Resource World Magazine

38 www.resourceworld.com j u n e / j u l y 2 0 1 5 iNvESTmENTS An extremely knowledgeable and sought after speaker at investment conferences and on business television, Rick Rule is Chairman/Founder of Sprott Global Resource Investments Ltd. Born in San Jose, California, Rule journeyed north to Canada to attend the University of British Columbia and then returned to the US to start his career in securities in 1977. He founded California-based Global Resource Investments, Ltd., which he sold to Sprott, Inc. in 2010 along with various affiliated companies. During his career, Rule has seen extraordinary financial success investing in and financing hun- dreds of mining companies. He spoke to Resource World from his office in Carlsbad, California. RESOuRCE wORld: I am aware of about a dozen junior and mid-tier mining companies that have recently hit 52-week highs. Do you think this is a sign that the extended bear market in this sector is end- ing or is this very selective recovery? RiCk RulE: I think the answer is some- where in the middle. We are experiencing what is called bifurcation. The best 10% or 20% of the juniors have certainly separated from the rest of the pack that constitutes the TSX Venture Exchange and have begun a recovery – sometimes a handsome recovery. This fact is disguised because the 50% or 60% of TSX Venture juniors are not viable – the ones referred to by market analyst John Kaiser as zombies. Those companies are trending down towards their inexorable value which is zero and pulling the rest of the TSXV Index lower. Rw: Some mining analysts go on about how the Federal Reserve is doing this or that. Does the Fed actually have much effect on the stock performance of high- quality mining shares? RR: I think the Fed does have an impact in the sense that artificially low interest rates forces money that would otherwise be invested in conventional savings prod- ucts into equities markets and sometimes into speculative equities markets. We must remember that the market collapses in the late 1990s and the 2008 global finan- cial crisis proved that gold stocks are just stocks and that a liquidity crisis in terms of general equities will affect mining equi- ties as well. I think it's fair to say that the benign conditions that exist in the equity markets today have been favorable for certain min- ing shares, although the overall experience that mining share investors have had has been anything but favorable. Rw: When you gave your recent talk at PDAC in Toronto, you noted that some mining companies were trading at a 40% discount to the cash in their treasury. If that is the case, why aren't more investors buying up their shares in a big way? RR: In the near-term, investors' percep- tions are geared to their experiences in the immediate past [which were bad]. The consequence of that is that if these [cashed-up] companies were medical mari- juana or technology, they probably would be bought up, but the fact that they are mining companies means that they have not been bought up. A second sadder fact has to do with the fact that most of the junior mining indus- try ills have been self-inflicted. Investors are expressing the perception that the cash in their treasuries will be rapidly used up by mis-investment. The truth is that one of the things that have caused the mining investment business not to see more merg- ers and acquisitions has been the flagrant misuse of funds, including termination benefits for incumbent mining company management. I think that the junior resource inves- tor has a well-placed fear of the greed and lethargy associated with some junior min- ing company management. That has led to the depressed price even for cash shells. Rw: How much influence does prevailing market sentiment have in comparison to solid company fundamentals? RR: I think that, in the near-term, some prevailing market sentiment is very important. In the long-term, of course, fundamentals win. A very good story that is true will find investors in any cir- cumstance. For example, Ross Beatty (Pan American Silver), Lukas Lundin (Lucara Diamond/Lundin Gold) or Bob Quartermain (Pretium Resources) don't have trouble raising capital. So, even in conditions when sentiment is the worst, the best companies can prosper. It is also true, however, that in stupid market conditions such as in 2007 and 2010, even bad companies can raise money for mining projects which is one of the reasons we are in this malaise today. Given that fact that they could – they did. We are still suffering from the hangover from that over-financing. Rick Rule talks stocks by Ellsworth Dickson

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