share price has jumped 310% in the last three years, more than
twice the rate of any other gold mining stock. Analysts, like
Bugos and Schaeffer, are predicting that the popularity of gold,
as a safe haven during troubled times, will continue to increase.
(Some even predict a "gold run.") Mr. Robert McEwen, the Chairman
and CEO of Goldcorp, received no less than five awards last
year from organizations as diverse as Northern Miner to Ernst
and Young. Is there gold in 'them thar mines,' or could the
recent run-up of Goldcorp simply be that Mr. McEwen, formerly
of the finance world, is media and market savvy?
Research.com says, "The outlook of gold remains bright. The
recent pullback in many stocks could provide a perfect opportunity
for investors to get in on the "ground floor" before the yellow
metal makes its next run higher." The mega-cap gold corporations
have more reserves and more market capitalization than Goldcorp,
but they don't beat Goldcorp's bottom line--cash operating costs
of just $65/ounce to produce the gold. (For a detailed industry
comparison, go to this week's sector report card.) Read on to
see how Goldcorp has reduced their production costs to the lowest
in the industry and substantially increased their reserves under
the visionary guidance of their CEO.
In 2002, Mr. McEwen was Northern Miner's 2003 "Mining Man of
the Year" for being the "biggest positive newsmaker" in 2002.
He was also Ernst & Young's Entrepreneur of the Year, Viola
R. MacMillan's Developer of the Year, Fast Company's "The
Fast 50" Champions of Innovation, Investor Relations Magazine
Best Senior Management in Canada and Business Week's "Web
Smart 50"--one of the 50 most innovative companies on the
Wynne--Five awards in one year. You'd think you were
an actor, instead of the CEO of a gold mining company.
been quite a year.
Wynne-- What makes you so well liked by these organizations?
in the company works pretty hard. They just need someone to
give an award to. We've approached the business a little differently,
and fortunately, have gotten results that surprised people.
In the mid-90s, our mine had been going for 50 years and was
assumed closed. Today, as a result of the discovery we made
at the bottom of it, it's considered to be the richest mine
in the world. Goldcorp is also one of the five lowest cost producers
in the world.
Wynne--What is so different about your approach, and
how do you keep the costs down?
tore down an old mine. We found gold where no one thought it
was going to be found. It totally altered the geological model.
We built a new mine with fiberoptics. We're beta testing with
wireless communication devices underground. Wireless communications
are pretty natural on surface, but underground radio waves don't
travel well. Think of being in an office tower, where you board
up all the windows and turn off all the lights. You're responsible
for twenty people, on different floors. Tell me what they're
doing? The key need is shortening communication times. That
reduces working capital. If you reduce working capital and fixed
capital, you reduce costs overall.
Wynne--I'm sure that makes you very attractive to shareholders.
had just remarkable performance. Our compound rate of return
on share price is 38%. We've outperformed more than 90% of the
list of companies in North America since the start of 1993,
when I began restructuring the company, until now. Our return
on capital is 26%. In 2001, we were the most profitable gold
mining company in North America. We split 2:1 last year. We
held back 10% of gold production. We believe the price of gold
is going higher. We thought we'd hold a little bit and sell
it once that occurs.
Wynne--Is Goldcorp's rate of return (for shareholders)
over the last nine years 37%? That outperforms Microsoft, IBM,
Coca-Cola and Warren Buffett, doesn't it?
and it puts all the senior gold producers in the dust. The senior
gold producers have a flawed strategy. They think growing the
top line is important. To me, it's growing the bottom line--the
share price. I've got a chart that compares us to the three
largest mining companies in North America. They're compounded
at today's T-bill rates at best, as opposed to our 37%. They've
ignored the shareholder. They're out to make a bigger company,
but they haven't paid attention to what happens to the per share
number. That, to me, is critical. Why be bigger if your share
price is going to stand still or go lower?
note: While the top three are performing as Mr. McEwen asserts,
there are two other gold mining companies with much better returns.
Be sure to check out the GOLD REPORT CARD in this newsletter!)
Wynne--With those returns, why isn't your face as well
known as Bill Gates? Why isn't Goldcorp mentioned in the same
breath as Berkshire Hathaway? It can't be that insurance is
sexier than gold. There will never be a Bond film named, Microsoft.
would someone buy a gold stock? We are more than just a gold
stock. What are your returns on capital, equity? What type of
operating margins do you have? Stack us up to leading companies.
We're delivering competitive results. Net margins of 35%. Business
Week does a survey of the top 900 companies in the country and
ranks them by return on equity and capital. If we were included,
we would be in the top 20.
Wynne--You weren't included because Goldcorp is Canadian-based?
It might also have been size. The other companies have multi-billion
dollar market capitalization above ours. [WIN note: GG's market
cap is $2.2 billion.] What we're trying to create is a company
that allows our shareholders to have a good night's sleep.
Wynne--While other companies were hedging, Goldcorp
held back some of its produced gold in reserves. If gold is
predicted to rise in value, why isn't everybody holding some
back for the higher sell price?
we have a very low break-even point, we don't have to sell to
survive. We started this policy when gold was $270 an ounce,
and today it's $350. Our outlook for gold is that it's going
to go higher from here for the next 6-8 years. If we sold the
gold we currently hold in bank vaults, our return on capital
would have been 32%.
Wynne--Has Goldcorp always had such a high return on
went through a difficult period between 1996 to 2000 at the
mine that is driving the company today. It was a high cost mine,
and had been that way for quite awhile. The company was cash
starved. There were problems with labor. I went in and said,
"This mine is going out of business. Let's find new ways that
people haven't thought of." We said that there was a way to
turn the company around. Our work force said they didn't want
to do it. We went through a 46-month labor strike.
Wynne--Ouch. That's a long, rocky period.
no one was hurt. The only property damage was to Goldcorp property.
It was the first and only time that I received a death threat
in the mail. We had SWAT teams at our house a couple of times.
All the windows on the ground floor were replaced with bullet
Wynne--The end result of that strike is quite noteworthy.
The labor union folded, didn't it?
was the first time the United Steelworkers of America walked
away from a mine.
Wynne--How did your team accomplish that?
we built the new mine, we wanted shared responsibility and to
embrace new technology. The skill set required for this new
mine was different. Many of the workers didn't possess those
skills. We set up a training facility to train them. Initially,
labor viewed us like a computer virus. The industry contract
we proposed, if they had accepted it, would have corrupted their
other contracts. The head of the union came to me directly and
said that we weren't going to have a good relationship, even
if we settled. We went from being the bad guy, to the executive
of the union being the bad guy. The union went to the workers
and said that it was a good fight, but they had lost. They said,
"If you don't accept this deal, there won't be any more strike
pay." We probably have 40% more labor force now than then, but
at the time, we were in need of a smaller work force.
Wynne--How did you handle the layoffs?
gave them [the workers who were laid off] a generous severance
package by industry standards. I also wanted to give them an
opportunity to participate in the company's future. We gave
stock options to all of the employees. One reason was selfish.
I wanted them [former employees] to have an interest in the
company. Maybe that peer pressure would stop one radical individual
from doing something untoward to the operations. The options
could fund a university education or a new pickup truck, or
moving somewhere else if they don't want to be in the community.
That worked out quite well.
Wynne--How does a cash poor company put in new technology,
an employee training program, and offer stock options as an
incentive to make the company succeed?
financed this process with equity at the bottom of the market--with
an asset sale.
Wynne--How quickly did the changes take effect? Was
there a long period of adjustment and/or negative cash flow
before the new technology and labor force became productive?
I came into the company, we were producing 53,000 ounces at
$360 cash per ounce cost of production. In our first full-year
of commercial production, we produced ten times the amount,
or 503,000 ounces. The direct cost of mining was $59 ounce,
or 1/6th of what it had been in 96. There was a 60-fold
change in the economics of the bottom line.
Wynne--That's an incredible pay-off, but it's hard to
imagine that it made up for the death threats and forty-six
months of labor strikes. You came over from the investment world,
didn't you? Was it tempting to return to that relatively safe
grew up in the investment industry, and stepped into mining
in the beginning of the 1990s. The investment industry was in
my blood. My father had me charting stocks at the age of ten.
I made nine times return on my money in 18 months. From that
time forward, I thought that was the way the market worked.
In the investment world, if you wanted to get out of a problem,
all you had to do was sell it. It's an abstract world, where
you're dealing with abstract concepts. In mining, it worked
on a totally different time frame. If you had a problem, it
didn't take three days or three months. You might be lucky to
get out of it in three years. I've been applying the urgency
and discipline of the financial markets to this company. I also
wanted to get into an industry where there was an opportunity
to hit a homerun, clear out of the park. I'd known people who'd
made discoveries. A discovery is transformational. And it worked.
Wynne--That's incredible. How did you find gold where
no one thought it was going to be found?
discovery occurred at the bottom of the mine that is 50 years
old. I had a brainstorming session with our geologists because
I wanted them to accelerate the process. I said, "I want you
to bring in all of the ideas that your superiors said were no
good." We spent two days in a forum. There was cross-fertilization
going on. I walked away thinking I'd like to get the larger
community involved in this process.
Wynne--The larger community, outside of your company?
ended up in a course at MIT, with a business organization that
I belong to, called the Young Presidents. So I went down there
for a weeklong immersion in technology and applications at the
Sloan Business School. They started talking about Linux and
the development of open-source code. A light went on.
Wynne--Was this the dawning of the Goldcorp Challenge?
launched the Goldcorp Challenge. We took all of our geological
data (50 years) and our data of reserves. We put them up on
the Internet. We were appealing to a group of people, giving
them access to proprietary data that no mine company had ever
done before. It was a 400-mg file. Software allowed viewers
to see the data in two and 3-D. The challenge was to find 6
million ounces of gold. For those insights, we offered prizes
totaling half a million dollars. During the four-month registration
period, we had 475,000 hits to the web-site. 1400 people in
51 countries downloaded this file. We had a panel of five international
judges -- from the U.S., Australia, Canada (2 judges), and South
looked at all of the submissions and picked the most innovative.
We were not going to drill right away. We were looking for innovative
thinking. We paid $10,000 to each of 25 semi-finalists, and
said, "Come back with your submissions. Revise, upgrade, use
Wynne--1400 people downloaded the file. 475,000 hits.
Wasn't judging this a nightmare? Was the time investment worth
it? Weren't you worried about "trade secrets" leaking into the
hands of the competition?
I saw the first submissions coming in, it was a cornucopia.
The diversity was remarkable. We saw people using intelligence
systems, applied math, and computer graphics. It was wonderful.
It is very interesting, when you share something that isn't
supposed to be shared. Most of the industry thinks you're crazy.
When you give it away, there are people who say, "This is just
a game, isn't it?" Others say, "I don't understand." A year
later, when we gave the prizes to the finalists and semi-finalists,
everyone was saying, "That's a rather interesting idea." Recently,
the largest mining company in the world copied us and called
it the Goldcorp Principle. They're using this as a way of engaging
the intellectuals in the industry.
Wynne--How did the competition lead you to find gold
reserves that you would not have otherwise found?
was a great way of getting third party validation of our estimates
of what was there. It was a tremendous talent hunt for innovative
thinking. We hired up to ten people from the top twenty-five
finalists (either full or part-time). It gave us terrific confidence
because 75% of the semi-finalists had targets that matched the
projections we had. We didn't provide them with our targets.
This process generated 110 exploration targets in a mine that
was supposed to have no future. 50% were brand new. 50% matched
ours. It opened doors into the imaginations of the geologists.
Our success ratio in drilling those targets is running 80%.
The Challenge pushed us into the 21st Century in terms of exploration.
The Goldcorp Challenge broke the mold for the industry.
Wynne--Let's talk about how you've applied your financial
acumen to the impressive operating efficiency of Goldcorp and
built Goldcorp into a $2.2 billion dollar company (current market
had a $50M market capitalization in 1993, when I started restructuring.
I took five companies and compressed them into one. I concentrated
the value in fewer and fewer companies, trying to make it easier
for the investors to understand. In Canada, we have structures
that are a little different, in terms of shares, called multiple-loading
shares, where one share can carry up to ten votes. I controlled
40% of the vote of the company. In the last restructuring, we
went to one vote per share. I went from 44% voting interest
to 6 1/2% equity interest in the company. We were able to inject
something into the market that everyone else had, but it was
new to our company, in terms of corporate governance. That had
a big bearing in our volume on the New York Stock Exchange.
From 1995 to the end of 2000, our trading volume was 95% in
Canada and 5% in NYC. At the end of last year we were trading
58% of our volume in NYC. On a net cash basis, we have more
cash than the aggregate of the five largest gold producers in
the world. We don't have any debt. We were the most profitable
mining company in 2001. I think we'll be again this year. We
Wynne--Describe what hedging is for our readers, and
why your company has an advantage for not doing it.
a term that means I will sell my gold five years from now at
today's price. It worked in the 90s, but it's backfiring today.
Being hedged leaves you out of the upside price of gold. Hedging
caps the price that you are going to get. Hedged companies are
underwater. On top of that, we withheld gold (and bought gold).
Right now we have 200,000 ounces of gold. We're the only company
in the world withholding production.
Wynne--I found out about Goldcorp because you were one
of the only equities in a short-selling fund. Are you most popular
with the bears? Do money managers only bet on gold when the
market tanks or during wartime?
I believe we're at the start of the third major market in gold
to occur in the last 106 years. There are very long economic
cycles that have occurred in gold. There's a chart that compares
the Dow Jones Industrial Average by dividing it by the price
of gold. It takes month-end value and plots it from 1896 to
present. When the Dow is much higher than the price of gold,
there is confidence in financial assets. When the number is
higher for gold, people go to hard money--assets that are tested
over time to preserve capital. There were peaks in 1929 (when
it took 18 ounces to buy the Dow Jones Industrial Average).
The next peak was in 1966. The last period was July of 1999,
when it took 44 ounces of gold to buy the Dow.
Wynne--Those are all peak periods before major market
adjustments. How low does the Dow Jones trade compared to gold
in the troubled times following the peaks?
other side of the numbers can be very abrupt. By 1932, it took
only two ounces to buy the Dow [down from 18 ounces in 1929].
From 1929-39, which was a deflationary period, it was a very
good time to own gold. Homestake Mining was up six-fold. From
1966 to 1980, an inflationary period, the Dow fell from 28 ounces
of gold to buy the Dow Jones Industrial Average, to just one
ounce, in 1980, to buy the DOW. Homestake Mining [during that
period] went up sixfold, while the DOW stood still. In July
1999, the Dow retrenched 50%. Unhedged gold stocks increased
twofold, in some cases, much more. If you average those first
two periods, you get a twelve-year period. We're a third through
it right now. That's just a psychological factor in the market,
where you move from confidence to no confidence. It's also a
supply situation. Supply is being reduced considerably, and
the interest is increasing. When you compare the global equity
market capitalization to the gold industry, there is only 1%
of the global market capitalization. If you have a small shift,
half a percent, the market capitalization of that sector increases
by 50%. The market is all about psychology. Expectations about
good times, and the expectation about bad times.
Wynne--Benjamin Graham says, "In the short run, the
market is a voting machine, but in the long run, it is a weighing
machine." Most experts agree that investor confidence is pretty
low right now, but if Hussein is exiled, geopolitical tensions
ease or if earnings pick up, investor confidence could return
soon than six to eight years. Don't you think?
the early 1930s, the SEC was created to deal with corporate
malfeasance. Consumer, corporate and government debt are all
at record levels. In the late 1920s, 10% of the population had
money in the market. Close to 60% of the population is in the
market today, through retirement, pension, insurance, etc. When
people start getting concerned, there's a bigger wave that goes
through. I could be very wrong on this, but I think it's prudent
for most investors to think about having fire insurance for
their portfolio. In the last three years, if you looked at the
top ten performing mutual funds, you'd find a predominance of
Wynne--Did investors already miss the time to buy? Goldcorp's
share price ($12.04 on 2.20.03) is trading near the 52-week
high ($13.60), and Money Central says your P/E to growth ratio
indicates the share price may be overvalued. In fact, all of
the gold companies listed on Money Central are flagged as possibly
being "overvalued," except Newmont Mining Company (the world's
largest gold producer).
Everyone is saying, "Don't invest in gold. It's too volatile."
It would be prudent to have 5-10% of your money in fireproofing
your portfolio. If you'd bought into the DJIA index, beginning
2001 through the beginning of 2002, you'd be down 23%. If you'd
put only 90% in instead, and put the other in Goldcorp, at the
end of last year, your whole portfolio would have been up 10%
rather than down 23%. In terms of trading high, the industry
has had a strong move through December, in anticipation of higher
gold prices. Gold prices ran, but the shares didn't run as fast.
If gold were to drop to $100 ounce, which has a low probability
of occurring, 90% or more of the industry would go out of business,
and we'd still be making money because of our low cost of production.
In terms of P/E, at the height of the tech bubble, Nasdaq was
trading at 300 P/E. We're trading at less than 20 P/E. The Dow
Jones Industrial Average is now trading at 30.
with gold is that there is a lost generation in the market.
People think it's a nice ornament to wear. When you look at
the performance and reflect on the statements, how come it has
performed so well and everybody tells me you that you shouldn't
be there? For gold investors, I'd say, you're not part of the
herd, right now. You're a contrarian if you buy gold today.
Wynne--My personal philosophy is that running counter
to the herd yields the highest rate of return, i.e. buy when
everyone is selling and sell when everyone is buying. My portfolio
has had incredible returns with that philosophy.
hate standing in line. If you want to go from Point A to Point
B, and you're standing behind someone, you can only go as fast
as the person in front of you. If you step out of line, you
might lose sight of the goal a few times, but odds are, you'll
get there much earlier than the person you stood behind.
Wynne--So is gold jewelry, status or money?
is money. It's accepted anywhere in the world. You can trade
it anywhere at anytime of the day. It's extremely liquid. It's
been around for a millennium or two. It doesn't have any debt
attached to it either. There are 114 nations that own gold in
their central banks. Our goal is to have more gold than the
bank of Canada. 41 Countries have less gold than we do.
Wynne-- Is there growth potential at your company, outside
of the argument that gold is good portfolio "fire-insurance?"
If the bulls run late this year and investor confidence returns
to the market, is Goldcorp positioned to perform well, or will
the demand for gold (and the price of gold) wane?
be sinking a shaft (elevator) which will be going down to 700
feet below surface. It's an $85 million capital expenditure.
Based upon $325/ounce gold price, we expect to get our money
back in 1.2 years. The rate of return will be 47%. It will allow
us to increase our production of gold from 500,000 ounces to
740,000 ounces, for a 40% increase. Our operating costs will
be below $60 ounce.
Wynne--What is your projected growth rate for the next
building of our expansion will take three years. We're fairly
flat currently in terms of production. The revenue will only
change with a change in the price of gold. We are an aggressive
exploration company (consider this our Research & Development).
We're looking at a number of situations where we can add reserves
or to the life or size of our property. Right now, we're executing
this plan of organic growth. We also invest in smaller companies
that are exploring--our farm team. We're putting money into
their treasuries to encourage them. If they find something,
we can offer additional capital, expertise and encouragement.
Wynne--Won't expansion increase production costs per
I wouldn't think so. We keep looking for ways to grab a technology
from another industry and apply it to our business. The people
who make the arm in the space shuttle want to diversify into
medicine and mining. We're doing work with them and a number
of others, looking to improve what we do. Mining is global,
but all of our assets are in North America. We're comfortable
with our risk profile. The rest of the world is unsettled right
now. Mining is a business where you end up being committed for
a long period of time, once you build a mine.
Wynne-- Is a $400 gold price coming? If the US is off
the gold standard, how does that affect the potential high end
high for gold was reached in Jan of 1980--up to $850 ounce.
Over the next 6-8 years, it's going to try and run to that and
Wynne--Would an investor be better off just owning the
gold itself or owning stock?
might try owning some gold. In 1929-39, gold went up 70%. [Compared
to the 6X price performance of Homestake during that period.]
1966-1980, gold went up 20-fold. Which is better to own? You
might want to split it between the two to cover your bases.
You might think of buying a couple of gold stocks, just as a
form of diversification. Prudent diversification is important
to any portfolio.
Wynne--Does technology, namely the fiberoptic network,
remain key to Goldcorp's low cost of production?
We use it as a communication means. Voice, data and video. Throughout
our mines, there are video cameras that allow us to go onto
the web and see what's happening at various points. The more
information you have, the better decisions you can make, on
a more timely basis, with less capital employed. You might start
working on different equipment to move materials around faster.
From a safety standpoint, you can determine where everybody
is in the case of emergency. You can look at the impact that
the mine has on the immediate area. Most are built as closed
systems, so as not to leak into the surrounding area. You want
to pay attention to that. You want to catch it before it creates
Wynne--Which brings us to another consideration, what
is Goldcorp's environmental and safety record like? Goldcorp's
web-site boasts that Red Lake's Mine's secondary pond is "of
such good quality" that suckers (fish) spawn in it? How do you
keep the run-off so clean?
At Red Lake, our record is excellent. We tore down the old mine,
and built a new one. In the process, we cleaned up everything
that would have been an issue. The mine at South Dakota sits
at the top of the hill. There have been fish kills in the stream.
We use technology to stop that. There have been birds that land
in our ponds. We cover the ponds with netting, but the birds
get poisoned. That hasn't happened for quite awhile, but it
does happen. We've offered to have a hatchery, but they say
no. If you look at mining, on the impact on the land, you see
a gaping hole in the ground. People in the mining industry would
say that malls and parking lots consume more of our landscape
than mines, and maybe do more damage, but it's hard to quantify
it. If you want to be in the mining business today, if you disregard
the laws for environmental protection, you should get out of
the business. We try to exceed the requirements. There are times
and events that push us the other way, but we've received awards
from South Dakota and elsewhere for what we've done.
industry at times playing catch-up. Originally, the mines were
encouraged to be built by the government to create employment.
The politicians said, "This a remote site. We want employment
and tax dollars." We're now learning that there was much more
to the story. A lot of companies predicated their financial
models based on historical costs. The industry as a whole has
done a good job of hiring environmental people today. If you
want to be in the business, it's prudent to go beyond what it
Wynne--North America has some of the toughest environmental
standards in the world, especially compared to some of the other
countries where your competitors have mines. What policies and
safeguards keep you ahead of the game?
environmental committee is composed of independent directors
who report quarterly. I think a lot of people have the image
of irresponsible people with no regard for the environment.
Our environment is precious. It needs to be preserved. It has
to serve the next generation. What protects us? It's a philosophy.
Wynne--So what's next. 2002, with all of the success
and awards, will be hard to top personally, won't it?
say to yourself, "Wow! This is something. Well, what do you
do with it?" Last year, we had all these awards and that. But
it was also a personal year. I lost my mother and one of my
sisters to cancer. That created an enormous respect for mortality.
I've been giving some away to hospitals and schools. There's
a greater need out there, and life has been very generous to
me recently. There is an area that intrigues me -- regenerative
medicine. I gave a gift to create a center for regenerative
medicine. I don't think our health care system has the capacity
to handle the demographics that are going to hit it. The regenerative
end could shorten time in hospitals, improve cure rates and
reduce financial burdens.
Wynne--Sounds like your home run came with a number
If you want to do something large, you have to put yourself
at risk. If you follow the path that everybody else is on, you
can't expect anything more. It's probably true in most aspects
Wynne--What personal traits most qualify you to lead
Gold Corp? What is the overriding principle you convey to your
managers and employees?
want them to be ever curious. In terms of working-- an open,
honest forum. We're out to improve the industry we're in. In
so doing, we can make a contribution to the community we work
in. In terms of looking at problems, I want them to pick it
up, turn it around, upside down. My favorite question is why.
What we lose as adults is curiosity. Keep asking, "Why are we
doing this? What's the purpose? Can we do it faster, cheaper,
better, with a superior result?" I want everyone to ask why
all the time, not because you want to be different. Just to
see if you can do it a different way-- shorter, faster, cheaper.
On an economical front, when you have an investment in the company,
you think about it more often. It's not what drives you, but
you tend to think about it. When companies allow employees to
grow with the company and become financially independent, they
feel that what they're doing is increasing their personal worth.
Wynne--Do you have a personal success strategy, favorite
quote or stress release?
have something hanging on my door. One I saw long ago. It basically
went, "A slave is someone waiting for someone else to free them."
That's one. There's another. He's a Scandinavian, Piet Hein.
"Living is a thing you do now or never. Which do you?"
Wynne--We choose life. Health. Joy. Prosperity. And
perhaps, now, gold.
N. Wynne Pace doesn't own any shares any Goldcorp.