Frank Giustra: I Was Early But I'm Still Buying
A few weeks ago, we heard from Pierre Lassonde of Franco-Nevada on the power of the royalty business model. Just recently, I spoke with another ‘superstar’ of the natural resource industry -- Frank Giustra.
Mr. Giustra started out as an assistant trader and then became a stockbroker at Merrill Lynch in his early career. He later went on to join Yorkton Securities, where he helped launch a new branch geared towards financing resource companies in Europe. He is now an advisor to major gold miner, Endeavour Mining Corporation.
As we discuss in this interview, he’s a serial entrepreneur. In the late 90’s, he founded Lionsgate Entertainment - the company behind The Hunger Games and Michael Moore’s Fahrenheit 9/11. The company had over $2 billion in revenue in 2013, and owns the rights to the hugely successful Twilight movie franchise and The Expendables series, among other big blockbuster titles.
Leaving movies for another day’s topic, we went on to discuss his views on the mining sector, though he did leave me with his quick take: “Making good movies is tough -- more an art than a science. It’s easy to get sucked into bad projects by people in the movie industry. You have to be on your guard.” Probably useful to remember when looking at small-cap mining stocks too.
“What’s your view, as an investor, on the resource market?” I asked.
“Wow, that’s a general question,” he laughed. Luckily, he indulged me with a response: “first off, the market does look like it’s past the bottom. Second, you still have time to implement a ‘simple’ contrarian strategy -- buy real, proven, assets cheaply and wait for them to be re-priced by the market.
“Many assets are on the market today that bear little risk to investors, but are trading well below their fair value because of the severity of the bear market. When an asset has already been studied and understood, analysts can come up with a good estimate for the value of the resource – a mineralized ore body – that is in the ground. In a very bad bear market, these assets trade cheaply – but it has nothing to do with the merits of the asset; it’s all about the market’s attitude towards resources. ‘Buy right, sit tight.’ Once you’ve bought the right assets, just wait for the market to re-value your asset higher.”
Can you buy safely, knowing the bottom is likely behind you?
Unfortunately, even for a veteran, serially successful investor like Mr. Giustra, you can get the call wrong:
“You can never pick absolute tops or absolute bottoms. Nobody can do that. I called the bottom a couple of years too early. What have I done about it? If you pick the bottom at the wrong time, and the market keeps getting cheaper, you can keep buying if you have the cash – but don’t ‘average down’ into bankruptcy. Your approach will depend on your financial situation. In 2013, I had the cash, so I averaged down.”
What about backing exploration companies that are looking for new deposits – the early-stage exploration juniors?
Mr. Giustra said the exploration stocks would be the last ones to rally in a recovery, so he was focusing on developed assets for now. When money begins to enter the resource sector, the first assets to go higher will be low-risk assets that have already been thoroughly explored and delineated. Those assets will get bought up by investors, or taken out by mining companies to get put into production.
“Exploration will have its day later in the cycle, but it’s just way too early for those companies for me,” he said.
What do you do after mining finance and major movie production? I asked whether there were any more major projects in the works.
“Yes,” he said, “for a long time, I’ve been interested in the healthy, natural food sector. I’m trying to tap into a new trend, which is especially popular among a younger generation. There’s demand for food that comes from ‘natural’ farming practices – not the feedlots and heavily industrialized agriculture that uses GMOs, pesticides, hormones and antibiotics. I’m involved in branding, packaging, production of these types of foods – I even started a magazine called Modern Farmer that’s geared towards people in this demographic.”
Mr. Giustra spent part of his childhood in Italy. Now, he owns an olive oil producer that makes olives in Italy and ships them to North America. His brand, called Domenica Fiore, was rated the top olive oil at a global competition in New York. And he ‘eats his own cooking’ – “I’ll use olive oil over butter any day,” he says. “So I make the best olive oil in the world. It’s my own little thing.”
The last subject we touched on was the state of the dollar and bonds, and whether he had any worries about the outlook for the US economy.
“I think that the general stock market, the dollar, and bonds are in for a severe correction,” he ventured. “If there’s one thing I’ve learned from my career it’s that there are consequences to economic decisions. At some point down the road, there will be consequences to massive money printing and bond-buying. For now, those
consequences have not been very negative, but there are always adverse effects. There’s a downside, and I think we will experience that in the form of major economic disturbances going forward. Will it come in the form of hyperinflation? Depression? I don’t know. But there is a price to pay – and I think it’s going to be severe.”
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