Rob McEwen is not your typical CEO. After a highly successful tenure as founder of Goldcorp (NYSE:GG), he launched McEwen mining (NYSE:MUX) and is banking on a robust stock price move, since he commands a paltry salary of only $1 per year.
Mr. McEwen wants his management decisions to align with his stockholders as he owns a substantial 25% of McEwen stock. With 300 million shares outstanding and the stock trading just shy of $4.00 per share, this is a $1.23 billion company.
Argentina has dramatically improved the financial fortunes of the company's 49% owned San Jose mine, by cutting onerous taxes that had driven miners out of their country. 51% owner Hochschild mining has delivered $13 million in dividends to McEwen Mining- through the first 3 quarters of 2016, with expectations of more to come. Hochschild has been cutting mining costs and the lifting of capital controls by Argentina President Macri has allowed the free market to properly devalue the peso currency. Mining costs have plunged alongside the weaker peso and new investment and exploration should lead to an expansion of gold and silver production.
The great Fidelity Magellan Fund Manager Peter Lynch stated that small company stocks make big price moves and large companies tend to make smaller moves. This fact is very applicable to the mining industry for those small companies that have strong balance sheets. McEwen Mining holds $62 million in cash, precious metals, and liquid securities and 0 debt through September 2016.
The 100% owned El Gallo mine in Mexico is also seeing a sharp decline of all in cash costs to $680 per ounce of gold equivalent (gold and silver converted to gold). The Mexican peso has devalued sharply and mining production costs have fallen accordingly. Gold price is hovering around $1,200 per ounce, but McEwen sees a potential high price of $5,000 in the next few years. Silver price has risen from an average of $14.86 in early 2016 to $17.50 per ounce amid continued reports of strong physical demand from both investors and industry.
McEwen is looking to propel the company into the S&P 500 stock index, through additional acquisitions or mergers. The deal has to be "good" for his stockholders as he is the largest one. One of the requirements of the S&P 500 is that the company must be based in the United States, and McEwen Mining was incorporated in Colorado. There is only one miner currently listed in the index, so the next miner to join-will experience some heavy share purchases and the stock price will jump higher.
Fiat paper money currency continues to be devalued as the central banks seem to believe that printing more paper currency will remedy weak economic conditions. There are huge debt problems in the United States and China, and paper currency inflation is only creating havoc across economic markets everywhere. India has confiscated paper money and China continues to attempt to control capital outflow. Venezuela is experiencing crippling inflation of 122% in 2015 and 546% in 2016 (CIA report) and the United States is vastly understating inflation when it excludes the crushing rise in healthcare costs from the failed Affordable Care Act. As citizens experience loss of paper currency purchasing power, they will continue to purchase hard assets, including silver and gold. China and Russia central banks continue to purchase gold, possibly as a prelude to backing a more stable currency. Noted silver metal analyst Ted Butler reports that JP Morgan has accumulated 80 million ounces of silver in their COMEX warehouse.
The reported manipulation of silver prices by Deutsche Bank among many others has set up a bullish scenario for miners who maintained their fiscal discipline during the period of price suppression. The suppressed price has shut down mining production because its arbitrary price was pushed below the cost of producing the precious metal. The stronger surviving miners such as McEwen, are now in a position to capitalize on these rebounding gold and silver prices. New miners will try to move in to production mode, but it takes time to do so. Rising demand and limited supply creates rising profits.
McEwen mining has not hedged any of its gold, silver, nor copper production and therefore will make large moves in the direction of precious metal prices. The company is funding capital expenditures from cash flow and those huge dividends from San Jose mine do not show in the quarterly earnings figure. This accounting method seems to vastly understate the rising value of this miner. $13 million dividend is a large figure that cannot be ignored. There are more of these dividends that will arrive in 2017 if gold and silver prices continue to move higher.
Disclosure: I am/we are long MUX.
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.