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Small Silver and Gold Miner Resists Buyout

Stocks in this article: MFN

DENVER ( TheStreet ) -- Minefinders (MFN) is a small gold and silver producer with a big go-it-alone strategy.

Minefinders has a big gold and silver mine in northern Mexico which is scheduled to produce 1.7 million ounces of gold and 64.4 million ounces of silver over the mine's 15-year life span. The mine started production in November 2008 and marks the first big win for the junior trying to avoid becoming a take-over target.

Large-cap and mid-cap gold miners are desperate for gold as demand outpaces supply. Kinross Gold (KGC), Goldcorp (GG) and Gammon Gold (GRS) all paid up for smaller companies as a quick fix to expanding their reserve base.

With one big mine already in production and three other exploration properties in New Mexico, this $622 million company looks ripe for the buying. The stock currently has eight buy ratings, two holds and one sell with an average price target of $13.34. Shares have actually fallen 11% year to date while gold prices have rallied 20%. The stock trades at a forward looking price-to-earnings ratio of 10.12, slightly above its peers.

I sat down with CEO Mark Bailey at the Denver Gold Forum to see what his exit strategy was and what the catalyst would be to shake-up the stock.

I want to first go over your last quarter. You had a net loss of 1 cent a share. How come?

Bailey: Well, we are still in our ramp-up period in our mine, we're still growing. It's a heap leach operation so you mine, you process, you put the material on a pad and then you have to leach it for a period of time ; gold comes out fairly quick in about 90 days.

In the case of silver, it takes over a year to get our expected recoveries so there's a lag time. You spend a lot of money upfront and then it takes a while to get steady state. We're not quite there yet, we did have positive cash flow but we also had some noncash items that caused the loss. We were actually profitable in the quarter but we had stock options that had to be accounted for, so they were noncash items.

So break that down for m -- you're producing, you're selling the gold but you're not selling it at the high price we are seeing today? There's a lag time?

No, we are selling. We are capturing the best prices. We're selling the $1,260 an ounce for gold, we're getting $20 silver. It's just that our production is not at steady state. We expect to be producing around 30,000 ounces of gold a quarter and we're not there yet because of the lag time. We should be doing over 1 million ounces of silver a quarter and we're not there yet because there's big lag time for the silver, it just leaches slower.

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