Rob McEwen: Looking Ahead of the Curve
Rob McEwen, whose Midas touch in mining has been as transformational as anyone's, sat down recently for this exclusive, wide-ranging interview withThe 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: Six years ago you 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 Gold Report 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 producing 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. 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 in the 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 it 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.
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.
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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.