Rob McEwen - Denver Gold Keynote

KEYNOTE ADDRESS ROB McEWEN
September 25th, 2006

Good afternoon, ladies and gentlemen. My talk is entitled "Giving Shareholders What They Want, A Higher Share Price".

Shareholders are the owners. Respecting that fact is the key to increasing your share price. These owners are buying your shares because they expect your shares to go higher. For management with a significant stake, this is an obvious statement. A bad decision will hurt them as much as it hurts their shareholders. It is the cold shower of reality.

I want you to think today about a solution for a big problem for all shareholders, and that is, how do we encourage senior management to put more money on the line? What incentives do we put in front of them? Because if we don't, we are not going to see the returns that we are looking for in our investment.

Just take a look at the share ownerships of the boards and management of most companies today, big companies, and the percentage is tiny, almost insignificant. And so, it is not hard to understand why there are so many high takeover premiums today. They have much less to lose than their shareholders.

In fact, generally, there is an inverse relationship. The bigger a company gets through acquisition, the smaller management's ownership becomes. But the larger their salary, bonus, options, pension plan grows. Getting bigger is better for management, not for the shareholders.

Just take a look, first of all, at the gold sector by a number of measures, net margin, return on assets, return on equity, earnings per share, dividend yield, and compare that to the S&P 500. On all measures, our industry is not performing in line with the broad market, and we need to make it do so, because if we don't, we will remain a small sector of the market.

Now, if you look at the gold stocks that went and said, "Bigger was better"...let's take a look at Barrick. In the last ten years, if you were a buy-and-hold shareholder and you bought in '96, right now you are up 6 percent. But they increased their production 3.7 times since then, and gold is 45 percent higher than it was then.

Take a look at Newmont, same thing. They increased their production by about 2.7 times, and their share price is down 8 percent over the 10-year period. Take a look at Kinross, increased their production almost 3 times, and they are down 50 percent from that period.

So, 19 years ago...over the past 19 years that I ran Goldcorp, this ownership concept was central to all my strategic decisions. Even today, I remain Goldcorp's largest individual shareholder because on February 14th of '05, I completed a $2.6 billion purchase that positioned Goldcorp to become, in my mind, the ultimate gold stock.

I was convinced Goldcorp's purchase of Wheaton River would create value that would cause Goldcorp's share price to more than double in the short term, and I am pleased to say it did. This transaction was the result of a decision I made in the spring of '05. At that time, we enjoyed a unique position in the industry. We had a fantastic financial position, 400 million in cash, no debt, no hedge, low production costs, big profit margins, owned the world's richest gold mine, and had one of the lowest cost-to-capital in the industry.

As a result, almost every investment banker in the world had our number and was trying to convince us that they had the next perfect deal. They would pitch this takeover or that. They would wave fame and fortune before our eyes and say, "If you do our deal, this is what you will get", using their classic line, "Bigger is better. Imagine, you could be..." and they would say, "Pick a number, ninth largest, sixth largest, fourth largest in North America or the world." They are good salespeople.

They also say, "If you don't do it a deal, your shares will start falling." We took a close look at a number of deals, but never could achieve internal consensus. As you know, doing corporate due diligence is very detailed, time consuming, frustrating and a big...very disruptive for management, but it is a necessary process.

After a while, my management team just wanted to do a deal. I didn't. I hadn't seen value. The most important question I would ask these investment bankers is, "What will happen to my share price?" Their answer was always the same, "Well, initially it is going to go down." So, I would ask, "Well, by how much?" And they would say, "We can't tell you." I said, "All right. Well, when is it going to recover and go higher?" And they said, "Well, we don't know, but the market really wants you to be a bigger company."

To me, that was totally unacceptable. I told them to come back when they had a deal that made my shareholders happy. The question my management team and I were struggling with was, "How do we grow from our strong base? How do we create the next chapter?" I constructed an equation of growth variables and looked at each one of them very closely, and I couldn't figure out what was holding us back.

Then one day, I was walking along a hall at home and I passed a mirror and I looked in it, and staring back at me was the variable I hadn't considered: it was me. So, I reflected on my strengths and skills and the needs of the corporation and decided it was time for a change.

I went to the board and said, "It is time we hire a new CEO." I was going to step down. They weren't happy. I mean, we were at the top of our game. I believed we were at a strategic inflection point in our corporate life, and I have seen it in many companies where the founder takes it to a point and then can't take it any further. The stock with either plateau or fall off.

Since I was a large shareholder, I had no interest in seeing my investment be diminished. I was looking for the next step that would take it higher. The board search had not yet found a suitable CEO candidate when I attended a presentation on Wheaton River. I liked what I saw, I did my numbers. They made sense to me and our financial advisor to put these companies together. And you can look at the slide, and it just made a lot of sense.

We were going to pay a 7 percent premium, issue about 70 percent of our stock to increase our cash flow threefold, earnings twofold, reserves by 90 percent, production by 100 percent. Our cash costs were going to go down by about 50 percent, and we were already at the bottom of the cost curve, 40 percent internal growth. And they were selling at one times NAV and we were two and a half times NAV.

They were viewed as a young copper-tainted producer, and I thought if we put the two together, we would have a value increase. On December 5th of '05, we announced our bid to acquire Wheaton River for a small premium of 7 percent over market. It was obvious the market liked the deal because, at the end of the first day, both stocks were up.

I was told this was a rare event for acquiring companies. It is unusual to see the acquirer's share price go up on the day of the bid. And I kept asking myself, "But why does that have to be? Why can't we make investments that cause our shares to go up. Why can't it be good for both shareholder groups?"

Ten days later, a complication came along when Glamis made a bid for Goldcorp. It started out as 22 percent and then moved to 27 percent. At that point, Ian Telfer, the CEO of Wheaton, concluded our deal was dead. He said there was no way for us to succeed combining Goldcorp and Wheaton in the face of Glamis's bid, and he advised his financial and legal advisors to close their files and go home.

For me, this was just the start of the game. I convinced Ian to spend three weeks with me criss-crossing North America talking to our investors. He agreed, but added Goldcorp was going to end up paying him a $35 million break fee because Glamis was going to win.

Most market observers also thought our cause was a lost cause, Glamis was going to win. For me, the math was obvious. The challenge was to convince our shareholders that the purchase of Wheaton River would be more attractive than accepting Glamis's 27 percent premium bid. And I had $100 million invested personally in Goldcorp. I was a large shareholder talking to other large shareholders.

I liked the Wheaton deal better, but I only owned 4 percent of the company, of Goldcorp. I respected the fact that many of the other 96 percent of the shareholders didn't like the Wheaton deal, and they wanted a vote. So, I gave them a vote. They are the owners of the company, they are entitled to make their own choice.

It is worth noting that, at the time, Wheaton's management didn't want to give Goldcorp shareholders a vote. They felt it introduced unnecessary risk to completing our deal. Right from the start of our campaign, we started seeing shareholders responding positively to our arguments for voting for the Goldcorp/Wheaton deal.

On the day of the vote, which happened to be Valentine's Day '05, I called the hotel where the meeting was to be held and asked them to bring a big tub, fill it with ice, and many magnums of champagne. We had had worthy opponents who were in the lead. We had given our best effort. We weren't sure how we were going to do. Win or lose, I thought it was time to celebrate.

Happily, it turned out to be a sweetheart of a day. Our shareholders, the owners of Goldcorp, approved the purchase of Wheaton River and effectively killed the Glamis deal, and within a year, the share price of the new Goldcorp had doubled. This is the kind of deal you want to do. This is the kind of deal your shareholders want you to do.

At that point, Goldcorp appeared destined to outperform the market. And you can look at this slide, this is a trailing 12 months, to June 30. EPS growth, Goldcorp first, net margin first, return on equity second, our assets second, on equity third in the industry. Clearly, a start, but there were some worrisome signs, particularly relating to share ownership.

The new CEO began selling shares within three months of assuming his office. Over the past 18 months, he sold 675,000 shares in six transactions, and his interest has fallen below 100,000 shares, while his salary, bonus and options have increased significantly.

He once said to me my salary was an embarrassment to the industry because it was so low. As a group, the board and management of Goldcorp own less than 400,000 shares, or .01 percent of the company. My interest is 16 times the total of management and the board. Furthermore, in a remarkable show of confidence, Goldcorp's chief operating officer and CFO together owned a grand total of 500 shares.

Now, I would like to talk about the factors that made Goldcorp a successful company before Wheaton. Number 1, we discovered an extremely rich gold deposit. It started with this fabulous deposit at the bottom of a 50-year-old mine that most people thought was about to close. This mine was under-capitalized. It was plagued with bad labour relations and high cost. It was unloved, and it was transformed through exploration into the world's richest gold mine.

There were a number of other factors that all focused on creating and increasing share price, starting with management and the board having a significant stake, aligning themselves with shareholders. We terminated a multiple loading share structure to become more attractive to investors. As I said earlier, we gave the vote on the Wheaton purchase.

We were financially conservative, foregoing debt, building cash, violently opposed to hedging. Our policy of withholding gold deferred our largest expense, income taxes, and it gave us leverage to the price of gold that no other gold producer offered. We believed in distributing our profits in an ever-increasing stream of dividends. I thought it was a very good discipline for management to say, "We have to pay rent to the shareholders."

We pulled the financing and the takeover bid when the terms were not to our advantage. We compared our performance to the best companies in the world, not just our industry. In terms of marketing and investor relations, we led the industry in radio advertising, weekly investor luncheons, aggressive Internet marketing, and being outspoken gold evangelists, actively translating the industry's language into the language of investors.

We avidly believe, passionately believe, that it is the responsibility of management of every public company to get out there and tell their story. Our innovation and success in exploration is well known, the use of the worldwide web, and Goldcorp's challenge. Even today, this innovation is being held up as a model for many other industries.

This month and next, two widely-acclaimed business books are coming out, one called Mavericks , the other called Wickeconomics , contain chapters on Goldcorp's challenge. And BusinessWeek and Fast Company magazines named Goldcorp as one of the 50 most innovative companies in the world on the web.

Operationally, after enduring a 46-month long strike, then watching the union walk away after 50 years on a site, we became very inspired. It was a breakthrough in attitudes that permeated the whole company. We achieved what every labour negotiator and labour lawyer in the country said was impossible, the union elected to leave after 50 years on the property.

We built the first virtual reality lab in the world on the mine site to help us understand what we were looking for. We worked with the makers of the space shuttle arm manufacturer to automate our underground. We encouraged innovation throughout the company. All of these actions differentiated us in the marketplace, contributed to investors seeing Goldcorp as a more vital, active, interesting company that they wanted to own. As a result, our share price performance continually was one of the top performers in the industry.

I would now like to comment a bit on my post-Goldcorp activities. Retirement was never considered an option. I believe we are too early into this gold cycle to walk away. It is time to load up, not sell. I like the outlook for gold and the outlook for making big profits. The question is where and what.

In terms of what, I looked and said, "I could invest in the seniors, the intermediates, or the juniors. The seniors don't offer the price leverage. They are proxies, basically, with a lot of specific risk, proxies for gold. The intermediates, I felt I had the best company in the sector in Goldcorp. And the juniors, well that is where you get the price leverage, but there is a lot of risk.

So, my first screen, looking at what juniors I wanted to buy, was looking at the geopolitical issues, and that took out about half the world for me. Then I looked at currency and said I wanted to be in a U.S. dollar zone because I believe the dollar has more room to fall against gold. So, if we ever went into operations, I don't want my costs going through the roof because of currency swings.

So, it got me to the United States and to Nevada, and there, if you were to treat Nevada as a country, compare it against all the other gold producers, it would be the third largest gold producer in the world. It has the infrastructure, the political inclination, the geological potential to be an excellent place to be.

Last summer, I bought a third of a company called U.S. Gold, and then bought interests in four other companies, and said, "Let's roll these all together and create one of the largest landholdings in the Cortez trend, right next door to Placer's Cortez Hills discovery. Well, we have seen Placer taken out, and I would venture to say the reason it was taken out was for the Cortez Hills joint venture.

Barrick, I believe, has spent more than $4 billion buying Cortez Hills, and that is right next door to U.S. Gold. The state of Nevada is owned basically by two companies, Newmont and Barrick, and we happen to be sandwiched between them.

It is the right time for gold, it is the right place in Nevada, and it is the right trend, Cortez, for U.S. Gold. This is looking...this slide at the top left, the checkerboard is Newmont, the pink is Barrick, the yellow is U.S. Gold. The green are the four other companies that we are looking to consolidate, and below the pink and the grey, again, are Barrick and Newmont.

This is the Cortez burger. The fatty carbohydrate-rich bun on the top and the bottom are Newmont and Barrick. The juicy meat in the centre are the juniors. I have looked elsewhere in making my investments, and this is a map of the world where I have invested, in addition to Nevada.

As I said, I have a very positive outlook on gold. My investment today, even after all of the erosion that we have seen in the market, is in excess of $350 million in gold stocks.

And at this point, I would like to give you some humour. I would like to show you a film that has just won some awards, and it is rather relevant to what is happening today. Please enjoy.

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