ick Rule has dedicated his entire adult life to many aspects of natural resources securities investing. In addition to the knowledge and experience gained in a long and focused career, he has a global network of contacts in the natural resources and finance sectors. As President, and Chief Executive Officer of Sprott U.S. Holdings Inc., Mr. Rule leads a highly skilled team of earth science and finance professionals who enjoy a worldwide reputation for resources investment management.
Rick, thank you for your time. What is your general view of the mining sector today versus when you first started?
I got my start in the early-mid 1970s, at the beginning of the epic resource bull markets of that decade. The price moves were so extreme, gold $35 to $850, silver $1.50 to $50, oil $3 to $32, that expectations, policy, and the narratives were reset in ways that are still being felt today.
It’s worth noting that by the end of my first decade in the sector, physical precious metals and precious metals equities comprised in excess of 8% of invested capital in the US. The same asset classes today have a combined market share of between one third, and one-half of one percent!
The incredible commodity price escalation the industry saw and enjoyed in the decade of the 1970s generated even more hyperbolic mining stock markets. I believe that that bull market did lasting damage. The investment community asked the mining industry to demonstrate leverage to commodity prices as a defining investment criterion. This is ironic, of course, because the high cost producer – the marginal player – exhibits the best leverage. The investors asked the miners to marginalize themselves and, sadly, the industry complied.
How do you feel about the impact of the US-China trade war on the resources sector?
It is crucially important to note that trade makes people and societies richer, therefore constraints on trade makes them poorer. Certainly, some politically-favoured groups or classes do well from restricting better competitors, but society as a whole always benefits from fulsome competition. The US-China trade war, if it escalates, will have the same result. The people of these countries will be poorer for the process. This is an important note for basic sectors like mining – richer societies consume more ‘stuff’, and ‘stuff’ is what we do.
How do you think exploration and development-stage deals will proceed in 2019?
Sprott believes that a lack of high quality projects available to develop will be the hindrance of development spending in 2019. It is clear that the industry trough of 2011 through to today has reduced capital expenditure levels in the system, which has, in turn, begun to constrain our ability, as an industry, to maintain adequate supplies of some important mineral commodities. Those projects that meet cost of production and capital efficiency tests today are finding debt and equity capital readily available, but the good projects are very scarce.
On the exploration front, this lack of a development pipeline has already resulted in a healthy upturn in exploration spending. While it is true that most of the spending is being done by existing producing miners, and that equity remains tight by traditional measures in the public exploration sectors, the eye-popping prices that get paid for exploration success will begin to bring risk capital back into exploration. At Sprott, we intend to be aggressive funders of generative exploration, worldwide, in 2019.
The ‘prospect generators’ exploration companies that originate exploration concepts that are financed by industry joint venture, rather than on balance sheet, are already seeing very dramatic upturns in interest from industry partners. They are looking for drill-ready exploration targets, to offset the weakness in development pipelines seen across the industry.
“Sprott believes that a lack of high quality projects available to develop will be the hindrance of development spending in 2019.”
It has been nearly four months (October-February) since the legalization of cannabis in Canada. Do you think that the market will re-balance back to mining?
I believe that the legalization of Cannabis in Canada was a very good thing for the Canadian mining industry. It has reduced an obvious risk of incarceration for many of our people, but more importantly, it ha allowed a lot of Canadian Capital Markets folk to participate in an industry they actually care about and understand! In Vancouver, they have done due diligence on cannabis nightly for a better part of a decade. It is great to see that expertise being put to good use.
Now I’m sure you want a comment on financial disintermediation from cannabis to mining. I’m certain that the cannabis ‘bloom’ will fade, and a mining bull market will replace the current bear market. Additionally when mining stocks are no longer cheap, without a doubt, the dumb money will flood back in on the back of some THC inspired valuation models.
Last year (2018), you said that gold stocks would have a great run. Do you believe that that is still the case? Where will gold go in 2019?
One of my many failings as an investor is that I often confuse two simple words: ‘imminent’ and ‘inevitable’. Looking at different factors, I believe that a gold and gold equities run is inevitable – but 2018 proved it did not have to be imminent. We know that gold often trades inversely to faith in the US dollar (particularly as expressed by the US 10-year treasury), and also that after a 35-year bull run, the US 10-year must be near the end of its run. We also know that the diminished market share of investable assets enjoyed by precious metals and precious metals securities boosts their capacity to recover. Something else to consider is that the total US government debt (federal, state, and local) is thought to exceed $200billion.
For your impatient readers, please note that I was similarly early on uranium in the 1998 to 2002 period. One could argue that being four years early, using a 10% discount, means I was wrong. However, the strength of the ensuing rally paid so much rent that being early was forgiven.
What is your view on the potential for blockchains to facilitate the trading and holding of physical gold?
I’m very excited about distributed ledger technologies to transform the way many asset classes are owned, traded, settled, stored, cleared, and authenticated. I think that physical precious metals markets will be particular beneficiaries of this technology because of the relative inefficiency in many of these markets today, despite the uniformity of the product and the extraordinary liquidity of these markets.
Sprott, in partnership with the exchange operator IEX, and several major mining companies, have invested in developing these technologies and has a functioning distributed ledger-based gold product platform on the market now. The entity is called ‘Tradewinds’ and the product is called ‘Vaultchain’. Investors and others can buy and sell distributed ledger receipts, backed by, and redeemable for, physical gold, stored at the Royal Canadian Mint. This is no ‘someday crypto fantasy’, it exists and trades today. I see no reason why gold mining issuers should not, in the very near future, allow shareholders to receive their dividends in gold receipts.
What would be your advice to gold companies in their aim to become profitable?
Listen to Bay Street more and Wall Street less. Also, listen to your shareholders! If you (a mining company manager) don’t believe in your product and your company enough to own a lot of stock, rather than relying on your salary, quit, form a pot company, or buy a bar, or do something you care about.
We have perverted the value creation mechanism in public mining equities markets. The ‘drive’ was once rocks to money, meaning you use capital to discover and develop a profitable ore body; the drive now is rocks to stocks, and stocks to money. There are too many ‘me too’ projects, designed to move a recently created shell from $.15 to $.45 rather than to make a discovery, and too many ‘twinned’ drill holes to exercise options, rather than to generate deposit knowledge. We have way too many public listings. As a consequence, our G&A, relative to our AUM, is insanely high. Our G&A relative to out (scarce) cash flow is way to high. Our G&A relative to exploration acquisition expenditure is way too high.
Long-term, where are we at right now in terms of cycles, and how do companies navigate this part of the cycle?
I believe, for the most part, we are slowly working our way out of a protracted bear market. I’m afraid that this recovery could be easily derailed too; our gradual global economic recovery is threatened by its own longevity (nine years is a long recovery), by populist nationalism, which makes everyone poorer, and by a rising interest rate environment, which could usher in a vicious liquidity squeeze, and will certainly increase the private sector’s cost of capital.
What is the ‘Rick Rule-ism’ for 2019?
There are two; For investors (me): “What is inevitable is not necessarily imminent.”
For societies, and especially governments: “When your outgo exceeds your income, your upkeep becomes your downfall.”