NOTE 7 INVESTMENT IN MINERA SANTA CRUZ S.A. ("MSC")—SAN JOSÉ MINE

As discussed above in Note 3, Business Acquisition, with the acquisition of Minera Andes in 2012, the Company acquired a 49% interest in MSC, owner and operator of the San José mine in Santa Cruz, Argentina. The Company's share of earnings and losses from its investment in MSC is included in the Consolidated Statement of Operations and Comprehensive Income (Loss), and amounted to net income of $2.1 million for the year ended December 31, 2013, or 49% of MSC's reported net income of $4.4 million. The amortization of the fair value increments arising from the purchase price allocation decreased our share of the reported net income from MSC by $1.3 million, resulting in a net income of $0.8 million for the year ended December 31, 2013, excluding an impairment charge of $95.9 million recorded in the second quarter of 2013. This compares to our share of MSC's reported net income of $25.3 million for the period from January 25, 2012 (after the closing of the acquisition of Minera Andes) to December 31, 2012, which was reduced by $4.5 million for the amortization of the fair value increments, resulting in our share of reported net income of $20.8 million for the period ended December 31, 2012.

A summary of the operating results from MSC for the year ended December 31, 2013 and the period from January 25, 2012 (after the closing of the acquisition of Minera Andes) to December 31, 2012 is as follows:

	Year Ended December 31, 2013			Period ended December 31, 2012

	(in thousands)
Minera Santa Cruz S.A. (100%)
Sales	$	240,723		$	290,848
Production costs applicable to sales		(190,281	)		(155,915	)
Income from operations before extraordinary items		4,338			51,634
Net income		4,338			51,634
Portion attributable to McEwen Mining Inc. (49%)
Net income on investment in MSC	$	2,126		$	25,301
Amortization of fair value increments		(1,280	)		(4,466	)


Income on investment in MSC, net of amortization	$	846		$	20,835

Changes in the Company's investment in MSC for the year ended December 31, 2013 and 2012 are as follows:

	2013			2012

	(in thousands)
Investment in MSC, beginning of the year	$	273,948		$	—
Fair value of investment in MSC from acquisition of Minera Andes		—			262,883
Income from equity investment		2,126			25,301
Amortization of fair value increments		(1,280	)		(4,466	)
Dividend distribution		(1,826	)		(9,770	)
Impairment of investment in MSC		(95,878	)		—
Contribution of Santa Cruz exploration properties, net of tax		35,857			—


Investment in MSC, end of the year	$	212,947		$	273,948

During the first quarter of 2013, it was determined that the cost of sales reported by MSC under U.S. GAAP for the year and quarter ended December 31, 2012 was understated, resulting in an overstatement of MSC's after-tax net income of $3.9 million. As a result, the prior year income from the Company's equity investment of 49% in MSC was overstated by $1.9 million. As the error is not material to the current or previously reported consolidated financial statements, the correction was recorded in the quarter ended March 31, 2013.

During the second quarter of 2013, the Company recorded an impairment charge of $95.9 million on its investment in MSC, primarily as a result of an unexpected and significant decline in gold and silver market prices and continued inflationary pressures during the year. The Province of Santa Cruz, in which MSC operates, also passed amendments to the Provincial Tax Code and Provincial Tax Law, which imposed a new tax on mining reserves in the Province. The tax will amount to 1% of the value of mine reserves reported in feasibility studies and financial statements inclusive of variations resulting from ongoing operations, less certain deductions, and MSC has estimated that this would result in a tax payable amount ranging between $2.0 million and $3.0 million for 2013. Based on these developments, the Company concluded that there were indicators that there was a loss in value in its investment in MSC that was other than temporary. The Company engaged a third party valuator to test the recoverability and determine the fair value of its investment in MSC. The valuator used a discounted cash flow approach and determined that the carrying value of the Company's investment in MSC exceeded its estimated fair value. As the loss in value of the investment was considered other than temporary, an impairment of $95.9 million was recorded in the second quarter of 2013. The investment in MSC is part of the "Argentina" segment as shown in Note 16, Operating Segment Reporting.

In October 2013, the Company and Hochschild entered into a vend-in agreement with MSC pursuant to which the Company agreed to contribute to MSC the mining rights of certain Santa Cruz exploration properties. The properties transferred totaled approximately 48,900 hectares, and included amongst others the Telken, Piramides, Tobias, and Este tenements, and are in close proximity to or abutting the properties comprising the San José mine. Hochschild also contributed to MSC certain of their mineral properties located in the same region, totaling approximately 82,700 hectares. The agreement contains a 2% net smelter return royalty payable to the Company or Hochschild based on any of MSC's production from the respective mineral properties contributed by each party. The carrying value of the Company's properties of $53.2 million, as well as the related deferred tax liability of $17.3 million, was transferred to the Company's investment in MSC, with no gain or loss recognized upon transfer. The carrying value of $53.2 million was net of the impairment recorded in second quarter of 2013, discussed in Note 6, Mineral Property Interests and Asset Retirement Obligations. The mineral property interests were part of the "Argentina" segment, as shown in Note 6, Mineral Property Interests and Asset Retirement Obligations, and Note 16, Operating Segment Reporting.

As at December 31, 2013, MSC had current assets of $113.1 million, total assets of $561.7 million, current liabilities of $66.7 million and total liabilities of $178.7 million. These balances include the increase in fair value and amortization of the fair value increments arising from the purchase price allocation, as well as the impairment charge of $95.9 million recorded in the second quarter of 2013.

In 2013, the Company received $1.8 million in dividends from MSC, compared to $9.8 million in 2012. Subsequent to year-end, the Company received dividend payments of 29.4 million Argentine pesos from MSC, which was equivalent to approximately $3.3 million based on foreign exchange rates at the date of the dividend receipts.