Rob McEwen explains his rationale for $5,000/oz gold and $200/oz silver and how factors leading to those prices will affect the industry and comments on some of the companies with which he is currently involved.. Gold Report interview
Author: Zig Lambo and Sally Lowder
PETALUMA, CA -
The Gold Report: Rob, you've been quite vocal about your belief that gold will reach $5,000/oz. (ounce) and silver $200/oz. for silver. Why and when will that happen?
Rob McEwen: Your readers need to appreciate: Gold is money. It is currency. I think the number of people familiar with gold will grow as people see gold as a currency. China, India, Russia are buying gold to diversify their foreign reserves. To restore the confidence in currencies, I think some central banks, such as the Chinese and possibly the Russian, will increase their gold holdings to the level that the percentage of their total currency will be greater than that of any other currency in the world. At that point, they will assert that their currency should become the reserve currency of the world.
If you look at the last gold run, gold went from $200/oz. in mid-1979 to $800/oz. in early 1980. During the 10-year period of 1970-1980, we saw a 20-fold increase in the price, from $40/oz. to over $800/oz. We also had a 20-year low in 2001 of $250/oz. If you apply that 20-times multiple, you're up to $5,000/oz.
For silver, if you use the historic ratio of an exchange ratio with gold of 16:1, you get to $312, so $200 is conservative. I think we'll see these numbers within four years' time.
TGR: You are talking about a 15-year bull market for gold and silver, starting in 2001 and ending in 2015 or 2016?
RM: Yes. I don't think prices will necessarily fall dramatically, but gold and silver will reach the zenith of purchasing power relative to other asset classes. When gold peaked in 1980, Volcker was channeling up interest rates. If you had rolled out of bullion into fixed income then, you would have made a tidy gain.
TGR: Are you predicting prices of $5,000/oz. and $200/oz. as spikes, or plateaus that they will reach, stay at and trade around?
RM: I think you'll have a spike at or above $5,000. Credit will become more expensive, and at some point credit will be denied. There'll be a need for liquidity, and the metals address that need.
TGR: When prices reach those levels, any project that smells of gold or silver will become a prospect that people will try to put into production. Will we end up with a glut of gold and silver on the market?
RM: No, but the higher prices will spur more exploration. At the same time, it is getting harder to bring a mine into production. It takes longer and costs more. The regulators have put more rules in place. It is not so much that the rules are wrong, but it's the extended time frames. The risk of putting a property into production has gone up dramatically.
You're starting to see real limits on the amount of growth that can occur. In the 1990s and 2000s, very few people were going through mining schools because there weren't many career opportunities. The people who built the physical plants have scaled back. We are seeing the impact of that lack of investment in education, in the productive capacity of the suppliers and huge jumps in the capital expenditures for various projects. Labor wants a larger piece and you see a lot more labor strikes. Finally, governments are looking at the mining industry as a very easy target to extract more money from because the industry doesn't have a lot of friends.
TGR: There is also a problem finding mining engineers who have track records of putting projects with proven ounces into production. There is a lack of intellectual capital.
RM: You can see that manifesting itself all over the place. Coal mines in Australia are hiring miners from Tennessee. They commute between Tennessee and Australia on a three-week cycle. One headhunter told me he had an assignment to hire 400 people-mining engineers, geologists and related workers-for an iron ore mine. His instructions were to make offers 50% higher than their current salaries.
On top of that, the mines have been mining lower and lower grade, supported by the higher prices. Few high-grade deposits are being found. You have to put more capital in the ground and mine a lower quality or concentration of mineral to stand still.
TGR: Wouldn't that increase the value of mid caps that have experienced personnel on the production, mine building and engineering side? They know how to put projects with tricky deposits and lower grades into production.
RM: You're right. There really is a premium on production and on reserves. As the price of gold moves up, those mid caps will become more desirable to the seniors and attractive to investors. Companies doing exploration have proliferated. That creates confusion in the marketplace. Companies will have to go to greater lengths to differentiate themselves to attract capital. Perhaps that is one of the reasons why the exchange-traded fund (ETF) is so popular.
TGR: Could that explain why the juniors have lagged? Companies have projects that sound like they have great potential, yet the prices of most juniors are going nowhere.
RM: A couple of years ago, gold stocks had greater leverage than bullion; it was said that when bullion moves 1%, gold stocks will move 3%. People bought into that and they haven't seen the performance. Perhaps they were looking initially at the seniors for leadership, but the seniors have been standing still while the price of gold has been running. You can look at someone like Kinross Gold, which has been trading at a five-year low, or Barrick Gold, and a number of others. They just haven't delivered the performance. I think investors are asking, "If they are not delivering the performance, why will the intermediates or juniors deliver?"
With gold, whether you buy physical or an ETF, you don't have any political risk. You don't have taxation issues or labor strikes. You don't have senior management making an investment that you don't agree with. All of those variables conspire to take the enthusiasm out of the buying of the juniors. ETFs are an easy way to get into gold quickly at a lower perceived risk. I prefer to be in the juniors because they have the potential to explode to the upside if they are lucky with a discovery or they are in a right position next to a mine that is growing and the ore body continues onto their property.
TGR: As the chairman, CEO and largest shareholder of Minera Andes and US Gold, tell us what's going on with the possible merger?
RM: In mid-June, I put a proposal to the board of Minera Andes and US Gold to combine the two companies with an exchange ratio of 0.4 shares of the new company for every share of Minera and one share of the new company for each share of US Gold. The combined company would be a low-cost, mid-tier silver producer with a strong balance sheet, an income stream, a producing silver gold mine, a development pipeline of two silver and gold mines in Mexico and Nevada, and production out of Argentina. In June, if you combined the treasuries, there would be more than $120 million in cash, no debt, and trade liquidity on the NYSE. It would be a low-cost producer based on the production projections from our El Gallo and Gold Bar properties, anticipated to go into production in 2014. We would be producing silver using gold as a byproduct for a negative cost. With the gold credit, our cost of production would be less than $1/oz.
The board has formed independent committees and hired financial and legal advisers to determine the appropriate ratio. The merger has to clear the SEC, which takes 30-45 days. Thirty-five days after the SEC approval, the shareholders will vote. In the case of US Gold, I won't have a vote, so what the SEC calls the minority shareholders, who are actually the majority, will vote on the merger. Minera shareholders will take two votes on an "evaluation and fairness opinion," one with me voting and one without me voting.
So far, the market has suggested this is a good combination. Both share prices went up on the day the proposal was announced and have been performing better than the silver price, the gold price or the junior index.
When I announced this deal, on a combined basis, my cost base in US Gold was $50M and $60M in Minera. Combined, based on the market, my investment is worth about $350M. If you were to compare that to the CEO holdings of almost every other gold or silver mining company, it's right up at the top, about 27 times higher than the average CEO.
TGR: Congratulations. You'll have cash flow from the Argentinian project, the blue sky of the Mexican silver, and the gold in Nevada with the silver credits. I can see why the shareholders were enthusiastic. Do you have a name for the company?
RM: The name McEwen Mining has been proposed. Given that we will be in copper, silver and gold, that name isn't aligned with any one metal; it's more reflective of what we're doing.
TGR: You are also chairman of Lexam VG Gold . It sounds like on this deal you're following in the footsteps of your Lexam merger up in the Timmins Mining Camp. Did you use that as a template?
RM: I started off with five companies and did three corporate restructurings over a period of eight years to create Goldcorp and then bought Wheaton River Minerals to kick it up to another level.
One of my goals in US Gold was to qualify for inclusion in the S&P 500 in 2015. I think gold is under-represented on the S&P. Newmont Mining is the only gold stock listed there.
There is more than $1 trillion invested by index funds in the S&P 500. It's a market that can add stability to your base and lower your cost to capital. That is an engine for growth, a low-cost capital. We've met five criteria for inclusion and have two remaining. We need a market cap in excess of $5 billion and four consecutive quarters of earnings. This combination moves us much closer to that objective.
TGR: Can you expand on the Timmins Mining Camp?
RM: Lexam is exploring in the Timmins area in northern Ontario, historically the largest gold-producing area in Canada. Lexam has acquired a number of properties in the shadow of the headframe, the shaft, of some of the largest mines in the area. We have four drills going and released news about some interesting grades we found, extensions of vein structures that had been mined 40 or 50 years ago.
There are about 1.5 million ounces largely in an inferred resource. We are looking to get the remnants and to go deeper than previous mines. There are a couple of sweet spots that we want to explore. The company has no debt and it has about $12M in its treasury, which will allow it to explore for the next two years.
TGR: Are there any other topics you've been thinking about that might interests our readers?
RM: Right now we are looking at debt: the U.S. debt ceiling debate and the debt of sovereign states in Europe. I think any correction should be used as a time to accumulate.
The quiet summer is a good time to stake out the juniors and intermediates and take positions. We've seen periods like this where physical gold and the gold shares separate in terms of performance. In September 1979, which was just before the top in the gold price, gold went from $200 to $400/oz. in the space of a little over four months, but the gold stocks didn't follow. It was as if the market didn't believe the price of gold would hold up there. It wasn't until September 1980 that gold stocks reached their highs. I believe that the market had to see the impact of the higher gold price on the cash flow and earnings before they would buy the stocks.
I think we're in that period right now. I would argue that we are starting to see the seniors move-Barrick has been moving today with the gold price. These are incredible cash-flow generators right now. They are going to have to do something with their earnings, dividend them out or up their yields.
They also are going to look for growth. Barrick surprised everyone by buying a copper project, with cash. That was a curveball. I think they went into copper believing it was a better cash flow and cheaper than buying a gold property. Barrick is diversifying because they see opportunities. The seniors are doing deals to build the size of their companies, and that's positive for the intermediates and the juniors. The seniors have been reaching right over the intermediates into the junior-producer/junior-explorer side. The longer this gap exists, the more attractive the juniors and intermediates will become.
TGR: Here at The Gold Report we've seen our readership increase along with the exponential increase in investor interest in gold and silver. Most U.S. investors don't own mining stocks in their portfolios; do you think they will dip their toe into, if not bullion, then an ETF?
RM: Yes. The ETF has given more people exposure to gold. I liken the ETF to a mutual fund. It was often said that buying a mutual fund was the place to start investing in the stock market. Once investors become comfortable with the concept of being in the market, they start thinking about buying individual stocks because they think they understand how the market works.
I think the same principle applies to the ETF. Once investors are in there, they are going to start looking around and saying, "Well, this gold price is going to do very positive things to these mining stocks at some point. Maybe I'll rotate some of my money out of the ETF or I'll put in some additional money and it will go into individual stocks where I think I can see much larger gains down the road."
TGR: Rob, thank you for your time and insights.
If you look at the last gold run, gold went from $200/oz. in mid-1979 to $800/oz. in early 1980. During the 10-year period of 1970-1980, we saw a 20-fold increase in the price, from $40/oz. to over $800/oz. We also had a 20-year low in 2001 of $250/oz. If you apply that 20-times multiple, you're up to $5,000/oz.
For silver, if you use the historic ratio of an exchange ratio with gold of 16:1, you get to $312, so $200 is conservative. I think we'll see these numbers within four years' time.
TGR: You are talking about a 15-year bull market for gold and silver, starting in 2001 and ending in 2015 or 2016?
RM: Yes. I don't think prices will necessarily fall dramatically, but gold and silver will reach the zenith of purchasing power relative to other asset classes. When gold peaked in 1980, Volcker was channeling up interest rates. If you had rolled out of bullion into fixed income then, you would have made a tidy gain.
TGR: Are you predicting prices of $5,000/oz. and $200/oz. as spikes, or plateaus that they will reach, stay at and trade around?
RM: I think you'll have a spike at or above $5,000. Credit will become more expensive, and at some point credit will be denied. There'll be a need for liquidity, and the metals address that need.
TGR: When prices reach those levels, any project that smells of gold or silver will become a prospect that people will try to put into production. Will we end up with a glut of gold and silver on the market?
RM: No, but the higher prices will spur more exploration. At the same time, it is getting harder to bring a mine into production. It takes longer and costs more. The regulators have put more rules in place. It is not so much that the rules are wrong, but it's the extended time frames. The risk of putting a property into production has gone up dramatically.
You're starting to see real limits on the amount of growth that can occur. In the 1990s and 2000s, very few people were going through mining schools because there weren't many career opportunities. The people who built the physical plants have scaled back. We are seeing the impact of that lack of investment in education, in the productive capacity of the suppliers and huge jumps in the capital expenditures for various projects. Labor wants a larger piece and you see a lot more labor strikes. Finally, governments are looking at the mining industry as a very easy target to extract more money from because the industry doesn't have a lot of friends.
TGR: There is also a problem finding mining engineers who have track records of putting projects with proven ounces into production. There is a lack of intellectual capital.
RM: You can see that manifesting itself all over the place. Coal mines in Australia are hiring miners from Tennessee. They commute between Tennessee and Australia on a three-week cycle. One headhunter told me he had an assignment to hire 400 people-mining engineers, geologists and related workers-for an iron ore mine. His instructions were to make offers 50% higher than their current salaries.
On top of that, the mines have been mining lower and lower grade, supported by the higher prices. Few high-grade deposits are being found. You have to put more capital in the ground and mine a lower quality or concentration of mineral to stand still.
TGR: Wouldn't that increase the value of mid caps that have experienced personnel on the production, mine building and engineering side? They know how to put projects with tricky deposits and lower grades into production.
RM: You're right. There really is a premium on production and on reserves. As the price of gold moves up, those mid caps will become more desirable to the seniors and attractive to investors. Companies doing exploration have proliferated. That creates confusion in the marketplace. Companies will have to go to greater lengths to differentiate themselves to attract capital. Perhaps that is one of the reasons why the exchange-traded fund (ETF) is so popular.
TGR: Could that explain why the juniors have lagged? Companies have projects that sound like they have great potential, yet the prices of most juniors are going nowhere.
RM: A couple of years ago, gold stocks had greater leverage than bullion; it was said that when bullion moves 1%, gold stocks will move 3%. People bought into that and they haven't seen the performance. Perhaps they were looking initially at the seniors for leadership, but the seniors have been standing still while the price of gold has been running. You can look at someone like Kinross Gold, which has been trading at a five-year low, or Barrick Gold, and a number of others. They just haven't delivered the performance. I think investors are asking, "If they are not delivering the performance, why will the intermediates or juniors deliver?"
With gold, whether you buy physical or an ETF, you don't have any political risk. You don't have taxation issues or labor strikes. You don't have senior management making an investment that you don't agree with. All of those variables conspire to take the enthusiasm out of the buying of the juniors. ETFs are an easy way to get into gold quickly at a lower perceived risk. I prefer to be in the juniors because they have the potential to explode to the upside if they are lucky with a discovery or they are in a right position next to a mine that is growing and the ore body continues onto their property.
TGR: As the chairman, CEO and largest shareholder of Minera Andes and US Gold, tell us what's going on with the possible merger?
RM: In mid-June, I put a proposal to the board of Minera Andes and US Gold to combine the two companies with an exchange ratio of 0.4 shares of the new company for every share of Minera and one share of the new company for each share of US Gold. The combined company would be a low-cost, mid-tier silver producer with a strong balance sheet, an income stream, a producing silver gold mine, a development pipeline of two silver and gold mines in Mexico and Nevada, and production out of Argentina. In June, if you combined the treasuries, there would be more than $120 million in cash, no debt, and trade liquidity on the NYSE. It would be a low-cost producer based on the production projections from our El Gallo and Gold Bar properties, anticipated to go into production in 2014. We would be producing silver using gold as a byproduct for a negative cost. With the gold credit, our cost of production would be less than $1/oz.
The board has formed independent committees and hired financial and legal advisers to determine the appropriate ratio. The merger has to clear the SEC, which takes 30-45 days. Thirty-five days after the SEC approval, the shareholders will vote. In the case of US Gold, I won't have a vote, so what the SEC calls the minority shareholders, who are actually the majority, will vote on the merger. Minera shareholders will take two votes on an "evaluation and fairness opinion," one with me voting and one without me voting.
So far, the market has suggested this is a good combination. Both share prices went up on the day the proposal was announced and have been performing better than the silver price, the gold price or the junior index.
When I announced this deal, on a combined basis, my cost base in US Gold was $50M and $60M in Minera. Combined, based on the market, my investment is worth about $350M. If you were to compare that to the CEO holdings of almost every other gold or silver mining company, it's right up at the top, about 27 times higher than the average CEO.
TGR: Congratulations. You'll have cash flow from the Argentinian project, the blue sky of the Mexican silver, and the gold in Nevada with the silver credits. I can see why the shareholders were enthusiastic. Do you have a name for the company?
RM: The name McEwen Mining has been proposed. Given that we will be in copper, silver and gold, that name isn't aligned with any one metal; it's more reflective of what we're doing.
TGR: You are also chairman of Lexam VG Gold . It sounds like on this deal you're following in the footsteps of your Lexam merger up in the Timmins Mining Camp. Did you use that as a template?
RM: I started off with five companies and did three corporate restructurings over a period of eight years to create Goldcorp and then bought Wheaton River Minerals to kick it up to another level.
One of my goals in US Gold was to qualify for inclusion in the S&P 500 in 2015. I think gold is under-represented on the S&P. Newmont Mining is the only gold stock listed there.
There is more than $1 trillion invested by index funds in the S&P 500. It's a market that can add stability to your base and lower your cost to capital. That is an engine for growth, a low-cost capital. We've met five criteria for inclusion and have two remaining. We need a market cap in excess of $5 billion and four consecutive quarters of earnings. This combination moves us much closer to that objective.
TGR: Can you expand on the Timmins Mining Camp?
RM: Lexam is exploring in the Timmins area in northern Ontario, historically the largest gold-producing area in Canada. Lexam has acquired a number of properties in the shadow of the headframe, the shaft, of some of the largest mines in the area. We have four drills going and released news about some interesting grades we found, extensions of vein structures that had been mined 40 or 50 years ago.
There are about 1.5 million ounces largely in an inferred resource. We are looking to get the remnants and to go deeper than previous mines. There are a couple of sweet spots that we want to explore. The company has no debt and it has about $12M in its treasury, which will allow it to explore for the next two years.
TGR: Are there any other topics you've been thinking about that might interests our readers?
RM: Right now we are looking at debt: the U.S. debt ceiling debate and the debt of sovereign states in Europe. I think any correction should be used as a time to accumulate.
The quiet summer is a good time to stake out the juniors and intermediates and take positions. We've seen periods like this where physical gold and the gold shares separate in terms of performance. In September 1979, which was just before the top in the gold price, gold went from $200 to $400/oz. in the space of a little over four months, but the gold stocks didn't follow. It was as if the market didn't believe the price of gold would hold up there. It wasn't until September 1980 that gold stocks reached their highs. I believe that the market had to see the impact of the higher gold price on the cash flow and earnings before they would buy the stocks.
I think we're in that period right now. I would argue that we are starting to see the seniors move-Barrick has been moving today with the gold price. These are incredible cash-flow generators right now. They are going to have to do something with their earnings, dividend them out or up their yields.
They also are going to look for growth. Barrick surprised everyone by buying a copper project, with cash. That was a curveball. I think they went into copper believing it was a better cash flow and cheaper than buying a gold property. Barrick is diversifying because they see opportunities. The seniors are doing deals to build the size of their companies, and that's positive for the intermediates and the juniors. The seniors have been reaching right over the intermediates into the junior-producer/junior-explorer side. The longer this gap exists, the more attractive the juniors and intermediates will become.
TGR: Here at The Gold Report we've seen our readership increase along with the exponential increase in investor interest in gold and silver. Most U.S. investors don't own mining stocks in their portfolios; do you think they will dip their toe into, if not bullion, then an ETF?
RM: Yes. The ETF has given more people exposure to gold. I liken the ETF to a mutual fund. It was often said that buying a mutual fund was the place to start investing in the stock market. Once investors become comfortable with the concept of being in the market, they start thinking about buying individual stocks because they think they understand how the market works.
I think the same principle applies to the ETF. Once investors are in there, they are going to start looking around and saying, "Well, this gold price is going to do very positive things to these mining stocks at some point. Maybe I'll rotate some of my money out of the ETF or I'll put in some additional money and it will go into individual stocks where I think I can see much larger gains down the road."
TGR: Rob, thank you for your time and insights.
Source: http://www.mineweb.com/mineweb/view/mineweb/en/page103855?oid=133848&sn=Detail&pid=102055
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