We’re now greater than midway via the Q2 Earnings Season for the Gold Miners Index (GDX), and whereas many miners have had a troublesome begin to the yr, few have bombed their outcomes as unhealthy as McEwen Mining (NYSE:MUX). The corporate produced 19,200 gold-equivalent ounces (GEOs), down 58% from final yr, and prices sky-rocketed at a good sooner tempo than the gold worth, with all-in sustaining prices (AISC) of $2,719/ozwithin the quarter. Whereas a superb chunk of this efficiency was associated to COVID-19-related headwinds, this development of poor efficiency has been in place for a number of quarters now, so chalking this as much as a difficult quarter as a consequence of COVID-19 is hardly correct. Based mostly on the corporate’s continued weak efficiency, non-existent margins at $1,700/ozgold (GLD), and incapacity to generate earnings, I proceed to see the inventory as an Keep away from above $1.50 in favor of producers which have truly delivered shareholder worth.
McEwen Mining launched its Q2 outcomes on Thursday with one more powerful quarter, little shock for these following the inventory the previous couple of years. The corporate reported quarterly manufacturing of 19,200 GEOs, down 58% yr over yr, with H1 2020 manufacturing of 54,200 GEOs, down from 82,200 GEOs in H1 2019. This disastrous efficiency was a results of operational points in addition to COVID-19-related headwinds, with the corporate’s latest Gold Bar Mine nonetheless performing nowhere close to expectations. Based mostly on the financial examine, Gold Bar supposed to supply 63,000 ounces of gold per yr at $843/oz, however the firm has struggled to get prices under $1,200/oz. The latest aim within the Q2 launch is to change into a 300,000-ounce producer ultimately, a aim mentioned within the 2013 presentation with the expectation to attain this by FY-2015. Clearly, the corporate has failed miserably on attaining this aim because it’s now been restated a brand new aim practically a decade later.
As we are able to see from the chart above, the closest McEwen Mining ever acquired in direction of its 290,000-ounce per yr aim was 174,400 GEOs produced final yr. Nevertheless, we’re on monitor for a big decline this yr with continued underperformance at Gold Bar, along with COVID-19-related closures. 12 months-to-date, the corporate has produced 54,200 GEOs, and my estimate is for 125,000 GEOs for FY2020, which might translate to a virtually 30% drop in manufacturing yr over yr. Assuming that is the case, we’ve got seen a 65% improve within the share rely since 2012 and fewer than 20% manufacturing progress eight years later. That is pitiful contemplating that Kirkland Lake Gold (KL) simply used 30% of its shares to develop manufacturing by over 50% in 18 months with the Detour Lake acquisition. Let’s take a more in-depth take a look at McEwen’s first-half outcomes under:
Starting with the corporate’s Gold Bar Mine, we noticed H1 2020 manufacturing of 15,200 GEOS at all-in sustaining prices of $2,293/oz. Whereas these outcomes have been up yr over yr from the 10,000 GEOs reported within the year-ago interval, they pale compared to the 60,000 ounces of manufacturing anticipated relative to the Feasibility Examine, and are coming in at greater than double the anticipated prices. The explanation for the a lot decrease manufacturing was that the corporate misplaced one month of operations with mining actions stopped on April 1st and never ramped up once more till Might 4th. Nevertheless, throughout Might, the corporate selected to function solely on day shift, which was an extra headwind, leading to a lot decrease manufacturing. The hope is that the mine will likely be again to common operations by September, and a brand new useful resource estimate and mine plan is predicted by This fall, after we noticed a large write-down in Q1 of $83.eight million on the mine as a consequence of a big discount in ounces relative to the mine plan.
Shifting over to the corporate’s Black Fox Mine, it was additionally a tough quarter with operations suspended from March 26th to mid-April as a consequence of government-mandated shutdowns. The corporate’s year-to-date manufacturing at Black Fox is sitting at 10,500 GEOs, down considerably from the 18,400 GEOs produced in H1 2019 as a consequence of considerably decrease grades and barely decrease throughput. Throughout H1 2020, we noticed throughput of 97,000 tonnes vs. 106,000 tonnes, a 9%~ lower, however grades have been down over 45% from 5.51 grams per tonne gold to 2.95 grams per tonne gold. This large drop in gold-equivalent manufacturing led to a surge in all-in sustaining prices, with H1 2020 AISC coming in at $1,803/ozvs. $1,311/ozin the identical interval final yr.
McEwen Mining mentioned the potential for Black Fox to include a number of deposits right into a Preliminary Financial Evaluation with the hopes of turning the mine right into a 100,000-ounce per yr producer by FY2024. I consider that is very formidable as the corporate has struggled to even function the mine at a revenue since buying it, and the mine life has now dwindled to lower than one yr except McEwen can substitute reserves. Due to this fact, whereas this plan to show Black Fox into a big operation sounds nice, I would not put an excessive amount of weight into this undertaking presently. Simply over a yr in the past, it was Gold Bar that was purported to be the game-changing asset for the corporate, and shareholders understand how that has turned out since.
Lastly, on the firm’s 49% owned San Jose Mine, it was not an excellent begin to the yr both because the mine continues to function effectively under regular ranges as a consequence of journey restrictions. The Argentinian Mine was initially hit with a suspension in March that was cleared by mid-April, however journey restrictions have made it tough for the mine to ramp up totally, so attributable GEOs got here in at simply 23,800 for McEwen Mining, down from 43,100 in H1 2019. That is disappointing as this has been the one mine working effectively for McEwen as Black Fox and Gold Bar have seen continued underperformance. The hope is that we’ll see a ramp-up to extra regular productions within the second half, however this relies on journey restrictions being lifted in Argentina.
Given the extraordinarily excessive prices at Gold Bar and Black Fox and far decrease manufacturing from McEwen’s one solidly performing asset, San Jose, it is no shock that all-in sustaining prices swelled within the quarter. Nevertheless, the quantity that they’ve elevated is sort of alarming, as H1 2020 prices got here in at $2,086/oz, effectively above the corporate’s common realized promoting worth of $1,645/oz. This contributed to a big internet loss within the quarter of $19.eight million, effectively above the $13.Zero million internet loss on the identical time final yr, and bringing the year-to-date internet loss to $119.Zero million, together with final quarter’s write-down. These are ghastly outcomes for a miner that must be benefiting from near-record gold costs. Clearly, these outcomes are a lot worse as a consequence of COVID-19, however most miners skated via COVID-19 with some headwinds and a 10% improve in prices. In McEwen Mining’s case, we have seen prices skyrocket throughout the board from already unacceptable ranges.
Given the weak working outcomes, McEwen Mining is projected to submit one more internet loss per share this yr, with FY2020 annual EPS estimates presently sitting at (-) $0.28. This is able to translate to the corporate’s fourth yr of internet losses in a row regardless of rising gold costs in the identical interval, and it could make McEwen Mining one of many solely gold producers posting a internet loss this yr. In my view, there may be completely no purpose to personal any gold producer except it could actually generate constructive earnings, and that is very true in a rising gold worth atmosphere. Provided that McEwen Mining is incapable of attaining this, I do not see any funding thesis right here, which is why I’ve rated the inventory as an Keep away from for over a yr now.
Gold has gone from $1,200/ozto $1,800/oz, but McEwen Mining has discovered a approach to proceed posting internet losses. One of many causes for that is that income has gone basically nowhere the previous two years, with income coming in at $18.three million in Q2 2020, down 50% year-over-year. Whereas Q3 2020 and This fall 2020 estimates are projecting a big bounce again to $27.1 million and $28.5 million, this may nonetheless translate to unfavorable income progress yr over yr if these estimates are met. At a time when we’ve got a few of the finest gold producers like B2Gold (BTG) posting 65% progress in revenues yr over yr, it’s extremely tough to justify investing in a laggard like McEwen Mining.
Whereas some buyers will chalk up this quarter to COVID-19-related headwinds, I’d argue that COVID-19 is merely the straw that is additional injured McEwen Mining’s again. Even earlier than COVID-19 got here, we already had regular internet losses, a large write-down on Gold Bar, underperforming belongings, and anemic progress. Due to this fact, whereas COVID-19 actually hasn’t helped issues, it is not like we might have seen a pointy turnaround right here absent the pandemic. Provided that McEwen Mining stays one of many solely gold producers that may’t generate constructive earnings and margins stay anemic even when prices do come down, I proceed to see the inventory as an Keep away from above $1.50. This does not imply the inventory cannot go larger if gold stays above $2,000/oz, however I see no purpose to personal an underperformer when we’ve got a number of miners firing on all cylinders and beating their objectives constantly.
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 (aside from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
Further disclosure: Disclaimer: Taylor Dart will not be a Registered Funding Advisor or Monetary Planner. This writing is for informational functions solely. It doesn’t represent a proposal to promote, a solicitation to purchase, or a suggestion relating to any securities transaction. The data contained on this writing shouldn’t be construed as monetary or funding recommendation on any material. Taylor Dart expressly disclaims all legal responsibility in respect to actions taken primarily based on any or the entire info on this writing.