With investors hurdling toward gold as our Government prints more money, I am reminded of a story that many gold enthusiasts may already know. It’s a story about a real life gold super hero whose deviance of conventional wisdom turned a failing corporation into one of the world’s largest gold producers.
Rob McEwen wasn’t a miner. He was a young man following his father’s footsteps into the business world. Like his dad, he had a fascination for gold.
After years growing up hearing stories around the dinner table of miners and prospectors, he finally got his shot.
One day, he stepped into a takeover battle as a white knight and emerged triumphantly as majority owner of a mine in Red Lake, Ontario. Here he stood at the head of the boardroom table filled with a room full of experienced senior geologists, all of whom doubted his ability to lead this company. Who could blame them? He was a mutual fund manager turned CEO of a gold corporation overnight.
But it was hardly a dream come true. The company he had taken over was plagued with negative news and on the brink of failure. The miners were on strike and they were overwhelmed by lingering debts. The gold market was contracting and the mine’s operating costs were exceedingly high, forcing them to cease mining operations. Unless they found evidence of new gold deposits, the fifty-year old mine was about to be shut down along with the company.
McEwen knew that the mine had potential. “The Red Lake gold district had 2 operating gold mines and 13 former mines that had produced more than 18 million ounces combined,” he says. “The mine next door had produced about 10 million ounces. Ours had produced only 3 million.” So he sent his geologists packing with $10 million dollars and a plan to drill in the most remote and deepest parts of the mine.
A few weeks later the geologists returned. With smiles on their faces, they broke the news to McEwen that would save Goldcorp – at least for another few years. They had found results signalling new deposits of gold as much as thirty times the amount they had been mining at the company. But that wasn’t enough.
The senior staff continued years of further exploration in attempts to find a more accurate depiction of the gold’s value and location. Despite the expertise and experience among the staff of senior geologists, they efforts proved stagnant. It had become obvious that something critical needed to change if they were to secure a future for Goldcorp. They needed to act faster.
Exhausted and uncertain about Goldcorp’s future, McEwen decided to take a break for some personal development. He attended a MIT conference in 1999, where corporate presidents from around the world had come to learn about advances in information technology. Perched up in his chair, he listened as the lecturer talked about how Linus Torvalds built a masterpiece computer operating system by revealing his code to anonymous programmers all around the world on the internet. Without the help of thousands of anonymous participants, the Linux system would have cost millions of dollars to produce and would have taken years. But it didn’t.
Then it hit him. If his senior geologists couldn’t find the gold in Red Lake, maybe someone else could.
McEwen wasn’t a miner. He didn’t think like one either. But that was his strength. So he rushed back to his corporate head office in Toronto to share his idea of “open sourced” mining.
McEwen wanted to take all of the data the company has spent creating in the last fifty years and he wanted to share it openly with the world by posting it on the internet: “Then we’ll ask the world to tell us where we’re going to find the next six million ounces of gold.”
At first, Goldcorp’s geologists were appalled at the idea of exposing their fifty years of secret data to the world. And they had good reasons to be. The mining industry is an intensely guarded business and geological data is to miners what treasure is to pirates. Giving this sort of data away could not only subject you to takeover risks, but can also imply that your company no longer has the ability to move forward on its own.
Despite the inherent risks, McEwen decided to push forward and in March 2000, he launched the “Goldcorp Challenge.” They posted every bit of information they could on their 55,000-acre property through their website and setup a contest offering $575,000 worth of prize money to the participants that could show Goldcorp the best methods and estimates on their property.
McEwen knew this strategy entailed big risks. But the risks of continuing to do things the old way were even greater. “Mining is one of humanity’s oldest industrial pursuits,” McEwen says. “This is old economy. But a mineral discovery is like a technological discovery. There’s the same rapid creation of wealth as rising expectations improve profitability. If we could find gold faster, we could really improve the value of the company.”
And improve the value they did. Within weeks, submissions from over one thousand virtual prospectors in over fifty countries crunched the data. But geologists weren’t the only participants. Mathematicians, graduate students, consultants, and military officers all submitted entries. They had, “applied math, advanced physics, intelligent systems, computer graphics, and organic solutions to inorganic problems.”
Not only had the contestants identified new targets on the Red Lake property, they introduced Goldcorpto state-of-the-art technologies and exploration methodologies, including new drilling techniques and data-collection procedures, and more advance approaches to geological modeling. McEwen had harnessed a technological trend that most in the industry would have shunned. As a result, he turned his destined-for-failure $100 million company into a company today worth over $27 billion – even in our currently depressed market.
In our last newsletter, we talked about Jim and his unwillingness to change by accepting current and future movements in technology and communications. This led to a ninety percent haircut of his company’s share value versus the average thirty percent haircut his peers experienced in the same year. McEwen’s courage to challenge the mining industry’s safe-keeping of geological data reveals to us that change can lead to astonishing results.
Despite our market climate, corporations need to advance. They must have the backing of their investors. No longer should a corporation’s marketing and communications expenditures be focused solely on attracting new shareholders. An emphasis and strategy for retention must be put into place for all corporations, big and small. Over the course of this year, Equedia will bring you deep inside the minds of the companies you invest in. This will allow you to truly gauge the sentiment of your investments and their management’s ability to conquer. As we work with corporations on deploying these methods, I hope that others will take part in these strategies.
When our economy picks itself up from under the dirt and begins to re-root its foundation, corporations willing to embrace change now will become the future. Investors will not forget the efforts of the corporations that held their hands through this crisis. They will not forget the corporations who cared.