During a time of intense fear and volatility in the precious metals and mining space, Sprott Asset Management’s Rick Rule was kind enough to share insight on where he sees the markets moving next, and how investors can make money during these periods. Rick views this period as a reflection of the four times during his career that he’s seen absolute capitulation, which is setting the stage for a “spectacular recovery”.
Here are the notes from his conversation with Bull Market Thinking’s Tekoa Da Silva.
Tekoa Da Silva: Rick, what are you seeing and hearing right now from an asset management standpoint?”
Rick Rule: Well, this is interesting. You will recall in a couple of prior interviews that you and I did, I said that bear markets ended in capitulation selling but I hadn’t seen that yet. We are now in capitulation. This is the fourth time in my career that I’ve seen capitulation selling and it gets ugly and spasmodic, but this is the beginning of the end. Certainly I believe the precious metals themselves as bullion are oversold, but they could sell off again. That’s not uncommon, a double bottom.
I think if we do get a [stronger] rebound in the precious metals prices, that it will not in the near term pull over to the equities. I think we’re going to get washout selling this summer—absolute capitulation selling. Then you’re going to have a sideways tail in the equities as both the buyers and sellers are exhausted.
The market will certainly bifurcate. The better names will do better but they will only do marginally better. It won’t feel good. But we are setting up the type of recovery that we saw in 2002, 1994, and 1986. This is the way markets work. It’s bear markets like this that cause bull markets and the inverse reaction is a function of the strength of the action.
The depth and severity of this down market cycle, the fact that maybe 700 juniors will go away over the next 12 months, sets the stage for a truly spectacular recovery. Bear markets cause bull markets, and bull markets cause bear markets.
TD: When we talk about that inverse reaction you’re expecting to the upside, do you expect to see doubles, triples, and quadruples in select names across the entire space?
RR: Absolutely. I mean without fail. I can’t tell you when it’s going to happen but I will tell you that what we’re going through right now is exactly what we needed.
From a pricing point of view, the resource market has been undervalued for a year. My nervousness about coming back into it with both feet was simply that we needed a downside blowout. We needed capitulation. We’re in capitulation now.
Two weeks ago, I was on the East Coast in the United States visiting very large institutional investors and the level of indecision I saw was absolutely classic of the period right before capitulation. Then last week, [capitulation] was right on schedule. Truly ugly. But this is the kind of cleansing that the market needs.
TD: Rick what about gold here. Were you closely watching it during the mid-70s when there was that similar type of shake-out?
RR: I sure was and by the way, that shake-out was much more aggressive than this one. That was a 50% decline over nine months and as ugly as it was on the bullion, it was uglier yet on the equities. I would suspect that the equities markets in the 1975 to 1976 cyclical decline, was more like a 65% decline over nine months. It was truly brutal.
That set the stage for an unbelievable recovery and that’s worth discussing because past is often prologue. In the decade as a whole, the gold price went from $35 an ounce to $850 an ounce.
In the period from 1970 to 1975, gold advanced six-fold from $35 an ounce to $200 an ounce, and suddenly over nine months it gave up $100, from $200 to $100.
Investors who didn’t have either the cash or the courage (or better yet both) to survive a 50% cyclical decline in the secular bull market, those who got shaken out at the bottom missed the move in gold from $100 to $850, an eight-fold move over six short years and the move in the equities was even greater. That’s a really instructive lesson.
TD: Rick, how much of this is about courage as compared to people getting hit with forced liquidation and/or redemptions and simply not being able to hold on?
RR: Well, I think it’s both. The truth is that many people don’t have the courage of their convictions which is why those people often go into mutual funds. But the truth is, it’s your decision as to whether you redeem. It’s your decision as to whether you add more capital in bad markets as opposed to adding more capital in good markets.
So the truth is it’s both. What I have found in my own life is that one of the functions of courage is cash. When I have more cash, I have more courage, and I’ve disciplined myself in my life, in periods like 2009 and 2010, to do a little more selling than other people, and I’ve always scaled back into markets.
Even as we speak, I’m conflicted. I realize that what you do with capitulation bottoms is buy. But rather than buying a broad basis, what I’m trying to do is save lots of cash to participate in private placements which will give me both shares and warrants. I want a leveraged participation to the upside and getting a warrant in a private placement is getting the opportunity (but not the obligation) to double up on your position at a fixed price over a fixed period of time.
You get to participate in success, be it market success or corporate success retroactively, and you get to do that for free. So it’s interesting that even in this time of capitulation, where cheap stocks are getting ridiculously cheap, I am keeping lots of powder dry because I believe that I will be able to provide capital when nobody else will be willing to provide capital to an industry and get warrants.
TD: Rick, are there certain types of projects in the metals space that might go the way of the Dodo Bird whether it be the big bulk tonnage, low grade deposits or otherwise?
RR: It’s OK to buy those large low grade deposits if you get them very cheaply. You can make an absolute fortune doing that like we did with Silver Standard, like we did with Lumina, like we did with Allied Nevada, if you have an eight or ten-year time horizon.
There is near-term money to be made two different ways. One is in the 18 to 24-month timeframe with regards to the undervalued prefeasibility or feasibility stage development projects.
The other is in the context of companies which have made discoveries and nobody cares. You’re in a market right now where you don’t have to buy these stocks in anticipation of the market’s reaction to news.
You can wait until the good news comes out, study the news, and then make your decision. We’re back in a period like 2000 where good news comes out and stocks go down.
This is the best of all possible circumstances if somebody has a two-year time horizon or a three-year time horizon, and it’s actually a spectacular set of circumstances if you have a seven to ten-year time horizon. This is a lethal set of circumstances if you have a three-month time horizon.
TD: Rick, most people in the industry are saying, “Oh, this is terrible. We’re getting killed.” But a few are saying, “We’re just getting up every day and we’re going to work.” How does this time impact the leading developers of the space, the Ross Beaty’s, the Bob Quartermain’s? What do you see those guys doing during these periods?
RR: All these guys are working hard. Ross Beaty is looking for opportunity, Lucas Lundin is looking for opportunity, and Bob Quartermain is completely ignoring the market. He’s proceeding with his bulk sample, dealing with the first nations, lining up his financing. He just got a long term investment the other day, Liberty Mutual Insurance Group, who have built a couple of billion dollar oil and gas businesses on the private equity side.
This is the time when the A-players go to war.
TD: When you look back on your career Rick, in terms of returns coming out of these periods over a longer timeframe; what sort of “light at the end of the tunnel” should people stay focused on during these times?
RR: Well, in the 1998 to 2000 timeframe, those first two partnerships I did, the capital that we allocated at market bottoms, over five to seven years, those partnerships generated sort of 20 to 1 returns. It doesn’t mean I will be able to do it again, I manage more money now than I managed then.
But certainly small, focused investors who are willing to allocate capital now and have a two, three, five-year timeframe can expect spectacular returns if they do the work. I was talking with Eric this morning on the phone and what he sort of reinforced to me was that he built Sprott from a $10 million manager to a $10 billion manager by the aggressive deployment of capital at times like these. Eric has always said don’t be afraid to be right. So that’s where we are.
TD: Rick Rule, Chairman of Sprott US Holdings, part of the $10 billion Sprott Group of Companies. Thank you so much for sharing your comments.
RR: Always a pleasure. Thank you for the opportunity.
Rick Rule has dedicated his entire adult life to many aspects of natural resource securities investing. In addition to the knowledge and experience gained in a long, successful and focused career, he has a worldwide network of contacts in the natural resource and finance worlds. As Chairman of Sprott US Holdings, Mr. Rule leads a highly skilled team of earth science and finance professionals who enjoy a worldwide reputation for resource investment management.
Mr. Rule is a frequent speaker at industry conferences, and is interviewed for numerous radio, television, print and online media outlets concerning natural resource investment and industry topics. He is frequently quoted and referred by prominent natural resource oriented newsletter and advisories. Mr. Rule and his team have long experience in many resource sectors including agriculture, alternative energy, forestry, oil and gas, mining and water.
Sprott US Holdings is active in securities brokerage, segregated account money management and investment partnership management involving both equity and debt instruments, across the entire spectrum of the natural resource industry.