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What Rob McEwen Looks for When Investing in Juniors

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Rob McEwen recaps goings on at McEwen Mining and discusses some of the juniors he has invested in.

Rob McEwen, the chairman and CEO of McEwen Mining Inc. (MUX:TSX; MUX:NYSE ) and founder and former chairman and CEO of Goldcorp, doesn't mince words. "In the last year, what we went through at McEwen Mining could almost be described in Biblical terms: we had a fire, a flood and COVID is sort of a plague."

McEwen Mining has operations in four countries—the U.S., Canada, Mexico and Argentina—and produces gold and silver and has a large copper deposit in Argentina. Last year the company produced 135,000 ounces of gold and 3.4 million ounces of silver.

"I'll start by saying our properties are well located in very productive gold mining districts. It is good real estate to be exploring in," Rob said. "I have experienced the enormous and explosive creation of wealth due to a successful exploration effort. That why I am such a big proponent and funder of exploration and attracted to distressed situations in areas where there is a history of a lot of gold being produced."

"The precious metal space is a great place to be investing today." - Rob McEwen

Last year, McEwen Mining started up the Gold Bar Mine in Nevada and ran into difficulties. "We built the mine based on a geological interpretation by SRK Consulting but we weren't getting the results we were expecting. We called them back in to review the situation. We were shocked that they changed their geological interpretation, which resulted in a significant reduction in the estimated size of the deposit. As a result, we took a $83 million write down in Q2."

Since then, the company has continued to produce gold as well as conduct exploration drilling at Gold Bar. "We expect to have new resource and reserve estimates and an updated feasibility study by the fourth quarter," Rob said.

McEwen Mining's Black Fox Mine is located in the prolific Timmins Gold Mining district in Ontario, Canada. "Early last year a fire on a contractor owned and operated crusher shut down gold production for seven weeks. That event was followed by a heavy spring run-off that flooded one half of the mine and cut gold production in half for more than an additional eight weeks," Rob noted. "These events significantly reduced our gold production and thus our revenue. Fortunately, these events were unique and not expected to reoccur. This year production was returning to normal levels when the COVID pandemic struck. We chose to protect the health of our employees and their communities and suspended operations for much of Q2. Since then operations are returning to normal levels."

"The good news is that we've had a very good exploration year at Black Fox, particularly the Grey Fox and Stock zones, which we believe should have a very positive impact on production over the next three to four years. Also at Black Fox, we're developing a ramp down to a satellite deposit called Froome. We expect that we will be producing gold from Froome by the end of next year," Rob said.

In Mexico, "We are working on a feasibility study for the Fenix project that contemplates a 10-year life of mine," said Rob. In the second quarter, McEwen Mining produced 1,900 gold equivalent ounces from residual leaching of the heap leach pad.

McEwen Mining also holds a 49% interest at the San José Mine in Argentina. "It is one of the highest grade silver and gold mines in the Americas. Government imposed measures designed to stop the transmission of COVID have materially increased the cost of mining," Rob said. "As such, the San José mine is operating well below its required manpower needs for an efficient operation."

Also, in Argentina is the company's large, 100%-owned Los Azules copper project. "To give you a sense of its size I will convert the pounds of copper to gold equivalent ounces (by dividing the gold price by the copper price, then take the product and use it to divide the number of Indicated and Inferred pounds of copper to arrive at the number of gold equivalent ounces) and to that number add the gold and silver ounces in the deposit. Based on current metal prices, Los Azules has a resources of greater than 50 million gold equivalent ounces. We have focused on derisking this asset, improving the access, and improving its attraction for a potential JV partner," Rob explained.

"With all of these issues, needless to say, our share price has unfortunately been going in the opposite direction to most gold stocks. We've significantly underperformed in part due to these issues," Rob said. "I hired a new chief operating officer in April, Peter Mah. He is a very skilled mining professional with a broad base of senior international experience building mines from scratch to turning around challenging mines. Peter was a member of the senior management at the Red Lake Mine when I was building Goldcorp. The Red Lake mine was the engine that drove the growth of Goldcorp, but when we started it was a high cost mine, with a very short life and a troubled history with unions. I see many similarities with Black Fox and the opportunities."

Rob McEwen's confidence in the company remains strong. "I believe we've turned the corner, our assets are performing better and the trend is up. Please note that it's going to take a couple of quarters of stronger results to rebuild the confidence of our shareholders and the market," Rob said.

"We are in a transition period setting up for future growth. We have a large resource base, four operating mines and we see an exciting organic growth pipeline of projects ahead that could potentially push our production to 300,000 ounces per year," he said. In the last quarter, Rob purchased 2 million shares, taking his ownership to 82 million shares, about a 20% stake.

In a ROTH Capital Markets report dated July 17, analyst Jake Sekelsky wrote, "we continue to view MUX as an undervalued producer at current levels and believe management is taking prudent steps to unlock value from the portfolio of assets."

In addition to McEwen Mining, McEwen invests in a number of junior mining companies. "I like buying juniors," Rob said. "I like buying them when they are out of favor. It's a sector that really powers up when the gold market starts running; they can run and deliver amazing returns."

When deciding on investing in a junior, McEwen says he uses broad guidelines. Most of his investing has been focused on the Americas and a little in Northern Europe. "I like to hear the story, meet management and I reflect on their ownership and degree of financial commitment. I look at the financial position of the company and how the market views it," he explained. "I am attracted to companies that the market doesn't like or just doesn't look at. These situations you can buy it at an advantageous price. When I buy, I buy 5%, 10% or more of a company. And then I will wait. I am long-term buyer. I believe there will be many more discoveries and I am convinced the precious metal space is a great place to be investing today."

One that McEwen has bought is Abitibi Royalties Inc. (RZZ:TSX.V), run by Ian Ball. "At Goldcorp I hired Ian out of school. He is very bright and he progressed through the ranks at McEwen Mining up to becoming its president. He left to be the CEO of Abitibi," Rob noted. "This company has a very small number of shares outstanding, 12 million. Its biggest asset, other than a large treasury, is its 3% net smelter return royalty on the eastern portion of the Canadian Malartic Mine, Canada's largest gold mine, which is operated by Agnico Eagle and Yamana Gold; it also holds royalties on numerous other projects. Ian has done a great job building value."

McEwen has also invested in Labrador Gold Corp. (LAB:TSX; NKOSF:OTCQX), Northern Shield Resources Inc. (NRN:TSX.V) and New Found Gold Corp. (NFG:TSX.V). "What attracted me to them was their properties in Newfoundland," Rob said. "There's a geological structure that comes over from Finland, across Greenland, down Labrador and Nova Scotia, and down to the Carolinas. Newfoundland hasn't had a lot of history of gold mining but these companies have come across a wide structure that has some really interesting gold values. All of these companies are working in that area that I think is going surprise a lot of people with its wide zones and good grades."

He also holds a 9% interest in Royal Road Minerals Ltd. (RYR:TSX), which has a massive land package in Colombia. "Colombia is a country famed for its historical abundance of gold. The company picked up this big tract of land that AngloGold-Ashanti had poured quite a bit of money into. Royal Road has joint ventured with Mineros SA on the gold skarn project. And in Nicaragua, they have a property that produces some interesting results," Rob said.

McEwen owns HighGold Mining Inc. (HIGH:TSX.V; HGGOF:OTCQX) shares; the company's properties in Alaska and in the Timmins Gold Camp in Ontario are notable for their historical high grades of gold. "In Timmins," Rob noted, "HighGold's property, the Munro-Croesus Gold project, includes the Croesus Mine that produced some of the highest grade gold ever mined in the region. And in Alaska the company has an arrangement with the Cook Inlet Region Inc. (CIRI), an Alaska Native Regional Corporation, on an area that has significant potential given the historical mining in and around the area."

Another holding is Inventus Mining Corp. (IVS:TSX.V). "The company has a curious story; its Pardo project is paleoplacer," Rob said. "I liken it to the types of deposits you might see in South Africa. It's a shallow conglomerate bed that begins at surface and goes down only three to five meters. So mining costs should be quite inexpensive. Sampling has in places encountered gold grades in excess of an ounce. The trouble with paleoplacer deposits is the difficulty estimating the size of the resource. It is a very drill intensive exercise that can be very expensive for a junior to fund. I look at it this way: this is a very shallow deposit that they could just peel back the vegetation and take out the gold and practically roll back the vegetation."

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Disclosure:
1) Patrice Fusillo compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
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Disclosures from ROTH Capital Partners, McEwen Mining Inc, Company Note, July 17, 2020

Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

ROTH makes a market in shares of McEwen Mining Inc. and as such, buys and sells from customers on a principal basis.
Shares of McEwen Mining Inc. may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities.

ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months.




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