McEwen Inc. Q1 FY2022 Earnings Call

Hello, ladies and gentlemen, welcome to McEwen Mining's Q1 2022 Operating and Financial Results Conference Call. Present from the company today are Rob McEwen, Chairman and Chief Owner; Anna Ladd-Kruger, Chief Financial Officer; Rory Greyvensteyn, Director of Operations, Canada; Adrian Blanco, Director of Operations, USA and Mexico; Stephen McGibbon, Executive Vice President of Exploration; Michael Meding, Vice President of McEwen Copper and General Manager. After the speakers' presentations, there will be a question-and-answer session. I will now turn the call over to Mr. Rob McEwen, Chief Owner. Please go ahead, sir.

Thank you, operator. Hello, ladies and gentlemen, welcome to our first quarter 2022 conference call. Last year we saw signs of our turnaround in progress. The trends look good as we closed on 2021 with higher gold production and lower production cost per ounce relative to 2020. This year, our results have been mixed. The Fox Complex started strong and then was slowed down by manpower shortages induced by COVID, followed by an equipment failure in the mill. But despite these issues, Fox produced more gold at a lower cost than it did in the first quarter of 2020. An important development in Q1 was our Preliminary Economic Assessment that outlines the future growth prospects of the Fox Complex. It details a bright future for Fox with a nine-year mine life, significantly longer than what we have right now and attractive mining costs. We are confident that our exploration will result in a shortening of the payback period and an improvement in the economics. Our Director of Canadian operations, Rory Greyvensteyn, will be expanding on the activities later on this call. Mining at Gold Bar, the costs were very high, and we expected that, because we are in a transitory stage of our mining cycle where there is an extensive period of stripping to remove overburden to reach the ore zone. Adrian Blanco, our Director of Operations for America and Mexico, will elaborate on both these operations. At the San Jose mine, which is operated by our joint venture partner, Hochschild Mining, COVID-induced manpower absences resulted in a temporary mine shutdown that adversely impacted gold and silver production and the costs associated with that production. Looking ahead, our partner believes that they will be able to make up what was lost in the first quarter over the balance of the year and deliver on guidance. At our Los Azules project, we have made much progress that I believe is significantly increasing the value for McEwen Mining of this large asset. Michael Meding, our Vice President, McEwen Copper, will provide you with an update. We encountered a cash squeeze during Q1 as a result of our revenue shortfall. However, I feel confident enough in the future value of the company to personally step up and provide the company with $15 million. We own a portfolio of assets, the majority of which are located in well-known prolific gold producing districts in areas considered exploration-rich real estate, and that is why we continue to invest in exploration with the belief that we will be able to extend the life and size of our mine. We also own a huge copper project that is looking increasingly more valuable as a result of our investment, due to the surging demand for copper, the higher copper price, and the changing geopolitical environment in the largest copper producing area in the world. At this point, I would like to ask Anna Ladd-Kruger, our Chief Financial Officer, to provide an overview of McEwen Mining's financial results for the first quarter of this year.

Thank you, Rob, and good day everyone. The COVID-19 pandemic continued to impact our operations in Q1 in areas of supply chain, labor shortages, and inflationary pressures. We continue to monitor the impact of these factors on our financial condition, liquidity, operations, suppliers, and our workforce. Our consolidated net loss in Q1 was $19.3 million or $0.04 loss per share. It relates primarily to $14.4 million invested in exploration and advancing our Los Azules project. Our operations had a total gross loss of $6 million. Contributing to this was a $4.1 million loss from our Mexico operations as we wind down residual heap leaching. We expect to make strategic decisions on our Mexican business units in the second half of this year. We benefited from a higher average realized gold price of $1,895 per gold equivalent ounce in Q1 versus $1,763 per gold equivalent ounce in the same quarter of last year. Consolidated production in Q1 was 25,100 gold equivalent ounces; this included 14,400 gold equivalent ounces from our 100% owned operations, which was 4% higher than the same period last year. The average cost per gold equivalent ounce sold in Q1 from our 100% owned lines was $1,696 for cash cost and $2,146 for all-in sustaining cost. These were expected to be higher this quarter; however, they did come in lower than we guided to the market in March. Liquid assets at the end of the first quarter, which includes cash, cash equivalents, and restricted cash, was $70.4 million, of which $35.6 million is attributable to McEwen Copper to advance Los Azules project. A few transactions this quarter to bolster our treasury include a flow-through raise of $15.1 million or $1.04 per share and an unsecured promissory note of $15 million. We also amended repayment terms on our senior debt facility, deferring principal payment to August 2023 and the ultimate maturity to March 2025 given that further liquidity this year. We also ended the quarter with a stockpile of 36,000 tons of ore at an average gold grade of 2.6 grams per ton, ahead of the mill at our Fox Complex operations. We are continuing to manage our operating margins by reviewing capital expenditure, production costs, material contracts, management systems, and procurement synergies between operations. Lastly, as most of you know, I suffered from a brain aneurysm in December and, against all odds, along with a lot of support from family, friends, McEwen Mining, and the mining community in general, I'm thankful to be here speaking, and I have just recovered 100%. On the back of this healthcare, I've decided to retire from the Executive role and focus my time with my family, Board roles, and nonprofit work as well. Thank you, and I will now turn the call to Rory for an operations review at the Fox Complex.

Thank you, Anna. The Fox Complex produced 7,700 gold equivalent ounces in Q1, with total cash costs and all-in sustaining costs of $1,193 and $1,729 per gold equivalent ounce sold, respectively. The Froome mine had a solid performance in Q1, in line with our budget. Challenges at the mill reduced our gold production in Q1, but as a consequence, we now have considerable stockpile in the mill that provides a variety of flexibility to reduce costs in future quarters. Our team is implementing needed upgrades to the mill to ensure it is capable of processing higher ore production right from the Froome mine. Moving forward, in the remainder of 2022, additional screening at the mill will reduce crushing requirements. This will ensure the Fox Complex meets its guidance for 2022. Thank you. Adrian will further speak about operations at Gold Bar.

Thank you, Rory. Gold Bar achieved the production target for gold in Q1 at 6,300 ounces. The heap leach recovery was higher compared to the 2021 feasibility study, and the gold grade at the mine was also 8% better than expected. On the other hand, we anticipated to have high cash costs in Q1 as we began mining Phase 2 of the Pick pit this year. This transition involved a high stripping ratio of almost six to one in the first quarter compared to the four to one expected for the full year. Additionally, we anticipated losing a few days of production due to weather conditions in the early months of the year. We are finding the presence of carbonaceous ore since we began mining Phase 2 of Pick. Preg-robbing carbon is not suitable for heap leaching. However, we have been successful in isolating such ore to avoid affecting the gold recovery. Furthermore, the environmental permit approval for the Gold Bar South deposit was received in April, and we are planning to begin the haul road construction this quarter and be ready for mining in the second half of 2022. We anticipate a negative impact on production in Q2 from ore losses to carbon. However, we are planning to maintain our gold recovery high as seen in Q1, and we are also defining potential new sources of ore for the 2022 mine plan from the Atlas pit and old waste dumps, while also advancing the readiness of the Gold Bar South deposit to begin mining in Q3. Additionally, Gold Bar is implementing many actions to reduce cost and capital expenditures; for instance, the capital expenditures for the haul road construction and the heap leach expansion will be less than anticipated, and our mining contractor is improving the productivity of drilling and blasting since two months ago, which will certainly improve our cash per ounce going forward. I will now turn the presentation to Steve, who will talk about our exploration program.

Thank you, Adrian. Our Q1 exploration investments in Ontario and Nevada totaled $3.2 million. The goal at each is to extend the life of our mines. At the Fox Complex near Timmins, our stock property covers eight kilometers of the Destor-Porcupine Fault and includes three gold deposits that occur within a three-kilometer length that is open for expansion. For 2022, we have four key target areas near our Stock mill with excellent potential to materially grow mineral resources based on poorly tested vertical and lateral trends. At Stock, we targeted near-surface delineation of mineralization during the first quarter, believing a successful outcome could shorten the payback period for the Fox Preliminary Economic Assessment delivered earlier this year. The remaining five kilometers at Stock is underexplored, both to the east and west of the Stock Mine. Another target is based on historic drilling that intercepted multiple mineralized zone structures with grades of up to 16.5 grams per tonne, located 1.5 kilometers west of the Stock West deposits. At Grey Fox, our largest and highest grade mineral resources, attractive exploration targets include multiple intersections drilled west of Whiskey Jack that we reported on in our April 25 press release, which included 7.29 grams per ton gold over 15.35 meters and 4.75 grams per ton gold over 25.2 meters. At Gold Bar in Nevada, Q1 exploration activities focused on several areas. In the mine, on the Southwest Pick extension and Cabin North, testing for extensions of the mineralization continued. The best of these oxide assays included 1.93 grams per ton gold over 38.6 meters. Drilling is continuing at Pick. At the Atlas pit, located three miles west of the Gold Bar Mine, we are following up on a hole that contained 3.1 grams per ton gold over 27 meters of oxide mineralization down dip to the east below the pit bottom. At our San Jose joint venture in Argentina, $1.7 million was spent in Q1 on a 100% basis of a $7 million exploration program for 2022. Typical intercepts of high-grade gold and silver were encountered in multiple holes at the Celina and Celina Piso vein and include 8.3 grams per ton gold and 561 grams per ton silver over 1.2 meters. A further 2,000 meters of resource delineation drilling will be conducted in Q2. The San Jose property surrounds Iman’s Cerro Negro mine and is host to high-grade epithermal gold and silver deposits. At Los Azules in San Juan province, Argentina, our exploration program has completed 11,500 meters year-to-date, weather permitting, the drill program will continue until mid-June and then resume again in early October. This drilling is confirming the mineralization of historic intercepts used for the 2017 PEA mineral resource estimate. In many instances, persistent copper mineralization encouraged us to continue drilling beyond the planned hole depth and is often still apparent when the hole is stopped. Hole AZ22142 intersected 419.1 meters of 0.79% copper and included an interval comprising 104 meters of 1% copper in the supergene enriched zone, and 46 meters of 1.59% copper in the primary copper zone. Importantly, our updated geological model will reflect some vertical structures and rock types that are key features controlling the distribution of mineralization. New to our program this year, geologic modeling is being augmented with a hyperspectral scanning program of all current and available historic core, allowing for a level of refinement not captured in previous work. I will now turn the presentation to Michael, who will tell you more about our developments at Los Azules.

Thank you, Stephen. The Los Azules Copper project is located in San Juan province of Argentina, a mining province ranked highest for investment attractiveness in Latin America by the Fraser Institute. According to Mining Intelligence, Los Azules is one of the top 10 largest undeveloped copper projects by resources. With GBP10.2 billion in the indicated category and GBP19.3 billion in the inferred category, assessed by the 2017 PA. Since that time, extensive enterprise optimization work has been completed on potential scale, lower costs, and our footprint options reviewing opportunities to guide drilling and technical workflows. In Q1 2022, McEwen Copper spent $9.8 million to advance the Los Azules Copper project, actively progressing drilling, road construction, technical studies, and community engagements. Year-to-date, 11,500 meters of drilling has been completed, and approximately 13,000 meters of drilling is targeted to be completed by the end of June. The critical issue of road access to the site has been resolved. Los Azules is no longer remote and cut off from the world for six to seven months of the year. We have developed a second road that will allow us year-round access to the site. This is a significant advance because it will allow us to advance and complete our field work faster and at lower cost. Another exciting development is the completion of the enterprise optimization study conducted by Whittle Consulting of Australia, who specialize in optimizing mine design by generating and evaluating a large number of different operating scenarios. Their work focused on the following objectives: improve value, optimize scale, minimize risk, and enable fast trade-off analyses of environmentally friendly green regenerative solutions. The analyses indicated that there is potential to significantly increase the project value. The results of their work will be included in the updated PA to be completed in Q1 of 2023. I will now turn it over to Rob. Thank you.

Thank you, Mike. We currently have two executive searches in progress due to some departures, and I want to acknowledge the farewell and gratitude we extend to two senior team members. As mentioned, Anna is retiring and Peter Mah, our Chief Operating Officer, is stepping down to focus on family matters and other opportunities. In the meantime, we have brought in Perry Ing, a former CFO of the company, to fill in during our search for a new CFO. For the Chief Operating Officer role, we are fortunate to have Bill Shaver, a Director, who has agreed to take on that interim role. Bill brings 50 years of experience in the mining industry and was a co-founder of Dynetek, a highly successful mining contracting firm. We are comfortable with this arrangement as we look for our new CFO and COO. This wraps up our presentation, but I would like to invite Bill to share a few comments about operations.

Yeah. Thanks very much, Rob, and good morning everyone. For many of you on the call, you’ve probably heard about me at some point in your career, and I'm happy to step in and help out over this interim period. Most of my background is in the mining construction business and in running operations on the sites that McEwen has. So I'm really looking forward to engaging a new COO and also helping the rest of the operations in any way I can. To that extent, I have made visits to Timmins a couple of times, also to Los Azules and, just before the end of the year, made a trip down to Gold Bar. There will be some visits to Gold Bar and Los Azules in the next month or so. But anyway, I'm looking forward to doing what I can to help out. Thank you.

Thank you very much, Bill. Happy to have you onboard. Operator, could we now go into the question and answer period? Thank you.

Certainly. Thank you. Your first question comes from Joseph Reagor from ROTH Capital Partners. Your line is open. Please go ahead.

Hey, Rob and team. Thanks for taking the questions. So first thing on Los Azules, obviously, it's a big part of the future value of the company, especially from your perspective, but what's the spending going to be like there for the rest of the year? It was a pretty decent-sized number in Q1, and I'm just trying to model out the rest of 2022.

We're entering the winter season in Argentina right now. So a lot of that expenditure we've done to date has been associated with drilling and maintaining a large camp up there. I would expect that to be less, and the money we have in the treasury should take us through this year.

Okay.

Drilling will resume in October.

Okay. So a little later in the middle two quarters and a little heavier at the end of the year?

That's correct.

Okay. And then at Gold Bar with this carbon issue encountered, do you have an idea of what percentage of the Pick deposit might have this carbon in it so far?

It's early. Adrian, do you want to jump in there?

Yes. Thank you, Rob. It's early to determine that number; certainly, the presence of carbonaceous ore represents a concern to achieve production for the second quarter. However, we are looking at ways to bring new sources of ore to the mine plan in 2022 from the Atlas deposit and old waste dumps, so we should be able to partially overcome this carbon issue.

Okay. Thanks for the color on those things, guys. I'll turn it over.

Thank you.

Thank you. Your next question comes from John Moran from South. Your line is open. Please go ahead.

Hello, John.

Yeah. Hi Mr. McEwen. I've been a shareholder for about 10 years; I have 400,000 shares, average base is about 160, 170. I have a series of questions I'd like to ask, short one at a time. First is, are there any institutional investors buying or selling recently? I'm asking that because I'm wondering if they are taking advantage of the low stock price to get a larger position.

It's a good question. I don't have an answer for you. I can put it this way, there hasn't been conversation with institutional investors recently that are saying they're buying. But you raised a good point; it's an attractive price to come in.

The next one. In a prior conference, you mentioned that the Q1 copper might be worth about $3, and I know there is 69% that McEwen Mining has in it. Why do you think that's not factored into the stock price now?

There are a couple of reasons. One, we just completed the second access to it. The drilling there has been some information coming out, but not a lot. I guess more recently, there is some nervousness in the marketplace. It has been obscured by some of the operating issues that we have in the gold and silver production area.

Okay.

I think the copper price is increasing, Los Azules is benefiting from this, and the project is becoming more significant. As Michael mentioned, it is recognized as the ninth largest undeveloped copper project globally that isn’t owned by a major company. Argentina is shifting its stance and is supportive of mining, whereas the governments in Chile and Peru are making investments more challenging due to higher taxes and increased regulations. It’s developing, but I can't explain why it isn't reflecting positively in the stock price.

Next one. Now that the prices dropped precipitously, how will the delisting affect the company?

Never having gone through a delisting, I don't know. I’d have to speculate. There are many exchanges that it could be traded on, and it currently has the volume on New York. So we'll have to see, and that will depend on what the state of the equity markets are.

All right. Next one, not that you are, but if the company was sold today to another company, what do you think it would approximately sell for? I'm asking that because I'm wondering whether, since my average basis is like $1.60, $1.70, it would be worth buying more.

An excellent question. I wish I could see into the future. I don't have an answer for you. I'm sorry, John. Not that you could rely on.

Okay. And the last one is, is there any chance that the company might become insolvent or go into bankruptcy?

I guess there is always a possibility, but at the moment, our liquidity is strong enough and we have assets that have value. I don't see that as a real possibility. Otherwise, we wouldn't have put in another $15 million.

All right. Okay. Thank you so much. I really appreciate your trying to answer these. I wish all the best.

Thank you very much. Thank you for your question.

Thank you. Your next question comes from the line of Michael Ela. Your line is open. Please go ahead.

Hello Michael.

Hi. I think that was supposed to be Heiko. But this is Marcus Giannini calling in. Yeah, thanks for taking my questions. First one, you're expecting meaningful exploration spend at Fox for this year given that you've spent $1.7 million in Q1. Can you break out the remaining $8.3 by quarter for the remainder of the year? And then, since we're halfway through Q2, what is the spend year-to-date, if possible?

All right. I'll ask Stephen McGibbon, our Executive VP of Exploration.

I'll answer that question with fairly broad strokes. So the $1.7 million spent in the first quarter is generally consistent with what would have been anticipated based on our 2022 budget, which more or less had consistent spending throughout the year. With the flow-through financing that was completed in March, we're now reviewing our program with the view of our plans through to the end of 2023, and that may impact planned spending in 2022 versus the original budget. We're working through that process now and should have a clear answer on that before the end of the second quarter. I would anticipate likely looking to accelerate to some level our planned spending in 2022 versus the original budget.

Okay. And then for 2023, the $15 million, should we just sort of break that out in terms of divided by four for quarterly spend?

At this point, I think that's probably the most reasonable view to take. Clearly, spending is results-dependent, and we'll try to be nimble and be in a position to make adjustments and accelerate if the opportunity presents itself. But for now, I think it is pretty straightforward.

Yeah. And then last question. I'm sorry. Go ahead, Rob.

No, no, I didn't mean to interrupt your question.

Okay. Yeah, one more in. Just sort of speaking about exploration spending and given all the talk around inflation, how are your drilling costs doing? Have you seen any sort of price movements due to recent fuel increases? And how is that reflected in these drilling expenditures?

Drilling contracts were entered into late in the fall of 2021, and our overall costs in Q1 on a unit basis were in line with that. Just to throw a number out there, it would have impacted our costs less than 10% versus what we experienced in 2021. I think the greater challenge has been in our contractors being able to secure experienced personnel and manpower-related, material-related issues that possibly represent a risk. But from a cost standpoint, they've been very much in line with our expectations.

Okay, fantastic. That's it from me. Thanks for taking my questions, guys.

Thank you.

Thank you. And my apologies for Heiko’s name. Your next question is from Bill Powers, a private investor. Your line is open, please go ahead.

Hi, Rob. Thanks for taking my call today. This is very informative. A few questions. I guess as far as the closing of the second tranche of the financing philosophy, I know you had previously mentioned that you were fairly close with, I guess, one or more parties, and I was wondering what your thoughts are toward getting that closed or I guess opening it up at a later date?

We may get to a point where we close it soon and open it up at a later date based on what we've done going forward. We've had a number of conversations, and they seem very serious and look like they were about to close, but there is always another question and another question. Your suggestion or comment about closing it and saying, well, the next time we come back to the market, given the money we have, it will take us around for next year that we've advanced the projects significantly. So the price of entry will be higher.

It seems that there should be significantly more drilling results soon, which makes it difficult to lock in the previous prices before the spending was completed. I hope you can expedite that process. Given the results from others in the area, there appears to be enough interest.

I agree. There have been some big drill results coming out of the province we're in.

Yes. I noticed that Filo released impressive results today in terms of grade. How similar is your work compared to theirs, or are you familiar with how the two compare?

Well, we're probably about 200 kilometers away from them, but with a long spine and in terms of what they're hitting. Steve, do you have knowledge of the press release today?

Not of the press release today, but in general terms, higher allocation, lower grade, but certainly, they've been putting significant deep results from their drilling this year.

Thank you for that. My second question is regarding your recent stock results. It seems to be trending positively. How much more drilling is required before you can determine the economic viability of your drilling efforts? Is that expected to take another six months, some time next year, or sooner?

Our Preliminary Economic Assessment was before starting the Stock West deposit. It was 144,000 ounces indicated, and I believe that 111,000 inferred. We do need to do drilling, which is part of our plan for this year to upgrade and further de-risk the resource. We want to try to move many of those inferred ounces to indicated. Outside of that, the deposits are still open. The nature of these deposits are that you typically expect there to be vertical continuation or continuity to the mineralization that we haven’t fully tested. To me, the PEA is the first step in the journey that I believe is going to ultimately realize a long term and meaningful material opportunity for the company after the Stock property. We’ve got three deposits, all of them open to depth. I believe there is a very good opportunity for a fourth to potentially be identified in drilling this year, but for now, the drilling that we’ve planned for Stock West deposit in 2022 should significantly de-risk that opportunity for us in a position to make decisions about the future.

Okay, that's very helpful. One last question, as far as I noticed in the press release that the Gold Bar South has been permitted, and it sounds like you're moving forward with the access or with the haul road. Is the plan to have Gold Bar South produce along with Pick and some of the other pits that are already in production, or is it going to be for production that solely comes from Gold Bar South once it's up and running?

It would be for all of the areas for mining, Bill. So Gold Bar South would work in combination with the others.

Okay. Will that increase your current production rate, or will the other sources be reduced as Gold Bar South begins operations?

As you said, we are just compensating as the other ones are going down, Gold Bar is coming up. Regarding Cerro, I just reviewed their results, which are quite impressive with high gold values, copper, and long intercepts. Steve, could you share your thoughts on some of the intercepts that have shown higher copper ratios compared to gold?

As mentioned in the presentation and our press release last week, we are primarily drilling in the core of the deposit. These holes are typically 500 to 600 meters long, and we usually decide to start a hole based not on the absence of mineralization but rather on the drilling productivity. If the progress slows too much, we choose to pause that hole and move to another. We anticipate that mineralization will likely extend deeper, and we have future exploration programs planned to investigate that. So far, we have had drill intercepts of 400 to 500 meters with grades close to one gram per tonne for gold and around 0.79% for copper in one of the holes. The drill program this year has not only validated past results but also reinforced our understanding and expectations for resource growth based on the refinement of our geological model.

And there are some big differences between the locations between Cerro and ourselves, starting with elevation. We're probably 800 meters lower, and we're not impacting glaciers, making it easier to access than some of the other copper deposits in the area, including Cerro. Okay. Any other questions, Bill?

Thank you. And that concludes our Q&A session for today. I will turn the call over to Mr. Rob McEwen for any closing remarks.

Thank you, operator. Thank you, ladies and gentlemen. Wishing you well. Goodbye.

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