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Monday
Oct132014

Rick Rule: Are the Worst of Times Yet to Come?

“I plan on using this recording a few years from now as marketing material,” said Rick, speakingto current clients and friends of Sprott Global Resource Investments Ltd., the firm he founded in 1994. “What I’m going to talk about today I think will seem like a prescient market call three or four years from now.”

His recent update was about putting the ‘carnage’ and heavy damage to people’s natural resources portfolio over the last two years, and acutely in the last couple of weeks, in perspective.

“It’s times like these that you’ll look back on as the ‘good old days,’” Rick suggests. “In 2017 or 2018, I believe we will think of 2014 as the days when you could buy companies with the most compelling projects and management teams at 75 percent discounts from their previous highs. ‘Back then, we could see a company fall 30 percent after they refused to take money from us in a private placement, and we could buy the stock at even more attractive terms,’ we’ll say.

“We have all had the experience of seeing goods on sale and procrastinating, and later on seeing them priced much higher. You think to yourself ‘I really wish I’d participated.’ Those are the kinds of times that get referred to as ‘the good old days.’”

Right now, it feels like we couldn’t be done with good old days soon enough. As Rick puts it, “You are either a contrarian or a victim, I’ve often said. Sometimes, it’s possible to be both.” Right now certainly feels like one of those times.

That’s no reason to give up on your contrarian investments, according to Rick. If you were correct in your initial assessment, and the goods you bought were indeed ‘on sale,’ then the right thing to do is to hang on.

As Rick explains, this is what made his fortune during the last period of ‘good old days’ for the resource sector – the profound bear market of the 1998 to 2001 period. He checked his reasoning for investing in the companies he owned, and decided he’d made the right choice.

Rick tells the story: “Companies in the resource sector were in a once-in-a-decade sale at the end of the 90’s. There was one commodity in particular, uranium, which had been in a 20-year bear market. The price had gone from 32 dollars to 8 dollars a pound. Not only did people lose money, but, to make things worse, it was a despised material. It was perceived as having cost people their lives at Hiroshima, Nagasaki, or Three Mile Island. The commodity had underperformed so bad that the margins on producing it were now negative.

“There was one Australian company at the time, called Paladin, which owned a uranium mine. The bear market for resources was even more severe in Australia than it was in Canada.

“In 1998, I realized that uranium was a spectacular contrarian investment. Nuclear power made up 16% of the world’s energy. As long as the Western world continued to want to have electricity, the price would have to go up, or the lights would go out. I had decided that Paladin was a highly speculative bet on that outcome.


“I financed them at 10 cents, and the stock rose a little. I financed them again at 12 cents. Then, things got ugly. The price went to 11 cents, then 9, then 8. A crisis of confidence had occurred among shareholders. The stock went all the way to 1 penny. That’s the kind of situation where you have to re-examine your premises. Was there something wrong with Paladin’s asset? Or was it my thesis that uranium would get more expensive that was wrong?

“I decided that my premises were accurate. The world consumed 160 million pounds of uranium, and it only produced around 80 million pounds. There was a standing supply of around 400 million in the way of a shortage. The deficit was getting worse because of low uranium prices. I also figured that Paladin’s deposit would not make money at 8 dollars a pound, but could make money at 25 dollars per pound.

“I got the courage to stay with the trade, partly thanks to George Soros’ comments that his fortune was made by finding commonly held perceptions that were false and betting against them.1 

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