Speaking at PDAC, he delivered a frank assessment of the junior mining sector that was part critique and part roadmap for investors willing to look beyond conventional wisdom.
The Reality of Junior Exploration
Mr. Rule did not mince words about the state of junior mining. Out of roughly 3,000 public junior exploration companies, he estimates only 500 are worth buying. Most are dramatically overpriced, losing billions in good years and even more in bad ones.
“How much should you pay for something that’s worth nothing?” Rule asked the audience, highlighting the sector’s fundamental valuation challenges.
The key to successful mining investment, according to Rule, isn’t just about commodities or projects. It’s about people. He mentioned Pareto’s Law, also known as the “80/20 rule”, suggesting that 20% of professionals generate 80% of the value in mineral exploration.
More critically, within that top 20%, another 4% drive most of the meaningful work. Rule’s advice? Identify the top 1% performers, stick close to them, and write cheques.
Identifying Quality in a Noisy Market
Rule recommended investors look for:
- Management with relevant past success
- A VP of Exploration with experience in the same commodity, in similar geology
- A CFO that can raise the money needed for exploration
- A clear understanding of the project’s unanswered questions
- Realistic timelines for project development
“Tell me the most important unanswered question,” Rule suggested asking exploration companies. “Most can’t.”
Market Opportunities in an Overlooked Sector
Rule sees multiple investment angles emerging:
- Look for companies with resources headed toward Tier 1 deposits and out-of-favour commodities:
- He believes that a company with a resource headed towards a “world-class deposit” and a commodity that goes from “out of favor, to favor” could lead to a “10 or 20 bagger”.
- High-quality producers:
- Agnico Eagle was highlighted. Currently, it is a top-tier gold producer and selling at nine times its cash flow. He remarked that it has an excellent development pipeline and a solid balance sheet. The expectation is that the company’s cash flow will significantly increase over the next five years.
- Royalty and streaming companies:
- He also believes that royalty and streaming companies can be a valuable part of an investment portfolio. Over the past six years, millions of dollars were raised and deployed by royalty and streaming companies.
- For the companies with good royalties or streams, their value will either increase or they will be acquired by companies with lower capital costs. Investors would benefit in either scenario, even if incumbent management doesn’t.
- Single-asset producers are ripe for consolidation:
- “Major mining companies are desperate,” he noted. “Their exploration pipelines are empty, and they know it.”
One of Rule’s most pointed observations was about investor impatience. Most speculators can’t hold stocks through a long weekend, let alone the years required to fully develop an exploration project.
His advantage? At 72, five years doesn’t seem like a long time.
The Underlying Opportunity in Commodities
While Rule did not dive deep into macro trends, he suggested the broader commodities market is set for a significant move. The precious metals sector, in particular, shows promising signs with the XAU, an index of precious metal mining companies, up 50% in the last year.
Rule’s core message was simple: Be willing to act when others hesitate. Write checks for quality people in out-of-favor commodities. Look for projects with potential 10x or 20x returns.
“I’m here to write checks,” Rule stated plainly. “For good people, with clear plans, in commodities that have to go up.”
The Takeaway
The mining investment landscape isn’t for the faint of heart. Success requires deep research, patience, and a willingness to go against the crowd. Rule’s message was not about guaranteed returns, but about creating opportunities where others see only obstacles.
For investors willing to do the work, the current market might just be offering a rare window of opportunity.
