McEwen Mining’s record Q2, new optimism on Argentina

Even with an after-tax, non-cash impairment charge of US$123.6 million related to the decline in metal prices and potential costs associated with a 1% tax on economically viable mineral reserves in Argentina’s Santa Cruz province, McEwen Mining (TSX: MUX; NYSE: MUX) posted record production and lower costs in the second quarter. And CEO Rob McEwen suggested that if the terms of a deal Chevron (NYSE: CVX) recently completed in Argentina is any guide, better times may lie ahead for miners there.

In the first big deal in the country’s oil sector since the Argentine government seized control of YPF (NYSE: YPF) from Spanish oil giant Repsol (US-OTC: REPYY)last year, Chevron signed an agreement with YPF in July to invest US$1.2 billion in the Vaca Muerta shale, oil and gas formation.

The government passed a new decree a day before signing the deal with Chevron that allows oil companies to export — tax-free — up to 20% of the oil and gas they produce. And unlike the current rules for mining companies, oil companies that export their product will be allowed to keep their earnings in foreign exchange outside the country.

“It’s just a new pragmatism by the Argentine government that in order to attract foreign capital they need to make large concessions today,” McEwen told analysts and investors on a conference call. “It is a glimmer of light that maybe will get brighter as we go forward.”

He continued that “Chevron’s change is a major shift I think in a government position. All they have to do now is look at the mining industry. There is a by-election coming up in October, which may cause some changes to come about.”

The 1% reserve tax became law in July after the Santa Cruz government voted for it in June. But the law does not contain all of the pertinent details — such as the method of calculation, the applicable period and reserve levels to be used — and still needs to be ratified by the governor’s office, according to Andrew Elinesky, McEwen Mining’s vice-president for Argentina.

“The time to ratify should usually be a few weeks, especially when considering that it was the governor’s party that proposed the law,” he explained in an email response to questions. “However, this still hasn’t happened. One could assume that this is due to the public and private statements made by the mining companies to the government that they will fight it the best they can and delay making any payments as long as possible.” 

Aside from the impairment charge in Argentina, of which US$95.9 million was related to the carrying value of the company’s 49% stake in the underground San Jose mine, and US$27.7 million related to its other mineral exploration properties in Santa Cruz province, McEwen pointed to the many records the company set in the second quarter, which included record production, “lower operating costs at a time when costs are going up for everybody,” increasing reserves and no debt.

Production in the three months ended June 30 rose 44% year-on-year to 35,955 equivalent oz. gold, or 20,988 oz. gold and 778,308 oz. silver.

Total cash costs of US$744 per equivalent oz. gold were 9% lower year-on-year and 22% lower than in the first quarter of 2013, while all-in sustaining costs of US$1,108 per equivalent oz. gold were 33% lower than in the first quarter of the year.

The El Gallo 1 mine generated $2.4 million in operating cash flow after sustaining capital expenses, and the company is on target to produce 130,000 equivalent oz. gold in 2013.

Meanwhile, measured and indicated gold-equivalent resources at El Gallo 1 and 2 increased by 34% to 2.1 million oz. (48.2 million tonnes grading 1.37 equivalent grams gold per tonne).

“Unlike a lot of our peer group, we still believe in exploring,” Ian Ball, the company’s senior vice-president, noted on the conference call. “We put out a new resource at El Gallo, and we continue to explore in Mexico.”

At the same time, McEwen Mining ended the quarter with a strong balance sheet of US$39.3 million in liquid assets, and no debt.

The Mexican government also owes the  company US$9 million in the form of a tax refund, and management believes most of it will be paid by the fourth quarter of the year. “We retain a lot of financial flexibility,” chief financial officer Perry Ing said on the call.

At its 100%-owned El Gallo I mine in Sinaloa, Mexico, which started commercial production on Jan. 1, the company produced 8,439 oz. gold and 6,341 oz. silver, or 8,561 equivalent oz. gold, and remains on track to produce 27,300 equivalent oz. gold in 2013.

Gold-equivalent total cash costs at El Gallo I equalled US$713 per oz. All-in sustaining costs totalled US$1,183 per equivalent oz. gold, 19% lower than in the first quarter. An expansion of the mine from 3,000 to 4,500 tonnes per day for US$5 million is underway, which the company expects by mid-2014. By 2015, the mine could produce 75,000 equivalent oz. a year, the company says.

At its 100%-owned El Gallo 2 project, tests are under way to determine whether heap leaching is a viable processing alternative. Heap leaching would cut the initial capital estimate to US$30 million from US$180 million under a milling scenario. But while capital costs would be reduced, it would also decrease production from an estimated 105,000 equivalent oz. gold to 60,000 equivalent oz. gold. Test results are expected next quarter. In the meantime, the company is advancing construction of the El Gallo 2 ball mill to make sure that both alternatives remain possible without incurring major costs or delays.

The company hopes that the three permits it needs to start construction and operations under the mill process will be approved before year-end. If the company proceeds with the heap-leach scenario, it will need to modify the permits.

Management is putting the finishing touches on an updated preliminary economic assessment at its wholly owned Los Azules copper porphyry project in Argentina’s San Juan province. The new PEA will evaluate whether it’s possible to increase the daily throughput, produce copper cathode instead of a concentrate (eliminating the need for a slurry pipeline through Chile) and process low-grade mineralized material not previously considered via a heap-leach operation. Avoiding a slurry pipeline would also reduce Argentina’s current export tax on concentrate.

At its Gold Bar project in Nevada, the company expects to submit its operational report by year-end. The project is forecast to produce 50,000 oz. gold per year.

In terms of his outlook on gold and the industry, McEwen said the primary drivers for the metal are still there and increasing, and that he sees no reason to decrease exposure to gold. “I do see consolidation taking place,” he continued, “with people wanting a little bit more size . . . and we have been looking in that area as well.”

As for the price of the precious metal and gold stocks, his view remains positive.

“In the short term, summer is usually a cyclical low and we get recoveries in September,” he said. “Since 1984 there have been eight presidential elections, and in each of those years the value of gold shares has declined, and in the year that has followed [the election year] — and we have only completed seven years — gold shares as measured by the Philadelphia Gold and Silver Index have increased by anywhere from 10­­–80% in
the year that followed the election. There was one exception, in 1987, which was Bre-X . . . but based on this time series, there’s a reasonably good chance that at the end of the year you’ll see gold stocks higher than they were at the beginning of the year.”

The second-quarter results and subsequent conference call helped push up the stock 9%, or 18¢, to $2.26 per share. Shares have traded in a 52-week range of $1.72 to $4.92, and last traded at $2.62, or US$2.52.