McEwen Mining: Steady Growth And Debt Free

| About: McEwen Mining (MUX)
This article is now exclusive for PRO subscribers.

McEwen Mining (NYSE:MUX) is a debt-free junior miner with a $565 million market cap. CEO Rob McEwen, a founder, Chair (1986-2005) and CEO (1994-2005) of Goldcorp (NYSE:GG), currently the world's largest gold miner by market cap, holds 25% of the company's shares and takes no salary. In addition to experienced management, share dilution is minimal: 1.2% on 300 million shares outstanding. Its 3Q 2013 results released Friday indicate that MUX continues to expand output at its primary producing sites, San Jose in Argentina and El Gallo 1 & 2 in Sinaloa, Mexico while reducing costs.

MUX is a top PM (precious metals) company in terms of potential and profitability. In the challenging environment of the past 20 months it has out-performed not only junior gold miners (NYSEARCA:GDXJ) but most of the PM sector. This has been true during periods of basing, updraft (fall 2012, August 2013) and declines.

McEwen has 4 properties in Nevada and a major porphyry-copper, gold and silver site, Los Azules in Argentina. Indicated and inferred gold at Los Azules are 3.4 million oz. as well as 23 million silver oz. indicated and 86 million inferred from preliminary drilling. MUX also has a cluster of properties in Santa Cruz province as well as near its El Gallo 1 & 2 sites. Once in operation, Los Azules would become one of the top copper mines in the world, producing 260k tones / year from 14.3 billion lbs. indicated reserves and 5.4 billion lbs inferred.

MUX's Gold Bar exploration site in Nevada is in permitting and is expected to produce 50k oz. gold/year at a low $700 / oz. in its first eight years with production expected to begin 2016. Gold Bar adjoins Barrick Gold's (NYSE:ABX) Cortez mine, one of the largest gold mines in the world (15.1 million proven & probable reserves) and the lowest cost ($392/oz). MUX hopes to tap a similarly rich vein at Gold Bar. Exploration and testing continue around MUX's Grass Valley, Keystone and Tonkin sites in Nevada.

During 3Q 2013, output of gold equivalent oz. rose 45% Y/o/Y to 36.5k (20.5k gold oz. and 832.6 k silver oz). MUX is on target to meet its 2013 guidance of 130k gold equivalent oz. Production costs dropped 7% Y/o/Y suggesting operating efficiencies and good mineralization grades to $749 cash costs and $1081 all-in sustaining costs/ oz., in the lowest 15% of PM producers.

Expansion of El Gallo 1 is on target for completion by April 2014 with cost reduction of nearly 40% by focusing on surface operations. Capex at El Gallo 2 is being reduced 11% which helps MUX achieve its position of being liquid net $32.6 million and debt-free as of September 30, 2013. A $10.1 million tax refund from the Mexican government should be added to the balance sheet by end 2013. The EIS (environmental impact statement) on mine expansion at El Gallo has been approved by the Mexican Federal government.

El Gallo 1 production for 3Q was 8k gold oz. and 4.9k silver oz. at an all-in sustaining cost of $1066, down 10% Y/o/Y. At San Jose, owned 49-51% with Hochschild Mining (OTCPK:HCHDF), MUX's 49% share of output for 3Q 2013 was 12.5k oz. gold and 828k oz. silver at all-in sustaining costs of $1003 / gold equivalent oz., down 11$ Y/o/Y. MUX figures its gold equivalent oz. at a 52:1 gold / silver ratio. EPS increased from -.1 to +.1 despite crushed bullion prices. MUX sold 24.7k oz. gold and 1.66 million oz. silver into the market during 3Q 2103.

While still a small cap, MUX's growth profile and management led to its inclusion September 20 in the NYSE Arca Gold Mining ETF (NYSEARCA:GDX). MUX has been in the iShares Silver Miner ETF (NYSEARCA:SIL). September 13, MUX promoted Senior Vice President Ian Ball, with MUX since 2005 to President partly to acknowledge his role in fostering under-budget development of the El Gallo sites in Mexico.

MUX shares were near $10 in 2Q 2011, before gold bullion spiked over $1910 that September. Like much of the sector, MUX made a secular low June 26 at $1.63, about a dime below the June 2012 low. Shares recently fell as low as $1.81 intraday before rebounding to $1.90. MUX is trading at its 2Q 2009 - 1Q 2010 level and in my view is a strong buy below $2.20 and a compelling buy below $2.

Here is an inviting entry point to a company with a clean balance sheet, expanding operations and able management. MUX is rated "strong buy" at with a consensus price target at $4.78, 2.4 x current price. The analyst at market watch rates it "buy" with a target of $4.18.

Going forward, MUX is poised for substantial growth if PM prices rise even modestly. It has enormous reserves to develop in a better price environment. Thriving in challenging times for the PM sector and producing commodities greatly in demand, MUX is a company whose success has been veiled by depressed bullion prices. These prices will rise, perhaps rise greatly, as physical demand overcomes the effects of selling hypothecated contract-gold and helps to re-order the financial and monetary system.

Disclosure: I am long ABX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own shares of PM companies separately and in a diversified fund.