Gold - Why, How, and Now? - With Randy Smallwood, CEO of Wheaton Precious Metals
Randy Smallwood’s career began down the computer science route with the technology’s novelty drawing him in. Shortly after, he realised that this path was not correctly suited to him and after a few years he contently found himself in the world of geological engineering where his passion flourished through his involvement in the in-the-field elements of this work.
He progressed in this area, becoming a mine manager, further climbing the ranks of the gold mining industry, to currently being CEO of Wheaton Precious Metals (WPM), and Chair of the World Gold Council (WGC). In this conversation, he shares a range of useful insights on the gold market, WPM's streaming model and ESG considerations.
Gold Prices - Supply Side
Gold prices have increased by approximately 400% since 2000, as shown here. This solidifies the information of the great upward attraction to gold as a currency. When he was running his mine, ‘Golden Bear Mine’ gold prices were around $300 an ounce, showing the incredible value for such a small amount of a mineral
In the conversation, it is shown that gold rises at an average of 2% a year, signalling the constraint in the availability and discovery of gold over time. Randy, being a member of the World Gold Council (WGC), strongly believes in their desire to help digitalise gold and make it a more liquid, easier-to use currency.
"The beauty of gold is that it's circular. None of it ever gets wasted. Obviously, with such a focus on ESG and on sustainability, one of the beautiful aspects of gold is that it is truly, in the phrase in ESG circles, is circular, in the sense that none of it ever gets wasted."
One crucial part of the discussion was directed towards the immense imbalance in the supply and demand of gold. BullionByPost published that there are around 197,000 tonnes of gold that ‘has currently been mined’, where there are also an estimated 57,000 tonnes below ground.
The issue with the supply of gold as noted is the ever-increasing lack of discovery of new gold due to the scarceness of the resource as well as permits, regulations and time taken to open new mines. However, as mentioned, Smallwood puts across the point that gold is not a wasteful product. It remains in circulation and is ‘circular’ in ESG circles because of its recyclability and how it is reused (due to the precious value it is assigned by us as a collective).
Gold Prices - Demand Side
When the conversation shifted onto the demand side, Smallwood drew the example of the US dollar as a neutral and ‘apolitical’ currency (until after Russia invaded Ukraine, when the US closed off Russia’s access to the SWIFT system, seen by some as 'weaponising' the dollar). The point of this was that in theory, no currency is completely impartial, apart from gold. Indeed, within the last year, gold purchases by central banks hit the highest level on record.
In theory, he also suggested that the spending of gold should be a simple task and could work alongside cash and card payments with a system capable of doing so. In Smallwood’s words, they are ‘expanding the way that you can own gold’, supported by blockchain-powered tokenisation.
Amid continued rising inflation and geopolitical tension, Smallwood explained how the World Gold Council is looking at creating a 'gold-standard' of tokenisation, with every unit linked to physical gold.
The idea is a nod to the past, when central bank currencies were pegged to gold prices, evolved into a 21st century decentralised and democratised model, powered by blockchain and the internet. He explained how the WGC is working with central banks and bullion exchanges to digitalise gold ownership, with instant exchange & settlement.
"What we're talking about now is a digital token, that is backed by gold, that will fit onto everyone's digital wallet, so that you can get to the point where you have confidence and accessibility to gold on a digitalized basis, and you have confidence that that token is backed by hard gold."
The Precious Metals Streaming Model
The conversation was focused on Wheaton Precious Metal's business model of streaming. Streaming occurs when companies like WPM pay traditional mining firms upfront to fund a project, in exchange for a fixed percentage of future production of silver and/or gold from the mine. Often, the mine will be primarily focused on the extraction of more abundant metals, such as copper, with silver/gold also being present in the polymetallic ore body.
The precious metals will then be delivered to the streaming firm once extracted, 'repaying' the loan. The precious metals streamer will then sell these metals on the market, using the proceeds to either invest in a new streaming project, or to pay dividends to shareholders (as well as meeting other business costs).
Smallwood explains that doing this reduces the risk of ‘cost surprises’, which could be operating or capital costs that exceed expectations, leading to lower returns than forecast. Through streaming, capital costs are defined and established early, supported by the streaming firm's technical & financial due diligence capabilities.
"If you're investing into mining companies, most of the failures relate to cost surprises, so to speak. Either operating costs are higher than expected, or capital costs are higher than expected, and the asset is just not as profitable as it was originally forecast. With a streaming company, we take that risk out. Our capital costs are defined in the original contract up front."
For instance, WPM as a company receives 8% of all gold production from Lumina's Cangrejos gold/copper mine in Ecuador. In exchange, WPM gave an upfront payment of $300m to fund the project.
It can be a very successful business model and has the potential to be 'win-win' for both parties; the mining firm gains the required capital for their project and the streaming company receives a long term cashflow in the form of precious metals rights (although like fiat currencies, precious metal prices will change in line with international commodity market dynamics).
Sustainability & Improving the Industry
Sustainability is a key goal which is paramount in most companies’ strategies during our strive to be a greener world. Randy conceeded that mining is often not viewed as a sustainable practice, due to the highly visible and widely covered environmental damage that it creates. With mines often in emerging economies, it is inevitable that GDP per capita will sometimes be prioritised over emission reduction targets.
Although streaming firms don't operate the mines, their role in funding projects means their ESG responsibilities are equal to (if not greater) than traditional mining companies. In defence of their environmental standards, Smallwood mentioned that they are co-funding programs which help the partners ‘deliver sustainable benefits to their communities’.
"I don't think there's a better example of wealth redistribution than the gold mining industry...the benefits [from mining] that come into these communities is substantial, in terms of improving of infrastructure. They just deliver good strong benefits all the way through, whether it's healthcare, education systems or power supplies".
He goes on to elaborate that the World Gold Council's responsible mining principles, explaining how these practices are evolving (which is often unnoticed due to negative press surrounding unregulated artisan mines, which have no link to either WPM or the WGC). Smallwood also puts across his view that change is best created from within the mining and commodity industry, and he called for young people to join the sector to help drive positive change.
"The mining industry does have a challenging reputation, in terms of some of the scars that we leave on this planet. But be part of the change. Society needs these resources. Society needs these minerals!"
Overall, Smallwood puts across a detailed summary of the precious metals market, and a range of exciting ways that the industry is innovating and pursing better ESG standards. He explains why it is an incredibly important material, with most people are aware of its value, but - understandably - not completely aware of supply-side dynamics.
For investors, Smallwood suggests that gold should be the foundation of financial portfolios, often immune from both inflationary and geopolitical risk, as well as a commodity that may be able to capitalise on the benefits of blockchain and tokenisation (where cryptocurrencies have arguably failed).
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In this conversation, Randy Smallwood shares his analysis on the world of gold, including perspectives on supply/demand, lessons from history, current central bank actions and why he recently observed that “gold is in a perfect position right now”.
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