Many small-cap miners look to partnerships or sales to major players, as precious metal prices rise. With a market cap of under $300 million, a stock price of $2.35 a share, and two large properties in Mexico and Nevada, U.S. Gold seems like a prime takeover candidate. But CEO Robert McEwen, who owns 21% of the company in lieu of a salary, has a vested interest in share price appreciation -- and not necessarily in becoming part of a larger company.
I recently interviewed McEwen at
Dahlman Rose & Co.
's emerging miners conference.
TheStreet: What makes U.S. Gold different?
McEwen: We have a good silver discovery in Mexico, in addition to a very large land position next to a very important discovery in Nevada. We don't have any debt. Probably one of the bigger differentiators is I own 21% of the company. I don't take a salary, so the only way I'm going to make money is how all my shareholders make money, and that's an appreciation of the share price.
U.S. Gold Goes It Alone
The grade of the discovery, or the concentration of silver, that we are finding in Mexico would make it, at least our preliminary assessment, a low-cost operation. Meaning that it would have high gross margins and high net margins, profit margins, which is exciting. A lot of deposits coming out today are fairly marginal and they require a lot of capital. Ours would be open pit and fairly simple metallurgy or metal processing and not that
much capital expenditures.
U.S. Gold is not yet a producer, so when you do expect to start taking metal out of the ground
We haven't put out any numbers in terms of economic calculations. In the second quarter of this year, we will have a preliminary estimate of how much silver we found to date along with some analysis of the recoveries on that metal. So at that point we will be able to give some indications of what might be the economics.
Since you have exposure to both gold and silver, which metal do you think will be more profitable down the road
I've been really tied to gold most of my career
McEwen was the founder and former CEO of
, so silver is relatively recent. It is another precious metal, and I would think because the unit cost is so low, there'd be a larger number of people buying silver than there would be gold.
You recently said gold prices could hit $2,000 by the end of 2010. As gold prices rise, what is U.S. Gold's long-term strategy
I think there is a big hole in the market. There's not that many American precious metal companies. I would like to take U.S. Gold and in the next five years get it to the point that it qualifies for being in the S&P 500. Right now there are only two metal companies in the S&P 500,
. So I think there is a very strong desire to have an American product servicing this market.
Going it alone is hard. How will you finance
Well, I expect that our discovery will grow and our share price should appreciate. Once we know the economics, we'll do a combination of debt and equity. I'm a big believer. I own 21%
of the company, so my interest is seeing the share value go up, and I think a lot of people who don't have big interest in the company, in running companies, are more interested in seeing a bigger company for the sake of a bigger company. To me it's only if the share price goes up do I want to entertain certain actions.
U.S. Gold is trading under $5 and is very speculative. What would you say to a potential investor
I'd say that we were having our prices come off from last fall. We were drilling, getting good results and then we went into a period where we were waiting to get a permit to drill a larger area. It took us 5 months when it was supposed to take less than a month. So there was no news coming to market and the market settled back to $2.60 from $3.50.
But we started drilling at the beginning of this year and I expect that we'll go back up to that line and continue expanding this deposit.
Why do you expect small cap miners as a whole to snap back
The seniors aren't exploring as much. They've chosen to say, "Well, we are going to look into the market to find future growth because we don't have to worry about the time and the uncertainty of having our own exploration department." And there will be discoveries -- there are always discoveries being made -- and some of those will get to a size where they are attractive and would be beneficial for a senior to own to get their growth. It wouldn't mean that the seniors' share price would go up, but, again, management is looking to expand revenue and have a statement that, "We're number two, we're number three in the world."
What are some risks that you are coming up against
Our risk for U.S. Gold was a delay in the permitting, and that can happen in many other environments. You might find that the discovery is limited, maybe we found all there is. I don't think that's the case, because we've been sampling and we've found
deposits quite a distance away. But the risks inherent in junior mining are the market turns down, and you need money at that time, and you can't raise money, and you have to dilute at a lower price -- or you can't raise any money at all. You can do deals with senior companies and they can disadvantage the shareholder if you're not paying attention to the legal matters. I guess someone can come along with a gun and say we want your property. And you have people holding up
your project whether it be local residences or governments coming along and saying we need more tax revenue.
They'll apply a royalty or they will just say we're taking it away.
So I like to mitigate risk as much as possible and when I started U.S. Gold ... I said I would like to be in a dollar zone -- meaning that if gold rises against the dollar and the dollar is falling against other currencies, I can contain my operating costs whereas if I was in other countries I couldn't. I want to be in a very prospective area for finding more minerals because you often find deposits next to where they were mining. And I wanted to be in geopolitically safe environments, because there are all sort of place in the world where you can find minerals but that doesn't mean you can keep them.
Written by Alix Steel in New York
Alix joined TheStreet.com TV in February 2007. Previously, she held positions in film and theater production, management, and legal administration. Alix has a degree in communications and theater from Northwestern University.