“The impediment to action advances action. What stands in the way becomes the way.” – Marcus Aurelius, Meditations.
Optionality
is a powerful force in the world of investments, as it provides the capacity to visualize numerous potential outcomes and pathways.
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, was quick to remind 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.
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.
And 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.
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.
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.
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 crucial commodities for eight billion people and supporting the EV revolution’s mineral demands.
