McEwen Mining Inc. - Quarter Report: 2013 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended June 30, 2013

 

 

For the transition period from                to               

 

Commission File Number: 001-33190

 

MCEWEN MINING INC.

(Exact name of registrant as specified in its charter)

 

 

181 Bay Street, Suite 4750, Toronto, Ontario Canada M5J 2T3

(Address of principal executive offices)  (Zip code)

 

(866) 441-0690

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer	o		Accelerated filer	x
Non-accelerated filer	o (Do not check if a smaller reporting company)		Smaller reporting company	o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 262,997,768 shares outstanding as of August 6, 2013 (and 34,116,591 exchangeable shares).

 

 

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MCEWEN MINING INC.

 

FORM 10-Q

 

Index

 

Part I     FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2013 and 2012 (unaudited)	3
	Consolidated Balance Sheets at June 30, 2013 (unaudited) and December 31, 2012	4
	Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2013 and 2012 (unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	38
Item 4.	Controls and Procedures	40
Part II   OTHER INFORMATION
Item 6.	Exhibits	41
SIGNATURES		42

 

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MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

(in thousands, except per share)

 

		Three Months ended						Six Months ended
		June 30,						June 30,
		2013			2012			2013			2012
					Adjusted (note 6)						Adjusted (note 6)
REVENUE:
Gold and silver sales		$	10,459		$	—		$	23,957		$	—
(Loss) income on investment in Minera Santa Cruz S.A., net of amortization (note 6)		(1,551		)	679			(1,788		)	3,728
		8,908			679			22,169			3,728
COSTS AND EXPENSES:
Production costs applicable to sales		8,278			—			18,871			—
Mine operating costs		—			3,494			—			6,216
Mine construction costs		—			6,994			—			8,635
Mine development costs		98			—			569			—
Exploration costs		4,889			10,073			19,489			21,857
Property holding costs		316			407			1,693			1,980
General and administrative		4,217			4,089			8,409			8,816
Acquisition costs		—			47			—			1,442
Accretion of asset retirement obligation (note 5)		121			120			234			232
Depreciation		245			263			527			484
Impairment of investment in MSC (note 6)		95,878			—			95,878			—
Impairment of mineral property interests and property and equipment (note 5)		27,729			179			27,729			179
Loss (gain) on sale of assets (note 5)		6,791			(128		)	6,791			(130		)
Total costs and expenses		148,562			25,538			180,190			49,711
Operating loss		(139,654		)	(24,859		)	(158,021		)	(45,983		)
OTHER INCOME (EXPENSE):
Interest income		68			57			139			182
Gain on litigation settlement (notes 7 and 11)		—			—			560			—
Gain on sale of gold and silver bullion (note 4)		—			434			—			1,842
Unrealized loss on gold and silver bullion (note 4)		(274		)	(359		)	(274		)	(359		)
Other-than-temporary impairment on marketable equity securities		—			(1,993		)	—			(1,993		)
Foreign currency (loss) gain		(1,226		)	79			(935		)	46
Total other income (expense)		(1,432		)	(1,782		)	(510		)	(282		)
Loss before income taxes		(141,086		)	(26,641		)	(158,531		)	(46,265		)
Recovery of income taxes		12,405			6,277			18,868			8,550
Net loss		(128,681		)	(20,364		)	(139,663		)	(37,715		)
OTHER COMPREHENSIVE LOSS:
Unrealized gain on available-for-sale securities, net of taxes		—			1,375			—			999
Comprehensive loss		$	(128,681	)	$	(18,989	)	$	(139,663	)	$	(36,716	)
Basic and diluted per share data:
Net loss - basic and diluted		$	(0.43	)	$	(0.08	)	$	(0.47	)	$	(0.15	)
Weighted average common shares outstanding:
- basic and diluted		297,097			268,009			296,938			251,001

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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MCEWEN MINING INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

		As at
		June 30,			December 31,
		2013			2012
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	34,773		$	70,921
Investment in gold and silver bullion (market value - 2013 - $1,416; 2012 - $2,062) (note 4)		1,416			1,690
IVA taxes receivable		9,031			9,150
Inventories (note 3)		7,967			7,262
Other current assets		4,617			2,895
Total current assets		57,804			91,918
Mineral property interests (note 5)		731,449			767,067
Restrictive time deposits for reclamation bonding (note 5)		5,183			5,183
Investment in Minera Santa Cruz S.A. (note 6)		176,282			273,948
Property and equipment, net		11,599			12,767
Other assets		54			54
TOTAL ASSETS		$	982,371		$	1,150,937
LIABILITIES & SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	10,694		$	21,235
Litigation settlement liability (notes 7 and 11)		—			3,830
Current portion of asset retirement obligation (note 5)		1,311			130
Total current liabilities		12,005			25,195
Asset retirement obligation, less current portion (note 5)		5,237			6,229
Deferred income tax liability (notes 2 and 5)		210,654			229,522
Other liabilities		400			400
Total liabilities		$	228,296		$	261,346
Shareholders’ equity:
Common stock, no par value, 500,000 shares authorized;
Common: 261,302 shares as of June 30, 2013 and 212,646 shares as of December 31, 2012 issued and outstanding
Exchangeable: 35,812 shares as of June 30, 2013 and 83,379 shares as of December 31, 2012 issued and outstanding		1,353,924			1,349,777
Accumulated deficit		(599,555		)	(459,892		)
Accumulated other comprehensive loss		(294		)	(294		)
Total shareholders’ equity		754,075			889,591
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY		$	982,371		$	1,150,937

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(in thousands)

 

							Accumulated
							Other
		Common Stock					Comprehensive			Accumulated
		Shares		Amount			(Loss) Income			Deficit			Total
Balance, December 31, 2011		139,753		$	613,831		$	(1,289	)	$	(393,238	)	$	219,304
Stock-based compensation		—		2,135			—			—			2,135
Issuance of exchangeable shares to acquire Minera Andes Inc.		127,331		664,671			—			—			664,671
Assumption of stock options in connection with the acquisition of Minera Andes Inc.		—		3,175			—			—			3,175
Exercise of stock options		317		594			—			—			594
Exercise of stock options assumed from Minera Andes Inc. acquisition		852		2,710			—			—			2,710
Shares issued for Mexico mining concessions		42		227			—			—			227
Realized loss on marketable securities		—		—			(994		)	—			(994		)
Other-than-temporary impairment on marketable equity securities		—		—			1,993			—			1,993
Net loss (adjusted - note 6)		—		—			—			(37,715		)	(37,715		)
Balance, June 30, 2012		268,295		$	1,287,343		$	(290	)	$	(430,953	)	$	856,100
Balance, December 31, 2012		296,025		$	1,349,777		$	(294	)	$	(459,892	)	$	889,591
Stock-based compensation		—		686			—			—			686
Exercise of stock options		48		95			—			—			95
Shares issued for litigation settlement		1,000		3,270			—			—			3,270
Shares issued for Mexico mining concessions		41		96			—			—			96
Net loss		—		—			—			(139,663		)	(139,663		)
Balance, June 30, 2013		297,114		$	1,353,924		$	(294	)	$	(599,555	)	$	754,075

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

		Six Months Ended
		June 30,
		2013			2012
					Adjusted (note 6)
Cash flows (used in) from operating activities:
Cash paid to suppliers and employees		$	(58,521	)	$	(42,781	)
Cash received from gold and silver sales		23,197			—
Interest received		139			125
Cash used in operating activities		(35,185		)	(42,656		)
Cash flows (used in) provided by investing activities:
Cash and short-term investments received from acquisition of Minera Andes Inc.		—			36,337
Short-term investments (net)		—			3,933
Acquisition of mineral property interests		(150		)	(563		)
Additions to property and equipment		(225		)	(1,658		)
Proceeds from disposal of property and equipment		510			53
Proceeds from sale of gold and silver bullion		—			11,330
Cash provided by investing activities		135			49,432
Cash flows from financing activities:
Exercise of stock options		95			3,304
Cash provided by financing activities		95			3,304
Effect of exchange rate change on cash and cash equivalents		(1,193		)	(98		)
(Decrease) increase in cash and cash equivalents		(36,148		)	9,982
Cash and cash equivalents, beginning of period		70,921			13,416
Cash and cash equivalents, end of period		$	34,773		$	23,398
Reconciliation of net loss to cash used in operating activities:
Net loss		$	(139,663	)	$	(37,715	)
Adjustments to reconcile net loss from operating activities:
Impairment of investment in MSC		95,878			—
Impairment of mineral property interests and property and equipment		27,729			179
Loss (gain) on sale of assets		6,791			(130		)
Loss (income) on investment in Minera Santa Cruz S.A. (net of amortization)		1,788			(3,728		)
Recovery of income taxes		(18,868		)	(8,550		)
Gain on litigation settlement		(560		)	—
Gain on sale of gold and silver bullion		—			(1,842		)
Unrealized loss on silver bullion		274			359
Other-than-temporary impairment on marketable equity securities		—			1,993
Stock-based compensation		686			2,135
Accretion of asset retirement obligation		234			232
Depreciation		527			484
Amortization of mineral property interests and asset retirement obligations		956			—
Foreign exchange loss		1,193			98
Change in non-cash working capital items:
Increase in other assets related to operations		(1,534		)	(2,810		)
Dividend receivable obtained from acquisition of Minera Andes Inc.		—			9,363
Decrease in liabilities related to operations		(10,616		)	(2,724		)
Cash used in operating activities		$	(35,185	)	$	(42,656	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2013

 

NOTE 1  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Basis of Presentation

 

McEwen Mining Inc. (the “Company” or “McEwen Mining”) was organized under the laws of the State of Colorado on July 24, 1979.  Since inception, the Company has been engaged in the exploration for, development of, production and sale of gold and silver. On January 24, 2012, the Company changed its name from US Gold Corporation to McEwen Mining Inc. after the completion of the acquisition, by way of a statutory plan of arrangement under the laws of the Province of Alberta, Canada, of Minera Andes Inc. (“Minera Andes”).

 

As a result of the acquisition of Minera Andes, the Company acquired a 49% interest in Minera Santa Cruz S.A. (“MSC”), owner of the producing San José Silver-Gold Mine in Santa Cruz, Argentina; a 100% interest in the Los Azules Copper Deposit in San Juan, Argentina, and a large portfolio of exploration properties in Santa Cruz, Argentina.  The San José mine is operated by the majority owner of the joint venture, Hochschild Mining plc (‘‘Hochschild’’).

 

In September 2012, the Company began production at the El Gallo 1 mine in Mexico, with a total of 15,342 gold equivalent ounces produced during the six months ended June 30, 2013 and 22,291 gold equivalent ounces since commencement of production.

 

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”) has been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included are adequate to make the information presented not misleading.

 

In management’s opinion, the unaudited consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2013 and 2012, the consolidated balance sheets as at June 30, 2013 (unaudited) and December 31, 2012, the unaudited consolidated statement of changes in shareholders’ equity for the  six months ended June 30, 2013  and 2012, and the unaudited consolidated statements of cash flows for the six months ended June 30, 2013 and 2012, 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 Form 10-K for the year ended December 31, 2012.  Except as noted below, there have been no material changes in the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s Form 10-K for the year ended December 31, 2012.

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All inter-company accounts and transactions have been eliminated.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 1  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recently Adopted Accounting Pronouncements

 

Comprehensive Income:  In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The updated guidance requires expanded disclosures for amounts reclassified out of accumulated other comprehensive income by component. The guidance requires the presentation of amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under GAAP to be reclassified in their entirety to net income, a cross-reference to other disclosures that provide additional detail about those amounts is required.  The guidance is to be applied prospectively for reporting periods beginning after December 15, 2012. The update is effective for the Company’s fiscal year beginning January 1, 2013.  The new guidance affects disclosures only and the adoption had no impact on the Company’s consolidated financial position, results of operations or cash flows.

 

NOTE 2   BUSINESS ACQUISITION

 

On January 24, 2012, the Company completed the acquisition of Minera Andes (“the Arrangement”) through a court-approved plan of arrangement under Alberta, Canada law pursuant to which Minera Andes, an Alberta (Canada) company, became an indirect wholly-owned subsidiary of the Company.

 

On the closing date of the Arrangement, holders of Minera Andes’ common stock received a number of exchangeable shares of McEwen Mining - Minera Andes Acquisition Corporation, an indirect wholly-owned Canadian subsidiary of the Company, equal to the number of Minera Andes shares owned by the holder, multiplied by the exchange ratio of 0.45.  In the aggregate, former Minera Andes shareholders received 127,331,498 exchangeable shares.

 

The exchangeable shares are exchangeable for the Company’s common stock on a one-for-one basis.  Option holders of Minera Andes received replacement options entitling them to receive, upon exercise, shares of the Company’s common stock, reflecting the exchange ratio of 0.45 with the appropriate adjustment of the exercise price per share.  The option life and vesting period of the replacement options has not changed from the option life granted under the Minera Andes option plan.

 

The estimated fair value of the vested portion of the replacement options of $3.2 million has been included as part of the purchase price consideration at their fair values based on the Black-Scholes pricing model.

 

The acquisition has been accounted for using the acquisition method in accordance with ASC Topic 805, Business Combinations, with the Company being identified as the acquirer.  The measurement of the purchase consideration was based on the market price of the Company’s common stock on January 24, 2012, which was $5.22 per share.  The total purchase price, including the fair value of the options, amounted to $667.8 million.

 

The fair value of mineral property interests exceeded the carrying value of the underlying assets for tax purposes by approximately $508.5 million.  The resulting estimated deferred income tax liability originally associated with this temporary difference was approximately $178.0 million, which was included in the allocation of the purchase price above.  At the end of 2012, the Company reduced the deferred income tax liability from $178.0 million to $156.9 million, as a result of further fluctuations in the foreign exchange rates between the Argentine pesos and U.S. dollar from January 24, 2012 to December 31, 2012.  As at June 30, 2013, the Company recorded an additional income tax recovery of $13.7 million as a result of the fluctuations in foreign exchange rates since December 31, 2012.  The Company also recorded a $2.3 million recovery on impairment charges pertaining to its Santa Cruz mineral property interests.  This resulted in a reduction in the deferred income tax liability on these assets to $140.9 million, which is included in the deferred income tax liability balance of $210.7 million on the unaudited consolidated balance sheet as at June 30, 2013.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 3   INVENTORIES

 

Inventories at June 30, 2013 and December 31, 2012 consist of the following (in thousands):

 

		June 30, 2013			December 31, 2012
Ore on leach pads		$	2,769		$	685
In-process inventory		852			3,604
Stockpiles		133			308
Precious metals		2,492			1,322
Materials and supplies		1,721			1,343
Inventories		$	7,967		$	7,262

 

NOTE 4   GOLD AND SILVER BULLION

 

The Company invested a portion of its cash in physical gold and silver bullion. Below is the balance of its holdings of gold and silver as at June 30, 2013 and December 31, 2012:

 

		As at June 30, 2013						As at December 31, 2012
		Gold			Silver			Gold			Silver
		(dollars in thousands, except ounces and per ounce)
Number of ounces		793			24,969			793			24,969
Average cost per ounce		$	1,192.00		$	18.86		$	1,278.63		$	27.08
Total cost		$	945		$	471		$	1,014		$	676
Fair value per ounce		$	1,192.00		$	18.86		$	1,657.50		$	29.95
Total fair value		$	945		$	471		$	1,314		$	748

 

The fair value of gold and silver was based on the daily London P.M. fix as at June 30, 2013 and December 31, 2012. Since ASC Topic 815, Derivatives and Hedging, does not consider gold and silver to be readily convertible to cash, the Company carries these assets at the lower of cost or market.

 

As at June 30, 2013, the Company’s average cost was $1,278.63 and $27.08 per ounce of gold and silver, respectively, compared to its fair value of $1,192.00 and $18.86 per ounce, respectively. As a result of the fair value being lower than the carrying value, the Company reduced its average cost per ounce and recorded an unrealized loss of $0.1 million and $0.2 million on its gold and silver bullion, respectively, in its statements of operations and comprehensive loss for the three and six month periods ended June 30, 2013. Changes in the Company’s holdings of gold and silver for the six months ended June 30, 2013 and year ended December 31, 2012 are as follows:

 

		Six months ended June 30, 2013									Year ended December 31, 2012
		Gold			Silver			Total			Gold			Silver			Total
		(in thousands)
Opening Balance		$	1,014		$	676		$	1,690		$	7,232		$	15,578		$	22,810
Proceeds from sale		—			—			—			(7,982		)	(15,854		)	(23,836		)
Gain on sale		—			—			—			1,764			1,311			3,075
Unrealized loss		(69		)	(205		)	(274		)	—			(359		)	(359		)
Ending Balance		$	945		$	471		$	1,416		$	1,014		$	676		$	1,690

 

Subsequent to the quarter ended June 30, 2013 the Company disposed of its remaining gold and silver bullion at a market price of $1,245.70 per ounce of gold and $19.18 per ounce of silver for net proceeds of approximately $1.5 million.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 5   MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS

 

At June 30, 2013, the Company held mineral rights in Argentina, mineral concession rights in Mexico, including the El Gallo Complex, and mineral interests in Nevada.  The El Gallo 1 mine recommenced gold and silver production in September 2012. For accounting purposes, the mine achieved commercial production in September 2012.  For the year ended December 31, 2012, a total of 6,949 gold equivalent ounces were produced at El Gallo. For operational purposes, commercial production was effective as of January 1, 2013.  For the three and six months ended June 30, 2013, a total of 8,561 and 15,342 gold equivalent ounces were produced at El Gallo, respectively.

 

In May 2013, the Company entered into a sale agreement for certain mining claims in the Limo Complex, Nevada, for a sales price of $0.8 million. The claims had a carrying value of $7.2 million. As the carrying value exceeded the proceeds from the sales agreement, the Company recorded a loss on disposal of $6.4 million. The Limo Complex is part of the “Nevada” segment as shown in Note 10. At as June 30, 2013, the proceeds from the sale of these claims had not yet been collected, and are included as a receivable in other current assets on the Company’s balance sheets. The proceeds were subsequently collected on July 17, 2013.

 

During the second quarter of 2013, the Province of Santa Cruz, Argentina, passed amendments to the Provincial Tax Code and Provincial Tax Law, which imposes a new tax on mining real estate property in the Province. The tax will amount to 1% of the value of the economically viable reserves of mining projects. Although there are a number of uncertainties surrounding the scope, calculation and enforcement of the tax and the mining industry is waiting for publication of regulations detailing these matters, it is expected that the law will be onerous and may limit future exploration activities in the province. Based on this development, along with a significant decline in gold and silver market prices during the second quarter of 2013 and continued inflationary pressures resulting in a depressed market for exploration companies in Argentina, the Company concluded that there were indicators that the carrying value of the mineral property interests located in the Santa Cruz Province may not be recoverable. The Company engaged a third party valuator to test the recoverability and determine the fair value of these properties. The valuator used a market approach to estimate the fair value of the properties by using the observed market value per acre in the region. Refer to Note 11, Fair Value Accounting, for further details on the valuation technique used in the determination of the fair value of these assets.

 

Based on this approach, it was determined that the carrying values of these mineral property interests exceeded their fair value, and as result, an impairment was recorded on the following mineral property interests for the quarter ended June 30, 2013:

 

				Three Months Ended June 30,						Six Months Ended June 30,
Name of Property/Complex		Segment		2013			2012			2013			2012
Telken Tenements		Argentina		$	13,792		$	—		$	13,792		$	—
Este Tenements		Argentina		2,784			—			2,784			—
Piramides Tenements		Argentina		5,079			—			5,079			—
Tobias Tenements		Argentina		6,074			—			6,074			—
Property, plant and equipment		Argentina		—			179			—			179
Total impairment				$	27,729		$	179		$	27,729		$	179

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 5   MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS (Continued)

 

The corresponding deferred income tax for the properties which were sold or impaired in the second quarter of 2013 was $4.8 million. This $4.8 million was recorded as a reduction to deferred income tax liability and a recovery of deferred income taxes on the statement of operations and comprehensive loss.

 

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 historic Tonkin property in Nevada and the El Gallo 1 portion of the El Gallo Complex in Mexico.  The current undiscounted estimate of the reclamation costs for existing disturbances on the Tonkin property as required by the U.S. Bureau of Land Management (“BLM”) and the Nevada Department of Environmental Protection (“NDEP”) is $3.8 million.  The Company submitted a mine closure plan to the NDEP and BLM for the Tonkin property during the fourth quarter of 2010.  Based on the Company’s estimate, the change in its bonding requirements was insignificant.  As at June 30, 2013, the closure plan has already been approved by the NDEP but is still under review by the BLM.  It is possible that reclamation plan cost estimates and bonding requirements may increase as a result of its review.  The Company, however, is unable to meaningfully estimate possible increases at this time. The costs of undiscounted projected reclamation of El Gallo 1 are currently estimated at $4.6 million.

 

For mineral properties in the United States, the Company maintains required reclamation bonding with various governmental agencies, and at June 30, 2013 and December 31, 2012, had cash bonding in place of $5.2 million.  Under Mexican regulations, surety bonding of projected reclamation costs is not required.

 

Changes in the Company’s asset retirement obligations for the six months ended June 30, 2013 and year ended December 31, 2012 are as follows (in thousands):

 

		Six Months Ended			Year Ended
		June 30, 2013			December 31, 2012
Asset retirement obligation liability - opening balance		$	6,359		$	6,253
Settlements		(45		)	(47		)
Accretion of liability		234			447
Adjustment reflecting updated estimates		—			(294		)
Asset retirement obligation liability - ending balance		$	6,548		$	6,359

 

Reclamation expenditures are expected to be incurred between 2013 and 2040.  As at June 30, 2013, the current portion of the asset retirement obligation was $1.3 million (December 31, 2012 - $0.1 million).

 

If proven and probable reserves exist at the Company’s properties, and upon commencement of production, the relevant capitalized asset retirement costs and mineral property interests will be charged to expense based on the units of production method.  As previously discussed, Phase 1 of the El Gallo Complex began production in September 2012.  However, since Phase 1 of the El Gallo Complex does not contain mineralized material that satisfy the definition of proven and probable reserves under the SEC Industry Guide 7, the amortization of the capitalized asset retirement costs and mineral property interests will be charged to expense based on the straight line method over the estimated useful life of the mine.  For the three and six months ended June 30, 2013, the Company recorded $0.3 million and  $1.0 million of amortization expense related to Phase 1 of the El Gallo Complex, respectively, which was reported in production cost applicable to sales on the unaudited statement of operations and comprehensive loss.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 6   INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) — SAN JOSÉ MINE

 

As discussed above in Note 1, the Company acquired a 49% interest in MSC, owner and operator of the San José Silver-Gold Mine in Santa Cruz, Argentina.  The Company’s share of earnings and losses from its investment in MSC is included in the consolidated statement of operations and comprehensive loss and includes 49% of MSC’s net income of $1.3 million for the six months ended June 30, 2013.  For the six months ended June 30, 2012, MSC reported to the Company only its net income from January 25, 2012 to June 30, 2012 since the acquisition closed on January 24, 2012.

 

As at June 30, 2012, based on the preliminary purchase price allocation, the investment in MSC was originally allocated an estimated fair value of $225.0 million. During the fourth quarter of 2012, the purchase price allocation was finalized and the estimated fair value of the investment in MSC was increased to $262.9 million. The adjustment affected the composition of the fair value allocation to MSC’s assets, resulting in a reduction in the amortization previously reported for the second quarter of 2012. Below is a reconciliation of the adjustment for the second quarter of 2012.

 

		Three Months Ended			Six Months Ended
		June 30, 2012			June 30, 2012
		(in thousands)
Amortization of fair value increments, as reported		$	1,803		$	4,607
Adjustment		(887		)	(2,738		)
Amortization of fair value increments, as adjusted		$	916		$	1,869
Net loss, as reported		$	(21,251	)	$	(40,453	)
Adjustment		887			2,738
Net loss, as adjusted		$	(20,364	)	$	(37,715	)

 

During the first quarter of 2013, it was identified that the cost of sales reported by MSC under U.S. GAAP for the year and quarter ended December 31, 2012 was understated resulting in an overstatement of MSC’s after-tax net income of $3.9 million. As a result, the prior year income from the Company’s equity investment of 49% in MSC was overstated by $1.9 million. As the error is not material to the current or previously reported consolidated financial statements, the correction was recorded in the quarter ended March 31, 2013.

 

During the second quarter of 2013, as a result of the new tax on mining real estate property in the Province of Santa Cruz (discussed in Note 5), coupled with a significant decline in gold and silver market prices and rising operating costs, the Company concluded that there were indicators that there was a loss in value in its investment in MSC that was other than temporary. The Company engaged a third party valuator to test the recoverability and determine the fair value of its investment in MSC. The valuator used a discounted cash flow approach and determined that the carrying value of the Company’s investment in MSC exceeded its estimated fair value. As the loss in value of the investment was considered other than temporary, an impairment of $95.9 million was recorded in the second quarter of 2013. Refer to Note 11, Fair Value Accounting, for assumptions used in the determination of the fair value of this asset. The investment in MSC is part of the “Argentina” segment as shown in Note 10.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 6   INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) — SAN JOSÉ MINE (Continued)

 

Changes in the Company’s investment in MSC for the six months ended June 30, 2013 and year ended December 31, 2012 are as follows:

 

		Six Months Ended			Year Ended
		June 30, 2013			December 31, 2012
		(in thousands)
Investment in MSC, beginning of period		$	273,948		$	—
Fair value of investment in MSC from acquisition of Minera Andes		—			262,883
Income from equity investment		1,256			25,301
Amortization of fair value increments		(3,044		)	(4,466		)
Dividend distribution		—			(9,770		)
Impairment of investment in MSC		(95,878		)	—
Investment in MSC, end of period		$	176,282		$	273,948

 

A summary of the results from MSC for the three and six months ended June 30, 2013 and the period from January 25, 2012 (after the closing of the acquisition of Minera Andes) to June 30, 2012 is as follows:

 

		Three Months Ended			Three Months Ended			Six Months Ended			Period ended
		June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
		(in thousands)
Sales - MSC 100%		$	68,556		$	56,375		$	112,369		$	96,603
Net income - MSC 100%		124			3,255			2,564			11,422
McEwen Mining’s portion - 49%		61			1,595			1,256			5,597
Net income on investment in MSC		$	61		$	1,595		$	1,256		$	5,597
Amortization of fair value increments		(1,612		)	(916		)	(3,044		)	(1,869		)
(Loss) income on investment in MSC, net of amortization		$	(1,551	)	$	679		$	(1,788	)	$	3,728

 

As at June 30, 2013, MSC had current assets of $124.3 million, total assets of $532.4 million, current liabilities of $61.6 million and total liabilities of $172.6 million on an unaudited basis. These balances include the increase in fair value and amortization of the fair value increments arising from the purchase price allocation and the impairment charge of $95.9 million recorded in the second quarter of 2013.

 

NOTE 7   SHAREHOLDERS’ EQUITY

 

During the six months ended June 30, 2013, 47.6 million exchangeable shares were converted into common stock.  At June 30, 2013, total outstanding exchangeable shares not exchanged and not owned by the Company or its subsidiaries totaled 35.8 million.

 

During the six months ended June 30, 2013, the Company issued 48,000 shares of common stock upon exercise of stock options under the Equity Incentive Plan at a weighted average exercise price of $1.97 per share for proceeds of $94,720.  During the same period, the Company issued the final installment of 41,500 shares of common stock as payment for mining concessions in Mexico.  In addition, the Company issued 1 million shares of common stock in January 2013, which was previously recorded as a liability of $3.8 million as at December 31, 2012, as part of the litigation settlement agreement with TNR Gold Corp. dated November 2012 with respect to the Los Azules Copper Project.  The issuance of the shares resulted in the elimination of the liability in the first quarter of 2013.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 8   STOCK-BASED COMPENSATION

 

During the six months ended June 30, 2013, the Company granted stock options to certain employees and directors for an aggregate of 1.7 million shares of common stock at an exercise price of $2.25 per share.  The options vest equally over a three-year period if the individual remains 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.  During the first half of 2012, the Company granted 0.3 million of stock options to the Company’s Chief Operating Officer, as part of his employment contract, at an exercise price of $5.80 per share.  The options vest equally over a three-year period if the individual remains affiliated with the Company (subject to acceleration of vesting in certain events) and are exercisable for a period of 10 years from the date of issue.

 

The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model.  During the three and six months ended June 30, 2013, the Company recorded stock option expense of $0.3 million and $0.7 million, respectively. During the three and six months ended June 30, 2012, the Company recorded stock option expense of $0.5 million and $2.1 million, respectively.

 

The principal assumptions used in applying the Black-Scholes option pricing model for the awards for the three and six months ended June 30, 2013 and 2012 were as follows:

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2013		2012		2013		2012
Risk-free interest rate		0.50%		—		0.50%		0.97%
Dividend yield		n/a		—		n/a		n/a
Volatility factor of the expected market price of common stock		66%		—		66%		75%
Weighted-average expected life of option		3.5 years		—		3.5 years		6.0 years
Weighted-average grant date fair value		$1.01		—		$1.01		$3.80

 

NOTE 9   RELATED PARTY TRANSACTIONS

 

Since the second quarter of 2010, an aircraft owned and operated by Lexam L.P. (of which Robert R. McEwen is a limited partner and beneficiary) 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. The Company’s independent board members have approved a policy whereby only the variable expenses of operating this aircraft for business related travel are eligible for reimbursement by the Company.  The hourly amount that the Company has agreed to reimburse Lexam L.P. is under half the full cost per hour of operating the aircraft or equivalent hourly charter cost and in any event less than even Mr. McEwen’s preferential charter rate. Where possible, trips also include other company personnel, both executives and non-executives, to maximize efficiency.

 

The above agreement was approved by the independent members of the Company’s Board of Directors.

 

For the three months ended June 30, 2013, the Company incurred and paid no expenses (2012 - $163,826) to Lexam for the use of this aircraft. For the six months ended June 30, 2013, the Company incurred and paid $70,525 (2012 - $203,718) for the use of this aircraft.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013

 

NOTE 10   SEGMENTED INFORMATION

 

McEwen Mining is a mining and minerals exploration, development and production company focused on precious metals in Argentina, Mexico and the United States.  The Company identifies its reportable segments as those consolidated operations that are currently engaged in the exploration for and production of precious metals.  Operations not actively engaged in the exploration for, or production of precious metals, are aggregated at the corporate level for segment reporting purposes.

 

											Corporate
		Argentina			Mexico			U.S.			& Other			Total
		(in thousands)
For the three months ended June 30, 2013
Gold and silver sales		$	—		$	10,459		$	—		$	—		$	10,459
Loss on investment in Minera Santa Cruz S.A. (net of amortization)		(1,551		)	—			—			—			(1,551		)
Production costs applicable to sales		—			8,278			—			—			8,278
Mine development costs		—			98			—			—			98
Exploration costs		2,017			1,949			870			53			4,889
Impairment of investment in MSC		95,878			—			—			—			95,878
Impairment of mineral property interests and property and equipment		27,729			—			—			—			27,729
Loss (gain) on sale of assets		326			—			6,468			(3		)	6,791
Operating loss		(129,703		)	(970		)	(6,110		)	(2,871		)	(139,654		)
For the six months ended June 30, 2013
Gold and silver sales		$	—		$	23,957		$	—		$	—		$	23,957
Loss on investment in Minera Santa Cruz S.A. (net of amortization)		(1,788		)	—			—			—			(1,788		)
Production costs applicable to sales		—			18,871			—			—			18,871
Mine development costs		—			569			—			—			569
Exploration costs		13,479			4,434			1,450			126			19,489
Impairment of investment in MSC		95,878			—			—			—			95,878
Impairment of mineral property interests and property and equipment		27,729			—			—			—			27,729
Loss (gain) on sale of assets		326			—			6,468			(3		)	6,791
Operating loss		(141,615		)	(3,020		)	(7,055		)	(6,331		)	(158,021		)
As at June 30, 2013
Investment in Minera Santa Cruz S.A.		176,282			—			—			—			176,282
Mineral property interests		511,363			12,187			207,899			—			731,449
Total assets		691,504			48,799			213,099			28,969			982,371

 

											Corporate
		Argentina			Mexico			U.S.			& Other			Total
		(in thousands)
For the three months ended June 30, 2012
Income on investment in Minera Santa Cruz S.A. (net of amortization) (adjusted - note 6)		$	679		$	—		$	—		$	—		$	679
Mine development and operating costs		—			3,494			—			—			3,494
Mine construction costs		—			6,994			—			—			6,994
Exploration costs		5,025			3,792			1,092			164			10,073
Operating loss (adjusted - note 6)		(5,266		)	(15,268		)	(1,301		)	(3,024		)	(24,859		)
For the six months ended June 30, 2012
Income on investment in Minera Santa Cruz S.A. (net of amortization) (adjusted - note 6)		$	3,728		$	—		$	—		$	—		$	3,728
Mine development and operating costs		—			6,216			—			—			6,216
Mine construction costs		—			8,635			—			—			8,635
Exploration costs		9,830			8,547			2,906			574			21,857
Operating loss (adjusted - note 6)		(7,689		)	(26,083		)	(3,630		)	(8,581		)	(45,983		)
As at December 31, 2012
Investment in Minera Santa Cruz S.A.		273,948			—			—			—			273,948
Mineral property interests		539,092			12,707			215,268			—			767,067
Total assets		825,047			47,359			220,148			58,383			1,150,937

 

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