McEwen Inc. Q2 FY2024 Earnings Call

Hello, ladies and gentlemen, and welcome to McEwen Mining's Second Quarter 2024 Operating and Financial Results Conference Call. Present from the company today are Rob McEwen, Chairman and Chief Owner; William Shaver, Chief Operating Officer; Perry Ing, Chief Financial Officer; Jeff Chan, Vice President of Finance; Stefan Spears, Vice President of Corporate Development; Michael Meding, Vice President and General Manager of McEwen Copper; and Carmen Diges, General Counsel and Secretary. After the speaker's presentation, there will be a question-and-answer session. I'd now like to turn the call over to Mr. Rob McEwen, Chief Owner. Please go ahead, sir.

Thank you very much, operator. Good morning, and welcome, ladies and gentlemen. It was a quarter we've all been waiting to see. It was our most profitable quarter since 2016. We recorded a gross profit of $10.8 million and adjusted EBITDA of $7.2 million, compared to losses in the second quarter of last year. It was a quarter of improved financial liquidity. Our cash was up 77% to $40.7 million, working capital was up 28% to $29.1 million, and our debt remained unchanged at $40 million since year-end. It was a quarter when both McEwen Mining and myself increased our investment in McEwen Copper. Based on the last financing of McEwen Copper, the implied value has risen to $947 million, which makes McEwen Mining's 48.3% interest equal to $457 million. On a per-share basis, that is $8.45 behind every fully diluted share of McEwen Mining. It’s worth noting that this value is greater than our entire market capitalization today. Last night, our closing share price was $8 on the NYSE. I want to remind you that McEwen Mining also owns a portfolio of six royalties, with the largest being a 1.25% NSR on Los Azules. Additionally, we own three cash-flowing gold and silver mines. Management has conducted an internal valuation of our assets, ranging from a low of $20 a share to $50 a share. Q2 was a quarter when the investment outlook for Argentina improved dramatically. I'll refer to it as 'Milei Magic' after President Milei. The Argentine government approved the most significant changes for foreign direct investment in the country in the last 20 years. These changes include lower taxes, removal of exchange controls, financial stability agreements, and more for major projects. The impact will be significant on McEwen Copper's Los Azules NPV. Following these legislative changes, the world's largest mining company, BHP, made a significant move into Argentina's copper scene, leading a $4.4 billion transaction with Lundin Mining to acquire Filo Mining and the Filo del Sol Deposit and the Josemaria Deposit. Not only does this transaction demonstrate tremendous confidence in Argentina, but it also sets a new value for large copper deposits in the country. Based on the current published resources of Filo del Sol and Josemaria, Los Azules has a deposit that is larger than the combined resources of both of these deposits and has a higher copper grade. All three deposits are located in San Juan province, a jurisdiction that the Fraser Institute ranks as one of the best for mining in South America. At this point, I'd like to open the call for questions and answers.

Thank you. We are now opening the floor for the question-and-answer session. Our first question comes from Jake Sekelsky from Alliance Global Partners. Your line is now open.

Hey, Rob and team, thanks for taking my questions and congrats on the quarter.

Thanks Jake.

So just starting with the ground conditions at Fox, I'm just curious if this is a one-off at a specific stope, or are you seeing this in other areas underground as well?

Thanks for the question, Jake. No, it's a single area of the upper level of the mine. It's along the contact between ore and waste and on the waste side there was some less competent rock, which failed. Once we realized exactly what was going on, we backfilled that area with cemented fill, and it's totally stabilized now. The path forward is to define exactly how we're going to recover the rest of that ore, which will be by using significantly smaller bites or significantly smaller sizes of stopes that we'll have absolute control of. So, I don't think we have a big concern about it. The mistake we made was that we didn't recognize that the rock adjacent to that particular stope being waste was, in fact, as incompetent as it turned out to be. I think it's a one-off that's now under control. We've had our rock mechanics consultants advising us on how to put more security around what we're doing there. I'm reasonably comfortable that we're not going to see that again.

Okay. That's helpful. Thanks for that color. And then just switching over to Gold Bar. You had a strong quarter there, and it seems like turnaround efforts have really taken hold. Do we expect sub-call it $1,500 an ounce AISC going forward there? Or were there anything specific to Q2 that drove that major decrease in cost?

Yeah. I don't think that there's anything that drove that cost down. It's basically because the production has so far been slightly above our target, which is helping. We're doing a significant amount of drilling. So far this year, we've done about $5 million of drilling. That is also included in the cost there. I think we anticipate that as long as we can move the right amount of material, the cost will stay in that same area, or it might move up slightly, but it seems predictable at this time based on the data we have.

Great. Thanks again.

Okay. Thank you.

Our next question comes from Heiko Ihle from H.C. Wainwright. Your line is now open.

Hey, Rob and team, thanks for taking my questions. I hope all’s well.

Thanks, Heiko.

You talked quite extensively about Argentina in your prepared remarks, which is obviously pretty pertinent. But maybe can you give a little bit of color on your longer-term internal tax outlook given the special incentives that you had discussed? I mean, I guess what I'm saying is internally what are you looking at receiving? And is there a way for us to maybe quantify that?

Mike, do you want to address that question?

Sure. We have done some interim calculations that show what the RIGI application means for our loan. By no means would we like to invalidate our existing BA. To give you an idea, the after-tax changes with the conservative application of the RIGI would be in the area of over 30%, which equates to $960 million. This makes projects, which is not our case, more attractive because what Argentina has done is that it has brought Argentina once qualified for the RIGI into similar footing with overall tax burdens such as Chile. It also includes several benefits that help significantly during the construction phase, such as fast VAT recoveries.

That's helpful.

Yeah, the tax rate is going from 35% to 25%, and there are other benefits. As Mike mentioned, VAT refunds are accelerated, and customs importation has sped up. It's a big push for us and others in the country.

Yeah. No, a 100%. And I mean things seem to be actually getting done there from everything you read in the press. Profitability in the quarter was obviously pretty good. What kind of cash flow should we expect with additional investments into your asset base beyond what you're currently forecasting? Is there an internal gold price metric that you have? Or is it sort of just a learning-by-doing thing where if excess funds are there, we'll figure it out then?

Yeah, Heiko, it's Perry. We're constrained by permitting in our current environment. I think that's driving our timeline. We're only looking at projects that we think we have the balance sheet to execute on. For us, that is building the ramp back at the stock mine which is going well, and we've raised the CDE for Mexico. We want to put that back into production, but that's subject to permitting. As Bill said at Gold Bar, we're spending money on exploration there, and we're having some tangible results which we hope to share in the future. All these things we hope will provide incremental production increases over the coming years.

It’s a very fair answer. Thank you very much. I'll get back in queue.

Thanks, Heiko.

Our next question comes from Mike Kozak from Cantor Fitzgerald. Your line is now open.

Good morning, Rob. Just a couple of questions for me. First, have you set a budget yet for the 2024-2025 exploration season at Los Azules, or is it going to depend on how much of the $70 million comes in between now and the end of the year?

We've done most of the drilling before the feasibility study. The big drilling campaign is finished. We will be drilling looking at that new deposit or new copper showing close to Los Azules, but it won't be anywhere near the type of expenditure we did this year.

Okay. That's helpful. And then the follow-up I had was how much do you have to spend on the technical work related to the feasibility study?

We're looking at about $60 million for that.

$60 million? And of which you all have still in front of you or some has been spent already?

Yes. That's in front of us.

Okay. That was it. Thank you for that. I'll turn it over.

You're welcome, Mike.

Our next question comes from Allan Barry from Rocks and Stocks. Your line is now open.

Hi, Allan.

Hi, everyone. Thanks for taking my call.

Happy to.

Every major mining company seems to be interested in getting into copper. The coverage is fairly bare when it comes to copper development projects that rank in the size that a major would be interested in highly. With BHP and Lundin taking a run at Filo, I think it gives us some real-world valuation metrics. And I was wondering if you could shine some light on how Los Azules compares to Filo del Sol and what's in the deal?

It compares very favorably. First of all, Los Azules is at a lower altitude than either Filo del Sol or Josemaria. Additionally, Los Azules is closer to infrastructure like major power lines and highways. According to a Goldman Sachs study of a PEA, we were in the lowest cost quartile while Josemaria was in the highest. That might change now that they are combining those two properties for development. Los Azules will likely require significantly less capital because we're going to be a heap leach operation as opposed to a conventional milling operation. Based on the published resources, we have a larger resource than the combined resources of Filo and Josemaria and a higher copper grade. That might change with new work coming out of those two, but at the moment, we're larger and of higher quality. So, I think we compare very favorably.

My second question was on the gold front. Gold has been a very powerful global market. And today I think that an argument can be made that really only the largest gold stocks have joined the party. And therefore, it looks like there are some attractive opportunities down the gold stock chain. Is there any comments you can make as far as possible strategic investments or your thoughts on those kinds of opportunities?

Very clearly the majors have gotten the most benefit out of the increase in the gold price. You're seeing it in their improved cash flow. A lot of the junior producers and explorers will see a rotation out of the seniors into the intermediates and juniors as the price of gold remains stable or increases further. We are a case in point. We were a high-cost producer, and with the higher gold price, our margins started improving smartly. This will happen across the sector. The juniors will see a rotation once the seniors accumulate more cash, and they will be looking to grow their resources and production, leading them to explore opportunities in intermediate and junior markets. I believe it's a good time for investors to be looking at smaller companies right now.

Thank you very much for taking my call. Congratulations on getting back on the right track since 2016. I'll turn it back over.

Thank you, Allan.

Our next question comes from Rene, an individual. Your line is now open.

This is her husband, David. We'd like to inquire about the MQMNW, we're involved with that. I just wonder if there's going to be any new movement in that direction?

I'm not familiar with that name. MQMW, what's that?

It's warrants. MQMNW.

MQMNW is an OTC ticker for McEwen Mining Warrants, which are out of the money and last traded for a very low price. So, what is your question about those particular warrants?

I was just curious if there's any kind of an IPO coming in on a project that was supposedly involved. We've been kind of waiting for an IPO for a long time.

Those warrants were issued some time ago and aren't related to any particular project. Those warrants are out of the money and expire towards the end of this year in November 2024. Regarding new projects, we are in the process of acquiring Timberline Resources. That company has assets in Nevada, which present good synergies with our existing mine there. That acquisition will hopefully close towards the end of this month in August. We're looking forward to working on those projects. That's the only current acquisition that we have in the pipeline.

So that wouldn't involve the warrant circumstance, would it?

No, not at all.

Not at all, okay. Well, I guess you've answered our question.

Thank you, David.

Our next question comes from John, individual. Your line is now open.

Hello, John.

Hi, thank you. My family and I have been shareholders for over 12 years. My question is why do you think that McEwen Copper hasn't been reflected in the stock price? And what do you think it will take to change that?

It's a good question. We separated the Copper and financed it independently starting in September 2022. Since that time, our share price has outperformed the Dow, the NASDAQ, the price of gold, silver, copper, the GDX, and the GDXJ. When we separated the copper, it was to gain visibility for it. I believe that the recent transaction with BHP and Lundin Mining on two large copper projects in Argentina's same province as Los Azules will get people thinking about its value. We are just beginning, and we've done a great deal of drilling. We'll have a feasibility study out early next year, so I hope all of that will be reflected in a higher price for the value of that project.

Thank you very much.

You're welcome. The copper prices weakened in the last three months relative to gold, which has taken a bit of the value out of the market. We followed a lot of the copper stocks in terms of price direction.

Okay. Thank you very much.

You're welcome.

Our next question comes from Phil Powers from an undisclosed source. Your line is now open.

Hi, Bill and Stefan. Thanks for taking my call. A couple of quick questions. As far as looking at the financials, it appears that San Jose is generating quite a bit of revenue and a fair bit of cash these days. I was wondering if there's been any update you've gotten from Hot Shield regarding a dividend? And if so, are there any plans for regular dividends?

Hi, Phil, it's Perry. Thanks for the question. We received a small dividend in the second quarter, but obviously, given where gold and silver prices are, we would want to see a more robust dividend. We've had a very good dialogue with Hot Shield. We're spending some of the free cash flow generated this year on a mill expansion, which will increase throughput to 2,000 tonnes per day. That project is going well and we should see the benefits of it next year. We have committed to look at this quarter's cash generation and potentially expect to receive a more sizable dividend in the fourth quarter of this year. While silver has come off a bit, gold is still above $2,400 as of today. It’s still generating positive cash flow, and the mine seems to be performing quite well.

Yes. Thank you. And my second question is, I know at least Bill and maybe a couple of other members of the team went down to Mexico recently, and it looks like you're making some adjustments to the permit. I was just wondering if you could give us a little more color on some details regarding some of the adjustments to the mine plan, as well as if this will raise the cost to getting towards a permit and a potentially production.

Yes. Thanks for the question. We're anticipating receiving the permit. Unfortunately, there have been recent elections in Mexico, so the new team is now getting into place on the government side. We have had discussions with responsible agents in Mexico about our permitting. There is an anticipation that we might get the permit late in Q3 or early Q4. In all permitting situations, there's not a lot of clarity around when permits will be given. Meanwhile, we're also looking at opportunities to reduce the capital cost and find other arrangements in terms of the permitting to make that less onerous on the government. At this point, we're in a state of flux and hope to have better news for ourselves and our shareholders later in Q3 and early Q4.

Okay. Thank you very much.

You’re welcome. Thanks, Phil.

Our next question comes from Patrick Shin from Private Investor. Your line is now open.

Hello, Patrick.

Good morning, Mr. McEwen and team. Just wanted to find out if there's any updates on the RIGI. From what I could gather through message boards and some Internet research, it's been debated, but it seems very unclear what benefits there are.

There are many. Michael Meding, our VP and General Manager of McEwen Copper, could provide a concise statement about that, and we'll be putting out a press release today. In the appendix, there will be a discussion. It has many positive features.

The RIGI is part of a law package that has been signed into law and has been discussed in the Lower House, in the Senate, and is now enacted. The provinces are in the course of adhering to the law. The law is active. The main benefits include a corporate income tax reduction from 35% to 25%, accelerated depreciation, and unlimited carry-forward of losses. There are no limitations on interest deduction for five years, the tax on dividends is reduced from 7% to 3.5%, and there is relief of withholding tax on certain payments to foreign beneficiaries, which is really important for big infrastructure projects. The bank tax, which was previously 1.2%, will be fully creditable against income tax, and the municipalities and provinces adhering to the law cannot increase taxes on the projects. For constructions, the 20% VAT in Argentina, which typically takes time to recover, now has a new mechanism for quick recovery. The state will issue certificates that can be used directly for tax payments. Exports, after a period, also have sliding scale export duties, which will be waived with the implementation of the RIGI. The law promises 30 to 40 years of tax stability, which can be litigated either in-country or outside the country, making it very beneficial for mining projects.

Okay. So it sounds like it's a done deal. There's no more debate needed by the Argentinian government for these benefits?

What happens now is that the law will be regulated. It has been signed into law and published in the official gazette, and the regulation should come out in the next couple of weeks. Provinces interested in adhering to that law are doing so via provincial laws. Argentina is arranged similarly to the U.S., so natural resources belong to the provinces. Discussions are ongoing, and some provinces have already adhered. We expect the province where we are to approve it soon, ensuring full coverage on a national, provincial, and municipal level, with the tax stability I mentioned lasting 30 to 40 years and all benefits included.

Okay. Thank you so much, gentlemen. I appreciate all the hard work you guys have done.

Thank you, Patrick.

As of right now, we don't have any pending questions. There are no further questions at the moment. Mr. Rob McEwen, I would like to turn the call over to you.

Thank you, operator. And thank you, ladies and gentlemen for joining us today. As you can see, we're in a good financial position. Our drilling is delivering results, and we've made several press releases on our exploration results. In the press release that's going out today on Los Azules, it will provide additional drill data, infill drilling. Argentina is open for business. It's been a pariah for a long time. I'll call it 'Milei magic' has changed that and been embraced by the government of Argentina. So that, plus our improving financial position, puts us in a very good position going forward to finance our growth plan. Thank you for joining us.