Some advice for mining executives everywhere

December 10, 2015 03:28 PM

What does a veteran mining executive look for when investing his money in junior equities?

In this interview with The Gold Report, Rob McEwen, who has been predicting $5,000/oz gold prices since 2011, explains why he still thinks that this is a possibility in the next four years and how companies can take advantage of technology to ensure that a price rise goes to the bottom line—and ultimately shareholders. And he shares the names of the three companies that meet his litmus test, one of which bears his name.

The Gold Report: For the last five years, you've been predicting $5,000/ounce ($5,000/oz) gold. Are you still predicting that and what would drive it there?

Rob McEwen: Yes, and the reasons are even more pressing and relevant. The industrialized world has never before increased the money supply as fast and as large as it is today and government debt is at unimaginable and unsustainable levels. The central bankers' objective was to get the global economy back up and running, but so far it hasn't worked. Interest rates are dragging along the floor and have forced investors and savers to desert their prudent ways and seek riskier investments in a frantic search for yield.

Our governments want us to spend, to consume believing this will keep the economy afloat. But they are wrong and pushing the wrong levers. What we need urgently is capital investment that creates jobs and expands the tax base. Unfortunately, this is not happening.

On top of this setting, there appears to be a number of powerful countries that want to remove the U.S. dollar from its role as the reserve currency of the world. These players have been strategically moving to reduce the role of the dollar in their economies and lessen the need to buy dollars to buy oil, food and other essential commodities.

TGR: But if all that money printing hasn't taken the price of gold up in the last five years, why would it do that at a later date?

RM: At some point soon, people are going to question the value of the dollar. Too many people believe the government can control interest rates and inflation. People are going to realize that the government is not telling us the truth about the economy, about inflation, about having the economy under control. When that happens investors will rush to diversify and put funds into gold and silver.

Right now is an appropriate time to start buying gold. It is cheap and gold shares are even cheaper. What most investors don't appreciate is the fact that gold has been going up significantly in the past year and a half in many currencies other than the dollar. Soon it will also climb in dollar terms.

How high will it go? Here's some simple math to show what is possible. From 1970 to 1980 gold went from $40/oz to $800/oz, an increase of 20 times. The low in this cycle has been $250/oz. If you apply the same factor of 20, you're at $5,000/oz.

TGR: What's the time frame for your prediction?

RM: Four years out, in that time the dollar will have given up its premium position in the currency world and many more investors will be buying gold. The combination of crowd psychology and instantaneous communication are going to propel the price of gold to new heights that most people can't imagine today.

TGR: If that's the case for gold, what are the prospects for silver?

RM: Silver will follow gold's upward climb and the gold/silver exchange ratio will compress in the future. It will go from the current high of 75:1 to potentially as low as 16:1.

TGR: As an investor, does it matter if gold goes to $5,000/oz if the operating costs and the capital expenditure (capex) costs continue to go up the way they have in previous cycles?

RM: Sure, but that scenario is not going to happen right away. I expect the gold price will increase far faster than the costs of producing it for several years. During that period, investors enjoy large gains due to the dramatically increased profit margins.

TGR: You've talked a lot about the role of technology. Could technology help to smooth out the ebb and flow?

RM: No, I do not believe that technology will alter the ebb and flow because mining is a cyclical industry, but technology could significantly improve the industry's profitability. Unfortunately, the mining industry has a lot of inertia, so it tends to adopt new technology slowly. However, there are signs that its adoption rate is accelerating. Take a look at the YouTube video on Rio Tinto Plc's Mine of the Future to get a good idea of how mining is changing.

On the wish list are: faster discoveries, faster resource modeling, speedier permitting, faster construction, lower capex and operating expenditures (opex), higher recoveries, faster payback, higher returns on invested capital, smaller environmental footprint and, most importantly, superior returns to shareowners. While this is quite the laundry list, it highlights the significant opportunity for improvement.

TGR: Is demanding innovation and austerity the role of the board, the shareholders or management? Where does the mindset change start?

RM: Shareowners buy or sell depending on their assessment of management's performance. The board should encourage and support management in embracing innovation and demand that management strive to always be efficient and productive with shareowners' capital.

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