Rule
Source: “Junior Venture Exchange Needs Cleansing” says Rick Rule of Sprott Global Resource Investments. Small Cap Power
Q: The Canadian junior market and the resource juniors continue to struggle as investors shy away from them despite the TSX and Dow Jones trading at very good levels. When do you see the junior markets starting to perform again?
A: That’s a very tricky question. I have to give a nuanced answer. Most of the companies on the TSX V, Venture exchange, are worth nothing. They have no net present value. And we need to have a cleansing on the exchange. We need to have a period like, ’91, ‘92 and ‘93 where dozens of companies got delisted every month. We need for the bottom half of the exchange at least to go to its intrinsic value, which is zero. So we are going to feel like we’re in a bear market in the TSXV for probably 18 months. What that will disguise is that the best 10 percent of the companies on the TSX V have probably already bottomed. The market is going to start to bifurcate and the bifurcation will be those companies that can raise enough money to continue to add value and those companies that can’t. You’re starting to see a plethora of financing of companies doing nickel deals and raising $300,000. The ability that that company has to employ the $300,000, to add value and exploration, is nil. These guys are raising money to pay for working capital deficits and salaries with no hope of generating any benefit to shareholders. So we need to wash this irrational activity out of the market. What you are going to see in 2013 is that some of the better market participants, some of the people who understand the nature of exploration and are good at stock picking, are going to have absolutely stellar performance years. My own performance in the period 1998, 1999, 2000, 2001, 2002, that is the last truly ugly bear market that we saw in resources, was absolutely superb. The old vets are going to do very, very, very well in 2013 ‘cause they can separate the wheat from the chaff. And as I say, my suspicion is that the best 10 percent of this market has already bottomed and is going to head up from low levels. This is going to occur for three reasons. One, we are starting from a cheap base. Some of the better companies that are listed on the exchange are down by 90 percent from their 2010 highs. So they’re simply oversold. They will come back because the sellers are exhausted and the buyers will dominate. The second reason is in the oil and gas and mining space between them there are probably 50 companies that will be taken over by larger companies. There will be consolidation, and this consolidation will add both cash and hope in the system. There will also be amalgamation that is horizontal amalgamations where three or four companies merge, reduce their combined G&A by 75 percent and become viable rather than non-viable entities. But the third thing that’s going to happen that people aren’t counting on right now is that because we have funded exploration very well for 10 years and because that’s what it takes, we’re coming into a discovery cycle. We talk about the fact that this market hasn’t performed but the industry hasn’t given the market very many reasons to perform. There hasn’t been very many discoveries. If you look at 2012, which was a dismal market from anybody’s point of view, and you look at companies like Reservoir Minerals, 26 cents to $3; Gold Quest, 6 cents to $2; Africa Oil, 80 cents to $10; you will see that the market performs when the industry gives it an excuse to perform. And as a consequence of having spent 10 years in the exploration cycle and being well-funded from 2003 to 2013, the industry is, I believe, on the cusp of a discovery cycle that will really, truly surprise people. So from my point of view, while 2013 and part of 2014 will feel dismal to market participants as a whole who don’t know how to segregate between the good, the bad and the ugly-- the part of the market that matters, the best 10 percent of the juniors, has already bottomed and are going to be heading up. And some of the upside move in some of the companies that make discoveries will be as explosive as the moves that we’ve just talked about, tenfold or fifteen fold. What could be really, really, really pleasant is participating in 2013 in private placements, with some of the better issuers, that have to issue full warrants to attract capital. And then experiencing the fifteen bagger that comes from exploration success, not only with the underlying stock but with the full warrant. Because that turns a fifteen bagger into a twenty-five bagger and that’s the thing that people will experience, the same way they experienced it in 2003 and 2004.
Q: Great. In today’s environment, when you are looking for new investment opportunities in resource companies what do you look for before putting money in?
A: People. You want people who have been successful or serially successful and you want them to have been successful at an activity that’s very similar to the activity that they’re undertaking for you. It’s not enough that somebody has been successful in mining. We said many times that somebody who comes to you and says that he’s a good mining man because he operated a gold mine in archean terrain in French-speaking Quebec is going to be successful exploring for copper in tertiary volcanics, young rock, in Spanish-speaking Peru. The exploration process is different, the production process, archean terrains are different than tertiary volcanics. And certainly there are cultural difference between French-speaking Quebec and Spanish-speaking Peru. You need to back people who are engaged in activities that they have specific success relating to. That’s important...
thanks rick….