Billionaire Rick Rule On The Rules of Success in Materials Exploration

Rick Rule is Chairman of Sprott U.S. Holdings Inc. and a highly experienced investor and speculator focussing on public companies with a market capitalization below $1 billion. Sprott is a broker-dealer and investment firm specialized on the natural resource sectors employing more than 130 professionals and managing around $10 billion in resource investments. Sprott is the world’s largest investment house focused on small capitalization natural resource stocks. 

Why is Sprott so successfully attracting gigantic amounts of client’s funds to invest in the junior market even in this depressed state of the commodity market? Because they know that it is the junior exploration market that offers the greatest percentage gains – and not the already successful discovery stories and producing mines that are leveraged, almost exclusively, to the underlying commodity market price only.

I have stated in the past on many occasions that I do not cover and invest in senior mining companies, because these are more riskier investments in my eyes as being dominantly dependent on the market prices of their respective commodities. Real and vast shareholder value is generated by investing early-stage and is maximized by discoveries and developing them into mines. Once a production decision is made, I tend to close my positions by selling into that good news.

In a recent interview with Palisade Capital, Rick discussed his outlook for the junior market in 2014 – he believes that the bottom is behind us. In 12-24 months, Rick expects that we will be in the midst of a spectacular bull market in resources:

“Bear markets are the authors of bull markets. A market that is off 75% is a market that is 75% less risky. It is my belief that the bear market, that we were in, was ugly enough that the bull market’s response will be pretty spectacular, too. My suspicion is: what we have seen so far is simply a dead-cat bounce in the better issuers – they were so oversold that the absence of selling and some small amount of buying took them up fairly substantially. And that is indicative of what happens in a bear market bottom.”

So which are these “better issuers” that were so “oversold” and have formed a bottom being on the rise already?

Take a close look at Western Potash Corp.(TSE:WPX), an advanced-stage development company that more than doubled since December. Or take a look at Commerce Resources Corp. (CVE:CCE), an advanced-stage rare earth metals development company that rose 150% since December. Another company we have been following since late 2013 is Lakeland Resources Inc., a uranium exploration company active in the prolific Athabasca Basin in Canada that has increased its market value by 80% already and starting one of the larger drill programs in the basin soon.

With our many reports on these companies, and their specific commodity markets, we explained why we are certain that these commodities are set to rebound strongly now as it’s these markets that provide limited downside risk at the very moment – in contrast to precious metals, which markets are believed to be manipulated heavily and thus don‘t offer rock-bottom prices.

Zimtu is one of the very few vehicles on the TSX that supply shareholders uniquely with vast upside potential – no matter what commodity prices may do. Thus, Zimtu is advancing to a bull itself – free from any market state and time.

“All the flowers of all the tomorrows are in the seeds of today” (Indian Proverb)

As an investor and analyst, I am always thinking about tomorrows. However, being specialized in the junior exploration sector, it’s getting tougher and tougher every day.

On the one hand, new deposits are getting scarcer and scarcer, especially in safe jurisdictions. While digging deeper and deeper, grades are getting lower and lower. On the other hand, energy and construction costs are increasing every year, whereas raising money to develop a deposit into a mine, or even for grass-root exploration, is more and more difficult.
“When I was in university, a long time ago in the early 70s, we were talking in Economic Geology that about 1 in 3000 mineralized anomalies became a mine. So the typical Howe Street or Bay Street investment proposition is that you take a 1 in 3000 chance for a 10 to 1 return – that makes the lottery look like a very very very good deal.” (Rick Rule, Chairman of Sprott Inc.)

In light of all this, why would anyone in this world play this game of exploration? Because those few that indeed discover a mineable deposit make gigantic piles of fortunes – not only the finders but as well those who invest in them.

The magic question: How to be successful?

“Simply put, mineral exploration is a numbers game. Because the odds of success are so low, it makes sense to run through as many projects as possible to maximize one’s chances of hitting it big… The idea of the prospect generator business model is to advance as many projects as possible – to get as many tickets in the lottery, so to speak  – to maximize the odds of getting a discovery.” (Brien Lundin)

There exist dozens of prospect generators on the TSX that try to generate as many projects as possible and thereafter trying to find a partner who takes it over and advances it with a majority interest leaving the prospect generator with a carried minority stake. If only one out of 10 projects (or so) makes it, the business model of the prospect generator was a full success and its shareholders benefitted generously.

It’s all about quantity? No, but add quality and you succeed

Why are so many prospect generators a lame duck? Because they lack one distinctive feature: People – who bring you the quality not only once but on a regular basis. Such a company does not exist?

It does exist. And I have been getting involved with such a rare opportunity. The reasons for it are straight-forward:

• It is a prospect generator with a unique and proven business model.

• It is among the most overlooked stocks on the TSX Venture potentially becoming one of the most treasured.

• It has a market capitalization of $6 million only – although the value of its assets exceeds $8 million.

• It holds investments in more than 40 exploration

• It has exposure to a growing portfolio of early-stage opportunities.

• It provides investors with a healthy diversification of commodities, geography and people.

• Its management team has raised over $150 million in the last decade alone.

• It can gain access to financings at levels not generally available to the public.

• One of its core holdings has seen a turnaround in share price, increased its market cap from $57 million to $115 million since December 2013, and has more than $25 million cash in the bank.

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• Another of its core holdings more than doubled since December thanks to a breakthrough in metallurgy sitting on one of the world’s most promising rare earths deposits to be put into production, I have been arguing.

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