“Many management teams in the resource sector are delusional.”
I thought Rick Rule was joking. Rick is the founder of Sprott Global Companies and chairman of Sprott U.S. Holdings. He has spent decades in the resource markets, financing some of the largest companies in the industry.
I caught up with Rick in Vancouver last week. He was hosting the Sprott-Stansberry Natural Resource Symposium. Over 500 guests were in attendance. And the dozens of speakers were a true “who’s who” of analysts and mining executives in the resource space.
Most attendees were searching for new ideas. Others were looking for answers to tough questions like: “When will the bear market in resources end?”
For those who are not familiar with the resource market, it’s been in a severe downturn since 2011. Some industry experts say it’s the worst bear market in the sector in more than 30 years.
Rick Rule is one of those experts.
He says this market reminds him of the early 1980s. Back then, lower prices led to a fall in global rig counts, a huge cut in exploration budgets and many layoffs.
Rick believes we still have a ways to go on the downside.
For example, most junior mining companies do not have enough cash to last longer than 12 months. Most of these small companies do not generate any revenue. That means they always need to raise cash (normally though secondary offerings).
However, Rick says there are a lot of companies that refuse to raise money. They are “delusional” to believe the price of gold or silver is suddenly going to rebound over the next few months.
Rick also told me the “all in” costs to produce an ounce of gold are over $1,100 an ounce. That’s higher than where gold is trading today.
This means most large gold producers can’t make money producing gold right now.
Therefore, they are not looking to buy smaller projects that require tons of cash to develop.
This explains why the biggest producers like Barrick (ABX), Newmont Mining (NEM) and Goldcorp (GG) are down over 30% each over the past few months. It also explains why these companies continue to shed assets — instead of acquiring properties at current prices.
Rick does have a small list of companies that have great management teams and are flush with cash. Several of these companies presented at the conference. These are names that could withstand a further downturn in the resource sector.
These names are down more than 70%. Insiders own a huge chunk of the company. And each company operates in mine-friendly districts.
There is no doubt we could witness a further downturn in the resource sector. The dollar remains strong and China’s economy continues to slow. These two factors have weighed on the commodities market.
However, if you have a stomach for volatility … if you are willing to invest in quality junior mining companies that are flush with cash … and if you are willing to hold these names long-term…
You could achieve some of the greatest returns you will ever see as an investor.
In most bull commodity markets, it’s common to see junior mining companies gain 500%. Given the severity of the current bear market, these gains could easily top 1,000% or more once this cyclical market turns.
And I, for one, intend to be at the forefront.
