McEwen Inc. Q3 FY2020 Earnings Call

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. 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 during COVID. At the onset of the pandemic, we temporarily suspended all four 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 mean that San José is still operating below its capacity. Our Los Azules Project is just emerging from the South American winter and is being reactivated. During Q3, our Gold Bar and Black Fox mines started to turn around, 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 the head office and at the mine site, so we're focusing on improving operating efficiencies and profit margins. 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. Before that, she was the Chief Financial Officer of Trevali Mining, where she was part of the team that 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 exploration 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 a 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 milestones 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 the 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 two 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. Fifteen follow-up holes have been completed since starting the current program in September, and eight of those contained visible gold 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.

The first question comes from Jake Sekelsky of Alliance Global Partners.

Just looking at the Q4 production guidance, 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. 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, 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. As you've heard us speak before, there's a footwall zone, which we haven't drilled off. 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 were intercepts 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 four 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. Additionally, do you have any idea, or a 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 costs. So there's a right in the middle of that budget time, I go to try and look at improved ways to reduce costs.

Yes. We don't have the breakdown 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. 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 regarding 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 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. I guess a lot of the things I would have asked but you 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 others can fund. 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. We think some of the projects have very robust economics. We hope to look for 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 an 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 that 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. We're working to accelerate the Froome project and looking at ways to improve and accelerate development so we can pull forward the commercial production date in the 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. 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.

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, 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?

About $6 million on the Froome to date. 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 a private investor.

I have a few questions. Let's start with Black Fox. What is the current status of the reconciliations between the grades extracted from the ground and the grades being produced? Have there been any improvements in that area?

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. Cutting previous drilling basins in half, more than in half has 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. Regarding Black Fox, I understand there have been discussions about implementing changes to allow the mine to continue production beyond 2021. Could you share some insights? I know the study hasn’t been released yet, but it appears you're making significant progress with some promising exploration results. What are your thoughts on extending the mine life beyond the middle of next year?

Yes, that's an excellent question. We are currently focused on Q1 and have extended some mining activities into that period. I mentioned this in my summary today, which is a very encouraging development. I believe it's still early days for Black Fox. We began mining the west flank discovery made earlier on level 280, which extends up into the Froome decline. We are actively drilling from the Froome decline on that west flank extension in Q3. Some of the drilling results you've been hearing about are related to old workings and current active stoping areas. I don't think we've identified all of the ore in the upper part of the mine, and we are gaining more insight as we obtain detailed information and better access. The Black Fox deeps remain a strong target, and the area from levels 840 to 810 is an active mining zone. We have been extending mineralization drilling there, and the stope we mined in Q2 performed very well. We implemented cable bolting, which allowed us to effectively manage the stope walls along the A1 faults through a successful dilution control program. I am quite optimistic about the potential for extending Black Fox. Our strategy is to transition operations to Froome, alleviating the production pressure on Black Fox, which will give our mine exploration team the opportunity to conduct their work and drill ahead to gain a better understanding of the ore body and identify resources that could be added to the mine plan along with Froome.

Okay. Moving over to Stock. I recently read about a plan to dewater the stock mine. Can you provide some insight into your current status in that process as you move 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 looking at 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. Tentatively, we are looking to try and target something mid-next year to start that dewatering and access of the mine.

And would that take about six months or so? 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 that's 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. We're obviously getting quotes on that and timing to see how it all fits together, but we're somewhere in the six- to nine-month range from what we know now.

I have a couple of questions remaining. Regarding Nevada, you mentioned that Gold Bar South is in the permitting process. When do you anticipate being fully permitted there? Additionally, when do you expect mining to commence at Gold Bar South since it is a priority?

Yes, the plan of operations has been submitted. A number of hoops to jump through. We expect the permit to come in the last half and start mining in Q4 next year.

Okay. Q4 of this year or next year?

By next year.

Okay. Regarding the move to Mexico, there appears to be a significant increase in costs in Q3 compared to Q2. Is this just related to how some costs were allocated, or is this a matter of capitalizing certain costs instead of expensing them? Could you provide some clarification on why the cash costs have increased noticeably from previous levels?

Yes. There were two main variances. First was COVID. Obviously, the delays until the government allowed us to get back in there. We experienced some COVID cases at the site, where we had to isolate employees. We had cross-functionally trained employees and had contractors on standby. So we had 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 ore on the heap and keep our ounce profile up, which was the basis of the cost per ounce. Those two factors, and the 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 to next year.

You can expect to see a decrease in costs, but they may not return to last year's levels. Is that the direction you see for the future?

Yes. As mentioned, we are still working through the budget issues. We have responded to those challenges, mining is advancing, and we are accumulating new orders.

The production from Argentina was similar to Q1 of this year, but the costs were significantly higher. Is the partnership supporting many additional social programs that could be contributing to these costs? It appears that while operations haven't changed, the costs per ounce produced have increased dramatically. Are there many one-time items included, or can we expect these higher costs to continue?

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 are 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 few restrictions. So that impedes people being able to get to site. A positive is sort of going forward in Q4, the MSC has negotiated with the union 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. We do expect, from everything we know, that cost profile could improve on a go-forward basis.

Is there any potential for dividends from MSC this year, or will that be postponed to 2021?

Yes, I think that's probably more likely going to be a 2021 event to get money out of Argentina, given the exchange, and it is quite expensive. We do know that 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, either formally or informally, returning capital to shareholders via buybacks and returning a percentage of ounces, 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. It seems as though that would be pretty accretive. Has there been some discussion around doing something along those lines?

Bill, you mentioned the loan and the provisions related to it. The loan is due in 2023, and until it is paid off, we can't consider an early retirement option. Currently, our production earnings are not sufficient to undertake that and also support our future development efforts.

Okay. Regarding corporate development, there is currently a $58 million short position, which appears to be the highest McEwen has seen. Unfortunately, dividends or buybacks are not feasible right now. Are there any new initiatives you foresee this year to promote your story? I know you've compensated some brokers through financing fees. Can you share your corporate development plans that would help communicate the turnaround story?

Well, clearly, it's returning the sites to profitable operations. 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? That is a possible spinout, combining it with another property that we have, another copper project in creating a dedicated copper vehicle. 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, 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 an incurred additional 37 million-ounce gold equivalent. It's a large deposit. If you look at it that way, it would 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.

I appreciate that. Are there any plans for a potential technical update later this year once the feasibility studies are completed?

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. 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.