State of Gold: Passive Investing in Gold Streaming w/ David Garofalo
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State of Gold: Passive Investing in Gold Streaming w/ David Garofalo

David Garofalo, former CEO of Goldcorp Inc, has 30 years of experience in the creation and growth of over 15 multi-billion dollar sustainable mining businesses across multiple continents, and has led the largest merger in gold mining history valued at $32 billion dollars. In this episode, Bob and Ben ask the hard-hitting questions, like what are the pros and cons of gold as an asset class? Does gold hold its value in an inflationary environment? Tune in to hear David answer all this, as well as his projections for gold prices, and dive deeper into one of his key strategies to invest in gold: gold royalties.

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State of Gold: Passive Investing in Gold Streaming w/ David Garofalo

We have an awesome guest. It is David Garofalo. He is going to be talking about gold as an asset class and specifically about gold streaming.

David is a star in the gold mining world. Years of experience in creating and growing over fifteen multibillion-dollar sustainable mining businesses across multiple continents. He has led the largest merger in the gold mining industry, valued at $32 billion. That was the sale of Gold Corp to Newmont. He serves as the Chief Executive Officer, President and Chairman of the Board of Directors of the Gold Royalty Corporation. Amazing experience, history and track record. It’s such a pleasure to have you on.

It’s my pleasure. Thank you for having me on.

Give us a little bit of context for your background in this space. You have been in the gold mining industry for pretty much your whole career. Especially as we are seeing higher inflation, investors want to hedge, all the money printing and the liquidity injected in the past couple of years, gold is becoming part of the conversation again. I would love to dive in and start with your background.

I spent years as a mine builder and operator. Interestingly, I have switched gears and I’m effectively financing new mine operations and mine development exploration through running a royalty company, which provides capital to the explorers, developers and operators and takes the royalty back. I positioned myself at this point in the cycle at that end of the spectrum simply because we are in an inflationary cycle.

We have seen dramatic underinvestment and exploration of mine development over the last years to the extent that gold reserves in the ground are down 40% from their peak in 2012. There has not been that reinvestment back into the exploration of mine development that the industry existential need over the years. I want to expose the gold. I believe gold is an asset class that is going to perform exceedingly well in this inflationary environment. What I don’t want is exposure to the operating costs inflation.

The beauty of the royalty model is we take a percentage of the top line and a fixed percentage of the revenue and we do not have any exposure to the operating or capital costs at the mine site. It gives our shareholders optimum leverage to the gold price leverage the exploration success because the royalties are not only the existing reserve at any growth in it but it insulates our shareholders entirely from operating capital cost inflation.

Before we get into that, let’s talk about you. How did you get started on this? Did you get a pan and start shaking some rocks and then become CEO? How did it happen?

There were a few steps in between. I started as a CPA in the 1980s. I worked with Deloitte, one of the biggest accounting firms in the world. I was recruited in a very junior position with a base metal company called Inmet Mining, which was taken over by First Quantum. I started accounting for the mines and then worked my way into the mine construction teams on the commercial aspects of construction, both the feasibility work, going out to tender major contracts. I integrated myself into the mine building team and learned the business from the ground up. Over time, I left Inmet to become the CFO of Agnico Eagle, one of the biggest gold producers in the world. I helped build them from $100 million in marketing capital.

They have multiple mines across the world but we were a $100,000 market cap when I started there in 1998. When I left, we are a $10 billion market cap. We grew through the drill bit and our construction efforts. I ran a base metal company called HudBay Minerals, one of the biggest base metal companies in Canada. I ran Goldcorp, one of the biggest gold producers in the world. We created the biggest gold producer by market cap and production in the world through our merger with Newmont in 2019.

Gold is an asset class that is going to perform exceedingly well in this inflationary environment. Share on X

You came in from the financial side. As the operator, figuring out how to build a great mine, including the trucks, managing diesel, infrastructure and all the dirty, hard stuff, you figured out what it takes to build a mine.

It’s not just me. If you look at the board of management that we have assembled, the Gold Royalty, collectively, we have 400 years of mine building and development experience across our board management, which is unique in the royalty space. Quite typically, royalty companies are run by financial engineers, not people that have built mines.

That is a unique value proposition of Gold Royalty because we have a clear eye view of the underlying risks of the royalty opportunities we are investing in. We understand what the operators think. We can see through their eyes what the risks are associated with what they are doing. Given the seniority of our team, which runs big, major, large-cap companies, we have access to anybody in the money business when we are looking at opportunities on the royalty side.

I had invested in Goldcorp back in the ‘80s or ‘90s but it had a legendary deposit. How many grams per ton of ore? A ton of ore had 50 grams.

50, 60 to 70 grams of gold.

It’s visible. It’s sitting there.

Super high-grade and low costs as a result of that high-grade, that high-grade zone at Red Lake was legendary. It was one of the most high-grade zones ever discovered in the mining business.

You had one of the lowest costs of production. That is how gold mines make money to have a low cost of production. It costs you $150 an ounce or somewhere around there. Anything you could sell gold above that, it’s all profit. It was incredible.

It provides you with some perspective about what 50 or 60 grams at that time means. The average grade of worldwide gold mines is 1 gram per ton. Think about that. That is profitable.

You helped develop that, build it into a world-class financial asset and sold it off to Newmont. That mine was subsequently sold to an Australian company. You are running Royalty Streamer, which I want to talk about. Before we get into that, let’s talk about gold as an asset class. What are the pluses and minuses? I was a gold bug. I met a lot of money investing in gold mines throughout the years.

ILB 22 | Gold Streaming
Gold Streaming: The royalty model is to take a fixed percentage of the revenue and not have any exposure to the capital costs at the mine site. This gives shareholders optimum leverage to the gold price.

Gold has been disappointing as an investment over the years. It has gone up about three times if you had invested in gold in 1980. January 1st, 1980, was about $500 an ounce. After 40 years, it was about $1,500 an ounce. It has not necessarily been a great investment, but it continues to be a place where people want to put money, as an alternative currency and chaos protection. Talk about why gold is a part of a smart portfolio.

It’s an accurate barometer of inflation in the economy. We have not had inflation for a long time. It’s where we’re at but for a long time, we had high-interest rates going back to the late-‘90s and early part of this century, relatively high-interest rates both on a nominal and real basis. We have had exceedingly low rates since the last credit crisis, 2008 to 2009. We have seen the printing presses continue on an unrelenting basis throughout that entire period for the last years. We are seeing the habit that has wreak in the accesses and economy. We are seeing headline inflation numbers of 7%, which are 40-year high. It understates real inflation because if you put food in your stomach, fuel in your car or a roof over your head, it is not 7%.

It is well into double-digit territory. Gold is holding its value in the face of that as financial assets eat away at your capital. Inflation is insidious. If you leave capital sitting in low-interest-rate structures, you see your capital rope 10%, 12%, 14% a year because that is where real inflation is. Gold has preserved value in that environment. Go back to the 1970s when we last had double-digit inflation. Paul Volcker came in to run the Federal Reserve in 1979 and started to ratchet up nominal interest rates, as we see with Jerome Powell.

He is talking about bringing interest rates up a quarter-point here and there. In the short to medium term, it doesn’t matter because inflation is going to continue to accelerate after a dozen years of the excess money supply. Tapering does not mean stopping the increase in the money supply. It is slowing down the increase of the money supply. It happened in the late ‘70s and early ‘80s. Gold will continue to run even as nominal rates go up because inflation will continue to accelerate and real interest rates will dive deeper into negative territory.

Sentiment will turn. When it does, we are going to see a flight of capital into gold and achieve what will be all-time highs that we saw back in 1981, which was $8.50 an ounce. Inflation adjustment is $3,000. That is what I’m looking for in the short-term. I’m talking about months, not years. When it happens, it does not happen in a nice and steady line upwards. It’s a violent movement of capital from one asset class to the other. That is typically how it happens. The best hand analogy is what is happening in the copper space. In 2021, copper was a dog.

It was plumbing real all-time lows. Now, it’s at all-time highs because the economy and the market have realized, “We need a lot of copper to decarbonize the economy. All those electric vehicles need three times the copper that an internal combustion engine does. Where is that copper going to come from? There have not been any copper production increases. My supply is going down. There is that squeeze coming on.” That is squeeze is coming to the gold market.

In the last years, crypto has stolen some of gold’s thunder. Gold investors are like me. They are in the 50s and 60s. This is boring to the younger folks. They are interested in crypto. The crypto has some advantages and gold-like characteristics, including limited supply and independence of central bank control or any financial engineering. It does have some similarities. Take the other side of this. Why is gold the smart way to play hard money versus crypto?

First off, digital currencies are here to stay. What is driving that is the fact that blockchain is revolutionizing the economy. It’s driving out transaction costs for cheap costs, removing the middleman, democratizing a lot of the transactions that we need to run our economy. That is extremely important and it is revolutionizing how we do business. You need digital currencies to participate in the blockchain. Digital currencies are here to stay. I’m not going to diss them. Digital currencies are exceedingly high levels.

There is a momentum play there. There is no way that the central banks in our universe are going to allow or abdicate our responsible for fiat currencies to the Wild West that the cryptocurrency market is at. They are going to domesticate cryptocurrencies and digital currencies, which will bring them back down to earth in terms of valuation. They are here to stay but you are going to see a rationalization in their valuation.

Possibly regulation?

Inflation numbers aren't just 7%. If you're putting food in your stomach, fuel in your car, or a roof over your head, it isn’t only 7%. Share on X

We see that in China. They expelled the whole cryptocurrency market out of China. That is arguably the biggest economy in the world. Cryptocurrency has a huge environmental footprint. Bitcoin mining consumes under 1% of the global energy supply. That is incredible. That is a huge carbon footprint. There is going to be a reckoning in that regard as well. Inevitably, you are going to see central banks take back responsibility for currencies. They will chase the speculators out of the market. What is interesting is they have taken our lunch for sure. There has been an allocation of capital into the Bitcoin market and cryptocurrency market writ large that has caused us to lose capital in the gold market.

That is because the younger investors realize intuitively that their fiat currencies are being undermined and are looking for ways to preserve their capital. They have this perspective that there is scarcity value in cryptocurrencies. There is a finite amount of Bitcoin but there is no scarcity value in the cryptocurrency market, generally, because there are no barriers to entry. Anybody can create a cryptocurrency. When anybody can create one, it becomes a fiat currency like everything else. That is why there is going to be rationalization. In contrast, gold is very scarce.

There have been 200,000 metric tons of gold that have been mined since the beginning of time. To give you a sense of what that looks like, it only fits in four Olympic-sized swimming pools. It’s tiny. We mine about 4,000 metric tons a year. We add about 5% of the global supply. If gold went to $3,000 an ounce, any other commodity, there would be a supply-side response to the gold price. The reality is that it cannot happen because of a kind line from discovery. The first production is typically 15 to 20 years. In the last years, the industry has done a horrible job of reinvesting back in the exploration of mine development.

That is why global gold reserves in the ground are down 40% from their peak in 2012. Even if there was a meaningful discovery need tomorrow, we would not see its benefit in our production profiles for a couple of decades. Our trajectory in reserve and production is irreversible in the short to medium term and even the medium long-term. That is why there is going to be a squeeze in the gold market much like we have seen in the copper market growth.

There is an argument that all the biggest deposits have probably been found because it’s easier to find bigger deposits than little ones. They are bigger. You add the fact that a lot of the gold deposits are in very inhospitable places and difficult to get to. I was reading one. It was a Canadian mine. They were going to spend $1 billion to build one road. It is nuts. Supply is not going to come on very rapidly.

You make a valid point. All cryptos are different but in Bitcoin, supply is unlimited. Cryptocurrencies, in general, are not. Anyone who wants to go start a cryptocurrency can do it and if he can market it, he can. There is the hype factor. How overpriced is it? What is crypto? What is the real value there? How much of it are fluff and substance?

That is a good point because it has not found its equilibrium pricing yet because of the volatility we see in the market, some days of trades 40%, 50% volatility. That is not a store of value. Stores of value will go up and down 40% to 50% in a day. What that tells you is equilibrium pricing has not been found yet. It will be eventually as it gets domesticated by the central banks. You are going to see equilibrium prices found in a lot less volatility in that market. Bitcoin has a place in the global currency market.

Bitcoin is easy. I could sit on my app and buy some. Although it’s going to be reported to the IRS, it’s certainly easy and would appeal to the electronic generation versus something like this that is so beautiful. Talk about the different ways to own gold, a lot of people, including our partner, Dan who is a big gold buff. He has got storage in his home with physical metal that he can pop out open, look at it and enjoy the beautiful color of it but you have to protect and store it. It’s super difficult to transport, sell or buy.

We could think of it as chaos. We are talking about a financial inflation hedge and what he is going for is more of a chaos hedge. He says, “I’m a prepper.” There is an appeal to that. There is a little bit of a prepper in all of us. The physical gold, there is one way to own it. It’s a chaos hedge and unreportable but it’s super expensive and inconvenient. It’s risky to own it because somebody can steal it. It’s very painful to transport it. What are the pluses and minuses from your perspective on physical gold?

You have hit them all. You have to line up at a bank, have an ID, get the goal, find a place to store it, pay for the cost of storage if you do not have a place in your home and there is a security issue if you do store it at home. There is room in the portfolio. For everybody to own some physical gold, I own some physical gold. It’s a smart thing to do to preserve wealth in a market with insidious inflation eating away at your capital, otherwise. The other way to play it is the ETF, which trades on the New York Stock Exchange, The GLD. It’s physically backed.

ILB 22 | Gold Streaming
Gold Streaming: Inflation is just going to continue to accelerate, and gold will continue to run even.

The gold sits in a vault. It has opened up a whole new universe of institutional buyers, pension funds and mutual funds that could not own commodities but can own the GLD because it’s traded on the NYSE. That is great for gold as a commodity. There is a much wider array of investors who can invest in it. The same thing, you get the economies of scale in ETF in terms of storage costs but there are still some costs that eat away a little bit at the value of the gold. It’s minute but still eats away at it. The other way to get leverage to the gold price is the producers.

That was the promise. I remember back in those days. If you can buy a producer producing at $800 an ounce and the gold is at $1,000 an ounce, there is a $200 margin but if gold goes up to $2,000 an ounce, the margin does not double or triple. It quintuple. The idea was it’s leveraged to the price of gold but it didn’t seem to work out that way.

It’s exactly why I positioned myself in the royalty space. That assumes that leverage proposition you are talking about. You described it so aptly. It seems that your cost structure is stable. That $800 an ounce cost structure stays the same. The reality is it does not always work that way because we are in an inflationary cycle. I will give you a tangible example of where that leverage proposition was undermined. Coming out of the credit crisis, gold went up 140%. The gold equities only went up 66%.

What happened?

We are in the middle of the Chinese supercycle. Base metals were ripping as well. Both the base and precious metal companies started to build new mines and rushed through the door and inflated input costs dramatically. That is the cost of equipment, labor and supplies. They all went up dramatically, double-digit inflation. We saw dynamic cost structures in the industry negatively, upwardly dynamic and that eroded the margins in the industry even as the amount of crisis is growing. The gold producers underperformed. Gold was up 140%. Streaming companies went up 350% because they provided top-line exposure with zero exposure to costs.

You were able to get true leverage to the price of gold. The biggest expense is usually diesel fuel.

Labor is bigger than energy. There is a big squeeze on labor.

I remember one of those tires. The tires are as big as a house. What did a tire cost?

Those tires were $500,000 each. They were ripping and expensive.

These trucks are running three shifts 24/7. You cannot afford to have them have these big mining trucks stop. It’s a giant, big operation with these exploding costs. The promise of leverage never materialized in stocks.

Cryptocurrency is here to stay, but you're going to see a rationalization in their valuation. Share on X

Even though gold has been remarkably stable through 2021 at around $1,800 to $1,850 an ounce, we have seen the mine equities and operators start to see their valuations erode steadily. They are down 30% to 40% in 2021 because of the overhang of inflation. It’s the concern about what is going to happen to their cost structure, even in the stable gold price in Bremen and gold price goes up. I see a repeat of that phenomenon we had years ago where gold prices are going to run.

I do believe about $3,000 an ounce in a matter of months but cost structures in the business are going to be upwardly dynamic. That is the concern the market has. That is why I want to be in the royalty and streaming space. That is where I get that optimum leverage. Low prices and exploration were completely insulated from the cost structure.

Let’s talk about that next. Before we get there, I want to talk about a little keyword you said in your bio, which is sustainable mining. Most people view mining as dirty, ugly and burns a lot of fossil fuels. You destroy beautiful, pristine land and it’s so primarily destructive. You threw Bitcoin under the bus for their energy usage. The reality is mines are not what people think. Talk about the sustainable components of mining and how it’s done in first-world nations sustainably and responsibly.

We have made a lot of progress on energy consumption at the mine site. When I was running Goldcorp, we built the first all-electric underground mine. Zero diesel generation or diesel exhaust fumes meant lower ventilation costs and the need for energy to ventilate the mines because we did not have diesel to deal with the underground. The temperature was lower, so we did not have to air-condition the mine to keep our workers cool in the summertime.

That technology has been rapidly scaled. You are going to see more electrification of both open pit and underground mines. That is driving down energy consumption dramatically within the industry. The other thing we have been able to do is significantly reduce our water consumption. Recycling rates are way up because of a new technology called filter tailings.

Tailings are the waste that we produce at the end of the mine production cycle and they have to be stored. There is a lot of water associated with that. We can dehydrate those tailings, stack them in bales and drive down water consumption dramatically. We are drawing less freshwater into our mine site. Wars are fought over water. The biggest impediment to new mine development is the perception by local communities that you are consuming water. Otherwise, they would use it for their purposes, whether personal or existing industries.

We have done a very good job and we are improving and driving down both energy and water consumption, the biggest impediments, in my view, to new mine development. We have done a great job. The reality is, if you look down the supply chain, you need metals to decarbonize the economy. You need battery metals, copper, all of these things to be produced in increasing quantities to drive down carbon in the general atmosphere in the world. You need metals.

If I’m understanding this right, when you go build a mine, you do not leave it a big giant eyesore. To get mines approved, you have to have a full reclamation plan. To leave that land as if you had never been there, it looks as beautiful when you are done as before you started the mine and the financing for that reclamation project has to be locked away through bonds and bonding. You have to put up bonds to make sure that even if the mine fails, you failed as a minor, that reclamation is going to be completed.

Those bonds reside with the regulators in the countries that we operate in. They can draw on those bonds if something happens to the operator, whether they go bankrupt or abandon the site. That rarely happens but they do have that reclamation financial assurance that they will draw on the capital they need to close the mine. I will give you a very tangible example of a sustainable mining operation. I used to run a company called Hudbay Minerals on the copper side. It still exists. It has been around for hundreds of years. Its roots go back to Northern Manitoba in Canada up in Flin Flon, Manitoba.

They have been operating there since 1950. They built and closed 28 mines in Northern Manitoba and still operate a couple of others. I would defy the flyover Northern Manitoba where mine sights are and pick out where those mines are. It’s impossible. They have been revegetated, reclaimed, rehabilitated, small environmental footprints and invisible to the naked eye. That is a very tangible example of sustainable mining. The company has been around for many years to pursue those sustainable mining principles consistently over its entire history.

ILB 22 | Gold Streaming
Gold Streaming: Gold has been remarkably stable through the last year, but operators are starting to see their valuations erode because of the overhang of inflation.

People remember maybe the pictures of the hydraulic mining done hundreds of years ago. It was to destroy the countryside. It does not happen like that anymore. No one wants to do that and run that mine. Certainly, the regulators are not interested in that. It is done very responsibly and sustainably in the 1st world, maybe not as much in the 3rd world.

Increasingly, we are expanding our footprint as Canadian miners further afield in the world. We do not pursue any lesser standards in those developing countries than we would be in our backyard. We apply the best practices regardless of where we are. There is a lot of romanticism about artisanal miners locally. The reality is artisanal mining, when it’s done by locals, tends to be done in a very irresponsible fashion. Well-capitalized operator to come in, one, provide that financial assurance engineering to ensure it’s done responsibly. Few countries are allowing artisanal mining to occur because of those environmental damages that occur when small-scale miners with no money do mining irresponsibly.

Let’s shift to streaming. This is the business you are in. It has some advantages over some other ways we have talked about owning gold. Before we jump into its performance, what is it exactly for our people who do not know about gold streaming? We stream YouTube. What does it mean to stream gold?

It’s interchangeably used with royalties. We act almost like a single-purpose bank for the mining industry. We raise capital in the marketplace and then put it to work with the developers, explorers and operators looking to expand existing operations. We give them the money to help finance the expansion and building of their mines. Rather than look for capital repayment like a loan, we take a perpetual royalty back on the mine or a stream. The difference between a royalty and a stream is royalty, you get a fixed percentage of the revenue, 1%, 2% or 3% of the top line. With a stream, you get a fixed percentage of the actual gold production. You physically get the gold.

I got a piece of land. I found some gold there and I’m broke. I did everything I could do with mom, dad and my friends. I could come to you potentially and assuming you like the deal and it was a good deal, you would give me millions of dollars in exchange for royalty or streams. A fixed amount of the top line of the gold coming out of that or a fixed share of the gold. You share none of the expenses. It’s just the gold production.

If any future expansions and additions to the deposit, we do not put in any more capital. We put that upfront and then have that royalty or stream in perpetuity. We have full optionality to the exploration upside. That is the beauty of it. You get that capital upfront and that royalty and stream become permanently adhered to the property. We have a lot of upsides that our shareholders can enjoy in terms of exploration. That is why streaming and royalty get the multiples they do.

That mine cannot be sold without your royalty being attached to it. It is like a lean.

It permanently adheres to the mine. It gives our shareholders infinite optionality of the exploration upside on the property.

Diesel prices go up ten times and tire prices go from $500,000 to $5 million. You do not care at the end of the day.

You care about cost structures and industry going up but presumably, the reason they are going up is there is inflation in the general economy, which tends to be bullish gold prices. We get the best of all worlds.

In gold royalty, you get a fixed percentage of the revenue. With a gold stream, you get a fixed percentage of the actual gold production. Share on X

If the gold price goes up, you capture that because your cost structure is pretty small. You are building this billion-dollar royalty business and going to have under 150 people working here.

We have six.

For a very large streamer, it does not take a lot of human effort or infrastructure to do what you are doing. The ability to primarily raise capital in public markets and manage those investors and then do due diligence on your projects is very small.

With due diligence, quite often, we outsource. We have a small group of very strong technical people, geologists, mining engineers and financial engineers. We have a former investment banker who ran Merrill Lynch’s mining practice in North America and helped to structure the deals. When we need to do due diligence on the opportunity, we often outsource that.

Their engineering firms can offer us subject matter expertise in geology, metallurgy and engineering. We do our environmental assessment of the mine site and the operator’s capability in that regard. We do a lot of due diligence but a lot of it is outsourced, so we do not need to have a lot of people on staff. I could run this business with the same 6 people that work 10 times the size. It’s very scalable.

Could you break down the economics of what a deal with an operator looks likes from a capital outlay? What percentage of royalties? How does that build up over time? What is the general payback period?

I can give you a very tangible example. In 2021, we completed a royalty package with an operator in Quebec called Monarch Resources and they are restarting an old mine. We gave them about $10 million upfront and we got a 2% net smelter royalty or 2% royalty on the mine site. That will generate double-digit rates of return for our shareholders. After providing the capital, they were reconditioning some existing infrastructure and getting it up and running very quickly. The payback is very quick with a very high rate of return.

Smelter means when the ore is turned into gold, they are going to take 2% of that and send it to you.

When you identify targets to make these loans, where do you focus? Is it in the startup mines or mines looking for growth capital? Break down your high-level due diligence process for who you look for and given your background in this space and being an operator. I’m sure you have a unique edge in identifying the most successful operators.

We have 191 royalties across the Americas. They cross the entire spectrum of the lifecycle of a mine. We have some early-stage exploration royalties. Highly speculative but they do not waste. They sit on the shelf and wait for that exploration to be crystallized into something economic. At the other end of the spectrum, we have six mines that produce cashflow.

ILB 22 | Gold Streaming
Gold Streaming: You can generate opportunities and royalties organically. You can have a small team who stake expiration claims around existing mines. They wait until someone wants that piece of real estate.

We have 11 in construction and will be producing cashflow in the next year 1 or 2. We have a lot better between feasibility study, pre-feasibility study, PA or Preliminary Economic assessment, a processing power spectrum. There is a lot of embedded organic growth within our pipeline as a result of how diversified our portfolio is across the life cycle of the mine.

That gives you a sense of the growth trajectory we have in our business. Our compounded average growth rate in revenue over the next years is 61% as a result of all of the mines that are in construction and are going to be kept spitting out cash very shortly. The other way we generate opportunities is to generate them organically at the grassroots level.

We have a small team in Quebec and Nevada. They are geologists or prospectors. They stake exploration claims around existing mines or deposits. They wait for the producer or explorer to say, “I need that piece of real estate. My deposit trends onto it.” We say, “We need you to make a capital commitment towards the exploration of this property and give us our royalty back.”

We put no money down other than staking the claim. They do all the work on the exploration side. We take our royalty back and wait. That has generated the majority of the 191 royalties within our portfolio. Quite often, royalties become available because a prospector had paid her and he is looking for cash in his royalty. He bent his asset into an operator. He got a royalty and looking for ways to cash in.

He might be an older prospector or have passed away as a state is looking away looking for a way to cash in. Royalty opportunities come that way to us. Base metal companies have copper or zinc deposits with a small component of precious metals. They are looking to cash in on the precious metal component because it does not drive the economics of what they are building. It helps finance their base metal development more cheaply.

A copper mine will sell off their gold to you because it’s a tiny little deal.

Here’s a tangible example where I was involved on the other side. I was running HudBay Minerals in 2012. I had this big copper deposit in Peru, a $2 billion ticket to build it. We did not have enough capital to do it. We had $1 billion on the balance sheet. We knew we could raise some debt in the US bond markets, but we still needed about $500 million or more to finance the construction. Five percent of the revenue from that copper mine was gold and silver. I called Wheaton Precious Metals, one of the biggest companies in the world run by Randy Smallwood, a personal friend of mine. He lives here in Vancouver.

I said, “What would you pay me for that 5% component of my revenue?” He cut me a check for $750 million, which financed the construction of the cornerstone asset for HudBay. It produces 150,000 metric tons of copper a year, one of the lowest-cost operations in Latin America. It was because we could access that stream capital much more cost-effectively than we could have accessed equity in the capital markets.

You not only get royalties on producing mines but you go upstream or execute a royalty contract agreement on a chunk of land that no development or exploration is on. It’s a low-cost option.

It’s an infinite option. You can put it on the shelf and wait. That gives me the confidence to say, “We are going to be in business for decades because we have 191 royalties and those are going to provide infinite optionality for shareholders. They are going to support the business for decades.” Months into our existence, I introduced a dividend. We have a $0.25 under 1% yield on the stock because of the cashflow that we have accumulated as a result of the acquisitions we have done. That upward trajectory in cashflow gives me the confidence to say, “That dividend is a start. It’s a down payment to our shareholders.” That dividend will go up as our cashflow realizes that upward trajectory that I was talking about a bit earlier on.

ILB 22 | Gold Streaming
Gold Streaming: The bigger you are, the more liquid you are, the lower cost of capital, and the more competitive you are for a new world. The opportunities create a virtuous cycle.

Bringing it back to the ways to own gold. Here is a way to own gold that does not, you buy GLD, as you point out the ETF. There are expenses. They have to guard that. There’s security and operating. It ends up always being a little bit worse than owning physical gold because there are expenses and no revenues. As opposed to a stream, you are generating revenues. Those revenues are leveraged to the price of gold and not to the cost of production but also, it does not cost you money to own. Is it an investment if it costs you to own it? Net revenues are nothing. This is a preferable way to own in my book.

Can you talk a little bit about your growth goals for Gold Royalty? With your background and connections, you have a lot of royalties already building up. What are your goals for growth?

We have realized exponential growth because we started with about fourteen royalties in our IPO and development stage assets. It was a very successful IPO, having raised $90 million in the US and got a post-money valuation of $200 right out of the gate. We use that currency to roll up our competitors because there is a proliferation of these smaller cap companies and they are dead in the water.

They cannot raise capital. They are liquid. We have been picking them up. We took over Ely Gold, which brought us from 14 royalties to 105 royalties and some cashflow royalties into the portfolio. We took over Abitibi and Golden Valley Royalties, bringing another 85 royalties into the portfolio. It brought us to 191 royalties and gave us royalty in Canada’s biggest producing gold mine, Canadian Malartic.

That is going underground with a $1.6 billion investment. Our royalty goes up as they get into the deeper material. That is a big source of cashflow growth over the medium term. We are continuing to look at roll-ups. We launched a bid for another company called Elemental Royalties. They have nine royalties. One of the bigger ones is in Australia. Another tier-one jurisdiction. 75% of our existing business is concentrated in Quebec and Nevada, the 2 best mining jurisdictions in the world for gold miners, mineral potential, low regulatory risk and low political risk.

These are two of the best school districts in the world and we are heavily exposed there. Australia adds another leg to the stool. That is the advantage of bringing these companies together and it continues to allow us to achieve scale. It ultimately gets us close to $1 billion of market cap and scale. The bigger you are, the more liquid you are. The lower your cost of capital, the more competitive you are for new royalty opportunities. It creates a virtuous cycle.

For investors that may want to look more into this, you are publicly traded. Which exchange? What is the ticker?

We are on the NYC GRYTY. If you like to learn more about the company, the website is Very easy to remember.

The final question is you made a pretty bold statement and have given your support for it but you think gold is going to be $3,000 an ounce. Can you give us the real succinct reasons why you think gold is on its way to that price?

We have not seen inflation like this since the 1970s. That was when gold started to run. Do not get worried about interest rates going up on a nominal basis. When Jerome Powell says, “I’m going to tighten interest rates by a quarter-point here and there.” It does not matter because inflation has been on leash because of the accesses that have been introduced into the system.

We have increased the money supply over the last dozen years. We are going to see inflation continue to go up far above the nominal increases in interest rates. That means real interest rates will be going deeper into negative territory. Gold will protect your capital as your savings accounts get eaten away at a rate of double-digit percentage every year.

Thank you so much for joining us on the show. It was super interesting. It has been a pleasure talking with you. For our readers out there, go check out Gold Royalty.

Thanks for having me on.

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About David Garofalo

David has 30 years of experience in the creation and growth of over 15 multi-billion dollar sustainable mining businesses across multiple continents, and has led the largest merger in gold mining history valued at $32 billion dollars. Now, David serves as Chief Executive Officer, President and Chairman of the board of directors of the Gold Royalty Corp. David has worked in various leadership capacities in the natural resources sector over the last 30 years. He served most recently as President and Chief Executive Officer of Goldcorp Inc. until its sale to Newmont Corporation in April 2019.

Prior to joining Goldcorp, he served as President, Chief Executive Officer and a director of Hudbay Minerals Inc. from 2010 to 2015, where he presided over that company’s emergence as a leading metals producer. Previous to this, he held various senior executive positions with mining companies, including Senior Vice President, Finance and Chief Financial Officer of Agnico-Eagle Limited from 1998 to 2010 and as treasurer and other various finance roles with Inmet Mining Corporation from 1990 to 1998.


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