McEwen Mining Inc. (MUX) Q1 2024 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen. Welcome to McEwen Mining's Q1 2024 Operating and Financial Results Conference Call. Present from the company today are Rob McEwen, Chairman and Chief Owner; Perry Ing, Chief Financial Officer; Jeff Chan, Vice President, Finance; William Shaver, Chief Operating Officer; Stefan Spears, Vice President, Corporate Development; Michael Meding, Vice President and General Manager of McEwen Copper; and Carmen Diges, General Counsel and Secretary. [Operator Instructions] I will now turn the call over to Mr. Rob McEwen, Chief Owner. Please go ahead, sir.

Thank you, operator. Good morning, ladies and gentlemen. Welcome to our first quarter 2024 conference call. A few moments ago, I looked at our share price and not well, what happened? We're down about $2. And I think a lot of it is -- I think it's overdone, but it's probably due a bit to our accounting policies, the difference between accounting treatment in Canada and in the United States of America. And I'd like to ask Perry Ing, our CFO, to talk about that difference.

So we would like to reiterate the fact that as a U.S. GAAP reporting company, we expense all of our attributable expenses related to the Los Azules copper project in Argentina. So given that we own 48% of the company. All of the work going into drilling for that project is being expensed through our income statement, unlike a lot of our peers, Canadian and Australian listed companies that report under International Financial Reporting Standards, where they may capitalize those costs and you would not see them reflected in net earnings or loss. So -- if you look at -- into more detail, into our earnings, we reported a consolidated net loss of approximately $20 million, of which $18 million was directly attributable to our investment in McEwen Copper as well as an additional $4 million in general exploration expenses. So again, had we reported under IFRS, we would not be showing a loss of that nature.

Thank you, Perry. I would start out just saying, we had a good quarter, and we're active on many fronts. We've been hitting production guidance, generating positive cash flow from our gold and silver mines, our exploration is producing encouraging results at our Fox Complex, our San Jose mine and our Los Azules project. In addition, there has been a dramatic political shift that's occurred in Argentina. Its newly elected President is moving aggressively to make the country attractive to large direct foreign investment, of which we have 1 of those situations. Overall, our consolidated gold equivalent production was up 7% over the first quarter 2023, and costs were in line with guidance. At 2 of our 3 mines, we're making good progress at Gold Bar and San Jose, they exceeded guidance by delivering higher production and lower costs. At Gold Bar, production was up 80%. And at San Jose, it was up 15%. And while the results of the Fox Complex were disappointing due to mining lower grade and tonnage during the quarter. We're expecting over the balance of the year that the production will increase and the cost per ounce will fall to be in line with our year-end guidance. From a financial perspective, the news was also positive. During the quarter, our gross profit was $6 million, some 36% higher than the $4.4 million in the first quarter of 2023. And in this quarter, we reported our results also on an adjusted EBITDA basis because we believe it provides a better representation of the performance of our gold and silver mining operations. Why? Because it removes the impact of our ongoing investment in McEwen Copper. During the quarter, our adjusted EBITDA was $6.3 million -- and -- or $0.13 a share and -- versus an adjusted EBITDA loss of $2.9 million or $0.06 a share. So when we include the $18 million loss attributable to our investment in McEwen Copper, we reported a consolidated loss of $20.4 million or $0.41 a share. In Argentina, the company's new President, Javier Milei, who Mike, Carmen, Stefan and I had the great honor to have a 1-hour meeting with recently, has unleashed an infectious mood of great optimism, something that has not existed in that country for many decades. I said to him that Argentina is very much like the story of Sleeping Beauty, who was poisoned by years of populous government policies and fell into a deep sleep and now he is the prince, whose kiss has awoken her. Global investors and innovators are starting to take notice. Just 2 weeks ago, Elon Musk tweeted, it's time to invest in Argentina. And President Milei's election, coupled with the progress we're making, advancing Los Azules has made this quarter an incredibly exciting time for McEwen Copper and for McEwen Mining. Our other asset in Argentina is our 49% owned San Jose silver and gold mine. Performance in Q1 of this year was much better than the comparable period last year. And as a result, management is considering resuming its dividend later this year. So we'll be receiving money, hopefully, from that investment for the first time in a couple of years. We've also encountered encouraging exploration results there from 2 different targets. The best assay results reported were 12 meters of 12.7 grams gold, plus 101 gram silver, and the other was 6.2 meters of 23.3 grams gold, plus 314 grams silver, pretty nice holes. It's worth noting that the San Jose land package surrounds Newmont Cerro Negro property on 3 sides. So let's go back to Los Azules. As the winter begins in the Southern Hemisphere, the 22 drills that we're operating there are now being removed, having drilled some 69,000 meters this season, which is quite a large program. This drilling has been confirming and upgrading the categories of our estimated resources that were contained in the June 2023 preliminary economic assessment. They were also drilling to precisely define the location of our payback pit, which is calculated to be payback in 3 years. Through the winter work, we'll be progressing on delivering a bankable feasibility study for Los Azules in the first half of next year. So looking ahead, we are now in a position to think about growing, and I feel the market conditions are ideal to search out opportunities in anticipation of much stronger markets for gold, silver and copper. And here's what we've been doing. First, we've been taking a closer look at the potential opportunities on our existing properties. And we will be very shortly providing you with exploration results from our Fox Complex, Los Azules and San Jose. Second, we're looking at opportunities that are close to these existing operations. And to that end, we've recently made a friendly takeover bid for a company called Timberline Resources, which has property located close to our Gold Bar mine. And it also has a property joining the McEwen Copper's Elder Creek property, both of which are in Nevada. And three, I believe there are some interesting situations out there -- where we could consider bolstering our management strength, increase our resource base and annual production and provide us with greater leverage to the prices of gold, silver and copper. In Los Azules, we have funds to continue for a while. We are looking at completing the feasibility study and doing the associated engineering and all the financing for Los Azules has been done in McEwen Copper. We continue to look for opportunities with our principal investors and others to fill that funding. At this point, I'd like to add Michael Meding, our Vice President and General Manager of McEwen Mining -- McEwen Copper to provide an overview of the political situation in Argentina and some of the changes to regulations that are being promoted and the impact it could have on the value of that asset of ours.

Thanks so much, Rob. Hello, everybody. Exciting times in Argentina, as Rob said already, we had an exciting quarter with lots of progress at Los Azules. And what we're looking at, at the moment, while Los Azules has a very strong PEA without further incentives. What we see in Argentina is that there are a lot of projects that could benefit from a better investment incentive scheme. And that has been presented to the Congress to the Lower House and a couple of days back and has received approval by the Lower House and is now in the Senate for discussion. It's going to the commissions and the administration is trying to get approval of this new exciting project. It's called [indiscernible] in Spanish. It contains something called VG, that's a large infrastructure investment incentive this year. Just to give you some ideas what this means if it goes through, and we are cautiously optimistic that it will go through [indiscernible]. Income tax will be reduced from 35% to 25%. Export duty would be reduced from 4.5% to 0%. VAT recovery would be basically instance. And operating bank takes debit credit taxes 1.2% would be -- we will be able to use 100% as an advance for income tax. So this means that this combined with what is included as having the opportunity to ensure access to the capital markets can change the face of mining projects and other large infrastructure projects in Argentina. We think that this project is a major driver for the Argentine economy going forward. Back to you, Rob.

Thank you, Mike. And as many of you know, there's a high rate of inflation in Argentina, and we've been able to offset that.

Yes, that's right, Rob. Overall, after our last financing transaction in McEwen Copper, we were able to invest in a variety of products that essentially fully hedged our exposure to Argentine inflation and devaluation. So I believe at the end of the first quarter, McEwen Copper had a treasury of just over $60 million. Since we've deconsolidated McEwen Copper in the fourth quarter of last year, we no longer show McEwen Copper's cash balance on our balance sheet. It's seperate apart, we only report there are 48% of the earnings and loss in our income statement.

Thank you, Perry. I'd now like to open the call to questions.

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

So it was good to see costs come down quite a bit at Gold Bar and I know you mentioned this is a function of mining lower strip areas. I'm just curious if that's something you expect to continue a bit into Q2 here? Before moving back to more normalized levels of strip, as you mentioned in the second half.

I'll ask Bill to comment on that.

Yes, Jake, I guess, production in the first quarter was pretty much on -- it's a little over budget, but it's pretty much on schedule. In the second quarter, we will be expanding the work that we're doing in [ pit ] and also expanding the work that we do in Gold Bar ourselves -- to try and -- or to get more material or more ore onto the pad in order to improve our leaching. As you probably know, the first quarter is always a bit of a challenge because of rain and snow and cold weather. This year was a little bit better than last year, although this year, we did release about [ 4 ] -- just under 5 million gallons where last year, we released about 9 million gallons. So all in all, I think the first quarter responded well to all the production challenges, and we see the second quarter as improving over that.

What about the stripping.

Yes. And the stripping is just related, I guess, to where we're taking the ore at the time and -- and we're working with our contractor to, I guess, upgrade the number of trucks we have at the site to look after the stripping that's associated with ore. So we see those 2 things as kind of being tied together.

Okay. That's helpful. And then, Rob, you touched on opportunities for growth and things that you're looking at from an M&A standpoint I'm just curious, should we be thinking more along the lines of complementary type transactions such as timber line? Or would you be willing to look at more of a transformational type acquisitions? Just your thoughts there would be helpful.

We're just going on several fronts, Jake. I just think this market is delivering some situations that bear a lot of consideration. And there was a transformational opportunity that was attractive, take a close look at it. Because I think we're in 1 of these rare opportunities where this is the time to grow. Yes, we're going to see higher basis going forward, I'm quite confident of that.

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

I guess, following on the Jake's comment -- Rob's comment there on acquisitions. The Timberline acquisition, what's the you guys best guess on timing on closing that?

I can answer that. It's Stefan. We're looking at an outside date in early July for that closing. There are a couple of factors that could accelerate that, but that's a good way to use at this point.

That's helpful. And then going back to the opening comments about the accounting treatment on McEwen Copper. Can you guys give us any guidance for the rest of this year on what you think your like income level expense is going to look like. So there's not such a big delta between what we have and what actually occurs.

Joe, I think as far as McEwen Copper, Q2 is going to be pretty similar to Q1. I mean we had over 20 rigs going until May. So we'll continue to have those costs flowing through. Q3 will be quieter as there's no drilling activity, although we will still be working on the feasibility. And then Q4 activity will be dependent on when copper raises money and what the program will be in terms of drilling in the fall. But I will note, obviously, once we do have a feasibility study for McEwen Copper and permits in hand, then under U.S. GAAP that we can start capitalizing costs at Los Azules, if it makes sense, kind of in line with our Canadian peers.

Okay. And what is the timing on having that feasibility study in hand?

Certainly, first half of next year.

Yes.

Okay. So that's helpful from a modeling standpoint. And then on Fox, Rob, you commented that the first quarter grades were light, but you expect things to pick up and then cost to drop. Have you already seen a pickup in grade in Q2?

The -- this is Bill. The grade has picked up from this month. It's running now around 3 grams. And we hope to see that pick up a little bit more, but we're seeing at this point that grade in Q2 will be around 3 grams. So right now, it's the case of making sure we put through all the tons we can through the mill.

Okay. So we should expect tonnage to stay relatively similar to what Q1 was in the grade to start working its way higher over the rest of the year.

That's correct.

Your next question comes from the line of Mike Kozak, Cantor Fitzgerald.

The last caller asked 1 of my questions, but I just wanted to follow up here, and make sure I heard Perry's comment correctly that you made right at the end of the prepared remarks. Did you say cash and investments of approximately $60 million, 6-0 in the copper subsidiary at exit Q1?

At the end of Q1 that's correct. Yes.

Okay. And then maybe as a follow-up to that, in prior quarters and prior years, you guys would give some, call it, soft guidance on when you would look at potentially IPO-ing McEwen Copper. Is IPO kind of off the table now? Are you going to -- is the priority to keep funding this with Stellantis and Newton? Or how are you thinking about potentially IPO-ing that unit?

Well, we feel we're in between spot in that we're -- we've got the PEA last year that was published, and we're looking at a feasibility study there's probably 100,000 meters of drilling that haven't been included in the resource, the results of which. And we are -- we filed for an environmental application approval and we're hopeful to get that before we publish the feasibility study. So after the feasibility is out and we have a permit in hand that would be a time to be looking at an IPO when we believe we'd maximize the value.

And your next question comes from the line of Bill Powers, private investor.

Just a couple of quick questions. I guess we could start with the decline at Fox. Could you just give us an update on that? I know it was supposed to start sometime this year, if you could give an update on that as well as the progress towards construction starting in Mexico.

Okay. I'll ask Bill to address that question.

Thank you very much, Bill. Yes, in terms of the ramp at stock, we expect to start the surface excavation work this month. We're in the midst of negotiating with contractors on that matter. And we hope to get started as like as soon as they can get the equipment into the field. So -- and the people we're talking to have equipment in their yard so that should start as scheduled. In terms of Phoenix, there we are waiting for permits -- and we -- those have all been -- the required submissions have all been made. We -- optimistically, we hope to see that in kind of the third second -- well, second to third quarter, I guess I'm going to say the third quarter now because we're hoping to have it like in the next few months. There's an election coming up in Mexico. So we're actually planning to make a trip to Mexico in the next few weeks, where we will go and have a chat with the Minister of Economic Development, who had to the site last year and basically said he would try and help us in any way he could. And if we need it, help to come and see him. So we're going to maybe take advantage of that. And -- but yes, we're -- and we're doing now the final engineering of the plant. And so as soon as we have a permit in hand, we'll start working on that -- we've already ordered gas generators for that project and most of the equipment that's going to be installed is now refurbished at the site.

Okay. So you'd expect construction to begin by fourth quarter with potentially first production coming out Q1 of next year? Is that a reasonable time frame?

That would be our hope. Yes.

Okay. And I guess as far as the -- given the results that came out in stock earlier or in February of this year, the -- are there any plans to include the Stock East into the initial ramp going down? Or is that something for future development?

No. Absolutely, that is going to be the first order of the day once we get underground, and we are we've cleaned a drilling program in the first quarter of the year at Stock East. And the results of that, I would say, are very good. And we are going to have an announcement about those results sometime in the next 30 days. And yes, we'll basically -- once we get the ramp colored and get underground, we will be heading in 2 directions: 1 towards Stock East and the other towards Stock West. So yes, that's -- because of its -- that particular ore zone is very close to surface, we will head there right away as soon as we get underground.

[Operator Instructions] It looks like there are no further questions at this time. Mr. Rob McEwen, I will turn the call back over to you.

Thank you very much, operator. Thank you, ladies and gentlemen, for joining us. I believe there is a question that came in by e-mail. And I think I've already answered it. It was relating to the market performance this morning. I think it's overdone. And we've got a lot of positive momentum at the moment. Thank you, operator.

Great. Well, thank you so much. This does conclude today's conference. You may now disconnect. Thank you.