Podcast

Rick Rule: We're Entering a Great Era for Resource Investing

Friday, December 9, 2011, 7:04 PM

Recently, we crossed the seven billion threshold for humans on the planet. Most of these people are desperately trying to get up the living standard curve. And that requires resources.

Simple math tells us there is going to be increasing competition for a steadily dwindling in both quantity and quality global pool of high-grade resources. This 'scramble for stuff' is going to be one of the key defining trends of this century. And while it will have game-changing repercussions across societies, economies, and geopolitics, we are at a moment in time where tremendous upside awaits investors who recognize today the true future value of key resources and secure meaningful exposure to them.

Rick Rule has made a successful and storied career as a resource investor, and has rarely seen as attractive an alignment for the space as he does today. What is there to be so optimistic about?

1. We are going to face an awful lot of volatility. And I should start by saying that volatility can be good news for you if you are prepared for it. It gives you frequent sales. Why the volatility? In the first instance, there are seven or eight trillion dollars sitting on the sidelines just in the United States looking to be invested. That has some upward bias.

2. We are in a secular bull market in 'stuff'. The bottom of the [global] demographic pyramid as it gets richer, and it is getting a bit richer, uses a lot more stuff than the top of the pyramid. So per capita consumption of stuff is growing, spread over lots and lots and lots of capitas. 

3. Resource stocks have not kept pace with commodity prices. So resource stocks for the first time in several years are attractively priced.
 
4. The senior resource companies, including the mining companies that have been real under-performers for the last decade, are starting to make an awful lot of money. And one of the themes I think that you are going to see in the resource space is mergers and acquisitions.

Of course, there is plenty of bad news to offset the good here, and Rick warns that as attractive as prices may be here for many resource-based companies, they could easily go lower in the short term before powering higher to their true valuations.

The bad news is also pretty straightforward. It appears to me like we are headed towards a liquidity or credit crisis, as a consequence of the fact that the political will does not exist, to cause the citizenry of western nations to live within their means, and because the banking system as we know it is bankrupt. An example would be Germany; the lender of last resort for the European economic community had a failed bond auction. If the lender of last resort cannot lend, you have a fairly interesting set of circumstances. Of course, they did find another lender of last resort, and that is us. And the market has not seemed to figure out that we are in some danger of going broke ourselves.

I am completely conversant with the fact that resource stocks could get cheaper before they get expensive. [A good mathematician] knows that you have a mean line and a median line, because things do not revert to mean or median, they revert through the line. And the fact that stuff is gotten cheap probably means it gets cheaper. But the nature of investing in natural resources is investing on a net present value basis, and the stuff is cheap. We do not see it cheap very often.

So the key here is performing good-old fundamental analysis to find the undervalued opportunities, buying in, and then letting time work in your favor.

As for the resource sectors that interest Rick the most?

I am interested across the barrel, but I think I am particularly interested in sub five hundred million market cap resource plays in the western Canadian sedimentary basin, Canadian listed companies with repeatable resource plays in oil.

I am also very, very, very attracted to the uranium space. As a consequence of the events in Japan, the uranium space got cut in half, but uranium consumption has not budged. So I like the risk to reward checks to position in uranium.

What really has me excited right now, however, is that for the second time in the last ten years, the smaller gold stocks are attractively priced relative to the gold price. You know Chris, I found myself in the embarrassing position in 2010 to be a fairly well known gold stockbroker that did not have any gold stock recommendations. As a consequence of the fact that the gold stocks were assuming very, very, very high gold prices, but were not putting on very good corporate performances. We have seen the situation now where the bullion price has continued to go up, but the share prices of the stocks have gotten absolutely creamed. So what is probably most attractive to me of all are the shares of the pre-feasibility stage junior companies, and some of the smaller producers that have large organic development pipelines. We think that they are absolutely cheap, and that is something that does not happen very often.

Click the play button below to listen to Chris' interview with Rick Rule (runtime 32m:58s): 

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Founder of Global Resource Investments, Ltd., Rick Rule began his career in the securities business in 1974 and has been principally involved in natural resource security investments ever since. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture.  At Global Resource Investments, Ltd., he leads a team that features professionals trained in resource related disciplines, such as geology and engineering, who work together to evaluate investment opportunities.


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9 Comments

seemorerocks's picture
seemorerocks
Status: Member (Offline)
Joined: Jan 11 2011
Posts: 2
Resource investment

The article starts off by saying that population has reached 7 billion and that resources are scarce and then seem to jump to a conclusion that this is a way of making money when normal avenues are failing.

I get a sickening feeling when I hear that - I hear a critique of a growth paradigm that has failed us and then in the same breath how to exploit this to personally win out.

"Make money on the way up and make money on the way down"

When it comes to food production there is no doubt that both climate change and energy shortage (along with population overshoot) are going to impact  on food production.  But right now nothing like speculation and investment in food derivatives is pushing up the price of food to a level where people are starving.

To put this down to population only is self-serving.

300 million people in North America can have consume more, and have more impact on the environment and resources than the remaining  6.5 billion.

The suggestion to invest in resources (in this way) is -at the very least AMORAL.

Now is the time to disengage from the beast of the infinite growth paradigm.

Aleksandr27Gerasimov's picture
Aleksandr27Gerasimov
Status: Member (Offline)
Joined: Dec 12 2011
Posts: 1
отзыв на этот пост

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brianl's picture
brianl
Status: Member (Offline)
Joined: Nov 14 2011
Posts: 1
re: Resource investment

How can the suggestion to invest in resource stocks be amoral? Investing in most resource stocks is an investment in a company that helps to provide resources to the populace, not drive up commodity prices.  An investment in CAT or ADM is an investment in a company that works to provide food more efficiently to people.

jonesb.mta's picture
jonesb.mta
Status: Silver Member (Offline)
Joined: Jun 11 2008
Posts: 100
brianl wrote:  How can the

brianl wrote:

How can the suggestion to invest in resource stocks be amoral? Investing in most resource stocks is an investment in a company that helps to provide resources to the populace, not drive up commodity prices.  An investment in CAT or ADM is an investment in a company that works to provide food more efficiently to people.

Actually ADM is one of the most corrupt companies out there, they owned Bob Dole and through Bob Dole put the ethanol scam in place. ADM doesn't work to provide food more efficiently, they try to control their markets by buying off crooked politicians. That said, I don't see how investing in resource stocks can be considered AMORAL.

seemorerocks's picture
seemorerocks
Status: Member (Offline)
Joined: Jan 11 2011
Posts: 2
 Anything that helps to

Anything that helps to perpetuate the Infinite Growth Paradigm is - perhaps not AMORAL - but IMMORAL.

Invest in gold and silver.

bitterbaldguy's picture
bitterbaldguy
Status: Member (Offline)
Joined: Jan 14 2011
Posts: 8
couldn't agree more

Yes, if you want to make more fiat regardless of the consequences, namely to the biosphere...call Rick.  Truly, if you REALLY believe in the 3 E's, then your investing strategy must also incorporate an ethical component. 

Rick Says "We are looking at the conjunction of three technologies; amplitude versus offset three dimensional seismic, directional drilling, and multi-stage fracturing. We are doing really truly a tremendous job of unlocking American energy. But we are doing it at a very, very, very high capital cost. If you compare the development cost for Bakken Oil, relative to the development cost of some of the Permian Basin pools that were discovered in the fifties, there is no relationship between production costs. What we are doing is wonderful, but as you pointed out in an earlier question, this is not low cost oil. All oil is good, but these are hard, hard deposits to develop from a financial point of view."

tremendous job?  what we are doing is wonderful?  If you believe that unconventional methods of resource extraction are wonderful, then it is plain that the third E (environment) has no place in your investment portfolio.  Supporting these endevours simply supports the notion that liquid hydrocarbons must exist to run our society, yet we all seem to come to this site and agree that this is not the long term solution.  Kick the can down the road anyone?

I love this site, but one of the big shortcomings is the order of the 3 E's.  The environment should come first.  Why?  Because at 3 degrees celcius from now, it won't matter whether you hold fiat currency, metal or a degree from Sprott University.  Support the type of BS that is happening in my country (Tar Sands are king) and we'll find out sooner than later that a climate tipping point was the real problem, not the derivatives market debacle or whether we can eek out a few more years with shale.

bewell4711's picture
bewell4711
Status: Member (Offline)
Joined: Nov 26 2011
Posts: 1
Uranium?

Well said. And, might I mention that uranium and uramium mining are more dangerous to the environment.

The distruction at Fukushima and the resulting nuclear contamination is and has been much worse than reported...what a surprise.

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