McEwen comments on uncertainty in Argentina

When mining entrepreneur Rob McEwen put US Gold and Minera Andes together to create McEwen Mining (MUX-T, MUX-N) he was working on the model that you could take one company that had cash flow and another company that had development projects and create a stronger company.

But what he didn’t foresee, he told investors and analysts on a conference call earlier this week, and apologized for not foreseeing, was that there would be changes in Argentina that would create a lot of uncertainty and put that model at a disadvantage.

McEwen arranged the May 22 conference call to alert shareholders about potential difficulties and delays in repatriating cash flow from McEwen Mining’s 49% stake in the San Jose mine in Argentina, which has been earmarked to fund development of the company’s El Gallo project in Mexico. (El Gallo is in Mexico’s Sinaloa state, along the foothills of the Sierra Madres, and includes the El Gallo and Palmarito silver deposits and the Magistral gold deposits, all located within a 13 km radius.)

Government measures taken in the South American nation in recent months have ranged from the nationalization of oil company RPF in April this year to rules on repatriating earnings late last year.  In October 2011, the Argentinean government issued a decree requiring that export revenue be repatriated to Argentina, and then converted from foreign currency into Argentinean pesos, before companies are allowed to use those pesos in the normal course of business.

Last month the government shortened the timeline for repatriating export revenues from between 120 days and 180 days to within fifteen days from the date of export, explained Andrew Elinesky, the company’s vice president for Argentina. In May that requirement was further amended to within fifteen days of the receipt of export earnings. 

And earlier this month, Bloomberg reported that at a meeting in Buenos Aires, five senior producers were asked to come up with a plan on how they could replace the products they import for their businesses with locally made equivalents.

While McEwen sees the various decrees as cause for concern, however, he doesn’t consider them an insurmountable obstacle. “I view it as a bump in the road, a nasty bump,” he told shareholders and investors, “but it’s not going to put us down, as we have sufficient funds to keep us going and we have a collection of assets that are world-class,” and that over time, do create value.  

Perry Ing, McEwen Mining’s chief financial officer, noted that at the start of the second quarter of this year the company had cash, gold bullion and securities worth about $67 million and based on projections expect to end the year at about the same level.

Next year, the company expects to undertake capital expenditure for Phase II of the El Gallo project, which will bring that $67 million down to somewhere between $30 million and $40 million, and in 2014 down to about $15 million as construction at El Gallo is completed.

But in a worst case scenario where McEwen Mining does not receive cash flow from Argentina, internal funding would become an issue, McEwen said. “To develop El Gallo and build the company without Argentina, we would have to go back to the market and look for about $150 million,” he cautioned shareholders. “I don’t think that’s going to be the case, but that is the worst case, and you need to know that.”

“How do I feel about all of this? Very disappointed that we have this uncertainty in the market,” he continued. “How do I feel as having $110 million invested in this company? I feel good about it, I just thought that it was prudent to alert all of our shareholders to the fact that what we had projected, and felt very good about in terms of the ability to internally fund, was now in question.”

In the best case scenario, he added, the confusion around Argentinean policies gets resolved, the revenues resume and while there may be a reduction, the company goes on as planned. But in the interim, if that does not occur, the company “is blessed with having a number of properties, some of them are a bit encumbered, but they are nevertheless properties of long-life and such size that they are of interest to a large number of players, in particular the Los Azules copper project,”  he said.

McEwen noted that the company has had encouragement in its drilling this year at Los Azules, which is one property that could be partially or completely sold to provide some or all of the funding McEwen Mining needs to carry on its business.  “That review process and discussions with interested parties has been going on for a while now,” McEwen said, “but we will certainly step up that tempo so that we continue without having to interrupt our game-plan of building this company and achieving our goal of getting included in the S&P 500 down the road.”

Los Azules is a 100%-owned advanced-stage porphyry copper exploration project in the cordilleran region of Argentina’s San Juan province, near the border with Chile. The company claims it is one of the world’s largest undeveloped copper deposits with a mineral resource of 10.3 billion pounds of copper (inferred) and 2.2 billion pounds of copper (indicated).

The San Jose mine, in which Hochschild Mining is the operator and owns 51%, is about 20 km north of Goldcorp’s (G-T, GG-N) Cerro Negro project in the northwestern corner of the Deseado Massif region of Santa Cruz province. Production results for the first quarter of 2012 at the underground mine reached 1.4 million ounces of silver and 20,357 ounces of gold on a 100% basis, and remains on target to meet full-year production guidance of 5.7 million ounces of silver and 85,000 ounces of gold, the company announced in April. The average grade mined during the quarter was 416 grams silver per tonne and 5.98 grams gold per tonne. Silver and gold recoveries averaged 87.8% and 91.6%, respectively.

Currently dividends are still being repatriated and the company expects its next dividend payment from San Jose in June, according to chief financial officer Ing.

When asked on the conference call whether he is worried about taxation and royalty creep, McEwen replied: “That is a distinct possibility, not only in Argentina but elsewhere in the world, but yes, that could happen. Actually that would be a better situation because at least we’d be getting revenue.”

As for the short position in the company’s stock, which is reported to be in the range of 8-10%, McEwen noted that all gold stocks have taken quite a hit, adding that “we are in a period where there is normally  a cyclical weakness in gold prices, and that is compounded this year by being the year of the presidential election [in the U.S.] and there is a tendency for stocks to weaken through to the election and strengthen after the election,  but I can’t offer you any other insights into that.”

At presstime in Toronto, McEwen Mining was trading at $2.56 per share within a 52-week range of $2.02-7.16.

Dahlman Rose & Co. has a buy rating on the stock and a target price of $6.35 per share.