Legends Abridged - Pierre Lassonde
Pierre Lassonde is in my opinion the best mining investor of all time. Much of that success came as a co-founder of Fraco Nevada. He also was President at Newmont, ran a mining fund, and has had a lot of success investing his own private fortune.
I'm going to compile transcripts of wisdom from various Pierre Lassonde interviews. Transcripts will be edited for readability, I might remove some ums and you knows that are part of verbal on the fly speaking, but I'll try to leave the substance untouched. I'll also link the original interview and timestamp the exerpt so you can go watch the actual interview.
I've skipped some lessons where I don't think I can summarize without losing some nuance I think is necessary. In the case of Pierre that would be selling your losers and holding your winners, the dow-gold ratio, his views on copper, among other things.
Lessons
- Don't try to time the market
- Don't pre-pay for optionality
- Invest In Pre-Production Sweet Spot
- Management Team Number 1 Critera
- Don't Spread Yourself Too Thin - He Owns 5 names
- Identify Promos by Price Management Paid
- Managemnt Should Own 5-10%
- Buy Things With Optionality
- Own Bullion
- Own Royalties
- Owning Mining Companies is risky
- Owning Large Miners Preferred Over Owning Single Asset Miners
- 99 Out of 100 Juniors Will Lose You Money
- Gold ETFs are Fine Vehicles For Most People To Hold Bullion
- Royalty Leverages More To Bull Gold Prices Than Miners
- Use Spot, Trailing 2 year, or Consesus Price For Gold
- 80/2 Rule Applies to Geologists
- Grab As Much Land As Possible
- DCF shortchanges Optionality Value
Don't Try To Time The Market
If one of the greatest most experienced investors can't time the commodity market you have to be pretty cocky to think that you can.
3:49 You know this is my sixth or seventh cycle okay. So I can't really get excited anymore by the lows and the ups and the downs. They happen and we'll maybe hit another low and then we'll hit another high. The point here to be all in cash if you're so prescient to be able to you know predict like when the low will be and when the high will be good on you. I've been at it for 40 years I still can't do it okay. So I don't try to time the market I don't I'm trying to beat the market.
Don't Pre-Pay for Optionality
Pierre likes to buy companies at a discount to the value of the metal in the ground in a 43-101 study with exploration upside to increase that amount of metal in the ground in the future. The value of the metal in the ground protects his downside and the potential to add more gives him upside. It's assymetric risk where the risk is to the upside.
4:45 Where you make your money in the mining business and the oil and gas business is optionality. That is, eighty percent of the value creation of a mining company comes with the drill bit. The drill bit is what gives you optionality so if you can buy an asset today for a dollar that is worth two dollars and on top of that you get optionality, that's where you can really make a big score. You can make sound investment so what I always try to do is look for investment where the stocks trade [at a discount]. They can be overvalued, they can be undervalued, the value of the company is fixed. That's a fixed number, but the sometimes the market ignores the company and they trade at half their value and sometimes they're way overvalued. You have to understand, you have to know what is the value that you're buying. Are you buying something for 50 cents on a dollar or you're overpaying because if you're overpaying you're not likely to get over it and you got to probably lose money. It's not an easy process but what I like to do is i like to look at companies that already have proven mineable reserve with a 43 101 number so those those reserves are real. They're there. So let's say a company has a million ounce of 43 101 reserve. Those reserve if you look at the average company out there are worth let's say $100 an ounce in the ground. You know the company should be worth about a billion canadian [based on ounces in the ground]. If the company trades at $500 million that's 50 cents on the dollar. If it trades for $250 million that's 25 cents on the dollar but if it trades at you know like a $2 billion market cap you got to say okay what do they know that i don't know . Do they think that this thing's [ounces in the ground are] going to double and now you are already prepaying for the optionality, which is not what i like to do. I don't want to prepay I want to have it for free because that's how you make money. I want to be able to buy into something for 50 cents on a dollar that maybe could be worth two dollars with more drilling for example.
Pre-Production Sweet Spot
We can add Pierre to the long list of successful investors that like the pre production sweet spot. Here Pierre calls out the re-rate relative to NPV that occurs during mine construction. He also then adds his own spin of liking companies that after they start production have more exploration potential.
9:54 The bottom of the the curve that is to my mind the best hunting ground. Where companies have fully disclosed their reserve, fully disclose their capex, exactly the share structure, & how they're going to finance the mine. That's where you have the the maximum leverage because usually the stock will trade at you know anywhere from 30 cents to 40 50 cents on the dollar. Then they start construction and by the time construction is like half to two-thirds completed then the market says like oh but we're way behind the curve and then the stock starts to go up and you have realization and then the company now that they have money and income they start drilling they increase reserve and then you get that optionality for free that i'm talking about so a good example of that would be Lundin Gold which came at public four years ago at about $4.15. I remember buying five percent of the company at the time because I thought this is a great project. They were hiring G Mining to build a mine. The most believable and best mine construction team in the world. They said it's gonna cost $675 million. They raised the money. The stock did nothing for three years and then three months before production stock went from $4.50 to $12.00 and that's what happens. Now they're drilling different prospects and you know who knows what the value could be down the road but you know you're getting all of that for free and in the meantime you tripled your money. But you have to have patience you cannot go in there and think that it's going to happen overnight it's just like you you buy it you know what you're getting you know the value is there you just be patient it's going to happen and you are going to make money.
Management Team Number One Criteria
There is an age old debate
16:35 Frankly management is my number one criteria. Who is running the company and how much faith do i have in the people? At the end of the day you make money with people good people make good things happen and good people will find good projects. They will run them properly, they will talk to the market. and they will make it happen.
Don't Spread Yourself Too Thin
He thinks 10-20 companies is too many. He likes to limit himself to 5.
17:01 The other thing that I will say I've learned, another lesson i guess over the years, is that I don't spread myself thin with 10 or 20 different companies. I limit myself to essentially about five companies. I dig very deep in in those companies. I know the management. I've worked with them or I understand who they are and where they're coming from. I look at their past what what they've accomplished.
How to Identify Promos
He doesn't invest in promotional companies. How do you identify them? By what management and early investors paid for their shares.
26:00 You know what I like to do is look at what price the management team paid for their shares. I don't like to be a sucker. I don't like someone who comes to me: "I got the greatest thing in the world I paid 10 cents but for you I'll give you a deal at a dollar." That's called a promo, a promotion and I was not born on this earth to be promoted. Not gonna happen with me. Now to be fair if a management team has gone out there worked for like two three years found a project and they want like a two-time promo on it right you know or maybe three fine, I could take that, but I'm not in for like the "they go in at five cents and you're coming in at two dollars." Forget that right! And the five cents was just two months ago for example.
Management Should Own 5-10%
This rule of thumb isn't a hard rule, but a general guideline to help be sure management and shareholders incentives are aligned.
Normally I would say I want to see anywhere from five to ten percent ownership by management and sometimes more. What I want is a team that is committed to the shareholders and not to themselves. I hate companies where management makes millions and millions and the shareholders make no money and because management owns no stock they take everything in cash and RSUs (Restricted Stock Units) and options and warrants and they have all the the the hoopla. They go to the party on your money but you're outside the party watching it. That's not my style.
Buy Things With Optionality
34:02 I've done it three times where we bought something for $2 million worth a billion dollars.
That's a 500x or 50,000% return. It's helpful the first gold royalty Franco bought was one of those three.
35:12 When we came back public in 2008 we had 20 million ounce of reserves and 30 million ounce of resource royalty to Franco Nevada. Ten years later all those ounces have been mined; 20 million ounces have been mined. We got the cash flow, we paid a billion dollars of dividends and guess what the reserves are? 20 million ounce of reserve and 30 million ounce of resource without Franco Nevada spending one penny. Why? Optionality! The mining companies kept drilling they found more and we have the same and that is the power of the business model of Franco.
Own Bullion
5:53 I would say that your first line of defense where you should put your money would be the bullion itself. It is the the safest. It has the leverage, it's a very liquid, you can sell it instantly. It has a role in your portfolio.
Own Royalty Companies
6:16 The second line of defense, or inquiry if you want to put it another way, would be the royalty companies. Franco nevada of all the equities it is the safest and also it has as much if not more leverage to price as an operating company without having uh the inherent risk.
Owning Mining Companies is Risky
6:50 If you really know what you're doing I would say then you can delve into the gold equities but I caution because even though I love gold equities and I'm involved in a number of them if for example a mining company has one asset that is a very high risk. You suffer a country risk, you suffer mining risk ,you suffer all kinds of risk that you're taking on and you're thinking that oh my goodness this thing could double but you don't look at the risk.
Owning Large Miners Preferred Over Owning Single Asset Miners
7:30 Single asset company: I don't like, okay i really don't like them. To me it's like a portfolio. You would be betting all your money on one asset, on one stock, you would never do that. It's the same with mining. You have to diversify your risk and if you want to be exposed to the gold equities I would pit pick the Newmont Mining, The Agnico Eagle, the very large ones. If you really know what you're doing you can go into the second tier company.
99 Out of 100 Juniors Will Lose You Money
8:00 As for the the juniors. forget it! You have to have the knowledge to get involved in them otherwise 99 [out of 100] of them are going to lose your money.
Physical Bullion vs ETFs
He basically says the ETFs are fine, but their management fees are more expensive than storing bullion if you have enough scale and a long enough holding period.
8:17 Do you have a problem with owning a gold etf over getting bullion delivered? Is it is that are you okay with owning a $GLD or something in that line?
Absolutely! It's really a question of size. If you're gonna have like fifty thousand or a hundred thousand dollars in direct gold bullion it might just be a lot easier to buy the ETF for transaction purposes. You can sell it, it's immediate, it's there, it's a hundred percent back by gold bricks in the london vault. You have total security. If you're going to own millions of dollars of it I would say buy the gold itself and have it stored at your bank. It's just cheaper. If you're going if you're going to end up owning gold for the next 10 years and you want to have like $10 million of it just by the physical of it and it's cheaper.
Royalty Leverages More To Bull Gold Prices Than Miners
11:20 If you look at 2004 to 2011 when the gold price went from essentially $350 [per ounce] to $950 dollars [per ounce] a lot of people went into gold stocks. The Newmont of this world and whatnot thinking they are doing $100 [per ounce] margin at $350 [per ounce gold price]. They are going to be doing $700 [per ounce] margin at $900 [per ounce gold price] but that's not what happened. Instead energy costs went from $30 a barrel to $150. Twenty-five percent of the mining cost is energy. The reality is that the margin did not change and the equities did not move at all. The price of the Newmont shares were the same in 2011 as they were in 2004 and yet the gold price had gone from $300 [per ounce] to a thousand dollars [per ounce].
The point is amazing. Traditional wisdom says own the miners in a gold bull market. If miners have costs of $250/oz at $350/oz gold prices and gold prices go to $950/oz they should be making $700/oz. That's 7x or 700% of what they were making, so if their profits go up 700% then the stock should go up 700%. But they don't!
$100/$250 = 40% profit margins.
$380/$950 = 40% profit margins.
So even if their profit per ounce improve A LOT (3.8x in this example) their profit margins can stay prettty flat. And that's with profit per ounce almost quadrupling.
Over the long term the growth of the stock price will converge towards their return on capital minus their cost of capital. Those relative margins matter more than the absolute margins.
Now imagine a royalty company had the same initial margin, they paid $150 per ounce and sold them at $250 per ounce. But then the price of gold goes up. Their costs stay at what they initially paid, $150 per ounce.
$100/$250 = 40% profit margin
$850/$950 = 89% profit margin
Use Spot, Trailing 2 year, or Consesus Price For Gold
Pierre is heavily against trying to predict gold price. He just kind of uses the current price of some sort. That may be the spot price, the trailing 2 year price, or the consensus price which all tend to be similar most of the time.
15:00 When you're looking at a development stage project for your own personal investments and of course you're going to look at it as an executive as well. What gold price are you using when you analyze a development project?
To be very candid my whole life I have used essentially either the spot price or the consensus price. I don't try to predict the gold price into the future I just look at what is it today or what's the consensus. I said, well if i'm buying this, what is it worth today and that's we do.
Not the trailing two-year average price?
Well, I think the consensus usually is around that number and that's as good a number as anything.
80/2 Rule Applies to Geologists
When i was at Newmont as president of Newmont I had 340 some geologists in our team. Out of this 340 I had about five geologists who discovered eighty percent of all the gold Newmont discovered. I call them my lucky geologists and there are people like that in the world and there are people like that in the junior world so first and foremost look at who you're putting your money up with.
You've heard the adage that 20% of the people get 80% of the results, well if you work out 5/340 that's closer to 2%.
Grab As Much Land As Possible
Pierre gave about an hour interview to Mining Stock Daily
It took me quite a few years. Most people don't understand the concept of optionality book. What we did? We said we just got to grab as much land on the royalty as possible because we have a free, a free perpetual action on the discovery made by the operators of those properties. That's where the real creation of wealth was going to be for the Franco's shareholders and actually what's happened.
DCF Shortchanges Optionality Value
So at the end of the day, every time that we went against another company, we bought, we're able to buy [the royalty]. We outbid them because they always short change the optionality value when you're assesing the value of royalties. You could do a DCF and they're very good at doing that. They all do it. But the other values, your optionality and no analyst to this day and no Mining Company ever ever does that. And we do we try to put value on optionality. We'd like to get it for free, but I'm willing to pay something for it. Back then we paid nothing. Then competition started to heat up. We started to pay up a little bit more for optionality because we wanted to keep the portfolio expanding. In the early days we were buying royalties that were not in production for literally 1 year cash flow. You know, today you're probably paying 5 or 6 times 7 times first year cash flow if not 8 or 9 and so prices have gone up with the competition. There's absolutely no question about it and where you are going to end up here but they got your money is you know like them in the 1 million ounce, 2 million ounce, gold reserve. You're not going to get any optionality and if you are not pricing it to get your money back, you going to be out of business very, very, very shortly. So when you look at Franco today, we buy like, you know, iron ore royalties with 50 year life, copper royalty with like 80-100 year life. Cobre Panama has got essentially 80 years of reserve.
Pierre wrote a book on Gold investing, it's no longer in print and copies on Amazon go for quite a lot of money. You can access it via the internet archive linked above. Here's some notes:
Land May Be Better Hedge Against Inflation
When Judas betrayed Jesus Christ for thirty pieces of silver these shekels would have been the equivalent of two and three quarters ounces of gold. In today's [time of writing] values, Judas betrayed Jesus for about U.S. $900 ... You couldn't buy a field for $900 today, which may mean land is a better hedge against inflation than gold.
Money
What makes inflation so insidious is that money, whether it's in gold coin form or a piece of paper, is supposed to be a medium of exchange, a unit of account and a store of value. The minute you tamper with the value of the currency it is no longer a store of value nor can it properly be a unit of account. If the public loses confidence in the currency, it collapses.
it is the money of last resort and the reserve foundation of the world's central banks. ... When gold is money, it's because the public may have lost confidence in currency, the monetary system or the economic system.