A great time to be buying gold shares - McEwen McEwen Mining CEO, Rob McEwen, talks about why gold is still going up, why gold shares are well priced and the group's first gold pour at El Gallo II.
mineweb.com
Interviewer: Geoff Candy
Posted: Wednesday , 03 Oct 2012
Download this interview Welcome to this week's edition of Mineweb.com's Gold Weekly podcast. Joining me on the line is Rob McEwen - he's the CEO at McEwen Mining. Rob the last time we spoke was in March 2010 - a few months before the US announced its first round of quantitative easing and in many respects while a lot has changed many of the underlying fundamentals for the gold price and gold price movement haven't really changed much since we spoke.
ROB MCEWEN: That's very true - I think there's a growing although it's still small - understanding that gold is money. It's just like any other currency only its better because it's not fiat currency or paper currency and if you were to look at that rather than looking at how gold has gone up in respective currencies since say 2001, if you looked at it and said "how much have these currencies lost in terms of purchasing power relative to gold". I would argue not many people are looking at it like that. So if you'd had a choice of only taking your money, whether its dollars or euros, pounds and putting it into gold back in 2001 to try to protect the purchasing power, the Australian dollar which is one of the stronger performing currencies, its lost 69% of its purchasing power in the last 10,5 years relative to gold. The American dollar has lost 85% of its value in the last 10,5 years and I don't think a lot of people are looking at gold that way - that it is a currency, that it does preserve value.
Just look at the creation of debt, either through the European central bank or through the Federal Reserve or central banks throughout the world, and they're still creating enormous amounts of money and they're doing it through the creation of debt.
The US gross national debt has just crossed $16tr and they said in their budget in February that it was going to go to $26bn by 2022. And we all know the politicians are notorious for overshooting their budgets...
GEOFF CANDY: Which is indeed a terrifying thought... It's interesting though because one does get the sense that for a while there was much made about this fact to some extent and that gold was viewed as a safe haven and that phrase was mentioned numerous times, in headlines and that kind of thing, that seemed to diminish somewhat and it started trading in the same way or in the same sort of vein as a risk asset. What's going on there in terms of peoples' views of gold as a safe haven?
ROB MCEWEN: There are more people thinking that way. You're looking right at the top central banks, whether they be Chinese or Russian or in the Middle East, are buying gold and other central banks that were inclined to sell gold, aren't that way today. So here you have central banks holding monetary assets in gold and some increasing, and as we go down the road I can see countries competing to show how strong their currency is by how much gold they have backing it. And I think that's China's game right now, to come out of this period with the strongest currency in the world and the strongest economy.
GEOFF CANDY: Can you see a more formal role for gold in the monetary system? One gets the sense that it's increasingly a much more legitimate asset class.
ROB MCEWEN: Very much so. Gold, for most people, is an invisible asset. They don't even consider it and so when I gave that example of the loss of purchasing power most people look at their bank accounts in their currency and say "I have this much money". It's just not buying as much and there is an asset that has been increasing in value relative to their currency significantly and we're going into a world that is awash with debt and awash with fiat currency and gold offers a place where you could put your money and preserve value. We've had 30 or 40 years of massive debt creation, credit expansion that to keep it up will mean that governments will have to keep debasing their currencies in just massive amounts. The concept of $16tr of gross national debt growing to $26tr - those are mind numbing numbers that people can't get their head around and the politicians around the world, particularly in the western world, are stealing from their citizens as they try to correct what's happening in the economy, try to get it to recover. But in doing so, they're making all of their citizens much poorer, they're stealing from them.
GEOFF CANDY: Indeed. In terms of the future for gold for the markets you've made no bones about the fact that you do see gold going higher than this as a result indeed of this devaluation of currencies. How do you see things unfolding and what role do you see gold playing?
ROB MCEWEN: I see gold going to $5,000 an ounce before the end of this cycle. You can get to $5,000 in a couple of ways but in the last run for gold from 1970 through 1980 it went basically from $40 to just over $800. So let's call that a twentyfold increase and if you applied it to this cycle where we started with a low of $250 an ounce in 2001, apply 20 times that, you're at $5,000. If you inflation adjust the high of $850 back in 1980 and look at it in today's dollars you'll be in the $2,100 to $2,200 range and our governments are showing no sign of easing up on their quantitative easing so I can see that propelling way beyond that $2,200 right now, closer to the $5,000. Will it have a more formal role - it could, if say someone like China or Russia comes along and say we've got the strongest currency. There is a battle to move the US out as a reserve currency. The reserve currency should have the integrity, the respect and the backing that justifies being called the reserve currency and the dollar right now is unfortunately losing that position in the eyes of investors around the world. And we've even seen gold thrown into the presidential election so there's a small segment that says let's get back to this monetary discipline, and on the other side of the world they're not waiting, they're buying. They're active buyers and encouraging their citizens to buy gold because they don't hold dollars, buy gold with the dollars that you have because it's becoming less valuable each day.
GEOFF CANDY: Now you've been a proponent of gold for many, many years now and with McEwen Mining that focus is still there but, increasingly, with McEwen Mining there's an element of importance being attached to silver as well. What is behind that and what are your views of the silver market?
ROB MCEWEN: You're right I've been through Goldcorp, running it, it was all gold and when I got to start off with US Gold which subsequently became McEwen Mining, we were looking for gold in Mexico and we found silver as well. So as long as you can mine precious metals such as silver and gold at very economic prices, then it's worthwhile pursuing and silver because of its lower dollar value per unit per ounce, you're going to have more people going in there and it would be more of an everyday form of money because of its lower unit cost than gold. I do think that it will follow gold and there will be times when silver will probably outperform gold as it's done in the recent past.
GEOFF CANDY: When you were with Goldcorp your focus was very much on making sure that it was a pure gold play and there was much talk then and now I suppose as well about the premium attached to gold mining stocks. Perhaps a premium that was a lot more justified when gold was at $250 an ounce than say now at say $1,600 or $1,700. What is your view of the gold premium that's been placed on the stocks - it has definitely come down. Is it likely to reach the heights that it once did?
ROB MCEWEN: It's a really good question because when I bought Wheaton River and put it into Goldcorp back in 2005, Goldcorp was trading at a 2,5 to three times multiple of its net asset value and Wheaton River was attractive to me because it produced the same amount of gold as we did at Goldcorp and it also produced copper, but it was trading at one times net asset value and I could see by combining the two we could get a very positive lift. In fact I said to the shareholders we should expect to see our share price increase by two to three times in the next 12 months after we put the two companies together. It took 14 months and we got a triple but there was a real difference in the valuations.
Since then though, you're seeing multiples of maybe a high of 1,5 times NAV but more closer to one times net asset value. And you have to ask yourself, what's causing this? I could say prior to the gold ETFs the only easy way you could get exposure to gold was by buying a gold stock and if you look back in time, certainly across the Toronto Stock Exchange the multiples accorded to gold stocks over a 20 year period generally ran at twice the multiple accorded to the broad market. So two times whatever the market was and I can only put that down to scarcity. Today, two things have happened. ETFs have come into play so it's easier to get exposure by way of equity going directly and buying a share representing an ounce of gold through an ETF or a fraction of an ounce of gold, and there's been with the rising prices - there's just been an explosion in the number of companies that are exploring for gold, that are developing gold mines and producing gold and that there's this increased supply and as you increase supply the multiples went down as well. So, an easier way to get gold through the ETF, lots of choice out there if you want to buy equities so the scarcity value has disappeared. And then on top of that, the companies that are considered the leaders in the gold industry by virtue of their size - the amount of gold they're producing and their market cap have just turned out incredibly poor performances. If I go from say May of 2006 and that's when Goldcorp did its triple after I bought Wheaton River, since that time to now, gold is up about 150%, and if I were to look at a selection of seniors, Kinross, Goldcorp, Newmont, Barrick and AngloGold - the best one is up 16% or approximately about one-tenth of what gold has gone up. All the rest are lagging far below that and that in the past, if you increased - bought a company that increased your resources or your reserves or your production or all of those, management expected their share prices to go up. These companies have gone out, increased reserves resources and production and there share prices are sitting still, becalmed and the reason I believe is driving that is the people running those companies have very little invested in their companies and they've ignored their shareholders. They've abused their shareholders by issuing enormous amounts of shares to fund their scrip and not enough has been dropping to the bottom line. The other aspect is that everybody in the industry is caught flat footed by the cost increases that came along. From 2001 to 2004 the gold price was really just moving in US dollar terms. Post-2004 gold was moving in all currencies and that unleashed a flood of money from the capital markets looking for exposure to the metals - silver and gold and the base metals and you had an industry that was short of talent just because through retirement and not many people going through the school... the suppliers to the industry, their inventories of consumables and fixed assets processed plants and that was non-existent and then this flood of money came in and said we want exposure to mines and everybody came out with the promise of building bigger and better mines and they found out the only thing in abundance was capital, and everything else was in short supply and people were tripping over themselves to pay people more and more money to pay more to speed up their timelines on building new mines. And the result was explosion of the capital expenditures. You'll see people, you started hearing stories of budget overruns 50% then 100% - it's not uncommon to see budget overruns of 200% to 300% and that can only damage the rate of return on these projects and that's why a lot of these majors have really suffered in the marketplace.
GEOFF CANDY: Indeed and one gets the sense that investors are saying enough is enough and you have seen a number of fairly high profile CEO changes and a much stronger demand and vocally a much louder demand for dividends and those kinds of things as well. Do you see things changing across the sector?
ROB MCEWEN: Well I see an improvement in the share price, 1) because the message has been sent loud and clear by shareholders and hey, we want you to manage these assets not sit on them. but if you were to look at how gold has performed relative to let's use the XAU Gold Index and go back to say the beginning of April 2001 and come forward, there's an enormous diversion in price performance that's happened basically around 2011 so that shares are really cheap now relative to gold and some signs you're seeing, you might be able to say that it's cheaper to buy a company with gold resources than it is to go buy a gold bar and we're seeing a couple of purchases - I think three now by Chinese gold producers in Australia and one is looking to buy Barrick's African asset. So someone looking to get exposure to gold, I think will see gold shares as a cheaper way of getting their gold exposure than buying a bar of gold now, because of that difference.
There's another factor that comes into play and that's the US election and I guess you could also say it has to do with the change of control in Chinese politics as well, the new leadership coming up at the end of the year. But I could credit CIBC World Markets - they produced a chart back in April where they looked at the performance of the XAU during the year of the presidential election in 1984 and then every election year coming forward to now, so last in 2008, and they plotted the performance of the XAU and there was a steady decline from the beginning of the year in January through to the election in November and into December. So they created a composite graph - took all the years from 1984 to 2008, plotted them, superimposed them on each other and came up with a composite of that. And then they plotted the year following the election and in the year following the election you had a recovery of 100% of what it lost during the year following the election.
If you look at that it feels quite intuitive to me that the incumbent is trying to tell the population that everything is great, it's going to get better, so re-elect me and they're using all the levers they have at their disposal, fiscal and monetary to get the electorate to vote for them. There's also the confusion in the market place so people are distracted by this and gold isn't seen as an investment that's necessary because everything is getting so good. Unemployment is going down, housing stocks are starting to increase and markets are recovering. They're throwing all sorts of money at it and then after the election, well people go wait a moment, those problems aren't resolved yet and yes there is a reason for owning gold, and know by the way that unemployment is still persistent and the job creation isn't as large as they said because after all the politicians, they lie... But that sinks in so you have a disparity between gold and gold shares. You have shareholders saying give us more of the pie, give us a better dividend yield and you're seeing some of the companies respond to that. They're saying be a better manager, don't screw up on those capital projects like you did before, you can't see a three times overrun on your budget and say you're managing something. And then you have this political overlay both in the United States and a distraction in Asia. So I think it's a great time to think about buying gold shares.
GEOFF CANDY: And I suppose it's a great time to be pouring your first gold at a new gold mine.
ROB MCEWEN: Well yes in Mexico this is our second source of cash flow. We have one out of Argentina, but this is managed by our partner Hochschild Mining - but this one is the first one we've brought into production and it's a great moment. We took an old mine that closed in 2005 - a previous operator had, it had a permit in place and we said let's put it back in, small capital $25m and these poured last week - second pour happened over this past weekend. It will contribute - we thought put a team together down there because El Gallo in Mexico - the complex is being developed in two phases. The first is a gold mine that's projected to produce annually about 30,000 ounces of gold at about $800 and the second phase is building a silver mine which is in the permitting stage right now and hopefully we'll have all the permits in hand by mid next year and start construction and come into production mid-2014 and that mine will be producing a little over five million ounces of silver a year. And at the same time we're going through the permitting process in Nevada to get another old mine started up that was run in the 1980s and it's going to be a very traditional Nevada oxide ore, heap leach operation, about an eight year life, $800 cost again but the delay in Nevada - the regulators seem to have a lot on their desk and it takes a while to get approvals. That would start construction in late 2014 if we're lucky.
GEOFF CANDY: We look forward to keeping track of it because I think it's going to be an interesting project. |
