HOUSTON (ResourceInvestor.com) -- Rob McEwen needs no introduction to anyone familiar with the gold mining business. Resource Investor caught up with the former CEO of Goldcorp and now head of U.S. Gold [OTCBB:USGL] by telephone on Tuesday following U.S. Gold’s all-share offer to consolidate four companies with properties in the Cortez Trend of northeastern Nevada, White Knight Resources [TSXv:WKR], Nevada Pacific Gold [TSXv:NPG], Coral Gold Resources [TSXv:CGR] and Tone Resources [TSXv:TNS]. All four companies have mineral properties that are adjacent to or near U.S. Gold's Tonkin Springs property.
RESOURCE INVESTOR: Most people know you as the enormously successful former CEO of Goldcorp [NYSE:GG; TSX:G], a company you guided from what some would call humble beginnings to a highly respected top tier gold mining powerhouse culminating with the merger with Wheaton River last year, and in the process you created some serious value for your shareholders and yourself. People may be wondering with the wealth you created safely in hand, why doesn’t Rob McEwen just kick back, take it easy and enjoy the hard-won fruits of your labor? Why tackle a new project and put your capital at risk now?
ROB McEWEN: “Well, it’s fun. I still remain the largest individual shareholder of Goldcorp. So the capital is working there and I have some other capital and I am very optimistic about the price of gold. I happen to believe that the junior sector will deliver much larger returns than the seniors and intermediates. When I stepped down (from Goldcorp) last February I thought, wow, I’m unemployed, now what am I supposed to do? I have an expectation to live a long life and the thought of just sitting still over the balance of my life didn’t seem very appealing.
Gold Commentary
RESOURCE INVESTOR: You have been saying that gold will test the old highs of $850 probably in the next couple of years, (BMO – Commodities Conference) but did you also say that you think that gold will be going well beyond that figure by 2010?
ROB McEWEN: Yes, I think it’s fair to say that you could have a lot more people crowding around the gold market than are there today. The move we have seen in the gold market was first driven by the U.S. audience when they saw gold going up in dollar terms, but the other currencies really didn’t see that. Since the start of 2005, however, gold has been moving up in all major currencies and people are now saying, “I should have some gold in my portfolio.” When that number becomes large, you have an industry that is consolidating, annual production that is decreasing, and the cost of production that is going up. So, there is less gold being produced, it’s costing more to produce it and there are more people coming into the market wanting to buy it.
RESOURCE INVESTOR: Previous bull markets for gold were driven by speculation and actual physical gold demand. In the 1970’s and 80’s, for example, individuals had to actually take delivery of gold in order to invest in it, or arrange for secure storage for a fee. With the advent of the new gold ETFs, do you see the potential for many more investors to participate in this gold bull?
ROB McEWEN: Definitely.
RESOURCE INVESTOR: Is it correct to say that you have not been a big fan of the World Gold Council in the past? You have called them “the home of the hedgers” among other things. Now that they have sponsored most of the new gold ETFs and increased the focus on gold as an investment has that changed your views any?
ROB McEWEN: No. I believe the ETFs have exceeded all of their expectations, that they were created to sop up some of the demand but not to cause gold to go to the sky because you have to remember, as you pointed out, most of the people who are members of the World Gold Council were hedgers and remain hedgers. So there would be little interest in seeing the gold price going up $50 or $100 or $200 above their hedge book because that annual production fee they are charged (for membership) would be a very expensive initiation for a hedge book getting off side by a billion dollars. As is the case of Barrick [NYSE:ABX; TSX:ABX], which is off side more than a billion dollars. So you look at that and just go, ‘alright, why would you want the gold price to go way up there?’ … I think what they have created is a wonderful vehicle – I won’t take that away from them, but I think it’s eating them for lunch right now.
Rob McEwen on the McEwen Approach
RESOURCE INVESTOR: It has been reported that you started your career in the financial markets with Merrill Lynch. How did a non-miner become so successful in the mining business?
ROB McEWEN: My father introduced me to the market when I was quite young and he had me charting stocks when I was ten or eleven. He was in the investment industry. And my first investment came when I was twelve. It was a “bad investment” because I made nine times my money in eighteen months and I thought that’s the way the market operated! I thought I started rather early, but Ian (Ian Ball, U.S. Gold investor relations) who is with us today made his first investment when he was five – he’s got a lot on me there. So I started off in the market, my father was a big advocate of gold and he put all his clients into South African gold shares and gold bullion in the mid to late ‘60s and they did very well.
Through him I caught the gold bug, but I was mainly in the investment industry and did research, sales, ran a number of mutual funds – so at least the first part of my career was looking at investments in the sector and during that period I was with Merrill Lynch. In the second career I stepped into the mining industry thinking I knew something about the mining industry and I was quickly brought up short when I found myself on a steep learning curve.
I would say that coming into the mining industry I had an advantage over some people because I had a different perspective and I didn’t come with the fundamental assumptions that are ingrained in anyone who grows up in any particular industry including mining. So I said how do we differentiate our product, why are we doing what we are doing, is there another way of doing it? And there is a question that I use very frequently and that is the question, “Why?” So, I kept looking for how we could create a competitive advantage and when Mother Nature delivered us a discovery the question was, how big is it and how long will it take and the mining industry, or at least the people I was using said they didn’t know to both questions.
RESOURCE INVESTOR: You certainly brought a different approach to exploration when in 2000 you put all your proprietary geological data for Red Lake up on the web and invited geologists to tell you where to look for more gold. Critics called you naïve. Some at the time said it was just a gimmick or a promotion, but you said later that the Goldcorp Challenge was very successful.
ROB McEWEN: Extremely.
RESOURCE INVESTOR: What on earth motivated you to do something like the Challenge when the mining community is so rigid in its secrecy?
ROB McEWEN: When they couldn’t answer my questions about how much gold was there and how long it would take to determine that. I asked our exploration department to put together a brainstorming session and bring all the geologists that we had into a room for two days and in preparation I wanted them to bring in all the ideas they had including the ones that had been shot down by their superiors. When it started off it did so with a certain methodology that within a few minutes I said I wasn’t going to allow and basically said who’s the youngest in the room in terms of tenure and I want to hear your ideas first not the person that runs this department.
That opened up the discussion and showed there was no hierarchy in the room – or at least you could violate it and not have any repercussions and we had a really good session. Everybody walked away really pumped up with a whole lot of new targets. After that I said, well, how do we get more of the world involved helping us define new targets? I was carrying that thought around in my mind for, I don’t know, six or eight months, and then I happened to go to a course at MIT in Boston on information technologies. (It was in connection with) an organization I belong to called the Young Presidents, a sort of international organization and they have sessions. This was an educational session and they had forty of us from around the world and we had the head of the IT department, head of the business school, and the head of their artificial intelligence there. For a week they just downloaded us all sorts of ideas.
In that process one of the ideas that we discussed was LINUX, and open source code, and I can clearly remember sitting on the right side of the classroom in the second isle up and as we were talking about LINUX a light bulb went on. There was a little explosion in my head and I said there is the template that I am looking for to have my global brainstorming. So I ran back to Toronto and I said, guys we are going to take all our proprietary data and throw it up on the web and ask the world to tell us where we can find the next six million ounces of gold. They looked at me rather strangely because they knew that you don’t do this, you don’t give away proprietary data.
So I said, how do I sell these guys? To the head of exploration I asked, what do you think of this deposit that we found so far? He said it’s great. I said, how does it rank in the world. He said, well it’s probably one of the best in the last ten-fifteen years … I said, if we distributed all of our data of this exciting discovery to every mining school in the world and your name was front and center would that be bad for your career? And, he answered correctly, he said it would be good for his career. And at that point we had buy-in and we started running with it, assembling the most comprehensive database available on any property in the world on a very exciting discovery. We gave it away.
At certain times my staff was a little concerned about this, that maybe someone would take us over because they could see all of this. I said but we own all the property and if we are taken over that’s good for our shareholders because that makes the share price go up.
Near the end, just before we released it publicly a number of them came forward and said, we’re really concerned about this, we would like to put in all of our targets that we have generated. I had insisted that it be an unbiased database so that we’d hear from other people what they thought without reflecting on ours. (The geologists) said well we can’t do that. If we don’t put in our targets in there the world is going to think that you think we’re dumb and you’re asking the rest of the world to tell you where to find the gold.
RESOURCE INVESTOR: I take it you went ahead and put their (the in-house geologists) targets in?
ROB McEWEN: No, I just said look, these people are signing off any proprietary rights to this data to win the prize and you are working at the project and if we make a discovery you have options and if the price goes up, you’re in the money. And besides it will give me all sorts of third-party validation of the targets that you may have provided me with and that will make my decision easier to fund you.
RESOURCE INVESTOR: Interesting. Now that you ARE a miner, has the mining influence begun to seep in? In other words, are we unlikely now to see something as “outside the box” from Rob McEwen going forward?
ROB McEWEN: I wouldn’t count on it.
RESOURCE INVESTOR: More than one expert thought that you were buying into a dying gold mine at Red Lake. Were you just lucky, or did you have a so-far unreported ace up your sleeve, perhaps some geologist you kept a secret all this time?
ROB McEWEN: I was lucky. When you looked at the situation, you saw the Campbell mine, a very rich mine. One of the best that Placer [NYSE:PDG; TSX:PDG] had at the time. And you had next door the Dickenson mine, and the first thing that struck me was that the Campbell mine had been the recipient of about $100 million in capital expenditures over the prior ten years. During that same ten-year period the Dickenson mine, which I’ll call the Red Lake mine, had been starved of capital. The other statement was these two properties shared the same deposit. So you had one mine where a lot of money had gone into it, into process, into exploration … the other mine, they had experimented with some bulk mining techniques, blew their brains out, any free cash they had they invested in the oil and gas industry and by the time they blew their brains out on their mining they had no money in their treasury.
They kicked out the old management and brought in some guys from the base metal industry and they were driven by financial models and they were just cost cutting. They didn’t put any money into exploration. So I thought we would find more gold there because it had been capital starved, ignored, and management wasn’t oriented toward exploration. They were more oriented toward cost containment.
I can quite truthfully tell you I did not expect to find the richest gold mine in the world. I did expect to find gold.
Cortez Trend Consolidation Bid
RESOURCE INVESTOR: You have been busy lately, in addition to investing in and taking the helm at U.S. Gold, you invested in at least four companies with properties in the area of the Cortez Trend in northeastern Nevada, and on Sunday you announced a bid to buy those companies in an all-stock transaction. (Readers see this link for a related article by Jon Nones and the announcement.)
As Yogi Berra would say, it’s Déjà vu all over again. You have history of doing “put-togethers” of companies so-to-speak such as with the nucleus of Goldcorp nineteen years ago. Wasn’t what became Goldcorp originally several smaller companies?
ROB McEWEN: Yes, there were about five put together over about eight or nine years, we did three re-organizations to bring all these companies together into one to simplify the package and concentrate the value.
Three years ago when I was running Goldcorp I was negotiating to buy Rio Tinto’s [NYSE:RTP; LSE:RIO] 40% interest in the Cortez joint venture, which is where the Cortez Hills discovery is now. They had the Pipeline deposit and Cortez Hills. I was looking to buy that and spent quite a bit of time looking at it, but then they had the discovery and it came off the table. So I was awakened to the size of the deposits down there. I knew Barrick had a big mine and Newmont [NYSE:NEM] had big mines in the Carlin Trend and the Cortez Trend, maybe 20 or 30 miles away, hadn’t been thought to look much like Carlin.
RESOURCE INVESTOR: The news seems to have been well received by the market. Shares of U.S. Gold jumped over 10% on the news even though you are offering what amounted to a 25% premium to the shares of the four companies based on the stock prices at the time of the bid. And, that came on a double digit down day for gold with most gold miners firmly in the red. Often the shares of an acquiring company take a hit on acquisition news. Why do you think that the market liked your proposal, at least initially?
ROB McEWEN: I believe they can see the potential and the merit of a consolidation, of rolling a number of juniors together that individually have small treasuries, somewhat fragmented property ownership and relatively small market capitalization. By putting them all together you create a company that has a shot at becoming the premier exploration company in Nevada. It would be the largest landholder in the Cortez Trend. It would basically have the property size of a major, with a treasury that would allow it to explore at the same rate as a major. It would have the market liquidity of an intermediate, but still retain the upside potential of a junior.
These land packages are sandwiched between on the north, Newmont and Barrick and on the south Newmont and Barrick. So for an investor looking to invest in Nevada, they say, where do I go? Do I buy a senior and they make a major discovery as Placer did … Placer added three-plus billion dollars of value over four or five months on this discovery, and most of that was on the Cortez Hills discovery, but their stock price only went up 30%. But if a junior were to happen to hit you know very well that it’s not 30%. It might be 300%. It might be 600% and it might be 1200% if you hit something that looks, smells and tastes like Cortez Hills.
So, my thought was to fill that need in the marketplace, there wasn’t a liquid, well funded junior exploration company in Nevada and here was an opportunity to create it. And probably in one of the most promising areas in Nevada which happens to be one of the most promising areas in the world. I thought there would be an appetite in the market for it and certainly the price performance of U.S. Gold, the recent financing that we did, where we brought in U.S. $75 million (and it was over-subscribed and we just closed the door at $75 million) demonstrates that the vision for U.S. Gold was getting a lot of adherents. The same would be true of the share prices of all these other companies, that their shareholders liked it. The market liked it and as you said, it’s very unusual for a company to make a 25% premium bid for one company and see its (own) share price go up, but we’re talking four companies.
RESOURCE INVESTOR: Is this offer for the four companies considered a “hostile takeover” or how would you describe it?
ROB McEWEN: An unsolicited shareholder-friendly bid.
RESOURCE INVESTOR: Okay, have you talked to the management of the other companies since your Sunday letters and if so, what are the reactions?
ROB McEWEN: I have spoken to all of them. First reaction, well, we sort of knew it was coming, we didn’t think it would come as quickly as it did. Some are saying this is great. Look at what our stock price has done. Looking forward to being together. Others are saying, well you know we have to hire independent counsel and get a financial advisor to go in and reflect on the value that’s being offered – and that’s what all of them have to do – so that wasn’t unexpected. I’d say the majority of them maybe thought they had a little more time.
But, with all of them I am the largest shareholder in the company and with all of them since I have made my investment in the company they have all at least tripled.
RESOURCE INVESTOR: You own between 17% and 26% of the companies U.S. Gold is making a bid for. How do you handle any potential conflicts regarding your shares of those companies and what becomes of your shares in the deal should it not succeed?
ROB McEWEN: Well, first I am going on the assumption that it will succeed. They’ll just all be rolled in. My investment in all five companies now has a market value in excess of $100 million, so I’m putting my money where my convictions are.
RESOURCE INVESTOR: (As you mentioned) you recently completed a U.S. $75.15 million private placement for U.S. Gold. (16,700,000 subscription receipts at $4.50 with a half warrant for 5 years at $10.) You said that was partly for exploration at Tonkin Springs. That’s a sizable war chest for exploration …
ROB McEWEN: Oh, it’s very sizable. When I looked at what was needed in Nevada for exploration, when I looked at most of the juniors, they usually don’t go out and raise a lot of money wither because they can’t or don’t want to. For the last couple of years it was because the market wasn’t accommodating enough, but they would only raise enough money to have a very limited exploration program and then they would have to go back and raise some more money. Each time they did that they sort of put a lid on their share price. I felt that the premier exploration company in Nevada would have a treasury where it could explore aggressively for more than two years and fund that without having to go back to the market.
RESOURCE INVESTOR: You are operating in the figurative backyard of the largest majors. Barrick just took out Placer Dome and many speculate that Placer’s Cortez Hills discovery was a major incentive in that deal. Some say that the majors don’t allow juniors to play on the same field. How do you build the company you want to in a state that is practically run by Newmont and Barrick, (S&P 500 companies)?
ROB McEWEN: By running faster then them.
RESOURCE INVESTOR: How do you keep from being gobbled up while you are still a relatively small fish in big fish water?
ROB McEWEN: Well, when you have a discovery you go at it as quickly as you can. You go out and communicate with your shareholders regularly about your progress, but you don’t stand still and wait for something to happen. Around the time of the Goldcorp Challenge I also changed the share structure of Goldcorp. It used to be that there was a multiple voting share structure through which I controlled the company. And, I felt that as we were growing, we needed to eliminate that and when I went to our board, our lawyers and our financial advisors, they asked, what are you saying to us? I said I want to make all of our shares the same. I’m going to give up my multiple (share class) voting control. Our financial advisors and legal advisors said, you’ll be taken over right away. I said, we’re not just changing our share structure and then waiting at the bus stop for the takeover bus to pick us up. This is just to allow us to run faster.
We’re going to explore as aggressively as we can. If the majors happen to like what they see and feel that it’s so appetizing they must have it, well we are going to make sure that they have to pay up.
RESOURCE INVESTOR: What would you say to the shareholders of the other four companies who may be considering how to vote, please include advantages and any disadvantages that come to mind?
ROB McEWEN: Well, advantages are many. We’ll be a very well funded company, able to execute aggressive exploration programs on not only U.S. Gold’s property but the other four properties that will become part of U.S. Gold. Only one of them has a treasury to speak of and they have been very slow to execute any exploration programs on their property. They raised money, but it seems they haven’t spent it as quickly … (the combined company) would have much better market liquidity and your market cap would be much larger so you would appeal to a larger group of companies. U.S. Gold is an American company. All of those companies are Canadian, but creating a larger American company we would have a shot at getting not only in the HUI Gold Bug Index, but also one day getting into the S&P 500 – and then we could take a shot at Newmont. Because they really have the S&P 500 to themselves.
RESOURCE INVESTOR: I see, so you aim to make it to the S&P 500 with U.S. Gold?
ROB McEWEN: You bet.
What Is It About the Cortez Trend?
RESOURCE INVESTOR: How about some background. What is it that draws you to the area and how long have you been interested in the Battle Mountain – Eureka/Cortez Trend region of northeastern Nevada?
ROB McEWEN: As I said, my exposure to it started about three years ago when I was looking at the Cortez Hills joint venture. Then I bought through Goldcorp shares in a company called White Knight, which is one of the four that we are making a bid for, because I like the area. When I stepped down from Goldcorp the new management of Goldcorp said they didn’t want to continue with the policy that I had of buying shares in juniors – I view them as farm teams and information sources – so they said they were going to sell them. I said if you want to sell the investments that I bought for Goldcorp then if you want to do it at market then I’ll buy a number of them. Which I did. White Knight was one of them. I was looking at the trend and in 2004-2005 interest in the gold market was low, interest in the juniors was nonexistent, but an interesting thing was happening in the Cortez trend. While the investing public wasn’t buying the shares, the seniors were going around and joint venturing with a number of the juniors on what I though very advantageous terms for the seniors. So the senior’s interest in this area was not diminished and in addition to joint venturing with a number of the juniors through ’04 and ’05 they were also staking a lot of new ground in the area.
So, this was the backyard of the two largest gold companies (well, actually three when Placer was around) and what were they doing? They were out there trying to acquire as much ground as they could. And what’s that tell you, when you have Cortez Hills looks like Carlin and there is 180 million ounces (of gold) at Carlin and we’ve got Gold Acres, discovered by Placer in 1989 and it looked like Carlin but very small, then we had Pipeline and it looked like Carlin (that was 1991) but it was considered one-off. And then you had Cortez Hills in 2003 looking like Carlin. And you go wow, maybe the gold along here at depth is like Carlin. In my mind I think the seniors reached the same conclusion, they had already seen enough discoveries to say there was a high likelihood or possibility that there would be other Carlin/Cortez Hills style discoveries along this trend. That’s the attraction.
RESOURCE INVESTOR: There are something like 2,800 drill holes on the U.S. Gold property, but only a few of them went below 1,000 feet. First, you must have some indication from the few that went deep whether there is anything below the surface deposits, and second why wasn’t there more deep drilling?
ROB McEWEN: Well, the 2,800 drill holes were drilled over a period of about 15 years. At the time they were looking for shallow deposits that they could mine by open pit methods and that was the view all along that trend. (The thinking was) that the only type of deposit along that trend was shallow deposits. All the drilling was done pre-Cortez Hills discovery in ’03. So, they didn’t have the benefit of knowing that Cortez Hills existed like we do today.
They were looking for a totally different target and on the property was a processing facility, a mill, that had been built in the early ‘90s and they kept looking at the gold that was defined down to about 300 feet below surface. The average depth is 220 feet on the drilling of that 2,800 drill holes. On the 28 holes that went deeper they are so widely spread out over 36 square miles that you could probably fit a Pipeline deposit in between the drill hole spacings. So it hasn’t been adequately tested.
That’s what attracted me, there’s this big, $3 billion-plus discovery ten miles away on the same structure, on trend, and we have the largest gold showing in the Cortez Hill Trend that doesn’t have a mine on it. We have 1.4 million ounces sitting near the surface.
RESOURCE INVESTOR: Once consolidated, what would be the size of your land holdings in and around the Cortez trend, assuming all five companies?
ROB McEWEN: About 170 square miles.
RESOURCE INVESTOR: Tell us a little about Ann Carpenter, (president and COO for U.S. Gold).
ROB McEWEN: Ann Carpenter is an exploration geologist. I think she is well suited for this job. She’s worked on projects from grassroots all the way up to feasibility study, so she has seen the full spectrum of taking an exploration program up to defining a commercial deposit. She spent about four years running Miramar’s exploration program in the Americas. She’s worked for the seniors around the world and for juniors. She has also been a member for 15 years of a woman’s mining group which is an advocacy group that goes to Washington to try to help educate the politicians and legislators about mining and about its contribution to society and about what works and doesn’t work in terms of these regulations. As such, she has built up very good relationships with the lawmakers and the regulators and the environmental agencies and I think that’s a very important skill and relationship to have when you are operating in the United States, where there are lots of regulations. It may be a very prolific area to find gold, but you also have to be very, very thorough in your stewardship of the land. And know those rules and know the people that are in those agencies. One of her first recommendations to me when she joined last October was to meet with both the state and federal agencies that govern the environmental protection where our property is.
One of the reasons this property had been neglected by the market was there were some issues that were hanging over it and I thought they were quite exaggerated but they were there nevertheless. We went and met with the Nevada division of environmental protection and they gave us a very good hearing – there must have been about ten of them in the room – and I introduced myself (they knew Ann) and we talked about what we were going to do and (we talked about) what their concerns about the property were. I had flown over the property last year in a helicopter at about 200 feet off the deck and I asked the pilot to go around a couple of times so I could see where the pits were. There is very little surface disturbance there. It amounts to about 30 acres on 36 square miles. You go look over at Carlin or up at Pipeline, you’re talking thousands of acres disturbed.
So it was just a case of U.S. Gold previously hadn’t had a lot of money and they hadn’t been as thorough attending to the environmental issues and that’s all been addressed. Everyone seems to be quite happy with the progress we have made on it. I was also wanting to quantify it. Was it something that could kill you or something that was easily contained? It’s easily contained.
Prospects for the Future
RESOURCE INVESTOR: Gold miners (yourself now included) are the ultimate gamblers to a degree. Gamblers make money by knowing the odds. Right now, knowing what you know about the Cortez Trend, where would you put the odds of making a truly significant discovery in the properties you are assembling?
ROB McEWEN: I think U.S. Gold has pretty good property. We have a number of drill holes that ended in mineralization. I think the number is 90. So, we’re going to look to expand our resources that we have and then drill deeper across the property. There’s a geophysical feature that we want to explore that looks like what’s called Lower Plate, which is the host of the Carlin style and Cortez Hills style deposits. That hasn’t been drill tested yet, so we’ll be going in there. The other companies I think they each have interesting targets of their own and that’s one of the advantages of consolidating, that you have multiple targets to explore. Multiple opportunities of hitting.
RESOURCE INVESTOR: Do you already have all the cards (stakes in companies) you want, or will you be going back into the deck for more?
ROB McEWEN: This is the beginning.
RESOURCE INVESTOR: You said recently that it could be that Cortez is about the same stage as the Carlin Trend was 15 or 20 years ago. Please put in a nutshell for us your vision and what you would like to accomplish with the Cortez Trend.
ROB McEWEN: I’d be happy finding another Cortez Hills.
In a World of Bigger, McEwen Goes Smaller, to Grow
RESOURCE INVESTOR: A little different turn on an earlier question: You took Goldcorp from a company with a market cap of about U.S. $50 million and turned it into one of the premier gold companies with a market cap of nearly $8 billion and then stepped down. There are very few CEO’s that would step down from a prestigious gold company in possibly the greatest gold bull market of our lifetime. In the world of mining, where just about everyone wants to get bigger, you went smaller. Why?
ROB McEWEN: A lot of it revolves around share price. As one fellow said to me back in 2001, I was in London at a gold conference and it was the biggest gathering I had seen in about four years, and we were just coming out and Red Lake was really starting to perform. It was a great story. At the end of the presentation he came up and introduced himself and said, “That’s a great story, Rob, you’ve really done a great job.” I said thank you very much and I asked him if he was interested in buying some shares. He said no. I said, but you just got through telling me it was a great story. “Well,” he said, “it’s going to be hard for you to make Goldcorp perform the way you have made it perform to date, going up 20 or 30 times.” I said that’s probably a fair comment. Then he said I think you should quit. Quit? And he said, “I’d like to see you have 30% or 40% of a small company and I would match you dollar for dollar, and watch you build it.”
So I thought about that and that little thought was wondering around in my brain for a while, because when I was growing Goldcorp what was paramount to me was not the size of the company but it was the value of the shares. If my share price was going up that was good. But if I went out and bought a company and my market cap went up but my share price stayed the same – I kept asking myself and all these dealers coming through and offering me all these deals – why is that a good deal for me? I don’t want to run a bigger company for the sake of running a bigger company. The only reason I want to run a bigger company is if my share price is higher.
So, anyhow, Goldcorp was growing. It had grown to a size that I felt it was not getting traction for the next stage. I had constructed an equation comprised of the variables that I thought contributed to growth. I looked at each of those variables and couldn’t come up with a reason why I wasn’t getting the traction. One day I was walking down a hall and I passed a mirror and I looked in the mirror and realized staring back at me was a variable that I hadn’t considered. So I started looking at myself and saying what are my skills and contrasting that with what I thought the needs of Goldcorp going in the future were. I came to the conclusion there was a mismatch of my skills and the needs of the corporation. I had looked and read and watched other companies where the founder had taken it to a certain level and then not been able to get it to the next stage of growth. In fact companies would either plateau or go down because at that point of inflection a decision wasn’t made by the founder to step away and allow another style of management to come in and run it to take it to the next step.
With that realization I went to my board and said, gentlemen it’s time for me to leave. And they said, well you can’ t do that. They said, just as you said, we’re at the top of our game. I said, no I really think it’s time for me to leave so we started a search for a new CEO and along the way I saw Wheaton River. I had always wanted to buy something, but I had never seen anything … I’ll call myself very selective. I was looking for something that I could buy that would expand Goldcorp’s value and increase its share price. So when I saw Wheaton River and saw that they were producing the same amount of gold that we were producing in addition to copper. They had no debt, they had a growth curve that we didn’t have and they were trading well below our price, because one, they were relatively new, two, they were perceived more a copper company than a gold company … and I said, wait a minute, if we combine our gold production which is 600,000 ounces and their production of 600,000 ounces – the copper that they are producing is currently 40% of their revenue stream would become 20% of the (combined) revenue stream and Placer’s copper component was about the same. Newmont’s was 12%. Wheaton was also cash-flowing twice what we were doing and twice our earnings. So I thought by combining with them I would only have to issue 70% of Goldcorp to triple my cash flow, triple my earnings, lower my costs, which were already low, but lower my costs by 48%, increase my production by 100%, give Goldcorp a growth curve of 40% and do it all without any debt, add several hundred million dollars of additional cash to our already large treasury of $400 million … I said, this company has only one way to go and that’s up.
So, I get my numbers and I phoned up the founder of Wheaton River and said here’s some numbers, take a look at them and I’d like to have a meeting. He called me back and said, that looks pretty good. So I flew up to Vancouver and he brought in Ian Telfer and we talked. I said, here’s the game plan. I’m going to buy Wheaton River. I’m then going to step down. Your management team is going to run the combined company. The combined company is going to move from Toronto to Vancouver, what do you think of that? And they said, well that sounds great!
And it gave me the freedom (to do other things). Goldcorp has doubled since we did that.
RESOURCE INVESTOR: If the share price is any indication, it was a good deal.
ROB McEWEN: It was a great deal.
Dang It, We Only Hit Oil!
RESOURCE INVESTOR: In doing research for this interview it surfaced that you recently took a large position in a financially troubled oil and gas company and in the process became the Chairman and CEO of Lexam Explorations [TSXv:LEX.H]. Are we about to see Rob McEwen make a foray into the energy sector, or is there more than meets the eye on that one?
ROB McEWEN: Lexam Explorations is a very speculative junior company that happens to have a very curious or intriguing property in south-central Colorado in the San Luis Basin. Back in the early ‘90s on the property that we own we were drilling for gold in an old gold camp. We drilled 42 holes and 27 of them hit oil. So everybody was scratching their heads and saying what’s this all about. We spun the company out and drilled two wells, one down to 5,000 another to 6,000 feet. We came up with source rock, reservoir rock but no oil. But, two of those 27 drill holes that I mentioned earlier flowed oil to the surface. What we had encountered was a thick layer of cretaceous age material that was generating oil. There was a large section of Dakota sandstone, which is a reservoir rock and we were trying to define a trap. The property is in excess of 100,000 acres. There are multiple large targets on it defined by seismic work and the game plan will be to put some money into it.
But it’s wildcat, it’s about 30 miles away from any pipelines, there are no known fields in the area, however there are fields to the south in New Mexico off the Rio Grande fault and its one that I’d like to test.
RESOURCE INVESTOR: What are your current plans for Lexam?
ROB McEWEN: We have to do some fundraising. We were just tightening up its structure, cleaning up its books and then we’re looking to do some financing, maybe a rights issue or another financing combined with a rights issue.
Opening Doors
RESOURCE INVESTOR: Quite a bit has been written about Rob McEwen, Goldcorp and now U.S. Gold. There is a bit of a challenge for a journalist to open new doors with you. What are some new doors you wouldn’t mind opening for us? Tell us what reporters are not asking you that they should be asking?
ROB McEWEN: The natural resource sector can deliver wonderful rewards and those need to be shared with a larger part of society. I’ve made some contributions to the healthcare system, the educational system. I am a big believer in regenerative medicine. My wife and I started and funded the McEwen Center for Regenerative Medicine at the largest hospital complex in downtown Toronto.
Regenerative medicine is one of those areas that holds up the promise to alleviate a lot of the problems that are facing our society. Rising healthcare costs, extended stays, longer cure times … and regenerative medicine is working to reduce the cost and shorten the stay and address some of the issues by causing the body to regenerate itself. That’s one of my passions right now.
I also think the mineral industry is going to deliver a number of discoveries and a lot of wealth and perhaps the government will start realizing that this is an industry that is very important to our economy. It is a foundation stone that a lot of people want to throw away, but they should embrace it. It’s high paying jobs, it’s long life assets, there is lots of technology transfer. This is an industry they should be embracing.
RESOURCE INVESTOR: Thank you very much for taking time and sharing your thoughts with us today.
Disclosure: The author holds a long position in U.S. Gold.
