McEwen Mining Inc. (NYSE:MUX) Q1 2023 Earnings Call Transcript May 9, 2023

McEwen Mining Inc. misses on earnings expectations. Reported EPS is $-0.91 EPS, expectations were $-0.25.

Operator: Hello, ladies and gentlemen. And welcome to the McEwen Mining’s Q1 2023 Operating and Financial Results Conference Call. Present from the company today are Rob McEwen, Chairman and Chief Owner; Perry Ing, Chief Financial Officer; William Shaver, Chief Operating Officer; Michael Meding, Vice President and General Manager of McEwen Copper; Stefan Spears, Vice President of Corporate Development; Jeff Chan, Vice President of Finance. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Mr. Rob McEwen, Chief Owner. Please go ahead, sir.

Rob McEwen: Thank you, Operator. Welcome and good morning, ladies and gentlemen. I’ll make this quick. We have gotten our mojo back. From September 1 of last year to last Friday, May 5th, our share pricing has increased by 200%. That represents an increase 4 times greater than the GDX and the GDXJ indices, 11 times greater than the price of gold and 15 times greater than the price of copper, and isn’t it about time and we still have much to regain. This outperformance was driven by a number of factors, which you’ll hear in greater detail as we go on today. But the big ones were a ARS30 billion investment in McEwen Copper by Stellantis, who is the world’s fourth largest automobile manufacturer and also an investment by the world’s number two mining company, Rio Tinto, their technology arm.

They increased their investment by $30 million to $55 million. Also factoring in was our increase in gold production and decreasing cost per ounce at our Fox and Gold Bar mines. We also had encouraging drill results from Fox and Los Azules, and we benefited from an improving gold, silver and copper price. We’re going to be improving our balance sheet, deleveraging it by reducing our debt by 38% on Friday of this week and I believe the best is yet to come. I will now ask Bill Shaver, our Director and Chief Operating Officer, to speak of our operations and growth projects for next year. And just before we start, he will be — after Bill, will be Stefan Spears, our VP Corporate Development, he’ll speak about our exploration progress, followed by Perry Ing, our CFO; and Jeff Chan, our VP, Finance, to address our finances, and we’ll conclude with Michael Meding, our VP and General Manager of McEwen Copper.

Bill?

William Shaver: Thank you very much, Rob. Good morning, shareholders. This morning, we are happy to report our operational and financial results for Q1, which have improved dramatically over last year and are expected to continue to incrementally improve based on changes we are making in our operations. On the safety front, our safety record continues to be the cornerstone of our plans going forward. Our three mining operations worked without a lost time incident in Q1. We did have a minor medical aid in February when a diamond drill contractor employee cut his finger on a sharp piece of metal. But other than that, there were no injuries to people or contractors working for the organization. On an operational front, at the Fox Complex, we have continued our operational improvement process, which has resulted in a higher gold production and lower costs in Q1.

We processed 17,500 tonnes of ore and produced 12,929 ounces of gold in the first quarter versus 68,000 tonnes of ore processed and 7246 ounces in Q1 of 2022. Thus, a very significant improvement of 57% on tonnage and 78% on ounces. Costs have also improved by approximately 30% over Q1 of 2022. We now have cash cost of $1,088 and all-in sustaining cost of approximately $1,300 per ounce. The Fox Complex is basically continuing a path of incremental improvement that began in Q2 of 2022 and have made steady improvement since that. We hope to continue this improvement over the remainder of the year. At Gold Bar, we completed the transition to a new contractor in January as planned and on schedule. We also moved the operation, the open pit operation that is run by the contractor to the Gold Bar South pit, which produced most of the ore in Q1.

In part of this transition was done because of the very heavy snowfall that we had over the winter in the Pick pit, which is at a higher elevation. In Q1, we placed 578,600 tonnes of ore on the leach pad versus a budget of 459,000 tonnes. We produced 6,456 ounces of gold versus our budget of 8,952 ounces. The cash cost per ounce sold was $1,491 and is a significant improvement from 2022 of $284 and ASIC was $17.25 versus $26.33 in Q1 of last year. The shortfall of 2,496 ounces was due in part to the slower beaching rate of the Gold Bar South ore, but also due to a record snow over the winter, as well as a very wet and rainy spring. The very heavy snowfall over the winter led to high — very high snow melt along with very heavy spring range, which resulted in a diluted gold grade in our solution that goes back and forth from the leach pad to the gold recovery plant.

This had some impact on our recovery. The very high spring runoff also interrupted production and site access for approximately three days in the quarter. During that time, our two access roads were flooded and getting to the site involve boat and helicopter for a few days. With the help of our own people and our contractors were able to mitigate the impact of these unusual weather events. We are working diligently to get our production back on track and we have returned to work in the Pick pit in mid-April where the ore has much better leaching kinetics, which will allow the gold to be released much quicker. This will improve our gold production in the remainder of the year. In Mexico, at the El Gallo Phoenix project, we have moved the plant that we purchased last year to the site and are planning for production in early 2024.

We are presently working on three important aspects of the project. Number one, the permitting modifications required by the revised plant configuration and production rate, the construction, engineering and scheduling for the project and the financing for this construction. As you might remember, we will reprocess the heap leach pad, which has a grade of 0.6 grams per tonne. To accomplish this, we acquired a use 7,000 tonne per day gold processing plant, which was recently operating at another mining operation. We have moved this plant to our site and we will assemble the front end of the plant, meaning the grinding cyclones and leaching portion of the plant and used the present El Gallo gold recovery circuit when we start production. This — the acquisition of this equipment reduces the capital cost for the project down to approximately $12 million with potential to allow us to increase production as we move into — as we move to production.

We see this plant operating later this year or early in 2021. In all of our operations, we are continuing our progress in stabilizing and improving operations so we can obtain predictable outcomes for gold production and cost in 2023 and into the future. Thank you very much and now I’ll turn it over to Stefan Spears for an update on our exploration efforts.

Stefan Spears: Thank you very much, Bill. I’ll start by highlighting exploration results from projects in the Timmins region. We have a large exploration and resource delineation program ongoing at the Stock property, the site of our mill, as well as the past producing Stock Mine. To-date, in 2023, we’ve completed 42,800 meters or approximately 140,000 feet of diamond drilling. Yesterday, on May 8th, we published an exploration update, which you can reference for complete results and diagrams. We had a positive outcome from our drilling near surface up plunge along the historic Stock Mine trend. This mineralization occurs just below the bedrock surface very close to the proposed ramp access to Stock West and our mill, with strong gold grades and widths in eight holes.

Two highlights are 18.9 grams per tonne gold over 9.4 meters, including 103 grams per tonne over 0.9 meters. And in the second hole, 18.7 grams per tonne gold over 3 meters, including 53 grams per tonne over 1 meter, results are true width and uncut. Drilling also returned positive results from the Stock Mine trend down plunge below the historic mine workings, as well as step-out drilling at Stock West, where additional intersections carrying visible gold are currently in the lab. We also encountered a potential new hanging wall zone above Stock West, which returned an intersection of 5.7 grams per tonne gold over 5.9 meters true width. Exploration drilling in Timmins will continue throughout the year at Stock with drilling also allocated to Grey Fox to follow up on positive results received last year.

Moving to Nevada. Exploration is just getting ramped up after the winter and a very wet spring period. We look forward to reporting on progress at several near-mine exploration targets during our next call. In Argentina, the McEwen Mining management team visited the San Jose joint venture mine in April to tour the site and received presentations on the production plan for 2023 and exploration progress. Drilling to define new veins is ongoing with a focus in 2022 and 2023 on two veins to the north of the mine. The first called Mora Northwest located approximately 750 meters north of the nearest underground infrastructure, had an initial resource defined in 2022 with additional potential along strike. The Mora Southwest located approximately 250 meters from the nearest infrastructure, returned encouraging drill results, such as 390 grams per tonne silver and 1.8 grams per tonne gold over 1.8 meters true width and the local geological team believe this vein has good potential for additional resource growth.

In the second half of this year, drilling is planned at the Telken North target, which is adjacent to the Cerro Negro mine, targeting the extension of the Northwest trending vein system that exists on Newmont’s property. We intend to highlight exploration opportunities and results from San Jose more actively in our disclosure going forward. Finally, moving to Los Azules. We have published four drilling updates so far in 2023. Most of the drilling has been devoted to delineating the deposit and improving our knowledge of the geologic controls metallurgy, rock quality, hydrology, et cetera, which is essential as we move to more advanced engineering studies. The area around Los Azules deposit remains underexplored with numerous geophysical targets never tested by drilling.

One deep exploration hole testing a geophysical anomaly to the north and below the deposit was published on March 6th. It was highly successful returning an intersection of 1,052 meters of 0.29% copper, including 480 meters grading 0.24% copper. Copper grade in this hole increased below 500 meters with grades up to 1.46% copper over 26 meters in early mineral porphyry with coat stainless, which is typical of the high grade core of the resource. Thank you. I’ll now turn the call over to Perry Ing, CFO.

Perry Ing: Thanks, Stefan. I’ll provide a brief overview of our first quarter results for 2023, following on from Bill’s overview of our operating results. Jeff and I will then discuss our liquidity and the impact of the Stellantis and Nuton Rio Tinto transactions, which closed late in the first quarter. So starting with McEwen Mining’s consolidated results. We reported a GAAP net loss of $43 million or $0.91 a share, which compares to a GAAP net loss of $20.7 million or $0.45 per share for the same period in 2022. Given that the reported loss is primarily a function of the Los Azules exploration expenditures at McEwen Copper, we have introduced a new metric this quarter of adjusted net earnings loss, which is a non-GAAP measure focusing on the results of our 100% owned gold operations and excludes the results of both McEwen Copper and the San Jose mine.

Accordingly, our adjusted net loss on this basis was $6.4 million or $0.14 per share for the quarter, compared to $13.1 million or $0.28 per share in the first quarter of 2022. Our adjusted net loss improved significantly despite acceleration spending on our 100% owned properties, nearly doubling from $3 million to $6 million this quarter. This demonstrates a significant improvement in our operations, particularly at the Fox Complex during the quarter. This is reflected also in the improvement in our reported gross profit and cash gross profit figures on a quarter-over-quarter basis. So looking at our operations and characterizing our results, build in a thorough job reviewing our operational successes and challenges at our properties. I’ll also add continuing on from Stefan’s discussion about San Jose that, at the San Jose mine, first quarter production was generally disappointing.

It came in at 23,000 gold equivalent ounces, which while slightly ahead of the first quarter of 2022, was significantly below budget expectations with resulting all-in sustaining costs coming in over $200 above realized gold equivalent sales prices. This is primarily a result of lower grade process as they experienced a high level of mining dilution and also processed lower-grade stockpiles because of — or shortfalls from underground mining. The average gold and silver grades processed were approximately one-third lower than the comparative period in 2022. Tonnage to the plant was 108,000 tonnes, which was slightly ahead of the 103,000 tonnes processed in the comparative period. We will work with the team at San Jose and our partner, Hochschild Mining, to monitor the execution of the drilling and recovery plan that I’ve outlined to better define the mining resources and access new areas of ore, not in the original mine plan, as Stefan outlined.

This should have a positive impact for San Jose both in 2023 and 2024. Adding the results of the three operations together leaves us consolidated production of roughly 30,000 gold equivalent ounces for the quarter, compared to 25,000 ounces for the first quarter of 2022. Again, while slightly ahead of where we were last year, we still have a fair amount of work ahead of us to meet guidance for the year. But based on the plans outlined by Bill, we believe we could do so and can also deliver these results profitably, especially at current gold prices. From a liquidity standpoint, the transactions, which Rob outlined leaves the company in much better shape in terms of cash and working capital as evidenced by our balance sheet. We are currently in the process of retiring $25 million with our — of our debt with front lending, which should close in the coming days, as Rob mentioned, and this will further deleverage our balance sheet.

Now I’ll turn it over to Jeff Chan, our VP Finance, to go over a [Technical Difficulty] highlights.

Jeff Chan: Thank you, Perry. During Q1, we raised a total of $185 million, consisting of private placements and secondary common share sales. These transactions brought in ARS30 billion from FCA Argentina, a subsidiary of Stellantis and US$30 million from Nuton, Rio Tinto Venture. McEwen Mining as a standalone company received $47.5 million in consideration of its 8.7% interest in McEwen Copper. The balance of the funds will be used by McEwen Copper to advance the Los Azules Copper project. The pricing of the recent transaction implies the market value for our copper business of $550 million. From an accounting perspective, the cash raise is fully reflected on our balance sheet, hence the reported cash balance of $190 million.

As we described in Note 4 to our financial statements, as of March 31st, McEwen Copper held ARS29.5 billion at an official exchange rate of ARS209 to $1. We are prudently managing our Argentine peso balances to mitigate inflation and devaluation risks, investing in low-risk liquid securities. As a result, our investments in Argentina yielded $9 million in interest income during Q1 against $7 million in devaluation impact on our peso balances. I’ll now hand things over to Michael Meding to discuss our Los Azules Copper project.

Michael Meding: Thank you, Jeff. In McEwen copper, we had a remarkable quarter this year. In a challenging market, and as mentioned by Rob, we have been able to win the support and investment of Stellantis, the world’s fourth biggest car maker by an equity investment of ARS30 billion, obtaining a stake of 14.2% in McEwen Copper. This is remarkable, because to my knowledge, it is the first time a car makers invested in a copper developer. This is testimony to a trend shift in the mining sector and validates the value that Los Azules and Stellantis [ph] represents. Car makers realize the eye-watering amount of natural resources required to shift toward a greener energy metrics and electromobility and the need to secure supply.

Los Azules presents a unique opportunity, a future mine that is aimed to be a paradigm shift in the mining world. A mine entirely built towards minimized environmental and carbon footprint with low water consumption aiming to produce copper cathodes that have direct industrial applications also in Argentina and are very attractive from an ESG perspective. It is remarkable because it is strategic beyond the essential but near financing. Stellantis produced about 160,000 cars in Argentina, half of which are exported, has approximately 24,000 employees in Argentina direct and indirect. 24,000 families that depend on Stellantis, which produced in Buenos Aires and Córdoba. Urban centers that do not have the same appreciation of mining as the more distant mining provinces in Argentina.

Now we’ll have a significant amount of exposure to our copper development, not only through the sharing of future tax income, but also directly through Stellantis participation in McEwen Copper. With Stellantis, we now bring mining to those urban centers, an essential component of our ESG strategy. Rio Tinto, the world’s second biggest mining company through the copper technology arm Nuton, also took the opportunity to invest another ARS30 million acquiring a percentage, which now makes them equal shareholders to Stellantis, owning 14.2% of McEwen Copper. As highlighted by Jeff, this together means that the implied market value of McEwen Copper increased from approximately $260 million to $550 million, while the share ownership of McEwen Copper decreased from 68.1% to 51.9%.

This represents an overall value accretion of 80% for McEwen Mining shareholders from $160 million to $290 million. Rio Tinto has ratified the value of McEwen Copper and our important of Los Azules project. So far, we have an environment where there was a scarcity of drill rigs, secured 15 drill rigs. This, including four new Boart Longyear LF160, we own ourselves and part of which we dedicated to local supply development. We have drilled 34.4 kilometers in 127 holes or 11 — 111,500 feet so far and have delivered and communicated strong inflow results in this year’s press releases with more to come. Stefan has mentioned in their exploration update our promising results regarding the stabbed exploration, showing the potential to increase to further out our already vast deposits laterally and at depth.

We have improved our existing roads. Our exploration road now can support 18 wheelers, which we have successfully tested with commercial loads to the site for the first time since the project inception. This is important because it makes future logistics so much more cost efficient. Argentina has become relatively more attractive compared to jurisdictions such as Chile or Peru. It shares thousands of kilometers of border in the Andes Mountains ridge were significant copper deposits are located. Testimony to this increase of interest in Argentina, especially Sao Juan, was the attendance of our event at PDAC, where we invited the Vice Governor of San Juan, the Mining Minister of San Juan and the Ambassador of Argentina to Canada and representatives of the financial sector and which was very well attended.

This, as well as the recent visit of the Canadian Ambassador to Argentina at which together with the Minister of Mines of San Juan we travel to our projects. We demonstrated our progress at the Los Azules project in Andes, the first project the Ambassador visited in this province. Both indications that Canada and Argentina are interested in working together to bring mining projects forward that play in a central role in the future energy transition. We have made remarkable strides also on the permitting side and filed for our environmental permit application for exploitation with San Juan authorities. And event, including the Governor, the Minister of Mines and representatives of the National Secretary of Mines and Legislators on the 14th of April and which is the primary permit application to furthering our projects.

Another milestone was the recent Memorandum of Understanding we signed with YPF Luz. YPS is one of the biggest companies in Argentina and the majority state-owned national oil, gas and energy companies. This memorandum signed between McEwen Copper and YPF Luz sets out the framework to deliver appropriate solutions to provide 100% renewable energy for the operation of Los Azules and San Juan, aimed to prepare Los Azules for carbon neutrality by 2038. Our competent management team in Argentina with powerful local experience is prepared to drive the project call the Build Our Vision, a green, sustainable mine with an accelerated time line. Chemical exploration on the other hand, the Rio Tinto Company, is expected to start drilling at our Elder Creek properties during this month.

Kennecott is slated to invest $18 million over seven years to be able to earn 60% of Elder Creek. Thank you for your attendance. I will turn the conversation back to Rob.

A – Rob McEwen: Thank you, Michael. Okay. Operator, we’re going to go to a question-and-answer period. And we have two questions that came in online. The first one from Glenn Wesure [ph], the shareholder. He asked what measures, we’re taking to minimize the potential losses from a declining Argentinian peso. I’ll ask Michael to reply to this question.

Q&A Session

Operator: Yes. We do. [Operator Instructions] The first question comes from the line of Jake Sekelsky from Alliance Global Partners. Your line is open.

Operator: And the next question comes from the line of Heiko Ihle with H.C. Wainwright. Your line is open.

Operator: And the next question comes from the line of Joseph Reagor with ROTH Capital Partners. Your line is open.

Operator: [Operator Instructions] Our next question comes from the line of Bill Powers [ph] of Private Investor. Your line is open.

Operator: And our next question — thank you. Our next question comes from the line of John Tumazos with Very Independent Research. Your line is open.

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

Rob McEwen: Thank you, Operator. Thank you everyone for attending and the rest is yet to come. Thank you.

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