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EX-32 - EX-32 - McEwen Mining Inc.mux-20150930xex32.htm
EX-31.2 - EX-31.2 - McEwen Mining Inc.mux-20150930ex31237617e.htm
EX-31.1 - EX-31.1 - McEwen Mining Inc.mux-20150930ex3116e581b.htm

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIRES EXCHANGE ACT OF 1934

 

For the transition period from               to

 

Commission File Number: 001-33190

 

MCEWEN MINING INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Colorado

 

84-0796160

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

150 King Street West, Suite 2800, Toronto, Ontario Canada M5H 1J9

(Address of principal executive offices)  (Zip code)

 

(866) 441-0690

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

 

 

 

 

 

 

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No  

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 274,654,010 shares outstanding as of November 4, 2015 (and 25,876,164 exchangeable shares).

 

 

 


 

MCEWEN MINING INC.

 

FORM 10-Q

 

Index

 

 

 

 

 

 

 

 

Part I        FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. 

    

Financial Statements

    

3

 

 

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2015 and 2014 (unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2015 (unaudited) and December 31, 2014

 

4

 

 

 

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2015 and 2014 (unaudited)

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited)

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosure about Market Risk

 

41

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

43

 

 

 

 

 

 

 

Part II        OTHER INFORMATION

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

44

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

 

 

 

 

 

Item 6. 

 

Exhibits

 

46

 

 

 

 

 

SIGNATURES 

 

 

47

 

 

 

 

2


 

PART I

Item 1.  FINANCIAL STATEMENTS

 

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands of U.S. dollars, except per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30,

 

Nine months ended September 30,

 

 

 

 

2015

 

2014

 

2015

 

2014

 

 

REVENUE:

 

 

 

    

 

 

 

 

 

    

 

 

 

 

Gold and silver sales

 

$

22,503

 

$

8,853

 

$

61,545

 

$

31,620

 

 

 

 

 

22,503

 

 

8,853

 

 

61,545

 

 

31,620

 

 

COSTS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production costs applicable to sales

 

 

11,170

 

 

10,997

 

 

28,912

 

 

30,424

 

 

Mine construction costs

 

 

 —

 

 

567

 

 

 —

 

 

1,723

 

 

Mine development costs

 

 

112

 

 

31

 

 

449

 

 

1,754

 

 

Exploration costs

 

 

1,830

 

 

2,306

 

 

7,252

 

 

7,623

 

 

Property holding costs

 

 

2,073

 

 

2,380

 

 

4,061

 

 

4,568

 

 

General and administrative

 

 

2,276

 

 

2,549

 

 

8,761

 

 

8,989

 

 

Depreciation

 

 

211

 

 

239

 

 

691

 

 

693

 

 

Accretion of asset retirement obligation (note 4)

 

 

110

 

 

100

 

 

342

 

 

309

 

 

Loss (Income) from investment in Minera Santa Cruz S.A., net of amortization (note 5)

 

 

1,641

 

 

4,441

 

 

3,964

 

 

(150)

 

 

Impairment of mineral property interests and property and equipment (note 4)

 

 

1,198

 

 

 —

 

 

29,740

 

 

120,398

 

 

Gain on sale of assets

 

 

(9)

 

 

(8)

 

 

(13)

 

 

(26)

 

 

Total costs and expenses

 

 

20,612

 

 

23,602

 

 

84,159

 

 

176,305

 

 

Operating income (loss)

 

 

1,891

 

 

(14,749)

 

 

(22,614)

 

 

(144,685)

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (expense) income and other (expense) income

 

 

(715)

 

 

347

 

 

2,415

 

 

456

 

 

Registration taxes

 

 

 —

 

 

(6,712)

 

 

 —

 

 

(6,712)

 

 

Foreign currency gain

 

 

(162)

 

 

(633)

 

 

(366)

 

 

(932)

 

 

Total other (expense) income

 

 

(877)

 

 

(6,998)

 

 

2,049

 

 

(7,188)

 

 

Gain (loss) before income taxes

 

 

1,014

 

 

(21,747)

 

 

(20,565)

 

 

(151,873)

 

 

Income taxes recovery (note 9)

 

 

1,619

 

 

8,714

 

 

15,103

 

 

52,705

 

 

Net income (loss)

 

 

2,633

 

 

(13,033)

 

 

(5,462)

 

 

(99,168)

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on available-for-sale securities, net of taxes

 

 

(479)

 

 

(2)

 

 

(1,126)

 

 

1

 

 

Comprehensive income (loss)

 

$

2,154

 

$

(13,035)

 

$

(6,588)

 

$

(99,167)

 

 

Net income (loss) per share (note 10):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

$

(0.04)

 

$

(0.02)

 

$

(0.33)

 

 

Diluted

 

$

0.01

 

$

(0.04)

 

$

(0.02)

 

$

(0.33)

 

 

Weighted average common shares outstanding (thousands) (note 10):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

300,530

 

 

297,164

 

 

300,420

 

 

297,162

 

 

Diluted

 

 

300,530

 

 

297,164

 

 

300,420

 

 

297,162

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

3


 

MCEWEN MINING INC.

CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

    

2015

    

2014

  

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

30,902

 

$

12,380

 

 

Investments (note 2)

 

 

855

 

 

1,082

 

 

Value added taxes receivable

 

 

10,855

 

 

11,739

 

 

Inventories (note 3)

 

 

12,425

 

 

12,404

 

 

Other current assets

 

 

1,831

 

 

2,096

 

 

Total current assets

 

 

56,868

 

 

39,701

 

 

Mineral property interests (note 4)

 

 

257,106

 

 

287,812

 

 

Investment in Minera Santa Cruz S.A. (note 5)

 

 

172,506

 

 

177,018

 

 

Property and equipment, net

 

 

17,739

 

 

17,896

 

 

Other assets (note 14)

 

 

531

 

 

531

 

 

TOTAL ASSETS

 

$

504,750

 

$

522,958

 

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

19,227

 

$

21,654

 

 

Short-term bank indebtedness  (note 6)

 

 

5,171

 

 

 —

 

 

Current portion of asset retirement obligation (note 4)

 

 

2,514

 

 

2,427

 

 

Total current liabilities

 

 

26,912

 

 

24,081

 

 

Asset retirement obligation, less current portion (note 4)

 

 

5,654

 

 

5,044

 

 

Deferred income tax liability (notes 9)

 

 

36,875

 

 

51,899

 

 

Deferred rent expense

 

 

295

 

 

319

 

 

Other liabilities

 

 

400

 

 

400

 

 

Total liabilities

 

$

70,136

 

$

81,743

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock, no par value, 500,000 shares authorized;

 

 

 

 

 

 

 

 

Common: 274,254 as of September 30, 2015 and 271,579 as of December 31, 2014 issued and outstanding

 

 

 

 

 

 

 

 

Exchangeable: 26,277 shares as of September 30, 2015 and 28,521 shares as of December 31, 2014 issued and outstanding

 

 

1,360,655

 

 

1,360,668

 

 

Accumulated deficit

 

 

(925,039)

 

 

(919,577)

 

 

Accumulated other comprehensive (loss) income

 

 

(1,002)

 

 

124

 

 

Total shareholders’ equity

 

 

434,614

 

 

441,215

 

 

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

 

$

504,750

 

$

522,958

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


 

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands of U.S. dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common Stock

 

Comprehensive

 

Accumulated

 

 

 

 

 

    

Shares

    

Amount

    

(Loss) Income

    

Deficit

    

Total

 

Balance, December 31, 2013

 

297,159

 

$

1,354,696

 

$

(295)

 

$

(607,634)

 

$

746,767

 

Stock-based compensation

 

 —

 

 

852

 

 

 

 

 

 

852

 

Exercise of stock options

 

697

 

 

1,382

 

 

 

 

 

 

1,382

 

Shares issued for settlement of accounts payable

 

393

 

 

1,004

 

 

 

 

 

 

1,004

 

Unrealized gain on available-for-sale securities, net of taxes

 

 —

 

 

 —

 

 

1

 

 

 

 

1

 

Net loss

 

 —

 

 

 —

 

 

 

 

(99,168)

 

 

(99,168)

 

Balance, September 30, 2014

 

298,249

 

$

1,357,934

 

$

(294)

 

$

(706,802)

 

$

650,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

300,100

 

$

1,360,668

 

$

124

 

$

(919,577)

 

$

441,215

 

Stock-based compensation

 

 —

 

 

1,047

 

 

 

 

 

 

1,047

 

Return of capital distribution (note 7)

 

 —

 

 

(1,503)

 

 

 

 

 —

 

 

(1,503)

 

Share issued for settlement of accounts payable

 

430

 

 

443

 

 

 

 

 

 

443

 

Unrealized loss on available-for-sale securities, net of taxes

 

 —

 

 

 

 

(1,126)

 

 

 

 

(1,126)

 

Net loss

 

 —

 

 

 

 

 

 

(5,462)

 

 

(5,462)

 

Balance, September 30, 2015

 

300,530

 

$

1,360,655

 

$

(1,002)

 

$

(925,039)

 

$

434,614

 

 

The accompanying notes are an integral part of these consolidated financial statements.

5


 

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands of U.S. dollars)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

    

2015

    

2014

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Cash paid to suppliers and employees

 

$

(43,168)

 

$

(51,300)

 

Cash received from gold and silver sales

 

 

59,246

 

 

31,620

 

Dividends received from Minera Santa Cruz S.A.

 

 

548

 

 

9,483

 

Lease incentive received

 

 

 —

 

 

328

 

Interest received

 

 

10

 

 

456

 

Cash provided by (used in) operating activities

 

 

16,636

 

 

(9,413)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(535)

 

 

(2,691)

 

Investment in marketable equity securities

 

 

(1,114)

 

 

 —

 

Decrease in restricted time deposits for reclamation bonding

 

 

 —

 

 

5,181

 

Deposits for surety bonds for reclamation bonding

 

 

 —

 

 

(481)

 

Proceeds from disposal of mineral property interests and property and equipment

 

 

13

 

 

39

 

Cash (used in) provided by investing activities

 

 

(1,636)

 

 

2,048

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Short-term bank indebtedness (note 6)

 

 

5,171

 

 

 —

 

Return of capital distribution paid (note 7)

 

 

(1,502)

 

 

 —

 

Exercise of stock options

 

 

 —

 

 

1,382

 

Cash provided by financing activities

 

 

3,669

 

 

1,382

 

Effect of exchange rate change on cash and cash equivalents

 

 

(147)

 

 

(716)

 

Increase (decrease) in cash and cash equivalents

 

 

18,522

 

 

(6,699)

 

Cash and cash equivalents, beginning of period

 

 

12,380

 

 

24,321

 

Cash and cash equivalents, end of period

 

$

30,902

 

$

17,622

 

 

 

 

 

 

 

 

 

Reconciliation of net loss to cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(5,462)

 

$

(99,168)

 

Adjustments to reconcile net loss from operating activities:

 

 

 

 

 

 

 

Loss (income) on investment in Minera Santa Cruz S.A., net of amortization

 

 

3,964

 

 

(150)

 

Impairment of mineral property interests and property and equipment

 

 

29,740

 

 

120,398

 

Gain on sale of assets

 

 

(13)

 

 

(26)

 

Recovery of deferred income taxes

 

 

(15,103)

 

 

(52,705)

 

Stock-based compensation

 

 

1,047

 

 

852

 

Depreciation

 

 

691

 

 

693

 

Accretion of asset retirement obligation

 

 

697

 

 

309

 

Amortization of mineral property interests and asset retirement obligations

 

 

966

 

 

923

 

Foreign exchange loss

 

 

147

 

 

716

 

Change in non-cash working capital items:

 

 

 

 

 

 

 

Increase in VAT taxes receivable, net of collection of $4,256 (2014 - $5,049)

 

 

884

 

 

717

 

Increase (decrease) in other assets related to operations

 

 

244

 

 

(342)

 

(Decrease) increase in liabilities related to operations

 

 

(1,714)

 

 

8,887

 

Dividends received from Miners Santa Cruz S.A

 

 

548

 

 

9,483

 

Cash provided by (used in) operating activities

 

$

16,636

 

$

(9,413)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


 

Table of Contents

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015

(tabular amounts are in thousands of U.S. dollars, unless otherwise indicated)

 

NOTE 1  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Basis of Presentation

 

McEwen Mining Inc. (the “Company” or “McEwen Mining”) was organized under the laws of the State of Colorado on July 24, 1979.  Since inception, the Company has been engaged in the exploration for, development of, production and sale of gold and silver.

 

The Company operates in Argentina, Mexico, and the United States.  It owns a 49% interest in Minera Santa Cruz S.A. (“MSC”), owner and operator of the producing San José Mine in Santa Cruz, Argentina, which is controlled by the majority owner of the joint venture, Hochschild Mining plc (‘‘Hochschild’’). It also owns and operates the producing El Gallo 1 Mine in Sinaloa, Mexico.   In addition to its operating properties, the Company also holds interests in numerous exploration stage properties and projects in Argentina, Mexico and the United States.

 

The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included are adequate to make the information presented not misleading.

 

In management’s opinion, the unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2015 and 2014, the Consolidated Balance Sheets as at September 30, 2015 (unaudited) and December 31, 2014, the unaudited Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2015 and 2014, and the unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014, contained herein, reflect all adjustments, consisting solely of normal recurring items, which are necessary for the fair presentation of the Company’s financial position, results of operations and cash flows on a basis consistent with that of the Company’s prior audited consolidated financial statements.  However, the results of operations for the interim periods may not be indicative of results to be expected for the full fiscal year.  Therefore, these financial statements should be read in conjunction with the audited financial statements and notes thereto and summary of significant accounting policies included in the Company’s annual report on Form 10-K for the year ended December 31, 2014.  Except as noted below, there have been no material changes in the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s Form 10-K for the year ended December 31, 2014.  The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.

 

Recently Adopted Accounting Pronouncements

 

Presentation of Financial Statements and Property, Plant and Equipment – Reporting Discontinued Operations and Disclosures of Components of an Entity:   In April 2014, Accounting Standards Codification (“ASC”) 205 and ASC 360 guidance were amended to change the requirements for reporting discontinued operations in ASC 205-20. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results when any of the following occurs: (1) the component of an entity or group of components of an entity meets the criteria in ASC 205-20-45-1E to be classified as held for sale; (2) the component of an entity or group of components of an entity is disposed of by sale; or (3) the component of an entity or group of components of an entity is disposed of other than by sale. The update is effective for the Company’s fiscal year beginning January 1, 2015. The new guidance did not have an impact on the Company’s consolidated financial statements.

7


 

Table of Contents

MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015

(tabular amounts are in thousands of U.S. dollars, unless otherwise indicated)

 

Recently Issued Accounting Pronouncements

 

Business Combinations – Simplifying the Accounting for Measurement Period Adjustments:  In September 2015, the FASB issued amended guidance which requires measurement period adjustments to be recorded in the reporting period in which the adjustment amounts are determined. Previously, such adjustments were required to be retrospectively recorded in prior period financial information. This amended guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date, with earlier application permitted for financial statements that have not been issued.  The Company is evaluating the impact that this new guidance will have on the Company’s consolidated financial statements.

 

Revenue from Contracts with Customers – Deferral of the Effective Date: In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The effective date of this pronouncement is for fiscal years beginning after December 15, 2017.  Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact that this new guidance will have on the Company’s consolidated financial statements.

 

Interest – Imputation of Interest – Simplifying the Presentation of Debt Issuance Costs:  In April 2015, the FASB issued ASU 2015-03 which requires entities to present debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that debt liability on the balance sheet as opposed to being presented as a deferred charge. ASU 2015-03 does not contain guidance for debt issuance costs related to line-of-credit arrangements. Consequently, in
August 2015, the FASB issued ASU 2015-15 to add paragraphs indicating that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The effective date of these pronouncements is for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the impact that this new guidance and does not anticipate it to have any impact on the Company’s consolidated financial statements.

 

Inventory – Simplifying the Measurement of Inventory: In July 2015, the FASB issued ASU 2015-11 which provides authoritative guidance requiring inventory to be measured at the lower of cost or net realizable value. The new guidance defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Current guidance requires inventory to be measured at the lower of cost or market where market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. This pronouncement is effective for periods beginning after December 15, 2016, including interim periods within those fiscal years. The guidance is required to be applied prospectively, with early adoption permitted. The Company is evaluating this new guidance and does not expect it to have any impact on the Company’s consolidated financial statements.

 

Presentation of Financial Statements – Going Concern – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern: In August 2014, ASC 205-40 guidance was amended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015

(tabular amounts are in thousands of U.S. dollars, unless otherwise indicated)

 

(6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update shall be effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016, with early application permitted. The Company is evaluating the effect that the updated standard will have on its consolidated financial statements.

 

NOTE 2   INVESTMENTS

 

During the nine months ended September 30, 2015, the Company invested an additional $1.1 million of cash in marketable equity securities.  As of September 30, 2015, the total cost of all marketable equity securities was $1.8 million (December 31, 2014 - $0.7 million). These securities are classified as available-for-sale securities and are recorded at fair value. As at September 30, 2015, the fair value of these securities was $0.8 million, consequently the Company recorded a loss, net of tax, of $1.1 million in other comprehensive income (loss).  The loss is recorded to an unrealized income and loss account (accumulated other comprehensive income (loss)) that is reported as a separate line item in the shareholders' equity section of the balance sheet. The gains and losses for available-for-sale securities are not reported on the statement of operations until the securities are sold or if there is an other than temporary decline in fair value below cost.

 

NOTE 3   INVENTORIES

 

Inventories at September 30, 2015 and December 31, 2014 consist of the following:

 

 

 

 

 

 

 

 

 

 

    

September 30, 2015

    

December 31, 2014

 

Ore on leach pads

    

$

5,293

    

$

6,221

 

In-process inventory

 

 

3,174

 

 

2,302

 

Stockpiles

 

 

1,149

 

 

 —

 

Precious metals

 

 

1,585

 

 

2,403

 

Materials and supplies

 

 

1,224

 

 

1,478

 

Inventories

 

$

12,425

 

$

12,404

 

 

 

 

 

NOTE 4   MINERAL PROPERTY INTERESTS AND ASSET RETIREMENT OBLIGATIONS

 

Mineral Property Interests

 

The Company conducts a review of potential triggering events for all its mineral projects on a quarterly basis. When events or changes in circumstances indicate that the related carrying amounts may not be recoverable, the Company carries out a review and evaluation of its long-lived assets for impairment, in accordance with its accounting policy. During the nine-month period ended September 30, 2015, the Company performed a strategic review of its mineral property interests in Nevada. A decision was made to allow certain non-essential claims and portions of claims, included within the Gold Bar Complex (“Gold Bar” project) and Tonkin Complex (“Tonkin” project), to lapse on the September 1, 2015 renewal date and therefore reduce property holding costs that otherwise would have been incurred in the third quarter of 2015. This resulted in a pre-tax impairment charge of $29.7 million, from which $20.8 million was attributed to the Gold Bar project and $8.9 million to the Tonkin Project.  An income tax recovery of $10.4 million was also recognized in the Statement of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2015. 

 

During the nine month period ended September 30, 2014, the Company recorded an impairment charge of $120.4 million relating to its Los Azules copper exploration project (“Los Azules Project”). The triggering event identified was the contemporaneous acquisition of a copper project located in Argentina, which shared similarities with the Los Azules Project due to its scale, location, and stage of development. Based on the announcement day value of the similar project, the estimated market value per pound of copper equivalent mineralized material from this transaction was below the carrying value per pound of copper equivalent mineralized material of the Los Azules Project, indicating a potential

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015

(tabular amounts are in thousands of U.S. dollars, unless otherwise indicated)

 

significant decrease in the market value of the Company’s Los Azules Project, and therefore a requirement to test the Los Azules Project for recoverability. To assist in performing a recoverability test, the Company engaged a third-party valuation firm which determined that the carrying value of the property exceeded its estimated fair value, resulting in an impairment charge of $120.4 million, along with a resulting deferred income tax recovery of $22.5 million, recorded in the Statement of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2014.

 

Based on the above, impairment changes were recorded on the following mineral property interests for the three and nine months ended September 30, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30,

 

Nine months ended September 30,

 

 

Name of Property/Complex

    

Segment

    

2015

    

2014

    

2015

    

2014

 

 

Los Azules Project

 

Argentina

 

$

 —

 

$

 —

 

$

 —

 

$

120,398

 

 

Gold Bar Complex

 

Nevada

 

 

1,161

 

 

 —

 

 

20,847

 

 

 —

 

 

Tonkin Complex

 

Nevada

 

 

 —

 

 

 —

 

 

8,856

 

 

 —

 

 

Other United States Properties

 

Nevada

 

 

37

 

 

 —

 

 

37

 

 

 —

 

 

Total impairment

 

 

 

$

1,198

 

$

 —

 

$

29,740

 

$

120,398

 

 

 

Asset Retirement Obligations

 

The Company is responsible for reclamation of certain past and future disturbances at its properties.  The two most significant properties subject to these obligations are the Tonkin property in Nevada and the El Gallo 1 Mine in Mexico.

 

A reconciliation of the Company’s asset retirement obligations for the nine months ended September 30, 2015 and for the year ended December 31, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

    

Nine months ended September 30, 2015

    

Year ended December 31, 2014

 

Asset retirement obligation liability, beginning balance

 

$

7,471

 

$

7,247

 

Settlements

 

 

 —

 

 

(52)

 

Accretion of liability

 

 

342

 

 

407

 

Adjustment reflecting updated estimates

 

 

355

 

 

(131)

 

Asset retirement obligation liability, ending balance

 

$

8,168

 

$

7,471

 

 

As at September 30, 2015, the current portion of the asset retirement obligation was $2.5 million (December 31, 2014 - $2.4 million).

 

Amortization of Mineral Property Interests and Asset Retirement Costs

 

The definition of proven and probable reserves is set forth in the SEC Industry Guide 7. If proven and probable reserves exist at the Company’s properties, the relevant capitalized mineral property interests and asset retirement costs are charged to expense based on the units of production method and upon commencement of production. Since the Company has not completed feasibility or other studies sufficient to characterize the mineralized material at the El Gallo 1 Mine as proven or probable reserves, the amortization of the capitalized mineral property interests and asset retirement costs are charged to expense based on the straight-line method over the estimated useful life of the mine. For the three and nine months ended September 30, 2015, the Company recorded $0.3 million and $1.0 million, respectively (September 30, 2014, $0.3 million and $1.0 million,  respectively), of amortization expense related to the El Gallo 1 Mine, which is included in Production Costs Applicable to Sales in the Statement of Operations and Comprehensive Income (Loss), of which $0.1 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015

(tabular amounts are in thousands of U.S. dollars, unless otherwise indicated)

 

million and $0.3 million, respectively, related to the amortization of capitalized asset retirement costs (September 30, 2014 - $0.1 and $0.4, respectively).

 

NOTE 5   INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) – SAN JOSÉ MINE 

 

The Company’s 49% attributable share of results of operations from its investment in MSC was a loss of $1.6 million and $4.0 million for the three and nine months ended September 30, 2015, respectively. This compares to a loss of $4.4 million and income of $0.2 million for the three and nine months ended September 30, 2014, respectively. These amounts include the amortization of the fair value increments arising from the purchase price allocation and related income tax recovery. Included in the income tax recovery is the impact of fluctuations in the exchange rate between the Argentine peso and the U.S. dollar on the peso-denominated deferred tax liability associated with the investment in MSC recorded as part of the acquisition of Minera Andes. As a devaluation of the Argentine peso relative to the U.S. dollar results in a recovery of deferred income taxes, the impact has been a reduction in the loss from the Company’s investment in MSC for the three and nine months ended September 30, 2015.

 

During the three and nine months ended September 30, 2015, the Company received $nil and $0.5 million in dividends from MSC, compared to $2.4 million and $9.5 million during the same period in 2014.

 

Changes in the Company’s investment in MSC for the nine months ended September 30, 2015 and year ended December 31, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

    

Nine months ended September 30, 2015

    

Year ended December 31, 2014

 

Investment in MSC, beginning of the year

 

$

177,018

 

$

212,947

 

Attributable net loss from MSC

 

 

(2,541)

 

 

(2,597)

 

Amortization of fair value increments

 

 

(7,705)

 

 

(13,190)

 

Income tax recovery

 

 

6,282

 

 

10,503

 

Dividend distribution received

 

 

(548)

 

 

(9,483)

 

Impairment of investment in MSC

 

 

 —

 

 

(21,162)

 

Investment in MSC, end of the year

 

$

172,506

 

$

177,018

 

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015

(tabular amounts are in thousands of U.S. dollars, unless otherwise indicated)

 

NOTE 5   INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) – SAN JOSÉ MINE (continued)

 

A summary of the operating results from MSC for the three and nine months ended September 30, 2015 and 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30,

 

Nine months ended September 30,

 

 

 

    

2015

    

2014

    

2015

    

2014

    

 

Minera Santa Cruz S.A. (100%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

45,357

 

$

38,263

 

$

141,106

 

$

148,386

 

 

Production costs applicable to sales

 

 

(41,767)

 

 

(36,136)

 

 

(119,940)

 

 

(117,620)

 

 

Net (loss) income

 

 

(3,375)

 

 

(5,488)

 

 

(5,185)

 

 

304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portion attributable to McEwen Mining Inc. (49%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,654)

 

$

(2,689)

 

$

(2,541)

 

$

149

 

 

Amortization of fair value increments

 

 

(1,617)

 

 

(3,522)

 

 

(7,705)

 

 

(9,652)

 

 

Income tax recovery

 

 

1,630

 

 

1,770

 

 

6,282

 

 

9,653

 

 

(Loss) income from investment in MSC, net of amortization

 

$

(1,641)

 

$

(4,441)

 

$

(3,964)

 

$

150

 

 

 

As of September 30, 2015, MSC had current assets of $96.6 million, total assets of $503.1 million, current liabilities of $51.3 million and total liabilities of $151.1 million on an unaudited basis. These balances include the adjustments to fair value and amortization of the fair value increments arising from the purchase price allocation, net of impairment charges recorded in the second quarter of 2013 and fourth quarter of 2014. Excluding the fair value increments from the purchase price allocation, net of impairment charges, MSC had current assets of $95.6 million, total assets of $289.7 million, current liabilities of $53.7 million, and total liabilities of $86.1 million as at September 30, 2015.

 

NOTE 6   SHORT-TERM BANK INDEBTEDNESS

 

On May 29, 2015, Compañía Minera Pangea (“CMP”), a wholly-owned subsidiary of the Company, finalized a line of credit agreement with Banco Nacional de Comercio Exterior (“Banco Nacional”), for an amount up to 90,000,000 Mexican pesos (approximately $5.9 million as of May 29, 2015), which is secured by CMP’s VAT receivable balance.  The applicable interest rate is equal to: (i) two and one-half percent (2.5%) per annum plus (ii) the 91 day Interbank Equilibrium Interest Rate (“TIIE”) rate, as published by the Bank of Mexico, payable quarterly. As of September 30, 2015, the 91 day TIIE rate was 3.31%Interest payments are due quarterly and a final payment of all principal and any accrued interest is due twenty-four (24) months following the date of the first withdrawal. CMP is permitted to prepay any amounts owed without penalty.  Upon signing the agreement, CMP paid a 1% commission on the total value of the simple credit agreement to Banco Nacional. 

 

On June 1, 2015, CMP drew down the entire 90,000,000 Mexican pesos, equivalent to $5.8 million as of September 30, 2015 from the line of credit, and realized a foreign exchange gain of approximately $0.1 million during the period.  During the three months ended September 30, 2015, CMP collected 3,045,190 Mexican pesos (equivalent to $0.2 million as of September 30, 2015) of VAT receivable, from which 454,111 Mexican pesos were applied against the accrued interest and the remaining 2,591,079 Mexican pesos (approximately $0.2 million as of September 30, 2015) were applied against the principal. 

 

The Company has guaranteed CMP’s obligations under the line of credit.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015

(tabular amounts are in thousands of U.S. dollars, unless otherwise indicated)

 

NOTE 7   SHAREHOLDERS’ EQUITY

 

During the nine months ended September 30, 2015, 2.2 million exchangeable shares were converted into common stock (2014 – 2.6 million).  At September 30, 2015, total outstanding exchangeable shares not exchanged and not owned by the Company or its subsidiaries totaled 26.3 million (December 31, 2014 – 28.5 million).

 

During the nine months ended September 30, 2015, there were no exercises of stock options under the Equity Incentive Plan.  This compares to 697,300 shares of common stock issued upon exercise of stock options during the same period of 2014, at a weighted average exercise price of $1.98 per share for proceeds of $1.4 million.

 

During the nine months ended September 30, 2015, the Company issued 430,295 shares of common stock under an agreement with one of its mining contractors to settle parts of its accounts payable for services rendered above a defined tonnage threshold. The fair value of the common stock at the time of issuance was $0.4 million. The agreement with this mining contractor expired and was renegotiated during the period. Under the revised agreement, the Company can no longer make share payments and instead is required to pay in cash.

 

On June 18, 2015, the Board of Directors declared an annual return of capital distribution of $0.01 per share of common stock, payable semi-annually.  The first semi-annual return of capital distribution payment of $0.005 was paid on August 17, 2015 to shareholders of record as of the close of business on July 31, 2015. The aggregate total semi-annual return of capital distribution paid was $1.5 million.  Return of capital distribution is paid to shareholders of the Company’s shares of common stock and to holders of exchangeable shares. 

 

NOTE 8   STOCK-BASED COMPENSATION

 

During the nine months ended September 30, 2015, the Company granted stock options to certain employees for an aggregate of 0.1 million shares of common stock at a weighted average exercise price of $1.07 per share. The options vest equally over a three-year period if the individual remains affiliated with the Company (subject to acceleration of vesting in certain events) and are exercisable for a period of 5 years from the date of issue. During the three and nine months period ended September 30, 2014, the Company granted stock options to certain employees and directors for an aggregate of 1.7 million shares of common stock at a weighted average exercise price of $2.90 per share.

 

A summary of the assumptions used to calculate the fair value of the stock options granted, using the Black-Scholes model for the three and nine months ended September 30, 2015 and 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30,

 

 

Nine months ended September 30,

 

 

    

2015

 

 

2014

 

 

2015

 

 

2014

  

Risk-free interest rate

 

 —

%

 

1.01

%

 

1.10

%

 

1.01

%

Dividend yield

 

 —

%

 

0

%

 

0

%

 

0

%

Volatility factor of the expected market price of common stock

 

 —

%

 

70

%

 

74

%

 

70

%

Weighted-average expected life of option

 

 —

 

 

3.5 years

 

 

3.5 years

 

 

3.5 years

 

Weighted-average grant date fair value

 

 —

 

 

1.45

 

 

0.56

 

 

1.45

 

 

During the three and nine months ended September 30, 2015, the Company recorded stock option expense of $0.3 million and $1.0 million respectively. This compares to $0.2 million and $0.9 million for the three and nine months ended September 30, 2014.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015

(tabular amounts are in thousands of U.S. dollars, unless otherwise indicated)

 

NOTE 9   INCOME TAXES

 

The Company’s income tax expense differs from the amount computed by applying the U.S. federal and state statutory corporate income tax rate of 35% to losses before taxes primarily as a result of valuation allowances being applied to losses, changes in the deferred tax liability associated with mineral property interests acquired in the Minera Andes acquisition and changes due to impairment of mineral property interests. The deferred tax liability is impacted by fluctuations in the foreign exchange rate between the Argentine peso and U.S. dollar. For the three and nine months ended September 30, 2015, the Company recorded an income tax recovery as a result of the Argentine peso devaluation of $0.9 million and $2.9 million, respectively, compared to $2.3 million and $23.7 million for the three and nine months ended September 30, 2014, respectively.  For the nine months ended September 30, 2015, the Company recorded an income tax recovery of $10.4 million (September 30, 2014 - $22.5 million) as a result of impairment of mineral property interests, described in Note 4, Mineral Property Interests and Asset Retirement Obligations.

 

 

NOTE 10   INCOME (LOSS) PER SHARE

 

Basic net income (loss) per share is computed by dividing the net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed similarly except that the weighted average number of common shares is increased to reflect all dilutive instruments.

 

Below is a reconciliation of the basic weighted average number of common shares and exchangeable shares the computations for basic income (loss) per share for the three and nine months ended September 30, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30,

 

Nine months ended September 30,

 

 

 

    

2015

    

2014

    

2015

    

2014

  

 

 

 

(in thousands, except per share)

 

 

Net income (loss)

 

$

2,633

 

$

(13,033)

 

$

(5,462)

 

$

(99,168)

 

 

Weighted average common shares (thousands):

 

 

300,530

 

 

297,164

 

 

300,420

 

 

297,162

 

 

Net income (loss) per share:

 

$

0.01

 

$

(0.04)

 

$

(0.02)

 

$

(0.33)

 

 

 

For the three months ended September 30, 2015, options to purchase 4.5 million shares of common stock outstanding at September 30, 2015 at an average exercise price of $3.34 per share were not included in the computation of diluted weighted average shares because the exercise price exceeded the average price of the Company’s common stock for the three months ended September 30, 2015.  For the three months ended September 30, 2015, no options with average exercise price below the average price of the Company’s common stock during that period, compared to 0.9 million outstanding options to purchase shares of common stock for the three months ended September 30, 2014, which were not included in the computation of diluted weighted average shares in the three months ended September 30, 2014 because their effect would have been anti-dilutive.

 

 

NOTE 11   RELATED PARTY TRANSACTIONS

 

For the three and nine months ended September 30, 2015, the Company incurred and paid $29,732 and $44,869, respectively, to an entity affiliated with the Company’s Chairman and Chief Executive Officer for the use of an aircraft, compared to $25,237 and $63,755 for the three and nine months ended September 30, 2014, respectively.

 

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MCEWEN MINING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015

(tabular amounts are in thousands of U.S. dollars, unless otherwise indicated)

 

NOTE 12   SEGMENTED INFORMATION

 

McEwen Mining is a mining and minerals exploration, development and production company focused on precious metals in Argentina, Mexico and the United States.  The Company identifies its reportable segments as those consolidated operations that are currently engaged in the exploration for and production of precious metals.  Operations not actively engaged in the exploration for, or production of precious metals, are aggregated at the corporate level for segment reporting purposes.

 

The financial information relating to the Company’s operating segments as of, and for the three and nine months ended September 30, 2015 and 2014 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate &

 

 

 

 

 

    

Argentina

    

Mexico

    

U.S.

    

Other

    

Total

 

For the three months ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

 —

 

$

22,503

 

$

 —

 

$

 —

 

$

22,503

 

Production costs applicable to sales

 

 

 —

 

 

(11,170)

 

 

 —

 

 

 —

 

 

(11,170)

 

Mine construction costs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Mine development costs

 

 

 —

 

 

(112)

 

 

 —

 

 

 —

 

 

(112)

 

Exploration costs

 

 

(268)

 

 

(788)

 

 

(718)

 

 

(56)

 

 

(1,830)

 

General and administrative expenses

 

 

(166)

 

 

(391)

 

 

(45)

 

 

(1,674)

 

 

(2,276)

 

Impairment of mineral property interests and property and equipment

 

 

 —

 

 

 —

 

 

(1,198)

 

 

 —

 

 

(1,198)

 

Loss on investment in Minera Santa Cruz S.A. (net of amortization)

 

 

(1,641)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,641)

 

Operating (loss) income

 

 

(2,224)

 

 

8,837

 

 

(2,933)

 

 

(1,789)

 

 

1,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gold and silver sales

 

$

 —

 

$

61,545

 

$

 —

 

$

 —

 

$

61,545

 

Production costs applicable to sales

 

 

 —

 

 

(28,912)

 

 

 —

 

 

 —

 

 

(28,912)

 

Mine construction costs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Mine development costs

 

 

 —

 

 

(449)

 

 

 —

 

 

 —

 

 

(449)

 

Exploration costs

 

 

(1,190)

 

 

(3,662)

 

 

(2,172)

 

 

(228)

 

 

(7,252)

 

General and administrative expenses

 

 

(486)

 

 

(2,405)

 

 

(153)

 

 

(5,717)

 

 

(8,761)

 

Impairment of mineral property interests and property and equipment

 

 

 —

 

 

 —

 

 

(29,740)

 

 

 —

 

 

(29,740)

 

Loss on investment in Minera Santa Cruz S.A. (net of amortization)

 

 

(3,964)

 

 

 —

 

 

 —

 

 

 —

 

 

(3,964)

 

Operating (loss) income

 

 

(6,077)

 

 

23,047

 

 

(33,460)

 

 

(6,124)

 

 

(22,614)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at September 30, 2015