Rick Rule and Marin Katusa Talk Resource Investing: Part 2
Dear Katusa Research reader,
As you likely know, this is a very special week at Katusa Research.
We just launched a
huge new project
… and the response so far has been incredible.
To kick off the new project, I’m sending you a valuable essay or interview excerpt every day the market is open this week.
Yesterday, I sent you Part 1 of a great interview I conducted with my good friend, resource legend Rick Rule. Now is a great time to start building a position in resource stocks… and Rick is putting on
an outstanding conference in Vancouver on July 26-29
to help investors select the best ones.
You’ll find Part 2 of our interview below. I hope you enjoy it.
Now Rick, let’s get into the energy sector. I know your conference is going to be more hard rock focused but both of us a significant energy investors so let’s talk about North American oil patch.
Rick Rule:
I’m beginning to be attracted to some aspects of North American oil. I don’t think that we’re going to get a pronounced change in oil and gas prices for 18 to 24 months. But the truth is that you’re seeing some companies that are beginning to differentiate themselves from other companies.
We’re looking very carefully at this and we’re looking to participate. We’re particularly looking to participate – when I say we now, I mean Sprott and you will hear a lot about this at the conference. We are looking to help some of the better companies reschedule their debt. We think that the junk debt market both in the United States and Canada has real, real opportunities and you will hear a lot at this conference about income investments in oil and gas, about the idea that there are below investment grade credits that were issued 7.5, that are trading at 50 percent at par meaning that the running yield is 15 percent and the yield to maturity is more like 25 percent. Those are equity-like returns but with a better place on the balance sheet.
So I’m very, very attracted to the North American energy business in the next 18 to 24 months. I don’t think that you’re going to see a rocket-like move in the share prices of the junior North American oil and gas stocks for a couple of years. But I definitely think that this is the time that the intelligent players begin to position themselves for what could be 20 or 25 percent internal rates of return on the debt and thousand fold increases – pardon me, thousand percent increases on the equities.
Marin Katusa:
So oil and gas, you’re very bullish?
Rick Rule:
I am. I think it’s more the realm of the professional investor right now than the well-heeled amateur. But I think it’s definitely the time to prepare your shopping list.
Marin Katusa:
Recently, Donald Trump released his energy plan. I don’t know if you had a chance to take a look at it. I don’t know if you even believe that he has a chance to win the presidency. I bet Doug Casey 100 ounces of silver that Donald Trump would lose. Doug is a big believer that Trump will win but Doug’s political track record for the last 14 years that I’ve known him is – I think he’s owed for every single bet we’ve made.
Rick Rule:
Yeah, I was going to say, “Could I pass that bet Marin?”
Marin Katusa:
But it’s interesting. It’s almost as if a copy – a newsletter copywriter wrote his energy platform. But we’ve seen such a massive growth in the subsidies and the growth of the alternative energy, the green energy, the wind farms, the solar farms and Sun Edison was a huge reality check for everybody in it. What are Rick Rule’s thoughts and what is Sprott doing to look at that sector right now in North America?
Rick Rule:
We’re doing almost nothing in alternative energy. We have of course paid some attention on all fronts in alternative energy and we have investments, passive investments, both with Lundin and Ross Beaty in the alternative energy space. We will talk a fair bit about alternative energy at this conference. But the truth is my suspicion is for the next 18 months, the speculators will make more money in precious metals than they will in alternative energy.
One of the things we’ve learned with regards to alternative energies – and this is an important lesson and I think one of the lessons that you talk about in your book is that politics in the near term are at least as important in markets and what we at Sprott forgot with regards to wind and solar is that they don’t have to work from an economic point of view if the rate payers are forced to make uneconomic transactions.
Fortunes have been made in alternative energies and I suspect as long as the commonwealth remains solvent, that fortunes will continue to be made simply because the political will to have alternative energy is very strong even in the face of uneconomic …
Marin Katusa:
I agree with you 100 percent. Now Rick, one of my favorite parts of the conferences are the spontaneous things that happen. You may not remember this but the first time I actually met you was 16 years ago at the end of Joe Martin’s Cambridge House Vancouver conference and the last two people leaving the conference were you and I. You were gracious enough to spend 50 minutes with essentially a young green horn at the time and you answered all my questions and you were very interested in what I had to say. You stayed until your wife Bonnie came by and says, “Rick, we really have to go to our dinner appointment,”. Why are you still the James Brown of the resource sector? You’re the first in, last out, the hardest-working man in the resources sector. Why Rick? I know you don’t need the money.
Rick Rule:
Well now in my declining years Marin, unfortunately I’m the second hardest man in the resource business. You’re the hardest-working man because you’re younger and stronger. But the truth is I love what I do. I love helping entrepreneurs build companies. I love helping investors make money-building companies as much as I like talking. Marin, you know I love talking. I love listening more and the opportunity, this is sort of the Woodstock of speculation. I can’t imagine anything that I would rather do with my time even as pretty as Vancouver is in the summer than participate in this conference.
Marin Katusa:
So Rick, how does the retail crowd get access into the industry events? To me some of the favorite parts are what happens behind the scenes and the annual night cruise. I love spending Rick Rule’s money, going on a cruise and drinking your wine. How does someone interested in getting into the private placements and getting to know these management teams and getting to know Rick Rule get a ticket for the love boat?
Rick Rule:
Well, with regards to the cruise, the cruise is only available to the sponsors. That is the exhibitors and the speakers. So that isn’t available. But the truth is Marin, with regards to the conference itself, I think it’s important for retail investors to understand that the most successful speakers and the most successful exhibitors are so caught up in what they do that they want to talk about it. They want to be engaged in conversation.
The idea that somebody is interested in what is their life work is important to them. Too many attendees I think believe that they’re imposing on the speakers, to engage them in conversation in the hall, that they’re imposing on exhibitors.
The truth is if you find that you’re imposing on somebody, that you understand that they are a poser. The truth is that the people who you want to talk to want to talk to you. That’s one of the important things to take away from this conference.
You will get on the list if you will for private placements simply by asking to be put on the list. Of course there will be people there who are not Sprott clients. We would love those people to become Sprott clients. We manage literally billions of dollars in the natural resource phase and the deal flow that we have in private placements is truly extraordinary. But the truth is that you employ all avenues. You talk directly to the company’s president and say, “I know you have a president’s list for upcoming financings. I want to be on it.” You talk to Marin Katusa. You talk to everybody you can. You do …
Marin Katusa:
We know that people want to do it but the reality is the X factor is you and I love what we do– this is why we’re talking at 7 o’clock in the morning. Every morning is Christmas morning for us and our wives unfortunately have to deal with us because of it. But not everyone is going to stay as focused and disciplined. And you’re very busy at the conference. You’re running the conference. You’re the quarterback. Give me three names of Sprott brokers for the retail crowd that every investor should talk to at the Sprott Conference that you believe have the ability of becoming the next Rick Rule of Sprott – whether it’s a broker, an analyst.
Brent Cook was trained under you. Paul van Eeden was trained under you. So who’s next?
Rick Rule:
Sure. I think Canadian investors in particular would be well-advised to talk to two Sprott people there. Jason Mayer is the young man who runs our Flow Through business and runs the speculative mining portfolios that used to be the province of Eric Sprott and myself.
Michael Kosowan is a young broker who despite the fact that he’s fairly young has been with the Sprott organization for almost 20 years. A mining engineer who brings the same sort of fundamental approach to mining that has characterized the US operation in Sprott. But he has brought it to the Canadian side, so Canadian investors would be particularly well-advised to talk to those two people.
Rather than pick out names, what I would prefer – because so much of the relationship between a broker and a client is personal, I would prefer that American investors paid attention to the resumes of the brokers from the US side and talk to them in the following manner. Say, listen, I know I want to do business with Sprott. I get that. I’m just not sure I want to do business with you. What part of you, what part of the relationship between you and me can you guarantee that will make this relationship work for me?
I like markets Marin and I like competition and I like the idea that high net worth investors will shop for an individual relationship within an institutional relationship. Certainly the conference gives people the ability to interview our employees individually and separately.
Marin Katusa:
I want to talk about the optionalit/mineral bank model or what Ross Beaty made famous with the Lumina Group. He leveraged large deposits in an increasing price environment and we all …
Rick Rule:
The optionality play. Yeah.
Marin Katusa:
There’s no better leverage than that type of play. But the problem is, is the holding cost. There’s the management cost and the burn rates, the dilution. How is Rick Rule playing the mineral bank leverage to the future?
Rick Rule:
It has been extremely difficult, this cycle, Marin, to play the optionality game. The optionality game as you mentioned comes apart when people spend too much money and dilute your interest in the option. What I have learned – and it should come as no surprise, that the most important part of the optionality business, other than having a superb deposit is having a superb jockey.
People say to me, “Rick, your prior success as an optionality involved companies who spent money to beneficiate projects,” and that is true. It did. But the average project spend began after the share price had increased 500 or 600 percent meaning that from my own point of view, I wasn’t getting diluted. It was accretive to me.
So I think one of the things that you need to do in addition to finding a very large, well-understood deposit that will work at higher prices is find the management team that owns a lot of stock themselves where their benefit comes from an increase in the share price rather than from general and administrative expense and understands the need to cut operating costs to a bare, bare minimum.
Marin Katusa:
What’s the cut-off for you? I think unless you own a tier one – an asset that a major individual will want to buy out, there’s no point of having optionality on small deposit– so many management teams think that their deposit is big and it might be big in their realm of the world but it’s not on the global scale. Let’s say gold or copper. Let’s focus on those for the optionality. What’s the cut-off for Rick in both tonnage and size, grade?
Rick Rule:
Well, certainly Ross told me that I had to come down a little bit in my standards last time. My grade standards in the copper business would have been pre-Ross, sort of eight-tenth of a percent and Ross showed me that well-located copper projects with good metallurgy and good jurisdictions – Chile could be beneficiated and sold down to ports point four or point five.
I suspect that’s true. My own suspicion is after a very, very deep bear market, like the bear market that we’re in, what you say is true, you probably go up the quality scale at least in terms of size and probably a better answer Marin is that there’s a matrix, tonnage and grade and location and jurisdiction. You probably have to bake all those into the cake.
I agree with you that you don’t want to be involved in a management team that is opportunistically selecting grade C projects, particularly if they’re spending money on them. My geologist Neil Adshead refers to those guys as turd collectors and there’s no particular reason why you would want to end up with collection of grade C projects.
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Marin Katusa:
Rick, I got a couple more questions here for you. But essentially what is the ultimate goal for the retail investor for you to be satisfied with? When they leave, what do you want them leaving with?
Rick Rule:
Well, the first thing from a purely selfish point of view is that we – we distribute an attendee evaluation form and we always ask every attendee, “Did you get your money’s worth from this conference?” I want the attendee to tell me if it’s true because I believe it will be true that they absolutely positively got their money and time worth and that it was the best natural resource conference that they attended. An overwhelming number of the attendees last year said exactly that.
But what I really want at this year’s conference is for attendees to first of all get the educational background to prepare themselves, to take advantage of this bull market and right now, I want the attendees to really pay attention to the exhibitors. Positioning yourself right now for the next three or four or five years for speculators. I think we will pay absolutely spectacular dividends. The increase in gold prices and gold stock prices that we’ve seen already notwithstanding.
Marin Katusa:
Rick, I’m doing this because of our relationship. You’ve been a great friend and mentor for me over the last decade. But I think we both have our favorite commodity which is the US dollar and a lot of the gold and the precious metals speculations depend on the US dollar.
Where do you see the US dollar over the next 6, 12 and 24 months?
Rick Rule:
Over the next 6 months, I see it stronger simply in the absence of any viable competition from anywhere else. Our mutual mentor Doug Casey described it as the prettiest mare at the slaughterhouse but I think the next direction of US interest rates is up a little bit.
So from my own viewpoint, that continues the 35-year bull market that we’ve seen in US sovereign debt. So I think in the next 6 months, the picture is brighter. Looking out 12 months, I would say that I’m neutral on the US dollar. Looking out 24 months, I’m bearish on the US dollar and I need to say probably more importantly because I’ve come to think in this timeframe over the next 5 years, I’m decidedly bearish on the US dollar as expressed by the US ten-year treasury. I think it’s important to note the difference. The US ten-year treasury is the world’s bell weather security. It’s the security that all others are benchmarked against.
The US ten-year treasury has been in a 35-year bull market. The yield has declined from 15 percent to 1.75 percent. The truth is I believe that that bull market is much closer to the end than the beginning. Maybe not for six months or twelve months but much closer to the end than to the beginning. If you have observed the fact, the countercyclical nature of the gold price and the US dollar, then I think it’s fair to assume that a bull market in gold is much closer to the beginning than the end.
Marin Katusa:
OK. And the last question is, what does a democrat victory mean for the precious metals over the next four years?
Rick Rule:
I think that the precious metals will do well irrespective. I think in very near term – this is Clinton being elected to the White House, will scare the country club republicans enough that there will be some reflexive move into gold. But I don’t think that either candidate is a good alternative for the United States. I think the economy as Warren Buffett said can survive either of them. But the truth is that US politics is inconsistent with helping the US economy and in either case, I’m afraid that the gold price will do well and the country somewhat less well.
Marin Katusa:
Anything else you want to leave the people with?
Rick Rule:
Just one more thing. I want to do a rematch where I ask you the questions for Sprott’s Thoughts at some point in time.
Marin Katusa:
Sounds great.
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Marin’s note
: If you're serious about making money in resource stocks, I encourage you to attend the Sprott Natural Resource Symposium, which is being held in Vancouver from July 26-29. I’ll be speaking there. I receive nothing for mentioning the conference. I simply think it’s well worth any resource investor’s time. You can
Regards,
