Pierre Lassonde is an industry veteran (and legend). Starting Franco Nevada from the bottom and building it into a company that grew at 36 percent compounded for 19 years in a row, we thought Pierre might have a little advice when it comes to investing in the mining industry
M&M: Pierre, you’ve spent many years in the industry. Is this downturn any different? If so how?
PL: I started my career in ’73, so we’re now talking 42 years in the business. Is this downturn any different to those in the past? Not really. Downturns are either supply or demand driven. I learned a long time ago that Miners can’t withstand prosperity! They always overbuild when the going is good and always wait too long in the downturns. This time around it’s a combination of both, though depending on which metal you’re talking about. Iron ore is definitely over-supplied. What is good for individual companies is not necessarily good for the industry. Even though China is slowing down, it is still growing. We also have India now growing very smartly but supply has completely overtaken demand there.
“They (miners) always overbuild when the going is good and always wait too long in the downturns.”
If you look at gold, it’s not as much a mine supply issue even though production has grown so little when you compare to 10 years ago. We’ve had a lot of secondary supply come in the market in the form of recycled gold from all the melting shops popping up in Europe and America at the same time as we’ve seen almost a thousand tonnes of gold coming out of the ETF in a 2 year period – that’s what’s really hammered the gold price more than anything else. The flip side of the tide of recycled gold and ETF selling we’ve seen, is that they are one off. That is to say that you can’t sell that gold twice. That’s one reason I am very constructive on the gold price at this time. Is this Déjà Vu for the mining industry? It sure looks like it.
M&M: The Chinese stock market has taken a nose dive in the last few months. What are the implications for the mining industry?
PL: I think the whole Chinese stock market is just a sideshow that really isn’t that meaningful for the broader commodity market.
When you look at wealth in china, people would rather put their money in real-estate over gold. The gold market in china is still very strong and growing. It hasn’t been affected by the debacle in the stock market. If anything, the resilience of gold has made it even more attractive to Chinese investors. As far as base metals are concerned, I don’t think that the collapse of the stock market has had a drastic impact.
“If anything, the resilience of gold has made it even more attractive to Chinese investors.”
Perhaps in terms of confidence in the future, maybe. For the mining industry it’s still construction, it’s still capital expenditure and it’s still infrastructure building that counts more than anything else.
M&M: What’s your advice for investors looking at gold and silver?
PL: The thing about gold which I find different now than at any time in the past 25 years, is the fact that the cost structure has become extremely inflexible in this current downturn. Think about this, when I became president of Newmont in 2001, the cash cost at Newmont were $180 an ounce, and the total cost in was about $250 – and the gold price at the time was also $250. And when you look at the cost structure today of cash costs of $700 and all-in costs of $1100, you have to ask yourself what happened? Why has the cost curve gone fourfold in such a short period? The answer isn’t really apparent because if you look only at mine production, it’s actually slightly higher than 12 years ago.
You have to ask yourself what happened. What happened is this – the exploration cycle of the last 15 years has just not delivered. As an industry we haven’t found the kind of ore bodies that were companies makers in the 80s and 90s. When you look at the junior exploration companies and you ask yourself why they’re so devastated, the answer is because the risk/reward ratio for investors as all but disappeared. It’s all risks, no rewards.
“The whole industry is in a far more precarious place than the price will tell you, which I think is an incredible opportunity for investors.”
How did the gold companies respond to higher gold prices and no discoveries? They went where they knew they had gold. The outer limits of their pits where the grade is half or less but the tonnes are – This means dig more. So CAPEX blew up because all of a sudden they weren’t mining 15,000 tonnes per day, they were producing more like 60 to 100,000tpd.
The entire cost structure now is such that they can’t go back because all the higher grade ore is gone. They’re stuck with their high cost structure whether they like it or not. Another 3 years of these relatively low gold price and I think you’re going to see mine lives being shortened and certainly no new gold mines to speak of. The whole industry is in a far more precarious place than the price will tell you, which I think is an incredible opportunity for investors.
M&M: You have a reputation as being a great builder of mining companies. What’s the one piece of advice you would give to someone entering the industry today?
“One piece of advice? Attach yourself to / go and work for a winner”
PL: One piece of advice? Attach yourself to / go and work for a winner. Work for someone who has built companies or discovered ore (if you’re a geologist) so you get first-hand experience at how a successful company is built or how a quality deposit is discovered. I was very fortunate when I started as I had a number of job offer and one was with a company with 4 self-made millionaires. My initial thought was, if I go work for these guys surely some of it has to rub off! And sure enough, that’s how I became an entrepreneur and how I met my future business partner. We started Franco Nevada, built it and never looked back.
M&M: One of the themes about Mines and Money London will the next generation of mining leaders. What makes a great CEO?
PL: A great mine always comes down to the same thing: grade. It’s all about grade.
Look at the Fruta del Norte project that Lundin Gold has purchased in Ecuador for example: 12gr gold and over 10M ozs known today, still wide open. – That will be a great mine one day.Another example is Goldstrike in its first 10-15 years. Barrick was literally mining half-ounce gold at 15000 tonnes per day open pit. That’s an incredible mine.
Look at these examples and ask what makes a great mining CEO? A great CEO is one that is able to put a portfolio of very high margins mines together, can generate real free cash flow, and with that you can deliver shareholder value.
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