McEwen Inc (MUX) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the McEwen Mining Third Quarter 2018 Financial and Operating Results Conference Call. (Operator Instructions) I would now like to turn the call over to Rob McEwen, Chief Owner. Sir, you may begin.

Thank you, operator. Good morning, fellow shareowners, ladies and gentlemen. I'm very pleased to welcome you to our Third Quarter Conference Call. Happy Halloween.

During the third quarter, we moved forward on a number of fronts. Exploration has been successful, increasing our resource base at Gold Bar and will lead to an extension of mine life. Gold Bar is also advancing as planned, on schedule, on budget, with production to begin in Q1 of next year. At Black Fox, exploration has not only increased the resource base of several existing deposits, it's found a number of new targets that are quite encouraging. At Los Azules, the most important development is the possibility of a new access route into the deposit, and this could provide 12-month or year-round access rather than the current 5-month access. It looks promising, and should it work, I think this will substantially increase the value of Los Azules to us. As a result of these factors and work being done at Black Fox and in Mexico, my confidence in our company's assets, management, exploration potential and my belief that we are in the early stages of the next bull market for gold equities, compelled me to increase my investment in the company by $25 million. This brings my total investment in MUX to $161 million.

I'd like to start here with this agenda. We'll start with our new President and Chief Operating Officer, Chris Stewart, addressing our operating performance and forecast for next year. Chris will be followed by our Senior Vice President of Exploration, Sylvain Guérard, who'll update you with the recent results from our exploration. And Sylvain will be followed by our CFO, Andrew Elinesky, who will cover off our financial performance for the third quarter. Chris, over to you.

Thank you, Rob. Good morning, everyone. Q3 2018 was a strong operating quarter with consolidated production of 43,700 gold equivalent ounces using a 75 to 1 gold to silver ratio. Consolidated production for the 9 months ended September 30, 2018, was 135,000 gold equivalent ounces, which is 48% higher than the comparable period in 2017.

At El Gallo mine in Mexico, residual leaching activities continued after the final ore was mined and stacked on the heap leach from El Gallo Gold. Work progressed on the Fenix project, including the start of our feasibility study in July and ongoing environmental permitting efforts. While the most recent Fenix project PEA economics were completed at $1,250 gold and $16 silver, based on current metal prices, the projects demonstrate strong economics with an NPV of $41 million and a post-tax IRR of 22%. Based on residual heap leach activity, the operating team achieved a production of 10,400 gold equivalent ounces in Q3, which brought the year-to-date production to 33,400 gold equivalent ounces. Following cessation of mining and crushing activities at El Gallo by the end of Q2, costs in Q3 were down to a total cash cost of $671, and all-in sustaining costs of $696 per gold equivalent ounce.

Q3 was strong as a result of ore stacked on the heap leach pad at the end of Q2. Residual leaching is expected to taper significantly in Q4 to be more in line with our longer-term recovery expectations. Closure, reclamation and residual heap leaching are ongoing and will continue for several years. Our Q3 work is focused on advancing the Fenix project towards a final feasibility study to be published during the first half of 2019.

During the 3 and 9 months ended September 30, 2018, we spent $1.5 million and $2.6 million, respectively, on feasibility study work, which includes reviewing mineral processing, mine sequencing, material transportation, tailing storage options and flow sheet optimization. We also progressed the permitting for Project Fenix and plan to make our formal submittal for Phase 1 in November, with approval expected in Q2 2019. Phase 1 is for the reprocessing of El Gallo gold heap leach material through a typical carbon and leach mill circuit. Phase 2 permitting, which we look to obtain in 2020, would require a further expansion to process sulfide ores for mainly El Gallo Silver. Project Fenix is expected to add another 12 years of mine life to our Mexican operations.

In Canada, at Black Fox, during Q3, underground exploration efforts focused on potential resource growth near existing infrastructure. We also commenced an exploration drift on the 810-meter level, which will allow us to drill the deep potential for the main Black Fox deposit. We've initiated cost, logistics and environmental baseline studies of Lexam's Fuller Project and we now have an updated resource estimate for the Froome deposit near the Black Fox mine and a new resource for the Stock East deposit near our mill. Together with the results announced in Q3 from the ongoing exploration program on the complex, we continue to develop expanded ore zones that can increase our mine output and gold production.

We produced 11,600 gold equivalent ounces for a total of 37,750 gold equivalent ounces produced year-to-date.

Cash costs were $932 and all-in sustaining costs $1,285 per gold equivalent ounce during the quarter, bringing year-to-date cash costs to $839 and all-in sustaining costs to $1,159. Black Fox production is in line with our full year production and cost guidance for 2018. For 2018, we forecast a total of $14.5 million for sustaining and capital expenditure activities at Black Fox mine, of which we spent $10.6 million during the 9-month period ending September 30.

We're excited about the potential of our Black Fox property and we'll closely evaluating our options with respect to bringing on additional production for one of our satellite deposits at Froome, Grey Fox and Tamarack in the next 12 to 18 months.

At the San José mine in Argentina, production is in line with our full year production and cost guidance for 2018. According to our 49% interest in the mine, our attributable production in Q3 was 21,600 gold equivalent ounces at a cash cost of $856 and an all-in sustaining cost of $1,028 per gold equivalent ounce. Our year-to-date attributable production is 64,000 gold equivalent ounces with a cash cost of $864 and all-in sustaining cost of $1,078.

At Gold Bar, construction is advancing on budget and on schedule for completion by the end of 2018, targeting production in Q1 2019. Activities at Gold Bar in Q3 focused on completion of a heap leach pad, the crushing and conveying system and advancing the gold processing facility. We expect to complete commissioning of the crushing and stocking circuit by mid-November and then we'll start loading the leach pads with ore.

Our EDR plan is expected to be completed in mid-December, after which the cyanide leaching process would commence. Mining activities are progressing well. We've pre-stripped 1 million tons of waste material at Gold Pick and Cabin Creek. We're also mining ore from Cabin Creek pit and currently have approximately 100,000 tons of ore sitting on the ground in front of our crushing plant, waiting to be placed on the heap leach pad. We also have another 97,000 tons of ore in Cabin Creek, waiting to be hauled to the crushing facility so we're in great shape with regard to having ore ready to go on the leach pads. All major equipment and bulk materials are either on-site or purchased. Engineering for the project is complete and 97% of the contracts are awarded. Exploration on the Gold Bar property restarted in November 2017 after receiving the construction permit for the mine. From the $5 million exploration budget for Nevada, we spent $1 million in Q3, adding to the $4.2 million for the 9 months ended September 30, 2018.

At Los Azules, we forecast $8.9 million in expenditures for the 2017-2018 exploration season. We spent $5.5 million during the year, with activities focused on technical site investigations, environmental baseline monitoring work in order to advance our permitting efforts. As you can see, Q3 was another quarter during which we delivered significant production and focused on the future production growth of our company. I will now turn it over to Sylvain Guérard, our Senior Vice President of Exploration, who will expand on the exploration programs for our properties.

Thank you, Chris. To better visualize the situation at our projects, I would like to refer you to localization slides available online.

On the exploration front, and starting with key highlights of Gold Bar in Nevada, we increased significantly our resources and the recent updated in-progress to extend our current mine life. In Timmins, we increased and we also added new resources and generated multiple drill intersections that will positively impact our development project and that may lead us to new discoveries. Q3 was another highly benefit and successful quarter. A total of 30,000 meter was drilled during Q3 for a year-to-date total of 110-meter -- 110,000-meter.

We are measuring our recent exploration success as follow first. We have significantly increased our mineral resource base and defined new resources at Gold Bar and at Black Fox. Our total of 241,000 ounces gold equivalent and measure indicated and 196,000 gold ounces in fair categories at an average grade -- at an average all-included cost of about $39 per ounces. Second, we generated multiple positive, including high-grade drill intersection; and third, we developed new high-quality drill target and kept reinforcing our exploration team. Starting with Nevada. One of our key objective is to extend the Gold Bar mine life. During Q3, we were pleased to announce an increase of the measured and indicated resources by 92,000 ounces and inferred resource by 82,000 ounces, representing a 13% and 68% resource increase, respectively.

The total resources on the Gold Bar property, including Gold Bar South, are now 822,000 ounces gold in the measuring indicated and 202,000 gold ounces in inferred category. An updated mineral reserve estimate is in progress and will be completed in Q1 2019, that will extend the life of mine at Gold Bar. A complete set of data, including new geophysical surveys have been assembled, contributing to the definition of multiple high quality near-mine targets. Drilling to test some of these targets started in mid-August and will continue in Q4. This new data is also providing key information in the development of conceptual targets or potentially deep and large current gold type deposit and drilling will start in 2019.

Moving now to the Timmins regions. Our Black Fox property drilling on the extension of the Froome deposit located only 800 meter west of the Black Fox mine led to an increase of 14% of the indicated resources to 181,000 ounces gold at a grade of 5.11-gram per ton. At the Stock property located about 30 kilometer northwest of Black Fox, drilling on the Stock East target led to an infer -- an initial inferred mineral resource totaling 114,000 ounces gold at an average grade of 2.51-gram per ton, including 40,000 ounces at 1.6 as open pit and 73,000 ounces at 3.9 as underground resources. This newly defined resource is located less than a kilometer from our mill and is part of a 2-kilometer priority exploration trend that holds the former Stock mine.

In 2018, Black Fox and Stock exploration programs were also very successful in generating multiple new significant results that may positively impact our development projects and lead to the discovery of new optimization. At the different fit well target, a new mineralized structure has been defined to the northeast of the Froome deposit with intersection of up to 54-gram per ton gold over 8 meter including 322-gram per ton over 1.3 meters. This new level of mineralization is considered important as it's located between the Black Fox mine and the Froome deposit, where future rent development is anticipated to access Froome.

At Grey Fox, a new mineralized structure with intersection of 13 gram per ton over 2.8 meter has been defined to the northeast of the Grey Fox zone of 147. This new target area has several overburden and would be considered as a potential site for surface access decline to reach the main Grey Fox deposit.

Finally, drilling at the Pike River target located along the Gibson-Kelore Fault is on the post Froome and Gibson deposit, return an intersection of 35 gram per ton of over 3.3-meter, highlighting the upside potential of this under explored structure. Follow-up drilling will continue into 2019 with the objective to define the extent and concentrated mineralization of the Froome pit wall, Grey Fox margins and Pike River target.

On the Black Fox mine, the deepest drill intersection yet returned 55-gram per ton gold over 1.2-meter at the 1,050-meter level on the depth extension of the mine. During Q3, we develop an exploration drift at the 810-meter level, from which we have initiated drilling to test the depth extension of the Black Fox deposit, and further drill results are expected over the coming quarter. At the Stock property, in addition to the focus on the Stock East zone where we have generated the first resource, drilling on the [blancmange] extension of the former Stock mine returned multiple positive intersection, including up to 30-gram per ton over 0.8-meter as part of the 3.8-meter sidewall grading 7 grams per ton, indicating that the mine mineral system remains open at depth. Further drilling is planned for 2019 to further assess the deep extension potential.

On the West extension of the Stock East deposit, a walled lower grade interval of 0.8-gram per ton was intersected over 35-meter core length and follow-up drilling was performed with pending assays over the sector with the objective to extend the Stock East inferred resource to the west. During Q4, our Black Fox surface drilling was focused on the Froome pit wall target. Underground drilling will focus on testing the depth extension and the far west target area. At Stock an updated inferred resource estimate for the Stock East deposit will be delivered later in the quarter. At Gold Bar, drilling continued testing priority targets, including Gold Bar South, to extend the mine life.

Finally, we are working on our program and budget planning for 2019 to build on the excellent exploration success generated this year at our Timmins and Nevada priority projects. Thank you, and over to Andrew.

Thank you, Sylvain. Good morning, everyone. Thank you for joining us today during a busy reporting period. In terms of Rob and Chris's opening remarks, the third quarter for us was one of steady production and operating cost on a consolidated basis. In addition to the stable performance, we have continued with the execution of our capital investments that the company had planned for this year, building the Gold Bar mine in Nevada, recapitalizing Black Fox mine, progressing with the Fenix project in Mexico, and of course, raising the required capital needed for achieving these goals within 2018.

Our operating performance in the quarter was in line with our expectations, both from a production and cost per ounce perspective. However, the company reported a net loss of $12.8 million or $0.04 per share, and this was greater than expected and it was due to the overall lower sales prices as well as increased foreign exchange and tax cost at the San José mine in Argentina. Our treasury balance continues to reflect the sizable investments being made across the board. And as such, you see the increase partially offset by the investments being made. Regarding our overall operating results, further to Chris's comments earlier, the company had consolidated production of just over 43,000 gold equivalent ounces for the quarter, and that brings our year-to-date production to over 135,000 gold equivalent ounces and still has us tracking above our full year guidance of 171,000 ounces. The increase in production versus the prior year is primarily the result of the addition of Black Fox and Timmins as well as a significant increase in production at our El Gallo mine in Mexico.

Our earnings for mining operations were $6.9 million or $0.02 per share in the quarter, which was 28% lower than the third quarter of 2017. This was the net result of the stronger performance in Mexico as a result of the increased production levels, while both the San José and Black Fox mines reported slight losses due to weaker sales revenues and increased costs. This made contribution from operations helped to offset the significant investments being made at Gold Bar, Los Azules and the exploration program, primarily at Black Fox. And in addition, the company finalized the previously announced $50 million term loan facility during the quarter, which should satisfy the capital needs required for our investment this year. This net result of the capital raised and investment spend meant our liquid assets increased by just under $20 million when compared to the end of the second quarter.

And to summarize the financial results for the quarter, the lower profitability of the Black Fox and San José mines in combination with the continued exploration program for the quarter, meant the company reported our net loss of $12.8 million or $0.04 per share. Moving on to the outlook for the final quarter of 2018. Firstly, with Mexico, we expect our cost to continue to decline compared to the first 3 quarters of the year. This is due to the completion of all mining, crushing and processing activities, which ended in the second quarter. And despite that no longer being in operation after June 30, we will continue to produce gold on a declining basis as residual leaching activities will occur for the next 2-plus years. This allows us to maintain and establish presence in the area, as we continue with our studies for the development of the Fenix product, which, despite the drop in metal prices, still has an IRR above our investment threshold of 20%.

Moving over to Black Fox. Production is in line with our plans, despite the lower grade in the third quarter, which we partially offset with an increase in tonnage. And we aim to keep our per ounce costs at or lower than our guidance. We also continue with the evaluation of our project opportunities in the area and plan to continue with a meaningful exploration program due to the significant success that Sylvain and his team have had so far this year. Thirdly, at San José, production levels should increase next quarter. This is in line with historical production profile that has occurred here over the last decade. And we should expect the cost at San José to stay in line with guidance on a per ounce basis due to this production increase in the quarter. However, we do likely anticipate the increased foreign exchange losses that we saw in the third quarter to continue, and there will be the additional export taxes which came into effect in September. Finally, at Gold Bar, we are still on schedule for commissioning of the mine in the fourth quarter of this year, and it is our objective to declare commercial production in the first quarter of 2019. The project is currently on schedule and on budget.

And I think it is worth highlighting 1 point that Chris mentioned earlier. With approximately 97% of the overall project cost locked in, we've removed significant portion of the project's price risk at this point. And this risk should continue to decline as we complete the remaining work in the coming months and puts us in an excellent position to meet the $81 million construction budget for the project. At this point, I'll thank you again for taking the time to join us today, and I'll turn the presentation back to Rob for his closing remarks.

Thank you very much, Andrew. I'd like to start by talking about what I call the invisible gold bull market.

And it started in January of 2016. But it appears to be invisible to almost everyone. Just look at the performance of the S&P 500 Index and the Dow Jones industrial Index since 2016 -- January of 2016. The results are quite respectable. The S&P is up better than 32%, the Dow is up even more, at better than 43%. So no, you don't have to look any further, those are good gains. On October 4, the Wall Street Journal wrote that "the pessimism for gold is near total." And I believe that view is shared by most investors.

In fact, if you were to look at the only gold stock in the S&P 500, which is Newmont, and took its market cap and compared it to the market cap of all the stocks in the S&P 500, Newmont's market cap would represent .07 of 1%, almost nothing. So the performance of gold stocks since January '16 will appear to many as unbelievable. Our share price during this period, January '16 to present, delivered a gain of greater than 3x the S&P and 2x the Dow and better than 100% gain in 22 months. I believe we are in the early stage of a new bull market in gold equities. And the performance of our shares is not unique, there are a number of gold stocks that have also done that.

In the last 3 months, there has been exploration companies. And what you're looking at is a situation, where there is very -- most of the selling has happened, there's very little volume out there. And when someone sees a story there they like and they start buying it, it's moving some stocks up very quickly. So in the last 3 months, if you want to look at the chart there are 6 companies we looked at and they increased in value between 50% and 500% in just the last 3 months. These are gold exploration stories, small companies. But they are another sign to me that we're in a bull market. Because if they had released their results 6 months earlier, it would have gone nowhere. It would have been like pushing a string. Their share price would have just sat there. But we're now in a market that is starting to pay attention to drill results. We're entering the market where profits can be made again by buying gold stocks.

I think we're well positioned to participate in this new bull market. We have growing production, exciting exploration results, one of the highest betas in the gold industry, large insider ownership, a good balance sheet, big optionality into copper. And I might say, we have a large, short position in our company, and it's probably take 25 days of the average daily trading to cover it. You might look that as a negative. But in a rising gold market, the shorts could find themselves in an uncomfortable position where they have to cover at a higher price than they sold, fueling a rapid increase. So I look at our share price and I look at in the past, there is some -- right now we have something that would be called an inverted head and shoulders pattern. It looks very positive. And that's also reinforced by my positive view on the gold market.

I'd just like to give you a little bit of history on gold equities. In the last 77 years, there have been 8 bear markets for gold shares. The last bear market that we were in ended at the end of 2015. And I can say, it was one of the longest bear markets we've endured in the last 77 years and it was the deepest. During that same period, there have been a number of bull markets, we are currently in the 7th, and the 6 -- of the 6 preceding bull markets, 4 of them had gains from bottom to top up over 600% or better. So if you use that 4 as a reference point out of the 6, you could project that -- it's on a very limited scale, we can say there's a 67% probability that you could get a 3- or 4-fold increase from where we are before this cycle ends. And to me that's worth looking at.

If the broad market is at record highs, and so there's room on the downside, and the gold market was pushed to the floor. And you could say, well, it could go lower, but I can tell you, there's not much left to go lower on, so I think the risk/reward is quite good here. And with that, I'd like to open the session for questions. We have some that were sent in. So I propose we intersperse questions that are online with questions that have been sent in. Operator, if you could ask for the first question.

(Operator Instructions) And our first question comes from Jake Sekelsky from Roth Capital Partner.

Costs at Black Fox for the quarter were mostly in line with 2018 guidance, but they did seem to tick up a bit from the previous quarter. Can you speak to the drivers behind the quarter-over-quarter increase there?

Sure, Jake. Chris, would you like to address that?

Yes, sure. Just could you clarify your question a little bit because our overall ounces mined was down slightly from Q2 and significantly from Q1 -- in Q3. So I just want to get a better understanding of your question, sorry.

I'm just trying to get a handle on cost going forward. On a cash cost basis, they did move up quarter-over-quarter, is that just a function of less ounces mined?

In Q3, the recoverable grade was down from what we anticipated. So as a result, we ended up with lower gold ounces produced. But the other thing we started do in Q3 is spend some more money on capital development. So we reactivated the ramp at the bottom of the mine to access some new levels coming into 2019 to set ourselves up for success there. I just joined the company, and that had been slowed down and that was our focus when I came on in mid-August was to start pushing that heading again so we can set ourselves up. So I think you'll see coming into Q4, costs will be similar to what they were in Q3, I would say, with respect to the cash costs.

Okay. That make sense. And then switching over to El Gallo. You've already beat 2018 guidance there. Can you just give us some color on where the residual leach activities are at right now, where we should expect that to be going into Q4 and in 2019?

Yes. Again, at El Gallo, as you mentioned, we've sort of overperformed on the recoveries. So we rejigged our recovery model for that and anticipate the overall recovery of gold to drop and be more in line with what we were projecting originally, which is sort of in the 1,000, 1,200 ounces per month type area. So we expect coming to year end, we will beat our guidance there, and then next year again, we are looking at more in the 1,000 to 1,200 ounces per month range.

Just like to read a question from [Neal Barron] he is a private investor from Virginia. And he starts off, "Rob, congratulations, thank you for another excellent quarter. Stay the course, keep the research exploration funded, keep building mines, producing gold and silver and looking for our next major acquisition." His question is about the short position. He was looking for insights into the short position, and when this might be over.

Our short position is equivalent to about 25 days of average trading volume, which is high relative to a number of companies in the industry. In looking into it, you can go out and borrow stock, and there are various rates that are applied for borrowing stock. And the last I saw was, the borrowing rate for our shares was 1.15%. So it's a low cost to borrow it. And we are in 57 ETF indices and mutual funds. And these holders often rent out or lease out their positions to people who want to short. So one way to stop that is probably to get your stock registered in your name. If we had all of our shareholders registering their stock in their name, there would be less of shares available for shorting and would probably increase -- and as a result, that would increase the cost of borrowing because some borrow rates are up around 5% or 6%. So might negate some of the benefit.

And Neal had a second question regarding the silver price being below $16 and the impact on Fenix.

And Andrew and Chris spoke about that. At the current price of silver and gold, which is below the numbers we used in our study on El Gallo, we still -- at current prices, it's generating about a 22% after-tax IRR. So we're still pushing that forward. Operator, next question, please.

Our next question comes from Heiko Ihle from H.C. Wainwright.

I spent some time on your website earlier and played around with that Black Fox virtual tour that you have on there, which is pretty cool. I think I mentioned that to you before. Can you just sort of walk -- and it's lets a -- pretty obvious question given that it's a virtual tour rather than images. Can you just sort of walk us through which parts have not arrived at the site yet? I mean, earlier on this call, someone mentioned that the ADR plant was getting completed in mid-December. I assume that the pricing is definitely done but I mean, what about deliveries, are they locked, is everything on-site, are there any potential bottlenecks that we may not know about yet?

Heiko, that would be our Gold Bar property rather than Black Fox.

I'm sorry, of course.

It's all right. And with respect to your construction, I'll turn it over to Chris, let him cover out that.

With respect to Gold Bar, we're in very good shape. All the critical items are on site. So there's no -- as far as the risk goes to complete and are we waiting for any materials to show up or anything like that, that's all looked after, and we're in very good shape and we're very confident that we're going to be on track to again start loading the leach pads sort of mid-November and have the ADR completed. The last items that were of concern were the MCCs for all the electrical and that was on site about a week late, but we've essentially caught up on the schedule on that so we're in good shape, the liquid natural gas plants for electrical power have all been commissioned, that's up and running now. We've got power across the site. So we're in very good shape with respect to the construction, and very confident we can deliver on time and on budget.

Great. You mentioned $4.2 million in exploration at that site for 2018 year-to-date. Any -- I know it's early, but any idea what we should expect to see for 2019?

In terms of our budget?

Correct.

We're looking around $5 million on Gold Bar.

Just to add on this, it's Sylvain speaking. Regarding our plan for next year, where we have developed a lot of quality target just around the mine site there, that we are currently drilling and will extend to 2019. And we also have very interesting target to develop deeper for large potential Carlin mineralization, that we are planning to add then also next year.

Our next question that was -- came in by e-mail was from [Steve Ellis], an investor, says, "I hope all is good with you. After 10 -- after additional 10 months of stock price, I was wondering if the company has any idea when they will turn profitable, even assuming the price of gold and silver stay where they are.

So we are investing heavily in growth in exploration and building roads, hopefully losses are less, and building the value. In terms of turning profitable, if gold and silver stay where they are today, it's unlikely we will turn a profit next year. But our objective is to be profitable and we will see the -- we're hopeful that our investments that we're making and the expenses we're incurring will generate assets that produce a healthy profit margin in the future. Next question, operator.

And our next question comes from Mike Kozak from Cantor Fitzgerald.

Few quick questions for me. First, just to go back to Black Fox. In Q3, the grades to the mill averaged 4.8 grams per ton. I think you mentioned that it's a little bit lower than expected. Is that just kind of slightly negative grade reconciliation or more dilution, can you just elaborate on that a little bit?

Yes. In Q3, we did incur more dilution than we had anticipated at some of our stopes. So we've actually -- we're spending time right now, redesigning the stopes and especially the hanging wall with respect to ground support work requirements. So we're taking steps to mitigate that. But certainly, if you look at the, overall we overproduced on tons but underperformed on grade and it's really a dilution.

Got you. And then just following up on that, I mean, that grade, I mean, it's down for 4 quarters in a row from when you guys bought it. I'm just wondering what -- when -- what's that grade going to stabilize at, or what kind of average grades are you guys looking at for next year at Black Fox?

We're still working on that process right now. So I can't give you a firm answer on that. But I think you can anticipate, seeing better grades next year than what we've seen this year. And that's our focus, is on controlling dilution, reducing dilution within the stopes and looking at how we handle the ore as well through the entire process to get it over to the mills, so.

Got you. Again, at Black Fox, just when I back calculate your unit cost per ton in Q3, I get $129 per ton, so that's mined, milled, G&A, everything on the operating front. That's down, I think, over 30% from last quarter and over, I think, 15% from Q1. So that's very good. I'm wondering is that sustainable, is this a function of some of those cost reduction initiatives that you talked about at your Investor Day, what number should we look at on a per ton basis going forward at Black Fox?

Yes. Again, we're just working through the plans for next year and what our budget will look like. I think certainly some of the cost-saving initiatives, especially the global adjustment work that the team has been doing there is certainly going to pay dividends next year, and that will be reflected in the cost per ton. The reason the cost per ton declined a fair bit in Q3 again was a result of handling all the tons that we have. But we do have excess capacity and we're again looking to match what we have with respect to manpower and equipment usage to match the production and that should in fact move our cost per ton down from where it's been in the past. But I would say, if you're in the $120, $130 range, it's probably a good sort of thumb suck for now for next year.

Okay. That's great because I mean last quarter, I think, costs were up at $180 a ton, so that's good to see them come down.

And then just my last question and I'll hop off. I think you mentioned, although you went through it pretty quick, that you have 100,000 tons of ore that was mined and crushed, that's sitting there in front of the leach pad, waiting to get stacked. If that number is right, what -- if you can say what is the grade -- what's the grade of that 100,000 tons and how did it reconcile relative to your reserve model?

Yes. We actually -- we've 100,000 tons of ore, it's not crushed, it's sitting in front of the crusher. We haven't fired up that part of the entire crushing and stacking circuit. So it's sitting there, basically run of mine ore. As far as reconciling with our model, we actually have a positive reconciliation on tons. We expected to get 67,000 tons. We've got 100,000 tons of ore. And with respect to the grade, we planned on a 0.014 ounce per ton for that ore and those benches, and we see 0. -- or sorry, 0.015, so actually slightly better than what was planned.

The next question is from [Alan Stevens], a long-term shareholder. He said we're doing a great job, especially with respect to management compensation, aligning interests with shareholders, a breath of fresh air. He was wondering about Los Azules, any possibly joint venture news there. And what about permitting PEAs in the next 6 months. So -- and the likelihood of a deal being struck, provided copper prices remain around $3.

We are going to be submitting in the first half of next year a permit application to develop the project. Right now we're doing reconnaissance on the access route into Los Azules, which, as I said earlier, would give us -- if it works, it would give us 12-month access below the snow line and would provide a very good route for bringing power into the site and would alter, in my mind, the value of the property pretty significantly. Given the capital cost, we are looking for a joint venture partner. We have had some discussions. A lot of the people -- the ones we had in had a lot of conditional statements attached to them and weren't attractive. But with copper up around $3, this is an attractive price and with the road we'll be able to put -- I was just thinking about something else, someone asked about running their 4x4 up the road, when it's ready, but -- sorry about that, Alan. We'll hear news from Los Azules over the next 6 months on the road and the permit application. Operator, next question, please.

And our next question comes from Bhakti Pavani from Alliance Global.

Just a quick question on Black Fox. Given that there is still potential below the mine, just kind of wondering at this point, with the exploration work that you have done, especially at the Black Fox main site, do you see any potential of extending the mine life of the Black Fox deposit itself over next 2 to 3 years or do you think you're going to have to bring in Froome in the next 12 months?

Yes. With respect to Black Fox, personally, I'm quite bullish on the operation. I think there's significant potential to see growth. If you look at all the deposits through the area in northern Ontario, they typically are down 2,000 meters below surface. We're only scratching the surface down to sort of 800 meters now and with the latest pull that Sylvain drilled down to 1,050 meters, we got a decent good grade gold intercept there. So I think there's significant potential at depth and also a long strike as well. We're finding some new areas with the exploration drilling that are quite interesting and close to our existing working. So that could move into the mine plan fairly quickly as we continue to drill that, moving into 2019. Overall, when you look at the -- the overall idea in my mind with respect to what we have in Timmins there, we got Black Fox mill, that's capable of 24,000 tons per day. And if you run 5-gram material through that, 5.5-gram material, you should be able to generate 140,000 ounces roughly per year. So our goal is to expand the life at Black Fox, have it continue to operate, and then in conjunction with that, bring in some of the satellite deposits, so we can actually start to bump up the overall production at the mill, right, so start to, essentially try and fill our mill over time. So it's going to take some time to do that, but that's sort of what our vision is for what we want to do there in the Timmins camp.

Maybe I can add a bit on this. Sylvain speaking. What we see there at Black Fox or in Timmins, the Black Fox is complex, it's a complete pipeline, where you have the mine and we are working to extend the life of mine with the underground exploration drilling there, and we have some success that we are advancing with. And going on with the development in projects and the pipeline point of view, we have, as you know, the Froome, that is sitting there, all ounces in the ground drill at 12.5-meter spacing and also Grey Fox in the southeast property area. Our exploration is adding mineralization drills to those 2 deposits in the Froome front wall hopefully that will contribute to make Froome even more attractive and economic. And at Grey Fox, we have the northeast zone, that is recently defined and could provide access to the Grey Fox main deposit. And we have a bunch of new early-stage exploration intersection that could lead us to new discoveries. I am just talking here of Black Fox's property. Not now, next year, our mill, as you know, we have Stock. Stock is a new play, it's been active for 20 years, no drilling on the Stock East, where we have generated our first resource. And this sits on a very attractive geological, sitting on a big structure, that's at the South Porcupine, right geology, right alteration and call out of gold over a 2-kilometer strike line, that we will be extending next year and drilling over a 3-kilometer strike line at Stock. So together, it's a pretty good story, and of course, we are working hard to extend life of mine at Black Fox.

Perfect. Just to follow up. If I have to model production for the Black Fox going forward, would it be fair to say that the production would remain consistent at the 2018 levels going into 2019? But -- and should I model an increase in production from 2020, assuming that Froome will come online, is it fair to say that?

I'd say '19, you're safe. Froome, we're doing the studies, the economics. We think we're going to be right now preparing a portal to go in. But I'd like to be a little more confident that we've driven over there and are ready for production before saying in 2020, we'll have Froome added to our production. But we'll know in the first half of this year -- next year about Froome.

Okay, perfect. Switching to El Gallo, I know third quarter was a quite a surprise when it comes to production numbers. So -- and the production was expected to taper off in fourth quarter, but just kind of wondering between now and when Fenix comes online, do you think the residual leaching activities would help you sustain during that time until Fenix comes online? And at this point, what is the expected time line for Project Fenix?

Yes. Also, the residual leaching will certainly help us maintain our operations and continue to do work on-site. We have incurred manpower layoffs as such given that the mining work has stopped, and once again, we're just residual leaching now, but we're moving full steam ahead on the feasibility study. And again, it's planned to be completed mid-next year, and then depending upon the outcome of that, a decision would be made to move that into construction. So we still have a bunch of work to do around that to sort of make that decision. But certainly based on -- if you run through the PDA numbers right now, with current metal prices, it does look like it's still quite attractive. But as you know, when you get to the feasibility level, you're digging a bit further into the cost and becoming a lot more accurate around that, so we'll have to see what the results there. But if it's positive, which we expect it will be, we can move into production. And we probably got a year's worth of work to get that up and running, and during that time, will still be residual leaching. We expect the residual leaching to last another sort of 3 to 4 years. And Phase 1 is actually reprocessing all that material on the leach pad and running it through a CIL mill to reprocess that. So we'll pick up whatever gold we haven't in the residual leaching by doing that.

Got it. And lastly, just to get a hand on the exploration spend across all your properties, what's kind of the expected exploration spend that we should be modeling in fourth quarter?

In the fourth quarter of this year?

Yes.

We're spending about $1.2 million in Nevada and we are spending just under $1 million at Black Fox. So the fourth quarter is a bit lighter than the first 3 quarters of this year. Black Fox was the significant program from the flow-through funds, which we completed before the end of September. So we're down to 1 surface rig right now at Black Fox; and Gold Bar, we're getting some work done. But we'll see an increase in activity next year for Gold Bar. And the Black Fox project in Timmins region, we'll still see a sizable investment, but it won't be the same as what we invested this year.

And lastly, Los Azules?

Los Azules for this year, so the season is just kicking off. We're waiting to get -- we're waiting for the snow melt to cooperate to get site access, so we can continue on gathering data for our permit application. So we have about $2.5 million budgeted for this quarter, but that's going to be dependent on the access and how quickly we get there to spend the funds. But we're looking at about -- for the '18, '19 season, we're looking between $7 million to $9 million depending on the work we can get done on the road access.

I just wanted to build on Alan Steven's comments about management compensation. And the Paulson fund management company a year ago delivered a blistering attack on the mining industry and focusing in on performance and compensation. We just built on that. But the 15 largest gold producers in the industry, the CEO compensation between 2010 and 2017, or over those 7 years, the total of the 15 amounted to $695 million, which is outrageous given the performance they had. Out of the 15, 13 of them delivered performance that ranged from -- their shares down 21% to 94%. In that same period, we were down 2%; and I received over that 7 years, $3 in pay. I do think the industry has to realign its compensation to reflect the performance and deliver more to the shareowners before. Shareowners are only too happy to share it when it's going up and improving but I think compensation is one of those big hot topics in the industry and that goes along with share ownership. Most of the people who got those large compensation packages had very little ownership in their companies. Any other questions online? Any other questions, operator?

And our next question comes from [Robert Silvera from R E Silvera Associates].

We've been shareholders for before your name was changed, long time. And our perspective has always been long term. Gold is your principal with silver, et cetera? It's getting harder and harder to find significant sources, so to speak, locations for gold especially and silver. What is your strategy for long term? Because we tend to be very long-term holders. We want to stay with the company, stay solid, love your management, love your approach, et cetera, your history, and that's why I've stayed with you for so many years. But it's getting harder and harder to find gold, harder and harder to find these deposits. Do you have any vision for going into -- because we know mining, things like the platinum groups and -- or lithium, for instance, which has a future in batteries, et cetera. To branch out into those areas, so that we have a very long-term future for the company?

I moved -- jumped from the investment industry into the mining industry many years ago. And it was a belief that -- I saw a number of prospectors that showed me property packages and they showed me that they kept discovering new deposits. My own history with Goldcorp, we took a mine that had been starved of capital for 15 years, was high. It had a short life, or thought to have a short life of 3 years, that had very difficult labor.

I know.

And at the bottom, a mile below the surface, we found what became one of the richest gold mines in the world. It defied a lot of the geological thinking at the time. There are deposits still being found, and I think maybe they're not on surfaces easily found as they were before. Some are found right in the shadow of the head frame of an existing mine. And there are other new settings. So I do believe you're going to see more. Barrick Gold would be a case, although that was 20, 30 years ago. They bought right between Homestake and Newmont in the Carlin trend for $60 million, bought something that ultimately produced 40 million ounces of gold. They are still finding deposits just north of our Gold Bar deposit up at Cortez Hills. Recently, Barrick announced a big discovery, their 4-mile discovery and it was right near Cortez Hills. They're picking them up in Africa, the Fosterville in Australia was a very difficult mine and they've encountered some high-grade at depth. We haven't gone -- we have gone deep in South Africa, much deeper than anywhere else in the world with their gold mines. Down a 1.5 kilometers, 2 kilometers. And you're down in Timmins, you're in Red Lake, Kirkland Lake, our mines. I think our properties could yield additional discoveries just at depth. We have some good real estate. If you were to take a look at our copper project and if you were to take the liberty of taking our inferred resources, both categories of resources, which you're not supposed to do, but that would be about 30 billion pounds of copper. If you put that into a gold equivalent, it's more than 70 million gold equivalent ounces based on our PEA of $1.14 a pound production cost. That will be equivalent to about $500 an ounce production cost, and it's modeled to have a 36-year life.

So you do see a long, long-term horizon insofar as being able to successfully mine gold and silver?

Yes.

What I read so many times is that these are being so hard to find. By the way, I've owned Goldcorp also since the days you were there at Goldcorp So I've been with you for a long, long time. And when you left Goldcorp and formed McEwen, I've stayed with you and very pleased with what you've done. But I wonder -- are you willing to look at and branch out to, for instance, the platinum groups because we need platinum, and we need palladium catalysts, all that stuff.

Yes. Part of my trust is in gold and gold is money and it's a monetary asset, not an industrial asset as much. But when I was running Goldcorp, we did have some industrial mineral operations that provided steady, long-term cash flow, and I'm not adverse (sic) [averse] to that type of investment.

I'm just trying to get a perspective because as I said we're a very long-term holders, and believe in the management pretty strongly.

I appreciate all that, Robert.

Hopefully, the price of gold will get real one of these days.

We have a moment, Sylvain, he's our head of exploration, just wanted to make a comment.

It's actually a very good question you're asking there. I like to have a bit of our view on exploration potential, how can we increase our chances of probability to be successful with our exploration program. One of the key point is that, we try to focus our exploration effort in the right regions, on the right projects, but in the right regions. And we are currently investing and focusing exploration in highly unknown regions. I'm talking here of regions that host hundreds of million ounces of gold. They are not small regions, they are not small deposit. And those deposits, those 100 million ounces of gold sit along very undefined structure, and yet to me those are the breaks, the Destor-Porcupine where Black Fox is located. And in Nevada, the trend that all the large Carlin gold system, including the Barrick Newmont deposit. So this is where we are and this is where we believe we have a lot better chance to be successful. And this is where discovery keep happening until now. Even if those can sometime have 100 years of mining and exploration, there still new discovery happening. So the maturity level is still relatively low because success keep happening there. So we have strategic position. And if you look at local scale, and Rob mentioned that, and as you know Gold Bar located right along the Cortez trend, right on the southeast of the Barrick large cluster of deposit and we have the right geology, the same geology, same type of mineralization, same type of deposit. And the other important thing about Timmins, Black Fox and Gold Bar, we are just starting a year ago exploration on those properties. So we acquired Primero in Q4 2017. And for Gold Bar, the project was in excess of 5 years and we are just restarted again in Q4 of last year. So it's a year of exploration. And what we have generated as new reserves, new exploration, drill intersections and development of new targets is extremely positive and give us all the confidence that we are at the right places to keep delivering good results there. And finally those good regions are -- you know Ontario and Nevada are some of the best mining jurisdictions in the world when it comes to investment and stability and very low political risk and security risk. So all this to say that we try to focus our efforts, where there's a lot of gold, where there's large deposit on the right property, along the right structure at our scale, and based on what we see with good encouragement, we keep advancing with strategic and exploration investment.

One thing from a political standpoint since you brought that up, and I do love the fact that you're in relatively stable places, how do you view Argentina and where we are as far as future goes, they keep throwing taxes around in their monetary situation, et cetera, how do you view that area?

It's a good question. It doesn't have a long history of mining. But it does have a long history of populist governments, bouts of inflation. And so we're watching it. They say that the, the tax they have reimposed on exports will be there until 2020. And I think right now they're desperate for foreign exchange and the exports seem to be the only additional source they could access. But if they want to attract any foreign -- large foreign investment, they're going to have to deal with that. So I would expect by the time we start thinking about developing Los Azules we'll be okay. It does have an adverse impact on our San José revenue, but.

Do you find when you're working with the people down there, a cooperative spirit in Argentina?

Generally, yes. Okay, there are no further questions online. Operator, are there any further questions?

We have one last question, it's from [Bill Powers], a private investor.

A couple of quick questions. 1, I guess, what is your projected cash flow? I know -- I believe I saw once for Gold Bar in the first year, it was projected at around $35 million and I was wondering if that is still holding true as far as the way you're seeing next year unfolding?

The cash flows as we've revised the mine plans, particularly recently we were seeing kind of the cash flows tapering off in '21 and '22 -- 2021 and 2022, so the guys have been going back to look at those cash flows for Gold Bar, and effectively we're trying to smooth that out so we get some stable performance there. So next year, some of that has come out of next year. We are looking at over $20 million in terms of cash flow for the mine site next year, assuming $12.50 gold. And then effectively seeing comparable, similar levels for the following 4 years after that. It's not as high as maybe it was in the feasibility study, but the feasibility study was significantly, it had a bit of a gap in 2022 in particular, which we've been looking to address with revised mine plans as well as minimizing the upfront OpEx that we plan to incur just to get going on the mine too.

Okay. I just have one more question regarding a slide you guys have out on your website regarding -- the sulfide mineralization that's from the Cabin Creek area. You guys have a couple of nice picture or a nice picture of some core samples, says it's from the Cabin Creek area. I guess, this goes back to your -- a little -- connects to your drilling, which you plan to do into the deeper sulfides next year. Could you just tell me a little bit about where this came from and kind of -- I guess, is this historic drilling that you were able to -- the core sample you were able to achieve -- or receive from previous drilling or -- and I guess, how is this connected to what you're planning to do going forward?

Yes. That's a good question. As you know, what we have at the Gold Bar, it's a heap leach outside open pit, but we know that there is a component of this system that will be hosted in the sulfide. And historically some exploration holes like the 1 that you see there on the photo, this is typical Carlin-type system into sulfide and it's high-grade. So for us, it's a very good indication that this style of mineralization exists at Gold Bar. And this one, it is lateralized to Cabin Creek, historical drill core that you're seeing there. But we work with former Barrick geologists, and actually our Exploration Manager in Nevada is a former Barrick geologist, that work at Gold Strike. When those people look at this core, they tell us this is exactly what we see at Cortez. This is what we see at other large Carlin gold system. So what we have there at Gold Bar is the -- it's along the trend and the project -- or the property scale has all the right ingredients for hosting a larger and hopefully higher grade sulfide deposit. And all the past explorations stop at the limit of the pit, that or when it starts to hit sulfides. But we know that mineralization is open into sulfides along the right stratigraphic horizon, and we are also developing the deeper target which thin beneath a unit called the Lone Mountain and this lower stratigraphy that could host this type of larger sulfide deposit like the other large one in Nevada remain basically untested on our Gold Bar property. And next year we are planning 5 major geophysical surveys and are defining targets to start drilling for such deep deposits. So we have the near mine extension of mineralization that is a bit more shallow exploration in parallel, with that, we want to initiate the deeper exploration. We believe, as I said, we have all the right ingredients to grow this Gold Bar deposit there.

Operator, any further questions?

I have no further questions over the phone line.

All right. Thank you very much one and all for joining us today. Best wishes for a successful investing.

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