Some advice for mining executives everywhere
TGR: You've been a mining executive for decades, but you're also an investor. You have 25% ownership in McEwen Mining Inc. where you still serve as chairman. What do you look for in a mining company when you're thinking about making an investment?
RM: First, I listen to management's pitch and if it sounds interesting; second, I ask about their share ownership and if I find they are talking a big story without having a large investment in their firm, then my interest starts to fade. But, third, I look at how the market is pricing the company. If its shares appear to be selling at a large discount my interest can return. I tend to take large positions in explorers and small producers that I feel have big upside potential.
And for the record, at McEwen Mining I take no salary, receive no bonus, had no options and the cost of my investment is $126 million. I wanted to be closely aligned with the interests of my fellow shareowners. We will both make money the same way, through a higher share price!
TGR: What do you look for in the resource itself? Are you focused on country risk? Are there countries you won't invest in, or do you have a short list of favorite countries?
RM: The location of a resource is very important. There are definitely countries that are unattractive to me, especially where there is no rule of law, high crime rates and greedy governments. Experience has narrowed my focus to the Americas and perhaps Europe. I have no interest in putting my staff's lives at risk. In addition, I wish to avoid exposure to regions where corrupt practices are commonplace and the potential for us to get ensnared inadvertently in the new foreign corrupt practice laws that have been enacted here at home.
TGR: How do you protect yourself against those risks?
RM: It requires much more due diligence and vigilance than ever before. Governments worldwide seem to think the mining industry hasn't been paying its share, despite the big investments made by the industry in infrastructure, employment and communities. They have a nasty habit of changing the rules, such as increasing taxes and taking larger interests in the mines without compensation, after companies have spent the capital and built the mines.
I'd like to see the mining industry unite and stand up to all governments. We need to tell the politicians that if they want us to invest our capital in their country, they have to give us iron-clad guarantees that they will honor the terms of the agreement. They should have to put in place financial instruments, financial guarantees that will return our invested capital, at a minimum, if they change the rules under which we invested.
One such way to ensure that they keep their part of the agreement is to require them to put up a letter of credit, equal to our investment, in a major financial center outside their country. And should they violate the terms of our contract with them then we take away the funds we invested, without any recourse to their legal system.
TGR: What about physical risk? You recently had a significant breach in Mexico. How do you deal with that?
RM: There is a powerful crime element in Mexico. Some regions of the country are much worse than others. Until our recent robbery we had little to complain about. Since then, we consulted with Brinks and other security experts and we have fortified our refinery and mine property in addition to having a detachment of state police on the property.
TGR: What do you look for on a balance sheet?
RM: Debt, forward sales and property ownership issues such as joint ventures or options that could reduce the shareholders' value.
TGR: Does that include hedging, royalties, streams, those sorts of things? Do you consider that debt?
RM: Absolutely, I consider those financial mechanisms a disaster. The sale of metal streams and the royalties have been one of the biggest sins committed by the industry. Many management teams view these financing vehicles as nondilutive and easy money. It's 7-11 money, convenience store money, and management grossly overpays for this money and their shareowners end up paying a very big price in terms of lost cash flow and profits. The evidence is glaring; the share price performance of the metal streaming and royalty companies have far outperformed that of the producers.
The market has spoken loud and clear; investors don't want to buy a producer that has sold a good part of its future revenue. The impact of streams and royalties has been particularly painful during this period of low metal prices, as these instruments have hammered operating margins. A number of mining CEOs say it's the only reasonable source of financing they can secure now, but to my mind their actions appear to be a Faustian bargain. They are selling their shareowners' future profit to the devil and he has come to collect it.