McEwen Mining Inc
NYSE:MUX
Earnings Call Analysis
Summary
Q3-2023
McEwen Mining's share price soared by 133% since September 2022, notably outperforming market indices and its sector, underpinned by raising $400 million equity for McEwen Copper. This has increased McEwen Copper's implied value to $800 million, enhancing the parent company's stock. Gold and silver mine operations are rallying, with a production rebound at Fox and Gold Bar mines. Fox is expected to reach 45,500 ounces of gold, an 86% improvement, and Gold Bar increased daily production averaging upwards of 210 ounces. The Q3 outlook for McEwen Mining remains positive, although costs at Gold Bar and San José may exceed guidance by 10%-15%. Meanwhile, a major leach pad expansion and exploration are significant cost factors. McEwen Copper's drilling campaign will continue to be the major expense as it advances towards a feasibility study. McEwen Mining's search for M&A opportunities, targeting cash-flow-positive producers or near-production projects, suggests a proactive growth strategy aiming for acquisitions within the Americas.
You don't have any saved screeners yet
Hello, ladies and gentlemen. Welcome to McEwen Mining's Q3 2023 Operating and Financial Results Conference Call.
Present from the company today are Rob McEwen, Chairman and Chief Owner; Perry Ing, Chief Financial Officer; William Shaver, Chief Operating Officer; Michael Meding, Vice President and General Manager of McEwen Copper; Jeff Chan, Vice President, Finance; Carmen Diges, General Counsel and Secretary; Stefan Spears, Vice President Corporate Development.
[Operator Instructions]
I will now turn the call over to Mr. Rob McEwen, Chief Owner. Please go ahead, sir.
Thank you, operator.
Good morning, fellow shareholders and guests. Welcome to our Q3 2023 conference call. The individuals you all heard on the call with me will be participating in our question-and-answer period.
I'm going to start by highlighting our share performance over the past 13 months. From September 1, 2022, to present, I picked that date because that is when the market began to see the value of our strategy to finance our McEwen Copper assets separately. Since that time, our share price has increased 133% and has far outperformed the performance of the Dow Jones Industrial Average, NASDAQ, the price of gold, price of copper and the ETFs of GDX and GDXJ, representing the gold sector. I believe our superior share performance has been driven by the success we have achieved financing our subsidiary, McEwen Copper, where we have raised privately equity of close to USD 400 million during this period. Recognizing the impressive size and value of McEwen Copper's Los Azules Project are 2 global giants who have provided 3/4 of these funds. Stellantis, the world's fourth largest car manufacturer and Rio Tinto, the world's second largest mining company through its new venture arm.
With the end of winter in the Southern Hemisphere, we are back up at Los Azules and moving aggressively to complete all the activities necessary to deliver a feasibility study in the first quarter of 2025.
As a result of the latest financing, the implied value of McEwen Copper has increased to $800 million, which gives McEwen's 47.7% ownership interest a value of $382 million, which translates into a value of $7.48 per fully diluted share of McEwen Mining. I expect our investment in McEwen Mining will continue to grow in value as we advance our large Los Azules Project and the demand for copper increases.
McEwen Copper is one of our assets. The others are gold and silver mines and a portfolio of 5 royalties. I believe these assets represent considerable underlying value. The range of our estimated value per share is from $9.32 a share to $29.17 a share, and our share price is currently trading around $7.20 a share. Details of these calculations can be found on our website under our latest corporate presentation.
I believe our next performance driver will be our gold and silver mines. After enduring a very challenging 3 years, we are seeing very encouraging signs that the fortunes of these operations are finally turning around. Production is increasing at all 3 of our mines, and it appears that we could achieve the low end of the range of guidance we gave for production this year of just over 150,000 ounces of gold equivalent.
Regarding cost per ounce, we expect the Fox Mine Complex should deliver within our guidance range, while Gold Bar and San José are likely to come in 10% to 15% over the cost guidance we've given. Gold Bar had a particularly difficult 9 months. However, in this quarter, we are putting on a big push to drive up production and that would result in lower cost per ounce.
You might ask, what are these encouraging signs. At the Fox mine, annual gold production in 2020 had fallen to 24,400 ounces. Since then, it has increased steadily, and we are expecting to reach 45,500 ounces by year-end, an improvement of 86%. At the Gold Bar mine, daily gold production was a meager 50 ounces at the start of the year. But as the year progressed, the daily gold recovery increased and has averaged year-to-date 92 ounces. And in late October, it really began to accelerate and by month end, it was over 210 ounces and has continued to climb higher since then. These improvements are a very welcome change, but our share price still has a long way to climb before many of you and myself get back to our cost.
I believe the combination of the advancement of Los Azules, the improving operating performances of our mines and our continuing exploration efforts will continue to lift our share price, hopefully, to the levels we were all expecting when we invested.
Many of you have asked a very important question. When will we make a profit? I'm sorry to say I'm unable to give an exact date, but this might surprise you, it could be as early as year-end. Our Fox and San José mines are now generating positive cash flow and Gold Bar is expected to generate positive cash flow this quarter. Our expenses have been -- have been large for 2 principal reasons. One, we've been consolidating the financials of McEwen Copper and its Los Azules Project, where exploration and development expenses are high. In addition, we have invested heavily in exploration at Fox and at Gold Bar a major leach pad expansion and exploration expenses represented more than $200 an ounce just in the third quarter.
Starting this quarter, our financial statements are likely to change significantly. We expect to be no longer consolidating McEwen Copper's financials due to our ownership interest dropping below 50% as a result of the recent McEwen Copper financing. The impact will be -- will significantly lower our cash balance, our total expenses and produce a large unrealized capital gain that will be reflected in both our income statement and balance sheet.
Recently, we put out a press release that we filed a new base shelf prospectus. And we've had some calls this morning and yesterday, are we going to do an issue? I want to emphasize that this is not an offering prospectus. We, like most other companies routinely file these base prospectus just to provide updated information, put us into a position where we could react if we saw an opportunity. And it's -- we've done this in the past every few years with a similar base shelf prospectus.
I think the market right now is a very attractive market to be looking for opportunity, and we will continue to do so. The price is right. We were established to grow, but the prior year's challenges effectively put any consideration of that on hold. Today, the timing is right, and we want to be positioned to act just pensively.
Operator, I'd like to open the Q&A.
[Operator Instructions] The first question comes from the line of Heiko Ihle with H.C. Wainwright.
This is Marcus Giannini calling in for Heiko.
Happy to.
So at Gold Bar, you stated in the release that costs increased due to delays from extreme weather and labor constraints during 2023. And then you expect the average cost for the year to be 10% to 15% higher than your guidance. Given these projections, how much of these increases do you view as, say, transitory and how much of this should we model into 2024? And can you provide any color on the different factors contributing to these expected increases?
Bill, would you like to handle that?
Yes, sure. Thank you very much for the question. Yes, we expect going into 2024 that we will be at or below the guidance that we gave for this year for the following reasons.
This year, we have spent about $5 million on exploration drilling, and that will continue into next year, probably at about that same value. But this year, we also built a new leach pad, which was completed about 2 or 3 weeks ago at a cost of about $7 million. And so that has -- those 2 things have plus or minus $100 impact on our cost per ounce. So the pad is finished, it was finished basically in the scheduled amount of time and was completed on budget. And as well, if you remember, we changed contractors at the end of 2022. So the ramp up early in the year was challenging in part because of the weather and so on. But now our contractor is doing very well. Their production numbers are higher than required. And the amount of material that we're putting on to the old leach pad is now approximately 6,000 tonnes per day, and we're also putting 4,000 tonnes a day onto the new leach pad where we have permission at this point to put material on the pad, but we still don't have permission to put cyanide onto that pad. But we anticipate getting that permit this week or next week.
So -- and basically, so we see the production of gold going to increase, for sure, for the next 2 months and hopefully carry on into the new year. As Rob mentioned earlier, we're basically at something like plus 200 ounces per day right now. So we're looking for 6 -- in the range of 6,000 ounces per day -- or per month for the next couple of months. And I guess we anticipated that that would have started earlier but we started the construction on the new leach pad late because of the winter weather from last winter, and we finished it in exactly the amount of time that we said we would, but it was a month late. So rather than the gold production popping up in October, it hasn't happened until well the last couple of days of October and now November and December.
So that kind of explains what situation is going to look like going forward. Production of funds is in good shape, and so we should have a reasonable start to the year next year.
Yes. No, awesome. That was great. And then just one quick follow-up regarding Los Azules, given the $18.5 million spend this quarter. Can you maybe provide some color on where you see this figure trending over the next few quarters? Are there any additional big ticket items apart from the feasibility work and drilling?
Mike, would you like to answer that?
Yes, sure. So the majority of the costs will be mainly on drilling. We have a very comprehensive campaign. We aim to drill more than 48,000 meters. We already have 14 rigs mobilized and will scale up to more than 18. So that is the driver of investment in Los Azules.
Your next question will come from the line of Jake Sekelsky with Alliance Global Partners.
So it looks like costs at Fox were lower in the quarter as the turnaround is taking hold. I'm just curious, is this related mainly to the grade profile? Or do you think this $1,300 ounce level is something you can expect going forward?
Bill?
So yes, I mean, as you probably know, we've increased the production at the Fox Complex from something like 950 tonnes a day up to now closer to say, 1,275 and maybe even a little bit more than that. Right now, we're up closer to 1,400 tonnes a day. And I guess the -- we did have a few issues with some stope sequencing where grade wasn't quite behaving itself, not -- nothing extreme. But -- so as we expect the grade to be in the back up into the 4 gram range as we move forward here. So the production for the last quarter -- well, as we've gone through the whole year, every quarter, we improved the production. So we're -- we're in a position now where we think the production going into next year will look pretty much like the last quarter.
Okay. That's helpful. And then, Rob, you touched on the M&A landscape a bit towards the end of your remarks. Obviously, valuations have come down across the board, whereas you held up pretty well in a difficult market. I'm just curious if you expect to take a proactive approach here if the right opportunity pops up? Or do you feel that you have your plate full right now? Any thoughts there would be helpful.
I'd like to see our currency value a little better and share price before acting. But in terms of the market environment, I think it's offering terrific value particularly in the junior and in the explorer space. It's just -- we've seen these cycles before. And this just looks like we're getting ready for a big run up in the price of gold, and it's good to be looking for opportunity to get a larger math.
Makes sense, and I couldn't agree more there.
[Operator Instructions] And your next question will come from the line of Joseph Reagor with ROTH MKM.
So kind of following on what Jake just asked, should we look at it like you guys would be looking for a certain type of asset, whether it be early stage exploration that's highly promising or something that's like late stage that's in permitting. Where is your thoughts there?
Good question. Well, one, we're contemplating and looking because we feel our assets start -- they've turned around, and we have a more stable solid base to push off from I. think if one is looking, we could use more cash flow, probably a producer or someone who's, I think, more attractive space would be someone who's got a permit, so you don't have to worry about the time delays, isn't going to cost a lot of money to put into production and some good exploration potential.
Okay. Fair enough. And then...
And probably within the Americas.
Yes, fair thing to add there. And then looking at the balance sheet. So if we ex out the cash that's in McEwen Copper, you got $6 million in the start of the quarter. Do you feel comfortable with that, call it, $7 million to $8 million level of cash moving forward? Is there like a certain minimum you guys would like to maintain? Or is there room there to add, say, flow through or something like that in the future to keep advancing projects like stock?
We expect our cash balance to grow during the quarter considerably, flow-through in that. We always have exploration. That might be a consideration going forward just as a way of an inexpensive way of exploring.
Okay. And if the cash balance does grow a bit for the McEwen parent company, like is there a certain level that you'd like to maintain once you get above it going forward to just provide the proper financial flexibility quarter-to-quarter?
That would be very dependent on the market, our share price. We think it's undervalued at the moment. So not keen to release many shares into an environment like this.
Fair enough. All right. Rob, I'll turn it over.
Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research.
Congratulations on all the different progress, especially in Argentina.
Rob, how do you think Los Azules is going to transition from the equity placement stage with a consortium of shareholders and McEwen Mining running the exploration project to one of those great big company mine operators. You know how they like to get presence from their suppliers and act like they're in command. How long do you expect that McEwen will continue to run the exploration project? And when is the right time to let one of those great big beasts tell you what to do.
Good question, John. We've just raised some money, so that allows us to weather some of the turbulent markets that are around us. We'd like to get to a feasibility or close to a feasibility. We do have conversations with those big companies. When -- they certainly have the expertise to build, but we're on our way. We're trying to build a new model here for mining that could make mining more attractive to the general population and more supportive. I think I'd like to see a stronger market for copper before we get into serious discussions with the big ones. And at the same time, our next steps will be talking to some of the large providers of capital that -- so we get a sense of we'd be in a better bargaining position with the majors, knowing what the cost of capital are. So I don't have a date for you, John, but we're moving in that direction to get there.
So we're probably still running the ship for a couple more years.
Yes. Yes.
Congratulations on so much progress so quickly now.
Thanks, John. Appreciate it.
There are no further questions at this time. Mr. Rob McEwen, I will turn the call back over to you.
Thank you, operator. Thank you, fellow shareholders. Ladies and gentlemen, the best is yet to come. Thank you.
That does conclude today's meeting. We thank you all for joining. You may now disconnect.