#111: Royalty Investing; Gold as a Hedge Against Inflation
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I'm very pleased to have David Garofalo. Mr. Garofalo has served as Chief Executive Officer, President, and Chairman of the board of directors of the Company since August 2020.
He has worked in various leadership capacities in the natural resources sector over the last 30 years. Prior to joining the Company, he served as President, Chief Executive Officer, and director of Goldcorp Inc., a gold production company headquartered in Vancouver, until its sale to Newmont Corporation in April 2019. Prior to that, he served as President, Chief Executive Officer, and director of Hudbay Minerals Inc. from 2010 to 2015, where he presided over that company’s emergence as a leading metals producer. Previously, he held various senior executive positions with mining companies, including Senior Vice President, Finance and Chief Financial Officer, and a director of Agnico-Eagle Limited from 1998 to 2010, and as treasurer and other various finance roles with Inmet Mining Corporation from 1990 to 1998. He was named Mining Person of the Year by The Northern Miner in 2012 and Canada’s Chief Financial Officer of the Year by Financial Executives International Canada in 2009.
In this episode, we’re discussing…
[1:30] What is Royalty Corp?
[3:33] Mining industry and all the entire system to take advantage of and invest
[5:06] What does inflation mean for gold?
[8:18] Why gold protects your savings in this economic environment
[9:33] What’s separate the top royalty companies like this one from all the others that we see up
[12:02] The reason they have 90% of their royalties in gold, 3% in silver, and the balance mostly in copper
[13:10] Their recent acquisitions, a big purchase, and how their portfolio is constantly growing
[15:05] What does it mean to have a royalty
[18:49] Gold mining and the environmental factors
[20:24] David’s advice would give to young and old investors who might be getting into mining and gold for the first time
[22:39] Why they’re exclusively in the New York Stock Exchange
Resources from David
+ Read the transcript
Mike Stohler
What if you could be doing something smarter with your money that creates income. Now, if you're wanting to get ahead financially, and enjoy greater freedom of choice, if you want a comfortable retirement, and you know, you'll have more choices, if you can do more with your money. Now, if you've wondered who else is creating ways to make their money work for them, and you want actionable ideas, with honest pros and cons, and no fluff. Welcome to the richer geek podcast. We're here helping people find creative ways to build wealth and financial freedom. I'm Mike Stohler. And in this podcast, you'll hear from others who are already doing these things, and learn how you can too.
All right, everybody, welcome back to another episode of the richer geek Podcast. I'm very pleased to have David Garofalo. He is the chief executive officer, President, Chairman and director of the board with gold royalty Corp. He was mine. He was named the mining Person of the Year. And Canada's Chief Financial Officer of the Year by financial executives, international Canada. Wow. Did I miss anything there, David?
David Garofalo
Yeah, that's playing. Thanks very much for the introduction.
Mike Stohler
You're welcome. You know, we love talking about mining, talking about gold is just so everyone knows gold. Everyone knows minerals. But not a lot of people know what it takes, and the different ways to invest and all the different things but mining, now, you work for royalty. Investing type of a corporation, you know, what is gold royalty Corp?
David Garofalo
Well, what we do is provide capital to the explorers, the mind developers, the operators that are looking to either build, explore, or develop and expand existing operating minds. And we provide that capital expecting to get a return in the form of a royalty on the mind. And over the course of the last year since our IPO on the NYC American, we've invested in 192 Different royalties across the Americas. And we have the highest compounded average growth rate and royalty revenue in the entire mining industry at about 60% per year. And that's an interesting model. Because what it does is provides you top line exposure to a mind in other words, you get a percentage of the revenue. So as the gold price goes up, our royalty revenue goes up as the operating partner achieved exploration success, so say they grow their deposit geologically through their exploration efforts, we get a royalty on that upside as well. But what we protect our shareholders from is cost inflation, because again, we only get a fixed percentage of the top line. So doesn't matter what happens the operating costs and capital costs of the mine. And that's particularly relevant in this environment, where we're seeing massive cost inflation in the general economy. And money companies aren't immune from that. So if you believe in gold as an asset class, my argument is the best place to put your money to work is in the royalty business because it provides that optimum leverage to the gold price and expiration, while protecting you from cost inflation.
Mike Stohler So it's not like no difference between I'm going to go buy some gold, throw it in a safe. And I'm at the whim of the inflationary prices in the market and all that if you invest in the royalties, you're kind of getting every aspect of the mining industry. And we've had several mining industry professionals on our podcast prior and so you're kind of taking advantage of that entire system.
David Garofalo
Yeah, look, I love physical I own physical gold, I think everybody should have a percentage of their portfolio in that in particularly in this insidious inflationary environment where your purchasing power gets eroded every year when you keep your money sitting in a savings account, right or checking account. But but, you know, when you own physical gold that doesn't grow, you know, it's it can grow in value as the gold price goes up. And that's certainly why you'd buy gold is, you know, in an environment where money is being printed, gold is the one asset that can't or one currency can't be printed. So you're protected in that way. It's very scarce. But what the royalty companies provide you is expiration upside so you get that exposure to physical gold in the ground that's going to be mined. But again, if the operators that own the mines are successful in their exploration efforts, your royalty is going to expand as the deposit expands so you get the exploration upside so You know, running royalty copies almost like only physical gold with expiration upside.
Mike Stohler
Very interesting now, as the world is looking at these record breaking inflation numbers, and I mean, what does that mean? We talked, you talked a little bit about what it means, you know, with some inflation, but where's it going to go next? I mean, we're not seeing end really, to this inflation anytime soon. What does that mean for gold?
David Garofalo
No, it's an excellent question. And, you know, the last time we had an inflationary cycle of this magnitude, it was in the 70s, and 80s. And I'm old enough to remember it, you know, I, I've seen all the signals that I saw back then, you know, fuel shortages, high gas prices, lineups at gas stations, empty grocery shelves, war, you know, we have the Vietnam War, as gold got decoupled, or the US dollar got decoupled from gold, the gold standard, you know, they were basically printing money to finance the Vietnam War. Now, we're printing money to finance the collapse of the financial system. And, and there's wars, I mean, Russia, Ukraine, and we're helping to finance what's happening in Ukraine to protect themselves, which is the right thing to do morally. But what that means is we have to print money to finance that war. So all of the things that we saw back in the 70s, all those flags, we're seeing them again, and I would argue that, you know, yeah, headline inflation numbers are approaching seven, or seven and a half 8%. But the reality is, if you're buying food, buying fuel, or putting a roof over your head, it's double digits, it's not 70%. What they exclude from that basket is ridiculous. You know, epi baskets are meant to placate the masses without really telling you exactly what's happening in terms of cost pressures. In that type of environment. Gold, you know, reached all time highs back in the late 70s, early 80s, over $800 an ounce.
That was in 19 $80. You know, if you inflation adjust that to today, you're probably looking at $3,000 An ounce that will be the 2022 equivalent of what we saw in the last inflationary cycle. So there's a lot of upside from here. And you know, there's been a lot of excesses introducing the system over a long period of time, this money printing is not a recent phenomenon, it really goes back to even prior to the credit crisis, when central banks were coordinating their efforts to stave off financial ruins in the financial services sector, you know, bailing out Wall Street, as it were. And they did that by printing a lot of money lowering interest rates to effectively zero on a nominal basis on a real basis, given where inflation is, interest rates are deeply deeply into negative territory. And so even as they raise nominal rates today, it doesn't matter because inflation is accelerating. So real rates will continue to pledge deeper and deeper into negative territory, which means there's no opportunity cost of owning gold, you know, back in the day when gold was 250, an ounce in late 1990s. And treasuries, really seven or 8%. Why would you own gold yields nothing and you might as well own treasuries? Well, treasuries, today yield effectively zero in on a real basis minus 810 15%. When you consider the erosion, your purchasing power, so gold protects you, that protects your savings in that type of environment. So gold's got a lot of upside from here.
Mike Stohler
Yeah, so the raising interest rates won't diminish it at all.
David Garofalo
No, because it's nominal rates, you know, inflation is still going higher and higher. So it's exactly what happened in late 70s, Paul Volcker came in, you know, he was an inflation Hawk to run the Federal Reserve in late 70s. He started racking up nominal rates, it took them over 10 years to tame double digit inflation. And so again, you know, we're the horse is out of the barn, you know, raising nominal rates. Now, we won't get the impact of that on inflation for many years to come. And we're going to have to be much higher in our interest rates in order to really tame inflation. And I don't think the central banks really have the appetite to do that, because there's been so much debt strapped on by sovereign governments, that there's no fiscally responsible way for them to tax and repay that. The only way to for them to deal with that debt is to debase it. In other words, inflate it away, debase the currency make the debt worthless, and so they're going to continue to print so when they talk about tapering, what that means is they're going to slightly slow down the increase in money supply but make no mistake about it money supply is going to continue to accelerate.
Mike Stohler
I mean, it's you just don't think about things like that. You know, we just we listen to the news we you know, you don't really get the insider's viewpoint on these things. Now if you if you Google royalty, companies mining or oil companies, lots of stuff that comes up what separates the top royalty companies like you from all the all the others that we see up there.
David Garofalo
Well, look, I think there's a few things that distinguish our story. You know, one is the diversification of our portfolio we have 192 royalties, and 75% of them, by value and by volume are in the two best money jurisdictions in the world come back in Nevada, which are rated top in the world by the Fraser Institute, which is an economic think tank here in Canada, the race them based on mineral potential, low political risk, and low regulatory risk. These are jurisdictions that welcome mining. And that's so important. And obviously, we're in stable tier one jurisdictions. And so that's important. So it's a low risk proposition, but again, very diversified.
And within those 192 royalties, we have 28, that are either cash flowing currently, or in various stages of development construction, so we have a lot of embedded growth. And the beauty of those 192 royalties is they're bought and paid for, we don't have to put another dime into them, that growth is embedded. And so that goes right to the bottom line for shareholders, we run our business seven full time employees, we could run a business 10 times the size with those same seven full time employees. So that means any incremental royalties we added to the portfolio, go right to the bottom line. And our growth has been so significant, we were able to introduce a dividend 10 months after our IPO, we paid just under a 1% yield. And given that our revenue is growing at a rate of 60% per annum, the ability to increase that dividend over the next three to five years we think is very, very high.
Mike Stohler
Wow. I mean, that is amazing that you can do so much with the cost, you know got to be very low with that that few amount of employees. Now, are you 100% in gold, are you doing any of the other you have any percentages and some I call them the the green minerals that are so common and so popular now with, you know, lithium and copper and those types of things that are
David Garofalo
well we think investors value purity. You know, we have over 90% of our royalties in gold. We have probably another 3% and silver. And the balance is probably mostly in copper, which is great. I mean, copper is so important to our decarbonizing world, so much copper using electric vehicles, electric grids, and our need for copper as a society's insatiable. And so it's good to have some of that exposure. I think coppers got LEDs as well. But we'll stay focused on precious metal that purity tends to attract the best multiples. And so we'll be focused on gold as a result.
Mike Stohler
Yeah, it's funny, I found out that I have 150 pounds of copper and my Tesla vehicle. That's just
David Garofalo
what it would be in your old internal combustion engine. You know, it's much more copper intensive in electric vehicles, and it is in traditional vehicles.
Mike Stohler
Now, you guys just made a big purchase. Try to think of the name of it was a probably going to screw up the name or acquisition was abitibi.
David Garofalo
Yeah, so we actually made several acquisitions last year. So it goes back to our IPO in March of 2021. So a little over a year ago now, march 11 2021. We IPO with our initial royalty portfolio of 14 royalties, on the development stage assets of our former parent company coal mining, and I know you've interviewed Dallas, you're still the CEO gold mining all the time. And on the strength of that, on the IPO, we raised $90 million US on the NYC American under the stock trading symbol G ROI dry, and we achieved a post money valuation of $200 million on the IPO. We then use that currency to go and start to roll up with is a fragmented sector and has been a fragmented sector. We bought three of our peer companies first, Ely gold, which grew our royalty portfolio from 14 royalties to 105 royalties. And then we bought it through a three way merger, Golden Valley and additivity. And we grew our royalty portfolio from 105 to 192 royalties, and effectively quadrupled our market cap and increase your royalty portfolio 15 fold plus. And so we've had a very, very active year and most recently, we announced an acquisition proposal for another peer company elemental royalties, that owns royalties in Australia, among other jurisdictions, and that would complement the portfolio we have now. So the lots of scope for consolidation, we've grown very quickly, what's come out of that, you know, in addition of 192 royalties I was talking about within that we have a royalty now on Canada's biggest gold mine Canadian Malartic we have a royalty on Canada's second biggest gold mine cote gold in Ontario, and we have a royalty on the United States his biggest gold mine gold strike in Nevada. We own a royalty on the underground extension of what's been the most fun prolific open pit gold mined, ever found and operated by Beric and Newmont.
Mike Stohler
Wow. You know, for our listeners don't really know what, what does it mean to have a royalty.
David Garofalo
It gives you the privilege of getting a fixed percentage of the revenue from that mine. So typically it could be a half percent to 3% of the revenue, but it's just the top line. So as I said, as the gold price goes up, our revenue goes up. And and again, because we are only getting a percentage of the top line, there's no obligation for us to put any more capital in. We're not supposed to cost inflation. It's really the best of all worlds. As I said, it's almost like owning physical gold. But with the exploration upside that comes from drilling these deposits outgrowing them geologically.
Mike Stohler
Yeah, so you guys have done this massive gross growth in such a short time, what would you say is next for you guys? What do you see?
David Garofalo
Yeah, there's, there's lots of opportunity, you know, the industry is under invested in new mind development over the last six or seven years, and there's going to be a catch up. In that regard. That opens up opportunities for us to provide capital to the operators, explorers, the mind developers to help them finance their project construction. So there's going to be lots of opportunities for us to create new royalties. And to continue to grow our portfolio, we're, you know, you really should think of us as a special purpose bank focus exclusively on money. We put capital work in mining space. And the beauty of it is, you know, within our board management, we have over 40 years of mind development, operating experience, I have 32 years of building operating minds. And that's, that's indicative of what we have in our broader Board of Management, there's a lot of people like me have similar vintage, that gives us a clear idea of the underlying risks of the things that we're investing in and taking royalties back on. But also it gives us unmitigated access to anybody in the industry. You know, you and I were talking about this before we are recording this interview, how small the industry is, I know everybody, everybody knows me. And that's true of all of our board management, we can pick up the phone and talk to anybody in the industry. And that affords us opportunities before they're available to the rest of the marketplace, given the seniority of our team.
Mike Stohler
Now, I asked you about what the future holds? What could go wrong for gold royalty Corp in the coming years?
David Garofalo
Well, look, there's really no downside, because as you said, royalties we own, we, we've already paid for it, we own them, there's nothing but upside, and optionality and owning those royalties, you know, and if the market goes, goes haywire and gold goes down, we don't have to deploy capital, we can just wait and harvest the returns on the royalties we've already invested in. That's the beauty of the business. And if you look at Gold royalties performance and royalty companies performance during the ups and downs of the cycle, royalty companies, outperform the mining companies on a relative basis, up in the cycle down in the cycle, because of the low risk model that we have, because we did not expose the costs. And not only that, we have a lot more diversification in the mining company can have even the biggest mining companies in the world, which one of which I helped create Newmont to the biggest gold merger in the world in 2019 $32 billion merger, you know, they have a dozen mines within their portfolio, we have 192 You know, we can we can have an infinite number of royalties in our portfolio because it doesn't require active day to day management we're managing contracts is rather than rather than minds to really have unlimited scope to take on more and more royalties and more diversification, it really does provide investors much more diversity to the risk associated with mining.
Mike Stohler
Yeah, I think that's amazing, where you've taken this concept. So hey, look, we'll let everyone else deal with you know, employees, because that's kind of a big thing now, trying to get people to show up and wanting to work and dealing with the headaches and buying the machinery and you guys just handle contracts and and the paperwork side of it. I think it's really good. Do you see you know, there's big talk about environmental factors and and all this that type of thing, you know, with the environmental stuff, you see gold mining being affected by that at all.
David Garofalo
You know, I really optimistic about the mining industry is done to make its environmental footprint smaller in a couple of respects. One is we're seeing increasingly electrification of our money fleets. And so we're seeing much less carbon intensity in our minds. We're seeing much less water intensity or minds we're able to, for example, recycle water much more effectively, particularly when it comes to waste management than we have historically that the technology Advanced leaps and bounds. So that's, that's very, very exciting. But again, within the royalty model, if you're concerned about that kind of ESG risk, we have much more diversification. That being said, when we invest in a royalty, we ensure we do a lot of due diligence around the ESG practices of our operating partners. And we've turned down more royalties than we bought because of poor ESG. Practices.
Mike Stohler
Hmm, that's good. Very good to know. Cuz I know a lot of our listeners are, are interested in that type of a topic. Now, for all of our listeners out there that are thinking of K. You know, they've listened all these different types of mining and different goals and different things. What kind of advice would you give to young and old investors that might be getting into mining and gold for the first time?
David Garofalo
Well, look, I think what you want is the lowest risk way to play gold with the highest leverage, and I still think that's the royalty and streaming space. So when you're investing in a company like that you want one that has growth already embedded in their portfolio has trading liquidity, you want something that's relevant distributional investors, and if it's an illiquid stock, the trades by appointment, I would avoid it because they're like Roach motels, easy to again, get in hard to get out. We trade upwards of $5 million US per day on the NYC American so we're very, very liquid, anybody can play is full of small and large investors. And I think that's important, do they pay dividends because royalty copies are a collection of annuities? You know, we have annuities on mind. So you should participate in that annuity as an investor.
And that's why it was so important for us. So shortly or after IPO, to launch a dividend to signal to the market, we're serious about returning capital to shareholders, that tells you it's a real business that creates profits and not just a play on the gold price. And then you have to look at the management track record. Have they done this before? Do they understand the industry and that's why you know, I'm is proud of the people we brought on board as I am the assets, you know, we have collectively over 40 years of industry experience in our board and management. That's a lot of seniority. That's a lot of on the ground experience. Again, we have a clear idea of the underlying risks of the business, we have access, that's extremely important ensure that, you know the company is executing on a strategy.
Mike Stohler
Now on the New York Stock Exchange, you're listed under as groyne gr O Y Yeah. Where else if they're Canadians were can they find you on that exchange?
David Garofalo We're exclusively on the NYC America. Canadians can very readily buy US stocks I you know, I own a chunk of jewelry myself even though I'm based here in Vancouver. Easy to trade is the most liquid deepest capital markets in the world. That's why we're in the NYC and proud to be there and and also if you'd like to learn more from us or about us, come to our website, Gold royalty.com
Mike Stohler
Gold royalty.com And is there any other place that they can get ahold of you or find more information?
David Garofalo
Well, there are several dealers that actually have launched research coverage on us. BMO urine Canada, HC Wainwright Haywood, Laurentian bank, they all have buy recommendations on us with target prices well above where we're currently trading. So I would say please read that research if you're looking for some independent perspective on our business and our prospects.
Mike Stohler
Well, sir, I appreciate your time today. And listeners if you're interested, I think this is a very, very good way do your research, but this might be a very good way to get your toes wet into the mining business. Thank you, sir. I appreciate the time. Thanks for tuning in to the richer geek podcast, where we're helping others find creative ways to build wealth and financial freedom. For today's show notes, including all the links and resources from our show, and more information about our guests, visit us at www.thericjergeek.com/podcast. And don't forget to jump over to Apple podcasts, Google Play Stitcher, or wherever you get your podcasts and hit the subscribe button. Share with others who could benefit from listening and leave a rating and review to get the podcast in front of your eyes. I appreciate you and thanks for listening.
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ABOUT DAVID GAROFALO
Chief Executive Officer, President, Chairman, and Director.
Mr. Garofalo has served as Chief Executive Officer, President, and Chairman of the board of directors of the Company since August 2020. Mr. Garofalo has worked in various leadership capacities in the natural resources sector over the last 30 years. Prior to joining the Company, he served as President, Chief Executive Officer, and director of Goldcorp Inc., a gold production company headquartered in Vancouver, until its sale to Newmont Corporation in April 2019. Prior to that, he served as President, Chief Executive Officer, and director of Hudbay Minerals Inc. from 2010 to 2015, where he presided over that company’s emergence as a leading metals producer. Previously, he held various senior executive positions with mining companies, including Senior Vice President, Finance and Chief Financial Officer, and a director of Agnico-Eagle Limited from 1998 to 2010, and as treasurer and other various finance roles with Inmet Mining Corporation from 1990 to 1998. He was named Mining Person of the Year by The Northern Miner in 2012 and Canada’s Chief Financial Officer of the Year by Financial Executives International Canada in 2009. He holds a Bachelor of Commerce from the University of Toronto and is a Fellow of the Chartered Professional Accountants in Canada and a Certified Director of the Institute of Corporate Directors. He also serves on the board of directors of the Vancouver Board of Trade and the Vancouver Symphony Orchestra.