McEwen Mining Inc. (MUX) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the McEwen Mining Third Quarter 2018 Financial and Operating Results Conference Call. At this time, all participants are in a listen-only mode. When you sign in into the call online everyone will be able to access the slides McEwen Mining will be going over on today’s call. And you will be able to access the slides after the call at www.mcewenmining.com where it will be posted. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the call over to Rob McEwen, Chief Owner. Sir, you may begin.

Thank you, Operator. Good morning, fellow shareowners, ladies and gentlemen. I'm very pleased to welcome you to our third quarter conference call. Happy Halloween. During the third quarter, we moved forward on a number of fronts. Exploration has been successful, increasing our resource base at Gold Bar and will lead to an extension of mine life. Gold Bar is also advancing as planned, on schedule, on budget, with production to begin in Q1 of next year. At Black Box, exploration has not only increased the resource base of several existing deposits, it has found a number of new targets that are quite encouraging. At Los Azules, the most important development is the possibility of a new access route into the deposit, and this could provide 12-month or year-round access rather than the current five month access. It looks promising, and should it work, I think, this will substantially increase the value of Los Azules to us. As a result of these factors and work being done at Black Fox and in Mexico, my confidence in our company's assets, management, exploration potential and my belief that we are in the early stages of the next bull market for gold equities, compelled me to increase my investment in the company by $25 million. This brings my total investment in MUX to $161 million. I'd like to start with this agenda. We'll start with our new President and Chief Operating Officer, Chris Stewart, addressing our operating performance and forecast for next year. Chris will be followed by our Senior Vice President of Exploration, Sylvain Guerard, who'll update you with the recent results from our exploration. And Sylvain, will be followed by our CFO, Andrew Elinesky, who will cover off our financial performance for the third quarter. Chris, over to you.

Thank you, Rob. Good morning, everyone. Q3 2018 was a strong operating quarter with consolidated production of 43,700 gold equivalent ounces using a 75 to 1 gold to silver ratio. Consolidated production for the nine months ended September 30, 2018 was 135,000 gold equivalent ounces, which is 48% higher than the comparable period of 2017. At El Gallo mine in Mexico, residual leaching activities continued after the final ore was mined and stacked on the heap leach from El Gallo Gold. Work progressed on the Fenix project, including the start of our feasibility study in July and ongoing environmental permitting efforts. While the most recent Fenix project, PEA economics were completed at $1,250 gold and $16 silver, based on current metal prices, the project still demonstrates strong economics with an NPV of $41 million and a post-tax IRR of 22%. Based on residual heap leach activity, the operating team achieved a production of 10,400 gold equivalent ounces in Q3, which brought the year-to-date production to 33,400 gold equivalent ounces. Following cessation of mining and crushing activities at El Gallo, by the end of Q2, cost in Q3 were down to a total cash cost of $671, and all-in sustaining cost of $696 per gold equivalent ounce. Q3 was strong as a result of ore stacked on the heap leach pad at the end of Q2. Residual heap leaching is expected to taper significantly in Q4 to be more in line with our longer term recovery expectations. Closure and reclamation and residual heap leaching are ongoing and will continue for several years. Our Q3 work is focused on advancing the Fenix project towards the final feasibility study to be published during the first half of 2019. During the three and nine months ending September 30, 2018, we spent $1.5 million and $2.6 million, respectively, on feasibility study work, which includes reviewing mineral processing, mine sequencing, material transportation, tailing storage options and flow sheet optimization. We also progressed the permitting for Project Fenix and plan to make our formal submittal for Phase 1 in November with approval expected in Q2 2019. Phase 1 is for the reprocessing of El Gallo Gold, heap leach material through a typical carbon-in-leach mill circuit. Phase 2 permitting, which we look to obtain in 2020 would require further expansion to process sulfide ores from mainly El Gallo silver. Project Fenix is expected to add another 12 years of mine life to our Mexican operations. In Canada, at Black Fox during Q3 underground exploration efforts focused on potential resource growth near existing infrastructure. We also commenced an exploration drift on the 810 meter level, which will allow us to drill the deep potential for the main Black Fox deposit. We have initiated cost, logistics and environmental baseline studies at Lexam’s Fuller project and we now have completed the resource estimate for Froome deposit near the Black Box mine and a new resource for the Stock East Deposit near our mill. Together with results announced in Q3 from the ongoing exploration program of the complex we continue to develop expanded ore zones that can increase our mining output and gold production. We've produced 11,600 gold equivalent ounces for a total of 37,750 gold equivalent ounces produced year-to-date. Cash costs were $932 and all in sustaining costs $1,285 per gold equivalent ounces during the quarter bringing year-to-date cash costs to $839 and all-in-sustaining cost to $1,159. Black Fox production is in line with our full year production and cost guidance for 2018. For 2018, we forecasted a total of $14.5 million for sustaining and capital expenditure activities at Black Fox mine of which we spent $10.6 million during the nine month period ending September 30. We're excited about the potential of our Black Fox property and we will be closely evaluating our options with respect to bringing on additional production from one of our satellite deposits at Froome, Grey Fox and Tamarack in the next 12 to 18 months. At the San Jose mine in Argentina production is in line with our full year production and cost guidance for 2018. According to our 49% interest in the mine, our attributable production in Q3 was $21,600 gold equivalent ounces at a cash cost of $856 and all-in-sustaining cost of $1,028 per gold equivalent ounce. Our year-to-date attributable production is $64,000 gold equivalent ounces. The cash cost of $864 and all-in-sustaining cost of $1,078. At Gold Bar construction is advancing on budget and on schedule for completion by the end of 2018, targeting production in Q1 2019. Activities at Gold Bar in Q3 focused on completion of the heap leach pad, the crushing and conveying system, and advancing the gold processing facility. We expect to complete commissioning of the crushing and stacking circuit by mid -November and then we will start loading the leach pads with ore. Our ADR plant is expected to be completed in mid-December after, which the cyanide leaching process would commence. Mining activities are progressing well. We pre-stripped one million tons of waste material at Gold Pick, and Cabin Creek. We're also mining ore from Cabin Creek pit and currently have approximately 100,000 tons of ore sitting on the ground in front of our crushing plant waiting to be placed on heap leach pad. We also have another 97,000 tons of ore Cabin Creek, waiting to be hauled at the crushing facility, so we're in great shape with regard to having ore ready to go on to leach pads. All major equipment and bulk materials are either onsite or purchased, engineering for the project is complete and 97% of the contracts are awarded. Exploration on the Gold Bar property restarted in November 2017 after receiving the construction permit from the mine. From the $5 million exploration budget for Nevada, we spent $1 million in Q3 adding to $4.2 million for the nine months ended September 30, 2018. At Los Azules, we forecasted $8.9 million in expenditures for the 2017 - 2018 exploration season. We spent $5.5 million during the year. The activity is focused on technical site investigations, environmental baseline monitoring work in order to advance our permitting efforts. As you can see Q3 was another quarter during which we delivered significant production and focused on the future production growth of our company. I will now turn it over to Sylvain Guerard our Senior Vice President of Exploration to expand on the exploration programs for our properties.

Thank you, Chris. To better visualize the location of our projects I would like to refer you to look at the presentation slides available online. On the exploration front and starting with key highlights at Gold Bar in Nevada we increased significantly our resources and a reserve update is in progress to extend our current mine life. In Timmins we increased and we also added new resources and generated multiple drill intersection that will positively impact our development projects and that may lead us to new discoveries. Q3 was another highly productive and successful quarter, a total of $30,000 meters was drilled during Q3 for a year-to-date total of 110,000 meters. We are measuring our recent exploration success as follows: - First, we have significantly increased our mineral resource base and defined new resources at Gold Bar and at Black Fox for a total of 241,000 ounces of gold equivalent in Measured and Indicated and $196,000 gold ounces in Inferred category at an average all included cost of about $39 per ounces; - Second, we generated multiple positive including high-grade drill intersection; and - Third, we developed new high quality drill targets and kept reinforcing our exploration team. Starting with Nevada one of our key objective is to extend the Gold Bar mine life. During Q3 we were pleased to announce an increase of the Measured and Indicated resources by 92,000 ounces and of Inferred resource by 82,000 ounces, representing a 13% and 68% resource increase respectively. The total resources of the Gold Bar property, including Gold Bar South, are now 822,000 gold ounces in the Measured and Indicated category, and 202,000 gold ounces in the Inferred category. An updated mineral reserve estimate is in progress and will be completed in Q1 2019, that will extend the life of mine at Gold Bar. A complete set of data including new the geophysical surveys have been at sound levels contributing to the definition of multiple high quality near-mine targets. Drilling to test some of these targets started in mid-August and will continue in Q4. This new data is also providing key information in the development of conceptual targets for potentially deep and large Carlin gold type deposits and drilling would start in 2019. Moving on to the Timmins regions at Black Fox property drilling on the extension of the Froome deposit located only 800 meter west of the Black Fox mine led to an increase of 14% of the Indicated resources to 181,000 thousand ounces gold at a grade of 5.1 gram per ton. At The Stock property, located about 30 kilometers northwest of Black Fox, drilling on Stock East target led to an initial Inferred mineral resource totaling 114,000 ounces gold at an average grade of 2.5 gram per ton, including 40,000 ounces at 1.6 as open pit and 73,000 ounces at 3.9 as underground resources. This newly defined resource is located less than a kilometre from our mill and it's part of a two kilometer priority exploration trend that hosts the former Stock mine. In 2018, Black Fox and Stock exploration programs were also very successful in generating multiple new significant drill results that may positively impact our development projects and lead to the discovery of new zones of mineralization. At the Froome footwall target a new mineralized structure has been defined to the northeast of the Froone deposit, with intersections of up to 54 grams per ton of gold over 8-meters, including 322-grams per ton over 1.3 meters. This new zone of mineralization is considered important and is located between the Black Fox mine and the Froome deposit, where future ramp developed is anticipated to access Froome. At Grey Fox, a new mineralized structure with intersection of 13 grams per ton over 2.8 meters has been defined to the northeast of the Grey Fox zone of 147. This new target area has shallow overburden and will be considered as a potential site for a surface access decline to reach the main Grey Fox deposit. Finally, drilling at the Pike River target located along the Gibson-Kelore Fault zone that hosts Froome and Gibson deposit, returned an intersections of 35 grams per ton over 3.3 meters, highlighting the upside potential of this underexplored structure. Followup drilling will continue into 2019 with the objective to define the extent and continuity of the mineralization of the Froome Footwall, Grey Fox Northeast and Pike River target. At the Black Fox mine, the deepest drill intersection yet returned 55-grams per ton gold over 1.2-meters at the 1,050 meter level on the depth extension of the mine. During Q3, we developed an exploration drift at the 810-meter level, from which we have initiated drilling to test the depth extension of the Black Fox deposit, and future drill results are expected over the coming quarter. At the Stock property, in addition to the focus on the Stock East zone where we have generated the first resource, drilling on the down-plunge extension of the former Stock mine returned multiple positive intersection, including up to 30-grams per ton over 0.8-meters as part of the 3.8-meters interval grading 7 grams per ton, indicating that the mine mineralized system remained open at depth. Follow-up drilling is planned for 2019 to further asses this deep extension potential. On the west extension of the Stock East Deposit, a wide lower grade interval of 0.8-grams per ton was intersected over 35-meters core length and followup drilling was performed with pending assays over the sector with the objective to extend the Southeast Central resource to the west. During Q4, our Black Fox surface drilling was focused on the Froome Footwall target. Underground drilling will focus on testing the depth extension and the Far West target area. At Stock an updated Inferred resource estimate for the Stock East deposit will be delivered later in the quarter. At Gold Bar drilling will continue testing priority targets, including Gold Bar South to extend the mine life. Finally, we are working on our program and budget planning for 2019 to build on the excellent exploration success generated this year at our Timmins and Nevada priority projects. Thank you and over to Andrew.

Thank you, Sylvain. Good morning, everyone. Thank you for joining us today during a busy reporting period. Further to Rob and Chris’ opening remarks, the third quarter for us was one of the steady production and operating cost on a consolidated basis. In addition to the stable performance, we have continued with the execution of our capital investments, that the company had planned for this year, building the Gold Bar mine in Nevada, recapitalizing Black Fox mine, progressing with the Fenix project in Mexico, and of course, raising the required capital needed for achieving these goals within 2018. Our operating performance in the quarter was in line with our expectations, both from a production and cost per ounce perspective. However, the company reported a net loss of $12.8 million or $0.04 per share. And this was greater than expected and it was due to the overall lower sales prices, as well as increased foreign exchange in tax cost at the San Jose mine in Argentina. Our treasury balance continues to reflect the sizable investments being made across the board. And as such, you see the increase partially offset by the investments being made. Regarding our overall operating results, related to Chris’ comments earlier, the company had consolidated production of just over 43,000 gold equivalent ounces for the quarter and that brings our year-to-date production to over 135,000 gold equivalent ounces and still has us tracking above our full year guidance of 171,000 ounces. The increase in production versus the prior year's primarily the result of the addition of Black Fox and Timmins, as well as a significant increase in production at our El Gallo mine in Mexico. Our earnings for mining operations were $6.9 million or $0.02 per share in the quarter, which was 28% lower than the third quarter of 2017. This was the net result of the stronger performance in Mexico as a result of the increased production levels, while both the San Jose and Black Fox mines reported slight losses due to weaker sales revenues and increased costs. This net contribution from operations, helped to offset the significant investments being made at Gold Bar, Los Azules and the exploration program, primarily at Black Fox. In addition, the company finalized the previously announced $50 million term loan facility during the quarter, which should satisfy the capital needs required for our investments this year. This net result of the capital raise and investments spent and our liquid assets increased by just under $20 million when compared to the end of the second quarter. And to summarize the financial results for the quarter, the lower profitability of the Black Fox and San Jose mines in combination for the continued exploration program for the quarter and the company reported our net loss of $12.8 million or $0.04 per share. Moving on to the outlook for the final quarter of 2018. Firstly, with Mexico, we expect our cost to continue to decline compared to the first three quarters of the year. This is due to the completion of all mining, crushing and processing activities, which ended in the second quarter. And despite El Gallo no longer being in operation after June 30, we will continue to produce gold on a declining basis as residual leaching activities will occur for the next two-plus years. This allows us to maintain and establish presence in the area, as we continue with our studies for the development of the Fenix project, which despite the drop in metal prices, still has an IRR above our investment threshold of 20%. Moving over to Black Fox. Production is in line with our plan, despite the lower grade in the third quarter, which we partially offset with an increase in tonnage. And we aim to keep our per ounce costs at or lower than our guidance. We also continue with the evaluation of our project opportunities in the area and plan to continue with a meaningful exploration program due to the significant success that Sylvain and his team have had so far this year. Thirdly, at San Jose, production levels should increase next quarter. This is in line with historical production profile that has occurred here over the last decade. And we should expect cost at San Jose to stay in line with guidance on a per ounce basis due to this production increase in the quarter. However, we do likely anticipate the increased foreign exchange losses that we saw in the third quarter to continue and there will be the additional export taxes which came into effect in September. Finally, at Gold Bar, we are still on schedule for commissioning of the mine in the fourth quarter of this year, and it is our objective to declare commercial production in the first quarter of 2019. The project is currently on schedule and on budget. And I think it is worth highlighting one point that Chris mentioned earlier. With approximately 97% of the overall project cost locked in, we've removed a significant portion of the projects price risk at this point. And this risk should continue to decline as we complete the remaining work in the coming months and puts us in an excellent position to meet the $81 million construction budget for the project. At this point, I'll thank you again for taking the time to join us today. I'll turn the presentation back to Rob for his closing remarks.

Thank you very much, Andrew. I'd like to start by talking about what I call the invisible gold bull market. And it’s started in January of 2016. But it appears to be invisible to almost everyone. Just look at the performance of the S&P 500 Index and the Dow Jones Industrial Index since January of 2016. The results are quite respectable. The S&P is up better than 32%, the Dow is up even more at better than 43%. So you don't have to look any further, those are good gains. On October 4, The Wall Street Journal wrote that “the pessimism for gold is near total”. And I believe that view is shared by most investors. In fact, if you were to look at the only gold stock in the S&P 500, which is Newmont, and took it to market cap and compared it to the market cap of all the stocks in the S&P 500, Newmont's market cap would represent seven 100th of 1%, almost nothing. So the performance of gold stocks since January 2016, will appear to many is unbelievable. Our share price during this period, January 2016 to present, delivered a gain of greater than 3x the S&P and 2x the Dow and better than 100% gain in 22 months. I believe we are in the early stage of a new bull market in gold equities. And the performance of our shares is not unique. There are a number of gold stocks that have also done that. In the last three months, there have been exploration companies, you're looking at a situation where most of the selling has happened, there's very little volume out there. And when someone sees a story, they like and they start buying it, it's moving some stocks up very quickly. So in the last three months, if you want to look at the chart there, six companies we looked at and they increased in value between 50% and 500% in just the last three months. These are gold exploration stories, small companies. But they are another sign to me that we're in a bull market because if they had released the results six months earlier, it would have gone nowhere. It would have been like pushing the string. Their share price would have just sat there. But we're now in a market and is starting to pay attention to drove results. We're entering the market where profits can be made again by buying gold stocks. I think we're well positioned to participate in this new bull market. We have growing production, exciting exploration results, one of the highest betas in the gold industry, large insider ownership, a good balance sheet, big optionality to copper. And I might say, we have a large, short position in our company and it’s probably take 25 days of the average daily trading to cover it. And you might look at that as a negative, but in a rising gold market, the shorts could find themselves in an uncomfortable position or they have to cover at a higher price than they sold, fueling a rapid increase. So I look at our share price and right now, we have something, we’d be calling an inverted head and shoulders pattern, it looks very positive. And that's also reinforced by my positive view on the gold market. I'd just like to give you a little bit of history on gold equities. In the last 77 years, there have been eight bear markets for gold shares. The last bear market that we were in ended at the end of 2015 and I can say, it was one of the longest bear markets we've injured in the last 77 years and it was the deepest. During that same period, there have been a number of bull markets, we are currently in the seventh,. Of the six preceding bull markets, four of them had gains from bottom to top all over 600% or better. So if you use that as a reference point, out of the six, you could project that – it’s on a very limited scale, we can say there's a 67% probability that you could get a three or fourfold increase from where we are before this cycle ends. And to me that's where it is looking at. The broad market is at record highs and so there's room on the downside. And the gold market was pushed to the floor. And you could say, well, it could go lower, but I can tell you, there's not much left to go lower on. So I think risk-reward is quite good here. And with that, I'd like to open the session for questions. We have some that were sent in. So I propose we address first, questions that are online. We have questions that have been sent in. Operator, if you could ask for the first question.

Thank you. [Operator Instructions] And our first question comes from Jake Sekelsky from Roth Capital Partners. Your line is now open.

Hey, guys. Thanks for taking my questions. Costs at Black Fox for the quarter were mostly in line with 2018 guidance, but they did seem to tick up a bit from the previous quarter. Can you speak to the drivers behind the quarter-over-quarter increase there?

Sure, Jake. Chris, would you like to address that?

Yes, sure. How you doing, Jake? Just could you clarify your question a little bit because our overall ounces mined was down slightly from Q2 and significantly from Q1 – in Q3 so I want to get a better understanding of your question, sorry.

Yes, so I'm just trying to get a handle on costs going forward. On a cash cost basis, we did move up quarter-over-quarter, is that just a function of less ounces mined?

In Q3, the recoverable grade was down from what we anticipated. So as a result, we ended up with lower gold ounces produced. But the other thing we started to do in Q3 have spent some more money on capital development. So we reactivated the ramp at the bottom of the mine to access some new levels coming into 2019 to set ourselves up for success there. So I just joined the company and that have been slowed down and I was very focused, when I came on at mid-August, to start pushing that heading against we can set ourselves up. So I think you'll see coming into Q4, costs will be similar to what they were in Q3, I would say with respect to cash cost.

Okay, that makes sense. And then just switching over to El Gallo, you've already beat 2018 guidance there. Can you just give us some color on where the residual leach activities are at right now, where we should expect them to be going into Q4 in 2019?

Yes, at El Gallo, as you mentioned, we've sort of overperformed on the recoveries. So we did our recovery model for that and anticipate the overall recovery of gold to drop and be more in line with what we were projecting originally, which is in the 1,000-1,200 ounces per month type area. So we expect coming to year end, we will beat our guidance and then next year we are looking at more in the 1,000 to 1,200 ounces per month range.

Perfect. That’s all for me. I’ll hop back in the queue. Thanks.

Thank you, Jake. I’d just like to read a question from Neil Barron, he’s a private investor from Virginia. And he starts off, Rob, congratulations. Thank you for another excellent quarter, stay the course, keep the research exploration funded, keep building mines, producing gold and silver and looking for our next major acquisition. His question is about the short position. He was looking for insights into the short position and when this might be over? Our short position is equivalent to about 25 days of average trading volume, which is high relative to a number of companies in the industry. In looking into it, you can go out and borrow stock and there are various rates that are applied for borrowing stock. And the last I saw was the borrowing rates for our shares was 1.15%. So it's a low-cost to borrow it and we are in 57 ETF indices and mutual funds and these holders often rent out or lease out their positions to people who want to short. So one way to stop that is probably to get your stock registered in your name, if we had all of our shareholders registering their stock in the name, there would be less shares available for shorting and would probably increase – and as a result, that would increase the cost of borrowing, because some borrow rates are up around 5% or 6%. So it might mitigate some of the benefit. And Neil had a second question regarding the silver price being below $16 and the impact on Fenix, and Andrew and Chris spoke about that. At the current price of silver and gold, which is below the numbers we used in our study on El Gallo, it's still generating about 22% after-tax IRR. So we're still pushing that forward. Operator, next question please?

Our next question comes from Heiko Ihle from H.C. Wainwright. Your line is now open.

Hi, guys. Thanks for taking my questions.

Happy to, Heiko.

Hey, I spend some time in your website earlier and play it around with that Black Fox virtual tour that you have on there, which is pretty cool. I think I mentioned that to you before – it led to a pretty obvious question, given there is a virtual tour rather than images. Can you just sort of walk us through which parts have not arrived at the site, and I mean that earlier on this call, someone mentioned that the ADR plant was getting completed in mid-December. I assume that the pricing is definitely done but I mean what about deliveries, are they locked as everything on-site, are there any potential bottlenecks that we may not know about yet?

Heiko, that would be our Gold Bar property rather than Black Fox.

I’m sorry, of course.

It's all right. And with respect to your construction, I'll turn it over to Chris, let him cover up that.

With respect to Gold Bar, we're in very good shape. Everything, all the critical items are on-site. So there's no risk to complete and are we waiting for any materials to show up or anything like that. That's all looked after and we're in very good shape and we're very confident that we're going to be on track to again sort of loading the leach pads in mid-November and have the ADR completed, the last items that were concerned where the MCCs for all the electrical and that was on-site, about a week late, but we’ve essentially caught up on schedule on that. So we're in good shape with the liquid natural gas plants, for electrical power have all been commissioned, that's up and running up. We got power across the site. So we're in very good shape with respect to the construction, we’re very confident that we can deliver on time and on budget.

Great. You mentioned $4.2 million exploration at sites for 2018 year-to-date, I know its early, but any idea we should expect to see for 2019?

In terms of our budget?

Correct.

We're looking around $5 million on Gold Bar.

Just to add on this, it’s Sylvain speaking. Regarding our plan for next year, we have developed a lot of quality target just around the mine site there, that we are currently drilling and will extend to 2019. And we also have very interesting targets developed deeper for large potential Carlin mineralization, that we are planning to add also next year.

Very helpful. Thank you guys.

Good, Heiko. Thank you very much. Our next question that was came in via email was from Steve Ellis, an investor, says I hope all is good with you. After an abysmal 10 months of stock price, I was wondering if the company has any idea when it will turn profitable, even assuming the price of gold and silver stay where they are. So we are investing heavily in growth, in exploration and building roads, hopefully Los Azules, and building the value. In terms of turning profitable, if gold and silver stay where they are today, it's unlikely we will turn a profit next year. But our objective is to be profitable and we're hopeful that our investments that we're making and the expenses we’re incurring will generate assets that produce a healthy profit margin in the future. Next question, operator?

And our next question comes from Mike Kozak from Cantor Fitzgerald. Your line is now open.

Yes, good afternoon everyone. Thanks for hosting the call. A few questions from me. First, just go back to Black Fox. In Q3, the grades of the mill averaged 4.8 grams per ton. I think you mentioned that's a little bit lower than expected. That just kind of slightly negative grade reconciliation or more dilution, can you just elaborate on that a little bit?

Yes, in Q3, we did incur more dilution than we had anticipated with some of our stopes. So we’re spending time right now, redesigning the stopes and especially the hanging wall with respect to ground sport requirements. So we're taking steps to mitigate that. But certainly, if you look at the overall – we overproduced on tons but underperformed on grade and certainly it's a dilution.

Got you. And then just following up on that, I mean that grade, I mean, it's down for four quarters in a row for when you guys bought. I’m just wondering, when – what that's grade going to stabilize that or what kind of average grades you guys looking at for next year at Black Fox?

We’re still working on that process right now, so I can't give you a firm answer on that. But, I think, we can anticipate seeing better grades next year than what you've seen this year and that’s our focus is on controlling dilution, reducing dilution within the stopes and looking at how we handle the ore as well through the entire process to get it over to the mill.

Got you. Okay. And then again at Black Fox, just when I calculate your unit cost per ton in Q3, I get $129 per ton, so that's mined, milled, G&A, everything on the operating front. That's down, I think, over 30% from last quarter and over, I think, 15% from Q1. So that's very good. I'm wondering is that sustainable, is this a function of some of those cost reduction initiatives that you talked about at your Investor Day, what number should we look at on a per ton basis going forward at Black Fox?

Again, we are just working through the plans for next year and what our budget will look like. And I think certainly some of the cost-saving initiatives, especially the global adjustments, the work that the team has been doing there, it certainly going to pay dividends next year, and that will be reflected in the cost per ton. The reason the cost per ton declined a fair bit in Q3, again, was a result of handling all the tons that we have. But we do have excess capacity and we're again looking to match what we have with respect to manpower and equipment usage to match the production and that should in fact move your cost per ton down from where it's been in the past. But I would say if you’re in the sort of the $120, $130 range, it's probably a good sort of thumbs-up for now, for next year.

Okay, that’s great. Last quarter, I think, costs were up at $180 a ton. So that's good to see it coming down. And then just my last question and I'll hop off. I think you mentioned, although, you went through pretty quick, that you have 100,000 tons of ore that was mined and crushed, that's sitting there in front of the leach pad, waiting to get stacked. If that number is right, what – if you can say what is the grade – what's the grade of that 100,000 tons and how to reconcile relative to your reserve model?

Yes so we actually have 100,000 tons of ore, it's not crushed, it's sitting in front of the crushers. So we haven't fired up that part of crushing and stacking circuits, so sitting there basically run a mine ore. As far as reconciling with our model, we actually have a positive reconciliation on tons. We expected to get 67,000 tons, we've got 100,000 tons of ore. And with respect to the grade, we planned on a 0.014 ounce per ton for that ore and those benches, and we see – sorry – 0.01, so actually slightly better than what was planned.

Okay, that’s great. Yes best of luck for next year guys.

Thanks very much Mike. The next question is from Allen Stevens, a long-term shareholder. He said we're doing a great job, especially with respect to management and compensation, aligning interests with shareholders breath of fresh air. He was wondering about Los Azules, any possible joint venture, news there. And what about permitting, PEAs in the next six months? And the likelihood of a deal being struck, provided copper prices remain around $3. We are going to be submitting in the first half of next year a permit application to develop the project. Right now we're doing reconnaissance on the access route into Los Azules, which, as I said earlier, if it works, it would give us 12-month access below the snow line and would provide a very good route for bringing power into the site and would alter, in my mind, the value of this property significantly. Given the capital cost, we are looking for a joint venture partner. We’ve had some discussions. The ones we've had had lot of conditional statements attached to them and weren’t attractive. Perhaps with copper around $3, this is an attractive price. And with the road, we'll be able to put, I was just thinking something else - someone asked about running their 4x4 up the road when it’s ready. But, sorry about that Allan, we'll hear news from Los Azules over the next six months on the road and permit application. Operator next question please.

And our next question comes from Bhakti Pavani from Alliance Global. Your line is now open.

Good morning guys.

Good morning Bhakti.

Just a quick question Black Fox, assuming there is still potential below the mines, just kind of wondering at this point, with the exploration work that you have done, especially at the Black Fox's main side, do you see any potential of extending the mine life of the Black Fox deposit itself over next two to three years? Or do you think you will have to bring in Froome in the next 12 months?

Yes good morning.

Good morning.

With respect to Black Fox, personally, I'm quite bullish on the operational. I think there's significant potential to see growth. If you look at all the deposits through that area in northern Ontario, we typically go down 2,000 meters below surface. We're only scratching the surface down, sort of 800 meters down with the latest pull that Sylvain drilled down to 1,050 meters. Again we’ve got a decent good grade gold intercept there. So I think there's significant potential depth and also along strike as well. We're planning some new areas with the exploration drilling that are quite interesting and close to our existing working, so that could move into the mine plan fairly quickly as we continue to drill that moving into 2019. Overall, when you look at the – the overall idea in my mind with respect to what we have in Timmins, we got Black Fox mill, that's capable of 2,400 tons per day. And if you run 5-gram material through that, 5.5 gram material, you should be able to generate 140,000 ounces roughly per year. So our goal is to expand life at Black Fox, have it continue to operate, and then in conjugation with that, bring in some of the satellite deposits, so we can actually start to bump up the overall production at the mill rate, to essentially try and fill our mill overtime. This id going to take some time to do that, but that’s sort of what our vision is for what we want to do there in the Timmins camp.

Maybe I can add a bit on this. Sylvain speaking. What we see there at Black Fox or in Timmins, the Black Fox Complex it's a complete pipeline, where we have the mine and we are working to extend the life of mine with the underground exploration drilling there, and we have some success, that we are advancing with. And going down with development projects and the pipeline point of view, we have, as you know, the Froome, that is sitting there all ounces in the ground drilled at 12.5 meters spacing and also Grey Fox in the Southeast property area. Our exploration is adding mineralization close to those deposits in the Froome footwall, hopefully that will contribute to make Froome even more attractive and economic. And at Grey Fox, we have the Northeast zone that is recently defined and could provide access to the Grey Fox main deposit. And we have a bunch of new early-stage exploration intersections that could lead us to new discoveries. And I am just talking here on Black Fox property. Now next to our mill, as you know, we have Stock. Stock is the new play, was inactive for 20 years, no drilling on the Stock East, where we have generated our first resource. And this sits on a very attractive geological setting on the big structure, that's the Destor-Porcupine, right geography, right alteration and quite a lot of gold over 2 kilometers strike length that we will be extending next year and drilling over a 3 kilometer strike lenght at Stock. So together it’s a pretty good story, and of course, we are working hard to extend life of mine at Black Fox.

Perfect. Thank you. Just a follow-up. So if I have to model production for the Black Fox going forward, would it be fair to say that the production would remain consistent at the 2018 levels going into 2019? And should I model an increase in production from 2020, assuming that Froome will come online, is it fair to say that?

I would say 2019 you're safe. Froome, we're doing the studies, the economics. Right now preparing a portal to go in. But I'd like to be a little more confident that we've driven over there and are ready for production before saying in 2020, we'll have Froome added to our production. But we'll know in the first half of this year – next year about Froome.

Got it. Okay, perfect. Switching to El Gallo, I know third quarter was quite a surprise when it comes to production numbers. So – and the production is expected to taper off in fourth quarter, but just kind of wondering, between now and when Fenix comes online, do you think the residual leaching activities would help you sustain during that time until Fenix comes online. And at this point what is the expected time line for Project Fenix?

Yes. Also the residual leaching will certainly help us maintain our operations and continue to do work on-site. We have incurred manpower, layoffs as such given that the mining work has stopped, and as again, we're just residual leaching out, but we're moving full steam ahead on the feasibility study. And again, it's planned to be completed mid-next year. And then depending upon the outcome of that, a decision would be made to move that into construction. So we still have a bunch of work to do around that to sort of make that decision. But certainly, if you run through the PGA numbers right now, its current material prices, it doesn't look like it's still quite attractive. But as you know when you get to the feasibility level, you're digging a bit further into the costs and becoming a lot more accurate around that. So, we'll have to see what the results are but if it is positive, which we expect it will be, we'd move into production and you probably got a year's worth of work to get that up and running. And during that time we’ll still be residual leaching, we expect the leaching, the residual leaching to last another sort of another three to four years. And phase one is actually reprocessing all that material on the leach pad running that through a CIL mill to reprocess that. So, we pick up whatever gold we haven't in residually leaching by doing that.

And lastly just to get a hand on the exploration expense across all your properties, what's kind of the expected exploration spend that we should be modeling in fourth quarter?

In the fourth quarter of this year, Bhakti?

Yes,

We're spending about 1.2 million in Nevada, and we're spending just under a million dollars at Black Fox. So the fourth quarter is a bit lighter than the first three quarters of this year. Black Fox was the significant program from the flow through funds, which we completed before the end of September. So it's we're down to one surface rig right now at Black Fox and Gold Bar we're getting some work done but we'll see an increase in activity next year for Gold Bar. And the Black Fox Project and the Timmins region will still see a sizable investment, but it won't be the same as what we invested this year.

And lastly Los Azules?

Los Azules for this year, so, the season is just kicking off, we're waiting to get – we’re waiting for the snow melt to co-operate to get site access, so we can continue on gathering data for our permit application. So we have about 2.5 million budgeted for this quarter but that's going to be dependent on the access and how quickly we get there to spend the funds but we're looking at about votes for that the 2018, 2019 season, we're looking at between $7 million to $9 million depending on the work we can get done on the road access.

Got it. That's it from my side. Thank you very much.

You're most welcome. Thank you. I just wanted to build on Alan Steven's comment about management compensation - the Paulson Fund Management Company a year ago delivered a blistering attack on the mining industry focusing in on performance and compensation. We just built on that. But the 15 largest gold producers in the industry, the CEO compensation between 2010 and 2017 are over those seven years. The total of the 15 amounted to $695 million, which is outrageous, given the performance they had. Of the 15, 13 of them delivered performance that range from – their shares down 21% to 94%. In that same period, we were down 2% and I received over that seven years $3 in pay. I do think the industry has to realign its compensation to reflect the performance and deliver more to the share owners. Before share owners are only too happy to share it when it's going up and improving. I think compensation is one of those big hot topics in the industry and that goes along with share ownership. Most of the people who got those large compensation packages had very little ownership in their company. Any the other questions online? Any other questions operator.

And our next question comes from Robert Silvera from R.E. Silvera Associates. Your line is now open.

Hi, Rob thanks for taking the call. We've been shareholders for before your name was changed, long time and our perspective has always been long-term. Gold is your principal with silver et cetera. It's getting harder and harder to find significant sources, so to speak, locations for gold especially and silver. What is your strategy for long-term? Because we tend to be very long-term holders want to stay with the company stay solid. Love your management, love your approach et cetera. Your history, and that's why I have stayed with you so many years. But it's getting harder and harder to find gold, harder and harder to find these deposits. Do you have any vision for going into – because we know mining, things like the platinum groups, and/or lithium for instance, which has a future in batteries et cetera to branch out into those areas, so that we have a very long-term future for the company?

Robert, I jumped from the investment industry into the mining industry many years ago, and it was a belief that I saw a number of prospectors that showed me property packages and they showed me that – they kept discovering new deposits. My own history with Goldcorp, we’ve took a mine that had been starved of capital for 15 years, it had a short life, or thought to have a short life of three years, had difficult labor and at the bottom, a mile below the surface, we found what became one of the richest gold mines in the world. It defied a lot of the geological thinking at the time. There are deposits still being found and I think maybe they're not on surfaces easily found as they were before. Some are found right in the shadow of the head frame of an existing mine. And there are other new settings. I do believe you're going to see more. Barrick Gold would be a case, although that was 25, 30 years ago. They bought right between Homestake and Newmont in the Carlin Trend for $60 million bought something that ultimately produced 40 million ounces of gold. They're still finding deposits just north of our Gold Bar deposits up at Cortez Hills. Recently Barrick announced a big discovery, their Fourmile discovery and it was right near Cortez Hills. And they're picking them up in Africa, the Fosterville in Australia was a very difficult mine and they've encountered some high grade at depth. We have gone deep in South Africa much deeper than anywhere else in the world with their gold mines about down a kilometer and a half two kilometers that you're down in Timmins, you're in Red Lake, Curtin Lake. Our mines, I think our properties could yield additional discoveries just at depths and we have some good real estate. If you were to take a look at our copper project and if you were to take the liberty of taking our both categories of resources, which you're not supposed to do but that would be about 30 billion pounds of copper, if you put that in to a gold equivalent it's more than 70 million gold equivalent ounces based on our PEA of $1.14 a pound production cost that be equivalent to about $500 an ounce production costs and its modeled to have a 36 year life.

So, you do see a long-term horizon as far as being able to successfully mine gold and silver. And not what I read so many times that – these are being so hard to find. By the way I've owned Goldcorp also since the days you were there at Goldcorp. So I mean I've been with you for a long, long time and when you left Goldcorp and formed McEwen, I have stayed with you and very pleased with what you've done. But I wonder are you willing to look and branch out to for instance the platinum groups because we need platinum and we need palladium catalysts all that stuff.

Yes well part of my trust has been gold and gold is money and it's a monetary asset not an industrial asset as much but when I was running Goldcorp we did have some industrial mineral operations that provided steady long-term cash flow and I'm not adverse to that type of investment.

Good and I am just trying to get a perspective because as I said we're very long-term holders and I believe in the management pretty strong.

Thank you very much, appreciate that Robert.

Thank you. And hopefully the price of gold will get real one of these days. We'll talk to you later.

Robert, if you have a moment Sylvain, he is our Head of Exploration, just wanted to make a comment.

Sure, sure go ahead.

Yeah thank you Robert. It's actually a very good question you're asking there. I'd like to add a bit of our view on the exploration potential, how can we increase our chances or probability to be successful with our exploration program. One of the key points is that we try to focus our exploration efforts in the right regions. On the right projects, but in the right region. And we are currently investing and focusing exploration in the highly endowed regions. I'm talking here of the regions that hold hundreds of million ounces of gold. They are not small regions, they are not small deposits and those deposits, those $100 million ounces of gold sit along very well defined structures. In the Abitibies those are the breaks, the Destor Porcupine where Black Fox is located. And in Nevada the trends that host all the large Carlin gold systems, including the Barrick-Newmont deposits. So, this is where we are and this is where we believe we have a lot better chance to be successful. And this is where discovery keeps happening until now. Even if those came sometime 100 years of mining and exploration, there are still new discoveries happening. So the maturity level is still relatively low because success keeps happening there. So we have a strategic position, if we look at the local scale and Rob mentioned that and as you probably know, Gold Bar is located right along the Cortez trend, right along the southeast of the Barrick large cluster of deposits. And we have the right geology, the same geology, the same type of mineralization, the same type of deposits. And the other important things about Timmins, Black Fox and Gold Bar, we were just starting a year ago exploration on those properties. So we acquired Primero in Q4 of 2017 and for Gold Bar the project was inactive for five years and we are just restarted again in Q4 of last year. So it’s a year of exploration and what we have generated as new resources, new exploration, drill intersections and development of new targets is extremely positive and gives us all the confidence that we are at the right places to keep delivering good results there. And finally, those good regions, Ontario and Nevada, are some of the best mining jurisdiction in the world when it comes to investment and stability and very low political risk and security risk. So all this to say that we try to focus our efforts where there’s a lot of gold or there’s a large deposit on the right property along the right structure at all scales and based on what we see with good encouragement, we keep advancing with strategic and exploration investment.

Good. What do you – from a geological standpoint since you brought that up, and I do love the fact that you’re in relatively stable places, how do you view Argentina and where we are as far as future goes, they keep throwing taxes around in their monetary situation, et cetera. How do you view that area?

It’s a good question. It doesn’t have a long history of mining. But it does have a long history of populous governments, bout to the relation. And so we’re watching it. They said that the tax they have reimposed on exports will be there until 2020. And I think right now they’re desperate foreign exchange and the exports seem to be the only additional source they could access. But if they want to attract large foreign investments, they’re going to have to deal with that. So I would expect by the time we start thinking about developing Los Azules will be okay. It does have an adverse impact on our San José revenue.

Do you find when working with the people down there, a cooperative spirit in Argentina?

Generally, yes.

Good. Okay. Well, thanks very much, Rob. I really appreciate it and congratulations and thank you for the way, you run the company. I’m very, very pleased within. Thank you.

Thank you very much. Rob and appreciate the comment.

Okay. God bless you.

Bye.

Bye. Okay. There are no further questions online. Operator, are there any further questions?

We have one last question, it’s from Bill Powers, a Private Investor. Your line is now open.

Hello Bill, good morning.

Hello, Rob. Couple of quick questions. One, I guess, what is your projected cash flow? I know -- I believe it’s all once for Gold Bar in the first year, it was projected at around $35 million and I was wondering if that is still holding through as far as where you’re seeing next year unfolding?

Thank you.

Hi Bill, the cash flows as we’ve revised the mine plans, particularly recently we were seeing kind of cash flows tapering off in 2021 and 2022, so the guys have been going back to look at those cash flows for Gold Bar. And in effect we’ve been trying to smooth out, we get some stable performance there. So next year, some of that has come out of next year. We are looking at over $20 million in terms of cash flow for the mine site next year, assuming 1250 gold. And then effectively seeing so comparable similar levels for the following four years after that. It’s not as high as new in the feasibility study, but the feasibility study had a bit of gap in 2022 in particular, which we’ve been looking to address with revised mine plans as well as minimizing the upfront OpEx that we planned to incur to get going on the mine too.

Okay. And then I just have one more question regarding slightly you guys have out on your website regarding its – the sulfide mineralization that’s from the Cabin Creek area. You guys have a couple of nice picture or a nice picture of some core samples from Cabin Creek area. I guess, this goes back to your a little next to your drilling, what you plan to go into the deeper sulfide next year. Could you just tell me little bit about where this came from and kind of – I guess, is this historic drilling that you were able to core sample you’re able to achieve, receive from previous drilling or – and I guess, how is this connected to what you’re planning to do going forward?

Yes, Sylvain here. That’s a good question. And as you know, what we have at the Gold Bar, it’s a heap leach oxide open pit, but we know that there is a component of this system that will be hosted in the sulfide. And historically some exploration holes like the one that you see there on the photo, this is typical Carlin type system into sulfide and it’s high grade. So for us, it’s a very good indication that this style of mineralization exists at Gold Bar. And this one is lateral to Cabin Creek and historical drill core that you’re seeing there. But we work with former Barrick geologists and actually our exploration manager in Nevada is a former Barrick geologist, that worked at Gold Strike. And when those people look at this core, they tell us this is exactly what we see at Cortez. This is what we see at other large Carlin gold systems. So what we have there at Gold Bar it’s along the trend and the project or the property scale has all the right ingredients for hosting a larger and hopefully higher grade sulfide deposit. And all the past exploration stopped at the limit of the pit depth or when they start to hit sulfides but we know that mineralization is open into sulfides along the right stratographic horizon. And then, we are also developing the deeper targets, which stem beneath a unit called the Lone Mountain and this lower stratography, that could host this type of larger sulfide deposits like the other large one in large Nevada, remained basically untested on our Gold Gar property. And next year we are planning seismic geophysical surveys and are defining targets to start drilling for such deep deposits. So we have the near mine, extension of non-mineralization and that is a bit more shallow exploration. And part of that we want to initiate the deeper exploration and we believe, as we said, we have all the right ingredients to grow this Gold Bar deposit.

Okay. Well thank you very much for the insight into that.

Thank you. Operator, any further questions.

I have no further questions over the phone line.

Thank you very much one and all for joining us today. Best wishes for a successful investing.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect. Everyone have a great day.