Contrarian Investment Opportunities in Natural Resources

Maurice Jackson of Proven and Probable has recently interviewed Sprott U.S. Holdings CEO Rick Rule, a well known specialist and “old hand” in the natural resource space. This is quite a wide-ranging and interesting interview, so we decided to present it to our readers. Below you find a summary and our comments on the main topics discussed, a video/podcast of the interview,  as well as a download link to a PDF file of the transcript for later reference.

 

Sprott US Holdings CEO Rick Rule

 

A summary of the main topics discussed and a few brief comments:

 

  1. Silver, Platinum and Palladium

Rick provides his views on non-gold precious metals, all of which have a large industrial demand component. Many of the ideas he presents in this context are fairly widely known but he also mentions a few issues which are rarely discussed and are probably not on the forefront of most investors’ minds. This includes e.g. his view on why silver supply-demand fundamentals are notoriously difficult to forecast, it seems there are a number of important drivers are actually not all that well known.

With respect to PGMs we would note that at current prices – particularly the prices for platinum and rhodium – it seems quite likely to us that a contrarian opportunity is close at hand. As a general remark to this we should point out that there were frequently time periods in the past (of short to medium duration) in which platinum prices moved independently of the trend in other precious metals and commodities more generally.

  1. “Energy Metals” (Lithium, Copper, Uranium)

In this segment Rick talks about metals like lithium, which has become a focus of investors with the increasing popularity of electric vehicles, but also other base metals that are likely to continue to benefit from the rising prosperity of people in emerging markets and the concomitant growth in energy demand.

Some of our readers may recall the Q1 2018 Incrementum conference call (see: “The Future of Copper” for the details), which was attended by special guest Gianni Kovacevic, the chairman of Copperbank, who spoke to us at great length about the effects of this development on the future demand for copper, a topic Rick touches upon as well.

Another energy metal Rick discusses in some detail in this interview is uranium, which certainly looks like a potential contrarian opportunity as well, given its current price.

  1. Project Generators

There is a brief detour on project generators in natural resources. We actually quite like a number of companies in this sub-sector – they work in a specialized niche that looks highly promising to us. Briefly, what these companies do is this: they build up portfolios of undeveloped and/or under-explored mineral land packages that appear to have potential (either by purchasing them outright or by staking) and then try to discover viable deposits. Once they have done so, they either spin off the discoveries into separate companies, or they sell them wholly or partly to financially strong senior mining companies with the wherewithal to develop them.

Monetization can take many forms which are sometimes mixed, ranging from outright cash payments to exploration/development commitments in exchange for majority stakes, to royalties on future production. This allows project generator companies to proceed with looking for the next viable deposit without having to dilute existing shareholders. The best of them occasionally even manage to create immediate returns for their shareholders in the form of special dividends upon project monetization and/or the distribution of free shares in projects that are farmed out and spun-off. We only regret that this part of the interview is a bit short, but we will definitely return to this topic in a future post. As Rick notes “these companies are neglected, which is odd” (as they are on average among the most successful companies in the exploration space). Naturally this neglect is precisely what creates great opportunities in this sector.

  1. Agricultural Sector: Agricultural Real Estate, Water and Water Rights

This is another very interesting area about which we have at best superficial knowledge. We were for instance blissfully unaware that there are in fact listed farming companies that have noteworthy ownership of water rights harboring great potential to increase in value, as they are scarce while water is obviously an indispensable resource. As a rule, water rights are privately owned and therefore inaccessible to most investors. It is good to know that there are actually a few exceptions (obviously, one has to do a lot of due diligence and analyze these businesses in great detail before one can tell with certainty which ones harbor the greatest potential in the context of water rights, but Rick provides us with a good starting point).

  1. Sprott Inc.

Sprott itself is a publicly traded company (symbol on the TSX: SII; in the US OTC market: SPOXF). As Rick Rule quite reasonably points out, the Sprott brand name is likely to become highly attractive in a bull market for natural resources, and particularly in a precious metals bull market, as Sprott is best known for its PM exposure and expertise. Even now, with precious metals essentially going nowhere, the company seems to be doing quite well, as evidenced by this brief summary Rick provides:I can tell you that it’s a prudently run company. We have no debt. We increased our EBITA in the last two years by roughly 50%. We earn and pay a generous dividend.”

Rick mentions that through conferences the company organizes it regularly brings together very interesting companies and high quality presenters (such as Doug Casey, Jim Grant, Grant Williams, Jim Rickards, David Stockman et al.), helping to educate investors in the process (as an aside, Jim Rickards is a fellow member of the Incrementum Advisory Board). The intellectual capital brought to these conferences and the networking opportunities they provide are no doubt of great value. In this interview segment our friend Jayant Bhandari (and a frequent contributor to this blog) also gets a well-deserved plug for his upcoming “Capitalism and Morality” symposium.

 

Sprott Inc. (SII), daily in Canadian dollars (TSX quote) – the company has evidently done well, despite the absence of a precious metals bull market since 2011. Investing in it is one way in which one can “buy Rick Rule”.

 

In 45 minutes these subjects can of course not be discussed in as much detail as one would like – but the interview definitely provides interesting ideas and useful pointers for further research. Without further ado, here is the interview:

 

Maurice Jackson interviews Rick Rule – investing in natural resources

 

Download link to the transcript:

Maurice Jackson Interviews Rick Rule – Investing in Natural Resources (PDF)