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RIGHT PLAY, RIGHT TIME
Rob McEwen's risky gold-mining bet pays off
KATHERINE MACKLEM
WHEN ROBERT MCEWEN got up to speak at his company's annual meeting earlier this month, his first words were: "Gold is money." It's become a mantra for the soft-spoken chairman and chief executive of Goldcorp Inc. "You can help your family and friends," he went on, offering advice to the 500 or so believers and investors gathered at the CBC's Glenn Gould Studio in Toronto, "if you get them to buy gold." It's worked for McEwen. In a market that's lost 50 per cent in value since its September 2000, peak McEwen's company's stock price has doubled, twice, in the past two years. Investors who put $1,000 into Goldcorp in 1993 now have an investment worth close to $23,000. With $460 million in assets and no debt, McEwen is sitting on a gold mine. Literally.
McEwen's firm is a mid-size Canadian mining company with operations in North Dakota and Saskatchewan. It has stakes in a handful of junior exploration companies. But its crown jewel is in northwestern Ontario: the Red Lake mine, first developed in the 1940s. By the time McEwen bought it, in 1989, it was thought to be nearly played out. Wrong. Today, Red Lake is the world's richest gold mine. It's made his shareholders happy and McEwen enormously wealthy. Recently, he donated $10 million for research to Toronto's University Health Network (three major hospitals) and on June 23, Prince Edward will officially open the McEwen Centre for Regenerative Medicine. But before riches and royalty entered his life, McEwen had to overcome major hurdles. In his bid to extract the gold he believed all along was at the Red Lake site, he faced lawsuits, a family feud, a debilitating strike and a death threat, not to mention an investment community that didn't believe in him. "It's funny," McEwen says today, "how things turn around."
McEwen, 53, is a small man, dressed in a nattily tailored suit. His tie is gold silk. On his left hand is a wedding ring of lapis lazuli with a diamond centre, set in a gold band. While his career didn't start out in mining -- he used to be an investment dealer -- he's had a long association with the industry. Growing up, he recalls, "bags of rocks were dropped on the dining room table." McEwen's father and, for a time, business partner, Donald McEwen, ran a small securities firm, McEwen Easson, that specialized in mining companies -- and grubstakers were often at the McEwen home looking for a financial backer. McEwen worked for his dad in the summers and after graduating from university. Apart from a couple of breaks -- back to school for an MBA and a stint at Merrill Lynch -- he stayed with the family firm, buying control from his father in the early 1980s. Around the same time, in 1983 -- three years before he died suddenly -- McEwen senior launched Goldcorp, a separate holding company for gold-mining shares and gold bullion.
McEwen is sitting in a boardroom in his downtown Toronto office. Hanging on the end wall there's a small painting of the Red Lake site, in taupes and reddish browns, signed by Group of Seven painter A. Y. Jackson. The painting was commissioned by the mine's developer, the late and fabled Arthur White, whose firm was called Dickenson Mines Ltd., which McEwen says he spotted as a takeover target in the late 1980s. By then, Red Lake, Dickenson's main holding, was a poor performer. But McEwen had a hunch that it still had lots of gold because right next door, sitting on the same ore bed, was Campbell Lake mine -- and it was an industry giant. Believing there was more, untapped gold in veins yet to be discovered at Red Lake, McEwen used Goldcorp, which he controlled following his father's death, to bid for Dickenson. But he had competition: the savvy Ned Goodman, a rival mining industry investor, now CEO of Dundee Bancorp Inc. An intense takeover battle ensued. Goodman sought a court injunction against McEwen but, with one day to go before the Goldcorp offer expired, an Ontario judge threw Goodman's case out. In April 1989, McEwen gained control of Dickenson and its Red Lake gold mine -- and his problems had just begun.
Before he could search for new veins at Red Lake, McEwen needed to transform Goldcorp, then a holding company, into an operating company. The reorganization would solve two problems: the mine desperately needed an infusion of cash, which the holding company had, but couldn't flip out of its coffers into a subsidiary's. And Goldcorp's share price was suffering from a "holding company discount." A newly minted operating company would both "turbo-charge" Goldcorp's shares, McEwen believed, and allow it to funnel capital into the mine. But he was surrounded by doubters, among them his own family members. "There were two years where our annual meetings were like theatre. I could have sold tickets," he says. "That's when I went out to get the tallest, meanest-looking lawyers I could find."
In those days, McEwen played speed chess against a computer, on the advice of a friend who suggested it would help him think quickly. It did, he says. It's clear he ponders a business strategy much like the board game. "There's a scheme. You have to move. There's a plan that's designed," he says. In the early 1990s, the game was rapid and multi-faceted -- and McEwen played ruthlessly. Restructuring the company, he replaced the entire board of Dickenson Mines and made himself CEO. While warding off an attempted class-action suit by a disgruntled Goldcorp investor, he handled his own relatives who lacked confidence in his strategy. Reluctant to speak about the family feud, he says: "When parents die and they haven't clearly laid out what the game plan is for the disposition or the continuation of assets, you have all sorts of competing interests all of a sudden. There were frustrations and a sense that this wasn't going to become anything." Did views on Red Lake's potential differ among his family members? "Yes," he answers. "And, I'd say, on my own talents."
In 1995, his organizational battles behind him, McEwen was ready to get at the gold underground. He made a crucial $10-million investment to explore the site. Six weeks later, his chief of exploration, Dutch van Tessel, came back with nine drill samples averaging a grade 30 times what the company was then mining. "This was a mine that was supposed to close," McEwen says. "The industry thought it was on its last legs." But before Red Lake's rich new veins could be opened up, the mine was shut down. Its workers, members of the United Steelworkers of America, walked off the job in June 1996. A bitter strike dragged on for 46 months. Against the advice of his production managers, McEwen refused to settle. He wanted a new work schedule, better-educated workers, and shared responsibility with the union for safety and discipline issues. On-site, he housed 150 workers who, he says, were not processing gold -- they were doing exploration work. He tore down the old processing plant and built a new state-of-the-art facility. "I wanted to purge the system of all attitude and start fresh," he says. The cost of producing an ounce of gold at Red Lake before the strike began was US$360, only US$20 less than the market price for an ounce; he says there was no room to negotiate.
In March 1999, McEwen received what he calls a death threat. "You want blood, we'll give you blood," a letter said. Pointing to an explosion that killed nine miners in 1992 at Royal Oak's Giant mine, it said ominously, "Remember Yellowknife." McEwen reacted swiftly, publishing the letter in a local paper and offering $35,000 for a tip that would lead to the arrest of the letter-writer. No arrests have ever been made. Finally in the spring of 2000, McEwen made an offer the strikers couldn't refuse: he'd pay each employee a hefty severance, a signing bonus, and even stock options, if the union agreed to abandon its bargaining rights. He also agreed to hire 45 of the 180 striking workers. It was the first, and only, time the Steelworkers walked away from a unionized shop.
That same year, in a move that rocked the whole industry, Goldcorp posted all its proprietary geological data on the Web -- the Linux of the mining sector -- and gave away US$575,000 in prize money to geologists who proposed the best strategy for finding Red Lake's next six million ounces of gold, above and beyond the company's own results. In 2001, the mine was finally in full production, mining new, richer tunnels, and processing gold for US$59 an ounce, one of the lowest production costs in the world. Last year, costs rose slightly to US$65, still among the world's lowest.
Gold mining is a business that's as much about romance as it is about rocks. The value of gold, which has been creeping up lately, is more about the world's sense of security than it is about one of the softest minerals found in the earth. Yet gold's sheen and its malleable quality allow it to be the very symbol of strength and love and riches. McEwen gets this -- and he's betting that the global marketplace has a long way to go before it feels secure again. Goldcorp holds back gold bullion and now, with seven tonnes, it owns as much gold as Mexico and more than 44 other countries. McEwen predicts gold, now trading at US$353 an ounce, will hit US$400 this year and US$800 in the next six to eight years -- a call he made at his annual meeting.
After that meeting, investors were invited to a reception that was part Brazilian Ball, part Klondike Days. Models clad in gold and with gold-flecked lipstick waved small, gold-coloured flags. Treated to champagne, hors d'oeuvres and finally dinner, shareholders examined displays from Goldcorp suppliers and associates. Even the Toronto hospitals had a display -- information about the regenerative medicine that will be studied in the new McEwen Centre. McEwen, who had his picture taken with Mounties on hand to protect the gold, mingled quietly with the crowd. Investors wanted to know how Goldcorp would maintain its stellar performance. McEwen says he wants, and has been trying to buy, the Campbell mine next door. He's exploring further in the region, and spending millions on a new, deeper shaft at Red Lake. When asked if Goldcorp is a natural takeover target for an even larger company, he suggests that's out of his hands: "Control is in the marketplace." But, like any master chess player, McEwen's not likely to give up the game easily. He'll be trying to ensure that, whatever happens, he and his company will come out golden. |
