Mining executive Rob McEwen spoke with SmallCapPower correspondent Angela Harmantas recently, with the former Goldcorp CEO talking about his company McEwen Mining bouncing back from a robbery, explaining how junior gold miners can remain profitable in this environment and what is driving his belief that the gold price will bounce back in a big way.
By Angela Harmantas
Rob McEwen is one of the more vocal members of a diminishing minority of gold bugs. He certainly has the experience to back his claim that gold will hit US$5000 an ounce in the not-too-distant future: over his 25-year mining career, he grew Goldcorp into a multi-billion dollar company that ranks as one of the world’s largest producers of precious metals. Today, as the Chairman and Chief Owner of McEwen Mining (TSX: MUX), he is hoping to achieve the rarified status of becoming one of only two gold companies on the S&P 500 (the other being Newmont Mining).
There have been a few setbacks for McEwen Mining this year, however. In April, a brazen robbery occurred at the company’s flagship El Gallo 1 mine in Mexico, a loss of nearly $7.6 million in revenue. And the beating that gold stocks are taking in the market thanks to a depressed gold price has caused MUX shares to fall to levels that threaten its inclusion on the NYSE. In addition to these insular challenges, the entire gold industry is struggling to maintain a positive outlook as gold plummeted recently to less than US$1100 after China dumped nearly 5 tons of bullion and Morgan Stanley analysts predicted gold could soon hit $800.
The market may have been unkind to gold miners so far in 2015, but Rob McEwen has seen more than a few cycles over the length of his career. His belief in the fundamentals of the precious metal remains firm, and as a 25% shareholder of MUX, there is much at stake for him personally. In an interview with SmallCapPower.com, Rob McEwen shares how MUX bounced back from the robbery, how junior gold miners can remain profitable and why he thinks that the gold price will bounce back in a big way.
You’re steadfast on your $5000 gold price target despite the fact that gold has dropped steadily over the past year. What are the signs you’re seeing that justifies this price in the longer term?
Investors seem to be very complacent. The velocity of money has slowed considerably – it’s actually the lowest it’s been in 60 years. The Dow Jones Industrial Average and NASDAQ are reaching higher highs but the number of people participating in the market has decreased. A lot of companies are doing buybacks rather than improving their productivity. I do think we are seeing inflation and even though the government is claiming that there’s no inflation, there are very few items going down in value. The fact is, our dollar buys less than it used to. There’s a belief that central banks can control the markets but that’s not realistic. Going through this low spot is uncomfortable but as an investor, it’s an interesting time to take your first position in gold and view it as a form of insurance for your portfolio. Look at 5-10% of the value of your portfolio and put it into an area that’s been heavily sold – there are some attractive values at these level – and then wait, because there will be a turn.
You’re still one of the few gold bugs left. Why are you still so bullish in your outlook?
I’ve experienced a number of commodity cycles in my career and there is always an upside. At some point, everyone who was going to sell will have done so, and those few who want in will find that no one is willing to sell at that level, so there will be large upward share price spikes. We saw a spike in August 2014, and in January 2015 we saw short periods of very strong runs. Now, it’s a compelling time to a buy and hold!
Is gold still the safe haven investment that it has been over the past few years?
I would say so. When most people buy gold it’s because they are looking for protection for their portfolios. Some diversification at this level is not expensive, and could pay large dividends in the future.
We talk about the low gold price in 2015 but at one point in your career gold was $400 and miners were still profitable. Now, we see miners unprofitable at $1100 gold. Why can’t these juniors make money – is there something fundamentally different in the way that the industry is conducting itself that make it so difficult to make money at this gold price?
Much of the difficulty is because the grades being mined today are much lower than in previous years. To counter this, plants have become larger and input costs have increased. However, profitability can and will change according to currency values. We saw this eight months ago when most Canadian producers were barely making any money, but a swing in the Canadian and Australian dollars allowed producers to generate positive cash flow.
What are your thoughts on the massive gold price routing a week ago in the market?
I think a lot of shareholders are throwing in the towel and declaring gold a lousy investment. They see other sectors moving a lot faster and want to get out of precious metals. But this just means that it’s a good time for other investors to get in. I’m doing it personally as the largest shareholder (25%) at McEwen Mining – all of the money I receive from the dividend will be reinvested into the company. What’s in store for McEwen Mining for the remainder of 2015 and into 2016? This year we are expecting our best production year, producing nearly 138,000 oz of gold equivalent. Most of this is due to our El Gallo mine in Mexico, where we expect to see around 50,000 oz produced at a lower cost than previous years. We did experience a gold theft at El Gallo 1 but our insurance has covered 80% of the loss, and we’re still hoping to recover the remainder. Our treasury is strong: we have no debt or sell royalties or metal streams, which I think are quite detrimental to the industry, particularly when margins are being squeezed. We declared our first dividend that will be payable on August 1, 2015.
So paying a dividend can be done in this gold price environment?
Absolutely. I’ve always viewed dividends as a form of discipline for management. You have to pay some “economic rent” to the shareholders as we continue to build our share price.
Should investors be wary of Mexican gold stocks in light of the theft that McEwen experienced at El Gallo?
Gold robberies are rare, but there is a criminal element present in Mexico. We’ve taken quite a few additional steps to raise the deterrent: improved boundary fencing, time delays for entry, and Mexican state police present each time we’re pouring and delivering. While it’s another risk that investors may not have previously considered, the probability of a theft occurringremains low. However, shareholders may want to ask their companies just how safe their facilities are.
Finally, do you have any words of advice for investors interested in small-cap gold stocks to weather this volatile gold price environment?
Look closely at the company’s balance sheet to check their debt levels – the smaller the better. See if they have a treasury large enough to take them through the year without them having to go back to the market. Avoid companies who sell royalties and metal streams. I think that’s the way you should look at a small cap company – the ability not just to survive, but also to be in a position to take advantage of opportunities that come along.
