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INVESTMENT IN MINERA SANTA CRUZ S.A. ("MSC") - SAN JOSE MINE

9 Months Ended

Sep. 30, 2020

INVESTMENT IN MINERA SANTA CRUZ S.A. ("MSC") - SAN JOSE MINE

INVESTMENT IN MINERA SANTA CRUZ S.A. ("MSC") - SAN JOSE MINE

NOTE 10 INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) – SAN JOSÉ MINE

The Company accounts for investments over which it exerts significant influence but does not control through majority ownership using the equity method of accounting. In applying the equity method of accounting to the Company’s investment in MSC, MSC’s financial statements, which are originally prepared by MSC in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, have been adjusted to conform with U.S. GAAP. As such, the summarized financial data presented under this heading is in accordance with U.S. GAAP.

A summary of the operating results for MSC for the three and nine months ended September 30, 2020 and 2019 is as follows:


		Three months ended September 30,						Nine months ended September 30,
		2020			2019			2020			2019
Minera Santa Cruz S.A. (100%)
Revenue from gold and silver sales		$	70,195		$	74,530		$	154,666		$	189,348
Production costs applicable to sales			(41,512)			(43,345)			(100,230)			(119,392)
Depreciation and depletion			(7,107)			(18,158)			(22,084)			(50,083)
Gross profit			21,576			13,027			32,352			19,873
Exploration			(2,814)			(1,482)			(7,855)			(7,373)
Other expenses			(6,509)			(5,394)			(17,651)			(8,926)
Net income before tax		$	12,253		$	6,151		$	6,846		$	3,574
Current and deferred tax expense			(4,922)			(4,512)			(2,989)			(8,350)
Net income (loss)		$	7,331		$	1,639		$	3,857		$	(4,776)

Portion attributable to McEwen Mining Inc. (49%)
Net income (loss)		$	3,592		$	803		$	1,890		$	(2,340)
Amortization of fair value increments			(1,255)			(2,551)			(3,891)			(6,922)
Income tax recovery			245			1,420			862			2,487
Income (loss) from investment in MSC, net of amortization		$	2,582		$	(328)		$	(1,139)		$	(6,775)

Shutdown costs related to the COVID-19 pandemic for MSC were recognized in other expenses and totaled $nil during the three months ended September 30, 2020 and $7.2 million for the nine months ended September 30, 2020.

The income or loss from investment in MSC attributable to the Company includes the amortization of the fair value increments arising from the initial purchase price allocation and related income tax recovery. The income tax recovery reflects the impact of devaluation of the Argentine peso against the U.S. dollar on the peso-denominated deferred tax liability recognized at the time of acquisition.

Changes in the Company’s investment in MSC for the nine months ended September 30, 2020 and year ended December 31, 2019 are as follows:


		Nine months ended September 30, 2020			Year ended December 31, 2019
Investment in MSC, beginning of period		$	110,183		$	127,814
Attributable net gain (loss) from MSC			1,890			(2,097)
Amortization of fair value increments			(3,891)			(9,448)
Income tax recovery			862			2,791
Dividend distribution received			(282)			(8,877)
Investment in MSC, end of period		$	108,762		$	110,183

During the three and nine months ended September 30, 2020, the Company received $nil and $0.3 million in dividends from MSC, respectively (three and nine months ended September 30, 2019 – $2.0 million and $4.0 million, respectively).

A summary of the key assets and liabilities of MSC on a 100% basis as at September 30, 2020, before and after adjustments to fair value on acquisition and amortization of the fair value increments arising from the purchase price allocation, are as follows:


As at September 30, 2020		Balance excluding FV increments			Adjustments			Balance including FV increments
Current assets		$	95,364		$	854		$	96,218
Total assets		$	190,746		$	110,885		$	301,631

Current liabilities		$	(44,761)		$	—		$	(44,761)
Total liabilities		$	(75,190)		$	(4,478)		$	(79,668)