Four Steps to Mitigating RiskMon, 10/22/2018 - 14:41
Q: How are companies reacting to the end of the market downturn?
A: In the last 77 years, there have been eight bear market cycles in gold equities. The last one was one of the longest and deepest bear markets of the eight and it ended in January of 2016. Since then we have entered a bull market that will take time to develop. It is important to note that four of the six preceding bull markets, over the last 75 years, experienced a gain of over 600 percent from bottom to top. Today, we are up 100 percent from the bottom and there exists a 67 percent probability, based on the past bull markets, that prices of gold equities could triple from here. I believe it is an opportune time to buy gold equities.
The senior gold producers took on too much debt prior to the downturn in the price of gold and have been trying to reduce their debt by aggressively selling assets. As a result, most of these companies now have declining production profiles. In an attempt to restore their growth profiles, a number of the seniors are reaching down market and buying junior companies with advanced stage exploration and development projects. As the bull market continues, this buying activity is likely to increase. At the same time, the intermediate and junior companies have positive production profiles and I believe they will deliver superior share performance relative to the senior producers.
Q: How does McEwen mitigate the risk of an inherently cyclical industry?
A: Understanding that mining is a cyclical business is the first step in mitigating risk. The second step is to reduce one’s exposure to changes in government behavior. At McEwen Mining, to build a mine we need to see a projected minimum after-tax internal rate of return of 20 percent and a payback period of three years or less. Third, geopolitical considerations factor high in where we want to invest and fourth, we are attracted to distressed assets and those unloved by the market where the entry price is lower.
Q: How is McEwen mining innovating the operational models of its projects?
A: At El Gallo, we are asking the regulators to amend our permit for a new processing plant to fill the pits we have created by mining with mine tailings. This would be a much more attractive method of dealing with tailings. While there are few examples of this method in Mexico there are about 40 of these in Australia. If we can successfully get this permit approved by regulators and silver prices rise to US$18/oz, we will go forward and build this project
Q: What approach does McEwen use to acquire new projects?
A: Our approach is opportunistic. We like to buy assets that are unloved by the market. While a distress asset purchase will guarantee more work, the low purchase price limits the downside and offers good upside potential. For example, our recently acquired Black Fox complex was originally purchased by Primero Mining in 2014 for US$300 million along with the assumption of US$140 million in liabilities. Then Primero invested US$120 million bringing its total investment to US$560 million. We bought it for US$35 million, which was equivalent to paying 6 cents for every dollar it had invested. It came with over 1 million ounces in resources, annual production of 40-50,000 ounces of gold however with a short mine life, an operating mill with excess capacity, numerous exploration targets and a US$190 million tax pool, which means we can shelter US$190 million of future profits.
Q: Where would you like the company to be positioned in the long term?
A: To earn a place in the S&P 500 index is our goal. We believe there is a clear and important competitive advantage given to companies in the S&P 500. Such as a stronger share price, better trading liquidity and greater access to the biggest single capital in the world.