McEwen Mining Inc. (MUX) Q1 2020 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen and welcome to McEwen Mining’s Q1 2020 Operating and Financial Results Conference Call. Present from the company today are Rob McEwen, Chairman and Chief Owner; Peter Mah, Chief Operating Officer; Meri Verli, Chief Financial Officer; and Sylvain Guerard, Senior Vice President of Exploration. [Operator Instructions] I will now turn the call over to Mr. Rob McEwen, Chief Owner. Please go ahead.

Thank you, operator. Good morning fellow shareholders, ladies and gentlemen. It’s been over two months since the World Health Organization declared the COVID-19 virus, a global pandemic. Starting in late March and into early April our operations were temporarily shutdown to protect all of our employees in compliant with government imposed restriction. I’m delighted to say that none of our employees or the employers of our contractors have contracted the virus. In part, we hope this result is because of our rapid action and the biggest measures that we put in place. As of today, Black Fox is back up operating normally, Gold Bar is starting to increase activities with a focus on preparing for production. Government restrictions in our San José mine operating at 50% capacity and our El Gallo mine is limited to residual reach. We think these government restrictions will be lifted in June. Let’s turn to Gold Bar. Last year was a disaster. I have, and I’m sure you hope our problems would be far behind us, but this year, we have experienced a significant hit. This quarter, we are reporting a very large noncash write-down of our Gold Bar Mine. This is a result of a revised geological model that reduced the size and structural interpretation of the deposit. This mine was to be a star asset for us, but so far, it is a clearly one an enormous screwup. Many professionals tend to work for us and others who were technical consultants made the decisions that compounded to bring us to where we are today. We’re not ready to close the mine and write it off as a very bad and benefit decision for several reasons. We believe there are opportunities to improve the operation, reducing costs and also defined additional resources through exploration. Both Peter and Sylvain will speak to these issues later in the presentation. Let’s talk about our financial results for the quarter. First, our liquidity at the end of Q1, our liquid assets were $31 million compared to $46.5 million at the end of the year. Working capital was $25.3 million. However, we are forecasting that our working capital will decrease below the required working capital levels required by our debt covenants. Therefore, we are evaluating several alternatives to refinance in order to extend and amend the turns of our $50 million debt. Materially, we have an alternative financing in place, which addresses the risk created by a potential working capital shortfall. Our auditors have added a growing concern language to our financial statement, and that is reflected in our Q1 10-K report. Assuming a constant – the current oil price remains constant, and we’ve been able to refinance the debt and amend the turn – extended churn, we believe we have adequate cash to fund the company through 2020. The big item on our balance sheet and income statement is the impairment of the Gold Bar Mine. We had said, a consequence of changes to our resource estimate related to mine. Our finance department, our auditors and then an external property evaluators, that information we put together and performed a recoverability test using a discounted cash flow method, employing a 9% discount debate. It also uses which I find hard to believe a long-term gold price assumption of $1,430 per ounce. The conclusion was that the carrying value needed to be impaired, as we are recording a noncash impairment, reducing plant and equipment and annual property interest by $83.8 million in the first quarter. When we combine the impairment with $6.3 million spent on exploration and some projects plus G&A, the consolidated net loss for Q1 was $89.2 million or $0.25 a share, excluding the impairment, a net loss of $15.4 million or $0.04 a share. I would now like to provide an introduction to our new Chief Operating Officer, Peter Mah, who joined the company on April 2. Peter is someone who has worked with before at Gold Corp. He is a very accomplished engineering executive, who is a believer in innovation, likes to challenge conventional wisdom and I have to say that he has been working flat out for the last six weeks to put in place strategies that we believe are going to turn McEwen Mining into a performer. I will now ask Peter to continue with the presentations.

Thank you, Rob. I’m very excited to be joining McEwen Mining and the opportunity to work alongside you again. McEwen Mining has a bright future. We have some near-term operational challenges to overcome a stellar pipeline of resources and discoveries with which to grow. Before providing the operations and projects update, I’d like to share some of my background and how my experience can be applied to the challenges and opportunities at McEwen Mining. I’m an engineer with a background in mining and mineral processing and earned a master’s degree in open pit and underground rock mechanics. Over the past 30 years, I’ve worked as an engineer, a supervisor, manager, an executive in open pit and underground operations. My experience spans feasibilities, new mine builds, expansions and a turn around. I also worked in the Red Lake Mine for nine years in varying capacities. My experience as Mine General Manager at the Victor Diamond Mine has taught me the importance of blending challenging clay rich ores and material handling systems designed to optimize processing efficiencies and throughput. At the Musselwhite Mine efficiencies in transverse open stopeing and conveying will support the transition to production at our new Froome project. Speaking of Froome the ramp development advanced in Q1 2020 and first store is expected in Q4 2021. The firm deposit as a resource grade of 5 grams per ton is expected to provide two to three years of mill feed productive low cost transfers open stope mining method. Continuing with the update on the growth of the Black Fox complex, the high grade mineralization at Grey Fox project, Black Box Mine and the Stock mine represent high growth potential to utilize the excess capacity at the Stock mill. High grade open pits are being evaluated at the Grey Fox project. Permitting is set to begin in Q2 2020 and expected to take approximately two years. In addition to the open pits underground scenarios are being evaluated. The Grey Fox project is expected to grow into a long life core asset for the company. The company has received permit or received the permit to dewater the stock shaft and is evaluating the options and costs to reaccess to mine via the existing shaft. Resource definition drilling is required to further advance this exciting discovery. High grade intercepts at stock use are also encouraging and there is strong potential for underground and/or open pit mining. At the Black Fox Mine lateral development was boosted in Q1 increased or faces and access to new stoping areas in the west side of the mine. Other costs and productivity improvement plans include reducing stope dilution through improved drill control and capable through trials, more focused exploration and mining in the upper part of the mine to reduce haulage costs, ground control optimization, reductions in rehab and improving development rates. Moving to Nevada. Results at the Gold Bar Mine were disappointing. An estimated 25% to 35% reduction in contained ounces in the gold pick deposit is expected. Drilling resource modeling updates and determination of the best business case going forward is ongoing and expected to be completed in early Q3. Key drivers for rising costs and underperformance in 2019 is being analyzed for improved solutions. Some areas for improvement being examined our resource reserve definition drilling to improve mine planning delivery, improved stockpile management and blending, better unit mining costs and productivities with a dispatch system, assessment of run-a-mine heap leaching, improved grade ore and blast control practices. In April the mind began a stage returned to operations that included maintenance, site cleanup and limited stripping for the next drill ready ore in west pick and processing of stockpiled ore. Ore remaining remains on hold as management adjust plans for operations. Gold Bar South is in the permit stage and is expected to begin production in the second half of 2021, ongoing metallurgical work indicates favorable metallurgical recoveries in excess of 70% with a potential for run-of-mine heap leaching. The mineralization starts at surface and exploration is plan targeting the extensions. In Mexico, our El Gallo mine continue to produce gold from residual leaching. The Phoenix project study demonstrates robust economics and we expect to finalize this study in the second half of 2020. At our San José joint venture mine in Argentina operations remain at 50% capacity due to the government travel restrictions. I will now turn the call over to Sylvain to take you through the exploration update.

Thank you, Peter. Our exploration over the last two weeks is focus on three properties, Black Fox and Stock interment, Ontario and Gold Bar in Nevada. During this time, through our strong commitment to exploration, we had the results that are clearly and beginning the high quality of our projects. Our drill programs have quickly driven the establishment of a discovery process that is contributing to our resource growth and to the definition of an outstanding project development pipeline. Here are some key highlights starting with Nevada. At the Gold Bar Mine, the startup of mining at Gold Pick West indicated lower grades and tonnage than expected and has led to our revision of the resource model with more emphasis on the geological and structural controls of the organization, which is now better exposed in the open pit. To assess with the model review and to derisk short-term mining, we have designed an in-pit drill program consisting of RC reverse circulation and core drilling. This drilling started in late March and about 15,000 meters have been completed so far in Q2. During results, as shown on the slide, are confirming significant gold mineralization over the respect area and will assess reinforcing our model. Significant drill results have been defining, first, in-pit mineralization derisking mining with results such as 5 grams over 64 feet, including 11 gram per ton over 70 feet and 3.4 over 90 feet. Also strong intersection beneath the revised pits that’s up 2.9 grams per ton over 82 feet, 1.2 over 144 feet, and 1.7 grams per ton gold over 225 feet and potential to extend mineralization to the Southwest of Gold Pick, where are we at an intersection of 0.9 gram per tonne gold over 120 feet outside the pit boundary. And update resource estimates using recent pit mapping all is to recall a new drilling information and the revised mine plan are expected to be completed by the Q2. In 2019 significant drilling or cure of the Gold Bar South deposit, where we have reinforcement jobs called instructional understanding and increased confidence in the resource of this quality satellite deposit to the main Gold Bar operation. The upside potential to grow the resource of the Gold Bar South, which sends out 63,000 ounces measure indicated remained strong and the drilling program expected to start later in Q2 will focus on three main targets. First, the South extension as a deposit is open for the last drilling in the – this area returning significant results as shown on this slide. Second, the Northern portion of the deposit which was only partially tested, and finally, Northeast Southwest structures that control higher grade mineralization. Moving now to Timmins, at the Black Fox Mine, our focus or resource and reverse expansion is on the West side of the mine from 300 to about 700 meter depth. We have generated multiple positive intersection including high grade pits typical of the Black Fox style of mineralization suggesting a potential losses increase over these targets area. The most significant recent intersection, such as 79 gram per tonne gold over 2.9 meter and other high grade pits are shown on the figure where the yellow highlights are indicating 2020 drill results. At Grey Fox now, we are pleased to announce that the mineral resource estimate for the Grey Fox deposit has been updated with exploration drilling completed in late 2019. The updated resource estimate contained 888,000 gold ounces at 7.1 gram per tonne gold in the Indicated category, and 173,000 gold ounces at 6.6 gram per tonne in the Inferred category, representing 43% and 30% increase respectively compared to the previous estimate. The Grey Fox gold mineralization – mineralized system is large covering an area of 1.5 kilometer by 1.5 kilometer and it's compose of five distinct deposits located on our Black Fox property, 2.25 kilometers Southeast of the mine. We believe the potential to grow the Grey Fox resource is excellent. Open pit and underground mining scenarios are being evaluated for the potential of developing the Grey Fox deposit. More information above these evaluations would be provided later in 2020. On the Stock property, our exploration is focused on the 3 kilometer trend reflecting a strong gold system that all of the Stock mine and newly defined zones of mineralization. The main highlight of our 2019-year program is the discovery of the significant use on the organization at Stock West. We have a total of 31 drill holes completed into this area. The gold mineralization is associated with quartz veining and [indiscernible] pyrrhotite hosted in the coarse-grained clastic rock. During the intersections average is around 5 gram per tonne gold over widths ranging from 15 to 20 meters and occurs in the area measuring 265 meter along strike and 200 meter vertically. The new mineralized zone is located less than 350 meter from existing underground development at the mine and within a kilometer west from our mill. The Stock West remains open in all directions, and our exploration program is designed to produce an initial mineral resource estimate and also to test the extension of the mineralization in order to assess the potential size of the discovery. Our exploration effort at Stock produce results quickly with the first infra resource of Stock East in late 2018 and then we upgraded it to indicated resource category at the end of 2019. Stock East is a shallow zone of mineralization of thing 121,000 gold ounces located within one kilometer east of our processing mill. Our 2019 program generated some of the best intersections so far at East zone including 63.6 gram per tonne over 6.2 meter and 34.7 gram per tonne over 6.5 meter suggesting potential shoots. The historical Stock mine, we have demonstrated that the mineralized gold system is open the depth extension of the old mine with a deep intersection of 27 gram per tonne gold over 7 meter, which include 0.8 meter drilling 300 gram per tonne gold. I prefer, it's called that of approximately 900 meter. To conclude, but I would say that we are well positioned to keep adding value going forward based on solid exploration foundation we have established in payments. In only two years, we have developed a strong exploration pipeline which goes from target delineation and during testing to resource estimations. Our rate of deal success is increasing. We have strong positive momentum and remain focused on the few high quality targets including new discoveries that are showing excellent upside and development potential at Stock West and Grey Fox. In Nevada, at Gold Bar, mining at the Gold Pick deposit reveal a different geological filling and control of the gold mineralization then was the foundation of our feasibility study. With this new understanding of the geological setting our in-house technical team believes there is more gold to be found on and around our highly prospective district scale of Gold Bar property. That concludes our presentation. We will now open the call to questions. Thank you.

Thank you, Sylvain. Operators, please open the session for questions.

Thank you very much. [Operator Instructions] Our first question comes from the line of Jake Sekelsky of ROTH Capital Partners. Your line is open.

Thanks for taking my questions and I hope everybody's well. It looks like work at Grey Fox is progressing pretty well. I mean, it's good to see resources expand there. Are you able to just provide any color on the environmental studies and permitting work that might need to be done as you work towards bringing it into the mine plan?

Sure. I'll just ask Peter to jump in on that question.

Yes. We actually have all our AFE in draft form ready to approve various works on baseline, water management, water studies the movement of the Creek that our North and South pits, our we'll mine through so that sort of early baseline information and development of the project description.

Okay. And have you seen that process slow at all just given the operating environment we're in right now with the pandemic or?

No, actually we haven't seen any impacts on that. There's been – we've been all working virtually and engaging with our consultants through the RFP process and the various departments. So we've not seen any real impact there.

Okay. That's helpful. And then just at Gold Bar, it looks like activities right now are focused on input drilling at Gold Pick and some stripping activities. Just trying to get a handle on the budgeted costs for these during Q2 and going forward. So are you able to provide any insight on that?

No. Not in this time. As mentioned, we're evaluating the plans forward and we'll come forward with that. And at the end of Q2, early Q3 as mentioned.

Okay, fair enough. That's all I had on my end. Thanks again.

And our next question comes from the line of Bhakti Pavani with Alliance. Your line is open.

Good morning guys. Thank you for taking my question. I would like to start with Gold Bar, if I correctly understood you had about 15,000 meters of drilling completed at Golden Pick. Just wanted to understand, do you think that drilling is sufficient enough to put out an updated resource or do you plan to further the drill and de-risk the deposit?

Sylvain, would you like to answer back these questions?

Yes, sure. Good morning, Bhakti. Yes, our drilling so far have been focused on the West Pick part of the Gold Bar deposit, because of this is where we are seeing short term mining. So we want to de-risk. We want to also hopefully regain the additional answers that is currently lost our falling under the revised pits scenarios and we also testing extensions around the pit at the same time. This drilling is critical for those reasons and other things that the land is to move to Gold Bar South, where we see good upside to increase the resource there and to come back up Gold Bar for follow up drilling, including on the East side of the deposit. We will have a resource update at the end of Q2 based on the revise interpretation of the structural setting based also on all of the available historical new drilling information. So to answer your question, this is key information that will contribute to new resource that would be completed by the end of Q2.

Okay. Thank you. One more question with regards to Gold Bar, you did mention in your prepared remarks that you have slowly started stripping and currently processing stockpiles. At this stage, what level of stockpiles do you have at site?

Peter, could you address that question?

Yes, we had some stockpile material left just before shutting down for COVID to below 60,000 tonnes that will be used up in the next four or five days. And then we have another stockpile of broken ore in West Pick about 60,000 tonnes that we're contemplating milling. But we haven't taken that decision yet.

Could you maybe provide some kind of color on the grade?

Sorry, I couldn't hear the question.

I said, could maybe provide some color on what kind of grade does is there in the stockpile of the broken ore?

I don't have that off the top of my head. But yes, I'm sorry. I don't have that answer for you.

No worries. Moving to Black Fox, you have pretty good results at Grey Fox and the drilling results shown in the slides looks pretty good. So at this point you guys are still developing the access plan for Froome, is that on target and with the drill results present to date, what does it imply for Black Fox? I mean, do you see that – do you see the mind life expanding within the Black Fox mine or do you think Froome will be replacing the Black Fox mine over the next two years?

Yes. So the decline is about – straight line about 160 meters in, we've got about 800 meters to get to the ore. The schedule that I quoted earlier is taking into account where we are currently in the decline and targeting first for Q4 2021. The idea is that we'll extend hopefully on this West Flank the new discoveries that Sylvain’s team and exploration have found in the Western area of Black Fox that will actually extend out Black Fox mining itself as well. But initially it was planned. Black Fox would finish mining and Froome would start the additional development I mentioned earlier, targeting some of that West Flank area that we're drilling now and having good success on hits. So, my expectations is we’ll see some improvement on the Black Fox mine side as well.

That’s great. Thank you. With regards to advanced projects, there was about a $1 million charge in Q2 with regards to Canada, I’m assuming that’s related to the actual development for Froome. Question is, how much of more development cost is remaining for the development of Froome at this point? And the second question is with regards to the $1 million cost in Mexico, which is related to Project Phoenix. So, how much of that cost still remains to be incurred in Mexico at this point?

Meri, if I could ask you to provide those numbers, please.

Sure. So in terms of Froome, we have forecasted another around $10 million, $10.5 million for the rest of the year. And then Phoenix there could be, just to know for Phoenix, it includes also property holding costs. So, we might have something similar for the rest of the year.

So, is it going to be a $1 million a quarter?

No, not the quarter. Not the quarter. Like, something similar, for I think it comes at the second half of the year. So, around another $1 million and there may be some like really small amounts.

Got it, perfect. Thank you very much. That’s it from my side, guys.

Thank you, Bhakti. Next question.

Your next question comes from the line of Adam Graf of B. Riley FBR. Your line is open.

Hello, Adam.

Hello guys. Thanks for taking my call. Just question, Rob, on the overall graphical development plan that you guys presented to us last time. Has there been any updates there on schedule? I think you guys mentioned a little bit about this potential for Western Black Fox development. Has there been any update there on the overall coordinated plan?

Not in terms of schedule. No, it’s still a couple of years out, being possible production.

And then just as far as the development over to Stock West, are you guys holding off until your breaking – broken through on Froome or what’s the development plan there just to drift over to the Stock West?

Peter, do you want to comment on that?

Yes. We have about 250,000 ounces of mineral inventory there that we’re targeting, which is enough to pull the trigger on the development, but we’d like to get a better resource definition drilling done first. And as well the permit I mentioned that we received to dewater the shaft – the main shaft at stock is another option we’re looking at that could connect into that decline and to any potential remnant mining that would be in Stock mine. So, we’re evaluating the costs and the trade-offs of what’s the best way to go about that while further drilling is required.

Could you guys get into the Stock mine to do some remnant mining there prior to the achieving permits for Grey Fox?

Yes. The Stock mine is permitted and as I mentioned, we have the permits to dewater now. And that’s exactly the opportunity we’re examining its early stages. We’re getting some quotes on what it would take to dewater the shaft and restore it to your production shaft or an exploration shaft. So, I’m just going through some of those evaluations over the next quarter.

And would that be – you’d be looking at that prior to development of – or prior to at least to drifting over to Stock West to do underground test mining and structural confirmation and all that?

That’s a possibility, as you probably are aware from previous communications. It’s a fairly lengthy, about – 2.5 kilometer development program for Stock West. So, we’re looking at opportunities. Is there any way to bring more to the mill quicker and get access for drilling, especially, the deeper targets that Sylvain mentioned, it would be helpful if we could get down on some of the lower levels of the existing mine, provide some drill platforms there. So, those are some of the things we’re looking at and hopefully, you can come forward with some exciting options on how to develop that mine.

Would you need additional permits for if you were to open pit Stock East? And if you didn’t, at what kind of – I know it’s lower grade, but at what kind of gold price is all of a sudden that ore become interesting, because you have so much extra mill capacity.

Yes. We would need extra permits. We haven’t actually advanced that even though they’re a fairly nice resource there. It’s near proximal to some water and a river there in some low lying areas and as well it’s open further to east and at depth. So, we’re not sure, the size of it yet, to be able to go to permit and as well as we’ve hit some really high-grade intersections and sheets. So, there’s an underground trade-off versus a pit and more drilling to take that decision.

All right, great. Thank you very much.

Thank you, Adam.

And our next question comes from Heiko Ihle – sorry, it comes from Mike Kozak [Cantor Fitzgerald]. Please go ahead. Your line is open.

Hi guys. Thanks for taking – hi, there. So, just looking at the balance sheet here with the Gold Bar challenge is going to impact on near-term cash flows for the company, I mean to what degree can you cut back on some discretionary spending? And then are you, in fact, looking at cutting back on things like exploration G&A, sustaining CapEx? And if so, by how much?

I’m assuming the current gold price stays or goes higher and we can refinance the terms under our debt. We should have adequate capital to go through the year. We’ve been looking at about $5 million of exploration at both Black Fox and Gold Bar and about a $1 million in Mexico and price has changed then when we change our plans with them.

Got it. And I think the first principal repayments on that debt started, I think Q3. So, I mean presumably, you want to refi that debt, I guess in the coming months?

Yes. That’s correct.

Okay. All right, thanks. That’s it from me.

Okay, good. Next question.

And our next question comes from line of Heiko Ihle of H.C. Wainright. Your line is open.

Hello, Heiko.

Hey, name of mine got ready to ask and then got skipped over. Thanks for taking my questions, guys. I hope everyone on this call and their families are staying safe and I’m sort of grateful to you guys still over $6 million exploration given the longer-term potential of the assets there. Just to follow up on one of Jake’s questions earlier a little bit. I mean, in regards to Sylvain on your remarks, you spent a decent amount on the pre-stripping at the Gold Pick West pit. Should we expect to see expenditures in that regard in Q2 and Q3; and building on that, I mean how much potential is there totally in mining in that area and essentially just move it elsewhere?

Peter, do you want to talk about that?

Well, we know West pit is a positive business. So, we’re just looking for the best way to go about and carry the mine forward, and then make improvements to the overall cost and productivities before we restart. Once we get the updated resource model that Sylvain mentioned, we’ll rerun our pit optimization of a better view on strip. But at current, there’s nothing major in terms of stripping that’s the change from the past and what was the second part of your question?

How much – I think you’ve got it pretty well. I mean, it was – how much do you seem expenditures and how much is there in order to could you possibly delay to mining there?

Delay the mining?

Just like move it elsewhere.

Oh, and go after like Pick East or something.

Correct.

Yes. I mean, we’re right on top of the Pick West ore, our current thinking is to mine out Pick West and then move to Pick East. But there may be an opportunity to come down the mountain there, and do it differently than previously. So, once we see the resource update, we’ll be looking at those scenarios.

Got it. In regards to the listing, I mean close to 90% of your volume is on the NYSE, I look this morning, it was 4.2 million [ph] shares versus 480,000 on average per day in Toronto. But clearly, the listing is extremely important. Can you walk us through some of the timelines that you have that you’re willing to disclose, but when you’d have to consider like a reverse split or like any other options in order to make sure you can stay listed given that there is a variety of a pool processes that would be needed if you were to do some of the tougher choices?

Sure. Well, one, it’s not our intention to do a reverse split. And the New York Stock Exchange and neither that COVID virus issues has pushed the deadline for compliance yet that requirement of being over $1 out to early December. We’ve got a good runway in terms of timing, you’d have to give notice to shareholders and so you probably have to be looking two months before that, so into early October.

Okay. So that’s actually much more compressed than I thought it would be. I mean, because I mean at this point, six and a half months, but it sounds like you’ve got four months left to come back and presumably, that’s actually going to happen.

Yes.

On that same topic, can you venture a guess on your G&A savings during Q2, and thereafter, given to you essential stoppage of travel, conference attendance. Are you looking to maybe, downsize your office a little bit? How meaningful of a number do you think you can get with everybody working from home and how sustainable do you think it is please?

Well, we had a lease. I’m not sure when our office lease – our head office lease expires. From what I can gather, I mean people don’t mind working from home some of the time, but they don’t want to do it all the time. So, we still need an office presence. We have not investigated downsizing the office, although that thought has been moved around, because of the familiarity people are getting with using technology to work remotely. We haven’t – I can’t give you a number on Q2 or Q3 as to where we can – the savings we might achieve at this time.

Fair enough. Excellent. I have someone else who scooped up at the house – let’s we can all go back to an office at some point in time. Stay safe, guys. Thank you.

Thank you, Heiko. bye. Next question.

Yes. Our next question comes from John Tumazos of Very Independent Research. Your line is open.

Hello, John.

Good morning, Rob. Thank you for taking my call. Did the Gold Bar charge wipe out all of the PP&E, but none of the working capital?

Meri? Is there anything to add?

Yes, of course. We haven’t really finally allocated the charge between – basically between PP&E and mineral interest. But we’ve determined that the fair value of mineral corporate or net assets, let’s say, it is $47 million. We’ll be splitting it and allocating it at a certain point in Q2.

Thank you. Rob, the issue with the bank covenants reminds me of a training Class I was in, and is a graduate student for commercial bank lending officers at Morgan Guaranty Trust Company.

Yes.

And a fellow named Charleston Chatfield III, give to our presentation on relationship banking and winning back the firestone account. And I’m a little bit confused that the lenders like your company enough to loan you money and now at sort of an awkward time, they’re enforcing the covenants and have triggered a going concern. It would seem a lot simpler if they just charged you a fee to waive the covenant, which banks like to charge fees or sat down with you privately to seek a remedy before it sort of triggered all these different events. Are the lenders just fundamentally uncomfortable with your strategy of assembling assets and drilling exploration? Or do they like the managers that departed more than the managers in place? Or are they just trying to make you write a personal check for $50 million to settle the loan? It’s just it’s sort of a weird situation. And to the extent you can make any comments, if you understand the situation yourself, I’d appreciate your insight.

Sure. We’re not – we haven’t violated the covenants on the loan for the first quarter. It’s the second quarter that we’re concerned about and going forward. The gap was structured with a three-year term, but a partial repayment of principal starting on the second anniversary. So that’s where we start getting into working capital issues. That – and that would amount to about $2 million a month or about $10 million for the year, principally in impairment. They haven’t – the lenders are concerned, and they just had this covenant that you had to maintain a minimum of $10 million working capital at the end of each quarter. But we’re just looking ahead. And that’s where it’s the partially payment and the working capital clause that got the auditors to say there’s a growing concern over the next 12 months. And we haven’t gotten to saying, I should write a check. We have talked to another party or two. And their creditors, I have half of that yet. Creditors put up 25 and I was another creditor for 25. So and I looked at it and said, “Well, I think we’re looking to refinance. And if we can refinance, we seem to have some agreement at the moment that we could extend the term and lighten or light and extend the partial repayments. That’s where we got. And as to that creditor in the half of the debt there just they like it, but they didn’t expect nor did we the problems that we’d encountered with Gold Bar.

Thank you for the explanation. The Grey Fox seven-gram per ton material seems really good. Given the need to do some development to ramp into it and other logistics, dewatering, ventilation, all the infrastructure to get into it. How many quarters or years out or is that seven-gram material from going through the mill?

Peter, would you like to speak to that question of John?

Yes. So the resource just came out last week. So we haven’t actually updated the open pit and underground scenarios for the announcement you’ve just heard from Sylvain. So, I really can’t speak to that yet. I think what I can say is, the new discovery at Gibson is an exciting discovery potential another open pit or third one, we have the 147, the contact and Gibson, and then looking at how undergrounds fit around those and transition and doing those trade-offs to look at what has the best margin and returns and what combinations of open pits and underground mining. So quite a bit of work coming ahead of us there.

Do you think it’s a year to figure it out and then a couple of years to get into it or longer?

No, I think it’s probably six months of work, mine planning where it won’t take that long, but other technical evaluations we are proceeding with the Grey Fox pit permits on the 147 and the contact, and we’re probably going to roll in initially expedite the work on the Gibson pit and include that in the project description. So our first priority would be the open pit. And then making sure how our footprint fits together and how the underground fits together with those pits so that we’re not sterilizing good ore still a number of trade-offs need to happen there, but we are proceeding with the permitting for the open pits.

It’s a little bit like a basketball game where you got your three-point shooter on the bench with the NYSE listing requirements in the bank loan and all these different pressures on the company, that seven-gram material going through the mills, you’re three-point is you need the same basket?

Yes. We’re very excited about it. It is harder ore, but we have to be a bit measured in how we bring in, in what quantities relative to the mill capacity. So that’s other parts of the trade-off and how it all blends together. With the rest of the feed. But yes, we’re very excited about it. I mean, very high-grade pits and very attractive underground ore, and we’re certainly going to be going on it as hard as we can.

Thank you.

Thanks, John. Next question?

And your next question comes from the line of Bill Power, Private Investor. Please go ahead.

Yes. Thanks for taking my call.

Hi, Bill.

Hi, Rob. And thanks for taking my call this morning. I had a couple of different questions. But I guess the first one would be that you said that in Gold Bar that the auditors were using a price of 14, 30 or something along those lines? I would assume that it doesn’t sound like they were using the future strip prices going forward or anything along those lines. I guess, have you worked out internally if you use the forward strip of its substantially higher, as you – I’m sure you’re aware, what the write-down would have been by any – or is it materially different?

It would probably be different. I know, to answer your question, I don’t believe I looked at prices higher than 14, 30. They employed endless projections and apparently, we have a – I mean you have Bank of America, $3 million, but they look beyond that and said, analysts were still down around $1,400 going into the future.

Okay. Okay. And so as far as, they didn’t – basically, they were using analysts. They weren’t using what actual pricing is in the future’s market. That didn’t seem to impact at all.

No, no.

And is that a traditional way of doing write-downs? Or do they go to – because this is kind of the – the reason I’m asking is, this is the second time in less than a year that they wanted to change the accounting for the end of mine life in Mexico as well as they wanted to – like we had talked about made up a new category to put that into. And it appears that by using analysts, this seems as though it’s a little random to not what you could – what the future’s market is telling you to price it?

Yes. I probably would have – I would have picked a higher price this is my view on the different market, but I mean.

And that’s fine. I – it just seems as though it’s a little bit when you – I guess, for the – in other industries, there is a pricing that is very clear and well established, whether it’s Comex or whatever. But anyway to move on from that, getting to the Black Fox mine, in the last quarter, you had an average grade of 4.58 with a process rate of 3.53, and that’s down materially from the first quarter of last year, but yet you were still able to come in very well on cash costs. And the all-in sustaining was actually lower. How did that seem to – how did you kind of come to those numbers? If you could shed some light on that.

So, they’re improving their operations a bit. There were a lot of problems in the first half of 2019 that didn’t occur. We had a crusher buyer. Then it was followed by flood, those weren’t reoccurring events. That’s why the costs are coming down.

Okay. And do you expect to return to a higher grade later this year? And I guess, are there further improvements that you can see for the costs, at least the cash costs coming down further?

So, we hope to have better recoveries. Solution has been a problem at the mine or dilution due to mining and the ground control, and we hope we have some entries to that. Peter, do you want to jump in there?

Yes. On the dilution [ph], as to we are related to the falls and here in the hanging walls. So, I’ve been discussing a lot with team of implementing capable thing trials and different techniques to try and minimize this start and onset of at least once it starts traveling up to that for that sort of being a historical challenge, especially at the lower areas of the mine, the upper areas of the marketing in the West Flank, 300. These are new areas of the mine, which aren’t around an old remnant mining. And so another reason we’re targeting in our development to get access to new areas should help the overall solution. But I’m not expecting yet.

Okay. So that sounds like you have it under control and are expecting improvements on the – at least the grade wise going forward. Is that fair to say?

Yes, we’re targeting that, I think it’s going to take time to prove it out and hone it. There is a good opportunity there to improve things.

Okay. And last question today. I appreciate all your patience. As I’m reading through the announcement down at Grey Fox, were the Whiskey Jack discovery – or I don’t know whether that was included in the discovery, but there seems to be some – it didn’t – it wasn’t mentioned specifically that it was included in the updated resource. Was the drilling done at Whiskey Jack included or is that something to be put in, in the future?

Well, I can answer that. Yes, Sylvain speaking, good questions. And yes Whiskey Jack is included in this revised updated resource. We have for the first time included Gibson, Gibson is part of Grey Fox. It’s to the West, hosted in a different host rock. It’s in a syenite. But we know now that the structure is in the vein that control mineralization cut all units from mafic volcanic to sediment to syenite, all of the rocks that can be potential host. And we merge in this updated resource contact zone and we added Whiskey Jack to it, so it’s part of what is shown as contact zone in this revised resource. And as you know we have spectacular results there 53 grams 7.4 meter at Whiskey Jack. It’s a new discovery with just starting point but can have to be included in this resource.

Okay. Well, thank you very much for all your answers this morning.

Thank you, Bill.

And your next question comes from the line of [Mike Hawkins]. Please go ahead, your line is open.

Hi guys. Thanks for taking my call. I just have a few questions on Gold Bar. Given the comments about the mineralization being more structurally controlled at Gold Pick. Can you provide some high level guidance on what you expect the impact to be on mine grade and dilution and strip ratio at least for this year? I think there was some comment about stripping similar, but any comments on that would be helpful.

Peter, do you want to talk about that?

Yes, as I mentioned, we’re waiting on the resort update in order to provide those numbers and those will come out towards the end of the next quarter.

Okay. But can you at least comment on sort of at least geometrically, it’s more structurally controlled and less bedding controlled. So does that mean that they’re narrower zones that have to be mined in a more narrow fashion or any commentary around that?

Yes, I think the slide that Sylvain showed of all the drill intercepts gives you a good idea. It hasn’t significantly changed the actual waste development required to access West pit. So we have, we’ll have full access to the – or some of the drilling results that Sylvain mentioned are outside of our current optimized pit shells, so with the old intermodel. So we’re anticipating some of those waste blocks to transition into West pit or really I can’t comment until we see such resource model in both the cones and then do all that good stuff.

Okay. And maybe just to follow-up on that. It just gives you the impression given the reduction in – or the, I guess the anticipated reduction in ounces and the commentary around it being structurally controlled that the zones are going to be different geometry than what you initially anticipated, and I’m thinking narrower. But the drilling that you showed has some pretty wide intercepts. So just wondering if you could help me reconcile what’s – what you think is going on there?

Right. Yes, well the actual, the three zones you have the West, the Central and the East haven’t changed all that much. The drilling that Sylvain mentioned is confirming the mineralization in West pit and that’s been most of the focus in near-term mining. The majority of the ounces were lost in the write down in the – what we call the hump area and it’s the stripping program we moved from West pit towards East pit. I think, so that can give probably a better color on that. Sylvain, could you speak to that issue?

Yes, sure. Sorry, I was on mute. Yes, the control of the mineralization all the way has been both sweaty graphic and structurally controlled. So structured across the right stratigraphical bedding horizon and mineralize the rock there. The big difference is the weight that has been allocated to the bidding or stratigraphic control versus the structural control. And this has impacted of course, the way the model – the resource model has been designed in the past. As we get better exposure to the bits and of course a lot detail coming from last hole and mining, we get better definition of what’s going on. We started with Cabin, overall, the reconciliation was okay when we moved to the West pit upper bench we saw less and less answers and we decided to go back with drilling, not just drilling, but also core oriented core, to look in more detail of the rock and better understand the control of the immunization. The drilling so far and together is showing that gold is there, grade is there, of course, we have to wait as Peter said, for our revise resource update and what would be the revised mine plan based on this global revision that we are doing right now. And based on those new submission or we’ll see what business, what the – where we stand with that Gold Bar.

Okay. And could you comment on sort of the wits of those structures that you see carrying grade versus what you saw in the bedding controlled mineralization?

Yes, there is actually a lot more structures than what was previously interpreted or understood. More we get them formation more we realize the structural setting is complex, which is not necessarily a bad thing, but it’s different how it was understood and interpreted so we still have significant width associated to structures to multiple structures, intersection of structure generating a wider zone of mineralization. The biggest impact we are seeing is that the model itself would be spreading less away from the structure than it used to do as parts of the last estimation.

Okay. Right.

Yes, Mike. It was a real blindside. I mean their structural interpretation was the foundation for the feasibility study in the mine plan and then it was built on that basis and then the same party came along and did that based on the mining and says, Oh, well it’s not laterally dispersed or spread. It’s more vertically controlled. Thank you very much.

Yes. Okay. And maybe just one more question on Gold Bar. If I look at just the cumulative ounces placed on the pad and the – does it have been produced, I get a cumulative recovery rate of about 52% after a little over a year of leaching. Is that correct? And can you comment on how it compares to the feasibility and how you think about recoveries going forward on the project?

Peter, would you like to answer that? Peter is only been with us since April?

Yes. I’ll do my best. If I recall, I think we ran the numbers in April, it was about 55% recovered. So we’re – you’re pretty close there. The actual recovery rates are slower than what the FS forecasted. So you’re seeing a bit more of a lag and it takes longer to get up to FS levels. But largely the expectation is to get towards the FS level by the end of mine life and cumulative. There are some impacts with a shorter mine life, obviously less each time. So as we update this resource model and the life of mine, we’ll be able to understand that better. We have done some leaching tests with Forte and are in the middle of updating the recovery model to reflect the combined run-of-mine placement on the – and agglomerated, and so far, our production is following those curves very well. So Forte has work will culminate and complete in August and through that study we’re also going to take the new updated model, which will include a clay model and a preg-robbing for the carbonaceous material. We’re going to feed all of that into an economic assessment to find the best net present value approach for agglomerated versus [indiscernible] hybrid of agglomerated and [indiscernible].

Okay. And do you understand what’s causing the difference in recovery versus the initial test work at this point? Is it that – is it clay that’s being placed on the pad or carbonaceous into? Or is it something else?

It was a combination. And hence, why I think we’ve taken the model over internally and planned to create those models and refine them with our in-pit mapping, so we can – that’s what I was getting out of out blending. And in terms of the preg-robbing segregation, but right, we segregate all the carbonaceous material out. But early on in the build, there was some tonnes placed on there. I can’t recall the amount, but a small portion of the area which has been taken into account in the model.

Okay. Great. Yes, that’s it for me. Thanks very much guys.

Thank you, Mike. Next question.

Actually this concludes today’s Q&A session. If you have any further questions, please direct them back to our management in rock open forum. I turn the call back over to Mr. Rob McEwen. Thank you very much.

Thank you, operator. Thank you everyone for joining us. Stay strong and healthy. Thank you. Bye.

And this concludes today’s conference call. You may now disconnect.