Rob McEwen, McEwen Mining’s (NYSE: MUX) president and CEO was frank on many fronts in an interview with Mineweb on Thursday afternoon: about progress on McEwen Mining’s ongoing attempt to sell its massive Los Azules copper project in Argentina; about the overall mergers and acquisition market; about the tarnished state gold miners themselves these days; and about the dangers he sees in the increasing popularity of royalty and streaming deals to gold project developers as a way to finance mines.
To start with, there has been some media reports (e.g. a Bloomberg story as published on Mineweb) that late last year said McEwen was in the process of organizing tours of Los Azules for potential buyers. I started here, asking if such parties had been on the ground in January, as suggested, to take a closer look at Los Azules.
“Short answer: We’ve had no one on the property yet,” McEwen said.
But plans are in the works, he says. While a trip has yet to happen and while he wouldn’t be specific about the number of interested parties going, calling it a “work in progress,” he did say a trip is being organized for several unnamed entities that have signed confidentiality agreements with McEwen Mining.
I then asked if it was good time to be selling a large copper project like Los Azules. On the one hand the price of copper is incredibly strong, but on the other a number of major miners have recently scaled back their planned expenditures on large capex projects, like Los Azules, given massive cost escalation. This might, by extension, point to diminished hunger for mega copper projects at the moment.
Indeed McEwen Mining is contemplating Los Azules – now with a new and larger resource – at a rate beyond 100,000 tonnes per day.
And, according to Ian Ball, McEwen Mining’s senior vice president who also took part in the interview, said the group has planned a further 5,000 to 7,500 metres of drilling between now and May at Los Azules, all of it expansion drilling outside existing resources. There is a new resource update expected in June.
But, McEwen sounded undaunted in selling size.
“I’d say there’s an appetite, but there’s hesitation given the big cost overruns on a lot of projects,” McEwen said. And he added a moment later, “Big projects: there ares not a lot of them around and that’s what gives the interest in Los Azules.”
Then McEwen brought up the question of political risk, as Los Azules is in Argentina, which, given some nationalization in the oil sector, has fallen out of favour among some investors as too risky a jurisdiction. There are two ways to look at that, according to McEwen. “There’s obvious hesitation because of what’s going on in Argentina,” he said. But did he think the fear of Argentina was overblown? “Argentina is still an unknown situation. I think it’s probably overblown. I think some people look at it and say, ‘Well this is a time to be buying when no one wants to buy.’”
Mergers & Acquisitions
At this point we turned away from the Los Azules project to talk about specific opportunities in mergers and acquisitions that might entice the group. McEwen is on record as saying McEwen Mining is in the market for acquisitions, so I wondered if he had favoured targets, say either juniors with advanced projects or those already in production.
“No. We’re looking at both of those categories,” he said. “I think it’s a great time to be looking. There’s a lot of hesitation in the market. Valuations are off a bit for everybody. If you can find people who are similarly inclined in terms of building, then you can build an interesting company. “
This brought up a point others such as B2Gold’s Clive Johnson have raised about the difficulty of closing deals because management of mining or mineral exploration companies may be reticent to do so in a depressed market. Here he made an interesting observation, juxtaposing the mining and oil and gas industries.
“The oil and gas industry tends to move a little faster,” McEwen said. “People get together and look and say, ‘How do we build value for shareholders?’ I think in the mining industry there’s still a sense of being a little more possessive of the income stream that is coming from their companies and (this makes them) less likely to jump into a combination.”
So was McEwen hitting his head against a wall in going after prospective targets?
“I wouldn’t say hitting our heads against the wall,” he said, laughing. But he added, “We haven’t met with a lot of the same mind.” Still he remained optimistic. “There are a large number of companies out there so I think there’s a lot of opportunity.”
I turned the interview to the subject of financing. For many juniors it has been difficult to raise money for some time now. I wondered if he saw risk money coming back to the market soon or if he thought the junior financing market would keep hobbling along for the foreseeable future.
McEwen’s take on the matter, having recently completed a financing (which he promised to backstop but didn’t have to), was that money can be had for the right project. “I think if you put the right deal out there and people feel there is an interesting future with some growth you can get financing.” But, that said, to make financing happen, “You have to work harder,” he said.
Then McEwen steered the conversation to alternative financings – streams and royalties. He didn’t mince words. He doesn’t like what he’s seeing.
“I will say that one trend that disturbs me is the growth of selling metal streams and royalties,” McEwen said. “It reminds me a lot of the hedging that was done 10 and 20 years ago. It’s an easy path, a relatively easy path to sell a metals stream. But unfortunately the companies that do are giving away a large part of their profit margin. They may have financed their mine, he said, but they have made their company less attractive in the market because you no longer get any margin expansion with the price increase.
“I think it’s a really big cost to the industry and too many people are doing it. And you can see the premium’s been taking out of the gold stocks and the silver stocks, the producers, and has gone to the royalties instead.”
Holding back gold
Some commentators and analysts have lambasted gold miners for not treating their product, gold, as something more than a product to sell as quickly as they can mine it. Some suggest miners should hold gold production back to entice investors who want to own the safety of gold, as a currency that cannot easily be debased; the kind of investor that has instead turned to the ease of buying gold ETFs for example. It’s a subject the blogger Otto Rock (not his real name) recently brought up in a posting pointing to a Scotiabank related research note on the matter by analyst Robert Cohen.
I asked McEwen for his opinion on the topic. Many who remember his tenure at Goldcorp won’t be surprised by his answer.
“When I was running Goldcorp, we did that,” McEwen said. “We started withholding gold back in 2001. We held back initially 10 percent and then eventually up to 30 percent of our gold with the belief the gold price was going higher and the tax rate was going lower in the jurisdiction where we had our biggest mine in Ontario. And you could borrow against that gold at anytime or liquidate it if you needed it.
“The analysts took a while to figure out what we were doing. But then after several quarters they said, ‘Oh we can figure this one out’ and ‘This is not a bad idea.’ For one of our largest shareholders, a U.S. institutional investor, that was one of the reasons they wanted to buy the company because they couldn’t buy a gold ETF. They wanted the gold we held in our vault. We held more gold at Goldcorp at one point than 50 of the 114 central banks in the world that held gold.”
This is not a policy McEwen Mining, as an emerging gold producer, now follows. But, hypothetically, I asked McEwen if he would do it again, now, if he were at the helm of a mature gold company.
“Yes. I think it’s a great idea to do it,” he said.
McEwen is also keen on dividends. After I brought the subject up, he again returned to his tenure at Goldcorp where he started a dividend policy.
“When we initiated a dividend stream I told my management group that this is a form of discipline that we return some capital to our shareholders while they’re waiting for a capital gain. I viewed it as rent. And that it would make our management more efficient with our capital. The shareholders deserve to get something while they’re waiting for the capital appreciation.”
He also predicted dividend policies would continue to grow in the mining sector given shareholder displeasure with the performance of gold miners. “You’ll see more of it,” McEwen said. “I also feel that with all the high profile departures of CEOs that the boards of the companies that removed their CEOs are probably feeling a little vulnerable at the moment that perhaps, maybe, they’ll also see the exit if they don’t improve their performance.
“So you’re going to see companies trying to expand their free cash flow. In some cases it’ll be hard. But you’ll see them expand their profit margins and increase distributions to shareholders to make their companies look more attractive.”
But might there also be danger in dividends in such a capital intensive industry? That in shelling out profits instead of re-investing them in the development pipeline miners cannibalize themselves?
In answer, he took the extreme. It was more or less his final point.
“Well, going out and borrowing to pay a dividend would be a stupid thing to do,” McEwen said.
Los Azules project
copper cathode?/100,000 tpd +
Additional feed possible from sub 0.35 percent Cu resources
New resource in June, updated scoping study thereafter
Los Azules deposit
1.3 billion tonnes @ 0.49 percent Cu, inferred
310 million tonnes @ 0.65 percent Cu, indicated
(0.35 percent Cu cutoff)
San Juan province, Argentina
100-percent McEwen Mining
TNR Gold holds 25 percent back-in right on northern claims
(covering about half of resources)
iPad Version – Picture: Courtesy of McEwen Mining
(Eds. note: A previous version of this article incorrectly stated the new Los Azules resource as 948 million tonnes @ 0.52 percent Cu, inferred, and 310 million tonnes @ 0.65 percent Cu, indicated. This was the January, 2012, resource.)