Friday December 20, 2013 11:48
During a time of continued stagnation in both share prices and sentiment in the mining sector, Rob McEwen, Chairman and Chief Owner of McEwen Mining, was kind enough to share a few comments.
Of particular interest to investors, Rob noted that the next move higher for the sector will likely be driven by a combination of rising gold prices, combined with new discoveries. The mantra of “growth for growth’s sake” is still alive according to Rob, but the companies who implement “big data” within their operations will likely generate better returns for investors going forward.
Here is his full interview commentary with Bull Market Thinking’s Tekoa Da Silva:
Tekoa Da Silva: Rob, I remember during the summer months the team there at McEwen Mining began adding language into company statements which basically read, “We’re looking to put together smart deals with other companies and if you’ve got something in mind, give us a call.”
Based on the feedback in response to that announcement, what would you say is the willingness out there right now in the marketplace in terms of people coming together to assemble unorthodox types of deals?
Rob McEwen: We received a number of suggestions from our shareholders, from general investors, and institutional investors. In many instances, the people making the suggestions were already shareholders of the companies they were suggesting we look at.
In some cases, I would say more institutional investors than retail were looking for large premiums over the current market to put the company together which was more than we wanted to do, [but suggestions are] still coming in. So the call for ideas I think was a very useful exercise. There’s certainly a wide array of companies out there and we haven’t quite fixated on one at the moment, but we’re still looking.
TD: Do you feel the longstanding ideas and philosophies that got some of the big mining companies into trouble—are those still being clung on to right now to the detriment of some of those companies?
RM: Well, the concept of growth—while everybody might talk about growth, the big question is “How are they going to finance it?” That’s throughout the industry [right now]. So it’s somewhat putting a cap on the growth of the industry because there’s [limited] access to capital and it’s much more difficult today, but the mantra of growth for growth’s sake, it’s still alive and kicking in the industry. [Otherwise], everybody is looking for a very conservative way to play the market which I think might be misguided.
People are looking at cash flow and margins. The next run in this market is going to be gold moving higher, but it’s also going to be lifted by discoveries and in this type of market, people are saying, “Oh, I don’t want to look at exploration.” But I think right now that’s when you should be looking [at it] because there are going to be some good stories and that’s what has pulled companies out of the doldrums before and they will do it again.
TD: Rob, considering the rhetoric by some of these companies of things like, “Hey, we’re going to shed our non-core assets”—is value starting to sort of ‘sprinkle down’ into the mid-tier and junior sector, maybe from the majors that are looking to get rid of things?
RM: There are some interesting deals starting to be done [as] we’re in a market where doing a cash deal to buy an asset is [becoming] quite difficult. So people are taking back shares of companies to execute a sale, to get some of their more marginal assets [sold] off.
Some of the big company sales probably have large company overhead on those assets as well. So they could be attractive to an intermediate or a junior where it runs a much leaner operation. It doesn’t have to have heavy overlay that comes with large companies. So yes, there will be opportunity in this market.
TD: Rob, you’ve also spoken in the past about pushing your management team to think outside of the box. I would think especially so, here in this down market. What sort of ways have you been continuing to think on that aspect and of course adding encouragement there?
RM: When you’re pressed against the wall, and you’re feeling you don’t have a lot of access to capital, you start reevaluating everything you’re doing. Everybody in the industry is I think doing it right now.
Scarcity is the mother of invention. So in terms of innovation, you look at all of your costs in saying, “Can we build something for less?” And the market is accommodating that right now [as] with the downturn in activity, if you want to do exploration, your assay times are shorter, and a couple of the areas where we’ve gone in and tried to improve the timeframe say for getting a permit, for drilling. We’ve gone in and rather than taking a bulldozer and clearing a road through a forest and carving out a drill pad, we started getting drills that we can break down and the parts could be carried in and assembled on site. It’s [also] something like an above ground swimming pool to hold all of the drilling fluids that are coming out of the process rather than digging a large hole in the ground and having a lot of remediation to do to the site.
So there’s that element on exploration and if you can [reduce] time on your permitting applications—we’ve been quite successful recently getting permits in Mexico where we’ve submitted it and usually you have it come back and you have to address this and this.
Recently, we got our permit on our first application [submission]. So [this market] is cutting out time and expense. That’s part of the push, saying, “How can we do this better?” and I think everybody is out there now looking under every rock, trying to figure out where they can find some money that they might be able [to use] to advance the project.
[Even] if you get the money, you don’t necessarily want to build the mine in this type of market environment…you need quite a positive outlook to build right now.
TD: Have you seen this sort of rush towards efficiency in the past, maybe in previous bottoms whether it be in 1991 or 2000—the ‘scramble to save’ if you could put it that way?
RM: Absolutely. It’s a repeat and the other aspect of the period, is you will see a number of mines that have been built that aren’t performing to the levels that were promised. There was a big article in The Northern Miner in the early 90’s where they talked about all the mines that were operating well below expectations, that were built when there was a flush of money that came through the system [along with] shortages of most inputs.
These plants were built and they didn’t perform up to the level expected, then their values went down and people picked them up, [so] that was a good time to enter the market if you’re a mining company picking up assets much cheaper than they were a couple of years earlier.
TD: Rob, is it usually younger management teams maybe without the firsthand experience that seem to make those decisions, to put those projects into production or is there usually a paradigm of “Well, things are different this time because of the ‘New Age’ or because of the ‘new economy,’ etc.?” Is that what usually gets people into trouble?
RM: I won’t put it down to age and inexperience. I’ll put it down to the call of the market and the readily available capital. In 05’, 06’, parts of ’07, all you needed to do was have gold in your company name and you could raise money. Investors were very eager, anxious to have exposure to the mining industry and that lead to probably some inefficient allocations of capital, and gave the impression to the developing world that had welcomed mining in, that these foreign investors had unlimited amounts of capital.
Now we’re feeling the pain and the governments of those countries are sort of making policies based on – it’s like they’re driving their car but they’re driving it by looking in their rearview mirror. They’re looking at the prices that were [of] a couple years ago for the metals and they were looking at this rush of money [coming] in – [and] they’re now levying taxes that will ensure that the amount of investment going into their country slows dramatically.
TD: Would that suggest it would be best to wait for desperation to set back into many of those countries in order for them to call the capital back with more accommodative policies? Is it desperation that will do that, you think?
RM: Yes. I mean right now we have poor equity markets and rising levels of taxation all around the world. Even if someone wanted to build a mine, and they [were subjected] to the tax, they can’t get the capital. So somewhere in the not too distant future, these jurisdictions are going to go, “What happened to those crazy foreigners with the bags of money?” They’re not buying up the property and we’ve just built up all of our infrastructure to handle them and we’re looking for their tax revenues and they’ve disappeared. So it will take a couple more years before they turn around their policies and say, “Maybe we have to be more accommodating and compel this money to come back here.”
TD: In previous times that we’ve spoken Rob, you’ve mentioned that when it comes to philosophical change in the mining industry, it’s like putting your feet into a bucket of wet cement in terms of how slowly it moves.
But then we’ve got extremely fast moving financial markets where the shares can rally 50% to 100% within 30 days or less. So when you look at the juxtaposition of that slowness against the speed, how quickly can things turn around or how quickly can the light switches get turned back on again when we start to come out of this based on your experience?
RM: It can be very quick. I’ll give an example. We hit lows in July of this year and then in the month of August, metal prices turned around. The price of gold was going up but the mining stocks just took off. There were gains of 25%, 75%, 100% in the sector in the space of less than 20 days.
It wasn’t sustained unfortunately, but to me, that’s illustrating how we can move from a market that is operating basically on a no-bid basis, [where] no one wants to buy, to suddenly getting into a space where no one is offering any stock and the prices are forced up as a result of that. I’m quite convinced we’re going to see that again in the not too distant future and that’s what makes it exciting in this space.
TD: If I can ask you about gold Rob—what are your thoughts at this stage?
RM: Parts of the world are still buying gold. Russia is still buying gold and they publish their gold reserves monthly. China is still buying gold. There’s a lot of gold going through Hong Kong and through Mainland China.
Countries with large dollar reserves are using some of those reserves to buy gold and you have to say, “Well, why are they buying gold?” Large Central Banks aren’t selling their gold. The U.S. hasn’t been selling their gold for quite a while.
If it was a worthless [relic] and it was going down, then you’d think they would just get rid of it. [But] I don’t think there’s much more on the downside in gold. Maybe five percent. You look at the broad market right now. The stock market is quite high at the moment and on a relative basis, gold is very cheap. So I think some investors will be looking at relative value situations, and saying, “Maybe I should have some gold in my portfolio now?” It’s off quite a bit from its highs, and I still believe our monetary base is being debased and one needs to protect their capital.
TD: Rob, you are a builder of industry, the founder of Goldcorp as our readers probably know, in which you took the company from a $50 million market cap to $10 billion. When you think about getting rich, and becoming rich—based on your experience, what would you say are some of the characteristics that lead to becoming rich as an outcome?
RM: You need to be focused on your goal. You need to be persistent in your effort to reach that goal. It’s going to take you some time. It’s not going to happen overnight. I think you need a reasonable amount of curiosity and not follow the herd. If you’re doing what everybody else is doing, you’re not going to get there. And you need some luck.
TD: As a second part to that question--for people who are looking for other people to invest in, whether it be public companies or individuals, when you think about other people and deciding if you should invest your capital in them, what do you usually look for in defining those people, whether it’s the CEO of a company or otherwise?
RM: I look at what is their commitment in terms of the time and attention and effort they put in. I look at their financial commitment as well—are they backing their words with their money. Are they backing their words with their effort and focus? Where is the company [in terms of] how is it priced relative to the rest of the market whether it’s the industry they’re in or the market on a relative basis? Is it cheap or expensive? Do they have a product, and in the case of mining, do they have some competitive advantage? Is it a high grade deposit or is it a low cost deposit that gives them margins that allow them to survive downturns such as we’re experiencing now? Is there room to grow? Are they putting enough capital into it to achieve their plans? What have they done before?
TD: Rob, in winding down, do you think there’s anything we may have missed?
RM: Well, the mining industry is perceived as possibly being slow. I think if people take a look at it, they would be surprised by the amount of technology in there. There’s still a lot of application of technologies from other industries that can be applied to the mining industry to improve the economics of the industry. Those are going to be tried and are in the process of being implemented today.
It’s not an antiquated investment or industry. It’s moving ahead fairly quickly, picking up new technologies; from a mine in Australia using autonomous trucks that have artificial intelligence in them to sensing. I think the whole concept of ‘big data’ needs to be applied to mining in a very large way and some of the large companies are doing it, but that’s going to fuse itself through the industry over time and will generate good returns for those using it.
TD: Rob McEwen, Chairman and Chief Owner of McEwen Mining, thanks so much for sharing your comments.
RM: Tekoa, thank you for your interest.
By Tekoa Da Silva