Ask The Expert - Rob McEwen - September 2020​

Announcer: You're listening to "Ask The Expert," on Sprott Money News.

Craig: Well, greetings out there to everyone from Sprott Money News at sprottmoney.com. It's the month of September 2020, and it's time for your "Ask The Expert" segment. I'm your host, Craig Hemke, and joining us this month is Rob McEwen. Rob, of course, the legendary founder of Goldcorp, and currently he is the chairman, CEO, and chief owner of McEwen Mining. Rob obviously has decades of experience in the mining industry, and it's a real thrill to have him here for "Ask The Expert." Rob, thank you so much for joining me.

Rob: Craig, it's a pleasure to be on. Thank you.

Craig: And before we get started, just a reminder, these ask the expert segments are brought to you by Sprott Money at sprottmoney.com. You will have to look far and wide on the internet to find better deals on all your bullion needs, bars, coins, you name it, Eagles, Maples, we got them. We also have great deals on bullion storage as well, safe, and secure. Of course, go to sprottmoney.com or you can call us anytime at 888-861-0775. Rob, with that, I think it's time to get going. If you are ready, can I hit you with question one?

Craig: Hit me hard.

Rob: You got it. All right. Again, we've been collecting these questions for the past several weeks through the email address submissions@sprottmoney.com, and I've got seven questions for you, my friend. We're going to start off with one I'm sure is on everyone's mind here as we record on September 24th. It has been a brutal five days for the precious metals. It all started after the latest FOMC meeting that somehow, the market decided the Fed was not dovish enough, and we've had a tough five days. So Rob, in your opinion, where are we now in this current bull market, and will central bank policies continue to drive gold higher?

Craig: I think we're at the end of the second inning, and there's still quite a game to go. Central banks, Powell came out and said that they were going to hold interest rates at these low levels until 2023. They'd like to see inflation come back. I think they'll see the inflation come back much faster than that. Craig, we're in an unprecedented period of history, where it's not one country or a small group of countries that are corrupting and debasing their currency. It's universal, global.

And the amount of money that's coming into the system right now is really, would have been unimaginable a year [inaudible 00:02:47] I think going to propel, not only the precious metals, but most hard assets, quite a bit higher. The commodities, the grains, the foods will go, and building materials go along with the precious metals, but in the end, the way to save yourself is to go into the precious metals, gold and silver.

Craig: Yeah, your protection against the madness, which only seems to be getting more mad as the months go by. Hey, the second question I think is always a fun one. It's something that Eric probably talks about every week on our "Weekly Wrap Up" segment. It's quite simple. Why, Rob, is the gold-silver ratio as high as it is?

Rob: The precious metals fell out of favor, and the space was deserted. No one was making any money in the space. I think you're going to see more people coming back into the space once it looks like the companies can make money. And silver is in short supply. Silver really doesn't get going until later in the game, when gold's had a good run. So I'd say that that ratio is going to compress, and I agree completely with Eric that that's a good place to have super returns as we go forward. But why is it being held back? I think it's just the lack of interest in the precious metal space by investors in general.

Rob: Well, that's true. And we got just our first taste of it when things really got going in July and August. Do you think, I don't know, personally, I mean, a lot of folks think 15 to 1 historically is the right number. Do you have just a number in your mind that you always gone off of that is the right number for that ratio?

Rob: It can shrink to 15 to 1. I could see it there again, but it'll take a while. But we did have it move. I mean, in March, silver was $12, and in August, September, it went up to $27, $29. I mean, that was a huge move. I think the silver producers, the few that are out there, it'll start reflecting in their quarterly numbers as we move forward. Silver's still significant, almost double where it was in March.

Those [inaudible 00:04:57] are going to attract news articles, and that is going to draw investors into the marketplace. Especially if you look at some of the explorers, they've had explosive growth in their share price in a very short period, in the last six months, and that wasn't happening before. So we just need to see a sector that's making money, see this sector make money, and you'll have money starting to come into the market before it becomes a tidal wave.

Craig: All right, Rob. Let's move on to question number three. This one kind of is right in your wheelhouse, as a mining executive. I mean, we're in 2020. We're seeing all sorts of technological advancements across, you know, the wide range of sectors. Here in the mining sector, what are some recent technological advances that are helping to grow mine output?

Rob: Well, one area that is being picked up is ore sorting, and they're using x-rays, optical scanners, and other ways of looking at the ore as it's coming into the mill or the process plant. Well actually, you could go back further. There's...but we'll deal with this. It's coming into the plant and it's rejecting all the material that doesn't have the grade or have any ore in it at all. So what it's doing is reducing the capital costs for the processing plants. And I've seen some pretty big numbers in terms of savings in that. So that's one space.

Another, you're seeing sensors placed in the shovels that work in the open pits, and in the trucks, that start telling you the grade. That's more in the base metal. We haven't seen it as much in gold, but in the base metals, where the metal is a larger, the percentage of the rock being mined. You're seeing them being able to tell how much metal is in that rock right when you take it off, rather than waiting until it gets through the process plant.

I believe COVID is going to accelerate the automation, the use of automation in mining as well. COVID, coupled with demographics, certainly, the demographics of North America, are showing that we're gonna see a significant drop in the number of employees, from the current workforce. There's a, large numbers of people working in the mining industry in North America are moving into retirement, heading towards retirement pretty quickly.

I know the Canadian Institute of Mining, they came out with a number that 90,000 people would be retiring in the next 10 years from the mining industry, and of that 90,000, 50,000 are the mining engineers and geologists. So you're gonna have to replace those people, and mining hasn't been a popular destination for new graduates from school. You will see technology coming in. I saw some, Elon Musk the other day announced that he was looking at the processing plants for nickel and couldn't understand why it was so detailed and cumbersome, and he was gonna come out with a way to simplify it.

Some of the other tech companies are looking around for ways of approaching mining. Just coming at it with artificial intelligence, to look at grade, look at processing, look at the handling of the ore.

And then there's a company, it's a private company called Offworld, and they started out originally looking at how you would mine in space, on the asteroid belts and on the moon. And I've had a couple of conversations with them. I'm quite intrigued by it. And they're talking about rather than blasting rock to extract it, you mechanically take it out, so with a saw, like a circular saw, going to the rock wall or the face, and cutting it out, and having swarms of robots, not one or two, but hundreds of robots.

One would be in there cutting, another would be in there just, it'd be like the woodworking project, where you have a chisel and you're taking slices out of the wood and then use a chisel to pop it out. So you'd have one in there with a radial saw and also a chisel. And then behind it would be one that has a bit of a vacuum and sweeps it into an area where it's pulverized and then transported by a hose out to a processing plant. It's sorted before it gets there.

And so you're cutting out the hours underground, say, when you have to let the mine clear of smoke and dust after a blast, and these robots, if you've ever been in a highly mechanized factory, they go nonstop. And so that one, we don't have to wait to go into space to see that. It's actually being tested in a couple of South African mines right now.

Craig: How about that. Fascinating, just fascinating. All right. Well, let's move on to question four. We had several people write in, curious about a recent investment you made in a company called Enduro Metals. Just wondering if you can share what you like there.

Rob: Yes, Craig. Well, I bought the company when it was called Crystal Lake, and the management of it were not completely forthright, and they were removed by one of their creditors, who happens to be a very bright geologist, young, bright geologist. And he is running, and assembled a very large northwestern VC. They're taking advantage of global warming. This area is opening up because a lot of the ice fields have been melting, and they're finding high-grade mineralization right at the surface. I mean, it's prime area, so I wanted to get them, contribute to their exploration program. Their initial results have been very interesting. I just think there's a lot more to that story.

I tend to buy stories early, where it looks like promising results, and I think Cole, who runs it, is a very bright young man, very skilled geologist, and he's got a great property with some very good drill results, and I'm willing to back that type of initiative.

Craig: All right, Rob. We're more than halfway done. Let's move on to question number five. Another one that draws on your experience, not only there at McEwen Mining, but from your days at Goldcorp. And we're here now in a period where, I mean, you mentioned earlier the producing miners are getting a little flush with cash, as their, quarter over quarter what they're able to sell their product for keeps going up.

So the question is, should large producing companies, and I'm sure that it gets hard to speak in general terms, obviously. It's going to be different from company to company, but in general, should large producing companies be spending their cash on increasing or reinstating dividends and share buybacks, or would they be better served, you know, acquiring new resources and, M&A type of stuff?

Rob: There are a couple of considerations for a large gold company. One is how significant are they in the marketplace relative to the other areas, particularly the tech companies? I mean, we might have mining companies, diversified mining companies, that are over a hundred billion in market cap that pales in size to some of the tech giants. And so, institutional investors, where do they go? Are the large ones big enough, or could they get bigger? And that's a question, do you go out and buy someone? If something looks cheap, and the junior sector still looks quite inexpensive, they could be buying some of their future growth today.

But I also think they should be looking at dividends. In a yield-starved market, with the metal price going up and their margins improving, they should be looking at providing their shareholders a greater return, and I think they'd see a larger inflow of money into their stories, with more of a generalist coming in.

Craig: That's...I would think. If we're going to drive more institutional money from, you know, the people that follow Warren Buffett and that sort of thing, you would think getting a dividend up to 2% or 3% or 4% would really pique some interest.

Rob: Yeah, no, I think so. And we've seen a couple of the big guys starting to increase their dividends. I think they'd be wise to do more of that. At Goldcorp, we started a policy. We started paying one year, and then we went semi-annual, then we went quarterly, and then we went monthly. And I have been a trustee on a REIT, a real estate investment trust. I remember going to the annual meetings and people saying, you know, I really like getting a monthly check, a distribution check, and I thought with computers today, and share registries, you can communicate with your shareholders regularly, and so we started giving a dividend monthly, and that was enjoyed by all of our shareholders.

Craig: Yeah. No, that's a great idea. All right my friend, we'll wrap up with two questions that are specific to your current company. Again, as the CEO and chairman and principal owner of McEwen Mining, you've described what's currently kind of holding the stock back as a perfect storm. I mean, it's quite a ways below the highs that it saw in 2016, and so people are wondering if you can kind of go into it a little more, what might be holding it back, and why would you call it a perfect storm?

Rob: Well, I'd go a little further than that. I'd say it almost has, almost biblical, in a sense. Last year, there were a number of events that fortunately are non-recurring. One, there was a fire at one of our mines in the crushing facility, that was operated by a contractor, and that shut down our revenue for seven weeks early last year. And then a few weeks later, there was a large runoff from the winter snow melting, and it flooded one half of the same mine, and cut out the production areas in that portion of the mine for three months. So it was...

Craig: [inaudible 00:15:52]

Rob: That, we couldn't have expected. And then you had COVID, and we shut down this year. All of our mines were shut down for a period of time, as we decided to protect the health of our workers in the communities. And unfortunately, you had to sacrifice any revenue as a result of that as well, but we had the expenses.

Craig: Rob, you had, let's see, fire, flood, and plague. You have any problem with locusts up there?

Rob: I'm looking at the horizon for clouds, and hope they don't show up. No. And we had a bumpy startup with our Gold Bar mine in Nevada, and we based the feasibility study on a geological interpretation done by a firm. And they said the ore body was controlled stratigraphically.

And after a year of production and not getting what we thought we should have gotten, they came back in and said, oh, well, the controls are different. They're controlled vertically, structurally. And that wiped out a number of tons of resources and ounces of gold, and we've been scrambling to get a new resource there and a new mine plan. So we've been really light on being able to give any guidance on production there, but it was like a body blow. And in the second quarter, we wrote off $83 million value against that mine.

On top of that, Argentina came along and put taxes on the exports of mineral resources, and we have a mine down there. We own a 49% interest. So that cut back on our receipts out of that country. And we had some management that had difficulty, where they were unable to deliver their guidance. And so every quarter, they said we're going to do this, and I shared it with the market, and every quarter, we missed.

So we lost an enormous amount of goodwill. We disappointed shareholders in a way that I couldn't have imagined. Very painful for all shareholders, including myself, but I feel for all our shareholders. It feels like we're turning around in the last three [inaudible 00:18:12] perform better than the index.

Historically, we've traded above the GDX and GDXJ. We have one of the higher betas in the industry to gold, and I feel it's going to take a couple of quarters before it becomes visible. We've made quite a few changes. We're starting to see the improvements, but I'm sorry it's not here immediately. But if we're able to execute this turnaround, we've significantly underperformed the market, and therefore to catch up, there's almost a 2X or more, just to catch up to the market. And that's what our game plan is, to catch up and pass the market.

We've had very good exploration results coming out of our property in Timmins, the Black Fox property. It's been overshadowed by the operational issues and the disappointment we delivered to the market. Interestingly, right now, exploration stories are moving some stocks very well, and we just want to put that out in front, but say not just the exploration results, but what does it mean? What does it mean in terms of future production and timelines?

Craig: Well, and that kind of leads us to the final question then, Rob. Yeah. I mean, what has happened has happened, and as you describe it as a perfect storm, now that I know the details, I'm like, yeah, what else could happen? But you made it through the storm, and now here we are. And of course, then the final question is in three parts, I guess, as I look at it. It seems like McEwen Mining all-in sustaining costs are high. Maybe you might take a stab at that. When might the company be profitable? And, do you have any idea, some, anything you can share on final mine output for this year and maybe what you expect for next year?

Rob: All-in sustaining costs were high as the results of production being lower than forecast. So you had more expenses than ounces produced. COVID started in March, we've had, it impacted our second and third quarter quite adversely. It, should see it dropping in the third quarter and definitely in the fourth quarter, it'll be much lower.

In terms of profitability, our first is we invest heavily in exploration. I was able to build Goldcorp on the back of exploration success. We had a great run with our Red Lake mine through exploration, sort of like the way Kirkland Lake and Fosterville ran.

We have an underexplored property in Timmins that delivered good results. And so, when you're investing in exploration, profitability is pushed into the future. What we're looking for is positive cash flow, so that we're able to not only sustain, but then start thinking of moving it on.

We will be continuing to invest in exploration and the development of our production pipeline, so I would say profitability is some way out, but we're investing in productive assets that will generate profits. We're looking at a number four years out of about 300,000 ounces possible, with a margin, hopefully, of a thousand dollars there.

Craig: And who knows where price might be by four years out, too, Rob. That can kind of impact things as well.

Rob: Well, yeah. Then your margins could change significantly.

Craig: That's right. That's right. Well, it's a fascinating story. And being able to pick your brain on all these items within the industry has been of great value. It's been really a treat to visit with you, Rob, and I want to thank you for your time. Thank you for bringing us all up to speed on these things.

Rob: Thank you very much, Craig. Appreciate it.

Craig: And from all of us, at Sprott Money News at sprottmoney.com, thank you for listening. On your way out, please be sure to stop by sprottmoney.com, where you'll find all great deals on all sorts of bullion and bullion storage. Again, sprottmoney.com, or call us at 888-861-0775. Thank you for listening to September 2020 "Ask The Expert." We'll have another segment for you next month.