McEwen Inc (MUX) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the McEwen Mining fourth quarter and year-end financial results call. I would now like to turn the meeting over to Mr. Rob McEwen, Chief Owner. Please go ahead, Mr. McEwen.

Thank you, operator. Good morning, ladies and gentlemen. Welcome to our conference call.

Today is going to be -- we will have three presenters. I will start with the introduction followed by Perry Ing, our CFO, and he will be followed by Ian Ball, our President. Perry will deal with financials and Ian will talk about operations, and after that it will be followed by Q&A.

So, I'd just like to start by saying this year was a good year. We achieved a number of milestones. First of all, we built a mine, El Gallo 1, and put it into operation successfully on budget, on time, and it's performing well.

This marked -- this is a real milestone for us, because it marks the first year having our own operation. Our other operation in Argentina, the San Jose mine, is operated by our partner Hochschild Mining.

So, we have two operations now. Other areas of note, we are getting money out of Argentina, which has been a big question mark for many investors, but money is now flowing out of there. We are in the process of completing the expansion of El Gallo 1 in Mexico, and that should be completed by the end of April.

We have received permits, final permits to construct and operate El Gallo 2 in Mexico. And we have been exhibiting some discipline in that, in terms of allocation of capital -- although we have the permits in Mexico for El Gallo 2, we have been waiting for a better silver price to improve the rates of return on that asset.

At $20 silver the -- and including the recent Mexican increase in taxes -- the IRR would be below 10% and clearly not attractive. But there is good leverage and should the -- for example, if the silver went to $20 -- and at $25 an ounce we would be looking at an IRR of 24%, and that starting to look much more attractive.

We have exploration going on in Mexico and Nevada, and I just think we're in a good cash position with no debt. And we're exercising, as I say, the discipline needed to get a good return on our investment.

Ideally we would like to see two-year paybacks on our investment, keeping a capital footprint small. Given the changing political whims around the world regarding nationalism and increased taxation, you want to be in and get your money back before the government starts changing their mind and rules.

So, with that, I would like to ask Perry to talk about how we performed last year and, more importantly, what we're looking at going forward into this year and 2015.

Thanks very much, Rob. I'll turn your attention to our earnings for 2013, and give you a high-level overview of where we stood for 2013. We recorded a loss for the fourth quarter of $11.3 million, and a loss on the full year of $147 million.

This is on a GAAP basis, and if you adjust that by taking out our impairment that we recorded on our San Jose mine and our exploration properties, then we would have recorded adjusted net income of $7.5 million for the fourth quarter or $0.03 a share, or a loss of $3.5 million or $0.01 a share for the full year.

The impairment we recorded for the San Jose mine was booked during the second quarter, primarily driven by lower metal prices. We also recorded an impairment on our 100%-owned exploration properties during the second quarter as well -- our 100%-owned exploration properties in Argentina, I should say.

During the fourth quarter we recorded an additional impairment of approximately $30 million related to our exploration properties in Nevada. These figures are before recovery of related deferred tax amounts.

Overall, though, I think you'll see that despite the 15% drop in gold prices during 2013 versus 2012, and 25% drop in silver prices, overall performance is improving significantly. You'll see from the results of the San Jose mine that they have been able to maintain their cash cost constant, and have reduced their all-in sustaining cost per ounce on a gold equivalent basis from about $1200 an ounce to just over $1050 an ounce.

So, I think you are starting to see the benefits in Argentina of the devaluation of the peso finally outstripping local inflation there. And moving on to 2014, you see a significant one-time devaluation of over 15% and a year-to-date devaluation of approximately 25%. So, I think going forward, depending on what inflation does over the longer term there, you'll see cost hold steady or come down.

It was the first full year of production for the El Gallo 1 mine. We recorded gold and silver sales of approximately $46 million, with related production costs applicable to sales of $35 million, so generating over $10 million in operating margin there.

On a cash cost basis we were at $750 an ounce; all-in sustaining $1164 an ounce. I think you'll see roughly the same numbers for 2014 with a reduction, slight reduction, in our all-in sustaining of approximately -- to approximately $1100 an ounce.

A couple of things I will point out as well in our income statement. We did expense mine construction costs of $1.4 million. That's related to the El Gallo 1 expansion. As we don't have industry guide sudden reserves, we expense all capital projects related to the mine. And we also expense approximately $850,000 in engineering and development work on El Gallo 2 for the same reason.

You will see that given the decline in metal prices, everyone's focused on efficiency and we have as well. We reduced our G&A cost from $17 million in 2012 to $14 million last year. We have also rationalized some of our property holding costs, so that has declined by about a third from $7.2 million to $4.6 million.

So, ending the year, you'll see that our treasury is approximately $26 million. That's comprised of our cash on hand and our gold and silver bullion.

As it stands now, we are still approximately at that level, just under $25 million, and that's reflecting the near completion of the El Gallo 1 expansion, as well as our ongoing exploration efforts.

As Rob mentioned, we are getting money out of Argentina. In addition to the dividends received last year, we have already received $4 million -- approximately $4 million in dividends from the San Jose mine this year and approximately two-thirds of that have been repatriated to Canada already.

We're also seeing things open up for other countries, bringing dividends out of the country. We're bringing our funds back through repayment of intercompany loans, but I think definitely things are changing there for the better, for the time being.

So, as far as a financial overview, I think that's a high level summary, and I will turn it over to our President, Ian Ball.

Thank you very much, Perry. Turning to production, overall we are quite pleased at how 2013 went. Our production was 7% above guidance, and our costs were in line as estimated. But I feel right now McEwen Mining is in a transition phase, where it will become a lot more interesting as we progress through 2014 into 2015 as this ability to generate cash will increase substantially.

But the first way we will be doing that is obviously in Argentina, although we are projecting flat production year-over-year there, the 25% reduction in the Argentinean peso in the month of January obviously is going to have a big impact on our cost structure, both short-term and long-term, as two-thirds of our costs are denominated in pesos, one-third denominated in US dollars.

We feel it's too early to predict how the long-term cost will play out at San Jose with the devaluation, as you still have to factor in the inflation rate within the country. However, we do think it's going to be a net positive for that operation. And it's always important to point out that San Jose is one of the highest grade mines in the Americas.

And as Perry and Rob have both spoken about, during the first two months of the year we received $4 million in dividends, so not insignificant for that operation.

Also, just on San Jose, we are going to be publishing a new resource estimate for that mine. San Jose has a track record of replacing its reserves and resources since we started production in 2007, and we expect that will be published by the end of this -- end of March.

In Mexico we will -- we started to see production rise here at El Gallo starting in mid-Q2 as our 50% expansion will be completed in April, and we expect to see costs start to decrease at the beginning of 2015 as the grade will be doubling from its current 1 gram a tonne to an expected 2 grams a tonne.

If you look at the free cash flow, Perry mentioned it last year. Although we experienced the overall higher metal price, we had $10 million of free cash from the mine last year. At today's spot prices we are projecting $8 million of free cash flow for 2014. But if you extrapolate the spot price out to next year with the higher grade and the expansion, we are looking at $35 million of free cash next year.

So that's a fourfold increase in the economics of that project. And with that, El Gallo is slated to become one of the lowest cost producing mines in Mexico, so we are quite excited by the transition that we will be experiencing here.

Just a bit on El Gallo 2; we continue to advance the longest leadtime items associated with the project -- bioengineering and the ball mill. Although we haven't made a positive decision to proceed, we want to make sure that option is available to us. So, by spending a little bit of money now, we could save ourselves a lot of time in the future.

We have made the decision to continue to defer the project and that's based on -- the function of silver prices and share price. We will continue to exercise patience here. It is the only project of this size in Mexico for silver that has all of its permits, so we think right now it is a very good option in silver, but we don't have to build it. But it is -- it does give our shareholders extra growth if metal prices cooperate.

So with that I will turn it back over to Rob.

Thank you, Ian. Just talking about production this year is going to be flat relative to last year. In 2015 we're projecting going from 131,000 to 225,000 ounces. That would be the expansion of El Gallo 1 and Gold Bar coming on stream.

As Ian mentioned, the optionality with El Gallo 2, it would take us up to 330,000 ounces, gold equivalent ounces. And it's really important both what our share price is and what the capital cost. We are exploring financing alternatives for El Gallo 2, which would look at debt an also and equity component at the appropriate price.

Exploration is ongoing in Mexico around our site, because that seems to be a very good investment for extending the lives of the operations we have there. And it's a large area, 0.5 million acres with lots of historic small-scale mining in the region.

And in Nevada we are exploring in and around our property, the Tonkin property, which just happens to be South, just below Barrick's Cortez Hills. And we think there is some opportunity there to add to what we have at Gold Bar and increase what we might have.

We're also looking at metallurgy of Tonkin. It is an enigma, but hopefully we'll find an answer to that and bring those ounces on stream.

So, in summary, last year we think it was a year of accomplishment and a number of milestones, and sets the foundation for strong growth going forward. At this point I would like to open the session up for questions.

(Operator Instructions). Adam Graf, Cowen and Company.

Good morning, guys, and congratulations. Quick question on Gold Bar and the permitting there. Could you maybe go into some detail on where the permitting stands and your current expectations for when you're going to receive that permit for construction at Gold Bar?

Yes, I will answer that, Adam, it's Ian. On Gold Bar, at the end of last year, we submitted our plan of operation to the BLM. They turned that around to us with their comment, none of which I would say that they present any concern outside what we were expecting.

We have addressed those comments and have resubmitted the plan of operation to the BLM and expect over the next 2 to 3 weeks to either get a final sign off on that or come back with additional comments. If it is signed off, then that will serve as a basis for the EIS study and we expect that process, from start to finish, will take about 12 months. So, what we are scheduling is looking at Q2 for final approval next year.

And then, when do you think -- if you receive the full EIS in Q2 2015, when do you think you will pour your first gold?

What right now we have budgeted it is about a 12-month construction period, so you would be looking at just putting on 12 months whenever the permit is approved.

I am sorry, so Q2 2016? I'm sorry; am I mistaken there?

Q2 2015 would be when we would have our permit, and a year later production, 2016.

Perfect. Thank you.

[Sam Saucher, Tudor Capital].

Thanks for taking my call. I just want to know do you have a lifespan on the El Gallo 1 mine? I know you were exploring in the central area, what you call Central in April of 2013, and I don't see numbers anywhere on the lifespan.

Yes, and right now what we are projecting is a mine life that's going into 2018/2019. We are working on right now permitting of the Central Zone, and we are looking at these satellite deposits, one called San Dimas and one called Twin Domes, which are also going through the permitting phases right now.

We have completed the bulk of the metallurgy and the geotech drilling required to develop the pit design. So that's ongoing and we expect to have that into the mine plan by the middle of this year.

So you are thinking that without the Central area you've got -- you're good until 2018 at let's say 50,000 ounces a year, and then if this goes through then you'll have even longer?

That is the current projection, yes.

Okay, thank you.

[Ernie Malisch, PMG].

I've got a question concerning potential mergers and acquisitions. Is there any thought of doing mergers and acquisitions in areas other than North and South America?

Ernie, at this point -- thank you for your question -- no. It is more -- I think there are plenty of opportunities in the Americas, and it's also easier to manage in terms of time.

Okay, and would you be looking at doing mergers with other junior producers? Or what was your thinking on that?

At the right price, certainly. There are opportunities out there to expand. It's a question of the price, cost to our shareholders and what is the contribution to the Company?

There is no interest to grow for just the sake of size. It has to be an improvement in the performance of the shares.

I see. And, then, what's your timeline for getting on the S&P 500?

Well, it is clearly going to depend on our market capitalization and we will need some M&A to get there in the near-term.

And, lastly, do you have positive free cash flow now, right? Is that correct? Is your cash increasing quarter-on-quarter?

We believe at current spot prices we will have free cash flow for 2014, correct.

Okay, that's all I wanted to know. Thank you.

[Carl Elkins], Private Investor.

You mentioned that you were going to need to go back into the market for some capital, and I was wondering if any consideration had been given to how much capital you would probably need, and if you would consider doing another rights offering.

We are exploring opportunities for funding El Gallo 2. We're not in a rush at the current moment to raise equity capital or debt, feeling that the cost of it is too high.

I'd also like to add we're not interested in royalties or metal streamings in addition to what we have right now. The amount -- for El Gallo 2, we think the additional capital would be about $150 million, and Gold Bar would be $25 million. Depending on the timing,

Gold Bar, the $25 million, is quite easily managed if, say, the silver price didn't go above $21 or $22 in the next year. We can manage that growth quite easily. So that's where we are right now.

And what about a rights offering?

It's a possibility; it's a possibility. We haven't discounted that.

Excellent. Thank you and congratulations on a great year.

(Operator Instructions). [Terry DeVries], Private Investor.

Thanks for the conference call once again. You had touched a little bit on the question I had on hand, but it was a question for Perry Ing. I was just trying to get an idea in my head of the cash flow -- of the cash that you're going to have in the bank at the end of 2014.

We went through roughly -- or you went through, McEwen did -- $25 million. We had about $50 million a year ago in the bank give or take. What are you projecting going forward if all things stay the same? I know it hinges on this low metal price for 2014.

Obviously there is -- thanks for the question, Terry -- obviously, there is a lot of variables, depending on how much we ultimately spend on exploration. We don't control the declaration of dividends from the San Jose mine, so their working capital levels could go up and down and affect how much we ultimately receive on a cash basis.

But I would say if we kept exploration on the lower end, then at spot prices we will end up roughly the same as we are now. But still having executed, say, several million dollars in exploration across different areas of the Company. But, again, I would be happy to talk with you off-line, but, yes, certainly a lot of moving parts there.

A second question I will direct to Rob. Rob, I was interested if you feel comfortable in commenting on the low metal prices and the allegations that have now come out from the German regulators. Bloomberg, Financial Times is now actually reporting on this manipulation scandal in the footprints that we are seeing reported of markets, from the large players, the bullion banks to central bankers that almost seem untouchable.

And if you have any comment that you would like to put forth, because that's clearly -- at an average gold price of $1300 an ounce over the last year, affected the bottom line to the tune of $50 million-plus for your Company. Have you considered contacting Canadian regulators as your position as a high profile, highly credible CEO in Canada?

Thank you for the question, Terry. In terms of manipulation, I've always looked at that question and viewed it as it's been the mandate of central banks around the world to manage their money. And they have a lot of tools at their disposal, such as if you look at the federal reserve coming out and saying interest rates are going to be here, say at 50 basis points or 100 basis points, and it's going to be locked there for a period time.

They have all sorts of levers they can move around. And one of those would be metal prices. I think it's quite reasonable to expect that they would be in there trying to manage the economy of the world, the central banks, and metal prices be one of those areas.

I don't -- there have been a number of very good attempts -- [Gada] is one -- to highlight what they believe is manipulation that goes beyond of the mandate of central banks. But to date that hasn't -- it's raised the awareness of it, but it hasn't changed the habits of the government, and I would say the governments are thinking that they are doing it for the good of the country and they can do anything they want.

I think making a comment to our central bank is like water on the back of a duck, unfortunately.

The market in my mind will catch up with this. The Federal Reserve coming along and say they are going to keep the interest rates fixed for a period of time, maybe they can do it in the short term. But in history suggests that over the intermediate and long-term, it's impossible to hold certain parts of the economy together and static.

There is lots of dynamics out there, and you are starting to see metal prices improving, and I'm quite encouraged by the firming that I'm seeing in prices right now, as people believe that -- there's a complacency in the broad market that all the issues that brought about the collapse a few years back have been dealt with. And that's far from the truth. But it's an easier thing to believe and a more pleasant way to look at the world than look at $17 trillion plus of debt, say, by the US alone and take that out over the Western world.

We still have quite a distance to go. And if interest rates were to go up, the cost of service is going to cripple a lot of governments and send shockwaves out around the world. So -- on gold.

Thanks for your comments.

Ken Rostron, Raymond James.

Thanks for the update. I had a little static on my line, and I just want to confirm my notes. We had $4 million first two months out of Argentina?

That's correct.

Great. And what was the silver price, where the internal rate of return jumps to 24% -- at $25?

That's correct. $25 silver would give you an IRR of 24% on (multiple speakers).

Okay, I apologize. I know it's been covered, but I wanted to emphasize those are really interesting numbers to me, but I am always a glass half-full kind of guy.

Anything out of -- on the Hail Marys and Grass Valley, anything out of there to talk? Some of the press releases said they were going to start drilling because of the dry winter. Has that commenced or any news there?

It's still in the air, and we don't know if there is a receiver who is going to catch it.

I shouldn't have given you that. That was too easy of an out. Are they drilling?

They are drilling, yes.

All right, so, I will be more pointed. All right, thank you very much. Thanks for the comments.

At least on my screen the last three weeks, I see no [shortage] of probably seven different commodities that are spiking. It's not being talked about -- cattle, coffee, hogs, corn, soybeans and I will stop short, but they are up over 12% to 14% in three weeks. I don't know what that means, gentlemen, but the canary may have bloodshot eyes and he is still alive, but he is sick.

And maybe some of these -- some of the stuff you talk about, Rob, maybe it's seeping out of the deemed good assets. And the control of what's deemed good is ultimately not going to be controlled is my thinking. But good job, guys. Great year.

[Ernie Malisch], PMG.

I noted that your all-in sustaining costs in San Jose were higher than your total revenue there. Do you have any leverage with Hochschild as far as the area of cost reduction and are they doing anything to take your cost down?

Hi, Ernie, it's Perry. Just looking at the all-in sustaining numbers for San Jose, they did come down from $1200 an ounce last year to $1050 an ounce in 2013, so it is below the realized price for 2013, which is why we were able to receive dividends last year.

But talking more big picture, we do not have significant influence on the way they operate the mine. We can give suggestions, but ultimately they control the day-to-day operations. They are in charge of the union negotiations. They are in charge of how much underground development work gets done.

So, I'd say we have limited influence given we only have one out of the three seats on the Board there.

Just partner to that, Ernie, it's Rob, I would say that Hochschild's been doing an admirable job running the mine in a difficult environment. They are constantly looking for ways to bring their costs down and at this point we are happy with them. We would like to see lower costs. Everyone would, but they are doing a very good job right now.

One of the ways of keeping costs down is to increase your production rate, so you spread your fixed costs out. Is there any thought of expanding production at that mine?

We have room to expand, and there have been discussions of expansion. Both ourselves and Hochschild are hesitant to take that step and commit more capital to the country until we get a clearer picture of what the future looks like in terms of taxation, inflation and government policy.

Okay, thank you.

[Jack Forbes], Private Investor.

Rob, congratulations on a great year. I live in Nevada, so I am very involved in your Nevada operations observing them. Could you address the situation at Tonkin to a greater degree? I know that we have a really interesting asset there that seems to be presenting a mystery to you as how to get at it. Could you address that a bit please?

Certainly. Thank you for your question, Jack. Tonkin is a complicated ore that at, a rate of about 1 gram, you could recover it by an autoclave, but the resource isn't large enough to justify the cost of an autoclave.

So we have been looking -- there have been several attempts -- there has been -- to unlock the gold. One was by a bioleach many years ago, but the effort was underfunded. It's been out for metallurgical testing and it appears that the ore oxidizes too quickly, so a number -- one group is looking to see if we could slow that down, so that we could recover the gold on an economic basis.

You are quite right. There is about 2 million ounces of gold there that it would be an easy win if we could find an economic way to release it, and to that end we have recently hired a new head of technology that -- we hope Nathan can find us the key to unlock that door.

At the same time, and we're looking around. We are drilling on the property for what might look like the Cortez Hills formation. It is in a similar geological setting and hasn't been drilled to date.

Well, I am watching that one with great anticipation. It would be wonderful to have 2 million ounces added. So --.

Wouldn't it?

It would be wonderful, but thank you very much. You guys have done a great job. Thank you.

There are no further questions at this time. I would like to turn it back over to Mr. McEwen.

Thank you operator. Thank you everyone for attending our conference call. Look forward to reporting back to you in the next couple of months. Thank you very much.

Thank you. The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation.