Rick Rule: 'Very High-Quality Deposits, Almost Irrespective Of Commodity - Will Be Taken Out This Cycle' (10/05/2018)

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by: Sprott Money

By Sprott's Thoughts

Tekoa Da Silva had the chance to sit down once again, with Rick Rule, Chairman of Sprott U.S. Holdings. It was a fascinating interview, as Rule discussed the developing trend of mergers and acquisitions in the resource and mining industry.

Rule indicated two general conditions - an overabundance of companies crowding a small industry, and high-quality resource deposits available at attractive valuations - will cause the M&A trend to continue.

"There are too many companies in a business that's too small," Rule explained, "[And] the industry has too much general and administrative expense - so anything you can do to 'thank and excuse' one set of management teams and rationalize more assets under fewer managers, is a good thing."

And as a result, "Compan[ies with] more assets under administration have more opportunities to allocate capital efficiently," he added. "To put it bluntly - they don't have to put a marginal project into production to keep their jobs."

When asked which segment of the resource industry is most likely to attract continued M&A activity, Rule noted, "The gold mining industry is probably the most ripe for consolidation, given that gold miner's cost of capital is lower than base metal miner's cost of capital, and also because broader development financing options are available."

With regards to which types of gold companies Rule finds attractive, he added, "Producing mines will get taken out, but the producing companies are often followed by 50 or 60 analysts, which means that the competition is higher and the premiums are smaller … [So] the ones that really interest me are the ones where we can get 10-fold returns, like [in the case of copper] Reservoir Minerals (OTCPK:RVRLF), or Mariana Resources (OTC:MRLDF)."

Rule concluded that in general, "Any top quality deposit, irrespective of commodity, will be a prime takeover candidate in the next 5 years … Even greatly out of favor commodities like uranium."

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