Global Mining Symposium: Garofalo on Gold Royalty’s role in reversing the reserve decline

The precious metals-focused royalty and streaming business model continues to unlock value through win-win deals for exploration and development, Gold Royalty (NYSE-AM: GROY) CEO David Garofalo told The Northern Miner’s recent Global Mining Symposium.

The prominent mining executive has made the transition to the royalty and streaming business. Garofalo is perhaps best remembered for his role as CEO of Goldcorp before its US$10 billion merger with what is the largest gold producer today, Newmont (TSX: NGT; NYSE: NEM), in 2019.

He says a 40% drop in global gold reserves over the past seven years has caused a proliferation of metals streaming and royalty companies fiercely competing behind the scenes to meet the industry’s “existential need to reinvest” in exploration and development projects. This comes at a time capital is most critical to build the industry’s next generation of cornerstone mines.

Garofalo believes the world has seen peak gold production, and the industry is now in steady structural decline.

“I don’t think that trajectory gets reversed anytime soon given the long lead time from discovery to production,” he said.

“I’m excited to see the juniors being able to raise money again. Some of the better juniors can raise capital, but we aren’t going to see the fruits of their efforts for many years to come. It’s vital for the industry for them to be successful.”

Garofalo took up the reins at the recently-gone-public Gold Royalty in August last year. The company’s parent, GoldMining (TSX: GOLD; NYSE: GLDG), opted to spin out royalties on a selection of its most advanced assets into a new royalty and streaming vehicle to daylight value by writing royalties on each of the underlying assets.

GoldMining acts as a gold project bank, buying assets on the cheap at the bottom of the cycle. Gold Royalty gives GoldMining cash to invest back into the more advanced assets in the stable in return for the royalties.

“I saw a lot of potential for outside capital to be deployed into these assets. And as that happens, they would get re-rated within the GoldMining portfolio and, by extension, for Gold Royalty,” said Garofalo.

“It’s timely now because the industry is going to have to refine their skills, exploration and mine development, which capacities have been largely underutilised over the last six or seven years. The result of that has been this downward trend in reserves.”

Garofalo took Gold Royalty public in March, raising US$90 million, and in doing so, resulted in a post-money valuation of about US$200 million.

Not only has the company collected 18 net smelter return royalties ranging from 0.5% to 2.0% covering 12 projects located in the Americas, but Garofalo has also gathered a “fairly impressive” board and management with collectively over 250 years of operational experience.

The board includes Garofalo with more than 30 years of experience; his successor at Hudbay Minerals (TSX: HBM; NYSE HBM), Alan Hair, bringing about 35 years of experience to the table; and Ian Telfer as chair who helped pioneer the streaming and royalty business.

The business model started with the creation of the world’s largest streaming company today, Silver Wheaton (TSX: WPM; NYSE: WPM; LSE: WPM), which was spun out of Wheaton River Minerals in 2004 in the wake of a hostile US$2.7 billion takeover bid by U.S. miner Coeur d’Alene Mines Corp. Telfer was at the helm of Wheaton River.

Wheaton was spun out initially with royalties on Goldcorp’s portfolio.

“We’re doing exactly the same thing. We were spun out of GoldMining with collectively 26 million oz. of gold resources and more than 31 million oz. gold-equivalent, when you add the significant copper by-product,” he says.

“We have this foundational element of resources to start us off. And now, with the US$90 million on our balance sheet, we have quite an amount of ammunition to go start to diversify our portfolio on the royalty side.”

Garofalo also serves as the chairman and CEO of the Marshall Precious Metals Fund, collaborating with China-based Zhaojin Mining. Garofalo set up the business at the request of Zhaojin, which capitalised it, to create an incubator fund to invest in gold juniors.

Echoing his strategy from the Goldcorp days, Garofalo said he had “always been a big proponent of investing in the juniors and setting up that incubation model.”

“I think [these two vehicles are] timely, given we see a re-ignition of gold exploration over the last year or so. And it’s much needed in the sector,” he said.

The Northern Miner recently reported Wheaton Precious Metals’ CEO, Randy Smallwood, saying the deal landscape had never looked better, a sentiment Garofalo shares strongly.

“I couldn’t agree more with Randy, which is why I’m repositioning myself with royalty companies at this stage in my career,” said Garofalo.

“Given the existential need to invest in exploration, we think there’s going to be a scramble for assets and capital to advance those assets.”

When Garofalo was running Hudbay and assessing finance options for the US$2 billion Constancia copper mine build in Peru, management had to weigh innovative financing avenues to foot such a large construction bill at a minimum dilution. Again, streaming helped ease the burden.

“That involved picking up the phone and calling Randy. We raised three-quarters of a billion dollars towards building that project. That was a win-win. It was a win for us; it was a win for him because he got that stream re-rated two times, and we got that mine built. So, it’s very important to be in a position to provide that capital,” said Garofalo.

Garofalo defined the value opportunity of streaming and royalties as the ability to capitalise on the arbitrage top-line exposure through royalty companies that provide leverage to the gold price and the operational success of its partners offer.

In the wide-ranging interview, Garofalo also shared his views on several other hot topics, from why the gold price has not yet topped US$5,000 per oz. to cryptocurrency’s impact on gold investment, and how ESG investment principles have generally contributed to higher costs and delayed exploration and project development timelines.

In terms of the gold sector’s capacity for more blockbuster deals such as Randgold Resources and Barrick Gold’s US$18.3 billion tie-up in 2018, Garofalo said the seniors were “pretty much done for now”. “I’d say there are lots of scope [for M&A] at the mid-tier level. There are too many of them. And scale is necessary; there’s scope for quite a bit more [M&A for mid-tiers].

“If you want to attract generalist investors, you need scale. I think there’s lots of pent-up M&A that is likely to come out in the coming months,” he said. “In royalties, there has been a proliferation over the last couple of years. There’s going to be a reckoning there.”

Garofalo has worked for thirty years in the mining industry and previously served as the president and CEO of Goldcorp between 2016 and 2019 until its merger with Newmont Mining.

Prior to his stint at Goldcorp, Garofalo was president and CEO of Hudbay Minerals (2010-1015) and before that served as senior vice president finance and CFO of Agnico Eagle Mines (TSX: AEM; NYSE: AEM) (1998-2010).