SK: Rick, let’s start out with an overview of what you do?
RR: I run the US and part of the International Business of Sprott, Inc. We manage or administer about $11 billion dollars principle in natural resources and precious metals rc drone. In truth I’m a credit analyst, but I do a lot of equity work as well. I help run worldwide portfolios in natural resources and precious metals.
SK: Let's get an update on the market? Commodities prices surged higher and then came down. Where are we now?
RR: Precious metals equity markets were overbought last summer, that was pretty easy to see and those over valuations have corrected somewhat, sort of 20%. My suspicion in the very near term is that the markets being oversold will recover a little bit, but I think it will retest the lows. My suspicion is that the bull market will get underway in earnest again, sort of in February or March of 2017. The truth is, I think we're in the 3rd inning of a 9 inning ballgame. I think we have a lot further to go, but we might go lower before we go higher.
SK: What was the biggest surprise to you in 2016?
RR: I guess there are two surprises that were extraordinary. One, I knew 2016 would be a good year in precious metals. I didn’t have any sense it would be up 100% in the precious metals equities.
The second thing and this is also a pleasant surprise. Unlike the last bull market in 2001, the precious metals mining companies haven’t greeted the bull market by doing a whole bunch of stupid things with their new found wealth. They have actually done a pretty good job with their money. I suspect given how many mining CEO’s got fired in the bear market, that this new found intelligence could last for two of three years to the benefit of all concerned.
SK: When you talk about using the money smartly, do you mean drilling and putting money in the ground?
RR: I mean, no dumb acquisitions yet and not putting marginal projects into production yet. No boards of directors increasing their emoluments four-fold, year-on-year. Gold mining companies for the first time in my lifetime are being run as businesses as opposed to warrants on the gold price. Which in my opinion is really wonderful.
SK: On a scale of 1-10, how would you rate 2016 with 10 being the best and how do you feel 2017 is going to be on a scale of 1-10?
RR: 11.2, on a scale of 1-10 for 2016, I had suspected 35% or 40% compound internal rates of return. 35% internal rate of return is astonishing. If you’re asking for 35% and somebody gives you 100%, that’s truly off the scale. My suspicion for next year, is what my suspicion for this year was. I would be very happy to see the juniors composite index up 35% or 40% next year. Believe me, I would be delighted to see it up 100%, but that’s not an expectation I have.
SK: Which group did the best over the course of 2016 in your opinion; the explorers, the developers, or the producers?
RR: None of the above. The optionality plays, the people had very large deposits that weren’t economic at $1,100 gold, but might have been economic at $1,500 gold. The optionality plays were up an average of 500%. On a risk adjusted basis of course the big producers did the best because they did well and they didn’t have too much risk associated with them. I suspect market leadership will change in 2017 though.
SK: What about Mergers & Acquisitions?
RR: In 2017, M & A is going to continue. The truth is, that the whole industry needs less general and administrative expense relative to assets and the way that you do that is through M & A, making redundant teams disappear. Now, the best of the best targets have begun to disappear, but this is interesting news for speculators too. You know, the industry has had a dearth of exploration and expenditures, which means the industry, as a whole, is shrinking. Gold production will begin to fall by 2018, every other thing left unsaid. What that means is that the better exploration discoveries; the higher quality discoveries, the Reservoir Minerals of the world, the Kaminaks of the world, will disappear into the jaws of larger mining companies and they will do so at eye popping prices. Very high quality new discoveries will go away much in the way that they went away in the 1990’s at prices that surprised everyone.
SK: So they don’t disappear, they just have new ownership?
RR: That’s correct and by the way, I’m happy to surrender my ownership for correct compensation.
SK: In reality, miners haven’t stopped mining. They’re taking their own resources out of the ground. How are they going to replace them? I’m not talking about the giants, like the Barrick’s (ABX) going out, I’m talking about the smaller mining companies. Where are they getting their new gold?
RR: It’s true on all levels Shelly. Barrick (ABX) is becoming a smaller company too, but what you say is very important for your readers to understand. This is not a business like a supermarket, where fresh groceries come in the back and go out the front. Every day you mine, your business gets smaller and the truth is, the industry is under invested over the past four, five, or ten years. Now, part of this is a natural and normal function that’s happening across all businesses, called outsourcing. The junior mining companies have cheaper access to capital than the senior mining companies because they have less of a book value to defend. So, in one sense the explosion of junior mining companies is a function of outsourcing the exploration function from the majors to the juniors. The truth is though, that this means successful efforts will become increasingly valuable. When the major mining companies begin to expand as opposed to contracting, and the CEO calls down to the exploration department, he’ll be reminded by the CFO that he laid them off three years ago.
SK: How do you feel about the global growth in the mining and resource industry?
RR: That is a very important question for your readers to understand Shelly. The truth is, the deposits are where you find them and the easy to find projects in places that are regarded as safe, have already mostly been found. All those deposits that we could stumble over in Nevada are in production. The big deposits we find worldwide are going to be in places that are regarded as trickier and have been less well explored. They’ll be in big Metallogenic belts, like the Tethyan Metallogenic belt*, and they’ll be in Chile, or the Congo, they’ll be in places that we are less comfortable going to. Not necessarily places that have more political risk by the way, just places that have political risk that we’re unfamiliar with. There is all the political risk that you need in the United States, but the truth is, the big deposits will be found elsewhere.
SK: So if you wanted to advise investors about the gold market, about what they should do, give us a timing answer and give us a little bit of direction from an expert from Sprott Group. Tell us what you think and what you tell your own investors?
RR: Traditionally, gold has been a flight to quality style asset. It’s competed with the U.S. 10-Year Treasury. Jim Grant, defined the U.S. 10-Year Treasury as return free risk. Meaning the government absolutely, positively guarantees to give you back less than you gave them. What that means, is that it’s a less viable competitor and that means gold should do well. The first thing I can say, is if you don’t own gold, buy some gold. Preserve your purchasing power. If you’re prepared to take implementation risk, if you’re prepared to speculate, buy the gold stock. As the gold price goes up, the earnings of gold mining companies will go up and the share prices will follow.
*The Tethyan Metallogenic Belt (TMB), extending from Europe through Anatolia to Iran, is one of the world's major metal producing belts, and consists of many sectors.
In addition Rick added:
It is worth noting that the dollar strength credited to the election of Donald Trump, and to the recent interest rate rise has led to a substantial weakening of the gold price, and a more dramatic weakening of gold related equity prices. Investors and speculators may want to consider whether the quarter point increase in rates is sufficient to make US treasuries viable investments, and whether Trump’s policies, (maintaining entitlements, restricting trade and immigration, increasing infrastructure spending) are policies that would either be good for the economy, or make a dent in the federal governments $20,000,000,000,000 in on-balance sheet liabilities, or the $120,000,000,000,000 in off-balance sheet liabilities. On my own account, I prefer gold to the promises of any Politian, including Mr. Trump.
Investors should also note that most non-precious metals extractable commodities continue to be very weak, but certain very oversold industrial materials, notably iron ore, metallurgical coal and zinc, have made substantial gains. Very recently oil quotes have moved up sharply as a consequence of supposed market tightening in the face of recent OPEC agreements. The outlook in these sectors is mixed: the industry pricing is often below the industry cost structure (the common precondition for a dramatic rally), but global demand and economic output continues to be very constrained. If past is prologue (never a guarantee) the materials sectors equity pricing will advance before a broad-based rebound in commodities pricing occurs. Investors in the sector need to ask themselves whether they believe the recent strength in these equities is predicting the inevitable rebound in commodities pricing, or is merely a “bear market” rally.
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