McEwen Needs A Partner - Seeking Alpha

Rob McEwen has been an outside the box thinker. While serving as CEO of GoldCorp (NYSE:GG) in 2000 - he offered $575,000 in rewards to people who could pinpoint where his company might discover more substantial gold deposits within their Red Lake mine. The company capitalized by producing $6 billion worth of gold from among the newly submitted sites.

I believe that McEwen mining needs a partner with capital-to perhaps split the production from one of his existing mines. McEwen has an existing partnership with Hochschild Mining-where they split the revenue from the San Jose mine in Argentina.

McEwen Mining (MUX) owner Rob McEwen, has been an outspoken critic of fellow miners who have sold future production by entering into agreements with royalty companies. He espoused that it was bad for shareholders when miners "give away" future production revenue.

It's also negative for shareholders when a company issues additional shares to finance a purchase or cover the cost to build a new mine. The purchase of Black Fox mine will cost the company $46.575 million and dilute current shareholders by 6.6 %. The company issued 20.7 million new shares and warrants that could raise that total to 31 million. (this would increase shareholder dilution to 9.9%)

McEwen projects Black Fox mine gold production at 50,000 ounces in 2018 but all in cash costs were at $1,101 per ounce at the mine in 2016. Those high production costs would squeeze profit margins to only $200 per ounce, assuming a gold price of $1,300 per ounce. Black Fox owner-Primero Mining had to take significant impairment charges after realizing that gold recovery would come in lower than original projections.

Gold Bar Mine in Nevada is awaiting final approval by the end of the year, and the timing is much needed. Gold Bar mine production is estimated at 65,000 ounces annual and cash costs project to be $728 per ounce. Unfortunately, McEwen will likely have to issue more shares or take on some debt-to cover the $60 million in capital costs to construct this mine.

If the price of gold remains at $1,300 per ounce, the company can continue to be profitable, contingent on being able to restrain or push down all in sustaining cash costs. El Gallo I mine production is nearing its end of life, and so the Black Fox mine will replenish this loss. It does not appear that Black Fox profit margins will be as favorable as those at El Gallo, so one must keep an eye on the quarterly financials in 2018.

If the price of gold rises sharply, as I anticipate it will, then the shareholder dilutions well be overcome by much higher margins at each gold mine. Early this year, McEwen predicted gold prices would reach $2,000 per ounce before the end of 2017. Gold prices at that level-would certainly reward shareholders who remained invested through this sharp stock price drop. McEwen Mining share price has dropped from $4.81 (July 2016) to $2.05 today. Gold miners profit margins widen sharply with upward gold price moves, and existing assets become more valuable to prospective buyers.

I remain optimistic that the company will turn more profitable over the next 18-24 months, but I also believe that market factors might drive the stock price at even lower levels in the short term. I will be looking to capitalize on further price pull backs.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MUX over the next 72 hours.

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.