The Tao of Rob

Rob McEwen, chairman and chief executive of US Gold (UXG-T, UZG-X), spoke with Trish Saywell on the sidelines of the Prospectors and Developers Association of Canada Convention in Toronto about his early influences and the importance of lateral thinking in the mining industry.

McEwen: “My parents had a farm east of Toronto they’d go to on weekends and there was a stream that ran from the back of the property and to me it became an analogy for life. This stream was a narrow stream with sand banks maybe two feet high. One day, I dropped a big boulder into it and it spanned the banks and the water stopped and it started building up behind. And then the water got to the top and it started coming over the top. It was going around the sides, and finding ways underneath, and then continued as if nothing had happened, and to me it was an illustration of the life force. That you can have these big obstacles in your way, but in time you will find a way around them and afterwards there is new music coming out of the stream because it’s burbling over the rocks. It’s just the way that I look at life.”

TNM: You’ve reached out to retail investors like nobody else. What was your philosophy behind that?

McEwen: “I take ideas from different places and try to apply them. I went to a session put on at Dell Computer in their Austin office and they had a client service. They basically bring in people every day that are potential customers and so there would be twenty of us in a room, from all different industries. And in they’d bring their CFO, or their controller, their production manager, their CEO, their marketing people, their service people, and they’d introduce the company’s management to the potential customers. And then you’d tour their production facilities and see how it works just in time and I thought that’s a really good idea. They would take an executive and put them in there for six months and they’d coordinate the entire process. And you’d get your executive team interacting with the public.

A lot of people don’t have the public speaking skills that they should have if they want to advance through a company. I thought, well, we’ve got a boardroom and it’s not used that much, and if you scribed an arc around our office there’s 250,000 people every day that go to lunch. So why don’t we use the boardroom, offer a sandwich, soup and a little gift, and give them an intimate one-on-one, or a very intimate setting, to meet our senior management? And I can train my senior management to present and these people can get to know them. I thought that was pretty easy and then we started doing it in other cities but it was based on Dell.

I listed Goldcorp in New York in 1995. I listed there because I wanted to have the currency value to go do deals elsewhere in the world because to me I wanted to have the lowest cost of capital in the industry and that meant I had to go out and talk to lots and lots of people. Merrill Lynch had taught me that when I worked for them. They just said: ‘We want you to talk to fifty people a day, every day that you work, for fifty weeks of the year, and you can’t leave a voice mail, you have to talk to them. They have to be qualified people. And at the end of the week you’re going to have two and a half customers, according to the statistics. And at the end of the year you’re going to have 125 customers. And you’re going to do this every, every, year.’

So it’s all about numbers. The more you tell the story, the better the chances there are that your story will click with people. So in the U.S. case, I looked at it and said, hmm, we listed in New York in 1995 and in 2000 nothing seemed to have happened.

It’s like your first car. You figure, all that marketing. You think you’re going to step into that car and your life is going to change. And it doesn’t. So I looked at it and thought if we want to get into the American market, which is the largest market for gold shares in the world, we want to have more trading there, how do we get it? Every dealer I talked to in the U.S. and Canada said: ‘You have to do an issue.’ I said, that’s not the problem, I don’t need any money. We’re generating good revenue from Goldcorp. And they said, ‘No, you have to go and do a road-show and do a financing.’ And I said, well I’m going to see if I can do it a different way.

So to brokers who wanted to take us around, I said: I don’t want to talk to anybody who invests in gold. Right now our growth margins are 68%, our net margins are 34%. We are a growth company by the definition of growth companies and 34% of the market invests in growth companies and 1% invests in gold companies, so the entire gold industry/ precious metals industry, is going to talk to that 1%. Why do I want that competition? There’s an audience out there of 34% that isn’t being addressed and I can go in there and I can talk about a company that is performing at the top end of the growth sector in terms of fundamentals and we have a story on gold.

So I went down there and said I want to tell these people about gold because we’re at a twenty-year low, and I want to show them how it’s going to go and then I want to show them the best gold stock in the world so that if and when they click and say they want to buy gold, they reach for Goldcorp. Well it seemed to work. Three years later 65% of our trading volume was New York. And the volume was four times higher.

TNM: You worked in the investment industry for about eighteen years before moving into the mining industry. What were your initial thoughts about the mining industry?

McEwen: “In the investment industry you’re dealing with abstract concepts. I wanted something I could touch… When you’re a portfolio manager it’s pretty easy because you’re just moving pieces of paper back and forth but once you get in (the mining industry) you’re dealing with people. And I found the mining industry, when I stepped into an operating role, it was like I dropped my feet into a bucket of cement and it was going hard. You just can’t move fast enough, and you’re running into an industry that’s full of tradition and inertia. And I kept going in and saying well, why are we doing this? And the answer was always the same: ‘Because that’s the way we’ve always done it.’ For an industry that is viewed as risky, a lot of people in the industry avoid risk because it’s unproductive to introduce new technology and if it doesn’t work you’ve just killed your career. So people don’t take large steps in innovating, because it’s just too hard on their careers.

So I went in and I said, look I’ll take the heat, and I’ll ask questions, and a lot of my guys thought it was like, the third degree, because they’d give me an answer and then I’d ask another question, and they’d give me an answer and I’d ask another question.

TNM: They thought you were just being difficult?

McEwen: “Yes, but I was just trying to learn, and I process that way. I remember being in the boardroom. I had bought control of the company (Dickenson Mines) but I hadn’t taken control of the board… So I went in there and I said, these guys know mining, I’m going to do the financial architecture.

About four months down the road I’m sitting in a meeting and they present the budget for the next year. There was no time to read it before, which I thought was a little unusual. Anyhow, we get it, and I’m looking at it, and I flip to the page about the number of working areas we’ll be in and I start doing the math, just figuring out how much money we’re going to make in each area. And the first one I do I see we’re losing money. Then I did another one and we’re losing money.

I tuned out of the board meeting and just started doing my math, I like numbers, and I went, almost 50% of the places where we’re going to work, according to my formula, we’re going to lose money, so I must have the wrong formul
a. So I put up my hand and said: Mr. Chairman, who was with one of the larger companies before, I have a question. I’d like to know if the formula I’m using is correct to calculate the profitability of each working area. And it goes like this. And he said: ‘Yes, that’s correct.’ I said, all right, now, I have a bigger question. I have done calculations on 50% of the places we’re going to work and we’re losing money on all of them. Can you tell me why we’re doing that? And he turned to the president at the time and he said: ‘Why are we doing this?’ And the president said: ‘I’ll have to get back to you.’ And I knew I had the wrong team because they weren’t paying attention. They should have known.

So at the next board meeting I said, we’re going to reconstitute the board. Everybody out. And they said you can’t do that. . . For six months there was back and forth, all sorts of people jockeying and positioning, and one year after I had taken control of the company I took out the entire board of directors of Dickenson and Wharf Resources, I stepped in as CEO, and rebuilt the management team, put in the new board of directors, and then we started down our road.

I ended up going through three heads of operations because they and I didn’t see things the same way. And one fellow said: ‘Well this is a business and we drill, blast and muck.’ And I went, okay, what about profitability? We drill, blast and muck, and if we get a higher grade or you get a better gold price, we’ll make money. And I said, how many years have you been in business? You’ve been running companies for twenty-five years and that’s the only way we’re going to make money? What about training, cost controls, inventory turnovers, all this? You have all these levers to play with. Well, good thinking. They weren’t being used.

TNM: It must have shocked you that that was how it was done.

McEwen: “Yes. Well, the Campbell mine next door, I hired one of its managers once. And I thought he’d come with all sorts of information. I said: You’ve got a hundred million dollars of revenue a year when gold was way down around $300. I said that’s a big company in a Canadian context — a medium-sized company. What do you do with the economics? The financials? Do you control your inventory? Do you hedge anything? He said: ‘All the financial matters of this mine are run out of Vancouver.’

And I asked: You have no tools to affect the performance of this mine financially? And he said ‘no.’ And I said: you’re paid on what, what is your bonus paid on? And he said: ‘Well it’s paid on how many tonnes mined.’ And I said, but if you have your inventory and it only turns over once a year rather than four times a year, or you don’t know how much it costs to take it from the face to the Brink’s truck, or how long it takes, you could double or triple your bonus.

One of the big watersheds was the strike that went on for 46 months. And that ushered in a whole change of behavior and I think that Goldcorp as a company grew extraordinarily well during that period. People suddenly said, those inhibitions we have, those barriers, those are in the mind, and we can get beyond them and then that whole place just took off, and we added virtual reality labs, and we wired the place with fiber optics, and you could go on the web anywhere in the world and see thirty working places underground. And we encouraged innovation. And it just caught hold and started running.

TNM: Can you give us other examples of the importance of lateral thinking?

McEwen: In South Dakota we had the Wharf mine and I remember we had a water balance problem. You have an open pit mine on the top of a hill, which is the wrong place to have an open pit mine and you’re trying to hold water that runs off the heaps, and it rains a lot there. So your water overflows, runs down the hill, and goes into a stream, kills a couple of fish, and you’re paying large fines and your operation is threatened.

We owned a third interest in a ski hill next door when we bought another property, and they were talking about how much water they went through snow making. And I went: They go through lots of water snowmaking, why don’t we get a couple of snow guns? And I went back to the mine site and said: We should get some snow guns to deal with water. And they said: ‘What are you talking about, you’re crazy.’ So I kept pushing it. And a couple of months later they went, ‘Well we’ve ordered a snow gun or two.’ And guess what, it really works well. And they became the experts in the industry on using snow guns and water. We had six of them at one point and dealt with our water balances very quickly.

It’s all about trying to get the lateral thinking and that’s the big promise I see out there in the mining industry. If you can tap into other industries; recognize what they’re doing and saying, does it have application here. That’s why when we did the internet — the Goldcorp Challenge — that was all about connecting separate points and focusing them on our problem statement.