Sprott Monthly Market Update With Rick Rule: 3 Keys To Success In This Bull Market

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Includes: GLD, IAU, MDRPF, NG, PAAS, PALAF, PHYS, SA, SLV, SSRI, THM, XRA
by: Palisade Radio

Summary

Is the bull market real?

Silver has not yet moved.

Many private placements are scams.

Will there be a bull market in rare earths?

Calling the top remains tricky.

No market goes to the moon directly, and Rick is of the opinion that a natural price consolidation is likely but current market events are meaningless compared to what we will see in the coming 3 to 5 years.

The current market situation reflects a war between gold and the US 10 year treasury. The US 10 year treasury bond yield has fallen from 15% to 1.6 - 1.7% and gold is in a sense contra-treasury. It is incontrovertible that gold is at the start of a bull run!

Silver and especially silver equities are extraordinarily volatile and have not yet moved though looking for multi baggers exposes you to huge financial risk and you should be prepared to lose half of your investment.

Rick provides detailed information on how to achieve spectacular multi bagger gains using optionality plays, private placements and stock warrants.

Rick has seen other bull markets and has experienced being right before. He is now very patient and is prepared to wait 5-6 years while this market plays out and take his time to find the right asset management to replicate the successes of the past.

Palisade Radio host Collin Kettell: Hello everyone and welcome. This is your host, Collin Kettell, and we are back with another Palisade - Sprott Monthly Market Update with Rick Rule. Rick, as always welcome to the program.

Sprott US Holdings, Inc., CEO Rick Rule: Well, thanks again for scheduling this monthly. I enjoy the continued discussion.

CK: Rick, the summer doldrums are fast approaching which signifies how there is usually a pull back in the summer for various different reasons that we can go into that is fast approaching, and has many investors concerned for a pull back or even an end to what could be a fake rally still. But, Rick, if this is indeed the beginning of the next bull market, could investors be caught off guard and witness a continuation of this trend into the summer? Do you see a rally continuing? What do you think is going to happen here?

RR: I do think we are going to have a pull back and the pull back will be natural and healthy. The fact is that no market goes to the moon directly and you need to have consolidation. I think we will have a consolidation. I think it will be tragic for those investors that get shaken out as a consequence of the consolidation. But I think it will happen. As I say I think that is a good thing. From Sprott's point of view, we and our clients have an awful lot of resources to deploy, and for us the real name for a pull back in English is a sale and we like sales.

CK: Fair enough. Rick, you guys put out through Sprott's Thoughts a few weeks ago a very insightful set of charts that showed this year's rally in the miners and in gold versus the past few years. At the time when it came out which was probably five or six weeks ago it showed that while we had exceeded the bull markets of the beginning of the years of the last few years we were not really that far ahead, and it brought some good questions is this real, is it not? Rick, is this real?

RR: Oh, I definitely think it is real. I mean let us examine two different markets. Let us examine the gold market first and then let us examine the gold equities market. In the context of the gold market, as we discussed on your show so often, what I think the charts reflect is a war between gold and the US 10-year treasury. Again, as we have discussed before the yield on the US 10-year treasury has fallen from 15% to 1.6 or 1.7%. Can the interest rate go lower and hence the treasury higher? Yes, a bit. But the truth is that we are somewhere near the end of a thirty year bull market.

If you follow the sense that gold is in effect the contra treasury, a bull market in the treasury being near its end means that the bull market in gold is near its beginning. I do not think that there can be any discussion of that. I think it is incontrovertible. I think that is what the chart shows. It is an illustration rather than a fact itself. With regards to the gold equities, in particular the junior gold equities, the TSXV resource index, you have an index that was off 90% in nominal terms and more than that in real terms. A market that doubles is still a market that is off by 80%.

Again, we have discussed on your show, if the narrative that existed in 2010 when gold was at $1900 and the TSXV was way, way, way above what it is today. If that narrative was true then, and I believe it was, a market that was down by 90% or 80% is either 90 or 80% more attractive than it was at the time it was popular. If you look at the gold equities and you look at the snap back that the gold equities have been you have to consider where they were at the bottom. Yes, they were off the bottom substantially, but also where they were at the top. I think there is lots of room to run. That does not mean that the gold price itself could not decline by 15 or 20%. It does not mean it could not retest a thousand. It absolutely could, and it does not mean the TSXV could not fall by 25 or 30%. It absolutely can. But neither of those means much in the context of the market that you are going to see over the next three to five years.

CK: The gold to silver ratio is something that is always interesting to investors. We have touched on this before as to the significance, if the gold to silver in the ground action matters, so we do not need to touch on that today. But gold has seen more love and more movement in the last few months than silver has. I believe I am correct in saying that, which a listener had a very interesting point. Would it not be wise to maybe at this point go ahead and look at primary silver producers or companies like Bear Creek with substantial upside to the silver price? Some brief looking I just did before the interview revealed that a lot of those silver equities have actually moved as much, if not more, than the gold equities. Have you taken any type of look at this, Rick? Are you interested in one or the other?

RR: Yeah. We like the silver space. We like it because it is poor man's gold and we like it precisely because it has not moved. As you point out some of the equities have moved. But the truth is the market action that we are seeing is completely consistent with actions that we have seen in prior transitions from bear market conditions to bull market conditions. The silver price lags the gold price, but when it catches up it catches up dramatically, and there is no set of speculators in the world that are quite as strange, quite as manic depressive than the silver bugs. The truth is that the silver bugs are an odd lot. I am not criticizing nor defending them, but I have made an awful lot of money trading against them.

The truth is when the silver market is down the silver bugs believed that all is wrong with the world and nothing is rational. When the silver market is running they are inclined to take third mortgages on their house to increase their position, which means that silver itself and silver securities are extraordinarily volatile. If the silver market does play catch up the response in the silver equities, despite the fact that they have risen alongside the gold without silver moving up, will be spectacular. It is a speculative theme that is not a certainly, but it has certainly won that knowledgeable trading speculators might want to pay attention to. And we do.

Another thing that needs to be considered is that when people look at silver equities they tend too much to be North American-centric. They tend to look at names that are North American listed in North American domicile. I think if you are a silver speculator the truth is that you have to look at names like .... You need to look at some of the Latin American names, too.

CK: Rick, I am your most speculative client and I have an infinite appetite for risk. I want to make somewhere in that 50 to 100 times gain that we have all heard stories about in the past over the next five years. I believe that private placements are probably a key ingredient there for the upside. But I want you to walk through what somebody with that type of risk appetite needs to look for if they are investing directly in the financings for the warrants? What kind of companies do I need to be looking at to get those types of gains?

RR: First off adult supervision. In order for me to answer the question you have to warrant to me that you can afford to lose half the money that you put up in the chase for 50-baggers, because the truth is that looking for 50 to 1 returns exposes you to really truly spectacular risks. You have to use money that you can afford to lose most of. Having suffered through that disclaimer, I think that private placements are an absolute critical part of the quest. And not any private placement; you have to have a right entry point in the right company, and you have to do a private placement because it gives you warrants. The point of a private placement is a warrant. It is not just to say that you were in a private placement.

The warrant gives you the right but not the obligation to increase your position in a company at fixed price over a fixed period of time. If you have contributed the capital that is catalytic for a company the warrant gives you the ability to participate fully in the increasing shareholder value that your capital contribution allowed to occur. Now as to what kind of company we had extensive discussions in the last three months at Sprott about our prior successes, about the successes that we enjoyed in the last bull market, what worked and what did not. What worked in spades for us were three things. The first was having the guts to deploy a lot of money in the face of very little competition: 1999, 2000, and 2001. That condition still applies. If you have the guts to go today, you deserve some of the reward.

The second thing that happened for us is that were able to play optionality in spades. We were able to find, which we have not been able to find this market cycle, management teams who were willing to buy very large deposits that were out of the money and were willing to do almost nothing to the deposits. In other words not advance the deposits. We were willing to exist in a news vacuum and liquidity vacuum in the belief that gold deposits that required $600 gold and were valueless in a $300 gold environment would become very valuable at $700 or $800 gold, and it made no sense to spend any money that would dilute our interest in the deposit that we were going to let price run its course.

The consequence of that were companies like Pan American Silver (NASDAQ:PAAS), $0.50 to $45; Silver Standard (NASDAQ:SSRI), $0.72 to $45; Paladin (OTCPK:PALAF) $0.10 to $10, not a typo; Lumina Copper, $0.50 to $162. It does not take very many 30 or 40-fold moves if you have a full warrant to generate truly spectacular portfolio performance. But the truth is that you have to identify good deposits and rational management teams. You cannot enjoy that kind of performance across the length and breadth of the junior mining business.

The third thing that you have to do in addition to optionality and entry is you have to participate in discoveries. There are two ways that worked for us in participating discoveries. The first was that we backed a variety, 15 in total, prospect generators; people who used their intelligence and their acumen to identify properties and then they farmed out the properties to third parties enabling the company to have a portfolio of properties, a bag of lottery tickets, if you will, financed by other people. The consequence of that is that we were able to participate in a lot of discoveries.

The other way that you participate in discovery is, in fact, by watching in hawk-like fashion the results of lots and lots and lots of people and participate immediately after a drill hole; not in anticipation of a drill hole rather that you pay up after the drill hole understanding what the drill hole can cause to occur. Now the truth is that the least lucrative of those strategies, the least lucrative, is participating in the third dimension. That is participating in the drill hole after the drill hole has gone down. It is also the least risky and it is the quickest which means it is the strategy that most people favor. It is a strategy that gives you 400% or 500% gains. It is a component of a portfolio that will give you a 50-bagger or a 100-bagger over time. But if past is prologue, the main part of a portfolio, if you are willing to take excessive risk over the next five years to maximize your gain, would be optionality and would be participating in a portfolio of prospect generators with warrants in private placements.

CK: Rick, that brings me to my next question. I have had several listeners inquire about the warrant strategy. Personally, I see probably twenty or twenty-five placements open a week and that is because I am very close to the market and talking to people. You are probably seeing even more than that. But the average retail investor could be hard pressed to find one or two at any time which is probably why it is key to work with a group like yourself and Sprott to access these deals. Can you touch on briefly why it is that the market works the way it does and that financing almost stays kind of quiet until it is too late for a lot of people to get in?

RR: Well, right now most people do not care. It does not make an awful lot of sense for the existing distribution networks to talk to the length and breadth of most investors because most investors do not give a damn. We are at an interesting place in the market now where most of the traditional market is still too beaten up to participate. But the part of the market that is willing to participate is cashed up and ready to go. There is not any particular incentive for the high quality companies to go out to the broad market place because a) the broad market place is disinterested and hence inefficient. But also because there is sufficient liquidity in the expert part of the market that high quality issuers do not need to go to a broad market.

The third thing, of course, is that most participants- by participants now I do not mean investors but rather issuers. Most issuers in the marketplace are completely valueless. It is likely that there are still 2,500 public companies that purport to be in mineral or energy exploration. I would suggest that all but 250 or 300 of those are valueless. The consequence of that is that most of the private placement product which is being offered up is being offered up by the lame, the halt, and the blind. It is being offered up by companies that have no prospect of success and just being offered up really as a salary maximization scheme for the existing failed managements in these so called cockroach companies.

The fact that you have the opportunity to participate in the private placement really means that you have the opportunity to determine whether or not the company that you are being asked to participate in is a scam, which is true in 80% of the cases, or has some ongoing value, which is probably true in 20% of the cases.

CK: All right. Thanks for that, Rick. I want to move on to a couple questions from listeners. We are starting to get quite a few now that the market is picking up. The first one is regarding Midas Gold which is a company I am sure you are quite familiar with. They could have been qualified as an optionality play, but I am wondering if they just broke the golden rule of an optionality play by conducting what essentially was a 50% dilution event near a bear market low valuation. You have also talked at times about how important it is to do a major dilution at or near the bottom in order to move things forward. So where do you sit on that deal?

RR: With regards to Midas (OTCQX:MDRPF) I think they had made a large mistake. I like the deposit and I am personality very fond of Steve Quin, the CEO. The truth is, as you pointed out, they diluted existing shareholder's interests in the company at a market bottom when I think their interest would have been served better by doing absolutely nothing. The truth is that that is a large deposit. It is a fairly high quality deposit. It is a deposit that is really marginal at $1200, and it is a deposit that could make a lot of money at higher prices.

The right thing to do in that company by existing shareholders would have been to do nothing. Preserve your proportional interest in the deposit and then sell the deposit to somebody who benefitiated the deposit at higher metals prices. The truth is that the people who were long suffering existing holders in that own half as much of the deposit as they used to. They will move the deposit forward.

Remember that the premise of optionality, Collin, goes like this: if you believe that the gold price is going to go from, say, $1200, currently, to $1800 or $2000 over, say, five years, the idea that you put a deposit in production early means that when the gold price does go up you have a hole in the ground where your gold used to be. You have paid back debt and you moved a whole bunch of rock, but the truth is that you have reduced your own gold inventory during the period when gold prices were low because you think that the gold prices was going to go up. That is precisely snatching defeat from the jaws of victory.

Now the thing that is ironic is even very high quality, very honest guys like the guy who runs Midas, Steve Quin, find it very difficult to do nothing and find it much more difficult to be paid appropriately for doing nothing. He made a decision that he believed was in the best interest of shareholders as a consequence of his life's work and his education which is to get great, big pieces of yellow iron moving around and smelling diesel. I am not accusing him of bad faith. I am accusing him of bad strategic thinking.

CK: Okay. Another question on optionality and this is when is a price too high? I am referring to Tower Hill Mines (NYSEMKT:THM). Their all-in sustaining cost was somewhere around $1400 or $1500 an ounce. A bank is going to be hard pressed to put that into production, until maybe gold reaches $2000 an ounce. At what point are you not interested because a project is too far skewed to the high end of a price of commodity?

RR: If the people at International Tower Hill or Exeter (NYSEMKT:XRA) came to me and they said, "We understand now that we are optionality plays. We want to raise enough money so that we can stay alive for five years, and we will do everything that we possibly can to keep from not coming back to market at all." Given the market capitalizations in place in those deposits and the number of ounces you have in place in those deposits and the incredible torque that those deposits have to gold prices that I think are inevitable but perhaps not imminent, I would be very attracted to those things. It is incumbent on me then to go through the Sprott investor universe and select investors who can afford the risk that I am wrong that have the patience to stay in the trade for five years, and have the greed necessary to look at the reward relative to the time it would take in the risk.

I personally, now, Collin, had been through the market cycle that we are going through right now several times in my past. The consequence of that because I have experienced the rewards associated with being right is I am perfectly prepared to see this thing take six years as opposed to two years. I am perfectly prepared to accept the fact that occasionally I will be wrong. I am perfectly prepared to accept the fact that I would buy a $30 million market cap and see it become a $20 million cap before I saw it become a $400 million market cap. I also accept the fact at 63 that I am a fairly rare, old duck, so what is appropriate for me might not be appropriate for all of your listeners.

CK: Okay, a personal question to insert here. You did a piece about a month ago with Sprott talking about optionality. Just a quick answer from you, have you found any companies or which companies have you found that truly qualify for this optionality play where management has recognized what they are and they are prepared to sit and wait?

RR: We have found one company where the management team appears to be prepared to sit and wait. We are doing due diligence now on their resources. The universe of companies that would qualify if they acknowledged internally that they were optionality candidates is much larger. I would suspect that the most obvious conjunction of a management team that understood what they were and the resources that they had were Seabridge (NYSEMKT:SA). It is not the cheapest. Rudi Fronk and his backers understand completely that that deposit requires too much front end capital expense to be put in production here.

They have done a pretty good job of minimizing ongoing holding expenses with regards to the project. But understand that is a fairly large cap project. Rudi Fronk, among the managers that have large deposits, understands optionality the best, and he has done a great job over 15 years of assembling the group of shareholders including some very bright shareholders who understand the gain. We own Seabridge ourselves as a consequence of that.

Another fairly obvious name, of course, is Novagold (NYSEMKT:NG), again, a fairly large cap adherent to the strategy. I would suggest perhaps a recidivist prospect generator. One needs to see how Tom Kaplan and the people who ran Novagold decide to advance or what investment strategy they take with regards to Galore Creek endowment. But what I am really interested in is recreating the success that we had in the last market cycle and the cycle before that. I am really interested in finding the 6 million ounce deposits and 10 million ounce deposits and 15 million ounce deposits that are in $20 million market cap skins and $50 million market cap skins.

The people who are willing to do for us what the great investors of the past, the John Borshoffs and the Bob Quartermains, and the Lukas Lundins and the Ross Beatys did. The people who are willing to do the right thing and as a consequence will give us moves from $20 million markets caps to $700 million market caps. Thus far, Collin, unfortunately, I have been unsuccessful in finding the conjunction of asset and management that will allow me for sure to replicate the success I have enjoyed in the past. That does not mean that through outlets like yours I will not continue to propagandize investors and managements to do nothing which is, of course, the right thing over the next five years.

CK: Very good. Okay, another listener out of Norway wanted to know how you felt about the rare earth sector. I did some looking and certainly a couple months ago the stocks were at rock bottom prices. He is laying out that the EU is spending a ton of money on wind, solar, and other green tech, and, of course, other advancements around the world. Do you believe a new bull market will emerge there and will you partake?

RR: I do not believe that another bull market will take place, but I may partake. The truth is that the last bull market in rare earths raised an awful lot of money and led to an awful lot of work. Expectations which would have been impossible to fulfill were not fulfilled. But anytime that I have the ability to sort through $3 or $4 billion in exploration efforts which are now marked down to pennies on the dollar and look for indications of success, is one that interest me.

The truth is that rare earths markets are misnamed because they are not rare. We have not looked for them for twenty years because rare earths had been so cheap as a consequence of the large deposits in Western China. They will become less cheap because the Chinese are beginning to pay some attention to the total cost of extraction in particular the environmental costs. We see the possibility. Not necessarily the probability, but the possibility that rare earth deposits in places like the Canadian Shield, places like the Archean and Proterozoic in Brazil or the Archean in Northeastern Congo could generate some wealth for us that was not a greater fool bull market, but rather was an efficacious discovery that we were able to buy for dimes on the dollar.

The truth is in financial markets that the three most prevalent rare earths are story-um, fraud-ium and scam-ium. Most of the rare earth promoters will come in based on the market for electronic cars and solar power and cell phones rather than any sense that they might have in process or geology. Most of those stories will have extremely unhappy endings. But it is not impossible that good exploration work was done accidentally in the last bull market and it is not impossible that we will be able to find a billion dollar deposit that has a $5 million market cap attached to it because it gets labeled falsely by the market a fraud-ium deposit and we will be looking for those.

RR: All right. Rick, my final question it is about quitting; quitting on the bull market when the time is up and trying to get some money out, not roll over the cliff with everybody else. We had a personal discussion I think a couple of months ago and you had alluded to how mining investors end up having so much fun at the top and they gain so much hubris around their personalities they end up failing to exit at or near a top. I have heard plenty of stories of, "Oh, I called the top and I got out." But I have never actually really seen it happen. How does one do that properly?

RR: Very difficult. I need to put myself in the latter camp. That is one who has not been particularly good at getting out on the top. I remember, Collin, personally, in 2010, that there was a lack of things to buy. If you see in the market a lack of things to buy that is telling you that the market is overpriced and you should sell. I did a good job of cautioning others to sell. I did a reasonable job of selling myself meaning that I sold about 30% of my portfolio. But what was wrong with the other 70?

You are asking somebody who has failed at this in the past. My hope is that I will be more disciplined this time. That when the market gets to the point where there is not much to buy that I will take that as a signal to do substantially more selling than I have done at any point in my career. The only market that I remember that I got it right in was the 1996 market, and I hope that the lessons that I learned in 1996 will prevail in 2021 or 2022 or whenever the time is that it would be rational to sell.

If you might indulge me in allowing me to recite a conversation I had with Ned Goodman in 2014 when I was beating myself up over my own inability to sell. Ned said to me, "Rick, the truth is that you will likely fail again." I asked Ned if that was a reflection of my own poor personality and he said no. He said, "The truth is it is a reflection of your success. You regard yourself as a better analyst than your competitors which is because you are. You regard yourself as one who backs superior managements which is true. You are. You regard yourself as one who understands deposits better than your competitors, which is true. You do. And you regard yourself as somebody who has the discipline to stick with better balance sheets, which is true, because it is. But when the market rolls over, Rick, none of that matters. The market takes down the good, the bad, and the ugly. The hubris that has infected you as a consequence of your discipline and rewarded you in the bull market will punish you at the top of a bull market, and you will likely write a substantial part of your portfolio over the edge again." The only thing I can say, Collin, is guilty as charged, but forewarned is forearmed.

CK: All right. Well, there you have it. For all of our listeners that make millions prepare to lose it at the end. Rick, always an excellent interview. You have given out some contact information in the past or some resources for our listeners to get in touch or find out more information. Feel free to do that now.

RR: We would love to talk to your listeners as always. We have established good relationships with many of them. Those in the United States and Canada can call us toll free at 800-477-7853. If you do not want to call us or if you live outside the United States and Canada the best way to reach us is by emailing me personally directly. That is r-r-u-l-e, rrule@sprottglobal.com. If you want to try before you buy come see our website, either www.sprott.com or in the US www.sprottglobal.com.

CK: All right. Excellent! Rick, really a pleasure. Thanks for coming back on the show.

RR: My pleasure. Thanks for the great questions.

Rick Rule began his career in the securities business in 1974.. He is a leading investor specializing in mining, energy, water, forest products and agriculture. Rick founded California-based Global Resource Investments, Ltd., which grew into a much larger organization with significant affiliated companies. As Director, President, and Chief Executive Officer of Sprott US Holdings, Inc., Mr. Rule leads a highly skilled team of earth science and finance professionals who enjoy a worldwide reputation for resource investment management.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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