McEwen Inc. Q4 FY2020 Earnings Call

Hello, ladies and gentlemen. Welcome to McEwen Mining's Q4 and Year-End 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; and Peter Mah, Chief Operating Officer. I will now turn the call over to Mr. Rob McEwen, Chief Owner.

Thank you, operator. Good morning, and welcome. As many of you have observed, 2020 was a brutal year for us. We have been consumed by fixing the problems that were created in 2019. We invested in capable people, new systems to monitor our operations, and in exploration to build our future. We are now seeing a turn in our fortunes for the better. I'm pleased to say that for the first time in two years, our operations are finally delivering on guidance. January and February were right on target. I will now ask Anna to talk about our financial results for 2020 and how we are very well positioned for 2021. She will be followed by Peter who will talk about how much of a transformation has been required and the progress made and the future we see. Anna, the floor is yours.

Thank you, Rob, and good morning, everyone. As we all know, it was an extremely challenging year in 2020 both financially and operationally at McEwen Mining. For Q4, our three 100% owned mines reported a cash gross loss of $6.9 million and a gross loss of $13.7 million. For the year 2020, we generated a cash gross loss of $4 million and a gross loss of $27 million. We ended 2020 with a consolidated net loss of $152.3 million, the worst that the company has ever seen. I want to speak a little about the loss. In particular, 55% of this loss is a noncash loss that's driven by the impairment of our Gold Bar Mine. And on the back of the feasibility study we just released, if we were able to reverse some of that loss, we would be looking at approximately a $30 million reversal or 35% of that original loss that didn’t have to be written down. However, Q1 does report on U.S. GAAP, which does not allow us to do any impairment reversals. We are not an IFRS reporter, but I thought that was important to highlight. Also contributing to the loss is approximately $27 million in support of our operations due to the challenges of 2020. General and administrative administrative costs were $9 million. We are required to record all of our advanced projects and exploration as expenditures, and that was an investment for the company of about $27.5 million or 18% related to the $60 million loss. Going forward into 2021, we did remove our going-concern note. Today, we have just under $50 million in liquid assets. We also extended our debt facility to deal with debt to mature in August of 2021 to now August 2023 with the new partner, Sprott Lending. We are fully compliant with all of our debt covenants. Subsequent to year-end, we also raised an additional $44 million, and we are now fully funded for our projects into 2021. The $20 million flow-through funding that was raised in 2020 will be used over the next two years for generative exploration at our Fox Complex in Northern Ontario where positive results were delivered, and Peter will speak to some of that. We also have a $5 million exploration program earmarked at our Nevada operations this year. We expect improved performance at our operations after a challenging 2020. We've had a busy Q4 and Q1 with some important growth projects while still with the feasibility study for Fenix and update for the gold mine in Nevada. We are forecasting the 2021 gold equivalent production to be in the range of 141,000 to 160,000 gold equivalent ounces, which is approximately a 23% to 40% increase over our 2020 production. As of today, we remain on track. In terms of our costs, I can say that they will improve from 2020. However, we will not be guiding costs at this point in time until we see our Q1 financial results. Thank you, and I will now turn the call over to Peter.

Thank you, Anna. I would summarize 2020 as a colossal challenge. When I joined McEwen Mining a year ago, the backdrop was the start of the COVID-19 pandemic and a write-down at Gold Bar imminent. Black Fox was underperforming while developing Froome, and the financial health of the company was on life support. Not a pretty picture. Rob and the Board asked me why I joined McEwen Mining, and my answer was simple: we can fix it, and the asset base is strong to grow a major. Fast forward to today, as Rob mentioned, in 2021, I'm pleased to report that we are on plan for January and February. Some highlights at Black Fox. Initially, the resource and reserve was expected to be completed in Q4 of last year. We've extended that into May of this year, and the team keeps working on its MinEx program, drilling and adding resources. So we hope to continue that trend through 2021. And Froome, I'm pleased to report, as of today, we're 36 meters away from first ore. So in a matter of a week, we'll be hopefully nearing the first ore and hitting a very important milestone. Gold Bar, we've worked our way through the write-down of resources and the waste strip that was associated with that and updated the feasibility with 6 years of mine life and/or just around 300,000 ounces of gold recovered. El Gallo remains on residual leach. We published the Fenix feasibility report early this year. Taking a look at Froome, this is an amazing deposit for us. It's bridged our gold production out of the Timmins area for 2.5 years. Some of the benefits of Froome include a very different deposit than Black Fox. It's a disseminated deposit with very wide intersections of 15 to 40 meters in stope width. We're planning a transverse open stoping, primary, secondary with a little bit of longitudinal retreat. It's got good ground, it's a short haul, and our decline has come in off the bottom of the pit at 5%. We're achieving our target development rates and have an improvement program around that to try and advance and accelerate Froome. We've purchased tele-remote LHD to take advantage of technology. This is a very good and low-cost deposit. It will form part of the Preliminary Economic Assessment (PEA) that we're working on for the Fox Complex expansion. This year, we're looking at 100,000 to 150,000 ounces per year over 10 years, and it has a resource base of over 3 million ounces of indicated resource and over 1 million ounces inferred. We have been doing a lot of work, trade-off analysis on mining methods and approaches. The following areas are trending very positively to the business case for the PEA, which includes Grey Fox, a 900,000 ounce indicated resource, about 7 grams per tonne. The Stock West deposit, which we're drilling and expect to have a maiden first initial resource with the PEA, will come out towards the end of Q2. The PEA will also include Froome and Black Fox, which I've spoken about, and two deposits on the Timmins properties called Davidson-Tisdale and Fuller. Bright days are ahead for the Fox Complex expansion and trending very well. This year, we're going to focus on delivery and continuing with the turnaround. It's a year of transition for some of our operations, particularly Black Fox, where we're ramping down mining activities at Black Fox while continuing exploration drilling and ramping up the Froome deposit. We're going to be working on a lot of the systems and processes that go along with that to set up our foundations for a good, efficient company and operating practices. In closing, I'd just like to say we survived 2020, and we are well-positioned to thrive in the years ahead. Thank you.

Thank you, Peter. I want to talk now about the assets that we have but have been largely obscured by the weak operational performance in 2020. There are three important assets, and as a result of the weak operational performance in 2020 and the results, we need to do multiple financings that have really hidden these assets from view. First is our exploration success at our Fox Complex and the resulting growth in the size of our resources there. As Peter mentioned, in the second quarter, we will be releasing a preliminary economic study on how we see the future of this Fox Complex developing. We think there’s good room and a large resource base in excess of 3 million ounces there. There's the infrastructure to develop those ounces, and we believe that there’s potential to develop 100,000 to 150,000 ounces of annual production there with a life in excess of 10 years. That will become more visible, as I said, in the second quarter. The other two assets have really come into the fore recently with the very large increase in the prices of silver and copper. Our copper project, which you've heard about before, is extremely sensitive to the price of copper. With the large increase, copper has gone from a low of $2.08 a pound to a high of just over $4.20 a pound and is currently around $4.10 a pound. It’s had a powerful impact on the value of Los Azules. Using the preliminary economic assessment from Los Azules that was completed in the summer of 2017 and looking at the net present value of this asset while applying an 8% discount, Los Azules now has a value of approximately $5 billion based on that PEA. I can say that with the rise in copper prices, we've seen a number of people knocking on our door asking to take a look at the project because it is a very large project with a long life, currently modeled at 36 years, and in the first 13 years, modeled to produce 415 million pounds of copper. When you include the silver and gold credit, you have a projected cost of production of $1.14 a pound. Right now, we have a number of major mining companies in our data room looking at it, and this is a first in many years, highlighting the interest in large copper projects by large companies. The next company that's within McEwen Mining, if you wish, is a silver company. It's not well appreciated, but between our San José Mine that produces very high-grade silver and gold—one of the highest in the Americas—it’s producing silver with a grade of just under 460 grams silver and 7 grams gold. Combining that with our Mexican assets, the El Gallo asset, El Gallo Mine and the Fenix project—which we recently released a feasibility study on—has potential for a 9.5-year life, producing gold and silver. If you were to put those two together, you would have a silver company that, when ranked against all the other public silver companies, would be a mid-sized producer. We’ve seen at least one investment banker suggest that if we spun it out, it would have a minimum value of $140 million. These two assets, we believe, aren't getting real recognition in our portfolio. We’re pursuing a course to spin them out into two separate companies: a copper company with Los Azules, along with a copper project we have in Nevada, and putting San José and El Gallo, Fenix project into another company. With the growing demand for metals to fuel the move for the electrification of transportation, renewable energies, and also to support the growth in demand from the emerging Asian market, we see a very bright future for both of those spinouts and creating value. We would retain a large interest in both of those companies, and we could see a strong appreciation of those companies. I just wanted to leave you with one last thought. We're very optimistic about the future, and that's definitely a turn for the better because last year was, as I said at the beginning, brutal. If you look at our stock symbol, we have a tagline that we’re striving to make it, and that is Motivated, United, Exceptional. Thank you very much for joining us today. Now I’d like to open the session for questions. Operator, back to you.

Your first question comes from the line of Joseph Reagor from Roth Capital Partners.

So first, it's good to hear the optimism. It's a nice change. And on that note, with these potential spinouts, how far down the road are you on those?

We've been looking at the tax implications and the best way to structure that. We have a draft prospectus on one of them, so it's a 3- to 4-month process.

Okay. Good to hear.

We're moving down there. We were a little consumed by getting our year-end results out and making sure that we were in a position where the auditors would agree to remove the going concern and having sufficient funds to carry us through this year on all of our projects.

Okay. On the cash guidance side, I know you guys aren't giving guidance yet that's specific, but is it fair to assume that costs should be lower this year than last year? And then in particular, the Gold Bar cash cost seemed pretty elevated in Q4. Any additional color on why that was?

It's all a function of we didn't produce a lot of gold, but we had the necessary costs. This year, we're looking to increase our production anywhere from 23% to 40%, which would bring the cost down. I'd just ask Peter to elaborate on that.

Yes. Thanks, Rob. Yes, as Rob noted, our top line ounces were down, and the waste strip was up. So we went through an elevated waste strip period, which was the result of the resource write-down. We lost some resource blocks within the strip. So we'll be coming through that in this year and emerging from that. We don't expect that to continue for the life of mine and all those physicals and whatnot that are in the feasibility for either.

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

I want to point out that I think you give yourself not enough credit for a year where life was tough for everyone involved, with at least some of the headwinds that you faced completely outside of your control. I mean one of the things earlier on this call was the word used colossal challenge, and it was. But at least in my opinion, a good part of those circumstances were external and not really attributable to you guys. That said, you stated in your release that you'll reach Froome by the end of Q1. That's in 20 days, less than 3 weeks. Well done, obviously. But you also say that commercial production will be reached by Q4. Can you maybe just provide a bit of color on your spending at Froome quarter-by-quarter until the cash flow and spending before you reach commercial production at the end of the year?

Sure. I'll ask Peter to answer that question.

Yes. I'll give the descriptions of how we're going to develop the deposit and add a bit of color on the cost for that, Heiko. And thank you for that. Even though things are out of our control, we try to do our job to mitigate those risks. But I appreciate your comment. Yes, Froome is a very exciting project. We're actually probably 2 to 3 weeks ahead of our original plan of getting to first ore. That’s just the timeline. What it will look like is as the waste development continues to access, the sublevel sits currently about 25 meters apart. We will go in and mine out the ore in the primary and secondary. The first ore that I'm speaking about on these calls is our first panel of our primary panel on the transverse stoping on the eastern side of the stope. We will skip the secondary and then open up each primary panel. We're talking about commercial production in Q4 because we have to do those development headings in ore, continue with the waste accesses for the sublevel, and then gain top and bottom and obviously go in and drill these stopes out. So there's a ramp-up process that we are working towards, but perhaps that’s pretty much the development cycle, and we're hoping to bring that forward.

That's actually quite...

On the cost side, Heiko, I would say about $6 million to $7 million every quarter until we reach commercial production. That being said, Heiko, we are working with the contractor to see good savings, probably at the lower end of that number that I just gave you.

Got it. And then can you walk us a little bit through the pricing that you're seeing for the treatment charges? You hear all these nightmare stories out there. I went through your 10-K and I did a control search for treatment charges, and I saw exactly one result. So am I missing anything? Is everything good?

So on the treatment charges, did you search for the refining charges, or since it's gold, so there isn't any sort of the charges?

No, the refining charges, yes.

So I don't have that information. We have competitive contracts with large refineries. We have one refinery, so we have the ability to move our treatments around. But I can certainly follow up with you regarding any clearer numbers. It's not something that I have with me at the moment.

Froome, it does not—Froome isn't something that moves the needle too much if you don't have nightmares about it every night. It doesn't seem to be an issue.

No, no, it hasn't really been.

I mean we're going to be processing it at our mill at Stock Mill, and then we send it off to the refiners. I'd say we have pretty much a standard rate that the industry gets.

Yes, it's definitely industry standard for sure.

Your next question comes from the line of Jeffrey Hall.

Hey, Rob?

Yes, Jeffrey.

Yes, Jeff Hall. I contacted you before. I'm a shareholder. First question, Rob, with the possible spin-offs, how would that work with the present shares that individuals would have?

At the moment, there would be no change there.

Okay. So you would— I get it—so with the possible spin-offs, you would continue to have your MUX shares, correct? And then would you get shares of the spin-off also? Or...

We haven't totally resolved that. Handing it out to shareholders becomes a little more difficult from a regulatory standpoint. So at the moment, we're looking at holding the shares that we retain in those companies inside McEwen Mining. Maybe at a later date, we could do something with them, but...

Hey, Rob, what's your feeling on—right now, it's kind of like a manic buying with Bitcoin as the new digital gold. I've tried to research that and the hash rates and all this. I have trouble just figuring out how to tip a pizza deliveryman, let alone all this mathematical mining. What's your feeling on it? Do you think there's room for both, either you're going to be a gold holder or a Bitcoin? Or...

I guess all of us who haven't bought Bitcoin a couple of years ago wish we had it. Where is its role? I think there's a generation that sees the problem that the governments are creating by expanding their monetary base. Bitcoin can be easily transacted over a phone, whereas gold is a little more difficult to move around. I think at the moment, gold has—a lot of central banks retain gold as a monetary asset, part of their reserves, but they lease that gold out. Investment banks and other—and the gold mining companies indirectly. So people can come up with all sorts of derivatives on gold, which we do today. The paper gold market is much bigger than the physical gold market. When the day comes that they have to return that gold, then we should see gold starting to move. But right now, the whole market's enamored with digital, and it assumes there will always be something to borrow. There will be a day that comes when it's going to become very difficult to borrow, and that will send the price of gold much higher.

Yes. I think the governments will eventually regulate—I believe in the blockchain technology, but I think governments are going to finally regulate this. But when you have two individuals like a Michael Saylor and an Elon Musk that can move like $5,000 either way with their massive buys of Bitcoin that—and anyway, it's just that I've been a shareholder since 2016. It's been such a disappointment—just a big disappointment of the gold miners. I know you're trying, but it just—it's so frustrating at least for me as a shareholder when we had a price at the $4 and you were paying a small dividend and you didn't have any debt. Now we're at it—it just seems like every quarter report, there's always something—no excuse or whatever. I don't know, it's just getting frustrating. I hope you can turn it around. You've been saying that for two years it's going to get better, and we're still there. But anyway, that's my two cents, my two cents.

Well, I think those two cents are shared by everyone who's a shareholder of the company. It has been a very difficult period. We do have—we have rebuilt management, and we are starting to see early signs of a turn at least from operations. January and February are on target. That’s the first time in two years. The feasibilities we've put out, there's some growth there. Metal prices, particularly copper and silver, have really soared in the last year. I think we can realize value that really hasn't surfaced, Jeffrey.

Is there any benefit, Rob—with now the electrification of the cars and really concentrating on Los Azules, putting more—yes, more concentration in developing that, the copper or...

Our challenge has been when the operations didn't deliver as much gold, it put us in jeopardy of breaching our debt covenant. That caused us to do a number of financings that were at prices I really didn't like, but we didn't have a lot of choices. We've refinanced the debt. We pushed out the maturity on it by two years to August 2023. We've returned and altered the working capital requirements of some of the covenants, so that buys us more room. The auditors took off the going-concern qualification on our financials. Right now, we're in a position where we have adequate cash to take us through the year, which includes investing in our growth and future cash flow. I'd like to get to the day where we're paying a dividend. We're running a gold operation, we got rid of the debt after a couple of years and then start paying a dividend monthly.

Well, anyway, yes. I appreciate you taking my call. I know I'm probably taking too much time, but I was just kind of—good luck. Peter, I hope you can help turn this around. I know I'm getting weary of holding on to the bulk of my shares.

Thank you.

But anyway, thanks a lot, and good luck, okay? I hope you can turn this thing around. Anyway, I'll let you go. Sorry, I'm rambling. But have a good day.

Anytime, Jeff. Thank you very much.

Jeff, I'm confident we can do that. We're setting up, as I mentioned earlier, the foundations toward that. We have some very exciting things ahead, but it's still a tough year this year. We're not losing sight of that and protecting shareholder value while delivering on what we say we’re going to do. Thank you for your feedback.

Your next question comes from the line of Joseph Perullo, individual investor.

Maybe I came on a little late, so maybe I missed this. But has the government of Argentina or the provincial government made any overtures or working with you to get a road or any other infrastructure? It seems like it's—I can remember buying Minera Andes in 2003 for that property. That was a long—a while ago, and I became a MUX shareholder sort of through that process and have been a shareholder for a while. Los Azules has been a tremendous discovery and nothing else for a very long time. It seems like it's almost like the place that can never be gotten to by any miners. So what are you doing to really try to get a road there? And will that be the sort of linchpin that gets this project moving forward?

Like yourself, I believe a road that would allow us 12-month access would be very beneficial to the development of the project. The Argentinian government to date has not felt that the road is a qualified investment in mining. They don't seem to understand that you need to be able to get there 12 months of the year rather than our current situation, which is five months of the year. You could probably try to keep the road open in the winter, but you have to cross two mountain passes at 4,000 and 4,200 meters. There are switchbacks up and down, and I'm quite certain there would be loss of equipment and life during the winter trying to navigate that road. During the period you've been a shareholder, we've also seen the copper price gyrate. We've seen it much higher than it is today and significantly lower during that period. The interest in the property, along with some uncertainties, geopolitical issues have caused the interest to go up and down with the price of copper and developments within the country. The reason for talking about spinning it out is that it would allow us to raise funds to advance the project to a feasibility study and then beyond that to production.

But the issue is, you can spin it out all you want, it still needs a road. If you think that's—and the infrastructure seems cost prohibitive. So how is the spin-off going to be successful if the sort of infrastructure costs dwarf the total project costs?

The spin-out, we would be able to raise money and fund the development of that road. If you’ve watched our financials, we have not been in a position to undertake a lot of projects beyond there.

Yes. I get the—I'm sorry, Rob. The issue is how much is the road? That's sort of the unknown to me as an investor. I don't have a sense of how much it would cost to build that road.

Well, as what might be called a pioneer road or just a four-wheel track road, it would be in the neighborhood of $5 million to $8 million, we've heard. But there is a section of the road that no one's really sure how much it's going to cost to build. There's about a 15-mile strip of very steep terrain. We've done many studies and had a road construction company looking at it, coming up with an assessment, and they keep coming back and saying, well, we won't know until we get there how much we have to blast the side of the mountain to get in. It's steep, sure.

I'm from Boston, Rob, so I know the Big Dig. I think it started out as a small project.

That went underground.

Yes, exactly.

To build a production road, then you're getting into the $30 million to $40 million range.

Got it. All right. Well, that helps. That shouldn't be cost prohibitive to getting somebody to help you out with that, I hope. I wish you guys all the luck. Long-term holder and remain so.

Thank you very much. I'm a big believer in the road as well as a priority.

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

Thank you, ladies and gentlemen. We look forward to giving you exploration results and the results of our Fox Complex preliminary economic assessments in Q2. All the best in your investments. Thank you very much.

That concludes today's conference call. You may now disconnect.