McEwen Mining's (MUX) CEO Rob McEwen on Q1 2017 Results -

Earnings Call Transcript

May 6, 2017 5:04 AM ET

by: SA Transcripts

Q1: 05-04-17 Earnings Summary

10-Q News

EPS of $-0.01 | Revenue of $ (+ NaN% Y/Y)

McEwen Mining Inc. (NYSE:MUX)

Q1 2017 Earnings Conference Call

May 04, 2017 11:00 AM ET

Executives

Rob McEwen - Chief Owner

Andrew Elinesky - CFO

Xavier Ochoa - President

Analysts

Shao Wang - Lotus Capital Partners

John Rast - Wheelhouse Securities

Operator

Good morning, ladies and gentlemen and welcome to the McEwen Mining 2017 First
Quarter Financial Results Conference Call. At this time, all participants are in a listen-only
mode. Later we will conduct a question-and-answer session and instructions will follow at
that time.

I would now like to turn this meeting over to Mr. Rob McEwen, Chief Owner. Please go
ahead, Mr. McEwen.

Rob McEwen
Thank you, operator. Good morning fellow shareowners and interested investors. We're
pleased to have you join us today. During the first quarter of this year, we invested in our
future growth and achieved a number of positive developments but this investment came
at a cost. I'd like to start with the good.

First, financially we continue to be in good shape, our treasury is strong at 55 million and
we remain debt free. In addition, we have not encumbered our future revenue by selling
metal streams, royalties or hedging. Second, the San Jose Mine increased its gold
production by 16% and silver production by 7% over the comparable period in 2016.

Third, we increased exploration and assessment work as Los Azules which has
significantly advanced the project and we now have much better understanding of the
capital, infrastructure and permitting requirements for a production decision.

Our goal is to advance this project to a point where it is a compelling joint venture for sale.
Fourth, subsequent to the quarter, we acquired a strategic property package in one of the
world's most famous gold district Timmins Canada. Fifth, the Gold Bar Mine permitting
process is advancing towards approval that we expect in Q4 of this year. And sixth, we
have continued adding to the depth of our management team with the addition of Sylvain
Guerard, as Senior Vice President, Exploration.

Now for the bad. First, our El Gallo Mine produced less gold this quarter than the
comparable period in '16 and that was due to lower gold grade. Second, exploration
around the El Gallo mine has not yet found additional oxide resources but additional
sulfide ounces have been discovered.

Third, production costs at both mines have increased. So the good so far is outweighing
the bad. And here to give you more details is our CFO, Andrew Elinesky, and he will be
followed by our President, Xavier Ochoa to give greater details. Andrew?

Andrew Elinesky

Thank you, Rob. I'm pleased to report that company had a good start to the year.
Consolidated production came in just under 30,000 gold equivalent ounces, which was in
line with our expectations and we are on track to meet our full year guidance for 2017.

However, despite the solid production levels and the reasonable costs that we -- the
company reported a net loss of $3 million or $0.01 per share. As Rob mentioned, this was
due to the increased levels of exploration and development at all of our projects but with
particular increased levels are being made at the Los Azules copper project in Argentina.
This increased level of spending was also reflected in our cash balance, which did
decrease by $8.5 million or $0.03 per share during the quarter. However, with most of our
investments that we have, they posted strong returns in the quarter. So this cash decline
was significantly reduced in terms of the total of our liquid assets.

As Rob mentioned, at the end of the quarter, the balance was just over $55 million
representing a decline of only $3.6 million from the end of the year. Moving the
conversation over to our site results. In Mexico, as I mentioned, production was in line with
expectations, but our cash costs and all-in sustaining costs were significantly lower than
our full year guidance. This was due to the carryover of lower cost inventory from 2016.

And while we aim to maintain these levels of cost savings, we do expect our per ounce
cost to trend in line with our full year guidance as we progress further into the year. In
particular, we plan to invest further into our exploration with the aim of extending the mine
life past 2018. We're also continuing our evaluations of the significant silver resources, as
well as the sulfides as Rob mentioned in the area.

Existing operation has the anticipated benefit of increasing grade for the second half of
2017. However, the appreciating Mexican peso versus the dollar is chewing into this
benefit. The Mexican peso has increased in value by over 13% since the start of the year.
However, overall, we anticipated El Gallo will still remain a strong contributor of free cash
flow for this year.

With regards to our San Jose mine in Argentina, the continued steady operational
performance of the mine continued into 2017. However, costs were higher as Rob
mentioned, they were higher than the full year guidance, which was primarily a result of
sales being impacted and being lower than planned during the quarter due to a temporary
port closure which delayed shipments and in turn obviously the sales of our -- of their
silver and gold. This delay, combined with a slight increase in labor costs and the
appreciation in the Argentinean peso versus the dollar as well as an increased level of
exploration activities meant that our per ounce costs were higher than expected.

This resulted in a decrease in our triple-income from the mine, which compared to the
prior year. However, the joint venture continued with its issuance of dividends and we
received $2.5 million in dividends during the quarter.

Going forward, we expect San Jose to bring their costs in line with the full year guidance
and that dividend should continue to repay during the year despite the increased levels of
investments in exploration.

Before I hand the call over to my colleague, Mr. Ochoa, I would like to quickly discuss our
planned expenditures at two of our projects. Firstly, regarding our newly acquired
properties in Timmins, we are currently budgeting $3 million for the rest of the year. While
at our Los Azules project, the expenditure levels will decrease significantly over the rest of
the year when compared to this quarter as we have now concluded the drilling season and
the focus will now move and shift over to furthering our studies on the project.

At this point, I would like to thank you very much for taking the time to join us. And I will
turn the presentation over to our President and COO, Xavier Ochoa.

Xavier Ochoa

Thank you, Andrew. In terms of our operations and projects, I would like to start with the El
Gallo Gold where as I had mentioned in our last call, we're now entering the final stages of
the current project mine life as we know it to-date.

This was reflected in a quarter-on-quarter production decrease of 51% at El Gallo when

compared to the same quarter last year having produced in the past quarter 9,808 gold
equivalent ounces at an average grade of 1.28 grams per ton of gold. Reinforcing
Andrew's earlier comments, we do remain on track to meeting our guidance for the year.
As our current mining ventures advance deeper into the two pits what we're mining to-
date, we do expect to see an increase in the average mine gold grade in the second half
of this year.

As this takes place, however, we are underway to -- with optimization work to maximize
the revenue we obtain from these pits. At El Gallo Gold, as Andrew mentioned, total cash
costs and all-in sustaining costs were 564 and 668 per gold equivalent ounces
respectively. During this quarter, our costs were good as we had the benefit of producing
metal and inventory at the beginning of the quarter.

However, as the year advances, we expect our cost should trend towards our guidance
numbers for the entire year as we will see an impact on our recovery efficiency in our unit
processing costs because of deeper mining with an increasing presence of sulfide
minerals as we enter transition zones.

At the El Gallo silver project in Mexico during the quarter we continue to advance our work
on the project. We're working in that reducing the initial capital investment and project
configuration that can deliver at lower operating cost. We are now closer to having a
project that is attractive in the current metals market. We expect to have more information
for our shareholders during our upcoming Annual General Meeting.
At the San Jose mine in Argentina where we hold a 49% interest, during the first quarter,
we saw our share of attributable production at 19,925 gold equivalent ounces. This was
reflected in a quarter-on-quarter production increase of 12% when compared to the same
quarter last year. During the quarter, some mining dilution issues were encountered and in
correcting them, our tonnage mine declined. This is typical when you manage high-grade
narrow vein mining.

At the Los Azules project in the Argentina, Andes, during the first quarter we conducted a
full field campaign. During that campaign, we conducted a combination of infill and
exploration drilling along with other exploration field work. We also conducted a series of
engineering related activities focused on the evaluation of the best sites on which to locate
the project facilities and related infrastructure with positive results which will be reflecting
in a new Preliminary Economic Assessment study which is now on progress.

Results from the drilling campaign as well as the new PEA are expected to be finalized
during the third quarter of 2017. At our Gold Bar project in Nevada in the United States
which we look forward to being our newest mine, we focused our efforts on advancing our
permitting.

At the end of the quarter, we were in the middle of the mandatory 45-day comment period.
As of today, based on the comments received, we believe that permitting remains on
schedule to receive our record of decision from the US Bureau of Land Management in
the third quarter of the year.

In parallel to permitting activities, detail engineering work and supplier evaluations

required for the execution of the project continue as planned. Our most recent acquisition
to our project pipeline came from the completion of the acquisition of Lexam VG properties
in the Timmins Camp.

We are now in the process of initiating activities to advance studies in the four projects
towards defining a development program. We expect to have more information for our
shareholders at the Annual General Meeting of this exciting new addition to our portfolio.

In terms of exploration, as Rob said, it is with great pleasure that I want you to know that
our team is now stronger with the addition of Sylvain Guerard who joined us last month as
Senior Vice President of Exploration. In to exploration manner, he is already in the field
visiting all of our exploration teams and the projects they are working on.

We continued with our grass-roots exploration program in Nevada in search of new

opportunities. And in Timmins, we are looking at resuming exploration in the newly
acquired properties in search of expanding the known resources as well as looking for
new high-grade zones which the district is famous for hosting.

At El Gallo, brownfield exploration is now looking at the deeper portions of our existing pits
to determine what the potential for new resources is in the zones containing transition and
sulfidic mineralization.

At the district level, the presence of this transition and sulfide zones represents an
interesting opportunity for our exploration efforts where we are now looking into the
deeper less oxidized mineralization which could become another chapter in the story yet
to be written of the prolific El Gallo district in Mexico.

Thank you very much for your interest in our operations. Rob, here it is, back to you.

Rob McEwen

Thank you, Xavier. Thank you, Andrew. I'd like to start by saying extending an invitation to
all of you to our Annual Meeting, it's going to be held on Thursday, May 25th at 4:00 PM at
the Toronto Stock Exchange, which is located at 130 King Street West in Toronto. We're
looking forward to seeing as many of you there as possible.

At the meeting, we will be going into much greater length on our exploration at our various
properties, the results of the studies we're doing for El Gallo Silver, for Los Azules and
Lexam, as well as El Gallo Gold. As I said earlier, we've been building our team, our goal
is to qualify for the S&P 500 and we need a team and an asset base. We need to enhance
our asset base further, but that is our clear goal and that is where we're driving to.

You might be wondering about Lexam and what was the attraction to us. As we said
earlier, it's in a world-famous gold camp. It's located adjacent to some very large former
and currently producing mines that have produced in excess of 50 million ounces of gold.
And I just wanted to share with you for a moment, some of the historical drilling that's
occurred on these properties, the four properties which we acquired. And I'll just give you
a drill result that caught our eyes from our Davidson Tisdale property.

You can look there was an intercept 197 grams over 4.6 meters, on the Fuller Property, 18
grams over 8 meters, Buffalo Ankerite, 13 almost 14 grams over 9 meters, and on
Paymaster just under 19 grams over 8 meters. These are very compelling results that
we're going to be following up on.

We think there's good room to expand on those resources, but the drilling will tell. So and
Lexam fits this strategy just building on the base we have to build our production and our
exploration success. I would now like to open the session to questions. Thank you,
operator.

Question-and-Answer Session

Operator

[Operator Instructions] We have a question coming from the line of Shao Wang from
Lotus. Your line is open.

Shao Wang

Good morning. Rob, sort of a personal question not necessarily related to Lexam. How do
you determine whether to make a personal investment in this area or whether you have
McEwen Mining make an investment. That's one question. Totally separate, just curious
about what you think about the broad gold markets at this point? Thank you.

Rob McEwen

Okay, thank you for that question. In terms of making an investment, mine tend to be
much earlier stage, much less certain than what we invest as a company. I'd say it's
conceptual stage where we are looking for something that might appear. But it doesn't
show, doesn't provide a lot of evidence of it right away, whereas with McEwen Mining, we
look for something that's more developed.

Still we'll look at exploration stories, but they have to show much more evidence that it
could grow.

In terms of gold, well, when I look at the world, it -- certainly gold is not fairing very well or
hasn't been very fairing very well for last couple of weeks. And it's as if the world is saying
well, there is no more risk out there. We've got the elections over in the EU. The economy
is recovering.

So there's no -- there is no risk to the economy. I keep looking and thinking, are people
blind, are they seeing the debt levels going up, are they seeing that these are going to
impair future actions by governments, corporations and citizens. But it seems that -- the
world seems to be oblivious to that. There doesn't seem to be any risk, there doesn't seem
to be any need for oil and there's not going to be any growth because oil is going down,
copper price is going down.

Perhaps, we're moving into a deflationary environment and people are saying, well gold's
inflationary -- good for inflationary periods but not deflationary. And I'd counter that by
saying gold offers one thing, one very important element that most other investments don't
and that's instant liquidity. And if you want to -- you can sell your gold in two days, but try
selling your house in two days and getting the money or a large block of stock. It's not
going to happen.

Another factor that's come in to the market and had a big impact on all of the gold stocks
has been the repositioning of one of the industry is that GDXJ, where about 24 junior
companies including ourselves, positions were reduced, and they added some seniors.
But here again we have the ETFs moving around in the market and it's a reflection of how
passive investments are becoming more and more popular over actively managed
accounts.

But that said, it's certainly crushed the lot of stocks, in our case, I think it starts. The
shares to be sold amounted to about three days trading, average trading. But some of the
other stocks where as much as 10 to 15 even 20 days average trading volume. We would
have thought that fall wouldn't have been evenly distributed across everybody. But it
affected the whole sector, it triggered the lot of redemptions.

How far down we go? I would guess it depends on how confident everybody is if the dollar
is going up and the economy is improving and the Fed says the world is all right, well I feel
sorry for the people that believe them. Next question?

Shao Wang

Thank you.

Operator

Thank you. Our next question or comment comes from the line of Terry Devries [ph] from
private investor. Your line is open.

Unidentified Analyst

Hi, Rob, how are you today?

Rob McEwen

Fine. Thank you, Terry.

Unidentified Analyst

Great. Rob, I apologize if you answered this question, I joined a little bit late. But, what
caught my attention when I looked at El Gallo ending -- end of its life in -- what did -- have
you given any production guidance for 2018, 2019 and your thoughts on how you're going
to grow production in the coming years?

Rob McEwen

Yes, Terry. We have 2018 production in El Gallo will be there. There are couple of areas
we're looking at in addition to continuing to leach. There the tailing dumps that will -- is
good grade in there of historic rate, so we'll be reprocessing that. We have sulfide ores
that we've been adding to our resources, we're looking at alternatives there for treating
them.

And El Gallo silver is moving along well. And as I said at the Annual Meeting, we'll be
giving a more fulsome description of how we've advanced that project and how we believe
in the current market justifies moving that ahead, so replacing that.

Gold Bar, we hope to get our permits to construct and operate in the fourth quarter and
that will be about a year to ago. So, we expect production to increase as we go. Next year
it will be flat, it will be a little lower and large increase in '19.

Unidentified Analyst

Okay, thank you.

Rob McEwen

You're welcome, Terry.

Operator

Thank you. (Operator Instructions)

Rob McEwen

Operator, I should also mention that regarding that last question, we do believe there is
the opportunity to be in production in Lexam in -- possibly 18 months -- 24 months.

Operator

Our next question or comment comes from the line of John Rast from Wheelhouse
Securities. Your line is open.

John Rast
Good morning, thanks for taking my call. I just had a question regarding Los Azules. What
type of timetable do you think you have as to when you might know where you have
advanced it to where it's a compelling joint venture or sale?

Rob McEwen

Excellent question, John. The price of copper, we've modeled at $3 and at $3 we feel we
can generate the type of returns we want on an investment after tax 20%, short payback
period and long life. Capital costs has come down considerably, but in terms of when will
joint venture or partner appear at the door or someone wanting to buy it with the check,
that remains unknown.

John Rast

Okay.

Rob McEwen

We know that we're advancing it, that we've improved our knowledge of the infrastructure
required, the capital required. It's a very intriguing deposit because it has at least in terms
of its physical layout, it has an advantage over many other projects and that there is lots of
flat area for processed plants and tailings and airstrips and other infrastructure, it is
remote.

So there is larger, maybe larger development cost for infrastructure, than other projects,
but it's a long life asset, a good grade. And Xavier, would you care to add to that?

Xavier Ochoa

No, I think you are summarizing it. It's got a number of advantages, other than its
landlocked position. But having said that, it's also close to the international border
between Chile and Argentina which gives us the opportunity to have an exit for the
concentrates add into the Pacific Basin. So that's a strategically located asset at the end
of the day.

John Rast

Okay, thank you. If I could follow up with just one -- one more. From your understanding
do you think that the majority of this rebalancing and whatnot with the GDXJ has occurred
or do you think there's more of that to come?

Rob McEwen
The balancing -- the GDXJ notifies the company manager, it notifies the market well in
advance of the rebalancing. I think that it's prompted a lot of selling in anticipation of that
rebalancing.

John Rast

Okay.

Rob McEwen

You have to wonder. You're welcome.

Operator

Thank you. Our next question or comment comes from the line of Bill Powers [ph]. Your
line is open.

Unidentified Analyst

Yes. Quick question on Lexam as far as capital cost that you would foresee for potential.
You mentioned that 18 to 24 months out. I'm assuming you would be interested in an
open-pit operation. Could you just provide a little more color as far as what's your initial
thoughts are as far as the path moving forward there?

Rob McEwen

Thank you, Bill. Yes, we're looking first to explore and further exploration on the property
and concurrently look at both open-pit and underground opportunities. On several other
properties our existing mine shafts and ramp which would facilitate less expensive
developments. We are envisioning that we could mine on the properties that we would
have the ore processed at nearby mills.

So we wouldn't need that part of the mining process or the capital required for that, we
would toll mill other properties. The studies are ongoing to see which is the first property
we should start with, with respect to a mining operation. Large number of the permits are
already in place. So if it is -- they are brownfield sites and the time to get up and running is
shorter.

Unidentified Analyst

And a follow-up on that is do you -- the properties, do you foresee them as feasible with a
short payback in with today's gold price environment or do you need higher prices to kind
of move forward from just exploration to few potential development?
Rob McEwen

No, they're good at current prices which is attractive -- in the attractive aspect.

Unidentified Analyst

Great. Thank you.

Rob McEwen

You're welcome, Bill.

Operator

Thank you. Our next question or comment is a follow-up from Mr. Shao Wang from Lotus.
Your line is open.

Shao Wang

Hi, thanks. Two issues again. First, with respect to the delay in the production in
Argentina, I think you mentioned that that was due to finding a richer vein and this was
typical in terms of sort of production for mining. I'm wondering if you could give me a little
more detail on that [indiscernible].

Rob McEwen

Xavier will speak to that point.

Xavier Ochoa

Yeah, I mean what happens at Minera San Jose is that, it's a mine composed of actually
several veins producing at the same time and these are high-grade silver veins that have
pitching and rolling and pinching and swelling depending on where you're at. And it just
happen to be that the stopes are where it would be mined in the latter part of the quarter.

It got a little bit narrower and they have to throttle back on the production rate to ensure
that they were not picking up a lot of dilution. It's not an unusual condition, but it is
something that does affect a little bit the way that the approach is done because they are
high-grade, generally speaking, if you reduce tonnage you can decrease the grade a little
bit.

Shao Wang
Should I infer that the vein was richer than you thought or it's -- this is just what happened
in terms of as you went deeper?

Xavier Ochoa

No, I think it's just circumstantial at this point because as it's looking right now, they're
back to what they were expecting to see originally. So I think it's more of a localized thing.

Shao Wang

Understood. Totally separate, I think you mentioned that you expected Lexam to be in
production in 18 months. Can you give us some more guess comment or estimate for
Gold Bar?

Rob McEwen

Oh, yes. We believe the construction period it takes 12 months and we'd start producing
product mix not commercial production, but producing product in the late, in '18.

Shao Wang

So both would be late '18 basically?

Rob McEwen

Yes.

Shao Wang

I got it. All right. Thank you.

Rob McEwen

You're welcome.

Operator

Thank you. [Operator Instructions] I'm showing no additional audio questions at this time. I
would like to turn the conference back over to management for any closing remarks.

A - Rob McEwen

Thank you, operator. Thank you everyone for joining us. I'm looking forward to better gold
prices. Thank you for your support. And please remember our invitation to the Annual
Meeting on May 25th. Love to see you there.
Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes
the program. You may now disconnect. Everyone have a wonderful day.

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