The recent decline in the prices of gold and silver, and the consequent decline in the prices of related mining companies, has made it difficult to separate out the winners from the losers in this opaque industry. This is especially true among the smaller companies that generally do not have consistent production if they have any at all. One way to locate those companies that will shine when the precious metals market resumes its uptrend, as I believe it will, is to seek out managers of gold mining companies that have been especially successful in the past. One such manager is Rob McEwen.
Rob McEwen is famous for his tenure as CEO at Goldcorp (GG) from 1993 through 2004, during which time the company produced 30%+ annual returns for its shareholders despite the fact that the gold price rose from the $300s to the $400s during this time period. He demonstrated an ability to deal with labor unions in a way that benefited labor as well as shareholders, and he successfully used financial incentives to motivate geologists to improve Goldcorp's mining operations.
Currently McEwen is the CEO and largest shareholder of two publicly traded gold companies: McEwen Mining (MUX), and Lexam VG Gold (OTCQX:LEXVF). The former company, which I should note has a lot of silver and copper resources, recently began production in 2012, owning a 49% stake in one producing mine and owning another producing mine outright. I would consider it to be somewhat speculative because it has yet to turn a profit or pay a dividend, yet it has a revenue stream. The latter is a relatively early stage exploration company that is admittedly very speculative, although it has enormous potential.
It is my contention that given McEwen's history of success in the mining industry that investors who are considering doing some bottom-fishing in precious metals mining stocks should consider betting their more speculative money along side McEwen.
Not only has McEwen demonstrated his ability to find mines and to bring them into production, as his history with Goldcorp and McEwen Mining indicates. But McEwen aligns his own interests with his shareholders in that he does not take a salary and he owns substantial stakes in the companies he manages. He currently holds a 25% stake in McEwen Mining, which currently has a market capitalization of just under $750 million. Furthermore he holds a 27% stake in Lexam VG Gold, which currently has a market capitalization of roughly $22.5 million.
Of course a company requires more than a reputable CEO to succeed, and so the two companies run by McEwen need to be analyzed individually. McEwen Mining appears to be a solid investment, especially at current prices. Lexam VG Gold, however, is still in its infancy and it is at best a highly speculative stock that has the odds in its favor because of McEwen's reputation. In what follows I will discuss the two companies in greater detail.
McEwen Mining is not among the best valued companies in the precious metals mining industry. One could easily scour through a list of mining companies and calculate their resource quantities relative to their respective market capitalizations and not find MUX near the top of a "best value" list. That isn't to say that McEwen Mining doesn't have substantial resources: it currently has roughly 7.5 million ounces of gold, over 200 million ounces of silver, and potentially nearly 20 billion pounds of copper if we include the company's "inferred" (i.e., less certain) resources. Still there are companies with significantly more resources that have smaller market capitalizations than McEwen's $750 million. But this is a case where Warren Buffett's adage, "It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price." is especially apposite.
McEwen Mining has a rich exploration budget: the company takes a long-term perspective and it sacrifices current profitability for future resource accumulation. Furthermore the company has $55 million in cash and no debt (according to the most recent company presentation) which will benefit the company should the precious metals markets remain weak during the next year or so.
The company currently owns six projects outright, one of which is in production. The El Gallo 1 project is expected to produce 30,000 gold-equivalent ounces (at a gold-silver ratio of about 52:1, the current ratio is about 58:1) in 2013 at $1,200 per ounce. Other notable projects include:
(1) The Los Azules copper exploration project, which the company claims has the potential to be one of the world's largest and highest grade copper mines.
(2) The Gold Bar project in Nevada, which is expected to begin production of 55,000 gold equivalent ounces per year beginning in 2015 at $850 per ounce.
(3) The El Gallo 2 project (located very close to the El Gallo 1 project), which is expected to begin production of 105,000 gold equivalent ounces next year at just $700 per ounce.
The company also holds roughly 50% interests in two joint venture projects - San Jose and New Pass - the former of which is currently producing 103,000 gold equivalent ounces at $1,200 per ounce.
Again there are companies that have larger resources relative to their market capitalizations, but few companies have the high exploration budgets that McEwen Mining has that are necessary to replace and grow reserves at a rate necessary to substantially grow the company. Furthermore few of these companies have the experience that Rob McEwen and his team has of building and growing mines. Ultimately this company should have a very bright future and it will be one of the shining beneficiaries of the ongoing bull market in precious metals and related equities.
Lexam VG Gold
Lexam VG Gold is a tiny company with just a $22.5 million market capitalization. The company is years away from production, and it has yet to find enough resources in order to build a substantial mine. It is highly speculative, and I would only invest money that I could afford to lose. While the company has found gold it has yet to release a timeline detailing its plans for production. Further it does not know how expensive it will be to develop the project. Consequently investors are at risk of their shares being diluted, or they risk seeing some of their ownership in the Buffalo Ankerite mine being sold off to a joint venture partner. One should only purchase shares in the company after extensive geological research, and even then one should do so with the knowledge that there is a very strong likelihood that one's investment will disappear.
That being said, the company has found some gold resources: 1.8 million ounces of measured and inferred, in the Timmins region in Ontario. This region has a rich history of gold mining and it is currently being mined now: often the best mines are found in regions where mines have been in the past or in regions near currently producing mines. Furthermore, the company has found fairly high grade gold - over 2 grams per ton, which is relatively high for the gold mining industry. This increases the chances that the Buffalo Ankerite mine will be economical.
Given Rob McEwen's involvement with the company, both as a major shareholder and as its CEO, Lexam VG Gold is probably one of the better speculation stocks among junior gold exploration companies. It also doesn't hurt that the shares are down over 90% since the beginning of 2011, especially for contrarian investors. But ultimately an investment in this company can only be successful if the company is lucky. If you do not mind playing with some of your money in this way then this is a potentially high reward approach to betting on Rob McEwen's acumen and experience in the industry. Otherwise I would stick with McEwen Mining.