McEwen Mining Inc. (NYSE:MUX) Q4 2022 Earnings Call Transcript

McEwen Mining Inc. (NYSE:MUX) Q4 2022 Earnings Call Transcript March 14, 2023

Operator: Hello, ladies and gentlemen. Welcome to McEwen Mining’s Fourth Quarter and Year End 2022 Operating and Financial Results Conference Call. Present from the company today are Rob McEwen, Chairman and Chief Owner; Perry Ing, Chief Financial Officer; William Shaver, Chief Operating Officer; Michael Meding, Vice President and General Manager of McEwen Copper. After the speakers’ presentation, there will be a question-and-answer session. I will now turn the call over to Mr. Rob McEwen, Chief Owner. Please go ahead, sir. Again, Mr. Rob McEwen, please go ahead.

Rob McEwen: Thank you, operator. Good morning, ladies and gentlemen. Today, I’ll start with a discussion about gold and then our share price performance and follow up with factors driving our future. With all the uncertainties in the world, many people are asking why the price of gold hasn’t climbed much higher. I believe that most investors feel that we have entered into a new era where very low interest rates and massive monetary stimulation are here to stay. And the gold’s reputation as a store of wealth is no longer relevant or needed in a world of awash with easy money. However, as we all know, the unexpected happens quickly. Rising interest rates and an unexpected bank failure are vivid reminders, gold still has a role to play in your portfolio.

I suspect more investors will start adding gold and gold shares to their portfolio and they will follow the lead of a select number of central banks who became large gold buyers in 2022. In fact, their purchases were the largest purchases made in the past 50 years by central bankers. Perhaps they too are concerned about holding too much of their reserves in fiat currencies. So, during 2022, the price of gold outperformed not only gold equities, but also the Dow Jones. Gold increased 1% year-over-year, and at the yesterday’s close, it was up 6% since December 31, 2021. During that same period, the senior and junior gold equities as measured by the ETFs, the GDX and the GDXJ registered losses of 10.5% and 15%, respectively in 2022, while the Dow was down 3.7%.

But if we look back another year to December 31, 2021, and come forward to yesterday’s close, the GDX was down 9.1%, the GDXJ down 16.2%, and the Dow was down 12.4%. We weren’t as lucky in 2022. Our share price was hammered. It was down a painful 36%. Fortunately, it has recovered much of this loss and has increased an impressive 136% since the end of last year, December 31, 2022. And if we look back to December 31, ’21, our share price is only down 13.1%, which is less than the GDX decline of 16.2%, and very close to the decline of the Dow Jones Industrial Average of 12.4%. So, looking at our stock chart, from a technical perspective, it looks very promising. With our share price having broken out on the upside through its 50, 100, 300 day moving averages.

Driving this price improvement is our demonstration of improving operational performance, good exploration results, production growth, and lower cost per ounce, along with the growing recognition that McEwen Copper’s Los Azules project is a large copper resource with large strategic shareholders, Rio Tinto, the world’s second largest mining company, and Stellantis, the world’s fourth largest automobile manufacturer and mobility provider. For 2023, we are looking at a production increase of 12.5% to 27.5% over what we did in 2022, and our costs are expected to decline by about 5%. In 2022, our Fox Complex and Gold Bar mines generated operating profits, but the accelerated activities at our subsidiary McEwen Copper and its Los Azules project and our heavy investment in exploration contributed significantly to our large reported loss.

I will now ask Perry to provide details on how we performed financially in 2022 and more importantly what we see going forward in 2023. He will be followed by our Director and Interim Chief Operating Officer, Bill Shaver, who will comment on our success in stabilizing our mine operations and where we see growth in those operations. Bill will be followed by Michael Meding, our Vice President and General Manager of McEwen Copper, who will outline our progress at Los Azules and the financings we recently completed and the strategic shareholders we have. Perry, off to you.

Perry Ing: Thank you, Rob. Good morning, everyone. As Rob mentioned, I’ll provide an overview of our fourth quarter and full year results for 2022, and then I’ll discuss the impact of the recent Stellantis and Nuton, Rio Tinto transactions for our balance sheet. These transactions are, obviously, transformative for the company. We’ll deleverage our balance sheet in a rising interest rate environment and allow the company to advance its Fenix project in Mexico, as well as continue to explore aggressively in Ontario and Nevada without issuing additional equity, especially at these current gold prices. For the Los Azules project, these transactions will bring two things. First, it brings on a key partner in the project in Stellantis and strengthens the relationship with another in Rio Tinto.

It also provides significant funding to Argentina to continue our aggressive exploration efforts and provide McEwen Copper further flexibility in the timing of a potential IPO. First off though, I’ll start with a review of McEwen Mining’s consolidated results for the prior year. It is important to note that we report McEwen Copper as a consolidated entity and reflect 100% of its expenditures on Los Azules on our income statement. As a U.S.-listed company reporting under U.S. accounting standards, we do not have the option of capitalizing the exploration and development costs at the project or any of our other projects for that matter until we have a completed feasibility study and permits for development, unlike many of our Canadian listed peers that often capitalize these costs at a much earlier stage.

In terms of looking at our headline figures, we reported a loss for the quarter and year of $37.4 million and $81.1 million, respectively. This translates into $0.79 per share and $1.71 per share, respectively. As ** for the loss for the year is due to the expensing of costs at Los Azules net of foreign exchange gains realized. A further 25% roughly is due to exploration and development costs at our 100% owned properties. The remainder of the loss figures per share reflect our G&A costs and certain one-time tax charges. I also note that the per share amounts reflect the 10 for 1 share consolidations completed in July of last year, which re-established the company’s compliance with NYSE share price listing requirements. Looking at our 100% owned mines, we generated a cash gross profit of $7.9 million for the quarter and $19.2 million for the full year, respectively.

On a gross profit basis, these operations were essentially breakeven, a significant improvement over 2021 performance. Looking at gold equivalent production, production for the fourth quarter of 37,300 gold equivalent ounces was down just under 10% compared to the fourth quarter of 2021, driven by a decrease of approximately 2,000 ounces at Gold Bar as they transition into the new Gold Bar South pit during the quarter. Full year production of 133,300 gold equivalent ounces was down approximately 14% year-over-year. Again, the decrease was primarily driven at Gold Bar due to carbonaceous ore issues experienced earlier in the year as well as the transition into Gold Bar South in the fourth quarter of the year. At the San Jose mine, production was down approximately 10% year-over-year due to issues with COVID and at the mill in the first quarter of 2022.

Bill Shaver will cover off these line operations in further detail. So, the revenue and cost standpoint realized gold prices were roughly unchanged at the $1,800 level for both 2022 and the prior year. Gold prices were slightly lower in the fourth quarter of 2022, but appears to have rebounded well into the first quarter of this year so far. Looking at costs, we noted significant improvement in cash costs at our 100% owned operations at $1,276 per ounce, which have decreased steadily since 2020, but lower cost reported at both the Fox Complex and Gold Bar compared to the prior year. All-in sustaining costs were largely consistent with the prior year and reflect the cost of bringing Gold Bar South into production at — in Nevada. At the San Jose mine, both cash costs and all-in sustaining costs increased incrementally over the prior year, reflecting lower production due to the issues I noted previously.

Finally, looking at our treasury, at the end of the year, our cash and equivalent balance stood at $44 million compared to $60 million at the beginning of the year. Now, I’ll turn the attention to the recent transactions with Stellantis and Nuton, Rio Tinto and how it impacts our balance sheet and working capital on a go-forward basis. These transactions all closed within the past three weeks. The transaction included an offering of primary shares directly from the McEwen Copper and a component of secondary shares, which are the shares of McEwen Copper owned by McEwen Mining. The details are summarized in our news release, so I’ll just try to encapsulate it at a high level. Essentially, McEwen Mining, if we look at it as a standalone company, it receives $48 million.

McEwen Copper receives approximately ARS30 billion. The price point of these transactions — the price point at which these transactions are valued from McEwen Copper standpoint has nearly doubled the initial $10 per share amount when we did the investments in June and August of last year. Following these transactions, McEwen Mining’s ownership of McEwen Copper reduces from approximately 68% at the end of 2022 to 51.9% today. In terms of the proceeds to McEwen Mining, we intend to use $25 million of the proceeds to retire the secured debt to Sprott Lending, which will reduce our total debt from $65 million to $40 million, saving the company significant interest costs going forward. With our enhanced treasury, we believe we now have the funds on hand to build Phase 1 of the Fenix project in Mexico and bring that operation into production within the next year without raising additional capital.

As far as McEwen Copper’s treasury, the ARS30 billion is a significant amount. At official exchange rate, this is equivalent to over $150 million. Using less official measures, such as a Blue Chip Swap rate, this is approximately equal to about $80 million. With this round of financing completed, McEwen Copper is well positioned to execute its drilling and development program for the remainder of the year and into 2024, which Michael will outline. So, based on these transactions, the urgency to complete an IPO in the first half of 2023 has been eliminated. So, with that, I’ll turn the presentation over to Bill Shaver.

William Shaver: Thank you very much, Perry. Good morning, shareholders. This morning, I’d like to leave you with three messages with regard to our operations. We have improved mining operations at the Fox Complex and are improving milling operations, which will result in higher output and lower cash costs in 2023. At Gold Bar, we have successfully transitioned to a new contractor and we have moved the operations to Gold Bar South pit, which will produce most of the ore in 2023. And based on the first two months of production, we are fully transitioned on both fronts, that being the new contractor and full operations. Cash costs for these operations will be approximately $1,100 per ounce in 2023, which is a significant improvement of approximately 15% from 2022.

And lastly, at the Fenix project, as Perry has mentioned, we have moved the plant — that we purchased last year to the plant site and are at — in the working stages of planning production in early 2024. The last quarter of 2022 was challenging, but hard work by all our mining operations helped us overcome these hurdles, making Q4 a reasonable quarter. We are also making progress in stabilizing and improving operations, so we can obtain predictable outcomes for gold production and costs in 2023 and into the future. And so far, this year, we are on track. On the safety front, in 2022, we had two low severity lost-time incidents in January and March at our El Gallo operations. And for the rest of the year, we were lost-time accident free. At the Fox Complex, we have operated for a full year in 2022 with no lost-time injuries.

And at Gold Bar, we recently passed three years without a lost-time injury. On the environmental front, we — there were no environmental events recorded in 2022. Now, I’ll turn it over to each of the operations. At the Fox Complex, we had a very challenging year with our mill, which continued to have significant availability issues, which hampered our throughput. This resulted in us missing our gold production last year. At the same time, the mine had an excellent year, which resulted in a stockpile build up to 120,000 tonnes by year-end. This represents a value of approximately $15 million after milling and recovery. On a positive note, we have now undertaken crushing of the ore at the mine prior to it being shipped to the mill. This lowers the amount of work that the mill needs to do in processing the ore.

This decision was followed — was following a test program to prove this concept last year. We have been able to get our production tonnage through the mill successfully in Q1 of 2023 and are looking forward to improving the throughput when we get the contract crushing plant that we have planned for the remainder of the year at Froome into place. This plant will be commissioned in early April, which will allow us to reduce the size of stockpile we have at the Fox mill, transforming it into gold and therefore cash. We anticipate we will meet our budgeted cash call for the year of $922 per ounce. At the Gold Bar mine in Nevada, 2022 was also challenging with our issues of preg-robbing ore and our parting of ways with our mining contractor at the start of Q4.

Notwithstanding these issues, we transitioned the mine plan successfully to main production in Q4, and we are happy to tell you we have successfully transitioned to a new contractor who is now in full production. We also completed the move to the Gold Bar South pit and are now in full production in this pit. Gold production from Gold Bar has been on budget for the first two months of this year and we’re looking forward to a good year from operations. At the Fenix project in Mexico, we have been able to develop an approach to get the Fenix project in production in a timely manner and at a significantly lower capital cost. We will reprocess the heap leach pad, which has a grade of 0.6 grams per tonne. To accomplish this, we have acquired a used 7,000 tonne per day gold processing plant, which operated recently at a local mining operation.

We have moved 80% of this plant to our site. And for Fenix, we will initially assemble only the grinding circuit, the cyclones and the leaching portion of the plant and use the present El Gallo gold recovery circuit. This will reduce the CapEx to approximately $12 million with the potential to increase the throughput as we move into production and prove that this plant will give the required outputs. There are a few minor changes in our permits that are required, but we hope to have this plant operating late this year or early in 2024. With that, I thank you very much. And now I’ll turn it over to Michael for an update on our world-class Los Azules project.

Michael Meding: Thank you so much, Bill. I will quickly highlight our financing and strategic importance of our new shareholders, then report on our drilling, exploration and study work, and finally mention what we did last year and in 2023 concerning our enhanced organizational and ESG competence in Argentina. McEwen Copper completed $81.9 million offering, including a $25 million investment by Nuton, a Rio Tinto Venture, on August 31, 2022, followed on October 24, by an option agreement with Kennecott Exploration, another subsidiary of Rio Tinto, for potential earn in of 60% for Elder Creek by investing $18 million over seven years. Subsequent to December 31, 2022, we announced the closing of an ARS30 billion investment by Fiat Chrysler Argentina, a subsidiary of Stellantis, to acquire shares of McEwen Copper and of a second investment of $30 million by Nuton that increased the investment to $55 million.

Now, Nuton is an innovative new venture with the portfolio of proprietary copper heap leach related technologies and capabilities at the core, a product of almost 30 years of research and development. Those have the potential to economically unlock copper sulfide resources and achieve higher copper recoveries on oxide and transitional material. Rio Tinto is the world’s second biggest mining company, bringing significant financial and technical resources to McEwen Copper and the Los Azules project. Stellantis, on the other hand, is one of the world’s leading automakers. It produces iconic brands such as Alfa Romeo, Chrysler, Citroen, Dodge, Fiat, Jeep, Lancia, Maserati, Opel, Peugeot, Ram, Vauxhall and others. And in Argentina, Stellantis produces about 160,000 cars yearly, has about 3,000 employees and is present with manufacturing in Buenos Aires and in Cordoba, Argentina.

Partnering with Stellantis is an expression of a paradigm shift for downstream customers of copper. Companies realize that copper is a mineral critical to the green energy and mobility transition. And to my knowledge, it’s the first time an automotive company has invested in a copper company. Subsequent to those transactions, Stellantis and Nuton each own 14.2% of McEwen Copper. McEwen Mining’s ownership is now approximately 52%. Now I’m going to talk about drilling, exploration, site and study work. A total of $41.3 million was incurred in 2022 at the Los Azules project to advance drilling, engineering and project feasibility work. Drilling has focused on increasing drill hole density to upgrade the copper mineral resource classification to measured and indicated and to define the payback pit design better, to provide metallurgical, hydrological and geotechnical data to support mine design and (ph) exploration testing for potential extensions of the copper resource to the north, south and the depth of this already vast deposit, which Mining Intelligence ranked in 2022 as the ninth largest undeveloped copper project by copper resource size.

In 2022, drilling started in January and went to May when it stopped for the winter in the southern hemisphere, then restarted in October and is currently ongoing. Since October 2022, there were six drill rigs on site and five more were added in early 2023. From 2022 to date, we have drilled over 105,000 feet, approximately 32,000 meters, in 98 drill holes to increase geological confidence and we see that drill results are generally consistent with our model. Beyond our robust delineation results, published in January and March this year, we recently published our northern step-out exploration results with 1,052 meters of 0.29% copper including an interval of 480 meters of 0.42% copper, which demonstrates the potential of the deposits to the north.

The updated PEA will include all available information on drilling, assay and metallurgical testing obtained until early 2023 and is now slated for publishing during Q2 this year. We are developing a scenario for Los Azules as an open pit mine that initially processes leachable copper content in a heap leach, with a solvent extraction and electro winning facility to produce copper cathodes. This scenario is more environmentally sensitive due to its much lower water consumption and carbon footprint, and is de risking the project due to lower complexity. The project design makes use of renewable energy, which will allow for low carbon footprint production and improves financial attractiveness. While the PEA as a base case considers economic leaching without Nuton technology, we are excited to be able to test heap leaching using their technology, which could represent a very interesting upside scenario, and initial results are promising.

We are in preparation for the filing of the environmental permit application for the exploitation stage to the San Juan mining authorities. The drafting of the report is underway and on track for submitting it to the authorities in April 2023. In 2022, a major advance was made that will accelerate the development of the Los Azules project with the completion of a new low altitude access roads, which goes to a maximum of about 11,000 feet or approximately 3,400 meters above sea level, which we share in part with other mining projects, including El Pachon from Glencore and Altar from Aldebaran Resources. The importance of having a second road into the site at more than 2,000 feet low altitude means that we now have almost year-round access to the site.

In addition, we upgraded the exploration roads, the former existing roads, to allow for articulated 18 wheelers to get to site, a significant logistics improvement, lowering costs and quickening transports. With regards to our organization, a strong and experienced management team was set up in Argentina in 2022. With management team members having a total of over 180 years of experience in Tier One operations, the majority in San Juan, Argentina where the project is located. To further cement our relations with local communities, we opened up our community affairs office in Calingasta in San Juan where the project is located, to have even closer relations with the community we are operating in. And I can report that we are happy to receive ongoing support to develop our project there.

This concludes my report on McEwen Copper. Thank you for your attention and I will now turn it back over to Rob.

Rob McEwen: Thanks, Michael. I’d like to say I’ve always felt that Los Azules was a tremendous asset for McEwen Mining. The problem was in 2022, our share price was scraping along the bottom and our treasury was small. But in order to advance Los Azules, we needed a lot of money. And the thought of trying to do a financing when we — our share price was at historic lows was just not that attractive or possibly feasible. So, we decided the best way to advance Los Azules and build its value and surface the value for McEwen Mining and allow it to access financing was to create McEwen Copper and fund it separately. And I believe we have been successful in surfacing value. We’ve attracted the second largest mining company in the world as a shareholder and the fourth largest automobile manufacturer in the world.

So, both did extensive due diligence on this, on Los Azules, and just confirming that we do have a very large, very attractive copper projects that will likely be one of the larger copper mines in the world when it is built. So, last August, we raised $82 million at a share price of $10. And now seven months later, we’ve completed an even larger financing of $30 million and ARS30 billion at an average price of approximately $18.75. As a result, the implied value of Los Azules has increased from $260 million to $550 million. And that’s excluding the 1.25% royalty that McEwen Mining holds on this property. So, now behind every share of McEwen Mining, on a fully diluted basis, is a value of $5.70 from Los Azules. Back in mid-2020, our share price was around $3 a share.

Looking ahead, with our operations performing much better than they have in the past, with prospects of growth at our Fox Complex where we can see the potential to double production and further reduce cost to below $900 an ounce; mining at Gold Bar, we’re in a new deposit that is higher grade and lower strip, and assuming the winter doesn’t frustrate our plans, we’ll be increasing production by better than 50%; and we’re looking at the Fox Complex increasing production anywhere from 15% to 30% and keeping its costs around a $1,000 an ounce, we’re looking at 150,000 to 170,000 gold equivalent ounces, representing an increase between 13% to 28%. McEwen Mining trades at a significant discount to its peer group and our objective is to get up and exceed that peer group economic value for gold equivalent ounce.

And when we do that, along with continuing to progress our Los Azules project, I think that the value behind McEwen Mining is going to increase and I see a value of somewhere between $7 and $28 a share. And you might be wondering how I got that number. There are — and it’s really the sum of the parts. We have Los Azules in there. And compared to two other copper projects in the same province in Argentina, we’re at a lower altitude closer to the infrastructure, then they are roads powered. Based on the published resources, we have a larger resource and a higher copper grade than either of those two properties, yet, one has a value — was purchased at $485 million last April and the other one has a market cap of about $1.9 billion. So, you could see — I think we are in a position to be somewhere between that $500 million and $2 billion for the value for Los Azules.

We have five royalties — non-producing royalties, 1.25% on Los Azules, 1.25% on McEwen Coppers, other copper project, Elder Creek, which you heard earlier has been optioned by Rio’s exploration arm Kennecott Copper, and then we have our gold assets that are trading well below our peer group. So, I think there’s quite a bit of room to grow. And I think we’re in really good position to push forward on that front. The investment that we have brought in recently into McEwen Copper, although it reduced our interest — our ownership interest, it increased the value significantly of that asset. And it allowed us to reduce McEwen Mining’s debt and put money in the treasury of McEwen Mining to further the development of our Fox Complex, expand down in Mexico and fund our exploration program.

So, if any of you are interested in buying — getting exposure to McEwen Copper, right now, the best way to do it is through the shares of McEwen Mining or wait for the IPO of McEwen Copper. Thank you. Operator, let’s open the session for questions and answers.

See also 11 Bank Stocks with Insider Buying and Selling Last Week and 30 Best Hotels in Canada.

Q&A Session

Operator: Certainly. And your first question comes from the line of Jake Sekelsky from Alliance Global Partners. Your line is open.

Jake Sekelsky: Hey, Rob and Perry.

Rob McEwen: Hi, Jake.

Jake Sekelsky: Thanks for taking my question.

Rob McEwen: Go ahead.

Jake Sekelsky: So, just starting with Gold Bar, you mentioned the change of contract during Q4. Can you give us any color on the improvements you’ve seen since making that switch, and if you’re able to quantify them at all?

Rob McEwen: Sure. I’ll ask Bill to address that question.

William Shaver: Thanks very much for the question. Yes, I guess, there’s two aspects to the improvement. The first aspect is that we have a significantly different contractual arrangement with this group. And that, along with their performance, has brought the relationship to a very professional relationship, which is contractually, I guess, not complicated. And that has been nice to see from my perspective and also from the site’s perspective. And they have successfully transitioned in a relatively short time, approximately three months from the time we first started talking to them until we had a contract in place and they were on site. And they are now totally ramped up as the Gold Bar South project, which is a new mining operation.

If you were there a year ago, it was a big hill out in the middle of the desert. And now, it’s a full-scale mining operation, producing about 100,000 tonnes of ore a month and between 300,000 and 400,000 tonnes a month of waste. So, it’s been a relatively smooth transition. We’ve had this fall and early winter, I guess, the toughest winter that they’ve had in the decade in Nevada from the perspective of snow and rain. So, with those challenges and seeing the success of the first two months where we’re basically right on budget, I think that tells me we’re on the road to seeing better performance as the year goes on. As the contractor becomes more comfortable and also as the amount of workspace that we have in the pits expanding, because right now it’s a very small pit, because of the fact that we’re just starting.

I hope that answers the question.

Jake Sekelsky: That’s helpful. And then, just looking at Los Azules, obviously, looking at the recent financing and increased cash position from McEwen Copper, I’m just wondering if this has changed your thinking on the IPO timeline with a longer cash run. Obviously, I think you have a bit more flexibility and kind of take a market approach. Any thoughts here would be helpful.

Rob McEwen: Sure, Jake. With the financing — well, I’ll go back a bit. We had thought we’d complete the updated PEA and use it as the basis for going public in this first half of the year. And as you mentioned, with the financing now completed, the urgency to do a financing is no longer there. And so, we’ll have the ability to think of it financing later this year or into early next year, but in a more buoyant marketplace.

Jake Sekelsky: Got it. Okay. That makes sense. That’s all on my end. Thanks again.

Rob McEwen: Thank you.

Operator: Your next question comes from the line of Heiko Ihle from H.C. Wainwright. Your line is open.

Heiko Ihle: Hey, Rob. Thanks for taking my questions.

Rob McEwen: Hi, Heiko. Go ahead.

Heiko Ihle: last week. One of our questions or primary question really is the contractor at Gold Bar South. I mean, you got new people there. What kind of efficiencies have they brought with them already to improve production? How much more do you think you can see? And even more importantly, do you think any of those efficiencies can be extrapolated to other sites?