With the US Fed focused on fighting inflation, interest rates have consequently gone higher. What is the impact that you’ve seen on asset valuations so far?
I don’t think we’ve seen much impact on valuations, mainly because most of the assets we look at are gold, which are meant to be inflation-free return assets. So, we don’t change the discount rate used in valuation as interest rates go up and down in the same way that say, a real estate investor might do it. For quality gold projects, you might be using a mid-single digit rate of return for the valuation.
The other thing that’s changed, that we might see going forward, is the consensus long-term gold prices showing an actual uptrend, which is all very flat right now. But, if people believe that inflation and higher interest rates are going to persist, then that should factor into longer-term gold price predictions, which should then flow through to our valuations.
Are there impacts to the general economy that you’ve seen from this focus on inflation in the US that is trickling down?
Yeah, we’ve seen it. If you look at the headline inflation number, it’s not that scary. Depending on which country you’re in, you’re getting into maybe 5%, maybe pushing up to 10% inflation in a place like England. Nobody likes that. We’ve got to increase interest rates and cool things off. But when you look at individual prices, I don’t know of any individual price that’s changed in the 5% to 10% range. It’s either staying flat or it’s up 30%.
It’s not the same as inflation in the ’70s or ’80s where it was just across the board, this gradual grind that we would’ve all experienced. Here, it just seems really spotty. It’s still related to disruptions. There were a lot of supply and demand disruptions related to COVID. Now, a lot of supply and demand disruptions are related to the war in Ukraine and sanctions. The big scare is if China gets involved and gets some sort of secondary sanctions against them.
In Western Australia (WA), inflation is seen in labour costs and the mine development costs across the board. They are up 30% over the last couple of years over what people were initially budgeting for. It depends which side of the fence you’re on there. Obviously, if you’re working there, you like it. But if you’re an operating company, you’re shocked at how much your costs are going to be on a project. There’s some bad news coming through for investors, and it’s still trickling through, one by one, as these projects update their assumptions.
Can we get a little bit deeper into these other macro factors that are impacting the gold markets. Like you mentioned, the Ukraine invasion, the sanctions related to China, how has that impacted the markets overall?
Around a year ago, there was a shock and things froze temporarily, as everybody tried to sit down and assess how these matters impact us. A good example, there’s a project here in WA that went into administration called Wiluna Mining. It was in June or July last year, they had just done an upgrade to their processing plant, and they were going to be shipping off gold concentrates to a smelter.
And it turns out their smelter was in Russia, and they had shipped off their first concentrates around December or January. And then at the end of February, there’s the invasion. In March, sanctions start to hit. Next thing you know, it’s like, “Oh, what do we do with our concentrates?” Like I said, they went into administration a few months later, and talking to the administrator the last couple of months, they had loads of concentrates that sat there for six months. I don’t know where they ended up going. They’ve all been shipped now, I think. It was just all those little disruptions.
Looking at your role with Franco Nevada, what’s your general sentiment for gold moving forward?
It depends on when you ask. It really flip-flopped over the last few months. 12 months ago, when the invasion started, everything just froze temporarily. Then things took off again, projects are still going ahead, and the market was still kind of bullish, because the gold price went up a bit.
But then in the third or fourth quarter last year, a lot of bad news started flowing in, companies with cost overruns, etc. These are companies that had already just raised capital or raised equity in the share market three to six months earlier, when the gold price was up and things were a bit more bullish. And they were like, “Oh, we’re in trouble.” So we were at a point where we were inundated with people wanting to talk to us about financing or refinancing on projects to the point where we had to actually say, “Look, we can’t look at 40 things. We’ve got to pick a few to run with them.”
Then in the last four to six weeks, it flipped again. A few companies went back to the market, they did share issues at steep discounts. We’ve seen one a couple of days ago that was a 25% discount to the closing price the day before, but it was a large quantum of money. It was about US$80M that I wouldn’t have thought that they could raise in the market. But clearly, the appetite is there from equity investors in gold. It’s just a question of the price.
In terms of the investment focus for you and your team moving forward, what’s your focus for the coming year?
Look, it’s gold. It’s always gold for us, but we do have other commodities in our portfolio. It’s roughly 70% precious metals and 30% other commodities. Our other focus is really the energy transition and battery metals, which can be challenging.
Currently, it seems like every other company has a lithium project in Australia, that they’re now trying to advance. There’s plenty out there. I’m sure some of them are going to advance. But trying to predict which of these various projects are going to move forward in a significant way if the market cools off, is challenging.
The difference for us is when we get outside of the gold space, we look for more advanced projects, ones that are either in production or near production.
Regarding royalties and streaming, what trends are you seeing within the investment industry? Where is momentum building?
It’s hard to pick. The one trend that seems to really be persisting in a good way is deal flow and transactions. It’s becoming much more the norm to include royalties and streams as part of that process. I think we’ve shed the word “alternative”. That might be a bold thing to say, but we’ll see.
On the projects that we’re progressing in terms of making an investment, it’s very competitive. Any of the ones we like, there’s other royalty and streaming companies that like them too and the bidding is ferocious.
