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September 22, 2005

From mining it to dreaming about it, Thurs., Sept. 22, 2005, 2:53 PM

Reader mail (one of a few regarding this situation): "Bill - Wondering your thoughts on Rob McEwen formerly of GG now of USGL.OB".

That's an easy one. Rob is a terrific guy. Proven operating performer. Excellent trader. Financially successful. Etc.

Unfortunately, I don't think this news release issued by U.S. Gold's William Reid, regarding a deal with McEwen is one of Rob's finest hours. If he has closed the deal, then I'm sure he'll put his best efforts and his serious money into it. And if readers want to speculate in these exploration plays, I'm sure McEwen will give you a fair chance at earning a return on your trade.

But the news release is unacceptable as I first read it. I have bolded some red flags.

http://finance.yahoo.com/q?s=USGL.OB

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DENVER--(BUSINESS WIRE)--July 29, 2005—Rob McEwen Becomes U.S. Gold's Largest Shareholder

U.S. Gold Corporation (OTCBB: USGL - News) is pleased to announce that Rob McEwen has purchased by way of private placement with the Company, 11.1 million shares for $4,000,000 becoming the Company's largest shareholder with 33.3% interest. It is planned that Mr. McEwen will be assuming the role of Chairman and CEO shortly following the planned resignation of current management.

"Rob McEwen is one of the noted visionaries and entrepreneurs in the gold-mining sector. As my brother David and I close out our last chapter in the U.S. Gold story, a company we founded 28 years ago, we are very pleased to be turning the next chapter over to Rob. Rob's vision for building U.S. Gold is exciting," said William Reid, U.S. Gold's outgoing President.

As part of the transition, four of the six current directors of U.S. Gold have agreed to resign from the board. Pending regulatory filings, the current board intends to replace the resigning members with nominees of Mr. McEwen.

Over the past twelve years, Mr. McEwen turned Goldcorp Inc. (NYSE: GG - News; TSC: G) from an investment company with a market capitalization of $50 million into a mining company with a market value of $5.4 billion today. He has been honored with such awards as the Northern Miners Man of the Year Award, Ernst & Young's Ontario Entrepreneur of the Year Award in the Energy Category, PDAC's Developer of the Year, and under his leadership, Goldcorp was named one of Fast Companies 50 Companies of Innovation and Business Week's selection as one of the 50 most innovative companies on the web.

"U.S. Gold's Tonkin Springs property is exciting. Its 36-square-mile property position, strategically located on the Cortez Gold trend in Nevada, is in the heart of a promising exploration play. Tonkin Springs has an existing gold resource of 1.4 million ounces within the upper 250 feet over a relatively small area of the property. The exploration potential of this property has increased over the past few years as Placer Dome, which adjoins our property to the north, has continued to discover several multi-million ounce gold deposits, some of which have reached to a depth of 2,000 feet. Tonkin Springs is a great asset, and I intend to aggressively explore this interesting property," said Rob McEwen, U.S. Gold's incoming Chairman and CEO.

The previously announced merger with Romarco Minerals has been terminated."

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private placement: If there was in fact a private placement completed, the news release should have given the details in specifics, including notice it has been filed with regulators and is subject to regulatory approval.

11.1 million shares for $4,000,000: Those figures extrapolate to 36.036 cents per share. Was that the deal or was it something else?

33.3% interest: Is that the deal, and is that McEwen's total holdings of shares, rights, warrants, options, and so forth, directly and indirectly?

Rob's vision for building U.S. Gold is exciting: Traders know McEwen is a visionary; they want to see his budget. How much capital is he going to raise for this company, for what purposes, over what time frame, etc.?

four of the six current directors of U.S. Gold have agreed to resign: It takes two minutes to sign the deal and for the exiting directors to resign, and an hour to put out a news release. Why is the news release a hypothetical?

It is planned that Mr. McEwen will be assuming the role: This grammar could stand as a definition of the word obfuscation". Did he sign the agreement or not?

shortly following the planned resignation: Did the exiting officers and directors tender signed resignations to the remaining board members or not?

U.S. Gold's Tonkin Springs property is exciting: I have never read about a precious metals prospect that didn't look exciting. The question is, are they bankable? Apparently under Mr. Reid this one is not, and the inference is that under Mr. McEwen, it very well may be, but to find out, we'll have to wait until he gives us more detail about what he calls a great asset" and interesting property" he plans to aggressively explore".

existing gold resource of 1.4 million ounces: Are these resources proven, probable, possible or the night dreams of Mr. Reid? Frankly, I'd like to see a reference to an independent geologist's opinion when I read statements like this.

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I don't want to rain on Rob McEwen's parade, and I'm not. Like I say, he is a serious guy who has paid his dues and made a gazillion dollars the right way, by earning it. I respect him a lot, and I have written about that a lot.

But there is a huge difference between a goldmine and an exploration play. That's why I always refer to goldminer producers". They produce gold, and run a real business. The exploration plays are speculations, not investments. They don't produce gold, and even if they are likely to, the number of shares to be issued will be substantially changed from the present day, and there will be many ups and downs before that day.

In fact the only business these people in an exploration office run is a fax machine, and raising money to pay off promoters, sub-promoters and sub-sub-promoters. Promotion, you know, clearly leads to a higher share price. Then a part (usually not much) of that money from selling shares at still higher prices goes to geologists and drillers, and so forth.

McEwen knows all this, and he's likely to spend your money, along with his, wisely.

At the end of the day, though, this Tonkin Springs property is bankable or not. Then in the years following that, it's mineable or not. Then in the years following that, it's a profitable mine or it is not. Then, ...well, you know the rest.

How many traders have the patience to wait that long? It is my experience that the people who buy promoter's stories quickly lose interest when they discover the reality.

In fact, in the 28 years since the Reid family founded U.S. Gold, how many corporate names, how many financings, how many exciting properties, how much aggressive exploration been done, and how many dollars lost by shareholders? I ask, not because I know a single thing about USGL.OB " I don't " but because it is a pink sheet stock of a company that has been around for 28 years.

The stock was 38 cents this Summer and is now $2.80 (yesterday's close), which is a market cap of about $90 million, vs the market cap in June of $12 million. Given that the tax losses, incorporation and regulatory costs, and shareholder list and so forth were worth say $2 million at the end of June, that's quite a bump from the end of July when McEwen is presumed to have invested $4 million.

Again, maybe I'm wrong. Maybe the U.S. Gold drilling program struck it rich in the past six weeks.

Yes, truly I could be mistaken about all of this. The fact is I looked at the news release and the summary/prices from Yahoo Finance. Took me two minutes, which, come to think of it, is about how much time otherwise smart people spend to consider these situations before investing" real money.

Posted by Posted by Bill Cara on September 22, 2005 02:53:38 PM | Category: Penny Stocks

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