The Northern Miner’s Global Mining Symposium this week featured an interview with Canadian mining entrepreneur Rob McEwen, chief owner and chairman of McEwen Mining (TSX: MUX; NYSE: MUX).
The legendary investor, perhaps best known for transforming Goldcorp into a global powerhouse and revitalizing the Red Lake gold mine in Ontario, shared his philosophy on everything from how to pick the right companies in which to invest to how unprecedented government spending around the world is creating the next bull market for gold.
“I am convinced that the price of gold is going much higher, and owning gold bullion is the safest way for me to protect my capital and the best way to make large capital gains is investing in distressed and overlooked explorers and turnaround situations,” he told Anthony Vaccaro, the Northern Miner’s publisher, during the online conference.
McEwen pointed to Goldcorp as an example of a turnaround story and one of the biggest wins of his career. “Goldcorp’s Red Lake mine became the company’s most profitable asset; however, at the time I bought it, it was considered a distressed asset,” he said.
His attraction to the Red Lake mine was based on three key things, he explained, all of which made it appear undervalued. First was its location next to the world’s richest and most profitable gold mines; second, was its exploration potential because it had not been aggressively explored for 15 years; and third, the company that owned it was out of favour, he noted.
“The Red Lake mine became a fabulous asset because we spent heavily on exploration and refocused management’s attention on cost per ounce,” he said. “We found a rich deposit – and it’s important to understand – where the experts said it wouldn’t be. We stopped production for 46 months while continuing to explore and investing in efficient new facilities. And when we restarted the mine, annual production went from 50,000 ounces a year to 500,000 ounces a year, and the cost of production went from US$360 per ounce to US$60 per ounce.”
“Goldcorp was a great turnaround story and exploration story, but it’s important to understand that it took time: 19 years,” he added. “I was the largest private individual investor and during my last 13 years as CEO, Goldcorp shareholders enjoyed a compound annual growth rate of 31% in their shares. And when I left Goldcorp, the market’s interest in exploration stories was low, which I consider prime time for looking for buying opportunities.”
McEwen then described the checklist he uses when first investigating a company and whether he should put his money behind it. First, he looks at how much the company’s insiders paid for their stock, “because very often it can be quite low,” and looks at CEO compensation. He then compares the company’s performance relative to the sector to see if it is outperforming or underperforming, examines its exploration results to see if there is room to grow with them; and investigates whether the company has more than one opportunity to score. Finally, he looks at what is the mood of the market — it is bearish or bullish.
McEwen then turned to the performance of McEwen Mining, whose assets include the Black Fox complex in Timmins, Ont.; the Gold Bar mine in Nevada; the El Gallo mine and Fenix project in Mexico; and the San Jose mine and the Los Azules project in Argentina.
McEwen noted that the company “is currently a distressed situation” but said he believes the turnaround is in progress and “offers significant upside potential.”
“The company has underperformed the sector because management didn’t deliver on guidance. We had a couple of non-recurring events. We had a large resource write-down in Q2 of this year, and constrained financials. But we have four mines and a pipeline of development projects through the Americas, so we have multiple opportunities to score.”
Turning to the exploration potential at the company’s Black Fox and Stock assets in Timmins, McEwen said the results have been significant. “The historic mining around our Black Fox properties and Stock properties in Timmins are quite shallow relative to the mines in the district, suggesting there is good exploration potential at depth and some of our drilling has confirmed that,” he said. “The bulk of our exploration effort in Timmins has been concentrated on trying to identify near-surface resources that we can bring into production quickly. The exploration results have been impressive, but it’s been overshadowed and gone largely unnoticed because of the operating issues.”
McEwen said the steps to turn the company around have included attracting new and experienced senior management at the head office and at the mines sites, as well as improving operating margins by increasing production, reducing costs and extending mine life. On the financing front, McEwen noted the company has refinanced its debt and extended maturity by two years out to 2023, to relieve liquidity concerns.
In addition, the company will “demonstrate a number of deliverables” in this quarter, he said, including exploration news, a feasibility study on a ten-year mine life in Mexico, resource updates and a preliminary economic assessment (PEA) on all of its Timmins properties. Management sees the opportunity to build annual production by up to 100,000 to 150,000 oz. in Timmins, and corporately up to around 300,000 oz. by the end of 2025.
“The objective of these steps is to close the price gap,” he said. “Historically we have outperformed the GDXJ ETF, but in the last 12 to 18 months, we have significantly underperformed the sector and are now trading at a discount. It’s this gap that I believe we are well-positioned to close, and affect this turnaround, and as we close this gap, it presents a very large potential gain.”
During a question and answer session, McEwen expanded on some of his thinking on exploration stories, Argentina, copper, and the gold market. He pointed out that in his experience, “when you get into a bull market, exploration stories can really run.” In some cases, he added, in as short a time as eight weeks, and “you can get ten times or twenty times on those moves.”
Asked about the situation in Argentina, McEwen noted that the country “has the unfortunate experience of almost every ten years it seems to go into a period of high inflation,” and are in the midst of that right now. “They are desperate for foreign investments, it’s a mineral-rich country, and they just haven’t got their mining laws together. They are inconsistent,” he said. “But I think we’re approaching a time where they are going to be more inviting and provide some safeguards to investments for foreign investors there.”
McEwen noted that the company’s Los Azules project in Argentina contains a large copper deposit, with indicated and inferred resources totalling 30 billion lb. copper and also has some gold and silver. To put it into perspective for gold and silver investors and convert the copper and silver into a gold-equivalent, Los Azules has about 19 million oz. gold-equivalent in the indicated category and another 37 million oz. gold in the inferred.
“We did a PEA on it using a US$3 per lb. copper price, and the economics on it are really robust. It envisions 415 million lb. of copper a year at US$1.14 per lb. copper. Copper right now is about US$3.14 per lb., so if I were to convert that again to a gold-equivalent, when you include the gold and silver credits, that would be about 800,000 oz. a year at US$800 an ounce.”
McEwen added that the large capex of $2.4 billion, at US$3 per lb. copper, could be paid back in under four years and run for 36 years. While he admitted that the size of the asset and capex is beyond McEwen’s balance sheet, the company continues to move it along and make it more attractive and is considering a variety of ways to advance the project.
“We’re currently thinking of spinning it out, and putting it with a copper project that we have in Nevada and create a separate company where we retain a large interest, to have the value reflected on our balance sheet and fund that to push it forward to a feasibility study.”
“I think it’s an overlooked asset in our portfolio mix,” he continued, adding that “a lot of investors like to have companies invested in gold and silver or in copper, but not have all of that in one company, especially in a smaller company.”
McEwen also addressed the specific operating issues the company has experienced this year. “There was not one, there were multiple issues,” he said in response to a question from the audience. “It was almost Biblical in proportion.” These included a fire at Black Fox in January that halted revenue for seven weeks. That was followed by a heavy spring run-off and half the mine flooded, resulting in no revenue for another three months from that part of the mine. Management was poor at giving guidance, he added. Argentina imposed a tax, and Gold Bar was slow to start up. The company also had to do a couple of financings and all of those factors weighed on the share price.
He pointed out, however, that some of the issues were non-recurring and the new management team, some of whom he has worked with before, is quite capable, “and their focus is on operating margins and delivering guidance, so a turnaround is coming.”
The interview concluded with McEwen’s thoughts on the pandemic, the future of gold and how the current market compares with previous bull markets.
“I believe a new gold bull market is in the makings,” he said. “Investor interest is growing, as they are seeing money is now being made in the sector once again.”
He pointed out that the gold market is going to be stronger than what we’ve seen in the past for several reasons. First, the debt loads around the world have expanded dramatically. “The monetary expansion is explosive, and, in some cases, nearing exponential rates of increase, and with Covid, we’ve seen governments around the world use that as a reason to become more fiscally irresponsible in an attempt to protect everybody.”
Normally, he continued, you see that happening on a national or regional scale, but, in this case, it’s happening globally, and this is the first time we’ve ever seen that type of expansion. In addition, you have zero and even negative interest rates. “There are a lot of dislocations that have occurred and people are saying: ‘Oh, it’s behind us.’ It’s not behind us and history tells you a very clear lesson that you should be going into gold.”
In terms of operating margins, “as long as the Canadian dollar stays where it is, we’ll be able to contain our costs. But heaven help us if the costs go back to par with the U.S. dollar. We won’t be profitable.”