NOTE 1 NATURE OF OPERATIONS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
McEwen Mining Inc. (the “Company”) was organized under the laws of the State of Colorado on July 24, 1979. The Company is engaged in the exploration, development, production and sale of gold and silver. 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.
The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included are adequate to make the information presented not misleading.
In management’s opinion, the unaudited Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2017 and 2016, the Consolidated Balance Sheets as at March 31, 2017 (unaudited) and December 31, 2016, the unaudited Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2017 and 2016, and the unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016, contained herein, reflect all adjustments, consisting solely of normal recurring items, which are necessary for the fair presentation of the Company’s financial position, results of operations and cash flows on a basis consistent with that of the Company’s prior audited consolidated financial statements. However, the results of operations for the interim periods may not be indicative of results to be expected for the full fiscal year. Therefore, these financial statements should be read in conjunction with the audited financial statements and notes thereto and summary of significant accounting policies included in the Company’s annual report on Form 10-K for the year ended December 31, 2016. Except as noted below, there have been no material changes to the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s Form 10-K for the year ended December 31, 2016. The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
Recently Adopted Accounting Pronouncements
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 Company beginning after December 5, 2016, with early adoption permitted. Adoption of this guidance by the Company, effective March 31, 2017 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. 2017-01 which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the following discussion, “McEwen Mining”, the “Company”, “we”, “our”, and “us” refers to McEwen Mining Inc. and as the context requires, its consolidated subsidiaries.
The following discussion analyzes our financial condition at March 31, 2017 and compares it to our financial condition at December 31, 2016. The discussion also analyzes our results of operations for the three months ended March 31, 2017 and compares those to the results for the three months ended March 31, 2016. With regard to properties or projects that are not in production, we provide an update of our plan of operation. We suggest that you read this discussion in conjunction with MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and our audited consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2016.
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, and average realized price per ounce, 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 30.
Reliability of Information: Minera Santa Cruz S.A. (“MSC”), the owner of the San José Mine, is responsible for and has supplied to us all reported results from the San José Mine. The financial and 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 information.
Overview
We were organized under the laws of the State of Colorado on July 24, 1979. Since inception, we have been engaged in the exploration for, development of, production and sale of gold, silver and copper. We own and operate the producing El Gallo 1 Mine in Sinaloa, Mexico. We also own a 49% interest in MSC, owner and operator of the producing San José Mine in Santa Cruz, Argentina. We also own the Gold Bar Project in Nevada, United States; the El Gallo 2 project in Mexico, the Los Azules Project in San Juan, Argentina, and a large portfolio of exploration properties in Argentina, Mexico and the United States.
In this report, “Au” represents gold; “Ag” represents silver; “oz” represents troy ounce; “gpt” represents grams per metric tonne; “ft.” represents feet; “m” represents meter; “km” represents kilometer; “sq.” represents square; and C$ refers to Canadian dollars. All of our financial information is reported in United States (U.S.) dollars, unless otherwise noted.
Index to Management’s Discussion and Analysis:
Operating and Financial Highlights
Highlights for the first quarter of 2017 are included below and discussed further in Results
of Consolidated Operations:
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·
|
|
We reported $14.8 million in gold and silver sales, from the sale of 12,147 gold equivalent ounces by our El Gallo 1 mine.
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|
·
|
|
We realized average prices of $1,220 and $17.54 per ounce of gold and silver, respectively, sold by the El Gallo 1 mine, and $1,253 and $18.18 per ounce of gold and silver, respectively, sold by the San José mine.
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|
·
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|
The El Gallo 1 mine reported production of 9,808 gold equivalent ounces, comprised of 9,730 ounces of gold and 5,794 ounces of silver.
|
|
·
|
|
The San José mine reported production of 40,664 gold equivalent ounces, comprised of 21,155 ounces of gold and 1,463,211 ounces of silver, based on a 100% basis, or 19,925 gold equivalent ounces, represented by 10,366 ounces of gold and 716,973 ounces of silver, based on the 49% basis attributable to us.
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|
·
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|
The El Gallo 1 mine reported total cash costs of $564 and all-in sustaining costs of $668 per gold equivalent ounce, respectively.
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|
·
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|
The San José mine reported total cash costs of $915 and all-in sustaining costs of $1,165 per gold equivalent ounce, respectively.
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|
·
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|
We spent $8.4 million in exploration activities, particularly at the Los Azules project.
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|
·
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|
We reported a net loss of $3.0 million, or $0.01 per share for the quarter.
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|
·
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|
Income from our investment in MSC was $0.2 million for the quarter, and we received $2.5 million in dividends during the three months ended March 31, 2017.
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|
·
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|
As of March 31, 2017, we reported $55.1 million in cash, investments and precious metals valued at the London P.M. Fix spot price and no short-term bank indebtedness
(1)
.
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|
·
|
|
On April 26, 2017, we completed the acquisition of Lexam VG Gold Inc. With this strategic acquisition, we add several assets located in the mining district of Timmins, Ontario, bringing the potential for development expansion through exploration.
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|
(1)
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|
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 30.
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Selected Financial and Operating Results
The following table summarizes selected financial and operating results of our Company for the three months ended March 31, 2017 and 2016:
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|
|
|
|
|
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|
Three months ended
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|
|
|
March 31,
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|
|
|
2017
|
|
2016
|
|
|
|
(in thousands, except otherwise stated)
|
|
Gold and silver sales
|
|
$
|
14,833
|
|
$
|
21,190
|
|
Income on investment in MSC, net of amortization
|
|
$
|
190
|
|
$
|
4,963
|
|
Net (loss) income
|
|
$
|
(3,018)
|
|
$
|
12,985
|
|
Net (loss) income per common share
|
|
$
|
(0.01)
|
|
$
|
0.04
|
|
Consolidated gold ounces
(1)
:
|
|
|
|
|
|
|
|
Produced
|
|
|
20
|
|
|
29
|
|
Sold
|
|
|
22
|
|
|
30
|
|
Consolidated silver ounces
(1)
:
|
|
|
|
|
|
|
|
Produced
|
|
|
723
|
|
|
674
|
|
Sold
|
|
|
699
|
|
|
829
|
|
Consolidated gold equivalent ounces
(1)(2)
:
|
|
|
|
|
|
|
|
Produced
|
|
|
30
|
|
|
38
|
|
Sold
|
|
|
31
|
|
|
41
|
|
Silver : gold ratio
(2)
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
(1)
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|
Includes the portion attributable to us from our 49% interest in the San José Mine.
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|
(2)
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|
Silver production is presented as a gold equivalent. The silver to gold ratio used for 2017 and 2016 is 75:1.
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Consolidated Performance
For the period ended March 31, 2017, we reported a net loss of $3.0 million or $0.01 per share, compared to net income of $13.0 million or $0.04 per share for the first quarter in 2016. The net loss was mainly due to a $6.4 million decrease in sales of gold and silver by our El Gallo 1 mine, coupled with a $6.7 million increase in exploration costs, primarily related to the drilling campaign performed at the Los Azules project.
During the first quarter of 2017, net income from our investment in MSC decreased to $0.2 million, from $5.0 million in 2016. Unusual storms damaged port facilities from which doré from San José is shipped, adversely affecting sales during the quarter. Despite the decrease in net income, MSC continued a strong operating performance that resulted in a dividend payment of $2.5 million to us.
Results of Consolidated Operations
Three months ended March 31, 2017 compared to 2016
Revenue
.
Gold and silver sales for the period ended March 31, 2017 decreased to $14.8 million, from $21.2 million in 2016 due to a 33% decrease in gold equivalent ounces sold during the period at our El Gallo 1 mine, partially offset by a 4% and 20% increase in the average realized prices of gold and silver, respectively. The decrease in the number of gold equivalent ounces sold was in line with the decrease in production reported in the first quarter. Based on our mine plan, we expect to increase production towards the second half of 2017.
Production costs applicable to sales
.
Production costs applicable to sales at the El Gallo 1 mine decreased to $7.0 million in the period ended March 31, 2017, compared to $9.1 million in 2015, due to the 33% decrease in the number of gold equivalent ounces sold mentioned above, partly offset by higher costs per ounce resulting from lower average grades processed during the period.
Operating Income (Expenses)
Mine development costs, which relate to engineering and development expenditures incurred at our advanced-stage properties, increased to $1.1 million for the three months period ended March 31, 2017 from $0.7 million in the 2016 period, due to $0.3 million higher expenditures incurred in Nevada. Please refer to the Advanced-stage properties section for a complete discussion on these costs.
Exploration costs in the first quarter of 2017 increased by $6.7 million to $8.4 million from $1.7 million in 2016. The increase is mainly due to $6.0 million higher exploration expenditures incurred at the Los Azules project, coupled with $0.7 million higher exploration costs incurred in Mexico. For a complete discussion on exploration costs, please refer to the Exploration properties section below.
General and administrative expenses increased to $4.3 million in 2017 from $2.8 million in 2016, mainly as a result of higher overhead from the development of Gold Bar and the advancement of Los Azules, as well as changes to senior management that occurred in the second half of 2016, which contribute to the increase on a period-over-period basis. The appreciation of the Mexican peso and Argentina peso against the U.S. dollar in the first quarter of 2017, also contributed to the increase in general and administrative expenses, when compared to 2016.
Income from our investment in MSC decreased to $0.2 million in 2017, from $5.0 million in 2016 due to a decrease in revenue from lower gold and silver sales, coupled with higher production costs applicable to sales from the increase in head count and labour expenditures, and the appreciation of the Argentina peso against the U.S. dollar, compared to the same period of 2016. Please refer to the section
Results of Operations – MSC
below, for further details.
Other income (expenses)
Other income increased to $1.8 million in the three months ended March 31, 2017 from $0.7 million in the same period of 2016, mainly due to a $1.8 million unrealized gain on derivative instruments, partly offset by lower currency gain and interest and other income (expense) reported in the prior quarter.
Recovery of income taxes
Recovery of income taxes increased to $2.7 million in the three months ended March 31, 2017, from $1.9 million in 2016, mainly due to $1.1 million income tax recovery to offset the unrealized gain in value of our investments, recorded through other comprehensive income.
Liquidity and Capital Resources
As of March 31, 2017, we had working capital of $58.3 million, consisting of $81.7 million of current assets and $23.4 million of current liabilities. Our cash balance decreased from $37.4 million at December 31, 2016 to $28.9 million at March 31, 2017, as a result of an increase in cash used in operating activities, partly offset by a decrease in cash used in financing activities. We believe that our working capital at March 31, 2017 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 construction decision and develop either of our advanced-stage properties, Gold Bar or 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 considered.
Net cash used in operations was $6.9 million in the three months ended March 31, 2017, compared to net cash provided by operations of $14.7 million for the same period in 2016. The significant changes quarter over quarter include:
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·
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$14.8 million cash received from gold and silver sales in 2017, compared to $20.3 million in 2016, resulting from the lower number of ounces sold during 2017, previously mentioned.
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·
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Decrease in collection of VAT in Mexico to $0.4 million in the first quarter of 2017, compared to $6.8 million in the same period of 2016.
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·
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Increase in other assets related to operations, including inventory items, of $3.9 million during the first quarter of 2017.
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Cash used in investing activities decreased to $0.3 million in 2017, from $0.6 million in 2016, mainly due to reduced property acquisitions.
We used $1.5 million in financing activities in 2017, compared to $5.5 million in 2016, primarily as a result of:
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·
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$1.5 million return of capital to our shareholders in 2017, compared to $1.5 million in 2016.
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·
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$nil repayment of the bank credit facility obtained by our Mexican subsidiary, compared to $3.4 million repaid in 2016; and
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·
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$nil share repurchase for the first quarter of 2017, compared to $0.6 million in share repurchases in the same period of 2016.
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Results of Operations — Mexico Segment
The Mexico Segment includes the El Gallo 1 mine, the El Gallo 2 advanced-stage project, and exploration properties neighboring 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.
The El Gallo 1 mine is a mature operation, which has mined and depleted various pits during its operating life. The current operations are producing from lower grade deposits typical of late stage operations. Exploration work is ongoing to replace production and extend the asset life beyond 2018.
Overview
The following table outlines 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 month period ended March 31, 2017 and 2016:
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Three months ended
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March 31,
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2017
|
|
2016
|
|
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(in thousands, except otherwise stated)
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Tonnes of mineralized material mined
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|
|
225
|
|
|
220
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|
Average grade gold (gpt)
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|
|
1.2
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|
|
2.1
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|
Tonnes of mineralized material processed
|
|
|
309
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|
|
250
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|
Average grade gold (gpt)
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|
|
1.3
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|
|
3.6
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|
Gold ounces:
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|
|
|
|
|
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|
Produced
|
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|
10
|
|
|
20
|
|
Sold
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|
|
12
|
|
|
18
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|
Silver ounces:
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|
|
|
|
|
|
|
Produced
|
|
|
6
|
|
|
6
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|
Sold
|
|
|
11
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|
|
6
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|
Gold equivalent ounces
(1)
:
|
|
|
|
|
|
|
|
Produced
|
|
|
10
|
|
|
20
|
|
Sold
|
|
|
12
|
|
|
18
|
|
Net sales
|
|
$
|
14,833
|
|
$
|
21,190
|
|
Average realized price ($/ounce)
(2)
:
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|
|
|
|
|
|
|
Gold
|
|
$
|
1,220
|
|
$
|
1,171
|
|
Silver
|
|
$
|
17.54
|
|
$
|
14.64
|
|
Silver : gold ratio
(1)
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
(1)
|
|
Silver production is presented as a gold equivalent. The silver to gold ratio used for 2017 and 2016 is 75:1.
|
|
(2)
|
|
Average realized prices is a non-GAAP financial performance measure with no standardized definition under U.S. GAAP. See “Non-GAAP Financial Performance Measures”, on page 30 for additional information, including definitions of this term.
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Gold and silver production
Production for the quarter ended March 31, 2017 decreased to 9,808 gold equivalent ounces, from 20,101 gold equivalent ounces in the comparable period in 2016, primarily due to lower average grades mined and processed, which decreased from an average 3.62 g/t for the first quarter of 2016 to an average 1.28 g/t in the same period of 2017. Average grades processed were lower than in 2016, since we continue mining from our remaining lower grade pit; whereas in the first quarter of 2016, we processed higher grade ore stockpiled at the end of 2015. The decrease in production was expected, and in line with our current production plan, which contemplates the increase in the number of gold equivalent ounces produced towards the second half of 2017.
Tonnes mined represent tonnes of ore extracted, while tonnes processed represent tonnes of ore crushed and placed on the leach pads. The difference between tonnes mined of 225,409 and tonnes processed of 309,472 correspond to ore previously mined which was consumed from the stockpiled 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 realized for gold production from September 1, 2012 (start of production at the El Gallo 1 Mine) to March 31, 2017 is estimated at 60%.
Gold and silver sales
|
·
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|
Revenue from the sale of gold and silver at our El Gallo 1 mine decreased by 30% to $14.8 million in the first quarter of 2017, compared to $21.2 million for the same period in 2016, due to a 33% decrease in the number of ounces of gold equivalent sold, partly offset by 4% and 20% increase in average realized prices of gold and silver during the period, respectively.
|
|
·
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|
The average realized price of gold was $1,220 in the 2017 period, compared to $1,171 in the same period of 2016. In comparison, the average London P.M. fix price for gold during the first quarter of 2017 was $1,219 per ounce, compared to $1,183 per ounce for the same period in 2016.
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|
·
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|
Further, the average realized price of silver was $17.54 in the 2017 period, compared to $14.64 in 2016. In comparison, the average London P.M. fix price for silver during the first quarter of 2017 was $17.42 per ounce, compared to $14.85 per ounce for the same period in 2016.
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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 El Gallo 1 mine:
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|
|
|
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands, except otherwise stated)
|
|
Total cash costs
(1)
|
|
$
|
6,846
|
|
$
|
7,816
|
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Total cash cost per gold equivalent ounce sold ($/ounce)
(1)(2)
|
|
$
|
564
|
|
$
|
432
|
|
All
‑
in sustaining costs
(1)
|
|
$
|
8,112
|
|
$
|
9,627
|
|
All
‑
in sustaining cost per gold equivalent ounce sold ($/ounce)
(1)(2)
|
|
$
|
668
|
|
$
|
532
|
|
Silver : gold ratio
(2)
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
(1)
|
|
Total cash cost, total cash cost per ounce, all-in sustaining costs, and all-in sustaining costs per ounce are non‑GAAP financial performance measures with no standardized definition under U.S. GAAP. See “Non‑GAAP Financial Performance Measures” on page 30 for additional information, including definitions of this term.
|
|
(2)
|
|
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 2017 and 2016 was 75:1.
|
2017 compared to 2016
Total cash costs per gold equivalent ounce for the El Gallo 1 Mine for the quarter ended March 31, 2017 were $564 compared to $432 for the same period in 2016. The increase in total cash costs per gold equivalent ounce is primarily due to lower average grades of ore processed, and the appreciation of the Mexican Peso against the US dollar, partly offset by lower extraction and input costs based on contracts renegotiated with certain vendors in 2017.
On an aggregate basis, total cash costs at El Gallo 1 Mine decreased by 12% to $6.8 million in 2017 from $7.8 million in the 2016 period, due to overall lower mine and production costs resulting from higher number of ounces sold from inventoried materials which partly offset the lower number of ounces sold produced from mined material and a temporary increase in mined waste required to expose mineralized material.
All-in sustaining costs for the quarter ended March 31, 2017 were $668 per gold equivalent ounce, compared to $532 per gold equivalent ounce in the same period in 2016.
On an aggregate basis, all-in sustaining costs decreased by 16% to $8.1 million for the three month period ended March 31, 2017 from $9.6 million in the 2016 period, due to higher sales of ounces produced from inventoried materials, partly offset by lower ounces mined, short term increased waste mining and higher exploration expenses. Despite the decrease in aggregate all-in sustaining costs, all-in sustaining costs on a per ounce basis increased by 22% due to a reduction in the number of gold equivalent ounces sold, over which the all-in sustaining costs are spread.
For 2017, we have budgeted a total of $2.0 million for sustaining and capital expenditures activities, from which we have spent $0.1 million during the first quarter of 2017.
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 and should not be relied on.
During the first quarter of 2017, we spent $0.2 million on studies for the advancement of feasibility and development of the El Gallo 2 project. These studies intend to identify opportunities to reduce initial capital investment required to start the project and seek to reduce operating costs 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 $6.5 million, including $3.4 million for exploration and $3.1 million for the advancement of feasibility and development. During the quarter ended March 31, 2017 we have incurred $0.6 million in exploration and $0.2 million advancement of feasibility and development.
Exploration Activities – Mexico
El Gallo area, Sinaloa, México
We are exploring at the El Gallo area with the objective of determining the prospects of the properties that we hold in areas adjacent to the El Gallo 1 mine and the El Gallo 2 advanced-stage property.
During the quarter, comprehensive digital evaluation of all geochemistry, geophysics, mapping and drill exploration data was completed resulting in a recommendation of high probability exploration areas of interest to evaluate. From this, we have identified a number of areas to follow up on including further detailed surface mapping, rock sampling, soil sampling and reverse circulation and core drilling if warranted.
During the quarter, we acquired a small mobile reverse circulation drill rig capable of conducting reconnaissance drilling with a minimal footprint, to work in the area adjacent to the El Gallo, and accelerate exploration drilling activities at lower costs.
For 2017, we have budgeted a total of $1.8 million for exploration at the El Gallo area, including areas located close to the existing facilities (El Cobre, El Chorro, Dos Amigos). We are also pursuing areas further afield including the Tescalama and Mapiri areas that have historical, artisanal mining activities noted along with anomalous rock and soil geochemistry from primary phase exploration. As of March 31, 2017, $0.9 million have been spent in exploration in the El Gallo area.
Infill drilling is to take place in areas with known resources or mineralization including the Mina Grande and El Encuentro areas. Mina Grande area where exploration drilling results continue to return potentially promising values which could expand the mineralized material known there. Ongoing review of the resistivity survey from last year is expected to identify potential areas to follow up with other geophysical methods such as Induced Polarisation (“IP”).
Results of Operations—MSC Segment
The MSC segment is composed of the San José mine, located in Argentina.
MSC
(on a 100% basis)
Overview
The following table outlines 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 three month period ended March 31, 2017 and 2016, presented on a 100% basis. Also, included at the bottom of the table are certain production figures on a 49% attributable basis, representing our interest.
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands, except otherwise stated)
|
|
San José Mine—100% basis
|
|
|
|
|
|
|
|
Tonnes of ore mined
|
|
|
108
|
|
|
108
|
|
Average grade (gpt):
|
|
|
|
|
|
|
|
Gold
|
|
|
6.9
|
|
|
7.0
|
|
Silver
|
|
|
502
|
|
|
527
|
|
Tonnes of ore processed
|
|
|
115
|
|
|
102
|
|
Average grade (gpt):
|
|
|
|
|
|
|
|
Gold
|
|
|
6.5
|
|
|
6.3
|
|
Silver
|
|
|
458
|
|
|
470
|
|
Average recovery (%):
|
|
|
|
|
|
|
|
Gold
|
|
|
88.0
|
|
|
89.0
|
|
Silver
|
|
|
86.4
|
|
|
88.4
|
|
Gold ounces:
|
|
|
|
|
|
|
|
Produced
|
|
|
21
|
|
|
18
|
|
Sold
|
|
|
20
|
|
|
23
|
|
Silver ounces:
|
|
|
|
|
|
|
|
Produced
|
|
|
1,463
|
|
|
1,362
|
|
Sold
|
|
|
1,405
|
|
|
1,681
|
|
Gold equivalent ounces
(1)
:
|
|
|
|
|
|
|
|
Produced
|
|
|
41
|
|
|
36
|
|
Sold
|
|
|
39
|
|
|
46
|
|
Net sales
|
|
$
|
48,343
|
|
$
|
52,072
|
|
Gross average realized price ($/ounce)
(2)
:
|
|
|
|
|
|
|
|
Gold
|
|
$
|
1,253
|
|
$
|
1,257
|
|
Silver
|
|
$
|
18.18
|
|
$
|
15.29
|
|
Silver : gold ratio
(1)
|
|
|
75 : 1
|
|
|
75 : 1
|
|
McEwen Mining—49% basis
|
|
|
|
|
|
|
|
Ounces produced:
|
|
|
|
|
|
|
|
Gold
|
|
|
10
|
|
|
9
|
|
Silver
|
|
|
717
|
|
|
667
|
|
Gold equivalent
(1)
|
|
|
20
|
|
|
18
|
|
|
(1)
|
|
Silver production is presented as a gold equivalent. The silver to gold ratio used for 2017 and 2016 was 75:1.
|
|
(2)
|
|
Average realized prices is a non-GAAP financial performance measures with no standardized definition under U.S. GAAP. See “Non-GAAP Financial Performance Measures”, on page 30 for additional information, including definitions of these terms.
|
Gold and silver production
|
·
|
|
Gold production at the San José Mine for the three months ended March 31, 2017 increased by 16% in 2017 to 21,155 ounces while silver production increased by 7% to 1,463,211 ounces. Using a silver to gold ratio of 75:1, the José Mine produced 40,664 gold equivalent ounces in the first quarter of 2017, compared to 36,443 gold equivalent ounces in the same period of 2016.
|
|
·
|
|
The increase in the number of ounces of gold and silver produced during the first quarter of 2017 resulted from a 13% increase in the number of tonnes processed in 2017, coupled with 4% higher average grades of gold. The overall increase was partly offset by a 3% decrease in average grades of silver processed during the quarter. Further, during the first quarter of 2017 there was no work stoppage at the San José mine, compared to a few days of stoppage that occurred in 2016.
|
Gold and silver sales
|
·
|
|
For the three months ended March 31, 2017, net sales decreased by 7% to $48.3 million from $52.1 million for the same period in 2016, due to a lower number of ounces of gold and silver sold in the quarter of 2017, partly offset by higher average realized price of silver during the period.
|
|
·
|
|
The number of ounces of gold sold decreased by 15% in 2017, to 20,023 ounces from 23,461 ounces of gold sold in 2016. The number of ounces of silver sold decreased by 16% in 2017, to 1,404,783 ounces compared to 1,680,845 ounces of silver sold in 2016. The overall lower number of ounces of gold and silver sold in 2017 was the result of unusual storms that occurred in March 2017, which damaged the Comodoro Rivadavia port facilities causing MSC to postpone
dor
é shipments until early April 2017.
|
|
·
|
|
The average realized price for gold sold in the first quarter of 2017, after mark-to-market provisional price adjustments, remained comparable to 2016 at $1,253 per ounce compared to $1,257 per ounce sold. In comparison, the average London P.M. fix price for gold during the first quarter of 2017 was $1,219 per ounce, compared to $1,183 per ounce for the same period in 2016.
|
|
·
|
|
The average realized price for silver sold in the first quarter of 2017, after mark-to-market provisional price adjustments, was $18.18 per ounce, an increase of 19% compared to an average of $15.29 per ounce sold in the same period in 2016. In comparison, the average London P.M. fix price for silver during the first quarter of 2017 was $17.42 per ounce, compared to $14.85 per ounce for the same period in 2016.
|
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, 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. Since silver prices were rising during the quarter, provisional pricing resulted in higher realized prices than the London fix.
Total Cash Costs and All‑In Sustaining Costs
The following table presents a summary of the 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
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands, unless otherwise indicated)
|
|
San José mine - 100% basis
|
|
|
|
|
|
|
|
Total cash costs
(1)
|
|
$
|
35,470
|
|
$
|
34,939
|
|
All
‑
in sustaining costs
(1)
|
|
|
45,155
|
|
|
42,937
|
|
|
|
|
|
|
|
|
|
San José mine - 49% basis
|
|
|
|
|
|
|
|
Total cash costs
(1)
|
|
$
|
17,380
|
|
$
|
17,119
|
|
Total cash costs per ounce sold ($/ounce)
(1)
:
|
|
|
|
|
|
|
|
Gold
|
|
$
|
889
|
|
$
|
811
|
|
Silver
|
|
$
|
12.58
|
|
$
|
9.46
|
|
Gold equivalent
(2)
|
|
$
|
915
|
|
$
|
762
|
|
All
‑
in sustaining costs
(1)
|
|
$
|
22,126
|
|
$
|
21,038
|
|
All
‑
in sustaining costs per ounce sold ($/ounce)
(1)
:
|
|
|
|
|
|
|
|
Gold
|
|
$
|
1,132
|
|
$
|
997
|
|
Silver
|
|
$
|
16.01
|
|
$
|
11.63
|
|
Gold equivalent
(2)
|
|
$
|
1,165
|
|
$
|
936
|
|
Silver : gold ratio
(2)
|
|
|
75 : 1
|
|
|
75 : 1
|
|
|
(1)
|
|
Total cash costs, total cash cost per ounce, all‑in sustaining costs,
and all-in sustaining costs per ounce are non‑GAAP financial performance measures with no standardized definition under U.S. GAAP. See “Non‑GAAP Financial Performance Measures” on page 30 for additional information, including definitions of these terms.
|
|
(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 2017 and 2016 was 75:1.
|
On a 100% basis, total cash costs per gold equivalent ounce sold by MSC in the first quarter of 2017 increased by 20% to $915 from $762 in the same period of 2016, as the net result of lower production costs and the significant decrease in the number of gold equivalent ounces sold, over which aggregate cash costs are spread.
On an aggregate basis, total cash costs increased by 2% to $35.5 million in 2017 from $34.9 million in the first quarter of 2016, as a result of lower refining, smelting and transportation costs, coupled with lower commercial discounts, which were partly offset by higher productions costs applicable to sales, royalty and production taxes, and general and administrative expenses incurred in the quarter.
For the quarter ended March 31, 2017, on a per ounce basis, all-in sustaining costs also increased to $1,165 per gold equivalent ounce in the 2017 period, compared to $936 per gold equivalent ounce in the same period in 2016, based on a silver to gold ratio of 75:1 for both periods. On an aggregate basis, all-in sustaining costs increased from $42.9 million to $45.2 million, due to higher on-site exploration expenses, capitalized stripping and underground mine development costs and capital expenditures.
Investment in MSC
(49%)
We report $0.2 million net income from our 49% attributable share of operations of MSC in 2017, compared to income of $5.0 million in 2016. The $0.2 million net income for the quarter ended March 31, 2017 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 $2.1 million and related deferred income tax recovery of $0.1 million.
Included in the income tax recovery is the impact of fluctuations in the exchange rate between the Argentina peso and the U.S. dollar on the peso‑denominated 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 three months period ended March 31, 2017 and 2016, is as follows:
|
|
|
|
|
|
|
|
|
|
For the Three months ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
Minera Santa Cruz S.A. (100% basis)
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
48,343
|
|
$
|
52,072
|
|
Production costs applicable to sales
|
|
|
(36,699)
|
|
|
(37,727)
|
|
Net income
|
|
|
4,381
|
|
|
8,248
|
|
Portion attributable to McEwen Mining Inc. (49% basis)
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,147
|
|
$
|
4,042
|
|
Amortization of fair value increments
|
|
|
(2,069)
|
|
|
(3,682)
|
|
Income tax recovery
|
|
|
112
|
|
|
4,603
|
|
Income from investment in MSC, net of amortization
|
|
$
|
190
|
|
$
|
4,963
|
|
During the three months ended March 31, 2017, we received $2.5 million in dividends from MSC, which compares to $2.6 million in dividends received during the same period in 2016.
For more details on our Investment in MSC, refer to Note 5 to the Consolidated Financial Statements,
Investment in Minera Santa Cruz S.A. (“MSC”) — San José Mine.
Results of Operations – Nevada Segment
The Nevada segment is composed of the Gold Bar project, our advanced-stage property located in Nevada, U.S. and early stage exploration projects. Early stage exploration activities such as field mapping and geochemical reconnaissance work was also conducted in various areas in Nevada where the Company has properties or considers exploration potential may exist.
Advanced-stage Properties – Gold Bar Project
Gold Bar is located primarily on public lands managed by the BLM. We have targeted this project for an open pit, heap leach operation allowing for construction to potentially begin in late 2017 and achieve production in late 2018, depending upon the completion of the ongoing permitting process.
During the three months ended March 31, 2017, we spent $0.5 million in exploration in Nevada, and $0.9 million on engineering and environmental works required to progress the permitting process and prepare for project construction.
Key developments at Gold Bar during the quarter were:
|
·
|
|
The initiation and subsequent closing of the 45-day public comment period on April 17, 2017. All public comments received will be addressed and incorporated into the final Environmental Impact Statement;
|
|
·
|
|
Applications for other critical permits, such as the Water Pollution Control and the Air Quality Control Permit, continue to progress which will authorize construction, operation, and closure of the approved mining facilities;
|
|
·
|
|
Engineering designs continue to progress as well as the initiation of formal request for quotations for long lead capital items;
|
|
·
|
|
Continued principal General Contractor and primary earthworks group engagement to ensure accurate cost estimation and construction feasibility confirmation;
|
|
·
|
|
We expect to receive a Record of Decision and initiate construction during the second half of 2017.
|
Results of Operations—Los Azules
Segment
The Los Azules segment is composed of the Los Azules project, a copper exploration project located in San Juan, Argentina.
Los Azules Project
We had budgeted $9.6 million for the 2016-2017 exploration season at Los Azules, from which we spent $6.3 million during the quarter ended March 31, 2017. Various study related activities including improved definition topographical surveys over larger areas were conducted to evaluate siting of facilities and offsite infrastructure such as access routes which are required to update project studies.
The main activities performed were:
|
·
|
|
A combination of infill and exploration drilling, along with some other exploration advancement expenditures. Results from the drilling campaign are expected to be finalized during the second half of 2017.
|
|
·
|
|
Some early stage geotechnical drilling at the mine and a potential mine tailings dam.
|
|
·
|
|
Performance of an aerial survey of the proposed mining area, mine facility areas and potential linear infrastructure areas.
|
|
·
|
|
Site evaluations of potential site access routes, power transmission routes and concentrate logistics.
|
|
·
|
|
Environmental base line monitoring work.
|
|
·
|
|
Geotechnical reconnaissance for materials for use in project construction such as concrete aggregates, sand and road surfacing materials.
|
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 (“Non-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 U.S. GAAP. There are material limitations associated with the use of such Non-GAAP measures. Since these measures do not incorporate, among other things, 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.
Earnings from Mining Operations
The term Earnings 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 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 exclude 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
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
El Gallo 1 Mine earnings from mining operations
|
|
|
|
|
|
|
|
Gold and silver sales
|
|
$
|
14,833
|
|
$
|
21,190
|
|
Production costs applicable to sales
|
|
|
(6,984)
|
|
|
(9,067)
|
|
Depreciation of mining related assets
|
|
|
(152)
|
|
|
(95)
|
|
Gross profit
|
|
|
7,697
|
|
|
12,028
|
|
Add: Amortization related to fair value increments on historical acquisitions included in Production Costs Applicable to Sales
|
|
|
533
|
|
|
322
|
|
El Gallo 1 Mine earnings from mining operations
|
|
|
8,230
|
|
|
12,350
|
|
|
|
|
|
|
|
|
|
San José earnings from mining operations (49% basis)
|
|
|
|
|
|
|
|
Net sales
|
|
|
23,688
|
|
|
25,515
|
|
Production costs applicable to sales
|
|
|
(17,983)
|
|
|
(18,486)
|
|
San José earnings from mining operations
|
|
|
5,705
|
|
|
7,029
|
|
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, 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 50% of the value of the sales in the first quarter of 2017 was derived from gold and 50% was derived from silver, which compared to 53% and 47%, respectively, for the same period in 2016.
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
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands, except per ounce)
|
|
El Gallo 1 mine cash costs
|
|
|
|
|
|
|
|
Production costs applicable to sales
|
|
$
|
6,984
|
|
$
|
9,067
|
|
Less: Depreciation
|
|
|
(533)
|
|
|
(322)
|
|
Less: Pre
‑
stripping costs for future pit access
|
|
|
—
|
|
|
(1,346)
|
|
On
‑
site general and administrative expenses
|
|
|
385
|
|
|
406
|
|
Property holding costs
|
|
|
10
|
|
|
11
|
|
Total cash costs, El Gallo 1 mine
|
|
$
|
6,846
|
|
$
|
7,816
|
|
Gold equivalent ounces sold:
|
|
|
12,147
|
|
|
18,101
|
|
El Gallo 1 mine cash costs per gold equivalent ounce sold
|
|
$
|
564
|
|
$
|
432
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands, except per ounce)
|
|
San José mine cash costs (49% basis)
|
|
|
|
|
|
|
|
Production costs applicable to sales
|
|
$
|
17,983
|
|
$
|
18,486
|
|
Less: Operating site reclamation accretion and amortization
|
|
|
(138)
|
|
|
(349)
|
|
Depreciation
|
|
|
(4,018)
|
|
|
(5,684)
|
|
On
‑
site general and administrative expenses
|
|
|
1,112
|
|
|
815
|
|
Refining, smelting, and transportation
|
|
|
783
|
|
|
1,636
|
|
Commercial discounts
|
|
|
1,605
|
|
|
2,193
|
|
Community costs related to current operations
|
|
|
53
|
|
|
22
|
|
Total cash costs
|
|
$
|
17,380
|
|
$
|
17,119
|
|
McEwen's share of San José mine gold equivalent ounces sold
|
|
|
18,989
|
|
|
22,477
|
|
Total cash costs, MSC
|
|
$
|
915
|
|
$
|
762
|
|
Reconciliation of All-In Sustaining Costs to Total Cash Costs
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands, except per ounce)
|
|
El Gallo 1 mine all-in sustaining costs
|
|
|
|
|
|
|
|
Total cash costs
|
|
$
|
6,846
|
|
$
|
7,816
|
|
Operating site reclamation accretion and amortization
|
|
|
81
|
|
|
214
|
|
On
‑
site exploration expenses
|
|
|
908
|
|
|
251
|
|
Capital expenditures (sustaining)
|
|
|
277
|
|
|
—
|
|
Pre
‑
stripping costs for future pit access
|
|
|
—
|
|
|
1,346
|
|
All
‑
in sustaining costs, El Gallo 1 mine
|
|
$
|
8,112
|
|
$
|
9,627
|
|
Gold equivalent ounces sold
|
|
|
12,147
|
|
|
18,101
|
|
El Gallo 1 mine all-in sustaining cost per gold equivalent ounce sold
|
|
|
668
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands, except per ounce)
|
|
San José mine all-in sustaining costs (49% basis)
|
|
|
|
|
|
|
|
Total cash costs
|
|
$
|
17,380
|
|
$
|
17,119
|
|
Operating site reclamation accretion and amortization
|
|
|
138
|
|
|
349
|
|
On-site exploration expenses
|
|
|
607
|
|
|
36
|
|
Capitalised stripping & underground mine development
|
|
|
3,017
|
|
|
2,410
|
|
Less: depreciation
|
|
|
(299)
|
|
|
—
|
|
Capital expenditures (sustaining)
|
|
|
1,283
|
|
|
1,124
|
|
All
‑
in sustaining costs
|
|
$
|
22,126
|
|
$
|
21,038
|
|
McEwen's share of San José mine gold equivalent ounces sold
|
|
|
18,989
|
|
|
22,477
|
|
San José mine all-in sustaining cost per gold equivalent ounce sold
|
|
$
|
1,165
|
|
$
|
936
|
|
The following table summarizes the consolidated number of gold equivalent ounces sold:
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
2016
|
|
Gold equivalent ounces sold at El Gallo 1 Mine
|
|
12,147
|
|
18,101
|
|
McEwen’s share of MSC gold equivalent ounces sold
|
|
18,989
|
|
22,477
|
|
Consolidated gold equivalent ounces sold (including McEwen’s share of MSC)
|
|
31,136
|
|
40,578
|
|
Silver : gold ratio
|
|
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) divided by 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
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
|
(in thousands, except ounce and
per ounce figures)
|
El Gallo 1 mine average realized prices
|
|
|
|
|
|
|
Gold sales
|
|
$
|
14,640
|
|
$
|
21,108
|
Silver sales
|
|
|
193
|
|
|
82
|
Gold and silver sales
|
|
$
|
14,833
|
|
$
|
21,190
|
Gold ounces sold
|
|
|
12,000
|
|
|
18,026
|
Silver ounces sold
|
|
|
11,000
|
|
|
5,600
|
Gold equivalent ounces sold
|
|
|
12,147
|
|
|
18,101
|
Average realized price per gold ounce sold
|
|
$
|
1,220
|
|
$
|
1,171
|
Average realized price per silver ounce sold
|
|
$
|
17.54
|
|
$
|
14.64
|
Average realized price per gold equivalent ounce sold
|
|
$
|
1,221
|
|
$
|
1,171
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
|
(in thousands, except ounce and
per ounce figures)
|
San José mine average realized prices (49% basis)
|
|
|
|
|
Gold sales
|
|
$
|
12,295
|
|
$
|
14,452
|
Silver sales
|
|
|
12,515
|
|
|
12,591
|
Gold and silver sales
|
|
$
|
24,810
|
|
$
|
27,043
|
Gold ounces sold
|
|
|
9,811
|
|
|
11,496
|
Silver ounces sold
|
|
|
688,344
|
|
|
823,614
|
Gold equivalent ounces sold
|
|
|
18,989
|
|
|
22,477
|
Average realized price per gold ounce sold
|
|
$
|
1,253
|
|
$
|
1,257
|
Average realized price per silver ounce sold
|
|
$
|
18.18
|
|
$
|
15.29
|
Average realized price per gold equivalent ounce sold
|
|
$
|
1,307
|
|
$
|
1,203
|
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 inventories with precious metals, valued at the London PM Fix spot price at the corresponding period. The following table summarizes the calculation of cash, investments and precious metals amounts shown in this report:
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Cash
|
|
$
|
28,890
|
|
$
|
34,623
|
Investments
|
|
|
15,329
|
|
|
460
|
Precious Metals
(1)
|
|
|
10,916
|
|
|
8,372
|
Total cash, investments and precious metals
|
|
$
|
55,135
|
|
$
|
43,455
|
|
(1)
|
|
Precious Metals is calculated using the number of ounces held in inventory at the end of the period, and valued at the London PM Fix spot
|
A reconciliation between precious metals valued at cost and precious metals valued at market value is described in the following table:
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
|
(in thousands, except ounces and
per ounce)
|
Precious Metals (note 3 of the Consolidated Financial Statements)
|
|
$
|
5,059
|
|
$
|
2,192
|
Number of ounces of doré in inventory
|
|
|
8,768
|
|
|
6,768
|
London PM Fix, per ounce
|
|
|
1,245
|
|
|
1,237
|
Precious Metals valued at market value
|
|
$
|
10,916
|
|
$
|
8,372
|
Off-Balance Sheet Arrangements
As of March 31, 2017, 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.
Contingencies
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 in the event we do not perform our reclamation obligations. When 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 March 31, 2017, no liability has been recognized for our surety bonds of $4.9 million.
Critical Accounting Policies
Critical accounting policies and estimates used to prepare the financial statements are discussed with our Audit Committee as they are implemented and on an annual basis.
There have been no significant changes in our Critical Accounting Policies since December 31, 2016.
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 among 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 the “Risk Factors” section in our report on Form 10-K 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, quality of ore 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.