One special session at
the April 27–29 Casey Research Recovery Reality Check Summit wasn't on
the agenda—a private panel for The Gold Report readers with three of
the premier summit speakers: Global Resource Investments Founder and Chairman
Rick Rule, Casey Research Senior Editor Louis James and Casey Energy
Opportunities Senior Editor Marin Katusa. You won't
pin them down to a timeframe, but they're looking forward to a buyer's
market, as equity prices fall and volatility increases. As Rule puts it,
"When the luster is off the sector, it's off all parts of the sector, so
in bad markets the best companies are cheap. When the best come cheap, you
have to play."
The Gold Report: When we talked last fall after the When
Money Dies summit, Rick, you were looking forward to the volatility
preceding the decline of paper currencies as an opportunity to take advantage
of the liquidity crisis.
Rick Rule: The volatility I
anticipated didn't happen because the amount of quantitative easing—I
would call it counterfeiting—was extraordinary. That cash coming into
the system acted as a soporific, so the volatility I had hoped for did not in
fact come to pass. People whose portfolios declined probably felt they
experienced volatility, but I think it was the weight of the chronically
overvalued junior resources sector. Probably 80% of the sector is nonviable
and in a state of permanent decline, with the market occasionally punctuated
by up moves driven by performance among the best companies.
TGR: So, you were
RR: I was very
disappointed. I expected a Volatility S&P 500 (^VIX) in the range of 30.
For somebody who makes a living basically as a pawnbroker, there are no
better circumstances than extraordinary volatility. I didn't get to practice
TGR: Do you think it will
change in the second half of 2012?
RR: I don't know, but the
disconnect between the way we in the West live and the way we can afford to
live will be problematic, particularly because the productive part of
society—the so-called one percenters—is
being vilified. The conflict between good and bad news will create incredible
volatility at some point, but I'd be pressed to tell you when.
"Inevitable is not the same as imminent."
– Rick Rule
TGR: That sounds like more
social than economic volatility.
RR: Social volatility
manifests itself in the economy. We'll see less productive investing if the
politics of envy drive increasing taxes on capital. To raise workers' real
wages, the workers must employ more capital, and you can't do that if the
capital isn't finding its way into the economy.
TGR: Last fall, Marin, you
said quantitative easing was deflating equity valuations. "He who has
cash will be king," you said, "because he can afford to buy discounted
stocks. If you do your homework and be sharp you'll make a fortune in the
next three years." Is that still the case? Are we too late?
Marin Katusa: Not too late at all, and I still believe
we're in deflating equity prices. I'd say it's going to get a lot worse,
especially for the junior resource companies. Less money is flowing into the
sector and it's now a buyer's market. This is the riskiest investment segment
on the planet. Risk mitigation is the key to succeed, and any opportunity to
reduce risk is the most important thing moving forward. By mitigating risk,
being strategic, always taking Casey free rides—the portfolios for 2011
for both the Casey Energy Report and Casey Energy Confidential
gained over 20%. And Q1/12 was over 20% for both newsletters also. So if you
do your homework and buy good companies, you can do well.
TGR: Louis, you said
"the secret is to figure out what real stuff people need because it will
retain value. When prices on valuable stuff go down ridiculously it's a
godsend because you can buy when it's cheap and sell when it's
expensive." Is the stuff people need cheap now?
Louis James: Stuff is not really
cheaper. There is deflation in some asset classes and some equities, but life
for the average Joe is not cheaper and commodities in general are not
cheaper. Gold is trading between $1,600 and $1,700/ounce (oz).
Copper is at what looks like maybe reasonable long-term prices, but short
term, they're ridiculously high. I can't believe the way copper has defied
gravity in the face of all the economic turmoil the world is in. It says
something about the supply destruction industry is seeing and the supply
It's actually fantastic
if you have high, driving prices in the commodities, find good companies with
good management, money in the bank and the wherewithal to weather the storms,
buy them cheap and profit from some of the volatility Rick is looking for.
But I agree with what he
said. I also think we'll see more volatility, and the chances of seeing much
lower prices are pretty good. When a bear sentiment grabs the market, it
takes everybody down, both the best and the worst players. If you have the
courage to face it, that's very good news. There's a good chance we'll see
much more of that over this summer and I'm looking forward to it.
"After the sector bounced back from 2008,
I wrote that we should be so lucky as to have another one." –
TGR: Participants came to
this conference for a Reality Check. Rick, you said a reconnoitering is
inevitable. But how do you tell the difference between a correction or
retrenchment in a supercycle and the start of a
RR: I don't know how to
know. Eric Sprott is a student of markets. I'm not.
My response to a market is simply to try and figure out what I think a
company's worth and buy or sell based on that. I think the resource equities
markets are headed lower this year. I also think we're going to see increased
merger and acquisition (M&A) activity simply as a consequence of the fact
that the entry points are going lower. Although I think the overall market is
going down, I'm writing more buy than sell tickets today. When the luster is
off the sector, it's off all parts of the sector, so in bad markets the best
companies are cheap. When the best come cheap, you have to play.
I'm keeping powder dry,
too, because I think we're going to have the best private placement market in
2012 since 2002, when it was truly spectacular, when management thought they
either had to raise money or forego their salaries. It made them reasonable
about things like warrants.
MK: There are already more
private placement opportunities on the buyers' terms, with full warrants,
three years minimum. We'll also see management teams participating in the
private placements. New terms will specify a certain amount that must go in
the ground. A lot has unraveled and the mergers have started. Just on April
27, IAMGOLD Corp. (IMG:TSX; IAG:NYSE) bought
Trelawney Mining and Exploration Inc. (TRR:TSX.V) with CA$585 million in
A lot of the easy money
has been blown up. Half the companies listed on the Venture Exchange have
less than $5 million (M) in the till. They cannot do a serious exploration
program. Drilling 4,000 meters in the Yukon costs a minimum of $2M. But the
good companies will do very well, better than any
bull market because there are more willing buyers for those few superb
LJ: Because a rising tide
lifts all ships, during part of a frothy bull cycle you have a reasonable
chance of making money on the greater fool theory: buying something in the
hopes somebody else will come along and pay more for it simply because the
market goes up—not because any value has been added or the company has
achieved any of its goals. But that's a pretty risky proposition; the greater
fool theory is exceptionally dangerous. You never know if the market will go
up, or whether a dip is a bottom or an increase is a top. Nobody in his right
mind tries to time the market.
A much better procedure
is to buy value. A rising tide will raise all ships but it should raise those
with real value higher. The people who know the quality players certainly
know what they're looking for, and they will buy the successful exploration
TGR: Do you also anticipate
increased M&A activity?
LJ: We've always had an eye
out for the takeovers and kept them on the radar, but we started to focus on
them more when the liquidity issue became very serious, because, frankly, as
the number of subscribers grew we became market movers. We moved toward more
liquid shares in the newsletter, and takeovers are among the best liquidity
As Rick says, M&As
aren't an "if" but a "when" question for the larger
mining companies, because if they don't buy the successful exploration
efforts, they will no longer be larger companies. There's no way a mine can
be anything but a depleting asset, so if these companies don't spend money
replacing reserves through their own grassroots efforts, they have only one
TGR: Rick, you say only a
handful of management teams have created most of the value in the mining
sector. Who are they?
RR: Two generations of
relationships with the Lundin family reminds me of
owning a row of slot machines. They've done something good for me every year
for 35 years. I've also known Bob Quartermain for
35 years. I've done two companies with him, and he's been spectacularly
successful. And the worst of the four companies that he wasn't involved in
but recommended to me over a period of 20 years was a tenbagger.
Same with Ross Beaty, who I've known since I was in
university. A serially successful man.
In Calgary, there's
Murray Edwards. Serially successful. If all you did for 20 years was hang out
with Murray Edwards, you would have made truly spectacular amounts of money.
Most junior resource investors won't spend time and don't have the education
to make technical decisions with regard to the length and breadth of the
market, but if they discipline themselves to stick with people who do that
for them for the long term—management teams that may make mistakes and
stumble but will deliver—they'll do well.
TGR: So even those with the
Midas touch sometimes stumble?
RR: Oh, yes. I talk about
how much money Ross Beaty has made my customers
over the years. There hasn't been a Ross Beaty
stock we've ever been in that hasn't fallen by 50% or more at one point in
time when we owned it. In the first incarnation of Lumina Copper Corp. (LCC:TSX.V),
I think the financing was $2/share. The stock ran to $6/share. Everybody
loved it. It fell back to $2.80/share. If you lost your nerve and sold out
then, you missed a 4½-year move to $44/share.
Marin runs a fund that I
invest in, the KCR Fund. I told him, "Visit everybody you can in Canada
between the ages of 30 and 40 and find me the next Ross Beaty.
It ain't going to be easy but it's more important
than anything else you can do for us."
TGR: Whom did you find,
MK: We created the NexTen, which is the next generation. Those in Rick's
generation are Casey Explorers' League honorees, a kind of hall of fame in
junior exploration. Amir Adnani, one of the first NexTen, actually built a uranium mine, and he's 33 years
old. He sat behind me in organic chemistry class in university, so I've known
him since then. And there's Nolan Watson, who was the youngest CFO of a
NYSE-listed company with a market cap over $1 billion and probably knows more
about royalty structures than anyone else in our business.
Morgan Poliquin, president and CEO at Almaden
Minerals Ltd. (AMM:TSX; AAU:NYSE.A), is also among
the NexTen. His father is Duane Poliquin,
Almaden's founder and chairman; he's a Casey
Explorers' League honoree. When it comes to the geologists, you stick with
the young ones who have it in their blood. They are true company builders.
They aren't serving on the boards of 10 different companies, spending half
their money on Canucks box tickets and the other half on their Ferraris.
LJ: We did a panel in
Vancouver in January with maybe six Explorers. If you'd invested in their
plays in this cycle in the last couple of years, you would have doubled or
tripled your money. That's striking because it's not just the 80/20 rule.
It's 80/20 and then 20% of that 20%, who make most of the discoveries. It's
very much the cream of the crop, with those serially successful track
Rick mentioned how Ross Beaty's companies have had 50% haircuts on their way to
multiple gains. We have to cull the herd in our newsletters, so we exited the
second-generation Lumina when everything went into reverse in 2008. But we
didn't say "sell" in our newsletters. We said we were closing our
position for portfolio reasons, that we may not sell our own personal shares
and we didn't think there was any hurry for readers to sell theirs—but
we weren't going to be following the company anymore.
Interestingly enough, a
good number of our subscribers didn't sell either. Now that political risk
has increased in Argentina, where Lumina operates, we're getting more
"should we sell?" questions—which tells me how many people
held on to that stock. When we closed our position at about a 50% loss, it
was at about $0.50/share. Last I noticed, it was in
the $6–7/share range; if you'd held on, you'd have had a high multiple
on your investment. Or if you bought at $0.50/share as a contrarian, you'd
have done extremely well—more than a tenbagger.
Every time Ross pitched
something to me and I didn't buy it, the stock went up a lot. The
least was a little bit better than a double on Ventana Gold Corp. (VEN:TSX).
I thought it was already expensive, but darned if it didn't more than double
after I didn't buy it. It pays to bet on winners like this.
TGR: You're talking about
company-builders providing a lot of value in the share price, and how
stockholders will get the value out of some of these equities through
M&A. Are the majors looking at management?
LJ: I doubt Newmont Mining Corp. (NMC:TSX;
NEM:NYSE) cares whether quality operators like the Poliquins
have advanced a project. They look at the numbers and decide, "Yes, this
fits our needs, it dovetails with our existing production or whatever. It works
for us and at X price, its value-accretive to us."
I don't think the majors
look that much at management. Good management does the things the majors want
to see. They derisk a project and advance it
properly. When the majors review the data, they see this is a real resource.
"Anybody who thinks an NI 43-101 will protect
them from a fraud
is smoking something."– Louis James
speculators, too, can focus on second-tier management teams and segregate
properties. Most investors don't have the ability to separate the wheat from
the chaff. If they're attracted to the performance this sector can produce,
the most reliable way is to stick with the very best operators. With
something like 250,000 geoscientists in the world and 3,000–4,000 operating
mines, most geoscientists will never be part of a discovery. But others, like
those in the Explorers' League, are responsible for 4–5 discoveries
MK: These aren't one-man
shops, either. They build exceptional teams. Ross Beaty
has David Strang as Lumina president and CEO, and
Leo Hathaway as vice president of exploration. A close friend of mine, Jim
O'Rourke, chairman of Copper Mountain Mining Corp. (CUM:TSX),
has built five mines and teams around him. He's 72 years old and still drives
up to the Copper Mountain mine near Princeton, British Columbia, on Friday
nights because that's what he loves.
TGR: Bud Conrad, Casey
Research's chief economist, pointed out during the summit that gold stocks
have never been lower compared to the gold price. When will this change?
LJ: My gut says that we
don't have real capitulation yet—just price destruction and desperation
that has Rick rubbing his hands together gleefully. Companies are hoping for
the next round of drill results to raise their stock price so they can raise
money at a better price and so forth. They aren't yet saying, "Forget
it. Name your terms." When we start hearing that, it's a good sign of
I'm quite happy for the
bottom to pass and then say, "Clearly that was a bottom and now we have
upward momentum," particularly in the context of a supercycle,
which I don't believe is over. Looking at supply and demand and political
factors, I have a high level of confidence that this major bull cycle for
metals has a longer way to go. Until the fundamentals change, any
retrenchments along the way, no matter how major, are buying opportunities.
It's just a matter of when and how much to deploy.
RR: The gap between gold and
gold equity prices came about for several reasons. In the first place, before
2010, gold stocks increased in price very rapidly, more rapidly than gold
itself. As a result, gold stocks simply overshot and needed a rest. The
second factor was partly a function of the first—the explosion of gold
ETFs. People who hadn't traditionally been gold buyers but bought gold stocks
for leverage to gold could buy bullion-like instruments in retirement
accounts and hoard gold in some fashion more efficiently than buying it and
burying it in the backyard.
The third factor was the
gold industry's extraordinarily poor performance. Between 2000 and 2010, the
price of gold advanced from $250/oz to $1,200+/oz.
One would have expected a meteoric rise in the free cash generation of the
gold companies, but the industry's cash-generating and earnings response was
pathetic. Worse, while cash didn't explode, equity issuances did, so they
diluted the cash they already had. That led to disgust with the gold
companies, which carried over into their stock valuations.
A fifth factor, of
course, is that the junior sector is perpetually overpriced. The sector
itself is valueless and always will be. Added to that, these little companies
incredibly inflated the number of shares they issued. The private sector is
always more efficient than the public sector, even in counterfeiting, and the
Canadian dealer network printed more phony share certificates than the Fed
printed phony dollar bills. So although share prices didn't escalate, the
market capitalization of the sector escalated dramatically.
If you step back and
look at all those factors, you'll see the stage set for a rebound in the
better gold companies. The performance of the senior and intermediate gold
companies has been much better over the last 18 months. The cash is really
starting to come out. Strip the tax gobbledygook from the accounting and look
simply at cash at the beginning and end of period and capital expenditures,
and you'll see how much cash these companies are generating.
That's good in a bunch
of ways. It allows them to grow organically so they don't have to issue
equity. It allows them to do takeovers, which adds capital and liquidity and
hope to the sector. And increasingly the companies are sharing some of that
capital with their shareholders either as dividends or equity buybacks.
That's making the gold equities more attractive.
Ironically, the stage is
set for a rebound just as gold share investors have conditioned themselves to
expect the worst. Does that mean it's going to happen anytime soon? I'm long
past confusing inevitable with imminent. And I would caution against reading
too much bullishness into what I say with regard to juniors because you have
to remember that most of them have no value.
That said, we're in a discovery cycle. Although the industry has
all kinds of flimflam artists, every year we get a few better people and over
the past 10 years we've empowered them with lots of capital. We now have some
great people using great tools to make discoveries in many places that have
never before been prospected by means more sophisticated than a pick and a
So I expect an
increasing cycle of discoveries that will really surprise people, and more
money may be made farther down the value chain than at the very top. If I'm
ever right about volatility—if the volatility index gets up to 25 or 30
again—one of the easiest ways in the world to make money is to buy very
good companies and sell short-dated puts and calls against them. Being
particularly volatile, gold stocks are especially appropriate for put and
call ratings. So for the next year, I'd suggest buying a couple of majors if
you're so inclined—they may not be cheap but they're reasonably
priced—and sell puts and calls against them, particularly when the
volatility goes nuts.
TGR: How about explorers
RR: If you're willing to
play the game, nothing makes money like successful exploration. Most
speculators don't have the patience to speculate on a process, which is what
anticipating exploration takes, but that's what's made me the money I have.
Buying ATAC Resources Ltd. (ATC: TSX.V) at $0.10/share nine
years ago, it was frustrating to watch it go to $0.22 to $0.13 to $0.27 to
$0.11. But then it went to $7/share and you say, "Oh yeah, that's why I
did that." So for people willing to take the risk and the time, the
exploration sector is a nice place to be.
TGR: In conclusion, tell us
about the best investing advice you have ever received or given.
RR: I think the best
investing advice I've ever received I read in Ben Graham's Intelligent
Investor—the chapter on Mr. Market. On the whole, he's your
manic-depressive business partner. If you trade against his mania and
depression, he's the best partner you could possibly have. By the same token,
probably the best investing advice I've given was merely paraphrasing Ben
Graham. I've told people for years that in an extremely cyclical business
such as natural resources, you can either be a contrarian or a victim.
MK: My best advice came
from two people. Doug Casey always said to focus on people, and Rick told me
to focus on people of my generation to reap the rewards for the next 30
years. The main advice I'd give anyone is before buying anything, go to free
shows, sign up for the Casey newsletters and figure out whether you even like
this sector. You're not going to succeed if you don't enjoy learning about it
and enjoy the people in it. If you follow your passion, whatever that may be, you will succeed.
LJ: Back to what Rick
said—and he continues to be one of my mentors—is the critical
concept of being either a contrarian or a victim. It's certainly proved true.
Of course, Doug Casey is the quintessential contrarian. Maybe I'll go one
further and add Bill Bonner's quip that a bull market is a random market
movement that causes average investors to mistake themselves for financial
geniuses. I've done a number of things wrong and there are things I might do
differently, but I'm pretty sure I haven't made the mistake of assuming that
the beneficial results of a bull market had anything to do with my particular
genius. I've been cautious and the bull market has made me disciplined.
I think the advice I
have given—and it's not mine but reiterating things that I've heard
that have worked—is about discipline. You have to know yourself. As
Marin said, you have to do something you care enough about to do the hard
work, and learn what you need to learn. Rick said something about staying in
the play until you get to the end game. That takes a lot of discipline. A
good speculator is not just lucky. A good speculator is very
TGR: That's a wonderful note
to end on. Thank you all for your time.
Founder and chairman of Global Resource Investments and president of Sprott Asset Management USA, Rick Rule began
his career in the securities business in 1974 and has been principally
involved in natural resource security investments ever since. He is a leading
American retail broker and asset manager specializing in mining, energy,
water utilities, forest products and agriculture. Rule's company has built a
sterling reputation for its specialist expertise in taking advantage of
global opportunities in the resources industries. In 2011, Rule closed a
landmark deal with Eric Sprott, founder of Sprott Inc., another famous powerhouse in the arena. Sprott Inc. offers resource-oriented investors
opportunities in segregated managed accounts, mutual funds, hedge funds and
private partnerships. The collective organization offers unparalleled
expertise and access to investment opportunities in all resource sectors. Sprott Inc. manages a portfolio of small-cap resource
investments worth more than $8 billion and boasts a workforce of more than
130 professionals in Canada and the U.S.
Louis James is chief metals and mining investment
strategist at Casey Research, where he is also the senior editor of Casey International Speculator, Casey Investment Alert
and Conversations with Casey. When not in meetings with mining
company executives in Vancouver, British Columbia, James regularly travels
the world evaluating highly prospective geological targets and visiting
explorers and producers, getting to know their management teams. For more
than 25 years, Casey Research, headed by investor and best-selling author
Doug Casey, has been helping self-directed investors to earn returns through
innovative investment research designed to take advantage of market
Investment Analyst Marin Katusa is the senior editor of Casey Energy Report, Casey Energy
Opportunities and Casey Energy Confidential. He left a successful
teaching career to pursue what has proven an equally successful—and far
more lucrative—career analyzing and investing in junior resource
companies. With a stock pick record of 19 winners in a row—a 100%
success rate last year—Katusa's insightful
research has made his subscribers a great deal of money. Using his advanced
mathematical skills, he created a diagnostic resource market tool that
analyzes and compares hundreds of investment variables. Through his own
investments and his work with the Casey team, Katusa
has established a network of relationships with many of the key players in
the junior resource sector in Vancouver. In addition, he is a member of the
Vancouver Angel Forum, where he and his colleagues evaluate early seed
investment opportunities. Katusa also manages a
portfolio of international real estate projects.
Rule, Katusa and James were featured in daily Gold and
Resource Stock Roundup sessions at the Casey Research Recovery Reality
Check Summit, where they revealed their favorite resource companies and
specific investment strategies. You can hear every word of these invaluable
discussions, as well as over 20 hours of presentations by contrarian investor
Doug Casey, former U.S. Office of Budget and Management Director David
Stockman and 29 other financial experts in the Recovery Realty
Check Summit Audio Collection.
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1) Karen Roche and JT Long of The Gold Report facilitated this panel
discussion. They personally and/or their families own shares of the following
companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: None.
3) Rick Rule: I personally and/or my family own shares of the following
companies I mentioned in this interview: ATAC Resources Ltd. I personally
and/or my family am paid by the following companies
I mentioned in this interview: None.
4) Louis James: I personally and/or my family own shares of the following
companies I mentioned in this interview: None. I personally and/or my family am paid by the following companies I mentioned in this
5) Marin Katusa: I personally and/or my family own
shares of the following companies I mentioned in this interview: None. I
personally and/or my family am paid by the following
companies I mentioned in this interview: None.
None of these experts were paid by Streetwise Reports for their interviews.