Add Shares of McEwen Mining Only If the Price Falls Substantially

GuruFocus.com

Sun, Mar 10, 2019, 6:37 PM

According to the jobs report for February, which was released by the US Department of labour on Friday, the U.S. economy added only 20,000 jobs last month reflecting a sharp 94% fall from the 311,000 jobs added in the previous month of January. This was the weakest number on jobs added since September 2017.

Regardless, the US Federal Reserve will procrastinate the rise in the Federal-funds rate target of 2.25 to 2.5% as inflation is still too low to resume a tightening monetary policy.

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MUX 15-Year Financial Data
The intrinsic value of MUX
Peter Lynch Chart of MUX

However, an increase in the number of analysts who predict lower real yield environment will unavoidably follow an extended period of unvaried interest rates. As a result, the price at close on Friday of one ounce of gold of $1,296.75 on the London Bullion Market and of $1,299.30 on the COMEX, which are about 1.2 to 1.3% down since the beginning of the current month, will start to rise again substantially.

A way to profit from rising commodity is acquiring shares of publicly traded gold mining companies which share price is also very volatile compared to changes in the price of gold.

Shares of the Toronto-based junior gold producer McEwen Mining Inc. (MUX) match the identikit because, as is illustrated in below chart of GuruFocus, patterns in the share price are characterized by sharp upswings and downswings compared to the VanEck Vectors Junior Gold Miners ETF (GDXJ). This means that if gold skyrockets, shareholders of McEwen Mining should gain substantially higher margins than average. The gold-backed exchange traded fund is used by gold mines investors as a benchmark for the junior gold stocks industry.

However, investors should also know that highly volatility brings a high degree of risk involved in an investment in McEwen Mining. Further, past performances do not pose any guarantee for future gains and most recent patterns in the share price demonstrated that McEwen Mining can also underperform the sector heavily.

Source of the screenshot: GuruFocus.com

The stock is not expensive because the share price is below the 200-, 100- and 50-day simple moving average lines after a 14% decline for the 52 weeks through March 8. It is also just 11.8% off the 52-week low of $1.61 and 40% from the 52-week high of $2.52. In addition, the price-book ratio of 1.18 is well below the industry median of 1.62. McEwen Mining has a market capitalization of about $607.08 million as of Friday.

In 2018 McEwen has produced 175,640 ounces of gold equivalent, reflecting 15.3% growth year over year, at an all in sustain cost of $1,002 per ounce, from its 49% interest in the San Jose mine in Argentina, from the Black Fox mine in Canada and from the El Gallo Project in Mexico.

The company is also engaged in exploration activities and in the development of the Gold Bar mine in Nevada, the Los Azules copper project in Argentina and the Fenix Project in Mexico.

Looking ahead, McEwen Mining targeted the production of 210,000 ounces of gold equivalent at an average AISC of $1,034 per ounce of gold equivalent.

According to a gold-to-silver ratio of 80.77 based on average prices of gold and silver for 2018, the company has approximately 851,007 ounces of gold equivalent in proven and probable reserves as of year-end 2018. Thus, without taking into account what explorations and development of mineral assets will add to the future production of McEwen Mining, current producing assets can guarantee production for about 4 years which, to be honest, is not much.

In addition, considering that the stock is composed by approximately 345 million shares outstanding I wouldn't assign an intrinsic value of more than $1 to one share of McEwen Mining in terms of ounces of gold equivalent produced every year that can be represented. Of course, the odds that the current share price will halve is extremely low.

However, a share price of $1.65, which is 6 to 7% down from share price at close on Friday, is likely to happen over the next weeks as the 14-day Relative Strength Indicator of 46.46 is down trending.

So, in light of this, I would wait for any meaningful weakness in the price before adding shares of McEwen Mining to any position, even though Wall Street recommends to buy the stock with an average target price of $2.84 per unit.

Disclosure: I have no positions in any security mentioned.

This article first appeared on GuruFocus.