McEwen Inc. Q1 FY2024 Earnings Call

Hello, ladies and gentlemen. Welcome to McEwen Mining's Q1 2024 Operating and Financial Results Conference Call. Present from the company today are Rob McEwen, Chairman and Chief Owner; Perry Ing, Chief Financial Officer; Jeff Chan, Vice President of Finance; William Shaver, Chief Operating Officer; Stefan Spears, Vice President of Corporate Development; Michael Meding, Vice President and General Manager of McEwen Copper; and Carmen Diges, General Counsel and Secretary. I will now turn the call over to Mr. Rob McEwen, Chief Owner. Please go ahead, sir.

Thank you, operator. Good morning, ladies and gentlemen. Welcome to our first quarter 2024 conference call. A few moments ago, I looked at our share price, and it’s not well, what happened? We're down about $2. I think a lot of it is overdone, but it's probably due a bit to our accounting policies, the difference between accounting treatment in Canada and in the United States. And I'd like to ask Perry Ing, our CFO, to talk about that difference.

We would like to reiterate the fact that as a U.S. GAAP reporting company, we expense all of our attributable expenses related to the Los Azules copper project in Argentina. Given that we own 48% of the company, all of the work going into drilling for that project is being expensed through our income statement, unlike many of our peers, Canadian and Australian listed companies that report under International Financial Reporting Standards, where they may capitalize those costs, and you would not see them reflected in net earnings or loss. If you look into more detail at our earnings, we reported a consolidated net loss of approximately $20 million, of which $18 million was directly attributable to our investment in McEwen Copper, as well as an additional $4 million in general exploration expenses. Had we reported under IFRS, we would not be showing a loss of that nature.

Thank you, Perry. I want to start by saying we had a solid quarter and we're actively engaged on multiple fronts. We've met our production targets, generated positive cash flow from our gold and silver mines, and our exploration efforts at the Fox Complex, San Jose mine, and Los Azules project are yielding promising results. Moreover, there's been a significant political shift in Argentina. The newly elected President is taking bold steps to make the country appealing for large foreign direct investment, and we are part of that wave. Overall, our consolidated gold equivalent production increased by 7% compared to the first quarter of 2023, with costs aligning with our forecasts. At two of our three mines, we made substantial progress; Gold Bar and San Jose surpassed their targets by achieving higher production and reduced costs. Specifically, production at Gold Bar rose by 80%, while San Jose saw a 15% increase. Although the Fox Complex's performance was below expectations due to mining lower grade and tonnage during the quarter, we anticipate an uptick in production and a drop in cost per ounce to meet our year-end guidance. Financially, the news was also encouraging. Our gross profit for the quarter was $6 million, a 36% increase from $4.4 million in the first quarter of 2023. We reported results on an adjusted EBITDA basis this quarter to better reflect the performance of our gold and silver operations, excluding our ongoing investment in McEwen Copper. Our adjusted EBITDA reached $6.3 million or $0.13 a share, contrasting with an adjusted EBITDA loss of $2.9 million or $0.06 a share previously. Including the $18 million loss from our McEwen Copper investment, we reported a consolidated loss of $20.4 million or $0.41 a share. In Argentina, we recently had the honor of a one-hour meeting with the new President, Javier Milei, who has ignited a wave of optimism that has been absent for decades. I likened Argentina to the story of Sleeping Beauty, awakened from a deep slumber by his leadership. Investors globally are starting to pay attention, with notable figures like Elon Musk recently advocating for investments in Argentina. The President's election and our progress with Los Azules make this an exciting time for both McEwen Copper and McEwen Mining. Our other asset in Argentina, the 49% owned San Jose silver and gold mine, performed significantly better in Q1 compared to the same period last year, prompting management to consider resuming dividends later this year for the first time in a couple of years. We've also seen promising exploration results there from two separate targets, with the best assays showing 12 meters of 12.7 grams gold and 101 grams silver, and another reporting 6.2 meters of 23.3 grams gold and 314 grams silver. Notably, the San Jose land package is adjacent to Newmont’s Cerro Negro property on three sides. Turning back to Los Azules, as winter approaches in the Southern Hemisphere, we're wrapping up our drilling program, having completed around 69,000 meters this season, which is quite extensive. This drilling is helping us confirm and upgrade our estimated resources outlined in the June 2023 preliminary economic assessment, as well as precisely defining where our payback pit will be, anticipated to break even in three years. This winter, we’ll be working towards delivering a bankable feasibility study for Los Azules in the first half of next year. Looking ahead, we are now positioned to consider growth opportunities, especially as market conditions seem ripe for exploring stronger markets for gold, silver, and copper. Here’s what we’ve been doing: First, we’re closely examining potential opportunities on our current properties, with exploration results from our Fox Complex, Los Azules, and San Jose coming soon. Second, we are exploring opportunities near these existing operations. Recently, we made a friendly takeover bid for Timberline Resources, a company with properties near our Gold Bar mine and adjacent to McEwen Copper’s Elder Creek property in Nevada. Third, I see intriguing opportunities where we could enhance our management capabilities, expand our resource base and annual production, and gain more leverage to gold, silver, and copper prices. In Los Azules, we have adequate funding to continue for some time. We're focused on completing the feasibility study and any necessary engineering, with all financing for Los Azules managed through McEwen Copper. We're also continuously seeking opportunities with our main investors and others to secure that funding. Now, I’d like to introduce Michael Meding, our Vice President and General Manager of McEwen Mining and McEwen Copper, to provide insights into the political situation in Argentina along with some regulatory changes being proposed and their potential impact on our asset value.

Thanks so much, Rob. Hello, everybody. It’s an exciting time in Argentina, as Rob mentioned, with significant progress at Los Azules this past quarter. We see numerous projects in Argentina that could benefit from improved investment incentives. This proposal has been submitted to Congress, received approval from the Lower House, and is now under discussion in the Senate. The administration is working to secure approval for this promising initiative. It includes substantial infrastructure investment incentives for this year. If it moves forward, we are cautiously optimistic about its passage. The income tax is set to decrease from 35% to 25%, the export duty will drop from 4.5% to 0%, VAT recovery will become instant, and the operating bank will allow 100% of debit and credit taxes at a rate of 1.2% to be applied as an advance for income tax. All of this combined with improved access to capital markets can transform mining and large infrastructure projects in Argentina. We believe this initiative could be a key driver for the Argentine economy moving forward. Back to you, Rob.

Thank you, Mike. As many of you know, there's a high rate of inflation in Argentina, and we've been able to offset that.

Yes, that's right, Rob. Overall, after our last financing transaction in McEwen Copper, we were able to invest in a variety of products that essentially fully hedged our exposure to Argentine inflation and devaluation. I believe at the end of the first quarter, McEwen Copper had a treasury of just over $60 million. Since we've deconsolidated McEwen Copper in the fourth quarter of last year, we no longer show McEwen Copper's cash balance on our balance sheet; it's separate. We only report there our 48% of the earnings and loss in our income statement.

Thank you, Perry. I'd now like to open the call to questions.

Your first question comes from the line of Jake Sekelsky, Alliance Global Partners.

So it was good to see costs come down quite a bit at Gold Bar, and I know you mentioned this is a function of mining lower strip areas. I'm just curious if that's something you expect to continue a bit into Q2 here before moving back to more normalized levels of strip, as you mentioned in the second half.

I'll ask Bill to comment on that.

Yes, Jake, I think production in the first quarter was largely on schedule, although it was slightly over budget. In the second quarter, we plan to expand our work in the pit and at Gold Bar to increase the amount of material or ore we place on the pad to enhance our leaching process. As you may be aware, the first quarter typically presents some challenges due to rain, snow, and cold weather. This year was somewhat better than last year, but we still managed to lose just under 5 million gallons compared to around 9 million gallons last year. Overall, I believe the first quarter handled the production challenges well, and we anticipate improvement in the second quarter.

What about the stripping?

Yes, the stripping is related to where we're taking the ore at the time, and we're working with our contractor to upgrade the number of trucks we have at the site to manage the stripping associated with ore. We see those two things as tied together.

Okay. That's helpful. And then, Rob, you touched on opportunities for growth and things that you're looking at from an M&A standpoint I'm just curious; should we be thinking more along the lines of complementary type transactions such as Timberline? Or would you be willing to look at more transformational type acquisitions? Just your thoughts there would be helpful.

We're exploring several fronts, Jake. This market is delivering situations that bear a lot of consideration. There are transformational opportunities that are attractive, and we're taking a close look at them because we believe we're in one of these rare opportunities where now is the time to grow. Yes, I’m quite confident we will see higher bases going forward.

And your next question comes from the line of Joseph Reagor from ROTH Capital Partners.

Following up on Jacob's and Rob's comments about acquisitions, what is your best estimate on the timing for closing the Timberline acquisition?

I can answer that. It's Stefan. We're looking at an outside date in early July for that closing. There are a couple of factors that could accelerate that, but that’s a good way to use at this point.

That's helpful. And then going back to the opening comments about the accounting treatment on McEwen Copper. Can you give us any guidance for the rest of this year on what you think your like income level expense is going to look like, so there's not such a big delta between what we have and what actually occurs?

Joe, I think as far as McEwen Copper, Q2 is going to be pretty similar to Q1. We had over 20 rigs going until May. So we'll continue to have those costs flowing through. Q3 will be quieter as there's no drilling activity, although we will still be working on the feasibility. Q4 activity will be dependent on when copper raises money and what the program will be in terms of drilling in the fall. Once we have a feasibility study for McEwen Copper and permits in hand, we will under U.S. GAAP start capitalizing costs at Los Azules, which aligns with our Canadian peers.

Okay. What is the timing on having that feasibility study in hand?

Certainly, first half of next year.

Yes.

That's helpful from a modeling standpoint. On Fox, Rob, you commented that the first quarter grades were light, but you expect things to pick up and then costs to drop. Have you already seen a pickup in grade in Q2?

This is Bill. The grade has picked up from this month. It's running now around 3 grams. We hope to see that pick up a little bit more, but we're seeing at this point that grade in Q2 will be around 3 grams. Right now, it's a case of making sure we put through all the tons we can through the mill.

Okay. So we should expect tonnage to stay relatively similar to what Q1 was, with the grade starting to work its way higher over the rest of the year.

That's correct.

Your next question comes from the line of Mike Kozak, Cantor Fitzgerald.

The last caller asked one of my questions, but I just wanted to follow up here and make sure I heard Perry's comment correctly that you made at the end of the prepared remarks. Did you say cash and investments of approximately $60 million in the copper subsidiary at the end of Q1?

At the end of Q1, that's correct. Yes.

Okay. And then maybe as a follow-up to that, in prior quarters and years, you guys would give some, call it, soft guidance on when you would look at potentially IPO-ing McEwen Copper. Is IPO kind of off the table now? Is the priority to keep funding this with Stellantis and Neutron? Or how are you thinking about possibly IPO-ing that unit?

Well, we feel we're in between spots and that we've got the PEA published last year. We're looking at a feasibility study; there's probably 100,000 meters of drilling that haven't been included in the resource results. We filed for an environmental application for approval and we're hopeful to get that before we publish the feasibility study. After the feasibility is out and we have a permit in hand, that would be the time to consider an IPO when we believe we'd maximize the value.

And your next question comes from the line of Bill Powers, private investor.

Just a couple of quick questions. I guess we could start with the decline at Fox. Could you give us an update on that? I know it was supposed to start sometime this year; if you could give an update on that as well as the progress towards construction starting in Mexico.

Okay. I'll ask Bill to address that question.

Thank you very much, Bill. Yes, in terms of the ramp at Fox, we expect to start the surface excavation work this month. We're in the midst of negotiating with contractors on that matter. We hope to get started as soon as they can get the equipment into the field. The people we're talking to have equipment in their yard, so that should start as scheduled. In terms of Phoenix, we are waiting for permits. All the required submissions have been made. Optimistically, we hope to see that in the second to third quarter, but I’m going to say the third quarter now because we hope to have it in the next few months. There's an election coming up in Mexico, and we’re planning to make a trip there in the next few weeks. We'll have a chat with the Minister of Economic Development who visited the site last year and basically said he would try to help us in any way he could. We’ll take advantage of that. We're now doing the final engineering of the plant. As soon as we have a permit in hand, we'll start working on that. We've already ordered gas generators for that project, and most of the equipment that's going to be installed is now refurbished at the site.

Okay. So you'd expect construction to begin by the fourth quarter, with potentially first production coming out in Q1 of next year? Is that a reasonable time frame?

That would be our hope. Yes.

Okay. Given the results that came out at Fox earlier in February of this year, are there any plans to include Stock East in the initial ramp, or is that something for future development?

No. Absolutely, that will be our priority once we get underground. We completed a drilling program in the first quarter at Stock East, and the results are very promising. We will announce those results in the next 30 days. Once we complete the ramp and get underground, we will proceed in two directions: one towards Stock East and the other towards Stock West. Since that particular ore zone is close to the surface, we will go there immediately after we get underground.

It looks like there are no further questions at this time. Mr. Rob McEwen, I will turn the call back over to you.

Thank you very much, operator. Thank you, ladies and gentlemen, for joining us. I believe there is a question that came in by e-mail that I think I've already answered. It was relating to the market performance this morning. I think it's overdone, and we've got a lot of positive momentum at the moment. Thank you, operator.

Great. Well, thank you so much. This does conclude today's conference. You may now disconnect. Thank you.