Since 1915, the Northern Miner weekly newspaper has chronicled Canada’s globally significant mining sector.
The Northern Miner’s Man of the Year in 2002, Rob McEwen of Goldcorp (G-T), has probably squeezed more shareholder value out of a small number of assets than anyone else in the gold business.
McEwen, as chairman and chief executive officer of the mid-tier gold producer, has built one of the strongest contenders in that field with an aggressive attitude coupled with an uncommon gift for timing. As a company, Goldcorp has used the resurgence of the gold market as a springboard to top-level status among comparable-sized North American gold producers.
McEwen’s association with the mining industry, and more particularly its financial-markets side, runs deep. His father, Donald, was a financial analyst and investment manager who started his own firm, McEwen Securities, in 1967, after a long association with Equitable Securities and before that, Crown Life. One of the firm’s first in-house offerings was Goldfund, an investment fund that held gold, gold equities, and gold-backed securities. The fund did much to make gold investment available to the individual investor.
The younger McEwen took over leadership of the companies his father had founded, with the keystone company, CSA Management, as the principal holder of control blocks in other companies, including the nascent Goldcorp Investments. Interestingly, today’s firm non-hedger put Goldcorp into the gold-lending business in 1987, at the peak of the flow-through era when gold mines were going into production at a fast pace.
And as cash-rich lenders to gold enterprises, CSA and its associated companies had their share of disputes when projects went sour. CSA lost one proxy fight with closed-end fund Equity Preservation Corp., when management wanted to convert the fund into a holding company financing mineral exploration and was caught in the middle of another row when its debtor, Abermin, got into a dispute with joint-venture partner Granges Exploration over poor operating performance at the Tartan Lake gold mine in Manitoba.
But it was in 1989 that Goldcorp made its move as a gold industry player, rather than a lender and finance house. In February of that year, Corona Corp. bid for ownership of Dickenson Mines and affiliated Kam-Kotia Mines. Dickenson, which owned its namesake mine in Red Lake, and Kam-Kotia, which had moved out of metal mining to become an industrial minerals producer in Saskatchewan, were languishing, and the bid piqued some market interest in the old producers. Both were management-controlled, and with each company holding the controlling interest in the other, they looked like a difficult target.
With Corona offering $7.15 for Dickenson’s B-series shares and $2.50 for Kam-Kotia’s, a major shareholder, Pamour, agreed to sell its holdings in the two companies. This set Dickenson management looking for a white-knight bidder.
It was CSA and Goldcorp that rode up, armed with an earlier agreement from Pamour to trade its Dickenson and Kam-Kotia holdings for CSA’s holding in Pamour’s affiliate Pamorex Minerals. Goldcorp launched its own bid for the two companies, offering $9 a share for a majority holding of the Dickenson B shares and $3 a share for half of Kam-Kotia. And — unlike Corona — it also bid cash for Dickenson’s subordinate-voting A shares.
The battle wound up in the courts, with the Supreme Court of Ontario ultimately dismissing an injunction Corona had obtained. In the end, Goldcorp had majority interests in both Dickenson and Kam-Kotia, and effective control, through Dickenson, of Wharf Resources, which held the Wharf gold mine in South Dakota.
That was the end of a takeover battle, but the start of another series of wrangles. These included a lawsuit by investor Reginald Howe (now best known as the plaintiff in the “gold price conspiracy” lawsuit), who claimed that Goldcorp had improperly changed the nature of its business by becoming a holding company — a curious irony, considering Goldcorp’s objections to Equity Preservation’s plans a couple of years earlier.
By the time the dust cleared, there was an open split between the new and old guard at Dickenson, and a proxy fight had begun. That was defused at Goldcorp’s 1990 annual meeting when two dissident directors were appointed to the board.
Lower costs
But while the corporate scraps went on, Dickenson’s operating side, which had been starved of capital for years, was profiting from the new management’s interest. Costs came down and a hedging policy was introduced that kept Dickenson’s revenues above the waterline. The industrial-minerals operations that had been folded in from Kam-Kotia were not as glamorous as gold, but they were charming conversationalists whenever the subject turned to money. An exploration subsidiary, Goldquest, had become one of the largest land-holders and explorers in the Red Lake camp.
Ultimately McEwen’s companies solidified their ownership and control in Dickenson and Goldcorp, and Dickenson, Goldcorp and Goldquest were merged in May 1994. The new company combined the Dickenson mine (rechristened Red Lake), the industrial minerals interests, and a shareholding in Wharf Resources that gave it an indirect interest in the Wharf mine and in another South Dakota gold mine, Golden Reward.
What the merger meant for the Red Lake gold mine was a large shot of capital at a crucial time. Red Lake had always been the poor relation of the richer Campbell mine across the fence, but with money for drilling, and a little geological savvy, it confounded many people by serving up wide and high-grade intersections once an exploration program began in 1994. The discovery meant that a whole new life — in effect, a whole new mine — could be planned for the Red Lake property, with new development and a rebuilt and redesigned mill.
Strike
But meanwhile there was an operating mine to manage, and a workforce that was becoming increasingly restive after a 4-year wage freeze. The miners, members of the United Steelworkers of America, went out on strike in June 1996, charging that Goldcorp had evaded negotiations for a new contract. The strike, which lasted more than three years, effectively shut down the old Dickenson operation, while at the same time development and exploration were going on to create the new mine.
McEwen was blunt about Goldcorp’s aims for the future: the company wanted an entirely new work regime, and would go ahead with a new workforce if the present one did not buy in. There would be a new work schedule and new provisions for using outside contractors. The union said it was ready to look at proposals for new work arrangements, and eager to co-operate on safety improvements, which had been a significant problem at the mine; but negotiations always broke down. Miners drifted away, many to the nearby Madsen mine, which was being developed in preparation for reopening, and ultimately the union conceded defeat: it would withdraw as the bargaining unit at the mine, and a significant number of workers would be laid off (though with a considerable severance package).
Progress at the new mine was rapid, and in 2001 the new zones were brought into production. Red Lake quickly became the largest — and one of the lowest-cost — gold mines in Canada.
In early 1996, Goldcorp floated a proposal to take Wharf Resources private, but it was rejected by the minority shareholders. A second proposal near the end of the year succeeded, and the Dickenson assets were at last under a single roof.
One problem remained: the old Dickenson corporate structure had bequeathed Goldcorp’s enduring problem of the 1990s — a two-tier system of subordinate and multiple-voting shares.
In November 2000, shareholders finally approved a deal to merge CSA and Goldcorp, and to consolidate the two classes of shares into one. The McEwen instinct for timing triumphed again, as the restructured company has caught the wave that brought gold stocks out of oblivion in the past two years. In May 2002, the stock was split, and at prices around $20, a dollar put into Goldcorp at the time of the consolidation is now worth $4.
While it has been usual to think of McEwen as being the beneficiary of the old corporate structure at Goldcorp, there would have been no change in that structure without his ultimate leadership on the issue; control of the company was largely in his hands. Far more than any other major gold producer, the company can be identified with its chief executive: Goldcorp, quite largely, is McEwen.
Resonates
This resonates with the retail investor, and — true to his background as a fund manager — McEwen has reached out to the retail crowd like no other executive in the gold industry. The commuter listening for traffic reports on a Toronto all-news radio station will hear a gold price report sponsored by Goldcorp; the gold bug at an investment conference will hear McEwen speak. Goldcorp’s share premium attests to the importance the retail investor still commands in the gold business.
With that level of retail interest, the company’s shares are among the most liquid in the industry, a factor that tends to support the price whenever investors get interested in gold.
Then there was the high-profile “Goldcorp Challenge,” in which geologists with time on their hands were invited to download Goldcorp’s Red Lake database and offer a proposal for further exploration. Gimmicky, it was: but good geologists took it seriously enough to enter the company’s contest, and several new junior companies were born out of the exercise — good old-fashioned promotion, via a new-fashioned medium.
There have been other factors in Goldcorp’s success, too, notably its willingness to stand aloof from the acquisition mania that hit the gold industry. While the largest gold producers have pursued growth as an end in itself, reasoning that large institutional investors will only see the largest companies on the radar screen, the successful mid-tier producers — the ones now commanding the highest premiums on their paper — have mainly kept out of the acquisition game, and have avoided using their cash to pay takeover premiums.
Pioneer
McEwen’s Goldcorp has also read the gold market with unusual success. At the time of the Goldcorp takeover, Dickenson was a high-cost producer dependent on its hedging strategy for profit; Goldcorp had been one of the pioneers of gold loans, which were at bottom a hedging strategy for producers too. As Goldcorp was bringing its costs down at Red Lake, it was also repositioning itself as a non-hedger. Whether or not Goldcorp did that because McEwen correctly sensed the upside pressure on gold, his company certainly was on top of the wave that has carried the unhedged gold producers higher.
From the Dickenson executive who admitted in 1992 that the Red Lake mine needed hedges to make money, to the Goldcorp executive of today who has memorably described hedges as “toxic waste” for gold producers, McEwen has been astute in his reading of the gold markets.
One related strategy was a quiet gold-money strategy. Without fanfare, Goldcorp began banking its own production against the possibility of a rise in the gold price, and has booked substantial paper profits on that hoard. The strategy both works well and plays well: it works as a money-maker, and plays to the pro-gold attitudes of the retail investor (who would, if he weren’t pro-gold, be somewhere else entirely).
There is another strategy going on, just as quietly. In the third quarter of 2002, Goldcorp took a shareholding in neighbour Placer Dome (PDG-T), selling it profitably later in the period. It had not necessarily been looking to take a run at Placer, but at a time when the Street’s conventional wisdom was that Placer should be carved up, Goldcorp was staking a claim.
Goldcorp management has been explicit that there are plans for the cash the company has stored up — and certainly for a company that is, to a great extent, a one-mine show, diversification is going to be an important strategy. Goldcorp opens the year with plenty of cash, and roughly as much attitude. And attitude is on a bit of a winning streak in the gold business these days.