With general equity markets sliding into the territory which will challenge Bernanke's Happy Exit with Tapering, time is to listen to those who have seen and have done it. Rob McEwen is dissecting the recent market situation in Gold and M&A activity, which will make the best stories in the market to move very fast from the bottom. McEwen Mining has bottomed at $1.65 in December and has closed at $2.63 last Friday. Los Azules Copper project will be the one of the coming M&A stories this year, which will move valuations of McEwen Mining and TNR Gold. TNR Gold holds shares of McEwen Mining after the settlement on Los Azules. Rob McEwen has announced on Twitter about the commencement of drilling in Nevada now. With Gold crossing $1270 and closing just below it we have a very exciting time for the best stories in junior mining these days.
Kip Keen: The Goldcorp takeover bid for Osisko has generated a lot of excitement. What are your thoughts on it?
Rob McEwen: The takeover in general is a symptom or an illustration of the consolidation that's been happening in the industry. And I think it will pick up pace as we move into this year. It's showing to investors that you can make money in this market; that it's been overlooked with people thinking there's no opportunity here. I think the biggest risk to investors is missing the run we're going to have in these stocks.
KK: Do you think it's fair to say that management teams and shareholders are more willing to accept M&A now after the long, tough couple of years we've had?
KK: In other words, some of the intermediates and larger juniors in a strong share position are saying, 'Look we can grab that nice deposit for less than 10 percent dilution in our shares and that's worth it.' But otherwise not a whole lot of activity.
RM: Right.
KK: You're projecting about 140,000 ounces gold-equivalent this year and 170,000 ounces AuEq next year in production at McEwen Mining. I was curious, are you keen to grow McEwen through M&A? Or is the focus squarely on organic growth?
RM: No, in order to achieve our goals we're going to have to take on some M&A. The ideal M&A is where you have a significant impact in production, a reduction in operating cost and a project that is in a stiuation that is adding to our cash flow that would allow us to build our El Gallo II project. Because right now we're looking at it and saying at current metal prices the IRR on El Gallo II is not attractive.
If you take the stance that the price of metals are going up, then you want to be in a position to profit from that. But for us at the moment to go out and think of financing either some combination of debt and equity or possibly an asset sale, it's just not on the table because the cost is too expensive and the return is too small.
KK: Are you seeing out there achievable opportunities in terms of picking up arguably a better project at current prices given the way the market has been. I mean you mentioned not missing the run up that might happen. Are you of the same mind in terms of McEwen?
RM: Well if we saw something that would increase the value of our shares, we want to do that. I'm not looking for size for the sake of size. I own 25 percent of the company. My cost base is C$125 million. I don't take a salary. The only way I'm going to make money is the same way my shareholders do, which is through a higher shareprice.
We've got most of our permits in Mexico for our El Gallo II project, which we hope to get before the end of the month. We're starting to drill on two projects in Nevada in the first quarter. We've got a couple targets we like. We continue to drill in Mexico. There's some organic growth there as well.
We're part way through our El Gallo I expansion in Mexico and that should be completed by the end of the first quarter. Then we move into a higher-grade part of the orebody as we go deeper. So we did just under 140,000 (AuEq) last year, which was a 33 percent increase over the year before. We'll probably be relatively flat this year.
And then going to about 175,000 next year based on the expansion of El Gallo I. We hope to have a permit on our Gold Bar property in Nevada in the first quarter of 2015. And that project we could manage to finance it with very little additional funding and dilution. So once that's completed, that would take us over 225,000 ounces AuEq. And if the metal prices improved we'd look at El Gallo II which would take us over 300,000 ounces. So we've got a good growth curve. And as our production goes up, our costs are coming down.
KK: You mentioned Mexico. A new Mexico mining tax just came in. What's your sense of the impact of the added tax on mining in Mexico?
RM: For Mexico I think it's unfortunate. Not just for the mining industry. It does start pulling the welcome mat away.
When you look at most of the politicians in the world they behave in a similar manner. Their legislation is based on looking in the rear view mirror. They have vivid memories of the gold price two years ago being $1,900 an ounce and feeling that the foreign companies that have come in are getting too big a share of what was there.
So they put in taxes in an environment where they're not appreciating what is happening now. They're dealing with the past and not recognizing that the capital markets are non existant for precious metals and that prices are way down so margins are skinny. And no ones making much money. And in order to attract capital you need an inviting environment.
I think it was a poor move on their part.
KK: Would it factor into your search for assets in terms of where they are?
RM: Oh yes. I mean you're going to look around the world and you're going to say that if you see something like: Is it in a part of the world you want to work in?
In our case it's through the Americas. And you go, where do you think the best place to maximize the return on investment for your shareholders?
Some of these moves seem to have come out of the blue. But if one takes in economic history and the mining cycles there comes a point where the politicians say 'We need more of that.' No one wanted to go there (Mexico) a while ago without big incentives.
KK: I want to speak about your own investments in explorers. I know you make a fair number of investments in junior explorers. I'm curious, what do you look for? How do you assess companies?
RM: I like grade. The higher the grade the more attractive the project is to me. I like projects that don't need enormous capital. I look for projects where management hasn't sold royaties or has an inclination to sell them because they're taking away, in my mind, the profit of the industry. Particularly in this lower price environment there's very little margin and free cash flow generated as a result of people sellling royalties and metals streaming. People say, 'It's the only money around or I'll have to dilute.'
Well, they're not looking to the future. They're giving away a large part of the value of the company and that's very clearly illustrated when you look at the performance of the royalty and streaming companies relative to the producers. There's a big gap. And the industry created that gab by selling the royalties and metals streams. So I avoid a company that does that. I want to hear management doesn't want to do that and I want to see it in writing.
KK: You seem pretty keen on some of the venerable Canadian gold jurisdictions.
RM: People didn't run out of money two years ago. They started running out of money last year and this year. And they were exploring and people were putting out good results. But they weren't getting any traction in the market. I look to August last year and the gold rally we had there. And I believe that's illustrative of what type of explosive move we can see in this sector when investors turn positive on it. So you saw 25 to 75 percent moves in companies in one month.
KK: There's a lot more talk these days about opportunities in the sector. Do you get a sense that the skies are clearing somewhat?
RM: I'd say we're either at or extremely close to the bottom and as an investor I'm not prepared to wait to see if the bottom's there because it's very hard to pick it. Because, as we talked about the performance last August, if you you're not taking advantage of it right now, you're going to miss a big part of the move. And when you look at the distance these stocks have to travel to get to their old highs, there's some wonderful numbers in terms of performance that I think we're going to see.
Rob McEwen
