Rick Rule: Making Millions in Junior Resources

we live in a fantasy world now reality has been destroyed this is the time that you really need to pay attention the probabilities are overwhelmingly on gold's side that is the best environment to see gold increase its value [Music] welcome to palisades gold radio i'm your host tom bargerovics joining me today is the one and only rick rule rick how are you today i'm fine tom thank you very much for having me back i appreciate it it's uh always excellent to have you as usual and we're going to focus today um primarily on how you rate uh equities in the in the gold and silver or mining space in general so you've you've been saying that investing in this space involves both hard work and luck so why don't we start there and tell us about how you think about putting in hard work as an investor well hard work involves getting away from the narrative feeling less if you're going to pay attention to the narrative don't pay attention to how it makes you feel pay attention to how you think it's going to make the market feel trading a narrative which is to say uh trading a story's ability to move a market is a form of securities analysis i need to say at the beginning of the exercise i'm not very good at it uh i haven't owned a tv for 35 years i don't know how to dress myself without my wife's assistance so probably my weak point in the system is a as is as a journalist but i note after grading now 22 000 portfolios uh going back a little more than a year that for most people most speculators the narrative and the way that the narrative appeals to them is their uh dominant form of stock picking which is why most people get it wrong if you're going to pay attention to the narrative don't pay attention to how it makes you feel except as a defensive mechanism pay attention to how you think it's going to make other people feel now i don't take that very much into account in my rankings i answered the question because you asked me in a sense my uh my rankings are all about and this is a very very very long phrase which i'll try to define probabilistic net present value calculations in other words uh before i care too much about what uh the price of a stock is its market capitalist capitalization and its enterprise value i want a sense of what it's worth what it's worth today which is to say it's liquidation value uh and what i think it could be worth in a probabilistic sense not a certain sense 18 months from now 36 months from now 50 months from now uh in my experience money is made on the delta between what something is worth or likely worth and what it's selling for and that's it the magic in there is calculating net present value and understanding that there's no certainty in other words understanding that you're never going to get it right you just have to get it more right than other people and as news changes your outlook for a company has to change so let's say as an example that uh the company that we are ranking is a gold miner and they're in production and they have a deposit that has a million ounces that we think is mineable maybe some of it is in the probable category but you know we understand from the drilling density that it's highly likely to be upgraded uh you know into proven producing and let's say just for fun that they're producing the stuff at the rate of a hundred thousand uh ounces a year uh what you try to do is develop a model of the net present value of future cash flows so you look at what the probable total production costs are what the probable cost of capital uh is what the probable closure liability is you discount at whatever rate you think is appropriate i'm using five percent now uh i use a number based on a libor that floats and you try and get a net present value calculation in other words what is the company worth if you had to liquidate it today too many people do liquidation value based on what companies with similar gross production statistics sell for in the market which is to say they use comparative analysis they do that because it yields a higher number and because it's easy but it's a worthless number really except for the fact that it's a ubiquitous number um so once you have uh an expected value of future cash flows and by the way um i usually use a pricing matrix uh which is to say i'll run a 1250 case i'll run a case on the forward strip which is the market's estimate uh of pricing and i might run uh an upside case i might run a 22 or a 2500 case just so that i can do a what if then you need to uh add in anything that are extraneous uh or redundant assets uh ironically accountants treat cash as redundant i've never found my cash to be redundant but just for fun you add cash back in and you add in to the extent that you can and this is the art development projects from this you take away what you see as recourse liabilities which is to say debt closure obligations as an example likely sustaining capital uh obligations and what you end up with is a number that is while uncertain much more certain than a number that's available to other people because only one in 100 people do this work that's the basis of my analysis the second part of my analysis very much involves the people once you know what it's worth who are the jockeys are they going to make it worth more or are they going to make it worth less there is a falsehood in this business that the rocks don't care who owned them in other words a scoundrel could have good rocks and make good money the truth is that scoundrels can always find a way to either steal or diminish uh the wealth inherent in geology and very good guys uh can take what you thought was a so-so deposit and make it into a very solid producer so uh it's very important for me that the people that are involved in this value proposition are high quality people and people whose value has been demonstrated in a task that is very closely related to the task at hand i think i've said on your show before if someone comes to me and says that he or she was a success in mining because they operated a producing gold mine in two billion year old archaean terrain and french-speaking quebec but the task at hand is exploring rather than producing for copper gold in 15 million year old accreted terrain in spanish-speaking peru although both tasks are mining they're completely completely unrelated so i want the task at hand to be familiar in other words i want the success that has been demonstrated to resemble uh very closely uh the task at hand i've also learned that i want partners not employees i want the officers and directors of the company to own a lot of stock and i want them to own stock at a price that's somewhat related to mine you know if somebody wrote themselves 100 million shares at a penny and now i have the opportunity to buy a million shares at 50 cents while they have ownership uh the cover charge if you will the markup between the price that they paid for their stock and the price that i paid for my stock is too great for me to consider their ownership to be relevant other than to say yes they have some incentive to succeed but what they are doing is sharing disproportionately in the gain without sharing proportionately in the pain that isn't the same as a partner that's the same as a promoter and i have no particular interest in that go ahead get a question and yeah absolutely and exactly as you say that that really goes to show let's say the incentives because this this world as when it comes down to it as as we think about it is driven by incentives so having that skin in the game is something um and not necessarily just having skin in the game but how that how that position is structured is also very important right you know tom uh now that we're in a bull market again on speculative issues people always send me these seed stage opportunities allegedly seed stage opportunities and generally it involves some project that they acquired for half a million bucks or a million bucks and somehow magically they marked that up from the million dollars that they acquired at four to twenty million dollars and they're giving me the opportunity to buy stock at 25 cents the 20 million dollar pre-money valuation in other words they're they're looking for a 20-fold lift when i was an active money manager uh i got a 20 carry a 20 lift not a 200 not a pardon me not a 2 000 lift and i got it off an 8 hurdle meaning that my investors had to make eight percent cumulative and compounded before i got my lift at all if i didn't give him the lift i didn't get paid and people argue that i was excessively compensated now you have a coalition of butchers bakers candlestick makers and copywriters that assign themselves 19 million dollars worth of value out of a 20 million dollar market capitalization they're trying to do me a favor at a 25 cent seed level uh truly insane truly insane i don't blame them for trying of course but it's uh you know it's up to me to use that wonderful word in english no seems very simple right rick people are governed by narrative if people are attracted to gold and a gold story comes across their desk they pay attention to the narrative they feel they they pay attention to the fact that they're attracted to gold and they don't seem to go below the golden glow on the cover uh to see all the sins hidden inside so as as we're talking about let's say a producing gold miner you've also talked a lot about answering the unanswered questions and is that mainly let's say pointed towards discovery and trend two replaces those ounces in the ground that are mined and diminished off the balance sheet every year that is much more involved in exploration uh but also it may be that uh the value proposition offered up is that the company has been uh an inefficient producer and they believe that with some capital improvements that they can go from being an inefficient producer to being an efficient producer that's an unanswered question uh how much money is involved in sustaining capital uh to get that done how much time will it take what is the probability of success how will i know that they're succeeding you know if you take a hundred thousand ounce uh a year producer and you take them down from a cash cost of uh let's say uh twelve hundred dollars an ounce down to nine hundred dollars an ounce uh the net present value of three hundred dollars an ounce over a hundred thousand ounces this year uh and a hundred thousand ounces a year for the next six or seven years makes an astonishing difference in that present value but it's an unanswered question they say they can do it they believe they can do it they're gonna do it what do you think the probability of this of their success is what do you think the value of a yes answer is how long will the period of indecision uh be before you know if they've succeeded or failed and what is the expected value of success relative to the time value of money and the cost of achieving that success all critical and remember you're never going to get it right you just have to get it more right than the other person which is easy because most people when you explain the process say oh i better buy an etf yeah that's uh seems like a bit of a safer option and and i want to get to you know building let's say safety into your portfolio and uh we'll we'll touch on that later but i think a a good let's say example of a company that has recently or or not necessarily recently but um you know having a recent conversation with keith neumeier digging into some of the the research in first majestic they have um increased their efficiency of extraction of their ore by 10 plus percent over the last i believe it was something like seven to ten years so is is that um an example rick to you of of a ceo that is able to increase efficiency and answer those unanswered questions yes uh keith is uh a ceo that i was always willing to pay a premium for because he has chosen deposits well and he tells the story well like ross beatty telling your story well lowers your cost of capital uh and that is an off-balance sheet asset that you have to pay for what has impressed me with keith is that he has bought uh what occasionally i regarded was as old tired minds san dimas and proven me wrong and there's nothing i like more than somebody proving me wrong in a positive sense which is to say a better outcome than i had anticipated understanding uh and rossby's done this too understanding that a large old legacy deposit that isn't performing hasn't been performing because it was starved for capital because the sustaining capital investments weren't made because people hadn't paid people hadn't invested intellectual capital in understanding the the genesis of the deposit and what was left in the deposit and writing those historic wrongs uh i i note that keith now has um picked up jarrett canyon uh you know i mean talk about a massive old legacy deposit if he can do and i'm not saying he can don't get me wrong i'm not touting first majestic but if you look at their historic success taking these large complex uh allegedly over the hill deposits uh investing a lot of time a lot of talent and a lot of treasure turning them around and then annuitizing the benefit uh over the course of a decade uh he's a difficult guy to bet against absolutely so something you just mentioned there rick is is the intel the inventory of intellectual capital and that doesn't necessarily just um apply to evaluating a company it also applies to looking at that entire company's team so is it not just about let's say the the ceo and and his direction and vision you uh get people by the way i'm one of them uh who are very good um purchasers of intellectual capital i would say that my unsung advantage going back 40 years is i am very good at hiring geologists i am very good at evaluating what their strengths and weaknesses are and i'm very good at consuming the intellectual capital that they produce understanding their strengths and their biases and weaknesses and you you get people um bob quartermaine comes to mind ross beatty comes to mind clive johnson comes to mind robert friedland comes to mind tom kaplan comes to mind a players people who have been serially successful and what you find is that they just they don't just hire good people they hire good people whose skill sets are appropriate to the task at hand and then they motivate them they engender tremendous loyalty among these people and they make great people even better there's this sort of intangible leadership quality that you see around the best of the best players i remember uh some years ago when i was held in somewhat less favor by robert friedland um and he had a geologist who i won't name who worked for him uh you know robert can be sort of volatile and i said to this geologist listen how i mean how can you work for this guy he calls you at two o'clock in the morning he screams he cusses he berates you he said listen in my career as an exploration geologist people for 15 years told me i had really good ideas and robert drilled him that's all i can ask for when i failed robert said okay grieve take the weekend off give your head a shake let's come back and make the money back it was a really good idea never feel bad about failing on a real good idea so this isn't meant to be the sort of robert friedland uh praise weekend but you find a consistency be it adolf or lucas lundin robert friedland they hire great people they create an atmosphere within the company that's conducive to success uh it's a skill set so as you're talking about these these great leaders rick what are some questions that should be asked of a ceo of let's say an exploration or a mining company why did you hire your vpx exploration what was it about him or her that drew you to hire them and why is it that their resume is suited to the task at hand talk to me about your cfo how does your cfo fit in that business plan did you hire this person from personnel agency uh in other words did you use somebody did you need somebody who could add and subtract uh and hire a cfo because the cfo was convenient or is there something about this cfo that made him or her uniquely suited to this tell me about the independent people on your board did you hire them just for their resumes uh tell me what their role is tell me what they bring to the company tell me about your relationship with them uh is there anybody on your independent board that has the courage to tell you that you're wrong uh is there somebody on your board that when you are very lonely you've made a mistake you can go to as a mentor who will buck you up uh you need to understand how the hiring decisions came about and how they relate to the task at hand very often when you ask these questions the ceo will respond oh that's a good question i never thought of it that way and they're actually doing you a favor then you can throw the company away and you don't have to research it anymore so how about the importance of let's say their their plan going forward the importance of getting from a to b rec well that's critical particularly in the exploration stage pre-production uh because fully eighty percent of the companies that i ask about with regards to a plan don't have one it's very tough to get somewhere if you don't know where it is that you intend to go basically what you find with 80 of the junior listings is that their chief plan is to be able to draw a paycheck in 18 months uh which i understand is relevant to them but it doesn't matter much to me so this is where the answering unanswered questions comes in uh when you ask them you know for the sort of grand plan uh you know i have this project i picked up in peru uh exploration dates back to the 1700s if the original mule hadn't died the prospector would be a billionaire that kind of thing and uh you know i think it's going to end up being 500 million ounces of silver well the first question is why do you think that because you want to explain to me how the facts at hand cause you to have that target um sometimes they get an answer that's intriguing say okay so now uh you add value to your company by answering unanswered questions you add value to your company by peeling away uncertainty the same way other people might peel an onion what's the first unanswered question that will allow the market to understand more about your project if this is a you know a sort of a district scale project in peru is what you're going to do well tell me what you're going to do you're going to do a variety of surface samples so that you can come up with a grid that will give you a target size or if you've already done that are you going to do a trenching program to see whether or not the mineralization extends a depth uh if you have already done a trenching program are you going to throw the truth machine at it meaning are you going to drill it tell me how you're going to answer the unanswered question tell me your thesis and tell me how you developed the thesis and tell me how you're going to propose to test the thesis most of them can't do that which as i say really does me a favor because i don't have to listen anymore i just throw them away then you know for that sort of 20 who has actually thought about answering the unanswered questions uh i make them do management one more time i say like tell me why i should care about your thesis tell me what it is about your background that gives you the expertise that i ought to want to listen to your thesis if they do that i say okay i really like that answer thank you and i like i i like the sequence i like everything tell me how you're going to know that you failed you have a 10 million dollar budget are you going to drill 10 million dollars or are three million dollars of the way into it are you gonna understand that your thesis was wrong and save the seven million dollars uh too many people drilled the budget irrespective of the results uh and you know tom nobody drills their worst hole first uh you can learn from one hole and vector off it or maybe doesn't release the worst hole first yeah but you get where i'm going in other words losing three million dollars is not a good outcome but it beats the hell out of losing 10. um yeah so i i i'm really interested in what will constitute success what will constitute failure and i'm interested too in the sequence of unanswered questions i say right now i know that you're not going to get exactly the yes answer that you suppose you might get a better one you might get a worse one but assuming that you get a yes one what's your decision trained from there what do you suggest that that data will suggest in terms of your ongoing plan oh yeah and tell me uh how much time it's going to cost to get me to a yes or no answer and if you don't have the money to get to a yes answer tell me where you're going to get the money you know too often people have proposed a plan that you know would take one and a half field season so 18 months it would take uh 5 million dollars takes them a million and a half or two million in gna so they have a seven million dollar need and they have a million and a half in the bank uh an unfunded unanswered question is not an asset it's a liability uh it's okay if they tell me they're five and a half million dollars short uh i might put up to five and a half million in conjunction with others if i really like everything and they were honest with me or i might say you find the five and a half million you come back and talk to me later uh right now what you have is a dream not a plan very different circumstance and investors taking themselves through the sequence need to adjust their time expectations to the plan that they just heard if answering the unanswered question which is the catalyst that moves the share price will take 18 months why would the investor expect the stock to go up in three months or four months so often uh investors time expectations are unrealistic with regards to the task at hand this isn't the company's fault this is the investor's fault uh but if i've learned anything from grading twenty two thousand portfolios over the last year and change it's the greatest flaw among speculators is that they have an imperfect sense of the time that is required to make their speculation work in other words they set themselves up to fail because their expectations are completely irrelevant it amuses me actually that many speculators think that what they want matters it's completely irrelevant what you can have what the probability of success is and the price you're willing to pay uh the risk of failure is what matters and and as you're saying rick you know we're we really want to know um also how to follow this story and if if the ceo is available to to comment on that you you you put some importance on that of how let's say how reachable the ceo is or if you have to follow the rest of the story through press releases so tell us a bit more about how you think about that and and maybe how you know what importance you place on a ceo spending you know less versus more time in addressing these questions to particular people um in every case um tier one ceos the a players are so completely obsessed with what they do that they don't have lives they don't want to talk about baseball they don't want to talk about popular culture they don't want to talk about politics except as it relates to their property and they are absolutely flattered if you ask them questions about their company if you are dealing with a ceo or a cfo that appears to be diffident uh that isn't delighted that you're asking him or her questions about their company walk away i i wrote an article about this that you may be referring to nine nosy questions i think it was called and i titled that one who's buying the beer is this call hello or is this call goodbye can i call you again if not you who can i call what restrictions would you put on questions that i have answered i know that you can't give me material non-public information but what i'm asking for is plans and these ought to be released in your proxy and your quarterly so where am i going to get this information who am i going to get the information from who if i care about the geology is going to walk me through the cross sections too often you talk to a cfo and the cfo sees their job as making payroll uh nothing else and so if you ask them about the relationship between general and administrative expense and project expenditure and how they see gna as a percentage of project expenditure going forward the bad ceo the bad cfo pardon me will say well you should look at the quarterlies uh in other words i don't want to talk about that uh i don't want to give you a basis to invest or not invest the good cfo will say oh you want to get in the dirt on this fantastic you know i mean i've i've had guys that have worked for reasonable size companies that would do things like almost describe the copier lease you know you want to get in the weeds let's get in the leads absolutely so rick as we're talking about the the capital expenditure within the company can you walk us through some of your considerations like how much needs to be spent to advance these projects um always timeline is very important let's say budget looking out six months 12 months 18 months burn rate and and more importantly their access to capital well the most important thing is in a small company where you're answering an unanswered question do they have the money to get you to a yes or no answer if not where will they get it uh a second thing is are they efficient uses users of shareholders capital in the exploration business if um you know one of the palisades juniors a joint venture an exploration project would say newmont and let's say that one of the palisades companies was the operator the exploration program newmont might allocate 12 or 15 of total project expenditures to general administrative expense uh to find out whether a junior company is efficient you look at how gna expenses as a percentage of total expenditures varies from 15 percent we had an intern probably 10 years ago now at sprott uh who pulled i think it was 25 juniors at random from the tsxv exploration companies uh and modeled general administrative expenses as a percentage of total expenses and the median pardon me the mean in 25 companies was 65 percent at a project level the expectation is 15 percent the reality among 25 juniors was 65 these things were salary machines as you can say kind of kind of like lifestyle companies right yeah so don't you think that might be a function of let's say the size of a junior company versus the efficiency of an established bigger company like that like yeah yeah it but that's not the company's fault if you're stupid enough to give them money they're going to spend it on themselves i believe that 80 of the companies in the junior market are capital traps uh i believe out of 2000 listings worldwide uh there may be 300 350 that are viable it's not my fault as an investor that their market capitalization uh and their cost of capital is too low to be viable i feel sorry for them but i don't care i'm not the red cross uh at a certain level why on earth should you sacrifice your treasure for somebody else's non-viable dream remember this tom and your listeners need to remember this too i've talked about the importance of disabusing yourself from narrative when you look at the junior mining sector as a whole if you assume that there's what fifteen hundred two thousand listings worldwide australia canada london all that if you merge them all together into one company junior explore co that company in a very good year would lose two billion dollars in a bad year it would lose five billion dollars so what's the net what's the expected net present value of the junior sector well how much money would you spend to lose between two and five billion dollars a year the answer is nothing the game is to find that small percentage of companies that are so spectacularly successful that they add um credibility and sometimes even luster to a sector that loses four billion dollars a year [Laughter] separating the week from the child the expectation is failure and you have to defend yourself from that so rick can we talk a little bit about how you how you really approach um viewing capital structure within these companies and let's say if you if you place um any any uh let's say discounting or or absolute no's based solely on capital structure warrant overhang anything like that not as much as i pay attention to the difference between my estimate of liquidation value and market capitalization uh what i have found is that i have made money by aligning myself with people who win lose or draw don't sell stock and if i'm not aligned with promoters but rather aligned with builders i don't have to worry about structure too much i know with ross beatty as an example if he has a hundred million shares of stock the percentage of that that's available is float is zero it's not for sale he's gonna sell it all at once uh if i'm dealing uh you know with somebody from the vancouver fraud machine uh you know one of the house street bandits very different circumstance but the truth is at age 68 i don't have time for those guys anyway so for me structure is less important the structure of the balance sheets important uh i want to see some cash there i i want to see an asset where enough money has been spent that i can understand its value but you know who's done what to who's done what to who uh warrant overhangs don't bother me too much because what i do given that i'm more a speculator than a trader i look at the size of the prize that is to say what i think yes answer will be worth i add in the cash from the warrant exercise and i add the warrant exercise to the market capitalization i you need to understand tom that the idea that 25 cent stock may go to 75 cents to me has some interest but it's not relevant what has made me a success is that several scores of times i've had a 25 cent stock that's gone from five gone to five dollars uh and i'm if my goal is to trade a 25 cent stock to 75 cent stock this is going to sound really elitist but i'm i i'm competing with the great unwashed i'm in a world of narrative i'm hanging around in that 80 percent of penny stocks that are actually worth nothing the idea that something that's worth nothing might go from 25 cents to 75 cents is to me one of the greatest irrelevancies in financial history what i'm looking for is a 25 cent stock that is perhaps potentially really on the road to being a five dollar stock uh that's of much more interest now a couple of caveats there uh that your listeners might understand the probability and what i do is failure uh that is to say that the chance the 25 cents talk goes to five dollars is fairly skinny so you have to accept a lot of failure on the way the second thing is that you have to take a lot of time i was looking back at my successes with ross beatty if i remember correctly 14 starts 13 wins i forget how many 10 baggers but the average 10 bagger took five or six years to occur so i i wasn't involved in the game for a quarter or a week i never had trauma holds holding stock over a long weekend probably more importantly uh during the five or six years that it took to generate ten-fold successes i experienced 50 percent or more share price declines at least twice which is to say i'd have a stock that went from 50 cents to 2 bucks it would fall from two bucks to a buck uh it would go from a buck to 375 before falling back to a buck 60. you have to have a sense of the relationship between price and value to stay these trades uh if you have a sense of value when a stock falls from 3.75 cents to a buck 60 if you like the stock you're delighted to see it because it wasn't for sale at 375 which means you're going to buy a lot more at a buck 60 and ultimately you're going to make more on the stock that involves a certain discipline and a certain willingness to work in a certain tolerance for failure that i've learned from grading 22 000 portfolios that many speculators don't yet have which is one of the reasons why i continue to do interviews like this i think if nothing else this sense of realism about the process is what i have to give back to the community and of course you're also very gracious in in doing all of those reviews uh for anybody that wants to send you their portfolio correct i enjoy it i learn a lot from it and as i say i would be disingenuous if i wasn't willing to educate people the way i do and by the way this is supposed to be educational for people you can impart a lesson to somebody much more easily if they're interested and the subject that really interests people is their own fortune if they have their own portfolio and you're grading a portfolio and making comments on companies it's very different than having a broader-based philosophical general discussion if you're talking about their future uh them being able to put their kids through college uh all of a sudden the lessons become uh really intensely focused which is great so rick let's talk a little bit about the liquidity of a stock how worried about you are or or how worried are you about having you know real liquidity and something that you're investing in or or speculating in um and and do you think that problem tends to take care of itself once uh hopefully it reaches that goal of going from let's say 25 cents to five dollars liquidity has two uses for me uh one is an exit strategy if i'm wrong i've already established i'm not a trader or if i am lousy at it uh so if i get a no answer uh it would be lit it would be nice if i could lose 20 as opposed to 35 i tend to take big positions uh but liquidity also goes to cost of capital uh a company that is liquid uh will have an easier time raising money and they'll have an easier time attracting ultra high net worth or institutional investors so liquidity is important to me in terms of cost of capital and it's important to me as an exit strategy but it's not particularly important to me in any other facet because i'm not a trader i don't use the liquidity what you're going to find and what your listeners should pay attention to is that there is a new financing mechanism coming into the market which is at the market financings particularly in the u.s market and canadian companies that are able to list in the u.s and avail themselves of the liquidity on the new york stock exchange access usi net worth retail and those u.s institutional investors that are enough dinosaurs that they won't invest outside the united states accessing that pool of capital and then using that pool of capital as keith newmeier has done as an example and as sprott does in our physical trusts to do evergreen prospectuses and at the market financings uh this is a real capital revolution for the mining business and so in that sense liquidity really goes to the cost of capital but it has to be a special kind of liquidity it has to be really nyse liquidity so rick when we're when we're talking about the um as you just mentioned companies that are let's say domiciled in canada or the us what considerations do you or or even discounts do you put on a company that isn't necessarily uh domiciled in one of these two jurisdictions let's take mexico for example listed in mexico becomes problematic if it's not listed outside mexico many investors won't have access to it and there is an opacity to mexican reporting that isn't present in canada and the united states uh i don't read spanish well either and uh so just having the the time and expense of translating proxies financial statements and income statements into english is problematic um i am comfortable with aim listings although i don't like the market maker structure there the you know the specialists there seem to specialize in raping american retail which is unpleasant given that i'm american retail uh and in i i love the australian market the australian market's probably my favorite market in the world for many reasons not least of which is that the whole period of private placement in australia is 24 hours which is certainly attractive but i also like the direct relationship in australia between rocks and money uh too often in canada it goes to narrative it's rocks to stocks and stocks to money so i like the direct drive nature of australia i would say that in terms of the north american market because the listing expense and the compliance expense is less in canada and because canada has a well-developed infrastructure on the venture exchange that you start a company in canada but as soon as you get to 30 or 40 million dollars of market cap you certainly become dtc eligible in the us which means that american people can buy you and participate in private placements and as soon as you're able you list either on nasdaq or the new york stock exchange directors don't like this because they don't want to be liable for u.s securities laws i mean they give you all kinds of reasons why they don't do it uh but the truth is that it mostly has to do with yes it's more expensive but you would expect to pay more to be exposed to a 380 million person market that's underserved in natural resources rather than being exposed to a 39 million person market that's over exposed to national natural resources i mean this is simple arithmetic so the canadian companies that pardon the phrase are stuck in the canadian extractive ghetto are companies that have chosen to have permanently high cost of capital and that's a management decision and it goes right straight to stupidity so rick one last thing i'd like to touch on about about basically geographics let's call it is are you again more worried about the personnel that are in charge of running the company rather than the jurisdiction that say one or two of their particular projects resides in yes sir yes sir you know people talk to me about political risk all the time i found british columbia as a property limited to be extremely risky i found california to be extremely risky i've been treated fairly well in congo the truth is i've been treated better in congo than california what you find about political risk is that people who look like you and i uh caucasian males have this odd belief that money that's stolen from us uh in english by caucasian people according to the rule of law is somehow less gone it isn't uh i am much more concerned about building something that's worth stealing uh you know i'll take my chances afterwards and i'm critically interested in who runs the company why do i care if a government may steal something from me 10 years from now if i'm absolutely certain that the ceo is going to steal from me this quarter excellent point rick so i'd like to touch on a little bit about let's say how you think about for the average let's say smaller net worth investor how you want to structure a portfolio is there space for um removing risk by investing in royalty or streaming models um and and let's say maybe is there space also to be invested in as a let's say savings account having some pslv or something like that physical boolean um as part of that strategy let's back up tom uh smaller investors need to be willing to invest time because they can't invest treasure so i would argue that most investors shouldn't own a number of stocks that's larger than the number of hours per month that they're willing to invest understanding those stocks uh the extent to which they can psychologically and financially afford risk will determine whether they have bigger companies or smaller companies and how hard they're willing to work i personally don't want to give investment advice but it's very difficult for me to understand why an investor in the united states and canada that is exposing themselves to negative real interest rates quantitative easing debt and deficits wouldn't own physical gold and or silver in some fashion be it you know pslv you know be it our product be it physical product and i wouldn't advocate owning those because you are anticipating capital gain i would rather own it the way that you own life insurance or auto insurance or health insurance i would regard it as insurance against congress or parliament and i believe that every north american needs insurance against the political class in the form of precious metals what some smaller investors if they want to be involved in the space ought to consider is that in a resource bull market uh the gains that the market itself gives you are so spectacular that you need you don't need to outperform the index uh then it becomes how much time are you willing to invest if the answer is you're not willing to invest very much time you buy the biggest and the best entrance in the sector if as an example you look back to the gold bull market 2000 to 2011 the metal itself went up 650 percent uh and the equities did about 50 better which means that an equity index could give you a thousand percent over 11 years do you really need to take a lot of risk to outperform the index uh if you're a smaller investor it may be worth your while to buy the five or six best companies in the index underperform the index a little bit because the best companies do underperform the index in a bull market but take away all the risk let's say that you only made 750 as opposed to a thousand percent over 11 years but you did so with almost no risk and no time is that a horrific outcome i don't think so if you can if you want to spend more time and you want to spread yourself throughout the market cap sort of continuum then i think the royalty and streaming companies are a great idea the royalty and streaming companies are priced at a premium to market relative to ebit but they generate often 80 margins uh you would pay up for a company that's earning four or five times the margin of a different company so the idea that uh somebody wanted to participate in the market wanted to take a bit more risk learning the five or six best companies in the market uh owning uh a selection of seven or eight royalty and streaming companies from the very biggest and the best from the wheatons and the francos down through the higher quality intermediates you know cisco royalty would be an example down to the efficient juniors the sandstorms the mavericks the altius's the emxs uh even as far down perhaps as the origins makes absolute sense absolute sense understand that you've got to pay attention to the little ones you don't pay so much attention the big ones you got to pay attention to the little ones excellent rick so as as we you know as we've allocated our capital as we've done the work to find the biggest and best or or let's not say the biggest and best but the best investments you you think you can how do you go about thinking about where your exit strategy is where that exit point is to get out and and maximize that capital risk that's such a great question you know i always buy too early and i always sell too early so the first part is to understand who you are and accept it uh i've done pretty well not buying at the bottom and not selling at the top taking a fat slug out of the middle and i accept that we talked earlier about the fact that i think the precious metals bull market is very much intact so understanding the exit means that you understand the reason for the entrance the reason for the entrance for me is quantitative easing uh debt and deficits and negative real interest rates if those three factors began to change that is to say if the canadian government and the u.s government stopped counterfeiting stopped printing species currency i'd begin to be concerned uh debt and deficits uh if the real gdp growth in either the united states or canada uh began to be substantially larger than the increase in the deficit uh then i'd begin to be concerned that we were actually amortizing the public debt and we could grow our way out of it with regards to real interest rates the 30-year mean real interest rate against the u.s 10-year treasury is 150 to 200 basis points positive you get that by adding the positive the pardon me the nominal yield to the cpi stated rate of inflation so right now i guess the nominal yields 175 basis points the trailing cpi rate of inflation's 160 basis points so if you saw the u.s 10-year treasury rather than yielding 175 basis points yielding 325 basis points you would start to see disintermediation from gold to the us 10-year treasury so because i bel because the the because the reason from my point of view for precious metals and precious metal stocks to rise are particularly those three factors if those three factors changed i would take my exit now characteristically i missed the end of a bull gold bull market the this sort of hockey stick graph maybe i know off top as some call it yeah i i'm usually out before that i'm not a good trader and the fact is i've noticed again in canadian parlance the back end of that hockey stick is just as steep as the front end a lot less fun so i tend not to do that but i've done pretty well understanding myself as an investor and staying within my own guidelines in industrial commodities it becomes a little different it really becomes a probabilistic that present value uh question let's say that oil is selling as it was six months ago for twenty dollars a barrel you need to establish what you think is a realistic price for oil given that the international energy agency says that the uh the industry requires between fifty and sixty dollars a barrel including cost of capital to produce a barrel of oil it would seem then to suggest that the price of oil should normalize around 55 or 60 dollars in uh constant dollars if you see a circumstance where the oil industry where oil selling at twenty dollars and the the shares are priced at twenty five or thirty dollar assumption you can be fairly certain that within two or three years the oil price is going to go up because if it doesn't your car won't start okay if you get to the point then where the oil price is say 60 a barrel then you do a probabilistic net present value you look at exxon you model the future cash flows at sixty dollars and based on that the enterprise value of exxon tells you whether it's cheap or it's not cheap if the enterprise value of exxon is 80 billion dollars and you think the probabilistic net present value is 120 billion dollars probably you stay in the game or else you don't remember too you're never going to get this right tom the idea is that you just establish uh parameters to operate in the idea is not to get it perfectly right the idea is just not to get away wrong excellent point there rick so as as we're kind of wrapping up here how do you go about you know finding this information maybe tell us a little bit about um the importance of speaking directly let's say with ceos and people around these companies um using resources such as yourself that that rates uh companies and and maybe gives you a bit of a bit of a better understanding to maybe something you didn't realize and also edgar and cedar um just kind of give us a an idea of where you go about finding this information rick well i'll let you in a little bit of secret sauce that i just got as an old man you know i started ranking portfolios at 67 and i learned that after many portfolio recommendations people would ask me about companies and i could look at the companies that they already owned and tell whether that person was particularly savvy and if i got you know 20 or 30 people out of a 20 000 person universe who had portfolios greater than the top decile or top quartile by the way i grade them all that way and they asked me about companies that i hadn't heard of uh or companies that i hadn't paid attention to boy i skedaddle over there and get to understand them i i have after more than 45 years in the business what used to be called a pretty good rolodex that is to say i know a lot of folks i'm in contact with a lot of folks uh and most of our conversations seem to revolve around extractive industry investments uh as opposed to anything else until very recently too i was an employee of sprott which is you know 200 investment professionals worldwide geologists engineers financial analysts all that kind of stuff and i had minute by minute access to sprott uh as a result as a retired person i have less access to that uh and so i'm having to rely although i have great relationships with all the people at sprott i don't have access to the proprietary data it's brought any longer but i have a pretty good proprietary database of my own excellent so rick uh just to just to mention it again uh tell us a little bit more about edgar and cedar well edgar and cedar are fantastic uh they are respectively the canadian and american securities industry databases where all of the information that the companies are required to file have to file it that is to say they're wonderful repositories before you and i went live i described my investment process 30 years ago which might be to take five years of quarterly reports take the staples out of them lay them on a very large conference table or much more commonly the floor and go month to month to month for six months all of that information is available it's cedar and edgar and you don't have to pull the staples out anymore you can look at changing ratios between general administrative expense to total expense with the click of a mouse now you can pull up five years proxy statements where the management told you what they hope to accomplish and why and look at what they did accomplish and why not the amount of information that's available in edgar and cedar if you pay attention to it is a treasure trove most people including i think most analysts don't pay attention to it and the fact that they don't means that they sort of unilaterally disarm in a knowledge war it's wonderful for those of us who care excellent rick well is there anything you think that i might have missed in my questions or uh anything that you uh would like to mention before we wrap up uh this was a fairly dense interview so there's lots more to talk about but we may have exhausted your audience by now i don't know how many more probabilistic net present values most people can stand uh you know when they have other things to do with a spring day uh what i would say is i've enjoyed the process of these interviews and i've enjoyed in particular uh talking to the palisades subscribers and listeners and for people who care to talk to me more the easiest way to do that is to go to a website sprottusa.com forward slash rankings enter your natural resource portfolio subject yourself to my rankings they're one to ten one being best ten being worst i'll comment on those companies where i think my comments might have value and i'll comment where i can depending on how many inbounds i'm getting a day on any questions that you might ask me once again sprottusa.com forward slash rankings excellent rick well we really really appreciate your time and and your views and uh you know sharing that that education um from uh from uh somebody with as much experience in this industry as as you have we really appreciate it great thank you for the opportunity thank you this podcast is for general informational purposes only nothing on this podcast should be taken as investment advice guests on this show are not compensated for their appearance listeners are urged to educate themselves and make their own decisions do not base any investment decisions on the information contained to view our full disclaimer please visit our website

Channel: Palisades Gold Radio

Views: 39,813

Rating: 4.9245877 out of 5

Keywords: Palisade Radio, Collin Kettell, buy, sell, invest, gold, silver, precious metals investment, QE, QE4, QE5, Stock, Market Crash, low, high, best, worst, trump, central, banks, freedom, bitcoin, blockchain, uranium, potash, expert, alpha, beta, fortune, billionaire, ounce, pound, mining, energy, independence, freefall, rise, fall, outlook, private placement, warrant, decline, increase, value, price, Monthly Report, Update, millionaire

Id: IyHTWrAWAo8

Length: 60min 29sec (3629 seconds)

Published: Mon Apr 05 2021