McEwen Mining (MUX-T) Shareholders Can Celebrate A Free Cash Flow Positive Quarter
I have recently written two articles on McEwen Mining the mining company where Rob McEwen is involved. In the past, I thought the company was terribly overvalued and people just paid for the name of McEwen, but after a 75% share price drop McEwen Mining is now valued $600M lower and thus the value proposition has changed dramatically.
The second quarter of this year was a good one. A really good one.McEwen has produced 17,200 ounces gold at its El Gallo mine in Mexico, but after a theft, it was only able to sell a part of the recovered gold. That's the main reason why McEwen's quarterly revenue was just $16.2M and not a bit higher. You shouldn't be surprised about the company's operating loss as McEwen Mining recorded a $28.5M impairment charge, of which $19.7M was a charge against the value of the Gold Bar project after McEwen decided to let some claims lapse. So reducing the value of Gold Bar by almost $20M doesn't mean the project is suddenly much less appealing as the impairment charge is just based on a smaller land package.
Source: financial statements
There also was an income tax recovery in the second quarter, so the net loss was reduced to $14.1M. Fortunately the impairment charge is a non-cash charge so McEwen's ability to generate a positive cash flow should not have been impaired.
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Source: financial statements
And indeed, McEwen had a positive operating cash flow of $6M, but this included a $6.6M change in McEwen's working capital position, so the adjusted operating cash flow was $12.6M which more than covered the $400,000 in capital expenditures, so its adjusted free cash flow was $12.2M in the first half of this year, a remarkable performance! Unfortunately the second half of this year will be worse, and McEwen expects the quarterly production at El Gallo to fall by 50% in the current quarter.
The balance sheet is growing stronger and the cash will be useful for the Gold Bar projectThanks to the excellent operating performance, McEwen's working capital position has increased from $15.6M as of the end of December to $27M at the end of June. This still excludes the settlement with McEwen's insurance company which covers a large part of the damage due to the gold concentrate that was stolen during an armed robbery. So I think it's safe to say the working capital position is now in excess of $30M.
Source: financial statements
That puts the company in an enviable position to continue to advance the Gold Bar project in Nevada which is located in the Cortez trend. McEwen has completed another 38 hole drill program focused on infill drilling to increase the confidence in the project's resources whilst aiming to upgrade some of the gold ounces into a higher category.
The next step at Gold Bar will be to publish an updated resource estimate (which already should reflect the upgrade of the inferred resources into the measured and indicated categories) as well as a feasibility study to determine whether or not it would make sense to build a mine in the current gold price environment. It sure looks like McEwen is trying very hard to keep the initial capital expenditures quite low to ensure a positive return on the invested capital. However, I'm not particularly overwhelmed by McEwen's plan to remove a two-stage crushing circuit from the flow sheet in favor of a run-of-mine operation. Okay, McEwen will save $10M in capital expenditures, but I'd expect the recovery rate of a run of mine operation to be 25-30% lower compared to leaching crushed ore.
Investment thesisMcEwen Mining had an excellent second quarter, but it will be very important to check up on the company after the current quarter as it looks like the free cash flow will be diminished due to a lower average grade of the ore that will be processed at El Gallo in Q3.
I'm looking forward to see the feasibility study at Gold Bar, and I hope the economics of the project will be sufficiently appealing to get the 'go ahead' nod. That being said, I'm not really sure a run-of-mine operation will be superior in the longer run. Yes, it reduces the initial capex, but you won't be able to recover as much gold compared to a two stage crush operation.
The Investment Doctor |
