While the natural resources market may be taking a pounding, the economic environment surrounding this space may be creating a once-in-a-lifetime long-term opportunity to generate real wealth for many investors. According to Rick Rule, those that have the mental fortitude and discipline to capitalize on these opportunities can experience a dramatic shift in their financial trajectory. Those that don't may just end up being victims of circumstance. Rule, of course, is one of the most prominent investment experts in the global natural resource arena.
He founded what is now Sprott Global Resource Investments, and has a wealth of experience in creating value through structured investments and identifying global opportunities in oil and gas, mining, alternative energy, agriculture, forestry and water industries.
Equities.com had a chance to catch up with Rick Rule to discuss his thoughts on the precious metals and junior mining sectors, among other topics. Rule will be joining a roster of notable and influential speakers at the upcoming New York Metals and Minerals Investment Conference on May 13-14, 2013 at New York Marriott Marquis.
EQ: Can you tell us more about your current focus at Sprott Global Resource Investments and Sprott Asset Management?
Rule: Sprott is pretty unique. We’re a $10 billion manager, but we’re truly focused on resources. There are a lot of managers out there that cover the waterfront, but we are resource-focused and to some measure, precious metals focused. We have also been, in our 30 years of existence, pretty contrarian. You’ve probably heard of my slogan before, “You’re either a contrarian or a victim.”
Market conditions like these where many of our competitors are frozen out of the market, either because of fund redemptions or because of their own lack of coverage, are perfect markets for us. Having been in the business for over 30 years, we’ve seen many cycles similar to this and we thrive in them. In terms of specific commodity focus, we like to be where other people aren’t. So we’re attracted to out of favor commodities like Uranium, North American natural gas, and platinum and palladium. That said, we also think the precious metals business, while not completely out of favor, as a consequence of a 10 or 12 percent decline in the market price of the metals, and a 30 or 40 percent decline in the market price of the equities, qualifies as fairly priced, which means in a historic context, it’s very cheap. So we’re aggressive buyers of selective precious metals equities and bullions.
EQ: If 2012 was a sale on junior mining companies, but investors were largely too afraid to take advantage of those opportunities. How does the landscape currently look like to you?
Rule: I think it’s just started to change. I had expected the market would bifurcate in 2012, but I think it’s bifurcating in 2013. By bifurcate, I mean that the best 5 or 10 percent of the issuers have bottomed and are starting to head back up. The majority of the TSXV is in some real trouble, and it deserves to be. Probably 60 to 70 percent of the companies on the exchange are valueless, and they’re headed toward their intrinsic value. So it’s going to be a market that’s very odd. It’s going to feel like the whole market is going lower because you’re going to see a lot of companies get delisted.
That is going to disguise that some of the better companies have already, and you can see this on the charts, have bottomed out and headed north. So for stock pickers, 2013 will be an extremely good year. For people who bought the index and for those that were less discriminating in terms of their buys in juniors will continue to have very, very bad years.
EQ: You said recently that seven or eight years from now, investors will look back at this current market as the best buying opportunity of the entire bull market cycle. Why is that?
Rule: When I look back at the market cycles that I’ve been through, and I came into the business in the early 1970s, this bear market bottom may be unique. The bear market bottom that we experienced in 1991, and also the one we experienced in 1998 through 2002, were certainly more severe than this bear market bottom. What’s unique about this one is that it comes after we had eight years of force feeding capital into these companies. So we’re buying assets at a discount now that were funded with much more generous capital, which would mean that in some caes the bargains that we’re able to get have much more intrinsic value than they would have in the ’91 bear market or the one of ’98 through ’02.
It’s important to note—and I didn’t know this until my CPA told me—the amount of money that you could make coming out of these markets, and of course it’s tough to focus on coming out of these markets when you’re getting pulverized in them, but the amount of money you can make coming out of these markets is characterized by the fact that I paid more personally in capital gains taxes in 1996 than my personal net worth had been in 1991. That’s the kind of wealth aggregation that you can do if you have the courage and if you work hard during a bear market to position yourself with positions you could liquidate in a bull market. If you have the courage to participate in private placements with full warrants, and hold those positions through an improvement not only in the market, but in the companies, it can do some truly dramatic things to personal balance sheet, and I think that’s what’s going to happen.
EQ: You are a keynote speaker for the upcoming New York Metals and Minerals Investment Conference, and I believe you’ll be speaking on owning precious metals during an era of government counterfeiting. What is the concept of government counterfeiting and how does this affect investors?
Rule: I think Americans need to know that our federal government is spending about $1.5 trillion a year more than it’s taking in. Don’t try this at home, of course. They are borrowing a substantial amount of the difference, and they are literally printing the rest. What they call quantitative easing, which is where they buy in their own obligations, is nothing more than counterfeiting. If counterfeiting was such a good idea, why wouldn’t they license you and I to do it? It would help them. In fact, what they are doing is they’re issuing valueless specie. They say that they’re doing it to add liquidity to the economy, which is probably one reason they are doing it, but the real reason they’re doing it is because they’re spending more than they are taking in. The only way that they can continue to do that without getting howls of outrage from taxpayers or cutting expenditures and getting howls of outrage from constituents, is to steal from the unborn. So in other words, counterfeit and debase the dollar.
The good thing about gold, silver, and platinum and palladium bullion is that bullion has consistently been used as a medium of exchange for a couple of thousand of years. They are a method of payment that constitutes payment, not just a promise to pay. A $20 bill is, in a sense, a floating abstraction. It’s an “I owe you nothing” from society. A gram of gold constitutes payment. It is a medium of exchange that simultaneously a store of value.
As an example, if you lived in Cyprus three weeks ago and had 100,000 euros worth of gold stored in a safe deposit box, the situation with regards to bank accounts being frozen would be of interest to you but it wouldn’t be relevant. It’s important to understand things like these, not just in the U.S. but on a global basis.
Now I’m not trying to say that everybody should have all their net worth in bullion, but people in this context, need to consider bullion, because the promises we as society have made to ourselves are unsustainable. The fallout is going to be unpleasant, and people need to consider taking portfolio positions in bullion simply as a consequence of the fact that it gets you, for some measure of your net worth, outside of the consequences of these inflated expectations and promises that we’ve made to ourselves through government.
EQ: Looking at the event itself, why are these conferences valuable for investors? What’s your advice for attendees to maximize their experience?
Rule: For one thing, pay some attention to who some of the exhibitors are, and do some research ahead of time so that you’re ready to ask questions. It is a whole lot more efficient to interview companies that you’re prepared to invest in than it is over the phone. So be prepared and go there to work. The second thing is, don’t be afraid to approach the speakers. As an example, if you come to either my general session or my workshop, and there are points I raise that you want to know more about, by all means, come by the booth and ask me a question. The best way to figure out what Rick Rule thinks about something is to ask Rick Rule. That goes for the other speakers too. The ability to interact one on one with people who do this full time, and have done this full time for three generations, particularly for the price that gets charged (which is zero) is a real bargain. People are foolish to not take advantage of it if they’re in the sector.
EQ: Which area of the natural resource arena do you feel is the most compelling right now for investors?
Rule: Probably platinum and palladium. In March, Russia and South Africa, which between the two of them, produce almost 90 percent of the world’s PGM metals, have decided to form a producers cartel. This could have a dramatic impact on the platinum and palladium market. A part from that, the platinum and palladium do not earn their cost of capital at these price points. Either the price of platinum or palladium have to go up, or we’re going to have more smog. That’s the trade off, and I think it’s going to be the former.
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