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Pierre Lassonde: what gold bullion's decoupling with miners signals for price

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We're joined today by a very special guest peer. The Sergeant chairman emeritus of Franklin Nevada. He is also the CEO and chairman of firelight investment. He is a very distinguished guest preeminent voice in the mining sector. We're delighted to have you back with this. Welcome, David. Thank you very much for having me always a pleasure to be on Kitco.

Thank you very much, always a pleasure to have you. We're here to discuss recent market action. I had you on the show a few months ago, and we went into detail about your philosophy, your background in mining for the viewers who haven't seen that video. It's highly educational peer has gone into great detail about his strategies for the last 30 years and how he's built an empire for himself.

I highly recommend you check out that video. If you haven't already today, we're talking about recent price actions. Gold has continued to fall. I like to start with an overview of the gold market. Why do you think in your words, why do you think the gold price has continued to fall since it's August highs?

Oh, well, the, the main answer to that is, uh, the, uh, ten-year tips and the U S dollar and a little bit of the Bitcoin. And if I can take all three separately, I would say that the increase in yield that we've seen in the U S particularly recently, Uh, accounts for probably 40 to 50% of the decrease in the gold price, the increase also in the U S dollar value.

Vis-a-vis other currencies, probably 30 to 40%. And then the rest, I would say like 10 to 20% is due to, uh, the, I would call it the mania around Bitcoin. That is about what's going on right now. All right. So you consider Bitcoin. A threat to, to gold. Would you, was that a fair term to use? I wouldn't say it's a trend because I look at Bitcoin very differently than I would look at gold.

Uh, you know, people who buy gold are risk off people. There are people that are, they want to essentially take a risk off their portfolio and diversifying. When you buy Bitcoin, your risk on, because if you look at the volatility of Bitcoin, it's totally totally risk on. So the profile of the investors is very different.

But the fact is, is that when you look at the millennials in particular and the kind of money that have been floating in their pockets because of, you know, Serbian and Canada, because of the COVID bill relief in the U S. They're at home, they're playing, what are their friends buying? They're buying Bitcoins.

They're not buying gold. And that has had an impact, which I value at about 10 to 20% of the decrease in the gold price. All right. Uh, we can talk about that again in just a minute. I'd like to talk about gold equities. Now you told me something very interesting offline, which is that gold equities typically lead the bully and at the bottom, uh, what did she mean by that?

And can we observe a similar pattern right now? Um, well, if you go back, you know, and this is my six or seven gold cycle, so I can't get too excited by, you know, like up and down 20 or 30%. I'm too old, I'm afraid, or I've seen too many. Um, but at the bottom, if you look at, uh, the, uh, you know, 2000, for example, when we had a turn, they, the gold equities always lead the bullion.

And why, I don't know, but it seems that the equity investors are smarter than the bullion investors. And they're always ahead by, you know, a month or two of the, the bullion. And, uh, right now there is a bit of a discrepancy and it started about last week where in fact the gold equities are up while the gold bullion keeps going down.

So I'm kind of wondering whether or not we're right at this point. Particular point in the cycle where the equities are low or telling the bullion market. Maybe there's a turn coming. So you could see, you could see the gold equity, the gold bullion go down, maybe another 20, $30. But if the gold equity stays on path right now, I would say that this is the sign that we are reaching the bottom and the boy in market.

Do you think the gold equities are following. Well, you said there's a discrepancy. Do you think maybe they're following the S and P 500, the broad equities indices more right now. Uh, well, equities are equities, so you're absolutely right. I mean, if the SNP is going up, the gold equities will have a tendency to go up because there are more correlated to the overall market than the bullion itself.

So there is some truth into that and we are in a bull market. So that's number one, but also there's the fact that, you know, even at $1,700 gold, The gold mining companies are making a lot of money and they are paying like, you know, a fantastic dividend. I, you look at Newmont, the stock has got a 4% yield.

Well, where are you going to get that kind of yield even in the debt market? Like you, you can't that. So, you know, I think that the return to the shareholders is putting a floor on the equities themselves. I, I, um, I want to. Ask you, if, if let's say we have a situation where gold and the equities move in different directions and that scenario with the gold miners follow the broad equities index, or would it follow goals?

Uh, well, I mean, at the end of the day, the, uh, impact of the market is more important than the gold equity. So if the SNP is going up at the gold, the equities are going to go up as well. And now of course, if they bullion market turns around, they're going to go up twice as fast. I understand. All right. So we're looking for a bottom here.

Let's talk about sentiment sentiment. Now I've spoken to some investors about gold sentiment, and I've been told that it's pretty bleak right now compared to last summer. Would you agree with that statement? You know, I, yes. I absolutely agree. When you look at the various indicators that that's absolutely true.

Personally, I can't see exactly, you know, like, yeah. I mean, we we've had a, you know, a correction that's been, you know, quite impactful, but you have to remind ourselves that if you're mining gold today and you're getting $1,700 an ounce, the miners are making a lot of money. There, there are costs all in it's about eight 50.

So they're making like a, you know, a hundred percent margin that is huge money. Can't forget that. Yes, absolutely. I remember you spoke to me last time about this. We spoke at a time when gold was trading, a couple of hundred bucks higher and margins were fantastic. Back then. Our margin is still fantastic.

Now, even if a couple of hundred bucks lower, they still are. They still are. Because if you look at their total across, most of the mining companies are in the 900, you know, plus or minus $50. So at $1,700, like, you know, there's still. You know, $800 margin. And that is really fantastic. I like to revisit a topic.

We spoke about a few months ago, which is mergers and acquisitions. I remember you telling me that, uh, people are going to go on a shopping spree in this year because of higher cash flows because of a higher cash reserves and the higher margins that you spoke about. Do you still see that happening? And, uh, do you see more consolidation between the mid tiers to juniors or perhaps the, the mega caps, which, uh, which tier do you see more of that happening?

That's a very good question, David. And what I will say to you is that this correction in the equities is setting up a, uh, an MNA, a merger and acquisition environment. Uh, that is exceptional, uh, because it's realigning, a lot of companies value to the point where they are keen now to proceed where before the values might've not been aligned, like, you know, one stock trading at 1.4 times nav versus one at 1.2, this correction has kind of brought everybody back up to like, you know, levels where they can talk.

And I expect, and I hear a lot of talking around in the industry. So I expect that you're going to see a number of announcements over the next three months. I really do. In your experience in the past peer, have you observed more deals being done at high margin environments or low margin environments, low margin environment.

That's in first of all, Th there there's more to gain, uh, you know, in a low margin environment when you do one plus one equals three. Um, and, uh, there, you know, there are a lot of, or, you know, I've done two triple mergers okay. In my life where one plus one plus one equals five and now the green by that pair.

Well, um, if you look back at it, you know, in 2007, eight, um, I engineer the, um, the triple merger of, um, uh, at that point it was Metallica, which had a small, nice open pit mine in, in, uh, Mexico making great margin. Uh, but it had no, no projects. And at that point we had just finished building the mine. So we had no cash.

And, uh, we were able to find a company which had the new Afton development project. So they had a great project, but they have no cash. And then we found a company that I cashed, but no project. And we put the three companies together. Now we have a company with an operating asset, making money, a development asset.

We have cash to develop it. And that became the new gold deal. And each of the stock were trading at a dollar and we, when we merged them, the resulting company ended up trading at over $14 a share. I see. And that's what I mean by one plus one plus one equals five. Yeah, so, okay. You've had, have you realized, uh, accretion higher synergies?

Uh, just absolutely. And that's the kind of thing that exists right now. I mean, you know, there are companies out there where, um, they should either merge with like their neighbors too, you know, so they don't have to spend twice the capital. Uh, they should really, you know, there there's too many, still too many management team, uh, that are collecting checks instead of like looking at shareholder value and say like, you know, what's best for our shareholders enough for the management, but for their shareholders.

And there's gotta be more pressure on these companies to merge and get on and deliver shareholder. Who's going to be applying this pressure of peer. Is it, is it, is it the shareholders themselves? Or is the market going to apply pressure by let's say, I don't know, maybe some incentive from either the government or we're going to see competitors doing, doing deals and then, okay, well maybe we should be catching up.

I liked, I like to know how this pressure will be implemented. I think the pressure will be implemented sent by the, uh, the, the board of directors of these companies more than anything else, because they will see the pressure coming from other deals. And, you know, in the case of, uh, Metallica, for example, and new gold, uh, when you have that kind of example, and your company is not on is under performing vis-a-vis the, the market, you get a lot of pressure from your shareholders, from your board of directors.

And then, you know, at some point you may just get, uh, you know, acquired you. You may have a hostile bid in front of you, and that's not good that doesn't reflect well on management. Right, right. Yeah. And in this environment that we're speaking about, do you think investors would prefer to be in the bullying space or in the mining space?

Usually when, when prices are at sort of a rebound, like you're talking about, what do you usually see? Oh, I mean, uh, you know, I would prefer to be in the equity. Absolutely. A hundred percent. Uh, but you know, just to come back to circle back to the, the bullion market, the one thing that you know is different between Bitcoins and gold is that the gold market as a real physical market.

And, uh, what we are seeing now in China and India is a huge rebound in the physical sales of gold. I mean, gold demand in China is up 171% this quarter. And over the last year, and we're going to see the same kind of rebound in China and India. Uh, and, uh, so I, you know, there is a point where. The physical market comes and say, okay, give it all to me because we'll take it.

And I think we're probably reaching that point right now as well. So that's also the good news of the gold market. I that's a very good point. How big is the physical market in relation to the entire gold market of around $9 trillion, just approximately. And does it have a lot of impact on the price at the end of the day?

Oh, it does. I mean, at the end of the day, the physical market sets the price because like, you know, every time announced of gold is sold to the physical market, it sets the price. So the physical market, just to give you an idea has been as much as 90% of the market and has been as low as 30 to 40% of the market.

Right now, it's about 50 50 between investment demand. And the physical demand, but last year, the physical market, the investment market was definitely the market that impacted gold the most. And if you look at the gold ETF, you know, they were up the op over, uh, 850 tons last year because of investment this year, it's been a relentless draw down like, you know, selling every week and every week.

When you see the gold ETF flatten out and the demands start to pick up. That will be the sign that the gold price is going back up. And, but in the meantime, it's the physical market, the jewelry market that will pick up the goal that's being sold, right? Like to draw parallels to the silver market. Now we saw something happen not too long ago with a silver squeeze.

There was a lot of demand, a huge surge in demand for the physical market. In fact, many retailers ran out of inventory. I remember that night, it was a Sunday. They ran out of inventory completely. They had to maybe even backdate some orders or reject some orders completely. Yet we did not see the physical price, that the spot price of silver rise above $30 and sustain that level of very long.

Why do you think that squeezed to not have the effect on pushing up the silver price here? Well, because the silver market is a huge market, just like the gold market is. And you know, at the end of the day, you can squeeze the market for a day or two. But, you know, you cannot squeeze the market forever.

And, uh, the trying to, you know, back in the 1980s, I remember when the hunt brother, uh, put the squeeze on the, on the silver market and ran the price from $5 all the way to 50, uh, by controlling the output. I mean, what they were doing is essentially buying the mind production. And they were the force, the market to go short and the market just went bananas here.

The market today is so large. It's a billion ounces that is produced every year that, you know, you can not have the same impact that you did back in the 1980s. Uh, now the good thing about what's happened though, is that it's sensitize a lot of the millennials to the physical market, to silver market. So even though they may have come in, come out and just like did a quick transaction, the fact that they're even aware of it to my mind has been, is a big plus to the market.

Okay. Well, do you think this silver squeeze movement, if you want to call it that had any lasting impact on the silver market? Well, if there is any lasting impact, I would say that was the lasting impact because in terms of price, no, but in terms of knowledge of the market, at least now there is a noise of the market by the, a whole new generation that wasn't there before to some other guests about this issue.

And I thought that perhaps if they had tried to squeeze specific mining stocks, more so than the bullying, maybe that would have more of a market impact. Would you agree with that? Yeah, I would agree with that. Especially the stocks that are more, you know, I would say illiquid because the thing would game stop.

The, the reason why it went nuts is essentially it was totally liquid. Uh, it had already been shorted twice over and, uh, there was no liquidity in the market. So if you were zoo take, you know, a mining stock would only, I dunno, like, let's say 50 million shares. Uh, and of which 20% is owned by management, then all of a sudden you could really have a huge impact on, on the stock itself, but that we did not see, okay.

I'd like to talk about the, uh, junior mining stocks that you're, that you're, uh, involved with. Now that was a perfect segue or the mining and prime mining. First of all, maybe you can give us a brief introduction to those people who have not seen our last interview. And I'm curious to know that. I'm curious to know how you transitioned into the stocks coming from a multi-billion dollar royalty company into the junior space.

Was there, was there a difference in strategy? Was your mindset different? How, how, how, how has your day-to-day changed? Well, th there is a definite mindset difference between the royalty businesses, a totally different business. And I will never compete with Franco Nevada on the royalty business. I am still a very large shareholder of the company and, uh, it will have a, my undying affection of you can be sure of that to the day I die.

So like, you know, there's no way I could be in that business. Uh, but you know, the other hand, uh, having been at Newmont mining for, uh, seven years and, you know, run what, at that time, the largest mining company in the world, I did learn a few things. And, uh, also my days as an investor to my, to me, the number one thing is optionality is that like, if you're going to make money, you need optionality.

And there's two forms of optionality. In our business, there's land optionality. And then there is, um, a reserve resource optionality. And if you can buy optionality for very cheap, you're going to make a lot of money, especially if you can get it for free. Uh, so when we built Orla, The idea here that we're able to buy Camino ROHO in Mexico, which at the time had, you know, a million ounce of oxide, but 7 million ounces of sulfide for a very modest price.

So, well, you know, all you need is for the gold price to go up and you have tremendous optionality and that's exactly what's happened. We're also able to do a deal with our neighbors. So now we have 2 million ounce or more or less of oxide open bit minable, which is now under construction, and there's still, you know, seven, 8 million ounces of sulfide resource that we're looking at.

How can we make that, you know, possible. So, uh, and then on top of that, we got a project in Panama. Uh, through our company that we bought and that company's got a small open bits, a real beauty, uh, gold mine, but there again, we had optionality on the land. We started drilling. And what did we find? We found a copper gold zone, which is now we're drilling.

We're increasing. But to my mind, if you got to find the best deposit in the world today, it's a copper gold deposit. If you can find one of those, you are in Nirvana because you know, copper is definitely the green metal it's going to go on for the next, like, you know, 40, 50 years the greening of the world.

And you're going to need copper, copper. Essentially I, our entire civilization rest on copper it's without copper, we have no transportation without copper. You have no communication. So the copper is absolutely the essence of where we're going and then gold at the end of the day, when you look at the money being printed, it's the metal to own.

So to my mind, that's where we've got the best, you know, optionality in the world. And just to clarify in a gold copper mine gold is a byproduct copper, is that correct? That's correct. Yeah. Okay. All right. I have one more. You get it for free. That's the best part. What's usually the ratio between golden copper and these types of mines.

You know, they've been it's all over the place. Uh there's uh, there, there are some, uh, copper mines, like Cobra Panama, for example, it's 95 plus it's 98% copper to, to buy value. It's about 95, five a hand, but yet there are some other mines where the value is closer to like 60, 40. And so in the case of the deposit that we found in Panama, it's a, the value is almost 50, 50.

Well, that's terrific. Okay. Uh, I have one last question for you Pierre now. Sure. Being the chairman of Franklin Nevada, you have the privilege of being where I, I was thinking both as a minor and an investor. You have both mindsets, and I'm just wondering if you were to think like an investor now. What would you do to convince some of these smaller junior companies to enhance shareholder value?

What could the industry, the junior mining industry as a whole do right now that could be more attractive for investors at this time? You know, it's the fundamental thing about junior mining is the end of the day. The 90% of the value in our business is created by the drill bit. So you've got to look at your finding cost per ounce.

And if these companies are not able to find gold for like 20, 30, $40 an ounce, you should not be in this business. All right. And you know, so what I look at as an investor, the bottom line is what's your cost of finding an ounce of gold. That's your common denominator. That's where you find the value for shareholders.

I understand here. Fantastic thoughts as always. I'm sure the audience will appreciate your insights. Thank you very much for coming on. Kiszko it's always a pleasure. Thank you, David. I look forward to speaking with you again in the future and thank you for watching Kitco news. I'm David Linn, stay tuned for more coverage and don't forget to.

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