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Form 10-Q McEwen Mining Inc. For: Mar 31

May 10, 2022 5:07 PM EDT

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to

Commission File Number: 001-33190

MCEWEN MINING INC.

(Exact name of registrant as specified in its charter)

Colorado

84-0796160

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

150 King Street West, Suite 2800, Toronto, Ontario Canada M5H 1J9

(Address of principal executive offices) (ZIP code)

(866) 441-0690

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, no par value

MUX

New York Stock Exchange (“NYSE”)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 474,275,626 shares outstanding as of May 10, 2022.

MCEWEN MINING INC.

FORM 10-Q

Index

Part I        FINANCIAL INFORMATION

Item 1.

    

Financial Statements

   

3

Consolidated Statements of Operations and Comprehensive Loss for the three months ended  March 31, 2022 and 2021 (unaudited)

3

Consolidated Balance Sheets at March 31, 2022 and December 31, 2021 (unaudited)

4

Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2022 and 2021 (unaudited)

5

Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited)

6

Notes to Consolidated Financial Statements (unaudited)

7

Item 1A.

Risk Factors

19

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

43

Item 4.

Controls and Procedures

45

Part II        OTHER INFORMATION

Item 4.

Mine Safety Disclosures

46

Item 6.

Exhibits

47

SIGNATURES

48

2

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

(in thousands of U.S. dollars, except per share)

Three months ended March 31,

2022

    

2021

    

 

Revenue from gold and silver sales

$

25,542

$

23,740

Production costs applicable to sales

 

(27,824)

 

(23,589)

Depreciation and depletion

(3,712)

(5,137)

Gross loss

(5,994)

(4,986)

OTHER OPERATING EXPENSES:

Advanced projects

 

(11,135)

 

(1,799)

Exploration

 

(3,210)

 

(4,956)

General and administrative

 

(1,981)

 

(2,083)

Loss from investment in Minera Santa Cruz S.A. (Note 9)

 

(1,120)

 

(574)

Depreciation

 

(142)

 

(75)

Reclamation and Remediation (Note 11)

 

(527)

 

(911)

 

(18,115)

 

(10,398)

Operating loss

 

(24,109)

 

(15,384)

OTHER INCOME (EXPENSE):

Interest and other finance expenses, net

 

(1,640)

 

(509)

Other income (Note 4)

3,871

 

1,412

Total other income

 

2,231

 

903

Loss before income and mining taxes

(21,878)

(14,481)

Income and mining tax recovery

814

2,015

Net loss after income and mining taxes

(21,064)

(12,466)

Net loss attributable to non-controlling interests (Note 18)

1,737

Net loss and comprehensive loss attributable to McEwen shareholders

$

(19,327)

$

(12,466)

Net loss per share (Note 13):

Basic and Diluted

$

(0.04)

$

(0.03)

Weighted average common shares outstanding (thousands) (Note 13):

Basic and Diluted

 

464,021

 

441,794

The accompanying notes are an integral part of these consolidated financial statements.

3

MCEWEN MINING INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands of U.S. dollars)

March 31,

December 31,

    

2022

    

2021

 

ASSETS

Current assets:

Cash and cash equivalents (Note 17)

$

63,783

$

54,287

Restricted cash (Note 17)

2,850

2,550

Investments (Note 5)

 

2,424

 

1,806

Receivables, prepaids and other assets (Note 6)

 

9,945

 

10,591

Inventories (Note 7)

 

16,293

 

15,792

Total current assets

 

95,295

 

85,026

Mineral property interests and plant and equipment, net (Note 8)

 

343,034

 

342,303

Investment in Minera Santa Cruz S.A. (Note 9)

 

89,841

 

90,961

Inventories (Note 7)

3,186

2,543

Restricted cash (Note 17)

3,797

3,797

Other assets

 

620

 

711

TOTAL ASSETS

$

535,773

$

525,341

LIABILITIES & SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued liabilities

$

42,435

$

39,615

Flow-through share premium (Note 12)

4,804

1,572

Lease liabilities

2,484

2,901

Reclamation and remediation liabilities (Note 11)

 

6,532

 

5,761

Other liabilities

2,850

2,550

Total current liabilities

 

59,105

 

52,399

Lease liabilities

1,267

1,515

Debt (Note 10)

63,553

48,866

Reclamation and remediation liabilities (Note 11)

 

29,559

 

29,691

Other liabilities

2,909

2,929

Total liabilities

$

156,393

$

135,400

Shareholders’ equity:

Common shares: 473,688 as of March 31, 2022 and 459,188 as of December 31, 2021 issued and outstanding (in thousands) (Note 12)

$

1,626,099

$

1,615,596

Non-controlling interests (Note 18)

13,040

14,777

Accumulated deficit

 

(1,259,759)

 

(1,240,432)

Total shareholders’ equity

 

379,380

 

389,941

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

$

535,773

$

525,341

The accompanying notes are an integral part of these consolidated financial statements.

Commitments and contingencies: Note 16

4

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands of U.S. dollars and shares)

Common Stock

 

and Additional

 

Paid-in Capital

Accumulated

Non-controlling

 

    

Shares

    

Amount

Deficit

Interests

Total

 

Balance, December 31, 2020

 

416,587

$

1,548,876

$

(1,183,548)

$

$

365,328

Stock-based compensation

 

227

 

 

227

Sale of flow-through common stock

12,601

10,785

10,785

Sale of shares for cash

30,000

29,875

29,875

Net loss

(12,466)

(12,466)

Balance, March 31, 2021

 

459,188

$

1,589,763

$

(1,196,014)

$

$

393,749

Balance, December 31, 2021

459,188

$

1,615,596

$

(1,240,432)

$

14,777

$

389,941

Stock-based compensation

 

183

183

Sale of flow-through common shares

14,500

10,320

10,320

Net loss

 

(19,327)

(1,737)

(21,064)

Balance, March 31, 2022

 

473,688

$

1,626,099

$

(1,259,759)

$

13,040

$

379,380

The accompanying notes are an integral part of these consolidated financial statements.

5

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands of U.S. dollars)

Three months ended March 31,

2022

    

2021

Cash flows from operating activities:

Net loss

$

(21,064)

$

(12,466)

Adjustments to reconcile net loss from operating activities:

0

Loss from investment in Minera Santa Cruz S.A., net of amortization (Note 9)

 

1,120

 

574

Depreciation and amortization

 

3,606

 

4,662

Gain on investments (Note 5)

(618)

Unrealized foreign exchange loss and adjustment to estimate (Note 11)

 

195

 

152

Income and mining tax (recovery)

 

(814)

 

(2,015)

Stock-based compensation

 

183

 

227

Reclamation and remediation (Note 11)

527

911

Increase in other assets related to operations

 

(763)

 

(1,562)

(Decrease) in liabilities related to operations

2,008

(626)

Cash used in operating activities

$

(15,620)

$

(10,143)

Cash flows from investing activities:

Net additions to mineral property interests and plant and equipment

$

(4,045)

$

(10,085)

Dividends received from Minera Santa Cruz S.A. (Note 9)

 

 

4,984

Cash used in investing activities

$

(4,045)

$

(5,101)

Cash flows from financing activities:

Proceeds from sale of shares, net of issuance costs (Note 12)

$

$

29,875

Sale of flow-through common shares, net of issuance costs (Note 12)

14,376

11,966

Proceeds from promissory note (Note 10 and Note 14)

15,000

Subscription proceeds received in advance

300

Payment of finance lease obligations

(215)

(8)

Cash provided by financing activities

$

29,461

$

41,833

Increase in cash, cash equivalents and restricted cash

 

9,796

 

26,589

Cash, cash equivalents and restricted cash, beginning of period

 

60,634

 

24,438

Cash, cash equivalents and restricted cash, end of period (Note 17)

$

70,430

$

51,027

Supplemental disclosure of cash flow information:

Cash received (paid) during period for:

Interest paid

$

(1,202)

$

(1,215)

Interest received

6

7

The accompanying notes are an integral part of these consolidated financial statements.

6

NOTE 1 NATURE OF OPERATIONS AND BASIS OF PRESENTATION

McEwen Mining Inc. (the “Company”) was organized under the laws of the State of Colorado on July 24, 1979. The Company is engaged in the exploration, development, production and sale of gold and silver and exploration and development of copper.

The Company operates in the United States, Canada, Mexico and Argentina.  The Company owns a 100% interest in the Gold Bar gold mine in Nevada, the Black Fox gold mine in Ontario, Canada, the El Gallo gold project and the Fenix silver-gold project in Sinaloa, Mexico and a portfolio of exploration properties in Nevada, Canada, Mexico and Argentina. As of March 31, 2022, the Company owns an 82% interest in the Los Azules copper deposit in San Juan, Argentina through its 100% owned subsidiary, Minera Andes Inc. It also owns a 49% interest in Minera Santa Cruz S.A. (“MSC”), owner of the producing San José silver-gold mine in Santa Cruz, Argentina, which is operated by the joint venture majority owner Hochschild Mining plc.

The interim consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are unaudited. While information and note disclosures normally included in financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations, the Company believes that the information and disclosures included are adequate and not misleading.

In management’s opinion, the unaudited Consolidated Statements of Operations and Comprehensive Loss (“Statement of Operations”) for the three months ended March 31, 2022 and 2021, the unaudited Consolidated Balance Sheet as at March 31, 2022 and audited Consolidated Balance Sheet as at December 31, 2021, the unaudited Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March, 2022 and 2021, and the unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021, contained herein, reflect all adjustments, consisting solely of normal recurring items, which are necessary for the fair presentation of the Company’s financial position, results of operations and cash flows on a basis consistent with that of the Company’s prior audited consolidated financial statements. However, the results of operations for the interim periods may not be indicative of results to be expected for the full fiscal year. Therefore, these financial statements should be read in conjunction with the audited financial statements and notes thereto and the summary of significant accounting policies included in the Company’s annual report on Form 10-K for the year ended December 31, 2021. Except as noted below, there have been no material changes in the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s Form 10-K for the year ended December 31, 2021. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated. Investments over which the Company exerts significant influence but does not control through majority ownership are accounted for using the equity method.

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

Risks and Uncertainties

COVID-19

The Company continues to closely monitor and respond, as possible, to the ongoing COVID-19 pandemic. As the global situation continues to change rapidly, ensuring the health and safety of the Company’s employees and contractors is one of the Company’s top priorities. Many jurisdictions including the United States, Canada, Mexico, and Argentina have varied but continued restrictions to travel, public gatherings, and certain business operations. Unlike the year 2020, there were no mandated suspensions for the Company’s operations during 2021 or during the three months ended March 31, 2022 (although, as described in this report Covid-19 impacted the Company’s operations and results for the quarter). In addition, vaccination rates in countries where the Company operates continue to increase.

7

The Company’s results of operations, financial position, and cash flows were adversely affected during the three months ended March 31, 2022 and 2021 due to COVID-19. The continuing impact of the COVID-19 pandemic on the Company’s results of operations, financial position and cash flows will depend on future developments, including the duration and spread of the outbreak, variants of the COVID-19 virus, the availability, ongoing effectiveness, development and distribution and effectiveness of vaccinations and treatments and on government advisories, restrictions, and financial assistance offered. To ensure a safe working environment for the Company’s employees and contractors and to prevent the spread of COVID-19, the Company continues to reinforce safety measures at all sites and offices including contact tracing, restricting non-essential travel, and complying with public health orders. The impact of COVID-19 on the global financial markets, the greater labor market, supply chains, and the overall economy and the Company is highly uncertain and cannot be predicted. Maintaining normal operating capacity is also dependent on the continued availability of supplies and contractors, which are out of the Company’s control. If the financial markets and/or the overall economy continue to be impacted, the Company’s results of operations, financial position and cash flows may be further affected. As the situation continues to evolve, the Company will continue to monitor market conditions closely and respond accordingly.  

Continuation of COVID-19 through 2022 and beyond could impact employee health, workforce availability and productivity, insurance premiums, ability to travel, our suppliers, labor costs, the availability of industry experts, personnel and equipment, restrictions or delays to field work, studies, and assay results, impeding access to capital markets when needed on acceptable terms and other factors that will depend on future developments that may be beyond the Company’s control. The Company has completed various scenario planning analyses to consider the potential impacts of COVID-19 on its business, including volatility in commodity prices, temporary disruptions and/or curtailments of operating activities (voluntary or involuntary). However, there is no assurance that these measures will prevent adverse effects from COVID-19 in the future.

Flow-through Issuance

During the three months ended March 31, 2022, the Company completed a Canadian Exploration Expenditures (“CEE”) flow-through common share financing for gross proceeds of $15.1 million. During 2021, the Company raised gross proceeds of $12.7 million through a Canadian Development Expenses (“CDE”) flow-through common share issuance and raised gross proceeds of $31.5 million through an equity financing (Note 12). In 2021a subsidiary of the Company secured an additional $40.0 million for its Los Azules project in Argentina (Note 18) and in March 2022, the Company entered into a $15.0 million unsecured subordinated promissory note and amended the terms of its $50.0 million senior secured term loan facility (Note 10).

NOTE 3 OPERATING SEGMENT REPORTING

The Company is a mining and minerals production and exploration company focused on precious metals in the United States, Canada, Mexico, and Argentina. The Company’s chief operating decision maker (“CODM”) reviews the operating results, assesses performance and makes decisions about the allocation of resources to these segments at the geographic region level or major mine/project where the economic characteristics of the individual mines or projects within a geographic region are not alike. As a result, these operating segments also represent the Company’s reportable segments for accounting purposes. The Company’s business activities that are not considered operating segments are included in General and Administrative and Other and are provided in this note for reconciliation purposes.

The CODM reviews segment income or loss, defined as gold and silver sales less production costs applicable to sales, depreciation and depletion, advanced projects and exploration costs, for all segments except for the MSC segment, which is evaluated based on the attributable equity income or loss. Gold and silver sales and production costs applicable to sales for the reportable segments are reported net of intercompany transactions.

Capital expenditures include costs capitalized in mineral property interests and plant and equipment in the respective periods.

8

Significant information relating to the Company’s reportable operating segments for the periods presented is summarized in the tables below:

Three months ended March 31, 2022

    

USA

    

Canada

    

Mexico

    

MSC

    

Los Azules

    

Total

Revenue from gold and silver sales

$

11,742

$

12,896

$

904

$

$

$

25,542

Production costs applicable to sales

(14,172)

(8,647)

(5,005)

 

(27,824)

Depreciation and depletion

(818)

(2,894)

(3,712)

Gross profit (loss)

(3,248)

1,355

(4,101)

(5,994)

Advanced projects

(45)

(91)

(1,243)

(9,756)

 

(11,135)

Exploration

(1,449)

(1,700)

(1)

(60)

(3,210)

Loss from investment in Minera Santa Cruz S.A.

(1,120)

 

(1,120)

Segment loss

$

(4,742)

$

(436)

$

(5,345)

$

(1,120)

$

(9,816)

$

(21,459)

General and administrative and other

(419)

Loss before income and mining taxes

$

(21,878)

Capital expenditures

$

277

$

3,546

$

$

$

234

$

4,057

Three months ended March 31, 2021

    

USA

    

Canada

    

Mexico

    

MSC

    

Los Azules

    

Total

Revenue from gold and silver sales

$

12,893

$

8,561

$

2,286

$

$

$

23,740

Production costs applicable to sales

(13,557)

(6,656)

(3,376)

(23,589)

Depreciation and depletion

(1,741)

(3,395)

(1)

(5,137)

Gross loss

(2,405)

(1,490)

(1,091)

(4,986)

Advanced projects

(84)

(623)

(1,092)

$

(1,799)

Exploration

(864)

(3,434)

(8)

$

(650)

(4,956)

Loss from investment in Minera Santa Cruz S.A.

(574)

$

(574)

Segment loss

$

(3,353)

$

(5,547)

$

(2,191)

$

(574)

$

(650)

$

(12,315)

General and administrative and other

(2,166)

Loss before income and mining taxes

$

(14,481)

Capital expenditures

$

757

$

9,567

$

$

$

$

10,324

Geographic Information

Geographic information includes the long-lived asset balances and revenues presented for the Company’s operating segments, as follows:

Long-lived Assets

Revenue (1)

March 31,

December 31,

Three months ended March 31,

    

2022

    

2021

  

2022

2021

USA

$

35,865

$

37,877

$

11,742

$

12,893

Canada

96,448

93,294

12,896

8,561

Mexico

26,558

26,561

904

2,286

Argentina (2)

281,607

282,583

Total consolidated (3)

$

440,478

$

440,315

$

25,542

$

23,740

(1)Presented based on the location from which the precious metals originated.
(2)Includes Investment in MSC of $89.8 million as of March 31, 2022 (December 31, 2021 $90.9 million).
(3)Total excludes $0.4 million related to the Company's Right of use office lease asset as the business activities related to corporate are not considered to be a part of the operating segments.

9

NOTE 4 OTHER INCOME

The following is a summary of other income for the three months ended March 31, 2022, and 2021:

Three months ended March 31,

2022

    

2021

COVID-19 Relief

$

$

1,111

Unrealized and realized gain on investments (Note 5)

445

Foreign currency gain

2,987

291

Other income, net

439

10

Total other income

$

3,871

$

1,412

During the three months ended March 31, 2022, the Company recognized $nil (three months ended March 31, 2021 - $1.1 million) of other income through COVID-19 relief from the Canadian government via the Canadian Emergency Wage Subsidy and Canada Emergency Rent Subsidy programs.

From time to time, the Company may acquire and transfer marketable securities to facilitate intragroup funding transfers between the U.S. parent and its Argentine subsidiary.

The Company does not acquire marketable securities or engage in these transactions for speculative purposes. In this regard, under this strategy, the Company generally uses marketable securities of large, well-established companies, with high trading volumes and low volatility. Nonetheless, as the process to acquire, transfer and ultimately sell the marketable securities occurs over several days, some fluctuations are unavoidable.

As the marketable securities are acquired with the intention of a near term sale, they are considered financial instruments that are held for trading. Accordingly, all changes in the fair value of the instruments, between acquisition and disposition, are recognized through profit or loss. Upon receipt of the transferred equity instruments by the local investment broker, the Company realizes an immediate foreign exchange impact. This foreign exchange impact is incurred directly as a result of holding equity instruments with the intention of trading, and as such the foreign exchange impact is also recognized through profit and loss.

As a result of having utilized this mechanism for intragroup funding for the three months ended March 31, 2022, the Company realized a net gain of $2.1 million. The net gain for the three months ended March 31, 2022, was comprised of a foreign currency gain of $2.2 million and a realized loss on investments of $0.1 million, including the impact of fees and commissions. During the three months ended March 31, 2021, no marketable securities were transferred between the U.S. parent and its Argentine subsidiary for intragroup funding purposes.

NOTE 5 INVESTMENTS

The following is a summary of the activity in investments for the three months ended March 31, 2022:

As at

Additions/

Net gain

Disposals/

Unrealized

As at

December 31,

transfers during

(loss) on

transfers during

gain on

March 31,

    

2021

    

period

    

securities sold

    

period

    

securities held

    

2022

Marketable equity securities – fair value

1,644

618

2,262

Warrants

162

162

Total Investments

$

1,806

$

$

$

$

618

$

2,424

On June 23, 2021, the Company closed the sale of two projects in Nevada, Limousine Butte and Cedar Wash, with Nevgold Corp. (“Nevgold”, and formerly Silver Mountain Mines Inc.). In addition to $0.5 million cash received as part of the consideration, the Company received 4,963,455 common shares and 2,481,727 warrants of Nevgold. Upon issuance, the common shares received by the Company represented 10% of the issued and outstanding shares of Nevgold. The warrants have an exercise price of $0.60 per share and are exercisable until June 23, 2023. The common shares trade on the TSX Venture Exchange.

10

NOTE 6 RECEIVABLES, PREPAIDS AND OTHER CURRENT ASSETS

The following is a breakdown of balances in receivables, prepaids and other assets as at March 31, 2022, and December 31, 2021:

    

March 31, 2022

    

December 31, 2021

Government sales tax receivable

$

2,930

$

3,708

Prepaids and other assets

7,015

6,883

Receivables, prepaid and other current assets

$

9,945

$

10,591

Included in government sales tax receivable for the three months ended March 31, 2022 is $1.2 million HST receivable from our operations in Black Fox (December 31, 2021 - $2.2 million).

Government sales tax receivable includes $0.9 million of Mexican value-added tax (“VAT”) at March 31, 2022 (December 31, 2021 – $0.9 million). The Company collected $0.3 million of VAT during the three months ended March 31, 2022 (March 31, 2021 – $0.6 million).

NOTE 7 INVENTORIES

Inventories at March 31, 2022, and December 31, 2021, consisted of the following:

    

March 31, 2022

    

December 31, 2021

Material on leach pads

$

385

$

4,660

In-process inventory

 

4,602

 

3,049

Stockpiles

 

6,713

 

5,105

Precious metals

 

1,783

 

1,819

Materials and supplies

 

5,996

 

3,702

$

19,479

$

18,335

Less long-term portion

(3,186)

(2,543)

$

16,293

$

15,792

During the three months ended March 31, 2022, inventory at the Black Fox, El Gallo and Gold bar operation were written down to their net realizable value by $0.8 million, $3.4 million and $nil respectively. In March 31, 2021 inventory of Black Fox, El Gallo and Gold Bar were written down to their net realizable value by $nil, $0.8 million and $1.4 Million respectively. These write-downs during the period ended March 31, 2022, a total of $4.2 million (three months ended March 31, 2021 – $2.1 million) were included in production costs applicable to sales and $nil was included in depreciation and depletion (three months ended March 31, 2021 - $0.1 million) in the Statement of Operation.

NOTE 8 MINERAL PROPERTY INTERESTS AND PLANT AND EQUIPMENT

The applicable definition of proven and probable reserves is set forth in the new Regulation S-K 1300 requirements of the SEC. If proven and probable reserves exist at the Company’s properties, the relevant capitalized mineral property interests and asset retirement costs are charged to expense based on the units of production method upon commencement of production. The Company’s Gold Bar and Black Fox properties have proven and probable reserves estimated in accordance with Regulation S-K 1300. The El Gallo Project is depleted and depreciated using the straight line, as the project does not have proven and probable reserves as defined in Regulation S-K 1300.

The Company reviews and evaluates its long-lived assets for impairment on a quarterly basis or when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Once it is determined that impairment exists, an impairment loss is measured as the amount by which the asset carrying value exceeds its estimated fair value.

During the three months ended March 31, 2022, no indicators of impairment have been noted for any of the Company’s mineral property interests.

11

NOTE 9 INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) – SAN JOSÉ MINE

The Company accounts for investments over which it exerts significant influence but does not control through majority ownership using the equity method of accounting. In applying the equity method of accounting to the Company’s investment in MSC, MSC’s financial statements, which are originally prepared by MSC in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, have been adjusted to conform with U.S. GAAP. As such, the summarized financial data presented under this heading is presented in accordance with U.S. GAAP.

A summary of the operating results for MSC for the three months ended March 31, 2022, and 2021 is as follows:

Three months ended March 31,

    

2022

2021

Minera Santa Cruz S.A. (100%)

Revenue from gold and silver sales

$

39,207

$

53,303

Production costs applicable to sales

(31,789)

(36,367)

Depreciation and depletion

(6,896)

(6,953)

Gross profit

522

9,983

Exploration

(1,735)

(2,236)

Other expenses(1)

(3,880)

(5,536)

Net income (loss) before tax

$

(5,093)

$

2,211

Current and deferred tax expense

3,807

(1,629)

Net income (loss)

$

(1,286)

$

582

Portion attributable to McEwen Mining Inc. (49%)

Net income (loss)

$

(630)

$

285

Amortization of fair value increments

 

(613)

 

(1,071)

Income tax recovery

123

212

Loss from investment in MSC, net of amortization

$

(1,120)

$

(574)

(1) Other expenses include foreign exchange, accretion of asset retirement obligations, other finance-related expenses.

The loss from investment in MSC attributable to the Company includes amortization of the fair value increments arising from the initial purchase price allocation and related income tax recovery. The income tax recovery reflects the impact of the devaluation of the Argentine peso against the U.S. dollar on the peso-denominated deferred tax liability recognized at the time of acquisition, as well as income tax rate changes over the periods.

Changes in the Company’s investment in MSC for the three months ended March 31, 2022 and year ended December 31, 2021 are as follows:

Three months ended March 31, 2022

    

Year ended
December 31, 2021

Investment in MSC, beginning of period

$

90,961

$

108,326

Attributable net (loss) income from MSC

(630)

132

Amortization of fair value increments

 

(613)

 

(8,331)

Income tax recovery

123

666

Dividend distribution received

 

 

(9,832)

Investment in MSC, end of period

$

89,841

$

90,961

During the three months ended March 31, 2022, the Company received $nil in dividends from MSC (three months ended March 31, 2021 – $5.0 million).

12

A summary of the key assets and liabilities of MSC on a 100% basis as at March 31, 2022, before and after adjustments to fair value on acquisition and amortization of the fair value increments arising from the purchase price allocation, are as follows:

As at March 31, 2022

Balance excluding FV increments

Adjustments

Balance including FV increments

Current assets

$

85,336

$

889

$

86,225

Total assets

$

176,818

$

88,710

$

265,528

Current liabilities

$

(51,574)

$

$

(51,574)

Total liabilities

$

(79,865)

$

(2,326)

$

(82,191)

NOTE 10 DEBT

$50 Million Term Loan Facility

On August 10, 2018, the Company finalized a $50.0 million senior secured three-year term loan facility with Royal Capital Management Corp., as administrative agent, and the lenders party thereto.  Interest on the loan accrued at the rate of 9.75% per annum with interest due monthly and was secured by a lien on certain of the Company’s and its subsidiaries’ assets.  

On June 25, 2020, the Company entered into an Amended and Restated Credit Agreement (“ARCA”) which refinanced the outstanding $50.0 million loan:

Scheduled repayments of the principal were extended by two years; monthly repayments of principal in the amount of $2.0 million are due beginning on August 31, 2022, and continuing for 11 months, followed by a final principal payment of $26.0 million, and any accrued interest on August 31, 2023 (but, later extended, as described below).
Additionally, the minimum working capital maintenance requirement was reduced from $10.0 million under the original term loan to $nil between June 30, 2020, through December 31, 2020, and from $10.0 million to $2.5 million from March 31, 2021, until the end of 2021. The working capital requirement increases to $