Gold to hit US$850 and beyond: Robert McEwen interview (October 22, 2007)

Rob McEwen, CEO and chairman of U.S. Gold, spoke with Peter Koven, mining reporter for the Financial Post, at the 2007 Toronto Resource Investment Conference on Sunday. Here is an edited transcript of their discussion.

Q. What is your outlook for the sector these days?
A. Very positive. I think the subprime issues and the asset-backed commercial paper crisis of August was the start of the problems we’re going to see. People are going to say, "What is money? And where do I keep it?" The Northern Rock problems we saw, they’re not alone. It’s not an isolated incident. And if people start wondering where they keep their money, they’ll turn to gold a lot faster. That’s why we’ve seen gold move from US$673 through US$750 since late August.

Q. Where do you see the next support level?
A. Before the end of ’08, I believe it will test US$850. Once it crosses through that, by the end of 2010 I think it’s north of US$2,000. and it could well hit US$5,000 on a big run.

Q. Would that be a result of a major U.S. recession?
A. Not so much recession, but there are very definite places of weakness in the U.S. economy. But I see the Federal Reserve abandoning the dollar. If they go in and sense a weakness in the economy and keep lowering the rates, then they’re going to see their currency relative to everyone else fall through the floor. And maybe the US$1.03 we’re seeing on the Canadian dollar will be significantly higher. But if you’re Japan or China holding a lot of American dollars in your foreign reserves, or you’re taking dollars in the Middle East for your oil, and you see the Federal government come along and deliberately lowering rates and reducing the attractiveness of the dollar, you’re going to say why do I keep taking these dollars? Where should I put my foreign reserves? Should I be buying something right now or should I be converting it to euros or some other currency?

Q. So you’re bullish on the Canadian dollar as well?
A. I think Canada has a lot going for it. There have been steps by the government to streamline the minerals business. Look at the McFaulds discovery. There’s all sorts of resources that have yet to be found. It’s a big country that’s not that well explored. When people want to buy our resources, they have to buy dollars.

Q. Any gold discoveries getting your attention?
A. I’m watching them all. But no, not at this point. There’s good holes coming from a number of companies. I’m just watching. I’m reasonably well invested in the sector.

Q. What are the big challenges mining companies are facing right now?
A. There are a number of properties that had exciting deposits that management said were ready to be put into production. They built them, and we’re finding instances where the grade’s not as good, or it took longer to build, or it cost more, or all three of those. And at the end of the day, the results aren’t anywhere near what was promised. So there’s a disappointment and I think there’s a shift.
Going back to late August, people said maybe “I want a business with a positive cash flow instead of negative cash flow,” which would be a typical exploration company. And I think the sector hasn’t bounced back, and the money is being redirected into larger companies even though they’ve had poor performance. They offer liquidity in trading, much more so than juniors. But they also have liquidity on their balance sheets.

Q. What about rising costs?
A. The average cost was US$160 in 2001 to produce an ounce of gold. And today you’re getting close to US$400. That’s your direct cost mining an ounce of gold. It isn’t taking into account your financial cost associated with building the facility to do it. So you’re seeing some really high numbers coming out now that are surprising a lot of people. You’re not seeing an expansion of the operating margin. You’re seeing a compression. Because the costs are rising faster than the metal price.

Q. Even now after the last rally?
A. In the last month we’ve seen a nice move of US$100. I’d have to look at the numbers again. But it isn’t opening the margins way up.

Q. What do you think of the recent deals like Newmont buying Miramar and Yamana buying Meridian?
A. You’re going to see more of them. There’s a lot of money out there available to everyone, particularly the seniors and intermediates. So the markets are saying "Come on, Do something! Buy something!" You’re not always sure if it’s being bought at the best price, but you know that activity’s going to continue.

Photo: Rob McEwen
Carlo Allegri/National Post