By Tekoa Da Silva, May 15, 2015
Rick Rule, Chairman of Sprott US Holdings, sat down with Tekoa Da Silva to discuss his early experience investing in natural resources.
What lessons did he learn from those early days? What are some of the principles for investing in individual companies, not just commodities as a whole?
In this talk, Rick discusses entering the sector during the bull market of the 1970’s and how he endured the subsequent catastrophic collapse of the sector, leaving him deeply in debt and unable to repay in the early 1980’s.
Yet he did not resort to declaring bankruptcy. “I managed over the course of 3.5 or 4 years to pay back everybody,” he says, which earned him the trust of some of his former creditors, who “became the foundation of both [his] reputation and success.”
TD: Hi. I’m Tekoa Da Silva with Sprott Global Resource Investments and I’m sitting down here again today with Rick Rule, Chairman of Sprott US Holdings. Rick, good to see you again.
RR: Thanks for the opportunity Tekoa.
TD: I want to ask you a little bit about your experience being a stock broker, a money manager and what that has meant to you throughout your career. The first question I want to ask is, “Do you remember your first client?”
RR: Well, I’ve had several different incarnations in the finance business which means I’ve had several different first clients. There are certainly 10 or 20 early clients depending on which incarnation that you want to talk about that were very memorable people and interestingly, they share a lot of attributes. They were people who were attracted to me in that incarnation as a consequence of the experience with me in an earlier incarnation. In other words, in addition to being attracted to the resource sector, in one way, shape or form, they knew enough about me to be attracted to the way I think and the way I act.
TD: Do you remember your first big ‘win’?
RR: Yes, yes, very well. My first big win in the natural resource businesses came in the early 1970s and the truth is, Tekoa, and I’m embarrassed to say this, there was so much money to be made in the sector when the oil price ran from $3 a barrel to $301 a barrel and where the gold price ran from $352 an ounce to $8503 an ounce that I made the young man’s mistake of equating a bull-market with brains. In fact the successes came fast and furious for me in the 70s and while I’m delighted to say that I made some good decisions that contributed to my own success, the truth is in retrospect that I was accidentally in the right place at the right time.
TD: Could I ask you a little bit more about that in terms of your first big win?
RR: Well, one of the real instrumental wins in my life was being involved in the predecessor to what became Glamis Gold in a private business. Now, the things that speak well for me in that transaction were that I came to understand very early in 1975 the impact that cyanide leaching on oxidized gold deposits would have in the Western United States.
In other words, even as a young man, I understood the improvements that would accrue as a consequence of that technology and the money that could be made. The second good thing I did was identify two clearly-superior human beings; one, Adolf Lundin, who I knew about from the oil and gas business and the other, Chester Miller, who I had just met. The conjunction of Chester Miller and Adolf Lundin gave us a combination of business and technical skills to employ this technology on a grand scale and that success which was, I think, my second mining endeavor made me, and investors who were associated with me, a tremendous amount of money. That’s the good news.
The bad news is that as a consequence of that success, I thought, well, that I understood the mining business and that it was a fairly easy game. I later learned that wasn’t the case but I certainly remember that success and I remember it with some fondness because, in addition to the fact that the gold price went up, in that success, as a consequence of my ability to identify the value of process and my identification to good people, I had something to do with my success. There were other successes that were purely price-related.
TD: Is the concept there Rick that applying a new technology to what would otherwise be a marginal deposit would allow its NPV to expand?
RR: Yes, absolutely. That isn’t the only way you can make money in resources. There’s a truism in exploration that says you make money employing old technology in new places or new technology in old places, but you don’t make money applying old technology in old places because that assumes that you are smarter than all your predecessors, which is highly unlikely.
So we’ve seen very recently that a conjunction of three new technologies — at least three — three-dimensional seismic, measurement while drilling, multistage fracturing, that sort of thing, has unlocked all kinds of oil and gas wealth in the most over-drilled strata on the face of the earth, the United States. That’s new technology in an old place.
We have also seen recently as a firm, three years ago as an example, that you can make money applying old technology in new places. We followed the Lundin family into the East African rift sedimentary basins that are frontier to be sure but were identified 40 years ago.
The application of old technology in new places — having the guts to go to new places — also generated a lot of wealth and that’s analogous to the impact of cyanide leaching on oxidized ores that we talked about as being the genesis of the success that we had in Glamis Gold.
TD: Rick, do you remember your first big loss?
RR: No. I remember my first period of catastrophic losses. We’ve talked before about how markets work, that bull markets are the authors of bear markets and bear markets are the authors of bull markets.
The truth is that the decade of the 1970’s was extraordinarily good to me. I was a young man that worked very hard but I was in the right place at the right time. Commodities were on the ascent and I was in the commodities business.
As a consequence of never being hurt before, I was extremely aggressive and the fact that I was extremely aggressive made me a very good salesman. I confused the bull market with brains and I was able to convince others to do the same.
I also drank the Kool-Aid myself. One of the things that happens is that bull markets, like bear markets, are self-fulfilling prophecies and the whole narrative in the 1970’s was that the 1970’s was going to go on further which was a very convenient paradigm for me to assume.
They didn’t. In 1982, in oil and gas parlance, I took a $30-a-barrel pro forma into an $18-a-barrel world and that was extremely unpleasant. Having been an extraordinarily wealthy young man through some part of the decade of the 70’s, in 1982 or 1983 I guess, woke up to discover that my net worth, my total net worth was sub-zero.
That’s a combination of declining equity prices and debt, a mistake that I haven’t made in the past. So I certainly don’t remember my first individual loss but I remember as clearly as I can see you today the processes that led to my first catastrophic loss, which was a group of many losses.
TD: Is that usually the point, Rick, where many would-be great investors or entrepreneurs give up?
RR: I don’t know if that’s the case. It takes unique fortitude, or perhaps in my case stupidity, to work through a period like I worked through. I know for a fact that many of my competitors, having discovered that they had a negative net worth, declared bankruptcy, went broke, and failed to pay back their debts.
I didn’t do that. I managed over the course of 3.5 or 4 years to pay back everybody – principal, interest and, I’m sad to say, taxes. But the consequence of that was in the first instance, I felt better about myself. I didn’t agree to take on those loans if it was convenient. I agreed to take on those loans and in the second instance, the people who watched me persevere and who were the beneficiaries of the fact that I paid them off stuck with me in business for the next 20 years and became the foundation of both my reputation and success.
One of the jokes that I have now with younger people in our firm like you is that my role in the firm is to trade scar tissue for fees. I’ve been able to collect a lot of fees because I have a lot of scar tissue.
TD: Rick, do you remember why you got into the business?
RR: I’ve always been fascinated with the extractive industries. I grew up in California when it was a much different place than it is today. Oil and gas were an important part of the California economy. Agriculture and water, which still fascinate me, were important parts of the California economy and I grew up in a little tiny place called Almaden in South San Jose that happened to be the host of the largest mercury deposit in the United States. So I had mining right in my backyard.
The whole consequence of exploration, which, for a young man, equated to a treasure hunt, was fascinating to me and the science of geology was and is endlessly fascinating. I began to become academically — if that’s the right phrase — or intellectually interested in both the scientific process of exploration for oil and gas and mining, and the concept of risk and risk-adjusted net present value as a very young man, which probably explains or probably describes me as a very boring young guy. There probably should have been a whole bunch of other things I was interested in. But I wasn’t. I knew from a very early age that natural resources and in particular natural resource finance were what I was interested in.
TD: As a final question Rick, why are you still in the business today?
RR: I’m one of these lucky guys, Tekoa. I have so much fun doing this that if you describe work as something that you have to do to sustain your life, I’ve never worked a day in my life. My wife would tell you that my life is what I do to sustain my work. I get up every day. I can’t wait to be here. I joke that I would do this for free if it didn’t pay so well. That’s not, strictly speaking, true. I like to get paid, if for no other reason than as a measurement metric. But this is an endlessly fascinating business.
The other thing, Tekoa, for right now, this is a really, really cyclical business. As I have said many times before, bear markets are the authors of bull markets and we are in an epic bear market with the TSX-V (the Toronto Venture Exchange where many mineral exploration companies trade) off 83 percent.4 If somebody thinks that I am going to cash out in 2015 — in other words my epitaph is ‘the contrarian who sold out at the bottom,’ they got another thing coming.
TD: Rick Rule, Chairman of Sprott US Holdings. Thanks for sharing your comments with us.
For questions or comments regarding this article, or on identifying high-quality precious metals mining companies, you can reach the author, Tekoa Da Silva, by phone 800-477-7853 FREE or email firstname.lastname@example.org.