Ahhh it seems like just yesterday when back in 2003 I bought my first gold coin and became a gold bull after never previously following precious metals. Then, I believe sometime that same year or in 2004 I started buying mining stocks. The first was Newmont Mining but then I began scouting the “juniors” for leverage in the new bull cycle. Now that we’re over 4 years into the gold, silver, and mining stock bear market correction, I both ponder the best approach to profit in the recovery and marvel at the bargains of companies I owned almost a decade ago. When an entire sector like the junior mining industry is washed out, and investors throw the baby out with the bath water, there are very attractive investment opportunities for long term investors.
One of the first juniors I began tracking back in the day was a company called U.S. Gold, now McEwen Mining (NYSE: MUX/TSE: MUX). When CEO Rob McEwen bought 3 Nevada focused juniors (one with exposure in Mexico) and rolled them into U.S. Gold, the stock went bananas running from about 35 cents in late 2005 to $10 by early 2006. The excitement was palpable as investors rushed to get into McEwen’s next deal. Rob is a Canadian Billionaire and in my opinion the most credible and capable operator in the small to mid-tier gold exploration and production industry. He may even be the best in the entire industry. But lucky for us he’s building another company (with his name on the door) from the ground up into a multi-billion dollar enterprise that is part of the S&P 500 (Rob has been vocal about this goal).
McEwen founded and is the former Chairman and CEO of Goldcorp. He formed the company in 1990 and grew it from a $50 million market cap company to a $20 Billion dollar behemoth. Despite the infamously terrible market for mining stocks and gold for most of the 1990’s, Goldcorp’s share price grew at a 31% compound annual growth rate during Rob’s tenure (he made many loyal shareholders rich). Goldcorp is still the 4th largest gold producer in the world today only behind Barrick, Newmont, and Agnico Eagle. I have followed the US Gold/McEwen Mining story fairly closely over the past 8-9 years and just this week began buying back a position. I will walk though why I plan on owning MUX as one of my core junior gold holdings for the duration of the next gold bull cycle. Even though, it would make perfect sense to buy some shares just based on Rob’s previous track record with Goldcorp, but it gets better.
As you can see in the monthly chart above that spans a decade, McEwen Mining is trading near 10 year low prices, despite having made significant progress since the last time it traded near a buck. I remember vividly begging clients to send in some cash to add more UXG (US Gold) the day it flushed to 38 cents in late 2008. The global financial meltdown was in frightening full swing and I remember the 38 cent low price because I actually bottom ticked the stock and got filled for 1500 shares at 38 cents! Even though it was less than $600 worth of shares, that same stock if held just 2.5 years would be worth $15,000. Such is the junior mining sector! It’s important to take a step back and take the long view because just as night follows day, I bet MUX hits at least $10 again in the next gold bull cycle.
One immensely unique fact regarding McEwen Mining is that the CEO owns 25% of the company AND it was purchased with out of pocket cash to the tune of $125,000,000 ($125 Million). In addition, it is very much worth noting, that his cost average for that 25%, is nearly $2 per share. So, we the people have a chance today to buy at a nearly 50% discount to the CEO who has been working and building this company every day for the last 10 years. Rob also takes no salary, gets no bonuses, and has no golden executive parachute in case of a change of control. Do you know how rare an arrangement like this is? If you know of any others even in the same ballpark please do let me know but I have not seen it in the mining sector where management teams are notorious for running “lifestyle companies” with no skin in the game themselves.
Now to the business. What brought my attention back to this stock recently was when I observed the share price was barely affected when the company announced over $7 million worth of gold concentrate was stolen from their El Gallo mine in Mexico in April. That’s a material amount of money yet the share price only dipped briefly then recovered quickly, which is a sign that the end of the bear market in this stock may be near. When bad news no longer has a negative impact on the share price, it is bullish. MUX has two primary producing gold mines, one called El Gallo in Mexico and one in Argentina called San Jose. To get a feel for their revenue/production profile I would encourage you to read the quarterly results from May 11th:
In summary, MUX is a cash flow positive company that posted earnings of $17 million for the quarter with over $5 million in positive cash flow. They are projecting 138,000 gold equivalent ounces produced in 2015 despite the $7MM theft (96,000 ounces of gold and the remainder in silver-3MM ounces). MUX has over $17 million in cash and unlike the vast majority of firms that transition from explorers to producers, has zero debt. They have a 3rd and 4th mine in the permitting and ready for build phases in El Gallo 2 and Gold Bar in Nevada. Cash and all-in-sustaining-costs (AISC) continue to improve at El Gallo 1 and this is a highly leveraged business to gold/silver prices. Much of these key points and projections are outlined in the new company presentation which I encourage you also to look through:
Production will continue to grow each year and due to the quality of the operator, costs should continue to be optimized, enhancing profitability. However, there is a potential lynchpin here that the market is not valuing whatsoever and we can buy it for free. That’s a 20 Billion pound high grade copper deposit that the company owns in Argentina called Los Azules. This is a very valuable asset. Many of you know my bullish perspective on Argentina and based on a recent investor presentation hosted by BMO, Rob McEwen seems to agree that the prospects are going to improve. The audio, also worthwhile and less than 30 minutes is available here:
What I can pretty much say with 100% confidence is that once the current “regime” in Argentina is removed at the end of the year, the business outlook and environment will begin to improve for years to come. Once this becomes reality, money will flow back into Argentina, which is the 3rd largest economy in Latin America behind Mexico and Brazil at a $600 Billion GDP. The country has a Trillion dollars of oil in the ground and other valuable commodities that have not been developed properly because of a hostile business environment overhang these past 8 years. This is all about to change in 7 short months and folks are already beginning to kick the tires there, even at Los Azules recently, according to Rob.
This is very important because MUX is going to sell this massive copper deposit, one of the largest and highest grades in the world. They are a focused gold/silver company, which I like. The Argentina assets have discounted MUX in the market but that is likely about to change to some degree. Even so, at a $300 Million enterprise value currently, we could see Los Azules easily sold for nearly that amount in the next 6-18 months. If/when that occurs, and we buy shares near $1 now, we own El Gallo 1 and 2, Gold Bar, the San Jose mine, and other exploration properties for free. If Los Azules only commands $200 Million (just one penny per pound of copper), then we paid $100 million for all of these assets which, in a bull market, will be valued over a billion dollars easily.
Mcewen Mining is a liquid stock trading millions of dollars per day, listed on the NYSE and Toronto Stock Exchange, and widely institutionally held. For gold to move back to its 2011 high prices, it would increase 59%. For Royal Gold (RGLD) the royalty company to do so it would only be a 56% gain. For GDX (ETF) 254% but for MUX it would increase over 715%. MUX is highly levered to the price of gold and has one of the highest betas amongst junior mining stocks. And, if MUX went to almost $10 in 2011 before the company was even in production, where will it go now with $2,000 gold? Even at $1200 gold it is very assuring that this company is nicely profitable, well managed, and has quite strong financial backing.
In summary, own McEwen Mining as a best of breed junior miner in your portfolio. Under $1.25 the stock is very cheap fundamentally and historically. Begin accumulating now at $1.10 and on any weakness for what should be extraordinary returns in a better environment for gold miners and in Argentina where the company owns significant assets.
I am initiating a Strong Buy recommendation on Mcewen Mining (MUX) at $1.10 per share with a 12-24 month price target of $3 US.
If this report happens to make its way to Rob Mcewen, it would be a pleasure to meet you my next trip in Toronto. I can be emailed at firstname.lastname@example.org.
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Disclaimer: Eric owns shares in MUX and may choose to buy more or sell at any time without timely notice