McEwen - Q1 2024

Transcript

Operator (participant)

Hello ladies and gentlemen, welcome to McEwen Mining's Q1 2024 Operating and Financial Results Conference Call. Present from the company today are Rob McEwen, Chairman and Chief Owner; Perry Ing, Chief Financial Officer; Jeff Chan, Vice President Finance; William Shaver, Chief Operating Officer; Stefan Spears, Vice President Corporate Development; Michael Meding, Vice President and General Manager of McEwen Copper; and Carmen Diges, General Counsel and Secretary. After the speakers' presentation, there will be a question-and-answer session. If you would like to ask a question during this time, press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Mr. Rob McEwen, Chief Owner. Please go ahead, sir.

Rob McEwen (Chairman and Chief Owner)

Thank you, Operator. Good morning, ladies, gentlemen. Welcome to our first quarter 2024 conference call. A few moments ago, I looked at our share price and thought, "Well, what happened?" We're down about $2, and I think a lot of it is I think it's overdone, but it's probably due a bit to our accounting policies, the difference between accounting treatment in Canada and in the United States of America. I'd like to ask Perry Ing, our CFO, to talk about that difference.

Perry Ing (CFO)

Good morning, Rob. So we would like to reiterate the fact that as a U.S. GAAP reporting company, we expense all of our attributable expenses related to the Los Azules Copper Project in Argentina. So given that we own 48% of the company, all of the work going into drilling for that project is being expensed through our income statements. Unlike a lot of our peers, Canadian and Australian-listed companies that report under International Financial Reporting Standards, where they may capitalize those costs and you would not see them reflected in net earnings or loss. So if you look into more detail at our earnings, we reported a consolidated net loss of approximately $20 million, of which $18 million was directly attributable to our investment in McEwen Copper, as well as an additional $4 million in general exploration expenses.

So again, had we reported under IFRS, we would not be showing a loss of that nature.

Rob McEwen (Chairman and Chief Owner)

Thank you, Perry. I started out just saying we had a good quarter, and we're active on many fronts. We've been hitting production guidance, generating positive cash flow from our gold and silver mines. Our exploration is producing encouraging results at our Fox Complex, our San José Mine, and our Los Azules Project. In addition, there has been a dramatic political shift that's occurred in Argentina. Its newly elected president is moving aggressively to make the country attractive to large direct foreign investment, of which we have one of those situations. Overall, our consolidated gold equivalent production was up 7% over the first quarter 2023, and costs were in line with guidance. At two of our three mines, we're making good progress. At Gold Bar and San José, they exceeded guidance by delivering higher production and lower costs.

At Gold Bar, production was up 80%, and at San José, it was up 15%. While the results at the Fox Complex were disappointing due to mining lower grade and tonnage during the quarter, we're expecting, over the balance of the year, that the production will increase and the cost per ounce will fall to be in line with our year-end guidance. From a financial perspective, the news was also positive. During the quarter, our gross profit was $6 million, some 36% higher than the $4.4 million in the first quarter of 2023. In this quarter, we reported our results also on an Adjusted EBITDA basis because we believe it provides a better representation of the performance of our gold and silver mining operations. Why? Because it removes the impact of our ongoing investment in McEwen Copper.

During the quarter, our Adjusted EBITDA was $6.3 million or $0.13 a share versus an Adjusted EBITDA loss of $2.9 million or $0.06 a share. So when we include the $18 million loss attributable to our investment in McEwen Copper, we reported a consolidated loss of $20.4 million or $0.41 a share. In Argentina, the country's new president, Javier Milei, who Mike, Carmen, Stefan, and I had the great honor to have a one-hour meeting with recently, has unleashed an infectious mood of great optimism, something that has not existed in that country for many decades. I said to him that Argentina is very much like the story of Sleeping Beauty, who was poisoned by years of populist government policies and fell into a deep sleep, and now he is the prince whose kiss has awoken her. Global investors and innovators are starting to take notice.

Just two weeks ago, Elon Musk tweeted, "It's time to invest in Argentina." President Milei's election, coupled with the progress we're making advancing Los Azules, has made this quarter an incredibly exciting time for McEwen Copper and for McEwen Mining. Our other asset in Argentina is our 49%-owned San José Silver and Gold Mine. Performance in Q1 of this year was much better than the comparable period last year, and as a result, management is considering resuming its dividend later this year. So we'll be receiving money, hopefully from that investment, for the first time in a couple of years. We've also encountered encouraging exploration results there from two different targets. The best assay results reported were 12 m of 12.7 g gold plus 101 g silver, and the other was 6.2 m of 23.3 g gold plus 314 g silver. Pretty nice holes.

It's worth noting that the San José land package surrounds Newmont Cerro Negro property on three sides. Let's go back to Los Azules. As the winter begins in the Southern Hemisphere, the 22 drills that were operating there are now being removed, having drilled some 69,000 m this season, which is quite a large program. This drilling has been confirming and upgrading the categories of our estimated resources that were contained in the June 2023 preliminary economic assessment. They were also drilling to precisely define the location of our Payback Pit, which is calculated to be payback in three years. Through the winter work, we'll be progressing on delivering a bankable feasibility study for Los Azules in the first half of next year.

So looking ahead, we are now in a position to think about growing, and I feel the market conditions are ideal to search out opportunities in anticipation of much stronger markets for gold, silver, and copper. And here's what we've been doing. First, we've been taking a closer look at the potential opportunities on our existing properties, and we will be very shortly providing you with exploration results from our Fox Complex, Los Azules, and San José. Second, we're looking at opportunities that are close to these existing operations. And to that end, we've recently made a friendly takeover bid for a company called Timberline Resources, which has property located close to our Gold Bar Mine. And it also has a property adjoining McEwen Copper's Elder Creek property, both of which are in Nevada.

And three, I believe there are some interesting situations out there where we could consider bolstering our management strength, increase our resource space, and annual production, and provide us with greater leverage to the prices of gold, silver, and copper. In Los Azules, we have funds to continue for a while. We are looking at completing the feasibility study and doing the associated engineering, and all the financing for Los Azules has been done in McEwen Copper. We continue to look for opportunities with our principal investors and others to fill that funding. At this point, I'd like to ask Michael Meding, our Vice President and General Manager of McEwen Copper, to provide an overview of the political situation in Argentina and some of the changes to regulations that are being promoted and the impact it could have on the value of that asset of ours.

Michael Meding (VP and General Manager)

Thank you so much, Rob. Hello, everybody. Exciting times in Argentina. As Rob said already, we had an exciting quarter with lots of assays at Los Azules. And what we're looking at at the moment, while Los Azules has a very strong PEA without further incentives, what we see in Argentina is that there are a lot of projects that could benefit from a better investment incentive scheme. And that has been presented to Congress, to the Lower House, a couple of days back, and has received approval by the Lower House and is now in the Senate for discussion. It's going through the commissions, and the administration is trying to get approval of this new exciting project. It's called [Foreign language] in Spanish. It contains something called RIGI, that's a large infrastructure investment incentive regime.

Just to give you some ideas what this means if it goes through, and we are cautiously optimistic that it will go through rather shortly. Income tax would be reduced from 35%-25%. Export duty would be reduced from 4.5%-0%. VAT recovery would be basically instant. And operating bank tax, debit credit tax is 1.2%. We would be able to use 100% as an advance for income tax. So this means that this combined with what is included as having the opportunity to ensure access to the capital markets can change the face of mining projects and other large infrastructure projects in Argentina. We think that this project is a major driver for the Argentine economy going forward. Back to Europe.

Rob McEwen (Chairman and Chief Owner)

Thank you, Mike. As many of you know, there's a high rate of inflation in Argentina, and we've been able to offset that.

Perry Ing (CFO)

Yeah, that's right, Rob. Overall, after our last financing transaction in McEwen Copper, we were able to invest in a variety of products that essentially fully hedged our exposure to Argentine inflation and devaluation. So I believe at the end of the first quarter, McEwen Copper had a treasury of just over $60 million. Since we've deconsolidated McEwen Copper in the fourth quarter of last year, we no longer show McEwen Copper's cash balance on our balance sheet. It's separate part. We only report our 48% of their earnings and loss in our income statement.

Rob McEwen (Chairman and Chief Owner)

Thank you, Perry. I'd now like to open the call to questions.

Operator (participant)

Thank you. As a reminder, to ask a question, you will need to press star followed by the number one on your telephone. To withdraw your question, press the pound key. Your first question comes from the line of Jake Sekelsky, Alliance Global Partners. Jake, your line is open.

Jake Sekelsky (Managing Director and Head of Metals & Mining Research)

Hi, Rob. Thanks for taking my questions.

Rob McEwen (Chairman and Chief Owner)

Hi, Jake.

Jake Sekelsky (Managing Director and Head of Metals & Mining Research)

So it was good to see costs come down quite a bit at Gold Bar, and I know you mentioned this is a function of mining lower strip areas. I'm just curious if that's something you expect to continue a bit into Q2 here before moving back to more normalized levels of strip, as you mentioned in the second half?

Rob McEwen (Chairman and Chief Owner)

I'll ask Bill to comment on that.

William Shaver (COO)

Yeah, Jake. I guess production in the first quarter was pretty much on it. It's a little over budget, but it's pretty much on schedule. In the second quarter, we'll be expanding the work that we're doing in Pick and also expanding the work that we do in Gold Bar South to try and or to get more material or more ore onto the pad in order to improve our leaching. As you probably know, the first quarter is always a bit of a challenge because of rain and snow and cold weather. This year was a little bit better than last year, although this year we did release about four point, just under 5,000,000 gal, where last year we released about 9,000,000 gal.

All in all, I think the first quarter responded well to all the production challenges, and we see the second quarter as improving over that.

Jake Sekelsky (Managing Director and Head of Metals & Mining Research)

What about the stripping?

William Shaver (COO)

Yeah, and the stripping is just related, I guess, to where we're taking the ore at the time, and we're working with our contractor to, I guess, upgrade the number of trucks we have at the site to look after the stripping that's associated with the ore. So we see those two things as kind of being tied together.

Jake Sekelsky (Managing Director and Head of Metals & Mining Research)

Okay. That's helpful. Then, Rob, you touched on opportunities for growth and things that you're looking at from an M&A standpoint. I'm just curious, should we be thinking more along the lines of complementary-type transactions such as Timberline, or would you be willing to look at more of a transformational-type acquisition? Just your thoughts there would be helpful.

Rob McEwen (Chairman and Chief Owner)

We're just going on several fronts, Jake. I just think this market is delivering some situations that bear a lot of consideration. If there was a transformational opportunity that was attractive, take a close look at it because I think we're in one of these rare opportunities where this is the time to grow because we're going to see higher prices going forward. I'm quite confident of that.

Jake Sekelsky (Managing Director and Head of Metals & Mining Research)

I agree with you there. Okay. That's all for me. Thanks again.

Rob McEwen (Chairman and Chief Owner)

Thanks, Jake.

Operator (participant)

Thank you. Your next question comes from the line of Joseph Reagor from Roth Capital Partners. Joseph, your line is open.

Joseph Reagor (Managing Director and Senior Research Analyst)

Hey, Rob and team. Thanks for taking my questions. I guess following on Jake's last comment there on acquisitions, the Timberline acquisition, what's your guys' best guess on timing on closing that?

Stefan Spears (VP of Corporate Development)

I can answer that, it's Stefan. We're looking at an outside date in early July for that closing. There are a couple of factors that could accelerate that, but that's a good date to use at this point.

Joseph Reagor (Managing Director and Senior Research Analyst)

Okay. Thanks. That's helpful. And then going back to the opening comment about the accounting treatment on McEwen Copper, can you guys give us any guidance for the rest of this year on what you think your income-level expense is going to look like so that there's not such a big delta between what we have and what actually occurs?

Rob McEwen (Chairman and Chief Owner)

Hey, Joe. I think as far as McEwen Copper, Q2 is going to be pretty similar to Q1. I mean, we had over 20 rigs going until May, so we'll continue to have those costs flowing through. Q3 will be quieter as there's no drilling activity, although we will still be working on the feasibility. And then Q4 activity will be dependent on when Copper raises money and what the program will be in terms of drilling in the fall. But I will note, obviously, once we do have a feasibility study for McEwen Copper and permits in hand, then under U.S. GAAP, then we can start capitalizing costs at Los Azules if it makes sense, kind of in line with our Canadian peers.

Joseph Reagor (Managing Director and Senior Research Analyst)

Okay. And what is the timing on having that feasibility study in hand?

Rob McEwen (Chairman and Chief Owner)

Certainly first half of next year.

Joseph Reagor (Managing Director and Senior Research Analyst)

Yes. Okay. That's helpful from a modeling standpoint. And then on Fox, Rob, you commented that the first quarter grades were light, but you expect things to pick up and then costs to drop. Have you already seen a pickup in grade in Q2?

William Shaver (COO)

This is Bill. The grade has picked up from this month. It's running now around 3 grams. We hope to see that pick up a little bit more, but we're saying at this point that the grade in Q2 will be around 3 g. So right now, it's a case of making sure we put through all the tons we can through the mill.

Joseph Reagor (Managing Director and Senior Research Analyst)

Okay. So we should expect tonnage to stay relatively similar to what Q1 was and the grade to start working its way higher over the rest of the year.

William Shaver (COO)

That's correct.

Joseph Reagor (Managing Director and Senior Research Analyst)

Okay. All right. Well, that was the questions I had. Thanks, guys.

Rob McEwen (Chairman and Chief Owner)

Okay. Thank you, Joe.

Operator (participant)

Your next question comes from the line of Mike Kozak, Cantor Fitzgerald. Mike, your line is open.

Mike Kozak (Metals & Mining Analyst)

Yeah. Good morning, Rob and team. Thanks for hosting the call. The last caller asked one of my questions, but I just wanted to follow up here and make sure I heard Perry's comment correctly, that he made right at the end of the prepared remarks. Did you say cash and investments of approximately $60 million, six zero, in the copper subsidiary at exit Q1?

Rob McEwen (Chairman and Chief Owner)

At the end of Q1, that's correct. Yeah.

Mike Kozak (Metals & Mining Analyst)

Okay. And then maybe as a follow-up to that, in prior quarters and prior years, you guys would give some call it soft guidance on when you would look at potentially IPOing McEwen Copper. Is IPO kind of off the table now? Are you going to is the priority to keep funding this with Stellantis and Nuton, or how are you thinking about potentially IPOing that unit?

Rob McEwen (Chairman and Chief Owner)

Well, we feel we're in an in-between spot in that we've got the PEA last year that was published, and we're looking at a feasibility study. There's probably 100,000 m of drilling that haven't been included in the results, the results of which. And we filed for an environmental application approval, and we're hopeful to get that before we publish the feasibility study. So after the feasibility is out and we have a permit in hand, that would be a time to be looking at an IPO when we believe we'd maximize the value.

Mike Kozak (Metals & Mining Analyst)

Got it. Okay. Thank you for that. I'll turn it back.

Rob McEwen (Chairman and Chief Owner)

You're welcome.

Operator (participant)

Great. Thank you. And your next question comes from the line of Bill Powers, private investor. Bill, your line is open.

Bill Powers (Analyst)

Yes. Thank you. Thanks, Rob, for hosting this call. Just a couple of quick questions. I guess we could start with the decline at Fox. Could you just give us an update on that? I know it was supposed to start sometime this year. If you could give us an update on that as well as the progress towards construction starting in Mexico.

Rob McEwen (Chairman and Chief Owner)

Okay. I'll ask Bill to address that question. Bill.

William Shaver (COO)

Thank you very much, Bill. Yeah. In terms of the ramp at Stock, we expect to start the surface excavation work this month. We're in the midst of negotiating with contractors on that matter, and we hope to get started as soon as they can get equipment into the field. And the people we're talking to have equipment in their yard, so that should start as scheduled. In terms of Fenix, there we are waiting for permits, and the required submissions have all been made. Optimistically, we hope to see that in kind of the third, well, second to third quarter. I guess I'm going to say the third quarter now because we're hoping to have it in the next few months.

There's an election coming up in Mexico, so we're actually planning to make a trip to Mexico in the next few weeks where we will go and have a chat with the Minister of Economic Development who we had to the site last year and basically said he would try and help us any way he could and if we needed help to come and see him. So we're going to maybe take advantage of that. But yeah, we're doing now the final engineering of the plant, and so as soon as we have a permit in hand, we'll start working on that. We've already ordered gas generators for that project, and most of the equipment that's going to be installed is now refurbished at the site.

Bill Powers (Analyst)

Okay. So you'd expect construction to begin by the fourth quarter with potentially first production coming out Q1 of next year. Is that a reasonable timeframe?

William Shaver (COO)

That would be our hope. Yeah.

Bill Powers (Analyst)

Okay. I guess as far as, given the results that came out in Stock earlier or in February of this year, are there any plans to include the Stock East into the initial ramp going down, or is that something for future development?

William Shaver (COO)

No. Absolutely. That is going to be the first order of the day once we get underground. And we've completed a drilling program in the first quarter of the year at Stock East, and the results of that, I would say, are very good. And we are going to have an announcement about those results sometime in the next 30 days. And yeah, once we get the ramp collared and get underground, we will be heading in two directions, one towards Stock East and the other towards Stock West. So yeah, because that particular ore zone is very close to surface, yeah, we will head there right away as soon as we get underground.

Bill Powers (Analyst)

Sounds great. That was all the questions I had. Thanks so much.

Rob McEwen (Chairman and Chief Owner)

Thank you, Bill.

William Shaver (COO)

Thank you.

Operator (participant)

Just as a reminder, if you would like to ask a question, press star followed by the number one on your telephone keypad. We'll pause for just a moment to see if there are any additional questions.

Rob McEwen (Chairman and Chief Owner)

Move your volume.

Operator (participant)

All right. It looks like there are no further questions at this time. Mr. Rob McEwen, I will turn the call back over to you.

Rob McEwen (Chairman and Chief Owner)

Thank you very much, operator. Thank you, ladies and gentlemen, for joining us. I believe there's a question that came in by email, and I think I've already answered it. It was relating to the market performance this morning. I think it's overdone, and we've got a lot of positive momentum at the moment. Thank you, operator.

Operator (participant)

Great. Well, thank you so much. This does conclude today's conference. You may now disconnect. Thank you.