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Rob McEwen, whose Midas touch in mining has been as
transformational as anyone's, sat down recently for this exclusive,
wide-ranging interview with The Gold
Report. Hoping we manage
to avoid the "darkest hour" he envisions, he describes fearsome
parallels between the Weimar Republic of the late '20s and early '30s to the
United States of today. Fast-forwarding to the future, he also explores a few
of the things the mining industry might do to start making itself invisible
in terms of environmental impact.
The Gold Report: We see a lot of troubling scenes
on the global economic landscape-from the bailouts in Europe to ever-increasing
deficit spending in the U.S. to talk about a housing bubble about to burst in
China. What's your view of all of this turmoil?
Rob McEwen: I think the economic news will continue to get worse.
We've had a lot of monetary stimulation by the governments of the West. In
Europe, we're seeing that not only were corporations levered, but governments
used off balance sheet techniques to alter the appearance of their
financials. Greece and Portugal and Italy and Ireland are all part of that,
but I suspect it's even larger. It all goes back to people taking advantage
of very easy, low-cost credit, believing the economy would continue to grow
endlessly.
Then people began to realize they got overextended. In the Middle East and
Far East, nations started moving money out of dollars into alternative
currencies, the most significant of which was the euro about a year to 18
months ago. Iran said they were going to price oil in euros because they
thought the dollar would get weaker and weaker and wouldn't be defended by
the U.S. government. China started to diversify its huge foreign reserves out
of dollars. They viewed the euro as the alternative to the dollar. Of course
today there's a tremendous rush out of euros.
Europe's as much a mess as America, but ironically, the dollar now offers
refuge because you can take money out of the euro (or any other currency) and
put it into a dollar very quickly. From that standpoint, America looks better
than Europe right now, but I believe that's a short-term view. It won't be
long before people look around and say, "Let's not forget about the
debts and the weakness in the U.S. economy. Where do we go next?"
TGR: What about gold?
RM: Gold came down but it's only temporary. The trend is up. Gold ETFs
are surging ahead right now. We don't need much of a move in terms of
percentage of assets into gold to start seeing some very powerful moves. The
pressure is building up and we're getting closer to a boiling point where
we'll see gold go quite a bit higher.
TGR: You have projected gold to be at $2,000 by the end of the year
and $5,000 further out. A big part of that was based on what you were just
explaining. It's growing debt, the uncertainty in fiat currencies, and
ultimately the inflation that will result. Do you anticipate any sovereign
debt defaults or U.S. state defaults that may abate this impending inflation?
RM: Definitely. Individuals and corporations and states and countries
all grow accustomed to certain income streams. We're approaching that point
when someone will say, "We can't lend you any more, certainly not at
these rates. Interest rates have to be a lot higher and your collateral has
to be better." It's almost inconceivable that major Western nations
could be in that position-but everybody should be thinking about that
possibility.
I recommend Tom Cammack's book, The Inflation Nation: Wise Investing in a
Foolish Age. It's a quick read that very succinctly puts out a message of
where we are and why we should be concerned about it. The environment we're
moving into will steal money from the conservative, the prudent, the cautious
investor-through currency debasement. You need to read a book such as
Cammack's to appreciate what's going on. I'd hope that will motivate readers
to shift their thinking. They have to understand that they have to work to
protect themselves because I see a time coming that's going to be very
painful. I hope it doesn't come, but I think it will.
TGR: Describe that worst case scenario.
RM: I can see strong parallels between what happened in Germany post
World War I, the Weimar Republic, and what's happening in America today. That
might seem a big leap, but if you know your history, you know that Germany
entered World War I as one of the richest and most powerful nations in the
world. It did a lot of damage in Europe but it lost the war. The Allied
nations that fought Germany said, "Look, you have to pay for it,
compensate us for all this damage. We're going to take the few working
factories you have left and you're going to owe us this big debt."
Post World War I, the U.S. was the largest creditor to Europe and to Germany,
lending for the reconstruction of the continent. At one point Washington
said, "We're not going to lend you any more money." Germany had
huge debts to repay, but no tax base. Industries had not survived. Most areas
of employment had been reduced to rubble. The German government responded by
printing money.
TGR: That sounds familiar.
RM: In 1919 you could buy an ounce of gold, valued at $20 at the time,
with 170 German marks. Germany kept printing money to pay their debts and to
keep money in circulation, but food prices, clothing prices, housing prices
all started climbing. Inflation started to soar. If you go forward to
November 30, 1923-about four-and-a-half years later- to buy that same ounce
of gold took to 87 trillion marks.
TGR: Impressive illustration of hyperinflation; 87 trillion as opposed
to 170.
RM: It was terrible. German citizens whose money was denominated in
German marks were wiped out. If I'd had the equivalent of $1 million in
German marks in January 1919, it would have been all gone before the second
year had passed. Let's try $100 million. That's a huge sum of money today,
but back then it was colossal. But if you had the equivalent of $100 million
in German marks in your German bank account, you would have received less
than one penny for it if you tried to convert those marks into dollars by
September 1923.
TGR: Considering the U.S. role in conflicts around the world, would
America face a situation like Germany did, where the conquerors come back and
demand reparations?
RM: Well, if you go back to 1980, America was the world's largest
creditor nation, undisputedly the most powerful, and it had a very strong
industrial heartland. Today, large parts of that industrial heartland have
been outsourced to the developing world, while the U.S. has become the
largest debtor nation in the world, with China being its largest creditor.
China's enthusiastic participation in U.S. Treasury auctions has declined
measurably. Suppose they were to stop buying Treasuries altogether. Suppose
suddenly the lending to America that allowed our lifestyle to be what it is
stopped. Remember, the tax base has been hollowed out by outsourcing, and a
lot of people are unemployed because there aren't enough jobs. Many people
would have to declare bankruptcy.
TGR: And meanwhile, the printing presses run, as they did in the
Weimar Republic about 90 years ago.
RM: Exactly. What governments can do is print money. The U.S.
government can make sure dollars circulate, but each dollar they print buys
less. The only value in any paper currency or what is called fiat currency
derives from confidence in the underlying issuer. The Fed printing dollars
endlessly without concern for U.S. debt-that's the darkest hour I see.
In prior periods of hyper inflation, keeping your wealth in bank accounts was
probably one of the worst places to keep it. Such periods drives everybody
who wants to survive to become a speculator, to take on debt, to do all the
things that aren't prudent in normal times. But in these days, an era where
the government is printing huge amounts of money, it is the prudent, the
conservative, the majority of citizens who are the most harmed.
TGR: And I'd assume they hold gold. If it gets to your projected
$2,000 by the end of the year, we're looking at about a 70% return in a year.
Under those circumstances, would gold be a better short-term investment for
conservative investors than equities, with equities having all the
operational and political and discovery risk?
RM: Gold bullion should be a key component of anyone's gold investment
strategy. Yes, gold could outperform the gold shares. Your readers should
understand that at certain times the price of gold bullion and gold shares
can go in different directions. One instance was back in late 1979-80 when
the price of gold ran up from about $400 to $800 per ounce in four months but
the gold stocks basically stood still. It was as though the market said that
gold price wasn't sustainable. Gold peaked in January of 1980, but the gold
stocks didn't reach their peak until a full nine months later when the
positive impact on earnings was clearly evident.
TGR: Would it make sense to over-leverage on gold short-term and then
shift over to the juniors when gold looks as if it's peaking?
RM: I happen to like having a portion in bullion and a portion in
juniors, but most would consider my portfolio skewed to the high risk end of
the investment spectrum. An investor who wants exposure to gold should own
some bullion. They could buy some seniors. Seniors will participate in this
move, but there could be some shocks to the system, too.
TGR: Shocks such as?
RM: In a few jurisdictions, governments are already putting in excess
profits taxes, and I'd expect other governments to do the same. It's a very
short-sighted move that can reverse capital flows dramatically in future
investment in those countries, but these governments are thinking that mining
doesn't have a lot of friends, and therefore taxing them will fill some
short-term need without creating a lot of noise.
TGR: Speaking of seniors, at PDAC, you said that you don't agree with
growth for growth's sake, and that you like to see acquisitions that enhance
share value. Many of people we've interviewed recently project a time of
mergers just ahead because some majors need to replenish their reserves. That
sounds a lot like growth for growth's sake.
RM: I do believe we're entering a period of increased M&A activity
in the mining sector. The growth curves of most majors are flattening. They
have to replace reserves and bolster their growth profiles to keep current
multiples. They have the ability to make acquisitions now, because they've
been benefiting from higher gold prices.
It is important to appreciate that the junior exploration companies have no
revenue, no earnings until they put a discovery into production while the
intermediate and senior producers have money coming in now that is building
up in their treasuries, and this group also has greater access to capital.
The intermediates and seniors have a definite advantage, which I expect they
will start using soon.
One problem with M&A is the pursuit of growth for growth's sake, which
very often leads to excessive dilution, due to paying high takeover premiums.
You are usually better off owning shares in the target company rather than
the company making the takeover.
As an investor all you have to do is look at the compound annual growth rates
(CAGR) for share price of some of the big ones once they started making major
acquisitions-Barrick Gold Corporation (NYSE/TSX:ABX), Goldcorp Inc. (NYSE:GG;
TSX:G), Yamana Gold Inc. (TSX:YRI; NYSE:AUY; LSE:YAU), Kinross Gold
Corporation (TSX:K; NYSE:KGC), Newmont Mining Corporation (NYSE: NEM; TSX:
NMC). Their share price growth rates have definitely slowed.
For instance, Barrick share price's CAGR was plus 50% from '85 to '94. But if
you held it from '95 to the present you would have realized a disappointing
2% compound annual growth rate. You can get carried away fairly easily with
M&A activity, once you get into the chase and premiums get ramped up.
Existing shareholders of the acquiring company get diluted. That's why I
suggest looking to the smaller explorers that are close to production and the
junior producers with growing reserves, because those companies are likely to
attract a premium in this market. I don't think many of the mining companies'
management really care about growth per share. They might say it, but their actions
haven't demonstrated it.
TGR: You've indicated that you like to buy under certain criteria-when
there's been a market correction, where odds favor finding a large discovery
because other large discoveries are nearby, or where technology has changed the
game. If you're buying now, which of these criteria drives your investment
these days?
RM: At the moment I'm developing a couple of large purchases. I think
US Gold Corp. (TSX:UXG, NYSE.A:UXG) will have a big silver mine in Mexico and
I'm quite intrigued by some work Minera Andes (TSX:MAI: OTC:MNEAF) is doing
in Argentina. At this point I'm inclined to put more money in these projects
that I'm working on when we need to do financing, as opposed to stepping
outside. I can just see a better return, personally.
TGR: Well stated. You bring up US Gold. Tell us why US Gold is one of
the leading gold mining companies and a good opportunity for investors.
RM: We have a large land package in Nevada next to Barrick's Cortez
Hills Mine, which is a very large gold mine that should produce a million
ounces this year. We're exploring for a similar Cortez Hills type deposit. In
the interim, we have a preliminary economic assessment on one part of our
property for a small gold mine that would provide 50,000 to 60,000 ounces of
gold for six to seven years. The next step is to complete a feasibility study
and expand the size of the deposit.
The real excitement has come from our Mexican properties, where we own about
half a million acres. We started drilling on a target in November '08, and
it's grown quickly. We'll have a resource estimate out by early July. It's a
high-grade silver deposit that starts at surface and extends down to about
500 feet. I expect this discovery will become a low-cost open-pit mining
high-grade, high-margin silver mine. It's gone from nothing to quite a large
area-over 1.5 kilometers long and still growing.
We think within our half million acres, a couple of other areas have a chance
of growing into deposits that could be mined. We have the largest exploration
program being staged by a junior in Mexico right now. It's an $18 million
program to do 100,000 meters of drilling. We're going at it very quickly.
News on this property has been coming out every three weeks since the start
of the year. It's quite exciting. We have money to go at a pretty aggressive
pace for the next two years. I also like it because I think we can produce
silver at low cost.
TGR: What leads you to believe that?
RM: A close model to what we believe we could have is Pan American
Silver Corp. (TSX:PAA; NASDAQ:PAAS)'s Alamo Dorado silver mine, which is
located several hundred miles away. While the geology is different, most
other aspects are similar. It's a near-surface deposit mined by open pit
methods, the strip ratio is low, the ore is milled and labor and fuel costs
are expected to be comparable. They're doing about 5 million ounces of silver
a year at a cost of about $5 an ounce. While we haven't completed all of our
numbers, general indications are that we should be within that range plus or
minus 20%. That's a really good start, and it wouldn't require huge amounts
of capital to get up and running in the next two-and-a-half to three years.
At the end of March 31, 2010, US Gold had in excess of $33 million in cash
and another $4 million in gold bullion. We believe gold bullion will go
higher so rather than just sitting on cash and earning a paltry interest
rate, we've bought some gold.
TGR: And you own 21% of the company. I like that-putting your money
where your mouth is. You also mentioned earlier that you're developing some
of your large properties and doing some financing. That didn't sound like US
Gold.
RM: Right. Minera Andes. It has a 49% interest in the San José
Mine, a producing silver/gold mine in southern Argentina. I bought into this
company because that area's geology looks an awful lot like Nevada's. It's
located next door to a discovery where Andean Resources (TSX:AND, ASX:AND)
has outlined 2.5 million ounces of gold. There are few places in the world
like Southern Argentina from an exploration standpoint. Amazingly, this area
had not been explored until 20 years ago. Since then four mines have started,
and one or two more mines are slated to go into production in the next couple
of years. San José has just under 80 million ounces of silver and
silver equivalent. By dollar value, its production is about 50% silver, 50%
gold.
TGR: What else is Minera Andes up to?
RM: Minera Andes also has a large copper project with an inferred
resource in excess of 11 billion pounds of copper, located in northern
Argentina. It's a major copper project, larger than 83% of the undeveloped
porphyry copper deposits in the world.
One way to look at Minera Andes is its large assets on a per share basis. So,
behind every share is an inferred resource of 42 pounds of copper,
one-seventh of an ounce of silver and silver equivalent and 5 cents in
cash-and it's trading for under a dollar. With copper at over $3 and silver
close to $18, it's an interesting combination of assets. There are just a
couple of issues that need to be worked out in that company but I like the
scale of the assets. They're global.
TGR: Isn't Rubicon Minerals Corporation (NYSE.A:RBY; TSX:RMX) another
junior you have a major investment in?
RM: I am not part of management or on the board, but I do act in an
advisory role and I do own 21% of Rubicon. When I left Goldcorp Inc.
(NYSE:GG; TSX:G) and bought into US Gold, I thought I'd leave the rest of my
money in Goldcorp, collect the monthly dividends and watch the share price
zoom over $100. Unfortunately, the new management that I put in place went
out and bought a number of projects, including Glamis Gold, for which they
paid a 30% plus premium and issued 80% of the stock without a shareholder
vote. After spending $1 million in legal fees trying to battle for a
shareholder vote against the 22 lawyers Goldcorp hired to deny shareholders a
vote, I decided it was time to sell my interest and look for other more
promising investments.
Since then, I have made large investments in exploration companies when the
market has corrected and when these companies needed money. My terms were few
but specific: I'd offer input as to how they could build their companies but
not serve on their Boards, I required a veto on major acquisitions,
divestitures, joint ventures, and first right of refusal on future financings
for a period of up to two years until I got to know the management better.
TGR: Why not be a director?
RM: I consider some of the corporate governance issues are another tax
on shareholders. They distract directors and management from building value
per share on a sustainable basis. There's a lot of box checking. Did I do
this? Did I do that? It's a large transfer of wealth from shareholders to
lawyers, accountants and other advisory groups jumping into this feeding
frenzy.
Rubicon has about $100 million in their treasury and a large land package in
a very prolific gold area-Red Lake. They've had good exploration success. The
stock's been under considerable pressure since their second financing last
year, but I think they're pretty much through that now. They're positioning
themselves underground to get a better shot at the structures they're
drilling. These are high-grade, narrow structures and not all the holes hit.
They're good geologists, have a great property, very well financed so no
problems with money. It's just a matter of time. In Red Lake it pays to
explore aggressive and be patient for the discovery.
TGR: Apparently you like the geology further north in South America,
too.
RM: Yes. Guyana Goldfields Inc. (TSX:GUY). Back in a much earlier time
in earth's history, it is theorized that South America and Africa were part
of the same land mass. The rocks that make up Africa's Gold Coast fit nicely
into the rocks of the northern part of South America. They're the same rocks.
Africa's Gold Coast has a long history of producing gold; the history of
producing gold in what's called the Guiana Shield-in parts of Guyana,
Venezuela, Suriname, French Guyana and northern Brazil-is spottier, but the
similar geology seems to be over a large area. Guyana Goldfields went in
there in 1996. Big land package. They're continuing to drill and get good
results. They're getting close to 5 million ounces. I got to know Claude
Lemasson, who's basically running the show there today-the operations,
exploration and most of the marketing-when he ran Goldcorp's Red Lake Mine.
It's one of those candidates that you'd think at some point a larger company
would pick it up. They'd want companies with growing reserves, the higher the
grade the better. The larger the resource, the more attractive exploration
company is to the senior companies.
TGR: To make it worth their while.
RM: Yes. For instance, if Barrick's going through close to 8 million
ounces a year, buying a company that has 5 million ounces doesn't even cover
one year's production. They would have to look at a resource thinking it
could grow to maybe 10 or 15 million ounces.
TGR: Switching gears completely, you have earned a reputation for
being ahead of the curve in the mining industry. For instance, you were using
3D models in mining back in 2000. You put out the online challenge to find
new resources. You've applied investment insights to what had been an
industry totally focused on geology. What do you see ahead of the curve for
mining now?
RM: The industry needs to get more serious about making a smaller
environmental impact. It has to look at nontraditional sources of energy, and
take advantage of the solar, wind or hydroelectric resources. It has to move
toward becoming almost invisible in terms of its environmental and visible
impact. Granted that's pretty hard when you're digging a big hole, but it
needs to do it.
The car industry has got knocked aside by people coming out of the computer
industry who basically said, "We use lots of compact and portable
batteries. Why don't we use that technology and create an electric car?"
That's going to happen to mining. Someone is going to come along with smaller
power sources, more efficient recoveries. They'll camouflage facilities so
they disappear into the background. There's a responsibility to have a
smaller footprint and I believe it will also improve the economics of mining.
TGR: Have you made any progress along the lines of leaving a smaller
environmental footprint?
RM: On the exploration front in Mexico, US Gold is using smaller
drills and equipment to minimize the surface disturbance. Looking ahead in
Argentina to a day when we will be producing copper in the high Andes, we
have been looking into opportunities to reduce our dependence on diesel fuel
with wind generators, solar and hydroelectric alternatives. It is very early
days for us but that's our direction.
When I was running Goldcorp and we built our mine in Red Lake, we did some
innovative thinking in terms of air circulation in the mine. Even though we
kept pushing on it, most people told us there's a compromise. If you want to
build the mine quickly, go with tried-and-true technology. If you want to
test some of these other technologies, you're going to slow it down. We
didn't want to slow it down, but as you mentioned, we put a 3D virtual
reality lab on site, which was the first of any mine in the world. You could
see the whole mine and all the infrastructure and the deposits and how it was
going to be developed. It was a great tool for communicating among
geologists, operations people and management people-who don't get close
enough to the mine. Geologists say they can see in 3D, but I think they're
the only people that can see in 3D.
TGR: Did you slow down production to implement these technologies?
RM: We did a couple of things differently in a couple of areas, but in
terms of large systems for air moving around and preheating it with some of
our other equipment, we didn't do it to the degree we could have. Part of
that was trying to get through the door as fast as we could. There's also a
great reluctance in industries that are driven by engineers to use new
technology.
TGR: Why?
RM: If they're wrong, their career is over or certainly a pause button
has been pushed. Investors view the industry as risky, but most people in the
industry are very risk-averse-probably the same as in the auto industry and a
lot of big organizations. Hierarchies are well developed and don't embrace
change in a bear hug.
TGR: "Embrace change in a bear hug." That's good for a
bumper sticker. Thank you for your time and your insights, Rob.
Rob McEwen, whose association with the resource industry spans nearly three
decades, serves as CEO of US Gold
Corporation
and chairman of its board of directors. Five years ago, when he also became
the company's largest shareholder (now owning more than 21% of US Gold's
outstanding shares), the company held 36 square miles within Nevada's Cortez
Trend; its land position now contains 170 square miles. Rob joined the Minera
Andes board of directors in August 2008 (at which time he held nearly 25% of
the company's shares), and took over as president and CEO a year ago. He
started building his reputation as the founder of Goldcorp, which has what is
still considered the richest gold mine in the world in its Red Lake Mine in
Ontario. He took Goldcorp from an investment company with $50 million market
capitalization to one of the largest gold-mining companies in the world with
an $8 billion market capitalization by the time he retired from the company.
Throughout Rob's career his efforts have been recognized with awards such as
Canadian Business' Most Innovative CEO, Northern Miner's Mining Man of the Year,
Ernst & Young's Ontario Entrepreneur of the Year (2002) and Prospectors
and Developers Association of Canada (PDAC) Developer of the Year. A 1969
graduate of St. Andrews College-where the McEwen Leadership Program was
modeled on Rob's vision-Rob went on to obtain a bachelor's degree from the
University of Western Ontario. He earned his MBA from York University's
Schulich School of Business, where he serves on the Dean's Advisory Board,
holds the Alumni Recognition Award for Outstanding Executive Leadership
(2007) and provides generous financial support. He also holds an honorary
Doctor of Laws Degree from York University. With community-oriented efforts
focused on encouraging excellence and innovation in healthcare and education,
Rob's generosity helped establish the McEwen Centre for Regenerative Medicine
at the Toronto General Hospital and support the Red Lake (Ontario) Margaret
Cochenour Memorial Hospital.
DISCLOSURE:
1) Gold Report publisher Karen Roche personally and/or her family own
shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Rubicon, Goldcorp and Guyana.
3) Rob McEwen: I personally and/or my family own shares of the following
companies mentioned in this interview: Goldcorp, Rubicon, US Gold.
The
Gold Report
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