Insiders say There’s Gold in Them Hills!

By Michael Brush
Exclusively for InvestorIdeas.com
July 31 2008

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A tiny gold exploration company called US Precious Metals (USPR) looks just like the kind of risky bulletin board penny stock you’d want to avoid.

• It’s bleeding cash. The company lost $3 million in the quarter that ended in February.
• It’s a highly speculative bet that remote land in southwestern Mexico -- where it has mining rights -- might contain gold, silver and copper that can be extracted for a profit.
• The company admits it needs to raise more capital, to learn more about the viability of its holdings.

Promising early results

Yet a few things stand out about this $35 million market cap mining play.

In the past three months, insiders have purchased about $600,000 worth of the stock for between 56 cents and 91 cents a share. (The stock recently traded for 75 cents.)

The buying immediately preceded a flurry of news releases suggesting there’s gold in them hills – or at least in some of the 42,000 acres in Southwestern Mexico where the company has mining rights.

These early testing results are another thing that stands out about the company. In late June and early July US Precious Metals put out press releases saying it has core samples showing some parts of its land holdings contain as much as a 0.05 to 0.12 ounces of gold per ton, and 6-7 ounces of silver per ton. The test results, paid for by the company, translate into concentrations of gold and silver worth $100 to $300 a ton.

Those can be quite profitable concentrations in the mining industry.

“The preliminary results are very promising,” says US Precious Metals chief Jack Kugler. “We have pretty big concentrations of gold copper and silver. We have 42,000 acres of land in the heart of the mineralized zone in that part of Mexico.”

David Burney, a geologist for the company, described the early results as “phenomenal.”

One key now is whether the valuable minerals can be extracted at low enough costs to produce healthy profits.

The properties

US Precious Metals properties are mainly located in the southern portion of the states of Michoacan and Sonora, which is in the southwestern Mexico. It controls the mineral concessions to a property known as Solidaridad in southern Michoacan, which it got in exchange for 1.5 million shares of company stock, plus an agreement to give the owners $1 million if it trades away the rights.

The company also has agreements with the owners of southern Michoacan properties, known as La Paz and El Diamante, in exchange for a percentage of proceeds. And it has an exclusive option to conduct geological studies on six mining sites near Caborca in the state of Sonora, Mexico, which expire next year.

The plan

The company’s most recent quarterly statement says it plans to drill 20 holes over the next twelve months to test the viability of its holdings. So far, it has released results on about 3-5 drill holes.

US Precious Metals also needs to build new roads and drill pads so it can test in remote areas of its holdings. In early June, the company announced it had submitted an environmental impact study needed to mine in the Michoacan region. Approval will grant the company the right to build new roads and allow it to apply for a mining and ore processing permit.

It’s not clear exactly how much money the company needs to get all this done. Again, filings project the costs over the next year or so at $1.9 million. But the company raised $1.4 million during the quarter ending in February, and it now has $1.1 million in cash. So while the company needs to raise more cash it’s not clear how much – and Kugler declines to clarify that.

The talent

US Precious Metals was spun out from American International Ventures (AIVN) in 2004. It operates in Mexico through a subsidiary called U.S. Precious Metals de Mexico.

Here’s one thing that might make you a little cautious about this company. Top management and directors include an assortment of colorful characters who have extensive experience in a wide variety of businesses – often far away from the realm of mining.

Jose Garcia, the president of the Mexican subsidiary, has a background in the restaurant business in New York, according to company filings.

Director Peter Toscano, serves as chairman of International Power Group (IPWG), a company set up to convert waste to energy. Its stock has fallen to around seven cents a share from about$1.75 at the end of 2005. Until 2001, he was with a fabric recycling and reprocessing business in Brooklyn, which had operations in Mexico City, Mexico.

Two board members who recently resigned were a ceramics engineer, and a former builder who also served as a consultant in the seafood business and had brokerage experience.

Only one board member, Brian Russell, appears to have extensive experience in mining – as a geologist who worked in the South African mining business.

All of this could change, and the company could bulk up on board members with more mining experience – if the early test results are sound enough to attract industry talent. Indeed, this could be one test to watch as a confirmation that the business holds promise, in addition to that insider buying.

The bottom line: We’ve had good luck with the few small-cap mining companies where there was insider buying, but never anything this early stage. The buying here and early test results are quite compelling, but I wouldn’t go overboard on position size.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site. For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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