Resource investors are desperate to know if we’ve reached the bottom of the market yet and whether or not now is the time to buy. Moreover, they want to know what they should invest in to help them rebuild their portfolios.

Mr. Rule’s thoughts were typically insightful, and he also gave a very frank assessment of the zero-value worth of some of the resource companies in the market today. This interview may shock and even offend some investors.

First, we asked Mr. Rule about the state of the market now and his expectations for the market in the near future. “I think the market has probably bottomed,” he said. “I think the start of the year has given everyone a better demeanor than last year but it’s probably a false start. My suspicion is that summer will try us again. I do think it’s likely that we put in a bottom but I think the bottom will be much more extended than other people believe.”

He continued with additional detail about what investors can expect, and provided a brief overview of how the market would likely act in the year to come: “My suspicion is that we’re in the middle of a pretty good PDAC rally. We’ll have a tough summer season but the market will be a gradually ascending trading channel with higher highs and lower lows but marked by 20% to 25% inter-year volatility, which will unnerve many participants. My suspicion is that the summer is going to be pretty soft and scary for a lot of people. As an example, we haven’t seen leadership in this market from commodity other than gold, and we’ve seen deterioration in some commodity prices – in particular, copper and nickel. If we either see broad market capitulation, which I don’t think we’ll see, or issuer capitulation, of the style we saw in July 2000, it will be very, very, very difficult to build a sustained recovery without further deterioration.”

This difference between quality companies and valueless companies is a hot topic for Mr. Rule. His insight and his passion are clear on this! “It’s worth noting that, although the TSX-V is up by 15%, that the move has been concentrated on the best 10% of the issuers, and you still have more companies making new lows than making new highs. That suggests a situation that we talked about in an earlier interview, which suggests that 60% to 65% of the companies on the TSX-V have no value and realistically should go to a price that approaches their Net Present Value before the market recovers. That price, of course, is zero.”

He went on to talk about this difference between quality companies and valueless companies: “Issuer capitulation… [is] where issuers say, ‘I’m not going to do a financing to survive. I’m going to do a financing that is large enough to move my company forward for 2 or 2 and a half years’. You can’t save your way out of a decline. You have to grow your way out of a decline. This market needs to thank and excuse the pretenders and it needs to support the performers. It needs to support the performers with their own concurrence: They need to do large market-clearing financings and grow their businesses.“

We pointed out that some companies right now are just raising a few hundred thousand to get them through to the recovery and Mr. Rule shared his frank assessment of that strategy: “Well, with any luck, they’ll go back to selling cars; they’ll go back from where they came. Someone who raises $200,000 is curious about his own salary and his ability to pay the office rent. That does nothing for the shareholders. Those companies should be thanked and excused. [The decision makers] should be allowed to pursue employment opportunities that are more in keeping with their skill sets.”

Next, we talked about where Mr. Rule was looking – where he thought the next opportunities would come from. “We are really seeing value in the generative exploration business. Everybody is chasing the same thing: Finished projects that are high-margin projects. There’s probably six billion dollars in private equity crowding into this market and there’s no home for it. What nobody is looking at is the paucity of high quality exploration projects. It’s my opinion that high quality exploration teams, that are respected by the industry, that can generate , which they can turn (and by the way, companies are taking projects; when generators say they can’t turn them, they’re lying or not trying)… will see their share prices triple in the next two years or three years. And a few of those companies will make a discovery.”

“The issuers at this convention say that this is a market that is not rewarding their efforts. Strictly speaking, that’s not true,” Mr. Rule pointed out. “This is a market that rewards successful efforts. It doesn’t reward story. Reservoir Minerals (TSX-V: RMC) made a great discovery in Serbia and its stock went from $0.22/share to $7.00/share. Something wrong with that move? Africa Oil (TSX-V: AOI) made a discovery and their stock went from $0.80/share to $12.00/share. Nothing wrong with that move. Sirius Resources (ASX: SIR) – up 1200% in nine months as a consequence of discovery. This is a market that will reward performance. It’s a market that has been starved for performance.”

So what should investors do? We get a couple of key points from our interview with Mr. Rule.

First, investors should take a serious look at the real value of the companies in their portfolio and consider whether they’re holding a company that has the potential to make discoveries or whether they are holding a company who’s Net Present Value should be zero.

Second, value investors should get ready for a market that won’t make dramatic advances but, rather, will provide numerous buying opportunities as the bottom extends longer than many are expecting.

In other words: As the market grows, investors should expect growing pains before we get any gains.

REFERENCES

PDAC Convention site: http://www.pdac.ca/convention

Rick Rule’s website: http://sprottglobal.com/our-team/rick-rule/

Contact: rrule@sprottglobal.com