Pierre Lassonde on $20,000 gold price and ‘most unbelievable margins’ ever

[Applause] our next guest has built a legacy with one of the most successful companies in the mining sector in the world pier lassonde joins us today he has built franco nevada up from the ground up and today he talks to us about his experiences and what he sees next for the industry pierre welcome back to the show it's an honor to speak with you today well thank you very much for having me it's always a pleasure always a pleasure to have you here we want to start with just a macro update we have so much to discuss but a lot of our investors are wondering what miners in the industry are thinking about the price action we've been seeing over the last few months last time you're on the show in april gold was trading around sixteen hundred dollars at over two thousand dollars gold prices have really expanded have you seen margin expansions as a result in the industry yes absolutely and this is very comparable to the kind of margin expansion that we saw in the early 2000s don't forget gold bottomed in not in 2001 at 250 dollars to rise to 1900 dollars by 2011. so the the ryzen gold price everybody thought would lead to enormous margin expansion and the stock went up in 2003 four five six seven and then all of a sudden they all plateaued out and then finally they turned around in 2011 and they never got the kind of multiple that you were expecting because there wasn't any margin expansion and there are two reasons for that one is the oil price kept going up and energy as we know is 25 more or less of the cost of operating gold mines so as the energy price went from 25 dollars a barrel to 140 dollars a barrel the margins were not expanding as fast and then because during the late 90s the gold price kept going down mining companies essentially stopped exploration and when the gold price started to come to come around what they did because they didn't have any reserve they dropped their cutoff grade and so they were producing the same amount of gold but moving twice as much dirt and that too costs a lot of money and you had no margin expansion the difference today is very very different number one because oil prices are flat lining when you look at oil price today 37 but when you look at the oil price for the next year you can look at the contango it's almost nothing you can look at two years out it's almost nothing so the market is telling you the oil price is well fed there's enough oil out there and it's going nowhere so that's a 25 component of the miners of their their costs and then um the the other thing is that in the last 20 years in terms of cutoff gold miners have decreased or cut off to the point now where open pit mining they're down at 0.05 of a gram in terms of cut off well the next cutoff is dirt okay there's nothing left all right so the the open pit miners don't have any ability to increase their reserve even if you know because they can't cut they're cut off great anymore they're down so that's a good thing because which means that as the gold price goes up that difference will go right down to the margin and you go and you are seeing margin expansion the gold miners today have never had it so good the margins that they are producing are the fattest the best the absolute unbelievable margin they've ever had ever so i guess an investor who is new to the space is probably wondering gee have i missed the boat on mining stocks since margins are at the best ever or is this or is this the right time now well i think the answer to that david was provided a couple weeks ago when warren buffett bought a half a billion dollars worth of barrick gold at today's price and what is warren buffett seeing it's this is not an individual that bets on the gold price he doesn't bet on commodity what he's seeing is that he can buy barrack at a you know a fraction of the kind of multiple that he believes is the right multiple so no you haven't missed the boat at all even though the gold stocks are up double from the bottom but you got to think at the bottom like you know six months a year ago the stocks were so cheap but nobody was interested nobody was interested it's the same old story in our space at the bottom of the market there's never enough money and at the top there's always way too much and we're barely off the bottom at this point in time and there's a lot a lot to go before we reach the top with margins at the levels they are now one would expect exploration activity to pick up significantly are you seeing a lot of that this year um we are seeing some but the exploration activity the majors are obviously ramping up but don't forget 50 or more 50 to 60 of all exploration activity is by the juniors and they in terms of the junior sector it's been risk off now for the past six years and that is they've not been able to get any money from the market that too is changing and i think that over the next six nine months you're going to see more and more juniors coming to the market doing two four five million dollar kind of raise and i would say that by next summer i would not be surprised if we were to see exploration budgets up by anywhere from 25 to 30 percent and the year after i think the budgets will be up more likely by 50 to 75 percent i i do believe there's going to be a big increase in exploration budgets over the next two years where is the funding for this increased budget going to come from uh pierre is the sector attracting a lot more capital at today's prices it is i it is and uh not again not to the level of the kind of frenzy that we saw back in 2011 but we are starting to see inflow um now you just have to watch the public gold funds to see if the money is coming in or not coming in or going out and for the past seven years essentially money has been going out for the last two years money has been flat and now they're starting to see inflows and that gives you a pretty good idea of where the money is going and then if you look at gold itself you just look at the gold etf look at gld gld is up over 900 tons this year alone which is the biggest they've had more inflow of money in the first nine months of this year than any year in the past 16 years it's been public since 2004. so the it's a record in flow of money into the gold gld and that's also a precar a precursor to what's happening in the equity sector okay peter you've worked with a lot of different uh mining companies throughout your career and you've seen different cycles of uh gold and silver prices let's take 2011 for example the last time we saw prices at current levels uh when prices were that high for gold did you see miners still exercise the same level of fiscal discipline as as you would expect in a lower price environment where they say maybe okay well prices are near two thousand dollars i have more room to spend now i have more i have a little more room to bump up my all unsustaining costs because like you said margins are so high it doesn't really matter i can just spend a little more have you seen some of that happen not yet um and you're absolutely right to point that out because what happens again when money starts to flow over the top essentially people are saying to mining companies we want you to grow and we don't you know really care about the margin we want you to grow and what do you you know the ceos they respond to what their shareholders are asking so they started to do back in 2010-11 frankly stupid acquisitions that then they took seven years to pay off or regret and now everybody has come full circle and they've all said me akul po me and max makulpa i'm not going to do it again but believe me i'm an old cynic i've seen seven of these cycles and when the money starts gushing in uh it will be very difficult to resist the temptation to go on the m a path very very almost impossible it will take discipline iron discipline that few ceos have that's it so are you are we going to see the shopping spree this time around you think oh of course of course we will of course we will and the main reason david is very simple is that most of most companies if you look at barrack you look at you know any of the large companies their reserves have been declining now for the past six years and yes they can start drilling but the brownfield exploration that you know will bring up that will give you the ability to lower your cutoff grade we're reaching the geologic geological boundary so where do you have to go it has to be green field exploration and green field exploration is before you find you know prove uh build develop and put it in production you're looking at seven to eleven years and if the gold price is twenty four hundred dollars next year what do you think they're going to do they want to buy they want the growth today they want to be able to have this project in production next year or the year after so obviously we're going to see mna in the space and i think the way you're going to see it is going to be sort of like three-tier that is if you got a projects that you know have one to three million ounce of reserve capability you'll you'll bet you'll get offers at par if you have three to five million ounce of reserve capability you'll get a premium and any projects that is from five to ten fifteen million ounces they'll be bidding war for those that's what i see you've talked about uh mining valuations uh you've talked about mergers and acquisition let's talk about the gold price itself now uh we've we've talked to you before about this and you have given twenty thousand dollar price forecast based on the dow uh dow to gold ratio have you updated your view since then has the coronavirus for example changed the way you perceive this ratio are we still going to see potentially a reversion to one one to one you think you know it's interesting because a year ago when uh we were talking about the gold price and i mentioned the dow gold ratio i did not know why you know why it would go to one to one i i you know i it was still hypothetical in my mind like you know the ratio has been one to one twice in the past i think we're going to get and then or you know it takes a 40 50 year period if you look at 1930 1980 well we're now 2020 so 40 years so sometime in the next five ten years i think we're going to see one to one but i didn't know how we're going to get there well with covid i think i've seen the answer in a sense that when you look at our neighbor to the south the federal reserve they are printing you know like three trillion dollars they're talking of another package in the 1 trillion to 2 trillion you look at what's happening in europe 700 billion of uh package of rescue another 100 billion in in uh this week you look at canada i mean you know it seems that mr trudeau loves to write checks left right right and center we're gonna reach over a trillion dollar debt in canada so um that money unlike 2007-8 which ended up staying in the banks and never went into the public this time around the difference is that the money is sent by checks directly to people and it's part of the reason why the stock market is where it is uh because people a lot of people have gone on to robin hood the new platform they're playing the stock market because they got nothing else to do they're at home they're stuck and you're seeing that money being spent you know and i think at the end of the day it will create inflation um and the other side of the coin is the amount of debt that is being take being taken on by the various countries they'll it'll never be paid back so how do they not raise taxes well they don't have to raise taxes the money is zero if you keep interest rate at zero and that's what the federal reserve is doing and that's what japan has been doing for 20 years japan's debt to gdp is 230 percent going to 300 but they don't have to ever pay back the money because it's zero interest rate in germany it's minus it's 0.7 and that's what's going to happen in the u.s we're going to end up with negative interest rates and possibly in canada and government don't care they can borrow all they want so this one-to-one ratio that you were talking about is that going to come from the gold side is gold going to go up or are stock's going to collapse you know i don't give you a bit of both if you again it's if it's instructive to look at the past because the twice when it's happened it's happened for a very different reason back in 1933 the the dao lost 90 percent of its value between 1929 and 1933 it went from 360 to 37. the gold price went from 20 dollars to 36. okay so you know the gold price almost double but the dow itself went down 90 in 1980 the dow had gone down from essentially a thousand to 600 from 1966 to 1980 it it came back up to 800 but the gold price as we all know went from 35 to 800 which is 24 times you know from the beginning so very very different response to different times this time around it's hard to say david because with the money that's floating around it's hard to see the dow going down to like ten thousand or twelve thousand could it happen yes but i find it very difficult could it go down to twenty very possibly seventeen yes fifteen could the gold price go up to 15 000 absolutely that's what i'm talking about but i don't think it's tomorrow morning i think it's somebody sometime in the next five to possibly as long as 10 years well should let's say gold goes to 15 000 or forty thousand dollars which is uh what you had assessed earlier how how would the industry change fundamentally are we gonna see major restructuring are we gonna see a major shift in priorities um you know the the the key question here is how long is it going to be there don't forget that in 1980 the gold price was 800 for less than a day okay let's be serious here uh if you look at the entire quarter the gold price was about 675 and if you average out for the year it was less than 600 so yes it did go to 800 but it was there literally for a day okay now uh and in 1933 though it went on a little bit longer than that but it was certainly less than a year i i don't have the detail in front of me so i can't really tell you but i i think it was you know probably closer to like three months or something like that so the key question is how long will that ratio be one to one how long are we gonna see the gold price at these you know crazy numbers and then what will be the inflation what's going to dollar be worth don't know you know we who's going to be the next president united states is if biden gets in and they decide to you know do a the kind of medicine that we have in canada the costs are just going to blow out they're going to have to print more money all of that is going to fuel the gold price up we don't know it's too early yeah you brought up a lot of good points here uh let's move back to uh royalty companies now because you are uh one of the world's foremost expert on royalty companies do you think that this new higher price environment has changed the preference for royalty agreement types like net smelter agreements net profit interests their different royalty types and you think companies have different preferences at different price levels no i don't think so because the the royalties are very much function of what it is that the company uh what stage the company is at is it an exploration company is it a development company is it the you know a company in production that you know wants a cash payment and then the quantum the size of the the money the the the need for the company like an exploration company may only need 20 million dollars to be able to you know finish drilling and get a pre-feasibility study done at which point you don't you don't have enough information to do a streaming agreement so you end up doing a straight nsr but if you're building a mine and you need 500 million dollars well that's a whole different story now you really need to build a streaming agreement but at that point you have all the data to be able to do it so the the gold price itself doesn't really affect the way you transact except at the end of the day the price you pay what about interest rates here we're seeing very low rates right now historic historic levels of low negative real interest rates would that be competition for loyalty companies do you think if a junior minor were to find financing he would say the ceo might say to himself well i can get very very attractive rates from uh from debt why would i have to go to a royalty copy to finance my agreement uh how would you respond to that well good luck the reality is that the banks will never never fund you more than like half of your project and then for the rest they say okay go get equity because we don't want to be exposed to more than 50 so the plain reality is that even though interest rates are very low the banks are still incredibly reluctant one to even land to the mining industry and two to be anywhere near 50 on the hook for the entire capex so that's not going to change the structure of the industry or the landing if you want not at all okay and what about what about the covet environment that we're seeing this year has that changed priorities for uh for ceos do you think i mean we're seeing different jurisdictions around the world emerge uh and recover differently in response to covet what new risks are they seeing how are they responding how are they changing the priorities you think um i was just looking at one of the bank produces a account of all the mining sites that have been impacted around the world and it's over 372 so far and how many are still down it's about 70 everybody else is back in the production so what i think what we found out in the industry is that kovid has been a an equal opportunity killer it goes around the world and it doesn't discriminate and you know it doesn't mind it doesn't care if he's if it's in peru or if it's in zambia or canada or whatever and we've what the the mining industry has been impacted equally everywhere and i think it's just one of the the risk that as an industry you have to deal with um just you know as you would have with uh drought or too much water or you know any other environmental factor that we deal with yeah so at the end of the day kovid does not i mean if you have a great mind in a country that's currently impacted by kovid you'll still you know build it because at the end of the day a good ore body trumps everything pierre this isn't just a change a year of change for uh the whole world it's also a year of change for not just the industry but yourself as well you've recently stepped down from the border franklin nevada how do you feel how did that make you feel you know after 35 years of being intimately involved in franco nevada from starting the company with my partner with two million dollars to building it to a 36 billion dollar juggernaut it's been a great and fantastic story but there comes a time where you have to you know make plays for the next generation and move on and i realized that a couple years ago and i decided you know what uh 2020 will be the year and in the background i started building a little um merchant bank and uh one of uh the fellow that was working with me at franco nevada joined me as well as two bankers from gmp uh rainmakers and uh started trinity advisor and um we got going and doing doing deals you're also involved in orla right tell us about that that's correct we started out four years ago with nothing and uh bought a company the public company that was not doing too well and then goldcorp was disposing of assets in mexico and we raised our hand and said yeah that sounds good to us and you know i you know david i love optionality so in orla we have a project in mexico camino rojo that we're going to put in production the oxide part of it two million ounces on surface one-to-one strip ratio good stuff but underneath it there's eight million ounces of sulfide and at nineteen hundred dollar gold that also all of a sudden becomes worth a huge amount of money and so we're and there's been 300 000 meters of drilling done on this thing so it's not exactly like you know it's a unknown i mean there's so many holes that when the wind blows it whistles okay so like this is something really big and uh we're looking at what we can do with that and then in panama we have another deposit with a billion pound of copper that we're just starting drilling this week to increase the size so i love that exposure i love that optionality the stock has done quite well it's gone from essentially um you know 50 cents to over five dollars but it it's nowhere near its full potential so i'm i'm very very pleased it's been and we have a great ceo uh jason simpson who used to be a torx bill torx and now he's with us he's building orla and we have a great uh chairman chuck jennings uh who used to be at goldcorp who used to be with glamis so we got experienced people great deposit and that's how you create the magic yeah but pierre you've built already so much in your career more than most executives you've retired from franco nevada some would say well why don't you just go to a cottage and relax what drives you why are you still so active in the space you know because i'm having fun because i love to help young entrepreneurs i i get a real kick out of that i get a real kick of having all these young people around me all fired up they want to create wealth for themselves for their shareholders and um you know we're also helping america gold and silver you know that's another company that i've got a bit of an involvement in uh and i i just love being able to do that you know much better than putting your feet up and like you know watching the day go by that's that's boring you know you were telling me uh frank nevada market cap around 36 billion dollars 36 employees that's roughly 1 billion dollars per per employee that's more than any other company that i can think of actually it was eb tucker i spoke to eb tucker just before you who brought that up to me that's incredible that's incredible it is quite incredible you know fred the franco nevada business model is absolutely bar none david the best business model ever ever invented and think about this okay when we just to give you a quick synopsis when we bought back franco nevada from newmont and we sold it for 3.2 billion we bought it back for 1.2 billion in in 2008 it had 20 million ounce of reserve 30 million ounce of resources 10 years later that 20 million ounce has been mined so you say what's the reserve today well it's 20 million ounces and the resource is 30 million ounces and how much did franco have to pay for that bubkus zero and that is the optionality embedded in the franco nevada business model and that is why it's such an incredible business model because the value of the company is not just the cash flow like you would have in a regular company the net asset value you know the discounted cash flow it's that embedded perpetual option on the discovery made by the operators of our property you know that's the real value it's important for our viewers to know because not everybody might know this as franco nevada wasn't always a royalty company you started off as an explorer at what point in the 80s did you did you and your partner decide you know what let's abandon this model let's do let's do this because that was a relatively new concept it's been done for oil and gas it's not been done for mining before and precious metals at least so you you took a leap of faith what happened there well it's funny you say that because um we started effectively as a another exploration company and uh after two years i was writing the annual report and i went into my partner's office and i said seymour all i have to say to our shareholders that we're losing their money i said like you know we we've drilled here we've drilled there and like you know we've done nothing we're gonna have to you know do another fundraise and it's the same story over again and i said you and i are the two largest shareholder like you know this is stupid we gotta we're gonna think about another way to do business and it's in that conversation that seymour just kind of floated he said well in the oil business there are royalties aren't there any in the mining business because if there are we could maybe buy one and have like cash flow so we can sustain ourselves and i said well i've heard of a few but you know why why don't we give it a go and this is really the genesis of the idea and then i mentioned to our geologists in nevada that we were looking for royalties and then three months later there was a an ad the box ad in the reno gazette it was royalty for sale and he gave her a call he called me sapir i think i found your first royalty and make a long story short that turned out to be the two million dollar that i paid for the gold strike royalty that then barrett came in bought the property two years later founds 50 million ounces of gold and that royalty has paid out over a billion dollars you entered the space actually in the 80s at a time when gold was on a long-term secular decline in prices first of all did you was this something that you had in the back of your mind and second how did you beat this you still were able to be successful you know despite this bare secular trend well yeah but david the goal strike or body you know again i'll tell you um after the discovery seymour and i our stock had gone from 65 cents to 17 so we said to ourselves why don't we put like you know a few bucks in our pocket and sell the company and then do it again and i was at the old mcdermott mine opening in northern ontario and brian mikel who is the discoverer of goal strike was there and um i said to brian i said well here's what we're going to do we're going to sell franco nevada and we're going to do it all over again and he looked at me and he said you don't know what you're doing do you and i'm thinking like was it i don't know like we're gonna put so much money in our pocket he said pierre this is not the discovery of a lifetime this is the discovery of three lifetime and he was right and that's why we were so incredibly successful in the 80s because you know after the discovery the growth was you know continuous and it helped us really create the company that it became here i have one last question for you you've built so much over your career and you've talked about helping young entrepreneurs what would you say to somebody who wants to build the next franco nevada you look around at all these streamers now that have followed your model what would you say to the executives now who are either running a streamer or somebody who wants to start an exploration company you know it's always the same thing i've made money with people good people make good things happen and if you are starting your company hit your right with someone that's already like you know created value that's already discovered that you know uh that discovered an ore body and uh pretty soon you'll find that you will you will yourself come up with ideas on how to create that value but it it's all about people good people good thing peer lesson that was a fascinating talk i want to thank you so much for your time today i really enjoyed speaking with you thank you i hope we uh i hope we have you on again thank you for watching the uh precious metal summit we'll have more coverage for you i'm david lin of piccolo news stay tuned [Music] so you

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Keywords: gold, silver, finance, news, investing, investing news, finance news, financial news, economy, precious metals, gold price, silver price, gold price today, dow jones, s&p 500, equities, stock market, stock market news, gold price forecast, franco nevada stock, franco nevada mining, pierre lassonde interview, pierre lassonde new gold, dow gold ratio, mining shutdown, mining stocks, gold stocks, silver stocks, gold royalty companies, royalty mining companies, Fed, david lin kitco

Id: gU0Z85mNweE

Length: 33min 4sec (1984 seconds)

Published: Tue Sep 15 2020