We have lastly begun the Q3 Earnings Season for the Gold Miners Index (GDX), with most miners releasing their manufacturing outcomes this week. The latest miner to report its outcomes is McEwen Mining (MUX). The mid-tier producer had one other tough quarter, with quarterly gold-equivalent manufacturing of simply 30,400 ounces, down 33% year-over-year. These weak outcomes greater than overshadowed the file gold (GLD) value, as did yet one more capital elevate, which has pushed the corporate’s share rely above 405 million. Based mostly on the continued share dilution, industry-lagging margins, and the truth that McEwen Mining is among the solely gold producers on monitor to put up internet losses per share this 12 months, I proceed to see the inventory as an Keep away from.
McEwen Mining had a tough Q2 report with the Black Fox operations temporarily suspended in Canada, Gold Bar voluntarily suspended in Nevada, and the corporate’s 49% owned San Jose Mine in Argentina hit with a mandatory quarantine as properly. Nevertheless, all mines had been efficiently restarted heading into Q3, and traders had some hope that the corporate would have the ability to present a robust restoration sequentially from the 19,200 gold-equivalent ounces [GEOs] produced in Q2.
Sadly, whereas we did see an enchancment, the Q3 outcomes manufacturing outcomes weren’t something to jot down residence about. Gold-equivalent manufacturing in Q3 got here in at a dismal 30,400 ounces, a 33% decline from the year-ago interval, which has left year-to-date manufacturing at simply 84,600 ounces, 35% under the place GEO manufacturing sat on the similar time final 12 months. In the meantime, added dilution has made it even more durable to generate optimistic annual earnings per share [EPS] with yet one more capital raise this 12 months close to multi-year lows. Let’s take a more in-depth have a look at the outcomes under:
Starting with the corporate’s latest Gold Bar Mine in Nevada, we noticed quarterly manufacturing of 6,800 GEOs: an 11% enhance from the 6,100 GEOs produced in Q2. Whereas some traders is perhaps applauding these outcomes, it is necessary to notice that these outcomes are a rustic mile away from what was anticipated within the 2018 Feasibility Study, which known as for 62,800~ ounces of gold manufacturing per 12 months, or a run-rate of 15,700 GEOs per quarter. Yr-to-date, Gold Bar has produced simply 22,000 GEOs, and that is contributing to a lot greater prices relative to the projected all-in sustaining prices of $843/oz. On condition that gold gross sales are unlikely to come back in above 35,000 ounces in FY2020, I might anticipate one other 12 months of prices above $1,275/oz (FY2019 prices: $1,282/oz). Actually, I might be stunned if prices got here in under $1,650/ozin FY2020 at Gold Bar. Because of this the mine is unlikely to generate a lot free-cash-flow in any respect for its second 12 months in operation.
McEwen Mining is at present engaged on an up to date Feasibility Research and reserve estimate for the Gold Bar Mine, after an $83~ million write-down on the mine earlier this 12 months. Whereas many new gold mines have their hiccup early on, Gold Bar has taken the cake for the worst begin to a mine life in years, with prices for the primary six months of FY2020 coming in at $2,293/oz, an 86% enhance from the identical interval final 12 months when industrial manufacturing started. Because the chart above reveals, the decrease than deliberate manufacturing resulting in decrease gold gross sales is just not ideally suited, as these ensuing excessive prices have worn out the entire advantages of the upper gold value. We must always have a greater thought by year-end how Gold Bar seems with the up to date financial examine, however I might take the economics with a grain of salt till we see precise outcomes as this mine has been a headache from the beginning.
Transferring over to the corporate’s Black Fox Mine, it wasn’t a really thrilling quarter right here both, with quarterly manufacturing of simply 5,800 GEOs, down 20% from the identical interval final 12 months. Because the chart under reveals, quarterly gold manufacturing has been steadily trending decrease for 2 years now, with this being the second-worst quarter since McEwen Mining acquired the mine in late 2017 for $35 million. The corporate continues to develop underground entry to the Froome deposit, which lies lower than a kilometer west of Black Fox. The hope is to achieve the deposit by Q2 2021 and obtain industrial manufacturing by This fall 2021.
Some traders is perhaps excited by the transfer to mining the Froome deposit because it has extra constant mineralization than the present mining space, and the corporate can make the most of lower-cost bulk mining strategies to mine Froome. The grades are fairly spectacular at Froome Underground, with a measured & indicated useful resource of 181,000 ounces at 5.09 grams per tonne gold. That is solely barely under the grades at Black Fox however properly above the latest grades at Black Fox, which have continued to pattern down through the years.
If we have a look at the chart above, which reveals quarterly throughput and gold grades, we are able to see a transparent downtrend in gold grades from 6.47 grams per tonne gold in This fall 2017 to three.53 grams per tonne gold in Q1 2020. In the meantime, tonnes processed have additionally trended decrease in the identical interval, and the mine operated under steering final 12 months, with 35,700 GEOs produced, properly under the outlook of fifty,000 GEOs. Due to this fact, whereas there is no such thing as a disputing that the corporate continues to supply stable exploration outcomes from the mine, and Froome is thrilling, it is necessary to notice that grades have constantly are available in properly under the reserve grade of 5.78 grams per tonne gold over the previous 12 months. For that reason, I might not get too enthusiastic about exploration outcomes or the shift to mining at Froome till we see what precise manufacturing seems like. I say this as a result of Black Fox has seemed nice on paper for years, and on the time of the acquisition, nevertheless it’s by no means delivered. Actually, it has by no means come near producing the 62,000 ounces per year it was producing earlier than McEwen Mining acquired it. I’ve chosen to disregard the Q2 2020 outcomes when declaring the downtrend in feed grades as a result of government-mandated shutdown, which introduced a major headwind attributable to fewer tonnes mined.
It is price noting that whereas feed grades coming in considerably under the reserve grade has not helped issues, the true situation for Black Fox is prices. Black Fox’s all-in sustaining prices of $1,225/ozlast 12 months had been properly above the industry average for gold producers, and these prices are affected by the huge 8% gold stream on the undertaking held by Sandstorm Gold (SAND). This 8% stream covers the Froome Zone and the present mining space at Black Fox, so whereas grades is perhaps higher at Froome and mining is perhaps extra straight-forward, I might be stunned if prices got here in under $1,050/ozat Black Fox, even after benefiting from mining at Froome. At the moment, the stream is in place till 2090, and McEwen Mining is obligated to sell 8% of gold production on the lesser of the market value of $550 per ounce.
Lastly, on the firm’s 49% owned San Jose Mine, it wasn’t an excellent quarter both, with quarterly manufacturing of 15,900 GEOs, which is down 34% from the identical interval final 12 months. The weaker outcomes are as a result of the corporate continues to function under capability attributable to government-imposed COVID-19 journey restrictions, which has made it difficult to get personnel to the location. On condition that Argentina is now within the top-10 international locations for many instances worldwide, I would not anticipate This fall to be significantly better for the mine. This isn’t ideally suited as San Jose is the biggest contributor to McEwen’s manufacturing profile, with 53% of McEwen Mining’s consolidated GEO production coming from the mine final 12 months.
Given the weak working outcomes year-to-date, it is no shock that McEwen Mining’s earnings pattern continues to be the worst within the sector, with extra internet losses per share anticipated this 12 months. Whereas a narrowing of internet losses per share would at the least be excusable, this is not the case in any respect, as that is the fourth 12 months in a row of internet losses, they usually’ve solely widened since FY2017. Some traders will take solace in the truth that FY2021 annual EPS estimates are firmly in optimistic territory at $0.09. Nonetheless, even when the corporate stories this determine, it is buying and selling at 12x FY2021 earnings estimates. At the moment, Kirkland Lake Gold (KL) trades at 11x FY-2021 earnings with a fortress-like stability sheet, higher margins, safer jurisdictions, a bigger manufacturing profile, and an lively buyback program. Due to this fact, there are clearly significantly better alternatives on the market, even when McEwen Mining hits subsequent 12 months’s estimates.
Some traders would possibly argue that the inventory is just too low cost right here, and the upside is big given the 5-year plan that is now discovered its means within the new company presentation. This plan means that the corporate would possibly have the ability to enhance annual gold manufacturing to 300,000 ounces per 12 months by FY2023, which might be a 60% plus enhance from FY2019 ranges. Nevertheless, it is necessary to notice that the corporate is just not one to fulfill its targets, with final 12 months’s steering lacking by a depressing 21% at 174,400 GEOs vs. steering of 210,000 GEOs. Moreover, we have heard this similar plan earlier than virtually a decade in the past, and it by no means got here to fruition.
As proven under within the 2012 company presentation, the hope was to extend gold manufacturing to 290,000 ounces per 12 months by FY2015, with Gold Bar and El Gallo 2 offering the gasoline for this progress. As a substitute, the corporate went out and bought Black Fox off a near-bankrupt Primero Mining, has seen a horrid begin to industrial manufacturing at Gold Bar, and 5 years after the goal date, we’re nonetheless nowhere close to 290,000 ounces of gold manufacturing. Whereas COVID-19 has definitely not helped issues, this 12 months’s pandemic was to not blame for the previous two years of underperformance and serial share dilution, with the share rely now creeping as much as over 405 million shares as of the top of September. Due to this fact, whereas these guarantees would possibly look thrilling, I do not see any cause to place any weight into them till we see the corporate lastly begin assembly its present targets at a naked minimal.
McEwen Mining has set forth new hopes of changing into a 300,000-ounce producer by FY2023, nevertheless it’s necessary to look at historical past to evaluate whether or not the corporate is prone to obtain this purpose. To this point, the corporate’s execution has been uninspiring, and an funding in McEwen Mining is extra an funding in an explorer than a gold producer. It’s because the corporate doesn’t generate free-cash-flow, dilutes sooner than most gold juniors, and burns money at an analogous tempo. Due to this fact, for traders trying to put some cash to work within the index, I consider confirmed gold firms like Kirkland Lake Gold (KL) that frequently under-promise and over-deliver and actively cut back their share rely via buybacks are higher choices. A rising gold value ought to elevate all boats, however I might view any rallies to the $1.50 degree as alternatives to exit the inventory.
Disclosure: I’m/we’re lengthy GLD, KL. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Searching for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
Extra disclosure: Disclaimer: Taylor Dart is just not a Registered Funding Advisor or Monetary Planner. This writing is for informational functions solely. It doesn’t represent a suggestion to promote, a solicitation to purchase, or a advice relating to any securities transaction. The data contained on this writing shouldn’t be construed as monetary or funding recommendation on any subject material. Taylor Dart expressly disclaims all legal responsibility in respect to actions taken primarily based on any or the entire info on this writing.