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Rob McEwen on preserving upside for shareholders

We are at the beginning of an uptrend in gold, according to Rob McEwen, Chairman and Chief Owner of McEwen Mining Inc. McEwen notes that the advent of negative interest rates is “causing a lot of people to question, where do they keep their cash, how do they hold their investments?”

McEwen notes that the big companies, always slow to change, have not yet adjusted their policies to match the new reality: “They basically have sold their growth, and it’s going to take a while before they are going to focus on growth again.” The intermediates and the juniors are nimbler, so we are seeing the capital markets opening up and giving them capital for exploration.

The challenge McEwen sees for McEwen Mining is to secure support from the big brokerage companies by getting into the S&P 500. He plans to do that over the next three years with a combination of organic growth in production and M&A.

Crucially, McEwen highlights the importance of preserving the upside for shareowners. McEwen Mining is unhedged and has no royalty agreements. In this way, they don’t put a cap on the upside. He notes that in down markets, management gave the profit margin to royalties and metal streaming. McEwen sees this as very shortsighted: “To me it’s a Faustian bargain – you’re getting something you need right now, but there is a longer-term much higher cost – you have sold your soul.”

The transcribed interview with Rob McEwen has been edited for clarity and brevity. Who are you?

Rob McEwen: I am Rob McEwen, Chairman and Chief Owner of McEwen Mining Inc. (MUX on the NYSE). What is McEwen Mining?

Rob McEwen: It’s a young company that has big aspirations. We have two mines right now and two development projects: a gold mine in Mexico; a silver-gold mine in Argentina; a development project in Nevada and another one in Mexico. Are we in a recovery right now?

Rob McEwen: A recovery? I think we are at the beginning of a new uptrend in gold. How come?

Rob McEwen: Well, it’s overdue. There’re a couple of factors here; one is the debts piling up are making a lot of governments actually insolvent. They have expanded the money supply aggressively and debased the currency, and those are contributing factors. But on top of that you have the advent of negative interest rates – that is causing a lot of people to question, where do they keep their cash, how do they hold their investments? The big argument against gold in the past used to be that it costs you money to store it – well, now it’s costing you money to store cash with negative interest rates! And people are starting to think, what about insurance companies, banks, pension funds, and annuities, how are they going to meet the promises they made when right now you have 12 trillion dollars of government debt that carries a negative coupon? They will never make the 5, 6, or 7 percent returns that they were looking for, so they have to look for more risky investments – and that makes people very anxious, and so people turn to gold. What is being done differently in this market now that it is in recovery?

Rob McEwen: Well, I think the big companies haven’t changed their minds yet. They are large companies. It’s like if you had an aircraft carrier and tried to turn it around, you couldn’t spin it on a dime, it would take a couple of days. In large mining companies it will probably take a year or two before they can change their situation. They have been in a cost containment mode, with cost cutting, trying to improve their margins, and trying to get rid of their high cost operations. They basically have sold their growth, and it’s going to take a while before they can start  focusing on growth again. The intermediates and the juniors are much more agile and alert to opportunities, so we are starting to see exploration companies, the capital markets are opening up and giving them capital so they can go and explore. There has been some consolidation by the intermediates, but that I think that is going to step up. One of the big changes in the capital markets was the number of intermediaries that disappeared. Brokerage firms  were servicing the resource sector – and there was no business for the last two and a half to four years – so they ran out of business and closed their doors. So a lot of the funding of the very small companies is going to be hard, and it’s an industry that is dominated by big banks and big brokers. So I think, in our case, our goal is to get into the S&P 500. We’re a little over a billion dollars market cap and we need five billion to get into the S&P 500. We have some organic growth that could increase our production by 60% over the next three years, but we will have to do some M&A to get to the 5 billion dollar threshold to get into the S&P 500. Why is it important that McEwen Mining is unhedged and has no royalty agreements?

Rob McEwen: It’s very important, in my mind, to preserve the upside for our shareowners. The people who sold royalties, who sold metal streams or hedged, are basically putting a cap on the upside. If you are a shareowner or shareholder and you are buying my shares because you think the prices of gold and silver are going higher, you probably don’t want to see me putting a cap on that upside. And that’s why I have been so adamantly opposed to it. In down markets the royalties and the metal streams effectively stole the profit margin – they didn’t steal it but management gave it to them, sold it to have enough financing to do whatever they want to do. But it’s very shortsighted. To me it’s a Faustian bargain – you’re getting something you need right now, but there is a longer-term much higher cost – you have sold your soul. What’s it like doing work in Argentina right now?

Rob McEwen: Much better – much, much better. Argentina was a basket case for the last couple of years. There’s a new government that’s very pro business. I will give you an example: we have a mine down there which is a joint venture with a partner. In 2012 we received a dividend of 20 million dollars. In 2015 we received a dividend of 500,000 dollars. This year the budget was done up using 1,050 gold and $14 silver, and they said you are going to get a dividend of 7.5 million dollars this year, much better than the $500,000. But that was at a much lower metal price, so we have already received the 7.5 million dollars this year. If you were to take the difference between what the budget was done at and the current, it’s $270 higher per ounce gold and it’s $5.60 higher for silver. So if you annualized it, that translates into better than a 30 million dollar improvement in the cash flow for our portion, our 49% ownership, so from $500,000 the year before. The government is very pro business; they have removed the export taxes on mineral concentrates and doré, which is an unfinished bar of gold or silver. And we have another project down there which is a large copper deposit, and that’s had a very positive impact on it because we had designed a plant there that wouldn’t produce a concentrate so it wouldn’t be exposed to the 10% export tax. We are now looking at a different design and we think there are very big inroads into the capital; we think we can drop the CAPEX by 40% and drop the OPEX by at least 10%. So we are quite excited about that and we will have a study out on that property by the end of the summer. But it’s 20 billion pounds of copper, if you put it on a gold equivalent and include the gold and silver credits there, it would be the equivalent of 35 million ounces of gold. So it’s a huge deposit with better than a 35-year life once in production. What’s the state of mining regulations these days?

Rob McEwen: It’s cumbersome, it’s more extended than before, so if you make a discovery it’s going to take you longer to put it into production and you’re likely to face higher operating costs than you would of in the past, because there are more people wanting to take pieces out. What is your interest in architecture?

Rob McEwen: Architecture, ah. Well, there is a McEwen School of Architecture at Laurentian University in Sudbury, Ontario. I come at it from two fronts: one, from Grade 2 to Grade 12 I knew exactly what I was going to be, I was going to be an architect – and maybe I wasn’t as diligent in my last year of high school, so architecture didn’t happen. But about 15 years ago I was putting some companies together and I said, “Ah, I am still doing architecture, only its financial architecture – building companies!” So, one was a love of architecture and a real appreciation for elegant, efficient, functional design. Two, my first hands-on exposure to the mining industry was the summer after my first year of university. I went up to Sudbury and worked for International Nickel as an underground miner. At the end of the summer the mine caption said, “If you apply for a scholarship, you will likely get one.” And I said, “Well, thank you very much for that recommendation, but I’m not going to be in mining, that’s not part of my career plan.” Sudbury and mining introduced me to an industry I never thought I would get into, but I met with great success in it. The architectural program is quite interesting because it is taught in French and English, and it’s First Nations elders giving consultation advice to the architectural students. It’s a Design-Build program, which makes it a bit unusual; they experiment with materials and build all sorts of structures. And it’s dealing with a sustainable, green, cold climate and also innovative uses for lumber and timber products. Thank you very much for your time.

Rob McEwen: You’re welcome Michael, thank you.

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