McEwen Mining posts record Q2; comments on Argentina

With the exception of 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...




With the exception of 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 chief executive Rob McEwen suggested that if the terms of a deal Chevron Corp. (NYSE: CVX) completed last month in Argentina is any guide, better times may lie ahead for miners in the South American nation.

In the first big deal in the country’s oil sector since the Argentine government seized YPF from Spanish oil giant Repsol last year, Chevron, signed an agreement with YPF in July to invest US$1.24 billion in the Vaca Muerta (Dead Cow) shale oil and gas formation.

More significantly for miners, the government passed a new decree a day before the deal with Chevron was signed 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.”

“Chevron’s change is a major shift I think in a government position,” he continued later in the call. “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 provincial 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, or reserve levels to be used, and still needs to be ratified by the governor's office, according to Andrew Elinesky, McEwen Mining’s VP 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 as best as 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 José mine and US$27.7 million was 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 AuEq oz or 20,988 oz of gold and 778,308 ounces of silver.

Total cash costs of US$744 per AuEq oz 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 AuEq oz 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 AuEq oz 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 grams AuEq oz per tonne).

“Unlike a lot of our peer group, we still believe in exploring,” Ian Ball, the company’s senior VP, 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 company is also owed US$9 million from the Mexican government 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 of gold and 6,341 oz of silver or 8,561 gold-equivalent ounces, and remains on track to produce 27,300 AuEq oz in 2013.

Gold equivalent total cash costs at El Gallo I equaled US$713 per oz. All-in sustaining costs totaled $1,183 per AuEq oz, 19% lower than in the first quarter. An expansion of the mine from 3,000 to 4,500 t/d at a cost of US$5 million is under way and the company expects the expansion to be operational by mid-2014. By 2015, the mine will be producing 75,000 AuEq oz a year, the company says.

At its 100% owned El Gallo 2 project, tests are underway to determine whether heap leaching is a viable processing alternative. Heap leaching would slice the initial capital estimate to roughly US$30 million from US$180 million under a milling scenario. While capital costs would be reduced, however, it would also decrease production from an estimated 105,000 AuEq oz to about 60,000 AuEq oz. Test results are expected during the fourth quarter. In the meantime, the company is continuing to advance the construction of the El Gallo 2 ball mill to make sure that both alternatives remain possible without incurring significant costs or delays.

The company hopes that the three remaining permits it needs to start construction and operations under the mill process should be approved between the third quarter and the end of the year. If the company decides to go with the heap leach scenario, it will need to modify the permits.

At its 100% owned Los Azules copper porphyry project in Argentina’s San Juan province, management expects to complete an updated preliminary economic assessment in the third quarter of this year. The new PEA will evaluate the possibility of increasing the daily throughput, producing copper cathode instead of a concentrate (thereby eliminating the need for a slurry pipeline through Chile) and processing low grade mineralized material not previously considered via a heap leach operation. Avoiding a slurry pipeline would also have the effect of reducing Argentina’s current export tax on concentrate.

Finally, at its Gold Bar project in Nevada, the company expects to submit its plan of operations report in the second half of the year. The project is forecast to produce 50,000 oz of gold a year.

In terms of his overall 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, he says, his view remains quite positive.

“In the short term, summer is usually a cyclical low and we get recoveries in September,” he says. “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] … gold shares as measured by the XAU gold index have increased by anywhere from 10% to 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.&r dquo;

In Toronto, the announcement of second quarter results and subsequent conference call helped push up the stock 9%, or 18¢, to $2.26 per share. Over the last year the company has traded in a range of $1.72 to $4.92.

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