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):
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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