McEwen Mining Inc. - Quarter Report: 2016 March (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2016

 

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

 

For the transition period from               to

 

Commission File Number: 001-33190

 

MCEWEN MINING INC.

(Exact name of registrant as specified in its charter)

 

 

150 King Street West, Suite 2800, Toronto, Ontario Canada M5H 1J9

(Address of principal executive offices)  (Zip code)

 

(866) 441-0690

(Registrant’s telephone number, including area code)

 

 

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 ☒  No ☐

 

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 ☒  No ☐

 

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):

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 277,044,650 shares outstanding as of May 2, 2016 (and 21,031,091 exchangeable shares).

 

 

 

MCEWEN MINING INC.

 

FORM 10-Q

 

Index

 

 

 

 

 

PART I

Item 1.  FINANCIAL STATEMENTS

 

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

(in thousands of U.S. dollars, except per share)

 

 

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

 

 

MCEWEN MINING INC.

CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)

 

 

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

 

Subsequent events, note 14.

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands of U.S. dollars)

 

 

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

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands of U.S. dollars)

 

 

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

 

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.

 

The Company operates in Mexico, Argentina, and the United States.  It owns and operates the producing El Gallo 1 Mine in Sinaloa, Mexico. It also owns a 49% interest in Minera Santa Cruz S.A. (“MSC”), owner and operator of the producing San José Mine in Santa Cruz, Argentina, which is controlled by the majority owner of the joint venture, Hochschild Mining plc (‘‘Hochschild’’).  In addition to its operating properties, the Company holds interests in numerous exploration stage properties and projects in Mexico, Argentina and the United States.

 

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, 2016 and 2015, the Consolidated Balance Sheets as at March 31, 2016 (unaudited) and December 31, 2015, the unaudited Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2016 and 2015, and the unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, 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, 2015.  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, 2015.  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

 

Business Combinations – Simplifying the Accounting for Measurement Period Adjustments:  In September 2015, the FASB issued amended guidance which requires measurement period adjustments to be recorded in the reporting period in which the adjustment amounts are determined. Previously, such adjustments were required to be retrospectively recorded in prior period financial information. This amended guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date, with earlier application permitted for financial statements that have not been issued.  The Company adopted this new guidance as of March 31, 2016, and as a result there was no impact on the Company’s consolidated financial statements.

 

 

Revenue from Contracts with Customers – Deferral of the Effective Date: In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2015-09. ASU 2015-09 outlines a single comprehensive model for entities

to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The effective date of this pronouncement is for fiscal years beginning after December 15, 2017.  Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company adopted this new guidance as of March 31, 2016, and as a result there was no impact on the Company’s consolidated financial statements.

 

Interest – Imputation of Interest – Simplifying the Presentation of Debt Issuance Costs:  In April 2015, the FASB issued ASU 2015-03 which requires entities to present debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that debt liability on the balance sheet as opposed to being presented as a deferred charge. ASU 2015-03 does not contain guidance for debt issuance costs related to line-of-credit arrangements. Consequently, in
August 2015, the FASB issued ASU 2015-15 to add paragraphs indicating that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The effective date of these pronouncements is for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company adopted this new guidance as of March 31, 2016, and as a result there was no impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Pronouncements

 

Compensation – Stock Compensation – Improvements to employee Share-Based Payment Accounting:  In March 2016, the FASB Issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The updated guidance 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 June 1, 2017, with early application permitted. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.

 

Investments - Equity Method and Joint Ventures - Simplifying the Transition to the Equity Method of Accounting: In March 2016 the FASB issued ASU 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting”. The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Company is currently evaluating the potential impact this guidance will have on its consolidated financial statements.

 

Financial Instruments — Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities: In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities”, which updates certain aspects of

recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for the Company beginning in its first quarter of 2019. The Company is currently evaluating the potential impact this guidance will have on its consolidated financial statements. 

 

NOTE 2   INVESTMENTS

 

The investment portfolio of the Company consists of marketable equity securities of certain publicly traded companies, which are classified as available-for-sale securities and are recorded at fair value based upon quoted market prices. As of March 31, 2016, the total cost of all marketable equity securities was $1.4 million (December 31, 2015 - $1.9 million).

 

During the three months ended March 31, 2016, the Company sold marketable equity securities for proceeds of $0.4 million and realized a gain of $0.1 million. 

 

In addition, as at March 31, 2016, the Company reviewed its investment portfolio to determine if any security is other-than-temporarily impaired, which would require the Company to record an impairment charge in the income statement in the period any such determination is made. In making this judgment, the Company evaluated, among other things, the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and the Company’s intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis.

 

From this assessment the Company concluded that the fair value of its portfolio of securities was $0.5 million.  The Company also concluded that the fair value of certain marketable equity securities exhibited a prolonged decline in share price due to deterioration of the issuer’s results; therefore the decline in these marketable equity securities was considered other-than-temporarily impaired.  Accordingly, the Company recognized an other-than-temporary impairment loss of $0.3 million on the Consolidated Statement of Operations and Comprehensive Income, for the three month period ended March 31, 2016. 

 

For the remaining marketable equity securities, the Company recorded a loss, net of tax, of $0.7 million in other comprehensive income, since it was concluded they were not other-than-temporarily impaired as of March 31, 2016.  The loss was recorded in accumulated other comprehensive income and is reported as a separate line item in the shareholders' equity section of the balance sheet. The gains and losses for available-for-sale securities are not reported on the statement of operations until the securities are sold or if there is an other-than-temporary decline in fair value below cost.

 

NOTE 3   INVENTORIES

 

Inventories at March 31, 2016 and December 31, 2015 consist of the following:

 

 

 

 

 

 

NOTE 4   ASSET RETIREMENT OBLIGATIONS

 

Asset Retirement Obligations

 

The Company is responsible for reclamation of certain past and future disturbances at its properties.  The two most significant properties subject to these obligations are the Tonkin property in Nevada and the El Gallo 1 Mine in Mexico.

 

A reconciliation of the Company’s asset retirement obligations for the three months ended March 31, 2016 and for the year ended December 31, 2015 are as follows:

 

 

As at March 31, 2016, the current portion of the asset retirement obligation was $0.2 million (December 31, 2015 - $0.2 million).

 

Amortization of Mineral Property Interests and Asset Retirement Costs

 

The definition of proven and probable reserves is set forth in the SEC Industry Guide 7. If proven and probable reserves exist at the Company’s properties, the relevant capitalized mineral property interests and asset retirement costs are charged to expense based on the units of production method and upon commencement of production. Since the Company has not completed feasibility or other studies sufficient to characterize the mineralized material at the El Gallo 1 Mine as proven or probable reserves, the amortization of the capitalized mineral property interests and asset retirement costs are charged to expense based on the straight-line method over the estimated useful life of the mine. For the three months ended March 31, 2016, the Company recorded $0.3 million (March 31, 2015, $0.3 million), of amortization expense related to the El Gallo 1 Mine, which is included in Production Costs Applicable to Sales in the Consolidated Statement of Operations and Comprehensive Income, of which $0.1 million, related to the amortization of capitalized asset retirement costs (March 31, 2015 - $0.1 million).

 

 

NOTE 5   INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) – SAN JOSÉ MINE

 

The Company’s 49% attributable share of results of operations from its investment in MSC was income of $5.0 million for the three months ended March 31, 2016 (March 31, 2015 - $0.3 million). These amounts include the amortization of the fair value increments arising from the purchase price allocation and related income tax recovery. Included in the income tax recovery is the impact of fluctuations in the exchange rate between the Argentine peso and the U.S. dollar on the peso-denominated deferred tax liability associated with the investment in MSC recorded as part of the acquisition of Minera Andes. As a devaluation of the Argentine peso relative to the U.S. dollar results in a recovery of deferred income taxes, the impact has been an increase in the income from the Company’s investment in MSC for the three months ended March 31, 2016.

 

During the three months ended March 31, 2016, the Company received $2.6 million in dividends from MSC, compared to $nil during the same period in 2015.

 

Changes in the Company’s investment in MSC for the three months ended March 31, 2016 and year ended December 31, 2015 are as follows:

 

 

A summary of the operating results from MSC for the three months ended March 31, 2016 and 2015 is as follows:

 

 

As of March 31, 2016, MSC had current assets of $94.0 million, total assets of $480.5 million, current liabilities of $36.3 million and total liabilities of $134.8 million on an unaudited basis. These balances include the adjustments to fair value and amortization of the fair value increments arising from the purchase price allocation, net of impairment charges recorded in the fourth quarter of 2015. Excluding the fair value increments from the purchase price allocation, net of impairment charges, MSC had current assets of $93.0 million, total assets of $284.2 million, current liabilities of $47.1 million, and total liabilities of $83.7 million as at March 31, 2016.

 

 

NOTE 6   SHORT-TERM BANK INDEBTEDNESS

 

On May 29, 2015, Compañía Minera Pangea (“CMP”), a wholly-owned subsidiary of the Company, finalized a line of credit agreement with Banco Nacional de Comercio Exterior (“Banco Nacional”), for an amount up to 90,000,000 Mexican pesos (approximately $5.9 million as of May 29, 2015), which was secured by CMP’s Value Added Tax (“VAT”) receivable balance.  The applicable interest rate was equal to: (i) two and one-half percent (2.5%) per annum plus (ii) the 91 day Interbank Equilibrium Interest Rate (“TIIE”) rate, as published by the Bank of Mexico, payable quarterly. Upon signing the agreement, CMP paid a 1% commission on the total value of the simple credit agreement to Banco Nacional. 

 

On June 1, 2015, CMP drew down the entire 90,000,000 Mexican pesos, equivalent to $5.2 million as of December 31, 2015 from the line of credit. During the year ended December 31, 2015, CMP collected 34,654,201 Mexican pesos (equivalent to $2.0 million as of December 31, 2015) of VAT receivable, from which 2,903,100 Mexican pesos were

applied against the accrued interest and the remaining 31,751,101 Mexican pesos (approximately $1.8 million as of December 31, 2015) were applied against the principal.

 

On January 13, 2016, CMP paid the remaining balance of the indebtedness in the amount of 58,248,899 Mexican Pesos (approximately $3.4 million as of March 31, 2016).  Upon the final payment, the line of credit agreement was closed.

 

 

NOTE 7   SHAREHOLDERS’ EQUITY

 

During the three months ended March 31, 2016, 3.2 million exchangeable shares were converted into common stock (March 31, 2015 – 0.9 million).  At March 31, 2016, total outstanding exchangeable shares not exchanged and not owned by the Company or its subsidiaries totaled 21.0 million (March 31, 2015 – 27.6 million).

 

On June 18, 2015, the Board of Directors declared an annual return of capital distribution of $0.01 per share of common stock, payable semi-annually.  The first semi-annual return of capital distribution payment of $0.005 was paid on August 17, 2015 for an aggregate total of $1.5 million. The second semi-annual return of capital distribution payment of $0.005 was paid on February 12, 2016, for an aggregate total of $1.5 million. Return of capital distribution is paid to shareholders of the Company’s shares of common stock and to holders of exchangeable shares. 

 

On October 1, 2015, the Board of Directors approved a share repurchase program authorizing the Company to purchase up to 15,000,000 shares of its common stock over a twelve month period, with an authorized maximum of $15.0 million to be spent on the repurchases. Under the program, purchases of common stock may be made from time-to-time in the open market, subject to compliance with applicable U.S. and Canadian laws. The timing and amounts of any purchase are based on market conditions and other factors including share price, regulatory requirements and capital availability.  Further, the repurchase program may be suspended, discontinued or modified at any time, at the discretion of the Board of Directors. During the three months ended March 31, 2016 the Company had repurchased 557,991 shares of common stock (year-ended December 31, 2015 - 1,896,442) at a total cost of $0.6 million (December 31, 2015 - $1.8 million), all of which have been cancelled.

 

During the three months ended March 31, 2015, the Company issued 430,295 shares of common stock under an agreement with one of its mining contractors to settle parts of its accounts payable for services rendered above a defined tonnage threshold. The fair value of the common stock at the time of issuance was $0.4 million. The agreement with this mining contractor expired and was renegotiated during 2015 and under the revised agreement, the Company can no longer make share payments and instead is required to pay in cash.

 

 

NOTE 8   INCOME TAXES

 

The Company’s income tax expense differs from the amount computed by applying the U.S. federal and state statutory corporate income tax rate of 35% to income before taxes primarily as a result of valuation allowances being applied to losses, changes in the deferred tax liability associated with mineral property interests acquired in the Minera Andes acquisition and changes due to impairment of mineral property interests. The deferred tax liability is impacted by fluctuations in the foreign exchange rate between the Argentine peso and U.S. dollar. For the three months ended March 31, 2016, the Company recorded an income tax recovery as a result of the Argentine peso devaluation of $1.9 million, compared to $1.2 million for the three months ended March 31, 2015.

 

NOTE 9   INCOME PER SHARE

 

Basic net income per share is computed by dividing the net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed similarly except that the weighted average number of common shares is increased to reflect all dilutive instruments.

 

Below is a reconciliation of the basic and diluted weighted average number of common shares and exchangeable shares outstanding and the computations for basic and diluted net income per share for the three months ended March 31, 2016 and 2015:

 

 

For the three months ended March 31, 2016, options to purchase 4.6 million shares of common stock outstanding at March 31, 2016 (March 31, 2015 – 5.0 million) at an average exercise price of $3.26 per share (March 31, 2015 – $3.32) were not included in the computation of diluted weighted average shares because the exercise price exceeded the average price of the Company’s common stock for the three months ended March 31, 2016. 

 

Other outstanding options to purchase 0.3 million shares of common stock were not included in the computation of diluted weighted average shares in the three months ended March 31, 2016 because their effect would have been anti-dilutive. 

 

 

NOTE 10   RELATED PARTY TRANSACTIONS

 

For the three months ended March 31, 2016, the Company incurred and paid $20,482 (March 31, 2015 - $16,137) to an entity affiliated with the Company’s Chairman and Chief Executive Officer for the use of an aircraft.

 

For the three months ended March 31, 2016, legal fees of $23,100 (March 31, 2015 – $nil) were incurred with REVlaw, a company owned by Ms. Carmen Diges, General Counsel of the Company, and an outstanding balance of $103,100 is included within accounts payable at March 31, 2016 (December 31, 2015 - $80,000). The services of Ms. Diges as General Counsel are provided by REVlaw.  These legal fees have been recorded at their exchange amount, being the amount agreed to by the parties.

 

The Company agreed to share services with Lexam VG Gold Inc. (“Lexam”) including rent, personnel, office expenses and other administrative services.  The Company’s Chairman and Chief Executive Officer is the Non-Executive Chairman of Lexam and holds a 27% ownership in Lexam. 

 

For the three months ended March 31, 2016 the Company reimbursed Lexam $23,177 for net shared services. During the comparable period in 2015, Lexam paid $4,312 to the Company. These transactions are in the normal course of business.

 

 

NOTE 11   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.

 

The financial information relating to the Company’s operating segments as of, and for the three months ended March 31, 2016 and 2015 is as follows:

 

 

 

 

 

 

 

NOTE 12   FAIR VALUE ACCOUNTING

 

Fair value accounting establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are described below:

 

Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

 

Level 3Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

Assets and liabilities measured at fair value on a recurring basis

 

The following table identifies the fair value of the Company’s financial assets and liabilities as reported in the Consolidated Balance Sheets at March 31, 2016 and December 31, 2015 by level within the fair value hierarchy.  As required by accounting guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

The Company's investments are marketable equity securities which are exchange traded, and which are valued using quoted market prices in active markets and are classified within Level 1 of the fair value hierarchy. The fair value of the investments is calculated as the quoted market price of the marketable equity security multiplied by the number of shares held by the Company.

 

The fair value of other financial assets and liabilities approximate their carrying values due to their short-term nature and historically negligible credit losses.

 

NOTE 13   COMMITMENTS AND CONTINGENCIES

 

Surety Bonds

 

As part of its ongoing business and operations, the Company is required to provide bonding for its environmental reclamation obligations in the United States. These surety bonds are available for draw down by the Bureau of Land

Management in the event the Company does not perform its 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. The Company believes it is in compliance with all applicable bonding obligations and will be able to satisfy future bonding requirements, through existing or alternative means, as they arise.

 

As at March 31, 2016, there were $4.8 million of surety bonds outstanding (December 31, 2015 - $4.8 million). The annual financing fees are 1.5% of the value of the surety bonds, with a required initial deposit of 10% ($0.5 million), which is included in Other Assets in the Consolidated Balance Sheet.

 

 

NOTE 14SUBSEQUENT EVENTS

 

On April 19, 2016, the Company completed the acquisition of the tiered net smelter return royalty (the “Royalty”) on the El Gallo 1 Mine, previously requiring payment of 3.5% of gross revenue less allowable deductions. The purchase price consisted of a $5.25 million payment at closing and a conditional deferred payment of $1.0 million to be made on June 30, 2018, provided that the El Gallo 1 Mine is in operation at that time. The Royalty ceased accruing at the end of March 2016. 

 

 

 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

In the following discussion, “McEwen Mining”, the “Company”, “we”, “our”, and “us” refers to McEwen Mining Inc. and as the context requires, its consolidated subsidiaries.

 

The following discussion updates our plan of operation as of May 5, 2016 for the foreseeable future. It also analyzes our financial condition at March 31, 2016 and compares it to our financial condition at December 31, 2015. Finally, the discussion analyzes our results of operations for the three months ended March 31, 2016 and compares those to the results for the three months ended March 31, 2015.  With regard to properties or projects that are not in production, we provide some details of our plan of operation. We suggest that you read this discussion in conjunction with MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and our audited consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2015.

 

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, all-in costs, all-in 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.

 

CAUTIONARY NOTE TO UNITED STATES INVESTORS — INFORMATION CONCERNING PREPARATION OF RESOURCE AND RESERVE ESTIMATES

 

McEwen Mining Inc. is required to prepare reports under the Canadian Securities Administrators’ National Instrument 43-101 “Standards of Disclosure for Mineral Projects” (“NI 43-101”), under the Canadian securities laws because our stock is listed on the Toronto Stock Exchange (“TSX”) and we are subject to Canadian securities laws. These standards are materially different from the standards generally required in reports filed with SEC.

 

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

 

One consequence of these differences is that “reserves” calculated in accordance with Canadian standards may not be “reserves” under Industry Guide 7 standards.  U.S. investors should be aware that McEwen Mining’s properties located in Argentina (with the exception of the San José Mine), Mexico and the United States do not have “reserves” as defined by Industry Guide 7 and are cautioned not to assume that any part or all of the disclosed mineralized material will be confirmed or converted into Industry Guide 7 compliant “reserves”.

 

Further, since we have not established reserves on some of our properties as defined in Industry Guide 7, we have in the past and will continue to expense substantially all design, construction and development costs with regard to those

properties, even though these expenditures are expected to have a future economic benefit in excess of one year. Only certain types of property and equipment which have alternative uses or significant salvage value may be capitalized without proven and probable reserves. We also expense our asset retirement obligations on those properties. Companies that have reserves under Industry Guide 7 typically capitalize these costs, and subsequently depreciate or amortize them on a units-of-production basis as reserves are mined. Unlike these other companies, we depreciate or amortize any capitalized costs on a straight-line basis based on the estimated remaining useful life of the mine, as determined by our internal mine plans. As a result of these and other differences, our financial statements may not be comparable to the financial statements of mining companies that have established reserves.

 

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

 

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

 

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

 

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 and silver.  We own and operate the producing El Gallo 1 Mine in Sinaloa, Mexico. We 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 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.

Selected Financial and Operating Results

 

The following table summarizes selected financial and operating results of our Company for the three months ended March 31, 2016 and 2015:

 

 

Operating and Financial Highlights