By Rick Rule
This is not my first bear market in natural resources; in fact, I have experienced four bear markets through my career in the sector. When I remember the recovery that happened after each bear market – and the substantial rewards to investors in the sector –, I am extremely optimistic about the future.
‘Big money’ entering the space…
There are a few reasons to be optimistic. As an example, we should look at my employer, Sprott Inc., which is one of the largest financial firms in the world focused almost exclusively on natural resources and precious metals. Last year, I told audiences about ‘big money’ circling the natural resource market. Today, I would say that some of that money has found a home.
Recently, we have won a couple of large mandates to manage money in the resource space. One mandate is with Zijin mining, which is the largest publicly-owned non-ferrous mining company in China, who has contributed $100 million to a partnership with Sprott. Zijin believes that some of the largest financial firms in China will contribute substantial additional capital.
The other ‘big money’ source comes from the South Korean Electric Power Company and the South Korean National Pension Service. These Korean investors have committed $750 million to be managed in partnership with Sprott.
The ‘big money’ that was circling last year is ‘landing,’ which is very bullish for the sector. Due to their cheapness, natural resources have attracted the attention of these extremely long-term investors looking for the opportunity to enter the sector. This is strategic, long term capital from investors with the required sophistication, means, and patience to make money in the sector.
Issuers still holding back on financing…
Where will these new funds, which will likely total around $1 billion, end up? We see lots of opportunity in the current market, but we do not want to deploy this amount of capital all at once. Instead, we want to structure specific transactions in the view of becoming stakeholders in companies where we feel comfortable taking a long-term position.
The pricing of deals that the issuers gave to investors in the period from 2003 to 2010 was ludicrously optimistic. Part of the problem today is that many of the issuers are still set in the mind frame of the bull market years. They have yet to face the reality of the current market for exploration and mining capital when it comes to deals and pricing expectations.
For lack of a better expression, the precious metals sector is ‘bombed-out’ both in terms of sentiment and participation. Nobody likes the sector. The issuers need to have a reality check.
Why we should stick around…
Although I believe issuers are too optimistic today, I agree with them that precious metals and natural resource markets are attractive. A market that has fallen in price by 80% is arithmetically more attractive by 80%.
This move down in the precious metals prices from the 2010 highs is not unprecedented. You will recall we had a 50% cyclical decline in a secular bull market for gold back in 1975 and 1976. The snapback from these cyclical declines in secular bull markets can be extremely rewarding.
When will the tides change? Investors need to decide for themselves whether the proposition upheld by governments and other collective forces is appealing. They have to ask themselves whether manipulated interest rates are really in the best interest of society; whether liquidity is a substitute for solvency; and whether US Treasuries are really a better investment than gold, silver, platinum and palladium.
When it comes to physical precious metals markets, we found when we launched our own Physical Trusts that even our relatively modest amount of institutional buying could have some effect on the metal price. Large institutions are the main players on the futures exchanges, which have mostly been on the short side. I think it would take a relatively modest amount of physical buying from institutions to unbalance those futures markets, giving the short sellers a truly ‘religious’ experience.
Most of you are likely natural resource and precious metals investors to some extent. Most of you have therefore had a very rough ride in the last three years. Having hung around for the pain, why not stick around for the gain?
To read more regular opinion and commentary from Rick Rule and other thought leaders in the natural resource and precious metals sectors, sign-up for our regular, thrice-weekly e-mail “Sprott’s Thoughts” here.
Rick Rule Bio:
Mr. Rule has dedicated his entire adult life to many aspects of natural resource securities investing. In addition to the knowledge and experience gained in a long and focused career, he has a worldwide network of contacts in the natural resource and finance worlds. As Director, President, and CEO of Sprott US Holdings, Inc., Mr. Rule leads a highly skilled team of earth science and finance professionals who enjoy a worldwide reputation for resource investment management.
Mr. Rule is a frequent speaker at industry conferences, and is interviewed for numerous radio, television, print and online media outlets concerning natural resource investment and industry topics. He is frequently quoted and referred by prominent natural resource oriented newsletters and advisories. Mr. Rule and his team have long experience in many resource sectors including agriculture, alternative energy, forestry, oil and gas, mining and water. Mr. Rule is particularly active in private placement markets, having originated and participated in hundreds of debt and equity transactions with private, pre-public and public companies.
Sprott US Holdings, Inc. is a holding company made up of three separate and distinct companies: Sprott Global Resource Investments, Ltd., a FINRA Registered Broker/Dealer; Sprott Asset Management USA Inc., an SEC Registered Investment Adviser offering managed accounts; and Resource Capital Investment Corporation, an SEC Registered Investment Adviser managing partnerships. These three companies make up the US Subsidiaries of Sprott Inc. and are active in securities brokerage, segregated account money management and investment partnership management involving both equity and debt instruments, across the entire spectrum of the natural resource industry.
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