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Sprott CEO Rick Rule says the easy money in uranium has been made and the next big contrarian play is gold
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Rick Rule, well-known mining investor and president & CEO of Sprott US Holdings, began his career in the securities business in 1974 and has been principally involved in natural resource stock investments ever since.
He has financed numerous exploration and mining companies over his 45-year career.
Last week, Rule spoke to Stockhead’s Oriel Morrison about his investment strategies as a contrarian investor, why the easy money in uranium has been made, and why gold is the next big contrarian play.
Here are the highlights. Scroll to the bottom to watch the full interview.
What is contrarian investing?
“To quote Buffet – ‘Be fearful when others are greedy, and greedy when other are fearful’,” Rule says.
“Most people prefer to buy commodities when they are already popular.
“Contrarian investing is looking for out-of-favour opportunities or better yet, opportunities in sectors that are hated.
“Natural resources provides such a wonderful opportunity to do that because it is such a cyclical business. Prices for some commodities can double or triple from the bottom of the trough to the peak.”
What are the risks to contrarian investing?
“I think the biggest risk is yourself, your temperament,” Rule says.
“When you get no reinforcement from price it can be difficult to have the courage of your convictions.
“If the investment takes longer than you hoped to mature – and by the way, most investments take longer than you hope — sometimes you can get shaken out of the investment.
“One thing that will either terrify or elate [readers] is that the big wins I have had in my career – the 10-baggers, the 20-baggers, the 30-baggers – have generally taken 4-6 years.
“And without exception, all the big winners I can think of have experienced 40-60% prices declines at some point in time in the period that I held them.
“Now, there was nothing about the company that would’ve shaken me out, but if I didn’t have the courage of my convictions, if I didn’t have patience that 10-bagger might’ve been a 20% loss.
“Buying things cheaply, and then selling them when they are no longer cheap is probably the most riskless strategy on the planet — if you have the courage of your convictions.”
What type of strategies do you use as a contrarian investor?
“I look for things that are unloved in natural resources,” Rule says.
“Find a commodity that you know will be in demand for at least 20-30 years, but the pricing for that commodity is below the median cost of production – like iron ore was 10 years ago, or uranium a year ago.
“Three years ago, people wanted to know about graphite and all kinds of minor metals; meanwhile the uranium market was staring them in the face.
“Uranium was selling for $US20 a pound.
“Either the price of uranium went from $20/lb to $US60/lb or the lights would go out. They were the only two options.
“Nobody cared. It wasn’t just that people didn’t care – they hated it.
“I remember during the last uranium boom – the early part of the 2000s – I would be talking about uranium and people would come up and says ‘you are a despicable human being. You are speculating on extinction.’
“When the uranium price went from $US8/lb to over $US100/lb some of the same people castigating me as an enemy of mankind were looking for tips on junior uranium stocks.”
In the last two years the uranium price has doubled. Stocks have gone up four-fold. Is there a contrarian strategy here or is that over and done with?
“I suspect that the better uranium stocks in the next two years will double, but the easy money has been made,” Rule says.
“My belief is that the uranium price goes to $US60 — $US70/lb.
“But now stocks are up ~400% geniuses are coming out of the woodwork making recommendations in a sector that two years ago they couldn’t even spell.
“So, I’m not think about uranium as a contrarian investor theme anymore.
“As soon as something becomes respectable, or semi-respectable you need to think about tasking some money off the table.”
What about gold stocks? Is there a contrarian investment strategy we should be looking at here?
“I think there is,” Rule says.
“The debasement of curries around the world is running rampant. This is the right circumstance for gold.
“Right now, in the US market, precious metals and precious metals related securities constitute one half of one per cent of the total savings and invest assets.
“0.5%. The three-decade mean is 1.5% to 2%.
“So, if the combination of quantitative easing, debt and deficit and negative real interest rates just propels gold to its three-decade mean, demand for these products triples.
“And that is precisely what I think is going to happen.
“Because the gold price, and gold stocks haven’t moved [up] for year investors haven’t had validation. It is an asset out of favour.
“Producing gold companies, including some Australian gold companies, are probably the cheapest they have been in my career.
“They are generating massive amounts of free cash flow; 25-30% free cash flow on existing operations.
“These are very, very cheap companies – and they are cheap producing a commodity I am also bullish on.
“Northern Star (ASX:NST), Evolution (ASX:EVN) – those sorts of mid cap names. I would say any gold company in the world with a 10-year reserve life that is operating on a 20% free cash flow yield is just stupidly cheap.
“And if the gold price goes up — which I think is going to happen — that is icing on the cake.
“But you don’t need the gold price to go up to understand that these companies are generating substantial surplus capital and they going to begin to return it to shareholders.
“They are either going to take over other companies – and in that case you buy the M&A targets – or they are going to increase dividends, or they are going to buy back stock.
“Three virtuous choices.”
Watch the full conversation here:
On The Bid: Rick Rule on contrarian investing strategies, key commodities and best stocks from Stockhead on Vimeo.
