Rob McEwen has become a legend in the gold mining industry by skillfully assembling and building mining companies over the past 20 years. In this exclusive Gold Report interview, he explains his rationale for $5,000/oz. gold and $200/oz. silver and how the factors leading to those price levels will affect the industry and the companies exploring for and producing the metals.
The Gold Report: Rob, you've been quite vocal about your belief that gold will reach $5,000/oz. (ounce) and silver $200/oz. for silver. Why and when will that happen?
Rob McEwen: Your readers need to appreciate: Gold is money. It is currency. I think the number of people familiar with gold will grow as people see gold as a currency. China, India, Russia are buying gold to diversify their foreign reserves. To restore the confidence in currencies, I think some central banks, such as the Chinese and possibly the Russian, will increase their gold holdings to the level that the percentage of their total currency will be greater than that of any other currency in the world. At that point, they will assert that their currency should become the reserve currency of the world.
If you look at the last gold run, gold went from $200/oz. in mid-1979 to $800/oz. in early 1980. During the 10-year period of 1970–1980, we saw a 20-fold increase in the price, from $40/oz. to over $800/oz. We also had a 20-year low in 2001 of $250/oz. If you apply that 20-times multiple, you're up to $5,000/oz.
For silver, if you use the historic ratio of an exchange ratio with gold of 16:1, you get to $312, so $200 is conservative. I think we’ll see these numbers within four years' time.
TGR: You are talking about a 15-year bull market for gold and silver, starting in 2001 and ending in 2015 or 2016?
RM: Yes. I don't think prices will necessarily fall dramatically, but gold and silver will reach the zenith of purchasing power relative to other asset classes. When gold peaked in 1980, Volcker was channeling up interest rates. If you had rolled out of bullion into fixed income then, you would have made a tidy gain.
TGR: Are you predicting prices of $5,000/oz. and $200/oz. as spikes, or plateaus that they will reach, stay at and trade around?
RM: I think you'll have a spike at or above $5,000. Credit will become more expensive, and at some point credit will be denied. There'll be a need for liquidity, and the metals address that need.
TGR: When prices reach those levels, any project that smells of gold or silver will become a prospect that people will try to put into production. Will we end up with a glut of gold and silver on the market?
RM: No, but the higher prices will spur more exploration. At the same time, it is getting harder to bring a mine into production. It takes longer and costs more. The regulators have put more rules in place. It is not so much that the rules are wrong, but it's the extended time frames. The risk of putting a property into production has gone up dramatically.
You're starting to see real limits on the amount of growth that can occur. In the 1990s and 2000s, very few people were going through mining schools because there weren't many career opportunities. The people who built the physical plants have scaled back. We are seeing the impact of that lack of investment in education, in the productive capacity of the suppliers and huge jumps in the capital expenditures for various projects. Labor wants a larger piece and you see a lot more labor strikes. Finally, governments are looking at the mining industry as a very easy target to extract more money from because the industry doesn't have a lot of friends.
TGR: There is also a problem finding mining engineers who have track records of putting projects with proven ounces into production. There is a lack of intellectual capital.
RM: You can see that manifesting itself all over the place. Coal mines in Australia are hiring miners from Tennessee. They commute between Tennessee and Australia on a three-week cycle. One headhunter told me he had an assignment to hire 400 people—mining engineers, geologists and related workers—for an iron ore mine. His instructions were to make offers 50% higher than their current salaries.
On top of that, the mines have been mining lower and lower grade, supported by the higher prices. Few high-grade deposits are being found. You have to put more capital in the ground and mine a lower quality or concentration of mineral to stand still.
TGR: Wouldn't that increase the value of mid caps that have experienced personnel on the production, mine building and engineering side? They know how to put projects with tricky deposits and lower grades into production.
RM: You're right. There really is a premium on production and on reserves. As the price of gold moves up, those mid caps will become more desirable to the seniors and attractive to investors. Companies doing exploration have proliferated. That creates confusion in the marketplace. Companies will have to go to greater lengths to differentiate themselves to attract capital. Perhaps that is one of the reasons why the exchange-traded fund (ETF) is so popular.
TGR: Could that explain why the juniors have lagged? Companies have projects that sound like they have great potential, yet the prices of most juniors are going nowhere.
RM: A couple of years ago, gold stocks had greater leverage than bullion; it was said that when bullion moves 1%, gold stocks will move 3%. People bought into that and they haven't seen the performance. Perhaps they were looking initially at the seniors for leadership, but the seniors have been standing still while the price of gold has been running. Some juniors just haven't delivered the performance. With gold, whether you buy physical or an ETF, you don't have any political risk. You don't have taxation issues or labor strikes. You don't have senior management making an investment that you don't agree with. All of those variables conspire to take the enthusiasm out of the buying of the juniors. ETFs are an easy way to get into gold quickly at a lower perceived risk. I prefer to be in the juniors because they have the potential to explode to the upside if they are lucky with a discovery or they are in a right position next to a mine that is growing and the ore body continues onto their property.
TGR: Are there any other topics you've been thinking about that might interests our readers?
RM: Right now we are looking at debt: the U.S. debt ceiling debate and the debt of sovereign states in Europe. I think any correction should be used as a time to accumulate.
The quiet summer is a good time to stake out the juniors and intermediates and take positions. We've seen periods like this where physical gold and the gold shares separate in terms of performance. In September 1979, which was just before the top in the gold price, gold went from $200 to $400/oz. in the space of a little over four months, but the gold stocks didn't follow. It was as if the market didn't believe the price of gold would hold up there. It wasn't until September 1980 that gold stocks reached their highs. I believe that the market had to see the impact of the higher gold price on the cash flow and earnings before they would buy the stocks.
I think we're in that period right now. I would argue that we are starting to see the seniors move. These are incredible cash-flow generators right now. They are going to have to do something with their earnings, dividend them out or up their yields.
They also are going to look for growth. Some companies are diversifying because they see opportunities. The seniors are doing deals to build the size of their companies, and that's positive for the intermediates and the juniors. The seniors have been reaching right over the intermediates into the junior–producer/junior–explorer side. The longer this gap exists, the more attractive the juniors and intermediates will become.
TGR: Here at The Gold Report we've seen our readership increase along with the exponential increase in investor interest in gold and silver. Most U.S. investors don't own mining stocks in their portfolios; do you think they will dip their toe into, if not bullion, then an ETF?
RM: Yes. The ETF has given more people exposure to gold. I liken the ETF to a mutual fund. It was often said that buying a mutual fund was the place to start investing in the stock market. Once investors become comfortable with the concept of being in the market, they start thinking about buying individual stocks because they think they understand how the market works.
I think the same principle applies to the ETF. Once investors are in there, they are going to start looking around and saying, "Well, this gold price is going to do very positive things to these mining stocks at some point. Maybe I'll rotate some of my money out of the ETF or I'll put in some additional money and it will go into individual stocks where I think I can see much larger gains down the road."
TGR: Rob, thank you for your time and insights.
Rob McEwen, whose association with the resource industry spans nearly three decades, serves as CEO of US Gold Corp. and chairman of its board of directors. Five years ago he also became the company's largest shareholder. Rob joined the Minera Andes board of directors in August 2008 and took over as president and CEO a year ago. Rob is also chairman of Lexam VG. He started building his reputation as the founder of Goldcorp, which has what is still considered the richest gold mine in the world in its Red Lake Mine in Ontario. He took Goldcorp from an investment company with $50 million market capitalization to one of the largest gold-mining companies in the world with an $8 billion market capitalization by the time he retired from the company. Rob has been recognized with awards such as Canadian Business' Most Innovative CEO, Northern Miner's Mining Man of the Year, Ernst & Young's Ontario Entrepreneur of the Year (2002) and Prospectors and Developers Association of Canada (PDAC) Developer of the Year. A 1969 graduate of St. Andrews College—where the McEwen Leadership Program was modeled on Rob's vision—Rob went on to obtain a bachelor's degree from the University of Western Ontario. He earned his MBA from York University's Schulich School of Business, where he serves on the Dean's Advisory Board, holds the Alumni Recognition Award for Outstanding Executive Leadership (2007) and provides generous financial support. He also holds an honorary Doctor of Laws Degree from York University. With community-oriented efforts focused on encouraging excellence and innovation in healthcare and education, Rob's generosity helped establish the McEwen Centre for Regenerative Medicine at the Toronto General Hospital and support the Red Lake (Ontario) Margaret Cochenour Memorial Hospital.
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