In a follow-up to a recent interview by Natural Resource Stocks, precious metals authority Don Durrett delved deeper into his investment strategies, expressing skepticism towards royalty models and outlining specific jurisdictional risks within the mining sector. Durrett, known for his data-driven approach and long-term perspective, provided nuanced insights that build upon his earlier warnings of economic turbulence and the potential for a significant precious metals bull run.
Continuing the conversation, Durrett addressed two key areas of interest for investors in the natural resource space: the merits of royalty companies and the importance of geographical considerations when evaluating mining stocks. His candid remarks offer a valuable perspective for those looking to navigate the complexities of this market.
Durrett articulated his reservations about the royalty business model, primarily due to a perceived lack of control for the underlying mining companies and the potential for contractual issues in a high-price environment for precious metals.
"I don't do royalty models because two reasons: one, the country the companies don't have control over their growth, they don't have control over their mines," Durrett explained. He emphasized that royalty companies are essentially reliant on contracts, a structure he finds potentially problematic, especially in a scenario where gold and silver prices surge dramatically.
His primary concern revolves around the fixed nature of many royalty agreements. In a hypothetical situation where silver reaches $100 per ounce, Durrett illustrated how a contract stipulating a $4 per ounce royalty could become detrimental to the mining company if their cash costs are significantly higher.
"If you have a $4 contract, you're you're losing and your cash costs are 10 bucks, you're losing $6 an ounce in every ounce that you're giving to this company, and the other company is getting you ready for this $96 an ounce in profit. They're getting 96, and you're losing six. Are you going to are you going to give them your silver? No chance in hell. You're giving it to them. You're basically saying, 'We're redoing the we're redoing the contract.'"
Durrett believes that such scenarios could lead to contract renegotiations, ultimately undermining the stability and predictability of the royalty model. He cited anecdotal evidence suggesting that this is already beginning to occur within the industry.
Despite his general skepticism, Durrett acknowledged the strengths of certain royalty companies, singling out Wheaton Precious Metals, Triple Flag Precious Metals, and Gold Royalty. He noted Wheaton's strong financial position and consistent dividend payouts while highlighting the experienced leadership at Gold Royalty.
"Weaton man is a thing of beauty. I mean, their margins are just unbelievable. I mean, they have no debt, they got 800 million in cash, and they're just cash is just rolling in; they're throwing out dividends. I mean, it's a beautiful thing, right? But at a certain point, you're going to get rug pulled, I think."
Durrett's analysis suggests that while royalty companies can offer lower-risk exposure to precious metals, the potential for capped upside and contractual risks in a booming market makes him favor direct investment in producers, which he believes offer greater growth potential.
Navigating Jurisdictional Risks in Mining
A significant portion of the discussion focused on the critical aspect of jurisdictional risk in the mining sector. Durrett provided a comprehensive overview of regions he generally avoids and those he finds more favorable for investment.
"Yeah, there's lots of them I won't touch. You got to be careful on location risk like South Africa. I've been burned there, so I stay away. DRC, like there's been in the news lately, I've stayed away from that."
Durrett explicitly mentioned avoiding regions such as South Africa, the Democratic Republic of Congo (DRC), and much of Central and Eastern Africa due to past negative experiences and perceived instability. He also expressed caution regarding Russian satellite countries, Eastern Europe, the Philippines, and Indonesia.
Conversely, Durrett highlighted more favorable jurisdictions, including Western and parts of Central and South America (with the notable exception of Venezuela), Australia, New Zealand, and Canada. He noted improvements in Argentina and a cautiously optimistic view on Ecuador and Bolivia. While acknowledging past challenges in Colombia, he does not currently have major concerns there.
Regarding the United States, Durrett indicated that most states are acceptable for mining investment, except Washington State, which he views with distrust. He mentioned past issues in California but noted potential interest in a project in San Bernardino.
Key Jurisdictional Considerations (According to Don Durrett):
- Avoid: South Africa, DRC, much of Central and Eastern Africa, Russian satellite countries, Eastern Europe, Philippines, Indonesia, Washington State (USA).
- Generally Favorable: Western and parts of Central and South America (excluding Venezuela), Australia, New Zealand, Canada, and most of the US (excluding Washington State).
- Improving/Cautiously Optimistic: Argentina, Ecuador, Bolivia.
Durrett's detailed breakdown underscores the importance of thorough due diligence that extends beyond the geological potential of a mining project to encompass the political, regulatory, and social environment of the host country. His personal experiences serve as a reminder of the significant impact jurisdictional risk can have on investment outcomes in the mining sector.
Don Durrett's latest insights provide a valuable extension to his previous warnings about the broader economic landscape. His skepticism towards the royalty model, rooted in concerns about long-term contractual viability, contrasts with his identification of specific royalty companies with strong fundamentals. Furthermore, his detailed assessment of jurisdictional risks offers crucial guidance for investors seeking to navigate the global mining sector. By considering these multifaceted perspectives, investors can develop a more informed and strategic approach to investing in gold and silver amidst a potentially transformative economic period.
Watch the full interview:
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