Junior Miner Goes from Strength to Strength

Q: How did the company ensure growth in the midst of a low metal price environment, causing McEwen Mining (NYSE:MUX) shares to increase 12 percent?

A: One of the most influential reasons for the increase in our share price and trading volume was related to the rebalancing indexes. McEwen Mining was included in the Van Eck Vector Gold Miners ETF (GDX), the Standard & Poor’s/Toronto Stock Exchange Composite Index (S&P/ TSX), and gained an increased position in the Market Vectors Junior Gold Miners ETF (GDX-J). McEwen Mining has a high beta to gold ratio of 2.7 over a three-year average, meaning that when gold moves up MUX moves strongly alongside. The company is working toward inclusion on the S&P 500. There are very few mining companies that can be included in the S&P 500 because the company must be incorporated in the US in order to be eligible. McEwen is Colorado incorporated making us one of five companies able to do so. However, we would also need a market cap of US$5 billion and three consecutive quarters of retained earnings.

Q: What have been the main accomplishments and highlights of McEwen Mining in Mexico?

A: We had an extremely successful 2015 at the El Gallo mine, which contributed to our free cash flow. Our grade in the open pit last averaged 4.3g/t of gold, which is almost double the reserve grade of 2.2g/t. We also had improved recoveries at the mine, and this contributed to the overall success of our operations and increased cash flow. The third way we were able to lower our costs involved renegotiating our agreements with our contract miners. All three of these items led to improved financials and operations. McEwen has maintained an extremely healthy balance sheet with over US$42 million in liquid assets and cash, no debt, and an anti-royalty policy. Nevertheless, our decision to buy Coeur Mining’s NSR tiered royalty on El Gallo was simple as it provided us a cost saving of US$40/oz, which makes a significant impact on our balance sheet over the long run.

Q: What are the key production and operational challenges the company has encountered in trying to reach these goals in Mexico?

A: The key operational challenges for McEwen were our growth from an exploration company to an operating company and the drive to become efficient and productive in the shortest time possible. Some of our inherent production and operational challenges include grade control, managing and achieving recovery rates, managing stripping costs, quantities, and sequencing, and dealing with weather conditions. Moreover, in Mexico specifically, there are security issues, VAT recovery, and permitting issues to consider. In terms of taxation, the new tax reforms adversely impact our business so we have decided to challenge them. We are also dealing with new customs requirements, and this impacts our invoicing process. There are some silver linings that make Mexico an attractive jurisdiction to work in such as the peso devaluation, which has provided some temporary relief to offset rising costs. Nevertheless, only about 30 percent to 40 percent of vendors are paid in pesos.

Q: What have been the key investments and decisions the company has made in order to optimize processes and costs in the El Gallo mine?

A: The main reasons for the extension of the El Gallo mine lay in the prospect of a longer life for the El Gallo 1 mine. The challenge has been in lowering costs to make lower grade ores profitable and in expanding exploration near the operating mine. The major improvements made at El Gallo include a major modernization and expansion of the process plant and crushing plant to be able to process up to 4,500t/d. Two leach pad expansions have ensured efficient leaching of ores. Additionally, the focus on safety, the installation of new liners in all process ponds, and increased physical security has all helped ensure the mine is operated in a safe, secure, and environmentally responsible manner. El Gallo 2 is fully permitted and we are hopeful that with the improving silver price we will be able to make a decision to proceed with this project soon. Given the security issues in Sinaloa, and the fact that US$8.5 million of gold was stolen last year, we have fortified the mine and refinery. We have installed cameras throughout the property, put in additional fencing, and implemented additional security measures and procedures for personnel.