Exclusive Interviews
Rick Rule on the Value of Mining Companies, the Future of Precious Metals and the Necessity for Contrarian Investing
By Anthony Wile - October 11, 2009

Introduction: Rick Rule began his career in the securities business in 1974, and has been principally involved in natural resource security investments ever since. He is a leading investor specializing in mining, energy, water, forest products and agriculture. A popular public speaker, Mr. Rule is a featured presenter at investment conferences and resource investment forums throughout the world. His firm provides unique insight into the workings of the natural resource marketplace. Global Resource Investments provides investment advice and brokerage service to individuals, corporations, and institutions worldwide. Rick Rule has originated and/or participated in several hundred transactions over the past 30 years, including both debt and equity in private, pre-public and public companies. These private placement activities have involved companies on six continents.

Daily Bell: Thanks for spending time with us.

Rick Rule: It's a pleasure and I enjoy the publication.

Daily Bell: Give us a little bit of background. Why were you attracted to the natural resource sector?

Rick Rule: I am not really sure, I grew up in California, my family had some background in oil and gas and some background in agriculture, so I suspect I was drawn to it by osmosis but at any rate I came up here to the University of British Columbia which is also a very resource-centric economy and have been in it all my life.

Daily Bell: When did you go out on your own and why?

Rick Rule: I had a varied career in the natural resources business and decided to go out on my own in 1992. I would say principally, and this might sound odd, to defend my clients from the brokerage industry as a whole. I had worked in various larger capacities in the brokerage industry and was never impressed with the ethics of the industry and decided I needed control of my own brokerage firm to protect my employees and my customers from the industry itself.

Daily Bell: Are you happy with the way things have gone for Global Resources?

Rick Rule: I suspect we could have grown more quickly than we did. We made the decision to hire engineers and geologists and make them into stock-brokers rather than hiring stock brokers and try to give them a technical background. Hiring scientific people gave us access to employees who looked at the fact that there is an empirical truth rather than attempt to tell stories. If I had a criticism of Global Resources as a business it would be that we haven't been able to attract enough qualified individuals, which would have enabled faster growth. But I am very comfortable with our client base and very comfortable with our employee base and our people think it is a nice place to work and people like us managing their money, which means we meet the critical tests.

Daily Bell: You have a focus on junior mining stocks. Are you investing in them currently?

Rick Rule: I would not describe our focus as junior mining. I would describe our focus as much more broadly based in natural resources and free markets letters, like your own, have got us in their sights because we have done a lot of work with junior gold stocks but in fact we are interested in agriculture, alternative energy, the whole panoply. My own believe is that the junior mining stock market is substantially ahead of itself, higher priced than the valuations that we would ascribe to much of the underlying equities. So we have been more involved in selling rather than buying for the last three or four months. We have a long term focus on the industry as it has treated us very well and we will be, in some fashion, involved in the industry certainly untill I am dead.

Daily Bell: When did you re-enter the resource industry?

Rick Rule: The question goes to the fact that to be charitable, this has been a tumultuous industry recently and a lot of people have been shaken out during the last year. We began to be pretty serious buyers in November and December of 2008, in retrospect not serious enough given the bounce back that the industry has enjoyed, but there were companies that we would have liked to have been invested in two years ago but couldn't because of price and we were able to establish meaningful positions in some of those shares in November and December when many people, to quote a phrase, "were down for the count".

I would say that we made a meaningful re-entry into the sector, which assumes we were gone but we weren't, and we increased positions dramatically in November and December of 2008. Not meaningfully enough, by the way, if you look at the rebound the sector has enjoyed since then.

Daily Bell: What is your criteria?

Rick Rule: VALUE!! In a very high risk, very high reward business, most of our competition chases reward. We try to manage risk. It is our belief that, in high risk and high reward businesses, if you mange risk the reward will take care of itself. So the first thing we look at is value. If a company has a 50 million dollar market capitalization, what's the underlying value that makes it worth 50 million dollars? The fact that the stock gets lucky and goes higher isn't enough. We look for intrinsic value. The second thing we look for, on par with the first criteria just mentioned, are the people involved – management. You previously interviewed Ross Beaty, he is as good a person as you can find in this market and an example of the kind of quality management we look for.

In fact, Global Resource Investments has been financing Ross Beaty for 25 years. So, I would define the metrics of our success as being attraction to value, attraction to top quality people and attraction to companies that are trying to do something significant enough that a success will matter – and that means being in the right sector at the right time in the business cycle. Many people attempt to find small mines that, with a little luck, occasionally succeed. But a small mine will never make you big money, though it does expose you to big, and often unnecessary, risk. We are looking for companies that are attempting to do something meaningful, for companies that have value and are run by people who have been successful in the same type of business endeavor previously.

Daily Bell: How about strategy?

Rick Rule: The important thing about strategy is that natural resource based business are extremely cyclical and they extremely volatile. What that means is that the only strategy that works over time is a contrarian strategy, albeit anchored in logic. It is my belief that in the natural resource based businesses that you are either a contrarian or you are a victim.

When all of your competition is terrified to be in the market, valuations are very cheap and you need to be very aggressive. You must have strong convictions in your philosophy and application thereof. When everybody collectively is feeling very smart and the sector is going to the moon, it is time to reduce your exposure and grab cash for the down cycle. Once again, sticking to your convictions based on logic… not emotion. So I would say my strategy is simple… you are a contrarian or you are a victim. You choose to think and employ human action, or you don't.

Daily Bell: Is gold lagging in your estimation?

Rick Rule: No. I think gold is performing very well. It has been so long since we have had a real gold bull market that, in the broader investment community, the luster has been off gold for some period of time. Those of us who come to the market from a free market point of view have never lost our focus on gold. We have often lacked understanding of how it is that the rest of the world didn't give a damn about our fascination with gold. We listen too much to ourselves, once again paying attention to our own convictions, meanwhile big investment banks and the big structured funds have paid little to no attention. I think that's changing. I think you are seeing more and more of the larger financial institutions coming to the point of view that the big store of value, the U.S. dollar, doesn't store value very well. I think you are seeing increasing attention being paid in circles outside of our own in the gold business.

Daily Bell: How about silver?

Rick Rule: Silver has always been a fascination for me but I can't claim to understand the silver market. Silver bugs are like gold bugs on steroids. They are really truly manic-depressive types. Trading against the whim of the silver bug has treated me extremely well over time. It is a very difficult market to understand. In the first instance, you can't understand supply easily as most silver is mined as a byproduct of mining gold or base metals, so the silver price is less an important determinant of silver supply than base metals prices are. On the demand side, much of the silver that is owned is owned as a store of wealth in India. Trying to understand the intention of silver buyers involves a lot more, as an example, such as understanding crop cycles in India, economic cycles in India and the sort of desires of the Indian peasantry. It is a market that has mystified a lot people for a very long time, myself included.

Daily Bell: Why haven't juniors done better?

Rick Rule: I think Juniors have done extraordinarily well. One needs to look at the broad junior market and understand that as a market in the collective, it is non viable. The junior mining industry consumes three or four billion dollars in capital a year. Chews it up, spits it out and takes the money to "money heaven." The money that's made in the juniors is made in about 5% of the juniors meaning that 95% of the juniors are valueless.

The fact that people keep investing money in the junior mining sector, which is for all reasonable economic points of view ‘valueless', means that the junior mining sector has done extremely well in some respects. Speculators need to be much more judicious in the junior mining sector than they have been. If you have kept your speculations tailored towards very good groups in the junior mining sector – then you have likely done very well indeed. If there was an index to buy that specialized in junior mining stocks, that index would have collapsed due to its valueless nature every five years or so over the last twenty.

Daily Bell: Will juniors start to break away and move up quickly?

Rick Rule: The sector is doomed because 95% of the sector has no value. I don't think I can be more clear than that. I think the sector as a whole is toxic. I think speculators need to pick and choose among the 2000 issues that are for want of a better phrase Dross, and select from a group that maybe consists of 150 issues. The rest are paper business plans with little to no investment merit.

Daily Bell: Can you explain why gold and silver are money metals and not, first of all, merely commodities?

Rick Rule: I don't know if I can explain that as well as one of my favorite free-market commentators, Doug Casey. He famously cites Aristotle in terms of describing why gold is well suited to money and why it has always been well suited to money. It has value in and of itself, it is divisible, and it is durable. There are a lot of reasons why gold and silver are well suited. Importantly for me it's an asset that isn't simultaneously someone else's liability. A dollar bill conveys upon me the right to draw, at least on faith, but it is someone else's liability. If you have an ounce of gold, nobody owes you anything, you have it; it's physically there. And it can't be debased. Those are all very important reasons.

But maybe, more importantly, gold and silver act as money because they ARE money. Over time, in civilizations that were varied both by geography and by time, gold and silver have functioned as money, on every continent – and they continue to do so to this very day. We are probably at a place in time, at least in modern history, where we have the least amount of market share by way of gold and silver as currency. But my suspicion is that will change. I think people will be tired of being short-changed by the collective. Maybe not in five years, maybe not in ten years, but I don't see people accepting as medium of exchange a bank note over time, considering it's an asset that's simultaneously somebody else's liability. I am less comfortable accepting them.

Daily Bell: Are these money metals manipulated by the larger monetary elite?

Rick Rule: I don't think so. Particularly when the gold and silver prices were going down, people from the free market community couldn't understand why the broad market didn't accept their genius. There were some suspicions among people that the gold market was being manipulated lower. In the first instance, I don't know why some elite would have manipulated it lower when it was going that way all by itself. Why struggle hard to do something that was occurring naturally. The second thing is, even being around Vancouver for 35 years and watching some manipulations fairly closely, manipulations don't last. These conspiracies are only as strong as their weakest link, which is often very weak indeed. The idea that there is some vast elite that could manipulate the price of gold when they can't deliver the mail or educate children strikes me as being somewhat farcical, particularly doing it over time. So, I am not particularly concerned about manipulations by the elite. I certainly think that the US Treasury manipulates many markets in the very short term but not over a long period of time.

Daily Bell: You do some public speaking. What do you emphasize most in your talks?

Rick Rule: I like to do educational speaking. I have found that I usually like the customers. I usually like the money more than the issuers. I enjoy helping people understand the way markets work and, for example, the differences between speculation and investment. I enjoy working with people who are willing to enjoy receiving the message that they have to be contrarians and buy things when they are unpopular and sell things when they are popular. Increasingly, I enjoy speaking to groups of younger people, hopefully saving them the same types of lessons that I had to learn the hard way, in ways other than by listening.

Daily Bell: What countries are most hospitable to mining today?

Rick Rule: Chile is probably the most hospitable from my point of view. Chile understands the mining business and why it is important to the country. They have regulations in Chile that simultaneously protect the environment and are workable. And, interestingly, unlike other countries enforcement of laws is by negotiation. There are not many laws in Chile but they are enforced vigorously. So, I would say that Chile is my favorite country for mining. Australia is also a good country for mining. What you have to look for is a country with a mining culture and an economy that is still dependant on extractive industries. The United States has a strong extractive culture but extractive industries are not important to the overall economy. If you killed mining in the state of California, it wouldn't matter because it's not as big as the ceiling fan industry. So, mining needs to be important or extractive industries have to be part of the economic culture.

Daily Bell: What are some of the most important silver mining companies – large and small?

Rick Rule: Certainly Pan American Silver is a fine and large emerging silver company. I would say it shares the local limelight with Silver Standard, which is also a spectacular company and an emerging producer with a couple of very large silver projects. The largest pure silver mining company in the world is Penoles, a very large Mexican mining conglomerate. Then you come down a notch to the Hecla and Coeur d'Alene, two of the world's second tier producers, but I don't have much interest in them. Personally, I have never understood the allure of the small miner. The small mine exposes me to all the risk, but none of the reward, that is inherent in larger mining companies. So in my mind I am interested in the companies that have attained enough scale that, if they really succeed, they have enough upside to compensate me for the risk I take for going along for the ride with them.

Daily Bell: What do you think of the current economic crisis? Are Western countries handling it well?

Rick Rule: I think Western countries are feeding the crisis. The crisis, from my point of view, came about because societies are living beyond their means. People spent too much and were too speculative. They simply borrowed too much. As a consequence we have a credit liquidity crisis. The government's answer seems to be to make credit more available so that an over incumbent society can borrow more. It seems obvious that people didn't have good personal balance sheets yet they were spending money that they didn't have and for some reason the government seems is content to keep on encouraging them to consume even more. And people's attitude towards their investments over time has become more and more speculative and yet the government still seems to be trying to create more liquidity so the people can speculate EVEN MORE. I am tempted to say that the government seems to be asking you to solve a rum hangover by consuming vodka. It seems to me that what needs to happen is that at every level of society we need to repair our balance sheets and we need to think about living within our means. That of course is a very unpopular message politically, and for most people realistically. As an example, telling a 55-year old auto worker that he or she isn't worth $70 per hour when a 22-year old auto worker elsewhere is willing to do the same job for two hours, is not a popular message. But it is a message that has to be delivered nonetheless.

Daily Bell: Do you believe in the bailouts taking place in America?

Rick Rule: NO, I think the bailouts are ineffective. First of all the idea to repair a broken balance sheet by piling more debt on top of more debt doesn't make a lot of sense. I also have a real problem with the false sense of moral hazard. When you encourage institutions to take excessive risk, of course, they will do it. There are people who would say, for an example, that we had to give those bankers huge bonuses because they would leave. Well if a guy lost me 188 billion dollars, I would be willing to let him leave. I don't understand why I would have to pay an individual a bonus for that type of performance. The same thing goes for the institutions. Had Citicorp been allowed to fail there would have been two or three months of massive economic dislocation and then the Citicorp branches and their deposits would have been reallocated. It would likely be very uncomfortable for people for some period of time. But remember, there is already a strong level in the United States of federal political interference in the banking system by way of guaranteeing deposits. I personally would prefer no federal involvement. I personally would prefer no deposit insurance so that investors were taught that they had to look after themselves, accept personal responsibility, and monitor their own risks.

Daily Bell: Can you explain the genesis of the financial crisis? How can it be solved?

Rick Rule: The genesis of the financial crisis is federal government interference in markets. The idea that something as inherently risky as investing could be made riskless is a lie. A socially mandated lie is still a lie. The distortions we have in the market as a consequence of federal regulation cause us to perpetuate a lie and also to favor certain types of economic activities over others – irrespective of what the market would consider to be functional. A federal prescription for harmful action, speculation, leverage, too big to fail, etc., is the equivalent of believing in the tooth fairy as a remedy for a cavity – yet the tooth fairy and the candy apple sales clerk wear seem to be the same person, just switching uniforms to suit their respective roles. So the U.S. Congress decided to conjure them up, a series of tooth fairies. Greenspan, Bernanke, Geithner are all just differently disguised tooth fairies. They are all selling candy apples, thus messengers of lies.

Daily Bell: What do you consider the best investments to make throughout the business cycle and do you think they change over time?

Rick Rule: They definitely change over time. What happens is that an investment that performs well causes people to understand the reasons for its performance. And the very performance of the investment validates the thesis and thus becomes a self-reinforcing prophecy to the point whereby people pay for a story that has already proven itself. They bid it up to a level that can't be sustained. My personal experience tells me that to be successful I need to disciple myself to be a contrarian and to do fewer transactions. I concentrate my efforts on people who had proven themselves to me in the past.

Daily Bell: On behalf of all the readers we thank you for sharing your views with us and for your important work.

Rick Rule: Thank you for publishing The Daily Bell.

After Thoughts

We're very partial to Rick Rule, but that's probably because we agree with much of what he says, and generally in his economic writings and thought. He also comes across as a genuinely pleasant and thoughtful person.

However, unlike Rick Rule, we do believe markets are manipulated and that these manipulations can be profound (the US plunge protection team comes to mind). But certainly much of what Rule has to say is well-reasoned, free-market oriented and from our point of view sensible in the extreme.

We might have a slight difference of opinion with his statement that people "spending too much" and societies "living beyond their means" were the proximate cause of the current mess. In fact, from our point of view (and we don't think Rule would disagree overmuch with this) the issue of over-spending is a SYMPTOM. The cause, of course, is government interference in the market. Especially central banking itself, the over-printing of money that fools businesses and individuals into thinking the economy is much better and more promising than it is.

Another reason, in our estimation, that people spend too much is because in a fiat money economy it is actually SENSIBLE to spend as much as you have and more. A fiat economy is based on debt, and people feel this intrinsically. They know if they wait long enough there will be another boom, another inflation, another episode in which money center banks will seem to be giving away money. And they will receive some of it.

Such episodes, people hope, will tend to wipe out whatever profligacy took place – though the trouble comes when fiat (and its destructive behaviors) bumps up against fiscal realities, every 30 years or so apparently. We're in that spot now, which is why consumers are again being blamed for spending too much. But is it really the fault of the poor consumer! If he or she sits on his money, it will certainly be gobbled up by taxes and inflation. Most people in the Western world, and especially in America realize this. So it is often spend, spend, spend.

It is hard to save and scrimp when one is daily exposed to reports of central banks printing TRILLIONS and pumping much of that money into firms which seemingly helped cause the problems in the first place. This is an invitation to societal corruption, as we have written in the past. Cultures cannot long survive when the evidence is overwhelming and no longer hidden that the elite is corrupt. The Internet has created just this sort of situation, in our opinion. In this situation, "spending too much" is likely something of a defensive tactic, as self-destructive as it may prove during downturns, especially deep ones. But people may feel they have no other choice if they want to get ahead and provide for their families.

Posted in Exclusive Interviews