“The impediment to action advances action. What stands in the way becomes the way.”
– Marcus Aurelius, Meditations.
The power of optionality in investing
Optionality is a powerful force in the world of investments, as it provides the capacity to visualize numerous potential outcomes and pathways. It embodies life in many ways – where obstacles can become opportunities and hard work can breed luck.
Pierre Lassonde and Seymour Schulich: The unlikely duo who changed the mining industry
Such is the story of Pierre Lassonde and Seymour Schulich, two intrepid explorers who charted a course to riches beyond their wildest dreams.
In 1985, Pierre Lassonde, a young French-Canadian, found himself in Nevada, scribbling away at his annual investment letter to shareholders of his small gold exploration outfit – Franco-Nevada. He remained undaunted despite countless failed drilling prospects, convinced there must be a better way to uncover gold deposits. Seymour Schulich, his partner and a man with a history in the oil and gas business, quickly reminded him of the energy industry’s reliance on royalties, whereby landowners received a cut of the profits generated by the operator.
Intrigued by the prospect of generating a steady income from royalties, Pierre and Seymour set their sights on acquiring one. But the gold mining business was a different beast altogether, and royalties were a rare commodity. Undeterred, they persisted in their search and soon stumbled (manifested?) upon an ad in the Reno newspaper for a gold royalty. Perhaps the down oil and commodity market of the late 1980s led the Houston owner to put the royalty up for sale. In any case, Pierre and Seymour seized the opportunity and emptied their business bank account of $2 million, nearly all they had.
The Goldstrike mine royalty: A $2 million investment that turned into a billion-dollar windfall
Their investment bought them a 4% royalty on a 3400-acre land package in Nevada. Within a year, the mine, aptly named “Goldstrike,” underlying the royalty, was purchased by the mining giant Barrick for a whopping $62 million. And as if by some divine providence, the company made a significant discovery on the land within the first three months of the purchase. Over the next decade, the mine produced 40 million ounces of gold. Then, in 1989, an additional discovery increased the reserves from 600,000 ounces to over 20 million, making it one of the world’s largest gold mines. Today, over 30 years later, the Goldstrike mine royalty still generates over $20 million annually. That initial $2 million investment alone has earned over a billion dollars in revenue.
But Pierre’s success did not end there. He went on to discover two more billion-dollar royalties and consistently espoused the value of optionality in ownership of mineral royalties. In the early 2000s, after selling his company to Newmont Mining for a cool $3 billion, he bought back the royalties from Newmont in 2007 for $1.2 billion – the largest mining IPO in North America and the birth of the current Franco-Nevada.
The Franco-Nevada story: From small mining outfit to global royalty giant
Today, Franco-Nevada boasts a market capitalization of nearly $30 billion, with royalties covering more than 400 locations across the globe with exposure to gold, copper, energy, iron ore, and other commodities.
The future of Franco-Nevada: A company that is well-positioned to weather the cyclical nature of the mining industry
Based in Toronto, the company generates annual revenues of over $1 billion with a lean workforce of just 40 employees. With over a billion in cash and no debt, the company can take advantage of the cyclical nature of the mining business.
The lessons of Pierre Lassonde: How to build a successful business based on optionality
Even though Pierre Lassonde could barely speak English when he got his MBA at the University of Utah in 1971, he claims it was one of his best decisions. Franco-Nevada‘s business model reflects his classroom lessons and early business career: Invest in royalties with high margins and low overhead.
His success is a testament to the power of optionality and the rewards of hard work and persistence. Today, he and his long-time partner, Seymour Schulich, are leading Canadian philanthropists.
Commodities in a portfolio can act as a hedge against currency devaluation, i.e., inflation while supplying essential commodities for eight billion people and supporting the EV revolution’s mineral demands.
With a possible shallow recession, the economy will likely slow in summer/fall. Debt ceiling debate crescendo likely in summer, uncertainty dragging on markets. Once lifted, the market looks ahead to 2024 with optimism. US firms with approximately 40% of revenue from overseas continue to grow and reward patient shareholders. China’s post-COVID opening helps the global economy.
We wish you all a warm spring outdoors after a powder-filled winter!
Peter and Barb
Read the inaugural BlueBird Advisory Lookout Q1 2022 —“There are decades where nothing happens, and there are weeks where decades happen”
This material is for educational and informational purposes only. It is not investment, legal, or tax advice. Do not implement a new trading strategy without consulting your financial professional. All investments involve risk, including loss of principal. Past performance of any security or strategy is no indication of future results or success.
Commodities and commodities futures trading involve substantial risk and are not suitable for all investors. Consult your financial professional before investing in commodities. The opinions, forecasts, and views expressed here are those of Peter Ruh/BlueBird Advisory and do not necessarily represent those of RFG Advisory, its employees, or its clients.
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