Pierre Lassonde - The Founding of Franco-Nevada with James Connor

unbeknownst to me when he went back to his office the operator of the property was there with a checkbook ready to buy the royalty and since then I've found 50 million ounces of gold and all came for [Music] free Pierre you and Seymour SCH started Franco Nevada in 1985 and it is now the world's largest precious metals royalty company and I want to examine why royalties are important to both mining companies Al and also investors and why don't we just start with mining companies why would a mining company enter into a royalty what are the benefits of doing so uh for a mining company the uh royalty financing is sort of in between Ane Equity financing and um but at a lower cost than Equity financing because you're selling part of your deposit instead of selling just like Equity so it's very much less dilutive for the shareholders it is equity in the sense that the royalty holder doesn't run the mine you know the operator does everything and but yet the royalty holder takes the same risk in terms of mining risk country risk and whatever as the operator so it's on the same side it's not a debt it's not a preferred it's just and uh it comes when you look at the multiple that the royalty companies are willing to pay for streaming royalties uh it's far better than an equity deal you know and most of the time I mean sometime if you're you know stock sells at two or three times the Nev at that point in time you're better off to you know get the money in the market uh but in today's market where most companies are selling at a discount to their Nev um they're much better off to do a uh royalty deal Pierre let's examine the reasons or the benefits now why an investor should invest in a royalty company and the number one element in my mind would be diversification you're not exposed to 5 10 or 15 producing mines you in the case of Frank Nevada they have over 400 royalties over 100 of which are producing mines then you also have the element of not being exposed to capb backs or operating expens associated with cost inflation but the one thing that really stands out in my mind where you can really reap or create shareholder wealth is optionality can you just tell us about optionality and the different types of optionality absolutely and uh I always say give me free optionality and I'll make you a millionaire because uh optionality in our business is not understood and it's you know undervalued because no one calculates it uh but it is the key to the Franco NADA success as you pointed out there's two kinds of optionality there's H price optionality and land price everybody understands it it's very simple in the case of a pure royalty um if the gold price goes from ,000 to $2,000 an ounce the royalty holder gets you know $1,000 increase in its Revenue and in its profit because you know there's no cost so if um you're getting you know 100,000 ounces at $1,000 an ounce now all of a sudden it's a th000 you know at $2,000 an oun so that's very understandable um the most incredible optionality is land optionality when we buy a royalty over a land package let's say 60,00 ,000 acres of land in the middle of Nevada the mine over which we have a royalty will have resource reserved that are fixed but then the operator will put up a billion or two to put the m in the production and then the operator has all the incentive in the world to keep exploring to be able to use that capex that capital for as long as he can so the operator will start you know like putting 10 20 50 million a year in Exploration at no cost to the royalty holder same if you're a streaming company you still don't pay any of the exploration and yet you get all the benefits of it and as the operator reduces the um the cut off grade the operator's cause goes up but for the royalty holder it's the same you know it the they they don't have operating costs or they're fixed so its margin goes up with time and that is the real beauty of uh the uh land uh optionality now I can give you the best example of it all okay which happens to be the very first deal I did which happens to be the best deal that I'll ever do in my entire life which is kind of sad at the end of the day that your first deal turns out to be your best deal ever but that is the case after Seymour and I created Franco Nevada we had um raised $2 million and we were saying to ourselves what are we going to do with the money and it took us about 18 months to figured out that we wanted to try royalties okay and the model came from the oil and gas business because that's where Seymour came from and we were trying to find a model where we wouldn't have to you know raise money every six months or every year and dilute ourselves all the time or have to put up money all the time to keep the company afloat and that's where the royalty model came from so at that time CMR asked me he said like well do you know of any mining royalties I said well I know a few but like no one had ever really uh talked about it or of course there was no business model you you know create a mining company based on royalties so we were working in Nevada and uh while I was there my chief geologist said well what else are you guys looking for so well if you see any royalties like give me a call because you know we would like to to get into royalties get by one or two and so three months later this uh geologist was in his office in Reno um Friday morning 9:00 a.m. reading the Reno Gazette with uh sipping his coffee and on page three there's a box ad royalty for sale with a phone number so he calls up the phone number it turns out to be someone in Texas and um they he got started talking and where's the royalty where's in the Carin TR of Nevada he calls me up he said Pier I think I found your first royalty uh where is it the Carin Nevada well it turns out that like 6 months before I had done a study for myself and Seymour about the cost of finding an ounce of gold because I said to Seymour if we're going to be in that business where is the cheapest place to find an ounce of gold that's where we ought to be and that was actually the Carin trend of Nevada in those days they were finding gold for like $7 an ounce which was incredible we're talking here the early 1980s so to make a long story short I told my goo tell the guy to meet me in his office in Salt Lake City Monday morning so over the weekend I did my work Sunday night I flew to Salt Lake City Monday 9:00 a.m. I walked in the office of the seller we started talking and Seymour and I had agreed that um the fair price was $1 million so at the time uh there were uh about 500,000 ounces of resource on the property divided up in about six seven little pits that they were mining at the rate of about 30 to 35,000 ounces a year out of like you know small 35 ton Hall trucks and like you know like a very custom operation Mom and Pop I would say anyway I made him an offer half a million nothing 750 no then I went like a million not at all and then he told me that um he had a $2 million bank loan the bank had called a loan he had 90 days to repay or they were going to put him in bankruptcy so all of a sudden it was 2 million or nothing he didn't have any other asset that he could sell so I I can still see myself like going through the numbers in my head of what's there the gold price was 350 um and then like so finally I said to him I said look I said um you have a deal but I have to call my partner so I called up Seymour and I said Seymour I have good news and I have bad news he said well what's the good news I said well we've bought our first royalty and I think we're going to make like five times our money I didn't know but I had to give him something and he said well what's the bad news I said well we got no more money because that was all the money we had in the treasury and he went nuts on me he said Lon are you F crazy what are you doing like you know he went on and on finally iung up and I said to the guy I said look let's go downstairs our lawyers are there they're in the same building we'll give it to them the terms dictate the whole thing you and I go have lunch we have bottle of wine we come back we sign we're done he agreed we did exactly that we we came back we signed Shake Ken and I left and I returned back to Toronto unbeknownst to me when he went back to his office the operator of the property was there with a checkbook ready to buy the royalty imagine carpedm that's one of my tenant okay like seiz the day that royalty that I bought for $2 million a year later bar bought the property started Drilling and since then I found 50 million ounces of gold that royalty has paid Franco Nevada well over a billion dollars US so far and there will be another 500 million coming that's what I called land optionality and all came for free that's quite a story now I'm curious when you okay so you had $2 million you and Seymour discussed that you were going to pay no more than a million dollar for this asset you ended up paying 2 million to go from 1 million to two million that's a big increase right but I'm just wondering what was it about the asset you thought you were confident about well the asset was being operated and at the end of the day the question I asked myself was will I get my money back that is like if you ask anybody at Franco Nevada today what what would Pierre ask that's the question I ask when am I going to get my money back okay uh because our business is a bit like the casino as long as you get your money back you can always go play but once you lose your money it's really tough you know to go raise more to go play so I always want to know when I get my money back in this particular instance the original deal that we had the $1 million we had calculated essentially like on the threeyear payback it was a bit aggressive okay uh but there was like we didn't have any reference point we didn't know like nobody had ever bought any of these it was a private transaction and we didn't know so when I was thinking about it like you know will I pay 2 million doll okay I'm going to take 6 years at 350 if the gold price goes up to 400 now I'm back at five years in the meantime I'm going to get like you know a good return and it there's enough Reserve to last like twice that so in my mind it was a workable deal and uh that's why at the end of the day like Seymour agreed with the deal we were maybe like you know again aggressive but there was no comparison today all these deals there's always like two three bids um and U it's it's very competitive and when did that deal conclude it was uh March April uh 17 uh 1987 and how long after the fact that you realize my God we really have something here uh it was only about a year later because what happened there is that the operator of the property um they wanted to sell the property so they drilled one hole that was like 1,000 ft of like a third of an ounce gold but the operator thought that they had drilled down a vein and so they put up the property for sale thinking they were going to fool people okay well Bob Smith who was the CEO of barck at the time when he saw that he figured that like I did that The Rock package was so big because it was sediment that there was a lot more there and so Barrick bought the property for about 75 million us and then started Drilling and the first three holes they offset that hole and they got the same thing 1,000 F feet and then I remember of of a third of an oun I remember you know Bob says like well I go drill 100 ft away because I don't believe it and they got the same result and he still would not announce it and said well go drill 100 ft the other side they got the same thing and finally they put out the result and it's at that point I said no no no this property is going to have a minimum of like 5 million ounces and then they drilled a few more and I said no it's going to be 10 and people were like L is like completely flipped out he's gone okay like you know I said no look at the thickness of the rock package and how uniform do are and you'll see and and guess what at the end of the day like 50 million ounces and they drilled the best gold hole I have ever ever seen in my lifetime it was 1,000 ft of 1 o gold imagine that 1,000 ft thick of 1 o gold you don't see that today I haven't seen anything like it in 40 years so that one asset became a company maker not only for Franco Nevada but also baric gold EX exactly it became a company maker for both Franco and barck yeah Pier I want to ask you about investing now and how you manage your own wealth when it comes to mining specifically and I know you have a great deal of your wealth tied up into Franco Nevada but what about gold producers or developers or explor Co I have found over the years that uh the best place to get involved in a mining company is um at the uh the second turn of the Lon curve I me I don't know if you remember like back about 30 years ago I created a um it's called the lon curve which depicts the um a typical Mining Company stock price over time including like the discovery where it shoots way way up and then it comes back down and then you do the feasibility study and then you go to finance to go to production and that usually kills the stock and yet the best time to invest is when all that b news quote unquote is out uh the company is fully finan and you actually have a good management team that you trust will be able to put the mine in the production at the stated Capital cost and at that point in time the company is always undervalued um and because now it becomes just a question of like is it 18 months two years to production and you don't know when it could be like a month before 3 months before production or 6 months before production the stock all of then so starts to rise because people can see that maximum Nev is actually the minute uh before you start you push the button and the thing starts producing so that to me is the most attractive place to uh get involved you know for example when um uh Lucas lundine was buying um what became lundine gold um asset in Ecuador um he had trouble getting you know people involved and uh you you look at you know the resource the reserve it was incredible like one of the best Reserve in place and it was not fully financed and so I remember saying to Lucas I'll I'll buy you know 5% of the company uh with you and I will promote but I want to have like lisiak as your guy who's going to build a mine because I know he's is going to build it you know on time on budget and I'd like to see uh all the money in place and uh then we're off to the race well the stock at that time was $450 and by the time it got to production it was like $112 so that is typical of where you can make like the most money in the mining business with the least risk um where you got the maximum risk is you know at the very beginning of course and those are what I call the fireflies okay um there are thousands of them you know they they have assays here there there but uh can they come up with you know like three5 million ounces which is the minimum you need kind of today to be able to have sustainable production for like 15 20 years otherwise you have like what we call in French the Minette okay like the small mines and those mines are not able to um support any shock okay like you know you're down for two weeks because of your frame your your head frame or because of this or because of that you can never catch up the the mail is never big enough the underground is never big enough to catch up and you can't really make any money with that you may have a million ounces but you're not going to go anywhere and when you're looking at an explor or a developer or a company that's about to go into production what's important to you are you looking at jurisdiction the management team the grade uh number one is management good people make good things happen bad people don't have to say the rest so number one is really the management team uh number two I'd say uh the asset um if you have a th000 feet of 1 ounce gold let me tell you this thing's going to turn out to be a big thing okay just because of what it is all right and having world class asset today is the most difficult thing to get to so uh I look for asset that are going to be in the 5 to 15 million ounce um like that to me is very appealing if you can get to that those numbers you're then in the top sort of like you know 1% of the the goal asset in the world uh and then jurisdiction of course um you know I've never Seymour and I used to joke that we will go anywhere in the world as long as you speak English you have an English code of law and where you can ski and play poker okay that was very simple uh yet when you think about it that's uh you know Australia Canada the US there's a number of countries where you know over time we've Diversified but there are a lot of countries where we would never go okay simply because you know if you don't trust the court system or the law you have nothing you can't move mines okay they they have to be where they are so um for us it's uh very critical that um you have a u you know a piece of paper that you can rely on should something happen you made mention of how difficult it is to find a five or 10 million ounce Reserve or resource and I want to get your views on m&a because we've seen a lot of m&a in recent years with all the large producers new M Bar and nio have all been very inquisitive what are your views on this and why are they doing is is it because valuation or is it because we're simply running out of gold there's no more five or 10 million ounce res I think there's plenty of uh gold deposits to be found uh but when it becomes cheaper to uh buy the ounces on Bay Street uh versus like finding them it's normal you know you just go buy them uh today particularly over the last 2 three four five years uh the Junior market is just on its back and is having incredible difficulty attracting risk money so the ounces that are selling in the market today you can buy like reserve ounces for $50 an ounce you can't find Reserve ounces for $50 an ounce so just go buy them I mean you know that's really the motivation behind what's going on today and do you think it's possible to find another Gold Strike oh yeah I mean look at Canada has the second largest land mass in the world where do you find you know gold deposits on land okay and do you think that Canada's land mass has been explored not a chance I mean there like huge area of Canada they never seen boots okay I've never seen you know pairs of eyes so I am absolutely convinced that there will be more gr deposit to to be found uh but the cost today because you know if you look at the the great white North as we call it there's no infrastructure so you have to go buy helicopter everything is you know helicopter supported it costs a pile of money and if the investors can't get a return out of it they're not going to get the money and that's really what's happening that's why in Quebec for example plol has been so popular because the mining companies now are able to drive and they're able to support exploration uh based on road which is like a fraction of the cost of being helicopter supported um I think the uh if uh you know Ontario ever gets it sack together after 23 years uh you know in the ring of fire you might see great discoveries over there but you know in the meantime it's too costly you're not going to see exploration and so that brings me to my next question and that is performance or gold performance and also by extension the performance of gold equities and Gold's done okay but in this environment where we have this double digit inflation inflation running at 40-year highs the money supply has doubled in the last four years a lot of real assets have increased significantly in price but gold really hasn't how do you explain that I would be very looking at it very differently than you are I think you know gold this year will be at a nominal high in uh in every in real term and in specific term and if you can't make money with gold at $2,000 you shouldn't be in this business okay like you should be able to make a ton of money and I would say if you look at the AO eagle of the world and the Newmont I mean they are making like really good money and they should uh however gold equities are not priced as if gold is 2,000 they're priced as say if gold is going to be $1,500 there's a disbelief out there and don't ask me why I've never seen it in 40 years in a business of uh like the gold equi lagging so badly on the gold price itself and when I look at you know 2024 2025 I look at um the uh the setup in terms of gold the central banks are buying gold like there's no tomorrow I mean last year they bought like over a, 1200 tons of gold out of supply of about 3,200 so think about this like it's a third of all the gold produced last year went into Central Bank hands okay this year they're buying again same thing okay why because they want to diversify out of the US dollar they don't want as many dollars because the US is kicking the living you know daylight out of everybody who doesn't agree with their policy so they're saying you know what we like you but we'd like to have gold because we can Transit Gold without you uh uh you know preventing us from doing so and um you look at the I was saying the budget deficit the US like $1.8 trillion this year and for the next five years the government forecast itself like over $2 trillion a year I mean James those numbers when I was a kid were reserved for astronomy okay like think about this I mean they are so off the chart numbers it's unbelievable and all the politicians they what they do is and it's it's been like this for thousands of years they kick the can down they kick the can down the road and all of a sudden it stops okay and nobody knows when I mean it's like you buying an you know fire insurance for your house you never want to see you know you cashing in on that policy but if it does you'll happy to have your policy gold is a bit the same way over the next 2 three years I think having gold in your portfolio will give you a great comfort that you know if as and when that can like it's not kick down the road you know um you're going to be very happy to have some gold in your portfolio and I really believe that over the next three years there's going to be one of this you know uh Black Swan event that will kick the living daylight of the US dollar and that's what's going to propel gold higher because gold is the inverse of the US dollar okay that's always been the relationship and will always be because the dollar is the reserve currency when the dollar acts as a reserve currency that is solid no inflation you know low budget deficit if non budget surpluses you don't need gold okay but when the dollar becomes suspicious that's when you want it Pierre we can't have a discussion on Gold without talking about Bitcoin and quite often Bitcoin is referred to as new gold or digital gold and it's performing significantly better than gold has in recent years do you think there's been less interest in gold and more interest placed on digital gold or Bitcoin for the same reasons that people used to invest in gold well I think that there are two different markets Al together um I mean you don't see uh Indian or Chinese buying uh cryptos okay they buy gold they trust gold you don't see central banks buying cryptos okay they're buying gold uh I think that the uh I mean at the end of the day crypto is a mathematical equation in space unplug your computer and what do you have nothing okay if you have no electricity City what do you have nothing okay with gold you have it in your hands you can take that 1 o and people will accept it anywhere in the world with crypto you know you need enough another crypto to buy or transfer and then you need someone else who's going to be the intermediate to actually give you real money um and all of that costs money you there's immense friction in the whole crypto world I mean to my mind um if as and when the US government puts regulation around crypto it will cramp the crypto style pretty pretty badly because it is being used for um criminal activities I've seen it with a few companies that I am involved in and uh the payments are in crypto guess what right so um I think once it's regulated I think that it's going going to become less interested most of the crypto are the Gen Z generation they think that like it's their thing their new thing we'll see if it has any uh duration it's their new gold well it's a it's a new asset class like fungible which you know frankly again the market is very very narrow uh you only you have very few people that have benefited from the entire crypto asset and uh versus goal which is broadly broadly Diversified Around the World trades 24 hours a day and is part of culture I mean specifically in China India um Europe as well um you know so yeah Pierre you have created billions of dollars in shareholder wealth you're still involved in numerous business ventures you still go into the office on a regular basis where do you get your passion from and what gets you going in the morning oh that's a good question um I I you know I'd like my um Tombstone to say that uh I've made a difference in this world and to me I have as much fun creating wealth as uh giving it away and uh to my mind uh creating wealth is uh it is so incredibly satisfying to see uh people you know benefiting from the work that you that you do I'll tell you one of the great very great story of uh of Franco Nevada so every year I um after the annual meeting Seymour and I this is back in the 90s we used to throw a party uh for our major shareholders the bankers the analysts U and uh Seymour and I we do skits okay and we uh we had a friend who did standup comedy and like so it was like a fun evening and I remember in 1999 um we um had uh rented the uh uh the restaurant the top of the all Four Seasons Hotel and I went there before the dinner just to check on everything like you know was the that be proper and there was this um older uh waitress who was there and she came over to me and she said said uh you're you're Mr Lon I said yeah and she said um and she had a very broken English um like Eastern European and she said uh well um I want to thank you and I'm like I thought she was thanking me for like you know having her as part of the staff that night she said uh back about um 12 years ago I I read a something on your company in the Sun the newspaper the sun Seymour had a friend who used to write a Friday column okay and uh like he wrote it that month the stock was like I don't know like 60 cents or so and she said uh after I read that column I put all my savings in your company I'm like oh my God like you know what did you do and she said well and and because of you she said um last week uh I was able to buy a house that is what we work for when you're a CEO is What you have to keep in mind is that you are working for the shareholders and that's what creating wealth means you know to me um and I've never forgotten that story and I've had a few others you know of the kind over the years and that's what animates me to create shareholder value and that's what get you going every morning every morning exactly it's what gets me and then to turn around and be able to you know like give the money away which is not easy people think like writing a check is easy it's not because again you're trying to create something that doesn't exist you're trying to help organization get better you're trying to help people essentially again it's always about people if if you can write a check that comes with a commitment a time a talent commitment and you where you can make a difference it that's makes the whole difference in the world so it keeps me busy busy busy busy and Pier do you still have a passion to find the next big Discovery the next Gold Strike oh yes yes yes yes so um back about two years ago uh one of the individual that uh I was involved back in the '90s when we created Metallica which became um new gold today uh came to me and said Pier we have this concession in Chile and we have like 1,000 ft of 73% no not a kilometer a kilometer thick intercept of 75 78% copper I said you got to be kidding and again like it's all about the size of the rock package that gives you an idea of where things are going so any anyway I helped them um and uh this company we've raised them like I don't know about 50 60 million since then and they're now up at like 1.4 billion tons of 75% copper I mean like you're talking here a major major new discovery and it keeps getting bigger and bigger and that's so much fun you know to me that's like being 18 years old all your life okay like you know it's uh I I love that Pier as we wrap up you have spent a good portion of your life focused on gold and royalties if you were 20 years old again would you do anything different would you focus on maybe a different medal or maybe a different sector alog together oh I would stay in the mining business I think that uh the mining business offers um you know like I love traveling I've been to 117 countries in the world mostly because of Mining and uh to me to my mind there's no better you know profession I love the uh wealth that we create for not only the shareholders but the community where we work we you know spend enormous amount of time finding these deposits and then developing them and then like creating the best paid jobs in collar blue worker job in the world anywhere we go and uh you know immense Community benefit as well um I would do exactly the same thing I I have absolutely like no desire to be in any other businesses I stick with what I know and uh I would stick with it and the royalty business was a great new um invention I think that the royalty model is the best business model on the planet be Bar None I mean think about this like Franco Nevada Revenue will be like a billion dollars with 42 employees it's a fabulous business model and that's why we've been copied today there's like 52 three four five compan companies that are trying to emulate us but we had a 20-year lead like you know for for 10 years nobody thought we could do anything and then for another 10 years it was only one other company who followed us and that gives us an enormous lead time to accumulate the whole bunch of land and so today we have like 10 million acres in the best royalty District of the world and you can't replace that uh so um I I would you know try to do the same thing and the same business absolutely 100% so no interest going into artificial intelligence or cryptocurrencies definitely not cryptos no and uh no artificial intelligence uh not for me uh but I I'm happy to use it uh and I think artificial intelligence will be incredibly useful at the exploration stage uh particularly we need it exploration today needs a a a game changer in terms of uh how we explore because the drill rigs they've been in existence for 100 years we haven't found any other way to like look for a deposit um and the uh the technology that we use in terms of geophysics I mean it's it's a lot better than it was like 10 20 30 years ago but it's nowhere near good enough as it is for example for the oil business so I think AI will prove to be incredibly useful uh for exploration it may be what the industry needs to finally get money back and actually produce return uh because that's what's been lacking is like real return for the shareholders uh so um I'm hoping that uh that's going to make a difference well Pier that was a fascinating discussion and I want to thank you very much for spending time with us today pleasure thank you J

Channel: Bloor Street Capital - Jimmy Connor

Views: 9,812

Keywords: Pierre Lassonde, pierre lassonde, Seymour Schulich, seymour schulich, Franco Nevada, franco nevada, gold, silver, precious metals, royalties, precious metal royalties, newmont, barrick, goldstrike, Black Swan, black swan event, recession, depression, how do i prepare for a recession, how do i prepare for a black swan event, should i buy gold, how do i buy gold, bitcoin, bitcoin and gold, what is better gold or bitcoin, is the market going to crash

Id: YMWeAbZQSEE

Length: 39min 28sec (2368 seconds)

Published: Fri Jan 19 2024