10 to the Consolidated Financial Statements, Investment in Minera Santa Cruz S.A. (“MSC”) — San José mine.
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Los Azules Segment, Argentina
Los Azules project is a copper exploration project located in San Juan, Argentina.
Los Azules Project
During Q2/20, the environmental baseline monitoring work continued as planned. We expect to continue environmental studies the rest of the year to gather further information necessary for the Environmental Impact Assessment for the next development phase.
The preliminary economic assessment for the Los Azules Project, completed and announced in September 2017, is available on our website at www.mcewenmining.com.
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NON-GAAP FINANCIAL PERFORMANCE MEASURES
We have included in this report certain non-GAAP financial performance measures as detailed below. In the gold mining industry, these are common performance measures but do not have any standardized meaning and are considered non-GAAP measures. We use these measures in evaluating our business and believe that, in addition to conventional measures prepared in accordance with GAAP, certain investors use such non-GAAP measures to evaluate our performance and ability to generate cash flow. Accordingly, they are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. There are limitations associated with the use of such non-GAAP measures. We compensate for these limitations by relying primarily on our U.S. GAAP results and using the non-GAAP measures supplementally.
The non-GAAP measures are presented for our wholly owned mines and the San José mine. The GAAP information used for the reconciliation to the non-GAAP measures for the San José mine may be found in Note 10, Investment in Minera Santa Cruz S.A. (“MSC”) – San José Mine. We do not control the interest in or operations of MSC and the presentations of assets and liabilities and revenues and expenses of MSC do not represent our legal claim to such items. The amount of cash we receive is based upon specific provisions of the Option and Joint Venture Agreement (“OJVA”) and varies depending on factors including the profitability of the operations.
The presentation of these measures, including those for MSC, has limitations as an analytical tool. Some of these limitations include:
| ● | The amounts shown on MSC’s individual line items do not represent our legal claim to its assets and liabilities, or the revenues and expenses; and |
| ● | Other companies in our industry may calculate their cash gross profit, cash costs, cash cost per ounce, all in sustaining costs, all in sustaining cost per ounce, average realized price per ounce, and liquid assets differently than we do, limiting the usefulness as a comparative measure. |
Cash Gross Profit
Cash gross profit is a non-GAAP financial measure and does not have any standardized meaning. We use cash gross profit to evaluate our operating performance and ability to generate cash flow; we disclose cash gross profit as we believe this measure provides valuable assistance to investors and analysts in evaluating our ability to finance our ongoing business and capital activities. The most directly comparable measure prepared in accordance with GAAP is gross profit or loss. Cash gross profit is calculated by adding back the depreciation and depletion expense to gross profit or loss.
The following tables present a reconciliation of cash gross profit to the most directly comparable GAAP measure, gross profit or loss:
Three months ended June 30, 2020 | Six months ended June 30, 2020 | |||||||||||||||||||||||
Gold Bar | Black Fox | El Gallo | Total (100% owned) | Gold Bar | Black Fox | El Gallo | Total (100% owned) | |||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Gross (loss) profit | $ | (2,834) | $ | (6,168) | $ | 127 | $ | (8,875) | $ | (9,411) | $ | (3,384) | $ | 235 | $ | (12,560) | ||||||||
Add: Depreciation and depletion | 2,565 | 2,184 | 63 | 4,812 | 6,428 | 4,932 | 150 | 11,510 | ||||||||||||||||
Cash gross (loss) profit | $ | (269) | $ | (3,984) | $ | 190 | $ | (4,063) | $ | (2,983) | $ | 1,548 | $ | 385 | $ | (1,050) | ||||||||
Three months ended June 30, 2019 | Six months ended June 30, 2019 | |||||||||||||||||||||||
Gold Bar | Black Fox | El Gallo | Total (100% owned) | Gold Bar | Black Fox | El Gallo | Total (100% owned) | |||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Gross profit (loss) | $ | 1,119 | $ | 1,189 | $ | 2,369 | $ | 4,677 | $ | 1,001 | $ | 1,586 | $ | 3,518 | $ | 6,105 | ||||||||
Add: Depreciation and depletion | 2,568 | 4,221 | 218 | 7,007 | 2,720 | 6,931 | 362 | 10,013 | ||||||||||||||||
Cash gross profit | $ | 3,687 | $ | 5,410 | $ | 2,587 | $ | 11,684 | $ | 3,721 | $ | 8,517 | $ | 3,880 | $ | 16,118 | ||||||||
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Three months ended June 30, | Six months ended June 30, | |||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
San José mine cash gross profit (100% basis) | (in thousands) | |||||||||||
Gross profit | $ | 9,029 | $ | 2,938 | $ | 10,776 | $ | 6,846 | ||||
Add: Depreciation and depletion | 7,650 | 16,545 | 14,977 | 31,925 | ||||||||
Cash gross profit | $ | 16,679 | $ | 19,483 | $ | 25,753 | $ | 38,771 | ||||
Cash Costs and All-In Sustaining Costs
The terms cash costs, cash cost per ounce, all-in sustaining costs, and all-in sustaining cost per ounce used in this report are non-GAAP financial measures. We report these measures to provide additional information regarding operational efficiencies on an individual mine basis, and believe these measures provide investors and analysts with useful information about our underlying costs of operations.
Cash costs consist of mining, processing, on-site general and administrative expenses, community and permitting costs related to current operations, royalty costs, refining and treatment charges (for both doré and concentrate products), sales costs, export taxes and operational stripping costs, but exclude depreciation and amortization, which are non-cash items. The sum of these costs is divided by the corresponding gold equivalent ounces sold to determine a per ounce amount.
All-in sustaining costs consist of cash costs (as described above), plus accretion of retirement obligations and amortization of the asset retirement costs related to operating sites, environmental rehabilitation costs for mines with no reserves, sustaining exploration and development costs, sustaining capital expenditures and sustaining lease payments. Our all-in sustaining costs exclude the allocation of corporate general and administrative costs. Following is additional information regarding our all-in sustaining costs:
| ● | Sustaining operating costs represent expenditures incurred at current operations that are considered necessary to maintain current annual production at the mine site and include mine development costs and ongoing replacement of mine equipment and other capital facilities. Sustaining capital costs do not include costs of expanding the project that would result in improved productivity of the existing asset, increased existing capacity or extended useful life. |
| ● | Sustaining exploration and development costs include expenditures incurred to sustain current operations and to replace reserves and/or resources extracted as part of the ongoing production. Exploration activity performed near-mine (brownfield) or new exploration projects (greenfield) are classified as non-sustaining. |
The sum of all-in sustaining costs is divided by the corresponding gold equivalent ounces sold to determine a per ounce amount.
Costs excluded from cash costs and all-in sustaining costs, in addition to depreciation and depletion, are income and mining tax expense, all corporate financing charges, costs related to business combinations, asset acquisitions and asset disposal, impairment charges and any items that are deducted for the purpose of normalizing items.
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The following tables reconcile these non-GAAP measures to the most directly comparable GAAP measure, production costs applicable to sales; the El Gallo project results are excluded from this reconciliation as the economics of residual leaching operations are measured by incremental revenue exceeding incremental costs. Incremental residual leaching costs for the three and six months ended June 30, 2020 were $2.4 million or $1,262 per gold equivalent ounce sold and $5.2 million or $1,124 per gold equivalent ounce sold, respectively, compared to $2.8 million or $412 and $5.6 million or $506 per gold equivalent ounce sold in the same periods of 2019.
Three months ended June 30, 2020 | Six months ended June 30, 2020 | ||||||||||||||||||||
Gold Bar | Black Fox | Total | Gold Bar | Black Fox | Total | ||||||||||||||||
(in thousands, except per ounce) | (in thousands, except per ounce) | ||||||||||||||||||||
Production costs applicable to sales - Cash costs (100% owned) |
| $ | 11,039 | $ | 8,150 | $ | 19,189 | $ | 28,071 | $ | 15,357 | $ | 43,428 | ||||||||
Mine site reclamation, accretion and amortization | 156 | 99 | 255 | 507 | 194 | 701 | |||||||||||||||
In‑mine exploration | 841 | 191 | 1,032 | 841 | 617 | 1,458 | |||||||||||||||
Capitalized underground mine development (sustaining) | — | — | — | — | 3,646 | 3,646 | |||||||||||||||
Capital expenditures on plant and equipment (sustaining) | 2,798 | 211 | 3,009 | 4,588 | 261 | 4,849 | |||||||||||||||
Sustaining leases | 502 | 49 | 551 | 978 | 144 | 1,122 | |||||||||||||||
All‑in sustaining costs | $ | 15,336 | $ | 8,700 | $ | 24,036 | $ | 34,985 | $ | 20,219 | $ | 55,204 | |||||||||
Ounces sold, including stream (Au Eq. oz)(1) | 6.2 | 2.6 | 8.8 | 15.3 | 11.2 | 26.5 | |||||||||||||||
Cash cost per ounce ($/Au Eq. oz sold) | $ | 1,772 | $ | 3,121 | $ | 2,170 | $ | 1,840 | $ | 1,369 | $ | 1,641 | |||||||||
AISC per ounce ($/Au Eq. oz sold) | $ | 2,462 | $ | 3,332 | $ | 2,719 | $ | 2,293 | $ | 1,803 | $ | 2,086 | |||||||||
| (1) | Total gold equivalent ounces sold for Q2/20 and H1/20 is 10,800 and 31,100, respectively, and includes gold equivalent ounces sold from the operating mines of 8,800 and 26,500, as disclosed above, and 1,900 and 4,600 gold equivalent ounces sold from the El Gallo Project for Q2/20 and H1/20, respectively. |
Three months ended June 30, 2019 | Six months ended June 30, 2019 | |||||||||||||||||
Gold Bar | Black Fox | Total | Gold Bar | Black Fox | Total | |||||||||||||
(in thousands, except per ounce) | (in thousands, except per ounce) | |||||||||||||||||
Production costs applicable to sales - Cash costs (100% owned) | $ | 7,835 | $ | 10,639 | $ | 18,474 | $ | 8,643 | $ | 16,475 | $ | 25,118 | ||||||
Mine site reclamation, accretion and amortization | 283 | 163 | 446 | 374 | 320 | 694 | ||||||||||||
In‑mine exploration | — | 900 | 900 | — | 2,475 | 2,475 | ||||||||||||
Capitalized underground mine development (sustaining) | — | 2,333 | 2,333 | — | 5,575 | 5,575 | ||||||||||||
Capital expenditures on plant and equipment (sustaining) | 870 | 1,038 | 1,908 | 870 | 1,140 | 2,010 | ||||||||||||
Sustaining leases | 478 | 119 | 597 | 934 | 173 | 1,107 | ||||||||||||
All‑in sustaining costs | $ | 9,466 | $ | 15,192 | $ | 24,658 | $ | 10,821 | $ | 26,158 | $ | 36,979 | ||||||
Ounces sold, including stream (Au Eq. oz)(1) | 8.7 | 12.7 | 21.4 | 9.4 | 20.0 | 29.3 | ||||||||||||
Cash cost per ounce ($/Au Eq. oz sold) | $ | 901 | $ | 837 | $ | 863 | $ | 924 | $ | 826 | $ | 857 | ||||||
AISC per ounce ($/Au Eq. oz sold) | $ | 1,088 | $ | 1,196 | $ | 1,152 | $ | 1,157 | $ | 1,311 | $ | 1,262 | ||||||
| (1) | Total gold equivalent ounces sold for Q2/19 and H1/19 is 28,100 and 40,500, respectively, and includes gold equivalent ounces sold from the operating mines of 21,400 and 29,300, as disclosed above, and 6,700 and 11,200 gold equivalent ounces sold from the El Gallo Project for Q2/19 and H1/19, respectively. |
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Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | |||||
San José mine cash costs (100% basis) | (in thousands, except per ounce) | |||||||||||
Production costs applicable to sales - Cash costs | $ | 30,402 | $ | 46,514 | $ | 58,718 | $ | 76,047 | ||||
Mine site reclamation, accretion and amortization | 111 | 282 | 246 | 559 | ||||||||
Site exploration expenses |
| 917 | 2,553 | 3,783 | 5,891 | |||||||
Capitalized underground mine development (sustaining) |
| 2,674 | 6,376 | 9,119 | 11,911 | |||||||
Less: Depreciation | (344) | (571) | (687) | (1,060) | ||||||||
Capital expenditures (sustaining) |
| 1,287 | 3,323 | 3,478 | 9,086 | |||||||
All‑in sustaining costs | $ | 35,047 | $ | 58,477 | $ | 74,657 | $ | 102,434 | ||||
Ounces sold (Au Eq. oz) | 23.8 | 48.5 | 48.6 | 87.9 | ||||||||
Cash cost per ounce ($/Au Eq. oz sold) | $ | 1,280 | $ | 960 | $ | 1,207 | $ | 865 | ||||
AISC per ounce ($/Au Eq. oz sold) | $ | 1,476 | $ | 1,207 | $ | 1,535 | $ | 1,165 | ||||
Average realized price
The term average realized price per ounce used in this report is also a non-GAAP financial measure. We prepare this measure to evaluate our performance against market (London P.M. Fix). Average realized price is calculated as gross sales of gold and silver, less streaming revenue, divided by the number of net ounces sold in the period, less ounces sold under the streaming agreement.
The following table reconciles the average realized prices to the most directly comparable U.S. GAAP measure, revenue from gold and silver sales. Ounces of gold and silver sold for the San José mine are provided to us by MSC.
Three months ended June 30, | Six months ended June 30, | |||||||||||
2020 |
| 2019 |
| 2020 |
| 2019 | ||||||
Average realized price - 100% owned | (in thousands, except per ounce) | |||||||||||
Revenue from gold and silver sales | $ | 18,291 | $ | 36,383 | $ | 49,691 | $ | 51,966 | ||||
Less: revenue from gold sales, stream | 179 | 499 | 681 | 851 | ||||||||
Revenue from gold and silver sales, excluding stream | $ | 18,112 | $ | 35,884 | $ | 49,010 | $ | 51,115 | ||||
Gold equivalent ounces sold | 10.8 | 28.1 | 31.1 | 40.5 | ||||||||
Less: gold ounces sold, stream | 0.3 | 0.9 | 1.2 | 1.6 | ||||||||
Gold equivalent ounces sold, excluding stream | 10.5 | 27.2 | 29.9 | 38.9 | ||||||||
Average realized price per Au Eq. oz sold, excluding stream | $ | 1,733 | $ | 1,318 | $ | 1,641 | $ | 1,313 | ||||
Three months ended June 30, | Six months ended June 30, | |||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 | |||||
Average realized price - San José mine (100% basis) | (in thousands, except per ounce) | |||||||||||
Gold sales | $ | 28,499 | $ | 39,215 | $ | 53,337 | $ | 66,525 | ||||
Silver sales | 18,582 |
| 26,782 | 31,134 |
| 48,293 | ||||||
Gold and silver sales | $ | 47,081 | $ | 65,997 | $ | 84,471 | $ | 114,818 | ||||
Gold ounces sold |
| 15.1 |
| 28.2 | 29.7 |
| 48.9 | |||||
Silver ounces sold |
| 904.4 |
| 1,784.8 | 1,867.6 |
| 3,189.5 | |||||
Gold equivalent ounces sold |
| 23.8 |
| 48.5 | 48.6 |
| 87.9 | |||||
Average realized price per gold ounce sold | $ | 1,893 | $ | 1,392 | $ | 1,796 | $ | 1,361 | ||||
Average realized price per silver ounce sold | $ | 20.55 | $ | 15.01 | $ | 16.67 | $ | 15.14 | ||||
Average realized price per gold equivalent ounce sold | $ | 1,982 | $ | 1,362 | $ | 1,737 | $ | 1,306 | ||||
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Liquid assets
The term liquid assets is also a non-GAAP financial measure. We report this measure to better understand our liquidity in each reporting period.
Liquid assets is calculated as the sum of the Balance Sheet line items of cash and cash equivalents, restricted cash and investments, plus ounces of doré held in precious metals inventories valued at the London PM Fix spot price at the corresponding period. The following table summarizes the calculation of liquid assets as at June 30, 2020 and 2019:
June 30, | ||||||
| 2020 |
| 2019 | |||
(in thousands) | ||||||
Cash and cash equivalents | $ | 18,410 | $ | 9,325 | ||
Restricted cash | - | 13,112 | ||||
Investments | - | 5,147 | ||||
Trade receivables | 882 | - | ||||
Receivables from marketable securities sales | 960 | 1,294 | ||||
Precious Metals valued at market value (1)(2) | 592 | 2,891 | ||||
Total liquid assets | $ | 20,844 | $ | 31,769 | ||
| (1) | As at June 30, 2020 and 2019 we held 335 and 2,052 gold equivalent ounces in inventory, respectively, net of our streaming agreement, valued at $1,768 and $1,409 per ounce, respectively. |
| (2) | Precious metals valued at cost, inclusive of ounces to be delivered to Sandstorm, equals $739 and $2,404, respectively. |
CRITICAL ACCOUNTING POLICIES
Critical accounting policies and estimates used to prepare our financial statements are discussed with our Audit Committee as they are implemented and on an annual basis.
The were no significant changes in our Critical Accounting Policies since December 31, 2019.
FORWARD-LOOKING STATEMENTS
This report contains or incorporates by reference “forward-looking statements”, as that term is used in federal securities laws, about our financial condition, results of operations and business. These statements include, among others:
| ● | statements about our anticipated exploration results, costs and feasibility of production, production estimates, receipt of permits or other regulatory or government approvals and plans for the development of our properties; |
| ● | statements regarding the potential impacts of the COVID-19 pandemic, government responses to the continuing pandemic, and our response to those issues; |
| ● | statements concerning the benefits or outcomes that we expect will result from our business activities and certain transactions that we contemplate or have completed, such as receipt of proceeds, increased revenues, decreased expenses and avoided expenses and expenditures; and |
| ● | statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. |
These statements may be made expressly in this document or may be incorporated by reference to other documents that we will file with the SEC. Many of these statements can be found by looking for words such as “believes”, “expects”, “anticipates”, “estimates” or similar expressions used in this report or incorporated by reference in this report.
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Forward-looking statements and information are based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties, risks and contingencies, and there can be no assurance that such statements and information will prove to be accurate. Therefore, actual results and future events could differ materially from those anticipated in such statements and information.
We caution you not to put undue reliance on these forward-looking statements, which speak only as of the date of this report. Further, the information contained in this document or incorporated herein by reference is a statement of our present intention and is based on present facts and assumptions, and may change at any time and without notice, based on changes in such facts or assumptions. Readers should not place undue reliance on forward-looking statements.
Risk Factors Impacting Forward-Looking Statements
Important factors that could prevent us from achieving our stated goals and objectives include, but are not limited to, those set forth in the “Risk Factors” section in our report on Form 10-K and other reports filed with the SEC, and the following:
| ● | our ability to raise funds required for the execution of our business strategy; |
| ● | the effects of pandemics such as COVID-19 on health in our operating jurisdictions and the world-wide, national, state and local responses to such pandemics; |
| ● | our ability to secure permits or other regulatory and government approvals needed to operate, develop or explore our mineral properties and projects; |
| ● | decisions of foreign countries, banks and courts within those countries; |
| ● | unexpected changes in business, economic, and political conditions; |
| ● | operating results of MSC; |
| ● | fluctuations in interest rates, inflation rates, currency exchange rates, or commodity prices; |
| ● | timing and amount of mine production; |
| ● | our ability to retain and attract key personnel; |
| ● | technological changes in the mining industry; |
| ● | changes in operating, exploration or overhead costs; |
| ● | access and availability of materials, equipment, supplies, labor and supervision, power and water; |
| ● | results of current and future exploration activities; |
| ● | results of pending and future feasibility studies or the expansion or commencement of mining operations without feasibility studies having been completed; |
| ● | changes in our business strategy; |
| ● | interpretation of drill hole results and the geology, grade and continuity of mineralization; |
| ● | the uncertainty of reserve estimates and timing of development expenditures; |
| ● | litigation or regulatory investigations and procedures affecting us; |
| ● | changes in federal, state, provincial and local laws and regulations; |
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| ● | local and community impacts and issues including criminal activity and violent crimes; |
| ● | accidents, public health issues, and labor disputes; |
| ● | our continued listing on a public exchange; |
| ● | uncertainty relating to title to mineral properties; and |
| ● | changes in relationships with the local communities in the areas in which we operate. |
We undertake no responsibility or obligation to update publicly these forward-looking statements, except as required by law and may update these statements in the future in written or oral statements. Investors should take note of any future statements made by or on our behalf.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risks includes, but is not limited to, the following risks: changes in foreign currency exchange rates, equity price risks, commodity price fluctuations, credit risk, interest rate risk and inflationary risk. We do not use derivative financial instruments as part of an overall strategy to manage market risk.
Further, our participation in the joint venture with Hochschild for the 49% interest held at MSC creates additional risks because, among other things, we do not exercise decision-making power over the day-to-day activities at MSC; however, implications from our partner’s decisions may result in us having to provide additional funding to MSC or in a decrease in our percentage of ownership.
Foreign Currency Risk
In general, the devaluation of non-U.S. dollar currencies with respect to the U.S. dollar has a positive effect on our costs and liabilities which are incurred outside the U.S. while it has a negative effect on our assets denominated in non-U.S. dollar currency. Although we transact most of our business in U.S. dollars, some expenses, labor, operating supplies and property and equipment are denominated in Canadian dollars, Mexican pesos or Argentine pesos.
Since 2008, the Argentine peso has been steadily devaluing against the U.S. dollar by 10% to 40% on an annual basis. During the six months ended June 30, 2020, the Argentine peso devalued 15% compared to a devaluation of 12% in the same period of 2019.
During the six months ended June 30, 2020, the Mexican peso devalued 18%, compared to a 2% appreciation in the same period of 2019.
The Canadian dollar experienced a 5% depreciation against the U.S. dollar for the six months ended June 30, 2020, compared to a 4% appreciation in the comparable period of 2019.
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 material market risk-sensitive instruments to manage our exposure to foreign currency exchange rates but may do so in the future. We hold portions of our cash reserves in non-U.S. dollar currencies.
Based on our Canadian cash balance of $0.9 million (C$1.3 million) at June 30, 2020, a 1% change in the Canadian dollar would result in a gain/loss of less than $0.1 million in the Consolidated Statements of Operations. We also hold negligible portions of our cash reserves in Mexican and Argentina pesos, with the effect that a 1% change in these respective currencies would result in gains/losses immaterial for disclosure.
Further, we are also subject to foreign currency risk on the fluctuation of the Mexican peso on our VAT receivable balance. As of June 30, 2020, our VAT receivable balance was Mexican peso 18,203,832, equivalent to approximately $0.8 million, for which a 1% change in the Mexican peso would have resulted in a gain/loss of less than $0.1 million in the Consolidated Statements of Operations.
Equity Price Risk
We have in the past sought and will likely in the future seek to acquire additional funding by sale of common stock or other equity securities. Movements in the price of our common stock have been volatile in the past and may also be volatile in the future. As a result, there is a risk that we may not be able to sell equity securities at an acceptable price to meet future funding requirements.
We have invested and may continue to invest in shares of common stock of other entities in the mining sector. Some of our investments may be highly volatile and lack liquidity caused by lower trading volumes. As a result, we are inherently exposed to fluctuations in the fair value of our investments, which may result in gains or losses upon their valuation.
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Commodity Price Risk
We produce and sell gold and silver, therefore changes in the market price of gold and silver have and could in the future significantly affect our results of operations and cash flows. Change in the price of gold and silver could materially affect our revenues. Based on our revenues from gold and silver sales of $49.7 million for the six months ended June 30, 2020, a 10% change in the price of gold and silver would have had an impact of approximately $5.0 million on our revenues. Changes in the price of gold and silver can also affect the provisionally-priced sales that we make under agreements with refiners and other purchasers of our products. At June 30, 2020, we had no gold or silver sales subject to final pricing.
We have in the past and may in the future hold a portion of our treasury in gold and silver bullion, where the value is recorded at the lower of cost or market. Gold and silver prices may affect the value of any bullion that we hold in treasury.
We do not hedge any of our sales and are therefore subject to all changes in commodity prices.
Credit Risk
We may be exposed to credit loss through our precious metals and doré sales agreements with Canadian financial institutions and refineries if these customers are unable to make payment in accordance with the terms of the agreements. However, based on the history and financial condition of our counterparties, we do not anticipate that any of the financial institutions or refineries will default on their obligation. As of June 30, 2020, we do not believe we have any significant credit exposure associated with precious metals and our doré sales agreements.
In Mexico, we are exposed to credit loss regarding our VAT receivable if the Mexican tax authorities are unable or unwilling to make payments in accordance with our monthly filings. Timing of collection on VAT receivables is uncertain as VAT refund procedures require a significant amount of information and follow-up. The risk is mitigated to the extent that the VAT receivable balance can be applied against future income taxes payable. However, at this time we are uncertain when, if ever, our Mexican operations will generate sufficient taxable operating profits to offset this receivable against taxes payable. We continue to face risk on the collection of our VAT receivables, which amount to $0.8 million as at June 30, 2020.
In Nevada and Ontario, Canada we are required to provide security to cover our projected reclamation costs. As at June 30, 2020, we have surety bonds of $31.3 million in place to satisfy bonding requirements for this purpose. The bonds have an annual fee of 2% of their value. Although we do not believe we have any significant credit exposure associated with these bonds, we are exposed to the risk 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.
Interest rate risk
Our outstanding debt consists of various equipment leases and the senior secured credit facility. As the debt is at fixed rates, we consider our interest rate risk exposure to be insignificant at this time.
Inflationary Risk
Argentina has experienced a significant amount of inflation over the last nine years and has now been classified as a highly inflationary economy. ASC 830 defines a hyperinflationary economy as one where the cumulative inflation rate exceeds 100% over the last three years preceding the reporting period. In this scenario, ASC 830 requires companies to change the functional currency of its foreign subsidiaries operating in a highly inflationary economy, to match the company’s reporting currency. In our case, the functional currency of all our Argentine subsidiaries has always been our reporting currency, the U.S. dollar. As such, we do not expect the classification of Argentina’s economy as a highly inflationary economy to change our financial reporting methodology.
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Item 4. CONTROLS AND PROCEDURES
(a) | We maintain a system of controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported, within time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of June 30, 2020, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. |
(b) | There were no changes in our internal control over financial reporting during the quarter ended June 30, 2020 that materially affected or are reasonably likely to materially affect, our internal controls over financial reporting. |
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PART II OTHER INFORMATION
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 25, 2020, we issued 2,091,700 shares of our common stock in a transaction that was not registered under the Securities Act of 1933, as amended (the “Securities Act”). The shares were issued to the two lenders under the ARCA in consideration of the extension of credit and other benefits received by us under that agreement and were valued at $1,875,000 based on the closing price of our common stock on the NYSE in five trading days preceding the closing of the loan.
The shares were issued in reliance on the exemption from registration provided by Regulation S under the Securities Act, Rule 901, et seq. No offers were made to a person in the US and the lenders which received the shares were not U.S. Persons as defined in Regulation S. The shares were issued in an “offshore transaction” as defined in Regulation S and we did not engage in any directed selling efforts in connection with the transaction. The shares were issued with resale restrictions.
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.
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Item 6. EXHIBITS
The following exhibits are filed or incorporated by reference with this report:
3.1.1 |
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3.1.2 | ||
3.2 | ||
10.1 |
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10.2 | ||
10.3 | ||
31.1 | ||
31.2 | ||
32 | ||
95 | ||
101 | The following materials from McEwen Mining Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 are filed herewith, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Unaudited Consolidated Statements of Operations and Comprehensive (Loss) for the three months ended June 30, 2020 and 2019, (ii) the Unaudited Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, (iii) the Unaudited Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2020 and 2019, (iv) the Unaudited Consolidated Statements of Cash Flows for the three months ended June 30, 2020 and 2019, and (v) the Unaudited Notes to the Consolidated Financial Statements. | |
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL and contained in Exhibit 101. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MCEWEN MINING INC. | |
/s/ Robert R. McEwen | |
Date: August 6, 2020 | By: Robert R. McEwen, |
Chairman and Chief Executive Officer | |
/s/ Andrew Iaboni | |
Date: August 6, 2020 | By: Andrew Iaboni, |
Vice President of Finance (Principal Accounting Officer) |
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