How will the gold market evolve in the coming few years in view of the current geopolitical context?
The current inflationary cycle we are in is very similar to what we experienced in the late 1970's, when the U.S. dollar was decoupled from the gold standard, and we saw a massive expansion of money supply. We’ve seen other similarities to this past cycle such as recent military conflicts, oil embargoes, and supply chain disruptions, however, the primary difference between then and now is the amount of debt that has been taken on by the global economy. Fifty years ago, global debt to GDP was approximately 100%, while today it is a remarkable 350%. Given this excessive debt burden, there is no fiscally responsible way for central banks to increase nominal interest rates to combat inflation, as a result we expect this period of high inflation to be sustained as central banks wait for debt to be inflated away. Gold has historically performed very well in this type of environment as there is a strong negative correlation between real interest rates and the gold price. Gold reached its real all-time high in the 80's at a price of over $800 an ounce, adjusting for inflation, that would be the equivalent of over $3,000 an ounce today. Despite this bullish outlook for gold, mining companies are still facing exceedingly high costs of equity and debt capital, and royalty companies are an important, non-dilutive source of capital for developing mining projects through this current commodity bull cycle.
Given all these special circumstances, how is Gold Royalty faring at the moment?
Seeing how the producers of the world are susceptible and vulnerable to inflation, the royalty business is the most attractive exposure to gold an investor can take at the moment. While operators have dynamic cost structures, we simply take a percentage of top line revenue which insulates us from operating and capital cost inflation.
At the moment, Gold Royalty has over 220 royalties, and complete leverage to gold price and to exploration success. Last year, our operating partners invested over $200 million in exploration on their properties, and we get the full benefit of this exploration upside at no cost to Gold Royalty.
How do you assess risk and determine which companies are to become profitable in the future?
Whenever we evaluate a projects, we look closely at various aspects including the geological potential, the production profile, and the jurisdictional risk of the project. Through our various acquisitions we’ve assembled a portfolio that includes royalties on some of the biggest producing gold mines in the world that will provide cash flows for multiple decades. These generational assets provide a solid foundation to our business and give us a strong platform for future growth. Geopolitically, we are entirely based in the American continent, with a heavy concentration in Quebec, Ontario and Nevada, which are amongst the top five mining jurisdictions in the world. As we ramp up, our cost structure remains fixed and we expect to have profit margins over 90% . Further growth in the business is driven by our world-class team. Collectively we have over 400 years of industry experience primarily in project development and operations at some of the largest precious metals companies in the world. This breadth of experience and expertise gives us the insight to appropriately price our investments, but also gives us the connectivity to access investment opportunities across the globe.
What main challenges will arise in the next few years and how can they be mitigated?
The biggest challenge we face as an industry is an existential one, and it is linked to reserves declining steadily since 2012. Today they are down 40% from their peak, primarily due to a massive underinvestment in exploration and development. Given that major new discoveries are lacking, the players are buying each other out in an attempt to survive in this depleted market. This effect is further exacerbated by the fact that capital markets have been closed to junior explorers for a long time now, hence there have not been any significant grassroots discoveries. Hopefully, government policy will help expedite permitting processes, because despite all the rhetoric of decarbonizing the economy, opening a new mining project can take from 15 to 20 years. In the wake of electrifying our fleets by 2035, our need for raw materials is acute, and, unfortunately, governments seem to have laid out these policies with no regard towards the supply chain. In addition, election cycles are far too short for them to be able to make extended decisions, and even in the most efficient regulatory framework a mining project would take eight to ten years to complete.
What main objectives do you wish to achieve at Gold Royalty over the next five years?
We are mostly interested in realizing our growth, and to go from $6 million this year to $60 million by the end of the decade. This plan is largely driven by the expansion of our three main projects: Canadian Malartic, the Côté Gold Project, and the Goldstrike Mine. More broadly, there is an opportunity in the royalty sector to create a mid-tier champion in the range of $5 billion to $10 billion market cap, which is big enough to be relevant to institutional investors, but still small enough to grow. Mining opportunities are usually found in undeveloped parts of the world, where we can leverage the power of this sector to create a sustainable economic activity that would provide wealth for generations.
