U.S. Gold Corp.: A Study in Junior Mining Leadership

Apr. 7.11 | About: US Gold (UXG)

Many years ago, as I was learning to trade junior resource stocks, a grizzled old gold miner -- the owner of a small publicly listed company -- asked me: “Do you know what a gold mine is?” I suspected he was leading up to the punchline, “A gold mine is a hole in the ground with a liar looking into it.” As a novitiate in that perilous arena, I never really completely believed in that sarcasm. Instead, I felt there had to be honest, adventurous visionaries who went out into the wilderness and stuck to the rules.

Researching the leadership of junior mining companies is crucial when screening for potential winners, and it's a major component of my research. When an investor finds leaders who have stellar track records and puts his own money where his mouth is, he needs to pay attention to their actions.

The majors were once penny stocks themselves. For example, Barrick Gold (NYSE:ABX) traded at $0.17 a share just a few years ago. Goldcorp (NYSE:GG) developed rapidly in the past decade. The power of a world-class discovery can lead to major gains for shareholders. In the junior mining sector, there is not a lack of stocks; however, there is a lack of quality leadership that knows how to finance and develop a discovery to make shareholders large returns on invested capital.

As a model for my mining stock selection, which has the quality leadership that I am looking for, I will use U.S. Gold (NYSE:UXG). Right off the bat, I was impressed with the leadership of this small, virtually obscure explorer. My interest was piqued by Rob McEwen. He had created Goldcorp, which again grew from pennies to be the major entity it is today. While leading Goldcorp, McEwen averaged a 31% annual return for shareholders. I also noticed his ability to cut costs and search for innovative approaches to find additional discoveries.

Others would have retired with such a feather in his cap, but McEwan went on to form U.S. Gold instead. When he took over leadership, banks, institutions and mutual funds began accumulating his new company and drove shares to $10 just on the news of his leadership. At the time, there wasn't much of an asset base and many exploration programs were lackluster.

As the credit crisis began in 2008, shares plummeted to below $1 a share. Investors realized the company did not have much value other than its famous leader and entrepreneur. Beginning at the end of 2009, the discovery of El Gallo in Mexico revitalized a struggling stock, pulling out of one of the worst credit crunches in modern history. At that time I told my readers that this was one of my favorite silver plays. (Please see original post by clicking here.)

Most people do not realize the value of a pure silver discovery and how rare they are becoming. My readers are well aware that my firm is highlighting the silver area as a moving force in 2011 by our focus on U.S. Gold, which might as well be renamed U.S. Gold & Silver. Its ownership of the El Gallo Project in Mexico places it at the forefront of world-class silver mines comparable to Pan American Silver’s (NASDAQ:PAAS) Alamo Dorado. There are very few silver discoveries. Since silver is mostly produced as a byproduct, this significant re-rating of the gold/silver ratio will awaken investors to pure silver discoveries, which can increase in value at higher silver prices.

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Source: usgold.com

From the recently released scoping study, El Gallo clearly demonstrates its world-class status by its low cash costs, good grade, open pit and significant exploration upside. With one of the most aggressive exploration budgets planned in Mexico, I expect El Gallo to return significant shareholder value. There are many exciting prospects around El Gallo in which I believe additional discoveries could be made this year.

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Source: usgold.com

El Gallo is very similar to Fronteer’s (FRG) Long Canyon in that they both had significant exploration potential and targeted prospects with high potential. I believe U.S. Gold is getting a clearer picture of this deposit and may produce significant exploration results this year.
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Now after the most recent financing, U.S. Gold has $100 million in the bank to explore and develop key assets in Mexico and Nevada. Insiders control over 20% of the shares -- unheard of in the industry. I expect 2011 to be a momentous year, where U.S. Gold breaks the $10 barrier and investors become aware of its world-class discoveries in Mexico and Nevada. The scoping study of its Gold Bar Project in the Cortez Trend and the recent discovery at Limo has now transformed the company; it has a fast-growing silver discovery in Mexico and is seeing the best results out of Nevada to date. In fact, John Hathaway of the Tocqueville Gold Fund has added U.S. Gold to the fund's holdings.

U.S. Gold was listed on November 2, 2010 on the prestigious New York Stock Exchange, home of such stalwarts as Newmont (NYSE:NEM), Barrick, and Goldcorp, though U.S. Gold is the only pure exploration stock on the exchange. Moreover, McEwen is on record saying that U.S. Gold will join the S&P 500 by 2015, with production of 5 million ounces of silver and 110,000 ounces of gold by 2014. Also noteworthy: McEwen receives no salary. He owns 21% of the company. Such a vote of confidence by a CEO in the company he is building is indeed a rarity in the annals of gold mining history.

The million-dollar question remains: When will U.S. Gold merge with Minera Andes (OTC:MNEAF)? Minera has a great land package around Goldcorp’s Cerro Negro Project. Goldcorp paid a hefty premium for this property, as there is blue-sky potential for additional discoveries in this region; I see a lot of positives of a merger and very few negatives. Costs will come down, and after a spin-off of its copper project, if U.S. Gold and Minera Andes are combined, it will be a precious metals exploration powerhouse with large valuable land positions in Nevada, Mexico and Argentina.

I thought McEwen was overly optimistic when he mentioned his goal was to be on the S&P 500 by 2015, at a time when he did not have the amount of resources he has now. Now, seeing the transformation of these two companies, maybe his call wasn’t so off the wall. In a very quick timeframe, he has built up two incredible exploration companies.

Disclosure: I am long UXG.