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McEwen - A Highly Overvalued Stock?

March 02, 2012 | About:

Gold prices rose dramatically last year, and the mining industry is riding the wave. Not all companies face a bright future though, since expanding operations could be the key to taking advantage of this trend. For those stuck with large amounts of debt or in the midst of administrative shuffles, it might be hard to focus on building profitable operations in new areas. Meanwhile, McEwen Mining Inc. (NYSE:MUX) is jostling new internal structuring while moving its emphasis to the silver sector.

McEwen is the result of US Gold Corporation's recent acquisition of Minera Andes Inc., after which the company was renamed. CEO Rob McEwen works for no salary, which to me indicates confidence in his own ability to keep the newly merged company competitive and valuable.

That being said, I'm often skeptical about any company that flaunts their CEO's low or non-existent salary too overtly. It's almost like these people are trying to distract investors from actual financial information about the company, like they have something to hide.

In my opinion, McEwen is getting close to the peak of its current upswing and share price will start decreasing again within a month or so. If I'm right, then now would be a good time to start selling off shares, for those looking to make some quick money.

Shares are currently selling at about $6, and since gold stock prices can sometimes influence this market more than actual sales, I'd normally say this company isn't doing so hot right now. But since gold has outshone silver in terms of media and investor attention last year, McEwen might be on to something with its new direction.

One thing that McEwen has over some other gold mining companies is that it doesn't deal in diamonds. Although the diamond market is enjoying rising prices due to diminishing supply, few companies are finding much to work with in terms of exploration results.

Tanzanian Royalty Exploration Corporation (TRX) is one of the lucky ones in this regard, which makes it a serious competitor of McEwen, as well as a possibly better option for investors, in my opinion.

Although Tanzanian Royalty doesn't offer dividends, it seems poised to create some good value for investors in the near future, especially since its diamond drilling at the Buckreef Gold Project in the Lake Victoria Goldfields of Tanzania is yielding some high grade assay results.

However, in the face of reports linking diamonds to governmental violence in Zimbabwe, I think this company will have to tread carefully — and ethically — to maximize profits from operations in Africa, especially since the Buckreef project is based around a joint venture agreement signed in October between the company and the Tanzanian government.

Gold hit a three-month high Thursday, probably at least partly due to the Greek Parliament's vote in favor of a bond swap that eliminates about $142 billion of private debt in the country. While this motion will not single-handedly solve the country's economic shrinkage, it gives investors a little more confidence to take risks in the market.

Still, McEwen's bet on silver comes on the heels of another significant period in the mining industry. Over a two-year period, the price of silver increased 142%, making gold's already impressive 78% look meager. And the company has a hand in both of these industries.

The company is more than doubling its exploration budget at its 49%-owned San José mine in Argentina, where it plans for 110,500 meters of diamond core drilling this year. Almost two-thirds of this drilling will be for exploration with the rest slotted for infill. As it turns out, the Nadia and Sofia veins are actually a part of the Pilar vein, which suggests rich resources still available in that area.

This all looks very positive, but silver supplies are starting to get even tighter than diamonds, so Tanzanian Royalty might still gain the upper hand in the long run. Demand is going up, which explains the hike in price, but with very few new supply sources, the silver industry might be facing some very dark days ahead, which doesn't bode well for McEwen.

The merger that created it may have been a shot in the dark, with the promise of silver revenue too enticing for decision makers at the company to think about the long-term problems this industry is going to have to deal with.

Another Canadian company, Nevsun Resources Ltd. (NSU) might have a better idea than the blind chasing of high prices that McEwen appears caught up in. Although its share price dipped this month, trends suggest the stock's value is at the bottom of an upswing.

In the face of decreasing supply and rising prices, Nevsun hasn't panicked yet, as far as I can tell. Instead, it is simply going about its business as usual, while decreasing operating costs. Its revenue comes from copper and zinc, as well as gold, and the company is focusing on expanding the Bisha Main Project, which hasn't disappointed yet in terms of yields.

I think Nevsun is on the right track. While McEwen, and even Tanzanian Royalty to some extent, are hunting new resources in new locations, Nevsun is following the slow-and-steady principle. It seems to me that the gold and silver bubbles are bound to burst within a year or two, leaving McEwen high and dry with little else to turn to.

For investors, this prospect spells out disaster. If my money was in this company, I'd be selling off shares while the price is high. In a short while, McEwen's value could be much lower than it is now, and it might be too late to get out.

The bottom line is that investing in gold and silver is still profitable if you do it right, but putting all your eggs in the shiniest-looking basket, like McEwen, will probably end badly all around, in my opinion.

About the author:

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