Wealth Podcast Post

Gold Mining with David Garofalo

George Grombacher April 11, 2023

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Gold Mining with David Garofalo

LifeBlood: We talked about gold mining, the price of gold, the state of the mining industry, how much gold is left in the ground, how long it takes to get a new mine up and running, and what the price of gold needs to be to catalyze investment, with David Garofalo, President, CEO and Chairman of Gold Royalty Corp, 30 year mining executive and expert.   

Listen to learn what the future holds for gold mining!

You can learn more about David at GoldRoyalty.com, Twitter and LinkedIn.

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Our Guests

George Grombacher

David Garofalo

David Garofalo

Episode Transcript

avid Garofalo 0:30
Well, I’ve been in the mining business for over 30 years developing and operating mines. As you correctly pointed out, I lead gold Corp to the merger with Newmont back in 2019, to create the world’s biggest gold company by market cap and production. Before that, I ran Hudbay minerals. And before that, I was the CFO of Agnico Eagle for about a dozen years and before that back in the base metal space for eight years as treasurer Inmet mining. So I spent equal amounts of time in copper and gold. And I built and operated over 15 mines in my career.

george grombacher 0:02
Well, this is George G. And the time is right welcome today’s guest strong and powerful David Garoppolo. David, are you ready to do this?

David Garofalo 0:08
I am delighted to be here. Thanks for having me on.

george grombacher 0:11
And excited to have you on let’s go. David is the president CEO and chairman of gold royalty. He’s worked in the natural resource sector for over 30 years leading companies like Newmont Gold Corp and Hudbay materials. David excited to have you on tell us a little bit your personal lives more about your work and why you do what you do.

I love it. And now gold royalty. Tell us a little bit about what what what that is what what does your company do.

David Garofalo 1:12
So gold royalty Corp was formed a little over two years ago, through an IPO on the NYSC. American under the trading symbol G ry G Roy, and go wealthy has over 200 royalties across the Americas on gold and silver deposits. And what we do is get a percentage of the top line, we get a percentage of the revenue in return for providing capital to the explorers, developers and operators to help them explore, build and expand their operations. And by taking a royalty in return, we get a percentage of perpetuity of the revenue from that mind. And so what that gives us is optimum leverage to the gold price while protecting our shareholders from inflation. Because we’re not exposed to operating or capital costs of the mine site, we just get paid on the top line.

george grombacher 2:04
So So you will. XYZ minor says we think that we’ve made a discovery, we need some money to actually put it into production. And you will then come in and help them with some of the funding to bring their discovery to an actual mine

David Garofalo 2:23
precisely. And we fit in neatly into their capital structure, they may raise some debt, they may raise some equity. And then we provide capital in the form of a royalty. So we provide upfront capital. And we get a perpetual royalty on their deposit in return. So we’re not looking for repayment, we’re a permanent part of their capital structure. But we get paid, we get our return to the return of a royalty on the producing mine once it’s up and running. To that end, at Gold royalty, we now have eight producing royalties, we have another 15 in various stages of development construction. And then we have another 180 or so that are from early stage exploration right through to feasibility that provide us a lot of organic growth. As a result, we have 60% compounded annual growth in our revenue over the next decade. That’s the highest growth rate among the royalty sector.

george grombacher 3:16
And it’s all the success is predicated on your or your company’s ability to be able to look at opportunities as good, bad or something you should pass on.

David Garofalo 3:29
Yeah, and that’s the unique value proposition I think we offer relative to some of our rocky peers in that there are a lot of people around my boardroom table. And within my management that looked like me, you know, plus 30 years of experience, building and operating minds, many of our peers are run by financial engineers, we’ve actually built an operating minds, which gives us a couple of unique advantages. One is it gives us a clear eyed view of the underlying risk of what we’re invested in. And we do a lot of technical due diligence, geological, metallurgical, environmental before we put any money into an opportunity, and we’re in better position to do that than most because we’ve actually built and operated mines. But because collectively, we have reformed years of industry experience among our Board of Management. That gives us unmitigated access to virtually anybody in the mining business, it means we can pick up the phone and talk to anybody. And that’s why we’ve grown so quickly. We started with 18 royalties two years ago when we IPO today, we have Twitter and 16 royalties. And we’re able to grow so rapidly because we’ve gotten access to opportunities before many of our peers were even aware of it because of the access that match of our board management has to everybody else in the mining industry.

george grombacher 4:43
This may be a dumb question but here goes nothing. Is is a royalty, something that that that you could sell if if you wanted to.

David Garofalo 4:52
You could and there’s quite a market for it. But really, it doesn’t make a lot of sense for us to sell them because our 216 royalties are fully bought and paid for, we never have to put another diamond to them. We never have capital calls. That means even early stage opportunities that might take many, many years to come to fruition don’t cost us anything to hold, it gives us infinite optionality. So really, by selling that optionality away, we’re really selling away the upside, we don’t want to do that, because it doesn’t cost us anything to own them. The other thing is reserves in the ground, don’t waste, they don’t decay, we can wait for them to come to fruition for the operators that make an economic case. And when they do, they’re the ones that have to raise the capital, in order to build the mind. Now, they’re the ones that have to bear the risk. Really, what we do is reap the the top line, we reap the benefits, not only from their production, but also from their exploration upside because as they drilled their deposits out and grow them geologically, we get that exploration upside because our royalty extends not only to the existing reserves, but any growth in reserves realized by the exploration efforts of our operating partners. For example, last year, our operating partners invested over $200 million in exploration on their properties. And that grew their reserves immensely to over 100 million ounces of reserves and resources. We didn’t have to contribute a dime, to their exploration budgets, but we got the benefit of that upside and our royalty portfolio.

george grombacher 6:20
Fascinating. So we’re having this conversation on March 13 of 2023. After we’re hearing the news about Silicon Valley Bank, and whatever else is going to happen with the American and now international banking system. I imagine, David that you were bullish on gold before, what are your thoughts on it now?

David Garofalo 6:40
Well, this is a symptom of what we’ve been talking about for really, a couple of years now. There’s been so much excess introduced into the system since the great financial crisis in 2008, then inevitably, it would come to roost and it came to roost in the form of inflation. You can expand money supply for a dozen years and leave interest rates to 0% without having inflationary implications. And we see a lot of polarity parallels in this inflation cycle to what we saw in the 1970s. You know, we entered the early 1970s with the US dollar being decoupled from the gold standard and a massive amount of money printing occurring to fund a war in Vietnam. Today, we’ve seen the great financial crisis see fiat currencies being unmoored from any form of physical backing, we’ve seen a massive expansion of money supply. And we’re in the midst of a war in Europe right now. It back in the 70s, we had an oil embargo imposed upon us by the Arab world today, we have an oil embargo self imposed, we’re not buying Russian energy products anymore. And that’s infected the supply chain. And it’s resulted in massive inflation as well. So a lot of parallels. The one striking difference that I see between today and the 1970s is back in the 1970s, the amount of debt that we’re carrying was only about 100% of GDP globally. Today, it’s 350%, three and a half times the amount of debt per capita that we had, back in the last inflation cycle. What that means is there’s very little margin for error in the financial system, there’s no margin for increases in interest rates, not on a real basis, because it could very well bankrupt Nations, the amount of debt service in the US has already grown to a trillion dollars a year one out of every $7 collected in tax revenue. And that’s doubling. That’s a doubling over the last two years. So you can imagine if interest rates went up even other 100 200 basis points, that that debt service member could grow to $2 trillion, it would be unsustainable, unsustainable for the US. But you can imagine what that would do to the developing world. And what that would do to undermine confidence in fiat currencies around the world. Gold is the one currency can’t print. And while it yields zero, the reality is Treasuries are yielding negative on a real basis, when you look at nominal rates, less real inflation is, and believe me, real inflation is not at seven or 8%. Those headline numbers are absolute fiction. We’re all experiencing double digit inflation. If you’re putting food in your stomach, fuel in your car or roof over your head, you’re experiencing well into double digits, you know, the Federal Reserve and the statistics agencies in the US like the lawless into a false sense of complacency. With really tricked out numbers on inflation, that’s just not the reality on the ground. So that means that real interest rates are deeply into negative territory, and that we’re experiencing a erosion in our savings erosion in the value of our fiat currencies as a result of this massive amount in Sidious, inflation.

george grombacher 9:45
I appreciate that. So fascinated by and curious about, as we see, or I, as as I hear about a growing need for for metals we need Eat more pretty much seems like every metal for for our electric vehicles and just, you know, really everything. And it seems like gold is becoming a lot more popular. But my perception is that there aren’t a lot of companies spending money on actually creating new mines, can you walk me through that you can tell me I’m wrong,

David Garofalo 10:21
you’re not wrong at all. And that just underlies the bull case scenario for gold. Because, really since 2012, there hasn’t been any significant exploration being undertaken by existing producers. Reserves are down 40% from their peak, that’s reserves in the ground unmined reserves. And the reason that is is because mining companies are at the end of the day, just a collection of financially fastest depleting assets. And every day that we mined an ounce of gold, we’re dying a little bit unless we’re redeploying capital back into the ground explore for new ounces. So we’ve seen a 40% decline in reserves, the average mine life of a gold mine is down to six years globally. So we have six years of reserves in the ground, it takes a minimum of 15 to 20 years from discovery to first production to bring a new gold mine up into production, because it’s capital intensive. Permitting is difficult social engagement is difficult. Getting an environmental license is difficult. It takes a long time to bring new mines into production. So you can imagine this downward trajectory that we’re seeing in reserves and production is likely irreversible for the foreseeable future. So that’s why we believe that not only because of the interest rate cycle and the negative interest rate cycle we’re experiencing a gold is going to go up. But also because we’re a very supply challenged industry, there isn’t the ability to bring on new capacity response to higher gold price. That’s why we’re calling for gold to be at least $3,000 an ounce, which is really where we need to be or above to incentivize massive amounts of new exploration of mined development, we’re well away from that. And that also matches the real all time high for gold. If you go back to the early 1980s. When we were still in the big inflation cycle 4050 years ago, gold at that time peak, that little read $100 An ounce in 1981. Today, if you inflation adjusted to 20 $23, that will be over $3,000 an ounce. So we’re not anywhere close to the real cyclical high for gold.

george grombacher 12:22
So we are we have essentially six years left of the existing mining operations that are going if we can continue to mined for six years. And then we will essentially be out of the metal

David Garofalo 12:37
out of new supply. And and you know, I am the first acknowledge that there’s a lot of above ground supply, but the central banks are snapping that up as quickly as they can. China, which is the biggest producer of gold as a country in the world consumes all of the gold they produce domestically. And they’re the biggest importer of gold in the world, as is Russia as is Venezuela any any country that deals with an avalanche of foreign currency proceeds through their exports, whether their energy products or manufacturing goods are diversifying out of the US Dollar as quickly as they can, and buying gold for their central bank reserves to preserve capital.

george grombacher 13:15
And how long did he say it takes to get a new mine into production

David Garofalo 13:18
15 to 20 years on average, from discovery to first production.

george grombacher 13:24
And in order for us, the the humans on Earth to to start more production, you’re feeling your senses that gold must be above $3,000 announced to justify the costs

David Garofalo 13:40
not only justify the cost, but actually start to bring some growth capital back into the sector. The juniors who do all the heavy lifting for us in terms of grassroots exploration simply do not have access to capital. The markets abandoned them. And as a result, their exploration efforts have waned. They haven’t been able to put drills in the ground to help the industry replace reserves. As a result, you know what the industry has done? They’ve resorted to m&a. You know, it happened back in 2019 when Beric merged, ran gold and Newmont merged with gold Corp, my former company, and now it’s happening again new monsters trying to take over Newcrest essentially the industry is cannibalizing itself. They’re not finding anything new in the ground. So to sustain themselves. They’re just basically eating each other up like a PacMan game.

george grombacher 14:27
Interesting. So let’s just we’ll just play pretend say that gold does in fact go over 3000 Let’s say it goes to $5,000 an ounce that will motivate money that is currently going to other asset classes to go into mining operations.

David Garofalo 14:44
Yeah, I think what the industry is waiting for or what the general equity markets are waiting for, rather, is for some momentum for the commodity catch a bid, in which case and you’re going to start to see General’s capital come back into the sector in a very major way. And the juniors who will then be able to access capital again so they can do the important work of exploration to replace depleting reserves. They haven’t had access to capital really since 2019. There was a brief window back in the first half of 2019, where juniors were able to raise money. Otherwise, since then it’s been a nuclear winter for the explorers.

george grombacher 15:18
Not so walk us through the investment experience for people that buy shares in gold royalty. What what what can I expect?

David Garofalo 15:27
Well, we already pay a dividend we have about a 1.9% yield. And that speaks to the quality of our asset base. Yes, we have over 200 royalties throughout the Americas. We also have a royalty Canada’s biggest producing gold mine Canadian Malartic. We have a royalty and what will be Canada’s second biggest producing gold mined cote in Ontario. And we have a royalty on the underground extension of barracks, prolific gold strike mine in Nevada, which will be a producer for many, many decades. And so we have quality foundation last is to provide an annuity for our shareholders for many, many decades to come. And gives me the confidence to say that with 60% compounded annual growth rates and revenue projected, I’m confident we’ll be able to raise your dividend over time as well.

george grombacher 16:11
Excellent. Well, David, thank you so much for coming on. Where can people learn more about you and tell us again, the ticker and where people can buy shares of gold royalty Corp?

David Garofalo 16:22
Sure, we’re on the NYSC American on the trading symbol, gr y g re gold royalty Corp. And our website is gold royalty.com. So it’s very easy to remember, we have a one 800 Number, we have an info email as well. We have a newsletter you can sign up for as well if you want to keep up to date on our developments. But those are the vitals for the company and again compounded annual growth and revenues of 60% going forward with substantial dividend of 1.9% with the prospect of that growing over time as we realize on that revenue growth.

george grombacher 16:56
Excellent. Well, if you enjoyed as much as I did, so David, your appreciation and share today share with a friend who also appreciates good ideas go to gold royalty.com Is that right David? That’s great. Thank you. Check out gold royalty.com and find out if this is a good opportunity for you to diversify your investment approach. Thanks again, David. Thank you, and until next time, remember, do your part but doing your best

Transcribed by https://otter.ai

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