Monday 17th June 2019

Resource Clips


Ever unconventional

Rick Rule might be even more contrarian than you thought

by Greg Klein

Not for the faint-hearted, resource stocks hardly suit reckless investors either. Rick Rule’s long and successful career in this volatile world likely stems from shrewd insight borne of a non-conformist outlook. The president/CEO of Sprott U.S. Holdings took time to talk with ResourceClips.com about his favourite commodities, mining management, trade wars and critical minerals as well as—if only to demonstrate the principle of enlightened self-interest—the Sprott Natural Resource Symposium returning to Vancouver from July 29 to August 2.

As miners and manufacturers struggle to secure adequate supplies of essential minerals, does he still see justification for gold’s special status?

Rick Rule might be even more contrarian than you thought

“I do,” he replies. “I think gold has a special place of its own among metals in the investment universe in that, while it has fabrication value in things like jewelry, iconography and electronics, it is also simultaneously a unit of exchange and a store of value.

“It is also a metal that attracts a certain class of equity investors precisely because of its volatility, and what that means is that people who have a reputation for being able to either find or produce gold more efficiently than their competitors have the lowest cost of capital of any entrepreneurs in the mining business. So I would suggest that precious metals are unique in the mining space.”

What other metals interest him?

“Well the truth is I’m agnostic as to how I make my money. But traditionally two commodities, iron and copper, have been unusually profitable, although they’re usually the domains of the big mining companies. Iron doesn’t occupy a very large part of the exploration space. What are particularly attractive to me right now are commodities that are so deeply out of favour that, on a global basis, the cost to produce them exceeds the price that they sell for, implying industries that are ostensibly in liquidation. So minerals that especially attract me at present are nickel, zinc, copper and in particular uranium.

“Having said that, Sprott will back a top-quality management team, or will finance what appears to be potentially a Tier I asset, irrespective of commodity.”

Speaking of mining management, that’s a subject he’s previously lambasted with scathing comments. Does he see the problem as unique to mining?

Rick Rule might be even more contrarian than you thought

Rick Rule:
An insider with an outsider’s perspective.

“I’ve spent 40 years in extractive industries and don’t have experience in other industries, so I don’t know how widespread the problem is in other places. I do know that in one study, a young Sprott intern pulled at random financial statements and income statements over I believe five years from 25 junior miners. The median expenditure on general and administrative expenses exceeded 65% of capital raised. That’s not the prescription for a successful industry.

“It’s worth noting that in joint ventures that we’ve observed where a major mining company is earning into an exploration project operated by a junior, the median general and administrative expenses allowed as a percentage of total expenditures is 12%. So that would suggest that the junior public company format is inefficient.

“Now it bears noting that the junior mining industry has been enormously profitable to me personally and also to Sprott. And the conclusion that one has to draw is that functionally all of the value delivered over time by the junior mining industry is delivered by a fairly small number of teams. I would argue that less than 5% of the management teams in the business generate well in excess of 50% of the value created. Their contributions are so valuable that they add legitimacy and sometimes even lustre to a sector that overall has a very poor track record.”

Rule applies his contrarianism to trade wars and legislated efforts to secure critical minerals. He opposes government intervention and considers the U.S.-China dispute unnecessary.

“I believe that tariffs are an indirect form of tax and that protectionism ultimately backfires on the protector by making him or her less efficient. Now having said that, with regards to the Section 232 review of uranium, I would personally be a beneficiary of any action that Trump took. So it would be bad for the United States of America and good for me. I’m an unalloyed believer in free trade and free investment. To benefit a small number of claimants at the expense of a market is, I think, very bad policy.”

While many observers fear the trade war will provoke a second Senkaku with China manipulating its rare earths dominance, Rule thinks the gambit would rebound to the benefit of non-Chinese producers.

If the Chinese decided to obviate their competitive advantage with some stupid political ploy, they would find themselves with a much smaller proportion of the global market.

“If the Chinese decided to obviate their competitive advantage with some stupid political ploy, they would find themselves with a much smaller proportion of the global market. So I’m unconcerned about access to those so-called critical metals.”

Meanwhile he thinks the trade war “is political posturing and it is clientelist in the most pernicious sense, seeking to benefit a few interests who might be big campaign contributors at the expense of markets and consumers.”

Does he think the Sino-American conflict will have long-lasting effects?

“I’m not a political analyst, but I hope this is a circumstance where Xi benefits by looking tough to a domestic political constituency and Trump does the same, and nothing much comes of it. My hope is this is just populist puffery on behalf of both executives.

“At least in my lifetime, every tariff that has ever existed is a euphemism for a tax, and has served no useful purpose and in fact has been destructive to global trade and to the nation imposing the tariff. Similarly, so-called free trade agreements are really political pacts that may serve a political purpose for a favoured few. But the truth is, a free trade agreement could be written on one piece of paper. You could say: There will be no legal impediments between the voluntary buying and selling of any willing parties. Period.

“Instead, NAFTA was 3,600 pages.”

Among the challenges facing junior mining is powerful competition from cannabis stocks. Does he see that as a short-term trend?

“Yeah, I do. I think the cannabis craze will wear itself out the same way any other craze does. I don’t know that the hot money necessarily will move back to mining until after it isn’t needed anymore. Frankly I welcome the move of hot money, dumb money, out of mining and into crypto and cannabis. The mining business has been over-funded and the subject of unrealistic expectations for 30 years to the extent that the industry went on a forced diet for a while, a lot of issuers failed and rational expectations returned to the space. I think that would be a very good thing.

I’m also delighted frankly that in places like Vancouver and Los Angeles management teams that were formally in mining have moved on to substances that they’re interested in and familiar with, like cannabis. If you live in Vancouver, it’s very clear that due diligence is conducted nightly on most street corners downtown.

“I’m also delighted frankly that in places like Vancouver and Los Angeles management teams that were formally in mining have moved on to substances that they’re interested in and familiar with, like cannabis. If you live in Vancouver, it’s very clear that due diligence is conducted nightly on most street corners downtown.”

And speaking of Vancouver, what’s Rule got to say about Sprott’s upcoming event?

“We hope to deliver the best possible experience that we can, all the way from big picture commentators like Danielle DiMartino Booth, Nomi Prins, Jim Rickards and Doug Casey, but also including really interesting industry participants. One of the things we’ve been doing for 25 years is we have always made room for speakers who are active in the mining business today after building billion-dollar companies from scratch. This is important because they talk not just about mining but also how the lessons they learned building their companies impact the way they invest their own money, and the way that speculators should invest theirs. Further, unlike any other conference I know, an exhibitor has to be owned in a Sprott-managed account. Our attendees have told us our exhibitors are not from their point of view mere advertisers, but rather they’re content too.

“Finally, while most resource-oriented conferences have shrunk demonstrably in size over the last four or five years, ours has grown every year. One of the benefits investors get attending our conference is that they do so in the company of 700 of their peers, high net worth investors who have been successful in natural resources. And there is a lot to be gained not merely from the dais or the exhibit hall, but also from talking to other experienced, successful and battle-scarred speculators and investors.”

Rick Rule hosts the Sprott Natural Resource Symposium in Vancouver from July 29 to August 2. Click here for more information.


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