Veteran investor Rick Rule is always on the hunt for under-the-radar opportunities. Here he shares two commodities he believes are “when” not “if” stories.
Rick Rule is known for his belief that you’re either a contrarian or a victim, and at the recent Sprott Natural Resource Symposium he spoke about two sectors he believes are flying under the radar.
Rule, who’s CEO of Sprott US Holdings, said agriculture is one of those industries, explaining that the appeal is simple. “There’s about 7.4 billion people on Earth and they like to eat. So ongoing demand is ensured, and there’s real population growth.” He added, “but it’s better than world population growth.”
Why? “When the poorest 2 billion people in the world get richer … the things that they spend their money on are commodity centric,” Rule continued. “One of the first things they do is they increase their calorie count, which drives demand for agriculture.”
He pointed out that potash and phosphate are both currently priced below the cost of production on a global basis, “meaning that either the price of those commodities goes up or over time they become unavailable and we starve … I think if you look at those two possibilities — the price goes up or we starve — the probability is that the price goes up.”
“The idea is the same as the agricultural idea. In the US you either believe that the lights are going to go out in six or seven years, or you believe that the uranium price is going to go up. I reckon it’s the latter, not the former,” he said.
INN: We’re here at your conference, the Sprott Natural Resource Symposium. You’ve been very busy this week and will continue to be busy. What’s the most interesting or surprising thing you’ve learned so far?
RR: I don’t know that there have been any surprises. We have been able to draw a good crowd in the hard resource market because we’ve been at it for a very long time, which is a nice thing. I need to say rather than being surprised I’m heartened, first of all, talking to the investors that are present here in Vancouver. This is a battle-scarred group of veterans. They’ve been through previous rises, previous falls. They have rational expectations, which doesn’t occur at every conference.
The second thing is measuring the progress of some of the exhibitors month-on-month and year-on-year has been very heartening. People are doing very, very, very good work out there. So I feel pretty encouraged by almost everything I’ve seen. Of course, Vancouver in the summer in the sunshine makes you feel good about life generally.
INN: People come to conferences like this hoping to hear advice from experts. You always talk about the value of having a network of experts around you. Who do you turn to for advice?
RR: A lot of the people I turn to for advice are here. One newsletter writer in particular whose work I like is Brent Cook. Partially because Brent worked for me seven or eight years so I know a lot about how he thinks. At this conference, we have also for years had some of the best-performing mining executives in the world speak rather than just exhibit. Having the ability to visit, as an example, with Robert Friedland, Ross Beaty, Bob Quartermain, Randy Smallwood — all of whom were here and presenting this year — has been useful to me for many years. First of all, learning about what they’re doing, which is almost always good. But also asking them about what their competition is doing.
The second thing that we’ve been able to do year after year after year here at Sprott is find some of the younger people who are successful in the business. The ones that aren’t living legends yet, but people who are still in their 30s and 40s that have already exhibited success, already built multimillion-dollar companies. I enjoy getting information from industry personnel. And I enjoy, frankly, being in an atmosphere where there are 600+ high-net-worth, sophisticated investors. The idea that in a room where there are 600 rich people who paid you for advice — the idea that all of the information in the room is on the dais and flows out to the crowd is wrong. There’s a lot of accumulated knowledge in the room that I like to gather for my own purposes.
INN: I was interested to see on the agenda you have some talks on cryptocurrencies and blockchain. It’s a resource-focused symposium. What is the draw there? Is it something people wanted to see? Is it something you feel has value?
RR: We did it for two reasons. The most important reason is that this conference is really driven by its attendees. Unlike most conferences, the attendees pay to be here. We believe in real sense they own the conference. The last two years, the attendee evaluation forms have told us that they wanted more description of crypto. And the second-most-requested speaker for this year that wasn’t on the roster last year was Teeka Tiwari, who is an expert in crypto.
The second reason is that Sprott four years ago now made its first investment in the distributed ledger, partnering with IEX and the Royal Canadian Mint to do a gold-oriented distributed ledger-based commodity trading system. That really whetted my interest in the distributed ledger and the blockchain. Coming to understand something about the technology behind it rather than the hype associated with the coins stimulated my interest. I wanted to be able to give the audience the same sort of understanding that I was able to effect myself with my own study.
INN: Bitcoin and cryptocurrencies — [that stuff is] very hot. Cannabis is also very hot as well, and we don’t see that here. What are your thoughts on that?
RR: Remember, we’re at a resource conference, and I think the agricultural applications of pot are fairly small. I can tell you that I’m delighted by the profusion of cannabis businesses. It’s nice to see management teams in Vancouver engaged in a business they actually understand. If you’ve walked around the street in Vancouver, you’ll notice that they do due diligence on cannabis here every night on almost every street corner. That … amuses me, but the truth is at age 65 I haven’t done any due diligence myself on cannabis for probably 45 years. I’m out of depth, and I don’t compete in that business.
INN: Those are some hot sectors, but you and I think a lot of people are looking for sectors that are under the radar and unnoticed. At PDAC you mentioned agriculture. What’s the appeal there?
RR: At least two appeals, maybe three. The first is that there’s about 7.4 billion people on Earth and they like to eat. So ongoing demand is ensured and there’s real population growth. But it’s better than world population growth. When the poorest 2 billion people in the world get richer, which they are — I’ve noticed that over the last 30 or 40 years. The things that they spend their money on are commodity centric. You and I already have too much stuff, but very poor people don’t have too much stuff. The things that they buy when they get money are very commodity centric stuff. One of the first things they do is they increase their calorie count, which drives demand for agriculture.
Specifically to now, agricultural minerals, particularly potash and phosphate, are priced on a global basis below the cost of production. Meaning that either the price of those commodities goes up or over time they become unavailable and we starve. I think if you look at those two possibilities — the price goes up or we starve — the probability is that the price goes up. I like circumstances like that.
Finally, with regards to very high-quality US farmland, I have invested in farmland for 40 years. It’s treated me really, really, really well. Not immediately, but really, really well. Right now, the price is depressed because of the trade wars … the price of soybeans is low, the price of corn is low. That means that farm rents are low, that means that farm incomes are low. That means that farm prices are falling. This is a period in time where everybody’s bearish on agriculture. Which means that from my own account, making an investment that I will likely hold for 10 or 15 years. This is a wonderful time. I may feel stupid in 2019. I know for certain I’m going to feel brilliant in 2026 or 2027. At least with regards to agriculture.
INN: Okay. Any other overlooked at sectors we should maybe be paying attention to? I don’t know how many examples you can give.
RR: Well, you need to think about everything that’s out of favor. Certainly uranium is despised. The story for uranium is in some sense the same as the story for agriculture. The way we live as we urbanize requires lots of electricity. Uranium, despite the fact that it is reviled, produces 20 percent of US base load, 65 percent of the non-carbon-generating electricity in US. Yet the stuff is priced at $23 a pound and it takes at least $50 a pound to make it.
The idea is the same as the agricultural idea. In the US you either believe that the lights are going to go out in six or seven years or you believe that the uranium price is going to go up. I reckon it’s the latter, not the former. And mercifully for me, anything that hasn’t been hot in the last sort of quarter is ignored. When you buy things where demand for them is assured because of the needs of mankind, where they’re priced below the cost of production, the investment equation becomes “when.” When will the price turn? In most speculations, this question begins with “if,” and a “when” question is always preferable to an “if” question. The beauty about the resource business is that most speculators focus on the “if” questions, leaving the “when” questions to old guys like me.
INN: To end, I think we need to talk about gold. Gold is not doing too well this year. How are you feeling? Is it a buying opportunity? How do you feel?
RR: I think with your permission, I’ll split that into two questions.
INN: Of course.
RR: Gold itself from my point of view isn’t an investment. It’s an insurance policy or a way to save. I own a lot of gold personally, and I hope in that context that the price of gold doesn’t go up because gold has functioned for 3,000 years as catastrophe insurance, and I’d just as soon skip a catastrophe. I’m getting past my sell-by day and I’ve had all the drama I want in my life. So I hope the gold price doesn’t go up in that regard.
Gold stocks are very different. You don’t buy them for insurance. I think the gold stocks are in pretty good shape now. Pretty good shape for two reasons. The commodity itself has outpaced the stocks. That’s happened twice before in my career, and both times that differential has reconciled by the stocks going up, not gold going down. The other thing is that the gold companies in the last two and a half years have become much more efficient businesses. They used to try to be leveraged warrants on the gold price, which ironically means they had an incentive to be inefficient. They’re focusing more and more on being good businesses. The third thing is, in my career at least, sectors really outperform when the sector exceeds expectation. This is going to be sound like damning by faint praise, but the expectation associated with the gold-mining community is so bad that the sector can’t help but exceed expectations. I think it will. I feel good about the gold stocks for the next 12 months. The current malaise notwithstanding.
INN: One last question. The gold companies, they’ve become better businesses, but we’ve gone through lots of cycles before. How do we know they will learn their lesson?
RR: I think it’s almost certain that this newfound sanity in the gold business will go away and they’ll become recidivist. When I’m talking about a recovery of sanity in the gold business, I’m not talking about something that’ll be a decade-long trend. I think that the mistakes they made in the last cycle and the fact that probably 70 percent of the senior management teams in the gold-mining industry were allowed to pursue other investment opportunities is a lesson that won’t be lost on current management teams for three years or four years. But certainly when the gold stocks begin to perform the expectation that they’re not businesses but rather gold warrants will return.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
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