My Chat With Rick Rule: The Best Mind in the Business Today
I recently had the good fortune of speaking with my close friend, Rick Rule – Chairman of Sprott Asset Management USA – in Las Vegas.
For those of you who aren’t familiar with Rick, he’s one of the sharpest and most successful investors in the natural resource sector. And he’s likely responsible for creating more wealth for individuals in the sector than anyone else in the world.
My goal was to learn a little more about his investing philosophy and find out which sector he believes is the most promising going forward.
Since Rick was kind enough to allow me to share our conversation with Wall Street Daily, I thought I’d post that interview today instead of my usual column.
Check it out below to see Rick’s take on uranium, gold and natural gas…
Rick: I espouse a very simple philosophy. I like to buy valuable assets when others are selling because of fear or ignorance. As the saying goes, “Buy straw hats in the winter.”
Karim: So, you’re a value investor?
Rick: For the most part. But I also like to speculate. Of course, I understand that not all speculations will pay off. So I look for speculations that will return many times what I might “lose” to compensate for the ones that don’t pay off.
Karim: What types of returns are you talking about?
Rick: The ones that pay off return 10 to 100 times the original investment. When uranium shares were soaring a few years back, it wasn’t unusual to see those types of returns.
Karim: Speaking of uranium, what’s your take on that sector?
Rick: Uranium is cheap right now. It costs more to get new uranium out of the ground than it’s selling for. That’s an anomaly that won’t last very long.
Right now people are fearful about the aftershocks of the Fukushima crisis. Yet, what they’re not considering is that places like Japan – that have no energy natural resources to speak of – will have little choice but to restart their nuclear operation if they want to satisfy their mandate of energy independence.
You hear about places like Germany wanting to shut down nuclear operations. What you don’t hear is that they’re investing in nuclear operations in places like Poland to generate the electricity to satisfy their demand. There are more nuclear plants under construction today than in the past three decades. They’re going to be buying uranium.
Karim: Interesting. What about the mining sector, gold and silver miners. It seems that the major miners are moving back up following a massive correction in 2011 and 2012. What about the junior miners? They don’t seem to be faring quite as well.
Rick: There’s a major opportunity building in the junior space. These companies, which were trading at lofty valuations in 2009 and 2010, have come crashing down. They’re hurting.
More than half of the companies in the space are cash starved [with] less than six months of working capital on hand. This presents some serious opportunity. But investors are famous for ignoring cheap assets and, instead, bidding up those sectors where money isn’t needed. In 2009, these junior resource ventures were turning away cash… Now they can’t find it!
Karim: One last question. What’s your view on natural gas? It’s been pummeled over the past year and fears of oversupply are keeping a lid on prices. Is it going to stay this way for the foreseeable future?
Rick: Natural gas prices are another anomaly today. It costs close to $4 per million cubic feet (mcf) to get the gas out of the ground, yet it’s selling for less than $3 per mcf. That situation will not last for very long. Companies will begin to shut down operations and many will walk away.
Just look back at the last decade. When copper prices fell to almost $0.50 per pound in 2002, no one wanted to touch it. Companies were spending twice that much to get it out of the ground. Fast-forward to today and copper prices are closer to $4 per pound in just a decade.
Sometimes investors lose perspective of how much it costs to produce something. Natural gas, like copper, is in a cycle right now. And when that turns, the price will move much higher – because it has to.
Karim: Thank you for your insights, Rick.
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Ahead of the tape,