Hard Asset Digest November 2019
Hard Asset Digest
November 2019
This month, I’m sitting down with Rick Rule, president and CEO of Sprott US Holdings, Inc. Rick is widely regarded as the most successful broker of natural resource investments ever.
A staunch contrarian, Rick looks to buy natural resource stocks at bargain prices oftentimes after they’ve suffered large declines. Through the years, his disciplined investing style has made his clients millions of dollars in natural resource investments in the areas of gold, silver, copper, uranium and more.
Rick 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.
Rick believes that the US dollar’s relative strength – particularly global faith in the ongoing purchasing power of the US dollar – is the most important determinant of precious metals pricing. You’ll get a good sense of that as you read my exclusive interview.
Rick is a frequent speaker at industry conferences and is often interviewed for radio, television, print and online media outlets concerning natural resource investments and industry topics. He is frequently quoted by prominent natural resource oriented newsletters and advisories.
Investors hoping to absorb his 45-plus years of investment wisdom ensure there’s standing room only whenever Rick steps up to the podium.
One of the more intriguing elements of investing with Sprott is the brain trust that comes along with it. Sprott has on its payroll a group of highly experienced geologists, mining and petroleum engineers, and specialists in the natural resource finance sector...all sharing the same goal of helping clients to make informed investment decisions.
Clients of Sprott can invest directly alongside Rick via the Rick Rule Managed Account. And for those who don’t wish to expose themselves to the same level of risk that Rick takes on...which needless to say is high...Sprott offers a myriad of products, at varying risk levels, for natural resource-oriented investors to choose from.
I’ll tell you one more thing I find incredible about Sprott. And mind you, this is a firm that manages or administers about $14 billion in natural resources and precious metals on behalf of 200,000 investors worldwide. Rick is literally willing to offer you something of significant value at zero cost before even asking you for your business. It’s something I have personally taken advantage of, and I recommend you do so as well.
You’ll see what I’m referring to in my discussion with Rick.
It’s vitally important to understand that Rick’s contrarian investment strategies in the junior gold space have stood the test of time for a reason. It’s because, year after year, Rick commits to putting in the requisite hard work and study to make informed decisions for himself and for his clients.
And he certainly will not hesitate to tell you the same thing: “If you’re not willing to do the work, if you’re not willing to buy information, read information, go to conferences, go to seminars, work and study...you need to be extremely careful in the junior market.”
I think that’s really sound advice.
After all, the number one rule of investing is: Don’t Lose Your Trading Capital! Once your trading capital is gone — you’re done. There are no get-rich-quick schemes. If there were, nobody would work for a living. There’s a big difference between investing and speculating, as Rick makes abundantly clear in our conversation.
Be sure to take personal inventory of your own risk tolerance and then allocate your trading capital accordingly. If you’re willing to put in the work, then you’re already one step ahead of the herd. Make sure you understand why you bought a particular stock and, more importantly, what you’re expecting to get out of it.
Last but not least…never fall in love with your holdings!
It’s easy to fall into that trap — especially with gold stocks. Gold has a certain allure that can be quite exhilarating when you hit it right. Just remember that stocks are simply vehicles with which to make money. It’s never a bad idea to take partial profits on the way up, and always have a set limit as to how far down you’ll let a position drop before cutting your losses.
Remember, it’s all about the preservation of capital. Taking a partial loss, learning from it, and then reinvesting in another issuer or commodity is a normal part of the natural resource learning curve. What’s not normal is riding a stock all the way to zero, which can happen quite easily in the junior resource space if you’re not paying close attention.
I think Rick says it best, “So the upshot of all this is that while I made a bunch of money in the seventies, I lost it in the early eighties. That actually turned out to be of benefit to me, ultimately, because what I learned first is that markets work. And second of all, that to be in natural resources, you must be a contrarian or you’re going to be a victim.”
I had a fascinating discussion with Rick...and I’m sure you’re going to enjoy it as well.
Yours In Profits,
Mike Fagan, editor
Hard Asset Digest
Interview with Rick Rule
Mike Fagan: Here with me today is Rick Rule — president and CEO of Sprott US Holdings Inc. and perhaps the most successful broker of natural resource investments ever. Rick is here to offer his insights on today’s resource market and the opportunities available to like-minded investors.
Rick, I really appreciate you taking the time today. I know gold is among your favorite topics, so let’s start by diving into the psychology of investing in gold from your own personal viewpoint. What is it about gold’s intrinsic value that keeps your juices flowing?
Rick Rule: Well, Mike, really two things. The first is what you described as gold’s intrinsic value. Gold, if one studies history, has been the real money in the sense that it is both a store of value and a medium of exchange.
Most things that we use as money today are really credit instruments. They’re promises to pay. Gold isn’t a promise to pay; it’s payment itself. It is in itself a store of value. And it’s a store of value that has stood the test of time literally through centuries and across cultures.
Before there were widespread mechanisms of communication around the world, gold was independently valued in East Asia, in South Asia, in the Middle East, in Africa, in Europe, in North America and South America. There’s something about the universal appeal of gold that seems to be intrinsic, which makes it both a store of value and a medium of exchange.
So I like that!
The second thing about gold is that in some senses these days, it’s a barometer on confidence. The more confident people are about the stability of the purchasing power of various fiat currencies, the less popular gold is. The less popular people are about fiat currencies, and let’s be honest – particularly the US dollar and even more particularly the US dollar as expressed by the US 10-year treasury – the more popular gold becomes.
I believe myself that the most important determinant of the gold price worldwide for the last 50 years – not the only factor, but the most important factor – has been the confidence of investors and savers worldwide in the expectation of the US dollar maintaining its purchasing power.
And I measure the US dollar by the US 10-year treasury.
That treasury reached its bottom in early 1982 when the federal government had to pay in excess of 15% interest to get people to loan it money for 10 years. That same interest rate has fallen to 2%...meaning that in effect the bond has escalated in price almost nine times during that period.
My suggestion is that the US 10-year treasury is either at or nearing the end of a 35-year long bull market. And if you believe that gold trades conversely to the US dollar, then gold is, I suspect, at the beginning rather than the end of its bull market.
MF: Rick, it’s wonderful getting your personal take on the yellow metal — thank you so much for that. I’ve heard you speak at length about the psychology of fear and greed in relation to gold. Can you shed some light on that subject for our audience members?
RR: Sure. To me, gold is primarily a fear investment. You buy it because you are afraid of depreciation of the purchasing power of the currency. But the truth is...a fear-motivated buyer is a pretty aggressive buyer, and the price escalation that is put in place by the fear buyer provides precisely the momentum that attracts the greed buyer.
And what certainly happened in the decade of the 1970s – which is when I came into the gold trade – is that the fear buyer and the greed buyer ricocheted off each other. The price escalation in gold validated the narratives of both the fear buyer and the greed buyer.
It’s very odd that one investment motivates both a fear buyer and a greed buyer simultaneously. And I think that the combination of those two buyers (or, in periods of confidence in fiat currencies, those two sellers) contributes to the extraordinary cyclicality and also the near-term volatility of gold.
MF: Very interesting. So, Rick, we’ve known each other a long time. In fact, I believe the first time I interviewed you was back in 1995 at the Rancho Santa Fe Golf Club in Southern California! For all of your successes over the years and decades, you’ve always remained a very humble person – which is refreshing in today’s...shall I say...tactless environment. Take me back, if you will, to when you first got started in the business; what piqued your interest in natural resources, and what are some of your biggest early successes?
RR: Mike, I’m so glad you didn’t ask for my failures, which were also, at least in the early days, numerous!
I got invested in the natural resource business very early on in the 1960s when I was a teenager. And being honest, I think it really stemmed from my interest in zoology, biology, and geology. I wanted to work outdoors, and I developed a real fascination for geology in my mid-teens.
Through a series of very fortunate circumstances, I attended the University of British Columbia, although I’m an American. And the University of British Columbia had a reasonably good commerce department and an excellent earth sciences department.
So I was fortunate enough to get a pretty good education. And of course, through the decade of the seventies, Vancouver emerged as a worldwide epicenter for mineral exploration and finance — particularly precious metals.
Yet, the Vancouver market was also active in all kinds of other exploration. So I had the extraordinarily good fortune as a very young man coming of age in a city that became the crucible for what I truly enjoy doing. I started off more in oil and gas because that was my initial interest as a kid. But I learned that at least some of the geological principles of oil and gas were similar to mining.
When I understood the rudimentaries of finance and the rudimentaries of geology, it was more difficult for the worst of the promoters (and there were plenty of good and bad promoters at that point in time) to lie to me. So I enjoyed some early successes...successes magnified of course by virtue of the fact that I was coming of age in the most aggressive bull market of my lifetime.
But interestingly, my first junior gold transaction was with the McCloud family in something called NorthAir Mines. It’s very unusual that your first transaction turns out to be a success and pay dividends — but it did! And even more amazingly, my second or third transaction was a private transaction called Chemgold that involved Adolf Lundin who became pivotal in my career (and also Chester Miller), which ultimately became Glamis Gold.
So two of my first three ventures in the mining business turned out to be resounding successes. And while that was pleasant at the time, it had the disadvantage of causing me early on to believe that I understood something about the business. Lessons that I was to unlearn rather rapidly later on. But the upside in those two deals was extraordinary.
MF: It’s funny hearing you talk about “believing you understood something about the business!”
RR: Well, you know, Mike, two experiences in two years that were almost each individually career changing...so indeed I had a very interesting start. Yet, it would be inauthentic of me to relate these lessons to your readers if I didn’t also relate the outcome, which was much less pleasant.
Through the decade of the seventies (when the gold-price went from $35 to $850; the silver price went from a $1.50 to $50; the natural gas price went from 15 cents to $3.50; and the oil price went from $3 to $30), inexplicably, during that period of time when I made a lot of money, I somehow thought it was my fault.
I confused a bull market with brains! I didn’t understand the incredible amount of wind I had at my back!
I also paid attention to the popular media, and the popular media used price to justify all narratives. Your younger readers won’t remember this, but this was the time of Jeremy Rifton, and the Club of Rome, and Jimmy Carter, and all of these big thinkers. And had you listened to the big thinkers in the middle 1950s, they made newsletter copywriters seem tame, in fact.
Their prophecy was that by the year 2000, 20 to 30 million people a year would be dying of starvation. Oil would be $200 a barrel. They had a very Malthusian sense of what would happen to commodities generally. They forgot that markets work. They forgot that the cure for high prices is high prices and that the cure for low prices is low prices.
So the upshot of all this is that while I made a bunch of money in the seventies, I lost it in the early eighties. That actually turned out to be of benefit to me, ultimately, because what I learned first is that markets work. And second of all, that to be in resources, you must be a contrarian or you’re going to be a victim.
We’re in a circumstance now where, from my point of view, the circumstance has reversed through the last four decades of history. Precious metals and precious metals equities have occupied between a 2% and a 2.5% market share of all savings and investment asset classes in the United States. At their peak, precious metals and precious metals related assets comprised a 7% to 8% market share at the end of 1981. Currently, the same number is between one-third and one-half of one percent.
Now, I’m not going to argue with you that gold is going to defeat the US dollar as a medium of exchange or as a store of value. But I am going to argue with you that it’s going to revert to the mean. In other words, it’s going to lose less badly.
And if precious metals and precious metals related investments regain their median market share of the last decade, they will go from less than one-half of 1% to more than 2%. In other words, there would be a four-fold gain in demand for those assets in the biggest investment market in the world. And that’s appealing to me.
MF: So with that said, does that mean you would say we’re at the beginning of the current gold bull market, and are you seeing things out there with respect to the US dollar that makes you think that this particular run will be longer-served than the one we had following the financial crisis?
RR: The answer to your question, Mike, is yes and yes! Are we in another gold bull market? If we’re not, we’re awfully close. I have in my possession, and I will share with you, a 40-year chart of the Barron’s Gold Mining Stock Index.
I use the Barron’s index because it’s the chart that goes back the farthest of any I can find. And if you see the aggregate gold mining indexes in the 40-year context, you can see that we are either approaching the bottom, at the bottom, or just up off the bottom.
The second thing you can see is that the gold bear market we’ve just been through has been both steep and long in duration. So if it isn’t over, I’m certain it is almost over. The other thing you can see is that the nine trailing up moves (the recoveries off of market bottoms) have been extraordinarily dramatic — between 200% and 1200% upside. So I’m certainly attracted to that.
The why here is interesting too, and the why really comes in two pieces. In other words, why this gold bull market will be impressive. The first part of the why is that around the world, we have negative interest rates on sovereign debt; almost $20 trillion in government debt that doesn’t pay any interest or pays a negative interest rate.
As far as I know, this is unheralded in human history. Why on earth would anybody in their right mind lend Greece money in a 10-year term with the explicit promise (which by the way, I believe the Greeks will keep) of giving you back less money than you gave them if you lend it to them for 10 years. My friend Jim Grant refers to this as return-free risk.
So what gold is really competing against is return-free risk. For years, if you owned gold, it had an implicit cost because the money that you had invested in gold wasn’t earning you a yield in a bank deposit or in a government bond. But today, that objection is gone.
Gold – again to quote Jim Grant – yields a good honest zero, which is competitive in this market.
The consequence of negative interest rates around the world is that, perversely, because of that, the US dollar is quite strong. I would argue with you that the US dollar isn’t strong because of any fundamental strength in the US economy, and certainly because 2% is not by historical standards a generous yield. It’s simply that in comparing our economy to other economies and our yields to other yields, we are relatively strong.
Doug Casey refers to US sovereign debt compared to other sovereign debts as “The prettiest mare at the slaughterhouse” which certainly is not high praise.
If you were to look at the credit that is the United States government (the person or entity that stands behind this paltry 2% yield), what you will see is on-balance-sheet liabilities that exceed $22 trillion. That’s 22 with 12 zeros. And probably of more concern, off-balance-sheet liabilities (entitlements) that exceed...according to the congressional budget office...$100 trillion.
So the headline obligation of this creditor is $120 trillion. And they propose to service that $120 trillion debt, of course, with the national income; the national income being tax and fee receipts, less expenditures at the federal level.
And what you see is...that number, this year (the income with which they propose to service $120 trillion in debt) is minus a trillion dollars. That is a trillion dollar deficit.
Now, there’s no kind of math in the world, including modern monetary theory, where you can add a column of negative numbers (a bunch of deficits) and come up with a positive, which would suggest the debt is unserviceable.
And by the way, that’s before state debt, local debt, and unfunded pension liabilities.
Now, I’m not saying that the world is going to crash and burn. There is a way out of this...but the way out is very, very painful and almost certainly includes much more “quantitative easing” and interest rate management. And quantitative easing in itself is bullshit. If you and I did quantitative easing, the government would call it counterfeiting, and they’d put us in prison. But when Congress does quantitative easing, it’s enormously popular with the spenders in society, and they get re-elected. So I believe for all of those reasons that gold has a tremendous tail wind.
MF: Turning to base metals such as copper, zinc, cobalt and the like – which ones are grabbing Sprott’s attention right now?
RR: I think in the next couple of years, you have to be extremely careful about base metals, energy, and industrial materials. That doesn’t mean there isn’t money to be made in tactical investing around them. But although I’m not an economist, in my experience, an economic recovery...a global economic recovery of the kind we’ve experienced lasting nine years...is rather long of tooth.
I would also note that, at least in my opinion, a lot of the recovery, particularly the recovery in Europe and North America, has been a function of artificially low interest rates.
So I’m concerned about all economically sensitive materials. I understand that current commodity prices are such that we’re going to begin to experience supply shortfalls – and this ultimately will impact price. But I think we’re going to see a period of constrained supply and constrained demand.
I think that relief will come the soonest in places that people might not expect. It wouldn’t surprise me in the next 18 to 24 months to see a fairly interesting up-move in uranium, although that’s really a function of the pace of Japanese restarts.
I also think that what was everybody’s favorite metal and is now everybody’s dog, cobalt, will see its day probably sooner rather than later. I think ultimately – but when I say ultimately, I’m speaking of perhaps as much as five years from now – that the upside in copper could take people’s heads off. But it also wouldn’t surprise me to see copper in a bit of a malaise between now and then.
Probably the best opportunity I see in the non-precious metal mineral space would be taking advantage of credit dislocation in the oil and gas business. But that might not be something that the average speculator who is reading your letter would be attracted to. It’s a strategy that worked very well for me in the early part of the nineties and I suspect will yield mid-teen to early-twenty rates of return for the next five years — but it’s a very special skill.
MF: Would you mind expanding on that?
RR: Yeah, sure. Throughout North America, particularly in Canada, the banks are restricting credit to smaller public and private issuers. And in Canada, in particular, the Red Lake decision puts plugging and abandonment liabilities (the liability that the company has when it has to plug an oil or gas well after production) ahead of the banks and the senior secured position in terms of lending.
And there has been a headlong rush away from sub-fifty, sub-one-hundred million dollar credits by the bank. This money has to come from somewhere. The banks have to get paid off. And given that there is no place to replace it, including equity markets, my belief is similarly to the early part of the decade of the 90s, buying these credits at a discount from the banks will be a wonderful, wonderful way to make money. It was very good to me in the past.
MF: Rick, I know you closely follow the uranium industry. In fact, I had lunch the other day with Fission Uranium CEO Dev Randhawa, and he remarked that his team is hoping for $50 to $60 per pound uranium sometime in the not too distant future.
With uranium languishing around $25 a pound, are you seeing any near-term catalysts that can finally get uranium back to levels where US and Canadian producers can profitably extract this critical element?
RR: Certainly, I see a catalyst...but I can’t say it’s near term. It is heartening from the uranium producers’ and the investors’ point of view to see that global uranium consumption now exceeds the consumption that occurred pre-Fukushima when the Japanese and German plants shut down. In the near term, it’s my belief that the overhang in the market is Japanese inventories.
So it’ll be the pace of Japanese reactor restarts that govern the price of uranium in the next 12 to 18 months. Looking out beyond 18 months, I’m fairly sanguine. We are building nuclear plants around the world, and while we’re also dismantling some, the ones we’re dismantling are 40 or 50 years old; they’re very small plants called, ironically, firecrackers. While the ones we’re building today are much larger plants consuming as much as four times the uranium per annum. So I feel quite comfortable about the uranium business looking longer-term.
But the opportunity I see is that it may easily be 18 months before they turn. And that circumstance means that the high quality uranium juniors around the world (and by the way, there are only 10 or 11 of them) will likely have to come back to the market for fresh equity to survive until the uranium quotes increase.
The ability for accredited investors to participate in giving those entities the working capital they need to get through this bear market, I think, presents an extraordinary opportunity. Make no mistake, there are some very high quality deposits out there, including the one controlled by Dev Randhawa and Fission Uranium.
There was some very good work done in the last bull market. And there are some assets that have been stranded by these artificially low uranium prices that I believe will make speculators a lot of money over the next while. But you prefaced the question by saying “near-term,” and I don’t see any near-term catalyst.
MF: Getting back to precious metals, what’s your take on silver from an investment perspective?
RR: Well, my experience has taught me that gold moves first; then silver — but silver moves further. It is more volatile both to the upside and to the downside. And better yet...from the speculators viewpoint...the silver stocks, which are few by the way, move further still.
There are probably only around 12 or 15 viable silver stocks in the world. And when silver moves, the generalist money wants to come into silver equities. The volume of money relative to the shares available for sale is overwhelming.
Doug Casey describes that circumstance as attempting to siphon the Hoover Dam through a garden hose. So if past is prologue, and I believe it is, investors will do well in gold; speculators will do well in physical silver. But intelligent speculators could do extraordinarily well in the silver stocks. Now that circumstance may not occur for 12 months or 18 months. But the upside moves are absolutely unbelievable.
In the early part of the decade of the nineties, I was part of the reorganization of Silver Standard Resources, which really caught the silver market in an extraordinary way. If my memory serves me well, we did an underwriting at C$0.72 with a full warrant at C$1.10 or C$1.15 over a few years. And by a few, I mean only like seven. The stock went from C$0.72 to C$45 per share!
Similarly, Pan-American Silver led by Ross Beaty...I remember this quite well...we underwrote it at C$0.50 and, in that same period of time, it too went to $45!
Now, please understand that these two are the best examples of implementation in the silver space at that time. They’re personal stories to me because I was involved in both of them. But they are educational; they are indicative.
They speak to what happens if you implement a successful strategy at the bottom of the market and you then catch the upside — particularly a market that’s as volatile to the upside as silver.
MF: So with that said, are you looking primarily at the largest silver producers right now?
RR: Mike, in the beginnings of a bull market in precious metals, you are better off buying the best companies. Most people try and generate alpha in a market where they have no need of alpha. If you study precious metals equities over the last 40 years, which I have done, you will see that there have been nine major recoveries from their markets. And those recoveries have generated returns of between 200% and 1,200% in fairly constrained periods of time — that is periods of time say between 14 and 40 months.
Now, if you are staring at a gain of between 200% and 1,200%, the idea that you need to somehow outperform that market is fairly silly. You just need to participate in it. So in the beginning of a bull market, what you do is buy the very, very best stocks you can. You try to create data, which is to say market performance, but with less risk. Rather than buying the 30 biggest gold or silver companies, you try and buy the five best of those thirty.
And after the bull market is confirmed, you take maybe 25% of your portfolio and you work that much harder — you speculate in the juniors. But it’s important that you don’t take on too much risk, too much alpha orientation, in the beginning of the market for fear of making the tactical mistakes that deprive you of the benefit you’re trying to capture from the market.
It’s important that you start with the best of the best and then diversify. And it’s important that, if you’re going to diversify, you do the work required to diversify. There’s probably 1,500 juniors worldwide, and I would suspect that not more than 200 of them are worth owning. So if you’re not willing to do the work, if you’re not willing to buy information, read information, go to conferences, go to seminars, work and study...you need to be extremely careful in the junior market.
Now, the junior market has treated me extremely well. When I talk about investment and poke fun at speculators, your readers need to know that all of the money that I now invest prudently, I made by speculation. I’m not discouraging speculation. I’m just saying that with speculation comes responsibility. Don’t do this without being willing to work and read and study.
MF: Great advice, Rick! So continuing with that theme of speculation in the juniors, are you looking more at the pure explorers or the prospect generators right now, and which do you think are more undervalued?
RR: I think that really depends on the customer. We don’t want to discourage customers from buying the best of the best issuers because we have found that most investors are underinvested in the space from day one. So we would always prefer to start a portfolio for investors who aren’t in the space at all by buying the best of the best.
Our competitive advantage is not necessarily in the best of the best, although we know enough that it’s pretty easy for us to select, say, the top 5 or 7 out of the universe of forty.
But our real expertise in Sprott relative to our competition comes in market capitalizations below $1 billion. Again, there are stratifications in risk. I believe myself that the good second tier producers will be taken over this cycle either by other second tier producers or first tier producers.
So putting together a portfolio of the best of the best second tier producers – or second tier producers that are vulnerable to takeovers – is a strategy that I think will work well for the next 12 to 18 months. Of course, the biggest money to be made will be from speculations that require the highest risk, which is to participate in exploration.
Statistically, arithmetically, the best way to participate in exploration is by buying the prospect generators. Those people who use their intellectual capital to acquire other people’s physical capital. They sell a proportion of a project in return for surrendering all of the financial obligation with regard to that project.
The other way to make money in exploration is by having the ability to analyze better...and more quickly...drill holes. And we certainly do both of those at Sprott. I would return again to the theme that there are 1,500 juniors worldwide, and there is no point considering more than 200 of them.
So between those two techniques – that is, strategic investing in prospect generators and tactical investing in companies that are drilling where we have the ability to understand the drill results more quickly or more thoroughly than our competition – has traditionally been the way that Sprott, over 35 years, has out competed its competitors on behalf of its customers.
MF: And what about the royalty and streaming companies? Can you explain a little bit about what they do, and are you looking at those as investments right now?
RR: Yes. Royalty and streaming companies are probably the best form of producing companies, at least by margin business. Royalty companies own a free carried interest in a project without any payment obligations.
So a 5% royalty on a gold mine means that a mine that produces 100,000 ounces of gold per year must surrender 5,000 ounces of gold per year to the royalty owner but cannot bill the royalty owner for 5% of the capital costs necessary to generate that response.
In that circumstance, other than paltry charges for smelting, the royalty producer’s gross is his or her net. It’s extraordinarily attractive.
A stream is also attractive. In a streaming transaction, the streamer (“the buyer”) buys from a mining company the right to receive a fixed or floating amount of gold and silver over time for an upfront fee and a negotiated annual fee.
So in this circumstance, say there is a copper producer that, as a byproduct, produces a million ounces of silver a year but his or her primary product is copper. A silver streaming company may prepay for 10 years of production, say 10 million ounces of silver. And because a lot of the silver will be produced in the out years (thus a lower net present value), the streamer may buy this 10 million ounces of silver for say $25 million ($2.50 an ounce plus a payment at the time of production of, say, $8 an ounce).
The consequence of that is that every year, the silver streamer is delivered a million ounces of silver against payment of fresh cash of say $7.50 an ounce. He or she sells that silver for $17.50 an ounce and makes a cool 10 million ounces a year.
The largest royalty and streaming companies, and some of the second tier royalty and streaming companies, make up the core of our gold and silver investment portfolios because they are the highest margin and most predictable of all the businesses.
MF: Rick, as president and CEO of Sprott US Holdings, can you tell me a little bit about the various types of financial services your firm offers to natural resource investors. And, also if you would just touch upon how Sprott has been able to sustain profitability in a sector that is so often out of favor?
RR: Well, we have avoided making enormous catastrophic mistakes, and we have avoided the excessive overheads that doomed some of the competitors we had in the last cycle. We have also maintained a fairly broad business.
We offer investors access to physical commodities through our Sprott Physical Precious Metals Trusts. That’s useful for US investors because physical metals investments in the form of a trust – rather than as bullion or as an ETF – are taxed at the capital gains rate as opposed to the collectible ordinary income tax rate. So we manage about $6 billion in physical precious metals investments primarily on behalf of US investors who prefer to be taxed at the capital gains rate.
We are also the largest of the secured lenders in mine construction in North America. That’s been a good business in its own right for us. But it has also given us special insight, I think, into the mining business that really aids our equity business.
At the same time, in conjunction with our recent purchase of the Tocqueville Gold Funds managed by the legendary John Hathaway, we manage well in excess of $2 billion worth of precious metals equities, which in turn gives us a competitive advantage in the lending business. By the time many of our competitors are aware that an issuer is seeking a loan, we might already have known that issuer for eight or nine years in the exploration phase.
So the fact that we cover essentially all branches in the resource business has been very useful to us. In the United States and to a lesser degree in Canada, we also have a specialized high net worth boutique brokerage business. We don’t try to be all things to all people.
In other words, don’t call us to look for advice in technology or consumer services or entertainment. Talk to us about assisting you with your portfolio and giving you information about natural resources and precious metals.
I think one of the things that we do that’s contributed to our growth of late is that we give our prospects something before we ask them for anything in return. That is to say...anybody who is a natural resource investor is able to email us their natural resource portfolio.
You can email that to rankings@sprottglobal.com including both the name of the company and the trading symbol in text. I will personally rank your portfolio from one to ten (one being best, ten being worst) and comment on your portfolio companies, where useful, and return that to you by email.
In other words, rather than give some generic advertisement to people about why we’re so great, we attempt to demonstrate our utility to those people with no obligation and earn their business before we ask for it...and we have found that to be an enormously powerful tool.
MF: Absolutely! As you know, I’ve taken full advantage of your insights in that regard, and you’ve helped me immensely.
So Rick, most people of course follow you for your contrarian speculations in the gold space — specifically the junior explorers and prospect generators. I’m sure a lot of my readers are wondering — what’s your focus now, and are there ways to invest directly alongside you?
RR: Yes, absolutely. We have various managed products including the Rick Rule Managed Account, which is the easiest investment product I’ve ever had in my life! I’ve set up an account myself, and people who are partners in the Rick Rule Managed Account...when I enter a trade for myself, I enter a trade for them too.
If you don’t want to expose yourself to the same level of risk I take, which by the way is high, there are a myriad of other products we offer. We manage or administer in Sprott about $14 billion in natural resources and precious metals. Despite the fact that we manage that much money, we are willing to open accounts for as little as US$20,000.
The easiest way for people to participate in the whole gamut of Sprott products – if they don’t want to do business directly with us – is they can become our shareholder.
The symbol is SII on the Toronto Stock Exchange and SPOXF on the US OTC.
As we speak, the price is below C$3.00 per share. And at that level, we pay almost a 4% dividend. By the way, we earn that dividend.
My friend Doug Casey famously described earned dividends as outward manifestations of inward grace. The fact that we have the ability to pay that dividend, and that we have a high enough regard for our shareholders to pay that dividend — I think says a lot about our business.
MF: Would you mind expanding on that a bit in terms of exactly what you’re getting when you make an investment in Sprott Inc.?
RR: Sure, if you were to buy Sprott Inc., what you would be buying is the company that manages all of those investment products. The company that manages the loan portfolio, the company that manages the physical trusts, the company that manages the Tocqueville mutual funds, and the institutional and individual managed accounts in the United States and Canada.
In other words, the company that manages and derives management and performance fees from all of the aforementioned products.
MF: Excellent, Rick, and thank you for the fabulous talk...let’s do it again soon!
RR: My pleasure, Mike, and I look forward to it.