McEwen buys claims near El Gallo

McEwen Mining (TSX: MUX; NYSE: MUX) is acquiring claims in Mexico — 10 km from the company’s El Gallo mine in Sinaloa state — that it believes could extend the life of the gold-silver mining operation, and chairman and chief owner Rob McEwen isn’t ruling out more purchases in the months ahead.

In an interview with The Northern Miner, McEwen said management is looking for opportunities to build the company’s resources — which could include an acquisition — and also said he would consider a merger of equals if given the opportunity.

The claims McEwen Mining is buying in Mexico from Almadex Minerals (TSXV: AMZ; US-OTC: AXDDF) make up the El Encuentro project, and cover an area of hydrothermal alteration and gold-silver mineralization where significant surface sample results came from trenching in 1996.

At that time, the project was owned by Almaden Minerals, before it was spun out into Almadex in 2015. In a press release announcing the sale, Almadex said that “given McEwen’s presence in the area, they are best placed to develop these assets in the near-term.”

The properties lie on a mineral trend over 7 km long, and McEwen’s team says the acquisition consolidates the district around its El Gallo mine and El Gallo silver deposit. McEwen Mining has explored extensively along the trend, and already discovered two satellite mineral resources: Twin Domes and Las Milpas.

Twin Domes is 17 km northwest of the El Gallo heap-leach mine and initial test results have shown that the gold mineralization is potentially amenable to heap leaching, which would allow it to be processed at El Gallo 1. The gold mineralization at Twin Domes has been identified from surface to 45 metres deep.

McEwen Mining will pay Almadex US$250,000 in cash plus a 2% net smelter return royalty for the El Encuentro property, which has six claims.

Two of the claims (4.21 sq. km) are wholly owned by Almadex, and the other four (totalling 3.76 sq. km) are held by Almadex under an option agreement that is the subject of a legal dispute. McEwen Mining says it will settle the litigation and obtain title to the disputed claims.

As far as the company’s El Gallo silver deposit is concerned, it is fully permitted and ready to build, but the company has always said it would wait for a minimum US$18 to US$20 per oz. silver price to meet a 20% internal rate of return threshold before building.

 

McEwen noted that given the recent strength in the silver price, “we are getting close to a price where it will make economic sense to start construction of our El Gallo silver mine in Mexico.”

“Silver has two things going for it,” he adds. “One is that when the gold price goes up, the price of silver goes up; and two, the exchange rate between silver and gold is shrinking. We’ve gone from [a ratio of 80 oz. silver to 1 oz. gold] to just over 72 to 71, and we can get back to the 50 to 60 range if we can continue the run in gold.”

He is also sticking to his bullish view on the gold price.

“There’s no question that gold is going higher — gold will have a run into the high teens, if not US$2,000 per oz. this year,” he says. “After that the gold price is heading up to US$5,000 per oz., three or four years out.”

In terms of the prolonged downturn in the mining industry, McEwen says that “we’ve come off the bottom.”

As for Argentina, where the company hasn’t spent any money in the last couple of years, McEwen says the plan is to invest US$1 million on exploration at its Los Azules copper project in San Juan province. And at its 49%-owned San Juan silver-gold mine, also in San Juan province, McEwen Mining and 51% partner Hochschild Mining (LSE: HOC) will spend US$4.5 million on exploration.

“The swing in the exchange rate, the removal of mining taxes and higher metal prices [in Argentina] are all going to contribute to much better numbers for us this year,” he says.

McEwen notes that last year’s election of a new business-oriented president Mauricio Macri — and the reforms he has instituted so far in office — are making Argentina a much better destination for investment.

Macri has removed almost all restrictions imposed by the previous administration of Cristina Kirchner on the purchase of foreign currency, expatriation and repatriation of funds and compulsory deposit of foreign investments.

The former mayor of Buenos Aires has unified the exchange market and floated the peso, so that foreign companies could send money to Argentina at the unified exchange rate, and abrogate restrictions on repaying foreign debt (principal or interest) in a bid to reach a deal with international creditors, and regain access to international credit markets. In February the national leadership and a group of holdout creditors agreed in principle to end their 15-year legal dispute over defaulted debt.

Macri has also removed export taxes on all metals as well as industrial and agricultural products, and taken steps to eliminate restrictions on imports, slashing the list of items requiring import approval permits from 19,000 down to 1,000.

“I’ve been impressed by what the government has achieved in quite short order,” McEwen says. “They’ve addressed the export taxes, the exchange rate and are now able to access the international credit markets after being denied access for the past 15 years. They have made real progress.”

McEwen notes that at the Prospectors & Developers Association of Canada mining convention this year, he had the opportunity to speak with Argentina’s new Secretary of Mines Daniel Meilan and the governors of San Juan and La Rioja provinces.

“They were all talking about large infrastructure investments in the north of Argentina to facilitate and encourage industrial and mining investments,” he says. “They spoke of extending transportation and energy grids, and a transborder tunnel as part of their economic development plans for northern Argentina.” The proposed 14 km Agua Negra tunnel would link Argentina and Chile through the Andes.

While McEwen acknowledges the company has looked at more opportunities in Argentina, the company has its hands full with its Gold Bar project in Nevada and its El Gallo silver deposit, where the company is considering a production decision. “We’ve looked at several situations, as the economic climate there has definitely improved,” McEwen says. “But we have a good development pipeline and expect to build our gold mine in Nevada next year.”

The Gold Bar project is situated within the Battle Mountain-Eureka-Cortez gold trend of Eureka County in the centre of the state.

Last year the company spent $1.3 million at Gold Bar, primarily to advance and complete the environmental impact statement, as well as a 4,000-metre infill drill program. A feasibility study on Gold Bar has outlined a conventional open pit with an oxide gold heap-leach recovery circuit, with key estimates including $60 million in initial capital; a 20% after-tax internal rate of return at US$1,150 per oz. gold; an average 65,000 oz. annual production; and an estimated US$728 per oz. cash cost.

At the end of the first quarter, McEwen Mining had liquid assets of US$43.5 million and no debt, according to production and financial results for the three months ended March 31. The company generated US$14.7 million in free cash flow during the quarter, up from US$5.6 million in the same quarter last year.

Consolidated quarterly production reached 37,958 equivalent oz. gold (up 14% year on year) and earnings from mining operations of US$19.5 million, or 7¢ per share, (compared to earnings of US$17.2 million, or 6¢ per share, in the first quarter of 2015).

The El Gallo mine reported total cash costs of US$432 per equivalent oz. gold and all-in sustaining costs (AISCs) of US$532 per equivalent oz. gold, while the San Jose mine’s total cash costs and AISCs were US$762 and US$936 per equivalent oz. gold. Consolidated net income reached US$13 million, or 4¢ per share, up from US$6 million, or 2¢ per share, in the first quarter of last year.

In mid-April, the company acquired the existing tiered net smelter return royalty on its El Gallo mine, which was paying 3.5% of gross revenue, less allowable deductions. The purchase price consisted of a US$5.3-million payment on closing and a conditional deferred payment of US$1 million to be made on June 20, 2018. In 2015, the royalty added US$44 per equivalent oz. gold sold to the company’s cash cost, and the company says eliminating the royalty “removes a royalty burden on existing and potentially new deposits inside the royalty’s area of influence, including the El Gallo silver deposit.

This year, McEwen Mining forecasts production at the El Gallo mine will be 55,000 equivalent oz. gold, and the company has budgeted US$3.3 million for AISCs and capital expenses, and US$2.6 million for exploration. At the San Jose mine, the US$4.5-million exploration budget aims at defining economic deposits on the San Jose property.

At Gold Bar, the company expects a record of decision on the project’s environmental impact statement in January 2017, and says all other state and local permits should be acquired within that time frame.

“We hope to get Gold Bar approved next year and see it in production in 2018,” McEwen said on a conference call about the first-quarter results. He noted that capital costs are an estimated US$60 million, and said management had contemplated financing. “We were looking at a combination of debt and equity to fund it, but we wouldn’t need the full US$60 million,” he said. “We won’t need the money until halfway through next year, or three quarters of the way through next year because of our cash balances.”

At the El Gallo silver deposit, he said the company will have a study out in the next two months looking at the economics. “We’re quite keen to progress this,” he told analysts and investors on the call. “We’d like to see some stability in the silver price, but looking at the metal markets right now, that’s going to be the case this year.”

When asked about what the company plans to do with its remaining cash-on-hand (US$46 million as of May 2) after its exploration and development costs, McEwen said the company “is also looking at opportunities, and might be able to deploy some of that cash in our pursuit of mergers and acquisitions (M&A) activity.

“In terms of M&A, we’re constantly reviewing projects, looking for an opportunity to build,” he noted, adding that inclusion in the S&P 500 might also call for M&A to get bigger. But he cautioned that size is not the determinant factor when he looks at M&A, rather, it’s “how do we build value behind every share of McEwen Mining?

“We are out there to build value behind every share, not just size. Size is a by-product of building that value. So we are looking at M&A activity. So far we’ve paid small amounts of money for ounces in the ground, below the replacement value … some troubled situations are worth looking at.”

When asked if the company had signed any confidentiality agreements in Nevada, McEwen said he couldn’t say. “If we did, we wouldn’t mention them. I’m sorry, we can’t divulge that.”

When asked if McEwen Mining remains committed to staying out of debt, McEwen commented that “the use of debt has been a dangerous device for strategies for a lot of the mining industry.

“The industry has been seduced by low interest rates, and they went and filled their balance sheets with debt and didn’t expect metal prices to drop, and they lost the ability in some cases to even service the debt. At some point in time, when we have good, dependable cash flow — and possibly the debt may be non-recourse — a certain amount of leverage on the balance sheet would be wise, but not a lot of debt … I’m not a huge fan of debt and don’t use it in my personal life, either.”

In response to a question about whether he would be interested in selling the company’s wholly owned Los Azules copper project in Argentina, McEwen said that when management had looked at whether to sell it in 2012–13, “the timing wasn’t good,” and “there were no takers — big capital projects were not attractive, the CEOs of mining companies were getting fired, so there was no appetite … to take on new projects.”

But with copper “showing a bit of life lately,” he would be willing to entertain bids if the price was right.

He pointed to two sales of copper projects in the South American country as context. In 2014, one project 300 miles north of Los Azules — which was a bigger deposit, but slightly lower grade than Los Azules — sold for US1.5¢ per lb. copper. Another that was 30 km from Los Azules sold in 2011 for US4¢ per lb. copper.

“If we were shown bids somewhere in that range for our 20 billion lb. copper, we’d look at it closely because it could be used to expand our production.”

McEwen also pointed to the “richness of the company’s asset base” and its strong balance sheet.

“We don’t have any debt. We haven’t sold any streams and we won’t. We haven’t sold any royalties and we won’t. We’re not hedging — we’re leaving all the upside for our shareholders.”