Bob Buchan, Chancellor of Heriot-Watt University, shares a selection of his business lessons learned at the sharp end of financing gold and copper mines in the harshest regions of the world.
He received an honorary doctorate from Heriot-Watt in 2011. He spoke to Kenny Kemp.
Take from Panmure House Perspectives Issue 2: Bob Buchan is an entrepreneur who thrives in hot climates. The Chancellor of Heriot-Watt University, an alumnus who is also a major benefactor of the University, prefers these days to spend the winter in southern California. After many years working in the slush and fog of Toronto winters, he and his wife, Marie, are now able to take time out becoming ‘Snowbirds’ – the name for Canadians who escape the worst of winter in the rejuvenating sunshine.
Panmure House Perspectives caught up with the Chancellor as he enjoyed breakfast in his Palm Desert hacienda, situated in the arid but beautiful Coachella Valley. The mercury on his veranda was heading for 36° C that day, while Edinburgh was barely above freezing point. Chancellor Buchan, who will be on hand for the June graduation ceremonies, was invited to share some of his business lessons.
A starter for ten
Bob Buchan was born in Aberdeen, Scotland. His parents, from the Peterhead fishing industry, in the north-east area of Buchan, later flitted to Rosyth in Fife. His family were involved in the naval dockyard, and his grandfather was a pilot on the Firth of Forth, steering ships safely up the estuary. He attended Dunfermline High School and then applied to go to university. Heriot-Watt University, before its shift to Riccarton, was then based in Edinburgh’s Chambers Street, with the mining department situated in the Grassmarket.
“Coming from the high school in Dunfermline, the university at the time wasn’t a lot bigger than the high school. I didn’t realise that this was unusual until later in life, when I understood how small Heriot-Watt was in relation to other universities,” he says in a Canadian drawl that still has a hint of Scotland. His mining class had only three undergraduates throughout the years of the course. “I was able to say at my installation as chancellor that two-thirds of the graduating class for my year were present. Everyone was amazed when only one other person stood up. This is the power of statistics.”
Previously, Heriot-Watt graduates had joined the UK’s National Coal Board (NCB), but coal mining was now in terminal decline. Soon after, Heriot-Watt’s mining department closed too. Of the trio, one joined the NCB, the other was an overseas student from Guinea, and Bob Buchan headed off to Canada. “My motivation to go into mining was made with minimal research. I wanted to go into architecture but I had no art qualification. I couldn’t get a place, so I went into engineering. Mining looked to be the easiest and that was the extent of my research.”
He admits he had no concept of what he would do if he graduated with a mining degree. However, he enjoyed the social life in Edinburgh. In his first year, he stayed at home, driving each day across the Forth Road Bridge in a bone-juddering Austin Westminster with clapped-out shock absorbers. For his second, third and fourth years, he moved into a city centre flat with fellow students, and became a proficient snooker player, turning out for the university team.
Lesson one: social education is important
“The formal education was almost an add-on to the social education. This was paramount for me because I came from such a narrow and closed world. To become exposed to a different environment and people from all over the country and other parts of the world expanded your horizons. That was as powerful a message as I got, probably more so than the formal education.”
For the Chancellor, this continues to be an important part of the whole British university experience. “With social media today, it might be less relevant. But for me it was an eye-opener at an important time in my development as a young adult. It certainly guided me on a different path to what I might have expected.” For Heriot-Watt University, with its diversity of people and cultures, including its campuses in Dubai and Malaysia, this appreciation for the value of social education should not be overlooked or underestimated. “I get totally fascinated at each graduation, where there might be 50, 60, 70 countries represented. I really enjoy asking as many graduands as possible, ‘Where are you from?’ It’s humbling to know they come from all over the world, from Afghanistan to Sweden, from Canada to Indonesia. It’s fascinating.”
Lesson two: expect surprises in life
His motivation for heading off to Canada was a handsome bursary for a master’s degree that exceeded a starting salary in the NCB. But he soon learned a basic lesson in economics: he got more in Canada because the cost of living was substantially higher. “I went there without any real sense of what I was doing, other than I didn’t want to go and work down a coal mine.” He knew very little about Queen’s University in Toronto, although it was significantly larger than Heriot-Watt at the time. It had a very strong scientific base. (In July 2009, Bob Buchan donated $10 million in the largest single donation to mining education in Canadian history.)
"I stumbled into a great programme at a great institution with the mining engineering department stretching back to 1883. I was able to complete my master’s programme over an 18-month period and then started looking for a job.”
He was invited to a few interviews, including with an oil major in Calgary recruiting a reservoir engineer, which didn’t go well. Much better was his interview with a mining equipment company, Joy Manufacturing, in southern Ontario. “I might have ended up in the oil and gas industry instead of mining. Life is full of surprises.”
The company was developing new technology for the industry and recruiting young engineers to help in their research and development. He stayed for several years, visiting underground mining operations across Canada. “It was a wonderful opportunity for me to see the different environments that the equipment is asked to work in, and it helped me develop an awareness of what constitutes a well-run operation and what does not.”
Lesson three: seize your opportunities
Living in Kitchener, in southern Ontario, Bob Buchan discovered that his neighbour was a portfolio manager for one of the country’s top pension funds. He ran money in the capital markets. “I befriended him and his life sounded so much more interesting than working for a mine manufacturing company. I was intrigued and decided to try and get involved.” He picked up the Yellow Pages to find stockbroking companies, and wrote to the first three on the list. Two of them offered him a job.
“It was a classic opportunity that happens often in life. There is a sea change happening in an industry and this was occurring in the brokerage industry, where there was an understanding that the firms had to have proper research. They needed to be in a position to give clients more and better advice.” Professionals from industry were now being recruited by stockbroking firms, and Bob Buchan, then aged 25, was among the early cohort. He was told: “You have a heartbeat and you’re a mining engineer? You’ll do: you’re now a mining analyst.”
He had no idea about the stock market and did not know how to trade stock. But he learned quickly, picking up financial statements, which he found easy to understand. In 1974, he moved to Toronto and joined A.E. Ames. It was both an eye-opener and an acute disappointment. He was surprised that Bay Street, Canada’s Wall Street, was filled with mediocre salesmen rather than intellectually rigorous and smart business people. Yet the salesmen were paid three times more than the analysts. This turned out to be an opportunity for Buchan.
Lesson four: find a mentor you can trust
Bob Buchan’s first research report was on the copper mining business, something he would come back to much later in life. But he soon turned his attention from base metals to gold mining. “Gold mining was, and frankly is, more exciting,” he says.
He moved to a boutique operation where the pay scales were better. In 1984, he left the brokerage business to set up his own consultancy. It was then that he met, befriended and ultimately partnered with Ned Goodman, who became a lifelong mentor. “Ned was one of the smartest people that I ever met. He was a Canadian from Montreal who moved to Toronto and had a stellar career. Ned taught me the importance of capital markets to the success of anything in the mining industry.”
Bob Buchan found out that the capital markets were fundamentally more important than anything else in the business. By its nature, the mining industry is ferociously capital intensive, and the high cost of entry means that gaining serious financial backing is the only key to success.
“Ned also taught me that it is a lot easier to mine the stock market than it is to mine an ore body. While this might seem a cavalier approach to business, it set the benchmark on how to build a company.”
Lesson five: it’s all about the jockey
As an analyst for 10 years, Bob Buchan met chief executive officers and senior executives from all the major and many of the smaller mining companies around the world. From this exposure, he developed a keen eye for who – and who not – to support.
“While there are many ways in which a company can be successful, few do not involve strong, imaginative leadership. As it always does, no matter if it is a financial or an academic institution, it comes down to the jockey. The horse is important – you’ve got to have an animal with four legs – but it’s the jockey that counts. It is way more important to support the right jockey.” A good institution with bad management can be led in the wrong direction. For Bob Buchan, it is all about learning who the good jockeys are and then supporting them. “For example, Ned Goodman was a great jockey and I jumped on his horse. I learned from him.”
Watching and learning the skill sets of successful “jockeys”, and, paradoxically, seeing what can happen with poorly qualified entrepreneurs, motivated Buchan to do it himself.
“Starting out in base metal extraction rather than precious metals is harder because the initial capital requirements are enormous: up to $1 billion to buy and develop a new mine. Whereas the gold mining business was a much better option with entry levels around $20–$30 million.” In the summer of 1993, he created Kinross Gold Corporation; he took it public the following year. The company started life with a 25% interest in a small mine in Nevada, $15 million in cash and a market capitalisation of about $50 million.
By March 2003, Kinross owned 13 mines around the world, employing over 9,000 people, and had a market capitalisation of well over $2 billion. “Obviously I didn’t grow the company from the assets we started with. I was able to convince the market that I was a jockey worth supporting. I was able sell myself to the capital markets as having an entrepreneurial ability and an intellectual awareness of how to build a company.” In March 2005, Bob Buchan announced he was stepping down from the board of Kinross Gold Corporation in Toronto.
Lesson six: grasp the idea of “super money”
Bob Buchan believes the financial game is about understanding “super money”. Gold mining stocks trade at multiples of what they are worth. He says it is one of those bizarre realities in life. “But if you know it’s a reality, it’s your obligation to use it.”
From 1994 to 1996, Buchan did around eight refinancings, and every one was 40% up on the previous. “After starting Kinross, it was hard work convincing investors that I could actually find a good acquisition and execute. It was difficult to find investors that would support you in raising the money to make the purchase. When the first deal proved to be successful, the market rewarded us with a rising stock price. By the time I had identified my second asset purchase, the stock had risen by almost 40% and financing was significantly easier. Since I was able to identify assets to purchase, and the shares of Kinross kept rising, raising money became easier and easier. All the people who bought before were happy to come in again. Over the first two years of Kinross’s life, the stock went from just over $1 a share to almost $15 a share.” This is super money! The amount that was raised got bigger and bigger.
Lesson seven: don’t believe your own hype
People talk about the Midas touch. Bob Buchan knows only too well that the super money cycle reaches a peak. He reckons one of his failings was buying too soon and selling too early. He was far too conservative when it came to selling.
“Eventually, the market gets tired and runs out of momentum. We had reached our peak of around $15 a share. Within two years, it was back below $1.” The gold market crashed and the mining sector fell badly out of favour. Bob Buchan’s company had purchased a pile of assets that were no longer nearly as profitable. “It took a while to digest the transactions that we had done. Then you were into a whole different attitude.” Nobody wanted to know and, for a while – from 1997 to 2000 – he disappeared off the radar.
"It was tough. I remember sitting down with my CFO and looking at three-year forecasts. No matter what we did to cut costs, we always ended up on the edge of a cliff staring at bankruptcy. Nothing tests your mettle like the prospect of looming bankruptcy.” But what was apparent to Buchan was the lesson: “Don’t believe your own hype! Stand back, be conservative and take some money off the table.” “I truly believed that our company was worth $20 a share and I never sold any shares on the way up.” His stock valuation went up to $100 million then dropped back to significantly less. He never made the mistake of not selling again!
Lesson eight: deal with the assets you have
With business on the ropes and no access to money, it’s essential to go back and re-examine the company. “We couldn’t sell any assets, and nobody would give us any financial help. So with potential bankruptcy on the horizon, we attacked our balance sheet, did some aggressive restructuring of our obligations, pushed bankruptcy further into the future and regained momentum.” It meant the balance sheet was in a stronger position when the market started to pick up, as it did very quickly. The technology boom of mobile phones, computers and even renewable wind energy all needed gold and copper. And the cycle started racing right up again. “By 2001 the balance sheet was completely repaired, and by 2003 we were able to effect a three-way merger that resulted in Kinross emerging as a senior global producer.”
Lesson nine: cyclical businesses are fun
It takes a certain type of individual to handle the peaks and troughs of a cyclical industry. “Cyclical businesses are fun. They are either emotionally debilitating or incredibly exhilarating. There is nothing in between.” Bob Buchan left Kinross in 2004 and started a copper mining company called Katanga Mining, with assets in the Democratic Republic of Congo. It was in a mess after having been owned by a Belgian company. The Belgians had been kicked out and President Mobutu had nearly destroyed the mining business over the course of a decade. “The assets were world class, but after 10 years of being plundered by President Mobutu they were in a sorry state. The mining complex was being offered for virtually nothing. Nobody was prepared to go there. It was like a Mad Max movie and the country was a mess.” The Katanga assets have come a long way since then. They are now considered to be one of the most important copper and cobalt production assets in the world and are one of the DRC’s most important sources of revenue.
Lesson ten: risks are not always obvious
Bob Buchan was convinced that the Katanga assets could be straightened out. He knew they had worldclass potential but was determined to accomplish this without paying bribes.
“We made it clear that we were not going to pay any bribes, and we didn’t. That made it difficult sometimes when people were looking to smooth the road for you. It took about a year to get our mining permit, which was sitting in Kinshasa waiting for us to bribe the appropriate people. Eventually the government gave us the permit, because the asset needed to be developed. “The mine has come a long way. It is a real treasure of the world’s resources. Two-thirds of the world’s cobalt comes from the Congo. It is now one of the key assets of Glencore, who ended up buying it.”
Did he not worry about the risks? Buchan learned about the complexity of risk while building Kinross. In 1998 he bought remote gold mining assets in the far east of Russia, 400 miles from a major road.
“Clearly, investing in Russia in 1998 and in the Congo in 2004 represented risk in its simplest form. But investment risk can be more complicated than that. My experience is in Greece and in North America, where corruption, frivolous lawsuits and regulatory over-reach proved to be a much more demanding and unexpected definition of risk. You can lose a dollar in Russia, if you invest a dollar, but you can lose 10 in the United States if you invest a dollar because of the power of the legal system. Risk is often seen through the wrong lens,” he says.
Lesson eleven: there is no right road
Bob Buchan’s life has been packed with the Technicolor experiences and drama of travelling the world as a leading CEO. His lesson is that there is no right road in life. Expect the unexpected. Just get on the bus, get in the traffic and stay focused. “Don’t worry about what your goal is. Enjoy the journey. Whenever you get to the goal, to the top of the mountain, there’s always going to be another mountain behind it. If you don’t focus on enjoying the journey, you are not going to enjoy each one of the mountains that you conquer,” he says. One concluding Bob Buchan nugget: “One life lesson that I believe is invaluable is that with success comes obligation. Share your knowledge, your time and, when you can, your wealth to benefit the generation coming behind you. Believe me, it will enhance and give greater meaning to your life.”
Above all, enjoy your journey in life!