Rick Rule: A Look At Rick’s Formative Years and Optionality Explained – 1/22/14
In this interview, returning guest Rick Rule looks back at his early career to share how he developed into one of the world’s top speculators. Did you know that Rick Rule started his career as a bouncer in a Vancouver night club? This ultimately led him into the gold sector, where he benefited from the epic 1970s gold bull to become quite wealthy at a young age.
After confusing a bull market for brains, Rick explains that he lost much of his money and in 1982, Rick’s goal for the year was to get himself back to broke. He explains it as a wonderful lesson and a lesson that happened early in his career. While it was extremely unpleasant, it was probably the way that he became the determined contrarian he is today.
Rick states that there is no better way to emphasize the cyclicality of the natural resource space than to become very wealthy as a young man and then have all of the money and all the hubris taken away quickly and violently.
Next, Rick explains optionality of a gold asset. It is important to understand that if a period of time exists when the sales price of a commodity is substantially below the production cost, either the price of commodity will rise or the commodity will become unavailable.
The risks involved in commodity speculation is actually lower when the industries are in liquidation than when the industries are solvent. Rick has been able to buy assets based on the then current price of gold and enjoy what is in fact a free option on the gold price.
Further, Rick shares a school of thought that says if you believe in higher gold prices, then buy a lot of gold in the ground, and do absolutely nothing. When the gold price rises, sell that gold in the ground to someone who is going to beneficiate it.
Rick defines optionality as the arbitrage between what you have to pay for a deposit that is uneconomic at current prices, in a market where the commodity price changes. The outlook associated with the equity value changes substantially and those values can be truly spectacular.
Rick points out that part of optionality has to do with preserving the value of the deposit by preserving the cash in the treasury so that the company can stay alive without additional equity dilution. In considering such an optionality play, one must look at what the general and administrative costs are for the company. In a bad market, the only thing a management team can do to an optionality deposit, is make them worse.
Other suggestions from Rick? He believes water is the most mispriced asset in the United States. Investors who live in the South and Southwest would be advised to buy water stocks.
Rick Rule is Chairman of Sprott US Holdings, part of the $10 billion Sprott Group of companies. Rick began his resource-investing career in 1974, and founded Global Resource Investments in 1992. The firm is the only firm in the United States that is exclusively focused on natural resource investments.