Issue link: http://resourceworld.uberflip.com/i/832998
10 www.resourceworld.com J U N E / J U L Y 2 0 1 7 again before we can move off another depressed base. RW: What do you look for in a junior mining stock? RR: I begin with people. I look for guys – and now gals – who have been serially successful in endeavors that are related directly to the task in hand. In other words, if someone is looking directly for copper, I want them to have found copper before. You've had some people who have been serially successful and then you have, what is for want of a better word, mostly the great unwashed. I want a big deposit or I want the opportunity to find a big deposit. Too many management teams dream of boot strapping and finding a small high-grade deposit and using that cash flow to build a company. It's a wonderful dream but it almost never works. If you're going to take the risk of inheriting a mine, you better make sure that the reward is consistent with the risk. In other words, it better be big! And I also look at value for money. When people tell me what could happen, I have to ask them what does happen. What's your market cap? If it's $25 million, say OK, I see you have $3 million in the treasury; that explains the first $3 million. How do you explain the other $22 million? Don't tell me just where it's going to go. Tell me what my downside is by describing to me the dif- ference between what the company is selling for and what it's actually worth when liquidated. RW: Looking at the world as a whole, would you say that the combination of infrastructure building and population growth will generate a significant demand for mineral commodities in the medium future? RR: If you define the medium future as five years from now and out, the answer is yes. In the nearer term – no. In the nearer term, what is going to drive commodity prices will be supply destruction. The prices of commodities have been lower than the cost to produce them for a substantial period of time and the lon- ger that goes on, the higher the probability that the productive capacity comes offline and we drive production up by meeting supply and demand at a lower level. When that happens, and the price spikes, the spike can't be dampened in the near term by supply increase because the productive capacity has already been destroyed. This is a very important point. RW: Is there any particular commodity that investors should target with a related mining stock? RR: Well, the easiest one to target from my point of view would probably be copper because it's a big market. There are a lot of people that know how to find it. In fact, I joke that over 40 years of my business, people have raised most of their money on gold and made most of their money on copper. Uranium, certainly with the caveats that we discussed, needs to go up. I continue to be attracted to platinum and palladium, although the very soft global economy has constrained demand for them more than I foresaw. I am looking in the agricultural mineral sector because it bores everybody else to tears and I like to write cheques when I have no competition. I also think people need to pay attention to gold and silver because I think there's going to be some surprises in the commodity price with regards to those metals. RW: Do you think that many of the mainstream stocks are now fully valued or overvalued and due for a correction? RR: With the caveat that I'm not a general securities analyst, when I look at the mainstream stocks that are an example of S&P components of the United States, I think they are probably at the high end of fairly valued. I'm not one of those that believe we're in a real bubble at least with regards with the large cap US stocks. These are very fine companies, they're globally competitive and have maintained their sales in the face of a very strong US dol- lar which has made their goods more expensive overseas. They learned their lessons in 2008 with regards to excessive leverage and by and large have very good balance sheets, and so I think yes, they're expensive because part of their sales has been driven by very low interest rates. Their cost of capital is a function partly of low interest rates and part of the implicit share price is a function of the fact that investors have looked at equities for dividends rather than bonds for yield because the bond market is so expensive. I don't see the overvaluation in many of the large stocks that some of the natural resource newsletter writers are reciting. In fact, my own experience is the most overvalued sector in the market at all times is the junior exploration sector because 80% of that sector is always valueless at any commodity price point. RW: Do you try to time the market or do you like to take a longer view? RR: I believe you have to take a longer view. I time the mar- ket in the sense that when I find a commodity where the selling price is less than the cost of production, in other words, an indus- try that's in liquidation, I know that either the material becomes unavailable or the price goes up and the longer the situation lasts, the more dramatic the response will be. If that type of fundamen- tal analysis is market timing, then I'm a market timer but most of the money that I have made in junior stocks has come about as a consequence of answering unanswered questions, either through process improvement or through exploration and that's a very long term gain. So my own expectation is that my minimum hold- ing period is going to be 18 months and my ideal holding period is probably five to six years. RW: Would you care to reveal any stocks that you are following? RR: Well, certainly I'm closely identified in the public markets with Ivanhoe Mines where I'm still a very large shareholder. I'm a very large shareholder of the company I work for, Sprott Inc., and of its recently refinanced private merchant banks, Sprott Resource Holdings where I am now Chief Investment Officer. But the truth is, that I am quite bullish in my outlook for natural resource com- modities, and the consequence of that is we're actively trying to increase our positions in a fair number of companies, most of which I wouldn't want to talk about because I know how broadly read you are and I wouldn't want any competition from your readers (chuckle). n