Gold & Copper: Your Inflation Hedge with Pierre Lassonde

Pierre Lassonde 0:00
Black Swan, as we all know now, and that’s, you know, by the time the black swan happens, it’d be too late for you to own gold. You’d have to buy it now as a safety precaution, and then just be patient.

Jimmy Connor 0:21
Hi, and welcome to Wealthion. My name is James Connor. Today my guest is Pierre Lassonde. Pierre was the co founder of Franklin, 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 giving you cofounded the world’s first precious metals royalty company, I want to start right here. What exactly is a royalty company? A royalty company is very different than an operator, it’s actually closer to the physical metal itself. So a pure royalty is a percentage off the top line of a producer. So if you have, let’s say, a 4% royalty, you will get and a producer produces like 100,000 ounces of gold a year, you get 4% of 100,000 ounces, which is 4000 ounces of gold delivered to your account completely cost free. 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 at a fixed costs, or cost that’s fixed by contract when the streaming is created. So those are the two forms of royalties that we have today in the market. So you meet mentioned that a royalty company is totally different from an operating company and more like owning the physical gold. But there’s many advantages to 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 expenditures. So there’s no the app, the producer, the operator cannot call on the royalty company to join in, and the capex. And when we know today that you know to try to build anything, it’s like 1,000,000,002 billion up to you know, like you look at some of these numbers, they’re absolutely enormous. So there is no demand on terms of capital. Second, there is no inflation. 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 optionality 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 catbacks. 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 CapEx and as royalty company, you don’t have to put up one additional penny for those additional ounces.

Pierre Lassonde 4:07
That is correct.

Jimmy Connor 4:10
So that’s a major benefit. And to your point, the capex are associated with building a mind now is many many billions of dollars and it can take many years also to get permitting. Does a royal company have to concern itself with permits?

Pierre Lassonde 4:25
No, I mean the the royalty go all you do is cash checks. So all you need is really good auditors make sure that you know you get the amount that you’re paid, but you know the royalty company does not have any say in the operations.

Jimmy Connor 4:43
So you made mention of the fact that the number one or primary advantages optionality Can you expand on that and and maybe provide an example?

Pierre Lassonde 4:54
Yeah, I say to people that if you can get free optionality you You know, I can show you a way to become a millionaire very quickly. There are three forms of optionality in the mining business. 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 a sense that, you know, if the gold price goes up from $1,800, to $2,000, while 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 costs 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 going up 10%, because the gold price is going up. So if you think that the gold price is going to 3000, well, you’re gonna get the entire benefit of the move from today’s price 2000 to 3000, deliver it to the royalty holder. So that’s a huge advantage. The the other one is land optionality. And that one, you it’s interesting in our business, there’s no analysts whatsoever who put any value attached to the land owned by the mining companies. And the 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, or royalty owner, once a company has spent, like, let’s say $2 billion dollars to put a mind into production, you know, it’s it’s put up all the capex, and you know, it erected all these structures, and now you’re doing whatever, like 20,000 tonnes a day or 50,000 tonnes 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 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 Franco Nevada story. You know how we got started. The first royalty that I ever bought was on a piece of land in the Carlin trend of Nevada, which had at that point in time, approximately 500,000 ounces of resource and about 300,000 ounces of reserves. And I paid $2 million for the royalty it was a 4% royalty off the top. And there was also a 5% net profit interest royalty attached to it. And we’re talking here in 1987 and 19, sorry, 1985. And the property was sold to a company called Beric. 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 Barrick very 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 dollars since and there’s still probably another half a billion to come. And that’s what I call land optionality meet. That is the ultimate okay, 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 was my first deal. Okay, I don’t think to be repeated quite the same, but we’ve done it at Franklin, Nevada three times, where we bought asset for 2 million and turn them into you know, literally billions of dollars. So it does happen. And that’s why I love land optionality. And you know, when we buy a royalty usually we get it for free, because nobody knows how to calculate it and you know, 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 New technology may come in where all of a sudden, the 10 20 million ounce that you have, like, you know, 20 years ago, you couldn’t mind them. And then now they have new technology. And lo and behold, be it can be mine, and time is on your side. So those are, to my mind, the really incredible aspect of royalty companies.

Jimmy Connor 10:23
Pierre 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?

Pierre Lassonde 10:49
No, you’ve got it about right. You know, the fact that, yeah, as a royalty holder, you benefit from inflation, because you have no costs or fixed cost, if it’s a stream royalty, and you have no exposure to capital costs to exploration costs. But yet, you get all the benefit of all of that.

Jimmy Connor 11:11
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. A lot of people think it should be up a lot more. What are your thoughts?

Pierre Lassonde 11:30
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 $2,080, I think it’s incredible. And I couldn’t be happier with where gold is, is right now and its performance. But I think what the people are reflecting is the fact that the gold equities are at 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 current gold price. And when I think of the next year, two years, you know, the gold price, it’s like an insurance policy. I mean, your house doesn’t go on fire every day, but you do buy the insurance policy in case it happens. And submit the same thing with with gold. We all know that, you know, the the US, for example, the current budget deficit is going to be something like $1.8 trillion. And over the next five years, it’s like 2 trillion a year. And they’re already have 34 trillion of debt. I mean, when I was a kid, those numbers were reserved for astronomy, okay, like, I mean, they are so big, they’re so huge. It’s just unbelievable. And at some point, 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, you may see the dollar continue to you know, to drift sideways with its current valuation, but like it happened in 1971, like it happened and you know, to in 19, I can’t remember when they had to have the Plaza Accord. There are you know, 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’d be too late for you to own gold, you’d have to buy it now, as a safety precaution. And then just be patient. You can’t or you know, like, think that, you know, I’m gonna buy it today, and then it’s all gonna 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 $3,000 gold right now. It’s really good.

Jimmy Connor 14:15
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?

Pierre Lassonde 14:27
You know, I don’t think so. James, I think that when you look at the producer, they’ve been able to contain costs by a longshot. I mean, you know, the total costs 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 produce SIRs are as low as 500 cash costs and all in costs of like, 700. And yet, you know, they discount a gold price of like, you know, $1,500 gold when it’s over 2000. So who’s right? I mean, it’s the equities, right, where the gold price will come down to 1500? Or is the gold market? Right? 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. Bull.

Jimmy Connor 15:34
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 coasts?

Pierre Lassonde 15:50
You know, look, I have a vested interest in Franco Nevada. So of course, I invest in royalty company, I think that the Franco Nevada business model is the best business model in the world, bar none. I mean, like, you know, the company, 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, you know, the business model, and we have over 100 royalties, actually, it’s over, like, I think it’s 400. But operating, I think it’s like around 100. So, incredible diversification as you point out, and then I have also intermediate size companies, and I have, you know, some development company, but there, I will remind, you know, you probably are aware of the the curve that I invented, like about, you know, 2030 years ago with called the Luxan curve, and it shows the share price over time, what happens, for example, if you have a discovery, so let’s say the share price is five cents, I’ll go up to, you know, let’s say $20, 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 that and then you have to have the feasibility study, and then you have to fund the construction. Today, that zone is becoming the Killing Fields. Because with the permitting process being so long, very few companies have the backbone have the financing to last, you know, like that three, four or five years. You know, you take, for example, this morning, Beric announced that they finally got 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 your shareholders, you probably gonna get diluted down to nothing. And usually, the best place 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 costs and on time, okay, because that’s where the other big hiccups happen. So if you have good 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 you’re patient over like a two year period. And so those are sort of like the kind of things that goes through my mind when I you know, select stock for a portfolio.

Jimmy Connor 19:10
Interesting points. And Pierre, in the past, you have said that junior mining companies are like fireflies. And I want you to do expand on that and tell us what you mean by that statement?

Pierre Lassonde 19:22
Well, back in 1990, I wrote a book I took like, you know, six months, nine months out of my life, I actually write a book and it was one paragraph on junior mining company. And I did a 10 year study at that time of junior mining companies from 1980 to 1990. What happens to them? Okay, and I had about 3000 companies and don’t forget, like the 80s were, you know, rock and roll for the mining industry. Okay. It was the discovery of hemlo I mean, like, you know, the voices Bay discovery mean that there was like discoveries that was like money pouring in. And the number of companies peaked at around 3000 junior mining company. And what I found out is that, out of that only 1% of these companies ever, ever made it to production. And the other ones, they get reorganized, they get bankrupt, the you know, like, they kept alive by the promoter, just, you know, they’re walking dead if you want, but they’re kept alive. And all that promotion, you know, like these drill holes stuff. 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 that’s why I call them fireflies. And unfortunately, that is the the reality of our industry. And it’s not, I mean, Mother Nature has given the same odds to all businesses, and I don’t want to disparage our business. Because if you look at technology, same, same odds, okay, it’s one in 1001. 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, 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 liked the promoter, and you liked 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.

Jimmy Connor 21:37
You’re gonna have a lot more fun in Vegas, too.

Pierre Lassonde 21:39
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?

Jimmy Connor 21:48
Pier, we can 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?

Pierre Lassonde 22:09
Well, I will turn it back to you with a question, you know, are central banks buying bitcoins? 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 or 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 the US can’t get their hands on, they can have the gold bars in, you know, Beijing or in Moscow or in you know, Turkey and the US cannot have access to it. And given what’s happened over the last few years and the very high end nature of the United States visa vie other countries central banks have figured out that you know what, we need to diversify and the way to do it is with gold and so they have you know, put the stamp of approval gold is money. Bitcoin it’s a mathematical equation in space. Okay. It’s like it benefits a few people mostly unsavory. It’s not regulated the day it’s regulated, they’ll probably you know, I wouldn’t say it’s gonna die there’s a place for it. But it has no intrinsic value it you know, it has I guess, to me, I can’t fathom why anyone would buy bitcoin. It’s a nice imagination, but long run, not sure where it’s gonna go.

Jimmy Connor 23:59
And I guess the other big advantage to owning gold is you can hold it in your hand, whereas you can hold Bitcoin

Pierre Lassonde 24:06
and gold is universal. I mean, you know, if you unplug your computer are you gonna 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 doesn’t work what do you have nothing gold gun in your hands you can run with it you can you know, buy things okay like anybody will accept gold it’s a universal value. You know, go in the middle of Africa where your Bitcoin try to buy something. Well, you know what, they take a hike, okay. Gold has 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.

Jimmy Connor 24:55
Pure I want to get your thoughts on m&a. Now, we’ve seen a lot of m&a happen In the past few years with a lot of the large producers, Newmont, Beric, and Agnico have all been very acquisitive. And Newmont recently closed on the new crest deal. But I want to get your thoughts on this and in why are they being so acquisitive as to as opposed to growing their reserves through exploration?

Pierre Lassonde 25:18
Well, the answer is a bit of what I just said earlier, the fact that right now, the entire sector is discounted by 50%. So it’s becoming cheaper to buy the answers on base 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 find gold for that price. So it’s cheaper to go by the companies that cheaper to go, you know, buy on big street, then try to find them. And that’s what’s happening, especially for good good deposits. You know, anything over 5 million ounces is quite rare. And anything over like 15 million ounces of reserve is very rare. And the cost of find those are in the hundreds and hundreds of dollars. So if you can buy them for 100, like blast, that’s what you do. And I think these companies are, I think very smartly in, you know, buying these these companies.

Jimmy Connor 26:28
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?

Pierre Lassonde 26:38
Well, I think there’s, you know, plenty of large deposits 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, you know, if you look at the record of discovery, the big mining companies usually find 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 again, the best thing is to just to go and, you know, buy them in the market. But no, I think you look at Canada, Canada has has the second largest landmass in the world. I’ve we explore that, you know, to the point where we can say there’s no more Not a chance, there’s still an enormous amount of places where we have not been we have not explored, there will be you know, great discovery to come. But you need the patience, and you need the money. And when a company is burning, you know, like 5 million ounces a year. When I say burning, and you know, producing 5 million ounces a year, they have to replace six a year. Well, five years, that’s 30 million ounce. I mean, like, 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.

Jimmy Connor 28:15
that’s a good overview of gold, I want to move on now discuss copper with you, you’re a big believer in copper, why?

Pierre Lassonde 28:22
It’s very simple. James, 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 elevators, all the transportation, your car, it’s all moving because of copper. And 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 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 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. I may be one. But then after that there’s a void. And you look at that, and you say yourself, like, we’re going to have to end the time to permanent be here, you can find them, maybe, but then it’s like 678 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 2030, I think that copper in particular is going to do very, very well, I’m quite optimistic about the entire copper industry.

Jimmy Connor 30:37
So you’ve 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 tear the stock market, the bond market, physical gold has caught a nice bed. 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,

Pierre Lassonde 31:13
you know, in terms of golden copper, James, I don’t think it matters, what the US economy’s gonna do, or the rest of the world, because the particularly copper and next year, the balance is very, very tight. And I would say the same with gold. So it doesn’t really matter. And as far as I’m concerned, I think inflation is going to be more enduring than the Fed would like, I don’t see interest rate coming down very quickly. Same for the rest of the world. And the Fed is going to be caught in, you know, a 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 if, and it’s going to get worse over the next five years, like a lot worse. So the Fed 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 rates 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, and but where, if you’re a US base investor, where are you gonna go? Like, there’s not a whole lot of places to go, you can buy some euro, but you’re gonna 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, what the economy’s going to do next year, you know, personally, I don’t know. And frankly, as I said, makes no difference.

Jimmy Connor 33:18
Pierre, as we wrap up, I’m going to put you on the spot. Now what will do better in 2024, gold or copper? I

Pierre Lassonde 33:24
think they’re going to be very similar. I mean, I could see gold up another, like, easily another 10% Next year, like $2,200. And, but I could see copper, like, you know, 450, something like this. So maybe up like 10 to 20%. So I’m quite, I’m quite bullish on both metal. And just to come back for a second to me, you know, like the best deposits in the world, the best find our copper gold deposit. Because those deposit they last for 50 years. And 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 Tinto and BHP, how did 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 undervalued than the copper equities. Well,

Jimmy Connor 34:42
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.

Pierre Lassonde 34:50
Thank you, James. Always a pleasure as I said, thank you.

Jimmy Connor 34:54
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