Rick Rule on Gold, Silver & Why Junior Mining Stocks Have Languished

Posted by Rick Rule via The Daily Bell

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Rick Rule is certainly one of the savviest gold and silver investors around and thus it is quite interesting to get such a deeply informed take on the markets.


Daily Bell: Junior mining stocks have been lacerated. What’s going on?

Rick Rule: They are getting what they had coming to them. These junior miners acted like small governments for many years. They spent way more than they took in and they over-promised and under-delivered. If you merged every public junior mining company in the world into one company –Junior ExploreCo – that company would lose in a very good year $2 billion. And when I say lose I mean it would spend more on G&A and exploration than it generated by way of property sales, product sales or takeovers. In a bad year it would lose $8 billion. So if you look at the industry as a whole, an industry which year after year loses between $2 billion and $8 billion, you’re stuck with how to value it. Do you value it at 5x losses, 10x losses? What’s the correct price loss ratio? You get my point.

All of the performance in the secondaries is contained in the top 5 percent of the companies and the trick really is stock selection. If you buy the sector from your broker, he or she will live up to that name and you will get broker and broker and broker.

It is my belief right now that the market is beginning to bifurcate, which is an extremely important thing. The bottom 60, 70 or 80 percent of the companies on the TXSV are lurching inevitably toward intrinsic value, which is zero. The top of the exchange, however, is going to be driven by three things: reasonable valuations (notice I didn’t say cheap because I don’t think the market is cheap in the first instance), secondly M&A because of the insatiable need for high quality projects by intermediate and large producers, and third – and this is the most important and also the least well understood thing – discovery.

I think that after ten years of capitalizing the junior exploration sector extravagantly and enabling their better people who spend more and more money in stranger and stranger countries we are on the cusp of a real discovery cycle. You will note, as an example, that it was the funding cycle of the 1970s that lead to the Nevada gold discovery cycle of the 1980s. It takes ten years. Make no mistake, this market, as dismal as some people think this market has been, is still a market that rewards discoveries extravagantly. Witness Gold Quest, 6 cents to $1.16. What is Vor Minerals, .30 cents to $3.80. Africa Oil, .80 cents to $10. These are not dismal market moves.

Part of the reason that the market has been so dismal is because it deserves to be dismal, given the performance of the sector. But when you give this market an excuse to respond it responds in spades and I believe that we are on the cusp of a real discovery cycle as a consequence of having fed cash into the discovery industry for ten years.

….read a deeper explanation and areas to be invested in HERE (take care to read the After Thoughts section at the end of the interview)