Rick Rule: What to ask before investing in natural resource stocks
Rick Rule, Chairman of Sprott Global Resource Investments Ltd., says that the ‘management interview’ is critical before investing in any junior resource company.
In this talk, he outlines what questions to ask before investing.
“You want to figure out how the company will generate a return for your money,” says Rick.
Exploration is similar to research and development in technology, he explains. Companies are trying to answer a question, or a series of questions. They need to discover something new of value. In the case of ‘juniors,’ the task is usually to discover a deposit or add on to an existing discovery by exploring over a wider area.
Start with a few simple questions, he says:
“What is the most important objective of the company? What key question is the company focused on answering?
“Should we care about its project? Is the effort worth the potential prize? You must determine how much value – if any — the company will create if it is successful.
“How likely is the company to succeed? And how long will it take the company to solve their ‘unanswered question?’ How long must we hold the stock before receiving a possible reward?
“How much money will it cost to carry out the project? Does the company have enough cash on hand to perform its research? If not, where will it get this cash?
“How will the company know to cut its losses on a project? And what will happen to any cash left over? Will management return it to shareholders?”
Many companies have more complex plans besides finding a new deposit. Perhaps they are negotiating the purchase or sale of an existing discovery. Or making a small mine more profitable. In these cases, achieving this goal is their ‘unknown.’ And often, resolving one question may lead to many more.
Of course, we have left out one key problem: Why should you trust what the person says? And why should you trust the company’s management? Are they qualified to take on the project in the first place?
“You want to know whether management is right for the job,” says Rick.
We want management teams that have already been successful – who have already proven themselves.
And don’t be fooled by past success that is unrelated to the current project. For instance, a team may have an impressive track record of making discoveries, but no experience at all in building successful mines; these endeavors require completely different skillsets.
Not all companies who successfully answer these questions will be winners. But most companies will not be able to do so. And you can quickly cross them off your list. This narrows the number of companies that we might consider buying, and improves our odds of success, Rick believes.
Even non-specialists can perform this task, he says, as long as you use common sense. “If a purported ‘fact’ told to you by the company does not make sense to you, it is likely because it is untrue.”
Today is the time to be out performing this type of due diligence, says Rick, when most investors are depressed and scared.
If you are interested in investing in natural resources, we invite you to attend our inaugural Sprott Vancouver Natural Resource Symposium in Vancouver, from July 22-25, 2014.
At the event, you will hear from industry leaders including Rick Rule, Doug Casey, and mining mogul Robert Friedland.
Click here from more details on this event.
Note: Rick also joked about your first time talking to a company. You will sit through ‘the pitch.’ That’s where the person at the booth or on the phone tries to sell you on the stock. You might as well enjoy it, since it is inevitable. It will give you a chance to assess the speaker before asking your own questions. Was the speaker competent and honest? Did he or she present an actual plan to create shareholder value? Once you have suffered the pitch, it will be your turn to take charge.
This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.
Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.