McEwen Inc. Q2 FY2020 Earnings Call

Hello, ladies and gentlemen. Welcome to McEwen Mining's Q2 2020 Operating and Financial Results Conference Call. Present from the company today are Rob McEwen, Chairman and Chief Owner; Peter Mah, Chief Operating Officer; and Sylvain Guerard, Senior Vice President of Exploration. After the presentation, there will be a question-and-answer session. I would now like to turn the call over to Mr. Rob McEwen, Chief Owner.

Thank you, operator. Good morning, fellow shareholders, ladies and gentlemen. It's a great day we have. The price of gold and silver have been climbing over the last couple of months. I was reminded the other day, someone called up and said, 'You said gold was going to $2,000 an ounce.' That was a couple of years back, and they said they thought it was impossible. Now we're just over $2,000 an ounce. Silver is on a real tear. Given all of the quantitative easing that's been going on in the world and the amount of debt, we are going to see much higher prices. If you take a look at the Indian rupee right now, the price of gold has just taken off over there. I think that's a good example of what's about to happen to a lot of other currencies and the price of gold in those currencies. Q2 was not a quarter we're proud of from a performance standpoint, but we are proud of one thing about Q2: we put the health of our employees before profits. We started with the PDAC. When COVID came along, we said, 'There's a risk to our employees being at that conference because of COVID,' and we didn't want to contribute to the spread. So we said, 'We have a booth, but we're not going to attend. No one in the firm is going to that conference.' Early on, we decided to suspend operations at our mines, which had a serious impact on our production. The expenses were there, but the ounces weren't produced. So in Q2, we've seen numbers that make me sick when I look at them, but I’m comforted in knowing that we've protected our employees. It's really important that they be protected because they are the life and longevity of these operations. Going forward, you'll hear from Peter today that production is picking up at all our operations, and we expect our cost per ounce numbers to return to levels that are reasonable in the ensuing quarters. We also have exciting exploration news that Sylvain will speak to you about. So, at this point, I'd like to turn the presentation over to Peter to talk about our operations.

Thank you, Rob, and good morning, everybody. At Gold Bar, gold production was 6,100 ounces in Q2, and for the first half of this year, 15,200 ounces. Production was impacted by shutdowns in April for COVID, and we operated on a single shift during May and June. Getting back on track, we started 24-hour operations towards the end of July and are ramping up towards feasibility levels in Q3. An optimization and improvement plan has been developed, and we are targeting improved costs and throughput. Implementation of that project started in late July and is progressing quite well. Work has also progressed positively on the optimization of mining and processing cost scenarios, and we expect a resource and curve update in Q4 this year. Moving on to Black Fox, gold production was 2,200 ounces for the quarter and 10,500 for the first half of this year. Again, production was noticeably impacted by the COVID-19 shutdown. We had slower-than-expected ramp-up as the mine resumed normal operations, experiencing lower grades from longer stope exposure times and delays in development timing that limited our stope access. Going forward in the second half, production costs are expected to align with pre-COVID-19 performance. I am pleased to report that we have achieved ore development at the West Flank 280W that is five months ahead of schedule, and we encountered high grades that we anticipate will lead to stopeing this year. Froome is on track for first ore in Q2 2021, with commercial production expected to be achieved in Q4 of next year. The Black Fox complex expansion study is currently out for tender and will be awarded next week. We expect to complete the preliminary economic analysis in Q4. Regarding our gold resources in Canada, we have nearly 3 million ounces in Canada, divided fairly equally between our Lexam properties and Timmins, as well as our Black Fox Complex. Our organic growth expansion strategy aims to convert resources to near-term total gold equivalent production of greater than 300,000 ounces per year that is sustainable and low-cost, leveraging our three operating regions in the Americas. The strategy includes seven projects: the Black Fox Mine, its extensions; Froome; Grey Fox; Stock; Fenix; Gold Bar; and Gold Bar South. Several of our projects are under review, such as the Lexam properties in Timmins and the Tonkin oxides. We will report on those in the upcoming quarters. The Fenix project is advancing towards feasibility, anticipated in Q4 2020. Based on the preliminary economic analysis, with updated metal prices of $1,500 gold and $19 silver, the IRR is 44% and the NPV at a 5% discount rate is USD 112 million. At spot prices, it improves. At $2,050 gold and $28 silver, the IRR rises to 97% and the NPV exceeds USD 252 million. On the next slide, I'll share highlights for improvements at the Black Fox Mine and updates on our near-term production projects like Froome and Grey Fox. This next slide shows Black Fox and the 2020 mine plan areas that we are developing. We have created new mining opportunities and acted on them in the first half of this year. Gray represents mined-out areas, blue represents the 2019 year-end resource, and red is for planned stopeing and development, with dark red showing actual development. Two examples of what’s different in the upper part of the mine are the 240 East, a new stopeing area that has so far added about 26,000 tons to the 2020 plan. Recently, we accessed the 280 level and developed some notable high-grade areas in the West Flank. Beyond these opportunities, by year-end 2020, we'll assess whether a bulk low-grade opportunity exists for the future. This next slide shows some new West Flank drill targets in red, near Froome declines, which could add to production at Black Fox this year. The following slide discusses the Grey Fox project, one of the most promising opportunities in our pipeline. The company anticipates it will become a long-lasting core asset. The inset in this slide illustrates the conceptual high-grade Grey Fox pit. It targets the Contact, 147 Northeast, 147, and South Zones, with the new Whiskey Jack discovery depicted above and to the right of the Contact Zone. A stopeing study and trade-off analysis to evaluate open-pit and/or underground mining while maximizing the Stock mill capacity will be finalized in Q4 2020. On the next slide, I will provide an update on the Froome twin ramp access, which is about 30% complete overall. The red dot indicates the location of the ventilation ramp as of July 31, which is around 40% complete. We aim to reach the ore body by Q2 2021 and begin transverse and longitudinal stope development, as illustrated here. This forecast includes a conservative estimate of advancement through the fault zone. Commercial production is projected for Q4 2021. This slide highlights advantages of the Froome project compared to Black Fox. It is a shallower deposit suited for low-cost bulk mining. It has more consistent grades and continuity in a wide, disseminated style of mineralization and larger stopes that will result in more efficient underground development and mine sequencing. Ground conditions are fair to good, and we expect favorable results regarding dilution and grade control. That concludes the operational and project updates. I'll hand it over to Sylvain for the Q2 exploration results.

Thank you, Peter. At Gold Bar, our exploration drilling activities primarily targeted the Pick West pit and the Gold Bar South satellite deposits. In-pit drilling confirmed significant gold mineralization, both in grade and width over the West Pick area, providing key information to support our model. At the Gold Bar South satellite deposit, located about 3.5 miles southeast of Gold Bar, we are completing a 10,000-meter drill program. Last year's drill results were positive, successfully confirming shallow zones of plus 2-gram gold mineralization. Additionally, drill results are extending mineralization toward the south with intersections like 2.4 grams per ton over 104 feet, 2.2 grams over 95 feet, and 1.2 grams per ton over 125 feet, along with shallow intersections in the northwest of the deposit area showing 0.7 grams per ton over 60 feet and 0.6 grams over 60 feet. The 2020 drill program is significantly enhancing our geological understanding and control of gold mineralization, occurring mainly along the stratigraphic contact and at intersections with northeast-southwest trending faults. An update to the Gold Bar South resource will be completed in Q4, and permitting for development and production from Gold Bar South is progressing, so we expect to start mining the satellite deposit in the second half of 2021. In Timmins, drilling focused primarily on closely spaced definition drilling of gold mineralization within our mining blocks. The BlackRock deposits remain open to the west and at depth, along two structural controls dictating the mineralized zone's geometry. High-grade intercepts were generated from these ore definition holes, such as 19.9 grams per ton gold over 3.5 meters and 162 grams per ton over 3.2 meters, including a 1,000 grams per ton intersection over 0.5 meters from the West Flank extension. The recent definition drilling in the Deep Central Zone around the 860-meter level revealed an impressive high-grade intersection of 44.8 grams per ton gold over 5.8 meters, including 149 grams over 1.5 meters. With that, I'll return the call back to Rob. Thank you.

Hi, Sylvain. Thank you. Sorry, a technical glitch. Peter and Sylvain outlined what's occurring in operations, and we're continuing to see excitement in exploration. Looking ahead, in the next couple of quarters, we will see more ounces and improved operating costs. This will be followed by economic studies on Grey Fox, Stock, and Fenix. Froome will be advancing, getting closer to the ore body. We've been constrained with our capital given the lack of production in the second quarter, but that will be partially addressed by the more ounces. I have to say I'm really excited about the growth prospects. Over the years, we've been adding properties, and now we're starting to consolidate them, making it easier for you to see our assets. There's a significant organic growth pipeline concentrated in several regions, and when you consider the potential for reaching 300,000 ounces a year from a few tightly contained areas, it sparks excitement. My confidence remains high, though I have been disheartened by certain setbacks we've experienced. Recently, I acquired another 2 million shares, bringing my total holdings to 82 million shares. I believe we will see improving fortunes for the company, as a result of our hard work and the movement in gold and silver prices. The world is starting to consider the implications of what may happen to our currencies, and we have witnessed a unique period. Historically, we would see fluctuations in specific regions, but now we've observed a universal response where governments have expanded their money supplies to assist their citizens. This is unprecedented and is poised to create explosive impacts on the value of gold and silver and other hard assets. So, I advise you to add to your positions wherever you are in the precious metal space, and I believe you're in for a significant reward. Thank you very much. I'd like to open it up for questions.

Our first question comes from Heiko Ihle with H.C. Wainwright. Your line is open.

Hi guys, thanks for taking my questions. Hope everybody is staying safe.

We are, Heiko. Thank you. I hope you are too.

I am indeed. Hey Rob, walk me through the ongoing COVID expenses. I don't know if there's an intelligent way to quantify it mine by mine, but can you just walk us through what additional expenditures you have this quarter, next quarter, etc.?

Sure. I'm going to ask VP Finance, Andrew Iaboni, to address your question, Heiko.

Thanks, Rob. Yes. To address the question, we looked at the COVID expenditures in three parts. One is the direct incremental costs required to improve safety as people enter and leave the sites. These costs are related to temperature gauges, increased security, and minor changes to workstations. These expenses are not significant and are not expected to be major costs in the future. The more significant costs incurred were related to the shutdown, particularly the labor costs we continued to retain during that period. Thus, keeping our labor force available for ramp-up was a major expenditure. The second category pertains to idle capacity costs where we operated below capacity. We still pay for wages, utilities, and overhead during this time, categorized as production costs applicable to sales, extending while we are not back at full capacity in the coming months.

Fair enough. But there's no way to quantify it. I mean are we talking about $100,000? Are we talking about $1 million, a couple of million bucks?

Well, we've quantified the shutdown costs. Those were disclosed in Note 4 of the financial statements. We incurred around $600,000 of shutdown costs at Black Fox. Additionally, we incurred roughly $1.4 million of costs for Gold Bar during that shutdown period.

Fair enough. And if we trend-line that, we're probably doing okay?

What do you mean in terms of trend-lining, applying that forward? Because those costs were specific to when we were not operating.

Okay. I see what you're saying. So, you don’t yet have a number for Q3 and Q4?

Not specifically. We're back at operations and ramping up. As long as that ramp-up continues, we shouldn't incur any significant COVID-related costs.

Fair enough. Okay. And then, Rob, I guess, a question for you. You mentioned in the release, 'I can see an exciting organic growth pipeline of projects ahead that could potentially push our production to 300,000 ounces per year.' Just to clarify, we're talking about acquisitions here? And is there a timeline you'd want to assign to that?

In the next three to five years, Heiko, and it wouldn't be acquisitions. It would all be organic. In the Timmins area, we have the Stock property, Grey Fox, and Froome is coming on stream first. We believe the Black Fox Mine will also contribute, as you heard Sylvain mention some of the drill results. It’s a shallow mine that shows deeper potential, and we also are seeing good results to the west. The mine needs more exploration, but it could return and add to production. Our goal is to integrate all properties, particularly those within the Timmins area that can bring production up and form a long-life asset, running better than 100,000 ounces a year. Gold Bar had setbacks when its ounces were cut back earlier this year, but Gold Bar South is expanding, showing attractive long intercepts of good grade for open-pit mining. Finally, the Fenix project looks promising and offers a robust feasibility study. These are all properties we own entirely, so no need for external acquisitions to achieve growth.

Very good. I appreciate the clarification. Thank you.

You're welcome, Heiko.

Our next question comes from Bhakti Pavani with Alliance Global Partners. Your line is open.

Good morning, guys. Thank you for taking my questions.

Hi, Bhakti.

I would like to dive right into Black Fox. You provided the long-term opportunity there. Just curious, specifically talking about the second half of 2020, how do you see the grade profile improving, considering grades have certainly improved from the second quarter compared to the first quarter and with good drilling results near the West Flank area?

Peter, would you like to answer that part of the question?

Sure. Thank you, Bhakti, for that question. Before answering, I’d like to point out a typo correction on Slide 6. It says first ore in Froome in Q2 2020—it should be 2021. Now, regarding Black Fox, we are excited because we are seeing some very good high-grade intersections in the West Flank and historically in the Central Zone. We expect to see some nice-grade areas, but it's still early days. We've just gained access and are drilling. We're very optimistic about the 280 area, where we've sealed some nice grades which are significantly higher than our head grade. However, it's too early to guide on that, but overall, the outlook is quite encouraging. As Rob mentioned, we need to invest time and resources into exploration in these areas moving forward.

Thank you so much for the clarification. And regarding tonnage, could you provide some color on how the tons are coming along at Black Fox since the second quarter’s decline due to COVID?

Yes, the tonnage is trending according to plan. These development accesses have helped us increase the number of stopes we have access to, improving our mining flexibility tremendously. Therefore, we don’t foresee any issues regarding available stopes in the second half.

Perfect. Moving on to Froome, it's expected to come online in Q4 2021. I know it’s preliminary, but can you talk about the cost profile there? I understand the grades are slightly lower compared to Black Fox; how does it fare concerning costs compared to Black Fox?

Yes, it's significantly better. We're finalizing our feasibility and will release that soon in Q3. Froome presents a great bulk, open stope deposit suited for low-cost mining. The expected costs will be notably better than Black Fox, with a 5% decline for a short haul. It encompasses efficient operations which is favorable for our cost structure.

Peter, could you contrast that for Bhakti regarding what's currently happening at Black Fox compared to Froome, and why you believe Froome will achieve better cost efficiency?

At Black Fox, we manage small Chiclet areas, retrieving high-grade sections, which results in a lot of setup work. Conversely, at Froome, we have broader intersections ranging from 15 to 40 meters wide. This results in more efficient stopeing and bigger productive stopes that significantly enhance our operation costs. As I mentioned, once we complete the final edits to the Feasibility Study, we’ll provide more definitive guidance on these cost comparisons.

Got it. Thank you so much for that clarity. Approximately 30% of development has been completed so far. Based on your models, what additional development expense do you expect to incur in the second half of this year with Froome's advancements?

I believe we’re projecting an additional $10 million in development expenditures for Froome for the second half of the year.

Got it. Thank you for clarifying. Moving to Fenix, you mentioned a renewed focus due to higher metal prices. Are you set for a production decision post feasibility study, and what would the initial capital requirements for the project look like?

Fenix Phase 1 has received the required permits. The gold project, Phase 1, stands at approximately $44 million, while Phase 2, the silver project, is about $23 million. We are in the final stages of that feasibility study, and both estimates might change with potential improvements in our business model. But for now, those are the figures we’re projecting.

Understood, and what's the tentative timeline for construction or development if you move ahead into production?

It's early days still, but our initial estimates suggest a 12-month schedule.

Lastly, what are the expectations regarding dividends from San José? I realize COVID has disrupted operations, but I'm curious about the situation.

San José is currently facing travel restrictions between provinces in Argentina, limiting its operations to about 60% capacity. Therefore, it's not realizing its full economic potential. With half its production being high-grade silver, the price increase from $12 in March to $28 today may positively influence the economics. They aim to return to full production later this year, but COVID has clouded that forecast, making it difficult to quantify potential gains from our interest in San José.

Thank you very much for all the information. That’s all from my side.

You're welcome.

Our next question comes from Michael Kozak with Cantor Fitzgerald. Your line is open.

Good afternoon, everybody. Thanks for hosting the call. A couple of questions from me. First, at Gold Bar, you're saying you're going to be back to mining at full capacity in September. What does full capacity mean for gold output at that mine? Are you still only mining in Pick West? Have you solved the grade reconciliation challenges there, and do you have a production target for Gold Bar in Q3 and Q4?

Peter, would you like to handle that?

Certainly. Full capacity means that we're ramping up to 24-hour operations, targeting our feasibility level production. As of the end of July, we increased our crews and ramped up to 24 hours. We are currently achieving somewhere between 5,000 to 6,000 tons daily. Our target is 7,000 tons per day as part of our optimization plan, which aims for cash cost reductions of a couple of hundred dollars per ounce. For Pick West, that is solely where we will mine throughout 2020, and most of the drilling Sylvain has mentioned previously has focused on that resource estimate, expected to provide an update in Q3. Reconciliation with the model is in its early stages, and early guidance is not possible. However, trends indicate positive developments, and we expect our teams to be fully crewed and operational by September.

Thank you.

If I may jump in, Peter, could you provide Mike with a reference point on the cost reduction? What are you aiming to reduce it from?

The completed operational review involved a thorough examination of our production and cost over the prior nine months, allowing us to project forward in our 18-month plan. This led to an adjusted gold production cost of $1,009 per ounce going forward, and our improvement program aims to achieve a reduction of $200 per ounce. This equates to an annual savings in the range of $13 million to $17 million for the life of the mine. This is encouraging and compelling. We have identified various areas for operational efficiencies without the need for new capital expenditures.

It seems you've gained a solid grasp on the expected costs, but the ounce profile remains uncertain until the reserve model and reconciliation issues are resolved—correct?

Exactly.

One last question for you, Peter. You've been with McEwen Mining for four months. Have you noticed anything at either Black Fox or Gold Bar that requires immediate improvements in the short term?

Yes, there are always opportunities for improvement. Similar opportunities exist at both mines. We’re looking to enhance resources and information availability, improving our understanding of geological drivers for informed planning and successful operations.

Thanks for that. Thanks, Rob and team. That's all from me. Have a great weekend.

Thank you, Mike. You too.

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

Thank you, and congratulations on all the progress, even if it's not reflected in the income statement.

Thank you, John.

I was analyzing your 10-Q reports, and I noticed discrepancies in recovery rates at Black Fox. In five of the 11 quarters, it shows recovery at 106% to 131%, while in the other six quarters, it was between 77% to 99%. The unweighted average was 100.5%, but it would be even higher weighted to 2018. Could you explain the top-cut procedure at Black Fox? I'm not criticizing it, but producing more than less seems favorable. However, recovery suggests grades are hard to estimate.

Sylvain, would you like to comment on that?

The top cut is often challenging to define in negative mining environments like at Black Fox. We have a dedicated resource geologist on-site for over a year, focusing on reconciliation and geological control. We are analyzing the top-cut procedures continuously and refining our modeling of the deposit.

Was the past top cut closer to 30 or closer to 100, or even higher?

It was closer to 100, I would say.

Regarding Gold Bar, as tons processed declined, recoveries rose to 95% in Q1 and 228% in Q2. Does this imply that the leach cycle might be closer to 12 months than three? Could it be possible that the gold will be realized later?

Peter, do you have insights on that?

Absolutely. During the shutdown, leaching residual gold occurred, allowing us to realize ounces with minimal tons. The leach life may shorten if mine life decreases. We aim to optimize leach time, which is part of our plan. Historically, feasibility was set at 20-foot stack heights, but operations shifted to 30-foot, delaying leaches. We're looking to revert to 20 or even 15 to enhance leach performance.

At the Black Fox complex, Grey Fox has 800,000 or 900,000 ounces at just over 7 grams, which looks promising. I understand Froome is preferred for development, but how much longer would it take to get to Grey Fox?

We're making progress, with some promising underground targets emerging. It's premature for timelines as we seek grade continuity. Initial permitting is about a two-year process post project description. We're working diligently to complete a stopeing study to understand costs and opportunities for underground versus open-pit mining.

With the top cuts at Grey Fox, is there a chance the grade could improve by 0.5 gram or more?

Sylvain, any thoughts on that?

There is potential upside at Grey Fox. We're drilling areas of high-grade, extending knowledge of the geology while optimizing key structures. Ongoing studies include an economic assessment regarding the best mining scenario for the deposit, and we will evaluate all opportunities moving forward.

Thanks for your technical depth. I admire the handling of these challenges.

Thank you, John. Your questions are insightful and highlight potential grade improvements and delays in Gold Bar. Good observations.

Our next question comes from Terry Devries, Investor. Your line is open.

Good morning, Rob, gentlemen, how are you today?

Good morning, Terry. We're well.

I find it hard to understand the sharp underperformance against your benchmarks, particularly the GDXJ since early 2019. The underperformance is striking, especially with $2,000 gold and $28 silver. I have concerned that while you mentioned moving toward 300,000 ounces of potential production, this is a three- to five-year timeline, and I worry that we might miss the ongoing bull market. How long will it take to return to at least your benchmarks?

Thank you, Terry. Like you, I am bothered by our underperformance, and I believe every shareholder shares the same concern. Historically, we traded around GDXJ, but we've dropped significantly. Currently, we are in a transitional phase. I believe the future looks brighter, though it has taken time to materialize. Gaining back trust and demonstrating that we can deliver solid quarters will help rebuild that confidence. We believe the turnaround is happening, and we need to show production numbers to prove this recovery. If we simply returned to where the market is, the increase would be substantial.

So if I could be patient for two to four quarters and you meet or exceed expectations, could I expect to see significant progress compared to GDXJ?

I sincerely hope that will be the outcome. We had a disappointing last year, affecting investor trust. Building confidence takes time, but we need to demonstrate our value through performance in ounces produced and costs during this rising gold price. This gap undoubtedly offers an opportunity for resurgence.

Lastly, could you discuss your long-term goal of qualifying for the S&P 500?

Initially, the threshold to qualify for the S&P was $3.5 billion but has risen to $8 billion. Given our market cap is under $800 million, achieving 300,000 ounces won't suffice unless they are extraordinarily inexpensive to produce. M&A might be necessary to reach that level. However, the goal remains as an aspirational target because there's only one gold stock currently in the S&P 500. However, we anticipate that more investors will seek exposure to gold and precious metals, which could significantly impact the market.

Thank you, Rob. Best wishes for a great year ahead.

You're welcome.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation, and you may now disconnect.