Rick Rule, 2012 Agora Financial Investment Symposium
“Rockstar” resource investing guru Rick Rule took the stage for the challenging “Happy Hour” time slot to cap off the first day. No slides needed, Rule went straight off the cuff.
He joked that while he enjoyed the previous biotech presentations, it reminded him why he limits himself to resources, because he only buys things he can spell – like gold and coal.
We Are Denying Markets
We have on-balance budget sheet liabilities of $16 trillion in the US, and off-balance sheet liabilities in the neighborhood of $85 trillion, Rule said. Hence the system is starting to wobble.
Who will pay the price for these liabilities? Channeling a previous Bill Bonner article, Rule agrees that everyone is on the hook.
“Markets are the purest extension of purpose and utility,” he eloquently stated. “While it’s messy, it works.”
But we are in the quandary we’re in now because we’re denying markets from working.
Rule asked the room if anyone believes the root circumstances from 2008 have been addressed…there were no takers. Because the government has not addressed any of the underlying circumstances, the chances of the situation recurring are high.
“We have a problem of solvency, not liquidity,” he said in reference to the government’s continuing attempts to pump liquidity into the system.
Stupidity in the Resource Markets
Rule believes we are still in a resource bull market, because resource businesses are very capital intensive and cyclical. The market’s response to shortages requires billions of dollars and many years to add supply.
The current resource bull market is a consequence of the previous 20-year resource bear market (1982-2002), which constrained the supply.
Today there are political constraints on the supply side as well, as governments increasingly tax and nationalize resource projects.
“That’s political science speak for theft, of course,” Rule deadpanned.
The circumstances from 2008 presented another supply constraint, as the credit was not available to build out new supply. (Jim Rogers is also on record as saying that 2008 would likely prolong the commodity bull market).
On the demand side, there has been a “gradual political liberalization” in the emerging and frontier markets over the past 30 years. Living standards have risen in these places, and when the poorest 3 billion people make more money, they buy a lot more stuff.
(Contrast this with the developed world, where Rule notes that when we make more money, we don’t necessarily buy more stuff, because we have a ton of crap already).
“But Before You Get Too Excited”
Rule cited gold’s painful 1975 decline from $200 to $100, a painful 50% retracement that shook out many gold bulls, as it would march on towards its eventual $850 peak.
A Remarkably Efficient Destroyer of Capital
“If you took the junior market as a whole, and called your broker, you would get broker, and broker, and broker…”
Rule warned the audience against buying all 4000 junior miners, asking what a fair “price-to-loss” ratio might be for the broader junior market.
(Recall our previous Rule article on why GDXJ is a sucker’s bet).
“The industry as a whole is a remarkably efficient destroyer of capital.”
But, he says, this disguises the fact that the top 5% generate such spectacular performance that they add credibility, hope, and liquidity in the face of the broader ongoing losses.
“Market Clearing” and Upcoming M&A Opps
Rule is anticipating a purging in the junior resource sector over the next twelve months, as 50% of the TSX exchange is on the verge of being turned upside down. 50-60% of these stocks will march towards their intrinsic values…of zero, he says.
But this will provide cover for what he sees as a stealth bull market in the good companies. The opportunity today is that these good companies are being taken down with the bad companies.
Junior companies are driven by events, rather by sentiment – namely a takeover, or a new discovery, Rule explained. And the setup for making money on event-driven opportunities is getting better and better.
He thinks merger and acquisition activity will be rife in the next 18-24 months, as the larger companies in the sector are flush with institutional capital, just as we are embarking on what he sees as a good exploration cycle.
Private placement investing is Rule’s preferred method for “bad times” like these in the sector. He said paradoxically it’s better to invest in private placements in bad times rather than good, because are investing for events rather than a rising tide.
There’s a LOT more Rick Rule scheduled during the week, so come back for more specifics on his favorite picks.
Rick Rule has been active in natural resource investing for 35 years. He is a well-recognized expert in mining, energy, water, forest products, infrastructure, and agriculture. Mr. Rule is a featured presenter at investment and industry forums and conferences around the world. He founded Sprott Global Resource Investments, which provides investment advice and brokerage services to high net worth individuals, institutional investors, and corporate entities worldwide.
This week Contrary Investing is coming to you LIVE from Vancouver, Canada, with coverage from the 13th annual Agora Financial Investment Symposium! Stay tuned this week for write ups on the presentations from Niall Ferguson, Rick Rule, Marc Faber, Michael Covel, Doug Casey, Barry Ritholtz, and more.
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