Lexam VG Gold Inc. (fka LEXVF)

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Rob McEwen Interview: On Gold Prices, Gold Miners And Bitcoin

Rob McEwen is the CEO of McEwen Mining Inc. and the founder and former CEO of Goldcorp. He’s well-known in the gold mining

industry for being innovative and being a champion of an “owner’s mentality.” He owns 25% of McEwen Mining and pays himself neither a salary nor a dividend.

He started Goldcorp in the late 1980s from nothing after formerly running a securities company. By 2006, the company was worth over $30 billion. In McEwen Mining, he sees the potential to take another junior miner to the big leagues. The company’s stated goal is to become a member of the S&P 500 within the next few years.

Like all miners, McEwen Mining has been sold off in the last 6 months and especially in the last few weeks as gold prices have dropped precipitously.

McEwen has seen plenty of booms and busts over the course of his career. I was interested to hear his perspective on what was going on in the markets when we chatted last week at his Toronto offices. Here’s an edited transcript of our conversation:

Question: How do you explain the gold carnage of the past couple of months?

Answer: The country of Cyprus has been a big part of it. Most people don’t realize what went on there. It’s really unbelievable. The government came in and arbitrarily decided that anyone with over 100,000 euros in their bank account was “rich” and that they were going to seize a big chunk of their deposits. I thought there would have been riots on the streets..

When the news that Cyprus was going to sell some its gold assets to cover its debt, the market got nervous believing other weak European economies would also be forced to sell their sizeable gold holdings. Then when the big banks [like Goldman Sachs] recommended selling and shorting gold soon thereafter, it accelerated the selling.

Take a step back from this and ask: “What’s really changed here?” The problems of Cyprus aren’t gone. They’re just obscured. Moreover, Cyprus’ issues hint at far larger financial problems within the European Union. The politicians and bureaucrats don’t want you to focus on look these problems. Rather their actions are designed to entice you to spend your money on risky assets and consumption.

A dangerous policy shift has occurred. We now have governments willing to seize their citizen’s assets. We now have currency controls on the table which we haven’t seen since the late 1960s/early 70s. We have continued debasement of currencies. And the economies of the western world remain stagnant despite enormous monetary stimulation. All these facts to me are bullish for gold and make me believe the price of gold will bounce back relatively soon.

Question: The Fed has now hinted that it might end QE in a few years and that also seemed to spook the gold market. Some commentators have started to say gold is going to go in another downturn like we saw from 1982 to 1999. What do you think?

Answer: Again, I don’t believe it. The gold price will consolidate this summer then trend higher in the fall. Most market commentators appear to be ignoring the economic reality of the western world. Unemployment remains persistently high, large long term capital investment is not happening despite record low interest rates, government debt is at alarming levels and still growing and there is a shoving match going on in the currency markets for the title of the world’s reserve currency.

Question: Is the mining industry different today from 20 years ago? There’s been more consolidation. What’s that meant for a junior like you?

Yes, the gold industry has changed in several ways from 20 years ago. First, western world Central Banks were selling their gold holdings then and today Russian, Asian and other non-western world Central Banks are buying.

Second, the precious metal ETFs didn’t exist 20 years ago. The large holders of gold were the Central Banks. Today the collective gold holdings of the ETFs are a big price variable in the market. This is a new element of demand that contributed to the upward climb of gold price and recently there has been a large source of selling pressure. Twenty years ago only Central Banks had that power.

Third, the price of gold was in a downtrend and today, we are experiencing a correction/consolidation within a long term uptrend.

Fourth, there are more investors in the gold market today. However, the majority of their investment dollars have gone into the ETFs, rather than gold shares. But, I believe this situation is about to change. Gold has significantly outperformed gold shares since 2008. So much so, that gold shares look very attractively priced and poised for an explosive move upwards.

Over the next few years, I expect many of the first time gold investors who bought ETFs are going to start investing in gold shares. Of course, we hope they look at us.

The current market environment will force the industry to consolidate. The seniors are sidelined, out of the game this year as their new CEOs work to resolve pressing issues. The juniors have no access to capital and dormant waiting for the return of the bull market for gold. Some of the intermediates and a few junior producers are going to be collecting assets. Also, increased dissident shareholders’ action should occur pushing reluctant management together.

We have the opportunity to stand out. We have cash, no debt, a growing production base that doesn’t cost a fortune to build and good exploration results. As you know, one of our goals is to get listed as part of the S&P 500 in a few years. Why, because it will give us access to lower cost capital, broader shareholder base and springboard for profitable growth. The majority of public gold companies are Canadian and Australian. In order to qualify for S&P 500, a company must be American, and we are. We are one of the very few companies in the gold industry that are eligible to be in the S&P 500.

What’s it meant for a junior like McEwen Mining? Curiously, I am in a similar situation to when I began building Goldcorp Inc. in the 90’s but with a new company. Through a combination of growing through M&A, application of an innovative approach to mining, aggressive exploration and good luck, Goldcorp grew into a powerful force in the gold industry. Investors’ interest in gold then was not dissimilar to today, close to non-existent. In my last 13 years running Goldcorp, our share price grew at a 31% CAGR (compound annual growth rate).

Today, I am working to repeat Goldcorp’s success with McEwen Mining. The price of assets is attractive, the competition by the industry is low – just like it was back when we built Goldcorp’s Red Lake Mine.

Question: The Miners have really been laggards in the last 2 years – even before the price of Gold dropped. Why?

Answer: This ties into your last question about the differences in the industry, between today and 20 years ago. When the price of gold started to take off in all currencies after 2004, a lot of investment began rushed capital into the mining industry. In hindsight, that capital was poorly used by many companies. Expensive M&A deals, massive costs overruns, big construction delays and poor operating performance turned many investors away from gold shares. The promise had been broken: The price of gold shares were not increasing in tandem with the gold price rise.

Today, the gap in performance between gold and gold shares is huge. Large enough to make gold shares look very attractive. Senior management of many companies have been removed and for the near term I would expect better financial performance to emerge.

Question: What are going to be the catalysts for your stock in the next 2 years? How do you make money even if the price of gold stays flat?

Answer: Well, during the late 90s and early 2000’s when I was running Goldcorp, the price of gold was basically flat and yet our share price performed exceptionally well, outperforming such stocks as Microsoft and Berkshire Hathaway. So the message is gold stocks especially exploration stocks with a hot discovery can deliver remarkable returns even during a period of flat gold prices.

Our projects are attractive, our mines have good grades and costs so if we continue building on budget, on time, delivering more than promised and having continued exploration success, we will do well in a weak market. My 25% interest (my cost base is $125 million) in the company certainly keeps my focus on building share value and share price.

Question: In the early days of Goldcorp, you bought Dickenson Mines in Red Lake, Ontario, when many thought it was going to be shut down. Yet it ended up being a huge mine for you. Given that we’re in another period where many junior miners are going to run low on capital, are you hoping to find more hidden gem mines?

Answer: Of course. We’re always looking. Right now is a great time to buy. The market is not differentiating between good and bad. Every mining company has been heavily sold.

Question: Can you give us an update on Lexam VG Gold Corp where you own a sizeable stake?

Answer: Lexam is an exploration company with properties in Timmins, Canada and in Southwest Colorado. Historically, Timmins has been the largest source of gold production in the country. Lexam’s properties host and adjoin some of the larger past and current gold producing mines. To date, Lexam has outlined gold resources in excess of two million ounces. An economic assessment of the viability of mining these resources by open pit methods is under-way. The results will be available later this year.

The property in Colorado, is large and has several former gold mines. During our exploration for gold Lexam struck oil, 27 of our 42 drill holes hit gold. It is a shale oil and gas target awaiting to be drilled. State permits to drill have been granted over the years but always blocked by legal actions by environmental groups. Lexam has a good cash position, no debt and looking for opportunities in this market.

Question: Finally, what do you think of Bitcoin as a gold guy? Is it a potential risk as an alternative to gold?

Answer: It is a fascinating topic. Any currency exists only because at least two parties (a buyer and a seller) agree that it represents value. So, what constitutes money? On a South Pacific island, we might agree that chicken bones are a currency. In prison, we might agree that cigarettes are a currency. Today, while we all use fiat or paper currencies as money, a medium of exchange, there is a growing concern about the value of these pieces of paper.

I don’t see why Bitcoin can’t also grow and become another viable currency, an internet based currency. If enough people accept it, it will be used. It seems to have momentum behind it and it’s intriguing how it’s truly separate from any country or central banks’ manipulation and control.

There will be growing pains, like the guy who lost money out of his electronic wallet because he left his computer on all night. Also, Bitcoin will spawn competitors, alternative digital currencies. I think it’s a mistake to write off this currency as a bubble or fad.

http://www.forbes.com/sites/ericjackson/2013/08/20/rob-mcewen-interview-on-gold-prices-gold-miners-and-bitcoin/