Interview with Rick Rule, President and CEO of Sprott U.S. Holdings Inc.
Sept 24 2017
Once again I had the pleasure of catching up with Rick Rule, and in this interview we talked about the Uranium market, Bitcoin, Gold, and the lessons he learned from his early mentor Peter Cundill. Enjoy!
Hi Rick, welcome back to The Next Bull Market Move. I’d like to start the interview with a question about one of your early mentors, Peter Cundill.
I understand he was an early mentor of yours at the beginning of your career, and I have recently been reading the book ‘There is always something to do’ which is about his investments and how he invested. What were the most valuable lessons your learned from him?
During the period of time that I was learning from Peter, he was focused on deep value opportunities of two primary types; net nets (companies where current assets exceeded all liabilities, and market cap) that were operationally cash flow positive, and companies with hidden, mispriced or redundant assets.
Peter loved closely held timber companies whose forest lands were selling for half of market value, or had real estate development potential. He called the cash flow positive net- nets, free bonds, meaning that you got the cash generating for free, after subtracting current assets from enterprise value.
Peter was of the habit of looking for extraordinary value, which was enabled by a tolerance for pain (a declining share price) and remarkable patience. He was not afraid to be right. Those bargains were seldom available in popular sectors, or favorable markets
‘Investors tend to follow trends and fashion rather that taking the trouble to look for value.’
This was a common theme of Peter’s, and a reason behind the long term success of most value investors. Most investors (maybe most people) believe themselves to be very cogent, rational beings, surveying the information landscape, accumulating facts, and weighing them objectively to reach reasoned conclusions.
Wrong! Most folks search for information that affirms their existing paradigms and prejudices, they look for justifications for comfortable narratives. Hence, trends in motion stay in motion, long after the circumstances that caused the trends cease to exist.
Value investors, including Peter, and certainly myself, are repeatedly guilty of the same sin, but we are taught to try to recognize it and guard against it. Peter’s guard was particularly successful, he was a pathological cheapskate, so he had a quantitative guard against fashion.
What are your thoughts behind Bitcoin and cryptocurrencies as a speculation? Will this space eventually turn into a dotcom mania like the late 1990’s?
Kerem, I’m the wrong one to ask, I don’t own a TV, and I can’t dress myself in stuff that matches! As a judge of popular culture, I’m your last choice.
That being said, I love the sector, in many regards. The technology, the “block chain” and the distributed ledger have the possibility to make many aspects of human culture, but particularly commerce and trade, much more efficient, while eliminating many of the supposed needs for government regulation and taxation.
As currencies, I’m a consumer of currencies, and mediums of exchange, and stores of value. A multiplicity of choice, competition between various currency systems to serve me better, is something I enjoy!
The ability to create and market an algorithm, and market it as a dream, converting the promoters ability to market the dream, in return for other peoples earned wealth will attract some very smart, and likely stupendously successful scam artists, who just like central bankers, will bill savers and investors out of billions of other currency units. Governments hate this, they want a monopoly on fraud and extortion, but in this circumstance, they are entering into a battle of wits, under armed.
Once again, the sentiment surrounding Uranium has fallen into pessimism and despair. Speculators have left the scene since the big run up we had at the beginning of the year. It seems to me that for the most part, investing early in bull markets involves patience and being able to handle a certain amount of boredom. When a market does nothing, no one is interested. When a market is rising, everyone is interested. Is Uranium following a similar path to the previous bull market you speculated in?
The early run up in uranium equities was a very interesting phenomenon in that it occurred on very low volume. I think two forces were at play. One, I believe a three year “bear market” wore out the sellers, they were out of inventory, and the shares had moved to stronger hands. At the same time, speculators with longer memories, of the last bull market, began to accumulate, in hopes of a repeat. The companies, stumbling on a funding window, which could and did save the sector from extinction, drowned the buyers in an avalanche of freshly issued equity.
I believe we need a period of sustained Japanese reactor restarts in order to have a uranium price response in the next two years. By 2020, the problem takes care of itself. Ironically, the longer it takes for the market to re-balance, the wilder the probable upside ride is on recovery. When you destroy productive capacity, which is what extended “bear markets” do, the industry is unable to respond to price increases by increasing supply, and we get those spectacular price spikes, like we did in the early part of the last decade.
What are your current thoughts on gold? Is the pullback we had over the last few years over?
My belief is that the most important factor in the gold price, is global faith in the purchasing power of the US dollar, and faith in US Treasury securities. The most important measure of this faith, that I’m aware of, is the US 10 year treasury yield, and more importantly, the delta between the 10 year, and the TIP.
If you have observed what I have observed, that gold trades inversely with the US 10 year treasury, and you observe that the US 10 year treasury has been in a 35 year “bull market”, with the yield falling from 15% to 2%, you might believe that the bond “bull market” is closer to the end, than to the beginning. If that is the case, gold, which I believe trades inversely, may be in a “bull market” which is closer to it’’s beginning, than it’s end.
Applying Cundill’s logic to the US 10 year treasury, it is simply not cheap enough to be attractive. Jim Grant refers to it as “return free risk”. I think gold will prevail over that type of competition.
Better yet, the gold quote has done better over the last twelve months, that the gold equities, and I believe the gold equities are poised to catch up.
And finally, give us an update on what Sprott is up to, and how investors can get in touch?
Sprott continues to refashion itself as a global merchant bank, and investment manager focused on natural resources and precious metals. We sold our broader market Canadian mutual fund business to that unit’s employees, which freed up a lot of capital, and sharpened our focus. We have a superb balance sheet (over $300,000,000 in working capital, with no debt), a very resilient business (we generated free cash flow in a sector where the most relevant measurement metric, the TSXV index declined by almost 90%,) and we manage to pay a 5.5% dividend on our common stock. Imagine what we can do in a favorable market.
We manage or administer in excess $10,000,000,000 on behalf of individuals and institutions worldwide, focusing on the sectors where we have spent three decades building our knowledge, and our brand; natural resources, and precious metals.
We would love for investors to visit our website sprottglobal.com and to stay subscribed to our free blog, “Sprotts Thoughts”, a journal of the best ideas inside and outside our organization.
As an added inducement to visiting us, if your readers will email me (firstname.lastname@example.org) a copy of their natural resource portfolio, in text, not as an attachment, with both security name, and symbol, I will rate and comment on those portfolio companies, for free, and send my response back, by email.
Many thanks Rick.
Thanks for the visit.
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