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In an exclusive preview of the 2019 edition, Mexico Mining Review interviewed Rob McEwen, Founder of Goldcorp, Chief Owner of McEwen Mining and infamous gold bull. He explained why he predicts gold will hit the US$5,000/oz mark and his goals for the future of McEwen Mining.
Q: How are companies reacting to the end of the market downturn?
A: In the last 77 years, there have been eight bear market cycles in gold equities. The last one was one of the longest and deepest bear markets of the eight and it ended in January of 2016. Since then we entered a bull market that will take time for it develop. It is important to note that four of the six preceding bull markets, over the last 75 years, experienced a gain of over 600 percent from bottom to top. Today, we are up 100 percent from the bottom and there exists a 67 percent probability, based on the past bull markets, that prices of gold equities could triple from here. I believe it is an opportune time to buy gold equities.
The senior gold producers took on too much debt prior to the downturn in the price of gold and have been trying to reduce their debt by aggressively selling assets. As a result, most of these companies now have declining production profiles. Since investors like to buy growth, these companies are in a difficult position. In attempt to restore their growth profiles, a number of the seniors are reaching down market and buying junior companies with advanced stage exploration and development projects. As the bull market continues this buying activity is likely to increase. At the same time, the intermediate and junior companies have positive production profiles and I believe will deliver superior share performance relative to the senior producers.
Q: How does McEwen mitigate the risk of an inherently cyclical industry?
A: Understanding mining is a cyclical business is the first step in mitigating risk. The second step is to reduce one’s exposure to changes in government behavior. At McEwen Mining, to build a mine we need to see a projected minimum after tax internal rate of return of 20 percent and a payback period of three years or less. Third, geopolitical considerations factor high in where we want to invest and fourth, we are attracted to distressed and assets unloved by the market where the enter price is lower.
Q: What is your production outlook in El Gallo?
A: Our El Gallo mine is approaching a transition point where we will cease mining oxide gold ores and hopefully to be permitted to start mining the sulphide gold ores. Mining of the oxides will cease at the end of May 2018. However gold production will continue for the next two years with residual leaching of the heap leach pads. The mining of the sulphide ores and the nearby El Gallo silver deposit requires and a new environmental permit along with additional capital to build a new processing facility. Details of the CAPEX and timing we will release in the next two months. Unfortunately, due to timing of the transition we will be reducing our workforce by 55 percent. Once the new plant is built we will be welcoming many of these employees back.
Q: Where would you like the company to be positioned in the long term?
A: We want to earn a place in the S&P 500 index. Currently, there is only one gold mining company in the S&P 500, Newmont Mining. It enjoys one of the lowest cost capitals in the industry along with a broad stable base of shareholders as a result of being in the index. We believe there is a clear and important competitive advantage given to companies in the S&P 500, such as a stronger share price, better trading liquidity and greater access to the biggest single capital in the world.
It is noteworthy that this competitive advantage is available to a very small number of gold producers. This is because approximately 99 percent of all publicly traded gold and silver producing companies are not eligible for inclusion in the S&P 500 because of where they are incorporated. One of the qualifications that need to be met to be eligible for the S&P 500 is that the company must be incorporated in the US.
McEwen Mining is among the three largest US precious metals producers after Newmont. The biggest hurdle for us will be reaching the required entry market capitalization of US$6.2 billion, which happens to be more the nine times our market cap. Over the next three to four years, through a combination of M&A, exploration success and an improved metals market, we will strive to at least meet the qualifications for the S&P 500.
This is an exclusive preview of the 2019 edition of Mexico Mining Review. If you want to get all the information, plus other relevant insights regarding this industry, pre-order your copy Mexico Mining Review or access our digital copy of the 2018 edition.