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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary. Each article or essay is selected on the basis of its long-term relevance for understanding the role gold plays in the individual's portfolio, the overall political economy, or both.
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FOREWARD -- On the deceptive
availability of gold in the physical market
by MK -- 11/14/02
In this following interview Mr. McKewen is hitting on something vital. As a matter of fact, when looking at the long term prospects of gold, as physical owners for the interim, we should view this as perhaps the most important gold story out there. He is absolutely correct and anyone in the industry who has tried to acquire a large gold lot -- and when I say large I mean one to ten tonnes, not 300 tonnes (!) -- they have found the bullion banks cannot produce. They can talk the talk, but when the money's on the table they can't produce.
We had a call about six months ago from a trading house in Canada looking for anything of size -- 1 tonne or better. There was nothing out there. The trader who shall remain anonymous confided in me: "It's not supposed to come to this, eh." But someone they represented needed metal and needed it fast. It happens. And it's going to begin happening with more frequency as more gold loans become due and mining production feels the hard downward curve associated with depleted high-grade zones.
The contradiction is that it seems there is always sufficient level of gold bullion coins and bars for small investor needs. Somehow the gold is found to keep mint and refinery production levels consistent with demand. Why is that? My own belief is that the bullion houses move heaven and earth to keep up the appearance of plentitude in order to keep the public from finding out the gold market's dirty little secret: There's no gold in size for anyone (including nation states) who wants it.
Just think what that means when the gold loan scenario rolls out of the paper game and real metal becomes an issue for settlement. In my view, the small third world central banks who've been depleted of their reserves in these lending schemes are going to get creamed in this and there's little they'll be able to do about it. Many ask for the real reason why the top central banks curbed gold lending through the Washington Accord. Once again, it was because the fractional reserve gold lending was getting out of control. The prospect loomed that all hope for the return of deposited gold would be lost in a massive default.
That propect hasn't gone away. It's still out there and that's why buying gold now while the bullion houses think they've got the wool over our eyes is one of the best investment prospects I have seen in my 30 years in the gold business. Last week, we had the question of how the late 1960s gold market compared to the present. It does in one important way: It's the best investment opportunity of a generation. View control of the gold price as your friend, not your enemy. The dollar market will someday break the back of the gold cartel. When it does gold owners will look back the beginning decade of the 21st century as they did the 1970s -- a time of unprecedented returns on our portfolio insurance policies.
Sell the rallies in stocks.
Buy the dips in gold (the rallies in the dollar). That's called
taking advantage of the new reality. Gold volumes at USAGOLD ~
Centennial Precious Metals over the past three months are running
at near 1999 levels -- the wider world is unaware of what astute
investors are doing, and consider their good advantage. --MK,
USAGOLD-Centennial Precious Metals, Inc.
____________________
In Depth with Rob McEwen, CE, Goldcorp
by Tim Wood, Mineweb
DENVER, 10 November 2002 -- Goldcorp chief executive Robert McEwen, in his own words.
MINEWEB: Goldcorp is the industry's favorite Cinderella
story right now. You got to the ball on time and no glass slipper
has been lost; now investors are itching to know how you're going
to ensure that Goldcorp ascends the throne.
ROB McEWEN: Earnings per share, Cash flow per share, net asset
value per share. Size is immaterial to me. I have 14 million reasons
why I want a better share price - that being my ownership of Goldcorp
and my call on Goldcorp.
MINEWEB: Goldcorp has always run a lean reserve base and
there is perhaps an incentive to save money on drilling for ounces
not to be mined in the near term. However, we see how important
the option value on reserve ounces is to the stock price
how will Goldcorp raise its reserves to lock in that value?
ROB McEWEN: Well, within Red Lake we have our most aggressive
program ever right now. Last year was all about delivering the
promise we made to the market with respect to Red Lake's production
and promise. This year we started off the year sacrificing some
of our production by cutting back by 5% to accommodate an accelerated
exploration program. The rate was better than we expected and
we have more tonnage and larger areas than we expected. So production
is going to be up to where it was last year, but we are running
a $16 million exploration program in Red Lake. There are some
constraints within our infrastructure that deny us accelerating
it a lot more than that. Our approach is to see what is the scope
of the mineralization, given that this is a very rich ore body
it is safe to assume there are a lot of mineralising events that
are just starting to be scratched. We are looking at the moment
to see how big our sulphides are, how deep do our high grades
go, and what is sitting over on the west or the east.
And if we're to look at a scale if we are wanting to incorporate
lower grade sulphides into a production plan, mine the high grades,
and possibly have a new mine sitting over in the far east. What
do we envision? Put the cart before the horse and say "Here
is the plan we build and how many reserves do we need". We
have been panning out in all directions on using a model with
very strong structural trends that control the gold mineralisation
in fact in our exisiting line, 75% of the gold discovered sits
in one trend that is 7,000 feet long and we believe that there
may be another trend between us and Placer Dome's Campbell Mine,
and another to the east of us that has the potential to host as
much gold as the one that has become our main feature. So, by
the end of this year we will hope to have to the market some of
our planning about bringing in the sulphides.
In terms of growing, because we have all the infrastructure right
there, and our six-year average for finding an ounce of reserves
is running at $11 an ounce, we can produce it for $60 and sell
it for over $300. So that is a very powerful equation. We know
it and have the infrastructure and we think there is a lot more
potential there.
MINEWEB: Does that mean Goldcorp is opposed to mergers
and acquisitions?
ROB McEWEN: One of my cautions is that over 85% of mergers
and acquisitions fail to deliver the promises that are given.
So you've got some pretty steep odds to buy. And then we have
said "well, how do we get leverage to gold right now while
we are waiting for opportunities?" One of those ways seemed
pretty simple to us: we won't sell all of our gold. So by not
selling all of our gold what happens we produce it in good deliverable
form but it is sitting here. And it is curious, because gold is
money and you can take it over to a bank and get 90 95%
collateral value on the gold that you haven't sold.
Well, that is effectively a 50% increase in possible cash flow
or capital available from our production and if we are right in
our assumption that the price of gold is going higher, we also
are in the future benefiting our revenue cash flow and earnings.
So you look at it and say "what is the lowest risk way of
increasing your exposure to gold?" Not paying tax, and holding
back gold. Now, you are deferring the tax, if the gold price goes
up you will be paying more tax, but will have more revenue, cash
flow and earnings.
We want to make mining attractive not just to investors who invest
in the mining industry, but to investors who are looking for investments
across the whole market. So you want an attractive rate of return
on your equity and your investor capital. Until this industry
takes that in, we are going to remain a small industry.
Being number one and ultimate gold stock are not the same. So
what is the ultimate gold stock? Low risk; superior assets; very
profitable business; leverage to gold; a strong board and management
group; and excellent growth prospects. We are North American based,
we have no debt, we are not hedged, a quarter billion dollars
in cash at the end of the first half.
MINEWEB: Don't you need to scale up a lot more though,
in order to attract big institutional interest?
ROB McEWEN: They said, back in 1993, if you are not big, you
won't be relevant in the market place. Our market cap in 1993,
when we started restructuring, was $50 million; today we are over
$2 billion. We have delivered one of the best performances in
the entire market, not just the gold market. We have a compound
annual growth rate of 37% over the last 9 years in terms of our
share price. We were a tiny trader on our New York listing up
until the end of 2000 we had 5% of our volume there. Today we
are doing more that 50% of our volume in the US.
MINEWEB: Has Goldcorp overcome that institutional resistance
to smaller caps?
ROB McEWEN: We are still considered a small cap in the scheme
of things. But people are looking at it and saying if I go to
sleep and night and toss and turn about this asset; about a political
coup - the bankers coming along and pressing its balance sheet.
So, what we are trying to do is remove all its objections, and
we have had some really great things happen to us. If you look
at our board, if you want independent validation of our board,
Canadian business magazine in August selected us as the 16th best
board in Canada. National Bank Financial did us a survey on the
z-score which has been around for a long time as an assessment
of bankruptcy risk and to my great delight and surprise we were
the second least likely candidate of the midcap and senior cap
Canadian companies across the entire industry to go bankrupt.
Mother Nature has been really kind to us. She is driving a lot
of this and we are doing incremental things around the margin.
We found gold where it wasn't supposed to be. We decided to run
at it as hard as we could with exploration dollars to see how
big it was, and we kept getting very positive reinforcement. Today
we are still running hard, in fact faster. I look at it and say
independent confirmation of what we are doing. I was honoured
last week by being awarded as one of the Entrepreneurs of the
Year in Ontario. These are the results of the management team
and all of our employees. We had Prospector and Developers association
honoured me and the efforts of everybody else with the Developer
of the Year this year. Fast Company named us as one of the fast
fifty champions of innovation in February of this year. Investor
relations magazine Canadian awards named us best senior management
in communication and three other nominations. That is not for
the industry, but for the country.
Business Week two years ago said that we were one of the 50 most
innovative companies on the web. We are a mining company and that
was at the height of the tech bubble. So its all about coming
to the business and say what is going to make it attractive not
on a relative basis to the rest of the industry, but on a relative
basis to the entire market. That is why we have outperformed companies
such as Microsoft, GE, IBM, Coca-cola, Berkshire Hathaway over
the last 9 years on a buy and hold with dividends re-invested.
That is not by a little margin, but an extraordinary large margin.
In fact, if you look at our return on Investor capital which is
the same as our return on equity since we have no debt, last year,
if you compare this to business weeks survey on the top 900 companies,
we would have been in the top 20.
Revenue last year was half a million dollars per employee our,profit
per employee was $170,000. It is the financial measures that we
look at and say how do we extract that, how do we present it.
Using a baseball analogy it is like hitting a home run, taking
all the wickets. It is an industry steeped in procedures. It has
huge inertia. In our company we reframe the problem statement
which is usually considered a given if you don't do anything different.
MINEWEB: Doesn't that give you an enormous opportunity?
You have a model that is working well, you could pay more that
what the market expects you to pay for an asset but turn it around,
install your own philosophy and make it accretive. So what is
the tripwire then, for example, on the Campbell consolidation?
ROB McEWEN: Well, we have unfortunately not been able to come
to terms on that. Placer seems to think there is more potential
there. Even though we have put an attractive sum of money on the
table that based on their current knowledge they would never get
paid back out of their existing operation. They still profess
to think that they don't want to do what people hate doing in
the mining industry: selling a property and someone else makes
a discovery on it. Our property was supposed to close. Seven years
ago we were talking $360 cost per ounce and 53,000 ounces of annualised
production. In our first year of commercial production in the
new mine, we are doing 10 times production at one sixth the cost.
Yet this mine was supposed to close: it was a basket case.
MINEWEB: Perhaps that justifies Placer holding on since
you are so confident based on Red Lake? Can't they just copy Goldcorp?
ROB McEWEN: Maybe the structure that has come up is that we
have the trunk of the tree and they have a branch. It used to
be that they have the trunk. It would be nice to find some middle
ground though.
They have always had an interest in buying it, but it kept changing,
it kept getting bigger and bigger. So that they were doing 300,000
ounces at about $130 and we were doing 53,000 ounces at $360.
Now, they are struggling to do 200,000 ounces at just below $200
an ounce and we are doing 500,000 ounces at $60. And so they are
saying we would like to own it, control it and operate it. Well,
come on, demonstrate why.
MINEWEB: Goldcorp is becoming a de facto voice for intermediates
and there is some expectation, clearly not cultivated by you,
for the company to foment rationalisation in its sector. What
is the problem with intermediate consolidation or is it really
as simple as executive egos, turf jealousies and job preservation?
ROB McEWEN: If size is a relevant factor in getting the margin
call of investors it would be a consideration to deal with. I
think some of the intermediates - ourselves, Meridian, Agnico,
Glamis - more recently have all had pretty good stories of their
own. They have all come up and said they won't hedge. We want
to get away from debt and get a return on our assets. The big
companies have come unstuck - they made their big investments
in the early nineties when gold was higher and there is no way
they could come along and get their costs down far enough to be
productive without major write-downs.
We have looked at quantum leaps. A lot of people have suggested
that we take over Placer.
MINEWEB: As an asset strip?
ROB McEWEN: Well, you've got to figure out if you are going
to do a step change like that, or any investment. Can you go back
to your shareholders and say, when the dust settles, we are going
to have a higher net asset value per share, a higher cash value
per share, a higher earnings per share and our profitability is
going to improve? Do I see that there? I see a lot of assets,
a lot with short lives. They have a hedge book they consider one
of their best assets, well it's only worth half of what it was
in September of last year. They have a wonderful opportunity just
to close it out right now and get some money out of it. These
hedges are toxic waste dumps. If they don't straighten out their
books quickly, there is going to be hell to pay. There are a lot
of shareholders. If they are buying gold because gold is going
up, all they have to do is look at long term capital, all they
have to do is look at the hedge books. Just recently, EDS was
cleaning up its hedge book and made a $230 million loss. Well,
we are going to see bigger losses than this if some unexpected
event occurs and the whole things starts unravelling. One of the
reasons we own gold is to give us more leverage while we are waiting
for opportunities, but also if there is no physical gold out there
and we happen to be sitting on more than 5 tonnes of it. You can
help out a hedger. If you look at the Aussies who went under,
shareholders equity went to zero.
MINEWEB: You are already invested in Armgold and there
is great potential to massively increase your reserves by investing
in South Africa. Is something like that on your radar scope?
ROB McEWEN: No. I think perception is more important that
reality. The market is unsettled right now. We need absolute transparency.
What the South African government is doing is destroying tremendous
value right now. There are some wonderful operators and superb
assets. However, the government has shown its hand and what they
are going to do is take a larger and larger share of the assets
and the shareholders are going to be the ones who suffer.
MINEWEB: Goldcorp has a lot of cash, mostly dollars. Is
there the risk of a penalty on your valuation if that cash is
not soon converted to raising your output, or reserves or bullion
holdings? Should you not boost your bullion holdings significantly
to increase your optionality while reserves remain low?
ROB McEWEN: We have been working on that premise. We started
this practise below $270 an ounce, I viewed that the gold market
was going up and it was better to hold gold than cash.
MINEWEB: When you made the first purchase, what convinced
you that that was the bottom?
ROB McEWEN: I saw production profiles falling off. The feedstock
from new production had all but disappeared in the form of exploration
effort. Exploration dollars spent were half of what they were
5 years ago. If you think of a snake having a meal, it was half
digested and it had not had another meal. Exploration projects
take a while to develop. 5 years is a short time for an exploration
project to get to a size to go to production. It is probably closer
to ten. Depending where you are it is probably another 5 years
to build, after that you have to recover your money. None of that
is happening.
These big companies that have gone up to 8 million ounces of gold,
well they have to have a lot of projects just to feed the system.
The growth curve of majors is neutral to negative right now. The
intermediate sector is showing good growth. I also saw gold at
a twenty year low, and the economic issues are big. There are
monstrous problems out there right now. I see a repeat cycle of
what happened from 1929-39 the deflationary period when gold performed
well, and also the inflationary period from 1966-80. Gold did
well while the market was either down or flat. Homestake was up
better than sixfold in both periods. It is as though a generation
or two have lost knowledge of economics and history. You have
periods of extreme confidence in financial assets and then it
falls. When you look back you have overcapacity of a misallocation
of capital, debt at record level at all levels: consumer, corporate
& government. There is no resilience in the system to keep
us going and so you then have this erosion. We are at three years
of what could be a twelve year system if you take the average
of the two former periods.
MINEWEB: If you go back and look at the period from 1968
80. Gold stocks had their best run from 1973 74 and
then started to level off. There wasn't a run again until the
last few months of 1980. Have we already experience the "pop"?
ROB McEWEN: I think not. In 1929, 10% of the working population
had investments in the market. Today 80 85% of the working
population has investments directly or indirectly through pension
or retirement plans in the market. So, as people get uncomfortable
saying that the stock market is rigged, every player in there
other than themselves is dishonest, people are pulling back to
protect their capital. In our internet challenge which was post
Bre-X to me one of the most important things when you have a high
grade gold deposit is to be very transparent. We put all our geological
data out there so that the rest of the world could take a look
at it, look at our methodology and decide whether it was hot air
or something to agree with.
The witch hunt going on in executive suites is not going to end.
The SEC was created in the thirties because of exactly the same
problem as today. So we will get more rules, it won't stop it
from happening. If you have a balance sheet that is too complicated
or a hedgebook that will take a day to explain to investors, people
are going to leave. They don't want confusion. They want clarity
and transparency and they want comfort that there isn't bank debt
that is going to trip you or something else.
Go back to October 1987, when the market crashed, the Dow rolled
over very precipitously and the gold stocks ran for the first
day and a half post crash. By the end of the second day the gold
stocks started following the path of the rest of the market and
gold continued running into January. There is still a window to
buy gold equities.
MINEWEB: Goldcorp has been very critical of hedging. Is
it even worth criticising since it represents individual board
decisions and everyone lives by the consequences of them
in the case of unhedged companies they suffered in the down cycle,
now the hedged companies are suffering the up turn. Why has hedging
taken on such religious overtones when the greater problem is
surely the industry's indiscipline in pursuing projects with negative
rates of return?
ROB McEWEN: But you're an investor today, and you look to
the future not the past. The hedgers did phenomenally well through
the nineties, and actually they created their own success by increasing
the amount of gold that was hedged.
With interest rates where they are, going out and hedging, you
could go out 5 years from now and get a 13 14% premium on
the spot. Well, on an annual basis that is less than 3% now and
we have seen gold move 3% in a day. They have given up the entire
opportunity because they have committed for a year. So if anything,
it is just saying, well, we have made all this money here, it
has been really good for us and it is such a sure thing. If you
look at Cambior; they hedged 3 times what they produced in a year
because they knew the gold price was going to go down. Or Ashanti,
and say okay, you've got 50 or 100 years of information. Here
is the delta on gold, the probability is 0000.1% that it is going
to go up by $50 in 20 days. Well that is a safe bet, put it on
and bang! Eleven days later it is up $70 and they are going 'oh
no!' We owe $200 plus million on the bust to $500 million on the
bet.
That is the mindset, it is very common. You lock on to a strategy
that is working, and you don't change it. You fail to recognise
some of the major macro moves starting to occur in the environment
you're operating in. They are now caught in a bind: do I cover
my head and close it our and run the risk of being wrong in this
assumption, and gold goes down and I've hurt myself. I've rendered
all of my operations unprofitable without the protection of the
shield.
So they are climbing a wall of worry saying its not going any
higher. It is like the gold analysts saying you know, two times
or three times net asset value is far too expensive. I'd say to
them did you invest in any high-tech stocks? What type of multiple
were you putting on plant and equipment let alone some of them
didn't even have revenue, and then they went oh, 100 times revenue.
Is that possible in the gold market? If the investor becomes so
uncomfortable and its not a lot of investors; as you know it's
a very tiny market. So you get a swing of 1% of investors putting
money into gold and that's massive.
MINEWEB: Which is perhaps why there should be less consolidation
- investors need diversity and choice which is increasingly a
problem.
ROB McEWEN: There's a shortage of product. Well you've seen
some generalists move in the market, because they are not burdened
by the fall that had happened, and that history. You don't see
analysts saying there's a $400 gold price coming. They say $325,
$350 tentatively, because they have been so badly burned so many
years ago. The market just evaporated and no one wanted to listen
to the story. What
we are getting is there is a lost generation of investors that
are looking around and saying: 'I've never heard of gold in a
good light.' But guess what, it's turned in the best performance
in the last 18 months. Some
of the gold share performance has been astounding.
MINEWEB: Have you been approached by institutional hedge
fund investors who would not ordinarily have invested in gold
in the last 20 years, but who are now wanting to understand the
product and buy it?
ROB McEWEN: Oh yes, absolutely. Well, we have made a conscious
decision to go out and talk to people who have no history of investing
in gold. If you want to think of it, it's a marketers dream, when
you say 99%
of the market is untouched.
And those are the people who need to be protected. Because I think
there is a tidal wave coming and you want as many people to get
to high ground as possible to escape it.
MINEWEB: How do you stop Ottawa from getting its hands
on money that should be going to shareholders. What can you do
to protect your profits from government predation?
ROB McEWEN: Well, I guess they would say they are entitled
to it! One way is new development projects. We raised the money
with the express purpose of being ready when the opportunity presents
itself. Whether it is buying the mine next door or building infrastructure
to increase our production or other opportunities that might occur
in the market from time to time when the bullion prices separate
from equity prices. That happened in 1987 and 1980 and there was
a probability it happened this summer, to some degree.
MINEWEB: There has not been a significant gold discovery,
at least in district terms, for a long time now. Is this because
every major deposit is already known, or do you think technology
and higher prices can deliver a brand new centimillion ounce district
sometime in future?
ROB McEWEN: Absolutely. Ask anyone how the gold formed and
how it got there. You'll never get a straight answer. Our mine
is classic; the deposit was at the bottom of a mine that had been
operating for 45 years and was viewed by almost the entire industry
as having no potential and was likely to close because of high
costs and poor labour. So that's at the bottom of a mine, so is
that redefining the district? Yes, because there are 20 companies
exploring Red Lake on the back of our success. Our discovery has
caused Red Lake to become the busiest exploration camp in Canada.
15 years ago there wasn't supposed to be a South African type
setting in North America, people who had walked across that ground
since almost the turn of the century, but suddenly someone had
another insight. The technology is going to play a large role
in exploration in going through databases and analysing them with
today's tools and filters in discerning patterns that weren't
visible before using a pen and a piece of paper.
MINEWEB: Where is the intellectual capital coming from
to do the analysis. We keep hearing how the universities are releasing
fewer and fewer mining related graduates each year.
ROB McEWEN: A child who is looking for a degree should consider
mining because of just that fact. There is a scarcity of talent
and this is an ageing industry. Any smart guy or gal coming into
the industry now is going to find a fast track to the executive
suite. But it is a concern. When we gave our Internet challenge
I was astounded and delighted by the types of responses that came
in. A geologist comes to work with a toolbox, but then you see
guys using intelligent systems, applied maths, advanced physics
and computer graphics of the like that I hadn't seem before. It
is those tools, and it did show that you could take a database
and from a remote location analyse it, put targets in place, generate
targets. The interesting thing is that we didn't put up any of
our targets, so it was blind. We had a 50% confirmation, but 50%
of the targets that we generated were brand new. And so you look
at that and say are there other deposits to be found? Absolutely.
Have we exhausted all of the alternatives? No way. This is all
about reframing the questions, the fundamental assumptions and
getting the slightly different perspective and generating alternatives
that are new and unexpected. People say it will never work. That's
the excitement of this industry: there is so much room right now
for innovation.
MINEWEB : I suppose we should call it open source geology.
Who else is doing it?
BHP Billiton has adopted it. After the Prospectors and Developers
Convention in Toronto last year they made a presentation to the
Mine Ministers Conference and BHP Billiton asked for our permission
to talk about the challenge that they had adopted. They called
it the Goldcorp Principle and they took 150 years of data, all
of the information in their filing cabinets, and shipped it all
way to South Africa to have it digitised. Then put it up on the
web with a welcome mat in front of it. That was 7 terabytes of
data. Its an enormous amount. Open to anyone who wants to have
a look at it and propose a joint venture. They want to monetise
the intellectual capital that has been rendered into two dimensions
and been stuck in a dusty filing cabinet. They are trying to make
it alive and useful today.
MINEWEB: Out of curiosity, the Challenge prize money was
$500,000 - what was the effective finding cost per ounce resulting
from the challenge?
ROB McEWEN: Well we didn't have to price it like that. We
were looking for geological targets. I don't think its over yet.
We were looking for another 6 million ounces of gold which would
have been a tripling of our reserves and resource estimates. The
judges, who were all independent of us, looked at the property
and said, we see 6 million ounces here easily. The 25 semi finalists
were all of the same mind, so can you put a price on getting all
sorts of third party validation?
The geologist comes in and says this is where to start. Who else
says that? Now we have people from all around the world who are
looking at the data without any of the political interests and
they are saying "it should be right there". And then
you look and say we have a 99% confidence in that target, and
we are 95% over here. We have 50% of our targets sitting in areas
where our geologists never thought about it. This is not about
saying I'm the geologist and I'm going to find it. It is about
saying how can we access the most information possible in the
shortest period of time and get the results in an abbreviated
time frame.
The paradigm for the industry, how do you shorten the risk that
is associated in our industry? You do that by shortening the period
of time and reduce working capital, and get the working capital
turning faster.
MINEWEB: You serialised the brain power of all these people.
ROB McEWEN: The benefits were great. The hit ratio is pretty
high. Some targets we already had, but others are new. It was
an enormous talent search. We have hired many of the semi-finalists.
A lot of the semifinalists have gone on and seen their careers
soaring right now. At a time when the business was flat on its
back, they have seen an explosion of their business. So by sharing
it was more than a benefit directly to us, it was going out to
the industry and getting back "When are you doing the next
one? How can we get participate in it?" If we can showcase
this industry as one that generates capital that has a discovery
it can give you financial independence.
MINEWEB: Vast sums have been poured into gold marketing
with questionable results. Is there any reason to believe that
the "new" World Gold Council and an increased budget
are capable of doing any better than, say, spending that money
to buy ounces at source and horde them?
ROB McEWEN: Last year at this conference [Denver Gold] the
largest companies got up and spoke about how they were launching
a wonderful initiative to promote jewellery, which I thought was
a pretty poor way to spend money. Anyone who studied the gold
market for any length of time realises that gold demand is strongest
at the bottom of the cycle and that the jewellery industry looks
for substitutions as the price of gold rises. It is investment demand that you want
to cultivate. Gold is money,
it's not decoration. The industry seems to have forgotten that
gold is money. We
are producing something very valuable, especially when your currency
is bouncing all over the place.
Last year when they wanted me to support the gold marketing initiative,
I said you are sucking and blowing at the same time. You are a
hedger and you want me to support moving the price of gold up
to $8 only so that you can hedge again. So forget it. If you came
around and said that you were going to make this investment asset,
and promote it as such I'd be behind you 100%, but you will have
to stop hedging too.
MINEWEB: Is North America becoming a risky place to mine
given the trend
toward overweening environmental regulation and the concerted
effort to make remediation liabilities prohibitive? Do you need to think long term about
getting out of Canada and the US?
ROB McEWEN: No, it just becomes more complicated. There is greater liability put on executive
teams and boards. The biggest risk is from an operating standpoint,
you are going to lose the expertise in the economy. The guys that
are senior in business are going to desert if this is taken through.
I am a director on a board and someone who has run a company has
lots to add to a growing company. How much do I get in directors
fees they are not paying me nearly enough money to compensate
for the risk to my efforts over a career. So the market is going
to be harmed by the loss of expertise. I've stepped off all boards
that I've any involvement with other than my own because you cannot
know the company in every detail. They are making the chairman
of the audit committee the point man for all responsibility. Give
the guy a break if he is a director this has got to become a full
time job and even then, the bigger the company and that's when
you're saying become one of the largest companies? How are you
to know what's going on in the far corner of the world if someone
is doing something inappropriate?
MINEWEB: Was Goldcorp, as alleged by some, attempting
to drive the gold price higher in the second quarter when it bought
bullion at an average cost of $323? Were you trying to tip it
past $330 with physical buying?
ROB McEWEN: I was curious to see what the breadth of market
was. I had had some conversations with some large bullion dealers
and at one point was just asking what the breadth of the market
was, and I said if I was to enter into -- if the Bank of England
was selling I thought it would be great fun to bid for their entire
allotment -- and I said "how long would it take me to acquire
20 tonnes of gold?" 640,000 ounces.
They said it would take 2 days to buy physical gold. They said no problem.
So 3 weeks later I went back to test that statement and I put in an order to buy [only] 40,000 ounces.
They came back and said the market is moving a little faster than normal with gold coming up to 320. The normal spread in the market is 50c, they said today it's 75c and 40,000 ounces suddenly became a big order.
They gave me the wider spread and I said I would take it. They came back and said they could do the 40,000 ounces, but if I wanted any more it would take two weeks to take physical.
There is something weird in this market when the assumption is the nominal liquidity is out there and broad, but when you go to physical, you have trouble getting it. So the real liquidity I think is much diminished. If we can, through our actions encourage other people to buy gold and other producers to withhold gold, maybe it would bring about a tightness that would be beneficial to the industry. I mean, 40,000 ounces!
We hold over 5 tonnes today,
and it's curious when you look at the piece of papers that we
hold in our wallets and think that this is based on the good faith
and credits of the various countries. We have more gold than 30
countries now, sitting in our vaults.
MINEWEB: If you were to try and sell it, do you think there
is enough liquidity to sell it quickly. Have you thought about
testing it in reverse?
ROB McEWEN: Not yet. But that is a good point.
MINEWEB: Why isn't the low liquidity driving the price?
Why are we not seeing far greater volatility?
ROB McEWEN: I don't know, it is phenomenal what lease rates
are 25 or 40 basis points which is probably the lowest it has
been in years, yet the price of gold is going up. And there is
supposed to be physical problems making physical delivery. They
don't coincide? There is something peculiar happening in the market
place.
Mineweb Interview by Tim
Wood
November 10, 2002
This material from Mineweb was reprinted at USAGOLD by generous standing permission of Tim Wood of Mineweb. No further reproduction without permission.
Copyright © Mineweb 2002. All Rights Reserved.
Reprinted by USAGOLD with permission. Further use without consent is prohibited.
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