At the PDAC 2024 conference, Rick Rule, an investor with decades of experience in the resource sector, shared his insights during the Investment Leaders Forum.
Mr. Rule, the President & CEO of Rule Investment Media and a notable figure in the mining investment industry, provided a comprehensive overview of his investment philosophy, portfolio additions for 2024, and his outlook on the resource market.
Market Outlook and Investment Philosophy
Rick Rule opened his presentation by addressing the current state of the commodity markets, which he believes are significantly underpriced due to a sense of pessimism among investors and geopolitical tensions affecting global markets. “In today’s climate, the current stock prices of commodity companies are underpriced,” Rule stated, “Too many people think the world is ending or we are heading into a recession and this negatively impacts commodity prices.”
He emphasized the opportunity to acquire “best-in-class” companies at discounted prices. “In today’s climate, the current stock prices of commodity companies are underpriced,” Rule stated, highlighting the market’s failure to recognize the inherent value in these firms.
Despite having filled his portfolio with these top-tier stocks since 2022, Rule maintains a significant cash reserve. He equates gold to cash, suggesting it as a hedge against market volatility.
“Having gold makes me sleep well at night,” he remarked, pointing out the dual benefits of liquidity and safety in a volatile market.
This approach is informed by his observation of the market’s historical volatility, where significant downturns have occurred at least three times in the past 50 years, each seeing a market decrease of over 50%.
[Editor’s note: From peak to trough, the S&P 500 declined almost 50% during the 1973-1974 stock market crash; the NASDAQ composite index declined approximately 78% and the S&P 500 declined about 49% during the Dot-com Bubble from 2000-2002; and the S&P 500 declined 50% during the 2007-2009 Financial Crisis.]
He remains an optimist about the market’s potential, “I am an optimist and believe we can survive either moron, either Biden or Trump, whoever gets elected in November,” showcasing his confidence in the market’s resilience. He is also building a bank in the US, called Battle Bank. The bank is waiting on final regulatory approvals but believes it should be running by this year.
Investment Recommendations
Rule’s investment recommendations for 2024 focus on sectors he believes are poised for growth:
- Oil & Gas:
- He identified this sector as particularly undervalued, with companies generating substantial cash flow and offering attractive dividends.
- He challenges the notion of peak oil demand, advocating for investments in both conventional and Canadian oil and gas companies, and underscores his contrarian investment philosophy.
- With $5 trillion of recent investments in Alternative Energy projects only increasing the percentage of global power generation from Alternative Energy from 18% to 19%, he believes Oil & Gas will be with us for a while.
- In the US, he likes Exxon Mobil (NYSE: XOM) or Devon Energy (NYSE: DVN).
- In Canada, he likes ARC Resources (TSX: ARX), Freehold Royalties (TSX: FRU), Peyto Exploration (TSX: PEY), and Birchcliff Energy (TSX: BIR); some are paying 5%-9% in dividends.
- Uranium:
- Having capitalized on the uranium price surge from $20 to $60 a pound, Rule has scaled back his investments in junior companies but remains bullish on the sector’s fundamentals.
- Gold:
- Rule expressed a strong conviction in gold stocks, noting a significant disconnect between gold prices and the valuation of gold stocks, a disparity he hasn’t observed since the 1970s.
- He argues for the potential of gold prices to escalate far beyond current levels, driven by quantitative easing, debt and deficits, and real inflation rates.
- “If gold starts to run higher than $2,000, there is nothing stopping it from actually going from $3000 to $7000 per ounce or higher,” Rule predicts.
- He still you should own gold stocks because they are “currently hated” but explained that gold stocks deserve to be cheap. From 2000 to 2010, the price of gold increased sevenfold, but the Free Cash Flow from gold companies declined and Junior Mining companies fared even worse. In comparison, during the same period, Big Tech companies made a lot of money.
- His focus is on individual companies, not the whole sector. “If you buy the sector, you go broke. If you buy good individual companies, you get rich,” he stated. He focuses his investment on people who have been successful in the past, such as Robert Quartermain, Ross Beaty, Frank Giustra, and Robert Friedland.
- Target companies with Tier One deposits:
- He is focusing on companies with “Big”, Tier 1 deposits with $10 billion or more of recoverable resources.
- He is commodity agnostic but is focusing on Rare Earths, nickel, silver, platinum, and palladium.
- For social and geo-political issues, he believes that the supply chain can be challenged at any point in time so companies need to find and develop new deposits.
- Invest in Good Companies After Bad News:
- He “loves” investing in good companies after they have bad news.
- One recent example was Franco-Nevada Corporation (TSX: FNV). When there were problems with First Quantum Minerals‘ (TSX: FM) Cobre Panama mine, Franco-Nevada‘s stock price declined 42%, even though the royalties it owns on the Cobra Panama mine are only approximately 15% of its Net Asset Value (NAV). So he was buying Franco-Nevada.
- Exploration Stocks:
- He believes that exploration stocks are riskier but they are also wealth creators.
- However, you need a basket of exploration stocks for diversification to spread the risk.
- He has been aggressively in private placements for the past 12 to 14 months. Good companies can always raise money and warrants help to get investors.
- He looks for companies and projects with five years of track record and wants to see 75% of the capital going into the ground.
Investment Principles
In concluding his presentation, Rick Rule shared several key principles that guide his investment decisions:
- Buy Quality:
- Focus on investing in high-quality companies.
- Maintain Liquidity:
- Keep sufficient liquidity to capitalize on market opportunities.
- Seek Out-of-Favor Stocks:
- The potential of out-of-favor stocks to offer substantial returns as out-of-favor stocks are cheap.
- Mining is a capital-intensive, cyclical industry so look for the stuff that has to go up, not the stuff that has already gone up.
- Invest in Experienced Management:
- Investing in companies led by experienced and successful management teams.
- Look for people that have done it before, those that are serially successful.
- Diversify with Exploration Projects:
- While riskier, exploration stocks can be significant wealth creators.
- Look for good exploration projects with private placements and warrants.
- Have a broad portfolio of exploration projects to reduce risk in any one company.
- Diligent Portfolio Management:
- Limit your portfolio to a manageable number of companies to allow for thorough research and monitoring each month.
- Investors should “spend 1 hour per month on every company in your portfolio,” advocating for a focused approach rather than spreading attention too thinly across too many investments.
Final Thoughts
Rick Rule’s session at the PDAC 2024 conference offered valuable insights into resource sector investments, blending his seasoned wisdom with a clear strategy for navigating the current market landscape.
His bullish outlook, underpinned by a strategic approach to investment in undervalued sectors, provides a blueprint for investors looking to capitalize on the opportunities in the commodity markets.
Rule’s insights into the importance of quality, liquidity, and the potential of gold as a safe haven underscore a thoughtful investment approach that balances optimism with caution.
PHOTO 1: Rick Rule at the PDAC 2024 Conference
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