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Expert Interview: Rick Rule on Why Now’s the Time to Be a Contrarian

For investors looking for opportunities in the natural resource market, having a guiding voice to help them navigate through the many layers of macro-economic trends and fundamental prospects is

For investors looking for opportunities in the natural resource market, having a guiding voice to help them navigate through the many layers of macro-economic trends and fundamental prospects is invaluable. From analyzing whether the price and demand for certain commodities will rise to whether a certain junior company is executing on its strategy, investors need to know what signs to look for. For over 30 years, Rick Rule has been a very prominent voice in global natural resource investments.

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. spoke with Rick Rule to discuss why he thinks the current market is great for investors, and how they can capitalize on it. Rule will be joining a roster of notable and influential speakers and attendees at the upcoming San Francisco Hard Assets Investment Conference on November 16-17, 2012 at The San Francisco Marriott Marquis.

EQ: To start off, can you discuss your background and experience as an investor in natural resource finance and this market?

Rule: I have been involved in natural resource finance since the 1970s. In 1987, I shifted from a wholesale function–a broker who sells to brokers–to a retail function, which is a broker who sells to individual investors. In the early 1990s, I started a firm called Global Resource Investments, which became the largest broker of microcap resource investments, particularly foreign domicile microcap investments in the United States. In 2011, our firm decided to sell itself to Sprott, Inc., who we believe today to be the largest, finest, and most focused microcap resource stock manager on the planet. So I am the director of Sprott, Inc., and also manage their U.S. business.

EQ:  Can you tell us more about Sprott Global Resource Investments and Sprott Asset Management?

Rule: We provide boutique brokerage services to investors in the United States, giving investors and speculators information and paradigm associated with natural resource investments and speculation on a global basis in order to help those investors manage their own money. When I talk about global resource businesses, I’m mean companies involved in power, energy, mining, agriculture, timber, water, and a range of other natural resources on a global basis. We do effective transactions on exchanges worldwide in markets such as Australia, Canada, Great Britain, and in the United States, but also more obscure exchanges as well. In addition, we manage money for those investors who prefer it and will make the investment decisions for them on a global basis.

Finally, we manage about $500 million in investment partnerships. These are partnerships where investors pool their assets for 10-year periods of time and we use the pooled funds to make fairly structured investments. What that means is we structure the investments in the debt and equity of public and private issuers on a global basis. So I would say that we’re 100 percent focused in the microcap natural resource space to both debt and equity for public and private issuers.

EQ: Would you say that your investors typically have a higher risk and reward profile?

Rule: It’s interesting, through Sprott, we have a range of products including things like our bullion trusts where we buy physical bullion, which is stored in Royal Canadian Mint. So through certificated form, we allow people to participate in the ownership of stored bullion. It’s important to differentiate our product, the bullion trust, and the ETFs like SPDR Gold Shares (GLD) in that our product is not hypothecated and we don’t accept delivery receipts. We have physical possession of the bullion that we hold on behalf of our investors. That is, in the context of the resource market, a much lower risk speculation than, as an example, an exploration company.

We are also fairly prominent providers of bridge and mezzanine debt to the natural resource business. We do that both for our own accounts and for the accounts of our investors. Because we are structuring debt offerings and debt is higher up the balance than equity, it’s worthy to note that the worst debt on any individual balance sheet is better than the best equity. In that instance, we are structuring investments where people are getting above average returns in the sector with less risk than they would expose themselves to as shareholders.

Finally, we are probably the largest structure of PIPE (private placement in public equity) or aftermarket private placement equity transactions for global issuers in the United States among retail investors. This is, of course, a higher risk/higher reward activity. I would point out, however, that for those who have the ability to participate in private placement transactions, the ability to attach a warrant to what would otherwise be an equity investment lowers the relative risk of that part of your portfolio as opposed to a straight equity investments. Warrants provide the right but not the obligation to double your investment for a fixed price over a fixed period of time. So yes, we’re in a higher risk/higher return business, but we’re working everyday to do our very best to mitigate our customer’s risks.

EQ: You are a keynote speaker for the upcoming San Francisco Hard Assets Conference. Can you tell us about your participation at these events and how they have helped you as an investor?

Rule: I’m proud to say that I’ve been speaking for the International Investment Conferences and their predecessors for almost 25 years. I regard them as very high profile, and highly important educational events. Many of the techniques and much of the knowledge associated with microcap stock investing seems fairly obvious to professionals like us, but for retail investors who have lives, and are people who are raising families or have jobs outside of the resource business, I have found that I have been able to help them become better investors over time. The reason is that I can point out what I have learned working 50 and 60 hours a week for 30 years at one specific thing. One of the most important things that takes place at these events is the transfer of knowledge from industry professionals to other industry practitioners. Also, having the ability to hear different points of view from many industry professionals, and then to employ in real time the techniques that you hear from the dais on 250 exhibitors in the exhibitor hall–who are all trying to attract your capital–is an absolutely wonderful situation to maximize speculative outcomes for individual investors. I have been delighted to participate in this forum for many years.

EQ: What are some examples of how attendees can apply the knowledge they gain from the speakers at the conference right away?

Rule: There are three reasons, really. The sponsors are honest enough to present speakers with different points of view. It’s useful for speculators to hear different points of view to select which point of view they feel is appropriate for the what period of the market we’re in and which point of view suits their own particular style well. So having competing points of view is important.

The second thing is, the speakers aren’t speaking from on-high from some video. After the presentations, most speakers are available to engage in interactive discussions so that somebody who wants to understand more particularly what the speaker had in mind or what technique they have to offer the speculator, they’re available in the flesh to do so.

The third thing is the ability in real time, like immediately, to employ the techniques that were taught by the speakers in examining the investment credibility of the exhibitors who are there in the adjacent hall. That is absolutely invaluable. As an example, one of my sessions is “9 Nosy Questions to Ask Mining Company Managers.” So attendees can write all those questions down and then employ them immediately. It’s an entirely different set of circumstances because investors can get the “9 Nosy Questions”, come by my booth and pick up our booklet with stock charts of every exhibitor in the hall that we have available for free every year, then trot off and visit the exhibitors and ask them the questions. You can find out one-on-one with the company’s president or chief financial officer whether or not the attributes put forward by that exhibitor make them suitable for your portfolio. It’s a wonderful, learning and earning opportunity for somebody who is willing to invest both their cash and their intellect.

EQ: Another topic you will be discussing is why the current market conditions will be great for speculators and contrarian investors in natural resources. Can you tell us some of the reasons why this might be true?

Rule: I absolutely can. For the better companies among the junior mining group–about the top 10 or 20 percent of the 4,000 issuers worldwide–two interesting things have happened since 2010, which is the last time when speculators were brave. In 2010, the prices were maybe double what they are now, and in some cases four times higher than they are now. While at the same time, many of these companies have advanced their projects, so you’re now getting better assets at half price. It’s interesting that we want to buy financial goods when they’re up in price, but if you and I were going to buy consumer goods like clothing or food, we’d be delighted to participate in a sale. Would you go to a store to try to find the most expensive items you could in the market? Of course not, you’d be looking for sales. Well, 2012 is a sale, but people are afraid. Their expectations of the future are set by their immediate past and the last two years have been dreadful for people. So they’re very cautious, but the truth is, in some cases, the assets are more valuable than they were in 2010 but they’re selling at half price. What could be better than quality merchandise at half price?

My experience has been that in capital intensive, cyclical businesses like natural resources, you have to be a contrarian to to really make money. You’re either a contrarian or a victim. You need write checks at times when other people are running for the hills. When people are storming into the market, you have to remember to sell some of those positions that you bought when they were cheap. You make money by buying low and selling high. Obviously, by definition, a bear market like what we’re in right now is the time when you can buy low, and the bull markets like 2010 when everybody was brave is when you sell high. Investors and speculators who pay attention to that and who invest in their own knowledge and education by doing things like coming to the San Francisco Hard Assets Conference are people who overtime will do well.

If you don't feel that U.S. culture (and much of the world in different ways) is in turmoil, you are not paying attention.
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