Rick Rule, founder of Global Resource Investments, doesn’t deny the global economy and markets are looking ugly. Moreover, he says Toronto’s Venture Stock Exchange, which is overloaded with companies that are six months away from “extinction” is going to trend lower.
But for those investors who are selective with their cash, he does believe that that the current rout in junior mining equities – coming in the midst of a continuation in the commodity bull market – presents opportunity.
“Your job now as always is to segregate between the good and the bad. We have an absolutely spectacular opportunity in front of us because I think we are, right now, in the incipient stages of a stealth bull market,” he said at the World Resource Investment conference in Vancouver on Sunday.
Rule pointed to research compiled by John Kaiser of Kaiser Research Online that showed over 50% of Venture Exchange companies are trading close to their 52-week lows; have only six months of working capital; and are trading at under 25 cents.
Rule added that if you merged all the mining and oil and gas juniors in the world into one company, in a bad year, it would lose $8 billion. Even in a very good year, it would still lose $2 billion.
“The only thing that keeps it going as (U.S. President Barack) Obama would famously say is hope, and hope is a four-letter word. Hope is a very very, very bad thing,” he said.
“The fact is that the junior market. . . is going to go lower because 50 or 60 or 70% of the companies in the market are non-viable. But the cure for low prices, in every instance is low prices.”
Rule said that the Venture Exchange would be a lot healthier if the non-viable companies went under, leaving more capital available for good companies.
“The problem is that as these companies approach their intrinsic value, it drags the rest of the market down. To the extent that you have companies like this in your portfolio, and you know you do, you need to sell them. It’s critical that you do that.”
The coming “stealth bull market” will be propelled by a number of factors, including that for the first time in a long time, junior resource shares are, if not cheap, at least reasonably priced.
Rule reminded the audience that the key to making money in the market is to buy low and sell high, something that many find difficult to do when negative sentiment is so pervasive.
Investors should be hunting for the same companies that big resource companies are looking for he says, adding that they have repaired their balance sheets since 2008 and are now “wallowing” in cash.
“The second part of the stealth bull market will be mergers and acquisitions,” he said. “There is no way that the gold industry can find another Carlin trend every year, they have to buy the successful efforts of the juniors. So the second part of the stealth bull market will be in the next 18 to 24 months, you’re going to see a mergers and acquisitions boom the likes of which you haven’t seen since the early 1980s.”
Finally, Rule predicted that after pouring money into exploration for the past decade, the payoff is about to begin in terms of discoveries.
“The third part of this stealth bull market is that I think we’re in the very, very early stages of a discovery cycle. We have funded the exploration business now for 10 years… but that’s how long it takes… The process of exploration takes years and years and years and many failures and many guys working very, very hard.”
He added: “Right at the point when we are the most disgusted with the discoveries process, is always the time when the discovery process begins to reward those who have understood it for the value it has.”
Rule also pointed to the opportunity for accredited investors to take part in well priced private placements. The institutional investors that have dominated private placements over the past decade – mutal funds and hedge funds — don’t have the money to fund them anymore due to capital outflows, leaving companies that need money without a primary source.