McEwen Inc (MUX) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the McEwen Mining Incorporated third-quarter results conference call.

I would now like to turn the meeting over to Mr. Rob McEwen, CEO. Please go ahead Mr. McEwen.

Thank you, operator. Good morning, ladies and gentlemen. Welcome to McEwen Mining's third-quarter conference call.

The past 24 months for precious metal investors has been brutal, but I feel like we're nearing a bottom. We had a brief and explosive rally in August, which I see as a good indication of the potential for large gains going forward. And despite a decidedly ugly mood amongst investors, analysts, and market commentators, I believe it's an excellent time to be a contrarian; a time to take a position.

And, other than our weak shareprice performance, we've been making good progress. We have achieved much during the quarter and during the year. With me today on the call is Ian Ball, who was recently promoted to the office of President and Perry Ing, our CFO.

Production was up and we remain on target to produce 130,000 ounces of gold equivalent this year, and while our cash cost production and all-in sustaining cost per ounce are in line with industry averages, we have been outperforming the industry in terms of bringing in mines into production. We have delivered on schedule and below budget.

Financially, we are better positioned than most in the industry. We are not under any financial pressure. We have no debt.

We ended the quarter with $32 million in cash, an amount sufficient to complete the expansion of El Gallo 1 under current operation and exploration into 2015 assuming these prices don't change. But before the end of 2014 I expect we're going to see higher gold, silver and copper prices, which will be positive for us and the industry.

An important point I'd like to stress is that we have not sold our future earnings to royalty and metal streaming companies and we have no plans to hedge. We want to preserve all the upside for our shareholders.

Our next major project is El Gallo 2. It will be a silver mine located close to El Gallo 1 about 5 kilometers away.

We are pleased to say that we have just received two of the three final permits required to construct and operate the mine. Once we have them, we will have the green light to build. I will now ask Ian to cover offer operations and Perry to review our financial performance.

Thank you very much, Rob. If you look at Q3, both of our mines had a very solid quarter. They were generating strong earnings of approximately $15 million coming from both of the two operations, but we can do even better.

If you look at San Jose we still have excess capacity at the mill that we suspect that will be filled over the coming quarters. And if you can combine it with grades that we were able to achieve in Q3, which are in line with our reserve grade, we're setting ourselves up for some very strong quarters at San Jose over the course of 2014.

If you look at Mexico El Gallo 1 during the quarter, Q3 is typically the wet season for Mexico, so it typically impacts production. We are now out of the wet season back up processing at our normal rate and we suspect we're going to have a very strong Q4 coming into El Gallo 1. Despite both of those, we still had a record quarter and we think that 2014 is looking just as bright for the Company and that we will meet our production guidance for 2013 if not exceed it.

If you look at our expansions El Gallo 1, we're looking forward to having this come online a quarter faster than we had anticipated coming in at the end of Q1 2014 versus Q2. We're also seeing a reduction in costs.

We were quite conservative when we put out the $5 million expansion figure. We're now looking at $3 million as we've purchase a lot of the equipment associated with the expansion.

Rob had alluded to El Gallo 2. We took a major step forward in receiving our EIS approval on that project as well as our risk analysis.

It is one more permit that remains before we can begin construction and that is a state permit that we suspect will be approved by the end of Q1. Whether we receive it or not will depend on metal prices.

It will depend on a number of cost reduction studies that are underway right now. We are proceeding with the construction of the mill and so that option remains open to us but we also got some positive heap leach results during the quarter that shows that we could look at alternative process methods should metal prices remain low and capital remain scarce.

On the exploration front, we believe this is one area that we should not reduce the budget. It's critical the industry, it's critical for growth and it's where you get your upside.

In Mexico we continue to drill around the mine. We've been finding new veins; several were currently mined that look good and demonstrate that there is excellent potential for Phase 1 to continue for many years. We're finding new discoveries around El Gallo 2 that should extend the reserve life well beyond the seven years that was published in the feasibility study.

In Nevada we're using new water sampling technologies that allow us to detect gold in water at very fine amounts and at South of Barrick's Cortez mine and we feel this is what the industry needs. We need to have new technologies coming to our exploration so we can make these new discoveries.

The target that we've outlined South of Barrick's Cortez mine is large. We're very encouraged by it but it is high risk. But if you're able to find something there it is a game changer for the Company and we suspect that will be drilled in Q1.

We also completed a 20 goal program in Argentina on a project that we have that's situated 70 kilometers away from Extorre, now Yamana's, Cerro Morro. We have attractive grades for gold and silver and we believe that by cutting exploration you're cutting off your future, so that's something that we don't intend to do and will continue to advance our projects despite the tough environment that we're finding ourselves in.

I'd like to hand over to Perry to discuss our financials.

Thanks, Ian. Just turning toward our 10-Q that we filed yesterday, just wanted to highlight a couple of things in terms of our earnings, our liquidity, and just a brief comment on the Mexican tax reform that was approved.

So starting with our income statement, we did report income of $3.3 million or $0.01 a share versus a loss of $2.7 million or $0.01 a share loss for the same period in 2012. As Ian mentioned, we continue to report good earnings from our mining operations of $15.4 million.

That is a figure that includes our 49% interest in San Jose as well as our 100%-owned El Gallo 1 mine in Mexico. Despite lower metal prices this year versus last year, we're continuing to deliver positive earnings from mine operations.

This is witnessed in our operating costs, which are coming down. We reported strong gold and silver sales of just under $12 million for the quarter from El Gallo 1, and in terms of our investment in MSC as we report on an equity basis, reported income of $2 million for the quarter versus a loss of $1.5 million in the second quarter.

When you compared our income from MSC versus a year ago, obviously the price environment has changed significantly. At this time last year, we realized gold prices of just under $700 an ounce and silver prices of just under $33 an ounce versus this quarter of $1,350 an ounce gold and $22 an ounce silver. As Ian said, we continue to optimize our operations and look for profitability despite the lower gold and silver price environment.

I'd like to also point out on our income statement Phase 1 expansion costs are being expensed. We reported approximately $750,000 in expense during the third quarter and we'll continue to see that come through as we don't capitalize those costs on our balance sheet.

We continue to optimize our general admin expense, which is down to $2.5 million versus $4.1 million a year ago and $4.2 million in the second quarter as we continue to rationalize our operation where possible. We did report a $6.3 million write-down from properties in Nevada that we dropped during the third quarter. Those were in the Battle Mountain Complex.

And so as a result of those items and our continued exploration spend, we were afforded an operating loss of approximately $9 million, or $0.03 a share. And offsetting that was the recovery of income taxes of $12 million, or $0.04 a share primarily due to the devaluating peso in Argentina and the effect that has on the deferred tax liability on our balance sheet, and $2 million of the recovery results from the deferred income tax that drops off with the Nevada property that we dropped that I mentioned earlier.

So those are the main items in terms of our income statement. In terms of our balance sheet our liquidity remains strong.

As Rob mentioned, we have cash and gold of approximately $33 million. We're well-positioned going into next year. As of today, November 6, our cash balance has not changed significantly from the end of the quarter as we continue to record good production for Mexico.

And just a brief comment in terms of the Mexico tax reform. In the past week that was approved by the Senate in Mexico. There are still some details to be fleshed out when they publish the details in the Official Gazette, but the main components affecting us are 0.5% gross royalty on precious metal sales and then a 7.5% royalty with allowable deductions, both of which are tax-deductible, and we expect at current prices we would expect to pay between $0.25 million and $0.5 million for El Gallo 1 for 2014.

So now I'd like to turn it back to Rob.

Thank you, Perry, Ian. Now I'd like to open the session up for questions.

Thank you, Mr. McEwen. We will now take questions from the telephone lines. (Operator Instructions) [Charles Richard Helm], private investor.

Rob, back in August or September you were interviewed on TV and part of that interview you came forward in saying that you thought that prices in gold would rise in the fourth quarter of this year being October, November, December. What did you base that on and do you still believe that we're going to see an increase in the price of gold going forward over the next few months?

Yes, I do. I base it on a couple of things.

One, there was a tightening of at the long end of the yield curve. Interest rates have been moving up, suggesting we are seeing some improvement in economic activity and an increased risk in the marketplace. We haven't seen the market subsiding.

People keep putting more and more money in there. I'm quite surprised by the complacency in the market with respect to everybody saying everything's back to normal. We don't have to worry about the debt.

We haven't seen large capital investments yet in many industries. Job creation is coming along slowly. The IMF came out with some warning statements that they're proposing a tax on the Western world, that the governments come together and go after everybody's wealth in maybe a one-time hit of 10%.

To me, that I thought would create some uncertainty in the minds and people would start moving into the metal. We have seen strong coin sales. The US mint, both silver and gold coins are running ahead of where they were selling last year in terms of demand.

And there has been large flows of bullion out of Europe and the United States into Asia via Hong Kong. Asian buyers right now are taking about two- thirds of the annual production of gold worldwide.

The countries that don't have much debt are buying gold and its citizens and the countries with lots of debt and leverage are selling the gold. I think that has to reverse at some point.

The strength of the dollar has come on lower interest rates in Europe and lower currencies in Japan. When that stops I'm not sure, but if you're a contrarian I think you'd be looking and taking some of your money, some of the gains you've got in the broad market, and putting it into gold.

Adam Graf, Cowen and Company.

Just a quick question on your gut feel from the Mexico tax situation. The other producers in Mexico kind of feel like it's a done deal. Do you feel like come next year once everything gets past maybe there'll be some reversal there and, if so, how do you see that taking place?

In terms of cost to us it's probably about $0.25 million impact. Will there be a change to it? Governments sometimes go back on what they say.

At the moment it's being pushed ahead. I think the only way they'd reconsider if there was deferral of a number of projects. At this point I don't contemplate a change in that rate near-term.

Just a follow up on that, Rob, I know there are some provisions in there that as far as deducting exploration. How do you think that will impact forward-looking exploration spend in Mexico?

Well, if you can reduce the tax levy on you by exploring I would say it might spur additional exploration. We're going ahead despite the tax and exploring, but I would say they're encouraging it on one side but then they're not encouraging you really to build on the other end.

And they haven't fully defined the legislation. So we'll have a clearer picture as that is published, once it's published.

And what's your expectation on that, on the timing?

It should come in place before January 1, from our understanding. So in late December, or sometime in December we would expect.

Very good. Thank you, guys.

Bill Powers, private investor.

Really two quick questions. I guess the first one would be as far as Argentina goes, I know there's been an election down there and whether that's falling out any ability to move money out of the country.

And the second question would be your expectation for gold bar given the limited capital expenditure that would be required to get that up and running and given its proximity to your other operations in Nevada, what are your thoughts about moving forward on that over the next 12 months? Thank you.

As far as Argentina, there was a midterm election just held in October. It showed opposition to the current party but it wasn't a landslide in favor of the opposition. The president of the country is currently on medical leave and so there seems to be, the government seems to be stalled, in terms of enacting any legislation in the near-term.

We haven't -- as the currency is devaluing against the dollar it's actually improving the performance of our mine in terms of earnings. We have registered with the Central Bank of Argentina. We could take out $70 million without any restrictions and in the past quarter we received, albeit it's small, but $1.2 million from the mine.

So at the moment, with the possible devaluation coming, you could see an improvement in performance of that asset. Also, there was -- the asset was interrupted several times during the year through strikes and labor disruptions, so if you could keep those at a minimum you can maximize the performance of that.

With respect to gold bar, we're in the permitting process. When we embarked on it it was a three-year endeavor. We are hoping to have permits by the end of 2014 and, thereafter, start construction.

It's an attractive asset. As you said, Bill, it's low CapEx and its near operations in Nevada, so it makes a lot of sense to do that. We haven't been able to speed it up just due to the regulatory environment for getting permits.

Okay, thank you. And to follow up on that $70 million, I know you had mentioned that you took down some in the last quarter. Are there plans -- I know you have a significant exploration project going on throughout the country, it sounds like over the next 12 months. Are there plans to repatriate part of that possible $70 million in 2014?

It depends on the metal prices and it will be the economics, really. There's good leverage to the silver price and if we saw higher prices there's a likelihood of higher profits being dividend and out.

We aren't spending a lot in Argentina right now -- more in Mexico and Nevada -- but we're spending it on a property that's a little east of where we are. But we're spending it there because we had some very good graph samples that were outlined in the press release on page 6.

But there were channel samples where you're cutting the rock and there were four samples that ran from just under 8 grams down to just over 2 grams, gold and some very high silver values. And we thought it was worthwhile going in there and testing it as there are some other mines in the region that have very good grades.

(Operator Instructions) [Jerry Wolf], Sequoia Partners.

When will you anticipate another capital need and do you have any idea at this point what you will require?

All right, in terms of capital the next moment would be when we're looking at financing El Gallo 2. We're hoping to get the final permit at the latest in the first quarter of next year.

We're currently out speaking to many sources of capital about what are the terms for some debt and equity. And the decision to build will be based on the metal price, as well.

So we've been looking into the first or second quarter, or in failing a stronger metal price, it would be delayed until we see a better metal price. We currently have enough cash to carry our business on and accomplish everything else we want to do and we'll see our cash flow developing over that period.

Okay. One more question. Los Azules, I know it's been quiet for a while and you did make some attempt to market it. Is that ongoing or has it been put aside for right now?

At the moment, Jerry, it's on the shelf. We're open to interest if anyone has it. The two questions are the price of copper and Argentina.

Yes.

And maybe the size of the capital.

Okay. So it is on the shelf but it is an asset but it's an asset that at this point can't be monetized?

No, but we had always hoped we'd be able to sell all of it or a portion of it and take the proceeds to fund part or all of our El Gallo 2 CapEx.

Yes, I think we're all hoping for that.

Exactly.

All right, Rob, well, thanks. That's all I had at this point.

[Jack Forbes], private investor.

Rob, you just discussed Los Azules. In the interim period of time will there be a continued drilling program over there? Will you continue to look to expand the resource, and will you continue to flesh out the project, or is Los Azules just going to be idle?

Jack, for this year our plan is to continue looking at the data we have and picking targets, but no plans for any drilling there. There will be some environmental work, some monitoring work, some baseline studies that would support a larger project going forward, but no current plans for drilling.

Thank you, Rob.

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you, Mr. McEwen.

Thank you, operator. I'd like to thank everyone for joining us today and best wishes for higher metal prices and share prices. Thank you.

Thank you, gentlemen. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.