Printer Friendly

A conversation with Doug Casey and Rick Rule, Part III
May 7, 2004

I literally just got off the plane from London a few hours ago where I spoke at a gold conference for European institutional investors. Apart from the opportunity to meet new people and hear the latest buzz, these conferences are incredibly valuable, and not just for me, but potentially for you too. It is uncanny how well you can predict short-term risks and opportunities just by listening to how bullish most of the speakers are, how many people show up for the conference and what kind of questions they ask.

The Vancouver conference in January this year was brimming with exuberance and the Prospectors and Developers Association Conference in Toronto was just over-the-top crazy. Both these events were clear signs that the market was frothy. In contrast, the mood at Calgary was far more somber and the London conference this week was almost as dreary as the worst conference I recall in 1999.

Over and above the fact that you can get an immense insight into the psychology of the market at these events, which, by the way, is an excellent reason why you should consider attending at least two or three of them every year, you can also get to spend time with guys like Rick Rule, Doug Casey, Bob Bishop and others. I go to ten or more investment conferences a year and in addition to giving a speech I almost always host a workshop, in which I discuss whatever questions are asked. It’s a great way to get your own questions answered and to find out what’s on other peoples’ minds.

Next month I’ll be in New York, St. Johns and Vancouver; if at all possible you should consider attending at least one of these conferences if you’re serious about investing in the metals, mining and exploration sectors. Look at the sidebar for details, and I hope to see you at one soon.

We left off last week after Rick Rule mentioned that his portfolio includes large-cap, very liquid, senior producers, and the riskier exploration stocks. Comments in brackets were added when I edited the article.

Paul: “I understand why you’re buying the big stocks: for insurance. And if it’s for insurance, and you end up losing money on these stocks, you can justify the loss as a premium payment. But am I to understand from your comments that you are still an active buyer of prospect generators (exploration companies)?”

Rick: “I’m attempting to be an active buyer. If you recall, in 1998, 1999 and 2000, we were, if not the only buyers, certainly among the only buyers of junior stocks. We had to compete for a couple of years with the smart money, which was tough. Now we have to compete with dumb money, which I attempt not to do. I am attempting to speculate on the prospect generators (exploration companies that generate projects and find joint venture partners to explore them). Fortunately I can compete in that sector better than most because, since it’s a fairly rational economic activity, it doesn’t generate as much competition as the other, less rational, exploration models, which are looked at with much more favor on the street. The street, as I would define it in Vancouver or Toronto, seems to prefer a drill-hole speculation, where they are hoping to get a ten for one return with a one-in-three thousand chance of success. The fact that people are that bad at math has always astonished me. I hope, for my sake, that people continue to flunk third grade math with the regularity that they have done in the past, and that they leave the rational exploration activity, which is prospect generation and wealth creation, to me.”

Paul: “From your initial comments on the gold market (last week’s column), it seems that you believe we may be heading into a bear market. For as long as I have known you, you’ve never bought and sold stocks based on economic projections of metal prices. You have however, consistently, and with great success, looked at the valuation of companies relative to their assets. So let’s go back to your attempt to be a buyer in the junior exploration sector, what are you seeing out there?”

Rick: “We are… in crazy times (recall, this conversation took place almost a month ago). A good indicator would be the Prospectors and Developers Association Conference, the granddaddy of all mining conferences. In the 1999 and 2000 conferences I was the only guy walking around with a checkbook; at least I was the only solvent guy walking around with a checkbook. I was the only guy who was willing to write a check and had the cash. As a consequence, those conferences were an extraordinarily productive time for me. The sort of normal four-day average would be twelve or fourteen transactions, which was really, really extraordinary. The last Prospectors and Developers Conference where, by the way, there were about twelve thousand attendees, I wasn’t able to write a check at all.

“I have a very high willingness to write a check now, I just don’t normally have a willingness to write checks on the terms and conditions the industry is currently offering so called opportunities.”

Paul: “And if you’re not a buyer, then you are, to some extent, a seller.”

Rick: “Certainly: the two partnerships that I manage, that attract most of my attention in this sector, have been strong net sellers.”

Paul: “Doug, you seem to have indicated that you are a net buyer. Is there anything that Rick has said that would make you reconsider your position as a net buyer? How do you sum up Rick’s positions in the market?”

Doug: “Well, you can’t argue with success, and Rick has been as successful as anybody could be in this market. Those partnerships he refers to have returned about ten for one since they were started, and that’s only about three years ago. So you can’t argue with that.

“I just think that this market is going to last longer, and go higher than anything we’ve ever seen. The character of the market has changed from being as black and gloomy as it could possibly be three years ago, but I don’t see it being as wild and crazy as Rick does. The character has changed an awful lot, that’s true, but I remember a number of cycles since gold was freed in 1971. There were so many times in the past when the average piece of junk in the market was selling for five, or ten dollars, with many, many stocks selling for twenty, thirty, forty or fifty dollars. And subsequently most of them went right back to where they came from, which is to say, pennies. And we’re just not there yet.

“There are exceptions, but most of the companies out there that have good assets, potentially big assets, albeit that some are uneconomic, have a typical market-cap right now only between, say twenty million and one hundred and fifty million Canadian dollars on the top end. And there is something else to remember: in past markets when these market-caps were several hundred millions, the dollar was actually worth something. So, no, I’m still a buyer. I may be wrong but I’m going to be consistent, and be a consistent buyer.”

If nothing else, I hope this interview, and my own articles, illustrate how three different investors, with different paradigms and methodologies, approach this market. In fairness I also have to add that, as I mentioned earlier, I have known Doug for more than twenty years and Rick for almost ten, six of which I worked for him. So my own investment paradigm is, in a way, a combination of both Doug’s and Rick’s. I have a lot of respect for both of them and attribute much of my own success to their help and guidance. All three of us will be in Vancouver next month, and Rick and I will also be in New York.

Paul van Eeden

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website (www.paulvaneeden.com) or contact his publisher at (800) 528-0559 or (602) 252-4477.

Disclaimer

This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.