Last week I had the opportunity to sit down with Rick Rule while he was in London to talk about his early career, the Uranium market, the upcoming Sprott Symposium, the Nickel market, and what it takes to be a contrarian.
On The Next Bull Market Move we are happy to welcome back Rick Rule, live from London. How are you today Rick?
I’m very good thanks.
Let’s start with why you’re in London. We’re both at the Mining Journal Select Conference and you’re going to be giving a keynote speech later on this week. Can you give our readers an idea of what you’ll be talking about?
At a conference like this with investor professionals, you have a title and then reality gets in the way. The truth is that I will be talking about the mining finance market and to a fairly select group in London.
The talk will end up being extremely focused about where the mining market is today and its pecuniary aspects, i.e., how the crowd can make some money on the market as it exists today, or how the issuers can lower their cost of capital. It seems that in a focused conference like this, irrespective of the title, the subject comes down to what can you do for me today?
Okay, let’s talk about Uranium. Over the last few weeks some of the shares of the Uranium companies have been moving - so are we still in a bottoming phase in the Uranium market?
I think we are still in the bottoming phase. What has happened, of course, is that the ranks of the issuers are so thin and the total flow to the uranium market globally is so low, that any expression of interest at all, when the industry develops a pulse, the shares move.
You will recall, or perhaps because of your age, you won’t recall, the last bull market that we had in uranium, 2001 to 2006, was such a violent event that the institutional memory around uranium stocks, when they moved, they really moved. So when they begin to catch a bid, the momentum that can be in the trade is fantastic. Please remember that at $25 a pound, the uranium business is still seriously underwater as a business.
Let’s talk about being a contrarian. The word contrarian gets passed around a lot and it seems on paper something very easy to do. You just buy something that no one wants, you wait for other people to buy it, and you sell it at the top. Sounds easy. Is it?
(laughs) Very hard to do. I’ve been a self described contrarian for many, many years and I struggle with it probably on a daily basis. Most people want to be a contrarian when it’s popular, which is particularly difficult, of course. I don’t have that problem, but like everyone else, I’m motivated with the desire to deliver for my investors on a timely basis. And that makes momentum, which is really observing a self-fulfilling prophecy in the near term, very, very difficult to resist.
I manage now at age 65 to resist it, but the truth is, I built my reputation as a contrarian when I was in my 30s, and it was much, much more difficult for me then without the benefit of decades and decades of experience to become an easy contrarian.
Let’s talk a little bit about your early career. Did you ever do any other styles of investing in terms of shorting or buying puts and options? Did you go through a phase of doing any of that at the beginning of your career?
I almost never bought options. When I was still in university, I was taught that 98% of all options contracts ever written, if held to maturity, expired worthless. So then I had to ask myself if I was smart enough to exist in a market where I had a one in 50 probability of success. Despite the fact that I wanted to answer that question in the affirmative, I knew that the answer was no. I have been a seller of puts and calls virtually my whole career.
My technique is very simple. I find a stock that I like, I buy it, and then I sell short dated puts and calls against my core position, particularly when the VIX is above 20, so that I get paid for volatility. Having the market pay you to do something that you should otherwise do for free, I think is a good habit.
The truth is when a stock is called away from you, you think you were stupid because of the call premium. You sold a good stock. When a stock is put to you, it’s usually on a big down day and you feel bad about the position that you already have, never mind your newly acquired shares.
That notwithstanding, over decades the discipline of allowing yourself to be forced, in fact, paid to buy low and sell high turns out to be a very good thing.
With regards to shorting, earlier in my career I was fairly active on the short side. In the 70s when resources were in favor, the last time that resources were broadly in favor, it was fairly easy if you had a modicum of training in accounting to spot very obvious frauds and markets worked since frauds would inevitably go to zero.
When I began the process of using my value disciplines to short stocks that weren’t frauds, I learned the basic bad arithmetic around shorts, which is that your upside is 100% and your downside, what you could lose, is infinite.
Again, attempting to operate against that arithmetic is something that I’ve decided in my declining years not to do. Should our sector ever return to the broad-based behaviour it enjoyed in the 70s, certainly the frauds will come out of the woodwork and I will probably, inevitably, re-emerge as a short seller. But until then, I don’t like the arithmetic around shorts.
Talking about your early career, it’s well known that Peter Cundill was an early mentor of yours, so I’ve got a couple of quotes from him and I just want your opinion on them.
“Peter had taken the view earlier on that he would be prepared to put money into anything, anywhere, provided the downside is measurable and acceptable and the chances of a good profit appear to be better than 50%.’’
“I will not take gambles but it is part of my job description to be ready to take very carefully calculated risks.”
That describes Peter well. It doesn’t describe me. I decided that I needed a definable competitive advantage, which is that I would understand valuations in some small sliver of the economy better than my peers. Partially you must remember the time that Peter was active. In the 70s and 80s in small cap equities worldwide, there were some extraordinary values.
You’ll remember, again, perhaps because of your age you won’t, in 1981, the prime lending rate in the United States was 15%, so cap rates were extraordinarily low.
The other thing that happened is that the incredible wave of corporate restructurings that began in the 90s hadn’t occurred, and Peter was a genius for finding redundant assets on balance sheets, assets that had value but didn’t contribute materially to earnings.
And one of Peter’s many geniuses was really perfecting the art of redundant assets, in particular, real estate assets. He’d find a brewer with a 200 million market cap whose brewery occupied, I’m thinking about Falstaff in this case, real estate in downtown San Francisco worth half a billion dollars. Peter surmised that if they had the brand and had it manufactured by somebody else and sold off the real estate, there was immediate triple.
Okay, all right. Let’s talk about the Nickel market. For the last year the spot price of Nickel has been steadily climbing. Some people think it’s going to go the same way as Cobalt where the price will inevitably shoot upwards over the next few years, because of electric vehicles and especially the fundamental issues regarding class one Nickel. What’s your opinion on the nickel market at the moment?
Let me begin by saying I like the nickel market and I have for quite some time. You and I did an interview some time ago where we talked about the fact that resource markets can recover as a consequence of supply destruction, and that’s happened in the nickel market.
It’s difficult to add new productive capacity to a market, it takes a long time, so that the commodity price can overshoot in the long side, which will happen in nickel.
Nickel is, however, very different than Cobalt. It’s a large and broad market and the sources of Nickel are diverse, unlike cobalt, which comes from Congo or Russia, really. So in terms of the explosive upside that you saw and may continue to see in Cobalt, I don’t think that you’ll see that in Nickel.
What you will see in Nickel, though, is a business that will go as a business itself from negative 20% or 25% operating margins, to positive 50% operating margins. It’ll got to 50% operating margins in tonnage that will make an enormous difference.
The Nickel business is a very, very good business from my point of view. Now, again, you have to deal with the fact that if you want a really, really top quality nickel company, the top Nickel company in the world, you have to go to a Russian company, you have to be comfortable with that.
As a final question, let’s talk about the Sprott Natural Resource Symposium that’s coming up in July. What should investors expect from that?
Congratulations on choosing my favorite topic. The Sprott Symposium, not just because I run it, is unique. It’s the only symposium that I know of where in order to qualify to be an exhibitor you have to be owned in accounts owned by Sprott.
In other words, every exhibitor is vetted. In most conferences, the qualification to be an exhibitor is a pulse and a check that cashes, in reverse order.
In our case we have literally vetted every exhibitor and we have plenty in place. It doesn’t guarantee that all the stocks will go up, of course, sadly, but it does guarantee that we understand them well. It’s also a conference that has, by design, focused mostly on smaller market cap companies because Sprott is still mostly a small cap and micro cap equity and debt shop.
Now, that doesn’t mean the companies that we were involved in early on that have become quite large companies, Franco-Nevada, Wheaton Precious, as an example, aren’t present, but the focus has always been sub $250 million market.
Fantastic. Is there anything else that’s in your mind at the moment?
Well, I think so, actually. My suspicion is that, absent a global recession, and I should qualify that. We’ve been a long time without a recession, but absent a global recession, I sort of think this business is poised for some very good times.
You and I talked in the prior interviews, I said earlier about supply destruction, and supply destruction has happened in our business.
As demand recovers, the ability to meet changing price signals by adding supply is absent in the two, or three, or four year timeframe in the mining business. Absent a global recession, I suspect that you’re going to see stronger commodity prices across the board.
I also think that as a consequence of nearly a decade of underinvestment in resources, that the development and exploration pipelines throughout the sector are empty.
The consequence of that is that first, you’re going to see the merger and acquisition cycle pick up, which we’ve begun to see with the Arizona Mining and, of course, the Nevsun bid.
The consequence of that is that you’re going to see exploration budgets increase fairly dramatically. So absent a global recession, this is a big ask, I think that we’re in for two or three pretty good years in our sector, perhaps more depending on the way that the global economy behaves.
Thanks again for your time Rick, and hopefully we’ll do it again soon.
Always a pleasure, I look forward to it.
The Next Bull Market Move
If you would like to hear more from Rick Rule, check out Collin Kettell’s recent interview with him https://www.youtube.com/watch?v=1ZQa9bB38Og
And as Rick Mentioned, the Sprott Natural Resource Symposium will feature a number of resource companies that are personally vetted by him and his team at Sprott. There are also a great selection of speakers that include Doug Casey, Steve Sjuggerud, Marin Katusa, Matt Badiali, and Jim Grant. Details below and click here to register.
Tuesday, July 17, 2018 - Friday, July 20, 2018
Fairmont Hotel Vancouver
900 W Georgia St.
Vancouver, British Columbia V6C 2W6
Disclaimer - Interviews are conducted in the name of research and learning from the best. Only you can decide what makes a good speculation/investment.