McEwen Mining's Next Stop Is The S&P 500

| About: McEwen Mining (MUX)

McEwen Mining, Inc. (NYSE:MUX) is the recent combination of U.S. Gold Corporation and Minera Andes, Inc. U.S. U.S. Gold Corporation was a gold and silver explorer trading on the New York and Toronto stock exchanges with very promising gold and silver projects in Nevada and Mexico. Minera Andes was a gold producer trading on the Toronto Stock Exchange and over-the-counter in the U.S. with an operating gold mine in Argentina. You can read about the newly formed company and view its initial website presentation here.

The common thread between the two companies is Rob McEwen, the CEO and 25% owner of the new company. His primary goal is to land the company on the S&P 500 by 2015. Of course, that's not something that can be done without excellent leadership, consistent earnings, and a plan to grow the company to a market cap that connotes leadership in the mining industry. However, we believe that McEwen is the man to do it.

By and large, precious metals mining companies are content with exploration, building mines, and producing metal. The CEO's of precious metals companies may be excellent geologists or very experienced in the fields of mining, or business in general. Their CEOs are surely conversant with phrases like "measured and inferred", "capex" and the "Dow to gold ratio".

But the CEO of McEwen Mining has something else. He has imagination, a vision; and very importantly, he has serious skin in the game. As indicated, he has a personal 25% stake in the newly formed company. Additionally, he takes no salary from the company. About a year ago, he purchased additional shares of UXG at 6.50 per share, a price higher than the recent close, and we wrote about it in our instablog.

In our view, this is leadership worth following. From our military experience, we have worked alongside and under a number of leaders (and "leader" wannabes), and we look for several important qualities in leaders of any stripe. Aside from experience (of which McEwen's is legendary), we expect corporate leaders to have a well-defined set of goals. Ideally, the major goals are extraordinary, even fantastic. This requires personal qualities of vision and imagination.

Next, there has to be a detailed plan or road map for attaining the goals, winning the objective, accomplishing the mission. There are a number of visionaries who merely and perpetually "dream on" because they have no real plan. In warfare, you can't win without a strategic plan, and the alternatives to winning are never acceptable.

We think that it is indicative of his sense of mission accomplishment that McEwen has set a 2015 deadline for the enlistment of MUX on the S&P 500. The combination of the cash flow of an established producer (Minera Andes) with the extensive additional resources of a near production explorer (U.S. Gold) is a huge step in the right direction.

Finally, we expect that leaders will not ask followers to bear hardships that they themselves are not willing to endure. In military leadership training parlance, this is known as "setting the example". Having such a high personal stake in the ownership of the company demonstrates equal acceptance of the risk and clearly sets the example. In our view, Rob McEwen possesses these leadership traits and more.

We expect volatility to expand again in the present environment for gold mining stocks, including the possibility of a steep run up followed by equally (or even more) steep declines. Investing in mining companies is not for the conservative or uncommitted investor. Additionally, the political risk of investment in central and South American jurisdictions should be considered carefully.

However, we think that efficient mid-tier producing miners with expanding resources will benefit most from price appreciation in the metals themselves, and we like the prospects for both gold and silver miners. Therefore, we believe that MUX fits the bill squarely, and we are also mindful of the exposure that will certainly be gained from the kind and course of expansion that McEwen plans. A listing on the S&P 500 will be no small achievement.

We have referenced the McEwen Mining website where we found the sixty-two (62) slide presentation interesting and informative. We were especially intrigued by "Slide #7" which compares several categories of five major gold stocks and the price of gold from May 2006 to the present. Of course, you can get different outcomes in these comparisons by adjusting the period of study.

However, according to the slide, whereas the price of gold has apparently risen 134% since May 2006, the share price of Barrick Gold (NYSE:ABX) has appreciated only 36%, Goldcorp (NYSE:GG) has appreciated 10%, Newmont Mining (NYSE:NEM) has appreciated 4%, Kinross Gold (NYSE:KGC) has actually declined 18% and the share price of AngloGold Ashanti (NYSE:AU) has declined 19%. Only two of the five and had an increase in production during that period of time, and none has paid more than a nominal dividend.

So one question arises; if you want exposure to gold, but don't want to store the physical, why buy shares in a major gold mining company? What you shouldn't buy is beyond the scope of this article. You may want to study the price activity in these companies and their performance as businesses before they became major enterprises. If you do, we think that you'll find that the "sweet spot" for investing in precious metals miners is after they emerge from their status as speculative explorers, but before they hit the big time.

We believe that MUX has just entered the "sweet spot", and we plan to continue to accumulate it at favorable prices. Its predecessors (UXG and MNEAF) each doubled in price in the last month, and we think that this is the market's clear vote of confidence in what McEwen is both doing and planning.

Disclosure: I am long MUX. I receive no compensation to write about any specific stock, sector or theme.

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