How Long Will The Short Interest In McEwen Mining Last?

May.18.12 | About: McEwen Mining (MUX)

McEwen Mining (NYSE:MUX) is one of my favorite stocks that I think has outstanding potential in the long run (see my previous coverage). The short story is that great management, operating in scenarios where they have a track record of success, sufficient capital and the support of strong investors/joint venture partners, is something I'll always find to be a potentially worthwhile investment opportunity. McEwen Mining fits that description perfectly, and so I think it is a stock that has a bright future.

From that perspective it's still buying season on the stock, as it has given back more than all of the gains it had accrued this year. The chart below illustrates.

(Click to enlarge)

I've been at the New York Hard Assets Conference the past few days, and McEwen Mining is one of the companies presenting here. I had a chance to speak with company representatives about the large short interest in the firm: Over 8% (22 million shares) of the total outstanding shares are being shorted. The representative I spoke with stated that the large short position was likely the result of hedge funds employing a long gold/short gold exploration stocks type of hedging strategy. He further stated that McEwen or one of the directors and officers of the firm would likely be buying shares back were it not for some restrictions placed on insider activity around news releases. I'm not familiar with the rules and regulations placed upon corporate officers, but the idea of a buyback is always reassuring to long-term, buy and hold bulls.

The representative also stated that many of the long-term shorts short position was likely in place before U.S. Gold and Minera Andes had merged into McEwen Mining. U.S. Gold was a stock with a market capitalization below $500 million, and thus is conducive toward hedge funds that seek to push and control the price; the market is small enough to make this feasible. If the shorts have been around this long, I think they may be able to hang around much longer - perhaps until the company can issue meaningful dividends, which would dissuade shorts as they would need to cover those dividends. To understand how far off that is, we'll need to take a closer look at MUX's anticipated production. See the chart below.

(Click to enlarge)

MUX currently has one mine in production in Argentina (their operations in Argentina may also be discounted over concerns regarding nationalization), but production won't really ramp up into high gear until 2015, as the chart above illustrates. If the chart above comes true and MUX is producing over 250,000 gold equivalent ounces by 2015, and the gold price is sufficiently above $2,000, the company may be able to start to issue some dividends. McEwen has expressed a pro-dividend policy, so it is something the firm finds to be consistent with its long-term vision and its goal of creating shareholder value.

From this perspective, I think MUX investors need to be patient - perhaps even more so than the rest of the precious metals community. The shorts seem determined, but with higher metal prices and substantially greater production, dividends can be used to throw shorts off. Till then, long-term investors who remain believers in the opportunity the firm has can use the shorts to their advantage by buying extreme sell offs. Personally, I've already got a sufficient amount of MUX in my portfolio for my taste, although if price falls to $2.15, I may simply find it too cheap to not add more.

Disclosure: I am long MUX.