Grant’s Current Yield Podcast
Episode Summary: "A Compelling Model"
Date: July 3, 2024
Host: Jim Grant
Co-host: Evan Lorenz
Guest: Shaun Usmar, CEO of Triple Flag Precious Metals
Episode Overview
This episode dives deep into the dynamics and appeal of royalty and streaming models in precious metals investment, amidst growing skepticism about fiat currency and mounting financial and political uncertainties. Jim Grant and Evan Lorenz, with their trademark wit and historical lens, are joined by Triple Flag CEO Shaun Usmar for a rich discussion on the advantages, risks, and contemporary relevance of gold-centric investment, as well as the discipline necessary for navigating today’s evolving credit landscape and resource politics.
Key Discussion Points & Insights
1. Current Credit Market Paradox
- Context: Despite tight spreads in high-yield credit, a surprising number of private credit issuers are under covenant relief, signaling hidden fragilities.
- Evan Lorenz [00:46]: “On the one hand, we have some of the tightest spreads… which is usually a sign things are going swimmingly well. And on the other, a report… saying nearly 10% of rated private credit issuers are under covenant relief... Just over a third of them can’t even cover their interest expense out of EBITDA… essentially insolvent entities.”
- Discussion of aggressive credit practices (“dividend recaps”) and the appeal of asset classes not encumbered by credit risk—cue for gold.
2. Introduction to Triple Flag & Royalty/Streaming Model
- Shaun Usmar [02:51]: Explains origin and focus of Triple Flag—diversified exposure to gold and silver streams, offering patient structured capital to miners, and delivering high, growing cash flows for investors.
- “In eight years… we’ve had the highest growth rate in the sector in actual ounces—20% CAGR—and a 34% growth in cash flow.”
- Model Mechanics: Royalties and streams give rights to top-line revenue or physical deliveries without operational (cost) exposure, participating in upside from expanded mine life and exploration without downside from cost increases.
- Usmar [04:52]: “You provide an upfront payment… for a royalty or stream, get a percentage of ongoing top-line revenue or physical product over the life of mine… When costs go up, that’s borne by the operator, not by the streamer.”
3. Historical Precedent & Risk Realities
- Anecdote: Comparison to the iconic Franco-Nevada deal where a $2M royalty returned $1.5B after Barrick Gold’s acquisition—demonstrating outsized potential returns ([Jim Grant & Lorenz, 06:05–07:35]).
- Political & Country Risk: Even successful models are not immune—Franco-Nevada’s Panama ordeal as a case study.
- Grant [07:36]: “They got socked by the most extraordinary… governmental perfidy in Panama… the stock got clobbered.”
- Usmar [08:57]: Describes the strategic importance of jurisdictional and operator diversity to manage such risks. 80% of Triple Flag’s NAV is in stable jurisdictions like Australia, the US, and Canada.
4. Country & Resource Nationalism
- Populism and Resource Nationalism on the Rise:
- Evan Lorenz [16:14]: “2024 is a big year for elections… Is resource nationalism also on the rise?”
- Usmar [16:25]: “The short answer has to be yes… The supply chains and globalization… increasingly is fractured. The Chinese and others have… engaged in a very strategic way… Western governments are just starting to realize what’s needed.”
- Growing barriers to permitting, especially in the US/Canada; portfolio construction must factor in these granular risks.
- On South Africa: Despite challenges, select opportunities exist where top management, local buy-in, and social license mitigate risks ([Usmar 18:40–22:07]).
5. Deal Flow, Scarcity, and Quality of Opportunities
- Scarcity of Transformative Deals:
- Grant [22:07]: “You typically find 25 or so unsolicited deal proposals… and the hit rate was only 1 in 32.”
- Usmar [22:48]: “We've seen well over 800 opportunities now… Those 234 assets were in 234 separate transactions… I think our pipeline right now… this year has been the busiest in our history… you have to really be disciplined.”
- Importance of focus on high-quality, accretive, not merely frequent, deals—“low-calorie” deals aren’t worth time.
6. Royalty/Streaming vs. Miner Business Model Analogies
- Comparison with Aircraft Lessors: Miners are operationally leveraged, often cyclical and over-levered, while royalty/streaming companies can be more resilient.
- Lorenz [27:21]: “Is that a fair analogy?”
- Usmar [28:09]: “Yes and no… if you’ve got a miner that is struggling… that has an impact on you, but it doesn’t have the same impact. For example, during Covid… as a streamer… we hadn’t lost [the ounces], they’re deferred.”
7. Gold Price vs. Miner Performance
- Paradox of Underperformance:
- Lorenz [31:56]: “Since the start of 2023, the price of gold has shot up by 28%, but the Philly Stock Exchange Gold and Silver Index is only up 12%... What’s going on?”
- Usmar [32:37]: “A lot of the driver... hasn’t occurred via investor demand in the West—it’s been a story of central bank buying, especially in China… The equity story is a little different… we’ve seen significant inflation, margin compression... but you’re starting to see a bifurcation between high quality names and others.”
8. Gold as a "Forward-Facing" Monetary Asset
- Gold vs. Copper and Other 'Forward Facing' Metals:
- Grant [34:58]: “I am of the view… that the forward facing metal par excellence is gold… Has the streaming business turned its back on gold?”
- Usmar [36:03]: “We’re unashamedly gold and silver focused… there’s so much of the world that does get [gold as a store of value]… especially against an inflationary backdrop… I cannot see how… something like gold as a store of value in this moment is not more relevant now than perhaps certainly in my lifetime.”
Notable Quotes & Memorable Moments
- On today’s corporate credit:
- Lorenz [00:46]: "On the one hand, we have some of the tightest spreads... and on the other, nearly 10% of rated private credit issuers are under covenant relief... essentially insolvent entities in a benign economic environment."
- Explaining the streaming model:
- Usmar [04:52]: "The beauty of this model is you provide an upfront payment... you get a percentage of either the ongoing top line revenue or the physical product... These are evergreen contracts."
- On country/political risk reality:
- Usmar [08:57]: "Our biggest country concentration is actually Australia... then the United States and Canada... that's about 80% of our NAV."
- On resource nationalism & generational risk:
- Usmar [16:25]: "Critical minerals... have been locked up already and these costs are going up... I think this is a chapter that's in its early innings and there’s more to come."
- On why gold is compelling now:
- Usmar [36:03]: "We're unashamedly gold and silver focused... The idea of putting money in a physical hard asset against that inflationary backdrop as a preserve of value is something that I think people in a more stable environment don't truly appreciate."
- On gold’s present relevance:
- Usmar [36:03]: “I cannot see how if governments lack the will... how something like gold as a store of value in this moment is not relevant, more relevant now than perhaps certainly in my lifetime.”
- Host's parting words:
- Grant [38:17]: "That is an inspiriting speech. In fact, I'm going to not forget that..."
Timestamps for Key Segments
- 00:46 — Discussion of current credit market contradictions (spreads vs. solvency)
- 02:51 — Shaun Usmar introduces Triple Flag & royalty/streaming value proposition
- 06:05–07:35 — Historical analogy: Franco-Nevada’s legendary early royalty windfall
- 07:36–16:14 — Deep dive into political/country risk, Panama case, and portfolio strategy
- 16:14–18:22 — On global rise of resource nationalism and strategic jurisdiction selection
- 18:40–22:07 — Insights from South Africa, ESG, and “social license to operate”
- 22:07–27:21 — Sourcing, evaluating, and filtering deals: scarcity, quality, discipline
- 27:21–31:55 — Comparing streamers to aircraft lessors; resilience through cycles, Covid example
- 31:56–34:58 — Gold price vs. miner stock underperformance; sectoral investor apathy
- 34:58–38:17 — Gold as forward-facing asset, central bank buying, and gold’s modern rationale
Conclusion
The episode offers an accessible yet sophisticated window into the world of royalty and streaming finance in metals, with candid discussion about today’s fractured global finance, inflation risks, and gold’s enduring value. Shaun Usmar’s insights reflect both the opportunities and rigor required in this asset class amid rising geopolitical and economic volatility. The discussion closes with a passionate reaffirmation of gold’s role as a forward-facing, monetary safe haven.