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Palisade Radio Host, Collin Kettell: Welcome to another episode of Palisade Radio. This is your host, Collin Kettell. On the line with us today is Rob McEwen. He is the founder and former CEO of the world’s largest gold producer by market cap and that is Goldcorp, of course. But Rob is now the current CEO and Chairman of McEwen Mining. Rob, welcome to the show.
Chairman and CEO of McEwen Mining Inc., Rob McEwen: Thank you, Collin, pleased to be on it.
CK: You know mining is arguably the worst business in the world. That is a quote from my friend, Doug Casey. It is a harsh statement, but there is some truth to be found there. Mining has not advanced significantly from a technological standpoint in the past couple decades. Political disruptions are always looming. You have the cyclical nature of the commodities which means constant ups and downs and then there is the environmental impact. But, obviously, there must be positive aspects of mining, and you have seen a lot of success in the sector. I want to start out by asking you, Rob, why have you dedicated your entrepreneurial endeavors towards mining?
RM: Well, I have a strong affinity for gold. I think it is money so I focused most of my attention on gold mining. There is some silver now but it is a precious metal as well. I think that the governments around the world, from time to time, are very abusive of their money supply and irresponsible with the amount of debt, and that individuals need to take steps to protect themselves against the actions of the government. Sometimes the governments get carried away with their zeal to make everybody happy and debase the currency and I think we happen to be in one of those times.
I also grew up in the investment industry. I spent eighteen years of my life in the investment industry, around gold bullion, gold mining shares. I met a number of promoters and a few of them did really well. One fellow in particular made a discovery and then lost it. He made a fortune, lost it; another discovery, another fortune, lost it. Third time, third discovery he kept his fortune. It demonstrated to me that all the big deposits in the world, all the exciting discoveries in the world have not been made and that is going to continue. It is an area when the gold market or the precious metals market is running, you have enormous gains that can be realized there.
It is also an industry, as you said, and quoting Doug Casey, that is a poorly managed business. Coming from the investment industry, I felt I had a different perspective than a lot of the people in the industry. I did not grow up with the same assumptions that became fundamental to my thinking about the industry so I was able to challenge them. I was able to import technologies and attitudes from other industries and put it into an old industry that is in great need of other perspectives. When you can do that you can ask questions that are difficult for people in the business to ask because it is not something they think about because of the fundamental unquestioned assumptions that lie in the industry.
I think it is possible to gain great financial rewards and with those rewards you can do a lot of good things with society and hopefully make the world better as a result of the gains you make in this industry. It is an industry where the probability of finding a new discovery is very, very low, but the possibility exists, and that is what is exciting about the industry. You can innovate, you can grow, and you can ride on the jet stream.
CK: Well that is exciting and it is a very true point. I want to ask you about the cycle that we are in today. You have been through at least a few of these ups and down cycles, and by some measures the one that we are in today in terms of the mining stocks has gone on longer and has gone down further arguably than any of the ones in the recent past. How much of the slump today is due to just normal commodity cycles of up and down, and is there anything that you can point to the blame for why we are in the situation that we are in?
RM: The slump is not that much longer. If you look back to the ‘70s, 1970 gold was $40 an ounce. It ran up to $200 an ounce so a five-fold increase by the beginning of ’74 when it became legal for Americans to own gold again. Two years later it was just below $100, around $96, and then in ’78 it got back up to $200. There was a four-year period where gold was down and then recovering. There were some pretty big losses there, losses of value, a lot of people discouraged by the performance of the industry. We saw it again, in ’99, 2001 where gold was down at $250 an ounce.
When I look at the industry it is cyclical. Investors have to keep that in mind that there will be a time it is going to go the other way, and that is just the nature of the beast. But I would say right now the state of the market is determined by the US dollar price of gold. Everybody seems to be fixated on the dollar price of gold and they are saying, “Alright, gold is off 45% from its high. The big gold stocks, the leaders are down even further. Their balance sheets are encumbered by heavy debt load. Their income statements are being reduced in size by hedging, by selling metal streams, by selling royalties, and just the low price of metal.” People are saying, “I do not want to be here.”
But if you look at gold in other currencies it is going up. In some currencies, in the Canadian dollar, in the Australian dollar it is 25% off its old high. If you would look at gold in Russian rubles or in Brazilian real it is at all time high. It is higher than what it was back in Sept 2011 when it was US $1,900, but in their local currency it is much higher. If you go back, again, to the ‘70s, the late ‘70s, in Sept. 1979 gold was $400 an ounce and then by January of ’80, three, four months later, it was up to $800 an ounce. During that period the gold shares did not run as much as gold. In fact it took until Sept of ’80 before the gold shares hit their high. But gold in January was $800 and then it fell off to $650, and what the market was not appreciating was Sept of ’79 at $400 and Sept ’80 it is $650. Gold is up more than 50% and you started seeing couple of quarters linked together of increasing cash flow and higher earnings, and that is when the market started buying.
Today we have a very similar situation happening in that Canadian, South African, and Australian gold stocks are all starting to generate healthy cash flow and, in a number of cases, increasing earnings. Well, they are starting to get earnings and they are improving. These stocks are starting to move as a result of their local expenses are in their domestic currency, but the revenues are in dollar terms and the revenue lines have been opening up for them and they are making money. You are starting to see some interesting moves in the stock. I mean if you look at the 52-week lows and the current price of, say, the Dow, it is +5%. If you look at gold it is +7%. If you look at the GDXJ, the index for junior gold, it is up 12%, and the GDX, the senior gold stocks, they are up 13%, so better than twice what the Dow has done, low to current in the last 52 weeks. If you look at Barrick, which has gotten all sorts of terrible press, since October it is up 62%. Our own stock, we got beaten up badly, but since July of last year to now we are up over 80%.
This is a sector that a lot of people have gotten out of their portfolio. It is under owned. It is unloved, and yet it is starting to generate some very interesting gains and as more of those accumulate I think you will see more people coming into the market.
CK: I have heard a couple main themes in the last six months, the first one you just touched on with the Canadian and Australian dollars being relatively low against the US dollar. The other one has been the steep decline in oil prices. Rob, since you are the CEO and you are leading an actual mining company that sees the input cost of oil going into your production cost, I want to ask you how much of a significant factor you think that that actually place if that is going to help in the turnaround of these mining shares moving up?
RM: Collin, it depends on the type of mine and where they are located. For open pit operations fuel cost will be a definite consideration, an improvement in the economics; underground, it is to a much lesser degree. Then in certain countries, we operate in Mexico and Argentina. They subsidize our fuel cost so we do not have as much of a benefit as other countries where there is no subsidy by the government, but it had a definite improvement. If you would look at Australia, Canada, South Africa with their own subsidies, the impact of the fuel cost would be greater, a greater positive for those companies.
CK: Thank you for that Rob. On to McEwen Mining, I want to talk about some of the results which you just released last week. Reported record production for 2015 was 22% increase year over year which is fantastic. As far as I know you have over $30 million in cash and cash equivalents with no debt. I see you have really not only done a great job in this environment, but you built an even stronger company as a result of this bear market and very well-positioned to come out of it. What can you tell us about what is going on at McEwen Mining?
RM: Thank you for those comments. Well, as you stated 2015 was a good year for us despite our share performance. Production went up, cost went down, and we were generating cash flow in all quarters. Treasury increased so much so that we are able to declare a dividend or capital distribution and do some share repurchase. I think what it is largely about is having financial discipline in place so that you are not jumping whenever someone comes along and says, “Here is some money that you are not diluting your shareholders.”
A large part of that comes from my own holdings in the company. I own 25% of the company and my cost of those shares is $127 million. When I wake up each morning I am thinking not about how big the company needs to be, but how do we grow it in such a way that we increase the value behind every share and that is reflected in a higher share price?
I think companies like Remarco would be the classic case of what not to do. In their case they fought really hard to get a permit and they got their permit, unfortunately, at the bottom of the gold market, and they still wanted to build their mine. They rushed out and raised $300 million and diluted their shareholders by 80%. I do not think that is the way to build a mining company, and if one was a large shareholder in a company you definitely would not have done that. The gold is not going to go away and you can build up when the metal price is better and you can see strong returns for your shareholders.
We have not sold royalties or metal streams and we do not hedge. To me that is taking it all off the top line and in depressed metal prices it just further shrinks the margins so that when you look at the performance of companies that were the royalty companies and the metal streaming companies as opposed to the producers they gave away their margins and you can see the outperformance by the royalty companies and the metal streamers very clearly, and that is the price. People say, “Well, I will raise my money that way and it will be non-dilutive to my shareholders.” And that is true. But what they do not say is that it is giving up the profits that the shareholders were expecting to see.
To me it is like payday loans or a convenience store where you pay a premium for that convenience, you pay a premium for that money in this market. We have not done that and we will not do that because of the shareholders.
CK: Rob, one other event that has been going on is the New York Stock Exchange and I am reading this from a press release back in November stipulating that the average closing price of a listed company stock be above $1 per share. Of course, a couple months ago, McEwen Mining was struggling with keeping the dollar per share. But that may not be an issue anymore; you are well above the $1.20 a share. I do not know if you passed the required 30-consecutive trading days to maintain the NYSC listing, but what can you tell investors about that process?
RM: Yes, we received a notice back in July that we have fallen below the $1 level and if you are down for more than an average of 30 days. You take an average of 30 days your closing price below a dollar. They measure it at every month end. There will be this Friday. It will come up for review by the New York Stock Exchange and barring any major reversal in the gold price and the share price between now and Friday. I have my fingers crossed and my toes crossed. I think we have put that behind us or will have put it behind us by the close on Friday. They measure every month at every month end. I am hopeful, very hopeful it will not be an issue come close on Friday.
CK: Great! Thank you for that. Well, I want to ask you about the future looking out over the next few years. We just discussed that you have built a company that has lasted through a bottom and a bottom can only last so long. You have made predictions in the past for gold to hit $5,000 an ounce or above which is not an outlandish thing to predict considering it almost hit $2,000 already. What would the mining sector look like when gold is at $5,000 an ounce?
RM: Well, there will probably be a few more smiles in the industry. What will it look like? Well, I think right now we are going through a phase where there will be further consolidation. The seniors going into this are right now shedding assets. They are trying to pay down their debts. I think there will be new leaders out there and they will come from the ranks of the intermediates. There will be new names that will be leading the market ahead. They will have more aggressive management. They will probably see more ownership in the companies and they will be a little bit more careful at least in the next three, five years about how they build their projects, where they build their projects, and how much capital they need to build them. I would expect there should be a good margin in the business and we will be one of the better performing sectors in the market three, four years out.
CK: Okay. In terms of McEwen Mining, what does the next few years look like? I knew that you guys just brought on a new president a few weeks ago which is Colin Sutherland. He is going to be helping you with leadership moving forward and planning for hopefully better market conditions. But you did this with Goldcorp. You merged several companies together and you just made a Goliath of a mining company. I would assume that you are trying to replicate that success through McEwen Mining. What are your plans to do so?
RM: Our goal is to qualify for the S&P 500. You might wonder why? What drives me there are a couple of reasons. One there is a lot of money invested in the S&P 500 stocks. Index funds invested directly in the S&P had assets under management of more than $1.7 trillion, so a very large pool of money and there is only one gold stock in there and that is Newmont.
We have a gold and copper company, Freeport, but that is it in terms of the space of companies in that mining companies, precious metal companies in there, and 99.9% of all the precious metal companies in the world are non-American companies. In order get into this index you have to be an American company. McEwen mining is a Colorado incorporated company so we meet that fundamental test. We need a much larger market cap than what we have today. But I think over the next five years we can grow considerably. We are expanding what we do domestically and organically, but we will have to do one or two M&A transactions to get up to that size. Getting into the S&P 500 provides you a better shareholder base, a larger, more stable shareholder base, and a lower cost to capital, so it gives you competitive edge over all the other producers out there.
As I said this is an opportune time to be looking for opportunities to combine with other companies. It is much more inexpensive than it was three, four years ago, and that is the attraction. But first it was putting our company on a very solid basis where you are not pressured by debt. You have not given away revenue through metal streaming and royalties, and you are building cash. We are on the right foot going forward right now. That is where we are, achieve our goal and not build the comp any for the sake of size; build it for the sake of the underlying value per share and the share price.
I do not take a salary. I do not get a bonus. I do not have any options. I have not taken a salary or gotten a bonus for ten years. I am going to make my money exactly the same way my shareholders make money and that is through a higher share price.
CK: Well, that is certainly not an easy combination to find in the mining sector today. Before we end I just want to ask one last question pertaining to Argentina where, of course, McEwen has production and assets. The regime just changed down there and things have already been changing quite a bit. There has been an inflationary currency crisis down there the last few years. The new government, I believe, just let the exchange rate float. They are saying they are pro-business. Are you having or seeing any effects for McEwen from this new regime at this point?
RM: Yes we are. We have a mine in Argentina, our San José Mine. We own 49% and our partner, 51% partner, Hochschild Mining, operates it. The change in the currency and the removal of an export tax on doré gold which is the bar we pour at the mine will have an immediate impact on the cash flow and earnings of that operation. They have removed a lot of the restrictions on taking money out. We were never really subject to that. But they are moving quickly. They are very pro-business, very pro-mining. I think anyone with assets in Argentina are going to see those assets revalued by the marketplace as time goes by. I think a big hurdle for the country will be negotiating with their creditors in New York and getting that behind them and opening the capital markets to the country.
None of the ministers that have been appointed by the new government are career politicians. They are all people who came out of the business world and they are looking at their country and they want it to move forward. Out are the days where a very populous government spends to buy votes. I think Argentina is going to be the turnaround story of 2016 for the mining community.
CK: Alright, well, Rob, it has really been a pleasure having you on. I know you are a busy man and you have a busy schedule so thank you for cutting out the half hour to talk to our audience and share your story on McEwen Mining. I would give your coordinates and information, but everybody knows McEwen Mining and they know Rob McEwen so they know where to find you. Thanks so much for coming on, Rob.
RM: Colllin, it has been a pleasure. Thank you for your interest.
Rob has been associated with the mining industry for 29 years. His career began in the investment industry, and then in 1990 he stepped into the mining sector. Rob is the founder of Goldcorp Inc., where he took the company from a market capitalization of $50 million to over $10 billion. Rob is currently the Chairman, CEO and largest shareholder of McEwen Mining Inc. and Chairman of Lexam VG Gold Inc., exploring for gold, silver, copper, in Canada, USA, Mexico and Argentina.
Colin Kettel Palisade Radio www.palisadeglobal.com
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