McEwen Mining Inc. (MUX) Q3 2020 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen. Welcome to McEwen Mining's Third Quarter 2020 Operating and Financial Results Conference Call. Present from the company today are Rob McEwen, Chairman and Chief Owner; Anna Ladd-Kruger, Chief Financial Officer; Peter Mah, Chief Operating Officer. [Operator Instructions] I will now turn the call over to Mr. Rob McEwen, Chief Owner. Please go ahead, sir.

Thank you, operator. Good morning, and welcome. I'll begin with an update on how we are managing our business in COVID. At the onset of the pandemic, we temporarily suspended all 4 of our operations out of an abundance of caution in order to prevent the possible spread. At the moment, the Black Fox, Gold Bar and El Gallo are up and operating. In Argentina, government imposed travel restrictions, meaning that San José is still operating below its capacity. And our Los Azules Project is just emerging from the South American winter and being reactivated. During Q3, our Gold Bar and Black Fox mines started to turnaround and performance improved, Anna and Peter will speak about this in the next few minutes. One thing that has my attention is the large gap in share price performance between McEwen Mining and our peers. Investment capital is in the early stages of moving into the precious metals space, and some companies appear to have had considerable upside, but are being ignored at the moment. I believe McEwen Mining is one of those companies whose share price has a lot of catching up to do. To address this, we have added key members to senior management in head office and at the mine site, so we're focusing on improving operating efficiencies and profit margin. Over the next several quarters, we expect to deliver better operating results, along with exploration news that we hope will start to close the price performance gap. I would like to introduce our new Chief Financial Officer, Anna Ladd-Kruger, who joined McEwen Mining a month ago. Anna was previously the Chief Financial Officer and Vice President of Corporate Development for Excellon Resources. And before that, she was the Chief Financial Officer of Trevali Mining, where she was part of the team who grew the company from a micro cap to a mid-tier base metal producer. Welcome, Anna. Could you provide an overview of our Q3 financial results?

Thank you, Rob, and it's a pleasure to be here. Good morning, everyone. The restart and turnaround of our operations progressed well during the third quarter. We ended Q3 with $18.8 million in cash and liquid assets and a positive working capital of $21.6 million. Financing activity during the quarter included a private placement of flow-through shares of $10.4 million, which was completed at $1.65 per share, a 21% premium to our prior-day share price. These funds are already being deployed to accelerate generative expiration in the Timmins region, and we are already seeing positive results. Revenue from gold and silver sales was $27.4 million, reflecting 14,500 gold equivalent ounces sold from our 100%-owned operations at an average realized gold price for the quarter per ounce of $1.25. For Q3, we reported a gross loss of $700,000 and a net loss of $9.8 million or $0.02 per share, primarily due to $8.5 million spent on exploration and advanced projects that we are required to expense under U.S. GAAP. Each of our operations had positive operating margin during the quarter, and we reported a GAAP cash gross profit, which is a non-GAAP measure of $3.9 million for the quarter compared to a cash gross loss of $4.1 million in the prior quarter. We are continuing to manage our operating margins by reviewing capital expenditures, material contract management systems and procurement synergies between operations. Overall financial performance is improving at our Gold Bar and Black Fox mines after a challenging second quarter. We have a very busy fourth quarter already in progress and some exciting growth pipeline milestone expected to be met, and we look forward to the next results of our exploration drill programs. I will now turn the call to Peter.

Thank you, Anna, and good morning all. As Anna mentioned, we are in turnaround process. We have started to overcome our near-term operational challenges and are continuing to grow a stellar pipeline of resources and discoveries sourced organically from our current assets. Production of 30,000 gold equivalent ounces for Q3 was on target for where we plan to be in the ramp-up of operations post the COVID shutdown. Consolidated production guidance for Q4 is a little higher at between 31,500 and 34,000 gold equivalent ounces, while costs are projected to continue to trend lower. At Black Fox, the operation is benefiting from additional development work completed during Q2 that increased mining flexibility. We expect mining from Black Fox to continue into Q1 2021, while we transition to mining the Froome deposit. Underground drilling at Black Fox for definition and delineation purposes around the 240- and 280-meter levels in the central and west part of the Black Fox Mine have recently returned impressive grades such as 81.5 grams per tonne gold over 4.8 meters, including 218.8 over 1.8 meters, and 19.3 grams of gold per tonne over 3 meters, including 71.6 over 0.8 meters. Strong results like these, in close proximity to underground development and mining, can provide opportunities to increase mine planning inventory. We continue to evaluate these opportunities on an ongoing basis. The Froome deposit will extend the life of the Black Fox Mine by approximately 2.5 years. The development of the underground access to the deposit is about halfway complete. We plan to reach Froome in Q2 2021 and expect to achieve commercial production in Q4 2021. Froome offers several benefits compared to Black Fox, such as a straighter, more efficient haulage route and wider, more consistent mineralization, that is amenable to low-cost bulk mining methods. We are targeting an average annualized production rate of between 40,000 to 45,000 gold equivalent ounces per year from Froome. In the medium term, we envision and plan to grow annual production from the Fox Complex from 100,000 to 150,000 ounces of gold at a cash cost of $800 an ounce and an all-in sustaining cost of $1,100 an ounce. The objectives envision increasing mine life to over 10 years and the start of production ramp-up in 2022. To support our vision, we have engaged an independent engineering group to complete a preliminary economic assessment for the Fox Complex expansion. It includes the Grey Fox, Black Fox, Stock and Lexam resources. Synergies are expected from utilizing our central milling capacity at Stock and the PEA will study potential expansions on this mill. The PEA results are expected to be available in late Q4 2020 and will support the optimal business case in which to complete the feasibility study in 2021. Operations at Gold Bar continued to ramp up during September, and savings from operational improvement initiatives are taking effect. To give you a tangible example, the mining cost per total tonne of material moved decreased from $3.42 a tonne in Q2 to $2.45 a tonne in Q3, or a 28% decrease quarter-on-quarter. We expect operational improvements to continue in future quarters. The valuation of the Gold Bar resource estimate progressed in Q3. Results of the recently completed 28-hole drill program designed to upgrade some of the Pick deposit mineral resources from the inferred category to indicated appear positive. The Pick resource model updates are underway and expected in Q4. A new reserve estimate and feasibility study update for Gold Bar are also expected to be announced towards the end of Q4 this year. In Mexico, an updated feasibility study to the Phoenix project is being finalized, and we anticipate releasing results in Q4 this year. On the exploration front, as part of the Fox Complex, we are drilling 2 exciting discoveries we made during the 2018/2019 exploration campaign, namely the Whiskey Jack and Stock West deposits. Whiskey Jack is an exciting target in the Grey Fox area that returned a wide drill intercept of 53 grams per tonne over 6.7 meters of estimated true width. 15 follow-up holes have been completed since starting the current program in September, and 8 of those contained visible gold and as well as some exceptional assay results, including 20 grams per tonne over 6.7 meters, 31.2 grams per tonne over 2.7 meters and 12.7 grams per tonne over 11.2 meters. All of these results are with an estimated true width. In summary, during Q3, all of our operations returned to generating positive operating margins after the COVID-19 stoppage in the previous quarter. Our operations were focused on ramping up production, increasing efficiencies, capital allocation and advancing growth plans. The turnaround of our operations is delivering tangible results, which will become more prominent in the following quarters. We have a very busy Q4 underway that includes engineering milestones planned as well as ongoing exploration results. That concludes our presentation. We'll now open the call for questions.

[Operator Instructions] The first question comes from the line of Jake Sekelsky of Alliance Global Partners.

Just looking at the Q4 production guide, are you able to provide any color on the breakdown on a per month basis?

Peter, would you like to answer that?

Yes. We are estimating about 50% of the production split sort of equally between Black Fox and Gold Bar. The -- at El Gallo, we're in the range of 2,000 ounces to 3,000 ounces. So if you take that off the total split that will come from Black Fox and Gold Bar at MSC, we've estimated about 15,000 to 15,500 ounces gold equivalent.

Okay. That's helpful. And then just at Froome, obviously, it looks like development there is on schedule. Do you see any low-hanging fruit on the exploration side at that deposit to potentially extend the mine life beyond the 2.5 years you're targeting right now?

Good question, Jake. Yes, definitely, there's -- as you've heard us speak before, there's a footwall zone, which we haven't drilled off. And we're not quite in a position yet to drill it off from our underground drill cuttings, but we will be doing that as we go in. And then as well, there was intercept that were released prior lower and to the west of the deposit, which haven't been drilled. So we anticipate trying to lay some of our underground development out to take advantage of those potential opportunities.

Okay. And it sounds like those are probably 2021 initiatives?

That's correct.

Okay. And then just lastly on broader exploration. I mean it's a major focus right now with activity kind of picking up across the sector, I'm just curious if you've seen any upward pressure in rates or rig availability in either Canada or Nevada?

Yes. We have, especially in Canada, but our partners fortunately had drill rigs available. So we didn't experience delays ramping up. We have 4 rigs turning right now at the Stock West infill drill program. Over in Nevada, we're actually engaged with a number of companies who are also earmarking rigs for us over there and our future programs. So things are picking up, but we've been fortunate to attract some good partners there.

Your next question comes from the line of Heiko Ihle of H.C. Wainwright.

This is Marcus Giannini calling in on behalf of Heiko. My first question is whether there's been any COVID-related delays in the development of access to Froome. And then, additionally, do you guys have any idea, so good estimate, on how much you'll spend there quarter-by-quarter until you hit production late next year?

Peter, would you care to take that question?

Yes. The first question, we did not experience any delays due to COVID. The contractor worked through COVID, and so things have progressed well in that respect. On the costs, Anna, maybe you could share the breakdown? But we are looking at ways to improve our productivity and lower cost. So there's a -- right in the middle of that budget time, I go to try and look at improved ways to reduce cost.

Yes. We don't have the break down by cost by quarter at the moment. Like we're actually just in the middle of going through our 2021 budget and quite a lot of detail. So we're still reviewing that. So if we can come back to you on that when we have some more definitive numbers, if that's all right?

Yes. No worries. And then, lastly, do you have any more clarity on timing in regards to the new resource and reserve estimate and an updated feasibility study for Gold Bar? Should we expect publication, say, right before the holidays or maybe sometime in mid-November?

Yes. So this is Peter here. The results of the Gold Bar reserve -- resource reserve and feasibility are all coalescing to be completed towards the end of Q4. We anticipate releasing results in Q4, late Q4, and the report, the NI 43-101 report update following shortly after that, January, February is the target.

Your next question comes from the line of Joseph Reagor of ROTH Capital Partners.

Congrats on the start of a turnaround here. So I guess a lot of the things I would have asked but I already touched on. But thinking big picture, are there any assets you guys have that you feel are less important to the future of the company and that you would be open to selling to shore up the balance sheet, maybe provide some capital for some of these growth initiatives you have over the next couple of years?

We have entertained some joint venture situations in Nevada, where there are some properties that are -- others can fund. And we're also looking at a number of alternatives for surfacing value in our Los Azules property, and one of those is a possible spinout into a separate company and adding to Los Azules and Nevada property that has a large copper showing. That's the extent of what we're looking at there.

Okay. And then what is the corporate plan otherwise to fund things like Phoenix or the Black Fox expansion?

We'll be coming up with our feasibility studies as sent later this quarter. And we think some of the projects have very robust economics. So we would hope to look to ways to finance that when we get to that point.

Okay. Fair enough. And then as far as an outlook to next year, can you give us any initial expectations for what a full year of current operations might look like next year?

Peter, would you like to jump in there?

Yes. Sorry, could you repeat that?

I was just looking for kind of like an initial, like, rough guide of what next year might look like on a -- across the company basis.

Right. As you heard Anna, we're right in the middle of that budget time. So we're not in a position at this point to guide. But we do anticipate towards the end of the year, we'll have the approved 2021 budget and life of mine at that point.

Would it be fair to say that taking Q4 and multiplying it by 4 would be kind of a very conservative view of next year?

That's a good question. I think each region is dependent on a number of factors. Gold Bar, the turnarounds are going well and trending upwards. So we expect results to improve and production to continue to improve. We are working through all those objectives and initiatives of how to do that and what it looks like. So we're still working on that process, but things are positive. At Black Fox, we expect production to continue into Q1. And we are working to accelerate the Froome project and looking at ways to improve and accelerate development so we can pull forward the commercial production data in current. So lots of positive initiatives there. The Phoenix El Gallo will remain on residual leach. So not a lot of changes happening there. The anticipation is we do have positive economics, as Rob shared. And next year, of course, financing dependent, would be a build year for Phoenix. I hope that helps you a little bit.

Yes. It sounds like we're going to get a lot of answers by year-end. So I'll turn it over.

[Operator Instructions] Your next question comes from the line of Mike Kozak of Cantor Fitzgerald.

A couple of questions for me. First one is, I mean, we're going into November here, and Argentina still has, as I understand it, a province-to-province travel restrictions. I mean do you have any idea how long that may last still? I mean, by my estimate, it's adding somewhere between $200 and $300 an ounce to your cost there. Are you hearing anything down in Argentina on when those restrictions might be at least eased?

No, we haven't, Mike. They're still having issues.

Yes. Okay. And then my second question, so the Froome ramp development you're saying is 47% done. What has the cumulative spend been so far on driving those declines, those ramps?

In about $6 million on the Froome to date. And we've just started capitalizing that as well, like, as of September 10. So it's been in pro rata, but year-to-date it's around $6 million.

Your next question comes from [ Bill Paras ], private investor.

A few questions. I guess we'll start with Black Fox. Have the reconciliations between the grades that are coming out of the ground and grades -- and what you're seeing being actually produced, have they been quote -- have they -- where do you stand on that? Because I know you tried to make some improvements there.

Peter, would you deal with that?

Absolutely. Yes, thanks for the question. Some good improvements in trends towards September. As we reported before, the increased development provided access for our grade control teams to get in there to do tighter drilling. We drilled on 5-meter centers for proven and 10-meter centers for indicated. So cutting previous drilling basins in half, more than in half, that's helped. In September, we started getting closer reconciliations through July and August. We were still using stopes from these older models. We can imagine the transition takes some time in September. So positive improvements there. We're getting closer to our new model, but there's still work to do.

Okay. And staying with Black Fox, as far as I know there's been discussions of making some changes so that the mine could be produced after 2021. I guess could you -- I know you haven't put out the study yet, but could you give us some insights? And it seems as though you seem to be hitting some good grade exploration lines there and kind of what your thoughts are as far as how to extend that mine life out past the middle of next year.

Yes. That's a great question. We currently are working on Q1, and we have extended out some mining into Q1. I mentioned that in my summary today. That's a really positive thing. I don't -- I think, personally, Black Fox, it's early days for Black Fox. And the west flank discovery that was made earlier, we started mining on that on 280. That area extends up in the Froome decline. We're actively drilling in Q3 out of the Froome decline on that west flank extension. Some of the drilling results you're hearing are in and around old workings and currently active development of stoping areas. So I don't think all of the sort of the ore has been found in the upper part of the mine, and we're learning a lot more as we get more detailed information and better access. The Black Fox deeps, which is still a very good target, and the 840 to 810 area is an active mine area. We have been extending mineralization drilling there. The stope that we mined in [ Q2 ] turned out very well. We cable-bolted it and we were able to actually hold, I think, for the first time, the stope walls along the A1 faults was a very successful dilution control program. So I'm very bullish on extending Black Fox. And what we need to do, the strategy is to get over to Froome, relieve the pressure from production on Black Box to allow our mine exploration team to get in there and the time to do the work and drill out ahead and understand the ore body and identify some resource that's potentially mineable, we can add back into the mine plan along with Froome.

Okay. Moving over to Stock. I know there was a -- I think I recently read that there was a plan to dewater the stock mine. And I guess, can you just give us some insight into where you stand in that process as far as that going forward?

Yes, absolutely. Another very exciting project. We're in the process of amending the permits to dewater the mine and re-access that. So that's going quite well. We're also [ RFT-ing ] and tendering different scenarios of how to get in there and dewater that. We haven't, obviously, set dates. We're trying to get that information closed off a bit on schedule certainty and permit certainty. But like strategically, tentatively, we are looking to try and target something mid next year to start that dewatering access of the mine.

And would that take about 6 months or so? Or what's your -- or would it be a lot shorter?

A lot shorter. Historically, it was dewatered months before, and one of our employees was on that project and is on the project now for the previous dewatering. It's not really the dewatering, the longer lead item, it's more checking all the guides, the shaft guides lining the ground support and making sure it's safe going down. But we're obviously getting quotes on that and timing to see how it all fits together, putting -- you got to put a new head frame of hoist. There's a number of steps. But roughly in our initial estimates, we're somewhere in the 6- to 9-month range from what we know now.

Okay. Just a couple of questions left here. As far as Nevada goes, I know that you've mentioned that Gold Bar South is in the permitting process. I guess, this is kind of 2-parts. When do you expect to, I guess, move to be fully permitted down there? And then I guess the other one would be, when would you expect that to be -- the mining to begin at Gold Bar South since it's a priority?

Yes, the plan of operations have been submitted. A number of hoops to jump through. As you know, we're expecting the permit to come in, in the last half and start mining in Q4.

Okay. Q4 of this year or next year?

By next year.

Okay. Okay. And then as far as moving to Mexico, there seems to be quite a big jump in costs in the -- in Q3. I guess compared to Q2 and I guess were these -- was this just the way some of the costs were assigned? Or is this capitalizing some costs versus expensing some costs? Could you just give some insight into, I guess, the cash cost seems to go up quite a bit vis-a-vis where they were previously?

Yes. There were 2 main variances. First was COVID. And obviously, the delays until the government allowed us to get back in there. And then we experienced some COVID cases at site, where we had to isolate employees. And then we had cross-functionally trained employees and had contractors on standby. So we had sort of gaps in resourcing our work, if you will, responding to COVID and COVID cases. But that then had a knock-on effect of the timing of our small-scale mining, which was going to play some fresh, deep -- fresh ore on the heap and keep our ounce profile up, which was the basis of the cost per ounce. So those 2 factors, and then that delay in mining, moved us into the rainy season, which is more added costs than we had originally planned to do the mining in the dry season. So those factors increased the cost. Those ounces that played are carried over next year.

Okay. Okay. So you would expect to see trending costs down there but never moved back to -- maybe not where they were last year, but closer? Is that kind of where you are on a go-forward basis there?

Yes. As mentioned, we're still sorting through that in the budget time here. Things are -- we've responded to that and mining is progressing and we're stacking fresh orders.

Okay. And then, finally, getting to Argentina. The production from Argentina was similar to what it was in Q1 of this year on a -- but the costs were on a completely different scale. And I guess are -- is the partnership funding a lot of, I guess, additional social programs that are -- that seem to be accounting for these costs? But it just seems to be a very difficult thing to -- as far as nothing seems to have changed from an operations standpoint, but the costs are now drastically higher on a per ounce produced basis. Is there -- are there a lot of onetime items in there? Or is this something that is going to carry on at these higher levels?

So a lot of those costs are related to COVID and something in Argentina that is mandated by the government is whether or not the workers show up to work or able to work, they still have to be paid in full. So as I alluded to before about Argentina, in general, it's pretty tough. There's still quite a lot of restrictions. So that impedes the people being able to get to site. But -- so a positive is sort of going forward in Q4, the MSC has negotiated with the union there that they will fund only up to 75% of the wages for those that aren't able to go to site, and they've also started some mechanized mining. So we do expect, from everything we know, that cost profile could improve on a go-forward basis.

And is there any potential for dividends from MSC this year? Or is that going to be -- or do they need to forward that to 2021?

Yes, I think that's probably more likely going to be a 2021 event to get money out of Argentina, do the exchange and it is quite expensive. We do know that -- yes, it will likely be 2021.

Okay. And then just a couple of quick questions for Rob. I know you talked about returning capital to shareholders and potentially paying a dividend and whatnot, I guess, given that your current loan agreement there is a restriction on paying dividends, and I know other companies have now instituted, I guess, or either formally or informally, returning capital to shareholders via buybacks and returning a percentage of ounces -- of the ounce produced, say, $250 per ounce produced to be of share buybacks given that you are valued at just your ounces on the ground at $10 an ounce in Canada on an all-in basis. I mean to me, it seems as though that would be pretty accretive. Has there been some discussion around doing something along those lines?

Bill, you brought up the loan and their provisions against that. Until the loans are repaid, that loan, it matures in 2023. So until we retire that -- if we had an early retirement, possibly consider it. But right now, we're not able to and have been talking about our earnings from production aren't large enough to do that at the moment and fund our future development.

Okay. And then as far as -- I guess, as far as getting out and doing more corporate development, I know there's a $58 million short position right now, which is, I think, the all-time high for McEwen. I guess it has -- and I know, unfortunately, the dividends or buybacks are kind of off the table, I guess, as far as doing -- trying to get your story out, I guess, has there been any initiatives that either you think are new potentially out this year? I know you've paid some of the brokers via the financing fees. I guess what are the -- if you could give us some ideas of the corporate development plans that you have to kind of get the turnaround story out would be great to hear.

Well, clearly, it's returning the sites to profitable operations. And just addressing what happened last year, the poor operational results and delivering on our guidance is one. Another area we're looking at, and I mentioned was, how do we best surface the value of Los Azules? And that is a possible spinout, combining it with another property that we have, another copper private project in creating a dedicated copper vehicle. Because I don't think Los Azules is really appreciated or valued in our portfolio. If you were to look at it, and maybe it's a bit of a reach. But if you put it on a gold equivalent basis, the resource space, if you converted the copper and the silver into a gold equivalent, you'd be looking at an indicated resource of 19 million ounces gold equivalent and on an incurred, an additional 37 million-ounce gold equivalent. It's a large deposit. And if you look at it that way, it's -- it'd be an interesting vehicle, I think. There are people who would prefer just to have a copper project or a copper company rather than a copper, gold and silver company.

Okay. Okay. Well, I -- and no, I appreciate that. I guess are there any -- so anyway, as far as doing a -- is there any plans to potentially a technical update later this year once the feasibility studies have come out?

Yes. There are a number of deliverables that are going to happen this quarter for Phoenix, Black Fox and Gold Bar.

There are no further questions at this time. Mr. Rob McEwen, I turn the call back over to you.

Thank you, operator. And I want to thank everybody for joining us today and continue to have much success in their investment. Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.