Sprott Global Resource Investments

Sprott's Thoughts

Kerem Mermutlu

The Next Bull Market Move Interview - Rick Rule from London

I was extremely lucky to meet and interview Rick Rule while he was in London last week. We talked about investing, the uranium market, and why you should follow your passion. I believe that if you want to learn something, you should try and learn from the best, and Rick Rule has a career as an investor that is among the best on the planet. He’s also a really nice guy. Enjoy.

Okay. Joining me today is the legend that is Rick Rule, President and CEO of Sprott US Holdings. How are you today, Rick?

Life is great, thank you very much.

Very good. We’re here in London at the Mines and Money Conference. I think it’s going to be a very interesting conversation we’re going to have. Recently, with the miners and gold and silver becoming very oversold in this correction, how do you think the play out will continue for over the next few years? Are we in a bull market?

I don’t mean to be fractious, but would dispute the fact that they’re oversold. I would suggest that they have been overbought in the summer. I would suggest that the correction that you’re seeing is normal and natural in a market like this. I believe in American parlance, and pardon me for doing that here, but in American parlance , we’re in the third inning of a nine inning ballgame with regard to the gold stocks. There is certainly renewed confidence in the system, and there’s also an age-old alternative to gold which is re-surging which is the US ten year treasury. At a 1.3% treasury yield, it was an unattractive instrument, but at 2% treasury yield, it’s a somewhat more attractive instrument, our elections notwithstanding.

Rick, how did you get involved in investing when you first started, particularly in the resource sector as well. How did you fall into that?

I have always been interested in business and always been interested in making money, at least as long as I’ve been cognizant. My early ambitions, my early university ambitions were to be a natural resource taxation lawyer. Don’t ask me how an eighteen year old set about to do that. I don’t actually remember, but that was my goal.

I was redirected by an early mentor, a very well-known tax lawyer away from law and into commerce. I had the extraordinary good fortune to meet a legendary value investor when I was still an undergrad in university. His name was Peter Cundill, and he’s legend among value investors. He was actually the one that set me on the course that became my career.

Fantastic. If you could go back in time and talk to a 30 or 20 year old Rick Rule, what would you advise him about money habits, investing, career guidance, things like that?

Really three things I guess in reverse order: Career guidance. Follow your passion. Do something that you can’t wait to get out of bed in the morning to do and you sort of resent having to go home at night from. If you are passionate about something, you will work easily. You’ll work longer, and you’ll create utility for other people without really being cognizant of what you’re doing. In other words, it won’t be work. It’ll be a calling.

If it is your calling and you are competing with people for whom it is not their calling, they won’t stand a chance. With regards to making money, you make money by adding utility for other people. It’s a fairly simple circumstance, actually. If you create value, you get to keep some of it. If you want to be rich, then in addition to you working, your capital has to work. In order to be a capitalist, you have to have capital, which means you have to save or in economic terms, you have to produce more utility than you consume.

You really do find that savings and investing become cumulative and compounding, meaning that the accretion of wealth when you’re younger is slow, but it becomes rapid if you continue to be disciplined and continue to work hard. What I’m tempted to say is at an alarming rate. It really surprises you later in life.

Can I ask about the psychology behind investing? It seems to me that most investors, most successful investors, don’t necessarily want to get rich just for the money, they’re more interested in researching the market, hunting for new investment opportunities, and then as a byproduct, the money is secondary. Would you agree with this?

Absolutely. Now, there are many different styles of investing, and I’m not suggesting that any of them were unsuitable. There’s only one style that’s suitable to me, which is the very empirical value-oriented style. There are many other styles that work. I certainly know investors who set out to become rich because they wanted the rich lifestyle.

For me, that’s less of a motivation. Certainly I didn’t want to be poor, and I don’t want to sound crass, but if I’m out with really good friends and I’m more fortunate than them, I don’t want them to have to look at the right side of the menu where the prices are, but that isn’t my primary goal. My primary goal is to have the capital to continue to be a capitalist. Many people have passions in life. Maybe it’s backgammon or maybe it’s museums. I just happen to be fortunate enough that people like to pay me well for my passion.

What would you say is the biggest lesson that the market has taught you in your career?

I’m limited really, for the most part, to natural resources. The biggest lesson with regards to resources is that they’re extremely cyclical. Bear markets are the authors of bull markets. Bull markets are the authors of bear markets, and the slogan that I use to educate my investors as quickly as I can to the market that they inhabit with me is that you are either a contrarian, or you will be a victim.

When things feel the worst, they’re the best, and when things feel the best, they’re treacherous. This lesson was an example of that. This summer was absolutely euphoric. The consequence of that is that most of the hardworking portfolios at Sprott were frozen out of the financing market because the turns were too buoyant and ebullient. The people who let their emotions overrun them in the middle of this year have been rewarded with a 35 or 40% spanking. This feels to be altogether a more rational and more intelligent market. I guess that’s the primary lesson that one learns in resources.

I think the second lesson is that maybe not in a one month or two month burst, but the harder that you work, the more that you employ, the more good fortune smiles upon you. You get luckier, if you will, if you work harder, if you employ empirical processes. The third, I think, is that you have to be part of one or preferably more networks. You can’t do it all yourself. You have to have access to financial skills whether or not you possess them yourself.

You have to have access to technical skills, geology, engineering. You have to read very, very, very wide. You have to be made aware of things that are outside your own particular circle so that you spread the number of data points that you examine. I think it’s important to read a lot. Read voraciously.

Definitely. Speaking of things that feel bad at the moment, the uranium market. Spot prices have been declining quite dramatically recently. Contrarian investors would say that this is an even better opportunity for the juniors. The juniors I’ve looked at recently have gone from pounds or dollars in 2011, 2007, down to pennies or cents now. This must be a great opportunity for the brave, I would assume?

This is. I suspect that Sprott, at least my part of Sprott, will become very deeply invested in uraniums this year. The international energy agency suggests in US dollar terms that the industry needs about $60 a pound in incentive price to produce uranium. That includes cost of capital. You make the stuff for 60, and you sell it for 20. You lose $40 a pound. You can’t make that up on volume. The truth is that we have some very hard months ahead of us. When I say months, I mean 18 to 24.

If you’re going to position in size, you need to position in anticipation for a turn in the market. My suspicion is that the fall, winter of next year will be ideal timing. Sprott is commissioned on a very thorough going study as we speak to try and really understand the dynamics of the uranium market because we think most people don’t, even uranium players. In conjunction with that, we will review the sort of 22 to 25 juniors that we think have a chance of surviving the market and try and participate in capitalizing five or six of them where we believe in management strategies to position themselves for the rebound.

We recently participated in the recapitalization of an Australian junior, Deep Yellow, behind John Borshoff and the original Paladin team who we enjoyed almost farcical success in the last bull market. That’s as much a bet on the team and the concept as it is on the uranium price. My suspicion is that I’ll be at least 18 months early with my Deep Yellow investment, but the truth is I was four years early with my Paladin investment, and that went from ten Australian cents to ten Australian dollars. Sometimes, being early is forgivable. 

Yes. Yep. Speaking of management, would you consider management the most important part of investing in a resource company?

Depending on the company, the stage of the company. For a junior, certainly. Most of the early stage assets are just excuses to lose money. You would be tempted to call them liabilities rather than assets. In that case, you need to think of these companies like technology companies. You need to think of exploration in the context of research and development. It’s the team that’s all-important.

You bring up a really good point. It isn’t merely that the team that you’re backing has been successful or determined. It’s important that they’re successful, that their past successes are in tasks that are immediately related to their task at hand. Somebody who has been successful operating a goldmine in Archean terrain in French speaking Quebec may be less successful exploring for copper in tertiary volcanics in Spanish speaking Peru. It’s important that the resume suit the task at hand rather than merely being an attractive resume.

Okay, that’s great. In regards to uranium again, do you think we’ll have, when the bull market finally happens, do you think we’ll have like a two year spike, or will this bull market continue longer because of China and all the reactors being built? 

I definitely think it’ll be a spike. I think that the memory of the last uranium bull market is still so fresh in so many people’s minds that the market will exhaust itself in fairly short order. There’s no shortage of uranium in the world. There is a shortage of uranium that could be produced below 50 US dollars per pound.

Okay.

When you reduce sustaining capital investments in recovery uranium projects, your production begins to decline fairly quickly. That can be wrapped up. . My suspicion is that you’ll see sort of a two, two and a half year run in the equities that will take people’s heads off. You’ll see a longer sort of four year run in the commodity, but the market will get top heavy, I believe.

I once heard a quote from an investor saying that he didn’t want the Porsche, he wanted the ability to buy the Porsche. He just wanted the skills and the knowledge and the information and the research and that hard work that goes into purchasing a Porsche. Would you agree with this?

Yeah, completely. I would go a little further. It’s not my business what other people do with their money. I think ostentatious displays of wealth are unseemly, but that’s just as I say, it’s none of my business what other people do with their money. I have other things to do with my money. Public display, I suspect, in the social climate that we’re heading into, public displays of wealth will become dangerous as opposed to merely unseemly. I have no interest in touring around London in a Maserati or a Porsche. I prefer a Black Cab.

Yes. Most wealthy people I know of are exactly the same, and I think in my opinion that’s the reason why they’re wealthy. Okay. Final question about Sprott,what’s  the future for Sprott Holdings and what’s going on in the next few years?

I’m not sure you have capacity in your recorder (laughs).

I’ll try (laughs).

Sprott is a very hardworking amalgam of people who are primarily focused on precious metals. We manage about two and a half billion dollars in credit and general equities outside the resource space, but mostly we’re a natural resource funding manager. On the retail side, I would suspect that by now we have the best brand name in natural resource small and micro caps in the world. Our goal will be to continue to build and capitalize in that brand in a bull market.

We have great experience in natural resource lending. We have great experience in natural resource private equity, my business. We have a Canadian mutual fund business, and we have a US precious metals trust and ETF business. Right now, all of those businesses are firing on all cylinders. We’re about something at Sprott. Our message is that while we believe that the ascent of man will continue unbroken, readjustments will be due in society due to excessive levels of debt, and due to an inter-generational transfer of wealth from your generation to mine. We have made promises that we intend to leave you the bill for.

At Sprott, our belief is that there will be some wrenching adjustments that need to be made. There’s a lot of euphoria in the United States, as an example, about our incoming president’s intention to spend a trillion dollars that we don’t have on infrastructure. There’s also a lot of euphoria about an impending tax cut, and by the way, I think tax cuts are a great thing because I think government is a bad thing. The truth is that nobody’s paying attention to the fact that in the US, our on balance sheet liabilities at the national level are about twenty trillion dollars.

The number is so large that people lose sight of it, and the truth is that the popular discussions in the press have more to do with, as an example, Trump’s hairdo or his fondness for female genitalia than they do with the debt and the deficit. My suspicion is that that’ll come back to haunt us. At Sprott, by contrast, we have about 300 million dollars in working capital and no debt. We try to eat our own cooking. In other words, we’d like Sprott to stand for something as well as being something.

We think we’ve done a good job of that. We’ve steadily built the business for five years in the bear market where many of our competitors were in fetal position. We anticipate that if it’s a huge bull market, they’ll be trying to be where we are now, but we won’t be there anymore.

Yeah, of course. Thank you very much Rick. That was really great. Hopefully we can do this when you’re in London again.

I look forward to it.

Thank you very much.

London is a great town, and I look forward to it.

Thank you.

To find out more information about what Rick and his team are doing, please contact your Sprott financial advisor or go to http://www.sprottglobal.com/.



 

 

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

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