McEwen Inc. Q2 FY2022 Earnings Call

Hello, everyone. Welcome to McEwen Mining’s Q2 2022 Operating and Financial Results Conference Call. Joining us today are Rob McEwen, Chairman and Chief Owner; Perry Ing, Chief Financial Officer; William Shaver, Chief Operating Officer; Stephen McGibbon, Executive Vice President of Exploration; and Michael Meding, Vice President of McEwen Copper and General Manager. After the presentations, we will have a question-and-answer session. I will now hand the call over to Mr. Rob McEwen, Chief Owner. Please proceed.

Thank you, operator. Good morning, ladies and gentlemen, and welcome. The first quarter of this year was a lot weaker than our second quarter. Second quarter was much stronger. We had higher production and lower cost per ounce. The drivers of this improvement were our Fox Complex that delivered its best performance since 2018 and the San Jose mine, which bounced back sharply, delivering, in Q2, what it should have done in Q1. Looking ahead, we expect Gold Bar South to be in production in the fourth quarter of this year, and it will be delivering more ounces and lowering Gold Bar’s cost per ounce. Exploration at the Fox Complex has been successful, building gold resources at Stock and should result in a significant reduction in the payback period from its current six years towards our goal of less than three years for the FOX PEA, which we published in January of this year. The PEA, I’d like to stress, outlines a longer mine life extending into the mid-2030s and a higher average annual production of 80,000 ounces, which is almost twice this year’s guidance for production at Fox Complex. Progress at McEwen Copper’s Los Azules project has been substantial. During the year, a strong management team with extensive experience operating in Argentina has been assembled. Drilling there has improved our knowledge of the deposit and will result in a big conversion of inferred resources into the indicated category. Multiple simulations have been conducted to optimize the mine planning. These results and other results will be included in the updated Los Azules PEA that will be released early next year. I also want to stress what we believed was very important to preserve, and that was our listing on the New York Stock Exchange, and that led to a 10-for-1 consolidation. I say the importance of maintaining it because 90% of our trading volume occurs on that exchange. Now I’d like to ask Perry to present our financials.

Thanks, Rob. Good morning, everyone. It’s a pleasure to be back at McEwen Mining as CFO after several years away, and having the opportunity to rejoin a strong management team. Having joined halfway through the second quarter, I do observe that, obviously, the company experienced significant operating challenges during the first quarter as well as various other times during the COVID pandemic. But I do believe the company is now well-positioned from a financial, operating, and leadership perspective for success in the second half of the year and into the future. Looking at our results, I don’t intend to read out a lot of numbers, but I’ll just touch on our GAAP earnings. So starting with that, on a GAAP basis, we reported a consolidated net loss for the quarter of $12.4 million or $0.26 a share. That includes $19.2 million invested in exploration and advanced projects, of which $14.4 million relates to the Los Azules copper project. If you look at just our operating assets, we actually generated $4.2 million in positive gross profit from our operations. As Rob mentioned, we completed a share consolidation just recently in July, and our results on a per share basis for the second quarter retroactively reflect that 10-for-1 consolidation. Looking now at our gold production for the quarter. Production improved significantly compared to the first quarter. Production was 27,600 ounces of gold and 704,600 ounces of silver for a total of 36,100 gold equivalent ounces. So this represents an increase of approximately 44% from the first quarter, as we experienced COVID-related labor shortages at both the Fox Complex and San Jose mine during the first quarter. The improved throughput in the second quarter is reflected in our cash cost and all-in sustaining costs for the quarter, which were $1,169 and $1,549 per ounce, which were 15% and 11% below the midpoint of our annual guidance for the year. As Rob noted, the highlight was strong production from the Fox Complex of 11,200 gold equivalent ounces. Production was also very strong at the San Jose mine, which produced 19,600 ounces. The only disappointing result was from the Gold Bar mine, which produced 5,100 gold equivalent ounces for the quarter due to the continued presence of carbonaceous ore. But as Rob noted, we have a plan in place to accelerate mining from the Gold Bar South project, and we believe we’ll show positive benefits from that by the fourth quarter. I’ll leave further discussion on this topic to Bill Shaver. And finally, looking at our treasury. Our cash and equivalent balance stood at $44 million, including restricted cash at $48 million at June 30. This is down just over $10 million from the beginning of the year. But I’ll note that our accounts payable and accrued liabilities balance decreased by approximately $14 million since the beginning of the year. From a capital market standpoint, our primary activity during the quarter was the completion of a $15 million private placement by our McEwen Copper subsidiary in late June. So now McEwen Copper has raised $55 million of the intended $80 million first tranche financing. Following this transaction, McEwen Mining’s ownership of Los Azules now stands at 76%. So with that, I’ll now turn the call over to Bill for a review of operations.

Thank you very much, Perry, and good morning. I am also happy to have been called upon to join the McEwen management team as COO. I’ve been here about three months, and in that time, have visited all of our operations, including Mexico and Argentina, and have been to each of the operating entities several times. We are happy to report that Q2 has been a safe quarter with one minor medical aid involving a diamond driller who had a cut to his hand that required some stitches. I might just comment in my visits around to the various sites. I’m reasonably happy with the state of our environmental, social, and reclamation matters as well as our safety programs. At the Fox Complex, we had a relatively good quarter, producing 11,200 gold equivalent ounces of record, apparently for the best quarter in three years. The cost per ton and per ounce were in line with budgets and expectations, and the mine was significantly ahead of schedule in tons of ore produced and most of the other measures for development, production drilling, and backfilling. Exploration is also confirming lower extension of the ore at the Froome deposit, which will extend the mine life into late 2024 and/or early 2025. We are also fully engaged in debottlenecking the process plant, which we hope will improve throughput, improve reliability, and reduce unanticipated downtime. To that end, we’ve installed a new screen tower in the month of July and have purchased a rebuilt cone crusher to improve reliability in this portion of the plant. The screen will direct the ore that is already the right size directly to the ball mill, thereby passing the cone crusher and improving the performance of the cone crusher and allowing more time for maintenance of this part of the plant. At the same time, we’re improving the maintenance capability of the plant personnel. All of these things will increase the mill throughput, which will result in more gold production at a lower cost as we move forward. At Gold Bar, we had a tough quarter due to the carbonaceous ore that Perry mentioned. This was encountered in the pit. This ore, which is preg-robbing, cannot be placed on the leach pad as it attracts and keeps gold captured in this material. This impacted our production and costs for the quarter. We were able to mitigate this situation to some extent by pivoting to other ore sources. We did carry out a 10-hole drilling program on an intensive basis to try to quantify the carbonaceous material, and we now have the results of that study. We feel we have the situation under control in terms of understanding where we cannot mine. And we see the impact of this continuing into Q3 in terms of our production. Part of our strategy is to move ahead more quickly on the Gold Bar South project. To that end, we have all of the permits now in hand, and we’ll be starting the access road and site development this month. This will allow us to have ore production from Gold Bar South in Q4. And as you may know, the grade at Gold Bar South is generally better. And of course, the ore is very clean of deleterious elements. The stripping ratio at Gold Bar South will be lower and the ore haul is shorter, although the recovery may be lower long-term. We plan to mine as much ore from Gold Bar South in Q4 and continue mining into 2023. The plan is to concentrate on the best grades possible in Q4 and into 2023. In Mexico, we have completed the leaching as planned in the month of July. I would say I’m happy to say that we’re carrying on with the remediation plan for the waste dumps and other parts of the site. This work is going well and looks very good. We have also come up with a different approach to the processing of the leach pad material with a traditional mill in a manner which will reduce the CapEx significantly and basically make that a project that we should be able to finance from a mixture of some of our present financing and a little bit better production from some of our operations. We’re in the midst of completing a study on this, and we anticipate that this might start in 2023. In summary, I’m relatively happy with our progress to date. We have a good dedicated group of people working hard to do a little bit better. We have some critical personnel holes that we need to fill, and there’s some more process-driven discipline that we need in the organization, but we’re in the midst of putting that into place. So with that, I’ll thank you very much. And now I’ll turn it over to Steve for some exciting exploration results, both in Timmins and at Los Azules.

Thank you, Bill, and good morning, everyone. Our Q2 exploration investments in Ontario and Nevada totaled $3.8 million, and they’re generating exciting results and positioning us for a strong second half of the year. The goal at each is to extend the life of our mines and grow our mineral resource base. Firstly, at the Fox Complex near Timmins. True underground drilling has continued to produce positive exploration results, as Bill alluded to, and these are extending mineralization to depth. Recently, hole 225-L041-118 reported around 5.2 grams per tonne gold over 8.6 meters at 100 meters below the mine’s access ramp. We are drilling and delineating to depth with 2 drills at the 20 to 25 level in the mine. On surface, our stock property covers 8 kilometers or 5 miles of the Destor-Porcupine Fault Zone, which includes 3 gold deposits that occur within a 3-kilometer or 2-mile length that are open for expansion. In 2022, we have four key target areas near our stock property mill with excellent potential to materially grow mineral resources based on poorly tested vertical and lateral trends. During Q2, we continued drilling mineralization proximal to the past producing stock mine with the view that a successful campaign could shorten the payback period in the Fox PEA delivered earlier this year. We have confirmed multiple areas with attractive initial results that can be expanded with additional drilling from surface or in time from underground. Recently, our success included identifying a deeper mineralized body close to the Destor-Porcupine Fault Zone. Today, we reported on encouraging drill results at the Stock property hosted in our green carbonate or host that may support improvements to the PEA. These results included two holes, 5.47 grams per tonne over 7.7 meters true width and 6.62 grams per tonne gold over 8.3 meters true width. These holes intercept mineralization at about 500 meters below the surface. We have a third hole pending results that includes visible gold noticed while core logging. We anticipate reporting on these and other exploration results from Fox in a press release in the very near future. At Gold Bar, Q2 result activities focused on several areas in the mine on the Pick extensions to the north and infill of the Pick Phase 2 pit. At the Atlas pit, our highest grade past-producing open pit located 3 miles west of the Gold Bar mine, drilling got underway on three target areas proximal to the historic pit, including following up on hole OGB-010 drilled in 2021 that intersected 3.1 grams per tonne gold over 27 meters or about 90 feet at the East Atlas target. That drilling has been just completed, and we hope to be reporting on results in the near future. At San Jose, in Argentina, 3,600 meters of drilling were completed on the mine site exploration program and a further 700 meters of drilling at the Ciclon Este project located about 70 kilometers south of San Jose. Mine site drilling result highlights include 7.5 grams per tonne gold and 84 grams per tonne silver over 4.1 meters and 6.9 grams per tonne gold and 648 grams per tonne silver over 1.5 meters. An additional 2,000 meters, or 6,600 feet of exploration drilling is planned in Q3. The San Jose property surrounds Newmont’s Cerro Negro mine and is host to high-grade epithermal gold and silver deposits. Finally, at Los Azules, our exploration program completed about 13,500 meters or more than 44,000 feet of drilling prior to the close of the field season in late May. All assay results from the exploration holes have been returned and included in the PEA update slated for early 2023. This drilling is confirming mineralization of historic intercepts using the 2017 PEA mineral resource estimate. Recently, return to assays include hole AZ22-158, which intersected 222 meters of 0.95% copper, including an interval comprising 44 meters of 1.38% copper in the supergene-enriched zone. Importantly, we believe we are meeting one of our primary goals of converting previous inferred mineral resources to indicated resources and thus improving our confidence in the ore body. Our drilling often extended to depth well below the 2017 PEA pit with mineralization that continued to the bottom of the completed holes, giving us more confidence that there is plenty of room for the resource to grow much more. I will now turn the presentation over to Michael, who will tell you more about our developments at Los Azules.

Thank you, Steve. The Los Azules project located in San Juan, Argentina is one of the world’s largest undeveloped open-pit copper porphyry deposits. According to Mining Intelligence, we are a top 10 by resource. If you look at it, we are top five by resource not owned by a major. As Steve mentioned, we completed some 13.5 kilometers of surface drilling with good results, as we have published in our latest press releases. Three primary objectives of the past and upcoming drilling program include: to improve confidence in the resource by converting inferred mineral resources to the indicated measures category, accelerate project advancement with metallurgical, hydrological, and geotechnical drilling, and to test the limits of the depth extension of the higher-grade mineralization. Results from this drill program will be used to update the 2017 preliminary economic assessment in which estimated indicated inferred mineral results were 10.2 billion and 19.3 billion pounds of copper, respectively. The update of the PEA study, as Steve mentioned, is planned to be released at the beginning of 2023. We have built a strong management team in Argentina, as already mentioned by Rob, that will support us in going from the updated PEA into the preparation of a definitive feasibility study and demonstrates our confidence in the accelerated development of this project. As shown in our annual meeting presentation, we have seen significant mineralization below the prior pit outline and in our deeper vertical holes. Our existing geophysical work indicates promising targets to the southwest and the northeast of our main mineralization that we aim to test further in our upcoming drilling program, combined with infill resource drilling. There our aim is to convert resource to the measured category for the first five years of future production, and we are executing additional metallurgical testing to analyze the option of an initial long-life heap leach operation, which could significantly lower the required CapEx, logistics costs, and environmental footprint and should provide an attractive business case. We have brought together a world-class team, including seminal engineering, Bechtel, Stantec and most recently joined to support the definition and development board for the PEA update. Work toward the development of the PEA basis has begun with the initiation of metallurgical testing program leveraging prior work and the completion of the geo-metallurgical model to ensure a comprehensive understanding of the deposits. Extensive enterprise optimization work with middle consulting from Australia is underway on a potential, larger scale, lower cost and lower carbon footprint alternatives. Based on the new information from the completed drilling and geological logging, resource and geological modeling upgrades are being refined for inclusion in the PEA. McLane Design, a renowned architectural design firm in the green architectural space, has also been working to assist in incorporating regenerative and sustainable design concepts into the PEA at this point in time. As reported, Los Azules is now accessible during most of the year via two access roads, which will make further development safer and more cost-effective. We have successfully used the Southern Access Road at the end of last season and leveraged shared resources together with Altar from Aldebaran Resources and Glencore, El Pachón, which are neighboring projects. The company is currently preparing for the upcoming drilling season beginning in Q4 this year. Our road crew is already improving access to the project site for an early start. I will now turn back the presentation to Rob. Thank you.

Thank you, Michael. I trust you will agree that our operating performance represents a big improvement over our past. In addition to our improving precious metal operations, you’ve heard from Michael that there’s a lot of activity at Los Azules and McEwen Copper. And I’d just like to go over some numbers with you and illustrate why we believe that Los Azules represents a very large asset for us and will play a big role in the future value of the company. So what’s Los Azules worth? Well, one comparison could be with a copper project in the same province in Argentina that sold earlier this year for $485 million. It’s called Josemaria. Josemaria is located at a higher altitude than us by 900 meters. So they are in an area that has potential problems with glaciers. The resource base of Los Azules is over twice the size of Josemaria. Los Azules’ copper grade is significantly higher than Josemaria’s. The projected CapEx of Los Azules is lower, and the NPV is higher. Los Azules is closer to infrastructure such as highways and power grid. And according to Goldman Sachs, based on 2018 numbers, Los Azules was in the lowest cost quartile of the industry for undeveloped copper projects while Josemaria was in the highest cost quartile. So I thought I’d look at it and say that if we were to look at that $485 million and discounted it by 50%, that would yield a value for McEwen Mining. McEwen Mining owns 76% of McEwen Copper right now. At a 50% discount of the $485 million, that would work out to a per-share value of $3.88 a share. If you said, well, it’s not a 50% discount, maybe it’s the same price, Los Azules is worth $485 million. That would yield a $7.78 value per share behind every share of McEwen Mining. If you said, well, it’s more than twice the size, it’s higher grade, it’s closer to infrastructure, and you get a 50% premium, then you have better than $11.60 a share value behind every share of McEwen Mining for that 76% interest. So when you’re looking at McEwen Mining, we have exposure to two of the critical metals for the future. We have gold, which is the ultimate form of money, and we have copper, which is the metal of electrification of clean energy going forward. So what you get is 100,000 to 150,000 ounces of gold at an improving cost, plus a 76% interest in one of the world’s largest undeveloped copper projects. And right now, we are trading well below the value of Los Azules contained in our company. I’m quite optimistic that we’re going to see improving results for our operations and the advancement of Los Azules is quite exciting in terms of building value for all of our shareholders. I’d now like to open the session up to question and answers. Operator, if you could do that. And before you get any questions online, I have a number of them that have come in ahead of this call. So the first question comes from Angie’s and Christian from Oregon. They say, we are long-time shareholders who want to know when you will declare regular dividends again with the investment in new mines behind us? What is the plan for sustained growing income that supports a dividend? I’m a big believer in dividends. When we were with Goldcorp, we reached a point where we were paying monthly dividends. We’re not at that point yet. I think we’re a considerable distance from that, but we’re building our assets to get to that point in the future. The second question from Gillian Tessier: What is management planning to do in order to stop the slide in the stock? Well, I think we have better results this quarter and we’re going to see continued improvements in our operations and continued growth in our copper and that should translate into an improving share price. John from British Columbia: Will the company need to do any financing for the remainder of 2022? I’ll ask Perry to jump in.

Sure, Rob. I think from the treasury side, on McEwen Mining, we’ve stabilized the balance sheet. So we don't foresee any need for McEwen Mining to raise equity during the remainder of 2022. Obviously, for McEwen Copper, it’s now completed a $55 million of the intended $80 million first tranche financing to advance the Los Azules copper project. So there’s a potential to execute that before the IPO. But other than that, no plans to raise financing.

And another question for Perry. This is from Steve Ellis. What are the current projections on when the company will make a profit?

That’s a good question, Rob. Obviously, as McEwen Mining, the U.S. GAAP reporting company, we expense exploration. So as long as we’re consolidating the results of Los Azules and continuing to spend a lot of money advancing the project, those will always be deducted from the company’s actual profitable operations. So it’s really a bit of an accounting exercise, but I’ll say that the company’s operations, as demonstrated this quarter, were quite profitable.

Thank you, Perry. The next question comes from someone in Belgium, and I’ll direct this to Michael. With the recent sharp decline in copper prices, how does management view the future prospects of McEwen Copper?

So we don’t build a mine based on a short-term copper spot price. We look into the longer-term future. But even looking at today’s spot prices for copper, we think that the Los Azules project will be very profitable. At the moment, we are using $3.25 for valuation in our simulations. Looking forward into the electrification and what is going on with greenification of our economies, we think there will be significant need for copper in the future, and this will be supported by the copper price. There’s a significant upside potential for Los Azules. So we’re quite comfortable regarding the Los Azules project at this point in time.

Thank you, Michael. Marie has a second question: how does management see the evolution of McEwen Mining for the rest of this year and for the coming year? That’s an easy one. We see continued improvement in operations. As Michael said, we see the copper project growing in profile, and we’ll be delivering an updated preliminary economic assessment early next year, and we’re driving towards a feasibility study on the project, where we think it will become a property that should attract significant attention. Just this morning, I saw someone commenting on the copper price and suggesting a $10 a pound that’s coming in the future. Operator, open for questions online.

Your first question comes from the line of Jacob Sekelsky with Alliance Global Partners. Your line is open.

Hey, Rob.

Hi, Jake.

Thanks for taking the question. Hey, Rob. Looking at costs, they obviously decreased substantially quarter-over-quarter. Do you think there’s further room for improvement in the second half, or should we expect levels to what we saw in Q2? I know it’s a difficult question with the inflationary environment, but any color there would be helpful.

I’ll ask Bill to jump in there.

Yes. That’s a good question. Where we have to look to improve cost is by improving production at the Fox Complex. If we look at our cost for Q2, we were slightly under our budget in terms of production, but right on target for cost per ounce and cost per ton. If we can improve the ore production or the ore processing production, that will have a follow-on impact on our operating costs. So I guess in terms of that operation, it will lower the cost. In the third quarter, at Gold Bar, we hope to get back closer to our budget numbers. So that should help the cost per ounce at Gold Bar. The combination of those two will overall hopefully reduce the cost. Going forward, when we ramp up Gold Bar South, which has a little bit higher grade and shorter distance to the mill, a lower recovery, and a lower stripping ratio, then that should help the overall operating cost. As we move forward, the ore grade in some of the exploration work that Steve has been doing appears to be at least consistent with what we have seen in the mining operations up till now. So I think the road forward is around trying to improve each of our assets that are operating, and to look to the future expansion in any way that we can.

Okay. That makes sense. And sticking with Gold Bar South, can you maybe just touch on the number of ounces that you guys have in the mine plan for that area? And I guess, how long do you expect Gold Bar South to be the dominant source of feed at Gold Bar?

So the total ounces in Gold Bar South recovered is something in the order of 120,000 ounces. It should operate through 2023 and into 2024. Based on the present data, that operation will end in 2024. But we’re optimistic that once we get into the operation and understand exactly where the ore is, we’re a bit hopeful we’re going to find some more ore there. We’ll need some exploration work to understand the extensions of the ore to the north and south and downward to lower elevations, which we’re more optimistic about than the possibility of the ore extending deeper. So I hope that answers your question somewhat.

That was helpful. That’s all for me. Thanks again.

Thank you, Jake.

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

Hey, everyone. This is May calling in for Heiko. Thanks for taking our call today. We’re looking at Fox, and you spent $2.6 million on exploration in the quarter. Extrapolating that to the year, we’re at $10.4 million, right in line with your forecast of $10 million. Next year, we’re looking at $15 million of spend, so a strong 50% increase. Can you provide a bit of color on where exactly those funds will be spent? How much of the 50% increase is attributable to higher costs? How many meters do you think you can drill in 2023?

Steve, would you like to address…

Yes. I can certainly add color to that question. Firstly, drilling costs—if we look back a year ago, our two primary concerns with respect to drilling were availability of drills and the likely cost increase in drilling in the future, late 2022 to 2023. We’ve seen that drills generally have been more available than what we anticipated a year earlier. The drilling costs are in line, specifically at Fox, below what we had budgeted for the unit cost for the year. This has been gratifying for us. You mentioned the spend on the year-to-date for exploration. Our plan on surface at the Fox Complex for the second half of this year is to complete about 39,000 meters of drilling, and that will mostly take five drills drilling continuously at both the Stock property and at the Fox—Black Fox property, primarily at Grey Fox. For our goals for 2023, an important part of the program next year will be to ensure we’re prepared and actively drilling targets that can be drilled only in winter due to difficult conditions. We’re beginning preparation for that part of our program next year. On average, the exploration program this year has begun to migrate from delineation-related work focused on improving the payback on the PEA in and around the Stock Mine and on the margins of Stock West. That drilling is continuing, but we’re also migrating toward attractive targets that we’ve been planning to follow up in the future program. Some of these targets will be deeper than those drilled in the last year, 1.5 years but also have the potential to—if successful—bring meaningful improvements to our resource base, either at Stock or on Grey Fox. We believe the second half of the year will be quite exciting for us. We’re accelerating our spend versus the first half of the year. We expect the second half of this year to see the spend at Fox in the order of about $7 million. We also expect to ramp up drilling in Nevada and are planning for our winter drill program, expecting to keep quite an exciting program into the end of next year.

Great. Thank you. That helps a lot.

Your next question comes from the line of Mark Ehlert with LendUS. Your line is open.

Okay. Thank you so much. Just a question for Rob. When you were going over the valuation and comparing it to Josemaria, were you talking about pre or post split value?

Hi, Mark. Rob had to step out of the room for a call. But maybe Stephen can answer these questions.

Yes. Rob’s numbers were split on a reverse basis.

Great. Thank you so much. I only asked because I know that it is highly sensitive to the price of copper. Just wanted to make sure. That’s all for me. Thank you all.

Thanks, Mark.

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

Thanks, operator. As I mentioned, Rob had to step out of the room. But on behalf of the management team at McEwen Mining, thanks for joining the second quarter results call, and we look forward to speaking to you again in the future.