NOTE 4 INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) — SAN JOSÉ MINE

The Company’s 49% attributable share of earnings from its investment in MSC was a loss of $2.4 million for the three months ended June 30, 2014, and income of $4.6 million for the six months ended June 30, 2014. This compares to losses of $1.6 million and $1.8 million for the three and six months ended June 30, 2013. These amounts are net of the amortization of the fair value increments arising from the purchase price allocation and related income tax expense. Included in the income tax expense 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 an increase to the Company’s income from its investment in MSC for the three and six months ended June 30, 2014.

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 three months ended December 31, 2012 was understated, resulting in an overstatement of MSC’s after-tax net income of $3.9 million. As the error was not material to previously-reported consolidated financial statements, the correction was recorded in the three months ended March 31, 2013. As a result, the income from the Company’s equity investment of 49% in MSC includes an adjustment of $1.9 million, resulting in a reduction of the Company’s Income from Investment in MSC for the six months ended June 30, 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, continued inflationary pressures during the year, and amendments to the Santa Cruz Provincial Tax Code and Provincial Tax Law, which imposed a new tax on mining reserves in the Province of Santa Cruz. As the loss in value of the investment was considered other than temporary, an impairment of $95.9 million was recorded in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2013.

During the fourth quarter of 2013, the Company entered into a vend-in agreement with MSC and subsidiaries of Hochschild pursuant to which both parties agreed to contribute to MSC the mining rights of certain Santa Cruz exploration properties. The carrying value of the Company’s properties of $35.9 million, net of 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.

During the three and six months ended June 30, 2014, the Company received $3.2 million and $7.1 million in dividends from MSC, respectively, compared to $nil during the same period in 2013. The Company received an additional dividend payment of 8.1 million Argentine pesos in July 2014, equivalent to approximately $1.0 million based on foreign exchange rates at the date of the dividend receipt, and expects another payment of 8.1 million pesos in the third quarter of 2014, equivalent to approximately $1.0 million based on foreign exchange rates as at June 30, 2014.

Changes in the Company’s investment in MSC for the six months ended June 30, 2014 and year ended December 31, 2013 are as follows:

	Six months ended			Year ended
	June 30, 2014			December 31, 2013
	(in thousands)
Investment in MSC, beginning balance	$	212,947		$	273,948
Income from equity investment	2,838			2,126
Amortization of fair value increments	(6,130		)	(18,425		)
Income tax recovery	7,883			17,145
Dividend distribution	(7,113		)	(1,826		)
Impairment of investment in MSC	—			(95,878		)
Contribution of Santa Cruz exploration properties, net of tax	—			35,857
Investment in MSC, ending balance	$	210,425		$	212,947

A summary of the operating results from MSC for the three and six months ended June 30, 2014 and 2013 is as follows:

	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
	(in thousands)						(in thousands)
Minera Santa Cruz S.A. (100%)
Net sales	$	53,234		$	68,556		$	110,123		$	112,369
Production costs applicable to sales	(41,847		)	(57,606		)	(81,484		)	(94,409		)
(Loss) income from operations before extraordinary items	(390		)	124			5,792			2,564
Net (loss) income	(390		)	124			5,792			2,564

Portion attributable to McEwen Mining Inc. (49%)
Net (loss) income	$	(191	)	$	61		$	2,838		$	1,256
Amortization of fair value increments	(3,429		)	(6,710		)	(6,130		)	(12,003		)
Income tax recovery	1,182			5,098			7,883			8,959
(Loss) income on investment in MSC, net of amortization	$	(2,438	)	$	(1,551	)	$	4,591		$	(1,788	)

As at June 30, 2014, MSC had current assets of $100.0 million, total assets of $529.5 million, current liabilities of $48.1 million and total liabilities of $140.0 million on an unaudited basis. These balances include the increase in fair value and amortization of the fair value increments arising from the purchase price allocation and are net of the impairment charge of $95.9 million recorded in the second quarter of 2013. Excluding the fair value increments from the purchase price allocation and the impairment charge recorded in the second quarter of 2013, MSC had current assets of $102.7 million, total assets of $312.7 million, current liabilities of $48.1 million, and total liabilities of $89.2 million as at June 30, 2014.