Invest like Rick Rule: Five essential tips to find those 10-bagger exploration stocks
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Famed resources guru Rick Rule invests in exploration stocks for those 10-20 baggers.
“Your winners must be big enough that they amortise your losers,” Rule says.
“Over 40 years that has worked out unbelievably well for me, but I have had 12-month periods where I have enjoyed no success whatsoever.
“The truth is, if you have a 20-bagger that amortises a hell of a lot of sin elsewhere in your portfolio.”
But it’s a tough game, warns the president & CEO of Sprott US Holdings, unless you have a tried and true method.
There are more than ~1,500 listed exploration stocks globally, and ‘most of them are rubbish’.
So savvy investors need to be very discriminating in how they apply their capital.
“It’s the good, the bad and the ugly,” Rule says. “Concentrating on the good, ignoring the bad, and avoiding the ugly like the plague.”
So here’s The Five Rules of Rule:
Successful explorers typically have quality leadership teams.
These proven mine finders and builders – the kind which make shareholders a lot of money – are hard to come by.
“To participate successfully in early-stage exploration, you are investing in the ‘explorationist’ – that is important to know,” Rule says.
“There are probably 250,000 active earth scientists in the world, and there are probably only 25 bona fide discoveries [per year] – the chance of any one earth scientist participating in a discovery in any one year is frightfully small.
“And yet, you have some guys around who have participated in 10, 14 or even 20 economic discoveries. The truth is that Pareto’s Law applies to exploration like any other function, which is to say a very small number of people contribute to most of the success.”
So, the iron law of exploration is this – invest in a team of explorationists that have been serially successful, or a company that can attract those people.
“But this game is about people. Either you or the person that advises you must do serious research on the people,” Rule insists.
And that isn’t just about the people who have been successful once or twice in exploration, but rather a person whose success has come from a task that is very similar to the task at hand.
It is unlikely, not impossible, that you will find a tier 1 deposit in a jurisdiction that makes you happy, Rule says.
“If you are looking for a 5Moz deposit in the Victorian goldfields you are assuming you are smarter than hundreds of years of geologists that went before you, which is a lousy assumption,” he says.
“Can it happen? Of course. It is a wonderful place to look for a deposit – just look at the Swan Zone at Fosterville. But is it likely? No.”
To participate in big exploration success, you need to be prepared to take political risks and exploration risks.
“You are going to have to go to jurisdictions where you are less comfortable, where the industry is less comfortable and where fewer people have gone before,” Rule says.
The idea that an explorer could fit a 5Moz gold mining operation on a 70-hectare, postage stamp-sized project area is silly. Explorers need a district scale land package — 50,000 hectares, 60,000 hectares, Rule says.
“And more often than not you want it in mineralised terrain, but not a known camp,” he says.
“You look at what Robert Friedland’s Ivanhoe Mines did to discover the massive Kamoa-Kakula copper mine in DRC.
“He looked at the extension to the Katangan copper belt, but he looked for it under sand, where the Belgians couldn’t have found copper [historically] because they did not have the ability to RAB drill through 10 or 12 metres of cover.
“He made the most important copper discovery in the last 100 years. That’s the sort of thing you are looking for.”
Rule passionately advocates for something called the ‘prospect generator’ model of exploration.
Prospect generators are mineral explorers that focus on finding numerous, very promising early-stage prospects using very technical methods.
They do the initial inexpensive exploration work to prove up a project’s potential. Then they attract a cashed-up joint venture partner to fund much of the expensive later stage exploration and development costs.
With a joint partner shouldering much of the costs, a prospect generator can have numerous projects on the go at the same time.
Prospect generation works, Rule says.
“Only one in 3000 mineralised anomalies becomes a mine,” Rule says.
“I have invested in 70 or so prospect generators over 40 years – [this has led to] 26 economic successes, and 24 takeovers.
“So, the headline number is one in 3000, and my experience is one in three.
The other great thing about prospect generation is that it reduces due diligence costs, Rule says.
“Maybe a broker is telling me this company is a great play, but the broker has an incentive. Hardly impartial advice,” he says.
“When due diligence is done on a prospect generator it is done by the miner — like Rio, Newcrest or BHP — optioning into their projects.
“It’s a wonderful form of due diligence for investors. I love it.”
Don’t invest in the ground floor – just participate in successful exploration efforts.
“I used to be unable to do this because I was a cheapskate,” Rule says.
“After a discovery is made a stock may go from 25c to $1. I felt bad because I missed it at 25c.
“What I didn’t realise until I was about 40 years old is that the stock was much cheaper at $1 than it was at 25c because I now had the information to validate data.”
Chalice Mining (ASX:CHN) for example, quadrupled on the discovery hole at Julimar in WA.
“If you didn’t buy the stock after it quadrupled you made a huge mistake, because since CHN quadrupled it is up 15-fold,” Rule says.
“The trick is to understand the significance of the discovery hole, being willing to pay up, and even averaging up if the data continues to improve.”