Complimentary Research: McEwen Mining

 McEwen Mining: Growing Leverage to Gold and Silver Prices. What’s Not to Like?


Gold IngotsThe old axiom that “a rising tide raises all boats” rings true for equity markets as much as anything else.

Of course the opposite holds equally as true, “an ebbing tide lowers all boats” which is generally the situation most commodity producers find themselves in today – most notably gold and base metal stocks.

However, recent strength in gold and base metal stocks suggest that a reversal for this beaten down sector may well be at hand. Although we’ve had false starts before, what’s different this time is the unprecedented outflow of gold from bullion vaults in the West to China where demand for gold is almost insatiable. Couple that with declining global gold output, recent allegations of major investment banks rigging foreign exchange and gold markets, a weakening U.S. dollar, and you have a recipe for much higher gold prices, perhaps sooner than most naysayers think.

The subject of my first report is a well managed, growth oriented gold producer, McEwen Mining (MUX:NYSE,TSX). I consider this company highly prospective in the context of a 2-3 year investment timeframe which in my opinion offers the greatest opportunity for serious stock appreciation.

Success Often Breeds More Success

This eponymous company is the flagship of Rob McEwen, the founder of Goldcorp which is arguably one of the most successful gold mining companies in the industry. Known for thinking outside the box, McEwen left the investment industry in 1990 and began an eight year process of consolidating five companies into what is now Goldcorp.

A shrewd businessman with an MBA, McEwen is a quick study. Aware of high grade deposits being developed by neighbouring mines in Ontario’s historic Red Lake mining camp, he decided to invest heavily ($10 million) in renewed exploration activity at the company’s strike-bound Arthur White mine.

By 1995 Goldcorp had discovered a new deep-seated high-grade gold zone that exhibited great potential and could possibly support the operation of a new mine. Further exploration by the company’s small team of geologists increased the size of the discovery and identified numerous promising locations but the process was both time-consuming and costly.

By late 1999 Goldcorp’s drilling activities had confirmed the high-grade gold deposit with proven and probable reserves estimated at 2.3 million ounces. This was sufficient to justify the development of a new mining operation. In its early production years, the company’s RedLake mill was being fed ore that graded over 2.0 ounces per tonne which was unheard of anywhere else in the world. The rest, as they say, is history.

Chief Owner: No Paycheck

McEwen became Chairman of the Board, President, and Chief Executive Officer of his namesake company in August 2005. Describing himself as “Chief Owner,” he currently owns 25% of the company’s shares at a cost of $125 million – hardly small change. An anomaly in the industry, he takes no salary although he does have stock options comprising approximately 1.75 million shares exercisable between $0.91 and  $1.80 per share.

Among his key objectives for McEwen Mining, is to qualify the company for inclusion into the S&P 500 index which requires a minimum market cap of $5 billion. That would translate into a seven fold increase in its current share price which is now approximately one quarter of its all time high in early 2011. McEwen sets his market expectations high and the quality assets he is currently developing suggests his company has an above average chance of achieving that S&P 500 goal – with a little help from gold prices.

Compared to other companies within its peer group, McEwen’s stock is highly liquid. Let’s face it: there is no point in buying a stock if you can’t trade it! For the six month period  ending December 2, 2013 the average daily trading volume (NYSE) was 4.4 million shares valued at $US7.6 million. The company’s stock has been very volatile and heavily shorted in concert with declining gold prices, political issues with its mining assets in Argentina, and the recent decision by the Mexican government to increase taxes and apply royalties on gold production. With some upward movement in the gold market, the company has the potential to become a classic short squeeze. Indeed, recent activity in the stock suggests this very scenario has begun to transpire. McEwen’s capital structure and five year trading history are as follows:



Mining & Exploration Assets

McEwen’s gold, silver and copper assets are located in Argentina, Mexico and the U.S. state of Nevada. Argentina has proved to be a difficult country in which to operate even though McEwen’s assets there hold great promise, especially the company’s world class Los Azules copper project which has been put up for sale and could finance new precious metal  projects in Mexico and the U.S. 

Argentina is endowed with tremendous natural resources including large deposits of gold, silver and copper. However, the investment climate there for mining companies has worsened appreciably under its President, Cristina Kirchner whose popularity continues to ebb due to rising inflation and high unemployment. The next presidential election in Argentina will be held in late 2015 which analysts believe could see a much more business friendly government come into power that would serve to placate investor concerns about the viability of operating in the country.

  • Strong Growth Profile Over Next Three Years 

Precious metal investors prefer companies with strong growth profiles and McEwen certainly has that. Debt free, fiscally conservative, unhedged, and with zero tolerance for excessive risk, the company’s program to become a mid-tier precious metals producer in 2016  has solid potential to generate above average returns for shareholders. Thee growth scenarios (see table below) envisage gold output ranging from 175,000 to 330,000 gold equivalent ounces over the next three years.


Reviewing the company’s principal assets, consolidated gold equivalent (1) production is seen rising from the current 130,000 ounces per year to 330,000 ounces by 2016. The table above shows projected output from three operations: San José  (Argentina); El Gallo Phase 1 and 2 (Mexico); and Gold Bar (Nevada). A brief description of each follows:



  • San José 

The San José mine  is 49% owned by McEwen Mining and 51% by Hochschild Mining which is listed on the Main Market of the London Stock Exchange. San José is an underground gold-silver mine located approximately 20 kilometres north of Goldcorp’s Cerro Negro project in the northwest corner of Santa Cruz Province, Argentina.

The San José deposits are considered to be structurally-controlled (similar to major gold mining camps in the U.S and Canada), low sulphidation, silver-gold epithermal vein deposits which are typically shallow in nature. These type deposits have been mined successfully for over a century.

Measured and Indicated Resources at San José as at December 31, 2012 were 4.4 million tonnes grading 484 g/t silver and 7.03 g/t gold containing 68.3 million silver ounces and 992,000 ounces of gold at a cut-off grade (the lowest grade they can mine economically) of 213 g/t silver equivalent. For reference purposes, silver equivalent ounces = the total metal value in a given ton/tonne of ore divided by the silver spot price. Care must be taken in assessing equivalent ounces for various metals as metallurgical recoveries can vary considerably from metal to metal. Recoveries tend to be higher for gold and less so for silver and copper. 


San José performed well in 2013 with production for the year totaling 221,073 gold equivalent ounces, representing 98,827 ounces gold and 6.4 million ounces silver. The mine met its production guidance in 2013, with McEwen’s share totaling 48,425 gold ounces and 3,114,832 silver ounces or 108,326 gold equivalent ounces. Cash costs and all-in sustaining costs per equivalent gold ounce for 2013 are estimated at $725 – $825 and $1,150 – $1,275, respectively. These are well within current industry norms.

McEwen’s attributable production from the San José mine during Q4 2013 totaled 29,407 gold equivalent ounces (12,999 gold ounces and 853,225 silver ounces) while full-year production reached 108,326 gold equivalent ounces (48,425 gold ounces and 3,114,832 silver ounces). The company’s  share of production from San José in 2014 is forecasted at 97,500 gold equivalent ounces (44,000 gold ounces and 3,200,000 silver ounces).

In addition to a minority interest in San José, McEwen also owns a 100% interest in the advanced stage Los Azules copper project which boasts resources of 20 billion pounds of copper, with attractive by-product gold and silver values. As mentioned above, Los Azules has been put up for sale, with the intention of using the proceeds to fund development of McEwen’s gold projects. It is unlikely that any sale will conclude before there is a change of government in Argentina or at least a more favourable investment climate for mining companies.



  • El Gallo

 The El Gallo complex is located 100 kilometers northwest of Culiacan, Mexico in the western foothills of the Sierra Madre Occidental mountain range. McEwen announced the initial discovery holes from the El Gallo silver/gold discovery in November 2008. The mining complex includes the El Gallo and Palmarito silver deposits and the Magistral gold deposit, located within a 13 kilometre radius. The company is currently expanding production at the El Gallo project in a two stage development program.

McEwen owns its interest in the El Gallo concessions through its 100% ownership of Nevada Pacific Gold Ltd. which owns 100 percent of Pangea Resources, Inc. Through Pangea Resources’ 100 percent ownership of Compania Minera Pangea, S.A. de C.V. , McEwen owns the concessions.

  • Phase 1 Program

El Gallo Phase I achieved its first gold pour in September 2012 with commercial production officially beginning on January 1, 2013. Production is expected to average about 50,000 ounces gold per year at a cost of $800 per ounce. El Gallo 1 had a successful first full-year of commercial production, producing 31,129 gold equivalent ounces (30,733 gold ounces and 20,635 silver ounces).

During Q4, El Gallo 1 produced 7,760 gold equivalent ounces (7,687 gold ounces and 3,786 silver ounces). In 2014, El Gallo 1 is forecast to produce 37,500 gold equivalent ounces (37,000 gold ounces and 25,000 silver ounces). El Gallo 1 is currently being expanded from 3,000 to 4,500 tonnes per day. The expansion is ahead of schedule with completion expected at the end of Q1 2014 versus the earlier estimate of end of Q2 2014. The cost to complete the expansion has been reduced to $3 million from $5 million due to a large contingency that was initially included but has since been reduced. The increased capacity, combined with higher grades as mining moves deeper in the open pit, is expected to increase production from 27,300 gold equivalent ounces in 2013 to 37,500 gold equivalent ounces in 2014 and 75,000 gold equivalent ounces by 2015.

  • Phase 2 Program

A feasibility study was completed in September 2012 for Phase 2 of El Gallo. This phase is estimated to contribute an additional 105,000 ounces of gold equivalent for a grand total of 135,000 ounces gold equivalent per year from the El Gallo project. The company estimates a $600 per ounce cash cost with the start date of 2014. The Capex for Phase 2 is approximately $180 Million.

Studies are being conducted to reduce the estimated Capex for El Gallo 2 by $20 million from the initial $180 million estimate. These changes are expected to have minimal impact on annual production. To date $10 million of the final construction cost has been spent. Provided the company realizes on these projected savings, and factoring in the funds that have been spent to date, approximately $150 million would be required to increase the mill rate to the higher capacity.

McEwen recently conducted tests to help determine if heap leaching is a viable process alternative to conventional milling. Heap leaching involves the treatment of ore grade material (either crushed or mine run size) with a weak cyanide solution on specially constructed leach pads lined with impermeable membranes to prevent leaking. Testing indicates that silver recoveries through heap leaching would be between 55-60% which is much lower than conventional milling albeit at a much lower capital cost.

While the heap leaching alternative would substantially reduce the estimated initial capital, it would also decrease production from an estimated 105,000 gold equivalent ounces to approximately 60,000 gold equivalent ounces. The company has not made a decision on the final process method as this will be determined by timing of permits, availability of capital and precious metal prices.

Current resources for the El Gallo complex total 893,271 ounces of gold in the measured and indicated categories and 78,480 ounces of gold in the inferred. Silver resources total 63.9 million ounces in the measured and indicated categories and 14.5 million ounces in the inferred.


 Gold Bar

The Gold Bar project is located within the Battle Mountain-Eureka-Cortez gold trend in Central Nevada. McEwen’s proposed mine development project includes a conventional open pit mine with an oxide gold heap leach recovery circuit.  Gold Bar is currently in the permitting phase, with construction expected to begin in 2014 and commercial gold production anticipated in 2016.

The Gold Bar project is forecast to produce 50,000 ounces gold per year for eight years at a cash cost of $700 per ounce. The Bureau of Land Management (BLM) and the Nevada Division of Environmental Protection (NDEP) are the primary government agencies responsible for approving the permits that would allow construction to begin. The main highlights of the feasibility study are as follows:

  • Average annual production of approximately 50,000 ounces of gold over an 8-year mine life (total 397,000 ounces), at a cash cost of $700 per ounce.
  • Open-pit mine with conventional oxide heap leach processing. Projected gold recovery of 82% after primary crushing to 5 centimeters (2 inches) and a 90-day leach cycle.
  • Estimated initial capital expenditures of $53.1 million and sustaining capital of $39.1 million for total life-of-mine (LoM) capital expenditures of $92.2 million. Pay-back period of 2.1 years at LoM average $1,300 per oz gold, or 1.7 years based on the spot gold price ($1,700 per oz).
  • After-tax Net Present Value (NPV) of $45.1 million at $1,300 per oz gold (LoM average) and 8% discount rate, giving an Internal Rate of Return (IRR) of 34.4%. Based on today’s spot gold price ($1,700 per oz) the after-tax NPV and IRR increase to $98.3 million and 53% respectively.

Gold Bar is a low grade project which would only likely be viable employing heap leach for recovery purposes. The projected recovery rates for Gold Bar are considerably higher than El Gallo Phase 2 which may reflect finer crushing or the metallurgical affinity of the ore to heap leach recovery methods.


 Summary Analysis

McEwen is a professionally managed company with good assets whose “Chief Owner,” Rob McEwen, created what is arguably the most successful gold company in the world, Goldcorp. The culture he imbued into Goldcorp allowed the company to avoid most of the pitfalls that have befallen its competitors including Barrick and Kinross. One can safely assume with a good degree of confidence that he will run McEwen Mining in the same fashion.

McEwen is a play on higher gold prices and an affirmation that the company will meet its production targets over the next 2-3 years. The worst appears to be behind it in Argentina where the current leadership is extremely unpopular and the call for a more business friendly fiscal policy is growing. The eventual sale of its world class Los Azules Copper Project in Argentina has the potential to be a real game changer for McEwen’s growth prospects.

While a few good trading weeks hardly constitute a trend, the recent strength in gold prices, along with the almost mind boggling disconnect between the physical and futures markets, suggests a turning point might be at hand – if not immediately, at some point in the next six months. Investors want to be positioned in the market before that happens.


The material contained herein is solely for information purposes. The  reader is advised to conduct his/her own research and due diligence, and/or obtain professional advice before making any investment decision. Nothing contained herein constitutes a representation by the publisher, nor a solicitation for the purchase or sale of securities. The information contained herein is based on sources which the publisher believes to be reliable but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data. The owner, editor, writer and publisher and their associates are not responsible for errors or omissions. Any opinions expressed are subject to change without notice.  The publisher and its employees/editorial contributors may from time to time have a position in the securities of the companies mentioned herein, and may change their positions without notice. Any significant positions held in a listed company will be disclosed explicitly. (1)

 (1)  David Duval, through his personal consulting company, Duval Minecom Inc., currently owns 154,000 shares of McEwen Mining, having purchased the shares at prices ranging from $2 to $3.80. He has no plans to sell any shares in the next thirty days.

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