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McEwen Mining Inc. (NYSE:MUX)

Q3 2012 Conference Call

November 7, 2012 2:00 pm EST

Executives

Robert McEwen – Chief Executive Officer

Ian Ball – Senior Vice President

Perry Y. Ing – Chief Financial Officer

Analysts

Richard McCray – Private Investor

Aleksandra Bukacheva – Fraser Mackenzie

Operator

Good afternoon, ladies and gentlemen. Welcome to the McEwen Mining Third Quarter Financial Results Conference Call.

I would now like to turn the meeting over to Mr. Rob McEwen, Chief Owner. Please go ahead sir.

Robert McEwen

Thank you, operator. Ladies and gentlemen, it’s a pleasure to have you join us today. The purpose of this call is to review McEwen Mining’s third quarter results and provide some guidance for next year.

Joining me on the call today are Ian Ball, our Senior Vice President; and Perry Ing, our CFO. And I just before getting them to speak about operations and financial aspects of the company, I’d like to deal with the three highlights of the quarter. For me, one was the, our second source of gold production started during the quarter at El Gallo Phase 1 and began producing gold. The second, we issued a feasibility study for Phase 2 at El Gallo, which will be an important source of production and cash flow. And our third mine, which we hope to have up and running are being constructed in the second half of next year.

And the other aspect was our rights offering, which was recently announced. And I just want to say, I currently have an investment in the company that equates to 25% of the company. My cost space on those shares is a $110 million and there was no stock given for free. With the rights issue, I will be subscribing for a further $15 million, which is my prorate of share. And I happen to like it. I think it’s a great investment from my perspective.

So I also said that I would backstop the entire issue. We wanted to give shareholders back. Shareholders have been loyal and supportive give them a benefit and the rights issue as a way of doing that it’s priced at a discount more than a 50% to market. So if it gives everyone who is a shareholder an opportunity to acquire an additional 10% for half of the current market and if they choose not to exercise the rights they can sell it and treat it like a dividend.

At this time, I would just like to and I’ll ask Ian Ball to discuss the highlights of our operations. He will be followed by Perry Ing to discuss the financial highlights and after that we’ll open it up for questions.

Ian Ball

Thank you very much Rob. Operationally our strategy continue to in fall as planned during the third quarter. I believe it’s provided us with a solid base where we can look to grow production in the coming quarters were we’ll go from a 105,000 ounces of gold equivalent at the end of this year to approximately a 125,000 ounces of gold equivalent by the end of next year.

At the San José mine in Argentina, production remains steady and quite predictable. The dividends that we are receiving from the mine are staying in the country and are going to be used to pay for our exploration at Los Azules and our 100% own properties around the San José mine and Goldcorp’s Cerro Negro project. San José remains on track to produce a 192,000 ounces of gold equivalent, 49% of which is attributable to McEwen Mining.

As Rob alluded to, this quarter was a significant milestone for our team. It was our first mine that we had constructed. This was El Gallo Phase I it was built slightly below the budget that we have predicted and it was built on time.

We exited October, running about 70% capacity and we expect to have commercial production by the end of this year. What we’ve been able to achieve there I think is going to tie over directly into our second phase where we’ve been able to attract talented personnel, construction experience, as well as operating experience that will play right into building of Phase II, which we’re looking to break ground on during the second half of next year.

Also on our feasibility study, well this was put out in beginning of September and a confirmed the potential to have another 5.2 million ounces of silver and 5,000 ounces of gold or a 105,000 ounces of gold equivalent coming out of Phase II in Mexico. So when you put both phase together you’re looking at dealing a 135,000 ounces of gold equivalent and that would be a tremendous boost in terms of our production cash flow going at the end of 2014.

Also I want to touch quickly on our exploration activities. During the quarter, both at San José and El Gallo we experienced good success, growing the resources beyond what’s currently been defined. At San José where we have a 13-year mine life, we announced a new Emilia vein, which is showing a very attractive grade in Intercept lengths comparable to what we’re currently mining at site.

On Tuesday morning we point out new drill results from El Gallo and what’s attracted both of these are the grades that we’re encountering. There are much higher grades in the current resource space. It is showing that is high, it could be high grade potential below the currently designed pits and we have exploration following upon as we speak. So it appears to be good organic growth at both of our projects and the reason why we invest so heavily into exploration.

At Los Azules, we said we are going to go there and secure larger drill rates for the season. That was successfully accomplished. We started drilling at the beginning of October and that was three and a half months earlier than what we were able to achieve last year and a month earlier than what we are predicting in the second quarter.

This year during the month of October we’ve already completed more meters than all of in last season and the team is doing an excellent job, trying to expand the size of this resource and making sure we can maximize this drill season versus what was completed in prior years. This year the drill program is 15,000 to 20,000 meters and we look to have results coming in at the beginning of January. And, so we’re quite serious about tacking this project and continue to grow the size as world-class asset.

With that, I’d like to turn it over to Perry Ing who will give a brief overview of the financial highlights.

Perry Y. Ing

Thank you, Ian. For the third quarter we’ve recorded total revenue of approximately $11 million. $10.7 million of that was a result of the San José mine and as Rob mentioned, just under 500,000 of that was sales of our own from El Gallo Phase I.

We reported an operating loss of $11 million and a net loss of $3 million or $0.01 per share. I’d like to remind investors that our financial statements are a little bit different than some other comparable companies, because under U.S. reporting rule in the absence of Industry Guide 7 reserves you need to expense your mine development costs. So for us, for El Gallo Phase I because we choose to do that without updating previous feasibility studies, we’ve expensed all the capital, which for this quarter it was $4.7 million and for the year-to-date it was $13.3 million.

So, just in terms of our ability to capitalize those amounts we have not done so and haven’t and so it expense them. And as well, we have also reported $2.4 million in mine operating cost costs relating to the deferred stripping of pits that we will be accessing in the future, which again we do not have the benefit of deferring onto our balance sheet.

In terms of other financial highlights, we ended the quarter with approximately $20 million in cash and liquid assets. With the completion of the rights offering during the first week of December, we expect to be well positioned going into 2013 to execute our acceleration and development program. We expect to end the year with approximately $75 million in our treasury. With the progress made towards achieving commercial production at El Gallo, we now considered Mexico to be a self-sustaining operation, which should not require additional funding other than for Phase II item.

The San José mine continues to perform well, reporting $116 million in sales during the quarter as they resumed doré and concentrate shipments at the beginning of the quarter. Our reported income for our 49% investment was $10.7 million as I mentioned earlier. We did receive a dividend of $2.6 million attributable to the third quarter. This is in addition to $2.2 million relating to the second quarter.

As with Mexico, from our standpoint, we consider Argentina to be self-sustaining as we expect to receive sufficient dividend to fund our aggressive exploration programs at Los Azules and in Santa Cruz Province.

In the near-term we do not expect to be repatriating cash from Argentina given our needs locally to fund our exploration programs as well as at the San José mine, they’re still working on restoring their working capital balances to normal levels given the delays in shipments during the second quarter as a result of decrease in Argentina. As we announced for concentrate sales, the lead time to process and recover your gold and silver from concentrate, so that can take up to 180 days. So it won’t be until the end of this year that they are fully recovered from the effect of those delays.

And that’s all I have to report. So I will return the call back to Rob.

Robert McEwen

Thank you, Perry. Thank you, Ian. At this point, I would like to open the session for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) The first question is from Richard McCray. Please state your company and follow with your question.

Richard McCray – Private Investor

Richard McCray, Private Investor. Hello, Rob. I think this is very useful opportunity to talk about the excellent progress the company is making at El Gallo. One thing I do like is that your published information is always pretty precise and informative. One of the questions I have is about the Argentinean situation. It would appear that the mine is functioning well and it should be on schedule to produce about 200,000 ounces a year, which would, I assume, be 100,000 for McEwen Mining. Should not that translate into a lot more than $10 million a month or a $10 million a quarter in dividends?

Robert McEwen

Hi, Rick. Good to hear from you.

Richard McCray – Private Investor

Hi, Rob.

Robert McEwen

I’ll ask Perry to jump in on that question.

Perry Y. Ing

Again as I mentioned, the mine is still working through some of the delays relating to the doré and concentrate shipments. So when they didn’t have revenue during the month of April to June, but they were still in full operation, they had to draw on local credit lines. And since then they have been focused on paying back those credit lines, which were approximately $38 million at the end of June. And during the third quarter they paid back approximately $16 million and obviously they expect to use cash flow during the fourth quarter to get that paid to below $10 million. So that’s where a lot of the cash flow has gone in addition to the dividend that we have received.

Richard McCray – Private Investor

So you are expecting in 2013 that the amount to be received by McEwen Mining should be substantially higher?

Perry Y. Ing

[As has been] large capital expenditure or other projects I would expect dividends to increase. That is correct.

Richard McCray – Private Investor

Thanks, Perry.

Operator

Thank you. (Operator Instructions) The following question is from Aleksandra Bukacheva from Fraser Mackenzie. Please go ahead.

Aleksandra Bukacheva – Fraser Mackenzie

Gentlemen, good afternoon. With regards to El Gallo, the results you are seeing below and also I guess that there is some mineralization southwest of existing pit on Phase I. When do you think you might be able to make a decision of how that fits into the mine plan?

Robert McEwen

Hi, Sasha. I’ll let Ian jump in there. He’s on top of that.

Ian Ball

Right now we are in a process of constructing a new resource model for that part of the project and we’re doing the wireframes, we’re doing the block models and then from there we’ll be looking at doing a rough pit optimization, just to get a general sense of the parameters and how economic it is. So we’re probably right now looking at middle of next year to have that published.

Aleksandra Bukacheva – Fraser Mackenzie

Okay. And just high level, what are you thinking? Are you thinking extending that mine life and just kind of keep the leach pad going at 30,000 ounces or are you thinking there might be potential to upsides of leach pad?

Ian Ball

Right now that has not been determined. So I can’t really comment one way or the other, but that will be assessed when we revise the mine plan.

Aleksandra Bukacheva – Fraser Mackenzie

Okay. Thank you.

Operator

Thank you. (Operator Instructions) There are no further questions registered at this time. I would like to return the meeting to Mr. McEwen.

Robert McEwen

Thank you, operator. Ladies and gentlemen, thank you very much for joining us. We don’t want to take a lot of your time, but we are excited about what we’ve achieved in the third quarter and what 2013 looks like for us, the strategy of putting US Gold and Minera Andes together back in January to form McEwen Mining. It is unfolding as we had hoped, larger market presence, internally financing and a concentration of focus on exploration and production.

We look forward to reporting on our fourth quarter and in between there we’ll have drill results. And any of you who are our shareholders, glad to have you in you’re exercising [your rights]. I think it’s well priced and interesting for all shareholders. Thank you.

Operator

Thank you. That concludes today’s conference call. Please disconnect your lines at this time. We thank you for your participation.

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