Rick: A lot of it is personal; and with me it’s precious metals. The reason for that is that I’m a reasonably well-known gold broker, and in 2010, as a consequence of the pricing, I was way underweight gold stocks. I was afraid because if gold had broken out, my clients would, for some reason, probably have strung me up. I would like to address those imbalances. It’s very seldom that you see an opportunity to buy the junior gold sector – or the senior gold sector – at reasonable prices. This is the first time that I have seen the sector at reasonable prices relative to the price of gold since 2004.
These are rare events, and in my experience in my career, when you have the opportunity to build positions in high-quality precious metals companies at reasonable prices – not cheap prices, but at reasonable prices – you’re well advised to take that opportunity. So my principal focus is in the gold, silver, and platinum sector, in the precious metal sectors as we speak. That isn’t to say that I don’t like some other sectors, including broadly the energy sector, but I have more opportunities spread over a decade to be in the energy business. It’s a much bigger business – it’s the business I’m from – and in my experience opportunities to participate efficiently in the precious metals sectors are rare and this is one.
Louis: Okay, that’s a great point for everybody to remember. Is there a timeframe? I know Doug hates crystal-ball questions and you probably do just as much – but you did say from the podium that you expect we’re probably going to see more bearish emotion over the months ahead as the summer is probably going to be a “sell in May and go away” type summer. I have to say my gut feeling, for whatever it’s worth is in harmony with that, but it could go any number of other ways. There could be black-swan events that send gold screeching up. Bets are off at that point.
But even if that doesn’t happen, I’ve also encountered more mainstream people now talking about gold in an informed way that’s really surprised me. I had dinner with a friend a couple of nights ago, a more mainstream investor who bought Newmont because of the dividend and because he was aware that commodity prices have held on, but the gold stocks – or gold in particular has held on, but the gold stocks are all selling off, and to him that was an opportunity. “Wow, the commodity is still there, but the stocks are cheaper, that looks good.” So maybe that’s just one data point, but it is a contrary data point. If there is an awareness percolating out there in broader markets that this is an opportunity as you’ve just said, could that contravene the “sell in May and go away” wisdom; and could we actually see greed take over from fear in the marketplace?
Rick: Yes and yes. I mean, the most important thing about the phenomenon that you describe this person observing is that it’s true. Many people observe phenomena that aren’t true, in which case their reaction to it is usually fairly short-lived, but the phenomenon that you described is accurate. And the phenomenon that you yourself observed, which is a greater understanding of the gold story among the broader investing public, is also true. Both of those are very bullish.
Another thing that’s bullish is that within the community the sentiment is so negative that it may be that everybody is talking their books and all the selling that they see coming has already occurred. I don’t believe that to be the truth because I see fund flows out of small funds and fund flows out of mutual funds, so I see logical selling pressure, not buying pressure, but everybody sees the same thing and we may all be wrong.
In terms of what could turn it around, I see three things. You named one of them: an anomalous black-swan economic event that causes the “catastrophe insurance” trade in gold to come back to the fore. There’s no more powerful economic motivation in the world than fear; the other one of course being greed. The useful thing about gold in terms of a bull market is that gold plays to both of the primary investment motivations, so the fear buyer stimulates the greed buyer and the greed buyer reinforces the precept of the fear buyer. And when you get a real gold bull market, it ratchets back and forth between those buyers on the way higher. So that’s one thing, an anomalous black-swan event.
The second thing is that the very low prices relative to historic norms that we are seeing in the precious metals business and the incredible investment in precious metals productive capacity we’ve seen in the last 10 years mean that we are in the early stages now of a merger-and-acquisition cycle. Markets work, and these low prices will beget takeovers, and the takeovers will add both liquidity and hope to the sector.
And the third is – and we’re ignoring this completely in this market – is that we’re very early on in a discovery cycle. And as much liquidity and hope as takeovers add, a big discovery is like a takeover on steroids.
Louis: The market always loves a discovery.
Rick: An event like Arequipa that goes from $0.30 to $30 in 19 months is the type of thing that really gets people’s pulse racing; and I think it’s unlikely that we won’t have a major discovery in the next 12 months. There’s too much money being spent in good places by too many good people. That’s going to be, from my point of view, the real black swan.
Louis: That’s a pretty optimistic, positive statement there.
Rick: I know.
Louis: Almost a Casey-style declarative statement.
Rick: I know a lot of good geologists. I don’t have a lot of talent in the world, but I’m pretty good at hiring geologists; and I know a lot of really good geologists who are doing really good work. Exploration takes a long, long time. People want exploration results in 90 days, but what people want doesn’t matter. We have been funding the exploration business now aggressively for 10 years, and we’re funding increasingly good people who increasingly have the experience to conduct exploration in the junior venue rather than as part of Barrick or Newmont or some larger company, and I think we will be surprised by discovery in the junior sector.
Louis: Okay, discovery versus development: if we’re looking at new buyers, that tends to put the spotlight on development stories, de-risking existing discoveries, getting ready for that takeover and/or production. But I also know that you like the prospect-generator model. Have you shifted from investing more in prospect generators to developers now, or–
Rick: In normal markets, I have focused on earlier-stage exploration because it’s less popular. I always choose sectors that I have to myself. I can’t always win a debate with 50 participants, but I can always win a debate where there’s only one participant. So, over 30 years I have done extremely well investing in exploration – in early-stage exploration – because I was the only one in it. And I have patience; I am willing to finance and continue to finance a company for five or six or seven years. I invest in process. Investing in process is how you get a big position, in something like ATAC at $0.10 and see it go to $7. There’s no other way to do it. You get in on the ground floor by creating the ground floor, so I love that space.
Right now you are seeing the broadest discrepancy between the valuations established in scoping and pre-feasibility studies to enterprise value that I’ve seen in 35 years in the business. As a consequence of the opportunity available to me in the development space, given the fact that the market’s on sale, I have diverted some of my traditional focus on earlier-stage exploration to come into a sector that normally is denied to me by wealthier, I would say, less-rational participants. They just seem to have gone on strike, and so I’ve decided to show up and go to work.
I see as a consequence of the values that have been established, a very, very active merger-and-acquisition market in the next 18 months. This is one of the reasons why despite the fact that I think the market is going to continue to decline, I’ve become a fairly aggressive investor. While I think the overall market is going lower, I think there’s going to be a dozen or 20 takeovers with 35 to 50 to 60 percent premiums, and I think our organization with its incredible investment in technical people will have the ability to differentiate.
We’re not going to get everything that is taken over. Some of the things that we think are going to be taken over won’t be, but I think that it will be an activity which will yield us substantial rates of return on substantial amounts of capital. In other words, we’ll be able to deploy significant amounts of capital for high internal rates of return, and opportunities to do that in a market don’t come very often.
Louis: That’s really interesting. Let me address directly the readers – I’m sorry, viewers. There’s a lot in there, that was an earful. Something that Rick said is really worth focusing on: discipline. Listen to what he said. This is a sector where buyouts, the takeovers of development companies make sense. They make money for people. But when a lot of people liked it – what does that mean? It means that prices were up. Rick didn’t buy. Investing in developers makes sense, it’s a good business plan, but he didn’t buy because other people were pushing the prices up. Now, when it’s not loved, nobody wants to hear about it, Rick is moving in. This is contrarian discipline, and this is how you become successful rather than roadkill in this sector.
So hats off to you for that, and thank you very much for your time.
Rick: My pleasure, Louis, I enjoyed the process.
