ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion updates our plan of operation as of March 1, 2017 for the foreseeable future. It also discusses our results of operations for three fiscal years ended December 31, 2016, 2015 and 2014 and our financial condition at December 31, 2016 and 2015, with a particular emphasis on the year ended December 31, 2016. With regard to properties or projects that are not in production, we provide some details of our plan of operation.
The discussion also presents certain non‑GAAP financial performance measures, such as earnings from mining operations, total cash costs, total cash cost per ounce, all‑in sustaining costs, all‑in sustaining cost per ounce, average realized price per ounce, and cash, investments and precious metals, that are important to management in its evaluation of our operating results and which are used by management to compare our performance to what we perceive to be peer group mining companies and relied on as part of management’s decision‑making process. Management believes these measures may also be important to investors in evaluating our performance. For a detailed description of each of the non‑GAAP financial performance measures and certain limitations inherent in such measures, please see the discussion under “Non‑GAAP Financial Performance Measures” below, on page 52.
The discussion also includes references to “Advanced-stage Properties”, which are defined as properties for which a feasibility study has been completed indicating the presence of mineralized material, and that have obtained or are in the process of obtaining the required permitting. Our designation of certain properties as “Advanced-stage Properties” should not suggest that we have proven or probable reserves at those properties as defined by the SEC Industry Guide 7.
In addition, as described under Critical Accounting Policies section below, we define “Mine Development Costs” as the costs incurred to design and construct mining and processing facilities, including engineering and metallurgical studies, drilling, and other related costs to delineate an ore body, and the removal of overburden to initially expose an ore body at open pit surface mines. Since no proven and probable reserves have been established on any of our properties except for our 49% interest in the San José mine, mine development costs are not capitalized at any of the our properties, but rather are expensed as incurred, and allocated within “Mine Development Costs” in the Consolidated Statement of Operations and Comprehensive Income (Loss).
The information in this section should be read in conjunction with our consolidated financial statements and the notes thereto included in this annual report.
Reliability of Information: MSC, the owner of the San José mine, is responsible for and has supplied to us all reported results from the San José mine. The technical information 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.
Index to Management’s Discussion and Analysis:
2016 Operating and Financial Highlights
2016 highlights are included below and discussed further in Results
of Consolidated Operations:
|
·
|
|
We reported $60.4 million in gold and silver sales, from the sale of 48,902 gold equivalent ounces by our El Gallo 1 mine.
|
|
·
|
|
We realized average prices of $1,235 and $16.77 per ounce of gold and silver, respectively, sold by the El Gallo 1 mine, and $1,242 and $17.28 per ounce of gold and silver, respectively, sold by the San José mine.
|
|
·
|
|
The El Gallo 1 mine reported gold equivalent production of 55,266 ounces, comprised of gold and silver production of 54,928 ounces and 25,336 ounces, respectively. Production was in line with our upwardly revised 2016 production guidance.
|
|
·
|
|
The San José mine also met its 2016 production guidance, achieving 184,213 gold equivalent ounces, comprised of 95,006 ounces of gold and 6,690,558 ounces of silver, based on a 100% basis, or 90,264 gold equivalent ounces, represented by 46,553 ounces of gold and 3,278,373 ounces of silver, based on the 49% basis attributable to us.
|
|
·
|
|
The El Gallo 1 mine reported total cash costs of $524 and all-in sustaining costs of $610 per gold equivalent ounce, which were below revised guidance of $550 and $620 per gold equivalent ounce, respectively.
|
|
·
|
|
The San José mine reported total cash costs of $760 and all-in sustaining costs of $954 per gold equivalent ounce, which were below guidance of $780 and $990 per gold equivalent ounce, respectively.
|
|
·
|
|
We reported net income of $21.1 million, or $0.07 per share for the year.
|
|
·
|
|
Income from our investment in MSC was $13.0 million for the year, and we received $17.7 million in dividends during the year.
|
|
·
|
|
At year end, we reported $58.8 million in cash, investments and precious metals valued at the London P.M. Fix spot price and no short-term bank indebtedness
(1)
.
|
|
(1)
|
|
For a reconciliation of precious metals valued at the London P.M. Fix spot price and cost, please see the discussion under “Non GAAP Financial Performance Measures” below, on page 52.
|
Selected Consolidated Financial and Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(in thousands, except otherwise stated)
|
|
Gold and silver sales
|
|
$
|
11,162
|
|
$
|
11,411
|
|
$
|
60,388
|
|
$
|
72,956
|
|
$
|
45,303
|
|
(Loss) income on investment in MSC, net of amortization
|
|
$
|
(838)
|
|
$
|
6,378
|
|
$
|
12,951
|
|
$
|
2,414
|
|
$
|
(5,284)
|
|
Net (loss) income
|
|
$
|
(4,491)
|
|
$
|
(14,988)
|
|
$
|
21,055
|
|
$
|
(20,450)
|
|
$
|
(311,943)
|
|
Net (loss) income per common share
|
|
$
|
(0.01)
|
|
$
|
(0.05)
|
|
$
|
0.07
|
|
$
|
(0.07)
|
|
$
|
(1.05)
|
|
Consolidated gold ounces
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Produced
|
|
|
20.3
|
|
|
25.5
|
|
|
101.5
|
|
|
110.3
|
|
|
84.4
|
|
Sold
|
|
|
21.9
|
|
|
21.6
|
|
|
97.6
|
|
|
105.7
|
|
|
80.3
|
|
Consolidated silver ounces
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Produced
|
|
|
839
|
|
|
982
|
|
|
3,304
|
|
|
3,316
|
|
|
3,196
|
|
Sold
|
|
|
851
|
|
|
791
|
|
|
3,487
|
|
|
3,142
|
|
|
3,114
|
|
Consolidated gold equivalent ounces
(1)(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Produced
|
|
|
31.5
|
|
|
38.5
|
|
|
145.5
|
|
|
154.5
|
|
|
137.6
|
|
Sold
|
|
|
33.2
|
|
|
32.1
|
|
|
144.0
|
|
|
147.6
|
|
|
132.2
|
|
Silver : gold ratio
(2)
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
60 : 1
|
|
|
(1)
|
|
Includes attributable production from our 49% owned San José mine.
|
|
(2)
|
|
Silver production is presented as a gold equivalent. Gold equivalent ounces calculations are based on prevailing spot prices at the beginning of the year. The silver to gold ratio used for 2016 and 2015 was 75:1; the ratio for 2014 was 60:1.
|
Consolidated Financial Performance
For the year ended December 31, 2016 we recorded net income of $21.1 million, or $0.07 per share, compared to a net loss of $20.5 million, or $0.07 per share, in 2015, as a result of the strong performance achieved by both the El Gallo 1 and the San José mines in 2016.
Despite a 22% decrease in the number of gold equivalent ounces sold by the El Gallo 1 mine, our Mexican operation contributed $60.4 million in revenues. In addition, San José delivered strong results from which we recognized income of $13.0 million from our attributable investment in MSC, which coupled with the absence of impairment charges recorded in the year, contributed to the net income reported in 2016. Furthermore, MSC paid dividends of $17.7 million attributable to us during 2016.
As a result, we also improved our cash position by 45% with cash and cash equivalents increasing from $25.9 million in 2015 to $37.4 million in 2016.
Results of Consolidated Operations
Year ended December 31, 2016 compared to 2015
Revenue
.
Gold and silver sales for the year ended December 31, 2016 decreased by $12.6 million, or 17%, to $60.4 million from $73.0 million in 2015 due to a 22% decrease in gold equivalent ounces sold during the year at our El Gallo 1 mine, partially offset by a 6% and 4% increase in the average realized prices of gold and silver, respectively, during the year.
Production costs applicable to sales
.
Production costs applicable to sales at the El Gallo 1 mine decreased by $6.5 million, or 19%, to $28.1 million in the year ended December 31, 2016, compared to $34.6 million in 2015, in line with the 22% decrease in gold equivalent ounces sold mentioned above.
Operating Income (Expenses)
Mine development costs, which relate to engineering and development expenditures incurred at our advanced-stage properties, increased to $3.9 million in 2016 from $1.2 million in 2015, and was comprised of $2.7 million at Gold Bar
project, in Nevada, and $1.2 million at the El Gallo 2 project, in Mexico. Please refer to the Advanced-stage properties section for a complete discussion on these costs.
Exploration costs in 2016 decreased by $0.8 million or 10% to $8.0 million in 2016 from $8.8 million in 2015. During 2016, we spent $4.1 million in explorations at our Mexican properties, $2.0 million in Nevada, $1.6 million at Los Azules, and $0.2 million in corporate exploration charges. For a complete discussion on exploration costs, please refer to the Exploration properties section below.
Property holding costs decreased by $0.8 million or 19% year-over-year as a result of the reduced number of claims held in 2016, compared to 2015, coupled with the decline in the Mexican peso.
General and administrative expenses increased by 6% in 2016, to $12.7 million from $12.0 million in 2015, as a result of changes to senior management, partly offset by the devaluation of the Canadian dollar, Mexican peso and Argentine peso against the U.S. dollar during 2016.
Income from our investment in MSC increased by $10.5 million, from $2.4 million in 2015 to $13.0 million 2016, due to the strong performance of the San José mine in 2016. Please refer to the section
Results of Operations – MSC
below, for further details.
No impairment charges were recorded in 2016, compared to impairment charges of $11.8 million related to our investment in MSC, and $50.6 million for mineral property interests and property and equipment, recorded in 2015.
Other income (expenses)
Other income decreased to $2.0 million in 2016 from $4.3 million in 2015, mainly due to the net result of lower interest and other income, foreign exchange gain and the impairment of marketable securities, which were partly offset by the unrealized gain on derivatives reported during the year. Interest and other income decreased by $1.6 million in 2016 due to an absence of the portion of insurance proceeds related to the theft of gold concentrate stolen from our refinery in Mexico. In addition, foreign exchange gain decreased by $1.3 million mainly as a result of the devaluation of the Mexican peso affecting the VAT receivable balance held in the year. Finally, we recognized a $1.4 million gain on derivatives from our ownership of certain warrants in a publicly listed entity, acquired in 2016.
Recovery of income taxes
Recovery of income taxes decreased by $20.8 million, from $24.6 million in 2015 to $3.7 million in 2016 as no impairment related tax recoveries were recognized in 2016 compared to 2015.
Year ended December 31, 2015 compared to 2014
Revenue
.
Gold and silver sales increased by $27.7 million or 61% to $73.0 million in 2015, from $45.3 million in 2014 due to higher number of ounces sold during the year at our El Gallo 1 mine, partially offset by a decrease in the average realized prices of gold and silver during the year.
Production costs applicable to sales
.
Although 75% more ounces were sold in 2015 compared to 2014, production costs applicable to sales decreased by $6.0 million, to $34.6 million in 2015 from $40.6 million in 2014. The decrease was the direct result of higher mineral average grades processed, coupled with lower average strip ratios and haulage costs when compared to 2014.
Operating Income (Expenses)
Mine construction costs decreased to $nil in 2015, from $1.7 million in 2014 as a result of getting the El Gallo 1 mine processing capacity expansion fully operational in the fourth quarter of 2014.
Mine development costs decreased to $1.2 million in 2015, from $1.9 million in 2014, due to a $1.1 million decrease in expenditures incurred at El Gallo 2, partly offset by $0.4 million expenditures at our Gold Bar project, which were incurred during the fourth quarter of 2015, when the positive feasibility study was completed.
Exploration costs in 2015 decreased to $8.8 million, from $11.3 million in 2014, reflecting the continuous reduction in exploration expenditures and drilling activities across most projects, in an effort to conserve capital.
Property holding costs decreased by $2.1 million year-over-year, to $4.3 million in 2015, compared to $6.4 million in 2014, as a result of dropping non-essential claims mainly at our projects in Nevada.
During 2015, we recognized income of $2.4 million from our investment in MSC, net of amortization of fair value increments. This compares to a loss of $5.3 million recognized during 2014. The change in MSC’s operating results during 2015, despite the decrease in revenue and average realized prices of gold and silver, was the result of inflation outpacing the devaluation of the Argentine peso which was offset by MSC’s management efforts to maintain costs and the effect of the fair value increments that resulted in gains on revaluation of the deferred tax liability.
During 2015, we recorded an $11.8 million impairment charge to our investment in MSC, triggered by the significant decline of silver prices in 2015, as well as a decline in the observed market value of comparable transactions in South America, indicating a potential significant decrease in the market price of the exploration properties owned by MSC. In comparison, we recorded a $21.2 million impairment charge on our investment in MSC during the year ended 2014.
Impairment of mineral property interests for 2015 decreased to $50.6 million from $353.7 million in 2014 as the write-downs recorded in 2015 were only $37.2 million for the Nevada properties and $11.4 million for Los Azules, whereas 2014 included a $228.3 million impairment charge to the Los Azules project, $27.0 million impairment of certain exploration properties in Argentina, and $98.4 million impairment of the Nevada properties.
Other income (expenses)
Other income (expense) improved by $13.2 million in 2015, from other expense of $8.9 million in 2014 to other income of $4.3 million in 2015, mainly due to the absence in 2015 of registration taxes related to our Argentinean entities accrued in 2014 in the amount of $6.8 million. Further, the improvement in other income was also the result of the foreign exchange gain position obtained as a result of the devaluation of the Mexican Peso and Canadian dollar observed during 2015, and the insurance proceeds received from the theft of gold in concentrate stolen from our refinery in Mexico, in April 2015.
Recovery of income taxes
Recovery of income taxes decreased to $24.6 million in 2015, from $107.2 million in 2014 due to $62.7 million lower tax recoveries associated with lower impairments noted above, coupled with $14.2 million lower tax recovery in 2014 resulting from the devaluating Argentine peso on peso-denominated deferred income tax liabilities, and $5.8 million resulting from the tax effect of temporary differences determined in 2014.
Liquidity and Capital Resources
We had working capital of $58.0 million at December 31, 2016, which consisted of $78.6 million of current assets and $20.6 million of current liabilities. The increase in working capital of $25.6 million from 2015 is attributable to the strong performance delivered by the El Gallo 1 mine, which translated into strong operational cash flows, coupled with higher dividends distributed by MSC for a total of $17.7 million. Overall, cash increased to $37.4 million in 2016, from $25.9 million in 2015. We believe that our working capital at year-end 2016 is sufficient to satisfy any obligations due in the next 12 months, and to fund ongoing operations, development and corporate activities over the next 12 months.
If we make a positive production decision to develop either of our advanced-stage properties, Gold Bar or the El Gallo 2, we will need to raise additional capital of approximately $60 million or $150 million, respectively (under existing estimates), given that each property’s estimated capital costs significantly exceed our available working capital. In such case, we would explore several financing methods to complete the required development and construction stages, which may include incurring debt, issuing additional equity, equipment leasing and other forms of financing. Our ability to build either the Gold Bar or the El Gallo 2 projects is dependent on one or several of the alternatives being completed.
Net cash provided by operations was $25.2 million and $15.6 million for 2016 and 2015, respectively, while we used $14.9 million of cash from operations in 2014. The significant changes from one year to the next are summarized as follows:
|
·
|
|
$17.7 million dividend received from MSC in 2016, compared to $0.5 million in 2015 and $9.5 million in 2014,
|
|
·
|
|
$9.5 million VAT collected in Mexico in 2016, compared to $6.0 million in 2015, and $5.0 million in 2014, and
|
|
·
|
|
$59.5 million cash received from gold and silver sales in 2016, compared to $70.2 million in 2015 and $43.8 million in 2014, resulting from the lower number of ounces sold during 2016, mentioned above.
|
Cash used in investing activities was $10.1 million in 2016, and $1.9 million in 2015, compared to cash provided by investing activities of $1.5 million in 2014, primarily due to the following factors:
|
·
|
|
During 2016, we spent $6.0 million on the acquisition of mineral property interests, primarily to acquire a royalty related to our Mexican mine, in an effort to improve our cash flow for the mine, compared to $nil in each of 2015 and 2014.
|
|
·
|
|
During 2016, we spent $4.4 million investing in equity securities, compared to $1.1 million and $0.4 million in 2015 and 2014, respectively.
|
|
·
|
|
During 2016, we collected $1.0 million as reimbursement of the deposit for unutilized equipment, compared to $nil in each of 2015 and 2014.
|
We used $3.2 million in financing activities in 2016, compared to 2015 and 2014, when our financing activities provided cash of $0.1 million and $2.3 million in 2014, respectively, primarily as a result of:
|
·
|
|
The $3.4 million repayment of the bank credit facility obtained by our Mexican subsidiary in 2016, compared to $1.8 million repaid in 2015, and $nil in 2014.
|
|
·
|
|
The $3.0 million return of capital to our shareholders in 2016, compared to $1.5 million in 2015, and $nil in 2014.
|
|
·
|
|
$3.7 million proceeds received from stock options exercised in 2016, compared to $nil in 2015 and $2.3 million in 2014.
|
Results of Operations—Mexico Segment
The Mexico segment includes: the El Gallo 1 mine, the El Gallo 2 advanced-stage project, and exploration properties naighbourng the El Gallo area.
El Gallo 1 mine
El Gallo 1 mine is a gold operating unit, 100% owned by us. The mine is located in Sinaloa, Mexico.
Overview
The following table sets out production totals, sales totals, total cash costs, and all‑in sustaining cash costs (on a gold equivalent basis) for the El Gallo 1 mine for the three months ended December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015, and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(in thousands, except otherwise stated)
|
|
Tonnes of mineralized material mined
|
|
|
347
|
|
|
256
|
|
|
1,048
|
|
|
1,209
|
|
|
1,271
|
|
Average grade gold (gpt)
|
|
|
1.14
|
|
|
3.58
|
|
|
1.32
|
|
|
3.37
|
|
|
1.40
|
|
Tonnes of mineralized material processed
|
|
|
320
|
|
|
279
|
|
|
1,108
|
|
|
1,128
|
|
|
1,462
|
|
Average grade gold (gpt)
|
|
|
1.46
|
|
|
4.20
|
|
|
2.14
|
|
|
3.41
|
|
|
1.58
|
|
Gold ounces:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Produced
|
|
|
7.6
|
|
|
11.0
|
|
|
54.9
|
|
|
63.0
|
|
|
38.2
|
|
Sold
|
|
|
9.1
|
|
|
10.2
|
|
|
48.7
|
|
|
62.2
|
|
|
35.6
|
|
Silver ounces:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Produced
|
|
|
3.9
|
|
|
4.8
|
|
|
25.3
|
|
|
29.9
|
|
|
25.9
|
|
Sold
|
|
|
1.0
|
|
|
4.4
|
|
|
17.6
|
|
|
35.9
|
|
|
19.4
|
|
Gold equivalent ounces
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Produced
|
|
|
7.7
|
|
|
11.1
|
|
|
55.3
|
|
|
63.4
|
|
|
38.7
|
|
Sold
|
|
|
9.2
|
|
|
10.3
|
|
|
48.9
|
|
|
62.7
|
|
|
35.9
|
|
Net sales
|
|
$
|
11,162
|
|
$
|
11,411
|
|
$
|
60,388
|
|
$
|
72,956
|
|
$
|
45,303
|
|
Average realized price ($/ounce)
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
|
|
$
|
1,219
|
|
$
|
1,111
|
|
$
|
1,235
|
|
$
|
1,163
|
|
$
|
1,263
|
|
Silver
|
|
$
|
17.52
|
|
$
|
14.40
|
|
$
|
16.77
|
|
$
|
16.15
|
|
$
|
17.87
|
|
Silver : gold ratio
(1)
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
60 : 1
|
|
|
(1)
|
|
Silver production presented as a gold equivalent. Gold equivalent ounces calculations are based on prevailing spot prices at the beginning of the year. The silver to gold ratio used for 2016 and 2015 was 75:1, while the ratio for 2014 was 60:1.
|
|
(2)
|
|
Average realized price is a non‑GAAP financial performance measures with no standardized definition under U.S. GAAP. See “Non‑GAAP Financial Performance Measures” on page 52 for additional information, including definitions of this term.
|
Gold and silver production
|
·
|
|
In 2016, we produced 55,266 gold equivalent ounces, compared to 63,366 gold equivalent ounces in 2015. The decrease in gold and silver production in 2016 was expected, mainly due to a decrease in the grades of mineral mined, as the high-grade Samaniego pit was substantially mined out in early 2016, coupled with lower number of tonnes processed during the year.
|
|
·
|
|
Average grades of material processed during the year ended December 31, 2016 were 2.14 g/t, compared to 3.41 g/t in 2015, while for the fourth quarter of 2016, grades of material processed averaged 1.46 g/t compared to 4.20 g/t obtained in the same quarter in 2015.
|
2015 compared to 2014
|
·
|
|
Production increased in 2015 by 64% to 63,366 gold equivalent ounces from 38,643 gold equivalent ounces in 2014 as a result of 116% increase in average grades obtained in 2015 from our Samaniego pit.
|
Tonnes mined represent tonnes of material extracted, while tonnes processed represent tonnes of material crushed and placed on the leach pads. The difference between tonnes mined of 1,048,483 and tonnes processed of 1,107,573 represent tonnes removed from stockpile inventory. Due to long process cycles, actual recoveries from the heap are difficult to measure and may fluctuate significantly based on the timing, quantity and metallurgical attributes of new mineralized material placed on the leach pads, among other variables. The cumulative recovery rate for gold production from September 1, 2012 (start of production at the El Gallo 1 mine) to December 31, 2016 is estimated at 59% (2015 – 56%).
Gold and silver sales
2016 compared to 2015
|
·
|
|
Revenue from the sale of gold and silver at our El Gallo 1 mine decreased by 17% to $60.4 million in 2016, compared to $73.0 million in 2015, due to a 22% decrease in the number of gold equivalent ounces sold in 2016, offset by a 6% and 4% increase in average realized sale prices of gold and silver, respectively.
|
|
·
|
|
The average realized price of gold and silver were $1,235 and $16.77 in 2016, compared to $1,163 and $16.15 in 2015, respectively.
|
2015 compared to 2014
|
·
|
|
During 2015, we sold 62,704 ounces of gold equivalent, for a total of $73.0 million, compared to $45.3 million or 35,923 gold equivalent ounces using the 75:1 silver to gold ratio, or 35,859 gold equivalent ounces using the 60:1 silver to gold ratio, respectively, in 2014.
|
|
·
|
|
The increase in sales was the net result of 75% more ounces of gold and 85% more ounces of silver sold during 2015, partly offset by a decrease in the average realized price of gold and silver of 8% and 10% respectively.
|
|
·
|
|
In 2014, the average realized price of gold and silver per ounce were $1,263 and $17.89.
|
Total Cash Costs and All‑In Sustaining Costs
The following table presents a summary of our total cash cost, cash cost per ounce, all-in sustaining costs and all-in sustaining costs per ounce of gold equivalent at El Gallo 1 mine:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(in thousands, except otherwise stated)
|
|
Total cash costs
(2)
|
|
$
|
6,399
|
|
$
|
5,090
|
|
$
|
25,609
|
|
$
|
27,607
|
|
$
|
31,418
|
|
Total cash cost per gold equivalent ounce sold ($/ounce)
(1)(2)
|
|
$
|
699
|
|
$
|
496
|
|
$
|
524
|
|
$
|
440
|
|
$
|
875
|
|
All
‑
in sustaining costs
(2)
|
|
$
|
7,615
|
|
$
|
6,112
|
|
$
|
29,818
|
|
$
|
36,439
|
|
$
|
42,895
|
|
All
‑
in sustaining cost per gold equivalent ounce sold ($/ounce)
(1)(2)
|
|
$
|
832
|
|
$
|
595
|
|
$
|
610
|
|
$
|
581
|
|
$
|
1,194
|
|
Silver : gold ratio
(1)
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
60 : 1
|
|
|
(1)
|
|
Silver production presented as a gold equivalent. Gold equivalent ounces calculations are based on prevailing spot prices at the beginning of the year. The silver to gold ratio used for 2016 and 2015 was 75:1, while the ratio for 2014 was 60:1.
|
|
(2)
|
|
Total cash cost, and all‑in sustaining costs are non‑GAAP financial performance measures with no standardized definition under U.S. GAAP. See “Non‑GAAP Financial Performance Measures” on page 52 for additional information, including definitions of these terms.
|
2016 compared to 2015
On a per ounce basis, total cash costs per gold equivalent ounce sold at the El Gallo 1 mine increased to $524 in 2016 from $440 in 2015. The increase was a result of slightly higher number of tonnes processed, from which lower mineral grades were obtained during 2016, that resulted in total cash costs spread over a fewer number of ounces produced and sold. This was partly offset by lower crushing and plant processing expenditures resulting from our efforts to contain costs, coupled with the devaluation of the Mexican peso against the U.S. dollar, when compared to 2015.
On an aggregate basis, total cash costs at the El Gallo 1 mine were $25.6 million in 2016, compared to $27.6 million in 2015, with the decrease mainly driven by the lower number of gold equivalent ounces sold when compared to 2015.
All‑in sustaining cost per gold equivalent ounce in 2016 was $610 compared to $581 per ounce in 2015, or $29.8 million in 2016 and $36.4 million in 2015, on an aggregate basis. The decrease in aggregate all-in sustaining costs was driven by the factors above, coupled with higher capital expenditures of a sustaining nature, including the expansion of our leach pad.
2015 compared to 2014
Total cash costs per gold equivalent ounce for 2015 decreased to $440 per ounce, compared to $875 per ounce in 2014, as a result of an overall reduction in the cost per tonne mined during the year, coupled with higher grades processed that resulted in a greater number of gold equivalent ounces produced and sold.
All‑in sustaining cost per gold equivalent ounce in 2015 decreased by 51% to $581 compared to $1,194 per ounce in 2014. Despite the higher number of gold equivalent ounces sold in 2015, on an aggregate basis all‑in sustaining costs decreased by 15% to $36.4 million in 2015, compared to $42.9 million in 2014.
Advanced-stage Properties - El Gallo 2
El Gallo 2 Project
As a result of changes in commodity prices since the publication of the technical report titled “El Gallo Complex Phase II Project, NI 43-101 Technical Report, Feasibility Study, Mocorito Municipality, Sinaloa, Mexico” with an effective date of September 10, 2012 (the “2012 Report”), we are of the view that there is no current feasibility study in respect of the El Gallo 2 project. We believe that the figures set out in the 2012 Report are historical in nature and should not be relied on.
During 2016 we spent $1.2 million furthering studies on the feasibility and development of the El Gallo 2 project. These studies are intended to identify opportunities to reduce the initial capital investment required to start the project while minimizing the impact on production. Potential changes include different mill configurations, mine plans, and tailings deposition methods. The $180 million of capital expenditures required in the El Gallo 2 feasibility study, has not been updated to reflect these possible changes.
Our 2017 budget for El Gallo 2 is approximately $6.0 million, including $3.0 million for exploration and $3.0 million for development.
Exploration Activities – Mexico
El Gallo area, Sinaloa, México
Exploration at the El Gallo area takes place with the objective of determining the prospects of the properties that we hold in areas adjacent to the El Gallo 1 mine. In 2016 we our exploration activities included a ground based resistivity survey (“CSAMT”) on survey lines surrounding the main Sinaloa batholith intrusion, from which we identified a number of anomalous areas to follow up on including soil, rock and drill sampling in 2017.
For 2017, we have budgeted a total of $2.0 million for exploration at the El Gallo area.
Results of Operations—MSC Segment
The MSC segment is composed of MSC, the operator of the San José mine, located in Argentina.
MSC
(on a 100% basis)
Overview
The following table sets out production totals, sales totals, total cash costs and all‑in sustaining costs (on a co‑product and gold equivalent basis) for the San José mine for the periods presented, on a 100% basis. Also included below are the production figures on a 49% attributable basis. As stated in
Item 8.
Financial Statements and Supplementary Data
, Note 2,
Summary of Significant Accounting Policies—Investments
, we account for investments over which we exert significant influence but not control through majority ownership using the equity method of accounting. In applying the equity method of accounting to our 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(in thousands, unless otherwise indicated)
|
|
San José mine—100% basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tonnes of ore mined
|
|
|
147
|
|
|
148
|
|
|
533
|
|
|
507
|
|
|
539
|
|
Average grade (gpt):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
|
|
|
6.73
|
|
|
7.00
|
|
|
6.72
|
|
|
6.73
|
|
|
6.06
|
|
Silver
|
|
|
490
|
|
|
511
|
|
|
512
|
|
|
505
|
|
|
448
|
|
Tonnes of ore processed
|
|
|
147
|
|
|
155
|
|
|
536
|
|
|
532
|
|
|
571
|
|
Average grade (gpt):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
|
|
|
6.32
|
|
|
6.63
|
|
|
6.28
|
|
|
6.36
|
|
|
5.77
|
|
Silver
|
|
|
418
|
|
|
453
|
|
|
444
|
|
|
448
|
|
|
404
|
|
Average recovery (%):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
|
|
|
86.9
|
|
|
89.3
|
|
|
87.8
|
|
|
88.8
|
|
|
88.8
|
|
Silver
|
|
|
86.3
|
|
|
88.6
|
|
|
87.4
|
|
|
87.5
|
|
|
87.2
|
|
Gold ounces:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Produced
|
|
|
25.9
|
|
|
29.4
|
|
|
95.0
|
|
|
96.6
|
|
|
94.0
|
|
Sold
|
|
|
26.0
|
|
|
23.2
|
|
|
99.8
|
|
|
88.8
|
|
|
91.0
|
|
Silver ounces:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Produced
|
|
|
1,704
|
|
|
1,994
|
|
|
6,691
|
|
|
6,706
|
|
|
6,469
|
|
Sold
|
|
|
1,734
|
|
|
1,604
|
|
|
7,081
|
|
|
6,340
|
|
|
6,316
|
|
Gold equivalent ounces
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Produced
|
|
|
48.7
|
|
|
56.0
|
|
|
184.2
|
|
|
186.0
|
|
|
202.0
|
|
Sold
|
|
|
49.1
|
|
|
44.6
|
|
|
194.2
|
|
|
173.3
|
|
|
197.0
|
|
Net sales
|
|
$
|
53,192
|
|
$
|
44,989
|
|
$
|
235,961
|
|
$
|
186,095
|
|
$
|
212,013
|
|
Gross average realized price ($/ounce)
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
|
|
$
|
1,115
|
|
$
|
1,060
|
|
$
|
1,242
|
|
$
|
1,120
|
|
$
|
1,236
|
|
Silver
|
|
$
|
15.19
|
|
$
|
14.00
|
|
$
|
17.28
|
|
$
|
15.05
|
|
$
|
17.68
|
|
Silver : gold ratio
(1)
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
60 : 1
|
|
McEwen Mining—49% basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ounces produced:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
|
|
|
12.7
|
|
|
14.0
|
|
|
46.6
|
|
|
47.4
|
|
|
46.0
|
|
Silver
|
|
|
835
|
|
|
977
|
|
|
3,278
|
|
|
3,286
|
|
|
3,170
|
|
Gold equivalent
(1)
|
|
|
23.8
|
|
|
27.0
|
|
|
90.3
|
|
|
91.2
|
|
|
99.0
|
|
|
(1)
|
|
Silver production is presented as a gold equivalent. Gold equivalent ounces calculations are based on prevailing spot prices at the beginning of the year. The silver to gold ratio used for 2016 and 2015 was 75:1, while the ratio for 2014 was 60:1.
|
|
(2)
|
|
Average realized prices, total cash costs, and all‑in sustaining costs are non‑GAAP financial performance measures with no standardized definition under U.S. GAAP. See “Non‑GAAP Financial Performance Measures” on page 52 for additional information, including definitions of these terms.
|
Gold and silver production
2016 compared to 2015
|
·
|
|
Gold production in 2016, on a 100% basis, was 95,006 ounces, exceeding the 2016 guidance of 92,000 gold ounces by 3%, as a result of minimum labor stoppages affecting production throughout the year, partly offset by lower average grades.
|
|
·
|
|
Silver production during 2016, on a 100% basis, was 6,690,558 ounces, in line with production guidance of 6,700,000 ounces set for 2016.
|
|
·
|
|
Tonnes mined and processed in 2016 increased by 5% and 1% respectively, mainly as a result of minimum stoppages previously mentioned, compared to 18 days of production lost due to stoppages in 2015.
|
2015 compared to 2014
|
·
|
|
In 2015, gold production, on a 100% basis, increased to 96,638 ounces from 94,161 ounces in 2014 due to rising tonnage and higher average grades.
|
|
·
|
|
Silver production during 2015 on a 100% basis was 6,705,614 ounces compared to 6,469,022 in 2014. This increase was driven by better than projected silver grades obtained of 448 g/t compared to the 2015 guidance of 414 g/t.
|
|
·
|
|
Tonnes processed in 2015 decreased by 7% to 532,488 from 571,018 tonnes in 2014, as a result of a longer labor stoppages, which mostly occurred during the first quarter of 2015. Comparatively, labor interruptions at the mine in 2014 totaled eight days, primarily due to employee travel being affected by national strikes throughout Argentina during 2014.
|
Gold and silver sales
2016 compared to 2015
|
·
|
|
Net sales of gold and silver in 2016 increased by 27% to $236.0 million, from $186.1 million in 2015 as a result of a 12% increase in the number of gold and silver ounces sold, coupled with 11% and 15% higher average realized prices for gold and silver ounces, respectively.
|
|
·
|
|
Sales volumes in 2016 increased to 99,762 ounces of gold and 7,081,158 ounces of silver, compared to 88,792 ounces of gold and 6,339,684 ounces of silver sold in 2015, as MSC was not affected by shipment delays at year-end 2016 as it was in 2015.
|
|
·
|
|
The average realized gross sale price, after mark‑to‑market provisional price adjustments, discussed below, were $1,242 and $17.28 per ounce of gold and silver, respectively, resulting in an 11% and 15% increase from $1,120 per ounce of gold and $15.05 per ounce of silver realized in 2015. In comparison, the average London P.M. fix price for gold was $1,251 per ounce of gold and $17.14 per ounce of silver in 2016.
|
2015 compared to 2014
|
·
|
|
Net sales of gold and silver in 2015 decreased by 12% to $186.1 million, from $213.0 million in 2014 mainly due to a 9% and 15% decrease in the average realized prices of both gold and silver.
|
|
·
|
|
Sales volumes in 2015 were 88,792 ounces of gold and 6,339,684 ounces of silver, compared to 91,276 ounces of gold and 6,315,799 ounces of silver sold in 2014. Gold sales were slightly lower in 2015 as a result of strikes that delayed shipments at Puerto Deseado.
|
|
·
|
|
The average realized gross sale price for gold and silver sold in 2015, after mark‑to‑market provisional price adjustments, were $1,120 and $15.05, respectively, a decrease of 9% and 15% when compared to average realized gross sale prices of $1,236 per ounce of gold and $17.68 per ounce of silver, realized in 2014. In comparison, the average London P.M. fix price for gold was $1,160 per ounce of gold and $15.70 per ounce of silver in 2015.
|
The difference between the average gross realized sale price per ounce of gold and silver sold by MSC and the average London fix prices noted above is due to adjustments of certain provisionally priced shipments of concentrates. Certain sales are ‘provisionally priced’ where the selling price is subject to final adjustment at the end of a period, normally ranging from 30 to 90 days after the start of the delivery process to the customer, based on the market price at the relevant quotation point stipulated in the contract. Sales revenue on provisionally priced sales of concentrates is recognized based on estimates of the final pricing receivable, which in turn are based on relevant forward market prices. At each reporting date, provisionally priced metal is marked to market based on the forward selling price for the quotational period of the sales contract.
Total Cash Costs and All‑In Sustaining Costs
The following table presents a summary of our total cash cost, cash cost per ounce, all-in sustaining costs and all-in sustaining costs per ounce of gold equivalent at the San José mine, on a 100% and 49% basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(in thousands, unless otherwise indicated)
|
|
San José mine - 100% basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash costs
(2)
|
|
$
|
35,803
|
|
$
|
34,099
|
|
$
|
147,478
|
|
$
|
149,938
|
|
$
|
156,225
|
|
All
‑
in sustaining costs
(2)
|
|
|
47,659
|
|
|
43,237
|
|
|
185,324
|
|
|
192,643
|
|
|
213,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San José mine - 49% basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash costs
(2)
|
|
$
|
17,543
|
|
$
|
16,709
|
|
$
|
72,264
|
|
$
|
73,469
|
|
$
|
76,550
|
|
Total cash costs per ounce sold ($/ounce)
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
|
|
$
|
723
|
|
$
|
764
|
|
$
|
751
|
|
$
|
871
|
|
$
|
874
|
|
Silver
|
|
$
|
9.81
|
|
$
|
10.22
|
|
$
|
10.24
|
|
$
|
11.45
|
|
$
|
12.11
|
|
Gold equivalent
(1)
|
|
$
|
729
|
|
$
|
765
|
|
$
|
760
|
|
$
|
865
|
|
$
|
795
|
|
All
‑
in sustaining costs
(2)
|
|
$
|
23,351
|
|
$
|
21,186
|
|
$
|
90,809
|
|
$
|
94,396
|
|
$
|
104,566
|
|
All
‑
in sustaining costs per ounce sold ($/ounce)
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold
|
|
$
|
963
|
|
$
|
969
|
|
$
|
944
|
|
$
|
1,119
|
|
$
|
1,193
|
|
Silver
|
|
$
|
13.05
|
|
$
|
12.95
|
|
$
|
12.87
|
|
$
|
14.72
|
|
$
|
16.54
|
|
Gold equivalent
(1)
|
|
$
|
970
|
|
$
|
970
|
|
$
|
954
|
|
$
|
1,111
|
|
$
|
1,086
|
|
Silver : gold ratio
(1)
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
60 : 1
|
|
|
(1)
|
|
Silver production is presented as a gold equivalent. Gold equivalent ounces calculations are based on prevailing spot prices at the beginning of the year. The silver to gold ratio used for 2016 and 2015 was 75:1, while the ratio for 2014 was 60:1.
|
|
(2)
|
|
Total cash costs and all‑in sustaining costs are non‑GAAP financial performance measures with no standardized definition under U.S. GAAP. See “Non‑GAAP Financial Performance Measures” on page 52 for additional information, including definitions of these terms.
|
2016 compared to 2015
On a 100% basis, total cash costs for the San José mine per gold equivalent ounce sold in 2016 decreased by 12% to $760 from $865 in 2015. On an aggregate basis, total cash costs decreased by 2% to $147.5 million in 2016 from $149.9 million in 2015, despite the higher number of ounces of gold equivalent sold in the year. The key factors of the decrease were:
|
·
|
|
A decrease equivalent to $9.4 million, in refining, smelting and transportation costs resulting from lower export duties in place in Argentina since November 2015.
|
|
·
|
|
A $2.6 million increase in commercial discounts given to the refineries, in line with the increase in the number of ounces of gold equivalent sold throughout the year.
|
All‑in sustaining cost per gold equivalent ounce in 2016 was $954 compared to $1,111 per ounce in 2015. On a 100% basis, total aggregate all-in sustaining cost per gold equivalent ounce was $185.3 million, compared to $192.6 million in 2015. The decrease was due to lower mine development costs incurred due to the lower number of meters drilled in the year.
Total cash costs and all-in sustaining costs per gold equivalent ounce, using a 75:1 ratio, of $760 and $954, respectively were below MSC’s 2016 production guidance of $780 and $990 per gold equivalent ounce, respectively.
2015 compared to 2014
On a 100% basis, total cash costs for the San José mine per gold equivalent ounce sold in the year 2015 was $865 per ounce compared to $795 per gold equivalent ounce in 2014. On an aggregate basis, total cash costs decreased to $149.9 million from $156.2 million, from 2015 to 2014, due to the lower sales volume in the year 2015 compared to 2014, as well as higher ending inventory levels due to delay in the shipment of concentrate during December 2015, as a result of a strike at Puerto Deseado.
All‑in sustaining cash costs per gold equivalent ounce sold in 2015 were $1,111 per ounce based on a 75:1 ratio, compared to $1,086 per ounce in 2014 based on a silver to gold ratio of 60:1, or $1,216 based on a 75:1 ratio. On a co‑product basis, all‑in sustaining costs for the year ended December 31, 2015 were $1,119 per ounce of gold, compared to $1,193 per ounce in 2014, and $14.72 per ounce of silver, compared to $16.54 per ounce in 2014.
Investment in MSC
(49%)
Our 49% attributable share of operations from our investment in MSC was income of $13.0 million in 2016, compared to income of $2.4 million in 2015. The $13.0 million net income for the year ended December 31, 2016 is net of the amortization of the fair value increments arising from the purchase price allocation recorded as part of the acquisition of Minera Andes of $12.3 million and related deferred income tax recovery of $9.3 million.
Included in the income tax recovery is the impact of fluctuations in the exchange rate between the Argentine peso and the U.S. dollar on the peso‑denominated deferred tax liability associated with the investment in MSC recorded as part of the acquisition of Minera Andes.
A summary of the financial results of MSC, including our 49% attributable share of operations from our investment in MSC, for the years ended December 31, 2016, 2015, and 2014, is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
Minera Santa Cruz S.A. (100% basis)
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
235,961
|
|
$
|
186,095
|
|
$
|
213,013
|
Production costs applicable to sales
|
|
|
(173,679)
|
|
|
(158,615)
|
|
|
(173,274)
|
Net income (loss)
|
|
|
31,976
|
|
|
(5,835)
|
|
|
(5,300)
|
Portion attributable to McEwen Mining Inc. (49% basis)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,961
|
|
$
|
(2,859)
|
|
$
|
(2,597)
|
Amortization of fair value increments
|
|
|
(12,274)
|
|
|
(10,669)
|
|
|
(13,190)
|
Income tax benefit
|
|
|
9,264
|
|
|
15,942
|
|
|
10,503
|
Income (loss) from investment in MSC, net of amortization
|
|
$
|
12,951
|
|
$
|
2,414
|
|
$
|
(5,284)
|
During the year ended December 31, 2016, we received $17.7 million in dividends from MSC, compared to $0.5 million in 2015.
Changes in our investment in MSC for the years ended December 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Investment in MSC, beginning balance
|
|
$
|
167,107
|
|
$
|
177,018
|
Attributable net income (loss) from MSC
|
|
|
15,961
|
|
|
(2,859)
|
Amortization of fair value increments
|
|
|
(12,274)
|
|
|
(10,669)
|
Income tax benefit
|
|
|
9,264
|
|
|
15,942
|
Dividend distribution received
|
|
|
(17,738)
|
|
|
(548)
|
Impairment of investment in MSC
|
|
|
—
|
|
|
(11,777)
|
Investment in MSC, ending balance
|
|
$
|
162,320
|
|
$
|
167,107
|
At December 31, 2016, MSC had current assets of $108.9 million, total assets of $468.3 million, current liabilities of $59.5 million and total liabilities of $137.0 million. These balances include the increase in fair value and amortization of the fair value increments arising from the purchase price allocation and are net of the impairment charges. Excluding the
fair value increments from the purchase price allocation and impairment charges, MSC had current assets of $107.9 million, total assets of $288.9 million, current liabilities of $63.6 million, and total liabilities of $88.6 million at December 31, 2016.
Results of Operations – Nevada Segment
The Nevada segment is composed of the Gold Bar project, our advanced-stage property located in Nevada, U.S.
Advanced-stage Properties – Gold Bar Project
Gold Bar is located primarily on public lands managed by the Bureau of Land Management (BLM). We have targeted this project for an open pit, heap leach operation allowing for construction to potentially begin in late 2017 and achieve commercial production in late 2018, depending upon the completion of the permitting process.
In line with our annual budget, during 2016 we spent $2.7 million on environmental studies and other requirements to complete our permitting process.
Key developments at Gold Bar continued during the year were:
|
·
|
|
Completion of an updated mine plan leading to operational improvements including accessing mineralized material earlier, mining efficiencies related to bench development, and improved delivery scheduling;
|
|
·
|
|
Completion of additional metallurgical work confirming previous recovery assumptions; and
|
|
·
|
|
Awarding M3 Engineering & Technology Corp. (“M3 Engineering”) the detailed design contract for Gold Bar. M3 Engineering is a leading engineering and infrastructure firm based in Arizona, United States.
|
Results of Operations—Los Azules
Segment
The Los Azules segment is composed of the Los Azules project, a copper exploration project located in Argentina.
Los Azules Project
In line with our budget, during 2016 we spent $1.6 million in further baseline environmental and optimization studies, and related activities at Los Azules, since no significant exploration work or drilling program had been planned for the 2015-2016 drilling season.
Commitments and Contingencies
The following table presents certain payments due by the Company under contractual obligations with minimum firm commitments as of December 31, 2016, and excludes amounts already recorded on the Consolidated Balance Sheet, other than reclamation costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
|
|
(in thousands)
|
Operating lease obligations (office rent)
|
|
$
|
494
|
|
$
|
309
|
|
$
|
315
|
|
$
|
318
|
|
$
|
257
|
|
$
|
512
|
|
$
|
2,205
|
Operating lease obligations (mining and surface rights)
|
|
|
2,044
|
|
|
2,337
|
|
|
2,332
|
|
|
2,291
|
|
|
2,261
|
|
|
2,466
|
|
|
13,731
|
Reclamation costs
(1)
|
|
|
751
|
|
|
415
|
|
|
690
|
|
|
3,540
|
|
|
2,709
|
|
|
2,810
|
|
|
10,915
|
Total
|
|
$
|
3,289
|
|
$
|
3,061
|
|
$
|
3,337
|
|
$
|
6,149
|
|
$
|
5,227
|
|
$
|
5,788
|
|
$
|
26,851
|
|
(1)
|
|
Amounts presented represent the undiscounted uninflated future payments
|
Operating lease obligations include long‑term leases covering office space, exploration expenditures, option payments and option payments on properties.
We have surety bonds outstanding to provide bonding for our environmental reclamation obligations in the United States. These surety bonds are available for draw down by the BLM in the event we do not perform our reclamation obligations. If the specific reclamation requirements are met, the beneficiary of the surety bonds will cancel and/or return the instrument to the issuing entity. As of December 31, 2016, no liability has been recognized for our surety bonds of $4.8 million.
As of December 31, 2016, we did not have any off‑balance sheet arrangements (as that phrase is defined by SEC rules applicable to this report) which have or are reasonably likely to have a material adverse effect on our financial condition, results of operations or liquidity.
Non‑GAAP Financial Performance Measures
In this report, we have provided information prepared or calculated according to U.S. GAAP, as well as provided some non‑U.S. GAAP financial performance measures. Because the non‑GAAP performance measures do not have any standardized meaning prescribed by U.S. GAAP, they may not be comparable to similar measures presented by other companies. These measures should not be considered in isolation or as substitutes for measures of performance prepared in accordance with GAAP. There are limitations associated with the use of such non‑GAAP measures. Since these measures do not incorporate revenues, changes in working capital and non‑operating cash costs, they are not necessarily indicative of operating profit or loss, or cash flow from operations as determined in accordance with U.S. GAAP.
The non-GAAP measures Earning from Mining Operations, Total Cash Costs, All-In Sustaining Cash Costs, Average Realized Prices, and Cash, Investments and Precious Metals, are not, and are not intended to be, presentations in accordance with U.S. GAAP. These measures represent, respectively, our Earnings from Mining Operations, Total Cash Costs, All-In Sustaining Cash Costs, and Average Realized Prices related to our wholly-owned El Gallo 1 mine and our minority interest in the San José mine, owned by MSC. The portions of the costs and prices related to the minority interest may be found in Note 6 to our Consolidated Financial Statements. The amounts in the tables labeled “49% basis” were derived by applying to each financial statement line item the ownership percentage interest used to arrive at our share of net income or loss during the period when applying the equity method of accounting. 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 JVOA and varies depending on factors including the profitability of the operations.
We provide the Non-GAAP measures because we believe they assist investors and analysts in estimating our earnings, production costs applicable to sales and sales revenue, including both our wholly-owned property and our interest in the San José mine, when read in conjunction with our reported results under U.S. GAAP. The presentation of these measures including the minority interest has limitations as an analytical tool. Some of these limitations include:
|
·
|
|
The amounts shown on the individual line items were derived by applying our overall economic ownership interest percentage determined when applying the equity method of accounting and do not necessarily represent our legal claim to the assets and liabilities, or the revenues and expenses; and
|
|
·
|
|
Other companies in our industry may calculate their earnings, costs and average realized prices differently than we do, limiting the usefulness as a comparative measure.
|
Because of these limitations, these non-GAAP measures should not be considered in isolation or as a substitute for our financial statements as reported under U.S. GAAP. We compensate for these limitations by relying primarily on our U.S. GAAP results and using the non-GAAP measures supplementally.
Earnings (Loss) from Mining Operations
The term Earnings or Loss from Mining Operations used in this report is a non‑GAAP financial measure. We use and report this measure because we believe it provides investors and analysts with a useful measure of the underlying earnings or loss from our mining operations.
We define Earnings from Mining Operations as Gold and Silver Sales from our El Gallo 1 mine and our 49% attributable share of the San José mine’s Net Sales, less their respective Production Costs Applicable to Sales. To the extent that Production Costs Applicable to Sales may include depreciation and amortization expense related to the fair value increments on historical business acquisitions (fair value paid in excess of the carrying value of the underlying assets and liabilities assumed on the date of acquisition), we deduct this expense in order to arrive at Production Costs Applicable to Sales that only include depreciation and amortization expense incurred at the mine‑site level. The San José mine Net Sales
and Production Costs Applicable to Sales are presented, on a 100% basis, in Note 6 of the accompanying financial statements.
The following table presents a reconciliation of Earnings from Mining Operations to Gross Profit, a GAAP financial measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
El Gallo 1 mine earnings from mining operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold and silver sales
|
|
$
|
11,162
|
|
$
|
11,411
|
|
$
|
60,388
|
|
$
|
72,956
|
|
$
|
45,303
|
Production costs applicable to sales
|
|
|
(6,894)
|
|
|
(5,695)
|
|
|
(28,133)
|
|
|
(34,607)
|
|
|
(40,608)
|
Depreciation of mining related assets
|
|
|
(182)
|
|
|
(102)
|
|
|
(528)
|
|
|
(333)
|
|
|
(278)
|
Gross profit
|
|
|
4,086
|
|
|
5,614
|
|
|
31,727
|
|
|
38,016
|
|
|
4,417
|
Add: Amortization related to fair value increments on historical acquisitions included in Production costs applicable to sales
|
|
|
568
|
|
|
322
|
|
|
2,413
|
|
|
1,288
|
|
|
1,288
|
El Gallo 1 mine earnings from mining operations
|
|
$
|
4,654
|
|
$
|
5,936
|
|
$
|
34,140
|
|
$
|
39,304
|
|
$
|
5,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San José earnings from mining operations (49% basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
26,064
|
|
|
22,045
|
|
|
115,621
|
|
|
91,187
|
|
|
104,376
|
Production costs applicable to sales
|
|
|
(23,410)
|
|
|
(18,951)
|
|
|
(85,103)
|
|
|
(77,721)
|
|
|
(84,904)
|
San José earnings from mining operations
|
|
$
|
2,654
|
|
$
|
3,094
|
|
$
|
30,518
|
|
$
|
13,466
|
|
$
|
19,472
|
Total Cash Costs and All‑In Sustaining Costs
The terms total cash costs, total 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 (San José mine and El Gallo 1 mine), and believe these measures provide investors and analysts with useful information about our underlying costs of operations. For the San José mine, where we hold a 49% share in the production through our 49% interest in MSC, we exclude the share of gold or silver production attributable to the controlling interest.
Total cash costs consists 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, and exclude depreciation and amortization. The sum of these costs is divided by the corresponding gold equivalent ounces sold to determine a per ounce amount.
All‑in sustaining costs consists of total cash costs (as described above), plus environmental rehabilitation costs and amortization of the asset retirement costs related to operating sites, sustaining exploration and development costs, and sustaining capital expenditures. Our all-in sustaining costs exclude the allocation of corporate general and administrative costs. The sum of these costs is divided by the corresponding gold equivalent ounces sold to determine a per ounce amount.
Costs excluded from total cash costs and all‑in sustaining costs are income tax expense, all financing charges, costs related to business combinations, asset acquisitions and asset disposal, and any items that are deducted for the purpose of normalizing items.
For MSC, co‑product total cash costs and all‑in sustaining costs are calculated by dividing the respective proportionate share of the total cash costs and all‑in sustaining costs for each metal sold for the period by the ounces of each respective metal sold. The respective proportionate share of each metal sold is calculated based on their pro‑rated sales value. Approximately 52% of the value of the sales in the fourth quarter of 2016 was derived from gold and 48% was derived from silver, which remained unchanged compared to the same period in 2015. For the year ended December 31, 2016, approximately 50% of the value of the sales was derived from gold and silver, respectively, compared to 51% and 49% in 2015, respectively.
The following tables reconcile these non‑GAAP measures to the most directly comparable GAAP measure, Production Costs Applicable to Sales. Total cash costs, all‑in sustaining costs, and ounces of gold and silver sold for the San José mine are provided to us by MSC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands, except per ounce)
|
El Gallo 1 mine cash costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs applicable to sales
|
|
$
|
6,894
|
|
$
|
5,695
|
|
$
|
28,133
|
|
$
|
34,607
|
|
$
|
40,608
|
Less: Depreciation
|
|
|
(568)
|
|
|
(322)
|
|
|
(2,413)
|
|
|
(1,288)
|
|
|
(1,288)
|
Less: Pre
‑
stripping costs for future pit access
|
|
|
(367)
|
|
|
(698)
|
|
|
(1,713)
|
|
|
(6,408)
|
|
|
(8,763)
|
On
‑
site general and administrative expenses
|
|
|
440
|
|
|
195
|
|
|
1,580
|
|
|
805
|
|
|
1,174
|
Property holding costs
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
26
|
|
|
27
|
Other non
‑
cash adjustments
|
|
|
—
|
|
|
220
|
|
|
—
|
|
|
(135)
|
|
|
(340)
|
Total cash costs, El Gallo 1 mine
|
|
$
|
6,399
|
|
$
|
5,090
|
|
$
|
25,609
|
|
$
|
27,607
|
|
$
|
31,418
|
Gold equivalent ounces sold:
|
|
|
9,155
|
|
|
10,270
|
|
|
48,903
|
|
|
62,704
|
|
|
35,924
|
El Gallo 1 mine cash costs per gold equivalent ounce sold
|
|
$
|
699
|
|
$
|
496
|
|
$
|
524
|
|
$
|
440
|
|
$
|
875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands, except per ounce)
|
San José mine cash costs (49% basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs applicable to sales
|
|
$
|
23,410
|
|
$
|
18,951
|
|
$
|
85,103
|
|
$
|
77,721
|
|
$
|
84,904
|
Less: Operating site reclamation accretion and amortization
|
|
|
(444)
|
|
|
(378)
|
|
|
(1,676)
|
|
|
(1,213)
|
|
|
(1,746)
|
Depreciation
|
|
|
(8,339)
|
|
|
(6,312)
|
|
|
(27,463)
|
|
|
(22,157)
|
|
|
(29,795)
|
On
‑
site general and administrative expenses
|
|
|
1,130
|
|
|
920
|
|
|
4,004
|
|
|
3,454
|
|
|
3,927
|
Refining, smelting, and transportation
|
|
|
461
|
|
|
2,168
|
|
|
5,072
|
|
|
9,657
|
|
|
12,078
|
Commercial discounts
|
|
|
1,295
|
|
|
1,309
|
|
|
7,064
|
|
|
5,795
|
|
|
6,957
|
Community costs related to current operations
|
|
|
30
|
|
|
49
|
|
|
160
|
|
|
211
|
|
|
223
|
Total cash costs
|
|
$
|
17,543
|
|
$
|
16,707
|
|
$
|
72,264
|
|
$
|
73,468
|
|
$
|
76,548
|
San José mine gold equivalent ounces sold
|
|
|
24,063
|
|
|
21,835
|
|
|
95,147
|
|
|
84,928
|
|
|
96,304
|
San José mine cash cost per gold equivalent ounce sold
|
|
$
|
729
|
|
$
|
765
|
|
$
|
760
|
|
$
|
865
|
|
$
|
795
|
Reconciliation of All‑In Sustaining Costs to Total Cash Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
2014
|
|
|
(in thousands, except per ounce)
|
El Gallo 1 mine all-in sustaining costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash costs
|
|
$
|
6,399
|
|
$
|
5,090
|
|
$
|
25,609
|
|
$
|
27,607
|
|
$
|
31,418
|
Operating site reclamation accretion and amortization
|
|
|
319
|
|
|
(20)
|
|
|
1,043
|
|
|
936
|
|
|
802
|
On
‑
site exploration expenses
|
|
|
530
|
|
|
344
|
|
|
1,110
|
|
|
1,488
|
|
|
1,592
|
Capital expenditures (sustaining)
|
|
|
—
|
|
|
—
|
|
|
343
|
|
|
—
|
|
|
320
|
Pre
‑
stripping costs for future pit access
|
|
|
367
|
|
|
698
|
|
|
1,713
|
|
|
6,408
|
|
|
8,763
|
All
‑
in sustaining costs, El Gallo 1 mine
|
|
$
|
7,615
|
|
$
|
6,112
|
|
$
|
29,818
|
|
$
|
36,439
|
|
$
|
42,895
|
Gold equivalent ounces sold
|
|
|
9,155
|
|
|
10,270
|
|
|
48,903
|
|
|
62,704
|
|
|
35,924
|
El Gallo 1 mine all-in sustaining cost per gold equivalent ounce sold
|
|
$
|
832
|
|
$
|
595
|
|
$
|
610
|
|
$
|
581
|
|
$
|
1,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands, except per ounce)
|
San José mine all-in sustaining costs (49% basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash costs
|
|
$
|
17,543
|
|
$
|
16,709
|
|
$
|
72,265
|
|
$
|
73,470
|
|
$
|
76,548
|
Operating site reclamation accretion and amortization
|
|
|
444
|
|
|
378
|
|
|
1,676
|
|
|
1,213
|
|
|
1,746
|
On-site exploration expenses
|
|
|
742
|
|
|
289
|
|
|
1,431
|
|
|
1,431
|
|
|
1,060
|
Capitalized stripping & underground mine development
|
|
|
3,287
|
|
|
2,925
|
|
|
12,832
|
|
|
13,383
|
|
|
15,170
|
Less: depreciation
|
|
|
(433)
|
|
|
—
|
|
|
(2,042)
|
|
|
—
|
|
|
—
|
Capital expenditures
|
|
|
1,768
|
|
|
885
|
|
|
4,647
|
|
|
4,899
|
|
|
10,042
|
All
‑
in sustaining costs
|
|
$
|
23,351
|
|
$
|
21,186
|
|
$
|
90,809
|
|
$
|
94,396
|
|
$
|
104,566
|
San José mine gold equivalent ounces sold
|
|
|
24,063
|
|
|
21,835
|
|
|
95,147
|
|
|
84,928
|
|
|
96,304
|
San José mine all-in sustaining cost per gold equivalent ounce sold
|
|
$
|
970
|
|
$
|
970
|
|
$
|
954
|
|
$
|
1,111
|
|
$
|
1,086
|
The following table summarizes the consolidated number of gold equivalent ounces sold:
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
December 31,
|
|
Year ended
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Gold equivalent ounces sold (El Gallo 1 mine)
|
|
9,155
|
|
10,270
|
|
48,903
|
|
62,704
|
McEwen’s share of MSC gold equivalent ounces sold
|
|
24,063
|
|
21,835
|
|
95,147
|
|
84,928
|
Consolidated gold equivalent ounces sold (including McEwen’s share of MSC)
|
|
33,218
|
|
32,105
|
|
144,050
|
|
147,632
|
Silver : gold ratio
|
|
75 : 1
|
|
75 : 1
|
|
75 : 1
|
|
75 : 1
|
Average realized prices
The term average realized price per ounce used in this report is also a non‑GAAP financial measure. We report this measure to better understand the price realized in each reporting period for gold and silver.
Average realized price is calculated as gross sales of gold and silver (excluding commercial deductions) over the number of net ounces sold in the period (net of deduction units).
The following table reconciles this non‑GAAP measure to the most directly comparable U.S. GAAP measure,
Sales of Gold and Silver
. Ounces of gold and silver sold for the San José mine are provided to us by MSC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands, except ounce and per ounce figures)
|
El Gallo 1 mine average realized prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold sales
|
|
$
|
11,145
|
|
$
|
11,347
|
|
$
|
60,093
|
|
$
|
72,377
|
|
$
|
44,956
|
Silver sales
|
|
|
17
|
|
|
64
|
|
|
295
|
|
|
579
|
|
|
347
|
Gold and silver sales
|
|
$
|
11,162
|
|
$
|
11,411
|
|
$
|
60,388
|
|
$
|
72,956
|
|
$
|
45,303
|
Gold ounces sold
|
|
|
9,142
|
|
|
10,211
|
|
|
48,668
|
|
|
62,226
|
|
|
35,600
|
Silver ounces sold
|
|
|
991
|
|
|
4,416
|
|
|
17,591
|
|
|
35,862
|
|
|
19,417
|
Gold equivalent ounces sold
|
|
|
9,155
|
|
|
10,270
|
|
|
48,903
|
|
|
62,704
|
|
|
35,924
|
Average realized price per gold ounce sold
|
|
$
|
1,219
|
|
$
|
1,111
|
|
$
|
1,235
|
|
$
|
1,163
|
|
$
|
1,263
|
Average realized price per silver ounce sold
|
|
$
|
17.52
|
|
$
|
14.40
|
|
$
|
16.77
|
|
$
|
16.15
|
|
$
|
17.87
|
Average realized price per gold equivalent ounce sold
|
|
$
|
1,219
|
|
$
|
1,111
|
|
$
|
1,235
|
|
$
|
1,163
|
|
$
|
1,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Year ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands, except ounce and per ounce figures)
|
San José mine average realized prices (49% basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold sales
|
|
$
|
14,203
|
|
$
|
12,030
|
|
$
|
60,729
|
|
$
|
48,745
|
|
$
|
55,268
|
Silver sales
|
|
|
12,905
|
|
|
11,009
|
|
|
59,960
|
|
|
46,749
|
|
|
54,711
|
Gold and silver sales
|
|
$
|
27,108
|
|
$
|
23,039
|
|
$
|
120,688
|
|
$
|
95,494
|
|
$
|
109,979
|
Gold ounces sold
|
|
|
12,733
|
|
|
11,353
|
|
|
48,883
|
|
|
43,509
|
|
|
44,725
|
Silver ounces sold
|
|
|
849,774
|
|
|
786,168
|
|
|
3,469,767
|
|
|
3,106,445
|
|
|
3,094,840
|
Gold equivalent ounces sold
|
|
|
24,063
|
|
|
21,835
|
|
|
95,147
|
|
|
84,931
|
|
|
96,530
|
Average realized price per gold ounce sold
|
|
$
|
1,115
|
|
$
|
1,060
|
|
$
|
1,242
|
|
$
|
1,120
|
|
$
|
1,236
|
Average realized price per silver ounce sold
|
|
$
|
15.19
|
|
$
|
14.00
|
|
$
|
17.28
|
|
$
|
15.05
|
|
$
|
17.68
|
Average realized price per gold equivalent ounce sold
|
|
$
|
1,127
|
|
$
|
1,055
|
|
$
|
1,268
|
|
$
|
1,124
|
|
$
|
1,139
|
Cash, investments and precious metals
The term cash, investments and precious metals used in this report is also a non‑GAAP financial measure. We report this measure to better understand our liquidity in each reporting period.
Cash, investments and precious metals is calculated as the sum of cash, investments and ounces of doré held in inventory, valued at the London P.M. Fix spot price at the corresponding period. The following table summarizes the calculation of cash, investments and precious metals amounts shown in this report:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Cash
|
|
$
|
37,440
|
|
$
|
25,874
|
Investments
|
|
|
8,543
|
|
|
1,032
|
Precious metals
(1)
|
|
|
12,795
|
|
|
5,065
|
Total cash, investments and precious metals
|
|
$
|
58,778
|
|
$
|
31,971
|
|
(1)
|
|
Precious metals is calculated using the number of ounces held in inventory at the end of the year, and valued at the London P.M. Fix spot
|
A reconciliation between precious metals valued at cost and precious metals valued at market value is described in the following table:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
(in
thousands, except ounces and per ounce)
|
Precious metals (Item 8. Financial statements and supplementary data, Note 4 - Inventories)
|
|
$
|
5,035
|
|
$
|
1,820
|
Number of ounces of doré in inventory
|
|
|
11,039
|
|
|
4,778
|
London P.M. Fix, per ounce
|
|
|
1,159
|
|
|
1,060
|
Precious metals valued at market value
|
|
$
|
12,795
|
|
$
|
5,065
|
Critical Accounting Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in conformity with U.S. GAAP. The preparation of these statements requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on historical experience and on assumptions that we consider reasonable under the circumstances; however, reported results could differ from those based on the current estimates under different assumptions or conditions. The summary of our significant accounting policies is detailed in Note 2 of the Consolidated Financial Statements. In the section below we identify estimates critical to the understanding of our results of operations and that require the application of significant management judgment.
Stockpiles, Material on Leach Pads, In‑process Inventory, Precious Metals Inventory and Materials and Supplies:
Stockpiles, material on leach pads, in-process inventory, precious metals inventory and materials and supplies are accounted for using weighted average cost method and are carried at the lower of average cost or net realizable value. Net
realizable value represents the estimated future sales price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the product to sale. Write-downs of stockpiles, material on leach pads, in-process inventory, precious metals inventory and materials and supplies, resulting from net realizable value impairments, are reported as a component of production costs applicable to sales. The current portion of stockpiles, material on leach pad, in-process inventory and materials and supplies is determined based on the expected amounts to be processed within the next 12 months. Stockpiles, material on leach pads, in‑process inventory and materials and supplies not expected to be processed within the next 12 months, if any, are classified as long‑term.
Stockpiles represent mineralized material that has been extracted from the mine and is available for further processing. Stockpiles are measured by estimating the number of tonnes added and removed from the stockpile, an estimate of the contained metals (based on assay data) and the estimated metallurgical recovery rates. Costs are allocated to stockpiles based on current mining costs incurred, including applicable overhead relating to mining operations. Material is removed from the stockpile at an average cost per tonne.
Mineralized material on leach pads is the ore that is placed on pads where it is treated with a chemical solution that dissolves the gold contained in the ore over a period of months. Costs are attributed to the ore on leach pads based on current mining costs incurred up to the point of placing the ore on the pad. Costs are removed from the leach pad inventory based on the average cost per estimated recoverable ounce of gold on the leach pad as the gold is recovered. The estimates of recoverable gold on the leach pads are calculated from the quantities of ore placed on the leach pads (measured tonnes added to the leach pads), the grade of ore placed on the leach pads (based on assay data) and a recovery percentage.
In general, leach pads recover between 50% and 95% of the recoverable ounces in the first year of leaching, declining each year thereafter until the leaching is complete. The cumulative metallurgical recovery rate for gold production at the El Gallo 1 mine from September 2012 (start of production) to December 31, 2016 was approximately 59% (2015 – 56%). Although the quantities of recoverable gold placed on the leach pads are reconciled by comparing the grades of ore placed on the pads to the quantities of gold actually recovered (metallurgical balancing), the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process is constantly monitored and the engineering estimates are refined based on actual results over time.
In-process inventories represent materials that are currently in the process of being converted to a saleable product. In-process material is measured based on assays of the material from the various stages of the ADR process and the projected recoveries of the respective plants. Costs are allocated to in-process inventories based on the costs of the material fed into the process attributable to the source material coming from the mines, stockpiles and/or leach pads plus the in-process conversion costs incurred to that point in the process.
Precious metal inventories include gold and silver doré and bullion that is unsold and held at the Company’s or the refinery’s facilities. Costs are allocated to precious metal inventories based on costs of the respective in-process inventories incurred prior to the refining process plus applicable refining costs.
Materials and supplies inventories are comprised of chemicals, reagents and consumable parts used in drilling and other operating activities. Cost includes applicable taxes and freight.
Proven and Probable Reserves:
The definition of proven and probable reserves is set forth in SEC Industry Guide 7. Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geological character is so well defined that size, shape, depth and mineral content of the reserves are well‑established. Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observations.
As of December 31, 2016, except for the Company’s 49% interest in the San José mine, none of the Company’s properties contain resources that satisfy the definition of proven and probable reserves.
Mineral Property Interests:
Mineral property interests include acquired interests in advanced-stage properties and exploration stage properties, which are considered tangible assets. The amount capitalized relating to a mineral property interest represents its fair value at the time of acquisition, either as an individual asset purchase or as a part of a business combination. The value of mineral property interests is primarily driven by the nature and amount of mineralized material believed to be contained in the properties. When proven and probable reserves exist, the relevant capitalized costs and
mineral property interests are to be charged to expense based on the units of production method and upon commencement of production. However, when a property does not contain mineralized material that satisfies the definition of proven and probable reserves, the amortization of the capitalized costs and mineral property interests are charged to expense based on the most appropriate method, which includes straight-line method and units-of-production method over the estimated useful life of the mine, as determined by our internal mine plans. As a result of these and other differences, the Company’s financial statements may not be comparable to the financial statements of mining companies that have established reserves as defined by SEC Industry Guide 7.
Impairment of Long-lived Assets:
The Company reviews and evaluates its long-lived assets for impairment 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. For the purpose of recognition and measurement of impairment, the Company groups its long-lived assets by specific mine or project, as this represents the lowest level for which there are identifiable cash flows.
For asset groups where impairment loss is determined using the undiscounted future net cash flows method or discounted future net cash flows method, future cash flows are estimated based on quantities of recoverable mineralized material, expected gold and silver prices (considering current and historical prices, trends and related factors), production levels, operating costs, capital requirements and reclamation costs, all based on life-of-mine plans. The term “recoverable mineralized material” refers to the estimated amount of gold or other commodities that will be obtained after taking into account losses during processing and treatment of mineralized material. The Company’s estimates of future cash flows are based on numerous assumptions and it is possible that actual future cash flows will be significantly different than the estimates, as actual future quantities of recoverable minerals, gold, silver and other commodity prices, production levels and costs of capital are each subject to significant risks and uncertainties.
For asset groups where the Company is unable to determine a reliable estimate of undiscounted future net cash flows, the Company adopts a market approach to estimate fair value by using a combination of observed market value per square mile and observed market value per ounce or pound of mineral material based on comparable transactions.
Asset Retirement Obligation, reclamation and remediation costs:
The Company records the fair value of a liability for an asset retirement obligation (“ARO”) in the period that it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset when proven or probable reserves exist, or if they relate to an acquired mineral property interest. Periodic accretion is recorded to ARO and charged to earnings. Since no proven or probable reserves have been established for any of the Company’s properties, other than at the San José mine, incremental asset retirement costs associated with the upward adjustments to the fair value of the ARO at the El Gallo 1 mine or Tonkin property are charged to expense. The fair value of ARO is measured by discounting the expected cash flows adjusted for inflation, using a credit-adjusted risk free rate of interest. The Company prepares estimates of the timing and amounts of expected cash flows when an ARO is incurred, which are updated to reflect changes in facts and circumstances. Estimation of the fair value of AROs requires significant judgment, including amount of cash flows, timing of reclamation, inflation rate or credit risk.
Ongoing environmental and reclamation expenditures are debited against the ARO liability as incurred to the extent they relate to the ARO liability and to expense to the extent they do not.
Income Taxes:
The Company accounts for income taxes under ASC 740. Using the liability method, recognizing certain temporary differences between the financial reporting basis of liabilities and assets and the related income tax basis for such liabilities and assets. This method generates either a net deferred income tax liability or asset for the Company, as measured by the statutory tax rates in effect. The Company derives the deferred income tax charge or benefit by recording the change in either the net deferred income tax liability or asset balance for the year. The Company records a valuation allowance against any portion of those deferred income tax assets when it believes, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized.
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, cost and feasibility of production, receipt of permits or other regulatory or government approvals and plans for the development of our properties;
|
|
·
|
|
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. You can find many of these statements by looking for words such as “believes”, “expects”, “anticipates”, “estimates” or similar expressions used in this report or incorporated by reference in this report.
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.
Included amongst the forward-looking statements and information provided on this document is production guidance. On an annual basis, we develop a consolidated budget, based on standalone budgets for each operating mine. In developing the mine production portion of the budget, we evaluate a number of factors and assumptions, which include, but are not limited to:
|
·
|
|
gold and silver price forecasts;
|
|
·
|
|
average gold and silver grade mined, using the resource model;
|
|
·
|
|
average grade processed by the crushing facility (El Gallo 1 mine) or milling facility (San José mine);
|
|
·
|
|
expected tonnes moved and strip ratios;
|
|
·
|
|
available stockpile material (grades, tonnes, and accessibility);
|
|
·
|
|
estimates of in process inventory (either on the leach pad or plant for the El Gallo 1 mine, or in the mill facility for the San José mine);
|
|
·
|
|
estimated leach recovery rates and leach cycle times (El Gallo 1 mine);
|
|
·
|
|
estimated mill recovery rates (San José mine);
|
|
·
|
|
dilution of material processed;
|
|
·
|
|
internal and contractor equipment and labor availability; and
|
|
·
|
|
seasonal weather patterns, particularly in Mexico.
|
Actual production results are sensitive to variances in any of the key factors and assumptions noted above. As a result, we frequently evaluate and reconcile actual results to budgeted results to identify if key assumptions and estimates requiring modification. Any changes will, in turn, influence production guidance.
We caution you not to put undue reliance on these 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
The important factors that could prevent us from achieving our stated goals and objectives include, but are not limited to, those set forth in other “Risk Factors” section in this report and the following:
|
·
|
|
our ability to raise funds required for the execution of our business strategy;
|
|
·
|
|
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;
|
|
·
|
|
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Securities Exchange Act of 1934 defines internal control over financial reporting in Rule 13a‑15(f) and 15d‑15(f) as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
|
·
|
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
|
|
·
|
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the board of directors of the Company; and
|
|
·
|
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated Framework
(2013).
Based upon its assessment, management concluded that, as of December 31, 2016, the Company’s internal control over financial reporting was effective based upon those criteria. Ernst & Young LLP, an independent registered public accounting firm, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of McEwen Mining Inc.:
We have audited the accompanying consolidated balance sheet of McEwen Mining Inc. and subsidiaries as of December 31, 2016 and the related consolidated statement of operations and comprehensive income (loss), shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of McEwen Mining Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statement based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of McEwen Mining Inc. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), McEwen Mining Inc.’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2017 expressed an unqualified opinion on the effectiveness of McEwen Mining Inc.’s internal control over financial reporting.
/s/ ERNST & YOUNG LLP
Chartered Professional Accountants, Licensed Public Accountants
March 1, 2017
Toronto, Canada
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
McEwen Mining Inc.:
We have audited the accompanying consolidated balance sheet of McEwen Mining Inc. and subsidiaries as of December 31, 2015, and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2015. These consolidated financial statements are the responsibility of McEwen Mining Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of McEwen Mining Inc. and subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Chartered Professional Accountants, Licensed Public Accountants
March 11, 2016
Toronto, Canada
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of McEwen Mining Inc.:
We have audited McEwen Mining Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). McEwen Mining Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, McEwen Mining Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of McEwen Mining Inc. as of December 31, 2016, and the related consolidated statement of operations and comprehensive income, changes in shareholders’ equity and cash flows for the year then ended, and our report dated March 1, 2017 expressed an unqualified opinion on those consolidated financial statements.
/s/ ERNST & YOUNG LLP
Chartered Professional Accountants, Licensed Public Accountants
March 1, 2017
Toronto, Canada
MCEWEN MINING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS
)
FOR THE YEARS ENDED DECEMBER 31,
(in thousands of U.S. dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
Gold and silver sales
|
|
$
|
60,388
|
|
$
|
72,956
|
|
$
|
45,303
|
|
|
|
|
60,388
|
|
|
72,956
|
|
|
45,303
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
Production costs applicable to sales
|
|
|
28,133
|
|
|
34,607
|
|
|
40,608
|
|
Mine construction costs
|
|
|
—
|
|
|
—
|
|
|
1,723
|
|
Mine development
|
|
|
3,866
|
|
|
1,169
|
|
|
1,829
|
|
Exploration
|
|
|
7,959
|
|
|
8,798
|
|
|
11,332
|
|
Property holding
|
|
|
3,536
|
|
|
4,336
|
|
|
6,365
|
|
General and administrative
|
|
|
12,734
|
|
|
12,045
|
|
|
12,069
|
|
(Income) loss from investment in Minera Santa Cruz S.A., net of amortization (note 6)
|
|
|
(12,951)
|
|
|
(2,414)
|
|
|
5,284
|
|
Depreciation
|
|
|
1,169
|
|
|
942
|
|
|
979
|
|
Revision of estimates and accretion of reclamation obligations (note 9)
|
|
|
595
|
|
|
429
|
|
|
407
|
|
Impairment of investment in Minera Santa Cruz S.A. (note 6)
|
|
|
—
|
|
|
11,777
|
|
|
21,162
|
|
Impairment of mineral property interests and property and equipment (note 5)
|
|
|
—
|
|
|
50,600
|
|
|
353,736
|
|
Total costs and expenses
|
|
|
45,041
|
|
|
122,289
|
|
|
455,494
|
|
Operating income (loss)
|
|
|
15,347
|
|
|
(49,333)
|
|
|
(410,191)
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
835
|
|
|
2,404
|
|
|
259
|
|
Gain on sale of assets
|
|
|
24
|
|
|
13
|
|
|
26
|
|
Gain on sale of marketable equity securities (note 3)
|
|
|
22
|
|
|
—
|
|
|
—
|
|
Other-than-temporary impairment on marketable equity securities (note 3)
|
|
|
(882)
|
|
|
—
|
|
|
—
|
|
Unrealized gain on derivatives (note 3)
|
|
|
1,379
|
|
|
—
|
|
|
—
|
|
Registration taxes
|
|
|
—
|
|
|
—
|
|
|
(6,788)
|
|
Foreign currency gain (loss)
|
|
|
581
|
|
|
1,906
|
|
|
(2,419)
|
|
Total other income (expense)
|
|
|
1,959
|
|
|
4,323
|
|
|
(8,922)
|
|
Income (loss) before income taxes
|
|
|
17,306
|
|
|
(45,010)
|
|
|
(419,113)
|
|
Income tax benefit (note 10)
|
|
|
3,749
|
|
|
24,560
|
|
|
107,170
|
|
Net income (loss)
|
|
|
21,055
|
|
|
(20,450)
|
|
|
(311,943)
|
|
OTHER COMPREHENSIVE INCOME (LOSS):
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment on marketable equity securities (note 3)
|
|
|
882
|
|
|
—
|
|
|
—
|
|
Unrealized gain (loss) on marketable equity securities, net of $0.5 million, $nil and $nil, tax benefit, respectively
|
|
|
1,609
|
|
|
(949)
|
|
|
419
|
|
Comprehensive income (loss)
|
|
$
|
23,546
|
|
$
|
(21,399)
|
|
$
|
(311,524)
|
|
Net income (loss) per share (note 13):
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
$
|
(0.07)
|
|
$
|
(1.05)
|
|
Diluted
|
|
$
|
0.07
|
|
$
|
(0.07)
|
|
$
|
(1.05)
|
|
Weighted average common shares outstanding (thousands) (note 13):
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
298,772
|
|
|
300,341
|
|
|
297,763
|
|
Diluted
|
|
|
300,474
|
|
|
300,341
|
|
|
297,763
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital distribution declared per common share (note 11)
|
|
|
0.005
|
|
|
0.010
|
|
|
—
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MCEWEN MINING INC.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31,
(in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,440
|
|
$
|
25,874
|
|
Investments (note 3)
|
|
|
8,543
|
|
|
1,032
|
|
Value added taxes receivable
|
|
|
4,304
|
|
|
10,032
|
|
Inventories (note 4)
|
|
|
26,620
|
|
|
14,975
|
|
Other current assets
|
|
|
1,667
|
|
|
2,530
|
|
Total current assets
|
|
|
78,574
|
|
|
54,443
|
|
Mineral property interests (note 5)
|
|
|
242,640
|
|
|
237,245
|
|
Investment in Minera Santa Cruz S.A. (note 6)
|
|
|
162,320
|
|
|
167,107
|
|
Property and equipment, net (note 7)
|
|
|
14,252
|
|
|
15,759
|
|
Other assets
|
|
|
532
|
|
|
531
|
|
TOTAL ASSETS
|
|
$
|
498,318
|
|
$
|
475,085
|
|
LIABILITIES & SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
20,044
|
|
$
|
18,429
|
|
Short-term bank indebtedness (note 8)
|
|
|
—
|
|
|
3,395
|
|
Current portion of asset retirement obligation (note 9)
|
|
|
537
|
|
|
215
|
|
Total current liabilities
|
|
|
20,581
|
|
|
22,039
|
|
Asset retirement obligation, less current portion (note 9)
|
|
|
9,306
|
|
|
7,569
|
|
Deferred income tax liability (note 10)
|
|
|
23,665
|
|
|
26,899
|
|
Other liabilities
|
|
|
1,727
|
|
|
286
|
|
Total liabilities
|
|
$
|
55,279
|
|
$
|
56,793
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
Common stock, no par value, 500,000 shares authorized (in thousands);
|
|
|
|
|
|
|
|
Common: 299,570 and 274,421 shares issued and outstanding as of December 31, 2016 and 2015 (in thousands) (note 11)
|
|
|
|
|
|
|
|
Exchangeable: nil and 24,213 shares issued and outstanding as of December 31, 2016 and 2015 (in thousands) (note 11)
|
|
|
1,360,345
|
|
|
1,359,144
|
|
Accumulated deficit
|
|
|
(918,972)
|
|
|
(940,027)
|
|
Accumulated other comprehensive income (loss)
|
|
|
1,666
|
|
|
(825)
|
|
Total shareholders’ equity
|
|
|
443,039
|
|
|
418,292
|
|
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY
|
|
$
|
498,318
|
|
$
|
475,085
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Subsequent events: note 18.
Commitments and contingencies: note 14.
MCEWEN MINING INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31,
(in thousands of U.S. dollars, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Comprehensive
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
(Loss) Income
|
|
Deficit
|
|
Total
|
|
Balance, December 31, 2013
|
|
297,159
|
|
$
|
1,354,696
|
|
$
|
(295)
|
|
$
|
(607,634)
|
|
$
|
746,767
|
|
Stock-based compensation (note 12)
|
|
—
|
|
|
1,324
|
|
|
—
|
|
|
—
|
|
|
1,324
|
|
Exercise of stock options (note 11)
|
|
1,499
|
|
|
1,932
|
|
|
—
|
|
|
—
|
|
|
1,932
|
|
Exercise of stock options assumed from Minera Andes Inc. acquisition
|
|
198
|
|
|
360
|
|
|
—
|
|
|
—
|
|
|
360
|
|
Shares issued for settlement of accounts payable
|
|
394
|
|
|
1,004
|
|
|
—
|
|
|
—
|
|
|
1,004
|
|
Shares issued to terminate back-in right
|
|
850
|
|
|
1,352
|
|
|
—
|
|
|
—
|
|
|
1,352
|
|
Unrealized gain on available-for-sale securities, net of taxes
|
|
—
|
|
|
—
|
|
|
419
|
|
|
—
|
|
|
419
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(311,943)
|
|
|
(311,943)
|
|
Balance, December 31, 2014
|
|
300,100
|
|
$
|
1,360,668
|
|
$
|
124
|
|
$
|
(919,577)
|
|
$
|
441,215
|
|
Stock-based compensation (note 12)
|
|
—
|
|
|
1,305
|
|
|
—
|
|
|
—
|
|
|
1,305
|
|
Return of capital distribution (note 11)
|
|
—
|
|
|
(1,503)
|
|
|
—
|
|
|
—
|
|
|
(1,503)
|
|
Share repurchase (note 11)
|
|
(1,896)
|
|
|
(1,769)
|
|
|
—
|
|
|
—
|
|
|
(1,769)
|
|
Shares issued for settlement of accounts payable
|
|
430
|
|
|
443
|
|
|
—
|
|
|
—
|
|
|
443
|
|
Unrealized loss on available-for-sale securities (note 3)
|
|
—
|
|
|
—
|
|
|
(949)
|
|
|
—
|
|
|
(949)
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20,450)
|
|
|
(20,450)
|
|
Balance, December 31, 2015
|
|
298,634
|
|
$
|
1,359,144
|
|
$
|
(825)
|
|
$
|
(940,027)
|
|
$
|
418,292
|
|
Stock-based compensation (note 12)
|
|
—
|
|
|
1,039
|
|
|
—
|
|
|
—
|
|
|
1,039
|
|
Return of capital distribution (note 11)
|
|
—
|
|
|
(2,986)
|
|
|
—
|
|
|
—
|
|
|
(2,986)
|
|
Share repurchase (note 11)
|
|
(558)
|
|
|
(582)
|
|
|
—
|
|
|
—
|
|
|
(582)
|
|
Exercise of stock options (note 11)
|
|
1,494
|
|
|
3,730
|
|
|
—
|
|
|
—
|
|
|
3,730
|
|
Other-than-temporary impairment on marketable equity securities (note 3)
|
|
—
|
|
|
—
|
|
|
882
|
|
|
—
|
|
|
882
|
|
Unrealized gain on available-for-sale securities, net of taxes (note 3)
|
|
—
|
|
|
—
|
|
|
1,609
|
|
|
—
|
|
|
1,609
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21,055
|
|
|
21,055
|
|
Balance, December 31, 2016
|
|
299,570
|
|
$
|
1,360,345
|
|
$
|
1,666
|
|
$
|
(918,972)
|
|
$
|
443,039
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MCEWEN MINING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Cash paid to suppliers and employees
|
|
$
|
(52,340)
|
|
$
|
(55,260)
|
|
$
|
(68,993)
|
|
Cash received from gold and silver sales
|
|
|
59,517
|
|
|
70,178
|
|
|
43,812
|
|
Dividends received from Minera Santa Cruz S.A. (note 6)
|
|
|
17,738
|
|
|
548
|
|
|
9,483
|
|
Lease incentive received
|
|
|
—
|
|
|
—
|
|
|
328
|
|
Interest paid
|
|
|
(5)
|
|
|
(156)
|
|
|
—
|
|
Interest received
|
|
|
276
|
|
|
287
|
|
|
464
|
|
Cash provided by (used in) operating activities
|
|
|
25,186
|
|
|
15,597
|
|
|
(14,906)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Acquisition of mineral property interests (note 5)
|
|
|
(5,985)
|
|
|
—
|
|
|
—
|
|
Proceeds from reimbursement of equipment deposit (note 7)
|
|
|
994
|
|
|
—
|
|
|
—
|
|
Additions to property and equipment (note 7)
|
|
|
(1,174)
|
|
|
(777)
|
|
|
(2,788)
|
|
Proceeds from disposal of property and equipment (note 7)
|
|
|
—
|
|
|
13
|
|
|
38
|
|
Acquisition of investments (note 3)
|
|
|
(4,419)
|
|
|
(1,114)
|
|
|
(446)
|
|
Proceeds from sale of investments (note 3)
|
|
|
470
|
|
|
—
|
|
|
—
|
|
Decrease in restricted time deposits for reclamation bonding
|
|
|
—
|
|
|
—
|
|
|
5,183
|
|
Deposits for surety bonds for reclamation bonding
|
|
|
—
|
|
|
—
|
|
|
(481)
|
|
Cash provided by (used) in investing activities
|
|
|
(10,114)
|
|
|
(1,878)
|
|
|
1,506
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank indebtedness (note 8)
|
|
|
—
|
|
|
5,171
|
|
|
—
|
|
Repayment of short-term bank indebtedness (note 8)
|
|
|
(3,395)
|
|
|
(1,776)
|
|
|
—
|
|
Return of capital distribution (note 11)
|
|
|
(2,986)
|
|
|
(1,503)
|
|
|
—
|
|
Share repurchase (note 11)
|
|
|
(582)
|
|
|
(1,769)
|
|
|
—
|
|
Proceeds from exercise of stock options (note 11)
|
|
|
3,730
|
|
|
—
|
|
|
2,292
|
|
Cash provided by (used in) provided from financing activities
|
|
|
(3,233)
|
|
|
123
|
|
|
2,292
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
(273)
|
|
|
(348)
|
|
|
(833)
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
11,566
|
|
|
13,494
|
|
|
(11,941)
|
|
Cash and cash equivalents, beginning of period
|
|
|
25,874
|
|
|
12,380
|
|
|
24,321
|
|
Cash and cash equivalents, end of period
|
|
$
|
37,440
|
|
$
|
25,874
|
|
$
|
12,380
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income (loss) to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
21,055
|
|
$
|
(20,450)
|
|
$
|
(311,943)
|
|
Adjustments to reconcile net income (loss) from operating activities:
|
|
|
|
|
|
|
|
|
|
|
(Income) loss from investment in Minera Santa Cruz S.A., net of amortization (note 6)
|
|
|
(12,951)
|
|
|
(2,414)
|
|
|
5,284
|
|
Impairment of investment in Minera Santa Cruz S.A., net of amortization
|
|
|
—
|
|
|
11,777
|
|
|
21,162
|
|
Impairment of mineral property interests and property and equipment (note 5)
|
|
|
—
|
|
|
50,600
|
|
|
353,736
|
|
Other-than-temporary impairment on marketable equity securities (note 3)
|
|
|
882
|
|
|
—
|
|
|
—
|
|
Loss (gain) on disposal of fixed assets (note 7)
|
|
|
517
|
|
|
(13)
|
|
|
(26)
|
|
Lease incentive
|
|
|
—
|
|
|
—
|
|
|
328
|
|
Recovery of deferred income taxes (note 10)
|
|
|
(3,749)
|
|
|
(24,560)
|
|
|
(107,170)
|
|
Stock-based compensation
|
|
|
1,039
|
|
|
1,305
|
|
|
1,324
|
|
Depreciation
|
|
|
1,169
|
|
|
942
|
|
|
979
|
|
Revision of estimates and accretion of reclamation obligations (note 9)
|
|
|
595
|
|
|
429
|
|
|
407
|
|
Adjustment to the asset retirement obligation estimate (note 9)
|
|
|
1,530
|
|
|
135
|
|
|
—
|
|
Amortization of mineral property interests and asset retirement obligations
|
|
|
2,413
|
|
|
1,288
|
|
|
1,236
|
|
Foreign exchange loss
|
|
|
273
|
|
|
348
|
|
|
833
|
|
Loss on sale of marketable securities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Gain on sale of marketable securities (note 3)
|
|
|
(22)
|
|
|
—
|
|
|
—
|
|
Unrealized gain on derivative instrument (note 3)
|
|
|
(1,379)
|
|
|
—
|
|
|
—
|
|
Change in non-cash working capital items:
|
|
|
|
|
|
|
|
|
|
|
Shares issued to supplier for settlement of accounts payable
|
|
|
—
|
|
|
443
|
|
|
1,004
|
|
Decrease (increase) in VAT taxes receivable, net of collection of $9,523 (2015 - $6,025 and 2014 - $5,049)
|
|
|
5,813
|
|
|
1,707
|
|
|
(148)
|
|
Increase in other assets related to operations
|
|
|
(11,156)
|
|
|
(3,003)
|
|
|
(3,638)
|
|
Increase (decrease) in liabilities related to operations
|
|
|
1,419
|
|
|
(3,485)
|
|
|
10,891
|
|
Shares issued to terminate back-in-right
|
|
|
—
|
|
|
—
|
|
|
1,352
|
|
Dividends received from Minera Santa Cruz S.A. (note 6)
|
|
|
17,738
|
|
|
548
|
|
|
9,483
|
|
Cash provided by (used in) operating activities
|
|
$
|
25,186
|
|
$
|
15,597
|
|
$
|
(14,906)
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted)
NOTE 1 THE COMPAN
Y
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. On January 24, 2012, the Company changed its name from U.S. Gold Corporation to McEwen Mining Inc. after the completion of the acquisition of Minera Andes Inc. by way of a statutory plan of arrangement under the laws of the Province of Alberta, Canada.
The Company operates in Argentina, Mexico, and the United States. It owns a 49% interest in Minera Santa Cruz S.A. (“MSC”), owner of the producing San José silver-gold mine in Santa Cruz, Argentina, which is operated by the majority owner of the joint venture, Hochschild Mining plc. It also owns and operates the El Gallo 1 mine in Sinaloa, Mexico. Finally, the Company owns the Los Azules copper deposit in San Juan, Argentina, the El Gallo 2 project in Sinaloa, Mexico, the Gold Bar project in Nevada in the United States, and a portfolio of exploration properties in Argentina, Mexico and Nevada.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates:
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the Company’s consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to environmental, reclamation and closure obligations; estimates of fair value of equity investment and asset groups used in impairment testing; estimates of recoverable gold in leach pad inventory; estimates regarding the collectability of value added taxes receivable; valuation allowances for deferred tax assets; and estimate of income tax provisions and reserves for contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates.
Basis of Consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. Investments over which the Company exerts significant influence but does not control through majority ownership are accounted for using the equity method, as described in
Investments,
below.
Cash and Cash Equivalents:
The Company considers cash in banks, deposits in transit, and highly liquid term deposits with original maturities of three months or less to be cash and cash equivalents. Because of the short maturity of these instruments, the carrying amounts approximate their fair value. Restricted cash is excluded from cash and cash equivalents and is included in long‑term assets.
Investments:
The Company accounts for investments over which the Company exerts significant influence but does not control through majority ownership using the equity method of accounting pursuant to ASC Topic 323,
Investments – Equity Method and Joint Ventures
. Under this method, the Company’s share of earnings and losses is included in the Consolidated Statement of Operations and Comprehensive Income (Loss) and the balance of the investment is adjusted by the same amount. Under the equity method, dividends received from an investee are recorded as decreases in the investment account, not as income. If and when there has been a loss in value that is other than a temporary decline, the carrying value is reduced to its fair value.
The Company accounts for its investment in marketable equity securities as available for sale securities and warrants on equity interest in publicly traded securities as held for trading securities in accordance with ASC guidance on accounting for certain investments in debt and equity securities. Unrealized gains and losses on these securities are accounted for through Other Comprehensive Income (“OCI”) except for gain and losses on warrants which are included in Other Income
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
(Expense) in the Statement of Operations and Comprehensive Income (Loss). The Company periodically evaluates whether declines in fair values of its investments below the Company’s carrying value are other‑than‑temporary in accordance with ASC guidance. Declines in fair value below the Company’s carrying value deemed to be other‑than‑temporary are charged to operations.
Value Added Taxes Receivable:
In Mexico, value added taxes (“VAT”) are assessed on purchases of materials and services and sales of products. Businesses are generally entitled to recover the taxes they have paid related to purchases of materials and services, either as a refund or as a credit against future taxes payable. In Argentina, except at the San José mine, the Company expenses all VAT as their recoverability is uncertain.
Stockpiles, Material on Leach Pads, In‑process Inventory, Precious Metals Inventory and Materials and Supplies:
Stockpiles, material on leach pads, in-process inventory, precious metals inventory and materials and supplies are accounted for using weighted average cost method and are carried at the lower of average cost or net realizable value. Net realizable value represents the estimated future sales price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the product to sale. Write-downs of stockpiles, material on leach pads, in-process inventory, precious metals inventory and materials and supplies, resulting from net realizable value impairments, are reported as a component of production costs applicable to sales. The current portion of stockpiles, material on leach pad, in-process inventory and materials and supplies is determined based on the expected amounts to be processed within the next 12 months. Stockpiles, material on leach pads, in‑process inventory and materials and supplies not expected to be processed within the next 12 months, if any, are classified as long‑term.
Stockpiles represent mineralized material that has been extracted from the mine and is available for further processing. Stockpiles are measured by estimating the number of tonnes added and removed from the stockpile, an estimate of the contained metals (based on assay data) and the estimated metallurgical recovery rates. Costs are allocated to stockpiles based on current mining costs incurred including applicable overhead relating to mining operations. Material is removed from the stockpile at an average cost per tonne.
Mineralized material on leach pads is the ore that is placed on pads where it is treated with a chemical solution that dissolves the gold contained in the ore over a period of months. Costs are attributed to the ore on leach pads based on current mining costs incurred up to the point of placing the ore on the pad. Costs are removed from the leach pad inventory based on the average cost per estimated recoverable ounce of gold on the leach pad as the gold is recovered. The estimates of recoverable gold on the leach pads are calculated from the quantities of ore placed on the leach pads (measured tonnes added to the leach pads), the grade of ore placed on the leach pads (based on assay data) and a recovery percentage.
In general, leach pads recover between 50% and 95% of the recoverable ounces in the first year of leaching, declining each year thereafter until the leaching is complete. The cumulative metallurgical recovery rate for gold production at the El Gallo 1 mine from September 2012 (start of production) to December 31, 2016 was approximately 59% (2015 – 56%). Although the quantities of recoverable gold placed on the leach pads are reconciled by comparing the grades of ore placed on the pads to the quantities of gold actually recovered (metallurgical balancing), the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process is constantly monitored and the engineering estimates are refined based on actual results over time.
In-process inventories represent materials that are currently in the process of being converted to a saleable product. In-process material is measured based on assays of the material from the various stages of the ADR process and the projected recoveries of the respective plants. Costs are allocated to in-process inventories based on the costs of the material fed into the process attributable to the source material coming from the mines, stockpiles and/or leach pads plus the in-process conversion costs incurred to that point in the process.
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
Precious metal inventories include gold and silver doré and bullion that is unsold and held at the Company’s or the refinery’s facilities. Costs are allocated to precious metal inventories based on costs of the respective in-process inventories incurred prior to the refining process plus applicable refining costs.
Materials and supplies inventories are comprised of chemicals, reagents and consumable parts used in drilling and other operating activities. Cost includes applicable taxes and freight.
Proven and Probable Reserves:
The definition of proven and probable reserves is set forth in SEC Industry Guide 7. Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geological character is so well defined that size, shape, depth and mineral content of the reserves are well‑established. Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observations.
As of December 31, 2016, except for the Company’s 49% interest in the San José mine, none of the Company’s properties contain resources that satisfy the definition of proven and probable reserves.
Property and Equipment:
As described in
Design, Construction and Development Costs
below, substantially all costs, including design, engineering, construction, and installation of equipment are expensed as incurred as the Company has not established proven and probable reserves on any of its properties except for the Company’s 49% interest in the San José mine. Only certain types of equipment which have alternative uses or significant salvage value, may be capitalized without proven and probable reserves. Depreciation is computed using the straight-line method with the exception of mining equipment. Mining equipment is depreciated using the units-of-production method based on tonnes processed over the estimated total mine life.
Design, Construction, and Development Costs:
Mine development costs include engineering and metallurgical studies, drilling and other related costs to delineate an ore body, and the removal of overburden to initially expose an ore body at open pit surface mines.
When proven and probable reserves as defined by SEC Industry Guide 7 exist, development costs are capitalized. Mine development costs incurred either to develop new ore deposits, expand the capacity of operating mines, or to develop mine areas substantially in advance of current production would be capitalized. Costs of start‑up activities and costs incurred to maintain current production or to maintain assets on a standby basis are charged to operations as incurred. If or when a project is abandoned, costs are charged to operations upon abandonment. All capitalized costs would be amortized using the units of production method over the estimated life of the ore body based on recoverable ounces to be mined from proven and probable reserves.
Certain costs to design and construct mining and processing facilities may be incurred prior to establishing proven and probable reserves. As no proven and probable reserves have been established on any of the Company’s properties, except for the Company’s 49% interest in the San José mine, design, construction and development costs are not capitalized at any of the Company’s properties, and accordingly, substantially all costs are expensed as incurred. Additionally, the Company does not have a corresponding depreciation or amortization of these costs going forward since these expenditures were expensed as incurred as opposed to being capitalized.
Mineral Property Interests:
Mineral property interests include acquired interests in advanced-stage properties and exploration stage properties, which are considered tangible assets. The amount capitalized relating to a mineral property interest represents its fair value at the time of acquisition, either as an individual asset purchase or as a part of a business combination. The value of mineral property interests is primarily driven by the nature and amount of mineralized material
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
believed to be contained in the properties. When proven and probable reserves exist, the relevant capitalized costs and mineral property interests are to be charged to expense based on the units of production method and upon commencement of production. However, when a property does not contain mineralized material that satisfies the definition of proven and probable reserves, the amortization of the capitalized costs and mineral property interests are charged to expense based on the most appropriate method, which includes straight-line method and units-of-production method over the estimated useful life of the mine, as determined by our internal mine plans. As a result of these and other differences, the Company’s financial statements may not be comparable to the financial statements of mining companies that have established reserves as defined by SEC Industry Guide 7.
Impairment of Long-lived Assets:
The Company reviews and evaluates its long-lived assets for impairment 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. For the purpose of recognition and measurement of impairment, the Company groups its long-lived assets by specific mine or project, as this represents the lowest level for which there are identifiable cash flows.
For asset groups where impairment loss is determined using the undiscounted future net cash flows method or discounted future net cash flows method, future cash flows are estimated based on quantities of recoverable mineralized material, expected gold and silver prices (considering current and historical prices, trends and related factors), production levels, operating costs, capital requirements and reclamation costs, all based on life-of-mine plans. The term “recoverable mineralized material” refers to the estimated amount of gold or other commodities that will be obtained after taking into account losses during processing and treatment of mineralized material. The Company’s estimates of future cash flows are based on numerous assumptions and it is possible that actual future cash flows will be significantly different than the estimates, as actual future quantities of recoverable minerals, gold, silver and other commodity prices, production levels and costs of capital are each subject to significant risks and uncertainties.
For asset groups where the Company is unable to determine a reliable estimate of undiscounted future net cash flows, the Company adopts a market approach to estimate fair value by using a combination of observed market value per square mile and observed market value per ounce or pound of mineral material based on comparable transactions.
Asset Retirement Obligation, reclamation and remediation costs:
The Company records the fair value of a liability for an asset retirement obligation (“ARO”) in the period that it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset when proven or probable reserves exist, or if they relate to an acquired mineral property interest. Periodic accretion is recorded to ARO and charged to earnings. Since no proven or probable reserves have been established for any of the Company’s properties, other than at the San José mine, incremental asset retirement costs associated with the upward adjustments to the fair value of the ARO at the El Gallo 1 mine or Tonkin property are charged to expense. The fair value of ARO is measured by discounting the expected cash flows adjusted for inflation, using a credit-adjusted risk free rate of interest. The Company prepares estimates of the timing and amounts of expected cash flows when an ARO is incurred, which are updated to reflect changes in facts and circumstances. Estimation of the fair value of AROs requires significant judgment, including amount of cash flows, timing of reclamation, inflation rate or credit risk.
Ongoing environmental and reclamation expenditures are debited against the ARO liability as incurred to the extent they relate to the ARO liability and to expense to the extent they do not.
Revenue Recognition:
Revenue consists of sales value received for the Company’s principal products, gold and silver. The Company currently does not earn revenue from any products other than gold and silver. Revenue is recognized when title to gold and silver passes to the buyer and when collectability is reasonably assured. Title passes to the buyer based on terms of the sales contract. Product pricing is determined under the sales agreements at the point revenue is recognized by reference to active and freely traded commodity markets, for example, the London Bullion Market for both gold and silver, in an identical form to the product sold.
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
Gold and silver doré produced from the San José mine is sold at the prevailing spot market price based on the London A.M. fix, while concentrates are sold at the prevailing spot market price based on either the London P.M. fix or average of the London A.M. and London P.M. fix depending on the sales contract. Concentrates are provisionally priced, whereby the selling price is subject to final adjustments at the end of a period ranging from 30 to 90 days after delivery to the customer. The final price is based on the market price at the relevant quotation point stipulated in the contract. Due to the time elapsed between shipment and the final settlement with the buyer, MSC must estimate the prices at which sales of metals will be settled. At the end of each financial reporting period, previously recorded provisional sales are adjusted to estimated settlement metals prices based on relevant forward market prices until final settlement with the buyer.
The Company entered into a doré sales agreement with a Canadian financial institution in July 2012. Under that agreement, the Company has the option to sell to the institution approximately 90% of the gold and silver contained in doré bars produced at the El Gallo 1 mine prior to the completion of refining by the third party refiner, which normally takes approximately 15 business days. Revenue is recognized when the Company has provided irrevocable instructions to the refiner to transfer to the purchaser the refined ounces sold upon final processing outturn, and when payment of the purchase price for the purchased doré or bullion has been made in full by the purchaser.
Property Holding Costs:
Holding costs to maintain a property are expensed in the period they are incurred. These costs include security and maintenance expenses, lease and claim fees and payments, and environmental monitoring and reporting costs.
Exploration Costs:
Exploration costs include costs incurred to identify new mineral resources, evaluate potential resources, and convert mineral resources into proven and probable reserves. Exploration costs are expensed as incurred.
Foreign Currency:
The functional currency for the Company’s operations is the U.S. dollar. All monetary assets and liabilities denominated in a currency which is not the U.S. dollar are translated at current exchange rates at each balance sheet date and the resulting adjustments are included in a separate line item under other income (expense). Revenue and expense in foreign currencies are translated at the average exchange rates for the period.
Stock‑Based Compensation:
The Company accounts for stock options at fair value as prescribed in ASC 718. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model and provides for expense recognition over the service period, if any, of the stock option. The Company's estimates may be impacted by certain variables including, but not limited to, stock price volatility, employee stock option exercise behavior or estimates of forfeitures.
Income Taxes:
The Company accounts for income taxes under ASC 740. Using the liability method, recognizing certain temporary differences between the financial reporting basis of liabilities and assets and the related income tax basis for such liabilities and assets. This method generates either a net deferred income tax liability or asset for the Company, as measured by the statutory tax rates in effect. The Company derives the deferred income tax charge or benefit by recording the change in either the net deferred income tax liability or asset balance for the year. The Company records a valuation allowance against any portion of those deferred income tax assets when it believes, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized.
Comprehensive Income (Loss):
In addition to net loss, comprehensive loss includes all changes in equity during a period, such as cumulative unrecognized changes in fair value of marketable equity securities classified as available‑for‑sale or other investments.
Per Share Amounts:
Basic earnings or loss per share includes no dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common and exchangeable shares outstanding during the period. Diluted earnings or loss per share reflect the potential dilution of securities that could share in the earnings of the Company and are computed in accordance with the treasury stock method based on the average number of
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
common shares and dilutive common share equivalents outstanding. The diluted earnings or loss are calculated using the treasury stock method and only for those instruments that that result in a reduction in income per share are included in the calculation.
Loans and borrowings:
Borrowings are recognized initially at fair value, net of financing costs incurred, and subsequently measured at amortized cost. Any difference between the amounts originally received and the redemption value of the debt is recognized in the consolidated statement of operations over the period to maturity using the effective interest method.
Fair Value of Financial Instruments:
Fair value accounting, as prescribed in ASC Section 825, utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
|
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
Level 2
|
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
|
Level 3
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
|
Recently Adopted Accounting Pronouncements
Presentation of Financial Statements – Going Concern
In August 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 201415 related to management’s going concern assumption. This update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. The update is effective for the annual period ending after December 15, 2016. Adoption of this guidance, effective December 31, 2016, had no impact on the Consolidated Financial Statements or disclosures.
Recently Issued Accounting Pronouncements
Business Combinations:
Definition of a business: In January 2017 the FASB issued ASU No. 2017-01which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The update to the standard is effective for the Company beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the effect of this amendment and the impact it will have on the Company’s consolidated financial statements.
Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory:
In October 2016 the FASB issued ASU No. 2016-16, to modify the current exception to income tax accounting that required companies to defer the income tax effect of certain intercompany transactions. ASU No. 2016-16 only allows companies to defer the income tax effect of intercompany inventory transactions under an exception to the guidance on income taxes that currently applies to intercompany sales and transfers of all assets. The update to the standard is effective for the Company beginning January 1, 2018, with early application permitted as of the beginning of an annual period. The Company is currently evaluating the effect of this amendment and the impact it will have on the Company’s consolidated financial statements.
Compensation – Stock Compensation – Improvements to employee Share-Based Payment Accounting:
In March 2016, the FASB issued ASU No. 2016-09, which changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update to the standard is effective for the
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
Company beginning after December 5, 2016, with early application permitted. The Company is currently evaluating the effect of this amendment and the impact it will have on the Company’s consolidated financial statements.
Investments - Equity Method and Joint Ventures - Simplifying the Transition to the Equity Method of Accounting:
In March 2016, the FASB issued ASU 2016-07, which affects all entities that have an investment that
becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or
degree of influence. The amendments eliminate the requirement that when an investment qualifies for use of the equity
method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the
investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had
been in effect during all previous periods that the investment had been held. The amendments are effective for all entities
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments
should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of
influence that result in the adoption of the equity method. Earlier application is permitted. The Company is currently
evaluating the effect of this amendment and the impact it will have on the Company’s consolidated financial statements.
Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities:
In January 2016, the FASB issued ASU No. 2016-01, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for the Company beginning in its second quarter of 2019. The Company is currently evaluating the effect of this amendment and the impact it will have on the Company’s consolidated financial statements.
Revenue from Contracts with Customers:
In 2016, the FASB issued three separate accounting standard updates regarding Topic 606: ASU 2016-08, ASU 2016-10 and ASU 2016-12. These ASUs outline amendments to Topic 606 which is not yet effective, including reporting revenue gross versus net, identifying performance obligations and licensing and narrow-scope improvements and practical expedients. The effective date and transition requirements for the amendments listed in these updates are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09) which is January 1, 2018, with earlier application permitted. The Company will not be early adopting the Topic 606. The Company is currently evaluating the effect of this amendment and the impact it will have on the Company’s consolidated financial statements. We have identified two potential areas of impact including bullion and doré sales from our Mexico Operations and doré and concentrate sales from the San Jose mine which has an impact on the income (loss) from the investment in MSC under the equity method of accounting. We will continue to assess and implement the new revenue recognition policy and any related impact on our internal controls throughout 2017.
Leases – Amendments:
In February 2016, the FASB issued ASU 2016-02 “leases (Topic 842)” which core principle is that a lessee should recognize the assets and the liabilities that arise from leases, including operating leases. Under the new requirements, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and the right-of-use asset representing the right to the underlying asset for the lease term. For leases with a term of twelve months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from the previous GAAP. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal year, with early adoption permitted. The ASU requires a modified retrospective transition method with the option to elect a package of practical expedients. The Company is evaluating the effect of this amendment and the impact it will have on the Company’s consolidated financial statements.
NOTE 3 INVESTMENTS
The Company’s investment portfolio consists of marketable equity securities and warrants of certain publicly-traded companies. The Company classifies the marketable equity securities as available-for-sale securities, which are recorded at
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
fair value based upon quoted market prices. The warrants are recorded at fair value using the Black-Scholes option pricing model. The following is a summary of the balances as of December 31, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Statement of
|
|
|
|
|
|
Opening
|
|
Additions
|
|
Disposals
|
|
Comprehensive
|
|
Operations
|
|
Fair Value
|
|
|
balance
|
|
during
|
|
during
|
|
Income (Loss)
|
|
(Loss)
|
|
end of the
|
As of December 31, 2016
|
|
(January 1)
|
|
year
|
|
year
|
|
(pre-tax)
|
|
Income
|
|
year
|
Marketable equity securities
|
|
$
|
1,032
|
|
$
|
4,004
|
|
$
|
(470)
|
|
$
|
3,043
|
|
$
|
(860)
|
|
$
|
6,749
|
Warrants
|
|
|
—
|
|
|
415
|
|
|
—
|
|
|
—
|
|
|
1,379
|
|
|
1,794
|
Investments
|
|
$
|
1,032
|
|
$
|
4,419
|
|
$
|
(470)
|
|
$
|
3,043
|
|
$
|
519
|
|
$
|
8,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Statement of
|
|
|
|
|
|
Opening
|
|
Additions
|
|
Disposals
|
|
Comprehensive
|
|
Operations
|
|
Fair Value
|
|
|
balance
|
|
during
|
|
during
|
|
Income (Loss)
|
|
(Loss)
|
|
end of the
|
As of December 31, 2015
|
|
(January 1)
|
|
period
|
|
period
|
|
(pre-tax)
|
|
Income
|
|
period
|
Marketable equity securities
|
|
$
|
1,082
|
|
$
|
1,114
|
|
$
|
—
|
|
$
|
(1,164)
|
|
$
|
—
|
|
$
|
1,032
|
Warrants
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Investments
|
|
$
|
1,082
|
|
$
|
1,114
|
|
$
|
—
|
|
$
|
(1,164)
|
|
$
|
—
|
|
$
|
1,032
|
As of December 31, 2016, the cost of the marketable equity securities and warrants was approximately $4.9 million (December 31, 2015 - $1.9 million).
On May 13, 2016, the Company participated in a private placement with Golden Predator Mining Corp. (“Golden Predator”) under which it acquired 3,125,000 units, each unit consisting of one common share and one common share purchase warrant (“warrant”), for a total cost of $0.4 million. Using proportional allocation, the Company allocated $0.2 million as the cost base for each of the common shares and warrants. Subsequently, on July 21, 2016, the Company participated in another private placement with Golden Predator under which it acquired an additional 1,500,000 units, each unit consisting of one common share and one-half of one warrant, for a total cost of $0.9 million. Using proportional allocation, the Company allocated $0.7 million as the cost base to the common shares and $0.2 million to the warrants.
The Company’s warrant holdings meet the definition of derivative instruments, and as a result, unrealized gains or losses arising from their revaluation are recorded in the Consolidated Statement of Operations and Comprehensive Income (Loss). During the year ended December 31, 2016, the Company recorded an unrealized gain of $1.4 million (December 31, 2015 and 2014 – $nil, respectively).
The gains and losses for available-for-sale securities are not reported in Net Income (Loss) of the Consolidated Statement of Operations and Comprehensive Income (Loss) until the securities are sold or if there is an other-than-temporary decline in fair value below cost. For the year ended December 31, 2016, the Company recorded a gain, net of tax, in other comprehensive income, of $1.6 million. The gain was recorded in accumulated other comprehensive income and is reported as a separate line item in the shareholders' equity section of the balance sheet. In the comparable period ending December 31, 2015, the Company recorded a loss, net of tax, in other comprehensive income, of $0.9 million.
During the year ended December 31, 2016, the Company sold marketable equity securities for proceeds of $0.5 million. The Company realized a gain of $0.1 million, which is included in the Consolidated Statement of Operations and Comprehensive Income (Loss). The Company did not sell any marketable equity securities during the years ended December 31, 2015 and December 31, 2014.
During the year ended December 31, 2016, the Company reviewed its investment portfolio to determine if any security was other-than-temporarily impaired (“OTTI”). An OTTI security would require the Company to record an impairment charge in the Statement of Operations and Consolidated Income (Loss) in the period any such determination is made. In making this judgment, the Company evaluated, among other things, the duration and extent to which the fair value of a
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
security was less than its cost; the financial condition of the issuer and any changes thereto; and the Company’s intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis. From this assessment, the Company concluded that the fair value of certain marketable equity securities exhibited a prolonged decline in share price due to deterioration of the issuer’s results; therefore, the decline in these marketable equity securities was considered OTTI. Accordingly, the Company recognized an impairment loss of $0.9 million in the Consolidated Statement of Operations and Comprehensive Income (Loss), for the year ended December 31, 2016. In the comparable periods ending December 31, 2015 and 2014, the Company recorded no impairment loss.
NOTE 4 INVENTORIES
Inventories at December 31, 2016 and 2015 consist of the following:
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Material on leach pads
|
|
$
|
14,267
|
|
$
|
7,150
|
In-process inventory
|
|
|
4,953
|
|
|
2,830
|
Stockpiles
|
|
|
1,102
|
|
|
1,923
|
Precious metals
|
|
|
5,035
|
|
|
1,820
|
Materials and supplies
|
|
|
1,263
|
|
|
1,252
|
Inventories
|
|
$
|
26,620
|
|
$
|
14,975
|
During the years ended December 31, 2016 and 2015, no write-downs of inventory were recorded by the Company.
NOTE 5 MINERAL PROPERTY INTERESTS
On April 19, 2016, the Company completed the acquisition of the sliding scale net smelter return royalty (the “Royalty”) on the El Gallo 1 mine and El Gallo 2 project, previously requiring payment of 3.5% of gross revenue less allowable deductions, eventually reducing to 1%. The total purchase price was $6.3 million and consisted of a $5.3 million payment at closing and a deferred payment of $1.0 million due on June 30, 2018, conditional that the El Gallo 1 mine and El Gallo 2 project are in operation at that time.
The total cost of the Royalty was accounted for as an addition to mineral property interests. The cost was allocated to El Gallo 1 mine and El Gallo 2 project based on the relative fair value of the future royalty payments for each project. The allocation resulted in approximately $5.1 million allocated to the El Gallo 1 mine and $1.2 million allocated to the El Gallo 2 project. The $1.0 million conditional deferred payment has been included under non-current other liabilities as of December 31, 2016. The Royalty ceased accruing at the end of March 2016.
The Company conducts a review of potential triggering events for impairment for all its mineral projects on a quarterly basis. When events or changes in circumstances indicate that the related carrying amounts may not be recoverable, the Company carries out a review and evaluation of its long-lived assets. In the year ended December 31, 2016, no such triggering events were identified with respect to the Company’s Nevada, Argentina or Mexico properties.
For the year ended December 31, 2015, the Company recognized impairments on its Argentina and Nevada properties and portion of Mexico construction-in-progress, for an aggregate of $50.6 million. For the Nevada properties, an initial $29.7 million impairment was recorded in the second quarter of 2015 when the Company performed a strategic review of its mineral property interests from which a decision was made to allow certain non-essential claims and portions of claims, included within the Gold Bar project and Tonkin property, to lapse on the September 1, 2015 renewal date and therefore reduce property holding costs that otherwise would have been incurred in 2015. Subsequently, during the fourth quarter of 2015 an additional $7.5 million was recorded given the continuous decline in the observed market value of the Nevada properties. The deferred income tax recoveries resulting from the Nevada impairments made in the second quarter and
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
fourth quarter of 2015 were $10.4 million and $2.2 million, respectively. The Company used the market approach to estimate the fair value of the impaired properties.
Further, when performing the recoverability test for the Los Azules project and El Gallo 2 project asset groups in the fourth quarter of 2015, the Company noted that the carrying value of each of the asset groups exceeded their estimated fair value, resulting in a total impairment charge for Los Azules project and El Gallo 2 project asset groups of $11.4 million and $2.0 million, respectively, along with a resulting deferred income tax recovery of $1.3 million and $nil million, respectively, being recorded in the Statement of Operations and Comprehensive Loss for the year ended December 31, 2015. The Company used the market approach to estimate the fair value of the impaired properties.
For the year ended December 31, 2014, the Company recognized impairments on its Argentina and Nevada properties, for an aggregate of $353.7 million. For the Argentina properties, an initial $120.4 million impairment was recorded in the second quarter of 2014 when the Los Azules project was deemed to have a lower carrying value than the market price determined from a contemporaneous and comparable transaction completed at the time. Subsequently, during the fourth quarter of 2014 an additional $107.9 million was recorded given the continuous decline in the observed market value of the Los Azules project. The Company used the market approach to estimate the fair value of the impaired properties. The deferred income tax recoveries resulting from these impairments were $22.5 million and $19.3 million, respectively. Further, when performing the recoverability test for the Gold Bar, Tonkin and North Battle Mountain properties in Nevada and its other exploration properties in Argentina, the Company noted that the carrying value of each of the properties exceeded their estimated fair value, resulting in a total impairment charge for Nevada and Los Azules properties amounted to $98.4 million and $27.0 million, respectively, along with a resulting deferred income tax recovery of $31.6 million and $3.2 million, respectively, being recorded in the Statement of Operations and Comprehensive Loss for the year ended December 31, 2014.
Based on the above, impairment charges were recorded on the following mineral property interests for the years ended December 31, 2016, 2015, and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Property
|
|
Segment
|
|
2016
|
|
2015
|
|
2014
|
|
Los Azules Project
|
|
Argentina
|
|
$
|
—
|
|
$
|
11,399
|
|
$
|
228,301
|
|
Other San Juan Properties
|
|
Argentina
|
|
|
—
|
|
|
—
|
|
|
7,817
|
|
Cerro Mojon Tenements
|
|
Argentina
|
|
|
—
|
|
|
—
|
|
|
1,971
|
|
La Merced Tenements
|
|
Argentina
|
|
|
—
|
|
|
—
|
|
|
1,891
|
|
Cabeza de Vaca Tenements
|
|
Argentina
|
|
|
—
|
|
|
—
|
|
|
877
|
|
El Trumai Tenements
|
|
Argentina
|
|
|
—
|
|
|
—
|
|
|
1,534
|
|
Martes 13 Tenements
|
|
Argentina
|
|
|
—
|
|
|
—
|
|
|
3,568
|
|
Celestina Tenements
|
|
Argentina
|
|
|
—
|
|
|
—
|
|
|
1,753
|
|
Other Santa Cruz Exploration Properties
|
|
Argentina
|
|
|
—
|
|
|
—
|
|
|
7,601
|
|
Gold Bar Project
|
|
Nevada
|
|
|
—
|
|
|
20,847
|
|
|
31,391
|
|
Tonkin Properties
|
|
Nevada
|
|
|
—
|
|
|
14,939
|
|
|
25,435
|
|
Limo Project
|
|
Nevada
|
|
|
—
|
|
|
—
|
|
|
23,438
|
|
North Battle Mountain Properties
|
|
Nevada
|
|
|
—
|
|
|
1,443
|
|
|
1,921
|
|
East Battle Mountain Properties
|
|
Nevada
|
|
|
—
|
|
|
—
|
|
|
4,060
|
|
West Battle Mountain Properties
|
|
Nevada
|
|
|
—
|
|
|
—
|
|
|
2,567
|
|
Other United States Properties
|
|
Nevada
|
|
|
—
|
|
|
—
|
|
|
9,611
|
|
Property, Plant and Equipment
|
|
Mexico
|
|
|
—
|
|
|
1,972
|
|
|
—
|
|
Total impairment
|
|
|
|
$
|
—
|
|
$
|
50,600
|
|
$
|
353,736
|
|
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
The carrying values for all of the mineral properties held by the Company as at December 31, 2016 and 2015 are noted below:
|
|
|
|
|
|
|
|
|
|
|
Name of Property
|
|
State/Province
|
|
Country
|
|
2016
|
|
2015
|
Los Azules Copper Project
|
|
San Juan
|
|
Argentina
|
|
$
|
191,490
|
|
$
|
191,490
|
Tonkin Properties
|
|
Nevada
|
|
United States
|
|
|
4,833
|
|
|
4,833
|
Gold Bar Project
|
|
Nevada
|
|
United States
|
|
|
31,180
|
|
|
30,730
|
North Battle Mountain Properties
|
|
Nevada
|
|
United States
|
|
|
785
|
|
|
785
|
El Gallo 1 Mine
|
|
Sinaloa
|
|
Mexico
|
|
|
8,545
|
|
|
5,925
|
El Gallo 2 Properties
|
|
Sinaloa
|
|
Mexico
|
|
|
5,807
|
|
|
3,482
|
Total Mineral Property Interests
|
|
|
|
|
|
$
|
242,640
|
|
$
|
237,245
|
For the year ended December 31, 2016, the Company recorded $2.4 million (2015 - $1.3 million and 2014 - $1.3 million) of amortization expense related to El Gallo 1 mine, which is included in Production Costs Applicable to Sales in the Statement of Operations and Comprehensive Income (Loss). This included $0.5 million (2015 - $0.5 million and 2014 - $0.5 million) related to the amortization of capitalized asset retirement costs and $1.9 million (2015 - $0.8 million and 2014 - $0.8 million) in amortization expense related to its mineral properties in Mexico and the capitalized royalty costs attributable to El Gallo 1 mine property which were acquired in the second quarter of 2016.
NOTE 6 INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) - SAN JOSÉ MINE
As noted in Note 2,
Summary of Significant Accounting Policies - Investments
, the Company accounts for investments over which it exerts significant influence but does not control through majority ownership using the equity method of accounting. In applying the equity method of accounting to the Company’s investment in MSC, MSC’s financial statements, which are originally prepared by MSC in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, have been adjusted to conform with U.S. GAAP. As such, the summarized financial data presented under this heading is in accordance with U.S. GAAP.
The Company’s 49% attributable share of operations from its investment in MSC was income of $13.0 million for the year ended December 31, 2016, compared to an income of $2.4 million for the year ended December 31, 2015 and loss of $5.3 million for the year ended December 31, 2014. These amounts are net of the amortization of the fair value increments arising from the Company’s purchase price allocation, net of impairment charges, and related income tax recovery. Included in the income tax recovery is the impact of fluctuations in the exchange rate between the Argentine peso and the U.S. dollar on the peso-denominated deferred tax liability associated with the investment in MSC recorded as part of the acquisition of Minera Andes. As a devaluation of the Argentine peso relative to the U.S. dollar results in a recovery of deferred income taxes, the impact has been a decrease to the Company’s loss, or an increase to the Company’s income, from its investment in MSC.
During the year ended December 31, 2016, the Company did not identify any potential triggering events for impairment in relation to its investment in MSC, and consequently the Company did not record any impairment during the year.
In 2015, the Company recorded an impairment charge of $11.8 million on its investment in MSC ($21.2 million in 2014), primarily as a result of the significant decline in long-term estimated silver market prices, as well as in the observed market value of comparable transactions in South America, which indicated a likely significant decrease in the value of the exploration properties owned by MSC. These factors caused the Company to assess that there was a decline in fair value of its investment in MSC that was other than temporary. As the loss in value of the investment was considered other than temporary, an impairment of $11.8 million was recorded in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended December 31, 2015 ($21.2 million in 2014).
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
During the year ended December 31, 2016, the Company received $17.7 million in dividends from MSC, compared to $0.5 million in 2015.
Changes in the Company’s investment in MSC for the year ended December 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
Year ended December 31, 2015
|
Investment in MSC, beginning of the period
|
|
$
|
167,107
|
|
$
|
177,018
|
Attributable net income (loss) from MSC
|
|
|
15,961
|
|
|
(2,859)
|
Amortization of fair value increments
|
|
|
(12,274)
|
|
|
(10,669)
|
Income tax benefit
|
|
|
9,264
|
|
|
15,942
|
Dividend distribution received
|
|
|
(17,738)
|
|
|
(548)
|
Impairment of investment in MSC
|
|
|
—
|
|
|
(11,777)
|
Investment in MSC, end of the period
|
|
$
|
162,320
|
|
$
|
167,107
|
A summary of the operating results from MSC for the year ended December 31, 2016, 2015, and 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Minera Santa Cruz S.A. (100% basis)
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
235,961
|
|
$
|
186,095
|
|
$
|
213,013
|
|
Production costs applicable to sales
|
|
|
(173,679)
|
|
|
(158,615)
|
|
|
(173,274)
|
|
Net income (loss)
|
|
|
31,976
|
|
|
(5,835)
|
|
|
(5,300)
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion attributable to McEwen Mining Inc. (49% basis)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,961
|
|
$
|
(2,859)
|
|
$
|
(2,597)
|
|
Amortization of fair value increments
|
|
|
(12,274)
|
|
|
(10,669)
|
|
|
(13,190)
|
|
Income tax benefit
|
|
|
9,264
|
|
|
15,942
|
|
|
10,503
|
|
Income (loss) from investment in MSC, net of amortization
|
|
$
|
12,951
|
|
$
|
2,414
|
|
$
|
(5,284)
|
|
As at December 31, 2016, MSC had current assets of $108.9 million, total assets of $468.3 million, current liabilities of $59.5 million and total liabilities of $137.0 million. These balances include the increase in fair value and amortization of the fair value increments arising from the Company’s purchase price allocation and are net of the impairment charges. Excluding the fair value increments from the purchase price allocation and impairment charges, MSC had current assets of $107.9 million, total assets of $288.9 million, current liabilities of $63.6 million, and total liabilities of $88.6 million as at December 31, 2016.
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
NOTE 7 PROPERTY AND EQUIPMENT
As of December 31, 2016 and 2015, property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Trucks and trailers
|
|
$
|
1,233
|
|
$
|
1,065
|
Office furniture and equipment
|
|
|
1,891
|
|
|
1,543
|
Leasehold improvements
|
|
|
661
|
|
|
661
|
Drill rigs
|
|
|
1,198
|
|
|
1,061
|
Building
|
|
|
1,514
|
|
|
1,514
|
Land
|
|
|
8,699
|
|
|
8,699
|
Mining equipment
|
|
|
2,008
|
|
|
1,625
|
Construction-in-process
|
|
|
2,812
|
|
|
4,314
|
Subtotal
|
|
$
|
20,016
|
|
$
|
20,482
|
Less: accumulated depreciation
|
|
|
(5,764)
|
|
|
(4,723)
|
Total
|
|
$
|
14,252
|
|
$
|
15,759
|
Additions to property and equipment during the year ended December 31, 2016 are mainly in relation to office, furniture and equipment and mining equipment acquired for the El Gallo 1 mine. Depreciation expense for 2016 was $1.2 million (2015 - $0.9 million, 2014 - $1.0 million).
Construction-in-process included a deposit with a contractor for the construction of certain equipment pertaining to the El Gallo 2 project. In the second quarter of 2016, the Company reached an agreement with the contractor, whereby the Company was refunded the deposit less costs incurred for the equipment design. The total amount of the deposit was $1.5 million, of which $1.0 million was refunded. The remaining $0.5 million was recorded under development costs in the Consolidated Statement of Operations and Comprehensive Income (Loss).
NOTE 8 SHORT-TERM BANK INDEBTEDNESS
On May 29, 2015, Compañía Minera Pangea S.A. de C.V. (“CMP”), a wholly-owned subsidiary of the Company, finalized a line of credit agreement with Banco Nacional de Comercio Exterior (“Banco Nacional”), for an amount up to 90,000,000 Mexican pesos (approximately $5.9 million as of May 29, 2015), which was secured by CMP’s VAT receivable balance. The applicable interest rate was equal to: (i) two and one-half percent (2.5%) per annum plus (ii) the 91 day Interbank Equilibrium Interest Rate (“TIIE”) rate, as published by the Bank of Mexico, payable quarterly. Upon signing the agreement, CMP paid a 1% commission on the total value of the simple credit agreement to Banco Nacional.
On June 1, 2015, CMP drew down the entire 90,000,000 Mexican pesos, equivalent to $5.2 million as of December 31, 2015 from the line of credit, and realized a foreign exchange gain of approximately $0.7 million during the period.
During the year ended December 31, 2015, CMP collected 34,654,201 Mexican pesos (equivalent to $2.0 million as of December 31, 2015) of VAT receivable, from which 2,903,100 Mexican pesos were applied against the accrued interest on the line of credit and the remaining 31,751,101 Mexican pesos (approximately $1.8 million as of December 31, 2015) were applied against the principal.
On January 13, 2016 CMP paid the remaining balance of 58,248,899 Mexican Pesos (approximately $3.4 million as of December 31, 2015) and fulfilled its obligation to Banco Nacional. As a result, this line of credit was closed.
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
NOTE 9 RECLAMATION OBLIGATIONS
The Company is responsible for reclamation of certain past and future disturbances at its properties. The two most significant properties subject to these obligations are the Tonkin property in Nevada and the El Gallo 1 mine in Mexico. The Final Plan for Permanent Closure (“FPPC”) and the Amended Plan of Operations for the Tonkin property was approved by the Nevada Division of Environmental Protection (“NDEP”) and by the Bureau of Land Management (“BLM”) pursuant to the Finding of No Significant Impact in March 2012 and September 2015, respectively. Subsequently, on October 3, 2015 the BLM requested an updated bonding requirement in the amount of $3.6 million, which is covered within the surety bonds that the Company has as of December 31, 2016. Under current Mexican regulations, surety bonding of projected reclamation costs is not required.
The Company’s reclamation expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Reclamation Adjustment reflecting updated estimates
|
|
$
|
89
|
|
$
|
—
|
|
$
|
—
|
Reclamation Accretion
|
|
|
506
|
|
|
429
|
|
|
407
|
Total
|
|
$
|
595
|
|
$
|
429
|
|
$
|
407
|
As outlined in
Note 2 Summary of Significant Accounting Policies,
except for the Company’s 49% interest in the San José mine, none of the Company’s properties contain resources that satisfy the definition of proven and probable reserves. Therefore, the upward adjustment reflecting updated estimate of reclamation of El Gallo 1 mine is included in the Statement of Operations and Comprehensive Income (Loss) and since El Gallo 1 mine is an operating site, the adjustment is included in the Production Costs Applicable to Sales.
The Company’s asset retirement obligations for years ended December 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Balance at beginning of the period
|
|
$
|
7,784
|
|
$
|
7,471
|
Settlements
|
|
|
(66)
|
|
|
—
|
Accretion of liability
|
|
|
506
|
|
|
429
|
Adjustment reflecting updated estimates
|
|
|
1,619
|
|
|
(116)
|
Balance at December 31
|
|
$
|
9,843
|
|
$
|
7,784
|
Current portion
|
|
|
(537)
|
|
|
(215)
|
Non-current portion
|
|
$
|
9,306
|
|
$
|
7,569
|
The Company utilized the following assumptions in the calculation of its asset retirement obligations for years ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
Undiscounted Cash Flows
|
|
$
|
10.7 million
|
|
$
|
9.5 million
|
Remediation timeline
|
|
|
2017-2025
|
|
|
2016-2022
|
Inflation rate
|
|
|
1.6-2.4%
|
|
|
1.4-1.7%
|
Credit adjusted risk free rate
|
|
|
4.2-4.6%
|
|
|
6.8%
|
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
NOTE 10 INCOME TAXES
The Company’s deferred income tax benefit (expense) consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
United States
|
|
$
|
515
|
|
$
|
(442)
|
|
$
|
215
|
Foreign
|
|
|
3,234
|
|
|
25,002
|
|
|
106,955
|
Deferred tax benefit
|
|
$
|
3,749
|
|
$
|
24,560
|
|
$
|
107,170
|
The Company’s net income (loss) before tax consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
United States
|
|
$
|
(13,959)
|
|
$
|
(19,935)
|
|
$
|
(21,436)
|
Foreign
|
|
|
31,265
|
|
|
(25,075)
|
|
|
(397,677)
|
Net income (loss) before tax
|
|
$
|
17,306
|
|
$
|
(45,010)
|
|
$
|
(419,113)
|
A reconciliation of the tax provision for 2016, 2015 and 2014 at statutory U.S. Federal and State income tax rates to the actual tax provision recorded in the financial statements is computed as follows:
|
|
|
|
|
|
|
|
|
|
Expected tax benefit at
|
|
2016
|
|
2015
|
|
2014
|
Income (loss) before income taxes
|
|
$
|
17,306
|
|
$
|
(45,010)
|
|
|
(419,113)
|
Statutory tax rate
|
|
|
34%
|
|
|
34%
|
|
|
34%
|
US Federal and State tax benefit at statutory rate
|
|
|
5,884
|
|
|
(15,303)
|
|
$
|
(142,498)
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
Equity pickup in MSC
|
|
|
(4,533)
|
|
|
(821)
|
|
|
1,850
|
Impairment of MSC
|
|
|
—
|
|
|
4,004
|
|
|
7,407
|
Revisions to prior year estimates
|
|
|
(828)
|
|
|
906
|
|
|
8,330
|
Adjustment for foreign tax rates
|
|
|
(501)
|
|
|
(1,230)
|
|
|
(1,803)
|
Other permanent differences
|
|
|
818
|
|
|
(15,694)
|
|
|
(14,760)
|
Unrealized foreign exchange rate (loss)/gain
|
|
|
5,972
|
|
|
9,389
|
|
|
19,444
|
NOL expired
|
|
|
586
|
|
|
1,215
|
|
|
10,268
|
Valuation allowance
|
|
|
(11,147)
|
|
|
(7,026)
|
|
|
4,592
|
Tax benefit
|
|
|
(3,749)
|
|
|
(24,560)
|
|
$
|
(107,170)
|
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as at December 31, 2016 and 2015 respectively are presented below:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
|
96,312
|
|
|
105,555
|
|
Mineral Properties
|
|
|
14,195
|
|
|
11,842
|
|
Other temporary differences
|
|
|
1,114
|
|
|
5,371
|
|
Total gross deferred tax assets
|
|
|
111,621
|
|
|
122,768
|
|
Less: valuation allowance
|
|
|
(111,621)
|
|
|
(122,768)
|
|
Net deferred tax assets
|
|
$
|
—
|
|
$
|
—
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Acquired mineral property interests
|
|
|
(23,655)
|
|
|
(26,899)
|
|
Total deferred tax liabilities
|
|
$
|
(23,655)
|
|
$
|
(26,899)
|
|
Total net deferred tax liability
|
|
$
|
(23,655)
|
|
$
|
(26,899)
|
|
The Company reviews the measurement of its deferred tax assets at each balance sheet date. On the basis of available information at December 31, 2016, the Company has provided a valuation allowance for certain of its deferred assets where the Company believes it is more likely than not that some portion or all of such assets will be realized. The change in valuation allowance of approximately $11.1 million primarily reflects a decrease of net operating loss carryforwards.
The table below summarizes changes to the valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
Balance
at
beginning of period
|
|
Additions(a)
|
|
Deductions(b)
|
|
Balance at
end of period
|
2016
|
|
$
|
122,768
|
|
$
|
1,430
|
|
$
|
(12,577)
|
|
$
|
111,621
|
2015
|
|
|
129,794
|
|
|
6,873
|
|
|
(13,899)
|
|
|
122,768
|
2014
|
|
|
125,202
|
|
|
11,514
|
|
|
(6,922)
|
|
|
129,794
|
|
(a)
|
|
The additions to valuation allowance mainly results from the Company and its subsidiaries incurring losses and exploration expenses for tax purposes which do not meet the more-likely-than-not criterion for recognition of deferred tax assets.
|
|
(b)
|
|
The reductions to valuation allowance mainly results from expiration of the Company's tax attributes and foreign exchange reductions of tax attributes in Mexico and Argentina.
|
The deferred tax liability related to the Minera Andes acquisition was $16.3 million as at December 31, 2016 (2015 - $19.8 million).
As at December 31, 2016 and 2015, the Company did not have any income-tax related accrued interest and tax penalties.
The following table summarizes the Company’s losses that can be applied against future taxable profit:
|
|
|
|
|
|
|
|
Country
|
|
Type of Loss
|
|
Amount
|
|
Expiry
Period
|
United States
(a)
|
|
Non-operating losses
|
|
$
|
160,900
|
|
2017-2036
|
Mexico
|
|
Non-operating losses
|
|
|
31,810
|
|
2017-2026
|
Canada
|
|
Non-operating losses
|
|
|
19,055
|
|
2017-2036
|
Argentina
|
|
Non-operating losses
|
|
|
79,807
|
|
2017-2021
|
|
(a)
|
|
The losses in the United States and Argentina are part of multiple consolidating groups, and therefore, may be restricted in use to specific projects.
|
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
The Company or its subsidiaries file income tax returns in Canada, the United States, Mexico, and Argentina. These tax returns are subject to examination by local taxation authorities provided the tax years remain open to audit under the relevant statute of limitations. The following summarizes the open tax years by major jurisdiction:
United States: 2013 to 2016
Canada: 2009 to 2016
Mexico: 2012 to 2016
Argentina: 2012 to 2016
NOTE 11 SHAREHOLDERS’ EQUITY
On June 18, 2015, the Board of Directors declared an annual return of capital distribution of $0.01 per share of common stock, payable semi-annually. The first semi-annual return of capital distribution payment of $0.005 was made on August 17, 2015 (declared in July 2015), the second payment of $0.005 was made on February 12, 2016 (declared in July 2015) and the third payment of $0.005 was made on August 29, 2016 (declared in August 2016), each for a total of $1.5 million. The fourth semi-annual return of capital distribution payment was approved by the Board in early January 2017 and was paid on February 14, 2017 to the shareholders of record on February 3, 2017. Return of capital distributions are paid to holders of the Company’s common stock.
On October 1, 2015, the Board of Directors approved a share repurchase program authorizing the Company to purchase up to 15,000,000 shares of its common stock over a twelve-month period, with an authorized maximum of $15.0 million to be spent on the repurchases. Under the program, purchases of common stock could be made from time-to-time in the open market, subject to compliance with applicable U.S. and Canadian laws. The timing and amounts of any purchases are based on market conditions and other factors including share price, regulatory requirements and capital availability. Further, the repurchase program could be suspended, discontinued or modified at any time, at the discretion of the Board of Directors. During the twelve months ended December 31, 2016 the Company repurchased 557,991 shares of common stock (December 31, 2015 - 1,896,442), all of which have been cancelled, at a total cost of $0.6 million (December 31, 2015 - $1.8 million). The share repurchase program expired on September 30, 2016.
At the Company’s annual meeting held on May 31, 2016, the holders of exchangeable shares of McEwen Mining-Minera Andes Acquisition Corp., a wholly-owned subsidiary of the Company (“MAQ”), voted to amend its Articles of Incorporation to allow early redemption of all outstanding exchangeable shares for common stock of the Company. The purpose of the early redemption was to reduce the administration costs of maintaining two stock listings and simplify the corporate structure. On July 25, 2016, the Company announced that MAQ had established a redemption date of August 23, 2016 in respect of all of its outstanding exchangeable shares and that McEwen Mining (Alberta) ULC ("McEwen (Alberta)") elected to exercise its overriding redemption call right to acquire all of the outstanding exchangeable shares (other than exchangeable shares held by the Company and its subsidiaries) on the business day immediately prior to the redemption date, being August 22, 2016. On August 22, 2016, McEwen (Alberta) acquired all of the exchangeable shares not yet redeemed for purchase consideration of one share of the Company’s common stock per exchangeable share. Following the redemption, MAQ applied to have the exchangeable shares delisted from the Toronto Stock Exchange (“TSX”). During the twelve months ended December 31, 2016, 24.2 million exchangeable shares were converted into common stock (December 31, 2015 – 4.3 million). At December 31, 2016, the Company or its subsidiaries had no outstanding exchangeable shares not exchanged and not owned (December 31, 2015 – 24.2 million).
NOTE 12 STOCK BASED COMPENSATION
Stock Options
The Plan allows for equity awards to be granted to employees, consultants, advisors, and directors. The Plan is administered by the Board of Directors, which determines the terms pursuant to which any award is granted. The Board of Directors
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
may delegate to certain officers the authority to grant awards to certain employees (other than such officers), consultants and advisors.
The number of shares of common stock reserved for issuance thereunder is 17.5 million shares, with no more than 1 million shares subject to grants of options to an individual in a calendar year. The plan also provides for the grant of incentive options under Section 422 of the Internal Revenue Code (the “Code”), which provide potential tax benefits to the recipients compared to non-qualified options. At December 31, 2016, 5,294,563 awards were authorized and available for issuance under the Plan.
During the year ended December 31, 2016, 1,494,085 shares of common stock were issued upon exercise of stock options under the Company’s Amended and Restated Equity Incentive Plan (“Plan”), at a weighted average exercise price of $2.51 per share for proceeds of $3.7 million. This compares to no shares of common stock issues during 2015 and 1,499,300 shares of common stock issued during 2014 upon exercise at a weighted average exercise price of $1.29 per share, for proceeds of $1.9 million.
The following table summarizes information about stock options under the Plan outstanding at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
|
|
Number of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Shares
|
|
Price
|
|
Life (Years)
|
|
Value
|
|
|
(in thousands, except per share and year data)
|
Balance at December 31, 2014
|
|
4,651
|
|
$
|
3.35
|
|
4.4
|
|
$
|
—
|
Granted
|
|
2,733
|
|
|
1.03
|
|
—
|
|
|
—
|
Exercised
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
Forfeited
|
|
(272)
|
|
|
2.82
|
|
—
|
|
|
—
|
Expired
|
|
(158)
|
|
|
2.12
|
|
—
|
|
|
—
|
Balance at December 31, 2015
|
|
6,954
|
|
$
|
2.49
|
|
4.1
|
|
$
|
98
|
Granted
|
|
645
|
|
|
3.99
|
|
—
|
|
|
—
|
Exercised
|
|
(1,457)
|
|
|
2.48
|
|
—
|
|
|
1,601
|
Forfeited
|
|
(1,422)
|
|
|
3.45
|
|
—
|
|
|
—
|
Expired
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
Balance at December 31, 2016
|
|
4,720
|
|
$
|
2.41
|
|
3.4
|
|
$
|
4,388
|
Exercisable at December 31, 2016
|
|
2,257
|
|
$
|
2.74
|
|
2.9
|
|
$
|
1,697
|
Stock options have been granted to key employees, directors and consultants under the Plan. Options to purchase shares under the Plan were granted at or above market value as of the date of the grant. During the year ended December 31, 2016, the Company granted stock options to certain employees and directors for an aggregate of 0.7 million shares of common stock (2015 - 2.7 million, 2014 - 1.7 million) at a weighted average exercise price of $3.99 per share (2015 – $1.03, 2014 - $2.90). The options vest equally over a three-year period if the individuals remain affiliated with the Company (subject to acceleration of vesting in certain events) and are exercisable for a period of 5 years from the date of issue.
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
The fair value of the options granted under the Plan was estimated at the date of grant, using the Black-Scholes option-pricing model, with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Risk-free interest rate
|
|
|
1.13% to 1.21%
|
|
|
1.10% to 1.79%
|
|
|
1.10
|
%
|
Dividend yield
|
|
|
0.24% to 0.27%
|
|
|
0% to 1.15%
|
|
|
—
|
%
|
Volatility factor of the expected market price of common stock
|
|
|
74%
|
|
|
73% to 74%
|
|
|
70
|
%
|
Weighted-average expected life of option
|
|
|
5.0 years
|
|
|
5.0 years
|
|
|
3.5 years
|
|
Weighted-average grant date fair value
|
|
$
|
2.36
|
|
$
|
0.49
|
|
$
|
1.45
|
|
During the year ended December 31, 2016, the Company recorded stock option expense of $1.0 million (2015 -$1.3 million, 2014 - $1.3 million) while the corresponding fair value of awards vesting in the period was $1.3 million (2015 - $1.5 million and 2014 - $2.0 million). None of the stock option expense was capitalized as part of the cost of an asset or any other item on the Consolidated Balance Sheet.
At December 31, 2016, there was $1.4 million (2015 - $1.6 million, 2014 - $1.8 million) of unrecognized compensation expense related to 2.5 million (2015 - 4.2 million, 2014 - 2.7 million) unvested stock options outstanding. This cost is expected to be recognized over a weighted-average period of approximately 1.6 years (2015 - 1.6 years, 2014 – 1.6 years).
The following table summarizes the status and activity of non-vested stock options for the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Number of
|
|
Grant Date
|
|
|
Shares
|
|
Fair Value
|
|
|
(in thousands, except per share amounts)
|
Non-vested, beginning of year
|
|
4,182
|
|
$
|
0.74
|
Granted
|
|
645
|
|
$
|
2.36
|
Cancelled/Forfeited
|
|
(826)
|
|
$
|
0.77
|
Vested
|
|
(1,538)
|
|
$
|
0.85
|
Non-vested, end of year
|
|
2,463
|
|
$
|
1.08
|
NOTE 13 NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing the net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed similarly except that the weighted average number of common shares is increased to reflect all dilutive instruments. Diluted net income (loss) per share is calculated using the treasury stock method. In applying the treasury stock method, employee stock options with an exercise price greater than the average quoted market price of the common shares for the period outstanding are not included in the calculation of diluted net income (loss) per share as the impact is anti-dilutive.
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
Below is a reconciliation of the basic and diluted weighted average number of common shares and the computations for basic income (loss) per share and diluted income (loss) for the year ended December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands, except per share amounts)
|
Net income (loss)
|
|
$
|
21,055
|
|
$
|
(20,450)
|
|
$
|
(311,943)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
298,772
|
|
|
300,341
|
|
|
297,763
|
Effect of employee stock-based awards
|
|
|
1,701
|
|
|
—
|
|
|
—
|
Diluted shares outstanding:
|
|
|
300,474
|
|
|
300,341
|
|
|
297,763
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - basic:
|
|
$
|
0.07
|
|
$
|
(0.07)
|
|
$
|
(1.05)
|
Net income (loss) per share - diluted:
|
|
$
|
0.07
|
|
$
|
(0.07)
|
|
$
|
(1.05)
|
Options to purchase 2.0 million shares of common stock at an average exercise price of $3.91 at December 31, 2016 were not included in the computation of diluted weighted average shares because their exercise price exceeded the average price of the Company’s common stock for the year ended December 31, 2016 and their effect would have been anti-dilutive. In 2015 and 2014, as the Company was in a loss position, all potentially dilutive instruments were anti-dilutive and therefore not included in the calculation of diluted net loss per share.
NOTE 14 COMMITMENTS AND CONTINGENCIES
Commitments
At December 31, 2016, the Company’s commitments include long-term operating leases covering office space, land and equipment purchase commitments, exploration expenditures, option payments on properties and reclamation costs for the following minimum amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
|
|
(in thousands)
|
Operating lease obligations (office rent)
|
|
$
|
494
|
|
$
|
309
|
|
$
|
315
|
|
$
|
318
|
|
$
|
257
|
|
$
|
512
|
|
$
|
2,205
|
Operating lease obligations (mining and surface rights)
|
|
|
2,044
|
|
|
2,337
|
|
|
2,332
|
|
|
2,291
|
|
|
2,261
|
|
|
2,466
|
|
|
13,731
|
Reclamation costs
(1)
|
|
|
751
|
|
|
415
|
|
|
690
|
|
|
3,540
|
|
|
2,709
|
|
|
2,810
|
|
|
10,915
|
Total
|
|
$
|
3,289
|
|
$
|
3,061
|
|
$
|
3,337
|
|
$
|
6,149
|
|
$
|
5,227
|
|
$
|
5,788
|
|
$
|
26,851
|
|
(1)
|
|
Amounts presented represent the undiscounted uninflated future payments.
|
For the year ended December 31, 2016, the Company had rental expense under operating leases of $0.4 million (2015 - $0.5 million; 2014 - $0.5 million).
As part of its ongoing business and operations, the Company is required to provide bonding for its environmental reclamation obligations in the United States. These surety bonds are available for draw down by the beneficiary in the event the Company does not perform its reclamation obligations. If the specific reclamation requirements are met, the beneficiary of the surety bonds will release the instrument to the issuing entity. The Company believes it is in compliance with all applicable bonding obligations and will be able to satisfy future bonding requirements, through existing or alternative means, as they arise. As at December 31, 2016, there were $4.8 million of outstanding surety bonds (2015 -
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
$4.8 million). The annual financing fees are 1.5% of the value of the surety bonds, with an upfront 10% deposit of $0.5 million which is included in Other Assets in the Consolidated Balance Sheet.
Other potential contingencies
The Company’s mining and exploration activities are subject to various laws and regulations governing the protection of the environment. These laws and regulations are continually changing and generally becoming more restrictive. The Company conducts its operations so as to protect public health and the environment, and believes its operations are materially in compliance with all applicable laws and regulations. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations.
The Company and its predecessors have transferred their interest in several mining properties to third parties throughout its history. The Company could remain potentially liable for environmental enforcement actions related to its prior ownership of such properties. However, the Company has no reasonable belief that any violation of relevant environmental laws or regulations has occurred regarding these transferred properties.
NOTE 15 RELATED PARTY TRANSACTIONS
The Company incurred the following expense (income) in respect to the related parties outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Lexam L.P.
|
|
$
|
187
|
|
$
|
104
|
|
$
|
93
|
Lexam VG Gold
|
|
|
85
|
|
|
(1)
|
|
|
(72)
|
REVlaw
|
|
|
124
|
|
|
59
|
|
|
—
|
The Company has the following outstanding accounts payable balance in respect to the related parties outlined below:
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
Lexam L.P.
|
|
$
|
—
|
|
$
|
66
|
Lexam VG Gold
|
|
|
27
|
|
|
—
|
REVlaw
|
|
|
148
|
|
|
59
|
An aircraft owned by Lexam L.P. (which is controlled by Robert R. McEwen, limited partner and beneficiary of Lexam L.P. and the Company’s Chairman and Chief Executive Officer) has been made available to the Company in order to expedite business travel. In his role as Chairman and Chief Executive Officer of the Company, Mr. McEwen must travel extensively and frequently on short notice. Mr. McEwen is able to charter the aircraft from Lexam L.P. at a preferential rate approved by the Company’s independent board members under a policy whereby only the variable expenses of operating this aircraft for business related travel are eligible for reimbursement by the Company.
Robert R. McEwen is the Non-Executive Chairman of Lexam VG Gold (“Lexam”) and holds 27% ownership in Lexam. The Company has agreed to share services with Lexam VG Gold Inc. including rent, personnel, office expenses and other administrative services. These transactions are in the normal course of business. Subsequent to the period-end, on February 13, 2017, the Company entered into an agreement pursuant to which the Company would acquire all of the issued and outstanding securities of Lexam. Refer to
Note 18 Subsequent Events for further details
.
REVlaw is a company owned by Ms. Carmen Diges, General Counsel of the Company. The legal services of Ms. Diges as General Counsel are provided by REVlaw in the normal course of business. These legal fees have been recorded at their exchange amount and these transactions are in the normal course of business.
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
NOTE 16 OPERATING SEGMENT REPORTING
McEwen Mining is a mining and minerals exploration company focused on precious metals in Argentina, Mexico and the United States. 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 and not provided to the CODM for review are included in
Corporate 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, mine development costs, exploration costs, property holding costs and general and administrative expenses for all segments except for the MSC segment which is evaluated based on the attributable equity income. Gold and silver sales and production costs applicable to sales for the reportable segments are reported net of intercompany transactions.
In the fourth quarter of 2016, the Company changed the measurement methods used to determine segment profit or loss composition of its reportable segments as a result of the change in the way that the CODM assesses performance and allocates resources. As a result, the Company separately reported segment income (loss) attributable to Los Azules and MSC. The updated composition of segments reflects the distinct economic characteristic of each mine/project.
Significant information relating to the Company’s reportable operating segments is summarized in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
Year ended December 31, 2016
|
|
Mexico
|
|
MSC
|
|
Los Azules
|
|
Nevada
|
|
Income (loss)
|
Gold and silver sales
|
|
$
|
60,388
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
60,388
|
Production costs applicable to sales
|
|
|
(28,133)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28,133)
|
Mine development costs
|
|
|
(1,174)
|
|
|
—
|
|
|
—
|
|
|
(2,692)
|
|
|
(3,866)
|
Exploration costs
|
|
|
(4,100)
|
|
|
—
|
|
|
(1,649)
|
|
|
(1,973)
|
|
|
(7,722)
|
Property holding costs
|
|
|
(1,642)
|
|
|
—
|
|
|
(405)
|
|
|
(1,489)
|
|
|
(3,536)
|
General and administrative expenses
|
|
|
(2,688)
|
|
|
—
|
|
|
(646)
|
|
|
(228)
|
|
|
(3,562)
|
Income from investment in Minera Santa Cruz S.A. (net of amortization)
|
|
|
—
|
|
|
12,951
|
|
|
—
|
|
|
—
|
|
|
12,951
|
Segment income (loss)
|
|
$
|
22,651
|
|
$
|
12,951
|
|
$
|
(2,700)
|
|
$
|
(6,382)
|
|
$
|
26,520
|
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other exploration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(237)
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,172)
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,169)
|
Revision of estimates and accretion of reclamation obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(595)
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
835
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
Gain on sale of marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
Other-than-temporary impairment on marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(882)
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,379
|
Foreign currency gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
581
|
Net income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,306
|
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
Year ended December 31, 2015
|
|
Mexico
|
|
MSC
|
|
Los Azules
|
|
Nevada
|
|
Income (loss)
|
Gold and silver sales
|
|
$
|
72,956
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
72,956
|
Production costs applicable to sales
|
|
|
(34,607)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(34,607)
|
Mine development costs
|
|
|
(761)
|
|
|
—
|
|
|
—
|
|
|
(408)
|
|
|
(1,169)
|
Exploration costs
|
|
|
(4,526)
|
|
|
—
|
|
|
(1,481)
|
|
|
(2,517)
|
|
|
(8,524)
|
Property holding costs
|
|
|
(2,471)
|
|
|
—
|
|
|
(356)
|
|
|
(1,509)
|
|
|
(4,336)
|
General and administrative expenses
|
|
|
(3,953)
|
|
|
—
|
|
|
(647)
|
|
|
(203)
|
|
|
(4,803)
|
Income from investment in Minera Santa Cruz S.A. (net of amortization)
|
|
|
—
|
|
|
2,414
|
|
|
—
|
|
|
—
|
|
|
2,414
|
Segment income (loss)
|
|
$
|
26,638
|
|
|
2,414
|
|
$
|
(2,484)
|
|
$
|
(4,637)
|
|
$
|
21,931
|
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other exploration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(274)
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,242)
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(942)
|
Revision of estimates and accretion of reclamation obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(429)
|
Impairment of mineral property interests and property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,600)
|
Impairment of investment in Minera Santa Cruz S.A.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,777)
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,404
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
Foreign currency gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,906
|
Net loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(45,010)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
Year ended December 31, 2014
|
|
Mexico
|
|
MSC
|
|
Los Azules
|
|
Nevada
|
|
Income
(loss)
|
Gold and silver sales
|
|
$
|
45,303
|
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
45,303
|
Production costs applicable to sales
|
|
|
(40,608)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(40,608)
|
Mine construction costs
|
|
|
(1,723)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,723)
|
Mine development costs
|
|
|
(1,829)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,829)
|
Exploration costs
|
|
|
(5,468)
|
|
|
—
|
|
|
(2,453)
|
|
|
(3,060)
|
|
|
(10,981)
|
Property holding costs
|
|
|
(1,829)
|
|
|
—
|
|
|
(610)
|
|
|
(3,926)
|
|
|
(6,365)
|
General and administrative expenses
|
|
|
(3,194)
|
|
|
—
|
|
|
(969)
|
|
|
(211)
|
|
|
(4,374)
|
Loss from investment in Minera Santa Cruz S.A. (net of amortization)
|
|
|
—
|
|
|
(5,284)
|
|
|
—
|
|
|
—
|
|
|
(5,284)
|
Segment income (loss)
|
|
|
(9,348)
|
|
|
(5,284)
|
|
|
(4,032)
|
|
|
(7,197)
|
|
|
(25,861)
|
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other exploration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(351)
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,695)
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(979)
|
Revision of estimates and accretion of reclamation obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(407)
|
Impairment of mineral property interests and property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(353,736)
|
Impairment of investment in Minera Santa Cruz S.A.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,162)
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
Registration taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,788)
|
Foreign currency loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,419)
|
Net loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(419,113)
|
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
Geographic information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived Assets
|
|
Revenue
(1)
|
|
|
Year
ended December 31,
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
Canada
|
|
$
|
663
|
|
$
|
763
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
Mexico
|
|
|
27,582
|
|
|
24,067
|
|
|
60,388
|
|
|
72,956
|
|
|
45,303
|
USA
|
|
|
37,620
|
|
|
36,967
|
|
|
—
|
|
|
—
|
|
|
—
|
Argentina
(2)
|
|
|
353,879
|
|
|
358,845
|
|
|
—
|
|
|
—
|
|
|
—
|
Total consolidated
|
|
$
|
419,744
|
|
$
|
420,642
|
|
$
|
60,388
|
|
$
|
72,956
|
|
$
|
45,303
|
|
(1)
|
|
Presented based on the location from which the product originated.
|
|
(2)
|
|
Includes Investment in MSC of $162.0 million as of December 31, 2016 (December 31, 2015 - $167.1 million).
|
As gold and silver can be sold through numerous gold and silver market traders worldwide, the Company is not economically dependent on a limited number of customers for the sale of its product. In 2016, 2015 and 2014, sales to Bank of Nova Scotia were $58.1 million (96%), $67.2 million (92%) and $43.2 million (95%), respectively, of total gold and silver sales.
Capital Expenditures information
Capital expenditures includes acquisitions of Property and Equipment and Mineral Property Interests, net of dispositions.
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Mexico
|
|
$
|
5,401
|
|
$
|
700
|
|
$
|
1,843
|
Los Azules
|
|
|
—
|
|
|
2
|
|
|
(3)
|
Nevada
|
|
|
764
|
|
|
62
|
|
|
2
|
Total segment capital expenditures
|
|
$
|
6,165
|
|
$
|
764
|
|
$
|
1,842
|
Corporate and other
|
|
|
—
|
|
|
—
|
|
|
908
|
Consolidated total for capital expenditures
|
|
$
|
6,165
|
|
$
|
764
|
|
$
|
2,750
|
NOTE 17 FAIR VALUE ACCOUNTING
Assets and liabilities measured at fair value on a recurring basis
The following tables set forth the fair value of 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 December 31, 2016 and 2015. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as at December 31, 2016
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
8,543
|
|
$
|
6,749
|
|
$
|
1,794
|
|
$
|
—
|
Total
|
|
$
|
8,543
|
|
$
|
6,749
|
|
$
|
1,794
|
|
$
|
—
|
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as at December 31, 2015
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
1,032
|
|
$
|
1,032
|
|
$
|
—
|
|
$
|
—
|
Total
|
|
$
|
1,032
|
|
$
|
1,032
|
|
$
|
—
|
|
$
|
—
|
The Company's investments include marketable equity securities which are exchange traded and are valued using quoted market prices in active markets and as such are classified within Level 1 of the fair value hierarchy. The fair value of the investments is calculated as the quoted market price of the marketable equity security multiplied by the quantity of shares held by the Company.
Furthermore, as noted in Note 2,
Investments,
the Company’s investments also include warrants to purchase common stock of certain extractive industry companies. Since these warrants are not traded on an active market, they are valued using the Black-Scholes option pricing model, and classified within Level 2 of the fair value hierarchy. The main inputs used in the valuation of the warrants are volatility, interest rate, dividend yield and exercise price of the instruments.
The fair value of other financial assets and liabilities were assumed to approximate their carrying values due to their short-term nature and historically negligible credit losses.
NOTE 18 SUBSEQUENT EVENTS
Proposed Acquisition of Lexam VG Gold Inc.
On February 13, 2017, the Company entered into an Arrangement Agreement with Lexam VG Gold Inc., a corporation existing under the laws of the Province of Ontario, Canada (“Lexam”), pursuant to which the Company has agreed to acquire all of the issued and outstanding common shares of Lexam (the “Arrangement”). The Arrangement will be implemented by way of a plan of arrangement and is subject to approval by the shareholders of Lexam and the Ontario Superior Court of Justice (Commercial List). Completion of the Arrangement will result in Lexam becoming a wholly-owned subsidiary of the Company.
Pursuant to, and subject to the terms and conditions of, the Arrangement Agreement and the plan of arrangement, the Company will acquire all of the issued and outstanding shares of Lexam (the “Lexam Shares”) in exchange for shares of common stock of the Company at a ratio of 0.056 of a share of the Company’s common stock for each Lexam Share. If consummated, the Company expects to issue approximately 12,689,709 shares of common stock, or approximately 4% of the outstanding shares of the Company’s common stock, to Lexam shareholders. In addition, all issued and outstanding options to acquire Lexam Shares will be converted into options to purchase shares of common stock of the Company at a ratio of 0.056 of a share of the Company’s common stock for each Lexam Share underlying each such Lexam option. The exchange ratio of 0.056 will not be adjusted for any subsequent changes in market prices of the Lexam Shares or the Company’s common stock prior to the closing of the Arrangement.
Consummation of the Arrangement is subject to various conditions, including, among others: (i) the approval of Lexam’s shareholders of the Arrangement and any other necessary actions related thereto; (ii) approval of the Court; (iii) approval of the listing of the shares of the Company’s common stock issuable to holders of Lexam Shares on the NYSE and the TSX; (iv) holders of not more than five percent of the issued and outstanding Lexam Shares exercising rights of dissent in respect of the Arrangement; (v) the accuracy of each party’s representations and warranties (subject to certain materiality qualifiers); and (vi) the absence of a material adverse effect in respect of each party.
The Arrangement Agreement includes customary representations, warranties, and covenants by the parties, including, among others, a covenant of Lexam not to solicit competing or alternative transactions, subject to certain exceptions to
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
permit Lexam’s Board of Directors to comply with its fiduciary duties, including the right of Lexam to enter into a “Superior Proposal” (as defined in the Arrangement Agreement).
The Arrangement agreement also includes customary deal protection and non-solicitation provisions in favour of the Company, including a break fee of $2.1 million payable to the Company in certain circumstances, and fiduciary out provisions for the benefit of Lexam. Lexam is entitled to a reverse break fee of the same amount payable in certain other circumstances.
Our Chairman and Chief Executive Officer, Mr. Robert R. McEwen, our Chairman and Chief Executive Officer, is also a principal shareholder of Lexam. In order to comply with NYSE rules, Mr. McEwen will not be entitled to receive shares of the Company’s common stock in exchange for his Lexam Shares in an amount representing more than 1% of the issued and outstanding shares of the Company without obtaining the prior approval of the Company’s shareholders. The Company expects to seek such shareholder approval at its 2017 Annual Meeting of Shareholders. If such shareholder approval is not obtained, the Company will pay for such excess shares in cash.
Closing of the transaction is expected to occur by May 23, 2017.
NOTE 19 UNAUDITED SUPPLEMENTARY QUARTERLY INFORMATION
The following table summarizes unaudited supplementary quarterly information for the years ended December 31, 2016, 2015, and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2016
|
|
June 30, 2016
|
|
September 30, 2016
|
|
December 31, 2016
|
|
|
(unaudited) (in thousands, except per share)
|
Net income (loss)
|
|
$
|
12,985
|
|
$
|
8,353
|
|
$
|
4,208
|
|
$
|
(4,491)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
(0.01)
|
Diluted
|
|
$
|
0.04
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
(0.01)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
298,242
|
|
|
298,237
|
|
|
298,510
|
|
|
299,518
|
Diluted
|
|
|
298,554
|
|
|
299,791
|
|
|
301,045
|
|
|
301,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2015
|
|
June 30, 2015
|
|
September 30, 2015
|
|
December 31, 2015
|
|
|
(unaudited) (in thousands, except per share)
|
Net income (loss)
|
|
$
|
6,021
|
|
$
|
(14,116)
|
|
$
|
2,633
|
|
$
|
(14,988)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
$
|
(0.05)
|
|
$
|
0.01
|
|
$
|
(0.05)
|
Diluted
|
|
$
|
0.02
|
|
$
|
(0.05)
|
|
$
|
0.01
|
|
$
|
(0.05)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
297,255
|
|
|
300,530
|
|
|
300,530
|
|
|
300,107
|
Diluted
|
|
|
297,266
|
|
|
300,530
|
|
|
300,530
|
|
|
300,107
|
Table of Contents
MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
(tabular amounts are in thousands of U.S. dollars, unless otherwise noted) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2014
|
|
June 30, 2014
|
|
September 30, 2014
|
|
December 31, 2014
|
|
|
(unaudited) (in thousands, except per share)
|
Net income (loss)
|
|
$
|
17,887
|
|
$
|
(104,022)
|
|
$
|
(13,033)
|
|
$
|
(212,775)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
$
|
(0.35)
|
|
$
|
(0.04)
|
|
$
|
(0.71)
|
Diluted
|
|
$
|
0.06
|
|
$
|
(0.35)
|
|
$
|
(0.04)
|
|
$
|
(0.71)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
297,159
|
|
|
297,164
|
|
|
297,164
|
|
|
299,009
|
Diluted
|
|
|
298,410
|
|
|
297,164
|
|
|
297,164
|
|
|
299,009
|
NOTE 20 COMPARATIVE FIGURES
Certain prior year information has been reclassified to conform with the current year’s presentation.