LJ: My gut says that we don’t have real capitulation yet—just price destruction and desperation that has Rick rubbing his hands together gleefully. Companies are hoping for the next round of drill results to raise their stock price so they can raise money at a better price and so forth. They aren’t yet saying, “Forget it. Name your terms.” When we start hearing that, it’s a good sign of bottoming.
I’m quite happy for the bottom to pass and then say, “Clearly that was a bottom and now we have upward momentum,” particularly in the context of a supercycle, which I don’t believe is over. Looking at supply and demand and political factors I have a high level of confidence that this major bull cycle for metals has a longer way to go. Until the fundamentals change, any retrenchments along the way, no matter how major, are buying opportunities. It’s just a matter of when and how much to deploy.
RR: The gap between gold and gold equity prices came about for several reasons. In the first place, before 2010, gold stocks increased in price very rapidly, more rapidly than gold itself. As a result, gold stocks simply overshot and needed a rest. The second factor was partly a function of the first—the explosion of gold ETFs. People who hadn’t traditionally been gold buyers but bought gold stocks for leverage to gold could buy bullion-like instruments in retirement accounts and hoard gold in some fashion more efficiently than buying it and burying it in the backyard.
The third factor was the gold industry’s extraordinarily poor performance. Between 2000 and 2010, the price of gold advanced from $250/oz to $1,200+/oz. One would have expected a meteoric rise in the free cash generation of the gold companies, but the industry’s cash-generating and earnings response was pathetic. Worse, while cash didn’t explode, equity issuances did, so they diluted the cash they already had. That led to disgust with the gold companies, which carried over into their stock valuations.
A fifth factor, of course, is that the junior sector is perpetually overpriced. The sector itself is valueless and always will be. Added to that, these little companies incredibly inflated the number of shares they issued. The private sector is always more efficient than the public sector, even in counterfeiting, and the Canadian dealer network printed more phony share certificates than the Fed printed phony dollar bills. So although share prices didn’t escalate, the market capitalization of the sector escalated dramatically.
If you step back and look at all those factors, you’ll see the stage set for a rebound in the better gold companies. The performance of the senior and intermediate gold companies has been much better over the last 18 months. The cash is really starting to come out. Strip the tax gobbledygook from the accounting and look simply at cash at the beginning and end of period and capital expenditures, and you’ll see how much cash these companies are generating.
That’s good in a bunch of ways. It allows them to grow organically so they don’t have to issue equity. It allows them to do takeovers, which adds capital and liquidity and hope to the sector. And increasingly the companies are sharing some of that capital with their shareholders either as dividends or equity buybacks. That’s making the gold equities more attractive.
Ironically, the stage is set for a rebound just as gold share investors have conditioned themselves to expect the worst. Does that mean it’s going to happen anytime soon? I’m long past confusing inevitable with imminent. And I would caution against reading too much bullishness into what I say with regard to juniors because you have to remember that most of them have no value.
That said, we’re in a discovery cycle. Although the industry has all kinds of flimflam artists, every year we get a few better people and over the past 10 years we’ve empowered them with lots of capital. We now have some great people using great tools to make discoveries in many places that have never before been prospected by means more sophisticated than a pick and a mule.
So I expect an increasing cycle of discoveries that will really surprise people, and more money may be made farther down the value chain than at the very top. If I’m ever right about volatility—if the volatility index gets up to 25 or 30 again—one of the easiest ways in the world to make money is to buy very good companies and sell short-dated puts and calls against them. Being particularly volatile, gold stocks are especially appropriate for put and call ratings. So for the next year, I’d suggest buying a couple of majors if you’re so inclined—they may not be cheap but they’re reasonably priced—and sell puts and calls against them, particularly when the volatility goes nuts.
TGR: How about explorers versus producers?
RR: If you’re willing to play the game, nothing makes money like successful exploration. Most speculators don’t have the patience to speculate on a process, which is what anticipating exploration takes, but that’s what’s made me the money I have. Buying ATAC Resources Ltd. (ATC: TSX.V) at $0.10/share nine years ago, it was frustrating to watch it go to $0.22 to $0.13 to $0.27 to $0.11. But then it went to $7/share and you say, “Oh yeah, that’s why I did that.” So for people willing to take the risk and the time, the exploration sector is a nice place to be.
TGR: In conclusion, tell us about the best investing advice you have ever received or given.
RR: I think the best investing advice I’ve ever received I read in Ben Graham’s Intelligent Investor—the chapter on Mr. Market. On the whole, he’s your manic-depressive business partner. If you trade against his mania and depression, he’s the best partner you could possibly have. By the same token, probably the best investing advice I’ve given was merely paraphrasing Ben Graham. I’ve told people for years that in an extremely cyclical business such as natural resources, you can either be a contrarian or a victim. That’s applying cyclicality to Ben Graham. It’s the same message; I just have a catchier slogan.
MK: My best advice came from two people. Doug Casey always said to focus on people, and Rick told me to focus on people of my generation to reap the rewards for the next 30 years. The main advice I’d give anyone is before buying anything, go to free shows, sign up for the Casey newsletters and figure out whether you even like this sector. You’re not going to succeed if you don’t enjoy learning about it and enjoy the people in it. If you follow your passion, whatever that may be, you will succeed.
LJ: Back to what Rick said—and he continues to be one of my mentors—is the critical concept of being either a contrarian or a victim. It’s certainly proved true. Of course, Doug Casey is the quintessential contrarian. Maybe I’ll go one further and add Bill Bonner’s quip that a bull market is a random market movement that causes average investors to mistake themselves for financial geniuses. I’ve done a number of things wrong and there are things I might do differently, but I’m pretty sure I haven’t made the mistake of assuming that the beneficial results of a bull market had anything to do with my particular genius. I’ve been cautious and the bull market has made me disciplined.
I think the advice I have given—and it’s not mine but reiterating things that I’ve heard that have worked—is about discipline. You have to know yourself. As Marin said, you have to do something you care enough about to do the hard work, learn what you need to learn. Rick said something about staying in the play until you get to the end game. That takes a lot of discipline. A good speculator is not just lucky. A good speculator is very disciplined.
TGR: That’s a wonderful note to end on. Thank you all for your time.
Founder and chairman of Global Resource Investments and president of Sprott Asset Management USA, Rick Rule began his career in the securities business in 1974 and has been principally involved in natural resource security investments ever since. He is a leading American retail broker and asset manager specializing in mining, energy, water utilities, forest products and agriculture. Rule’s company has built a sterling reputation for its specialist expertise in taking advantage of global opportunities in the resources industries. In 2011, Rule closed a landmark deal with Eric Sprott, founder of Sprott Inc., another famous powerhouse in the arena. Sprott Inc. offers resource-oriented investors opportunities in segregated managed accounts, mutual funds, hedge funds and private partnerships. The collective organization offers unparalleled expertise and access to investment opportunities in all resource sectors. Sprott Inc. manages a portfolio of small-cap resource investments worth more than $8 billion and boasts a workforce of more than 130 professionals in Canada and the U.S.
Louis James is chief metals and mining investment strategist at Casey Research, where he is also the senior editor of Casey International Speculator, Casey Investment Alert and Conversations with Casey. When not in meetings with mining company executives in Vancouver, British Columbia, James regularly travels the world evaluating highly prospective geological targets and visiting explorers and producers, getting to know their management teams. For more than 25 years, Casey Research, headed by investor and best-selling author Doug Casey, has been helping self-directed investors to earn returns through innovative investment research designed to take advantage of market dislocations.
Investment Analyst Marin Katusa is the senior editor of Casey Energy Report, Casey Energy Opportunities and Casey Energy Confidential. He left a successful teaching career to pursue what has proven an equally successful—and far more lucrative—career analyzing and investing in junior resource companies. With a stock pick record of 19 winners in a row—a 100% success rate last year—Katusa’s insightful research has made his subscribers a great deal of money. Using his advanced mathematical skills, he created a diagnostic resource market tool that analyzes and compares hundreds of investment variables. Through his own investments and his work with the Casey team, Katusa has established a network of relationships with many of the key players in the junior resource sector in Vancouver. In addition, he is a member of the Vancouver Angel Forum, where he and his colleagues evaluate early seed investment opportunities. Katusa also manages a portfolio of international real estate projects.
Rule, Katusa and James were featured in daily Gold and Resource Stock Roundup sessions at the Casey Research Recovery Reality Check Summit, where they revealed their favorite resource companies and specific investment strategies. You can hear every word of these invaluable discussions, as well as over 20 hours of presentations by contrarian investor Doug Casey, former U.S. Office of Budget and Management Director David Stockman and 29 other financial experts in the Recovery Realty Check Summit Audio Collection.
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Disclosure:
1) Karen Roche and JT Long of The Gold Report facilitated this panel discussion. They personally and/or their families own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: None.
3) Rick Rule: I personally and/or my family own shares of the following companies I mentioned in this interview: ATAC Resources Ltd. I personally and/or my family am paid by the following companies I mentioned in this interview: None.
4) Louis James: I personally and/or my family own shares of the following companies I mentioned in this interview: None. I personally and/or my family am paid by the following companies I mentioned in this interview: None.
5) Marin Katusa: I personally and/or my family own shares of the following companies I mentioned in this interview: None. I personally and/or my family am paid by the following companies I mentioned in this interview: None.
