David Garofalo: Gold Has What Bitcoin Does Not

we live in a fantasy world now reality has been destroyed this is the time that you really need to pay attention the probabilities are overwhelmingly on gold's side that is the best environment to see gold increase its value [Music] welcome to palisades gold radio i'm your host tom bogervicks joining me today is david garofalo ceo and chairman of gold royalty corp david thanks for joining me today thanks for having me on tom great to have you and uh you know i've been looking forward to this interview for quite some time um you were the former ceo of goldcore one of the largest miners in the world at the time but you've deliberately positioned yourself now in the development stage end of the spectrum so what factors led you to this decision well i think the reality is reserves have been declining by about 40 that's the bottom line over the last seven or eight years the dynamic behind that is the fact that the um the established producers have not been reinvesting back in expiration or place depleting reserves their focus um deliberately has been on deleveraging and now we have net zero debt in the gold industry which is unprecedented it's been on returning capital to shareholders it's been on harvesting the existing business because you know 10 years ago we were last at peak gold in terms of the price market price for gold around 1900 an ounce there was a massive amount of investment in the mine development both in the precious and the base space and so we saw a vast escalation operating capital cost and eroded the margins that investors were looking for so coming out of that and that hangover the industry has been rightly focused on delivering returns to shareholders and driving up margins now that's gone a little bit too far the pendulum swung a bit too much and the industry needs to invest back into development and i think there's going to be an avalanche of capital that goes into new mind development both on the base and pressure side as both metal prices are quite robust right now we're at an incentive price right now for both gold and copper development this is the time that you're going to see a rapid deployment and massive deployment of capital into mind development and that's why i'm positioning myself at that end of the spectrum both in terms of running a precious metal investment fund focus on exploration but the royalty business is an important part of the ecosystem to help and incentivize mine development because royalty companies access capital more cheaply and then deploy that into new mine development take royalties back so i'd like to get to the the royalty side of things david but as you were mentioning basically the the fundamentals for how the um the gold space is operating right now uh with with no debt and and all of those considerations do you think that this this has been one of the let's say the best shape that the gold industry has ever been in it is financially absolutely that's that's entirely the case the balance sheets are squeaky clean uh nobody's been raising equity in any significant fashion so there's been that dilution there's been returns of capital in the form of dividends share buybacks so the industry has done a great job of harvesting their business where they're in terrible shape is in their reserve base so the average reserves um for global minds seven eight years ago was about 20 years and today it's 10 years so it's been cut in half so they've done almost too good a job of harvesting their business and not taking some of that profitability and reinvesting it back into those depleting assets so as we're speaking here on the afternoon of monday april 26th it was announced this morning that fortuna silver was taking over rocks gold so do you think m a in the space is starting to pick up and is this a good sign for the industry in general well you know if you're not if you're not um finding ounces you're going to have to buy them and the industry clearly has an existential issue with the rapid deterioration of the reserve so of course there's going to be an m a it's an imperative for there to be m a because generally from discovery to first production that's a minimum of 10 15 and often 20 years so you're not going to see it turn around in production profiles unless you go out there and acquire new new mines to replace your deployment reserve base and that's why newmont goldcorp merged um several years ago that's why barrick and rangold merged so the top end of the pyramid has done they're merging now there really isn't any seniors that are really going to be able to merge with each other it's going to be in that mid tier that's become significantly populated with new entrants emerging producers there's almost too many of them there's going to have to be a rationalization because of the dynamic we've seen in reserves globally has covid basically caused a lost year uh from your standpoint in this in the m a sector surprisingly not um you know it may have been more pronounced if it weren't for covet but there's been a lot of m a in the space a large ballot volume of smaller transactions as i said the bigger guys have already done their m 8 they're unlikely to undertake any any more on m a so it's really going to be focused on the mid-tier and the emerging producers and that's been happening so there's been a large volume of small dollar transactions and i think you'll see a pickup in that because there's been an impediment because of lack of the ability to do physical due diligence so there will be uh more m as i see a big pickup once we exit the covet crisis that we're currently experiencing so david how important will scale efficiency and diversif diversification be for majors uh in this coming bull market look scale is extremely important um and that's been demonstrated in the gold industry in the mining industry generally large institutional investors the generals investors who by and large have not participated in the gold business in a significant way require scale because they need liquidity to get in and out of the stock and even if you took all of the mining companies and collectively look at the market cap they're still smaller than apple it's still a relatively small industry so we have to compete against other industries to attract that generalist capital so scale becomes extremely important so that's one of the reasons that in addition to the dynamic on reserves you're going to see a drive to m a to achieve that scale so some of these companies can start to graduate into major indices and attract that outside capital so do you think the the gold industry in general has has learned lessons from the past or are we doomed to repeat the same mistakes uh as in past cycles i i think yes and no um i think what what the last several years has demonstrated in the gold industry in particular for that matter in base as well his companies are very good at harvesting their business profitably deleveraging they've really done a very good job of repositioning their balance sheets and making them as sound as they've ever been in the entire mining industry but the reality is the significant under investment that we've experienced in the mining business over the last several years is going to come to roost i think there's going to be a competitive allocation of capital from both base and precious into new mine development because the reserve dynamic is the same in base as it is impressions it's been down in a significant fashion for a long period of time but the demand is still very robust so there is a big demand supply gap that will have to be filled and i'm afraid you know that capital will be deployed from every every angle every perspective in the basin pressure side i think we're going to see rapid cost inflation in the industry i think it's going to happen again so from that perspective we haven't learned we've under-invested for too long and that's going to have to come to roost technique in the short to medium term so david you've you've worked at really every end of the of the gold spectrum basically for for a major producer uh a junior and now in the royalty space so how do you look at the way in which capital is raised by the juniors in your opinion is it more advantageous for them to raise capital through a royalty deal rather than doing placements you know it's really a costly capital giving decision and um i think by and large until the last year or so juniors really couldn't raise equity um in the general equity markets it just wasn't available that started to open up a little bit over the last year or so we're starting to see juniors start to get capital uh again uh but but uh royalties have become a very uh competitive source of capital for the juniors that are looking to reinvest back into exploration and so uh as i said royal economy is an extremely important part of the ecosystem as the industry starts to renew its focus on exploration of mind development so is is part of the idea that you might have in this model to provide these juniors with with guidance and support from an experienced team like yours yeah you know in when i was at igneco at hud bay and at goldcorp we ran incubator funds in each of those companies uh to invest back into exploration because by and large the juniors were not having a lot of success on a consistent basis and for us it was extremely important that the juniors were successful you know the reality is the established producers do a terrible job of grassroots exploration because that's not their skill set you know when you're running a junior you have to embrace risk when you're running an established producer you have to avoid respect and mitigate it every at every turn um it's about you know mitigating risk from a safety perspective environmental perspective capital cost risk operating cost risks all about risk aversion and risk mitigation when you're a junior you're much more entrepreneurial you have to embrace that risk you'll have to try to hit the home run every once in a while and strike out i mean that's the reality is juniors 19 times out of 20 do strike down and so we saw the importance of making sure they had a consistent source of capital as an established producer so they could do what they do and in fact what we were doing is effectively outsourcing that grassroots exploration because you recognize that wasn't a report competency as an operator so do you find um your experience of running a major is instructive to thinking about risk when you're looking at these juniors yeah you know when we're investing in royalty opportunities we're doing it from an operator's perspective and and that was a deliberate choice by uh amir and manny um the co-founder of gold world team myself it's a popular board management with operators um and so in addition to me and i've been in the mind development and operation side for over 30 years i have alan hare on my board um alan was my successor at hud bay he was my chief operating officer at hud bay 35 years as a metallurgical engineer and a prolific mind builder warren gilman who runs queens world capital lee kashin's natural resource fund out of hong kong um he is a very very capable former investment banker understands the business inside out comes from a technical background as well um yeah we have ian telfer as the chair of our advisory board ian delco corp he founded wheaton precious metals where you know it's not an accident we're replicating that model by spinning gold royalty out from gold mining um and and uh and then in addition to that i have john griffith my chief development officer who spent 30 years banking the industry a lot a lot of royalty engagements that he had alistair still who's my head attract head of technical services and was also the ceo of gold mining is a very experienced operator mind builder and and did m a work for us at goldcorp in the last few years i was there um so really um we are trying to distinguish ourselves from the other sub 1 billion dollar market cap royalty players by stacking ourselves in fact overstaffing ourselves with people with strong operating pedigree which gives us a clear eye view of the underlying risk of the royal opportunities we're investigating but also gives us a very very deep rolodex and network that we can leverage to look at royalty opportunities perhaps before they're available to the rest of the market so when we look at the projects in gold mining's portfolio are these projects that will be advanced by drilling and developing the resources more or are they just kind of a set and forget type of idea until we see the gold price rise some more well initially it was the latter and uh emir was quite a visionary in picking up these assets in gold money at 10 cents on the dollar during the bottom of the cycle you know he paid about 80 million dollars in gold mining stock to buy assets that were trading collectively north of 800 million dollars market cap in the previous cycle and so he bought them he put them on the shelf and he waited for the gold cycle to turn now that cycle has turned we're at as i said the incentive price for new mine development now the objective with bringing aleister in who's a capable mineboat and operator is to start to staff out the project team on gold mining and start to attract outside capital into the projects in the form of exploration and eventually studies pas pre-feasibility studies feasibility sites to de-risk these projects and demonstrate their economic potential so we can start to attract outside capital both from the marketplace and the gold mining but also from established producers who are clearly starved of development stage opportunities and collectively those gold mining assets have 26 million ounces of gold resource and over 31 million ounces of gold equivalent when you include the substantial amounts of copper and silver byproduct that's inherent in those projects so there's a lot of resource in that collection of a dozen projects and in fact if you look at that collective resource it's bigger than the reserve and resources some of the bigger established mid-tier producers in the gold industry that's an enviable position to be in in an industry that's starved of of projects this will attract interest from the established producers and that's alistair d risks these opportunities re-rates them in the marketplace we're going to enjoy the benefit of it at gold royalty because we have royalties in each and every one of those dozen development stage projects so i know uh you were speaking in the past about basically focusing on listing gold royalty as a on the nyse instead of the let's say tsx um is that simply due to trying to attract that capital that you're talking about yeah look we've gone to what i would say non-traditional source of capital for this royalty opportunity um and and what will that give us is a much deeper source of capital as we look to grow the business and we'll grow the business through a couple of ways one is we'll start to write royalties on development stage opportunities we'll buy some existing royalties that are sitting in the hands of smaller prospectors and whatnot that are looking to liquidate um the the wealth that they've created by putting royalties on their discoveries and also there's a proliferation of sub 1 billion dollar market cap players in the space they need to be consolidated there's been a significant number of entrants into the royalty space in that sub 1 billion category over the last couple of years there's too many of them now and now we have to start to go about the business consolidating and why we put such a strong board of management in place is we see ourselves as a survivor and i would say among that category we have by far the largest mineral endowment underlying our royalty position so we're the biggest in terms of attributable allowances uh to our shareholders um so we have scale and now we're going to create scale by um by consolidating i think some of the smaller players in the space and creating that scale in the marketplace to track those generalist investors into the story when you were saying that you guys are a survivor what does that mean to you david and why do you say that well survivor means that we're building a sustainable business for the long run which means we operate under very stringent criteria and when we allocate our capital we're doing so with a view of growing the net asset value of our underlying business clearly with 90 million dollars in our treasury we had a very successful ipo that we completed in early march we have also by far the largest treasury among those sub 1 billion dollar market cap royalty players now it's about deploying that capital like any financial institution would and i really look at royalty players as a financial institution and bank if you will to the mining space do so with expecting to get a strong return on that capital in the form of royalties which gives us a steady cash flow but also gives us leverage to the expiration upside that the operators that we've invested in hopefully achieve as they drill out their deposits so when when we look at majors in the space um thinking about taking over smaller projects that that are ounces in the ground are they going to look less favorably upon a project like that that that has a royalty attached to it rather than one that doesn't um well we'll certainly it enters into the economic analysis but what we want to ensure is that when we do put a royalty on the property we don't encumber it economically we don't impair it in any way and royalty is in financing it comes from the world he provides a very important source of capital tools that early stage exploration it hopefully allows the deposits to grow geologically and make it much more interesting economically so turning a little bit david to your views on the fundamentals of gold what would have to what would we have to see to become for you to become less bullish on the gold price at this time well i i would have to see a rapid increase in real interest rates and end of quantitative easing and nothing like that is on the horizon particularly considering the uncertain economic environment that we find ourselves in and i would say that predated even the pandemic i think we were in a period of sustained lower interest rates for the foreseeable future uh both on a nominal and a real basis and even if we started to see nominal interest rates creep up you know which has been suggested by both the bank of canada and the federal reserve over the next couple of years the reality is given all the quantitative easing that's been introduced into the market we're going to see a lot of inflation so real interest rates are unlikely to go up and in fact could go down further they're negative now and they're likely to become more negative as we see more pronounced inflation that's very very bullish for gold historically gold has been a very accurate barometer of those inflationary pressures that's why the gold has had gold prices have the run it's had over the last couple of years is likely to have sustained run from here gold in 1981 was 850 an ounce that was actually the real all-time peak because in today's dollars that would be about three thousand dollars an ounce and twenty twenty one dollars so we're a long way from there and i would say the amount of quantitative easing that we're experiencing now is unprecedented it certainly far exceeds what we saw in the 70s and early 80s when we had hyperinflation so some criticisms of gold have been that it has no yield but when we contrast it with the state of the us dollar or other fiat currencies right now why does it why does it look even more attractive now than ever well the reality is sovereign debt has no yield in fact with inflation in many cases even without inflation is negative yield um and so your capital is steadily being eroded by inflation when you invest in sovereign debt whether it's the you know u.s treasuries whether it's euro treasuries or even canadian depots you're seeing your capital steadily erode over time uh gold does not erode uh you know gold is indestructible it's been recognized as a currency for for millennia um and it's it's the one true currency uh that you know human civilizations has uh accepted as a currency for for as long as we can remember so merrill lynch has projected a 3 000 gold price in your view is this fairly conservative david i i would say so and i think i think they're being deliberately conservative i think they're taking that 1981 um peak gold price and and inflation-adjusting today's dollars i don't think they pulled that 3000 out of the hat i think that's where it came from if i were to speculate but i think um the potential for gold to far exceed that is is there i mean all the rest all the ingredients are there i should say for that to happen it's massive amounts of monetary stimulus in other words printing money extremely low interest rates massive amounts of debt reality is no government in the industrialized world can hope to repeat the debt that they strapped on even in the last year they'll inflate their way out of debt uh and that's that is extremely bullish for the gold price so what about the silver price as well david considering the historic price price ratio for gold to silver does this present another striking opportunity as well for investors well i think silver price has the potential to significantly outperform gold because as you correctly point out that ratio over time uh can be as low as 40 to one and i think we're closer to 70 or 80 to one right now so in a rising gold price environment people are looking for a proxy to play gold something a little bit more optionality and silver definitely offers that so i do see the potential for significant outperformance by silver over gold something you mentioned earlier david was that the let's say the supply demand characteristics for gold um have have almost never been more favorable but you also have a lot of experience dealing with copper so why not position yourself in in some copper plays as well right now well we do have quite a bit of copper within the gold royalty portfolio as i said we have 26 million ounces in gold mines portfolio of just gold but there's another six million almost six million ounces of gold equivalent that's uh primarily copper byproduct it's about 2 billion pounds of copper within the gold mining portfolio so we have significant exposure to copper and those copper gold opportunities are going to become extremely attractive to both the gold and copper industry in my view so is there uh let's say a particular reason why you don't focus let's say solely on copper is it um maybe considering the fact that these these large copper deposits are so hard to get into production and there's so many obstacles on that way yeah and that's that's absolutely right um and and there isn't that perceived optionality in copper that you have in gold people are there's there's a much larger population of juniors in the gold space because of that optionality the inherent optionality in in the metal copper is a very lightly populated sector there are very few mid-tier producers in the copper space there's virtually no junior exploration that goes on that's really done by the seniors and the reason that is because copper assets tend to be more scarce as you correctly pointed out but also tend to be much more capital intensive uh they tend to be found in large bulk tonnage low grade deposits are significant equipment and machinery significant capital investment up front long lead times so you don't have that inherent optionality gold gold assets tend to be shorter in life but much quicker to build than the copper place and there's an interesting kind of distinction here let's say of um really demand driving the copper price rather than sentiment driving the gold price is that right yeah look i i you're right absolutely i mean given the the impurity of the decarbonizer economy copper is likely to see massive amounts of demand because copper intensity will increase dramatically as we look at electric electrifying vehicles as we look at just decarbonizing economy and for that matter urbanizing the economies in the third world you know that requires a lot of copper consumption in terms of electrical grids appliances machinery whatever is required in order to migrate large populations whether than china and india from rural settings into urban settings that's just going to continue to drive copper consumption for the foreseeable future you know exponentially in my view but supply is going to be extremely challenged so david do you think bitcoin and cryptos in general have eaten some of gold's lunch um what do we need to see for gold to start making gains and getting attention again like like bitcoin has had of late yeah no absolutely you know and i think um you know you've heard me i think in the past um you know say some somewhat disparaging things about bitcoin but the reality is what's driving that dynamic and demand for bitcoin is a desire for reserve currency it's a recognition by maybe a newer generation of investors that you know what our fiat currencies are being undermined how do i protect my capital and at least you know rightly or wrongly they see bitcoin as as a preserver or capital in an inflationary environment in an environment where the fiat currencies are being perpetually undermined by by printing um my argument is um cryptocurrencies one have no physical properties there's nothing backing them there's zeros and ones at the end of the day and frankly there's nothing uh that would impede um the introduction of another cryptocurrency to take away market share from bitcoin so yes bitcoin has a finite quantity much like gold does but the reality is any market entry could create a cryptocurrency which could capture people's and investors imagination and that would undermine the value of bitcoin with gold you know since the beginning of man there's been 200 000 tons metric tons of gold that's been produced it's sitting in central bank vaults and on people's wrists and fingers and would fill at most four olympic sized swimming pools volumetrically it's tiny we only as an industry produce 4 000 metric tons per year and that's declining so it's very very high cost of entry very very difficult uh to create gold you can't do it and and i'd say there's really no barriers of entry uh on the cryptocurrency side so when when we look at like let's say the price of the price of gold appreciating the price of silver the rise of these cryptocurrencies are these acting as um pools of of capital to absorb all of this liquidity that's been injected into the system yeah and i'd say that's true of the general equity markets as well and we've never seen multiples priced in that price to earnings price the cash flow as extended as they are now um we've never seen real estate prices particularly in urban settings you know in some of the bigger cities in canada just on fire money's free right now and it's chasing um a finite amount of hard assets and that's really what's driving a lot of these um these valuations to unprecedented levels so as we as we take those those different classes of investment um if we look at them all together does this make the investment of gold at this time the most favorable it is i mean we've been range bound for for a number of months and maybe even a year right now gold's been stuck in this range and i think it's base building i think we're going to see a very violent upwards movement in the gold price in the short to medium term uh just reflective of the macroeconomic environment we find ourselves in with with a lot of stimulus being introduced into the system and it's not going away anytime soon uh gold is a barometer of that um you know and i also see an exodus of capital out of the more speculative assets whether it's the general equity markets generally speaking whether it's cryptocurrency that have seen a lot of volatility a lot of upwards movement to unprecedented levels i think you're going to see an exodus capital back into gold which has always been an anchor in people's portfolios for a long long period of time excellent david is there anything else you'd like to share with us as we wrap up here well look i i think um if you're going to play gold you can buy the gld um you can buy physical much more readily than you could ever you know 20 years ago gld didn't exist so it's open to not only individuals but institutional investors by physical gold but i would argue the best place for you to be if you want to invest in gold is in the royalty space because it gives you optimal leverage to the gold price because you're getting a percentage of the revenues as the gold price goes up your revenue will go up and your return will but also gives you expiration upside um so it gives you leverage the success of the expiration efforts of the operators that operate those assets the gld unfortunately doesn't provide that it provides you that physical exposure but doesn't provide you the upside that the operators will start to achieve and with exploration budgets now being reinflated in response to the downward trajectory in reserves you're going to have a lot more exposure to that exploration upside within royalty companies like lake gold royalty corp which is gr01 nyc american excellent david thanks very much for your time today if there's any of our listeners that want to uh find more out about you you also post quite a bit on linkedin is that right that's right and goldroyalty.com is our website perfect thanks david thank you this podcast is for general informational purposes only nothing on this podcast should be taken as investment advice guests on this show are not compensated for their appearance listeners are urged to educate themselves and make their own decisions do not base any investment decisions on the information contained to view our full disclaimer please visit our website

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Id: 7dp1cN4yR9w

Length: 28min 49sec (1729 seconds)

Published: Wed Apr 28 2021