McEwen Mining Inc. - Quarter Report: 2017 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, 2017

 

☐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, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐   

 

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: 311,871,121 shares outstanding as of May 3, 2017.

 

 

 

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 and shares)

 

 

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”) 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.

The update to the standard is effective for the Company beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the effect of this amendment and the impact it will have on the Company’s Consolidated Financial Statements.

 

Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory: In October 2016, the FASB issued ASU No. 2016-16, to modify the current exception to income tax accounting that required companies to defer the income tax effect of certain intercompany transactions. ASU No. 2016-16 only allows companies to defer the income tax effect of intercompany inventory transactions under an exception to the guidance on income taxes that currently applies to intercompany sales and transfers of all assets. The update to the standard is effective for the Company beginning January 1, 2018, with early application permitted as of the beginning of an annual period. The Company is currently evaluating the effect of this amendment and the impact it will have on the Company’s Consolidated Financial Statements.

 

Revenue from Contracts with Customers: In 2016, the FASB issued three separate accounting standard updates regarding Topic 606: ASU 2016-08, ASU 2016-10 and ASU 2016-12. These ASUs outline amendments to Topic 606 which is not yet effective, including reporting revenue gross versus net, identifying performance obligations and licensing and narrow-scope improvements and practical expedients. The effective date and transition requirements for the amendments listed in these updates are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09) which is January 1, 2018, with earlier application permitted. The Company will not be early adopting Topic 606.

 

The new guidance permits two methods of adoption: (i) the full retrospective method, under which comparative periods would be restated, and the cumulative impact of applying the standard would be recognized as at January 1, 2017, the earliest period presented; and (ii) the modified retrospective method, under which comparative periods would not be restated and the cumulative impact of applying the standard would be recognized at the date of initial adoption, January 1, 2018.  The Corporation expects to use the modified retrospective approach; however, it continues to monitor industry developments. Any significant industry developments could change the Company’s expected method of adoption.

 

The Company is currently evaluating the effect of this amendment and the impact it will have on the Company’s consolidated financial statements. We have identified two potential areas of impact including bullion and doré sales from our Mexico Operations and doré and concentrate sales from the San Jose mine which has an effect on the income (loss) from the investment in MSC under the equity method of accounting. To date, the Company has reviewed a sample of sale agreements, and management is still in the process of completing the assessment.  Based on the analysis completed thus far, the standard may have an impact on the timing of revenue recognition due to a potential change in timing of control being transferred to the customer. The Company also continues to assess the impact of the new standard on other aspects of revenue recognition, such as potential impact on insurance and shipping services arranged by the Company on behalf of its customers. We will continue to assess and implement the new revenue recognition policy and any related impact on our internal controls with an expectation of having an update to the impact of the standard in the second quarter of 2017.

 

Leases – Amendments: In February 2016, the FASB issued ASU 2016-02 “leases (Topic 842)” which core principle is that a lessee should recognize the assets and the liabilities that arise from leases, including operating leases. Under the new requirements, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and the right-of-use asset representing the right to the underlying asset for the lease term. For leases with a term of twelve months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from the previous GAAP. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal year, with early adoption permitted. The ASU requires a modified retrospective transition method with the option to elect a package of practical expedients. The Company is evaluating the effect of this amendment and the impact it will have on the Company’s Consolidated Financial Statements.

 

Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities: In January 2016, the FASB issued ASU No. 2016-01, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for the Company beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effect of this amendment and the impact it will have on the Company’s Consolidated Financial Statements.

 

NOTE 2   INVESTMENTS

 

The Company’s investment portfolio consists of marketable equity securities and warrants of certain publicly-traded companies. The Company classifies the marketable equity securities as available-for-sale securities, which are recorded at fair value based upon quoted market prices. The warrants are recorded at fair value using the Black-Scholes option pricing model. The following is a summary of the balances as of March 31, 2017 and December 31, 2016:

 

 

As of March 31, 2017, the cost of the marketable equity securities and warrants was approximately $4.9 million (December 31, 2016 - $4.9 million).

 

The Company maintains a portfolio of warrants on equity interest in publicly traded securities for investment purposes. As the warrants meet the definition of derivative instruments, unrealized gains or losses arising from their revaluation are recorded in the Consolidated Statement of Operations and Comprehensive Income (Loss). During the three months ended March 31, 2017, the Company recorded an unrealized gain of $1.8 million (March 31, 2016 - $nil).

 

The gains and losses for available-for-sale securities are included in other comprehensive income and not reported in Net Income (Loss) unless the securities are sold or if there is an other-than- temporary decline in fair value below cost.

 

During the three months ended March 31, 2017, the Company reviewed its investment portfolio to determine if any security was other-than-temporarily impaired (“OTTI”). An OTTI security would require the Company to record an impairment charge in the statement of operations in the period any such determination is made. In making this determination, the Company evaluated, among other things, the duration and extent to which the fair value of a security was less than its cost; the financial condition of the issuer and any changes thereto; and the Company’s intent to sell, or whether it will more likely than not be required to sell, the security before recovery of its amortized cost basis. From this assessment, the Company concluded that none of its marketable equity securities were considered OTTI (March 31, 2016 - $0.3 million).

 

The Company recorded a gain, net of tax, in other comprehensive income, of $3.9 million ($5.0 million pre-tax) for the three months ended March 31, 2017. The gain was recorded in accumulated other comprehensive income and is reported as a separate line item in the shareholders' equity section of the balance sheet. During the three months ended March 31, 2016, the Company recognized a loss, net of tax, in other comprehensive loss of $0.1 million.

 

NOTE 3   INVENTORIES

 

Inventories at March 31, 2017 and December 31, 2016 consist of the following:

 

 

 

NOTE 4 MINERAL PROPERTY INTEREST

 

The Company conducts a review of potential triggering events for impairment for all its mineral projects on a quarterly basis. When events or changes in circumstances indicate that the related carrying amounts may not be recoverable, the Company carries out a review and evaluation of its long-lived assets for impairment, in accordance with its accounting policy.  During the three months ended March 31, 2017, the Company did not identify events or changes in circumstances affecting the carrying values of its long-lived assets.

 

The definition of proven and probable reserves is set forth in the SEC Industry Guide 7. If proven and probable reserves exist at the Company’s properties, the relevant capitalized mineral property interests and asset retirement costs are charged to expense based on the units of production method upon commencement of production. 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, 2017, the Company recorded $0.5 million (March 31, 2016, $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 (Loss).

 

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

 

The Company accounts for investments over which it exerts significant influence but does not control through majority ownership using the equity method of accounting. In applying the equity method of accounting to the Company’s investment in MSC, MSC’s financial statements, which are originally prepared by MSC in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, are translated into U.S. GAAP by MSC’s management. As such, the summarized financial data presented under this heading is in accordance with U.S. GAAP.

 

The Company’s 49% attributable share of results of operations from its investment in MSC was income of $0.2 million for the three months ended March 31, 2017 (March 31, 2016 - $5.0 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 Argentina peso and the U.S. dollar on the peso-denominated mineral property interest fair value increment and deferred tax liability associated with the investment in MSC recorded as part of the acquisition of Minera Andes.

 

For the three months ended March 31, 2017, income tax recovery from the depreciation of the fair value increment was almost completely offset by the impact of the appreciation of the Argentina peso relative to the U.S. dollar on the deferred tax liability. In the comparative period in 2016, the impact of the devaluation of the Argentina peso relative to the U.S. dollar resulted in higher recovery of deferred income taxes.

 

During the period ended March 31, 2017, the Company did not identify any potential triggering events for impairment in relation to its investment in MSC, and consequently the Company did not record any impairment during the period.

 

During the three months ended March 31, 2017, the Company received $2.5 million in dividends from MSC, compared to $2.6 million during the same period in 2016.

 

Changes in the Company’s investment in MSC for the three months ended March 31, 2017 and year ended December 31, 2016 are as follows:

 

 

A summary of the operating results from MSC for the three months ended March 31, 2017 and 2016 is as follows:

 

 

As of March 31, 2017, MSC had current assets of $104.1 million, total assets of $461.9 million, current liabilities of $58.3 million and total liabilities of $135.3 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. Excluding the fair value increments from the purchase price allocation, net of impairment charges, MSC had current assets of $103.3 million, total assets of $286.6 million, current liabilities of $62.4 million, and total liabilities of $87.2 million as at March 31, 2017.

 

NOTE 6 RECLAMATION OBLIGATIONS

 

The Company is responsible for reclamation of certain past and future disturbances at its properties. The two most significant properties subject to these obligations are the Tonkin property in Nevada and the El Gallo 1 mine in Mexico. The Final Plan for Permanent Closure (“FPPC”) and the Amended Plan of Operations for the Tonkin property was approved by the Nevada Division of Environmental Protection (“NDEP”) and by the Bureau of Land Management (“BLM”) pursuant to the Finding of No Significant Impact in March 2012 and September 2015, respectively. Subsequently, on October 3, 2015 the BLM requested an updated bonding requirement in the amount of $3.6 million, which is covered within the surety bonds obtained by the Company as of March 31, 2017. Under current Mexican regulations, surety bonding of projected reclamation costs is not required.

 

A reconciliation of the Company’s asset retirement obligations for the three months ended March 31, 2017 and for the year ended December 31, 2016 are as follows:

 

 

 

NOTE 7   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 asset associated with marketable securities and changes in the deferred tax liability associated with mineral property interests acquired in the Minera Andes acquisition. The deferred tax liability is impacted by fluctuations in the foreign exchange rate between the Argentina peso and U.S. dollar.

 

For the three months ended March 31, 2017, the Company reduced the deferred income tax recovery by $1.6 million (March 31, 2016 - $1.9 million) as a result of the increased exploration spending in Los Azules, giving rise to a deferred tax benefit partially offset by the appreciation of the Argentina Peso. The Company also recorded an income tax recovery of $1.1 million (March 31, 2016 - $nil) due to the increase in value of its publicly traded securities classified as available for sale instruments, with the deferred tax benefit recognized in accumulated other comprehensive income. 

 

NOTE 8   SHAREHOLDERS’ EQUITY

 

During the three months ended March 31, 2017, 20,000 shares of common stock were issued upon exercise of stock options under the Equity Incentive Plan, at the weighted average exercise price of $2.34 per share for proceeds of $0.1 million.  This compares to nil shares of common stock issued upon exercise of stock options during the same period of 2016 under the Equity Incentive Plan.

 

During the three months ended March 31, 2017, the Company paid a semi-annual return of capital distribution of $0.005 (March 31, 2016 - $0.005), per share of common stock, for a total of $1.5 million (March 31, 2016 - $1.5 million).

 

NOTE 9   NET (LOSS) INCOME PER SHARE

 

Basic net (loss) income per share is computed by dividing the net (loss) 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 outstanding and the computations for basic and diluted net income per share for the three months ended March 31, 2017 and 2016:

 

 

For the three months ended March 31, 2017, as the Company was in a loss position, all potentially dilutive instruments were anti-dilutive and therefore not included in the calculation of diluted net loss per share. For the three months ended March 31, 2016, options to purchase 4.6 million shares of common stock outstanding, at an average exercise price of $3.26 per share, which 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 during that period. 

 

NOTE 10   RELATED PARTY TRANSACTIONS

 

The Company recorded the following expense (income) in respect to the related parties outlined below:

 

 

The Company has the following outstanding accounts payable balance in respect to the related parties outlined below:

 

 

An aircraft owned by Lexam L.P. (which is controlled by Robert R. McEwen, limited partner and beneficiary of Lexam L.P. and the Company’s Chairman and Chief Executive Officer) has been made available to the Company in order to expedite business travel. In his role as Chairman and Chief Executive Officer of the Company, Mr. McEwen must travel extensively and frequently on short notice. Mr. McEwen is able to charter the aircraft from Lexam L.P. at a preferential rate approved by the Company’s independent board members under a policy whereby only the variable expenses of operating this aircraft for business related travel are eligible for reimbursement by the Company.

 

Robert R. McEwen was the Non-Executive Chairman of Lexam VG Gold (“Lexam”) and held 27% ownership in Lexam. The Company agreed to share services with Lexam VG Gold Inc. including rent, personnel, office expenses and other administrative services. These transactions were in the normal course of business. Subsequent to the period-end, on April

26, 2017, the Company completed the acquisition of 100% of the issued and outstanding securities of Lexam. Refer to Note 14 Subsequent Events for further details.  

 

REVlaw is a company owned by Ms. Carmen Diges, General Counsel of the Company. The legal services of Ms. Diges as General Counsel are provided by REVlaw in the normal course of business.  These legal fees have been recorded at their exchange amount and these transactions are in the normal course of business.

 

NOTE 11 OPERATING SEGMENT REPORTING

 

McEwen Mining is a mining and minerals exploration company focused on precious metals in Argentina, Mexico and the United States. The Company’s chief operating decision maker (“CODM”) reviews the operating results, assesses performance and makes decisions about allocation of resources to these segments at the geographic region level or major mine/project where the economic characteristics of the individual mines or projects are not alike.  As a result, these operating segments also represent the Company’s reportable segments. The Company’s business activities that are not considered operating segments and not provided to the CODM for review are included in Corporate and other and are provided in this note for reconciliation purposes.

 

The CODM reviews segment income (loss), defined as gold and silver sales less production costs applicable to sales, mine development costs, exploration costs, property holding costs and general and administrative expenses for all segments except for the MSC segment which is evaluated based on the attributable equity income. Gold and silver sales and production costs applicable to sales for the reportable segments are reported net of intercompany transactions. 

Significant information relating to the Company’s reportable operating segments is summarized in the tables below: