McEwen Mining Inc.
Q1 2017 Earnings Call Transcript

Published: 6 May 2017

[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

[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.

[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.