McEwen Inc (MUX) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the McEwen Mining 2017 First Quarter Financial Results' Conference Call. (Operator Instructions) .

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

Thank you, Operator. Good morning, fellow shareowners and interested investors. We're pleased to have you join us today. During our first quarter of this year, we invested in our future growth and achieved a number of positive developments, but this investment came at a cost.

I'd like to start with the good. First, financially we continue to be in good shape. Our treasury is strong at $55 million, and we remain debt free. In addition, we have not encumbered our future revenue by selling metal streams, royalties or hedging. Second, the San José mine increased its gold production by 16% and silver production by 7% over the comparable period in 2016. Third, the increased exploration and assessment work at Los Azules, which has significantly advanced the project and we now have much better understanding of the capital infrastructure and permitting requirements for our production decisions. Our goal is to advance this project to a point where it is a compelling joint venture or sale. Fourth, subsequent to the quarter, we acquired a strategic property package in one of the world's most famous gold districts, Timmins, Canada. Fifth, the Gold Bar mine permitting process is advancing towards approval that we expect in Q4 of this year. And sixth, we have continued adding to the depth of our management team with the addition of Sylvain Guerard as Senior Vice President, Exploration.

Now for the bad. First, our El Gallo mine produced less gold this quarter than the comparable period in '16, and that was due to lower gold grade. Second, exploration around the El Gallo mine has not yet found additional oxide resources but additional sulfide ounces have been discovered. Third, production costs of both mines have increased. So the good so far is outweighing the bad, and here to give you more details is our CFO, Andrew Elinesky, and he will be followed by our President, Xavier Ochoa to give greater details. Andrew?

Thank you, Rob. I'm pleased to report the company had a good start to the year. Consolidated production came in just under 30,000 gold equivalent ounces which was in line with our expectations and we are on track to meet our full year guidance for 2017. However, despite the solid production levels and the reasonable costs, the company reported a net loss of $3 million or $0.01 per share. As Rob mentions, this was due to the increased levels of exploration development at all of our projects, but with particular increased levels being made at the Los Azules copper project in Argentina. This increased level of spending was also reflected in our cash balance, which did decrease by $8.5 million or $0.03 per share during the quarter. However, most of our investments that we have, they post a strong returns on the quarter so this cash decline was significantly reduced in terms of the total of our liquid assets. As Rob mentions, at the end of the quarter, the balance was just over $55 million, representing a decline of only $3.6 million from the end of the year.

Moving the conversation over to our site results. In Mexico, as I mentioned, production was in line with expectations, but our cash costs and outstanding costs were significantly lower than our full year guidance. This was due to the carryover of the lower cost inventory from 2016, and while we aim to maintain these levels of cost savings, we do expect our per ounce cost to trend in line with our full year guidance as we progress further into the year. In particular, we plan to invest further into our exploration with the aim of extending the mine life past 2018. We will also continue our evaluations of the significant silver resources as well as the sulfides that Rob mentioned in the area.

The existing operation has the anticipated benefit of increasing grade for the second half of 2017. However, the appreciating Mexican peso versus the dollar is chewing into this benefits. The Mexican peso has increased in value by over 13% since the start of the year. However, overall we anticipated El Gallo will still remain a strong contributor of free cash flow for this year.

With regards to our San José mine in Argentina, the continued steady operational performance of the mine continued into 2017. However, costs were higher, as Rob mentioned, they were higher than the full year guidance, which was primarily a result of sales being impacted and being lower than planned during the quarter due to a temporary port closure which delayed shipments, and in turn, obviously the sales of their silver and gold. This delay combined with the slight increase in labor costs and depreciation in the Argentinian Peso versus the dollar as well as an increased level of exploration activities has meant that our per ounce costs were higher than expected. This resulted in a decrease in our tribunal income from the mine which compared to the prior year. However, the joint venture continued with its issuance of dividends and we received $2.5 million in dividends during the quarter.

Going forward, we expect San José to bring their costs in line with the full year guidance and that dividend should continue to be paid during the year despite the increased levels of investments in exploration.

Before I hand the call over to my colleague, Mr. Ochoa, I would like to quickly discuss our planned expenditures at 2 of our projects. Firstly, regarding our newly acquired properties in Timmins, we are currently budgeting $3 million for the rest of the year, while at our Los Azules project, the expenditure levels will decrease significantly over the rest of the year when compared to this quarter, as we have now concluded the drilling season and the focus will now move and shift over to furthering our studies on the project.

At this point, I would like to thank you very much for taking the time to join us, and I will turn the presentation over to our President and COO, Xavier Ochoa.

Thank you, Andrew. In terms of our operations and projects, I would like to start with El Gallo gold, where as I had mentioned in our last call, we're now entering the final stages of the current project mine life as we know it today. This was reflected in a quarter-on-quarter production decrease of 51% at El Gallo when compared to the same quarter last year, having produced the best quarter 8,808 gold equivalent ounces at an average grade of 1.28 grams per ton of gold.

Reinforcing Andrew's earlier comment, we do remain on track to meeting our guidance for the year. As our current mining ventures advance deeper into the 2 pits remaining to date, we do expect to see an increase in the average mine gold grade in the second half of this year. As this take place, however, we are under way with optimization work to maximize the revenue we obtain from these pits. At El Gallo gold, as Andrew mentioned, total cash costs and all outstanding costs were 564 and 668 per gold equivalent ounce respectively. During this quarter, our costs were good as we have the benefit of producing metal and inventory at the beginning of the quarter. However, as the year advances, we expect our costs to trend towards our guidance numbers for the entire year as we will see an impact on our recovery efficiency and our unit processing costs because of deeper mining and an increasing presence of sulfide minerals as we enter concession zones. At the El Gallo Silver project in Mexico, during the quarter we continued to advance our work on the project. For work aimed at reducing the initial capital investment and project configuration that can deliver a lower operating cost, we are now closer to having a project that is attractive in the current metals market. We expect to have more information for our shareholders during our upcoming Annual General Meeting.

At the San José mine in Argentina, where we hold a 49% interest, during the first quarter, we saw our share of attributable production at 19,925 gold equivalent ounces. This was reflected in a quarter-on-quarter production increase of 12% when compared to the same quarter last year. During the quarter, some mining dilution issues were encountered and, in correcting them, our tonnage mine declined. This is typical to when you manage high-grade narrow way mining. The Los Azules project in the Argentina Andes during the first quarter, we conducted a full field campaign. During the campaign, we conducted a combination of infill and exploration drilling along with other exploration fieldwork. We also conducted a series of engineering-related activities focused on the evaluation of the west sites on which to locate the project facilities and related infrastructure with positive results which will be reflecting in the new preliminary economic assessment study, which is now in progress. Results from the drilling campaign as well as the new PA are expected to be finalized during the third quarter of 2017. At our Gold Bar Project in Nevada, in the United States, which we look forward to being our newest mine, we focused our efforts in advancing our permitting. At the end of the quarter, we were in the middle of the mandatory 45-day comment period. As of today, based on the comments received, we believe that permitting remains on schedule to receive our record of decision from the U.S. Bureau of Land Management in the third quarter of the year.

In parallel to permitting activities, detailed engineering work and supply evaluations required for the execution of the project continue as planned. Our most recent acquisition to our project pipeline came from the completion of the acquisition of Lexam VG properties in the Timmins Camp. We are now in the process of initiating the activities to advance studies in the 4 projects towards defining a development program. We expect to have more information for our shareholders at the Annual General Meeting on this exciting new addition to our portfolio.

In terms of exploration, as Rob said, it is with great pleasure that I want you to know that our team is now stronger with the addition of Sylvain Guerard, who joined us last month as Senior Vice President of Exploration. Into exploration manner, he is already in the field visiting all of our exploration teams and the projects they are working on. We continued with our grassroots exploration program in Nevada in search of new opportunities, and in Timmins, we're looking at resuming exploration in the newly acquired spending to known resources as well as looking for new high-grade zones, which this district is famous for hosting. At El Gallo, brownfield exploration is now looking at the deeper portions of our existing pits to determine what the potential for new resources is in the zones containing transition of sulfatic mineralization. At the district level, the practice of this transition in sulfide zones represents an interesting opportunity for our exploration efforts where we are now looking into the deeper, less-oxidized mineralization which could become another chapter in the story yet to be written of the prolific El Gallo district in Mexico.

Thank you very much for your in interest in our operations. Rob, here it is back to you.

Thank you, Xavier. Thank you, Andrew. I'd like to start by saying -- extending an invitation to all of you to our annual meeting. It's going to be held on Thursday, May 25, at 4 p.m. at the Toronto Stock Exchange, which is located at 130 King Street West in Toronto. We're looking forward to seeing as many of you there as possible. At the meeting, we will be going into much greater length on our exploration at our various properties, the results of the studies we're doing for El Gallo Silver, for Los Azules and Lexam, as well as El Gallo gold.

As I said earlier, we've been building our team. Our goal is to qualify for the S&P 500 and we need a team and an asset base. We need to enhance our asset base further. But that is our clear goal and that is where we're driving to. You might be wondering about Lexam and what was the attraction to us. As we said earlier, it's in a world-famous gold camp. It's located adjacent to some very large former and currently producing mines that have produced in excess of $50 million ounces of gold. And I just wanted to share with you for a moment, some of the historical drilling that has occurred on these properties. There are 4 properties which we acquired. And I'll just give you a drill result that caught our eyes from our -- the Davidson Tisdale property, you can look there was an intercept 197 grams over 4.6 meters; on the Fuller property, 18 grams over 8 meters; Buffalo Ankerite, 13, almost 14 grams over 9 meters; and on Paymaster, just under 19 grams over 8 meters. These are very compelling results that we're going to be following up on. We think there's good room to expand on those resources. But the drilling will tell. So -- and Lexam fits the strategy just building on the base we have to build our production and our exploration success.

I would now like to open the session to questions. Thank you, Operator.

(Operator Instructions) We have a question or comment from the line of (inaudible) Wang from Lotus.

Rob, sort of a personal question not necessarily related to Lexam. How do you determine whether to make a personal investment in this area or whether you have McEwan Mining make an investment? That's one question. Totally separate, just curious about what you think about the broad gold markets at this point?

Okay. Thank you for that question. In terms of making an investment, mines tend to be much earlier stage, much less certain than what we invest as a company. I'd say it's a conceptual stage, where you're looking for something that might appear, but it doesn't show -- doesn't provide a lot of evidence right away whereas with McEwan Mining we'll look for something that is more developed. Still we look at exploration stories but they have to show much more evidence that it could grow. In terms of gold, well when I look at the world, it -- certainly gold is not faring very well. It hasn't been faring very well for the last couple of weeks, and it's as if the world is saying, well there's no more risk out there, we've got the elections over in the EU, the economy is recovering, so there's no risk to the economy. I keep looking and thinking, are people blind? Aren't they seeing that debt levels going up? Aren't they seeing that fees are going to impair future actions by governments, corporations and citizens? But it seems -- the world seems to be oblivious to that. There doesn't seem to be any risk, there doesn't seem to be any need for oil and there's not going to be any growth because if oil is going down, copper price is going down. Perhaps we're moving into a deflationary environment and people are saying, well gold's inflationary -- good for inflationary periods but not deflationary. And I counted out by saying, gold offers one thing, one very important element that most other investments don't, and that's instant liquidity. And if you want to, you can sell your gold in 2 days, but try selling your house in 2 days and getting the money or a large block of stock. It's not going to happen. Another factor that has come in to the market and had a big impact on all of the gold stocks has been the repositioning of one of the indices of GDXJ, where about 24 junior companies, including ourselves, positions were reduced and they added some seniors. But here again, we have ETFs moving around in the market and it's a reflection of how passive investments are becoming more and more popular over actively managed accounts. But that has had a -- it certainly crushed a lot of stocks. In our case, I think the stocks -- the shares to be sold amounting to about 3 days' trading, average trading. But in some of the other stocks were as much as 10, 15, even 20 days' average trading volume. We would've thought the fall wouldn't have been evenly distributed across everybody, but it's affected the whole sector, triggered a lot of redemptions. How far down we go? I guess it depends on how confident everybody is. If the dollar is going up and the economy is improving and the Fed says the world is all right, well, I feel sorry for the people that believe them. Next question?

Our next question or comment comes from the line of Terry DeVries from -- private investor.

Rob, I apologize if you answered this question. I joined a little bit late, but what caught my attention when I looked at El Gallo ending -- the end of its life -- what did you -- have you given any production guidance for 2018, 2019? And your thoughts on how you're going to grow production in the coming years?

Yes, Terry, we have. 2018 production at El Gallo will be there. There are a couple of areas we're looking at in addition to continuing to leach. There are the tailing dumps that will -- there is good grade in there, historic grade. So we'll be reprocessing that. We have sulfide ores that we've been adding to our resources. We're looking at alternatives there for treating them. And El Gallo Silver is moving along well. And as I said, at the annual meeting, we'll be giving a more fulsome description of how we've advance that project and how we believe in the current market justifies moving that ahead so replacing that. Gold Bar, we hope to get our permits to construct and operate in the fourth quarter and that will be about 1 year to build. So we expect production to increase as we go. Next year, it will be flat and it will be a little lower and a large increase in '19.

(Operator Instructions)

Operator, I should also mention that regarding that last question, we do believe there is the opportunity to be in production in Lexam in possibly 18 months -- 24 months.

Our next or comment comes from the line of John Rast from Wheelhouse Securities.

I just had a question regarding Los Azules. What type of timetable do you think you have as to when you might know where you've advanced it towards a compelling joint venture or sale?

Excellent question, John. The price of copper we modeled at $3. And at $3, we feel we can generate the type of returns we want on an investment of after tax 20%, short payback period and a long life. Capital cost has come down considerably. But in terms of when will a joint venture or partner appear at the door or someone wanting to buy it with a check, that remains unknown. We know that we're advancing it, that we've improved our knowledge of the infrastructure required, the capital required. It's a very intriguing deposit, because it has, at least in terms of its physical layout, it has an advantage over many other projects in that is lots of flat area for process plants and tailings and airstrips and other infrastructure. It is remote, so there is larger -- maybe larger development costs for infrastructure than other projects. But it's a long-life asset of good grade. And, Xavier, would you care to add to that?

No, I think you are summarizing it. It's got a number of advantages other than its landlocked position. But having said that, it's also close to the international border between Chile and Argentina, which gives it the opportunity to have an exit for the concentrates out into the Pacific Basin. So that's a strategically located asset at the end of the day.

Okay. If I could follow up with just one more. From your understanding, do you think that the majority of this rebalancing and whatnot with the GDXJ has occurred? Or do you think there is more of that to come?

The balancing -- the GDXJ notified, the company management, notified the market well in advance of their rebalancing. I think it's prompted a lot of selling in anticipation of that rebalancing. You have to wonder -- you're welcome.

Our next question or comment comes from the line of Bill Powers.

Quick question on Lexam. As far as capital costs that you would foresee for a potential, you mentioned you have 18 months to 24 months out. I'm assuming you would be interested in open pit operation. Could you just provide a little more color as far as what your initial thoughts are as far as the path moving forward there?

Thank you, Bill. Yes, we're looking first to explore, do further exploration on the property and concurrently look at both open pit and underground opportunities. On several of the properties are existing mine shafts and ramps which would facilitate a less-expensive development. We are envisioning that we could mine on the properties, but we would have the ore processed at nearby mills so we wouldn't need that part of the mining process or the capital required for that. We would tow [to mills,] other properties. The studies are ongoing to see which is the first property we should start with, with respect to a mining operation. A large number of the permits are already in place, so it is -- they are brownfield sites and the time to get up and running is shorter.

And a follow-up on that is, do -- the properties, do you foresee them as feasible with a short payback in -- with today's gold price environment? Or do you need higher prices to kind of move forward from just explorations to potential development?

No, they're good at current prices, which is attractive, one of the attractive aspects.

Our next question or comment is a follow-up from Mr. (inaudible) Wang from Lotus.

Two issues again. First, with respect to the delay in the production in Argentina, I think you mentioned that it was due to finding a richer vein and this was typical in terms of a sort of a production or mining (inaudible). I'm wondering if you can give me a little bit more detail on that totally (inaudible)...

Xavier will speak to that point.

Yes. I mean, what happens at (inaudible) San José is that it's a mine composed of actually several veins producing at the same time and these are high-grade silver veins that have pitching and rolling and pinching and swelling depending on where you are at. It just happened to be that the stops where we mined in the latter part of the quarter got a little bit narrower and they had to throttle back from the production rate to ensure that they were not picking up a lot of dilution. It's not an unusual condition. But it is something that does affect a little bit the way that the approach is done. Because they are high grade, generally speaking, if you reduce tonnage, you have to increase the grade a little bit.

Should I infer that the vein was richer than you thought? Or is it just what happened in terms of as you went deeper?

No, I think it's just circumstantial at this point, because as it is looking right now, they're back to what they were expecting to see originally. So I think it is more of a localized thing.

Understood. Totally separate, I think you mentioned that you expected Lexam to be in production in 18 months. Do you have a similar guess, comment or estimate for Gold Bar?

Yes. We believe the construction period can take 12 months and we would start producing product, maybe not commercial production, but producing product in late in '18.

So both will be late '18 basically?

Yes.

(Operator Instructions) I'm showing no additional audio questions at this time. I would like to turn the conference back over to management for any closing remarks.

Thank you, operator. Thank you everyone for joining us. I was looking forward to better gold prices. Thank you for your support. And please remember our invitation to the Annual Meeting on May 25, love to see you there.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.