US gold corp. (OTC: USGL)
Age: 56 | Years at the company: 1
Goldcorp INC.'s friendly bid to acquire Glamis Gold Ltd., turning two mid-tier players into the world's third-largest gold producer, may have surprised some people when it was announced on Aug. 31. After all, the $8.6-billion all-stock purchase would be the second-largest gold deal ever, behind only Barrick Gold Corp.'s acquisition of Placer Dome Inc. in March. And it comes less than two years after Glamis launched a bitterly fought and ultimately unsuccessful hostile takeover bid for — you guessed it — Goldcorp.
But no one should be surprised by Rob McEwen's strong reaction. As founder and former chairman and CEO of Goldcorp, it was McEwen who brazenly built the company out of next to nothing through smart financial arrangements and innovative uses of technology — not to mention staring down a union in a 46-month strike, death threat included. In the process, McEwen turned the nearly shuttered Red Lake gold mine into one of the industry's biggest success stories and emerged as a prominent, often controversial figure in the gold industry who blazes his own trail. And it doesn't often pay to put a bee in his bonnet or make what he feels is an unsuitable offer for his baby.
Even though McEwen stepped aside from Goldcorp in 2005, he's still the company's largest non-institutional shareholder, with 1.5% of shares. And he's not happy about the Glamis deal — not with the price, not with how Goldcorp shares have dropped 27.7% in the month since the announcement and certainly not with how Goldcorp shareholders won't get to vote on the deal. He argues the company has violated Ontario corporate law, so he's busy drumming up enough support to force the board to hold a meeting, and commencing an application with the Superior Court of Justice (Ontario) for a compliance order. Goldcorp intends, it says, to “vigorously defend” itself, but in short order, McEwen has cast dark shadows of doubt over the deal.
Say this much about Robert R. McEwen: he isn't timid. But his style sometimes overshadows the fact that he is also on the cutting edge of the mining industry — so much so that McEwen was selected Most Innovative Executive by Canadian Business and a panel of experts through an open call for nominations last spring. As many surprising twists and turns as his career has had — and continues to have — McEwen has consistently proven to be a maverick. Whether he's busy challenging a merger deal, using the web to find gold or founding a new exploration company that within months launches four concurrent takeover bids, there is no doubt that McEwen does it his way.
The gold industry is hardly the first sector one thinks of when it comes to innovation. Mining is, after all, a gritty business: an expensive, labour-intensive and sometimes controversial pursuit of a malleable mineral buried deep in rock. How antiquated. Even gold's status as a store of wealth is waning. But that doesn't stop McEwen from playing the promoter, gladly trying to make the gold industry relevant to today's investors. “People probably aren't comfortable with the sector. They think it's an old industry, that it's not exciting, that it doesn't incorporate the technologies of the modern world,” McEwen says. “In an industry that a lot of investors view as very speculative or risky, the people operating in it tend to be very conservative–and overly conservative.”
No wonder McEwen stands out. He transformed Goldcorp from a moribund investment fund into one of the world's most dynamic gold diggers. He launched the Goldcorp Challenge, a now-famous online contest that offered prize money to people who could help him find gold. His Red Lake mine was the first to use a virtual-reality lab so that engineers and geologists could view three-dimensional renderings of the deposit. McEwen's tactics are those of someone who isn't afraid to challenge convention, in his pursuit of one of the most precious minerals on earth.
Now 56, McEwen caught the gold bug as a teenager in the 1960s, listening to his father talk at the dining room table about his travels around the world, a return to hard currency and his investments in gold. McEwen followed his father into the investment industry, and the two were briefly business partners running McEwen Easson, a small securities firm that specialized in mining. But something was missing. “The stock market is dealing with abstract concepts. You have paper. And I wanted to see if I could build something. I wanted something tangible,” says McEwen. Although McEwen recognized that finding the motherlode was highly unlikely, he was drawn to how it was possible. “The type of return you could get in that industry could create financial independence,” he says. “When I stepped down from Goldcorp, I'd met all of the objectives I'd set for myself in terms of financial independence and building something.”
And then some. Goldcorp was originally a closed-ended investment fund that McEwen's father started in 1983 to hold shares in gold mining companies and bullion. McEwen gained control of the fund upon his father's death in 1986. The next year, the fund's market value had fallen to where it was trading at roughly a 50% discount of its net asset value, and shareholders wanted to break it up. Instead, McEwen set about turning Goldcorp into an operating company. First step: remove the prohibitions on debt and constraints on owning companies. Step No. 2: wait for the right opportunity.
In 1989, he spotted Dickinson Mines, whose major holding was the Red Lake Mine in northwestern Ontario. It was a high-cost operation, about 45 years old, saddled with labour woes. Most in the industry expected it to close down within a few years. McEwen wasn't one of them. The mine was adjacent to Placer Dome's Campbell Mine, where some $100 million had been spent on exploration and capital investment in the previous 15 years. Dickinson hadn't spent anything at Red Lake, even though it sat on the same deposit. All it needed was a complete financial overhaul, a large infusion of cash and all-new technology. After a contentious court fight with a rival investor, McEwen acquired Dickinson Mines.
After a battle to reconstitute the board, McEwen cleaned house, and then put more than just a financial stake in the industry: he became a mining executive. Coming from the fast-paced investment world, the mining industry seemed to operate at a glacial pace, but McEwen moved swiftly. By 2000, he had consolidated five companies into one, Goldcorp, and eliminated a multiple-voting share structure that had given him ownership control but weighed down the stock. By getting rid of that protection, he also got around a Toronto Stock Exchange rule that kept him from leveraging all of his assets. “The whole purpose,” he says, “was to concentrate value in one company.” He'd also financially restructured the former Dickinson Mines, eliminating $50 million in debt, tightening its cost controls and finally putting it in a position to go drilling for more gold — just as the only geologist on his board was advising him to dump the Red Lake mine.
In March 1995, his geologists started finding gold — at 30 times the concentration of what they were currently mining. It breathed new life into Red Lake. But a year later, the union, represented by United Steelworkers, went on strike. At the time, the price of gold was about $380. Red Lake's cost of production was $360. Within a few months, the price of gold fell below that economic threshold, and the well-timed strike bought the time McEwen needed to remake the mine.
During the 46-month strike, McEwen accelerated exploration and pushed his management to lose their pessimism, think big and take control of their own destiny. Despite gold's steadily falling price, Goldcorp's stock kept going up because of its discoveries. In 1999, while workers watched from the picket line, part of the old Red Lake mine was torn down, and construction began on a new, state-of-the-art mine, full of the latest technologies to keep the cost of production low.
So far, so good. But McEwen was about to turn the industry on its ear.
The best ideas don't solve one problem — they solve many problems at once.
McEwen had a big problem on his hands in 1999: Placer Dome was watching Goldcorp with interest. With its Campbell Mine right next door to Red Lake, it intimately knew about the deposit both mines sat on. McEwen sensed that a takeover might be in the offing. But instead of tidying things up, he accelerated exploration to keep the share price tracking up. He gathered all of his geologists together for a two-day brainstorming session, and they revisited every idea that had been shot down or not shared. McEwen insisted on an open format — no hierarchies, no titles, no seniority. “We came away with a lot of really good ideas,” recalls McEwen. “Everybody was charged up and went off with a new sense of vigour and purpose. And I walked away thinking, How do we do that on a larger scale?”
Not long after, he attended a weeklong session at Massachusetts Institute of Technology that served as a crash course on the future of information technology — something that McEwen knew the mining industry sorely lacked. On the third day, he was listening to a presentation about Linux and the open-source model for developing operating system software, when he had his eureka moment. “All of a sudden,” he recalls, “there was this explosion that went off in my head. There's the template I'm looking for!”
McEwen's brainwave? The Goldcorp Challenge, the now-famous contest launched in March 2000 with US$575,000 in prize money: the company posted all its proprietary mining data on a website and asked the world to help them find Red Lake's next six million ounces of gold. His managers and geologists were wary. The mining industry thought it was not only childish but foolhardy, like laying down a welcome mat for a takeover. McEwen thought otherwise. Placer Dome likely already knew as well as he did what Goldcorp was sitting on. By giving away his database, everyone in the industry would be right up to speed should Placer Dome make a bid. In other words, it snatched away any competitive advantage.
The high-profile contest did much more, too. When the 400-megabyte file was released, it was the largest publicly available database of its kind on a current gold discovery. But it also marked the first time that Goldcorp had all of the deposit's data in one place. Previously, data was split into three separate databases for the top, middle and bottom portions of the deposit. The contest proved to be a catalyst toward integrating those databases, and that effort later enabled the mine to use visualization tools and computer graphics. Red Lake became the first mine to use a virtual-reality lab (a concept borrowed from the oil-and-gas industry), so that mining engineers and geologists could view 3-D renderings of the deposit on a 24-foot-wide screen.
In all, 1,400 people from 50 countries downloaded the file. Of the 110 submissions that were viewed as semi-finalists, 50% of the targets were brand new to Goldcorp — and they had an 80% success rate. “We found the six million ounces we were looking for,” says McEwen. “It changed the mindset of the people working for the company. It was a breakthrough and showed what was possible.” When the strike began, the mine was producing 53,000 ounces of gold a year, at a cost of $360 an ounce. In 2000, after the strike was settled and the first full year of production, Red Lake produced just over 500,000 ounces, and at a cost of $60 per ounce — a 10-fold increase in production at one-sixth the cost.
As fondly as McEwen remembers his hard-fought successes at Red Lake and Goldcorp, he doesn't regret his decision to step aside from the company in 2005. And he's adamant that his current opposition to Goldcorp's acquisition of Glamis has nothing to do with his past run-ins with the latter company. “It's all about value,” he says. “The last time Glamis came along, they offered us [Goldcorp] a 22% premium. But here you have Goldcorp turning around and offering a 30% premium, and the only thing that's changed in Glamis is that they've acquired a silver deposit that isn't permitted yet. And that's made it attractive enough for it to swing 50% in value?”
Despite McEwen's current campaign to halt the Glamis deal, Goldcorp is largely in his past. He has plenty of other potential nuggets to mine. In 2003, he and his wife, Cheryl, established the McEwen Centre for Regenerative Medicine, which will officially open its doors in Toronto this month, to fund research into treatments based on a patient's own tissues, cells and DNA. It's an exciting field, and has introduced McEwen to the biotech industry, where he sees tantalizing similarities to gold mining: probabilities of success are low, lead times are long, it's expensive and, as he says, “you can hit some pretty good home runs there.”
McEwen's not done with gold, either. His current passion: Nevada's Cortez Trend, a hotbed of speculative gold exploration by both juniors and industry giants such as Newmont Mining Corp. and Barrick. (In fact, McEwen figures that about half the price Barrick paid for Placer Dome earlier this year was for its Nevada properties.) McEwen's own fledgling US Gold Corp. is a Colorado-based exploration company he bought a third of in July 2005. McEwen is trying to structure his new company as something of a hybrid: the land package and aggressive exploration budget of a senior, the treasury and market capitalization of an intermediate and the potential pop of a junior — should it strike gold. “One of the joys of running a company is the liberty to experiment, and to test ideas,” he says. “When you do it once and it works, you're encouraged to do it again. And then you pick up the pace.”
Consider McEwen's approach with US Gold. It owns the Tonkin Springs property — smack dab in the middle of the Cortez Trend. It's surrounded by stakes owned by four Canadian juniors: Nevada Pacific Gold Ltd., White Knight Resources Ltd., Tone Resources Ltd. and Coral Gold Resources Ltd. In March, McEwen made a characteristically bold move: he launched concurrent takeover bids for all four. “Bidding for one company is sometimes complicated,” he says. “Bidding for two is problematic. But going for four? I haven't seen consolidation like that before. But I just looked at it and went, Well, I don't want to do it sequentially, it will take too long. Let's get it done and get our base, and then we can go from there. To me, if you want to build a company, let's start now.”
It hasn't all gone according to plan, with McEwen blaming some faulty legal advice about cross-border securities regulations for why the deals aren't done yet. McEwen, as always, remains undeterred. “I don't like standing in line,” he says. “I know if I step into the line, I'm only going to get to my destination as fast as the person in front of me. Whenever I've stepped out of line, I've gotten to the front of the line well before the people I would've stood behind. You have to change, you have to take positions that are controversial. Otherwise, what differentiates you in the market?”