There has been a lot of bad news in the market lately, and the media's focus on the European and American debt crises hasn't helped lift spirits. But it's not all bad. And even when it's bad, it's good.
Rick Rule thinks that we have a mix of good and bad in the year ahead, but it seems to be all good news to him – an investor who likes to buy when everyone else is fleeing.
Rick Rule is a well-known investor with 35 years of resource investing experience. He is the founder of Global Resource Investments (which is now owned by Sprott Inc.) and is a popular speaker. He spoke to investors at the PDAC conference in Toronto on Sunday, March 4th. We've provided highlights of his talk below. Where possible, quotations are used directly from his presentation but may have been slightly edited, without changing the meaning.
He started with a very clear disclaimer: "If I say something about a company, it is not a tip or recommendation. It is disclosure of a conflict of interest." In other words, all the stocks he mentioned, he owns.
Mr. Rule divided his half hour talk into three separate sections. First, he talked about the market, then he talked about the opportunity in the coming year, and then he reviewed some of the stocks he is investing in.
His first topic, about the market, he dubbed "the good, the bad, and the ugly".
First, he covered the good stuff: "The biggest piece of big news out there is that there is $8 trillion worth of cash on the sidelines," said Mr. Rule. "The people who have this money are losing 300 basis points in purchasing power over time [because of inflation]."
This is an opportunity for all investors because, "if you can overcome people's fears and propel them to greed, you could see some very interesting things happen in the market if that $8 trillion tried to find a home."
Mr. Rule also said that he believes the resource bull market is very much intact and, as a result of low resource prices for the last 20 years, we still have supply issues. And there's even more good news. "The senior mining companies and the senior oil and gas companies are finally making money and they have to spend their money to grow. There is a shortage of prospects. A 20 year bear market means that these people don’t have large exploration pipelines. Remember. Every day that these guys mine, their business gets smaller. They have to grow. The easiest way to grow is to buy."
Mr. Rule also reported some bad news in his attention-getting manner. "Quantitative Easing or balance sheet adjustments… It's counterfeiting!" he proclaimed. "Every unit of 'counterfeiting' produces less and less GDP. It used to be, if you stole $1.00 from future generations, you could produce $0.60 or $0.70 of growth now. We have borrowed so much that now $1.00 from future generations, you're generation $0.10 or $0.12 of growth. There are diminishing returns."
And lastly, Mr. Sprott covered what he calls "the ugly" part of the market. He said: "Who are the most profligate counterfeiters we know? Junior resource companies! The Canadian dealer network can print phony share certificates faster than the treasury can print dollars. There is a lot of money to be made in the juniors but if you buy the sector over time, you will go broke. Every year, this industry consumes $4 or $5 billion more than it generates in sales."
So, what should investors do? Mr. Rule advised that investors should "look for companies to throw away. Find fatal flaws as quickly as you can." He suggested that investors can weed through the bad junior companies and ultimately find the best, "you'll make a fortune," he said.
Then Mr. Rule moved into the second part of his speech, where he described the upcoming year.
"The first thing you're going to face this year is volatility," he said. "It's been very benign the last 4 or 5 weeks; very pleasant. We're starting to think we're smart again. Tax loss selling is over. People are releasing good news so they can drink beer with their friends at PDAC. Market conditions are pretty good." Then he dropped the real punch line: "That isn't going to last. I think we're going to have lots of volatility."
Fortunately, though, this isn't necessarily bad news. Mr. Rule said: "I like volatility [because it results in] frequent, deep sales. What you need to train yourselves to do is use volatility. You need to have the guts to use the volatility in the same way you would if you went to a grocery and found your favorite brand of bread priced down by 30%."
Mr. Rule also shared another piece of investing advice to investors: "The big source of capital in the industry IS the industry. I'm buying stocks that will be sold to mining companies or oil and gas companies, and not stocks sold to institutions," he said.
Then Mr. Rule moved into the third part of his speech in which he talked about overall resource opportunities as well as the stocks he called "his conflicts" – the stocks he's investing in.
He said: "The first opportunity is what I call 'issuer roulette'. There are a lot of issuers who didn't issue equity last year because they thought the equity markets were too soft. In spite of the fact that they didn't issue, they kept spending. They're going to have to come to market this year, no matter what the market is. And if they come to market during the period of time where the liquidity is as ugly as I think it's going to be, there will be opportunity for someone who has the cash and the courage to give them the money." Although Mr. Rule advised getting involved with warrants and private placements, he recognized that not all investors could do that. In that case, he advised: "Buy on psychotic breaks. Have the cash to take advantage of situations where other people can't."
Then he listed specific stocks he was buying and once again urged investors that these were not recommendations but only the stocks that he owned.
In development stage mining stocks, he listed three stocks: "Lydian International (TSX: LYD); the market is saying it's 2.5 million ounces, we think it's 4 million ounces. Perseus Mining Ltd (TSX: PRU); the market thinks it's 5 million ounces in 2 deposits, we think it's 10 million ounces in 2 deposits. Esperanza Resources (TSX-V: EPZ); including redundant assets, they have a very cheap, easily minable million ounces."
Next, he moved into oil and gas picks and said that there were at least 20 Canadian companies that were "in the penalty box" in terms of price but were sitting on a lot of oil and gas resources in the ground. He rapidly listed a few of the 20: West Fire Energy (TSX: WFE); Novus Energy Inc. (TSX: NVS); Arcan Resources (CA: ARN); Delphi Energy Corp (TSX: DEE); Open Range Energy Corp (TSX: ONR)."
Then he talked about investing in the exploration side of the business: "If you're going to participate in exploration, the best way is to do it with prospector generators. They use their acumen to generate prospects and they share the risk with someone else who contributes a lot of capital."
Again, he provided the names of a number of companies that he was invested in, but which he felt were trading at a significant discount to their value: Sprott Resource Corp. (TSX: SCP); Sprott Power Corp (TSX: SPZ); and Sprott Resource Lending Corp (TSX: SIL). "They are well run, successful, and stupidly cheap," he said.
And with that, Mr. Rule answered some quick questions and wrapped the day of speeches.
In his usual style, Mr. Rule alerted investors of challenges and opportunities in the market and gave them ideas and tools to exploit the opportunities when they arise.
Lydian International (TSX: LYD) http://www.lydianinternational.co.uk/
Perseus Mining Ltd (TSX: PRU) http://www.perseusmining.com/
Esperanza Resources (TSX-V: EPZ) http://www.epzresources.com/
WestFire Energy (TSX: WFE) http://www.westfireenergy.com/
Novus Energy Inc (TSX: NVS) http://www.novusenergy.ca/
Arcan Resources (CA: ARN) http://www.arcanres.com/
Delphi Energy Corp (TSX: DEE) http://www.delphienergy.ca/index.htm
Open Range Energy Corp (TSX: ONR) http://www.openrangeenergy.com/
Sprott Resource Corp (TSX: SCP) http://www.sprottresource.com/
Sprott Power Corp (TSX: SPZ) http://www.sprottpower.com/
Sprott Resource Lending Corp (TSX: SIL) http://sprottlending.com/