Executive Summary
McEwen Mining Incorporated ("McEwen") (TSX:MUX)(NYSE:MUX) is a Canadian company that has operated several small precious metal mines in the USA and Mexico and has a sizeable beneficial interest in a very large porphyry copper project in Argentina called Los Azules.
The mineral reserves and resources at the operating mines give the impression of McEwen living from hand to mouth, having to invest heavily in ongoing exploration and mine development just to maintain precious metal production. A review by Crux Investor of the financial performance of the operations over the last 6½ years shows that cash from operations has almost always been negative and perpetually negative after investments.
For the above reasons, Crux Investor deems the operations to have nil value at best and has looked into the beneficial interest in Los Azules to determine whether or not this sufficiently underpins the market capitalisation of McEwen.
The Los Azules project is a vast copper-precious metal porphyry deposit located at a high altitude and in a very isolated position in Argentina. Whereas the primary component of the deposit is very low grade and of questionable economic value, there has been substantial leaching of the near-surface section with supergene enrichment below this over a very considerable vertical distance. This part of the deposit has been the focus of recent studies, with heap leaching followed by solvent extraction/electrowinning (“SX/EW”) as the process route. Mining of Los Azules will benefit from having the best grades and copper solubility located directly under the leach cap, providing the highest positive net cash flow in the early years of operation.
Los Azules would be an attractive venture in most global jurisdictions, but its difficult geographic location, combined with very onerous revenue-related charges and taxation in Argentina greatly detracts from the project. The latest preliminary economic assessment (“PEA”) comes to an NPV8 of US$2.66 billion at a copper price of US$3.75/lb Cu and initial capital expenditure of US$2.46 billion. Crux Investor, however, records inconsistencies between off-mine cost rates suggested in the text and reflected in the PEA. Moreover, the PEA does not include a charge of 17.5% on purchasing foreign currency when repatriating profits. After making amendments Crux Investor arrives at an internal rate of return (“IRR”) of 14.2% and NPV8 of US$1.82 billion. Given the long lead time, with first production only in 2029 at the earliest, discounting at 8% greatly reduces the value of net free cash flow.
The PEA has a number of very optimistic provisions for operating costs and capital expenditure. Benchmarking the suggested operating cost against other projects in a similar location and altitude shows that these are very low and, following adjustment, result in an overall cost rate that is 83% higher. The life of mine (“LOM”) capital expenditure in the Crux Investor cash flow model is 27% higher at US$2.65 billion. These adjustments drop the NPV8 to US$0.73 billion, despite a copper price that is 10% higher.
McEwen's beneficial share in the project would require it to contribute US$1.26 billion, which will be very difficult to raise given the company's size. It may be forced to dilute its shareholding further by letting its large partners, Stellantis and Rio Tinto, contribute more to the construction financing. Ignoring this, McEwen’s share in the calculated NPV8 value is US$347 million. The diluted Enterprise Value on 19 August 2024 is US$510 million, which exceeds the NPV8 by more than 47%.
Does this mean that McEwen is heavily overrated? Not necessarily. A shareholding in McEwen gives exposure to one of the largest global copper deposits. Technically the risk associated with this project is relatively low. The mineral resource estimation (“MRE”) can be trusted, the metallurgy has been well established, and the process route employs conventional methods. The deposit will allow for operating cash flow in early years
What currently detracts from the project is its location in Argentina, a complex jurisdiction that has not been business-friendly. However, with the current president, Javier Milei, there is a good chance this will change. The recent acquisition by BHP and Lundin Mining of two porphyry copper projects in the same province where Los Azules is located points to major mining companies positioning for such a change and confidence about further copper price increases in the mid to long term.
Therefore, two developments can dramatically change McEwen's attractiveness: a return to rising copper prices; and Argentina taking steps to improve business investment conditions. A rise of only 5% in the present copper price would take McEwen’s participation in the NPV8 value beyond its Enterprise Value. Any favourable changes in Argentina will add to Los Azules’ prospects.
In conclusion, McEwen gives exposure to an attractive, extensive copper project. It would do well to dispose of its loss-making mining operations and fully focus on advancing Los Azules. Crux Investor is of the opinion that eventually shareholders will do well holding McEwen shares. They may have to wait for years until production starts, but there is always a chance that another large mining company will make a partial or full bid for its stake in Los Azules.
Introduction
McEwen Mining Incorporated ("McEwen") (TSX:MUX)(NYSE:MUX) is a Canadian company that owned in 2017 the El Gallo mine in Mexico and a 49% beneficial interest in the San José mine in Argentina. In 2017 McEwen acquired Lexam VG Gold Incorporated (“Lexam”) through a plan of arrangement. Lexam owned a group of properties in the Timmins district in Canada with Measured and Indicated (“M&I”) mineral resources containing 1.47 million ounces (“Moz”). This was followed up by the acquisition of the Black Fox Complex, which comprised an underground mine and two development projects. It was a busy year for McEwen as they also commenced construction of the Gold Bar property and completed a PEA for their Los Azules project in Argentina.
The acquisition of Lexam was probably precipitated by the El Gallo mine coming to the end of its LOM. The Black Fox mine was effectively acquired in October 2017 allowing the company to report production for the last quarter of the year.
Commercial production was achieved in May 2019 at the Gold Bar heap leach operation. The company had to run hard to stand still as the reserves at the Black Fox mine were predicted to run out in 2020, and continued production was subject to the development of other areas (the first being Froome). At the El Gallo Complex, the placement of material of the leach pads had stopped, and residual leaching had commenced.
Froome achieved commercial production in the third quarter of 2021, with an expected LOM until 2026. The company hoped to find additional resources in the area at targets referred to as Grey Fox and Stock West. In January 2022 McEwen completed a PEA on mining resources defined at Froome, Grey Fox, Stock West and Fuller, suggesting a remaining LOM of 13 years with gold production in years 6 to 10 forecast at around 0.1 Moz per annum, which is more than double the current rate.
In Mexico, McEwen is advancing the Fenix project within the Gallo mine tenement area. In February 2021 a feasibility study (“FS”) was published, which envisions reprocessing material from the leach pad at the existing El Gallo mine, followed by processing of open-pit silver mineralisation from the nearby El Gallo Silver deposit. The company purchased a second-hand gold processing plant and associated equipment in September 2022 that includes all of the major components for the project's first phase.
In July 2021 the company decided to create a separate vehicle for its Los Azules asset and announced the creation of McEwen Copper Inc. (“McEwen Copper”). Over time the beneficial interest in McEwen Copper dropped from 100% to 47.7%. From 2021 until now, private placements have been made with Stellantis and Rio Tinto, diluting McEwen’s share. The company further disposed of McEwen Copper shares to fund its gold operations. In 2023 the beneficial shareholding dropped below 50%, and McEwen decided to “deconsolidate” and account for its interest on an equity basis.
Table 1_1 shows the relative contribution of the various operations to gold equivalent (“AuEq”) production, illustrating that San Jose contributed almost half of the metal produced.
Table 1_2 reproduces the latest declared total mineral reserves and Measured and Indicated (“M&I”) mineral resources for the mineral assets of McEwen. At the current treatment rate, the Gold Bar and San José mines have very little LOM left. San José is an underground operation that often proves up reserves for a few years ahead. The calculated LOM may be too conservative, as ongoing exploration and mine development could substantially add to the LOM. However, having only a time horizon of one year ahead is extremely short and risky.
The table above, and the history and developments in Canada and Mexico, give the impression of a company that lives from hand to mouth, having to invest heavily in ongoing exploration and mine development just to maintain precious metal production.
The Los Azules project is however of a size that could propel McEwen into a different league, even with only a 47.7% beneficial interest. Progress has been slow, with the first PEA completed in 2009, followed by two others in 2010 and 2013, and now the subject of an FS planned for completion early in 2025.
Figure 1_1 shows the share price performance on the Toronto Stock Exchange (“TSX”) since October 2017 when it took control of the Fox Mine Complex.
The graphs illustrate that the share has been on a declining trend from mid-2018 until August 2022. This is probably a reflection of slow progress at Los Azules, and the mining operations not generating positive cash flow, as will be shown in the next section. However, from August 2022, the trend reversed, and from February 2024, there was a sharp improvement.
Historical Operational and Financial Performance
Table 2_1 gives McEwen's historical production and financial performance since 1 January 2018.
Table 2_1 shows the operational performance:
- After 2018 the average AuEq grade dropped sharply with the commencement of the Golden Bar mine. As the Gallo Mine wound down, metal production did not increase;
- Total AuEq production fluctuated wildly from year to year, but never reached 2018 levels again;
- Investors can at best hope for the company to maintain precious metal production with the forecast increased output from the Fox Mine complex compensating for the closure of Golden Bar Mine; and
- The average precious metal grade dropped to the lowest level in H1 2024.
Table 2_1 shows the financial performance:
- The annual revenue reflects the variations in metal production, reaching record levels in 2023, assisted by the rise in precious metal prices;
- The company has been bleeding cash from operations, aggravated by having to make considerable investments in sustaining production and developing the Los Azules project;
- To cover the cash outflows, US$487 million in funding was secured, of which shareholders contributed US$163 million. In 2022, and especially 2023, McEwen received considerable cash injections through the sale of shares in McEwen Copper, the company owning the Los Azules project, bringing its beneficial interest down from 81.4% to 47.7%. The cash raised from equity placements by McEwen Copper was used to advance the development of the Los Azules project, and the cash received from the sale by McEwen of McEwen Copper shares was used to repay third-party debt, and for general corporate purposes;
- With its beneficial interest dropping below 50%, the investment in McEwen Copper was “deconsolidated” on 10 October 2023, and its holding was rather accounted for as an equity investment. The large number for “exchange rate effect” reflects the impact of the deconsolidation;
- The effect of a private placement announced on 24 June 2024 for McEwen Copper is not reflected in the table. Confusingly, the June 2024 quarterly report states that McEwen subscribed for US$14 million, increasing its beneficial shareholding to 48.3%. The announcement however states that “assuming completion of the full amount of the Offering and the investment amounts shown above, McEwen Mining will own 45.8% of McEwen Copper and Rob McEwen will own 12.5%.” The latest corporate presentation and the fact sheet dated 10 July still show the beneficial interest as 47.7%.
Based on McEwen being unable to generate any positive cash flow from its operations, Crux Investor will not model cash flows from such operations. The following sections assess whether or not its beneficial interest in Los Azules supports the company’s current market valuation.
Valuation of the Los Azules Project
Background
Unless expressly stated otherwise, all illustrations, technical information, and wording in Section 3.1 to Section 3.6.4 have been drawn from an NI. 43-101 compliant technical report in support of a PEA dated 31 May 2023.
The Los Azules copper project is located approximately 80 km west-northwest of Calingasta, in the San Juan Province of Argentina, and approximately 6 km east of the border with Chile (Figure 3.1_1). Calingasta is located 173 km by road west of the city of San Juan along Route 12.
The project area is in a challenging location as the area is remote, with no infrastructure, and is at high altitude, with the proposed pit and facilities situated between 3,200 and 3,600 metres above average sea level (“masl”). The project area is currently accessed by 120 km of unimproved road with eight river crossings and two mountain passes above 4,100 m elevation. This access is subject to snow accumulation and is passable only from November through to May. Another disadvantage of the location is the high seismic activity risk, affecting the building standards that will apply to mine facilities.
McEwen Copper controls approximately 32,700 ha of mining rights and 18,000 ha of surface rights around the Los Azules project.
The tenement area is subject to two net smelter royalties (“NSR’s”): 0.4% to TNR Gold Corporation (“TNR”) and 1.25% to McEwen. The San Juan Province charges a 3% royalty based on the “mine head value”, which currently is calculated on gross revenue without any deductions. In addition, the Province of San Juan has an unlegislated practice of negotiating a voluntary contribution to a trust, usually between 1.2% and 1.5% on the same calculation basis as mine head value. The above means that the project will be subject to total royalties of 5.85%-6.15%, which is very onerous.
Geology and Mineralisation
The Los Azules deposit is a classic Andean-style porphyry copper deposit. The igneous phase started with the intrusion of a relatively poorly mineralised stock, which is elongated in a NNW direction, extending at least 7 km in that direction, and being at least 2.5 km wide. This was followed by the intrusion of a dyke phase, again along a trend, interpreted as following a major tectonic structure. This is referred to as the “early mineralised porphyry dike phase” (“EMP”). The EMP contains the best mineralisation. It is a body 1.8 km long and 50-200 m wide, which is responsible for a ridge due to the silica content rendering it resistant to erosion. Associated with the EMP are several breccia bodies, also controlled by the major NNW tectonic structure, which are relatively small, but constitute the highest grade mineralisation. There is a later phase of dykes, referred to as “intra-mineralised porphyry dikes (“IMP”), which are poorly mineralised. One of these dykes (the most prominent one) is located along the east side of the EMP and is about 1.7 km long with widths ranging from 50 m to 150 m.
The deposit is capped by a leached zone of oxidised and clay-rich rock up to 180 m thick. Beneath the leached cap, a thin mixed sulphide-oxide zone gives way to a supergene sulphide zone where hypogene (= originally deposited from rising hydrothermal fluids) sulphides, mainly chalcopyrite (CuFeS2), are replaced by chalcocite (Cu2S) and minor covellite (CuS). The thickness of the supergene chalcocite blanket typically varies between 60 m and 250 m but can penetrate to more than 400 m down structures. The intensity of supergene mineralisation gradually decreases with depth from the top of the zone. Copper values in the supergene enriched zone vary between 0.4% Cu and greater than 1.0% in the north-central part of the system, and they decrease in the south and the peripheries to 0.2% to 0.4% Cu. The supergene component is the most important mineralisation of economic interest at Los Azules.
Any mineralisation that has a cyanide-soluble copper component exceeding 50% of total copper content is classified as supergene enriched. Figure 3.2_1 is an isometric view with the area classified as enriched in red and the rest of the mineralised early porphyry dyke in magenta.
Figure 3.2_2 shows the close relationship of boreholes with the best grade intersections and the NNW trending tectonic structure. Crux Investor has annotated the map by adding an ellipse with orange colour around the area with boreholes generally intersecting higher than 0.60 % total copper (“% CuT”), and an ellipse with boreholes with intersection usually higher than 0.20 % CuT.
The higher grades define an area with a maximum width of approximately 500 m, based on the distance of 50 m between coordinates. The blue ellipse has a maximum width of 625 m.
The cross-section below demonstrates the consistent trend of better copper grades as a function of proximity to the NNW structure, irrespective of lithology and oxidation level.
The peak in grades 600 m to the left of the main NNW trending structure is explained by its association with a second structure at depth.
Mineral Resources and Mineable Inventory
Mineral Resources
The latest MRE is based on 162 drill holes with a spacing of approximately 150 m to 200 m, but there are localised areas where drilling is on a 100 m spacing. Mineralisation of economic importance is below sterile overburden, a low-grade leached zone, and minor oxide mineralisation, which has been ignored.
The model for the MRE combines structure, lithology, and copper mineral zonation (i.e. oxides, supergene, hypogene, and transitions). As it was found that grade statistics are very much defined by lithology and copper mineral zonation, the domains have been accordingly defined, and all lithological contacts have been treated as hard boundaries for grades during estimation, with no sharing of sample values between lithological units.
The MRE is based on uncapped copper grades, which were found to have a negligible effect on overall copper content. The chosen composite length was 2 m and the block size was 20 m x 20 m x 15 m high, which is the expected smallest mining unit (“SMU”). Variograms were generated for each lithology, and it was shown that the strongest correlations are along the NNW trend and dip of the structure for both the enriched and primary zones. Soluble and total copper block grades were estimated using ordinary kriging for the main domains and inverse distance weighting for the smaller domains. Soluble copper is the combined acid-soluble (copper from oxides) and cyanide-soluble (copper from chalcocite and covellite) grade.
This grade information type is essential for determining reasonable prospects of economic extraction. The reported mineral resources include a component that is expected to be treated by heap leaching and solvent extraction/electrowinning (SX/EW) to get to copper cathode, and another component with low solubility, but with credits for precious metals when treated by milling and flotation to produce a concentrate.
The cut-off grades are expressed in NSR values, which gives due consideration to variations in metal recovery and off-mine charges, which a straightforward metal grade cut-off would not provide. The MRE assumes a very low cut-off of US$2.74/t for Leach resources and for Milling/Flotation resources approximately US$5.45/t. These values are not formally derived in the technical report, but Crux Investor records that the revenue charges (Boca de Mina, NSR royalties, and the Export Retention rate) have been ignored. The Leach cut-off value includes processing cost, but the Mill/Flotation cut-off does not. For both, the mining cost of the block that will be treated is ignored. This is correct for deciding whether or not to treat material that is already mined, but not appropriate for a decision to mine a block.
Table 3.3.1_1 gives the mineral resource statement, effective 9 May 2023.
The table shows that total resources are impressive, but for milling/flotation, these are of very low grade and questionable economic feasibility. The PEA implicitly endorses this view by developing a production schedule based on treating only Leach resources.
The Inferred resources account for 34% of total copper and almost 32% of soluble copper content. Substantial infill drilling will be required to convert the Inferred resources to a higher category for inclusion in an FS.
Mineable Inventory
As the Los Azules economic assessment is of PEA standard it is allowed to include Inferred resources in the production schedule. However the term “reserves” may not be used as this is exclusively permitted for M&I resources that have been proven to be economic in terms of a pre-feasibility (“PFS”) or FS. “Mineable Inventory” is that portion of all mineral resources that are included in a PEA production schedule.
The PEA mine plan is to extract resources by conventional open pit methods using very large equipment, reflecting the bulk nature of the deposit.
One of the significant advantages of Los Azules is the presence of the best grade blocks at shallow levels just below the leach cap. This means a starter pit can be selected with limited initial waste stripping, whereafter high-grade material can be mined for treatment by heap leaching. Figure 3.3.2_1 illustrates this in a longitudinal and cross section through the block model. Not evident from the illustrations is that copper soluble grades are highest just below the leached cap and gradually drop with depth, further improving short-term copper production.
In defining the mineable inventory due consideration was given to surface restrictions, with the key constraint being areas identified as cryogenic geoforms (zones of subsurface frozen water). No disturbance is permitted within 50 m (measured horizontally) of these geoforms.
Overall pit slopes in overburden will be 30 degrees. Pit slope angles are planned to reduce with the planned final depth of the pit declining from 42 degrees for pit depths down to 600 m to 32 degrees for pit depths down to 1,000 m. Flattening the overall pit slope with depth significantly impacts pit optimisation studies, limiting the maximum pit depth to less than 800 m, with only a small proportion of the pit wall (in the east) designed at an overall slope of 38 degrees.
The pit optimisation assumes a dilution of 5% and a mining recovery rate of 95%, which is conservative given the bulk nature of the mineralisation.
The table shows that almost 97% of the copper soluble metal in Indicated resources is captured as mineable resource, and nearly 75% is in Inferred resources. Despite 5% dilution, the forecast feed grade is substantially higher than for resources. When calculating the grade of the Indicated resources dropped out, it comes to approximately 0.23% CuT and 0.07% CuSol, and 0.25% CuT and 0.11% CuSol for Inferred resources, respectively. These numbers look unlikely. If correct, the technical report should explain how such selectivity is possible.
Mining Operations
The PEA heavily promotes the fact that Los Azules will be a “green” project, employing methods to reduce its carbon imprint. The mine plan incorporates a combination of electric-hydraulic front-end shovels and large mine haul trucks equipped with pantographs from the start of operations to allow for the early use of trolley-assist infrastructure. The SMU is 20 m long, 20 m wide and 15 m high. Given the large equipment size, the minimum mining width at the bottom of the pit is 60 m.
Non-mineralised material is hauled to either the North mine rock storage facility (“MRSF”) or the South MRSF. Mineralised material is hauled to either the Leach Stockpile or directly to the crusher for processing. The North MRSF at a starting elevation of 3600 mamsl has approximately 835 Mt of storage while the South MRSF at a starting elevation of 3860 mamsl has approximately 530 Mt of material storage. The South MRSF is the primary destination for non-mineralised material in the initial ~five years of mining. The remaining non-mineralised material is hauled to the North MRSF.
Low-grade leach material is sent to a stockpile east of the North MRSF for treatment at the end of the LOM. Initially, only a small amount needs stockpiling, but as mining progresses more low-grade material is exposed, and significant amounts of material are stockpiled in years 9 through 19.
The main mine equipment comprises up to eight large rotary blast hole drill rigs, 37 dump trucks with 363 t dump capacity, 25 m3 front-end loaders (2x), 40 m3 hydraulic front shovels (3x), and one 61 m3 electric rope shovel. Two large dozers (D10) will be used for levelling the MSRFs, and for pit and road maintenance.
Given the shallow depth to groundwater and the high permeability of the geologic units in the pit area, high-capacity vertical dewatering wells, both in-pit and outside the pit boundaries, will be necessary.
Metallurgy and Processing Operations
Metallurgical Test Work
Metallurgical test work spans a long period with initial work informing the first PEA in 2008. The envisaged process changed from the production of copper concentrate to treating such concentrate on site by pressure oxidation (“POX”) followed by SX/EW to produce copper cathode, to the current plan of dissolving copper in a leach pad followed by SW/EW to produce copper cathode. This section will only review the test work relevant to the heap leach route in the 2023 PEA.
9 composite samples were created out of 78 to emulate the different material types and grades between 0.019% and 0.578% CuT, and between 0.008% and 0.296% CuSol.
Comminution tests show that the impact work index indicates soft to medium hard rock. Abrasiveness is low to moderate.
For column test work two crush sizes were chosen 100% passing 19 mm (3/4 inch) and 12.7 mm (1/2 inch). The tests were conducted in Chile at the SGS laboratories in Santiago and at moderate temperature (i.e. 18.6 °C when the columns were loaded) with leaching up to almost 200 days. Recoveries were such that it was recommended to assume a fix of 100% for soluble copper plus another 15% for residual copper. However, at the publication date of the PEA leaching was continuing and no assays for residual columns were available. In a press release dated 22 February 2024, the final results were announced confirming the 100% recovery of soluble copper but raising the recovery of residual copper to 25%, for an overall recovery rate of 76.0%.
The sulfuric acid consumption is estimated at 16.5 kg/t treated when leaching at an acidity level of close to 2.0 pH.
This valuation has adopted the latest recovery estimate into the PEA production schedule.
It should be noted that in parallel the Nuton LLV technology of Rio Tinto is being tested as an alternative bio-leaching process.
Processing
To minimise truck haulage a primary gyratory crusher is planned at the pit rim, which will reduce the run of mine ore to a -150 mm product. This material will cycle through a series of secondary/tertiary screens and crushers to generate a product 80% passing (“P80”) -16.4 mm. The crusher product will be transported to the heap leach pad by a series of overland conveyors. The overland conveyors will discharge the material into agglomeration drums, bringing the moisture up to 5% using raffinate solution directly from the raffinate pond. The agglomerated material will be discharged through a tripper conveyor, a series of portable conveyors, and a telescoping radial stacker to place the material directly on the heap leach pad in 9 m lifts, to a maximum elevation of approximately 150 m. In the last quarter of the year, no placement of material on the leach pad is planned.
Loading a pad is estimated to take 14 days, after which raffinate leach solution (= dilute sulphuric acid) is pumped directly from the raffinate pond and applied to the surface of the heap through irrigation by sprinklers and drip emitters. Biomass will be added to the raffinate allowing for leaching of sulphide minerals. The active solution application will last for 180 days. The acid solution will percolate through the heap leach material dissolving copper and some impurities. The resulting pregnant leach solution (“PLS”) will drain from the bottom of the heap and will be collected in the PLS pond. From the PLS pond, the solution will be pumped to the feed tank for solvent extraction.
At the solvent extraction section, the PLS is mixed with an organic solvent for two minutes, after which it is stripped from the solvent by mixing it with a concentrated sulphuric acid solution which is sent to the electrowinning section for precipitation of the copper as copper cathode. Cathode stripping from the permanent stainless-steel blanks will be done in semi-automatic stripping machines. The EW plant, which has a nominal capacity of 175,000 t copper per annum, determines the overall processing capacity.
To avoid expensive and risky trucking of concentrated sulphuric acid, an acid plant will be constructed on-site, supplied by elemental sulphur from the YPF refinery in Lujan de Cuyo, south of Mendoza in Argentina.
Economic Valuation – Los Azules Project
Copper Price Assumed
The PEA uses a copper price of US$4.00/lb. For the Base Case of this valuation, the spot copper price on 19 August 2024, US$4.13/lb Cu was assumed as a long-term price.
Crux Investor has adopted the suggestions in the PEA that the selling cost will be US$0.02/lbs Cu (= US$44.1/t Cu cathode) and transport and freight costs total US$150/t Cu.
Production Schedule
Figure 3.6.2_1 reproduces the mine production schedule of the PEA report, which was adopted for this valuation.
The PEA assumes a construction period of 33 months, including two years of pre-production waste stripping and 16.9 million tonnes (“Mt”) of leach ore mining.
The diagram shows that the strip ratio (here defined as waste/leach ore) in the year before production is 3, after which it drops for two years to reach a peak in production in Year 3. The average rate over the LOM is 1.05. In the early years, when the mined grade is highest, extraction of leach material is just above 22 million tonnes per annum (“Mtpa”) which rises from production Year 5 onwards to reach a steady state level of 50 Mtpa by Year 7. With dropping waste stripping, the mining equipment can mine extra ore for stockpiling, both leach ore and primary ore. Primary ore may or may not be treated in future, depending on whether or not it will be economical. The PEA has ignored this possibility in its forecast.
Figure 3.6.2_2 shows the processing production schedule.
The diagram shows the high feed grade in the early years, which exceeds 0.7% CuT until production Year 5, after which it rapidly drops to settle around 0.45% CuT. Leaching of reclaimed leach ore from the stockpile from Year 21 onwards is at a grade of 0.27% CuT.
The initial processing feed rate is 22 Mtpa, increasing to 35 Mtpa in Year 4, and ultimately to 50 Mtpa in Year 7 through to the end of the LOM.
The capacity of the EW plant is designed at 175,000 tpa cathode copper. In the early years, the copper in the PLS solution exceeds capacity, and the excess copper will be recirculated until the plant can handle this. The result is that annual copper production only drops below 175,000 tonnes in Year 21.
Capital Expenditure
Table 3.6.3_1 summarises the estimated expenditures in the PEA technical report.
The pre-stripping amount converts to a mining cost rate of US$1.47/t. In the next section of this report, it will be demonstrated that this is an unrealistic number. Crux Investor has doubled the provision.
Initial crushing and treatment capacity is approximately 25 Mtpa. In Year 4 of operation, a secondary and tertiary crusher is added to increase the capacity to 36 Mtpa. In Year 7, a final addition of a secondary and tertiary crusher is installed to increase the capacity to a maximum of 51.4 Mtpa of material. The total provision of US$664 million looks reasonable.
The initial sulphuric acid plant has a capacity of 200,000 t per annum. In Year 4 an additional acid plant train is expected to be operational to bring the total capacity to 300,000 tonnes per annum, and in Year 6 another acid plant train for a total capacity of 400,000 tonnes of sulphuric acid a year. Crux Investor records that the sustaining capital expenditure provision includes three expansions, two costing US$115.1 million each, and the third expansion US$222.5 million. It does not make sense, particularly as the initial plant with double the capacity supposedly costs only US$94.9 million. Crux Investor suspects the US$222.5 million number should be part of the initial plant construction cost. The total provision of US$548 million over the LOM looks reasonable.
The initial heap leach capacity is 75.9 Mt within a total initial pad design of 956.6 Mt. Expansions for the initial leach pad are planned every 2-3 years. Another pad design is planned for Year 21, adding in total another 225 Mt. Crux Investor records that the cost of the initial pad amounts to US$2.10/t capacity dropping to US$0.46/t for the expansions of the first leach pad. Strangely enough, the cost of the second leach pad is only US$0.49/t capacity. These estimates need to be more consistent and look in general very low. The author has been involved in a heap leach operation in Chile where in 2012 heap leach construction was estimated to cost US$2.47/t capacity. Crux Investor has increased the cost rate for the first phase to US$2.40/t capacity, US$1.00/t for expansions, and again US$2.40/t for the second leach pad.
The forecast includes the assumption that the local electrical power supplier will construct the 220 kV power line to the site and recover the cost at the rate charged.
According to https://www.globalpetrolprices.com/Argentina/electricity_prices/ the electricity price for businesses in Argentina in 2023 was US$0.025/kWh, which is exceptionally low in a global context. Across the border in Chile, it was US$0.173/kWh. However, the study assumes that the project will use “green” electricity from renewable sources. Such electricity generation is more expensive than hydro schemes or nuclear and fossil fuel generation, and it is doubtful that the general rate would be charged. In Europe, this is noticeable in the significant rate differences between Eastern European countries/France with Denmark and Germany which have been most aggressively pursuing “green” energy.
Included in the initial capital expenditure forecast is a contingency rate of 25%, but for sustaining capital expenditure this has been ignored, which is not consistent. Whereas much of the sustaining capital expenditure relates to mining equipment and is relatively accurate, the other items should have included a substantial contingency. This valuation has however also ignored such a contingency.
Operating Expenditure
Table 3.6.4_1 shows the cost structure suggested in the PEA technical report, benchmarked cost at operations in a similar location and altitude, and highlighted in yellow the rates used by Crux Investor for its valuation.
As benchmarks, reference was made to the Puna Operations of SSR Mining and the Veladero Mine of Barrick/Shandong Gold.
The Puna Operations are located in the far northwest of Argentina at an elevation of 4,000 mamsl to 4,500 mamsl. The production rate of 8.2 Mtpa is far lower than planned for Los Azules, but its remote location at high altitude makes it a good reference. The cost rates were extracted from a technical report dated 11 February 2024. With a totally different processing route, no processing cost rate has been included in the table.
The Veladero operation is more akin to Los Azules, also located in the San Juan Province of Argentina, 6 km from the border with Chile, and at an altitude between 3,800 mamsl and 4,800 mamsl. It also treats ore by heap leaching but of gold, not copper. This should be less costly than copper production as its leachant is a weak cyanide solution and electrowinning is much less energy intensive. The mining rate of 62 Mtpa of Veladero is much closer to Los Azules than the Puna Operations. The cost rates have been extracted from a technical report for Valadero dated 19 March 2018. These rates are consistently higher than Los Azules' numbers, particularly as the Veladero rates are in 2018 dollars.
According to a very experienced process engineer the heap leach SX/EW processing cost in Central Africa for operations with an acid consumption of 25-30 kg/t is approximately US$2,000/t Cu Cathode. Using this rate for Los Azules as covering all processing costs, a total LOM cost that is 2.5x the PEA's processing cost is derived. Moreover, at the suggested delivered cost of US$315/t for sulphur, the produced acid would cost approximately US$130/t. Applying the net acid consumption rate of 16.5 kg/t treated, the acid cost per tonne treated alone would be US$2.15. Considering the above, Crux Investor is confident that a processing cost of US $ 5.00/t treated is more reasonable.
The PEA for Los Azules uses a General and administrative (“G&A”) cost rate expressed in US$ per tonne treated. This is inappropriate as such expenses are in reality almost fixed. Applying a rate per tonne treated would make the annual cost in the early years extra low. The Veladero technical report shows that the remote and challenging location makes for a very high annual outlay. Crux Investor has used US$100 million per annum to recognise the larger and more complex process at Los Azules compared to Veladero.
Working Capital
Being located in a very isolated area with little infrastructure, and producing copper cathode for export, implies a considerable investment in working capital. Table 3.6.5_1 shows the assumptions of Crux Investor to arrive at total investment in working capital.
Based on the Crux Investor assumptions Los Azules will have to make an investment of almost US$ 307 million in net current assets. These are assumed to be recouped in full by the end of the LOM without losses due to obsolesce or pilferage.
Royalties and Taxes
The PEA applies several revenue-related charges:
- The San Juan “Boca de mina” royalty of 3% of gross revenue;
- NSR-based royalties, 1.25% in favour of McEwen Mining and 0.4% in favour of TNR; and
- An export retention tax of 4.5% on the value of metals at the point of export. According to the technical report deductions applicable are transportation and treatment/refining charges, the latter not being relevant for copper cathode. The PEA assumes that annually 10,000 tonne copper cathode would be sold locally and escape the duty. Crux Investor has ignored this assumption.
Argentina charges 10.5% value-added taxes (“VAT”) on capital expenditure, even the pre-production component. The PEA assumes that 95% of the VAT is recovered, with the charge on initial capex recovered in the first two production years. During operations, VAT is charged at 21% on all non-labour expenses, with the operation only recovering 95%. Non-labour expenses also attract an Operating Bank Tax of effectively 1.0%.
Income tax is 35% in Argentina. The report gives no details on what amortisation and depreciation are allowed for income tax purposes. For this, Crux Investor referred to the Puna Operations technical report. The depreciation methodology for property, plant, and equipment (PP&E) included in this report is 60% in the first year, with the remaining 40% in equal portions in the two subsequent years. Intangible assets are depreciated on units of production throughout the LOM.
Ernst & Young in an announcement dated 7 May 2024 advises that Argentina applies a tax of 17.5% on the purchase of foreign currency when remitting dividends.
According to https://practiceguides.chambers.com/practice-guides/mining-2024/argentina there is a capital gains tax on profits from the sale of shares in an Argentine company levied at the election of the taxpayer at 13.5% on the gross amount of the sale price or 15% on the net gain. This also applies to the transfer of a foreign company that owns a controlling interest in an Argentine company. It is not clearly defined what “controlling interest” is, but with McEwen’s beneficial interest in Los Azules dropping to well below 50% capital gain tax may no longer be applicable, should McEwen be taken over.
Results
Table 3.6.7_1 summarises the LOM results for the Los Azules for Base Case metal prices and the input parameters set out above. The PEA input parameters were used as a comparison, but certain discrepancies were noted. For example, the report gives a selling cost of US$0.02/lb Cu, and transport and freight costs of US$150/t copper cathode. However, when using these rates Crux Investor gets to much higher expenses than the US$167.7 million as per the PEA. Moreover, for the tax calculation Crux Investor used an intangible asset balance of US$454.4 million on 1 January 2023, to which the US$80 million FS cost has been added. For this reason, the Crux Investor model has much higher amortisation and depreciation deductions than the PEA.
The table shows that despite a very good cash margin of more than 60% of gross revenue for the PEA, the project has a very modest NPV8 equal to 74% of the initial capital expenditure. The IRR is 14.2%. There are several reasons for this. There are considerable charges against the revenue that, together with a high income tax rate, and the cost of purchasing foreign currency, result in the government taking 29.5% of gross revenue. This is a higher proportion than for operating costs. Net free cash flow is 23.3% of revenue, but with a long lead time to production, modelled to start in 2029, the value of US$7.6 billion net cash flow drops considerably to US$1.8 billion when discounted at 8% annually.
When applying the more conservative assumptions of Crux Investor the net cash flow is considerably lower despite a copper price that is 10% higher. With operating costs 83% higher the cash margin drops to 44.3%. LOM capital expenditure is 27% higher. The overall effect is that operating costs absorb 44.6% of gross revenue and capital expenditure 16.5%. The government’s take drops to 21.2% of gross revenue leaving US$5.17 billion as net free cash flow, equal to 13.8% of gross revenue. Discounting at 8% results in an NPV of US$0.73 billion, 27% of initial capital expenditure.
Table 3.6.7_2 shows the sensitivity of the NPV’s at various discount rates for one-percentage point changes in the main input parameters.
The table illustrates that the project is highly sensitive to changes in the main input parameters. The NPV8 increases by 10.3% (i.e. US$75 million) for a one percentage point increase in the copper price (i.e. US$0.04/lb). For every percentage point change in the operating cost (US$0.14/t treated) the NPV8 changes by US$35.5 million, and for every percentage point change in LOM capital expenditure (US$60 million) the NPV8 value changes by US$39.6 million. The high sensitivity to capital expenditure is partially due to the long lead time to production.
Net Free Cash Flow Over Time – Attributable to McEwen Mining
Figure 3.7_1 contains the forecast net free cash flow for Los Azules attributable to McEwen Mining given its 47.7% beneficial interest in the project.
The graph illustrates the large amount of funding (totalling US$1.26 billion) required until positive cash flow is generated at the earliest in 2029. For a company the size of McEwen it will be difficult to secure this kind of funding, and the company may well have to dilute its shareholding further by letting its large partners, Stellantis and Rio Tinto, contribute more to the construction financing.
After production starts there are three years of positive cash flow with the high initial feed grade. Only for it to drop again because of the capital expenditure required for the production expansions.
The Enterprise Value of McEwen on 19 August 2024
At the share price of C$12.69 on 19 August 2024, and with 51.09 million shares issued, the market capitalisation of McEwen is C$648 million, or US$474 million.
Unfortunately, the financial statements for the quarter ending 30 June 2024 give no details on exercise prices for the various tranches of warrants and share options. The only statement indicating the number of shares that could possibly dilute current equity is “all 868,480 outstanding stock options and all 2,169,926 outstanding warrants were excluded from the computation of diluted loss per share”. Given the share price performance in the last few years, this valuation assumes none of these are in the money.
On 30 June 2024, the company had net current assets of US$29 million and long-term debt of US$34 million.
Table 3.8_1 derives an Enterprise Value of US$510 million based on the above.
The Enterprise Value is therefore 47% higher than its 47.7% participation in the NPV8 value.
Despite the current overrating of the company’s value, Crux Investor is of the opinion that McEwen constitutes good value. Being one of the most significant global undeveloped copper projects it is an excellent option for the copper price with small rises in the price of the metal translating to large increases in the prospective net present value of Los Azules. The project must be on the radar of the large producers seeking reserve replacement.
Any favourable changes in Argentina will add to Los Azules’ prospects. With the current president, Javier Milei, there is a good chance this will change.
Executive Summary
McEwen Mining Incorporated ("McEwen") (TSX:MUX)(NYSE:MUX) is a Canadian company that has operated several small precious metal mines in the USA and Mexico and has a sizeable beneficial interest in a very large porphyry copper project in Argentina called Los Azules.
The mineral reserves and resources at the operating mines give the impression of McEwen living from hand to mouth, having to invest heavily in ongoing exploration and mine development just to maintain precious metal production. A review by Crux Investor of the financial performance of the operations over the last 6½ years shows that cash from operations has almost always been negative and perpetually negative after investments.
For the above reasons, Crux Investor deems the operations to have nil value at best and has looked into the beneficial interest in Los Azules to determine whether or not this sufficiently underpins the market capitalisation of McEwen.
The Los Azules project is a vast copper-precious metal porphyry deposit located at a high altitude and in a very isolated position in Argentina. Whereas the primary component of the deposit is very low grade and of questionable economic value, there has been substantial leaching of the near-surface section with supergene enrichment below this over a very considerable vertical distance. This part of the deposit has been the focus of recent studies, with heap leaching followed by solvent extraction/electrowinning (“SX/EW”) as the process route. Mining of Los Azules will benefit from having the best grades and copper solubility located directly under the leach cap, providing the highest positive net cash flow in the early years of operation.
Los Azules would be an attractive venture in most global jurisdictions, but its difficult geographic location, combined with very onerous revenue-related charges and taxation in Argentina greatly detracts from the project. The latest preliminary economic assessment (“PEA”) comes to an NPV8 of US$2.66 billion at a copper price of US$3.75/lb Cu and initial capital expenditure of US$2.46 billion. Crux Investor, however, records inconsistencies between off-mine cost rates suggested in the text and reflected in the PEA. Moreover, the PEA does not include a charge of 17.5% on purchasing foreign currency when repatriating profits. After making amendments Crux Investor arrives at an internal rate of return (“IRR”) of 14.2% and NPV8 of US$1.82 billion. Given the long lead time, with first production only in 2029 at the earliest, discounting at 8% greatly reduces the value of net free cash flow.
The PEA has a number of very optimistic provisions for operating costs and capital expenditure. Benchmarking the suggested operating cost against other projects in a similar location and altitude shows that these are very low and, following adjustment, result in an overall cost rate that is 83% higher. The life of mine (“LOM”) capital expenditure in the Crux Investor cash flow model is 27% higher at US$2.65 billion. These adjustments drop the NPV8 to US$0.73 billion, despite a copper price that is 10% higher.
McEwen's beneficial share in the project would require it to contribute US$1.26 billion, which will be very difficult to raise given the company's size. It may be forced to dilute its shareholding further by letting its large partners, Stellantis and Rio Tinto, contribute more to the construction financing. Ignoring this, McEwen’s share in the calculated NPV8 value is US$347 million. The diluted Enterprise Value on 19 August 2024 is US$510 million, which exceeds the NPV8 by more than 47%.
Does this mean that McEwen is heavily overrated? Not necessarily. A shareholding in McEwen gives exposure to one of the largest global copper deposits. Technically the risk associated with this project is relatively low. The mineral resource estimation (“MRE”) can be trusted, the metallurgy has been well established, and the process route employs conventional methods. The deposit will allow for operating cash flow in early years
What currently detracts from the project is its location in Argentina, a complex jurisdiction that has not been business-friendly. However, with the current president, Javier Milei, there is a good chance this will change. The recent acquisition by BHP and Lundin Mining of two porphyry copper projects in the same province where Los Azules is located points to major mining companies positioning for such a change and confidence about further copper price increases in the mid to long term.
Therefore, two developments can dramatically change McEwen's attractiveness: a return to rising copper prices; and Argentina taking steps to improve business investment conditions. A rise of only 5% in the present copper price would take McEwen’s participation in the NPV8 value beyond its Enterprise Value. Any favourable changes in Argentina will add to Los Azules’ prospects.
In conclusion, McEwen gives exposure to an attractive, extensive copper project. It would do well to dispose of its loss-making mining operations and fully focus on advancing Los Azules. Crux Investor is of the opinion that eventually shareholders will do well holding McEwen shares. They may have to wait for years until production starts, but there is always a chance that another large mining company will make a partial or full bid for its stake in Los Azules.
Introduction
McEwen Mining Incorporated ("McEwen") (TSX:MUX)(NYSE:MUX) is a Canadian company that owned in 2017 the El Gallo mine in Mexico and a 49% beneficial interest in the San José mine in Argentina. In 2017 McEwen acquired Lexam VG Gold Incorporated (“Lexam”) through a plan of arrangement. Lexam owned a group of properties in the Timmins district in Canada with Measured and Indicated (“M&I”) mineral resources containing 1.47 million ounces (“Moz”). This was followed up by the acquisition of the Black Fox Complex, which comprised an underground mine and two development projects. It was a busy year for McEwen as they also commenced construction of the Gold Bar property and completed a PEA for their Los Azules project in Argentina.
The acquisition of Lexam was probably precipitated by the El Gallo mine coming to the end of its LOM. The Black Fox mine was effectively acquired in October 2017 allowing the company to report production for the last quarter of the year.
Commercial production was achieved in May 2019 at the Gold Bar heap leach operation. The company had to run hard to stand still as the reserves at the Black Fox mine were predicted to run out in 2020, and continued production was subject to the development of other areas (the first being Froome). At the El Gallo Complex, the placement of material of the leach pads had stopped, and residual leaching had commenced.
Froome achieved commercial production in the third quarter of 2021, with an expected LOM until 2026. The company hoped to find additional resources in the area at targets referred to as Grey Fox and Stock West. In January 2022 McEwen completed a PEA on mining resources defined at Froome, Grey Fox, Stock West and Fuller, suggesting a remaining LOM of 13 years with gold production in years 6 to 10 forecast at around 0.1 Moz per annum, which is more than double the current rate.
In Mexico, McEwen is advancing the Fenix project within the Gallo mine tenement area. In February 2021 a feasibility study (“FS”) was published, which envisions reprocessing material from the leach pad at the existing El Gallo mine, followed by processing of open-pit silver mineralisation from the nearby El Gallo Silver deposit. The company purchased a second-hand gold processing plant and associated equipment in September 2022 that includes all of the major components for the project's first phase.
In July 2021 the company decided to create a separate vehicle for its Los Azules asset and announced the creation of McEwen Copper Inc. (“McEwen Copper”). Over time the beneficial interest in McEwen Copper dropped from 100% to 47.7%. From 2021 until now, private placements have been made with Stellantis and Rio Tinto, diluting McEwen’s share. The company further disposed of McEwen Copper shares to fund its gold operations. In 2023 the beneficial shareholding dropped below 50%, and McEwen decided to “deconsolidate” and account for its interest on an equity basis.
Table 1_1 shows the relative contribution of the various operations to gold equivalent (“AuEq”) production, illustrating that San Jose contributed almost half of the metal produced.
Table 1_2 reproduces the latest declared total mineral reserves and Measured and Indicated (“M&I”) mineral resources for the mineral assets of McEwen. At the current treatment rate, the Gold Bar and San José mines have very little LOM left. San José is an underground operation that often proves up reserves for a few years ahead. The calculated LOM may be too conservative, as ongoing exploration and mine development could substantially add to the LOM. However, having only a time horizon of one year ahead is extremely short and risky.
The table above, and the history and developments in Canada and Mexico, give the impression of a company that lives from hand to mouth, having to invest heavily in ongoing exploration and mine development just to maintain precious metal production.
The Los Azules project is however of a size that could propel McEwen into a different league, even with only a 47.7% beneficial interest. Progress has been slow, with the first PEA completed in 2009, followed by two others in 2010 and 2013, and now the subject of an FS planned for completion early in 2025.
Figure 1_1 shows the share price performance on the Toronto Stock Exchange (“TSX”) since October 2017 when it took control of the Fox Mine Complex.
The graphs illustrate that the share has been on a declining trend from mid-2018 until August 2022. This is probably a reflection of slow progress at Los Azules, and the mining operations not generating positive cash flow, as will be shown in the next section. However, from August 2022, the trend reversed, and from February 2024, there was a sharp improvement.
Historical Operational and Financial Performance
Table 2_1 gives McEwen's historical production and financial performance since 1 January 2018.
Table 2_1 shows the operational performance:
- After 2018 the average AuEq grade dropped sharply with the commencement of the Golden Bar mine. As the Gallo Mine wound down, metal production did not increase;
- Total AuEq production fluctuated wildly from year to year, but never reached 2018 levels again;
- Investors can at best hope for the company to maintain precious metal production with the forecast increased output from the Fox Mine complex compensating for the closure of Golden Bar Mine; and
- The average precious metal grade dropped to the lowest level in H1 2024.
Table 2_1 shows the financial performance:
- The annual revenue reflects the variations in metal production, reaching record levels in 2023, assisted by the rise in precious metal prices;
- The company has been bleeding cash from operations, aggravated by having to make considerable investments in sustaining production and developing the Los Azules project;
- To cover the cash outflows, US$487 million in funding was secured, of which shareholders contributed US$163 million. In 2022, and especially 2023, McEwen received considerable cash injections through the sale of shares in McEwen Copper, the company owning the Los Azules project, bringing its beneficial interest down from 81.4% to 47.7%. The cash raised from equity placements by McEwen Copper was used to advance the development of the Los Azules project, and the cash received from the sale by McEwen of McEwen Copper shares was used to repay third-party debt, and for general corporate purposes;
- With its beneficial interest dropping below 50%, the investment in McEwen Copper was “deconsolidated” on 10 October 2023, and its holding was rather accounted for as an equity investment. The large number for “exchange rate effect” reflects the impact of the deconsolidation;
- The effect of a private placement announced on 24 June 2024 for McEwen Copper is not reflected in the table. Confusingly, the June 2024 quarterly report states that McEwen subscribed for US$14 million, increasing its beneficial shareholding to 48.3%. The announcement however states that “assuming completion of the full amount of the Offering and the investment amounts shown above, McEwen Mining will own 45.8% of McEwen Copper and Rob McEwen will own 12.5%.” The latest corporate presentation and the fact sheet dated 10 July still show the beneficial interest as 47.7%.
Based on McEwen being unable to generate any positive cash flow from its operations, Crux Investor will not model cash flows from such operations. The following sections assess whether or not its beneficial interest in Los Azules supports the company’s current market valuation.
Valuation of the Los Azules Project
Background
Unless expressly stated otherwise, all illustrations, technical information, and wording in Section 3.1 to Section 3.6.4 have been drawn from an NI. 43-101 compliant technical report in support of a PEA dated 31 May 2023.
The Los Azules copper project is located approximately 80 km west-northwest of Calingasta, in the San Juan Province of Argentina, and approximately 6 km east of the border with Chile (Figure 3.1_1). Calingasta is located 173 km by road west of the city of San Juan along Route 12.
The project area is in a challenging location as the area is remote, with no infrastructure, and is at high altitude, with the proposed pit and facilities situated between 3,200 and 3,600 metres above average sea level (“masl”). The project area is currently accessed by 120 km of unimproved road with eight river crossings and two mountain passes above 4,100 m elevation. This access is subject to snow accumulation and is passable only from November through to May. Another disadvantage of the location is the high seismic activity risk, affecting the building standards that will apply to mine facilities.
McEwen Copper controls approximately 32,700 ha of mining rights and 18,000 ha of surface rights around the Los Azules project.
The tenement area is subject to two net smelter royalties (“NSR’s”): 0.4% to TNR Gold Corporation (“TNR”) and 1.25% to McEwen. The San Juan Province charges a 3% royalty based on the “mine head value”, which currently is calculated on gross revenue without any deductions. In addition, the Province of San Juan has an unlegislated practice of negotiating a voluntary contribution to a trust, usually between 1.2% and 1.5% on the same calculation basis as mine head value. The above means that the project will be subject to total royalties of 5.85%-6.15%, which is very onerous.
Geology and Mineralisation
The Los Azules deposit is a classic Andean-style porphyry copper deposit. The igneous phase started with the intrusion of a relatively poorly mineralised stock, which is elongated in a NNW direction, extending at least 7 km in that direction, and being at least 2.5 km wide. This was followed by the intrusion of a dyke phase, again along a trend, interpreted as following a major tectonic structure. This is referred to as the “early mineralised porphyry dike phase” (“EMP”). The EMP contains the best mineralisation. It is a body 1.8 km long and 50-200 m wide, which is responsible for a ridge due to the silica content rendering it resistant to erosion. Associated with the EMP are several breccia bodies, also controlled by the major NNW tectonic structure, which are relatively small, but constitute the highest grade mineralisation. There is a later phase of dykes, referred to as “intra-mineralised porphyry dikes (“IMP”), which are poorly mineralised. One of these dykes (the most prominent one) is located along the east side of the EMP and is about 1.7 km long with widths ranging from 50 m to 150 m.
The deposit is capped by a leached zone of oxidised and clay-rich rock up to 180 m thick. Beneath the leached cap, a thin mixed sulphide-oxide zone gives way to a supergene sulphide zone where hypogene (= originally deposited from rising hydrothermal fluids) sulphides, mainly chalcopyrite (CuFeS2), are replaced by chalcocite (Cu2S) and minor covellite (CuS). The thickness of the supergene chalcocite blanket typically varies between 60 m and 250 m but can penetrate to more than 400 m down structures. The intensity of supergene mineralisation gradually decreases with depth from the top of the zone. Copper values in the supergene enriched zone vary between 0.4% Cu and greater than 1.0% in the north-central part of the system, and they decrease in the south and the peripheries to 0.2% to 0.4% Cu. The supergene component is the most important mineralisation of economic interest at Los Azules.
Any mineralisation that has a cyanide-soluble copper component exceeding 50% of total copper content is classified as supergene enriched. Figure 3.2_1 is an isometric view with the area classified as enriched in red and the rest of the mineralised early porphyry dyke in magenta.
Figure 3.2_2 shows the close relationship of boreholes with the best grade intersections and the NNW trending tectonic structure. Crux Investor has annotated the map by adding an ellipse with orange colour around the area with boreholes generally intersecting higher than 0.60 % total copper (“% CuT”), and an ellipse with boreholes with intersection usually higher than 0.20 % CuT.
The higher grades define an area with a maximum width of approximately 500 m, based on the distance of 50 m between coordinates. The blue ellipse has a maximum width of 625 m.
The cross-section below demonstrates the consistent trend of better copper grades as a function of proximity to the NNW structure, irrespective of lithology and oxidation level.
The peak in grades 600 m to the left of the main NNW trending structure is explained by its association with a second structure at depth.
Mineral Resources and Mineable Inventory
Mineral Resources
The latest MRE is based on 162 drill holes with a spacing of approximately 150 m to 200 m, but there are localised areas where drilling is on a 100 m spacing. Mineralisation of economic importance is below sterile overburden, a low-grade leached zone, and minor oxide mineralisation, which has been ignored.
The model for the MRE combines structure, lithology, and copper mineral zonation (i.e. oxides, supergene, hypogene, and transitions). As it was found that grade statistics are very much defined by lithology and copper mineral zonation, the domains have been accordingly defined, and all lithological contacts have been treated as hard boundaries for grades during estimation, with no sharing of sample values between lithological units.
The MRE is based on uncapped copper grades, which were found to have a negligible effect on overall copper content. The chosen composite length was 2 m and the block size was 20 m x 20 m x 15 m high, which is the expected smallest mining unit (“SMU”). Variograms were generated for each lithology, and it was shown that the strongest correlations are along the NNW trend and dip of the structure for both the enriched and primary zones. Soluble and total copper block grades were estimated using ordinary kriging for the main domains and inverse distance weighting for the smaller domains. Soluble copper is the combined acid-soluble (copper from oxides) and cyanide-soluble (copper from chalcocite and covellite) grade.
This grade information type is essential for determining reasonable prospects of economic extraction. The reported mineral resources include a component that is expected to be treated by heap leaching and solvent extraction/electrowinning (SX/EW) to get to copper cathode, and another component with low solubility, but with credits for precious metals when treated by milling and flotation to produce a concentrate.
The cut-off grades are expressed in NSR values, which gives due consideration to variations in metal recovery and off-mine charges, which a straightforward metal grade cut-off would not provide. The MRE assumes a very low cut-off of US$2.74/t for Leach resources and for Milling/Flotation resources approximately US$5.45/t. These values are not formally derived in the technical report, but Crux Investor records that the revenue charges (Boca de Mina, NSR royalties, and the Export Retention rate) have been ignored. The Leach cut-off value includes processing cost, but the Mill/Flotation cut-off does not. For both, the mining cost of the block that will be treated is ignored. This is correct for deciding whether or not to treat material that is already mined, but not appropriate for a decision to mine a block.
Table 3.3.1_1 gives the mineral resource statement, effective 9 May 2023.
The table shows that total resources are impressive, but for milling/flotation, these are of very low grade and questionable economic feasibility. The PEA implicitly endorses this view by developing a production schedule based on treating only Leach resources.
The Inferred resources account for 34% of total copper and almost 32% of soluble copper content. Substantial infill drilling will be required to convert the Inferred resources to a higher category for inclusion in an FS.
Mineable Inventory
As the Los Azules economic assessment is of PEA standard it is allowed to include Inferred resources in the production schedule. However the term “reserves” may not be used as this is exclusively permitted for M&I resources that have been proven to be economic in terms of a pre-feasibility (“PFS”) or FS. “Mineable Inventory” is that portion of all mineral resources that are included in a PEA production schedule.
The PEA mine plan is to extract resources by conventional open pit methods using very large equipment, reflecting the bulk nature of the deposit.
One of the significant advantages of Los Azules is the presence of the best grade blocks at shallow levels just below the leach cap. This means a starter pit can be selected with limited initial waste stripping, whereafter high-grade material can be mined for treatment by heap leaching. Figure 3.3.2_1 illustrates this in a longitudinal and cross section through the block model. Not evident from the illustrations is that copper soluble grades are highest just below the leached cap and gradually drop with depth, further improving short-term copper production.
In defining the mineable inventory due consideration was given to surface restrictions, with the key constraint being areas identified as cryogenic geoforms (zones of subsurface frozen water). No disturbance is permitted within 50 m (measured horizontally) of these geoforms.
Overall pit slopes in overburden will be 30 degrees. Pit slope angles are planned to reduce with the planned final depth of the pit declining from 42 degrees for pit depths down to 600 m to 32 degrees for pit depths down to 1,000 m. Flattening the overall pit slope with depth significantly impacts pit optimisation studies, limiting the maximum pit depth to less than 800 m, with only a small proportion of the pit wall (in the east) designed at an overall slope of 38 degrees.
The pit optimisation assumes a dilution of 5% and a mining recovery rate of 95%, which is conservative given the bulk nature of the mineralisation.
The table shows that almost 97% of the copper soluble metal in Indicated resources is captured as mineable resource, and nearly 75% is in Inferred resources. Despite 5% dilution, the forecast feed grade is substantially higher than for resources. When calculating the grade of the Indicated resources dropped out, it comes to approximately 0.23% CuT and 0.07% CuSol, and 0.25% CuT and 0.11% CuSol for Inferred resources, respectively. These numbers look unlikely. If correct, the technical report should explain how such selectivity is possible.
Mining Operations
The PEA heavily promotes the fact that Los Azules will be a “green” project, employing methods to reduce its carbon imprint. The mine plan incorporates a combination of electric-hydraulic front-end shovels and large mine haul trucks equipped with pantographs from the start of operations to allow for the early use of trolley-assist infrastructure. The SMU is 20 m long, 20 m wide and 15 m high. Given the large equipment size, the minimum mining width at the bottom of the pit is 60 m.
Non-mineralised material is hauled to either the North mine rock storage facility (“MRSF”) or the South MRSF. Mineralised material is hauled to either the Leach Stockpile or directly to the crusher for processing. The North MRSF at a starting elevation of 3600 mamsl has approximately 835 Mt of storage while the South MRSF at a starting elevation of 3860 mamsl has approximately 530 Mt of material storage. The South MRSF is the primary destination for non-mineralised material in the initial ~five years of mining. The remaining non-mineralised material is hauled to the North MRSF.
Low-grade leach material is sent to a stockpile east of the North MRSF for treatment at the end of the LOM. Initially, only a small amount needs stockpiling, but as mining progresses more low-grade material is exposed, and significant amounts of material are stockpiled in years 9 through 19.
The main mine equipment comprises up to eight large rotary blast hole drill rigs, 37 dump trucks with 363 t dump capacity, 25 m3 front-end loaders (2x), 40 m3 hydraulic front shovels (3x), and one 61 m3 electric rope shovel. Two large dozers (D10) will be used for levelling the MSRFs, and for pit and road maintenance.
Given the shallow depth to groundwater and the high permeability of the geologic units in the pit area, high-capacity vertical dewatering wells, both in-pit and outside the pit boundaries, will be necessary.
Metallurgy and Processing Operations
Metallurgical Test Work
Metallurgical test work spans a long period with initial work informing the first PEA in 2008. The envisaged process changed from the production of copper concentrate to treating such concentrate on site by pressure oxidation (“POX”) followed by SX/EW to produce copper cathode, to the current plan of dissolving copper in a leach pad followed by SW/EW to produce copper cathode. This section will only review the test work relevant to the heap leach route in the 2023 PEA.
9 composite samples were created out of 78 to emulate the different material types and grades between 0.019% and 0.578% CuT, and between 0.008% and 0.296% CuSol.
Comminution tests show that the impact work index indicates soft to medium hard rock. Abrasiveness is low to moderate.
For column test work two crush sizes were chosen 100% passing 19 mm (3/4 inch) and 12.7 mm (1/2 inch). The tests were conducted in Chile at the SGS laboratories in Santiago and at moderate temperature (i.e. 18.6 °C when the columns were loaded) with leaching up to almost 200 days. Recoveries were such that it was recommended to assume a fix of 100% for soluble copper plus another 15% for residual copper. However, at the publication date of the PEA leaching was continuing and no assays for residual columns were available. In a press release dated 22 February 2024, the final results were announced confirming the 100% recovery of soluble copper but raising the recovery of residual copper to 25%, for an overall recovery rate of 76.0%.
The sulfuric acid consumption is estimated at 16.5 kg/t treated when leaching at an acidity level of close to 2.0 pH.
This valuation has adopted the latest recovery estimate into the PEA production schedule.
It should be noted that in parallel the Nuton LLV technology of Rio Tinto is being tested as an alternative bio-leaching process.
Processing
To minimise truck haulage a primary gyratory crusher is planned at the pit rim, which will reduce the run of mine ore to a -150 mm product. This material will cycle through a series of secondary/tertiary screens and crushers to generate a product 80% passing (“P80”) -16.4 mm. The crusher product will be transported to the heap leach pad by a series of overland conveyors. The overland conveyors will discharge the material into agglomeration drums, bringing the moisture up to 5% using raffinate solution directly from the raffinate pond. The agglomerated material will be discharged through a tripper conveyor, a series of portable conveyors, and a telescoping radial stacker to place the material directly on the heap leach pad in 9 m lifts, to a maximum elevation of approximately 150 m. In the last quarter of the year, no placement of material on the leach pad is planned.
Loading a pad is estimated to take 14 days, after which raffinate leach solution (= dilute sulphuric acid) is pumped directly from the raffinate pond and applied to the surface of the heap through irrigation by sprinklers and drip emitters. Biomass will be added to the raffinate allowing for leaching of sulphide minerals. The active solution application will last for 180 days. The acid solution will percolate through the heap leach material dissolving copper and some impurities. The resulting pregnant leach solution (“PLS”) will drain from the bottom of the heap and will be collected in the PLS pond. From the PLS pond, the solution will be pumped to the feed tank for solvent extraction.
At the solvent extraction section, the PLS is mixed with an organic solvent for two minutes, after which it is stripped from the solvent by mixing it with a concentrated sulphuric acid solution which is sent to the electrowinning section for precipitation of the copper as copper cathode. Cathode stripping from the permanent stainless-steel blanks will be done in semi-automatic stripping machines. The EW plant, which has a nominal capacity of 175,000 t copper per annum, determines the overall processing capacity.
To avoid expensive and risky trucking of concentrated sulphuric acid, an acid plant will be constructed on-site, supplied by elemental sulphur from the YPF refinery in Lujan de Cuyo, south of Mendoza in Argentina.
Economic Valuation – Los Azules Project
Copper Price Assumed
The PEA uses a copper price of US$4.00/lb. For the Base Case of this valuation, the spot copper price on 19 August 2024, US$4.13/lb Cu was assumed as a long-term price.
Crux Investor has adopted the suggestions in the PEA that the selling cost will be US$0.02/lbs Cu (= US$44.1/t Cu cathode) and transport and freight costs total US$150/t Cu.
Production Schedule
Figure 3.6.2_1 reproduces the mine production schedule of the PEA report, which was adopted for this valuation.
The PEA assumes a construction period of 33 months, including two years of pre-production waste stripping and 16.9 million tonnes (“Mt”) of leach ore mining.
The diagram shows that the strip ratio (here defined as waste/leach ore) in the year before production is 3, after which it drops for two years to reach a peak in production in Year 3. The average rate over the LOM is 1.05. In the early years, when the mined grade is highest, extraction of leach material is just above 22 million tonnes per annum (“Mtpa”) which rises from production Year 5 onwards to reach a steady state level of 50 Mtpa by Year 7. With dropping waste stripping, the mining equipment can mine extra ore for stockpiling, both leach ore and primary ore. Primary ore may or may not be treated in future, depending on whether or not it will be economical. The PEA has ignored this possibility in its forecast.
Figure 3.6.2_2 shows the processing production schedule.
The diagram shows the high feed grade in the early years, which exceeds 0.7% CuT until production Year 5, after which it rapidly drops to settle around 0.45% CuT. Leaching of reclaimed leach ore from the stockpile from Year 21 onwards is at a grade of 0.27% CuT.
The initial processing feed rate is 22 Mtpa, increasing to 35 Mtpa in Year 4, and ultimately to 50 Mtpa in Year 7 through to the end of the LOM.
The capacity of the EW plant is designed at 175,000 tpa cathode copper. In the early years, the copper in the PLS solution exceeds capacity, and the excess copper will be recirculated until the plant can handle this. The result is that annual copper production only drops below 175,000 tonnes in Year 21.
Capital Expenditure
Table 3.6.3_1 summarises the estimated expenditures in the PEA technical report.
The pre-stripping amount converts to a mining cost rate of US$1.47/t. In the next section of this report, it will be demonstrated that this is an unrealistic number. Crux Investor has doubled the provision.
Initial crushing and treatment capacity is approximately 25 Mtpa. In Year 4 of operation, a secondary and tertiary crusher is added to increase the capacity to 36 Mtpa. In Year 7, a final addition of a secondary and tertiary crusher is installed to increase the capacity to a maximum of 51.4 Mtpa of material. The total provision of US$664 million looks reasonable.
The initial sulphuric acid plant has a capacity of 200,000 t per annum. In Year 4 an additional acid plant train is expected to be operational to bring the total capacity to 300,000 tonnes per annum, and in Year 6 another acid plant train for a total capacity of 400,000 tonnes of sulphuric acid a year. Crux Investor records that the sustaining capital expenditure provision includes three expansions, two costing US$115.1 million each, and the third expansion US$222.5 million. It does not make sense, particularly as the initial plant with double the capacity supposedly costs only US$94.9 million. Crux Investor suspects the US$222.5 million number should be part of the initial plant construction cost. The total provision of US$548 million over the LOM looks reasonable.
The initial heap leach capacity is 75.9 Mt within a total initial pad design of 956.6 Mt. Expansions for the initial leach pad are planned every 2-3 years. Another pad design is planned for Year 21, adding in total another 225 Mt. Crux Investor records that the cost of the initial pad amounts to US$2.10/t capacity dropping to US$0.46/t for the expansions of the first leach pad. Strangely enough, the cost of the second leach pad is only US$0.49/t capacity. These estimates need to be more consistent and look in general very low. The author has been involved in a heap leach operation in Chile where in 2012 heap leach construction was estimated to cost US$2.47/t capacity. Crux Investor has increased the cost rate for the first phase to US$2.40/t capacity, US$1.00/t for expansions, and again US$2.40/t for the second leach pad.
The forecast includes the assumption that the local electrical power supplier will construct the 220 kV power line to the site and recover the cost at the rate charged.
According to https://www.globalpetrolprices.com/Argentina/electricity_prices/ the electricity price for businesses in Argentina in 2023 was US$0.025/kWh, which is exceptionally low in a global context. Across the border in Chile, it was US$0.173/kWh. However, the study assumes that the project will use “green” electricity from renewable sources. Such electricity generation is more expensive than hydro schemes or nuclear and fossil fuel generation, and it is doubtful that the general rate would be charged. In Europe, this is noticeable in the significant rate differences between Eastern European countries/France with Denmark and Germany which have been most aggressively pursuing “green” energy.
Included in the initial capital expenditure forecast is a contingency rate of 25%, but for sustaining capital expenditure this has been ignored, which is not consistent. Whereas much of the sustaining capital expenditure relates to mining equipment and is relatively accurate, the other items should have included a substantial contingency. This valuation has however also ignored such a contingency.
Operating Expenditure
Table 3.6.4_1 shows the cost structure suggested in the PEA technical report, benchmarked cost at operations in a similar location and altitude, and highlighted in yellow the rates used by Crux Investor for its valuation.
As benchmarks, reference was made to the Puna Operations of SSR Mining and the Veladero Mine of Barrick/Shandong Gold.
The Puna Operations are located in the far northwest of Argentina at an elevation of 4,000 mamsl to 4,500 mamsl. The production rate of 8.2 Mtpa is far lower than planned for Los Azules, but its remote location at high altitude makes it a good reference. The cost rates were extracted from a technical report dated 11 February 2024. With a totally different processing route, no processing cost rate has been included in the table.
The Veladero operation is more akin to Los Azules, also located in the San Juan Province of Argentina, 6 km from the border with Chile, and at an altitude between 3,800 mamsl and 4,800 mamsl. It also treats ore by heap leaching but of gold, not copper. This should be less costly than copper production as its leachant is a weak cyanide solution and electrowinning is much less energy intensive. The mining rate of 62 Mtpa of Veladero is much closer to Los Azules than the Puna Operations. The cost rates have been extracted from a technical report for Valadero dated 19 March 2018. These rates are consistently higher than Los Azules' numbers, particularly as the Veladero rates are in 2018 dollars.
According to a very experienced process engineer the heap leach SX/EW processing cost in Central Africa for operations with an acid consumption of 25-30 kg/t is approximately US$2,000/t Cu Cathode. Using this rate for Los Azules as covering all processing costs, a total LOM cost that is 2.5x the PEA's processing cost is derived. Moreover, at the suggested delivered cost of US$315/t for sulphur, the produced acid would cost approximately US$130/t. Applying the net acid consumption rate of 16.5 kg/t treated, the acid cost per tonne treated alone would be US$2.15. Considering the above, Crux Investor is confident that a processing cost of US $ 5.00/t treated is more reasonable.
The PEA for Los Azules uses a General and administrative (“G&A”) cost rate expressed in US$ per tonne treated. This is inappropriate as such expenses are in reality almost fixed. Applying a rate per tonne treated would make the annual cost in the early years extra low. The Veladero technical report shows that the remote and challenging location makes for a very high annual outlay. Crux Investor has used US$100 million per annum to recognise the larger and more complex process at Los Azules compared to Veladero.
Working Capital
Being located in a very isolated area with little infrastructure, and producing copper cathode for export, implies a considerable investment in working capital. Table 3.6.5_1 shows the assumptions of Crux Investor to arrive at total investment in working capital.
Based on the Crux Investor assumptions Los Azules will have to make an investment of almost US$ 307 million in net current assets. These are assumed to be recouped in full by the end of the LOM without losses due to obsolesce or pilferage.
Royalties and Taxes
The PEA applies several revenue-related charges:
- The San Juan “Boca de mina” royalty of 3% of gross revenue;
- NSR-based royalties, 1.25% in favour of McEwen Mining and 0.4% in favour of TNR; and
- An export retention tax of 4.5% on the value of metals at the point of export. According to the technical report deductions applicable are transportation and treatment/refining charges, the latter not being relevant for copper cathode. The PEA assumes that annually 10,000 tonne copper cathode would be sold locally and escape the duty. Crux Investor has ignored this assumption.
Argentina charges 10.5% value-added taxes (“VAT”) on capital expenditure, even the pre-production component. The PEA assumes that 95% of the VAT is recovered, with the charge on initial capex recovered in the first two production years. During operations, VAT is charged at 21% on all non-labour expenses, with the operation only recovering 95%. Non-labour expenses also attract an Operating Bank Tax of effectively 1.0%.
Income tax is 35% in Argentina. The report gives no details on what amortisation and depreciation are allowed for income tax purposes. For this, Crux Investor referred to the Puna Operations technical report. The depreciation methodology for property, plant, and equipment (PP&E) included in this report is 60% in the first year, with the remaining 40% in equal portions in the two subsequent years. Intangible assets are depreciated on units of production throughout the LOM.
Ernst & Young in an announcement dated 7 May 2024 advises that Argentina applies a tax of 17.5% on the purchase of foreign currency when remitting dividends.
According to https://practiceguides.chambers.com/practice-guides/mining-2024/argentina there is a capital gains tax on profits from the sale of shares in an Argentine company levied at the election of the taxpayer at 13.5% on the gross amount of the sale price or 15% on the net gain. This also applies to the transfer of a foreign company that owns a controlling interest in an Argentine company. It is not clearly defined what “controlling interest” is, but with McEwen’s beneficial interest in Los Azules dropping to well below 50% capital gain tax may no longer be applicable, should McEwen be taken over.
Results
Table 3.6.7_1 summarises the LOM results for the Los Azules for Base Case metal prices and the input parameters set out above. The PEA input parameters were used as a comparison, but certain discrepancies were noted. For example, the report gives a selling cost of US$0.02/lb Cu, and transport and freight costs of US$150/t copper cathode. However, when using these rates Crux Investor gets to much higher expenses than the US$167.7 million as per the PEA. Moreover, for the tax calculation Crux Investor used an intangible asset balance of US$454.4 million on 1 January 2023, to which the US$80 million FS cost has been added. For this reason, the Crux Investor model has much higher amortisation and depreciation deductions than the PEA.
The table shows that despite a very good cash margin of more than 60% of gross revenue for the PEA, the project has a very modest NPV8 equal to 74% of the initial capital expenditure. The IRR is 14.2%. There are several reasons for this. There are considerable charges against the revenue that, together with a high income tax rate, and the cost of purchasing foreign currency, result in the government taking 29.5% of gross revenue. This is a higher proportion than for operating costs. Net free cash flow is 23.3% of revenue, but with a long lead time to production, modelled to start in 2029, the value of US$7.6 billion net cash flow drops considerably to US$1.8 billion when discounted at 8% annually.
When applying the more conservative assumptions of Crux Investor the net cash flow is considerably lower despite a copper price that is 10% higher. With operating costs 83% higher the cash margin drops to 44.3%. LOM capital expenditure is 27% higher. The overall effect is that operating costs absorb 44.6% of gross revenue and capital expenditure 16.5%. The government’s take drops to 21.2% of gross revenue leaving US$5.17 billion as net free cash flow, equal to 13.8% of gross revenue. Discounting at 8% results in an NPV of US$0.73 billion, 27% of initial capital expenditure.
Table 3.6.7_2 shows the sensitivity of the NPV’s at various discount rates for one-percentage point changes in the main input parameters.
The table illustrates that the project is highly sensitive to changes in the main input parameters. The NPV8 increases by 10.3% (i.e. US$75 million) for a one percentage point increase in the copper price (i.e. US$0.04/lb). For every percentage point change in the operating cost (US$0.14/t treated) the NPV8 changes by US$35.5 million, and for every percentage point change in LOM capital expenditure (US$60 million) the NPV8 value changes by US$39.6 million. The high sensitivity to capital expenditure is partially due to the long lead time to production.
Net Free Cash Flow Over Time – Attributable to McEwen Mining
Figure 3.7_1 contains the forecast net free cash flow for Los Azules attributable to McEwen Mining given its 47.7% beneficial interest in the project.
The graph illustrates the large amount of funding (totalling US$1.26 billion) required until positive cash flow is generated at the earliest in 2029. For a company the size of McEwen it will be difficult to secure this kind of funding, and the company may well have to dilute its shareholding further by letting its large partners, Stellantis and Rio Tinto, contribute more to the construction financing.
After production starts there are three years of positive cash flow with the high initial feed grade. Only for it to drop again because of the capital expenditure required for the production expansions.
The Enterprise Value of McEwen on 19 August 2024
At the share price of C$12.69 on 19 August 2024, and with 51.09 million shares issued, the market capitalisation of McEwen is C$648 million, or US$474 million.
Unfortunately, the financial statements for the quarter ending 30 June 2024 give no details on exercise prices for the various tranches of warrants and share options. The only statement indicating the number of shares that could possibly dilute current equity is “all 868,480 outstanding stock options and all 2,169,926 outstanding warrants were excluded from the computation of diluted loss per share”. Given the share price performance in the last few years, this valuation assumes none of these are in the money.
On 30 June 2024, the company had net current assets of US$29 million and long-term debt of US$34 million.
Table 3.8_1 derives an Enterprise Value of US$510 million based on the above.
The Enterprise Value is therefore 47% higher than its 47.7% participation in the NPV8 value.
Despite the current overrating of the company’s value, Crux Investor is of the opinion that McEwen constitutes good value. Being one of the most significant global undeveloped copper projects it is an excellent option for the copper price with small rises in the price of the metal translating to large increases in the prospective net present value of Los Azules. The project must be on the radar of the large producers seeking reserve replacement.
Any favourable changes in Argentina will add to Los Azules’ prospects. With the current president, Javier Milei, there is a good chance this will change.
Executive Summary
McEwen Mining Incorporated ("McEwen") (TSX:MUX)(NYSE:MUX) is a Canadian company that has operated several small precious metal mines in the USA and Mexico and has a sizeable beneficial interest in a very large porphyry copper project in Argentina called Los Azules.
The mineral reserves and resources at the operating mines give the impression of McEwen living from hand to mouth, having to invest heavily in ongoing exploration and mine development just to maintain precious metal production. A review by Crux Investor of the financial performance of the operations over the last 6½ years shows that cash from operations has almost always been negative and perpetually negative after investments.
For the above reasons, Crux Investor deems the operations to have nil value at best and has looked into the beneficial interest in Los Azules to determine whether or not this sufficiently underpins the market capitalisation of McEwen.
The Los Azules project is a vast copper-precious metal porphyry deposit located at a high altitude and in a very isolated position in Argentina. Whereas the primary component of the deposit is very low grade and of questionable economic value, there has been substantial leaching of the near-surface section with supergene enrichment below this over a very considerable vertical distance. This part of the deposit has been the focus of recent studies, with heap leaching followed by solvent extraction/electrowinning (“SX/EW”) as the process route. Mining of Los Azules will benefit from having the best grades and copper solubility located directly under the leach cap, providing the highest positive net cash flow in the early years of operation.
Los Azules would be an attractive venture in most global jurisdictions, but its difficult geographic location, combined with very onerous revenue-related charges and taxation in Argentina greatly detracts from the project. The latest preliminary economic assessment (“PEA”) comes to an NPV8 of US$2.66 billion at a copper price of US$3.75/lb Cu and initial capital expenditure of US$2.46 billion. Crux Investor, however, records inconsistencies between off-mine cost rates suggested in the text and reflected in the PEA. Moreover, the PEA does not include a charge of 17.5% on purchasing foreign currency when repatriating profits. After making amendments Crux Investor arrives at an internal rate of return (“IRR”) of 14.2% and NPV8 of US$1.82 billion. Given the long lead time, with first production only in 2029 at the earliest, discounting at 8% greatly reduces the value of net free cash flow.
The PEA has a number of very optimistic provisions for operating costs and capital expenditure. Benchmarking the suggested operating cost against other projects in a similar location and altitude shows that these are very low and, following adjustment, result in an overall cost rate that is 83% higher. The life of mine (“LOM”) capital expenditure in the Crux Investor cash flow model is 27% higher at US$2.65 billion. These adjustments drop the NPV8 to US$0.73 billion, despite a copper price that is 10% higher.
McEwen's beneficial share in the project would require it to contribute US$1.26 billion, which will be very difficult to raise given the company's size. It may be forced to dilute its shareholding further by letting its large partners, Stellantis and Rio Tinto, contribute more to the construction financing. Ignoring this, McEwen’s share in the calculated NPV8 value is US$347 million. The diluted Enterprise Value on 19 August 2024 is US$510 million, which exceeds the NPV8 by more than 47%.
Does this mean that McEwen is heavily overrated? Not necessarily. A shareholding in McEwen gives exposure to one of the largest global copper deposits. Technically the risk associated with this project is relatively low. The mineral resource estimation (“MRE”) can be trusted, the metallurgy has been well established, and the process route employs conventional methods. The deposit will allow for operating cash flow in early years
What currently detracts from the project is its location in Argentina, a complex jurisdiction that has not been business-friendly. However, with the current president, Javier Milei, there is a good chance this will change. The recent acquisition by BHP and Lundin Mining of two porphyry copper projects in the same province where Los Azules is located points to major mining companies positioning for such a change and confidence about further copper price increases in the mid to long term.
Therefore, two developments can dramatically change McEwen's attractiveness: a return to rising copper prices; and Argentina taking steps to improve business investment conditions. A rise of only 5% in the present copper price would take McEwen’s participation in the NPV8 value beyond its Enterprise Value. Any favourable changes in Argentina will add to Los Azules’ prospects.
In conclusion, McEwen gives exposure to an attractive, extensive copper project. It would do well to dispose of its loss-making mining operations and fully focus on advancing Los Azules. Crux Investor is of the opinion that eventually shareholders will do well holding McEwen shares. They may have to wait for years until production starts, but there is always a chance that another large mining company will make a partial or full bid for its stake in Los Azules.
Introduction
McEwen Mining Incorporated ("McEwen") (TSX:MUX)(NYSE:MUX) is a Canadian company that owned in 2017 the El Gallo mine in Mexico and a 49% beneficial interest in the San José mine in Argentina. In 2017 McEwen acquired Lexam VG Gold Incorporated (“Lexam”) through a plan of arrangement. Lexam owned a group of properties in the Timmins district in Canada with Measured and Indicated (“M&I”) mineral resources containing 1.47 million ounces (“Moz”). This was followed up by the acquisition of the Black Fox Complex, which comprised an underground mine and two development projects. It was a busy year for McEwen as they also commenced construction of the Gold Bar property and completed a PEA for their Los Azules project in Argentina.
The acquisition of Lexam was probably precipitated by the El Gallo mine coming to the end of its LOM. The Black Fox mine was effectively acquired in October 2017 allowing the company to report production for the last quarter of the year.
Commercial production was achieved in May 2019 at the Gold Bar heap leach operation. The company had to run hard to stand still as the reserves at the Black Fox mine were predicted to run out in 2020, and continued production was subject to the development of other areas (the first being Froome). At the El Gallo Complex, the placement of material of the leach pads had stopped, and residual leaching had commenced.
Froome achieved commercial production in the third quarter of 2021, with an expected LOM until 2026. The company hoped to find additional resources in the area at targets referred to as Grey Fox and Stock West. In January 2022 McEwen completed a PEA on mining resources defined at Froome, Grey Fox, Stock West and Fuller, suggesting a remaining LOM of 13 years with gold production in years 6 to 10 forecast at around 0.1 Moz per annum, which is more than double the current rate.
In Mexico, McEwen is advancing the Fenix project within the Gallo mine tenement area. In February 2021 a feasibility study (“FS”) was published, which envisions reprocessing material from the leach pad at the existing El Gallo mine, followed by processing of open-pit silver mineralisation from the nearby El Gallo Silver deposit. The company purchased a second-hand gold processing plant and associated equipment in September 2022 that includes all of the major components for the project's first phase.
In July 2021 the company decided to create a separate vehicle for its Los Azules asset and announced the creation of McEwen Copper Inc. (“McEwen Copper”). Over time the beneficial interest in McEwen Copper dropped from 100% to 47.7%. From 2021 until now, private placements have been made with Stellantis and Rio Tinto, diluting McEwen’s share. The company further disposed of McEwen Copper shares to fund its gold operations. In 2023 the beneficial shareholding dropped below 50%, and McEwen decided to “deconsolidate” and account for its interest on an equity basis.
Table 1_1 shows the relative contribution of the various operations to gold equivalent (“AuEq”) production, illustrating that San Jose contributed almost half of the metal produced.
Table 1_2 reproduces the latest declared total mineral reserves and Measured and Indicated (“M&I”) mineral resources for the mineral assets of McEwen. At the current treatment rate, the Gold Bar and San José mines have very little LOM left. San José is an underground operation that often proves up reserves for a few years ahead. The calculated LOM may be too conservative, as ongoing exploration and mine development could substantially add to the LOM. However, having only a time horizon of one year ahead is extremely short and risky.
The table above, and the history and developments in Canada and Mexico, give the impression of a company that lives from hand to mouth, having to invest heavily in ongoing exploration and mine development just to maintain precious metal production.
The Los Azules project is however of a size that could propel McEwen into a different league, even with only a 47.7% beneficial interest. Progress has been slow, with the first PEA completed in 2009, followed by two others in 2010 and 2013, and now the subject of an FS planned for completion early in 2025.
Figure 1_1 shows the share price performance on the Toronto Stock Exchange (“TSX”) since October 2017 when it took control of the Fox Mine Complex.
The graphs illustrate that the share has been on a declining trend from mid-2018 until August 2022. This is probably a reflection of slow progress at Los Azules, and the mining operations not generating positive cash flow, as will be shown in the next section. However, from August 2022, the trend reversed, and from February 2024, there was a sharp improvement.
Historical Operational and Financial Performance
Table 2_1 gives McEwen's historical production and financial performance since 1 January 2018.
Table 2_1 shows the operational performance:
- After 2018 the average AuEq grade dropped sharply with the commencement of the Golden Bar mine. As the Gallo Mine wound down, metal production did not increase;
- Total AuEq production fluctuated wildly from year to year, but never reached 2018 levels again;
- Investors can at best hope for the company to maintain precious metal production with the forecast increased output from the Fox Mine complex compensating for the closure of Golden Bar Mine; and
- The average precious metal grade dropped to the lowest level in H1 2024.
Table 2_1 shows the financial performance:
- The annual revenue reflects the variations in metal production, reaching record levels in 2023, assisted by the rise in precious metal prices;
- The company has been bleeding cash from operations, aggravated by having to make considerable investments in sustaining production and developing the Los Azules project;
- To cover the cash outflows, US$487 million in funding was secured, of which shareholders contributed US$163 million. In 2022, and especially 2023, McEwen received considerable cash injections through the sale of shares in McEwen Copper, the company owning the Los Azules project, bringing its beneficial interest down from 81.4% to 47.7%. The cash raised from equity placements by McEwen Copper was used to advance the development of the Los Azules project, and the cash received from the sale by McEwen of McEwen Copper shares was used to repay third-party debt, and for general corporate purposes;
- With its beneficial interest dropping below 50%, the investment in McEwen Copper was “deconsolidated” on 10 October 2023, and its holding was rather accounted for as an equity investment. The large number for “exchange rate effect” reflects the impact of the deconsolidation;
- The effect of a private placement announced on 24 June 2024 for McEwen Copper is not reflected in the table. Confusingly, the June 2024 quarterly report states that McEwen subscribed for US$14 million, increasing its beneficial shareholding to 48.3%. The announcement however states that “assuming completion of the full amount of the Offering and the investment amounts shown above, McEwen Mining will own 45.8% of McEwen Copper and Rob McEwen will own 12.5%.” The latest corporate presentation and the fact sheet dated 10 July still show the beneficial interest as 47.7%.
Based on McEwen being unable to generate any positive cash flow from its operations, Crux Investor will not model cash flows from such operations. The following sections assess whether or not its beneficial interest in Los Azules supports the company’s current market valuation.
Valuation of the Los Azules Project
Background
Unless expressly stated otherwise, all illustrations, technical information, and wording in Section 3.1 to Section 3.6.4 have been drawn from an NI. 43-101 compliant technical report in support of a PEA dated 31 May 2023.
The Los Azules copper project is located approximately 80 km west-northwest of Calingasta, in the San Juan Province of Argentina, and approximately 6 km east of the border with Chile (Figure 3.1_1). Calingasta is located 173 km by road west of the city of San Juan along Route 12.
The project area is in a challenging location as the area is remote, with no infrastructure, and is at high altitude, with the proposed pit and facilities situated between 3,200 and 3,600 metres above average sea level (“masl”). The project area is currently accessed by 120 km of unimproved road with eight river crossings and two mountain passes above 4,100 m elevation. This access is subject to snow accumulation and is passable only from November through to May. Another disadvantage of the location is the high seismic activity risk, affecting the building standards that will apply to mine facilities.
McEwen Copper controls approximately 32,700 ha of mining rights and 18,000 ha of surface rights around the Los Azules project.
The tenement area is subject to two net smelter royalties (“NSR’s”): 0.4% to TNR Gold Corporation (“TNR”) and 1.25% to McEwen. The San Juan Province charges a 3% royalty based on the “mine head value”, which currently is calculated on gross revenue without any deductions. In addition, the Province of San Juan has an unlegislated practice of negotiating a voluntary contribution to a trust, usually between 1.2% and 1.5% on the same calculation basis as mine head value. The above means that the project will be subject to total royalties of 5.85%-6.15%, which is very onerous.
Geology and Mineralisation
The Los Azules deposit is a classic Andean-style porphyry copper deposit. The igneous phase started with the intrusion of a relatively poorly mineralised stock, which is elongated in a NNW direction, extending at least 7 km in that direction, and being at least 2.5 km wide. This was followed by the intrusion of a dyke phase, again along a trend, interpreted as following a major tectonic structure. This is referred to as the “early mineralised porphyry dike phase” (“EMP”). The EMP contains the best mineralisation. It is a body 1.8 km long and 50-200 m wide, which is responsible for a ridge due to the silica content rendering it resistant to erosion. Associated with the EMP are several breccia bodies, also controlled by the major NNW tectonic structure, which are relatively small, but constitute the highest grade mineralisation. There is a later phase of dykes, referred to as “intra-mineralised porphyry dikes (“IMP”), which are poorly mineralised. One of these dykes (the most prominent one) is located along the east side of the EMP and is about 1.7 km long with widths ranging from 50 m to 150 m.
The deposit is capped by a leached zone of oxidised and clay-rich rock up to 180 m thick. Beneath the leached cap, a thin mixed sulphide-oxide zone gives way to a supergene sulphide zone where hypogene (= originally deposited from rising hydrothermal fluids) sulphides, mainly chalcopyrite (CuFeS2), are replaced by chalcocite (Cu2S) and minor covellite (CuS). The thickness of the supergene chalcocite blanket typically varies between 60 m and 250 m but can penetrate to more than 400 m down structures. The intensity of supergene mineralisation gradually decreases with depth from the top of the zone. Copper values in the supergene enriched zone vary between 0.4% Cu and greater than 1.0% in the north-central part of the system, and they decrease in the south and the peripheries to 0.2% to 0.4% Cu. The supergene component is the most important mineralisation of economic interest at Los Azules.
Any mineralisation that has a cyanide-soluble copper component exceeding 50% of total copper content is classified as supergene enriched. Figure 3.2_1 is an isometric view with the area classified as enriched in red and the rest of the mineralised early porphyry dyke in magenta.
Figure 3.2_2 shows the close relationship of boreholes with the best grade intersections and the NNW trending tectonic structure. Crux Investor has annotated the map by adding an ellipse with orange colour around the area with boreholes generally intersecting higher than 0.60 % total copper (“% CuT”), and an ellipse with boreholes with intersection usually higher than 0.20 % CuT.
The higher grades define an area with a maximum width of approximately 500 m, based on the distance of 50 m between coordinates. The blue ellipse has a maximum width of 625 m.
The cross-section below demonstrates the consistent trend of better copper grades as a function of proximity to the NNW structure, irrespective of lithology and oxidation level.
The peak in grades 600 m to the left of the main NNW trending structure is explained by its association with a second structure at depth.
Mineral Resources and Mineable Inventory
Mineral Resources
The latest MRE is based on 162 drill holes with a spacing of approximately 150 m to 200 m, but there are localised areas where drilling is on a 100 m spacing. Mineralisation of economic importance is below sterile overburden, a low-grade leached zone, and minor oxide mineralisation, which has been ignored.
The model for the MRE combines structure, lithology, and copper mineral zonation (i.e. oxides, supergene, hypogene, and transitions). As it was found that grade statistics are very much defined by lithology and copper mineral zonation, the domains have been accordingly defined, and all lithological contacts have been treated as hard boundaries for grades during estimation, with no sharing of sample values between lithological units.
The MRE is based on uncapped copper grades, which were found to have a negligible effect on overall copper content. The chosen composite length was 2 m and the block size was 20 m x 20 m x 15 m high, which is the expected smallest mining unit (“SMU”). Variograms were generated for each lithology, and it was shown that the strongest correlations are along the NNW trend and dip of the structure for both the enriched and primary zones. Soluble and total copper block grades were estimated using ordinary kriging for the main domains and inverse distance weighting for the smaller domains. Soluble copper is the combined acid-soluble (copper from oxides) and cyanide-soluble (copper from chalcocite and covellite) grade.
This grade information type is essential for determining reasonable prospects of economic extraction. The reported mineral resources include a component that is expected to be treated by heap leaching and solvent extraction/electrowinning (SX/EW) to get to copper cathode, and another component with low solubility, but with credits for precious metals when treated by milling and flotation to produce a concentrate.
The cut-off grades are expressed in NSR values, which gives due consideration to variations in metal recovery and off-mine charges, which a straightforward metal grade cut-off would not provide. The MRE assumes a very low cut-off of US$2.74/t for Leach resources and for Milling/Flotation resources approximately US$5.45/t. These values are not formally derived in the technical report, but Crux Investor records that the revenue charges (Boca de Mina, NSR royalties, and the Export Retention rate) have been ignored. The Leach cut-off value includes processing cost, but the Mill/Flotation cut-off does not. For both, the mining cost of the block that will be treated is ignored. This is correct for deciding whether or not to treat material that is already mined, but not appropriate for a decision to mine a block.
Table 3.3.1_1 gives the mineral resource statement, effective 9 May 2023.
The table shows that total resources are impressive, but for milling/flotation, these are of very low grade and questionable economic feasibility. The PEA implicitly endorses this view by developing a production schedule based on treating only Leach resources.
The Inferred resources account for 34% of total copper and almost 32% of soluble copper content. Substantial infill drilling will be required to convert the Inferred resources to a higher category for inclusion in an FS.
Mineable Inventory
As the Los Azules economic assessment is of PEA standard it is allowed to include Inferred resources in the production schedule. However the term “reserves” may not be used as this is exclusively permitted for M&I resources that have been proven to be economic in terms of a pre-feasibility (“PFS”) or FS. “Mineable Inventory” is that portion of all mineral resources that are included in a PEA production schedule.
The PEA mine plan is to extract resources by conventional open pit methods using very large equipment, reflecting the bulk nature of the deposit.
One of the significant advantages of Los Azules is the presence of the best grade blocks at shallow levels just below the leach cap. This means a starter pit can be selected with limited initial waste stripping, whereafter high-grade material can be mined for treatment by heap leaching. Figure 3.3.2_1 illustrates this in a longitudinal and cross section through the block model. Not evident from the illustrations is that copper soluble grades are highest just below the leached cap and gradually drop with depth, further improving short-term copper production.
In defining the mineable inventory due consideration was given to surface restrictions, with the key constraint being areas identified as cryogenic geoforms (zones of subsurface frozen water). No disturbance is permitted within 50 m (measured horizontally) of these geoforms.
Overall pit slopes in overburden will be 30 degrees. Pit slope angles are planned to reduce with the planned final depth of the pit declining from 42 degrees for pit depths down to 600 m to 32 degrees for pit depths down to 1,000 m. Flattening the overall pit slope with depth significantly impacts pit optimisation studies, limiting the maximum pit depth to less than 800 m, with only a small proportion of the pit wall (in the east) designed at an overall slope of 38 degrees.
The pit optimisation assumes a dilution of 5% and a mining recovery rate of 95%, which is conservative given the bulk nature of the mineralisation.
The table shows that almost 97% of the copper soluble metal in Indicated resources is captured as mineable resource, and nearly 75% is in Inferred resources. Despite 5% dilution, the forecast feed grade is substantially higher than for resources. When calculating the grade of the Indicated resources dropped out, it comes to approximately 0.23% CuT and 0.07% CuSol, and 0.25% CuT and 0.11% CuSol for Inferred resources, respectively. These numbers look unlikely. If correct, the technical report should explain how such selectivity is possible.
Mining Operations
The PEA heavily promotes the fact that Los Azules will be a “green” project, employing methods to reduce its carbon imprint. The mine plan incorporates a combination of electric-hydraulic front-end shovels and large mine haul trucks equipped with pantographs from the start of operations to allow for the early use of trolley-assist infrastructure. The SMU is 20 m long, 20 m wide and 15 m high. Given the large equipment size, the minimum mining width at the bottom of the pit is 60 m.
Non-mineralised material is hauled to either the North mine rock storage facility (“MRSF”) or the South MRSF. Mineralised material is hauled to either the Leach Stockpile or directly to the crusher for processing. The North MRSF at a starting elevation of 3600 mamsl has approximately 835 Mt of storage while the South MRSF at a starting elevation of 3860 mamsl has approximately 530 Mt of material storage. The South MRSF is the primary destination for non-mineralised material in the initial ~five years of mining. The remaining non-mineralised material is hauled to the North MRSF.
Low-grade leach material is sent to a stockpile east of the North MRSF for treatment at the end of the LOM. Initially, only a small amount needs stockpiling, but as mining progresses more low-grade material is exposed, and significant amounts of material are stockpiled in years 9 through 19.
The main mine equipment comprises up to eight large rotary blast hole drill rigs, 37 dump trucks with 363 t dump capacity, 25 m3 front-end loaders (2x), 40 m3 hydraulic front shovels (3x), and one 61 m3 electric rope shovel. Two large dozers (D10) will be used for levelling the MSRFs, and for pit and road maintenance.
Given the shallow depth to groundwater and the high permeability of the geologic units in the pit area, high-capacity vertical dewatering wells, both in-pit and outside the pit boundaries, will be necessary.
Metallurgy and Processing Operations
Metallurgical Test Work
Metallurgical test work spans a long period with initial work informing the first PEA in 2008. The envisaged process changed from the production of copper concentrate to treating such concentrate on site by pressure oxidation (“POX”) followed by SX/EW to produce copper cathode, to the current plan of dissolving copper in a leach pad followed by SW/EW to produce copper cathode. This section will only review the test work relevant to the heap leach route in the 2023 PEA.
9 composite samples were created out of 78 to emulate the different material types and grades between 0.019% and 0.578% CuT, and between 0.008% and 0.296% CuSol.
Comminution tests show that the impact work index indicates soft to medium hard rock. Abrasiveness is low to moderate.
For column test work two crush sizes were chosen 100% passing 19 mm (3/4 inch) and 12.7 mm (1/2 inch). The tests were conducted in Chile at the SGS laboratories in Santiago and at moderate temperature (i.e. 18.6 °C when the columns were loaded) with leaching up to almost 200 days. Recoveries were such that it was recommended to assume a fix of 100% for soluble copper plus another 15% for residual copper. However, at the publication date of the PEA leaching was continuing and no assays for residual columns were available. In a press release dated 22 February 2024, the final results were announced confirming the 100% recovery of soluble copper but raising the recovery of residual copper to 25%, for an overall recovery rate of 76.0%.
The sulfuric acid consumption is estimated at 16.5 kg/t treated when leaching at an acidity level of close to 2.0 pH.
This valuation has adopted the latest recovery estimate into the PEA production schedule.
It should be noted that in parallel the Nuton LLV technology of Rio Tinto is being tested as an alternative bio-leaching process.
Processing
To minimise truck haulage a primary gyratory crusher is planned at the pit rim, which will reduce the run of mine ore to a -150 mm product. This material will cycle through a series of secondary/tertiary screens and crushers to generate a product 80% passing (“P80”) -16.4 mm. The crusher product will be transported to the heap leach pad by a series of overland conveyors. The overland conveyors will discharge the material into agglomeration drums, bringing the moisture up to 5% using raffinate solution directly from the raffinate pond. The agglomerated material will be discharged through a tripper conveyor, a series of portable conveyors, and a telescoping radial stacker to place the material directly on the heap leach pad in 9 m lifts, to a maximum elevation of approximately 150 m. In the last quarter of the year, no placement of material on the leach pad is planned.
Loading a pad is estimated to take 14 days, after which raffinate leach solution (= dilute sulphuric acid) is pumped directly from the raffinate pond and applied to the surface of the heap through irrigation by sprinklers and drip emitters. Biomass will be added to the raffinate allowing for leaching of sulphide minerals. The active solution application will last for 180 days. The acid solution will percolate through the heap leach material dissolving copper and some impurities. The resulting pregnant leach solution (“PLS”) will drain from the bottom of the heap and will be collected in the PLS pond. From the PLS pond, the solution will be pumped to the feed tank for solvent extraction.
At the solvent extraction section, the PLS is mixed with an organic solvent for two minutes, after which it is stripped from the solvent by mixing it with a concentrated sulphuric acid solution which is sent to the electrowinning section for precipitation of the copper as copper cathode. Cathode stripping from the permanent stainless-steel blanks will be done in semi-automatic stripping machines. The EW plant, which has a nominal capacity of 175,000 t copper per annum, determines the overall processing capacity.
To avoid expensive and risky trucking of concentrated sulphuric acid, an acid plant will be constructed on-site, supplied by elemental sulphur from the YPF refinery in Lujan de Cuyo, south of Mendoza in Argentina.
Economic Valuation – Los Azules Project
Copper Price Assumed
The PEA uses a copper price of US$4.00/lb. For the Base Case of this valuation, the spot copper price on 19 August 2024, US$4.13/lb Cu was assumed as a long-term price.
Crux Investor has adopted the suggestions in the PEA that the selling cost will be US$0.02/lbs Cu (= US$44.1/t Cu cathode) and transport and freight costs total US$150/t Cu.
Production Schedule
Figure 3.6.2_1 reproduces the mine production schedule of the PEA report, which was adopted for this valuation.
The PEA assumes a construction period of 33 months, including two years of pre-production waste stripping and 16.9 million tonnes (“Mt”) of leach ore mining.
The diagram shows that the strip ratio (here defined as waste/leach ore) in the year before production is 3, after which it drops for two years to reach a peak in production in Year 3. The average rate over the LOM is 1.05. In the early years, when the mined grade is highest, extraction of leach material is just above 22 million tonnes per annum (“Mtpa”) which rises from production Year 5 onwards to reach a steady state level of 50 Mtpa by Year 7. With dropping waste stripping, the mining equipment can mine extra ore for stockpiling, both leach ore and primary ore. Primary ore may or may not be treated in future, depending on whether or not it will be economical. The PEA has ignored this possibility in its forecast.
Figure 3.6.2_2 shows the processing production schedule.
The diagram shows the high feed grade in the early years, which exceeds 0.7% CuT until production Year 5, after which it rapidly drops to settle around 0.45% CuT. Leaching of reclaimed leach ore from the stockpile from Year 21 onwards is at a grade of 0.27% CuT.
The initial processing feed rate is 22 Mtpa, increasing to 35 Mtpa in Year 4, and ultimately to 50 Mtpa in Year 7 through to the end of the LOM.
The capacity of the EW plant is designed at 175,000 tpa cathode copper. In the early years, the copper in the PLS solution exceeds capacity, and the excess copper will be recirculated until the plant can handle this. The result is that annual copper production only drops below 175,000 tonnes in Year 21.
Capital Expenditure
Table 3.6.3_1 summarises the estimated expenditures in the PEA technical report.
The pre-stripping amount converts to a mining cost rate of US$1.47/t. In the next section of this report, it will be demonstrated that this is an unrealistic number. Crux Investor has doubled the provision.
Initial crushing and treatment capacity is approximately 25 Mtpa. In Year 4 of operation, a secondary and tertiary crusher is added to increase the capacity to 36 Mtpa. In Year 7, a final addition of a secondary and tertiary crusher is installed to increase the capacity to a maximum of 51.4 Mtpa of material. The total provision of US$664 million looks reasonable.
The initial sulphuric acid plant has a capacity of 200,000 t per annum. In Year 4 an additional acid plant train is expected to be operational to bring the total capacity to 300,000 tonnes per annum, and in Year 6 another acid plant train for a total capacity of 400,000 tonnes of sulphuric acid a year. Crux Investor records that the sustaining capital expenditure provision includes three expansions, two costing US$115.1 million each, and the third expansion US$222.5 million. It does not make sense, particularly as the initial plant with double the capacity supposedly costs only US$94.9 million. Crux Investor suspects the US$222.5 million number should be part of the initial plant construction cost. The total provision of US$548 million over the LOM looks reasonable.
The initial heap leach capacity is 75.9 Mt within a total initial pad design of 956.6 Mt. Expansions for the initial leach pad are planned every 2-3 years. Another pad design is planned for Year 21, adding in total another 225 Mt. Crux Investor records that the cost of the initial pad amounts to US$2.10/t capacity dropping to US$0.46/t for the expansions of the first leach pad. Strangely enough, the cost of the second leach pad is only US$0.49/t capacity. These estimates need to be more consistent and look in general very low. The author has been involved in a heap leach operation in Chile where in 2012 heap leach construction was estimated to cost US$2.47/t capacity. Crux Investor has increased the cost rate for the first phase to US$2.40/t capacity, US$1.00/t for expansions, and again US$2.40/t for the second leach pad.
The forecast includes the assumption that the local electrical power supplier will construct the 220 kV power line to the site and recover the cost at the rate charged.
According to https://www.globalpetrolprices.com/Argentina/electricity_prices/ the electricity price for businesses in Argentina in 2023 was US$0.025/kWh, which is exceptionally low in a global context. Across the border in Chile, it was US$0.173/kWh. However, the study assumes that the project will use “green” electricity from renewable sources. Such electricity generation is more expensive than hydro schemes or nuclear and fossil fuel generation, and it is doubtful that the general rate would be charged. In Europe, this is noticeable in the significant rate differences between Eastern European countries/France with Denmark and Germany which have been most aggressively pursuing “green” energy.
Included in the initial capital expenditure forecast is a contingency rate of 25%, but for sustaining capital expenditure this has been ignored, which is not consistent. Whereas much of the sustaining capital expenditure relates to mining equipment and is relatively accurate, the other items should have included a substantial contingency. This valuation has however also ignored such a contingency.
Operating Expenditure
Table 3.6.4_1 shows the cost structure suggested in the PEA technical report, benchmarked cost at operations in a similar location and altitude, and highlighted in yellow the rates used by Crux Investor for its valuation.
As benchmarks, reference was made to the Puna Operations of SSR Mining and the Veladero Mine of Barrick/Shandong Gold.
The Puna Operations are located in the far northwest of Argentina at an elevation of 4,000 mamsl to 4,500 mamsl. The production rate of 8.2 Mtpa is far lower than planned for Los Azules, but its remote location at high altitude makes it a good reference. The cost rates were extracted from a technical report dated 11 February 2024. With a totally different processing route, no processing cost rate has been included in the table.
The Veladero operation is more akin to Los Azules, also located in the San Juan Province of Argentina, 6 km from the border with Chile, and at an altitude between 3,800 mamsl and 4,800 mamsl. It also treats ore by heap leaching but of gold, not copper. This should be less costly than copper production as its leachant is a weak cyanide solution and electrowinning is much less energy intensive. The mining rate of 62 Mtpa of Veladero is much closer to Los Azules than the Puna Operations. The cost rates have been extracted from a technical report for Valadero dated 19 March 2018. These rates are consistently higher than Los Azules' numbers, particularly as the Veladero rates are in 2018 dollars.
According to a very experienced process engineer the heap leach SX/EW processing cost in Central Africa for operations with an acid consumption of 25-30 kg/t is approximately US$2,000/t Cu Cathode. Using this rate for Los Azules as covering all processing costs, a total LOM cost that is 2.5x the PEA's processing cost is derived. Moreover, at the suggested delivered cost of US$315/t for sulphur, the produced acid would cost approximately US$130/t. Applying the net acid consumption rate of 16.5 kg/t treated, the acid cost per tonne treated alone would be US$2.15. Considering the above, Crux Investor is confident that a processing cost of US $ 5.00/t treated is more reasonable.
The PEA for Los Azules uses a General and administrative (“G&A”) cost rate expressed in US$ per tonne treated. This is inappropriate as such expenses are in reality almost fixed. Applying a rate per tonne treated would make the annual cost in the early years extra low. The Veladero technical report shows that the remote and challenging location makes for a very high annual outlay. Crux Investor has used US$100 million per annum to recognise the larger and more complex process at Los Azules compared to Veladero.
Working Capital
Being located in a very isolated area with little infrastructure, and producing copper cathode for export, implies a considerable investment in working capital. Table 3.6.5_1 shows the assumptions of Crux Investor to arrive at total investment in working capital.
Based on the Crux Investor assumptions Los Azules will have to make an investment of almost US$ 307 million in net current assets. These are assumed to be recouped in full by the end of the LOM without losses due to obsolesce or pilferage.
Royalties and Taxes
The PEA applies several revenue-related charges:
- The San Juan “Boca de mina” royalty of 3% of gross revenue;
- NSR-based royalties, 1.25% in favour of McEwen Mining and 0.4% in favour of TNR; and
- An export retention tax of 4.5% on the value of metals at the point of export. According to the technical report deductions applicable are transportation and treatment/refining charges, the latter not being relevant for copper cathode. The PEA assumes that annually 10,000 tonne copper cathode would be sold locally and escape the duty. Crux Investor has ignored this assumption.
Argentina charges 10.5% value-added taxes (“VAT”) on capital expenditure, even the pre-production component. The PEA assumes that 95% of the VAT is recovered, with the charge on initial capex recovered in the first two production years. During operations, VAT is charged at 21% on all non-labour expenses, with the operation only recovering 95%. Non-labour expenses also attract an Operating Bank Tax of effectively 1.0%.
Income tax is 35% in Argentina. The report gives no details on what amortisation and depreciation are allowed for income tax purposes. For this, Crux Investor referred to the Puna Operations technical report. The depreciation methodology for property, plant, and equipment (PP&E) included in this report is 60% in the first year, with the remaining 40% in equal portions in the two subsequent years. Intangible assets are depreciated on units of production throughout the LOM.
Ernst & Young in an announcement dated 7 May 2024 advises that Argentina applies a tax of 17.5% on the purchase of foreign currency when remitting dividends.
According to https://practiceguides.chambers.com/practice-guides/mining-2024/argentina there is a capital gains tax on profits from the sale of shares in an Argentine company levied at the election of the taxpayer at 13.5% on the gross amount of the sale price or 15% on the net gain. This also applies to the transfer of a foreign company that owns a controlling interest in an Argentine company. It is not clearly defined what “controlling interest” is, but with McEwen’s beneficial interest in Los Azules dropping to well below 50% capital gain tax may no longer be applicable, should McEwen be taken over.
Results
Table 3.6.7_1 summarises the LOM results for the Los Azules for Base Case metal prices and the input parameters set out above. The PEA input parameters were used as a comparison, but certain discrepancies were noted. For example, the report gives a selling cost of US$0.02/lb Cu, and transport and freight costs of US$150/t copper cathode. However, when using these rates Crux Investor gets to much higher expenses than the US$167.7 million as per the PEA. Moreover, for the tax calculation Crux Investor used an intangible asset balance of US$454.4 million on 1 January 2023, to which the US$80 million FS cost has been added. For this reason, the Crux Investor model has much higher amortisation and depreciation deductions than the PEA.
The table shows that despite a very good cash margin of more than 60% of gross revenue for the PEA, the project has a very modest NPV8 equal to 74% of the initial capital expenditure. The IRR is 14.2%. There are several reasons for this. There are considerable charges against the revenue that, together with a high income tax rate, and the cost of purchasing foreign currency, result in the government taking 29.5% of gross revenue. This is a higher proportion than for operating costs. Net free cash flow is 23.3% of revenue, but with a long lead time to production, modelled to start in 2029, the value of US$7.6 billion net cash flow drops considerably to US$1.8 billion when discounted at 8% annually.
When applying the more conservative assumptions of Crux Investor the net cash flow is considerably lower despite a copper price that is 10% higher. With operating costs 83% higher the cash margin drops to 44.3%. LOM capital expenditure is 27% higher. The overall effect is that operating costs absorb 44.6% of gross revenue and capital expenditure 16.5%. The government’s take drops to 21.2% of gross revenue leaving US$5.17 billion as net free cash flow, equal to 13.8% of gross revenue. Discounting at 8% results in an NPV of US$0.73 billion, 27% of initial capital expenditure.
Table 3.6.7_2 shows the sensitivity of the NPV’s at various discount rates for one-percentage point changes in the main input parameters.
The table illustrates that the project is highly sensitive to changes in the main input parameters. The NPV8 increases by 10.3% (i.e. US$75 million) for a one percentage point increase in the copper price (i.e. US$0.04/lb). For every percentage point change in the operating cost (US$0.14/t treated) the NPV8 changes by US$35.5 million, and for every percentage point change in LOM capital expenditure (US$60 million) the NPV8 value changes by US$39.6 million. The high sensitivity to capital expenditure is partially due to the long lead time to production.
Net Free Cash Flow Over Time – Attributable to McEwen Mining
Figure 3.7_1 contains the forecast net free cash flow for Los Azules attributable to McEwen Mining given its 47.7% beneficial interest in the project.
The graph illustrates the large amount of funding (totalling US$1.26 billion) required until positive cash flow is generated at the earliest in 2029. For a company the size of McEwen it will be difficult to secure this kind of funding, and the company may well have to dilute its shareholding further by letting its large partners, Stellantis and Rio Tinto, contribute more to the construction financing.
After production starts there are three years of positive cash flow with the high initial feed grade. Only for it to drop again because of the capital expenditure required for the production expansions.
The Enterprise Value of McEwen on 19 August 2024
At the share price of C$12.69 on 19 August 2024, and with 51.09 million shares issued, the market capitalisation of McEwen is C$648 million, or US$474 million.
Unfortunately, the financial statements for the quarter ending 30 June 2024 give no details on exercise prices for the various tranches of warrants and share options. The only statement indicating the number of shares that could possibly dilute current equity is “all 868,480 outstanding stock options and all 2,169,926 outstanding warrants were excluded from the computation of diluted loss per share”. Given the share price performance in the last few years, this valuation assumes none of these are in the money.
On 30 June 2024, the company had net current assets of US$29 million and long-term debt of US$34 million.
Table 3.8_1 derives an Enterprise Value of US$510 million based on the above.
The Enterprise Value is therefore 47% higher than its 47.7% participation in the NPV8 value.
Despite the current overrating of the company’s value, Crux Investor is of the opinion that McEwen constitutes good value. Being one of the most significant global undeveloped copper projects it is an excellent option for the copper price with small rises in the price of the metal translating to large increases in the prospective net present value of Los Azules. The project must be on the radar of the large producers seeking reserve replacement.
Any favourable changes in Argentina will add to Los Azules’ prospects. With the current president, Javier Milei, there is a good chance this will change.
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