The Northern Miner’s three-day Global Mining Symposium kicked off on Tuesday with a one-on-one interview with Paul Brink, president and CEO of Franco-Nevada (TSX: FNV; NYSE: FNV).
The Northern Miner’s Group Publisher, Anthony Vaccaro, chatted with Brink for nearly an hour about his plans for the company, his view on the mining industry, the gold market, Franco-Nevada’s energy assets and the challenges of working during a global pandemic.
Brink was appointed CEO in May, after serving as president and chief operating officer of the company from 2018 and as senior vice president from 2007. Prior to joining Franco-Nevada, he held roles in corporate development at Newmont (TSX: NGT; NYSE: NEM), investment banking at BMO Nesbitt Burns and project financing at UBS.
“I think I have the best job in the gold industry,” Brink told Vaccaro, adding that his greatest aspiration is to make the company’s two founders, Seymour Schulich and Pierre Lassonde, and its CEO since Franco-Nevada’s IPO in 2007, David Harquail, “proud.”
“I have the tremendous challenge and the tremendous responsibility of carrying the torch at Franco-Nevada,” he added, noting that the gold-focused royalty and stream group “is truly a unique company and, at its heart, a generational company,” with a strong reputation, tradition and culture.
“The strategy is not we’re trying to get the share price up this quarter or this year. We’re really looking for assets to build this company so it is a strong cash flow generator,” and a good company “for our grandchildren,” he said.
Vaccaro asked Brink whether Schulich, Lassonde or Harquail had imparted any good advice when he took the reins of the company, and he replied: “Surround yourself with good people because they make you look good.”
That’s important in the midst of a pandemic, given Franco-Nevada has interests in 56 producing assets, fifteen of which have experienced some form of curtailment, particularly in Latin America, the largest being the Cobre Panama project in Panama.
While Franco-Nevada is a small company with less than forty employees, he said, and isn’t an operator and therefore doesn’t have any fixed costs at its assets, the pandemic’s impact is indirect through the deferral of revenue.
Brink praised the efforts operators have made throughout the crisis, from extended shifts in difficult conditions to offering early retirement packages at Lundin Mining’s (TSX: LUN) 80%-owned Candelaria operation in Chile’s Atacama region.
Turning to drivers behind the gold price in the last few cycles, Brink noted that “when you think about gold, it really is, by the scale of global asset classes, a tiny asset class.”
“People hold a bit of gold in their portfolio for their concerns … sometimes a concern over currencies, sometimes concerns about not getting a decent return because of low interest rates. There can be different concerns,” he explains. “In the last bull market, it started as a risk-reward driver … seeds of that market were sewn in risk aversion. Then you had an inflationary period … Then, in 2008, you had the crash, and then it was monetary stimulus, and it was monetary printing that drove that last cycle, and a weak U.S. dollar …”
In this bull market for gold, he notes, starting in 2015 and over the last four years, the U.S. dollar has been strong, so the driver has been negative rates, which drove the first part of the cycle. “But then two months ago the U.S. dollar turned down … and now you have last week’s announcement by the Fed that it will put less focus on inflation and more focus on employment, and that raises the spectre that they will have less of a steady hand when it comes to inflation concerns, so there are a number of tailwinds for the gold price …. You have to expect more monetary stimulus and that comes through low rates.”
Vaccaro noted that the so-called ‘smart money’ has also come in this time, with investors like Warren Buffett and, before him, Mark Mobius and Ray Dalio moving into the sector. “I can’t remember a time when big hedge fund managers are this constructive on gold,” he said. “Have you ever seen something like this in the past?”
“I think it is quite new. I don’t recall it in the last cycle,” Brink affirmed. “Gold didn’t have that same macro appeal.”
“In a sense, 2008 was the death of austerity … so for all those hedge fund managers having seen that play out, the playbook is fairly obvious for them,” he continued. “One of the interesting things [is] you have so many of those hedge fund managers who are principally equity players … but, at the same time, you have folks like PIMCO, who look at gold through a debt lens, also championing gold, so it’s interesting that both sides have come to the same conclusion.”
When asked whether there are any investors the mining executive particularly admires, Brink named John Paulson of Paulson & Co. and Warren Buffett of Berkshire Hathaway, Paulson for the way he figured out the subprime mortgage crisis and thought about A-symmetrical investments, and Buffett for believing that the best investment is a royalty on a well-run business.
As for some of the tenets of Franco-Nevada’s investment strategy, Brink said, one is to invest and spend most of its capital in market troughs, execute real value arbitrage across the streaming industry, increase its dividends each year making them “progressive and sustainable,” regardless of the gold price, and staying competitive when times are good.
And while there may be more players emerging in the royalty and streaming space, he says, “the trick in the business is obviously knowing when to be aggressive and when not to be.”
“When you get into a bull market, developers have capital to spend,” he says. “We’ve got 56 operating mines and another 35 in the development stage and 200 exploration interests … In this market, they can all raise capital, get drills turning … Already we’ve seen exciting discoveries … so we have confidence that in a bull market the portfolio is growing organically.”
When asked whether Franco-Nevada intends to stay invested in energy assets when the metals space is so strong, Brink responded with a resounding yes. “We are committed to staying in,” he says, “we’ve never sold an asset ever.”
“We’ve always said [to our shareholders] give us latitude, up to 20% of our portfolio, that we can invest and be opportunistic,” he explains. “Seymour, being an oil and gas guy, couldn’t resist oil and gas royalties, and it’s always been part of our business. It’s always been a good hunting ground for us, it’s such a big industry … and there are a lot of players and lots of opportunities.”
Brink noted that while 80% of Franco-Nevada’s assets are in precious metals, the company is also “completely open to the other commodities, as well,” and has a number of copper royalties on large assets.
“The beauty of some of those other metals and minerals is there are often large deposits with enormous mine lives … It never starts with the commodity for us. It starts with the assets.”