It may be comforting to know that even investing gurus like Rick Rule, the founder of Global Resource Investments – Now part of the Sprott family of companies – makes mistakes.
At a talk during the first day of this year's Prospectors and Developers Association of Canada convention on Sunday, Rule related how after the market crashed in 2008 “like a boulder off a bridge,” he was ready for bargain hunting.
He and his team found 19 companies that were selling at values well below (50% or more) their cash holdings. But Rule only put 60% of the funds he had available into these stocks and kept 40% in reserve.
“Now if you think about how stupid that is, if you went outside this door right now and a guy came up to you and said 'I'll give you a dollar for those two quarters.' What should you say? Yes!” Rule said.
“I had hundreds of millions of dollars worth of doubles in my sights, and I spent 60% -- in other words, I cheated myself, I cheated my investors out of really, really substantial upside, despite the fact that it was my fourth cycle, by exhibiting bear-market thinking.”
So what does that mean for investors right now?
It means potentially missing out on such opportunities. Market psychology is such that investors are all too ready to pile into stocks that they know are overvalued at market tops than to jump on the opportunity to buy quality companies at a discount to working capital in the midst of a bear market, Rule said.
While he clearly stated that he expects the market to head lower and that a recovery in the juniors is by no means imminent, he did note that investors shouldn't be too shy to pull the trigger on a good buy, because sometimes things are “cheap enough.”
Although the junior mining industry as a whole is not viable, and 600-800 companies need to “go away,” the few solid junior companies out there are on sale because of the current cyclical decline we're going through within the wider secular bull market for resources, Rule said. And the resulting “cleansing” in the junior market is something that is both normal and healthy.
Things will get worse. Rule noted that in the bear market of the early 1990s, there were 25 companies a week that were failing to pay their filing fees – something that is not yet happening this time around.
Opportunity in the early '90s came when a couple of discoveries turned the market with a “violent upswing” in 1992, something that may or may not happen again.
Rule likes all the precious metals as a hedge against “currency debasement” -- even gold, which is currently experiencing a not-unusual retrenchment.
However, platinum and palladium have the best fundamentals, he said.
Unlike gold, the supply of these metals gets used up every year in a variety of industrial uses. And 90% of platinum and palladium production takes place in jurisdictions that are not overly stable -- South Africa, Zimbabwe or Russia. Lastly, existing mines are not making money at current prices. So prices have nowhere to go but up.
Rule says when Sprott Global Resource went looking for platinum and palladium stocks to invest in, they didn't find any they felt comfortable buying.
Then legendary mining entrepreneur Robert Friedland launched Ivanplats (IVP-T), which is advancing the Platreef PGE project in South Africa, as well as base metals projects in the Democratic Republic of Congo and Gabon. Rule can't recommend stocks because of securities rules, but he mentioned Ivanplats to say that even it has struggled in the market. (The stock is currently hovering above $4 after hitting a high of $5.45 in mid-January.)
“It is indicative of a bear market that one can buy the best promoter in history... telling the best story he's ever told in his career... and the stock goes down.”
The PDAC convention continues through March 6 at the Metro Toronto Convention Centre.
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