If you’re like most of us, I’m sure that at one point or another you’ve reached one of those crucial career junctures – you know, a point in time when circumstances forced a really tough job choice… or when you made a gutsy career call on your own.
For Rob McEwen, that critical career juncture came in the late 1990s, and it was accompanied by three tough-to-swallow realizations:
He was about to lose his company.
[ad#Google Adsense 336×280-IA]His miscues were going to cost workers their jobs and crush a venture that had a huge amount of potential.
And, worst of all, the failure would mean that he’d failed at his lifelong dream.
All his life, you see, McEwen had dreamed of being a gold miner.
That’s no surprise, really. McEwen’s father – Donald McEwen – was an avid “Gold Bug” and had even formed several gold-related investment companies.
So the son had grown up hearing wondrous stories about prospectors, grubstakes, and mining miracles; these tales were as much a staple at the evening supper table as the food the family ate. Indeed, “bags of rocks” were sometimes dropped on the family’s dining room table – brought there by prospectors who were seeking working capital for their own latest dream.
McEwen followed his father into the investment business, working for a time at Merrill Lynch and then joining him as a partner at McEwen Easson, the mining-financing firm Donald had formed.
But Rob McEwen knew that – instead of just financing mines – he wanted to run a mine of his own. In his spare time, that younger McEwen even crafted a business plan detailing how a modern miner should operate.
For the time being, however, that plan remained just that… a plan. McEwen needed some sort of push to spur him to action…
Through Struggle to Profits
In 1989, Rob McEwen was 39 years old. His father had died three years earlier. And he decided his dream could wait no longer.
Using an investment vehicle that his father had formed – a company called Goldcorp – McEwen muscled his way into a takeover battle as a “white knight” and won control of a dying-on-the-vine 50-year-old mine in Red Lake, Ontario, Canada. He ultimately would combine five small mines into one venture.
But his timing stunk.
The gold market was in the dumper, so the mining industry was contracting. The production costs at his mine were stratospheric – and many “experts” believed the property was “played out.” McEwen was feuding with family members. Workers walked off the job and stayed on strike for 46 months because McEwen – ignoring the advice of his advisors – wanted a better-trained work force and refused to settle.
He even received a death threat.
This saga would last for nearly 10 years.
But where most saw disaster, McEwen only saw promise.
“The Red Lake gold district had two operating gold mines and 13 former mines that had produced more than 18 million ounces combined,” he told FastCompany magazine back in 2002. “The mine next door had produced about 10 million ounces. Ours had produced only 3 million.”
McEwen told interviewers that he was certain the high-grade gold ore that was present in the neighboring mine also ran through parts of the 55,000-acre Red Lake stake.
But he had to find it before the company ran out of money – and he wasn’t getting a lot of help from his in-house geologists.
A Big Vision, a Bigger Plan
That was the career juncture McEwen had reached in the late 1990s.
The company’s in-house geologists couldn’t reliably estimate the value and location of the gold on his property.
McEwen was frustrated and desperate – but those unpleasant emotions also opened his mind to innovative alternatives.
He just needed the “right” idea.
In 1999, at an information-technology seminar at the Massachusetts Institute of Technology (MIT), McEwen hit pay dirt. Corporate leaders from all around the world were studying the latest and greatest IT discoveries and, during a discussion about Linux, finally got around to the “open-source resolution.”
McEwen remembers thinking “open source… that’s what I want!”
Today we’d call it “crowdsourcing” – a new theory of innovation that has a company turn to outsiders… such as the online community… for help, instead of limiting inquiries to the in-house staff.
Whatever you call it, the payoff was a big one for McEwen… and for the big-cap miner we now know as Goldcorp Inc. (NYSE: GG).
In March 2000, McEwen announced the “Goldcorp Challenge” and exhorted the world’s “virtual prospectors” to tell him where they believed the gold could be found.
Breaking with the traditions of the conservative mining industry, McEwen uploaded every bit (about 400 megabytes worth) of geological data on the Red Lake property onto the web, where anyone who wanted could view it. Some of the data went back as far as 1948.
He made a total of $575,000 in prize money available to those who submitted the best methods and estimates.
Company insiders were horrified. And industry leaders were stunned.
“This is a very conservative, very private industry,” Dr. James M. Franklin, former chief geoscientist for the Geological Survey of Canada and a judge in the Goldcorp Challenge, told FastCompany. “Confidentiality and secrecy about reserves and exploration have been its watchwords. This was a totally unconventional thing to do.”
Unorthodox or not, McEwen had ignited a gold rush that would’ve given goose bumps to the “Miner Forty-Niners” of Sutter’s Mill, Calif.
But this one was unfolding in cyberspace.
More than 1,400 engineers, graduate students, military officers, geologists, and scientists from 50 different countries downloaded Goldcorp’s data and became digital prospectors. When the submissions started rolling in, Dr. Franklin and the four other judges on the panel admitted to being stunned by the quality and creativity of the presentations (one of the winning entries even featured 3D graphics… and this was a dozen years ago).
Best of all: There was a huge payoff for Goldcorp.
The Payoff Crushed the Competition
As part of the competition, contestants had identified 110 “targets” on the Red Lake property.
In 1996, Red Lake was producing at an annual rate of 53,000 ounces at $360 an ounce. By 2001, the mine was producing 504,000 ounces at $59 an ounce.
And by 2007, more than 80% of those “targets” had yielded substantial quantities of gold.
In fact, in the seven years that followed the challenge, Goldcorp had found a staggering 8 million ounces of gold – with a value of more than $3 billion.
At that point, every $100 invested in the company back in 1993 was worth more than $3,000 – a hefty return.
Success story… case closed. Right?
Wrong.
And that’s why I’m telling you this story – which isn’t just a history lesson.
You see, gold “strikes” weren’t the only wealth that crowdsourcing delivered to Goldcorp.
It also delivered a competitive advantage that Goldcorp maintains to this day. McEwen has since left the company. But his legacy lives on…
As BusinessWeek shrewdly observed at the time:
“Today, Goldcorp is reaping the fruits of its radical approach to exploration. McEwen’s willingness to open-source the prospecting process not only yielded copious quantities of gold, it introduced Goldcorp to state-of-the-art technologies and exploration methodologies, including new drilling techniques, and data collection procedures, and more advanced approaches to geological modeling. This catapulted his under-performing $100 million company into a $9 billion juggernaut while transforming a backwards mining site in Northern Ontario into one of the most innovative and profitable properties in the industry.”
McEwen himself alluded to this in comments he made for that same BusinessWeek piece.
“We had applied math, advanced physics, intelligent systems, computer graphics, and organic solutions to inorganic problems. There were capabilities I had never seen before in the industry,” McEwen said. “When I saw the computer graphics, I almost fell out of my chair.”
And that brings us to “Goldcorp: The New Chapter.”
Peter Krauth — a colleague and a longtime expert on gold, precious metals, and mining firms – told me that Goldcorp “is a company that I like a lot. It’s well-run, innovative, and forward-thinking. And there’s lots of upside for investors.”
When gold prices cratered, mining stocks and funds were crushed. But Goldcorp held up fairly well.
The stock has a nice 3.6% dividend yield, and Goldcorp pays its dividends out on a monthly basis – something the company has done since 2003.
Goldcorp has been working to control costs (capital outlays will drop to about $1.4 billion this year from $2.2 billion a year ago). And now it’s ramping up production at several new mines.
The firm’s Éléonore mine in Quebec and its Cerro Negro operation in Argentina – both formerly “development-stage” operations – are now entering actual commercial production. The upshot: Production could reach 3.6 million ounces this year from 2.9 million ounces a year ago.
A lot of investors have thrown in the towel on gold. Don’t make that mistake.
In fact, consider an interview that I did with investment guru Jim Rogers – in which the best-selling author, commentator, and vaunted contrarian investor warned investors not to give up on the “yellow metal.”
“Gold has to go a lot higher over the next decade or so, because [the world’s central banks] keep printing money,” he told me.
I know Rogers well: He wrote the foreword for my 1998 book, Contrarian Investing: How to Buy and Sell When Others Won’t and Make Money Doing It.
The metal may have more room to fall. But we’ll reach a point where negative sentiment is at its maximum, meaning gold has bottomed.
And that will set us up for much higher prices.
Once that happens, Rogers said, “gold will [then] make a beautiful bottom, and we can all participate in a multiyear bull market.”
It won’t take a rally of that magnitude for the miners to start to rally – especially as institutional investors look for alternatives to other pricey stocks. And because Goldcorp is the best-run firm in its industry, its shares won’t be hurt as much in a decline – and will rebound faster and higher than its peers in an upswing.
Goldcorp, which now has a $13.8 billion market cap, is engaged in the operation, exploration, development, and acquisition of precious metal properties in Canada, the United States, Mexico, and Central and South America. That means that its low-cost gold production is located in mostly safe jurisdictions. It remains one of the world’s fastest-growing senior gold producers.
The shares were recently trading at $16.60. We don’t take our lead from Wall Street, but we’re never averse to cite its research if its views coincide with our own.
And with Goldcorp, Wall Street analysts are starting to see the company’s financial strength and vast business potential.
A year ago, Cowen & Co. cited Goldcorp as one of the two strongest major miners in the world. In fact, Cowen’s analysts “stress-tested” Goldcorp and said the company appears able “to withstand a severe gold-price decline and still achieve positive earnings.
And now we’re seeing the start of a major “upgrade cycle” by Wall Street sell-side analysts.
And those analysts see a big, big upside for Goldcorp’s shares.
Wall Street has a current consensus of $25 on the company’s shares – 52% higher than the current share price. And at least one estimate goes as high as $29 – 75% above current levels.
Here are several very recent update examples.
On July 6, Credit Suisse Group AG (NYSE ADR: CS) resumed coverage on Goldcorp with an “Outperform” rating and a target price of $24 – about 45% above its current trading price.
Only a day later, Morgan Stanley (NYSE: MS) boosted its rating on Goldcorp from an “Equal Weight” to an “Overweight.” But here’s the good part: Morgan analysts slapped a $25.50 price target on the miner – representing a 54% upside.
There’s still plenty of uncertainty in the gold market. But the most uncertain periods often offer the biggest profit opportunities. If you don’t already own Goldcorp, look to establish a position via several purchases, or “tranches.” Make an initial purchase now and add to it on subsequent share-price dips.
And know that you own shares in perhaps the best-managed senior miner in the business – which is what founder Rob McEwen set out to create so many years ago.
–William Patalon III
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Source: Money Morning