Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
AN: We are here at the 2016 Vancouver Resource Investment Conference and joining us today is one of the greatest entrepreneurs and business builders the mining industry has ever seen. He is the former founder of gold producing giant, Goldcorp, and has now built his second company McEwen Mining which is a precious metals producer in the Americas. Ladies and gentlemen, Rob McEwen.
RM: Thank you, Andrew.
AN: Rob, thank you for taking the time to speak with us today. I thought it would be a good time to do a recap of 2015 as we have just started the New Year. Could you please touch on some highlights McEwen Mining had.
RM: 2015 was a really good year for us. Our production went up, ours costs went down, our free cash flow increased, and our treasury increased year over year. We have no debt and we are in a great position to go forward.
AN: That was also something I wanted to talk to you about. Cost containment and debt levels, it’s a big focus in the mining industry right now, so what is McEwen Mining doing to lower its All-In-Sustaining-Costs?
RM: Well, it’s two-fold. One, it’s like everybody else, rationalize our costs, negotiating with our contractors, trying to get better deals on the materials we use, but at the same time looking at our processes and figuring out how do we put automation in there, how do we put wireless devices in our crushing plant. We are looking at our heap leach work, we are experimenting with that to find out what is happening in the heap leach (ie. compaction, temperature, saturation). If you crush it and recover 70%, you are leaving 30% on the pad. So it’s trying to say how we can maximize revenue from what we are mining. Innovation is another key driver as I believe big data is going to come into this industry in a fast way.
AN: Now there’s also been a big focus on debt levels, many major mining companies are facing astronomical amounts of debt, you’ve always been a big believer in having no debt to minimal amounts of debt on your balance sheet so what advice would you give to leveraged up mining companies why they shouldn’t be leveraged on debt in a price environment like this?
RM: In a price environment like this they know why they shouldn’t have much debt, you know, they are just getting crushed with the margins where they are. The majors are selling their assets and they are trying to pay down their debt which creates opportunities for middle and smaller companies. So they should keep doing what they’re doing and it’ll reinvigorate the industry.
AN: One of my other favorite financial concepts you talk about is free cash flow. Why is free cash flow so important in a market like the current one?
RM: You can’t do anything without it. In this type of market if you aren’t generating positive cash flow you can’t develop new projects easily, you might not be able to sustain yourself, you’re chewing into your capital and your prospects are being abbreviated.
AN: I would also like to discuss with you potential acquisitions going forward. On your last set of financial statements the company generated $18.5M in free cash flow, your treasury is well stocked up, so what do you have your eye on right now in the market place that you can tell us?
RM: There are a lot of things we are looking at but there a lot of problems still out there. Some people have sold metal streams, so they’ve given away part of their future. Some people have even hedged again or sold a royalty and then as you said there are the debt levels so you’re looking and saying is there a good company out there that doesn’t have those aspects and the investor has the upside in a much higher price environment? So that’s the question we are looking to answer. We are trying to grow organically, we purchased a couple of properties adjoining where our deposits are and we think we will be able to extend the life of the mines that we have there. And some consolidation I believe will happen. Our goal is to get into the S&P 500 so we have to have good organic growth and then some M&A.
AN: Well hopefully with the appointment of Colin Sutherland, CPA, CA your new President he’ll be able to help with that. Can you tell me a little bit about him and why you see him as a good fit to run your company?
RM: Colin has a financial background; he’s a Chartered Accountant (CA) and tax accountant, so very detailed oriented. He’s worked with a number of gold mining companies, both in Canada and Mexico. More recently he was the CEO of Archipelago Resources and it was based in Indonesia. The company was doing approximately 200,000 ounces of gold per year and they increased their production. We were looking for a new president and he came along and said I like what you are doing and believe we can grow it. Colin mentioned he’d like to make an investment, so he bought 460,000 shares before joining us. And I really like people who put money where their mouth is.
AN: Can you remind me what your share ownership in your company is?
RM: It’s 25% with a cost base of $127,000,000.
AN: I don’t think any interview would be complete with you if we didn’t touch upon your legendary gold forecast. Are you still calling for $5,000 gold and if so why?
RM: I am. I think all the reasons we’ve said before; massive amounts of debt at the government and corporate level. A shortened duration with a low coupon right now, if interest rates start going up, the ability to service that debt will become much more difficult. And also monetary expansion, if you look at economic history, there isn’t a precedent for this.
AN: So going forward in 2016, what can investors look forward to and what catalysts will there be for the company?
RM: Well, I’d first like to mention we’ve outperformed a lot of the companies in the last year and too many people in the gold space are too focused on the US dollar price of gold. They are missing the point that anybody in other currencies whether it be Canadian, South African, or Australian they’re starting to see that their revenues are much higher. The gold price is about 25% off its high in those currencies, rather than 45% off of its high. So the next couple of quarters I think you will see stronger cash flow and earnings appearing and people will be asking, where is that coming from?
Now the other day I was visiting with a money manager that we visited with last July and just met again last Friday, January 22, 2016. So between July 23, 2015 and January 22, 2016 our stock (McEwen Mining: MUX) was up 80% in Canadian dollar terms.
Our story is not unique because there are other stories out there where people are just looking at gold and saying it’s not moving because they are focusing on US dollar gold. But if you look there are some movements occurring right now and once the broad markets start seeing you can make money here then we just have to link a couple more performances like that and then they’ll be here in droves! Because of that I think prices will rise substantially.
AN: Alright folks, you’ve heard it from Rob McEwen, their management team is working to further lower its All-In-Sustaining-Costs, they are generating free cash flow, the company has no debt right now, they’ve just appointed a new President, Colin Sutherland, who has a track record of success in the industry and Rob McEwen of course is still calling for $5,000 gold. Thanks for watching and Rob thank you for your time.
RM: Thanks, Andrew.
