Franco-Nevada CEO David Harquail on Investing in the Gold Space

As CEO of Franco-Nevada (TSX:FNV,NYSE:FNV), one of the largest gold royalty and streaming companies in the world, David Harquail certainly has some valuable insight into the gold space. At the recent Sprott-Stansberry Vancouver Natural Resource Symposium, he spoke about the gold price, Franco-Nevada’s strategy and gold investing in general.
Certainly, the gold price hasn’t inspired much confidence in precious metals investors lately. Harquail stated that while falling price charts are often said to look like a “vomiting camel,” currently the gold price chart looks more like a “slinky toy” — in other words, the metal has been hitting successively lower highs as it continues its downward trend. He quipped that when Goldman Sachs (NYSE:GS) says that gold is going lower, “it’s not a forecast — it’s a statement.”
Of course, Harquail does see value in investing in gold, and he offered up a few key points for investors looking at the space to keep in mind:

• Be a contrarian: Harquail started out by noting the importance of buying low and selling high, which is perhaps the most common and least-followed advice for many investors. He stressed that markets are always cyclical, and that it’s important for investors to protect themselves to both the downside and the upside. “There is no long-term [price] call,” he said.
• Producers can hold on longer than you think: Betting against the ingenuity of man to make metals more cheaply and efficiently is never a good plan, Harquail stated. In other words, if you’re waiting for low prices to force supply out of the market, you’ll probably be waiting longer than you think. Beyond gold, the current state of the iron ore market certainly gives weight to that statement.
• Be on the right side of the cost curve: That said, while producers may be able to hold on at lower metals prices, they may not be able to keep making money. “The majority of deposits out there are not world class,” Harquail said, noting that it’s important to be on the right side of the cost curve when it comes to projects.
• Know what you don’t know about orebodies: Harquail asked the audience to imagine the main hall at the conference as an underground orebody. Then he asked them to imagine a drill hole just 2 inches wide coming through the center as a means for defining the mineralization. Of course, as Harquail also pointed out, orebodies aren’t homogenous. “What other industry knows so little about what’s going through its factories or plants?” he asked. Of course, miners can drill more holes, but that gets exponentially expensive, which can upset shareholders. Thus, Harquail suggested that many mining executives must simply “be optimistic.”
• Writedowns: As a result of the previous point, Harquail pointed out what many investors and miners already know — mining is a risky business. He noted that writedowns are common, and can be driven by any number of issues, including mining failures, disappointing ore grades or downward price cycles.

Harquail’s words might make mining seem like a scary place, and certainly, there’s a lot more to consider when investing in gold mining companies. Still, he made some valuable points for those looking to do due diligence on companies in the space, and it was interesting to hear the views of a seasoned industry executive.
 
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article. 
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