Categories: General Market Commentary / Precious Metals
Topics: General Market Commentary / General Precious Metals

PDAC 2017: Sprott’s Rick Rule likes prospect generators

PDAC 2017: Sprott’s Rick Rule likes prospect generators

Rick Rule, president and CEO Sprott U.S. Holdings, shared his investment ideas and view on exploration in an interview on the sidelines of the recent Prospectors and Developers Association of Canada convention in Toronto.

Rule’s top names include prospector-turned-royalty generator Eurasian Minerals (TSXV: EMX; NYSE-MKT: EMX) and prospect generator Riverside Resources (TSXV: RRI). Sprott Global Resource Investments currently holds 13.5% of Riverside and 8.9% of Eurasian.

Simply put, prospect generators focus on adding value through exploration before attracting a buyer or partner to further advance the project.

“We see a dearth of exploration taking place, and arithmetically our experience has been the most efficient form of exploration finance is in prospect generators, where our money provides working capital for the assemblage of intellectual capital, where the risk is farmed out to others,” Rule says.

Asked what he liked about Eurasian’s properties or the company, which expanded its prospect generation business model to include royalties, Rule responded he does not “fall in love with properties.”

“What I have found is exploration is not an asset-intensive business, but it is like research and development.” He believes the best way for him to participate in exploration is by having a skilled group of people propose and test an exploration thesis, before selling that idea to “a third-party to do the heavy lifting.”

Rule shares he learned early on that the probability of a “mineralized anomaly” becoming a mine was 1 in 3,000. Those odds lower to 1 in 100 if you explore in prospective terrains with generous exploration budgets, and further decline if you  employ a “serially successful explorationist” or people with previous exploration success, he explains.

“If you have a team in a prospect generator that originates and turns four projects a year and you have a portfolio of 10 prospect generators. What you are doing is you are building every year a sack of 40 partial lottery tickets, where somebody else paid for most of the ticket.”

So far, in his over 30-year career, Rule has invested in about 60 prospect generators, which has allowed him to be part of 21 economic discoveries. “If you think about that statistically, 21 successes in 60 starts relative to 1 in 3,000. The success I experienced, relative to the success I should have expected, is three standard deviations better.”

He reiterates for him exploration success is always about the process. “Properties, put very rudely, are things you should date not marry. Following that sort of ridiculous line of thinking, a prospect generator allows you as an investor to be very promiscuous; it exposes you to an awful lot of opportunity.”

Another characteristic Rule likes about prospect generators is that other companies interested in the assets would complete their own technical due diligences. “From my point of view, first the due diligence is free to me, and second, it is completely un-conflicted. So it’s a better level of due diligence.”

Commenting on the state of the industry, Rule, like many market observers, points to both the lack of exploration spending, as well as the ill-advised investments in the past five years. “The consequence of this is we see everybody’s cupboards being very bare with the regards to exploration.”

Rule notes he has seen this happen three times before in his career, and in each case “stepping into that void has had a very happy ending.” Something he hopes to repeat.

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