The emergence of McEwen Mining (MUX) as a high-growth, low-cost precious metals explorer and producer focused in Argentina, Mexico and the United States has been a long and choppy ride for many shareholders. Its original roots date back to 1979 with the incorporation of Silver State Mining. In 1988 the name was changed to U.S. Gold Corporation (UXG). But possibly the most important change was when Rob McEwen became U.S. Gold's largest shareholder, Chairman and CEO in 2005 with ambitions of repeating his past successes.
Rob McEwen is notably the visionary behind the founding of Goldcorp Inc. (GG), one of the world's largest gold producers today. During his 13-year run with Goldcorp, Rob transformed it from an investment company with a meager $50 million market cap into a powerhouse miner with a staggering $8 billion market cap (and is much larger today).
Taking over the helm of U.S. Gold, McEwen quickly moved to increase its liquidity by achieving common share trading on the Toronto and American stock exchanges in 2006 (and now on the NYSE). Rob also made another move that would play a significant role in shaping the company McEwen Mining is today; he became the largest shareholder of Minera Andes Inc. (TSX: MAI and US OTC: MNEAF), a silver, gold and copper exploration company focused on rich Argentinean properties. Fast-forward through a few U.S. Gold acquisitions and discoveries to 2008, and McEwen becomes the interim president and CEO of Minera Andes, setting the stage for the 2011/2012 business combination of U.S. Gold and Minera Andes to form McEwen Mining.
Today, Rob McEwen has a 25% stake in McEwen Mining and takes no salary according to its website. Considering his personal stake, it's in Rob McEwen's best interest to transform this company into another mining powerhouse. McEwen Mining's principal assets consist of a 49% stake in the San José mine in Santa Cruz, Argentina; the El Gallo complex in Sinaloa, Mexico, which recently had its first gold pour; the Gold Bar project in Nevada, US; the Los Azules Copper project in San Juan, Argentina and a large portfolio of additional exploration properties in Argentina, Nevada and Mexico.
With lofty goals of McEwen Mining qualifying for inclusion in the S&P 500 by 2015, long-term investors in McEwen Mining can be in for a wild, albeit profitable, ride. For many, building a position in this stock was simply a gamble on, or a sign of faith in, Rob McEwen's management skills. Considering recent developments, though, I think the company's fundamentals are finally giving credence to precious metal and miner investors entering this stock and not just Rob McEwen fans.
For one, production is underway and ramping up across the properties. Some highlights from the Q3 2012 release include year-to-date production of 72,530 gold equivalent ounces with a target of approximately 105,000 gold equivalent ounces in 2012. Year-to-date cash costs totaled $753 per gold equivalent ounce.
In September, McEwen Mining announced the 100% owned El Gallo Phase I mine in Mexico had its first gold pour. Commercial production operating capacity is expected to be achieved by the end of 2012. Phase I is expected to produce 30,000 ounces of gold annually. After the El Gallo Phase II build out, feasibility studies forecast the potential to produce 5.2 million ounces of silver and 6,100 ounces of gold annually. Further exploration and expansion of the resource also continues.
The San José mine in Argentina is on target to produce 85,000 ounces of gold and 5.7 million ounces of silver this year, of which McEwen Mining has a 49% interest in. Total cash costs during the quarter equaled $755 per ounce of gold and $13.60 per ounce of silver, which to me is favorable considering gold is trading around $1,700 and silver around $32. Drilling on the resource is also revealing encouraging new vein systems.
In Nevada, investors should be encouraged as permitting for the Gold Bar Project is on schedule for production to begin in 2015; it's forecasted that 50,000 ounces of gold can be produced annually here.
Next, one of the largest obstacles for the future success of McEwen Mining has been resolved. The litigation surrounding ownership rights of certain portions of the Los Azules Copper Project in Argentina have been settled out of court, with both McEwen Mining and TNR Gold Corp. (OTC:TRRXF) feeling relieved and optimistic for the future. It was feared that McEwen Mining could lose all ownership rights to certain deposit-rich claims, but after the settlement, McEwen Mining received a clear title to the contested claims. Los Azules is one of the world's largest high-grade undeveloped copper porphyry deposits, and now further drilling, exploration and feasibility testing can commence.
Rob McEwen, in a press release detailing the settlement said,
This is a very positive development for McEwen Mining, TNR Gold and the Province of San Juan, Argentina. It allows us to accelerate and expand the magnitude of our exploration effort. With this legal obstacle behind us, we are now embarking on the largest drill program in the project's history.
Kirill Klip, the Non-Executive Chairman of TNR Gold, also reacted positively, saying in a press release,
I welcome the positive resolution of the Los Azules litigation in the out of court settlement between TNR Gold and McEwen Mining. I would like personally to thank Rob McEwen as this resolution is a highly beneficial outcome for both our companies. Removing the uncertainty over the rights to Los Azules will allow the project to now achieve its full potential for the benefit of the shareholders of both TNR Gold and McEwen Mining, and I consider our stake in McEwen Mining as a strategic holding for TNR Gold.
With this issue settled and leadership of both companies seemingly optimistic, it's hard not to think only positive developments are ahead. There are concerns around Argentina's government after it spooked investors and miners with tough talk about exports and repatriating cash, but has since softened its tone. In any case, in a recent conference call, McEwen Mining leadership said that they would not be repatriating cash from Argentina in the near-term because they'll be using it to fund local exploration and development programs.
Lastly, I'd like to point out that the leadership at McEwen Mining is incredibly shareholder friendly. Whether you're a novice investor, a large stakeholder, or an analyst, leadership continually makes itself available to answer questions personally. It's not too often that a CEO will tell a small shareholder to call him directly when they're having trouble converting old U.S. Gold shares to McEwen Mining shares, but Rob McEwen does. The point is, leadership is keeping its shareholders' best interests in mind. The recently announced Rights Issue is another example of this. Instead of taking on debt and intentionally diluting the holdings of current shareholders, McEwen Mining is giving current shareholders the option to step in to provide the funds needed for further exploration and mine development. Rob McEwen is also personally backstopping the offering if all options aren't exercised by shareholders. While this may have limited effects on the stock price, it's good for investors to know that the company leadership does value the money that you've put at stake.
In conclusion, I think the patient investor will reap rewards by building a position in McEwen Mining over the next couple of years. I have no doubts that the ride will be bumpy, the 52-week trading range is approximately $1.96 - $6.17, especially considering the current market pullback and ongoing fears of the 'Fiscal Cliff'. In general, the metals markets and miners are a volatile bunch. But the long-term prospects for precious metals prices remain strong and that bodes well for McEwen Mining. Throw in their ability to produce ounces at low costs during these early stages and the future certainly looks prosperous for them as production ramps up to commercial capacity at active mines, new mines come into production, their vast properties are explored further, and capital expenditures subside.
There's been no shortage of positive developments coming from McEwen Mining, and with Rob McEwen's leadership, and the headwinds of the TNR litigation and building out Phase I of El Gallo behind, I expect faster growth and new discoveries to come in 2013 and beyond. I think now is the time for investors looking to get in at the ground floor of a small- to mid-tier miner to consider a position in MUX. If the stock performs anything like Goldcorp's did during McEwen's time at the helm and beyond, sizeable gains look to be in store for MUX shareholders.
I certainly encourage you to do your own due diligence before making any purchases. McEwen Mining has a very nice investor relations website to help you with your research. I'd caution that this stock is not for the faint-hearted as it often moves sharply, and as of October 31, short positions consisted of 23,853,931 shares requiring about 12 days to cover.
Disclosure: I am bullish on precious metals, and a portion of my portfolio is dedicated to physical bullion. I have held long positions in U.S. Gold and McEwen Mining. I am a current McEwen Mining shareholder. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.