The price of gold fell 0.4% to $1,498.40 per troy ounce on Tuesday after the U.S. agreed to postpone tariffs on a select number of Chinese goods, pushing the Van Eck Vectors Gold Miners (GDX, Financial) exchange-traded fund, which is the benchmark for the mining industry, down 1.9% to $28.45 per share.
The drop in the commodity price sent stocks higher and pushed the demand for safe-haven assets like gold lower.
It is possible Tuesday’s loss will be followed by more declines in the share price of gold mining stocks in the coming weeks. Thus, investors may want to soften their positions in companies that are underperforming the industry.
As such, I would suggest selling shares of McEwen Mining Inc. (MUX, Financial) as the Canadian miner is growing at a much slower pace than the rest of the industry.
The company is a laggard compared to its peers as the stock has gained only 1.7% so far this year. In contrast, gold gained an impressive 16.8%, while the Van Eck Vectors Gold Miners ETF climbed nearly 35%
McEwen Mining also underperformed its most direct competitors. The VanEck Vectors Junior Gold Miners (GDXJ, Financial) ETF gained almost 33%, suggesting investors better divert their preferences toward other small-cap junior gold stocks.
The decline in the gold price may significantly hurt the stock. On Tuesday, shares were trading at $1.9, above the 200-, 100- and 50-day simple moving average lines, hinting at overvaluation.
The share price was also 54% below the lower limit of the 52-week range of $1.23 to $2.44. The Toronto-based gold producer, which has assets in North America, Mexico and Argentina, has a market capitalization of $669.72 million.
In the second quarter, McEwen missed analysts' earnings estimates by 2 cents, having posted a loss of 4 cents per share on $36.4 million in revenue.
The second-quarter loss was down from the prior-year quarter even though revenue increased 7.6%, surpassing projections by $4.37 million.
During the quarter, the increase in commodity prices was offset by a nearly 3% year-over-year decline in total production of gold equivalent to 45,881 ounces, impacting the bottom line. Gold production decreased 2% to 36,216 ounces, while silver production grew 10.1% to 850,525 ounces.
McEwen needs to boost production and lower costs to scale up to the intermediate mining company stage, abandoning the status of junior operator and achieving cost efficiencies that will drive operating margins up to align with well-known operators.
Currently, McEwen’s operating margins are far below the average peer and, because of this, the company received a low GuruFocus’ profitability and growth rating of 2.2 out of 10.
McEwen tries to accomplish its profile growth target with a modest balance sheet since 70% of total $47 million in liquidity is exposed to changes in metal prices, and total financial obligations were valued at $49.4 million as of June 30.
So achieving the goal is an endeavour for the company that, in the short run, has to raise $25 million to advance several projects.
These projects are: drilling campaigns to grow mineral resources at Timmins in Ontario, efforts to improve throughput and gold recovery rates at Gold Bar in Nevada and the construction of the Northern access route to the Los Azules Project in Argentina.
The weak fundamentals for silver makes the backdrop of McEwen Mining more complicated.
Unlike gold, which works as a safe-haven investment, silver is for industrial use. China, the world’s largest consumer of the grey metal, has a sluggish economy now due to dwindling global demand, the ongoing trade war with the U.S. and alarming off-balance-sheet borrowings by local administrations.
The Chinese economy expanded 6.2% year over year in the second quarter, down from 6.4% growth in the previous quarter. It was the lowest growth rate over the past 27 years.
The company is projecting supplying 152,000 ounces of gold and 3,225,000 ounces of silver to the market in 2019.
Because of small throughputs, the all-in sustaining costs are not competitive. For the full year, the miner anticipates an AISC of $1,120 an ounce at its 49% interest in the San José Mine in Argentina, of $915 an ounce at El Gallo Mine in Mexico, of $1,080 an ounce at Black Fox Mine in Canada and of $975 an ounce at Gold Bar Mine in Nevada.
For these reasons, I do not agree with sell-side analysts who recommend buying shares of McEwen Mining, targeting a share price of $2.74Ă‚ to hit within 52 weeks.
Disclosure: I have no positions in any securities mentioned.
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