McEwen Inc (MUX) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the McEwen Mining 2014 Q1 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, and good morning, ladies and gentlemen. Welcome to McEwen Mining's Q1 conference call. This is an important milestone for us for a number of reasons. First, it's the second year of operation of our El Gallo 1 mine. Second, we have completed the expansion of our El Gallo 1 mine. Third, we have secured permits for El Gallo 2. And fourth, we are debt-free, and our treasury is well-stocked. And five, we are getting dividends from Argentina.

Here to tell you the details are Ian Ball and Perry Ing, President and CFO, respectively, of McEwen Mining.

Think you very much, Rob. Operationally, from ounces produced and costs, we were in line with our expectations. It's important to note that Q1 is typically the lowest quarter for production at our San Jose mine in Argentina. And as pointed out in the press release, this is for two reasons: one, we are coming out of the year-end holiday. San Jose does traditionally shut down during the Christmas break, and we have to ramp up. And secondly, there is fewer days in Q1 than what you see in the subsequent quarters.

We expect higher production to come in Q2 versus Q1. And then we expect our strongest quarters to come in Q3/Q4, as we will benefit from the full expansion at El Gallo 1.

Production guidance for the year remains 135,000 to 140,000 ounces of gold equivalent. We are reaffirming our cash costs at $750 per ounce and our all-in cost of $1,100 per ounce.

Regarding the El Gallo expansion, we are happy to report that it is now complete, and commissioning began last week. We expect our first ounces to be poured from the expanded capacity by the middle of May. Final costs were under the budget, and we are two months ahead of schedule. So we are quite happy how that progressed, and the team that we did in Mexico.

In terms of mining, we are now about 2.5 quarters away from the high grade at El Gallo 1. And this is plus 2 gram material that we will see deeper in the pit. This will increase production from 37,500 ounces this year to 75,000 ounces next year. At $1,300 gold, we expect El Gallo 1 to generate approximately $35 million of free cash flow once we in encounter this higher-grade material.

You will see costs -- you know, our Q1 costs for cash were $720. This would fall to $585. Our all-in costs rate right now are running over $1,000 an ounce, and this would drop to $850 per ounce. So we're about half a year away from seeing some significant financial increases at that operation.

In terms of exploration, we continue to explore -- that was one of the things that we have emphasized last year is that we were not going to back off on the exploration. Right now, there is two drills at the El Gallo 1 mine. They are exploring targets immediately north of the pit, where most of our production is coming from.

And they are targeting zones that are immediate extensions of the mineralization that we have in our resource estimate. Right now we are feeling relatively confident that this drilling will extend the mine life. The infrastructure is there. We know the metallurgy and we know the rock mechanics. And these drill results will be included in a new resource update that is scheduled for Q3.

Rob spoke about El Gallo 2. This permit was approved in Q1 and is now one of the few projects in Mexico of this size that is fully permitted for construction. Although we have made the decision to defer construction due to the silver price, we are advancing talks on the financing; and, more specifically, on debt financing. That does take some time to arrange, and we are moving that forward should we see an increase in silver prices in the second half of this year. And just to give you a brief update, the mill that is currently under construction -- because it is the longest lead-time item associated with El Gallo 2 -- is 65% complete.

Turning our attention to Gold Bar, permitting there continues to advance per our original schedule. The plan of operation was approved by the Bureau of Land Management in Q1. We have now entered into the NEPA process, which is the final step towards getting the construction approval. And we continue to target Q2 2015 to move ahead with that project for construction.

As you probably are aware, Gold Bar is a lower CapEx project of approximately $50 million versus El Gallo 2, which is $150 million. And so Gold Bar is something that we could find much more manageably on our own than El Gallo 2.

Nevada exploration -- and this goes back to our point of continue to explore, because we feel it is very important; it's one way to step outside of the box -- we announced a new joint venture in Nevada with a company called Kinetic Gold. That is a privately held company where we could earn 70% of their project. It is located in the Cortez trend, which is an area we've always believed in and think is quite prospective. And Barrick continues to have a lot of success there.

Drilling on this property has been initiated. And we are doing a small program to start the year. And we will have reports -- results to report back there probably within the next two months.

With that, I would like to hand it over to Perry to review our financials.

Thanks, Ian. I'm just going to provide a very brief financial overview of the quarter, as it was a relatively straightforward quarter. I will start first with the earnings from mining operations.

We are pleased to report earnings from mining operations of $11.4 million, which is a significant increase from $6.5 million the prior quarter and $7 million in the year-over-year quarter. Approximately $3 million of that was generated at El Gallo 1, with the remaining $8.5 million from the San Jose mine. So overall, we are starting to see the benefits of reduced costs, despite the current low gold and silver price environment.

We also -- as Rob mentioned, we received $4 million in dividends from MSC during the quarter. And turning to our income statement, just in terms of what we did with the cash generated during the quarter -- as Ian mentioned, our El Gallo 1 expansion is complete. We spent approximately $1 million during the first quarter. And you will only see about another $200,000 coming through in costs during the second quarter, as we completed the expansion in April.

We spent approximately $1.6 million on El Gallo 2 permitting and $1.4 million in terms of payments for the mill for El Gallo 2. This amount doesn't flow through the income statement. It is reflected in construction and progress.

In terms of all other amounts on the income statement -- G&A, property, holding costs, and other -- they totaled about $5 million.

So then, just turning back to how this translates into our reported earnings, we did report earnings of approximately $18 million. But the majority of that -- or, in fact, $24.7 million of that relates to foreign currency adjustments that we're required to reflect according to the accounting rules, mostly due to the devaluation of the Argentine peso. This has no impact on cash generation and is an accounting gain only. So it's just the way the rules work in terms of revaluing your financial -- your liabilities on your balance sheet.

The last item I'd like to touch on is just in terms of the dividend situation in Argentina. We did receive payments in the first quarter, and we do anticipate further payments during the remainder of the year. But we can't give any assurance in terms of the timing and amount.

But some of the things that will drive that will be what will happen with the peso since the devaluation. It has moved from 6.5 to 1 to the US dollar to 8 to 1 at the end of January and has pretty much held steady ever since.

We are still continuing to see inflation running at about 25% in Argentina. So unless there is further devaluation, we will start to see costs increase. So it really is difficult to predict what's going to happen there.

And the other issue, I guess, would be the availability of local credit lines. Given the economic situation in Argentina, there's no certainty that MSC will have continued access to those credit lines. There's currently about $15 million outstanding on those lines. So movements in that balance could affect the amount of dividends we receive.

That's it in terms of a high-level summary of our financial operations. So I will turn it back to Rob.

Thank you, Perry. Thank you, Ian. Operator, I would now like to open the call to questions.

Certainly. Thank you. (Operator Instructions). John McClintock, Pareto Securities.

Just two questions here. One concerning -- what's the time frame for the $13.1 million tax refund from Mexico? Are you expecting that -- more of it earlier half in this year, or later half of 2014? And secondly, the second question is: any sort of guide that you can give us towards what the strip ratio looks at El Gallo 1 in the next, say, in the next quarter or two? That would be fantastic.

Okay. Regarding the VAT, we are still awaiting final decision from the Mexican government, and that's uncertain as to the receipt of that. And on the strip ratio, I will ask Ian to address that question.

In Q2 you're going to see a higher strip ratio closer to 12 to 1, and the reason for that is to develop enough benches to feed the expanded capacity for the rest of this year. And then for Q3/Q4 you should see it come down to 9 to 10 to 1 for the remaining two quarters, which was consistent with Q1 and then 2013, as well.

Okay. So that ramp up to 75,000 ounces -- we are not going to see a bump to 15 to 14? That's going to be in that 10 range for the next year?

Yes. In theory you would see it go down slightly in 2015 of the 75,000 ounce rate. However, we are probably going to keep mining it at the 10 to 1 ratio, just to ensure that we have always enough ore ahead of us.

Okay. That is all for me. Thanks a lot.

(Operator Instructions). There are no further questions registered at this -- I do apologize. Bill Powers, Private Investor.

Quick question as far as from what your guidance was for Mexico. It appears that you were below your guidance for cash costs and all-in sustaining for Q1. And it appears as though it is -- so are you expecting that to rise in Q2? And I guess as far as the guidance goes, do you expect that to be materially higher due to the commissioning of the second part of El Gallo?

I will ask Ian to address that.

Yes, I do think you are going to see higher costs in Q2. If you look at the mining sequence there, Q2 will be the lowest grade for the year. Q1 was what we expected. Q2 is going to be lower. Q3/Q4 are going to be more aligned with the first quarter. So second-quarter costs will be up, and that's why we are still reaffirming the $750 for the entire year.

Okay. And then due to the higher grade, it will drop back down next year. Is that --?

That's correct. We are going to encounter that high-grade in the pit late this year, early 2015. And then immediately, you will see the costs begin to go down.

Okay. Thank you.

Robert Kecseg, Las Colinas.

I realize Argentina is really a wildcard with the uncertainty with the currency and the political environment. I was reading from some investors that were pretty serious about investing in Argentina currently. And they were saying that the black market for the ratio for the currency exchange is more like 11 to 1 instead of -- I think what the government stated ratio is at 8 to 1.

I was just wondering, with something like that out there, if it were to go to that in the marketplace and that was to be realized, what kind of an impact would that have on the Company?

The initial impact would be a lowering of our costs. I think labor would probably be quick to try to catch up, at least on an annual basis, through labor negotiations. But the immediate impact would be a lowering of our operating costs, followed by a bit of a catch-up there, probably giving up at least half again due to labor contracts.

And as you stated, Rob, the unofficial rate has blown out significantly for about the last two or three years. And the devaluation that took place merely closed the gap to some degree. But the unofficial rate has been in leading indicator of where the exchange rate has generally been going. So unless you see that close, I think you will continue to see volatility there.

Okay. Thank you.

Kenneth Rostron, Hill Country ACM.

I am known for my kind of broad questions. El Gallo 1 expansion -- 2.5 quarters high-grade. Ian, you said that's the plan in about 2.5 quarters?

That is correct.

Okay. I view this as money in the ground. How would you respond to -- is that set in stone, irregardless of gold price? Do we have a plan to modify or manage these prices? Because -- or are we corporately committed to, irregardless of gold price, that we are going to do this? We are going to high grade in two quarters?

No. I guess I would just emphasize: in two quarters the grade goes from 1 gram, to 1.25 grams, to 2 grams. And we expect it to stay consistently at 2 grams for the bulk of the mine life going forward. So we don't think it will go to the high-grade and then drop back down. It will stay consistently at the 2-gram level.

All right. So we are just not -- okay. So it's not --.

I wouldn't deem it a high-grade as the mine gets richer and then stays there.

If I might interject, the -- your question, Ken, is: would we slow our production rate to leave the gold in the ground to wait for higher prices?

Yes, thanks. I was speaking in code. But that is -- effectively, yes. Cut to the chase.

Yes. We haven't got to that decision point. We were rushing to build to get cash flow to finance. But it is a consideration that we'd have to look at if the price of gold dropped further.

Yes, I agree. Go ahead. I'm sorry, Rob.

No, I just take your point, that it is money --.

Yes. I mean, it won't be pleasant, but it hasn't been pleasant anyway.

Right.

So it's a matter -- you know, the way I look at it is like the guys going around trying to get people to sell forward -- if that is actually happening or has happened, I would tell them to pound sand. You know? You know, essentially.

Because if you want to lock somebody into a financial contract at these levels, I think -- I would almost rather take our chances with whatever the future holds in the lock-in ore extract at these prices. That's just my humble opinion. Thanks for your work; good quarter.

Thank you, Ken. I agree with you completely on hedging at this level or selling a metal stream is tantamount to giving way all your profitability.

The only thing we have left is the optionality of that. And I would rather retain that optionality than -- well, I have already said it. Thank you.

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

Thank you, operator. Thank you, ladies and gentlemen, for attending the call. We are looking forward to better gold prices.

We are not out of the crisis, and you can look at charts; recently Chairman Yellen said that there's been 8 million new jobs created, or 8 million people of working age have entered the workforce since President Obama took office. And jobs have fallen by 0.5 million. So where did those people go?

And there's concern that the housing market is not moving along the quickly. Concern about the number of people living with their parents who are of working age. We are still in troubled waters. And don't get deceived by the low gold price. China, Russia, and others are buying gold. And the price is waiting to move up. So I think it's a good place to have some of your money.

Thank you very much, and we will talk to you with our next release.

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