Rick Rule | Next Two Years Will Be Profitable for People Who Know How to Play the M&A Game

At the end of the second day of the 2018 Sprott Natural Resource Symposium, Rick Rule shared his thoughts regarding the mood and happenings of the conference as well as his outlook for the mining sector for the next 6 to 24 months. Rick stated, “I think it is going to be really profitable for people who know how to play the [mergers and acquisitions] game” over the next two years.  As usual, the content-dense interview is packed with Rick’s trademark insightful wisdom and sage advice for mining investors.

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0:05 Introduction of topic and guest

1:21 What Rick Rule is picking up on in regards to investor sentiment right now

2:10 Takeaways from the mirco of the Sprott Conference that can currently be applied to the macro situation in the resource sector

3:25 What Rick has learned at this year’s Sprott Conference

5:27 Having the proper timeframe for expected returns is crucial for the mining investor

7:22 Rick’s thoughts on current mergers & acquisitions in the mining sector and what to expect in the next two years

10:04 The most important “Rick Rule-ism” investors should remember in the second half of 2018


Bill: You’re listening to “Mining Stock Education.” I’m Bill Powers reporting from the beautiful city of Vancouver. I’m at the Sprott Natural Resource Symposium and I have the opportunity to speak with its president, Rick Rule. Rick, thanks for joining me today.

Rick: Pleasure, Bill. Thank you.

Bill: This is a very intimate conference. The last conference I met you at was PDAC and this is much more intimate than that massive conference.

Rick: I like them both for their own purposes. The PDAC is, of course, the biggest technical conference of the year. This is different. This is the old Sprott constituency.  This is the 19th year this conference has gone on so a very different circumstance.

Bill: As you’re interacting with speakers and investors, what are you picking up on in terms of sentiment in the sector right now?

Rick: That’s an unfair question in the sense that the exhibitors here are much higher quality than at a normal conference. The consequence of that is that these exhibitors have already been successful and the pain that most of the industry is feeling, they aren’t feeling. Similarly, with regards to the attendees here, unlike many conferences, these people are paid attendees and many of them have been through many cycles. So, while the mood of the industry as a whole is pretty somber, the mood here is pretty upbeat. The issuers are mostly cashed up. They’ve been successful in the past. The attendees have been through prior cycles and understand that what other people think are bear markers are actually sales.

Bill: That’s right. And I can tell you that my first-hand experience that most of the geologists and CEO’s that I have talked to as I’ve gone from booth to booth, they are very optimistic, as you say. Is there anything that we can learn from what’s going on in the micro of this conference that could apply to the macro of the resource sector right now?

Rick: Well, I think there is. I study the work of a social scientist, I think his name was Alfredo Pareto, the author of the sort of 80/20 principle. And what you learn, if you learn about performance dispersal curves among people, is that a very small number of people are responsible for most of the value creation in the world. And the first rule, I think, in exploration or any other knowledge business is that success is aggregated by a very small population of the total players. As an investor, what I think you try to do is identify what you laughingly call the A team and stick with them. It’s tempting in a bull market to go to a B team or a C team, but it usually has a very unpleasant outcome. What you see going from booth to booth here are people that have stood the test of time and many of them have been successful in the past. And I think that’s the first key to success, irrespective of markets.

Bill: You’re one of the few people that I’ve heard teach and give investors a paradigm for how to prepare for a conference, how to engage management, give questions to management. With that in mind, you’re the lead learner, what have you learned so far in…and now we’re at the second day of this conference?

Rick: This conference, to be honest with you, I’m gonna have to learn some of in retrospect. One of the things I do is eat my own cooking. And the MP3s, that is the conference recording, gives me the ability 15 days after the conference to sit down in the light of day and refresh my memory with regards to the speeches that I have heard. Certainly, I am struck by the delta between the doom and gloom that affects the industry in general. And then the attitudes that were expressed, as an example, in the last panel, the “Living Legends” panel, Sean Roosen, Randy Smallwood, Ross Beaty, Robert Friedland, people who have been through various cycles, who understand that cycles are a tool, not a risk. Just refreshing myself in the sense that the things that have succeeded in this business have always been the same. So, I think the lesson that I come away with is one that I already knew: “What worked in the past will work now.” I think one piece of advice that was useful that I just heard, that I’d love to refresh your readers with was Robert Friedland saying in the last panel that prices are ephemeral. Price information, the share price, is easy information to get and it’s a number that makes you feel good or feel bad. But if you don’t have an opinion as to the value of the stock, the price information is useless. Money is made in the delta between price and value. And focusing slavishly on the share price to the exclusion of working to ascertain how that price reflects value is, at best, a waste of time.

Bill: Something you said in the last general session that I’d like for you to share with listeners is, the time expectation of return that often mining investors have and how that can really cloud one’s vision and cause one to make bad investing mistakes.

Rick: My experience has been…my reputation, first of all, was built on the more speculative end of the market. That isn’t to suggest that I’m not an investor too, but I’m known as a speculator. In fact, all the money that I now invest, I made speculating. And, in speculation, that is the search for 10-baggers or 20-baggers, what I’ve learned since 1998, which is when I started really keeping track of my performance, was that the average length of time for a 10-bagger was almost 5 years. It was 50 months. Most investors’ time frames are two weeks, or three weeks, or a quarter, or something like that. You make money in exploration by answering unanswered questions. And to make a lot of money, you have to answer a series of unanswered questions. If you assume, as I do, that each individual unanswered question takes between 12 and 18 months, if you buy an exploration stock without the expectation of holding it for 18 months, you’re lying to yourself. You’re setting yourself up to fail. The other part of that that’s important is remembering that prices are ephemeral. I was talking to Ross Beaty on the last panel and I’ve participated in all of Ross Beaty’s successes. And I can tell you that I have never been involved in a Ross Beaty 10-bagger where the price of the stock didn’t fall 50% twice during the time that I owned the stock. So, the first lesson is that investors’ time expectations are wrong. They’re way, way, way, way, way too short. And the second thing is that investors, in the context of time, waste way too much time with the share price.

Bill: Robert Friedland said in the last session that he expects a lot of M&A (mergers and acquisitions) activity in the next 18 months. We’ve seen some M&A activity in the last four to six weeks. What are your thoughts about what’s occurring and its significance?

Rick: Robert is exactly right, first of all. And so far, the M&A that we’re seeing has been fairly rational, fairly logical, and fairly strategic, unlike last decade where a lot of the M&A was idiotic, just for size. The truth is that right now the mining industry as a whole is behaving rationally. For too long in the past, investors looked at mining company shares as leveraged options on commodity prices. Now, oddly, of course, the most inefficient companies are the most leveraged to commodity prices. So, for 40 years, we asked mining companies to be marginal and they complied. The upshot of that was, of course, the idiotic mergers that we saw in the last decade. A lot of those managers were thanked and excused, allowed to pursue other employment opportunities and the management teams that have reflected them so far have been very sober. Mining businesses are starting to emphasize return on capital employed, efficient allocation of capital, all the things that you’re supposed to do in a business. And I think that the mergers and acquisitions that you’re gonna see for at least the next two years are gonna be ones that benefit, of course, the sellers because they’re gonna get a premium, but they’re gonna benefit the buyers too. You’re gonna get the double bump. Now, I’m sure, ultimately, when mining returns to favor, that stupidity will return to mergers and acquisitions, but I think we’re gonna get a wonderful holiday for two years and I think it’s gonna be really profitable for people who know how to play the game.

Bill: There was recently Anaconda Mining’s attempted hostile takeover of Maritime Resources which I found actually quite entertaining. Do you have any thoughts on that?

Rick: I think more amalgamations need to take place in the junior space. And I think the discussion that you’re talking about is educational in many senses. Often times, mergers fail simply because the team that has the potential to be acquired understands that their salaries go to salary heaven. And, many times…and I’m not suggesting that this is the case in this circumstance. I’m also not suggesting that it isn’t. Many times, what you see that prevents amalgamation is a management team that cares far more about their salary and emolument than they do about the shareholders’ well-being. We need many, many, many more juniors to amalgamate. I mean, what we need more than anything else in this space is less general administrative expense relative to field expenditures and relative to capital employed. So, we need a whole bunch of mergers which, sadly, we’re unlikely to see.

Bill: Rick, a proverb I consider a long-learned truth that’s conveyed concisely and you are the king, in my opinion, of resource investor proverbs, also known as Rick Rule-isms, for the second half of 2018, what would be the last and most significant Rick Rule-ism you’d like to leave with my listeners?

Rick: Well, I think one that I’ve used many times, “In this business, if you aren’t a contrarian, you’re going to be a victim.” This business is extraordinarily cyclical. We learned, as an example, in 2015 when everybody was in despair, that the cure for low prices was truly low prices and we had a spectacular run in 2016. Out of the ashes. Nobody saw it coming, myself included. In 2016, when it got good, it became very good and people, of course, carried their enthusiasm to an illogical conclusion. And the consequence of that is that, of course, 2017 was bad. What’s the lesson? Low prices are the cure for low prices. High prices are the cure for high prices. And if you’re not a contrarian, you’re gonna be a victim.

Bill: Those are two Rick Rule-isms, but I’ll let you get away with it. You mentioned the MP3s of the sessions and the lectures, how can listeners get a hold of those?

Rick: We will provide a link, a computer link, for your listeners to get the MP3s at the special conference price.

Bill: Okay, so, listeners look to that. Go to www.MiningStockEducation.com and look for this Rick Rule interview and its transcript. In that posting, you’ll find the link to order the MP3s at the special conference pricing. Rick, it’s a long day for you. It’s the end of the day. I appreciate you sitting down with me and sharing with my listeners.

Rick: I appreciate the opportunity. Thank you very much.

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