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Edited Transcript of MUX earnings conference call or presentation 31-Jul-19 5:30pm GMT

Q2 2019 McEwen Mining Inc Earnings Call

TORONTO Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of McEwen Mining Inc earnings conference call or presentation Wednesday, July 31, 2019 at 5:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Alexander Stewart

McEwen Mining Inc. - President & COO

* Merushe Verli

McEwen Mining Inc. - CFO

* Robert Ross McEwen

McEwen Mining Inc. - Chairman & CEO

* Sylvain Guérard

McEwen Mining Inc. - SVP of Exploration

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Conference Call Participants

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* Bhakti Pavani

Alliance Global Partners, Research Division - Senior Research Analyst

* Jacob G. Sekelsky

Roth Capital Partners, LLC, Research Division - Director & Research Analyst

* John Charles Tumazos

John Tumazos Very Independent Research, LLC - President and CEO

* Michael Peter Kozak

Cantor Fitzgerald Canada Corporation, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, ladies and gentlemen. Welcome to the Q2 2019 operating and financial results conference call. (Operator Instructions) Thank you. I will now turn the phone over to Rob McEwen, Chief Owner.

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Robert Ross McEwen, McEwen Mining Inc. - Chairman & CEO [2]

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Thank you, operator. Welcome, fellow shareowners and interested investors. With me today are 3 members of our senior management: Chris Stewart, our President and Chief Operating Officer; Meri Verli, our CFO; and Sylvain Guérard, our Senior VP, Exploration. Today, we are going to discuss our performance and progress made in Q2 in the first half of this year.

In addition, we will be providing our outlook for the balance of the year and the steps we will be taking to build our resource base, increase annual production on our existing properties. And at this point, I would like to ask Meri to speak about our financial performance during the quarter and past year.

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Merushe Verli, McEwen Mining Inc. - CFO [3]

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Thank you, Rob. Good afternoon, everyone. Thank you for joining us today. In the second quarter, McEwen Mining achieved commercial production at Gold Bar, continuing its exploration and development at Black Fox and Gold Bar as well as continued work on Los Azules and the feasibility study for the Fenix Project.

Our production and sales in the first half of the year were lower than planned, with Black Fox production impacted by heavy -- by the heavy spring melts and Gold Bar Q1 delays impacting our Q2 production. The combination of lower-than-planned sales in addition to the project investments resulted in the company reporting a net loss of $23.2 million or $0.07 per share for the first half of 2019. We invested over $24 million at mine development and plant and equipment and raised $25 million from equity financing.

Regarding our overall operating results for the first half of the year, the company had total production of just over 82,000 gold equivalent ounces, which was lower than our forecast and impacted our cash costs around our cash margins from mine operations and our operating loss. The operating loss for the first half of 2019 was $8 million higher compared to the first half of the previous year, impacted by lower cash margin or revenue from sales less production costs from our 100%-owned mine operations, higher depletion and depreciation, a higher loss from the investment in Minera Santa Cruz, partially offset by lower spending on exploration.

Our cash margin for the first half of 2019 was expected to be lower than the 2018 as lower planned ounces at El Gallo as the mine transitioned to residual heap leaching were expected to be replaced by Gold Bar production at a higher cash cost per ounce. Our cash margin came approximately $3 million lower than planned, with the impact of lower production at Black Fox and Gold Bar partially offset by higher production at El Gallo and higher price average realized per gold equivalent ounce.

Moving on to the outlook for the rest of 2019. We have revised our forecasted production at each of our 100%-owned sites reflecting results from the first half of the year, operational improvements during the second quarter as well as the impact of adopting variable gold:silver ratio for Q2 and going forward for calculating our gold equivalent ounces.

Our ratio for Q2 was 88.1 (sic) [88:1] compared to 75.1 (sic) [75:1] from Q1 and previous years, and the average for 2019 is estimated at 85:1. The impact of the variable ratio adoption in the guidance was a decrease of approximately 5,000 gold equivalent ounces with the largest impact on the production and cash unit cost for San José mine.

We increased the full year guidance for 2019 for El Gallo to 16,000 ounces, reflecting the improved leaching performance from process plan modification in Q2. At Gold Bar, we expect to produce 32,000 ounces for the second half of the year for full 2019 production of 42,000 ounces, down from our original forecast of 50,000. Black Fox had a tough first half of 2019 operationally, which Chris will discuss further, and as a result, production guidance has been reduced from 50,000 to 45,000 ounces for 2019. At San José, the site is on track to achieve full year guidance for 2019 of 49,000 gold ounces and 3.2 million silver ounces.

We closed Q2 with cash of over $22 million and a positive working capital of $31 million which, combined with increased production for the second half of 2019, should take us through the end of the year and beyond. While our cash decreased by $8 million from the beginning of the year, our working capital was $7.5 million higher as we built heap leach inventory at our Gold Bar mine, the benefits of which, together with increased production plan, we should see in the second half of the year.

In addition, the company is highly leveraged to gold and silver prices. A $100 increase in the price of gold would result in over $6 million more in cash for the second half of 2019 from our 100%-owned operations and a similar increase in cash from San José, which will also increase our dividends from San José.

At this point, I will thank you again for taking the time to join us today, and I'll turn the presentation over to Chris.

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Christopher Alexander Stewart, McEwen Mining Inc. - President & COO [4]

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Thank you, Meri. Good afternoon, everyone. During Q2, we produced 36,200 ounces of gold and 850,000 ounces of silver, which amounts to 45,900 gold equivalent ounces using a gold:silver ratio of 88:1 for the quarter. Our San José and El Gallo mines exceeded our targets, while our Gold Bar and Black Fox mines performed better than in Q1 but below our Q2 forecast.

Compared to the previous quarter, global Q2 results have shown an increase of 34% in gold production and an increase of 21% in silver production. Looking ahead, our production guidance for the year 2019 was reduced by 6% for gold and is unchanged for silver, bringing us to an anticipated consolidated production of 190,000 gold equivalent ounces.

At Gold Bar, our newest mine located in Nevada, during Q2, we continued with our commissioning efforts on the ore handling system. The ore handling system is the term we use for the overall mechanical circuit that crushes, screens, agglomerates and conveys the ore onto the heap leach pad.

The efforts of our team culminated with the declaration of commercial production on May 23 after operating the ore handling system at 75% capacity for 30 days. Since that time, we've been steadily increasing our throughput towards our average steady-state production rate of 7,200 tons per day.

For the month of July, we've operated the ore handling system at an average rate of 6,500 tons per day. We have seen a continuous improvement in our performance as the month progressed. In the second half of July, we ran at an average of 7,100 tons per day, and over the past 4 days, we've averaged 8,000 tons per day. Gold recoveries are tracking well relative to the feasibility study design and production is steadily increasing as more ores were placed onto the heap leach pad.

Gold Bar produced 7,940 ounces of gold in Q2. The lower production in Q2 is directly attributable to the delays in moving our operation into commercial production in Q1 as originally planned. With lens -- less tons placed on the heap leach pad in Q1, there is less gold available to recover through the leaching process during Q2. As we continue to ramp up our production rate and place more ore, so more gold onto the heap leach pad every month, we will see our gold production increase as planned in Q3 and beyond.

Mining of the Cabin and Pick pits is progressing well. Our ore grades and tonnages are reconciling positively to our block model. Our revised plan is to produce 15,000 ounces of gold in Q3 and 17,000 ounces of gold in Q4. Gold Bar achieved a cash cost of $901 per ounce, which is 3% below our guided cost of $930 per ounce. Our all-in sustaining cost was $1,088 per ounce or 11% higher than our guided cost of $975 for the year.

We started our $5 million exploration program in mid-May. One of the objectives is to obtain the data necessary to advance economic studies on permitting for Gold Bar South. We are targeting to begin its development in late 2020.

In Canada, at the Black Fox mine, our team recorded a production of 9,400 ounces of gold in the second quarter. Mining operation in the Timmins area, including our Black Fox mine, struggled with a heavy spring melt this year due to the large amounts of snowfall received during the winter months. As a result of this, we had to adjust our mining plans, which negatively impacted our ore production in the month of May. The situation was temporary, and we are back to normal mining activities.

Our cash cost was $837 per ounce, which is 7.5% lower than our guided cost of $905 per ounce for the year. And our all-in sustaining cost was $1,196 per ounce, which is 10% higher than our guidance of $1,080 for the year.

During Q2, we prepared the crushing circuit at our mill facility for a refurbishment project, which commenced on July 2. If you recall, during Q1, we had an unfortunate incident of a surface crusher located at the Black Fox mining, which is operated by a contractor. This incident negatively impacted our gold production during Q1, and the decision was made to take crushing activities back in-house.

As of July 29, we have been performing our own crushing at the Black Fox mill facility. There will be no more crushing of ore at the mine. We will be shipping a round of mine ore to the mills as this reduces the chances of gold losses as the ore crushing is confined to the mill facility only.

We have been busy working on updating our resource model for Black Fox in an effort to identify opportunities to increase production. We've also updated our Grey Fox resource model, taking into consideration all the drilling we have completed over the past 18 months.

We're in the process of finalizing our scoping study for the Froome deposit, with the results of this analysis to be released later in Q3. The study evaluates the economics of driving twin ramps to access the deposit from the bottom of the west end of the Black Fox open pit, which is the opposite side of where our current Black Fox mine portal access is located.

In addition to evaluation of Froome, we started a scoping study for the Grey Fox deposit, which is currently made up of 3 zones: the 147 Main, Contact and South zones. While some parts of these zones come right to the surface, it appears that it will be more cost effective and productive to drive a centrally located decline ramp to access the 3 different zones in the mine than using underground mining methods.

Our 2019 exploration budget for Black Fox Complex is $18 million includes -- and includes surface and underground drilling. Drilling restarted in April, and we're exploring multiple targets on Black Fox and Stock properties. During Q2 of 2019, we -- exploration drilling expenditures on the Complex totaled $4 million.

At the San José Mining in Argentina, production continues to be on track to achieving the guided ounces for 2019. Our attributable production in Q2 is 13,500 gold ounces and 850,000 ounces of silver for a total of 23,150 gold equivalent ounces. Cash costs were $960 per ounce. Gold equivalent ounce and all-in sustaining costs were $1,207. For the first half of 2019, cash costs and all-in sustaining costs averaged between 1% to 4% from the guided cost for the year. We're seeing slightly higher costs for 2019 and prior years due mainly to the export tax that was imposed by the Argentinian government in September of 2018, which will continue until the end of 2020.

At the El Gallo Complex in Mexico, residual heap leaching activities from the El Gallo project continued. Our operating team achieved an improved quarterly production of 5,350 ounces in the second quarter, which is comparable with the previous quarter. We're in the process of connecting our El Gallo operation to the regional power grid, thus eliminating our reliance on diesel-generated power for this site. This will provide a reliable power at a much lower cost to our operation going forward as well as improve the economics for our Project Fenix.

Based on the improved performance of our residual heap leaching activities, we are increasing our full year guidance for 2019 at El Gallo by 23% or 3,000 ounces to 16,000 ounces from the residual leaching activities. Total cash costs at El Gallo project were $926 and all-in sustaining costs were $939 per ounce for the second quarter compared to guided cash cost of $875 and an all-in sustaining cost of $915 per ounce. A slight increase in cost is related to some additional reclamation work being carried out on the site as well as a small capital investment at the gold recovery circuit, with an additional leach tank being installed.

The Fenix Project has progressed to feasibility study phase, and we expect to have a final report issued in Q3. Our permit application has been submitted, and we expect to receive a decision from the Mexican regulatory authority in the third quarter. During the 3 months ended June 30, we spent $800,000 in relation to these activities.

At Los Azules, our world-class copper project in Argentina, we have budgeted $3 million for 2019 to continue our -- progressing the project. We're working on project derisking from an infrastructure solutions perspective looking at the runway design for Los Azules. It is now completed, and we are moving into the permitting phase.

We've agreed on a memorandum of understanding with the Port of Coquimbo for the export of concentrate through Chile and into the Pacific Ocean. We also made significant advances on our IIA application for the permit for resource exploitation. And we anticipate submitting the permit in the fourth quarter of 2019 and would expect the environmental impact declaration to be received in late 2020.

The second quarter has shown progress with our projects and improvements at our operations. We're coming through a solid production performance at El Gallo and San José, and we are focused on improving our production performance at Black Fox. And we continue to ramp up production in Gold Bar after achieving commercial production in mid-May.

As we increase the ounces produced from Black Fox and Gold Bar, our production costs will start to come down, and we expect to see more of these effects in the second half of the year. We look forward to presenting you with positive updates from our projects and operations over the remainder of 2019.

And I'll now turn the presentation over to Sylvain Guérard, our Senior Vice President for Exploration, who will talk about our exploration highlights. Thank you.

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Sylvain Guérard, McEwen Mining Inc. - SVP of Exploration [5]

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Thank you, Chris, and good afternoon, everyone. Here are the key points that I will discuss. First, at the Black Fox Mine, our drilling intersected significant to high-grade gold with multiple intersection of plus 30 grams per tonne on target located on the west extension and depth of the mine. Our improving geological models will produce at the resource and the reserves estimation update by year-end.

At Grey Fox, we have generated a significant indicated resource increase of 22% to 567,000 ounces of gold. The new 147 Northeast zone remain -- remained open and is being drilled right now. Another target with similar setting will be tested in the second half of the year. At the Stock property, we have intersected visible gold on the depth extension of the Stock Mine.

At Gold Bar now, infill and pit delineation drilling was mostly completed in July at the Gold Bar South deposits. In the objective to add this deposit to the mine plan and reserve by year-end, drilling results are positive and new mineralized structures were identified and drilling is ongoing to better assess this higher-grade mineralization that has the potential to extend the planned open pit design. Over the western part of the property area, drilling is ongoing to the shallow and deep potential mineralization.

Our surface exploration drill program started in early April in Timmins and in mid-May at Gold Bar, with 49,000 meters drilled during the quarter. In Timmins, our focus was on Grey Fox and Stock. At Grey Fox 147 and the nearby 147 Northeast zones, we have high-grade results and an indicated -- indicated an inferred resource increase of 135,000 ounces gold. We believe there is good potential to discover the additional mineralized shoots that is trending over the Grey Fox target area.

It is important to note that most historical gold at Grey Fox were drilled subparallel and in weak angle with the main structure controlling mineralization, and may have missed or only partially intersected potential mineralized shoots. Our drilling is to drill -- approach is to drill perpendicular to the main structure to more effectively test the targeted mineralized zones.

The Grey Fox deposit now also total of 567,000 ounces indicated resources at an average grade of 7.1 grams per tonne gold and, in addition, 135,000 ounces in inferred resource category. The gold mineralization is defined at shallow depth, road access and other infrastructure offering a significant, underdeveloped deposit sitting in next to our Black Fox mine.

Just to the west of Grey Fox, we are also drilling the Gibson Target, where we have a gold mineralization also then the syenite intrusion, similar to many other mines in the Abitibi, such as Malartic, Young-Davidson and Holt-McDermott that have enjoyed a great planning track record. The type of mineralization in geological setting at Gibson is different than all other deposit at Black Fox.

So far, 8 widely spaced holes drilled below 300 meter at a 100% rate of success, intersecting a wide zone of tens of meters of alteration and low-grade gold mineralization that include more narrow intervals of higher-grade gold, such as 11 gram over 6 meter intersected last year and 17 gram per tonne gold over 3 meter and up to 519 gram per tonne over 0.4 meter reported earlier in Q2. We continued drilling this target to better define the size, continuity of the mineralization and economic potential of this target that offer high upside potential near the Grey Fox deposit and existing ramp access.

At Stock, our drilling focus on the 3-kilometer segment of the structure that holds the historical Stock Mine. Our 2018 drilling on the depth extension of the mine intersected several zones of significant mineralization with grade of up to 30 gram per tonne at about 700 meters vertical below the mine. This year, a follow-up drilling intersected zone of alteration, we're seeing coarse visible gold at about 200 meter down deep from last year's positive intersection.

Although at too early stage to demonstrate potential continuity of the mineralization, the visual drilling observation combined to last year positive results suggest that the mineralized system remain open at depth. We are continuing to drill the depth extension of the mine and also the Stock East deposit, which represents quality expiration targets near our mill.

At Gold Bar now, we are drilling the Gold Bar South deposit where we have a near-surface indicated resource of 100,000 ounces gold to better define the continuity of the mineralization and delineate the planned open pit. The objective is to add the Gold Bar South to the mine plan by the end of the year to extend the mine life.

The mineralization at Gold Bar is silica-rich and will be an excellent blending material for the existing mine. Drill results are positive and in line with expectation. Some holes return high-grade intersection associated to some feeder structure interpreted to control the in-placement of the gold mineralization.

We obtained intersection which are significantly higher than the 1 gram average grade of the deposit, such as of 2.1 gram per tonne over 55 meter and 616 gram per tonne over 24 meters. We are following up on these positive intersection to better define width and strike extensions as this mineralization has the potential to extend deeper portion of the planned open pit.

On the Gold Bar property along the Wall Fault, on the extension of the Cortez Fault, which comes from the mineralization of the large Barrick deposit to the north, we have started a deep exploration hole. This hole will first test the near-surface target and will continue to test the deeper potential of this target area for large Carlin gold deposit.

In conclusion, our explorations are in 2 of the best gold mining regions of the world and close to our existing operation. Our 2019 program is progressing well towards delivering our main goals to define new resource and reserves to extend the life of our mine, positively impact the economics of development projects and make new discoveries.

During Q2, we have generated positive results in Timmins and Nevada. At Black Fox mine, we continued to drill the west end depth extensions to replace resource and reserve. At Grey Fox, we added resource to the existing deposit. And at Black Fox -- and at Stock, sorry, we hit encouraging visual mineralization, including visible gold on the extension of the Stock Mine. In Nevada, ore drilling at Gold Bar South is confirming a quality satellite deposit.

A portion of our drilling is allocated to potential game-changer discoveries, such as the deep drilling to test the Gold Bars for large Carlin gold deposit. We keep advancing with the major drill program for the remainder of 2019 that should generate more excitement and create value by adding low-cost ounces near our operations.

Thank you. And on this, over back to Rob.

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Robert Ross McEwen, McEwen Mining Inc. - Chairman & CEO [6]

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Thank you, Sylvain. So there you have it. Our balance sheet will provide us with a good level of liquidity, our large exploration program is taking place in 2 prolific gold districts, our operations have turned the corner and improving, and we have a growing organic pipeline of development project. I must say that I'm a big believer in the potential benefit of concerted exploration program.

Our exploration success at the Black Fox properties has enabled us to see opportunities for newer -- new near-term sources of production. Again, organic growth at Froome and Grey Fox. The beauty of these deposits is twofold: first, their close proximity to our existing mine; and second, starting production of these sites will allow us to cut back production of Black Fox -- the Black Fox mine to give us more time to explore it, to build its reserve base and develop an efficient mine plan.

I'm fascinated by the number of high-grade assay values that we have encountered in the Black Fox mine, plus 10 grams per tonne, plus 100 grams per tonne and a few plus 1,000 grams per tonne. This is a nuggety ore body that needs more drilling and analysis to determine a good geological model and develop a mine plan that looks ahead more than 5 years.

Other areas of excitement for us are at Gold Bar, we expect our exploration drilling will be able to replace this year's production and extend our current mine life beyond 7.4 years. In addition, we will be testing the Contact, that the deep sulfide ores found 25 miles north on trend at Barrick Gold's Cortez Hills, Gold Rush and Fourmile discovery exist on at-depth on our property.

In Los Azules, we have achieved a significant breakthrough. We have determined that a viable alternative access route can be built and that it would give us year-round access versus the current access of only 4 to 5 months. We believe this new route will significantly improve the value of Los Azules and accelerate the opportunity to develop it. For the balance of the year, we look forward to providing you with a stream of news releases on our exploration progress, resource update and feasibility studies.

At this time, I would now like to open the call to our question-and-answer session and allow people who want to listen to the Federal Reserve to break off and catch that news, starting soon. And operator, would you open up the Q&A?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jake Sekelsky with Roth Capital Partners.

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Jacob G. Sekelsky, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [2]

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I think you've touched on this briefly, but can you just provide a little bit more color on the deep hole planned at Gold Bar? I mean, what you're hoping to see here? What the budget is for the planned hole? And when we should expect to see some news to flow there?

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Robert Ross McEwen, McEwen Mining Inc. - Chairman & CEO [3]

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Certainly. Sylvain, could you address that question for Jake?

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Sylvain Guérard, McEwen Mining Inc. - SVP of Exploration [4]

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Yes, for sure. Thanks for the answer. Gold Bar, you know the story, you know the location. This project is perfectly located along strike. And for the very first time since we reactivated, we've got the permit first and reactivated. The file is there. We put together the key informations to develop a full understanding of the situation we have at Gold Bar, and we had different surveys and got all of the information together and put a quality team around that.

And what has been generated has been extremely positive. More we've been learning about this place, more we liked it. And we have a full pipeline of targets near our mine. Gold Bar South, that is coming along as the next open pit -- a satellite open pit there. And over the western part of the property, and this is an extension and mention of the Cortez Fault that extend to the south and become the Wall Fault over our area.

We have a near-surface mineralization in this sector. We have some oxide intersection over 1 gram over 40 meter and historical RC. And we believe that this mineralization is coming -- or is driven from this Wall Fault.

So adjacent to this fault, we've started our first deep hole. We have 2 deep holes planned this year on the property. We expect that those deep holes will go up around 1,000 meter depth, maybe a bit more. We are not fully sure at what depth exactly will it -- lower part of the stratigraphy, which is the Roberts Mountain, a very good holes in this sector.

So the first hole started in collar into the upper mineralization going through visually a nice-looking rock that we don't have access yet, and keep going to test a deeper target that we, as I said, expect at the 1,000 meter.

We have the right geology. We have the right site of mineralization. We are well located along the trend. And we have, so far, as part of this budget of $5 million, 2 holes. We allocated about $1 million to that deep drilling. One would be there -- or is ongoing over this part of the property. And the next hole will be more to the east side, east of the series of pits we have there at Gold Bar.

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Jacob G. Sekelsky, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [5]

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Got it. That's very helpful. And I guess, just staying in the exploration vein, given the positive results at the Grey Fox over the last couple of weeks, could you kind of walk us through the timeline for the scoping study there? It seems like there's potential for that to be a good source of stream-free tonnage in an important piece of the longer-term story at Black Fox.

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Robert Ross McEwen, McEwen Mining Inc. - Chairman & CEO [6]

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Sure. Chris, would you like to answer that part of the question?

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Christopher Alexander Stewart, McEwen Mining Inc. - President & COO [7]

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Yes. No. For sure. We're quite excited about the exploration success we've had there in the Grey Fox area. We've had our own in-house resource model now, and we've gone through entering all the data that we've obtained over the last 18 months into the new updated resource, and we've handed that off. We're working with Stantec, and we're moving ahead right now with the scoping study. We expect to have that completed by end of Q3, early Q4.

And then at the same time, in parallel to that, we're also starting down the permitting path to look at reopening those existing portal there at the Gibson deposit. Historic, it's been closed off but we're pursuing the option of reopening that and giving ourselves underground as an advanced exploration project to do a bulk sample and learn a bit more about the deposit, and while we continue to push ahead from a scoping study into more detailed engineering work. So timeline, we should have results coming out end of Q3, early Q4 with respect to Grey Fox.

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Jacob G. Sekelsky, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [8]

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Okay. Perfect. And then just lastly, a similar question at Los Azules. Obviously, the approval for the northern access route was -- is a big win for the project. When should we see news on that front just related to, say, on estimated cost and potential economic impacts of that?

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Robert Ross McEwen, McEwen Mining Inc. - Chairman & CEO [9]

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On the cost, that would be later in Q3 -- this quarter. And we expect to start construction before year end.

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Operator [10]

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(Operator Instructions) Our next question comes from John Tumazos with John Tumazos Very Independent Research.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [11]

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I'm looking at the Table 1 of your press release where you just go through output and guidance. And for the 6 months, Black Fox and Gold Bar, while the volumes were light, the costs were good. The Black Fox costs were $79 less than guidance and Gold Bar was $6 less than guidance despite the well outputs. Should we expect the costs to fall more as volume rebounds in the second half? And maybe is that cost guidance of $905 and $930, respectively, maybe stale and easy to beat?

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Robert Ross McEwen, McEwen Mining Inc. - Chairman & CEO [12]

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Chris, could you answer John's question?

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Christopher Alexander Stewart, McEwen Mining Inc. - President & COO [13]

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Yes. Hi, John. You're correct in the fact that we've done a good job at managing our cash costs within the business. There's a number of changes and a number of cost savings coming into -- at Black Fox, for example. With respect to our power, we expect to save 2 -- just over $2 million in the next 12 months based on work that was done in the previous year to mitigate our global adjustment, which is a fee you pay on top of your hydro cost based on your usage. So we've been managing that closely, and that's reflected in what we're seeing now coming in with our cash costs.

With respect to the all-in sustaining, it's a bit higher than what we've planned. And that's a function of capital development work and some additional items that we need to do with Gold Bar with respect to weather protection and some adjustments to the ore handling system. So with the production expected to increase here in the second half of the year, I would expect to see definitely our all-in sustaining costs drop. We are taking on some other projects within the operations. I think when we came out with the cash costs at the beginning of the year, I would say that was based on our budget. We have managed to make some improvements.

So I would expect that we will see or we will beat our cash cost numbers overall for the year. Whether it's an easy beat, I'm not sure. Everything seems to be a bit of a challenge at Black Fox, especially Gold Bar is certainly starting to hit its stride there now. We're pleased with the performance there. But Black Fox will continue to challenge us a little bit, although we've dealt with the crushing issues and the water from the spring melt is sort of a one-off, so we're getting a lot better handle on Black Fox as well. So I think we'll have to take another look at that, but I would expect as your divisor gets larger, you'll certainly see a reduction in the cost in the second half of the year.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [14]

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This is a small question, Chris, but the cash costs and -- are almost $100 higher than budget at El Gallo. And for residual leaching, there shouldn't be a lot of activity or costs. I know it's a small amount or ounces and a small amount of dollars but what's the cost variance there?

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Christopher Alexander Stewart, McEwen Mining Inc. - President & COO [15]

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Well, a lot of that was related to the Project Fenix works that we're doing, and we kept additional people on site. And we did a bit more exploration/metallurgical work to support Project Fenix, and that was something that wasn't originally planned at the beginning of the year. But we increased our level of confidence in a couple of things we were looking out at Project Fenix. We needed to spend a bit more money on that.

And same with the all-in sustaining costs, the bump-up there was related to the additional carbon leach tank that we installed to improve our gold recoveries or speed up our gold recoveries within the system, which is why we're seeing a better performance out of El Gallo on the year. We then -- we increased the guidance to 16,000 ounces. So again, they're minor costs but that's kind of what we've been up to there.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [16]

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So Chris, I'm going to unfairly put you on the spot for a second. Rob drops a hint about maybe lowering the output next year at Black Fox to catch up on some things. I know you're not issuing formal guidance for 2020 yet, but is there a rough range of what Black Fox and Gold Bar production might be?

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Christopher Alexander Stewart, McEwen Mining Inc. - President & COO [17]

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I would say, it's a bit too early to put a number out there. I would -- with respect to Black Fox, we're looking at sort of the overall concept of what we want to do with that operation. We've got Froome sitting there with 180,000 ounces in resource. We've got Grey Fox, which has got 700,000 ounces of resource. And then we've got Black Fox, which we're continuing to work through. And what Rob was speaking about, again, we've done our scoping study on Froome. We're going to be coming out with some results from that here in the next sort of month or so. And the idea is to look at bringing on these other deposits to basically reduce production coming out of the Black Fox.

But again, sort of maintaining our kind of 50,000 ounce production level for the next little while, while we get Black Fox figured out. And the idea is that our concept is to bring 2 deposits on it one at a time as we have talked about, I think, last quarter. But essentially, try and get our mill full, so we're putting 1,800, 2,000 tons of [hay] into our mill, which will move our production profile up in the coming years to more in the 90,000, 100,000, 110,000 ounce range depending on the grades. So that's kind of the high-level concept of what we're looking at with respect to the Timmins area.

And I think Black Fox has a lot of potential. And again, the exploration program has a lot of really high-grade hits. But we need that time. There is a lack of capital investment in that operation over the years, and that's why you see our all-in sustaining cost is higher because we're having to do a whole bunch of development. We're mining right on top of ourselves. So really, you need to buy yourself time to push it to development, get the drilling done, get all your mine plans fixed up, stope designs done and have all that stuff sitting in front of you rather than trying to move ahead with 1 year of reserve all the time. So Froome and Grey Fox, I think, will give us that opportunity as we work through the engineering work here over the next few months.

And then down at Gold Bar, we're actually in the process of, again, relooking at our recovery model based on performance to-date and revamping the life-of-mine plan for Gold Bar going forward. So we should be out -- we'll have to wait to see what the guidance looks like but that certainly suggests that we were at, I think, this year, the original plan was around 55,000 ounces. And I think that would probably be the bottom for where we're looking at going forward. So the plan, I think, is around 60,000 to 62,000 ounces per year average production coming out of Gold Bar so. And recovery seem to be aligning up with the feasibility study at the moment. So can't put a number on it yet, but things are looking positive for Gold Bar, in my view.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [18]

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So Rob, if I could impose and ask one last question to Sylvain?

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Robert Ross McEwen, McEwen Mining Inc. - Chairman & CEO [19]

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Yes, John. Yes.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [20]

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Sylvain, you're drilling, as you said, 25 miles south of where Barrick's found tens of millions of ounces of gold. And several times, a few years ago at my annual conference, I hosted NuLegacy Gold that had a JV with Barrick on the south side of Goldrush, maybe 20 miles closer or more, and there the famous geologist, Roger Steininger, that's sort of been a nothingburger. And Barrick seemed to be more interested in drilling on the north side toward Fourmile and not on the south side.

Could you tell a little bit -- tell us a little bit about the structures to the south and the dips and valleys and cuts and faults and all that stuff because some of it -- some of my clients lost money in this other guy that was a lot closer than you guys.

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Sylvain Guérard, McEwen Mining Inc. - SVP of Exploration [21]

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Okay. Yes. No. Happy to talk about Gold Bar, and thanks for asking. What we have there, it's, as you know, well located along the trend. It's one thing, like in the Abitibi, to be along the breaks for gold mineralization.

And the same apply to the trend in Nevada, but you have to be at the right place along those trends. And we have some distance between the big deposits to the north and our property there. And the good news about Gold Bar is that we are sitting on a proven gold system. It's not just the right rock, it's not just along the trend, we also have a gold system there. There's close to 2 million ounces endowment, total endowment, if you look at historical mining, resource, reserve altogether. So that gives you some indication of the size system.

And those Carlin gold deposit or mineralization are a spatial type of deposit. Statistically, they are not very abundant, there's not a lot of those. But if you're sitting, especially in Nevada, this is where they are. If you're sitting on a good system, they can grow significantly and get to 10 million ounces size mark. So if you look back at the big one, the -- and people forget that sometimes, all of the big deposits that go straight to Cortez and the others, they all started at small heap leach low-grade open pits. So this is the way those system start their lives.

And through development of the understanding and quality exploration and deeper drilling, the companies were highly successful to take those smaller system to large and Carlin gold deposit that we see today in Nevada.

So we believe that at Gold Bar, we have the right geology. We have the right location. We have many, many similarities with the big deposits. And we stand a fair chance to -- through exploration success to hopefully see Gold Bar growing to the next level to a bigger size of deposit.

As I said, we have a bunch of targets, some are near mines just to extend and provide organic growth. Gold Bar South is a different deposit, very silica-rich, very poor in plate, so potentially good blend material for Gold Bar. And the deep potential, and I'm talking here of significantly deeper holes, remain untested on Gold Bar. So we have our concept well defined. We've been calibrating ourselves with a bunch of former Barrick geologists and geophysicists very familiar with this type of deposit in Nevada. And everybody is on board to say let's go for the deep potential. And here we go, and we'll see what happens there.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [22]

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So if you were to just traverse the 25 miles between the big gold ounces and your ounces, how many faults or valleys or large structures are there between you and them?

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Sylvain Guérard, McEwen Mining Inc. - SVP of Exploration [23]

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I mean there's a bunch of -- there's significant distance in between. And actually, with our Tonkin project, that's somewhere in between there. It's a low-grade sulphides, as you know, but it's still a large endowment there, another 2 million ounces flows that we have there. There is a fair distance but, as I said, along the trend, along the extension of the Cortez Fault, you get to Gold Bar in your own new gold mineralized system with the right construct, with the right structure and significant size. And this place remains underexplored.

As I mentioned earlier, this was work by previous companies using pieces of data. It was not a complete coverage. So what we did is putting together all of the available information and also covered and added a bunch of different surveys, geophysical surveys, geochemical surveys to make sure we had all the pieces of key information to first develop the understanding and develop the quality targets for our drilling. And this is what -- last year, we've been starting around the open pit. It's always a good place to start, and we've been increasing significantly our resource. And this year, we are still close to our mine but stepping out a bit outside of those pits and going to Gold Bar South and also testing other parts of the property.

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Operator [24]

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Our next question comes from Mike Kozak with Cantor Fitzgerald.

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Michael Peter Kozak, Cantor Fitzgerald Canada Corporation, Research Division - Research Analyst [25]

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Two questions for me. First, and this one's probably for Chris. With the primary crushing at Black Fox now and taking place at the Stock mill as opposed to at the mine with the presumably lower rehandling you'll now be doing, any idea yet as to how much gold in the fines you hope to save as a result? Or do we have to wait a couple of months before we can tell?

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Christopher Alexander Stewart, McEwen Mining Inc. - President & COO [26]

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Yes. No. It's difficult to quantify that. We just want to make sure that we're being diligent in how we're handling the ore given that's nuggety ore body, and we do have visible gold. So the shipping from the mine to the mill with larger chunks of ore, for lack of a technical term, you're essentially safeguarding any chance of losing. We're not sure how much gold we've lost over the years by crushing at Black Fox. But we're going to be cleaning up that area once the crusher demobes from our Black Fox mine, and that will give us an idea on what we see with respect to the grade in the muck there as we clean that up as to how much potential gold loss we did incur.

So that would be the potential savings, I guess, when you get to that. But that will be a few months away before we have an idea around that. Again, it's all about being diligent in making sure that you reduce any chance of losing any gold by, again, crushing at our mill facility rather than doing it at the mine and shipping it down the road in a very fine product.

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Michael Peter Kozak, Cantor Fitzgerald Canada Corporation, Research Division - Research Analyst [27]

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Got it. And then the second question, or maybe it's more of a comment for Rob. I mean, Rob, your name's synonymous with gold investing. We've had a great quarter here for the gold prices, the gold stocks and silver has finally woken up.

I'm sure you saw -- I mean, 20 minutes ago, the Fed just cut by 25 basis points. The initial knee-jerk reaction was lower but now, over the last few minutes, the gold has bounced right back to where it was before and stocks bounced back. I just -- I'd love to get your thoughts kind of maybe short-term and longer-term on just the current state of the gold market. What's changed? And just your thoughts on the macro, if you wouldn't mind?

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Robert Ross McEwen, McEwen Mining Inc. - Chairman & CEO [28]

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Certainly. Nice deductions, Mike. I have a very positive view on the price of gold and silver. In a low-real interest rate environment, the opportunity cost of holding gold is very low. And I mean, if you want to take some real extremes, you could look at how gold, when it was basically free in 1971, it went from about $40 to $800 or better than 20x increase. And then from 1999 and 2001, it reached the low of $250, and it ran to that just over $1,900, that was 7.5x. And this is going to sound really outrageous, but if you took the low of $1,050 and apply that 7.5x, you're up almost at $8,000, and if you apply that factor of 20x, well, a lot further north.

One last thing in the market that's positive about gold, no, it hasn't slowed down. I mean, the U.S. is still putting on a lot more debt, where it's up to $22.5 trillion right now and doesn't show any signs of slowing down. Other areas, student loans are now up over $1.6 trillion. You've got -- the cost to service the debt has dropped dramatically. But if interest rates were ever to turn, it would be very difficult to service debt. For now, interest rates as a percentage of the outstanding national debt is just hovering about 3%. We're still seeing a rather anemic homeownership numbers. And the propensity to consume, which is the indication of expectations in the marketplace, it put times as -- at the low point -- the lowest point it's been since 1960.

We've had a financial asset, have grown disproportionately to disposable personal income. You had your first big correction from 1970 and 1999 with the dot-com bubble. Then you had the housing bubble and the global financial crises '08, '09. And right now, we're approaching what might be called the everything bubble. You've seen a lot of IPOs done. And large number, about 80% of the IPOs done in 19 -- 2018 were for companies with negative earnings. If you look at the growth, stock versus the value, we're looking at levels now that we haven't seen since the dot-com bubble.

So I just think there's real reasons to be looking at gold's commodities since the 1900s relative to the dollar, the lowest point puts us a hundred -- almost 120 years, 119 years. That central banks, Russia, China, India, Kazakhstan, Turkey, all adding to their gold reserves. Why are they doing that? They appear to be wanting to get out of the dollars because they think maybe the dollar is going to correct. So if it would correct, price of gold would go up. Gold has been moving up in many currencies around the world beyond the dollar. And money is moving into ETFs again and hitting closer to the levels we saw at the end of 2011 and beginning of 2012.

And then when I look at gold equities, we've got some really interesting performance numbers showing up. While gold is only up about 35% over the last 3 years since the beginning of 2016, we're looking -- and so it has underperformed the Dow and the S&P but it's -- the GDX, the GDX there are up over 100%. So they're doing -- the gold stocks are 3x better than gold and 100% better than the Dow and the S&P. So there is money moving into gold, and I think you're going to see a lot more moving into gold.

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Operator [29]

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Our next question comes from Bhakti Pavani with Alliance Global.

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Bhakti Pavani, Alliance Global Partners, Research Division - Senior Research Analyst [30]

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Just a quick question. I know you are very focused on exploration drilling at Black Fox and Gold Bar. But given the recent increase in metal prices, both gold and silver, what's your view on Project Fenix?

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Robert Ross McEwen, McEwen Mining Inc. - Chairman & CEO [31]

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Chris, would you like to discuss that question?

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Christopher Alexander Stewart, McEwen Mining Inc. - President & COO [32]

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Yes. Hi, there. So we've been, as I mentioned earlier, we're down to the short strokes on the feasibility study. We anticipate having the results out of here later in Q3. Certainly, the movement in gold price and silver price is certainly making the outlook for that project even more positive. We're being a bit conservative on the pricing that we'll be using within the study itself. But certainly, when you look at what we have there in Mexico, we have quite a bit of potential. Looking at with the PEA was targeting a 12-year mine life. We think it will be probably some -- a little bit smaller than that. As you know, when you move from PEA to feasibility, you have to drop your inferred ounces. You cannot use those on the feasibility study so that will result in a sort of decrease in the overall life of the project based on what we know now. But certainly, it'll have a positive impact on that project. The timing on when we would actually move ahead to decide on whether we're going to build it or not or, again, depends on a number of factors, including our cash position and access to capital to move that project forward. So that will be decisions that get made later this year, early in 2020, I would think.

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Bhakti Pavani, Alliance Global Partners, Research Division - Senior Research Analyst [33]

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Okay. But at least, in the past, you had mentioned or you had talked about potentially selling the asset or selling the project. Is that still on the table?

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Robert Ross McEwen, McEwen Mining Inc. - Chairman & CEO [34]

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It is at the right price, Bhakti. I think we -- there's an improvement in value coming. As Chris said, we expect to get a permit to proceed with construction or approve to construct in this quarter. And there'll be a feasibility study out, so much tighter analysis of the cost, the capital involved and what the payback will be in the return and also having permits go so it'd be ready to build. So I think that would improve the value of that property.

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Bhakti Pavani, Alliance Global Partners, Research Division - Senior Research Analyst [35]

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Got it. And then talking about the price, at this point, do you have an interested suitors or interested parties willing to take the project off your hands?

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Robert Ross McEwen, McEwen Mining Inc. - Chairman & CEO [36]

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Not yet, but you might want to direct some forces.

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Operator [37]

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And there's no further questions at this time. I will now turn the call back over to the presenters for closing remarks.

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Robert Ross McEwen, McEwen Mining Inc. - Chairman & CEO [38]

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Thank you very much for joining the call. Just want to wish you much success investing in gold, and keep your eye on McEwen Mining. I think we're going to start moving.

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Operator [39]

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This concludes today's conference call. You may now disconnect.