.
Rick Rule's presentation at the New York Hard Assets Conference earlier this week sees some light for the informed junior resource investor despite current patterns which have mostly been Bad or Ugly!
Author: Lawrence Williams
Posted: Friday , 18 May 2012
NEW YORK (MINEWEB) - In a highly entertaining keynote address to the New York Hard Assets Investment Conference, Rick Rule of Global Resource Investments, now part of the Sprott Group, who professes to be a contrarian investor presented his views on resource investment in a financial meltdown - a very relevant speech in the current environment when so many resource stocks have been decimated.
He divided much of his talk into three categories - The Good, The Bad and the Ugly.
So as not to depress people too much at the start of his talk he examined The Good first and said there is much that is Good for the investor. Primarily he reckons the natural resource bull market remains intact despite the recent poor performance of the markets. There are very good fundamental reasons for this driven by a dramatic increase in living standards for the poor in the emerging market economies. As people become more free they become more rich - and the things they buy are made of ‘stuff', while in the West we are mostly buying what could be termed luxuries rather than ‘stuff'.
So as the bottom 2 billion people get more rich they buy more ‘stuff' which in turn increases demand - and given there was a lack of investment in resources in the previous era supply has had trouble keeping up with this demand and hence prices for the metals and materials which are in demand have been rising.
However that is seen as the only Good factor affecting the current markets. The rest is Bad or downright Ugly. Take Western World debt. In the U.S. alone the debt is around $80 TRILLION. This year the US is planning to save $500 billion. Knocking nine zeros off this figure equates to household with $80,000 of debt while the household is saving $500 a year to pay it off. Clearly silly figures.
"It gets worse" said Rule. The conditions precedent have not been addressed by the administration. The excesses have not been curtailed so the whole financial imbroglio is likely to occur again. We are getting no nearer a solution.
Liquidity though is high through Quantitative Easing - or 'counterfeiting' as Rule puts it, although not much of the money generated through QE is finding its way into the real economy. Indeed he quoted a friend at a financial institution saying that banks can borrow government money at 195 basis points on the one hand and then lend it to another government backed institution - Fannie May - at 575 basis points which to Rule makes no sense whatsoever. Banks would much rather do this than lend to anything which could have any degree of risk attached so it's not surprising the government handouts to banks are not filtering through to where it is needed most. Much of what went wrong in commodities in 2008 was a lack of credit in the interbank market so short term money to the commodities market was just not available. Is this going to happen again? Perhaps not but it is something that people need to be aware of.
.
And then on to the Ugly - particularly with respect to junior mining stocks. How low can the sector go?
.
Rule gave an example: In a very, very good year, the junior sector as a whole expends $2 billion more than it generates. In a bad year it's more like $8 billion. So as a sector the junior sector is valueless. So if you buy the sector it's going to be Ugly! However within the sector there are stocks which will, on the other hand, make you a lot of money. You need to do a lot of due diligence and have some luck to make money - the performance at the top of the sector can be spectacular.
"But it gets even worse" said Rule. Once every 10 to 15 years you have a junior market clearing event - it falls by 90%. At the end of this the sector becomes cheap and money is there to be made, but in the meantime 50% of the sector will need to raise finance - and they may not be able to in this kind of market. This makes them vulnerable to going out of business altogether.
He quoted a Bay Street (Toronto's equivalent of Wall Street) saying on activity in a bull market - "When the ducks quack, feed them". But in a bear market, when the good stocks are driven down with the bad he reckoned the corollary to the saying should be "When the quacks duck, eat ‘em"!
But with good stocks being driven down with the bad there are some tremendous buying opportunities in this kind of market. Companies with strong cash positions may be selling, for example, at a market cap well below this cash position. That's like buying a dollar for 50 cents!
Rule reckons the low prices means that there is going to be a huge amount of consolidation in the market, with the new buyers being largely from the industry itself. The majors are becoming cash rich with the institutions being forced to sell and the industry being a willing and able buyer having benefited from strong commodity prices.
Overall, Rule sees this as an excellent time for selective investment. To make money you have to buy low and sell high and this could be the time to do the former. Need to look for companies with strong cash position, an IRR of 25% or more, anticipated payback within three years and preferably with an NPV higher than the enterprise value (market cap plus net debt) plus the upfront capital cost.
He sees 60 or 70 takeovers looming in the next two years and considers now is the time to sow, while 2013-2014 the time to reap!
On gold he is bullish and feels that despite the current strength in the dollar which is adversely affecting the precious metal, the latter is "the most liquid lie in the world". In his lifetime the dollar has lost 95% of its value and he reckons it will lose another 95% in the next few generations, while gold remains a better store of wealth. He also sees some of the larger resource stocks attractive at current valuations.
0 comments:
Publicar un comentario