Black Swan as we all know now and that's you know by the time the Black Swan happens it'll be too late for you to own gold you have to buy it now as a safety precaution and then just be patient hi and welcome to wealth on my name is James Connor and today my guest is Pierre Lon Pierre was the co-founder of Franco Nevada the world's largest precious metals royalty company and also past president of Newmont Mining and the former chair of the world gold Council so there is no one else who can provide a better perspective on precious metals and how they can be used to benefit your portfolio during times of economic uncertainty Pierre thank you very much for joining us today it's always a pleasure thank you for having me Pierre I want to focus this discussion on precious metals and more specifically gold and how it can be used to provide protection to your portfolio against the constant erosion of inflation and when we want exposure to Gold we can use many different products including buying physical gold or gold mining stocks or a gold royalty company and given you co-founded the world's first precious metals royalty company I want to start right here what exactly is a royalty company a royalty company is uh very different than an operator it's actually closer to the physical metal itself so a pure royalty is a percentage of the top line of a producer so if you have let's say a 4% royalty you will get and the producer produces like 100,000 ounces of gold a year you get 4% of 100,000 ounces which is 4,000 ounces of gold delivered to your account completely costree so that is the particularity of a royalty now there's another form of royalty called a stream royalty where the royalty company gets a percentage of the production whatever it is on a yearly basis uh at a fixed cost a cost that's uh fixed by contract when the streaming is uh created so those are the two forms of royalties that we have today in the market so you made mention that a royalty company is totally different from an operating company and more like owning the physical gold but there's many advantages to in investing in a royalty company can you just review what these advantages are well the advantage number one is that a royalty company has no capital expenditure so there's no the the op the the the producer the operator cannot call on the royalty company to join in in the capex and when we know today that you know to try to build anything it's like a billion two billion up to you know like you look at some of these numbers they're absolutely enormous so there's no Demand on terms of capital uh second there's no inflation uh because when you have a percentage of the top production in the case of the pure royalty you're not affected by inflation in fact you gain by it because of course the gold price keeps going up and you have no costs so you're totally protected from inflation and then finally you which is the best part of royalty is the optional that you get from owning this royalty and the land that it's attached to so I just want to examine some of those points in a little more detail you made mention of the fact that once you buy a royalty you do not have to put up any further capital for capex and so if I want to provide an example let's say if you have a royalty on a mine that produces 100,000 ounces a year and they want to grow that to 200,000 or 300,000 ounces a year that will take a lot of capb backs and as a royalty company you don't have to put up one additional penny for those additional ounces that is correct so that's a major benefit and to your point the capex are associated with building a mine now is many many billions of dollars and it can take many years also to get permitting uh does a royal company have to concern itself with permits no I mean the the royalty all you do is cash checks so all you need is really good Auditors to make sure that you know you get the amount that you're paid but uh you know the uh royalty company does not have any say in the operations so you may mention of the fact that the number one or primary advantage is optionality can you expand on that and maybe provide an example yeah I say to people that if you can get free optionality um make you know I can show you a way to become a millionaire very quickly uh there are three forms of optionality in the mining business uh there's price optionality there's land optionality and then the third one I call it time optionality so price optionality it's very easy to understand in the sense that you know if the gold price goes up from $1,800 to $2,000 well you've been given a $200 lift and the royalty holder gets all of it at no costs so that's like a 10% boost in your Revenue without again having any cost associated with it so even if the operator has inflation and you know the margin for the operator may end up being exactly the same your margin has just gone up 10% because the gold price has gone up so if you think that the gold price is going to 3,000 well you're going to get the entire benefit of the move from today's price 2,000 to 3,000 deliver it to the royalty holder so that's a huge Advantage the the other one is land optionality and that one you uh it's interesting in our business there's no analyst whatsoever who put any value attached to the land owned by the mining companies and their reason is that well we don't know you know how to calculate the land optionality so you don't get any value for it but yet from a royalty standpoint a royalty owner once a company has spent like let's say $2 billion to put a mine into production you know it it's it's put up all the capex and it you know it it erected all the structures and now you're doing whatever like 20,000 tons a day or 50,000 tons a day well the operator will do everything it can to keep on going so when they start production for example they may have like you know let's say 5 million ounces of Reserve but the first day you start mining your reserve are going away so what do the operator do they explore they keep exploring around the land to be a able to keep Mining and all the exploration comes at no cost to the royalty holder so you don't have to put up as a royalty holder any money for the exploration and yet you get all the benefits in the world and then some and of course my favorite story is the uh Franco Nevada story you know how we got started the first royalty that I ever bought was on a piece of land in the Carin Tran of Nevada which had at that point in time approximately 500,000 ounces of resource and about 300,000 o of reserve and I paid $2 million for that royalty it was a a 4% royalty off the top and there was also a 5% net profit interest royalty attached to it and we're talking here 1987 and 19 sorry 198 5 and um the property was sold to a company called Barrack uh then the property at the time was producing about 30,000 between 30 and 35,000 ounces of gold from a bunch of small open pits and the property was sold to baric baric comes in start exploring and lo and behold they find a 50 million ounce gold deposit and the production went up to 3 million ounces a year so that loyalty that I bought for 2 million has paid out over a billion dollar since and there's still probably another half a billion to come and that's what I called land optionality I mean that is the ultimate okay me like I don't want to give you the impression you do that every day this is the best deal I've ever done and unfortunately it was my first deal okay I don't think to be repeated quite the same but we've done it at Franco Nevada three times where we bought asset for 2 million and turn them into you literally billions of dollars so it does happen and that's why I love land optionality and you you know when we buy a royalty usually we get it for free because nobody knows how to calculate it and you know um it comes with the royalty and then the other one is time time is always once you own a royalty on a piece of land it stays there forever and so times may change and you know the the the new technology may come in where all of a sudden the the 10 20 million ounce that you have like you know 20 years ago you couldn't mine them and then now they have new technology and lo and behold you can be M and time is on your side so those are to my mind the the the really incredible aspect of royalty companies Pier that was a fascinating story I just want to summarize the benefits of owning a royalty company and first of all there's diversification you own a large number of assets second of all you're not exposed to Capital risk or an increase in costs at all and then you have this optionality benefit are there any other advantages that we should be aware of no you've got it about right you know the fact that you as a royalty older you benefit from inflation because you have no cost or fixed cost if it's a stream royalty and you have no exposure to Capital cost to exploration costs but yet you get all the benefit of all of that and I want to get get your views now on the price of gold it's depending on what day of the week it is it's around $2,000 an ounce and some people aren't too happy with that performance get it given the growth in the money supply over the last few years uh a lot of people think it should be up a lot more what are your thoughts oh I mean I think that gold is at a new high it just hit a new high like a couple of weeks ago like $280 I think it's incredible and uh I couldn't be happier with where gold is uh is right now and its performance uh but I think what the people are reflecting is the fact that the gold equities are at the 50% discount to where they should be relative to the gold price and that is really unexplicable I mean you know I've been in the business for 40 some years and I don't understand why there's such a disconnect between the gold equities and the the the current gold price and when I think of uh the uh the the next year two years um you know the gold price it's like an insurance policy your house doesn't go on fire every day but you do buy the insurance policy in case it happens and it's a bit the same thing with with gold we all know that you know the the US um for example current budget deficit is going to be something like $1.8 trillion and over the next five years it's like two trillion a year and they already have 34 trillion of debt I mean when I was a kid those numbers were reserved for a strong economy okay like I mean they are so big they're so huge it's just unbelievable and at some point um the US dollar will become suspect but it you know we all know it is suspect but until you have a break until something happens um you may see the dollar continue to you know to to drift sideways with its curent valuation but like it happened in 1971 like it happened in you know two in 19 can't remember when they had to have the plaza Accord um there are you know there there is dislocation event that occurs Black Swan as we all know now and that's you know by the time the Black Swan happens it'll be too late for you to own gold you have to buy it now as a safety precaution and then just be patient you can't you know like um think that you know I'm going to buy it today and then it's all going to happen tomorrow this is a slow moving train wreck okay and you know it's it's happening but you have to have a bit of patience but $2,000 gold right now it's really good you made mention of the fact that the gold producers are severely underperforming gold price and do you think a lot of that has to do with wage inflation and also fuel prices you know I don't think so James I think that uh when you look at um the the producer they've been able to contain cost by a long shot I mean uh you know the the total cost to produce an ounce of gold is actually coming down I mean it it peaked at around on on average it peaked at around you know like $1,200 and now it's drifting back to 1100 and cash costs are closer to $800 an ounce and some producers are as low as 500 cash costs and all in cost of like 700 and yet you know they they discount a gold price of like you know $1,500 gold when it's over 2,000 so who's right I mean is the equities right where the gold price will come down to, 1500 or is the gold market rate and the gold equities will you know double from where they are today because of you know they're like at 50% of their intrinsic value at $2,000 gold so as we mentioned on the onset there's many different ways to invest in gold or to get gold exposure and I'm curious to see how you invest do you prefer royalty companies or producers or do you also invest in developers and explore Co um you know look I I have a vested interest in uh Franco Nevada so of course I invest in royalty company I think that the uh Franco Nevada business model is the best business model in the world Bar None I mean like you know the company uh we have essentially 42 employees and with revenue of over you know like a billion a year like on on a revenue per employee I think we're probably the best in the world and uh you know the business model and we have over a 100 Royal actually it's over like I think it's 400 but operating I think it's like around a 100 so incredible diversification as you pointed out uh and then um I have also um intermediate size companies and um I have you know some uh development company but there I will remind you you know you probably are aware of the the the curve that I invented like about you know 20 30 years ago called the lon curve and uh it shows the uh the share price over time what happens for example if you have a discovery so let's say the share price is 5 cents it'll go up to you know let's say $20 uh and with all the hype and everything else and then it comes back down to like five and then there's a long period where you know once you've done the initial reserve the and then you have to have the feasibility study and then you have to fund the uh the construction um today that zone is becoming The Killing Fields uh because with the permanent process being so long very few companies have the backbone have the financing to last you know like that three four five years uh you know you you take for example this morning uh barck announced that they finally got uh the record of decision from the Nevada Bureau of Land Management for Gold Rush well they've been waiting for I think five years okay like you know so a company like Barrack can sustain that but any other company who doesn't have the cash can't do it so those are becoming The Killing Fields where if you're shareholders you probably going to get diluted down to nothing uh and usually the best place to to buy a stock in that range is once it's fully funded fully permitted and about to start construction and hopefully you have confidence in management that they can build on cost and on time okay because that's where the other big hiccups happen so if you have a good management it's fully and usually at that point you can buy a stock for 50% of its net asset value and you can double your money if if you're patient over like a two-year period And so those are sort of like the the kind of things that goes through my mind when I you know select stock for a portfolio interesting points and Pierre in the past you have said that Junior mining companies are like fireflies and I want you to expand on that and tell us what you mean by that statement well back in 1990 I wrote a book I took like you know six months nine months out of my life actually to write a book and it was one paragraph on Junior mining company and I did a 10year study at that time of Junior mining companies uh from 1980 to 1990 what happens to them okay and I had about 3,000 company don't and don't forget like the 80s were you know rock and roll for the mining industry okay it was a discovery of hemo I mean like you know the the voes bay Discovery I mean there was like discoveries there was like money pouring in and the number of companies peaked at around 3,000 Junior mining company and what I found out is that of out of that only 1% of these companies ever ever made it to production and the other ones they get reorganized they get bankrupt they you know like they kept Alive by the promoter just you know they're they're walking dead if you want but they're kept alive and all that promotion you know like these drill holes that yeah they're good but they don't amount to anything when you start to look at you know where's the beef okay like you know and uh that's why I call them fireflies and unfortunately that is the the the reality of our industry and it's not I mean M Mother Nature has given the same odds to all businesses and I I don't want to disparage our business because if you look at technology same same odds okay it's one in a th000 one in 10,000 if you look at biotech same odds we're no different than any other sector in the world but we just have to really you know take that and put it in the back of our mind when you're buying a junior Mining Company U an exploration company you're rolling the dice like anybody else okay you know and you could go to Vegas and do just as well okay and you know if you like the promoter and you like the place and you want to have fun by all means go ahead but you have to understand the odds are not in your favor you're can have a lot more fun in Vegas too I think so but hey it's a lot easier to talk about the stock you own that you know what you've done in Vegas Pierre we can't have a discussion on Gold without discussing Bitcoin and quite often it's referred to as the new gold or digital gold and Bitcoin is up over 120% on the year what are your thoughts on bitcoin and do you think it's become the new gold and maybe it's taken away a lot of interest in Gold well I I will turn it back to you with a question you know um are central banks buying Bitcoins or are they buying gold well the reality is that they're buying gold okay and central banks believe that gold is money and that's why they're beefing up their Reserve whether it's China Russia you know all the central banks that are not attached to the dollar they want gold Reserve because it's the only money that uh the US can't get their hands on they can have the gold bars in you know uh Beijing or in Moscow or in you know turkey and the US cannot have access to it and uh given what's happened over the last few years and the Very high-ended nature of the United States Visa other countries uh central banks have figured out that you know what we need to diversify and you know the way to do it is with gold and so they have you know put the stamp of approval gold is money um Bitcoin it's a mathematical equation in space okay it's like it benefits a few people mostly um unsavory uh it's not regulated the day it's regulated it'll probably you know I wouldn't say it's going to die there's a place for it uh but it has no intrinsic value it you know it has uh I guess to me I can't fathom why anyone would buy Bitcoin uh it's a nice imagination but uh long run not sure where it's going to go and I guess the other big advantage to owning gold is you can hold it in your hand whereas you can't hold Bitcoin and gold is universal I mean you know uh if you unplug your computer how you going to get access to your Bitcoin okay like you know if you're in Gaza right now you need to get out or you're in the Ukraine you need to get out like you know your computer was blown to Pieces electricity work what do you have nothing gold you got it in your hands you can run with it you can you know Buy things okay like anybody will accept goal it's a universal value you know go in the middle of Africa where you're Bitcoin try to buy something well you know what they take a hike okay gold everybody everywhere knows what it's worth okay the price is posted it's International it's Global it has you know that aura that Bitcoin will never never have Pier I want to get your thoughts on m& now we've seen a lot of m&a happening in the past few years with a lot of the large producers Newmont barck and Neo have all been very inquisitive and Newmont recently closed on the new Crest deal but I want to get your thoughts on this and and why are they being so inquisitive as to as opposed to Growing their reserves through exploration well the answer is a bit of what I just said earlier the fact that right now uh the entire sector is discan by 50% so it's becoming cheaper to buy the ounces on Bay Street or Wall Street than it is to put your own money to try to find the ounces so when you can buy Reserve ounces for less than $100 an ounce you know and resource ounces for like $20 an ounce you can't find stuff you can't find gold for that price so it's cheaper to go buy the companies and cheaper to go you know Buy on Bay Street than try try to find them and that's what's happening especially for good good deposit you know anything over 5 million ounces is quite rare and anything over like 15 million ounces of Reserve is very rare and uh the cost to find those are in the hundreds and hundreds of dollars so if you can buy them for 100 like bless that's what you do and I think these companies are acting very smartly in uh you know buying these companies and do you think there's an element you mentioned how rare it is but do you think that's also an element is that there's just no more large deposits to discover oh I think there's you know plenty of large deposit yet to be discovered but that's the key it's like yet to okay like you know someone's got to spend the money and to and go find them and uh you know if you look at the record of Discovery the big mining companies usually find a about half the deposit and then the the junior intermediate find the other half but they have to be funded and right now the Junior market is like you know it's almost impossible to get money so um again the best thing is just to go and uh you know buy them in the market but no I think you look at Canada Canada has has the second largest land mass in the world have we explored that you know to the point where we can say there's no more not a chance there's still enormous amount of places where we have not been we have not explored there will be you know great discovery to come but um you need the patience and you need the money and when a company is burning you know like 5 million ounces a year uh when I say burning you know producing 5 million ounces a year they have to replace six six a year uh well 5 years that's 30 million ounce I mean like it where do you get that kind of deposit then sometimes it's just easier to buy someone who's already got one and assure yourself of the next like 20 years to give yourself time to find that next big one Pier that's a good overview of gold I want to move on now and discuss copper with you you're a big believer in Copper why uh it's very simple James uh there was a study done by shell a number of years ago and they pointed out that today 80% of the terminal energy that we use is carbon base that is petroleum oil you know coal and 20% is electricity and if we want to get to a green world and limit emission carbon emission to you know a certain amount you have to flip that on its head and you have to go to 80% terminal energy being electricity and only 20% being carbon base well when you look at you know terminal energy 80% that means you're going to need electricity you're going to need you know electricity distribution system and it's all copper I mean like you know if you look at your buildings all the air conditioning all the uh elevators all the transportation your car it's all moving because of copper so when you look at the Copper demand over the next 20 years to get there we essentially need to more than double the current production and um you know where are you going to come up with mines that produce two 300,000 tons of copper a year to replace the depletion and and double the production so like this year it's pretty good we have like you know a couple of really new sizable mine that are coming in production next year um maybe one but then after that there's a void and you look at that and you say to yourself like we're going to have to and the time to permit me you can find them maybe but then it's like six seven eight years to permit and then you build them it's another three four years you're looking at like 10 to 12 years so when I look at 2025 to 20 30 I think that copper in particular is going to do very very well I'm quite optimistic about the the entire copper industry so you provided a good framework on how investors can invest in gold and copper to benefit their portfolios now that's let's tie that into the economy in the last few weeks of 2023 the market was on a tier the stock market the bond market physical gold has caught a nice bid and it's all predicated on the notion that the FED has done lifting interest rates and they're going to start cutting and depending on Whose research you read it could be as soon as q1 or even Q2 what are your thoughts on the US economy and as we head into 2024 you know in terms of gold and copper James I don't think it matters what the US economy is going to do or the rest of the world because the particularly copper next year the balance is very very tight uh and I would say the same with gold so it doesn't really matter uh and as far as I'm concerned I think inflation is going to be more uh enduring than the FED would like I don't see interest rate coming down very quickly same for the rest of the world um and um the the FED is going to be caught in you know uh Catch 22 situation where interest rate on the American debt is going to be by next year more than the entire defense budget of the United States and uh if uh and it's going to get worse over the next five years like a lot worse so the FED at at some point in time they're going to do like they did in Japan and the only reason where why you know Japan is still alive I mean they have a debt to GDP of over 230% well what do they do they have you know Financial repression they keep interest rate at zero okay well that's what I call Financial repression but the Japanese are able to go and you know get US Dollars and so they manage uh but um where if you're a us-based investor where are you going to go like there's not a whole lot of places to go you can buy some Euro but you're going to have to buy some gold at some point in time because that's the asset that you know you cannot repress so I'm very optimistic you know no matter what uh what the economy is going to do next year you know personally I don't know and frankly as I said makes no difference Pier as we wrap up I'm going to put you on the spot now what will do better in 2024 gold or copper I think they're going to be very similar I mean I could see gold up uh another like easily another 10% next year like $2,200 and uh but I could see copper like you know 450 something like this so maybe up like 10 to 20% so I'm quite uh I'm quite bullish on boat metal and uh just to come back for a second to me you know like the best uh deposits in the world the best find are copper gold deposit uh because those Deposit they last for 50 years and uh you you know you get the benefit of time and price for so long that you can't miss as a company and that's why you have companies like you know Rio tento and BHP how do they get that big because of these deposits so if you can you know invest in a company that's got one of these you are should be doing quite well so back to your question I'm indifferent I think both copper and gold are going to do very well next year now in terms of equities I think the gold equities should do better than the copper equities simply because they're far more on their value than the copper equities well that was a great discussion Pierre and I want to thank you for spending time with us today and sharing your insights and I look forward to our next discussion thank you James always a pleasure as I said thank you I hope you enjoyed that conversation with Pierre Lon if you have any ideas or suggestions on who we should interview in the coming weeks please drop us a line in the comments section below we'd love to hear from you one of the reasons we do these interviews is to help you prepare for your financial future if you would like to speak with someone to assist you in preparing for your financial future consider having a discussion with a wealth on endorsed financial adviser at wealth on.com after providing some basic information wion will put you in touch with a vetted adviser and there's no obligation to work with any of these advisors it's a free service that wealth on offers to all of its viewers don't forget to subscribe to our Channel wealth on.com and also hit that notification button to be kept up to date on future events we have some amazing content coming up in the coming weeks that will help you prepare for your financial future once again thank you for spending time with us today and I look forward to seeing you again soon
