As I mentioned in my recent article on Nevsun Resources (NSU), I really like to see mining stocks in with market capitalizations between $1 and $2 billion. To me, that is the sweet spot where companies have proven themselves to a certain degree -- often through both sustaining operations and their ability to attract capital to drive share price up -- but still have great room for appreciation, either by entering or continuing mining operations or via a takeover by a larger company that could yield great returns to shareholders.
And one company that I feel is on the verge of entering this sweet spot is McEwen Mining (MUX). Here's the story:
Right now the company has a market capitalization of just over $800 million, so it is within striking distance of crossing the $1 billion mark.
The company has six mines for which it has NI 43-101 measured gold resources. The total measured amount of these six mines is 1.684 million ounces of gold. There's also 36 million ounces of measured silver resources. These are just the measured numbers from the NI 43-101 reports, which are narrower than the indicated and inferred measurements. But even if a fraction of these resources can be obtained at current market prices (let alone the price increases that are quite likely), the company's chances for outstanding profitability seem very possible. Its mine in San Jose, Argentina, has an especially noteworthy ore of 8.1 grams per ton, which should help to reduce the overall cost per ounce of its larger mines with an ore yielding about 1 gram of gold per ton.
The balance sheet looks solid, with no debt and a current ratio near 10. The company burned just over $40 million in the first nine months of 2011, and has more than 61 million in current assets as of its Q3 2011, financial statement. The company's strategy of financing additional development through early profits and of reaching four consecutive quarters of positive earnings by 2015 (as noted in its investor presentation) seems well within reach.
McEwen Mining is of course the company that has resulted from the merger of Minera Andes and US Gold. The merger gives the company access to mines in Mexico, Argentina, and the United States, and so there is a fair amount of jurisdictional diversification. As the global sovereign debt crisis grows and the risk of nationalization of gold mines grows as well, jurisdictional diversification will be of greater importance.
Of course, the ultimate reason to invest in McEwen Mining is the name: Rob McEwen. McEwen is the man who built Goldcorp (GG), one of the best majors in the mining industry and one I regard as an essential part of any mining portfolio, one being McEwen Mining as well. This means McEwen has lots of industry contacts and domain expertise that can help build McEwen Mining -- already the company has some projects near mines operated by Goldcorp, thus setting the stage for potential collaboration. More importantly in our current environment, though, is that as traditional investment funds look to enter the gold market, they will gravitate toward names with a proven track record because investing in such names is easier to understand than trying to figure out whether or not the geology of a given mine is a worthwhile investment. And so, McEwen's real "unfair advantage" is the ease with which his company will be able to sell to institutional investors -- doubly so with a NYSE listing, a stock trading above $5, and a market capitalization closing in on the magic $1 billion mark.
As with all my favorite mining stocks, MUX is one to hold until the mining market peaks. Barring some unforseen adverse development with this stock, I'll be looking for signs of a bubble -- rapid appreciation, onset of speculators, media frenzy -- in the sector as a whole as the cue to exit.