Rob McEwen, a leader in the mining industry, has shaped the current business climate for mining gold and silver in North America and beyond. He is the founder and former chairman of Goldcorp, a senior producing gold company that calls itself the lowest cost, fasting growing gold company.
Today, Mr. McEwen is active and invested in other companies, and investors would do well to watch as he works to improve these companies and make them into industry giants as well. We spoke to Mr. McEwen about the companies he invests in and he generously shared some tips for would-be investors.
I tend to make investments of 20% to 30% in companies,” said Mr. McEwen, “and I’m looking for places that are near discoveries or old mines that may have been overlooked in the market. I want to get a large position and then I look to put different pieces together to create a stronger more attractive company.”
Next, Mr. McEwen told us about his current investments, which comprise millions of dollars of investment capital: “My biggest investments are in three companies and gold and silver bullion – US Gold (TSX & NYSE: UXG), Minera Andes (TSX: MAI), and VG Gold (which is merging with Lexam Exploration by the end of December) (TSX: VG).”
Mr. McEwen then spoke about each of his investment companies to explain why he found them to be compelling opportunities.
“VG Gold, which is the smallest of my investments, is in the largest gold-producing area of Canada. Seventy million ounces of gold have been produced [in that area]. VG Gold has four properties with an estimated total resource of 1.2 million ounces of gold on the properties right now.” Then Mr. McEwen provided a valuable comparison between VG Gold and another mine located in the same area in Canada. “Compare VG Gold to a company like Lake Shore Gold, which has built a mine and a resource of 2.2 million ounces. VG Gold has about 45% of the ounces that Lake Shore has and is trading at about one-seventh of the value.”
The next investment is Minera Andes. Mr. McEwen explained more: “Minera Andes’ activities are focused in Argentina. It has 3 property packages, including a 49% interest in a producing silver-gold mine, the San Jose mine. In 2009, this mine produced 5 million ounces of silver and 80,000 ounces of gold. Minera Andes also has 100% of a copper project and that has an indicated resource of 12.5 billion pounds of copper; it’s larger than 83% of the undeveloped copper deposits in the world. The company has no debt and generates cash flow and earnings from its San Jose silver and gold mine.” Then Mr. McEwen shared why he felt this project was an excellent investment: “A big highlight in the story is Goldcorp’s recent $3.6 billion purchase of Andean Resources property that changed the value of the real estate for our neighbouring San Jose Mine and our adjoining 100% owned exploration properties.” “Minera Andes trades on OTC and its symbol is OTC MNEAF. We are working to get it listed on the Amex in 2011, as it recently started trading above the Amex’s minimum share price threshold.”
Then we turned our attention to his work with US Gold. They have some exciting properties, but what is most exciting about US Gold is Mr. McEwen’s vision: “With US Gold, I would like to create America’s next major precious metals producer. Our goal is to qualify in the S&P 500 by 2015.” The S&P 500 is a basket of stocks and is used as a measure of stock market movement and economic health. “There are seven criteria [to qualify for the S&P 500] and we meet five of them right now. One of the two criteria we need to work on is market cap. Our current market cap is $700 million but to get on the S&P you need a minimum market cap of $3.5 billion. We also need 4 consecutive quarters of earnings. So we need to bring a property into production and add production through a future M&A transaction.”
We spoke in more detail about the US Gold company’s properties. “The silver project in Mexico has advanced very quickly. We just recently announced that it has an estimated resource of 60 million ounces of silver and 600,000 ounces of gold. The silver deposit starts at surface and goes to a depth of 300 feet. The topography is very gentle so the mining should be simple. We expect the operating cost to be somewhere around $6/ounce and since silver is trading well above $20/ounce, the mine should generate attractive operating margins. The property package is very large and showing excellent exploration potential.
In Nevada, we have a large property package right next door to Barrick Gold’s Cortez Hills mine, which is their largest mine in Nevada. They have outlined 40 million ounces of gold there and we’re hoping to find some of what they found next door. In the interim, we have one deposit on which we will complete a pre-feasibility by third quarter 2011 followed by an 18 month permit process then construction.”
Mr. McEwen has clearly put so much emphasis on gold by committing long-term investments into gold and gold companies. Does that mean he is bullish on gold? “I believe the price of gold and silver are going much higher,” he said. “Gold should hit $5,000 an ounce in the next 3-5 years. Silver should follow gold and it’s possible that it will outperform gold by a significant factor; especially, if it returned to the exchange rate that prevailed in 1980 where 14 ounces of silver could buy 1 ounce of gold. It’s currently trading at 50 ounces of silver can buy 1 ounce of gold.”
Even though gold is high right now, $5,000 an ounce seems astronomical so we asked him for his reasons why: “The macroeconomics are pointing to further monetary stimulation and quantitative easing, but it’s not just happening to one country – as it has in the past – it’s happening to the entire western world. That introduces a powerful variable into the equation that makes it very difficult to gauge where the ultimate price of gold might go.”
Along with the ubiquity of the situation, there is another factor that will impact the price of gold and silver: The interconnectedness of the marketplace today. “If you look at how well connected the world is today, we are going to see waves of mass psychology – fear and greed – sweeping into these sectors in unimaginable ways. Right now, gold and silver, as a percentage of the invested capital globally, is quite small – less than 4% -- and it’s been up to 20% in the past. So you could have a massive five-fold increase in percentage held which could be magnified dramatically because of the interconnectedness of the market.”
Although this is exciting for investors, Mr. McEwen also cautions investors: “You’re going to see a lot more entrants into this space. A lot of people attracted by the higher prices will come up with companies and they’ll have amazing stories about all the different gold opportunities. Back in the last gold bull market of the 1970’s, I was at a gold conference in Atlanta where I was astounded by what people were offering and buying. For example, one firm offered investors the opportunity to buy gold that was located 1,000 feet below surface.. The problem with the proposal was the very high price and there more importantly there was no mine in place that would allow the investors to collect their gold. But people were buying! I think that kind of crazy thinking will return.”
So, what should investors do? Mr. McEwen shares his insight into managing risk in this speculative market: “The junior sector is volatile, full of risk for the unaware and the impatient because only a few of those companies will actually find an economic deposit and even fewer will build a mine that produces a profit. But it’s not to say that the junior share prices won’t run higher on expectations. That is the positive side of crowd psychology. Despite my cautionary remarks, I believe the exploration companies are the feedstock, the growth engine for the intermediate and senior gold producers and thus an area of the market that can generate oversized returns. So for investors looking to get their first exposure in this space they should buy four or five companies – if not more – to have a diversified package. Also, they might want to buy a mutual fund that buys juniors.”
Mr. McEwen is an industry leader with a bold vision for the companies he invests in. Investors would be wise to take note of what he says, combine it with their own due diligence, and consider whether an investment into gold, silver, or a gold- or silver- producing company is right for them.