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Having seen a few bear markets during his three decades as a resource investor, Rick Rule, founder and chairman of Sprott Global Resource Investments, offered some words of reassurance to would-be investors who are wary of the sector after the drubbing it has taken over the past two to three years.
“Bear markets are the author of bull markets,” Rule said at the Vancouver Resource Investment conference on Jan. 19-20, explaining that he’s optimistic about the industry precisely because of the rout. However, he stopped short of declaring that the sector has seen a bottom.
“The only thing that stands between me and saying that we have bottomed and are headed up in the market has been that there is as of yet no incidence of total market capitulation – that’s where a market collapses – or issuer capitulation, where there is the widespread rush to market to fund ongoing concerns that existed as an example in July and August of 2000, which was of course the bottom of that market.” While there is financing out there, issuers are still demanding too high a price for their securities, Rule says — something that he believes will change this year.
Companies will soon realize that they must finance, even at their current low share prices and the dilution that entails in order to move their projects forward, Rule reasoned, or risk their shares going to zero.
However, Rule noted that it will not feel like the market has bottomed this year, because the market has bifurcated and only a minority of companies will participate in the recovery.
“The recovery, from my point of view, will be limited to the 20% or 25% of the best issuers in the sector,” he said, adding that 60-70% of issuers will “continue to slide to their intrinsic value, which is zero.”
The better companies have already started to exhibit a strong uptrend over the last three months, Rule said, albeit from very low bases.
Admittedly, investing in commodities, mining and exploration is not for everyone – only for those investors who understand and accept the cyclical and volatile nature of resource investing.
“There are really, really, really violent cycles in this business and not understanding these cycles and not taking advantage of these cycles consigns the participants to failure. It really is that simple,” he said.
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