Investing takes courage. Investors who put their money into something and they secretly hope their purchase will trigger a meteoric spike in prices. When that doesn't happen (and it rarely happens), investors are left with the pit in their stomach as their purchases stumble and falter along.
Everyone knows the rule that you profit from buying low and selling high but there's a reason why people frequently do the opposite: They want to jump on the bandwagon when prices are up and they want to jump free of the sinking ship when prices are falling.
Rick Rule, founder of Global Resource Investments Ltd. (now part of the Sprott family of companies), knows that it takes courage and liquidity to act when prices are low. And right now, prices are low (and possibly going lower).
We spoke to Mr. Rule at the recent Hard Assets Investment Conference in New York. Mr. Rule was a speaker at the conference and we caught up to him after his speech to ask him for his assessment on the market and where he thinks the opportunities are.
First, Mr. Rule gave us his view on the market. He told us: "I'm excited about the fact that things are cheap and getting cheaper. One of the things about bull markets is that the speculative community takes the bad stocks up with the good stocks. And the great thing about the bear market is the investment community takes the good stocks down with the bad stocks." Even his bearish outlook has an optimistic quality about it that makes him almost bullish.
Mr. Rule believes that the market still has more room to fall. "I don't think we're close to the bottom," he said. "The simple truth is more than 50% of the issuers on the TSX Venture are selling below $0.25/share – substantially less than half of their previous 12 month highs. And, they have less than six months of working capital left. That is not a prescription for turnaround. Statistically, half of the market is headed toward extinction. Not a very pleasant set of circumstances."
This is the time that many investors would bury their cash in the backyard and wait until things look better. But Mr. Rule is looking for opportunities. "Investors are throwing the babies out with the bathwater. Ironically, we're seeing the best investment opportunities since 2002," Mr. Rule explained. "I am not seeing the financing opportunities in this market that I had anticipated seeing but I think it's only a matter of time. You have issuers that have not been raising money for the last 18 months [because stock prices are low] but they haven't stopped spending money. Eventually the curves will cross each other and they will have to raise money. If they have to raise money in a market like this that has no participants willing to give them money, the pricing will be superb indeed. I hope to have the cash and courage to be there."
And later he added: "If you're a check writer like me, understand that bad market conditions take down good companies with bad companies. The opportunities to write checks for good companies will be spectacular."
So, what is Mr. Rule looking to invest in? And, how can other investors find opportunities in this market? Mr. Rule gave us his playbook for the next 18 months: "I'm looking for takeovers by bigger companies and I’m looking to participate in the discovery cycle," he said. "In this market, because prices [of stocks] are going lower at the same time that the industry itself is doing well, I would look at companies that are fairly obvious takeover candidates."
Next, he listed the qualities that make a company an ideal takeover candidate: "Developmental-stage gold assets with at least a preliminary economic assessment out. Companies with a Net Present Value established by a prefeasibility study that exceeds the sum of the Enterprise Value and the up-front capital costs. Projects with a Net Present Value above 25% and payback periods shorter than 3%. Pay attention to the management teams of stocks that you are going to buy. Pay real attention to the properties. And in particular, pay attention to the burn rate and how much free cash the companies have left. You can have wonderful management and a wonderful property but it's a capital intensive business… so no capital, no business."
Then he summarized the above list with this thought: "In other words, I'm pretending I'm a Mergers and Acquisitions guy at a mid-size or major mining company. I'm not looking for institutional momentum. I'm not looking for leverage to gold. I'm looking for acquisitions that would be cash-on-cash accretive for other mining companies."
We asked Mr. Rule if he thought investors should wait and try to time the market bottom. He advised investors to participate when they are ready and not for any hard-to-identify bottom. He also provided some guidance to investors about using junior resource companies as a surrogate investment to replace buying physical assets: "I don't think the average investor should be waiting for anything. Investors need to decide what they want to do. If you think gold and silver prices are going higher then buy gold and silver… not gold stocks and silver stocks. Buy gold stocks and silver stocks because you think the company is going to do something special, not because you think it's going to react to a gold and silver market."
Our conversation briefly ranged across all of mining and non-mining sectors he is paying attention to: "The most undervalued resource on the planet is water. That's a whole different interview," he said. "I'm attracted to the conventional oil and gas business. In a different interest rate environment, I love infrastructure business like ports and pipelines, but they are way over-priced right now. For the very long term, I've done pretty well in timberland investments. What's interesting to me is that right now, the sector that I see having the most attractive acquisition parameters is the precious metals sectors. It's very seldom in my career that I have seen precious metals attractively priced relative to the gold and silver prices themselves. In prior times, when I've seen attractively priced precious metals assets, I have been very well rewarded buying them (although not always immediately)."
The interview closed as Mr. Rule summarized his position on the current market – a market that most people are staying out of because prices are too low. "You have two choices," he said. "You can be a contrarian or you can be a victim. You have to have the cash and courage to act when you have no competitors. An old fat guy like me can win a 100 yard dash when I'm the only guy running. It's up to investors if they want to participate. Buying low and selling high first involves buying low. You're going to have the opportunity to do that in the next 18 months."
Investors need to do their own due diligence to determine if a particular stock is right for them. If it is, and if they have the means to invest, then they need the courage to buy and stick with their decision while the market stumbles along. As Mr. Rule points out, the opportunities are out there right now for investors want to buy low.