How has 2020 been for Franco-Nevada and what are the impacts that covid-19 has had for you?
Franco-Nevada has performed well so far in 2020. Though you almost feel guilty referring to positive company performance at a time when we see the social and economic stress all around us. There was a great deal of uncertainty in Q2. 15 of the 56 operating mines in our royalty and stream portfolio had operations disrupted due to COVID-19, and we revoked our revenue guidance for the year. By the start of Q3, all or nearly all, of those operations were ramping back up to full capacity. In the background to this was a rising gold price, as investors look to gold as a safe-haven investment in times of trouble. So now, unit production is back on track, and precious metal prices are up. That is the external environment for us.
Internally we have followed the advice of health agencies. Our staff are working from home, and business travel has been put on hold. For the first time since 2008, we did not gather our staff in Toronto in May for the Franco-Nevada AGM. Some staff have returned to their offices a few days per week on a rotating basis, but we are all ready to continue working from home indefinitely.
Are there any impacts that you see lasting through to 2021 – for the business or the industry overall?
Don’t expect any real change from the current state until we have a vaccine for COVID-19 widely available to the public. We can expect the current circumstances to roll forward 6-12 months. I have noted that the US has 8 vaccines in Stage 3 trials, so I’m feeling confident in a 6-12-month timeline right now. We will not get back to our pre-COVID-19 routine until people feel safe, and that requires ready access to a vaccine or treatment. In the interim, we will see minimal travel, cautious re-openings following lockdowns, and further localized lockdowns whenever a cluster of cases pops up. The longer-term impacts in 2021 and beyond are unemployment and government debt/deficits. Forget about a V-shaped recovery. Expect it to take at least 5 years to get back to pre-COVID-19 employment levels. That is the experience after any recession. Expecting this to be different is just wishful thinking. Hope for it, but don’t plan for it.
“Expect current trends to continue into 2021. Strong physical demand will keep gold and silver prices at record levels. Capital is available for good projects and the government is encouraging investment”
Here in Western Australia, the mining industry has performed well overall. Assisted by strong commodity prices and overall demand, it has kept the local economy running stronger than most. We managed to keep operating, without putting our employees and communities at risk.
The real surprise so far has been twofold. First, it is the strong demand for commodities, and in particular precious metals, at a time of general economic weakness. Second, it is the availability of capital and the enthusiasm of investors at a time of economic weakness and uncertainty.
What sort of projects have you been investing in? What types have been of particular interest to you over the past year?
Franco-Nevada is still focused on precious metals, as always. The strong gold price and the availability of capital has pushed many projects forward to the next stage of development. There have been numerous investment opportunities related to project finance. The surprise is the amount of capital available from a wide variety of sources. Competition for project financing has been as strong as ever throughout 2020. Capital providers have not been sidelined due to economic uncertainty, as some might have expected. This is great news for project developers. With high gold prices and plenty of available capital, expect a constant flow of project development news.
It has been an interesting year for the precious metals markets. What sort of trends are you predicting regarding pricing, supply & demand as we move towards 2021?
I can offer an Australian perspective on this. Physical demand for gold and silver is strong. Gold companies with quality projects are well supported in the equity markets. Exploration spending is increasing, backed by successes like De Grey Mining’s Hemi discovery at its Mallina Gold Project, or Rio Tinto’s Winu discovery.
Australia announced a recent tax change in its federal budget, which will benefit explorers with higher available R&D tax credits. An even bigger item in the federal budget was the spur to private investment, with the immediate write-off of capital expenditures for companies. The government is encouraging companies to invest, rather than rely on a few big government infrastructure projects to spur economic growth and employment. The rationale is that companies will act fast to invest and move projects forward, while the government takes longer to get large public projects moving.
Expect current trends to continue into 2021. Strong physical demand will keep gold and silver prices at record levels. Capital is available for good projects and the government is encouraging investment, so we can expect increased investment and production in both Australia and elsewhere. Outside of the precious metals space, capital for carbon emitting products like coal is being cut off by wary investors, and shifting to projects perceived as greener, like battery metals. This is happening outside, or regardless of any government mandate. It is tied to the growing importance of ESG factors in investment decisions, at both the corporate level and the investment funds level.
One note of caution is in looking at standard mining practice in response to commodity price changes. As prices rise, cut-off grades are lowered, mine plans are revised, more marginal ore is mined and processed, and costs then increase in line with the increased prices. Investors expecting higher prices to generate higher profits end up disappointed. There is a lag time in the adjustment. As long as prices are on an uptrend, then everyone is happy. Once prices flatten out for a period and costs catch up, investor sentiment changes.