U.S. Gold: The Accidental Silver Miner

Includes: AG, EXK, PAAS, UXG
by: Mark Thomas

At thesilvershortage.com we have been riding the bull market in silver and silver mining stocks for almost four months now. During that time it has become more difficult to find value in the sector. Many of the stocks like Endeavor Silver (NYSE:EXK) and First Majestic Silver (NYSE:AG) have shot up to where they trade at 6-8 times revenues. They also trade at above average market P.E. multiples which is ironic because just as late as two weeks ago you could buy the best at 13-15 times earnings or just an average market multiple. Last week we concentrated our positions in relative value Coeur d’Alene mines and over weighted Pan American Silver which was the last true value in the silver sector. Pan American had an analyst day Friday and was up 8% plus so we took profits on half of our position and are holding the rest. The silver sector is so red hot right now we’re only 50% invested. We’re up 55% Y.T.D now so we are looking to book and protect our hard earned profits, more than betting big for more.

Last week though it came to our attention there is a new stock in the sector and even their name sends investors in the wrong direction and which is why we missed it to begin with, U.S. Gold (NYSE:UXG). U.S. Gold is an exploration company whose primary mission was gold but they have come across a very nice potential five million ounce per year silver mine that could be operational by 2014 in Mexico. While we’re bullish on gold and that is still their long-term focus, this potential silver mine that could gross $200 million per year in three years make the valuation more justified. If they make their 2014 production target with gold at their other projects too, they could gross $350 million. They have a $1.369 billion market cap with $110 million in cash, so their enterprise value is 1.26 billion. So they trade at between 3-4 potential times future 2014 production. This is the first and only exploration stage company we’re buying at thesilvershortage.com.

There are some things behind these basic facts that make it more attractive. Of the $110 million in cash, they have $10 million in gold bullion and $25 million in silver bullion. They want that to equal half and half cash and bullion soon. That’s better than US companies leaving it earning .25% and losing value to inflation. The CEO of US Gold Rob McEwen takes no salary and owns 20% of the stock putting $53 million of his own money in, so his interest are 100% your interest as a shareholder. He has a tremendous record building shareholder value at Goldcorp Inc. (NYSE:GG) where he took a $50 million company to an $8 billion market cap company. The CEO is a big believer in excess money printing leading to currency debasement which will lead to an eventual bubble in precious metals. However he feels that is at least until 2014 until we reach that level. The CEO’s goal is to get this stock included in the S+P 500 in the next three years which is very ambitious.

See this corporate presentation.

See this video on potential silver project.

Here is the reason we like this stock. We think that the stock can get to $12 in the next three to six months which would be a potential 25% gain. All they have to do is stay on track with their new projects and let the rising price of silver and gold take their market cap higher. With $58 million of the CEO’s own money invested, he has about as much incentive possible to get it right and avoid any missteps. So even though this is a speculative exploration type company that doesn’t even have silver in its name, we will add another 5% to our 10% position to make it a 15% position after the open Monday.

We continue to think you remain cautious chasing the silver miners here. There valuations are now stretched so much it is hard to justify them by any fundamental basis except Couer d’Alene, Pan American Silver and exploration company U.S. Gold is for speculative money only and 15% of the money you allocate to silver is the maximum we will ever be in or consider for that position and we’re aggressive traders. This is a longer-term story than our other picks so don’t tie up that much capital in the name.

Disclosure: I am long UXG, CDE, PAAS, SIVR.