“But for the 20% or 30% of juniors that are truly viable they’re absolutely cheap,” says Rick Rule, Chairman of Sprott US Holdings Inc., in an interview with Smallcappower.com. Mr. Rule reveals his thoughts on geothermal energy, discusses which areas of the resource sector he likes at this time, and explains ‘optionality’ and how it relates to the price of gold. Sprott Inc. (TSX: SII) and Sprott Resource Corp. (TSX: SCP) are related companies.
VIDEO TRANSCRIPTION
Tracy Bezeau: So, Rick, I know you like to buy these junior resource stocks when they’re really, really cheap. Is that the case right now.
Rick Rule: Tracy, two answers to that question. Seventy percent of resource juniors are never cheap, because they’re worth nothing. For the bottom part of this market they need to go lower to get to their intrinsic value which is nothing.
But, the more important part of the question is for the 20 or 30 percent of juniors that are really truly viable. They’re absolutely cheap. They’re down 75% from their highs which is one way of saying they’re 75% more attractive than they were during the bull market.
Tracy Bezeau: During past shows you’ve talked about how much you like geothermal energy. Can you tell me a little bit more about that.
Rick Rule: Yeah. I think geothermal energy as an asset class is probably more suited to private equity than public markets now. I’ve come to understand in terms of accessing capital for geothermal businesses and capital intensive businesses generally that the retail stock buyer isn’t the right source of capital for these businesses. The private equity buyer is the right source of capital.
In terms of the geothermal business, generally it’s a good business. The problem has been the management teams that we hired to implement the strategies for us. From Sprott’s point of view we will be investing in geothermal heavily over the next ten years not in a public format.
Tracy Bezeau: Which are your favorite resource areas to invest in this year and why?
Rick Rule: We think the entire resource industry is attractive. But, in terms of specifics we like the water business a lot in the U.S. west and southwest. We think the uranium price probably doubles over the three to four year time frame. We like platinum and palladium again because of supply-demand fundamentals. We like the zinc business.
But, the truth is that maybe once a decade precious metal stocks – gold and silver stocks – become reasonably priced. They never become cheap. Buying precious metal stocks when they’re out of favor and reasonably priced seems to me to be an especially prudent thing to do at this point in time. Not because they’re cheap, but simply because they’re reasonably priced which is unusual.
Tracy Bezeau: Eric Sprott takes a very positive view on where the gold price will go, and he seems very convinced that gold is going to go to about $2000 per ounce probably within the next 12 months. Are you similarly convinced that this is the perfect time to be investing in this marginal small cap gold producer?
Rick Rule: I think this is a good time to be investing in gold and silver stocks. You should note that I work at a place called Sprott. He doesn’t work at a place called Rule.
Eric has been a directional investor who really, really, really seeks alpha. I’m a credit analyst, and I am inherently more conservative than Eric. So, while he has a point of view as to where the gold price is going and when, I’m more agnostic about that.
I share his perception that this is the time for those who can afford the risk to be heavily involved in the more speculative end of the gold and silver equities, although I would have to say I have never, ever, once in 40 years been as bullish as Eric has always been.
Tracy Bezeau: Can you explain optionality and how it relates to the price of gold. And, are there any companies that you can mention that are currently using the optionality to their advantage?
Rick Rule: Well, that’s a wonderful question. Optionality refers to buying companies not based on the money that they would make at the current gold or commodity prices but ones that are extraordinarily leveraged to higher commodity prices. That’s a strategy that’s worked very well for me in the past.
It’s also a strategy that became extremely popular in the sort of 2005 to 2011 time frame. It failed the industry in a massive way. The mining companies lost probably $50 billion on optionality. As a consequence, optionality is very much out of favor. And, as a consequence of that, it’s back in favor with me.
It’s important when discussing optionality with juniors to know that general and administrative expenses destroy optionality. Selling stock to raise money to pay salaries lowers your proportional interest in the deposit. It’s tough to get a junior mining company management to do nothing and to accept the management compensation that is due management teams that do nothing.
Tracy Bezeau: So you have coined the phrase ‘the falling knife syndrome.’ What do you mean by this?
Rick Rule: Well, that goes back to the prior question. The falling knife syndrome is that when you buy a company with very large cash resources because you believe that buying cash at a discount is a good thing to do, what happens is that management salaries, and rent, and overhead cause the amount of cash in a company’s treasury to decline. So, the falling knife means as the cash falls you try and grab the knife in hopes that the cash burn declines.
Tracy Bezeau: Tell our viewers about the ‘Sprott’s Thoughts’ newsletter.
Rick Rule: Thank you for asking that question. To begin with, we think it offers exceptional value because it’s free. ‘Sprott’s Thoughts’ goes to 40,000 people currently. It comes three times a week. And, it contains the best ideas, the best paradigm, the best educational message from all of the thought leaders at Sprott, including Eric Sprott, Dr. Marc Faber, John Embry, myself, and the other analysts and portfolio managers in Sprott.
As I say, it comes three times a week to your own inbox absolutely free, which means I absolutely positively guarantee that you’ll get your money’s worth.
Tracy Bezeau: Well, thank you very much for taking the time for the interview.
Rick Rule: Tracy, thank you for having me. I appreciate it.
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