How To Invest In Gold Royalty Companies: Rick Rule

when gold recovers it really recovers but it always tests your faith and tests your patience [Music] hi my name is georgia checko with cambridge house today i'm talking with resource investing legend rick rule and the ceo of emx royalty corp david cole david's had an impressive 30-year career including management roles with leader newmont mining we'll be talking about the current gold bull market the economy and why the royalty model might be offering investors the best returns for more investing insights from cambridge house follow us at cambridge on twitter or click the link in the pin comment below to receive our weekly newsletter if you enjoyed the video which i hope you do please hit like and subscribe thanks and enjoy welcome rick rule david cole pleasure to have you both uh with me today exciting times for investors so let's just jump right in rick fair to say we're in a gold bull market now uh in your own words how do we not waste this one well the the first thing i think there's two things to understand um the first is that if we look at the eight prior recoveries in precious metals from oversold bottoms uh it's pretty it's pretty obvious that we're in the early innings of this so don't check out too soon the chart that i discussed the last time that you interviewed me the barons gold mining index chart showed that in eight prior recoveries over 40 years from oversold bottoms the most tepid recovery for the index not the best stock but the index was 180 percent from trough to peak and the best recovery was 1200 percent by most estimations were up about 25 or 30 percent from the uh indexes so there's more to come the second thing though in uh sort of unpacking that chart is that bull markets but particularly precious metals bull markets are volatile it is easy easy in a bull market to see a 15 retracement a 20 retrenchment even a 50 retrenchment my first bull market in the 1970s saw gold go from 35 an ounce to 200 an ounce nice move of course that move attracted lots of people who were going to be faithful to the metal forever then in nine months the metal fell by 50 from 200 to 100. people wish they didn't know how to spell gold sold out at the bottom and watched gold go from 100 to 850 in five short years so the message i think is that the wind is in gold sales when gold recovers it really recovers but it always tests your faith and tests your patience remember those two those three things and you'll do well excellent absolutely uh is this the real deal though or is this just a byproduct of the pandemic panic i think this has nothing to do with the pandemic well it does have to do with a pandemic it has to do with the worst virus in human history which is government the move that you're seeing in the gold price is a function of the fact that people are beginning to lose faith in the purchasing power of their savings denominated elsewhere quantitative easing we've talked about this before georgia if you did it they'd call it counterfeiting and they would put your gorgeous self in prison when they do it it's policy and they get more more votes artificially low interest rates uh of course that erodes faith in the purchasing power of your dollar because they pay you less to store them and then of course debt and deficits the creditor associated with canadian government securities or worse us government securities is broke the balance sheet and the income statement defies anybody to understand math and still buy them finally precious metals are under owned precious metals and precious metals related investments comprise less than one half of one percent of all savings and investments in the united states the three decade long mean is between one and a half and two percent if the factors that we talked about debt and deficits quantitative easing artificially low interest rates those pieces of wind in gold sales don't cause the market share of gold just to reach the three decade mean i'll be very surprised interesting uh question for you both then we saw 1800 gold this week 8.5 year high uh let's start with you david what do you think where's the ceiling here well that's simply asking how bad can the us dollar get um because it's the antithesis to the us dollar uh i don't know where the ceiling is but my recommendation is to buy the dips gotcha rick uh similarly i'm uh old enough that i'm too smart to answer a specific question like that either with regards to target or time uh i can simply tell you that if i have my choice between trump's dream biden's dream or gold i'm more comfortable with gold gotcha well uh that leads nicely into my next question you both live in the u.s and of course it's an election year will the election have an effect on gold price rick i think it'll have a psychological impact i i really believe that whether tweedledum or tweedledummer and by the way they're interchangeable gets elected that their prescription for the economy will be more of the same republicans will steal on behalf of republicans democrats will steal on behalf of democrats and both of them will steal from the unborn who can't vote which is to say that there will be more quantitative easing there will be more artificially low interest rates there will be more debt and there will be higher deficits uh so your choice is tweedledum or tweedledummer which candidate you assign which moniker to i think depends on which warring tribe you're from neither make much difference to the outlook for gold there it is and david what do you think well elections are advanced auctions of stolen property and um uh you know we have seen in the recent past during the covet situation where the two major parties in the united states were arguing over who gets to give away more money to who and all of that is negative for the currency rick i've heard you say recently that investors need a business plan just like a company needs a business plan and so often they come to the issuer for their investing business plan so what should the retail plan look like perhaps you can name three rules or parameters retail investors should integrate into their plan well the first thing is i would always suggest that people invest before they speculate now i didn't do that of course uh all the money that i make now all the money that i invest sensibly now i made through wild speculation but people can't count on being lucky as i was so you need to invest before you speculate you need to place some money with the expectation of getting reasonable returns back the reasonable expectations and then with the money that you can afford a greater loss of you should speculate that's the first thing um but with regards to the quote uh that uh you're referring to we often ask companies their business plan uh what is in particular the answer to the unanswered question the most important development which might happen with regards to a company which would change its value investors need to make a plan with every single investment if i was going to go out and buy emx royalty today i would need to ask davey several questions which i look forward to doing later in this interview and based on the answers that i got to those questions i would need to make a plan how long do i plan to hold the stock for what is going to change with information with regards to emx that will cause its value to escalate what might be a range of fair values how might i know if my expectations are right or wrong what would cause me to sell the stock the nature of speculations is that you endure many 25 or 30 losses on your way to that one that gives you thousand percent gains it is important to cut your losses when you're wrong 25 or 30 rather than letting your losses run so that you have less money to redeploy to those companies that can give you outstanding gains it isn't important necessarily that if the circumstances around your speculation change that your strategy doesn't change you do need to change the strategy but you absolutely have to have a strategy on the way in where you are almost guaranteed loss in the absence of extraordinary luck good to know a question for you both i've heard you both refer to silver as the poor man's gold uh but is silva losing its title as a precious medal i was chatting to mickey folk last week and he thinks so uh dave i'll start with you well mickey phelps quite the character you know of course early in our careers uh silver was consumed repeatedly in the photographic process and that's no longer the case as we've gone to digital photography so that's been the big headwind for silver and that has fundamentally changed the silver to gold ratio in my opinion uh over time that's been one of the larger contributors to that but when you look at the actual price performance of silver it's still very fascinating it can lag gold for long periods of time and then completely outperform gold for short periods of time and it that comes back to this concept of the poor man's gold where when you do see a a specific market event then all of a sudden the price is over can take off so i wouldn't discount it entirely and um we could see a uh you know revision back towards silver gold ratios uh closer to what we saw in the past because new uses of silver are forthcoming and it's a simple use as a as a poor man's gold or an alternative precious metal gotcha rick what do you think silva's still a precious metal absolutely dave's comments with regards to industrial uses are accurate and prescient in fact i would only add that as a student of markets uh in the eight prior recoveries that i've lived through in my life by recoveries i'm not talking about my personal recovery but rather uh recovery in precious metals markets from oversold bottoms silver has lagged gold every single time uh gold moves first because it moves on fear gold needs to establish the momentum and the narrative for silver to move and silver bugs are manic depressives which is why silver moves so far silver bugs for at least the last five uh recoveries where i've been a quote guru have been asking me in total despair when will silver move when will silver move when will silver move and my suspicion is that you're just now starting to see the silver move gold has established the momentum the silver narrative is coming to the fore um in this particular sense i really do believe that past is prologue it's important to note that in industry in addition to the industrial applications the sobriquet poor man's gold is important uh rich people are more interested in protection they come into the market first and they can afford the unit prices associated with gold the lower unit prices of silver means that people who don't have the means that other people do store their purchasing power preserve their purchasing power in silver i think it's also uh and this is suspected of point this next one it's important to note that the substitution of silver for gold has been particularly prevalent among very poor people south asian people indian people pakistani people bengali people sri lankan people and in that in that context i'd like to suggest to you that the fact that the poorest two billion people on earth although they're still desperately poor have had their lot improved markedly in the last 30 years many of them now actually have something to say and my suspicion is that the increased capability economic capability of very poor people and very poor people's access to information and communication via the web suggests that the next bull market in silver might be i'm not saying will be might be substantially stronger than people expect it to be simply because of the democratization on a global basis of access to financial products and financial information interesting i had never thought of it from that perspective and let's talk a little bit more specifically about emx now where you are the ceo um can you explain to the viewers what the royalty model is for those that may not be familiar uh well the royalty model has actually evolved substantially over my career and there's been some fantastic examples we can go back to pierre lassonde and starting franco nevada as one key example i always like to to to go back and think about that i was a geologist on the carlin trend when pierre lassonde was was coming to visit properties that he had royalties on he bought a royalty out of the reno gazette journal for a little over a million dollars and thanks to embedded optionality which is one of the key aspects that makes royalties so phenomenally interesting uh that royalty has now paid close to a billion dollars and um uh but you know royalties are are fantastic financial instruments because they of that embedded optionality commodity price optionality but but more importantly is discovery optionality and then other types of optionality that people oftentimes don't think about and that would be the establishment of more infrastructure the availability of cheaper electricity the advancement of metallurgical technologies the advancement of engineering technologies all of which are to the benefit of the royalty holder because it increases the resource in the ground increases the reserve increases production over time at no cost to the royalty holder and it's those aspects of embedded optionality in the on the carlin trend and some of the first royalties of franco nevada acquired would be preeminent examples of the combination of those optionalities all coming in to help them multiply and win in a huge way and uh so in a nutshell um in the early days royalties were created by prospectors that would sell their properties and keep a cut off the top of production in the future but that has evolved now into a situation where the big royalty companies have become finance institutions and they're providing financing via royalties and streams which are similar financial instruments to finance advancement of projects it whether that be into production or increased production and there's even exploration royalty financing is going on now so it's evolved over time as people have recognized that these are very dear financial instruments that folks love to own gotcha and what is the difference between a royalty and a stream so in a nutshell royalties typically come right off the top and streams are our contract to purchase metal where there's a strike price involved so for example the byproduct silver from a copper mine can have a stream on it and someone has a contract to buy that silver at five bucks an ounce and so it has a strike price and there could be other contractual aspects to that deal as well they have similar aspects and similar exposure to optionality but they are different uh contractually different vehicles right and rick you don't invest exclusively in royalty companies but why as an investor is it particularly appealing um royalty and streaming companies generally have very very very good operating margins franklin nevada's operating margin is hovering close to 90 percent which is to say that 90 cents out of every dollar that comes in comes home to mama and papa in addition uh they don't have any sustaining capital investments or new capital investments which is to say once again your gross is your net there are no operational risks per se other than uh bankruptcy of the operator if you happen to be a stream holder so they're good businesses good businesses seem to attract good business people when i look at the people who run uh the top tier royalty and streaming companies and the mid-tier companies what i see is that good businessmen and good business women end up being attracted to good businesses so the capital allocation decisions that are made tend to be better than the capital allocation decisions that are made by people who have chosen to um populate less good businesses which stands to reason uh i i was trying to figure out why in my mind there was an aggregation of intellectual capital superior intellectual capital both in the oil and gas and mining business in the royalty and streaming part of the business relative to the rest and then it struck me the simplest of all answers smart people are attracted to easy tasks not hard tasks and so the idea that you have better people involved in a better business is a pretty simple um pretty simple reason to be there simple as that i said the global pandemic has made us all appreciate security a little more i feel so you've got assets all over the world do you feel as though safe and predictable jurisdictions are more important now than ever and will the pandemic change how emx acquires new assets well it's interesting you brought that up and this goes back to the early days of starting emx royalty corporation in discussions with rick rule who was a founding shareholder and helped us get going in the early days as a prospect generator we oftentimes had this discussion generally speaking big picture i believe that political risk is fully if not overvalued because we read about it every day in the papers and other types of risks and there's a whole multitude of them but let's just collectively call a lot of them technical risk are typically understood and typically not well valued in the marketplace and so there can be a significant inefficiency there so we've always had the viewpoint that we're willing to go to places that other folks may not be willing to go to take advantage of that inefficiency all that being said we love working in fennel scandia we think it's a flat fantastic place to work and we love working in the western united states and western canada or in canada in general they're great places to work so um you know it's a balancing act of understanding geological potential with all the other various risk factors rick what about davey as you call him court your attention as a ceo worth your investment well uh dave first came to my attention as a consequence of a very bright geologist that he had worked for named gordon putnam i was looking to hire somebody who would be a geologist and go to work for me and i approached davey and he had the good sense to refuse my offer uh which caused me to know how much wisdom he actually had although i wasn't able to hire him and by the way this has happened to me many times i was able to convince him to go to work for a company that i had funded to start with another geologist who for various reasons couldn't follow through so i've known uh dave figuratively since he was diapers of course he wasn't actually in diapers but he was a very young geologist he had uh superb technical skills uh which were acknowledged by people who i knew uh and whom i knew had good judges of people with technical skills but dave had great communication skills too as a wet behind the years newmont geologist uh he just knocked me out with his presentation and i said you know dave you're a natural promoter but you've never promoted and i'll never forget this dave you might not remember this but you said if you propose and defend a budget in front of the board at newmont you are promoting you may not be promoting moz and paws but you are absolutely promoting the guy who puts his presentation out the best and defends it the best with the best information and the best technical skills is the person who wins and i think it was that realization that caused me initially to bet on dave the next thing that happened is that dave by the way i need to give the disclaimer that this doesn't constitute technical advice we're having an intellectual discussion around the topic of ems royalty um but dave was able to attract and retain and motivate very high quality earth scientists to work with him uh i have been quoted in the past at cambridge house that emx had more iq relative to market cap than any junior on the planet that i was familiar with uh i look forward to meeting the new generation at emx now that the market cap is higher so that i can refresh that assessment but i can say that dave in addition to having great technical skills and great communication skills has uh exhibited over time great people skills he has not been afraid as a geologist to hire other geologists who say dave you're crazy you're wrong this is right and he hasn't been so ego driven that he wasn't willing to accept technical judgment from people who he who he had the good sense to hire which is really commendable and unfortunately extraordinarily rare so again back to emx specifically dave what catalysts can investors expect from emx this summer in continued deal flow and that's been one of our our hallmarks um everybody can be lots of folks can be prospect generators and acquire assets and talk about how good they are the rubber meets the road when you get them sold and in our case because we're royal to generators we're selling those projects and always keeping a royalty and what we have shown year after year market cycle after market cycle is that we sell quality projects to an industry hungry for new discovery opportunities and keep more and more and more royalties we believe you cannot own enough mineral rights you cannot own enough royalties we want to be exposed to as many as possible we believe the most astute allocation of capital is the organic growth of royalties through the execution of the royalty generation business model so that's kind of a long-winded answer but you're going to see more deal flow and of course gold is in vogue right now we have a lot of gold properties in the portfolio we've just recently sold some for royalties and other payments and you're going to see more being sold as we move forward additionally we also buy royalties to augment our portfolio and this is one of the cool and very key things about emx is the integration between organic royalty growth through royalty generation in addition to buying royalties and there's significant team synergy there with respect to those entrepreneurial economic geologists out in the world doing the organic growth identifying key royalties that can be purchased i'll say right up front buying royalties is a tough business everybody knows what phenomenal financial instruments they are they trade at a premium and we are value guys our dna is value and quite honestly uh momentum world and so sometimes that's difficult for us because it's hard to find substantial royalties to buy because in our view they just trade at valuations that don't make sense it absolutely makes sense to grow them organically that's astute allocation of capital but occasionally we find royalties and loyalty portfolios that we believe is distinctly a creative and astute allocation and we do buy those and you'll see a combination of organic growth and acquisition growth as we work our way through the summer excellent looking forward to it and rick i've heard you say many times even earlier today uh that when you're investing in a company you're helping that company answer an unanswered question so perhaps i can hand the reins to you and you can educate investors what sort of questions they should be asking emx before they invest sure and i need to disclaim that emx is a particular kind of company uh so that some of the questions will annual easily to dave's benefit uh but others are probably more appropriate to companies that are single asset focused companies dave has wisely said in the prospect generator and royalty business deal flow is what you want what he didn't say i'm sorry for the quantification but it uh is necessary for what follows uh what dave forgot to say is that he has focused for 20 years on uh accretive transactions which is to say transactions that increase the per share value i got four congratulatory emails today self-congratulatory emails today from companies that completed very large financings which is to say that they deluded the existing shareholders and they thought this was a wonderful thing dave has been able to grow the company with minimal delusion i suspect although i don't know that the company has as much money in the treasury today as they have raised from investors over the last 25 years which is to say all the money that they have ever raised despite paying themselves living salaries they still have and the growth of the company has come as a consequence of the contribution of intellectual capital it's important to understand that the first question that i always ask companies before i ask them what the unanswered question is is i say what is your company worth if you had to break it up today and sell it on the market if you had to liquidate your assets to a willing buyer and seller what would you get for most exploration companies the answer to that is seven tenths of nothing i mean what they have is a bunch of assets that are reasonably the opportunity to spend money which is to say liabilities and they have no assets dave has the advantage when i ask them that question of pointing to recent royalty transactions and the cash in the treasury so it's an unfair question because he gets to say yes well most guys have to say no they don't have any assets the important question that i would ask dave is what do you think in the next one to two years will be your competitive advantage over the other smart prospect generators the other smart explorers how are you going to compete with sandstorm with altius with robert beatty with robert friedland uh what's the secret sauce inside emx that's gonna allow you first of all to have the intellectual capital to generate where those guys aren't before they get there uh you know what i'm trying to say dave i do yeah and i know the answer great let's have it alpha our alpha is economic geologic talent and that is integrated with and and self grown within an entrepreneurial spirit and business acumen and we have a saying here that astute business decisions are rooted in solid technical understanding it's key to understand the technicals before you invest and we've always led with technicals and that the business decisions fall in place based upon what those technicals are telling us and that sounds very simplistic and you would think most people do that but again and again and again in my career i've seen the finance guys go to the geologists and the engineers and say we've made this decision tell us why we're smart and um and that with with catastrophic uh uh consequences so um you know it it you know our our alpha in the past has been economic geology it will continue to be um and we always tweak and refine our model based upon the aspects of the capital markets at any given time but we we we have a model we love we're going to keep doing it well i think what would be useful for your listeners uh rather than delve exclusively in the future is to look at some of the successes in the past and how they occurred dave in addition to being a prospect general maybe as a consequence of being a prospect generator these current assets that you enjoy largely have come about as a consequence of transactions perhaps you could tell us historically about the uranium transaction and then the russian transaction yeah i'm happy to how you make money or rather you built your treasury not by telling lies to widows and orphans uh on the vancouver stock exchange but rather by turning dimes into dollars talk about how you did that i'd be happy to and this really boils back to our our unique business model rick as you know so our bread and butter is what we've been talking about and that is royalty growth through through royalty generation but the same team of economic geologists are out around the world doing that also identify royalties to be purchased occasionally that fit our valuation criteria and they also occasionally identify strategic investment opportunities and our criteria to our criteria to make a strategic investment is it has to be so good that you cannot not do it and so we have a very high filter and consequently in our 17-year history as a public company and even further back if you look at our private history so over a couple of decades now um ours our track record for our strategic investing for invested capital is 40 internal rate of return after tax it's just been absolutely fantastic now we've been able to leverage our invested capital with intellectual talent in many of those cases to help enhance the return but rick brings up a couple of key examples one being our uranium example early in the history of the company i spent some time in vienna the international atomic energy agency and had an awakening with respect to future supply demand fundamentals for uranium and realized that we need to get in the uranium business that was when the price was seven bucks a pound for yellow cake and and we thought that uh based upon our great intelligence that the price might go to 30 we were entirely wrong it went to 130 and that investment that investment worked out very very well and put us in a situation where when we liquidated that investment um which was a seed investment into a company that went forth to pursue the acquisition of uranium assets in north america that did very very well went on to become an 18 stock was ultimately sold for 1.8 billion dollars and the money that emx made out of that put us in a position similar to where we are today where we had more than all the money we'd raised in the history of the company in the bank in addition to all the assets that we've grown through royalty generation and um at royalty acquisition so we've done this a couple of different times a recent example is our investment in ig copper which was advancing a copper project in south far southeastern russia called malmish turned into a belt scale discovery we contributed intellectually as well as financially to the advancement of that project and ultimately was sold to russian copper corporation setting a record for one of the largest transactions where 100 percent foreign asset was sold to 100 russian company in russia in the mining business and emx sure emx corporation netted out 69 million out of that investment at the end of 2018 once again giving us a strong treasury and that gives us more arrows in the quiver to be able to further execute our three-pronged approach of royalty generation royalty acquisition and strategic investing fantastic uh well thank you both so much for joining me it was a real pleasure to chat to you david where can our viewers learn more about emx royalty corp if you could share websites social tickers all of that ticker symbol emx on the new york stock exchange ticker symbol emx on the toronto stock exchange most of our volume these days is in new york but stock is trading nicely in toronto emxroyaltycorp.com is our website there's a plethora of information there all the contact information for isabelle belger our top-notch investor relations representative in the european theater and scott close our investor relations director here in the united states great folks to contact there and they're more than happy to put you in contact with other folks within the company if you have some piercing questions wonderful you guys really are a great team and rick where can viewers follow along with you in the near future i'm going to give them an incentive georgia as i always do uh i would like to make an offer to cambridge listeners and subscribers to rank their natural resource portfolios including emx royalty if you will go to sprott usa.com front slash rankings and enter your natural resource stocks i will personally rank them one to ten one being best ten being worst and i will add comments where i think my comments are appropriate dave you'll be happy to see the comments associated with emx royalty in addition to that and by the way there's no obligation for this you don't need to be a sprott client although you should be in addition to that i will include in the return email uh two special visual aids one the barons gold mining index of gold equities going back 45 years it's a wonderful illustrative tool to understand where we are in the gold equities market particularly in the historical context and finally a hundred year commodity chart uh which will put the rest of the industrial materials and the values offered by them in the historical context once again that's sprott usa dot com front slash rankings by the way be patient i've ranked 8 500 portfolios so far i understand i'm 1200 behind so if you don't get a response for three weeks please be patient what a generous offer thank you so much uh to you both simply thank you for doing this georgia it's been fun thank you for being prepared and thank you for uh leading the process thank you very much great to be here rick rule always a pleasure sir thank you so much for watching i hope you enjoyed the video please hit like and subscribe to our channel you can follow us at cambridge on twitter and if you click the link in the pin comment below you can receive our weekly newsletter bye for now

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Keywords: How to invest in gold royalty companies, how to invest in gold, gold, investing in gold, investing in gold royalty companies, gold royalty companies, rick rule, rick rule investing, investing rick rule, rick rule gold, rick rule investing in gold, gold 2020, emx royalty, gold stocks, gold royalty stocks, precious metals, gold price, gold recovery, precious metals bull market, bull market, David Cole, David Cole EMX

Id: e6-1EL4m0y4

Length: 37min 54sec (2274 seconds)

Published: Mon Jul 06 2020