Indeed, on May 12 and 13, just two short weeks away, some of the shrewdest and most respected voices in the business will be gathering at the Marriott Marquis in midtown Manhattan for a series of workshops and talks on a variety of issues of related to metals and minerals investing.
And few, if any, of the presenters command as much attention as Rick Rule. The President, Director, and CEO of Sprott US Holdings has decades of experience in the natural resources space to his credit. Combined with an invariably trenchant wit, his exhaustive knowledge of the market and especially its history - the way in which its characteristics change as it fluctuates between highs and lows, and how this cyclicality affects all of those involved - he’s the fellow that a great number of the attendees will be showing up to hear.
Readers of Equities.com, however, should already be familiar with Mr. Rule from the numerous conversations we have had with him in the past. We had another opportunity to speak with him prior to next month’s event in New York, to get his read on what might be expected at the proceedings, as well as his take on conditions currently prevailing in the junior exploration space.
Equities.com: Unsurprisingly, you’re speaking at next month’s Metals & Minerals Investment Conference in New York. Aside from the more basic things that investors can expect to learn at the various workshops, presentations, and so on, what, if any, do you believe will be the overarching theme or themes at next month’s proceedings?
Rick Rule: Well, the thing that I hope comes through at the conference is that investors have suffered through a fairly long cyclical decline in a secular bull market. Declines of this style are not unprecedented, although this decline has been of an order of magnitude that is unusual. The junior market as a whole has suffered a 75 percent decline. The point here is that junior mining equity markets are extremely volatile, but they’re extremely cyclical. Bear markets are the author of bull markets, and the slogan I use to describe this to people is “you have suffered through the pain, now hang around for the gain.”
My belief is that we have been through the worst of the bear-market. I believe we are in a saucer shaped recovery that will see higher highs and higher lows, but this recovery will play out over 12 to 18 months; we’re not going to see a V-shaped recovery. People who were in the sector and who remember the last bear-market decline from 1998-2002 should first of all remember the duration of the recovery. Second of all, however, the nature of the bull market recovery; speculators who remember the period 2003-2006 will remember an absolutely meteoric bull market recovery from the bear market decline that happened at the last part of the 1990’s.
So I think that’s the thing that people need to familiarize themselves with.
Another thing that people need to familiarize themselves with is that the narrative behind the natural resources market, at a bear market bottom, was the same as the narrative at the bull market top. There were two parts to the narrative. One was the nominal pricing narrative that said that the US dollar was challenged because of structural problems with US politics and the US economy. As an example, quantitative easing was counterfeiting, and that deficit spending was unsustainable. The promises that the American political culture had made to itself were unsustainable, and that the likely form of default would to inflate away the net purchasing power of the obligations that we have made.
Nothing with regards to that narrative changed between the 2010-2011 bull market peak, and the 2013 bear market bottom. The only thing that changed was perception.
The second part of the narrative in the bull market was that every day on a global basis, more people were born. In conjunction with population growth, the people in frontier and emerging markets, very poor people, wanted to live the way you and I live. That combination of demographic growth and globalization in terms of expectation, was very bullish for resources. The commodity-intensive lifestyle that people in Western Europe, the US, and Japan enjoy is the lifestyle that people around the world aspire to. And as people begin to develop the means to acquire that lifestyle, it’s extremely bullish for natural resources: energy resources, metal resources, food resources. That narrative is unchanged too.
So if the circumstances surrounding junior mining markets are bullish from a nominal perspective, and bullish from a fundamental perspective, then the only thing that’s different between a bull market top and a bear market bottom is the price of opportunity. And if that is true, the recovery is both inevitable and potentially dramatic. That’s the macro scene.
EQ: In the last 12 months, the Market Vectors Junior Gold Miners ETF (GDXJ) has been on somewhat of a rebound in 2014, up over 20 percent whereas it had been lower over the past 12 months by some 27 percent. Is this a reliable indicator for what can we expect from the juniors through the rest of the year?
Rule: I think the lesson that you learn there is that the GDXJ is a useful proxy for the whole market, which brings up two points.
One, monitoring the GDXJ you’ll see it strongly up in January and February, which of course gave hope to people who believe that happy days are here again. My own suspicion is that you’ll see higher highs and higher lows but all the gains need to be consolidated. This type of market action, “backing and filling” or consolidating rapid gains, is exactly what one would expect. It may be inconvenient for people who require the psychological reinforcement, the courage of their convictions. But the truth is we’re going to have a saucer-shaped, gradual recovery rather than a V-shaped one. The market will certainly go V-shaped in the out years. At least it has in the four other recoveries I’ve lived through in my life.
A useful corollary discussion to that is that investing in the universe of junior mining equities is suicidal. The exploration business, the junior exploration business, on a global basis, loses between $2 billion and $5 billion a year, and it’s a business that, probably more than any other, requires extraordinary stock selection. The best 5 percent of junior issuers on a global basis in decent markets generate enough performance to add respectability and sometimes even luster to a sector that loses a ton of money. So one needs to look at the GDXJ as a proxy for a lucrative but treacherous sector. Investing in the GDXJ is much more challenging. I use it myself, as a short position to hedge the market risk in my selected longs, and if people are going to refer to the index, they need to understand the nature of the industry that the index refers to.
EQ: Last we spoke, you had just been in Vancouver, at the VRIC, an event at which you were put off by an undeservedly optimistic atmosphere. In particular, you noted the plethora of $400k financings that were being doled out to companies with relatively large capital deficits. At the time, you said that that sort of cash could only last about 4 months, a period that is about up by now, so I was wondering how you see that playing out at present.
Rule: Well, my hope is that we see 500 or 600 listing go to listings heaven. There is a class of speculator out there who seems to believe that a $0.05 stock can’t go any lower. I would point out to them that in the 1991-1992 bear market, dozens of them every week went to their intrinsic value, which was zero. The trend in Canada is continuing where there are dealers, often limited market dealers, who will raise $300,000 or $400,000 for a functionally bankrupt issuer. These dealers will raise enough money from very sophisticated or very unsophisticated investors which basically goes to pay down a working capital deficit, but that can’t go to ongoing operations because it has to pay off existing debt. And certainly, if you understand the value in exploration is created by answering unanswered exploration questions, $300,000 is barely enough to mobilize a drilling rig, much less get any drilling done.
The idea that any fundamental value could be generated with a financing that small is silly. It is rather buying access to a very large number of low-priced but worthless shares, in hope that somebody even dumber than the subscriber will come along and bail them out for $0.10 or $0.12. An investment strategy that is organized around doing something stupid in the hopes that you can find a community less intelligent than you, is a difficult strategy.
EQ: Difficult, or perhaps even dubious…
Rule: I’m being charitable. But I want to leave this on a bullish note, though. I want to say that a market that’s down by 75 percent, with everything else being equal, which it is, is a market that is precisely, arithmetically 75 percent more attractive than it was. In a bull market, like 2010, assets get priced at irrationally high levels. In a bear market, like now, the get priced at irrationally low levels. When would you rather be a buyer?Normally, at investment conferences like the New York Precious Metals conference, I am very leery about naming individual names because the market’s response to my discussion is too dramatic. One of the liberating things from the point of view of a presenter is that you can present fairly good ideas about without fear that the market will do irrational things with it, because the primary mood is pessimistic right now, which means, ironically, that I can give people fairly good ideas with immunity. And I promise to do just that.
EQ: So what you’re saying is that you’re in your element?
Rule: Yes sir!
EQ: That is excellent news for attendees. One last question; there are some familiar names speaking at the show, and I was wondering who else you think our readers may want to pay attention to.
Rule: Well, obviously there’s Ron Paul, the only mainstream political figure in the United States that has any credibility at all, so that’s useful.
Frank Holmes will be useful in the sense that he’s a peer, a professional investor, and I enjoy his big-picture macro, so that’s good. And of Adrian Day, I think it’s pretty safe to say that his track record speaks for itself in, bull markets and bear markets. He’s handily outperformed all of the indexes he’s competed with for the last 20 years.
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