Q&A With Chris Lowe and Rick Rule – Part II

Chris: Rick, given where we are in the uranium cycle, what are you looking at now that is in an earlier part of the cycle? I know, especially the way you look at it, that it’s a cyclical business. But you tend to have that framework front and center.

So where would you be looking now if you wanted to make that easy money again?

Rick: Very broadly, I’m looking at four sectors.

The most attractive for investors, rather than speculators, is conventional, carbon-based energy.

If you love hate like I do, you’re looking at coal. Everybody hates it. But it’s really cheap. And the operating margins are the best I’ve ever seen in my life in the coal business.

For bigger business, look at oil and gas. If you don’t thrive on hate, if you’re content to be merely disliked as opposed to hated, look at oil and gas. This is the best investment quality theme that I know of in natural resources.

The big thinkers in the world – the World Economic Forum, Prime Minister Trudeau, President Biden, Greta Thunberg – would all have you believe that peak oil demand will occur in 2030. But they’re delusional. Peak oil demand will occur in 2065 or 2070.

The big thinkers would say that a net present value calculation ends in six years. Rational thinkers would say it ends in 40 or 45 years, which is a big difference.

Alternative energies are, of course, all the rage now. It’s worth noting that we have now invested $5 trillion in alternative energies, and we’ve reduced the market share from a high of 82% all the way down to 81%. A $5 trillion investment over 40 years has reduced the market share of fossil fuels by 1%.

Meanwhile, world demand for energy is growing by leaps and bounds. The urbanization of China, as an example, is being emulated, to a lesser degree, in places like India, Brazil, Indonesia, and Ethiopia. And this is causing amazing new demands for energy.

Just in electricity alone, a billion people on earth are still unserved with electricity. And 2 billion people on earth have access to only intermittent or unaffordable electricity.

Around the world, too, humankind has done a wonderful job in lifting the living standards of the poorest of the poor. When poor people get more money, which they’re doing rapidly, they want to live like we do. It’s a very energy-intense, very commodity-intense lifestyle.

Their mode of transportation may go from barefoot to tennis shoes… tennis shoes to a bicycle… bicycle to a motorcycle… and then to a Toyota Hilux. All of this means that demand for oil and gas will be much stronger for much longer than most people think.

Meanwhile, part of the oil industry is selling at a 50% discount to net present value. The oil industry, worldwide, is skimping about $1 billion a day on sustaining capital investments, which limits companies’ ability to produce two, three, or four years from now.

The game is to find high-quality oil and gas companies that are making sustaining capital investments and are still generating high enough current yields for shareholders. And there are scads of them.

You don’t have to come, as an investor, too far down the value chain. I would suggest that most people start at Exxon (XOM) – the largest, most liquid oil company on the planet. The best allocator of capital among oil companies on the planet.

A company that, rather than skipping on sustaining capital investments, just invested $60 billion in their domestic operations. Further, a company that made an 11-billion-barrel cumulative discovery in Guiana.

It’s an exploration discovery large enough that it could move the needle on Exxon. Exxon is generating so much free cash that they can increase, rather than maintain their production.

At the same time, they have said that they’re going to increase returns to shareholders – either through dividends, buybacks, or both – by 14% this coming year.

Chris: Wow.

Rick: I think it’s a no-brainer.

Chris: What would you be recommending in terms of a coal stock?

Rick: On the coal play, you can go a couple of ways.

You can go for the focused coal producers – either the Australians or the big American ones – which are less efficient.

My own particular favorite coal play is more of a hybrid play, and it exposes you to political risk. That’s Glencore – the cheapest diversified miner in the world.

Admittedly, it’s in the news for very bad reasons, allegedly acquiring concessions in various parts of the world with sub rosa payments to sitting politicians.

You face ongoing political risk, but when everybody else in the world was running from coal, Glencore was running to it. Their average acquisition cost for producing coal assets, by the way, their immediate reserve life in the acquired assets is 30 years and has been 1.5 times annual free cash flow.

Certainly, Glencore is for people with an appetite for risk. But I’m not sure people need to take on risk. I think for most people, the return on capital employed that they will enjoy in Exxon over the next five years is such that they can sleep nights and stay calm.

For me, I want to be in the coal space. For people who have lives… people who want to read books, look after grandchildren, go fishing, stuff like that… buy Exxon.

If you want to take a bit more risk, the most undervalued part of the hydrocarbon business that I know, other than coal, is North American natural gas.

In the U.S., our oil production is increasing so much that the byproduct gas production is exceeding our ability to gather it, transport it, and sell it. We’re investing like mad. But right now, the gas prices are unduly depressed as a consequence of that.

The price of energy through natural gas in West Texas is about $2.50 per million British thermal units – or BTU. That same gas, liquified and delivered in Rotterdam or Tokyo, sells for $8 or $9, and it costs $1 to get it from West Texas to Rotterdam.

The arbitrage between the European gas price and the American gas price is astonishing. And it is subject to tens of billions of dollars.

Again, the opportunity is so big that you don’t need to come down into the smaller names. You don’t need to seek alpha because the beta is mind-boggling.

Beta names include Devon Energy (DVN) for West Texas and Oklahoma… or Equitable (EQH) for the U.S. Northeast. Both have spectacular five-year outcomes and pay very high current dividends.

For investors who want to take a little more political risk, go north of the border to Canada where the Prime Minister is actively hostile to the oil and gas business.

The poor moron suggests that there isn’t a business case for Canadian natural gas even though the biggest customers in the world are begging him for it.

I hope that at the next election, the Canadians thank and excuse their Premier, and allow him to pursue some higher calling. But even if he doesn’t, the Canadian oil and gas industry is thriving despite the country’s political leadership.

Names there include ARC Resources – the finest-run mid-cap oil and gas company on the planet. Tourmaline is another very high-quality company. Freehold Royalty, ironically, has such low production costs that they’re less leveraged.

In the natural gas world up there, I would suggest both Peyto and Birchcliff Energy. Very high-quality names with lots of upside and spectacular dividend payers.

The first thing that I would suggest – in terms of stocks that are unusually depressed because of hatred – would be in the energy sector.

The next ideas I have are a little less current and probably not as good for investors. These are probably more for speculators.

The nickel price on a global basis has fallen by 50% in 12 months. What was three years ago an investment darling is now an investment pariah.

But as I said at the beginning of the interview, I love hate. I thrive on hate, and people have come to hate nickel.

The price decline has occurred for two reasons. One, an incredible proliferation of nickel mines – specifically laterites – in the Philippines and Indonesia.

No one would accuse me of being a bleeding heart environmentalist… But I just flew over the nickel mines in southern Sulawesi. The environmental devastation is mind-boggling and will not be able to continue. Or, at least, it will not expand. The disposal of waste at sea is poisoning tens of kilometers, and, I believe, will not continue.

The second reason for the nickel price decline has been that our friends, the Russians, need money. I watched this before, in 1990 and 1991 – the last time Russia was broke. They sell everything in the country that they can to generate cash.

One thing they had a lot of – and have a lot of still – is nickel. I suspect that in 18 months, the Russians will have no more goods to pawn in the nickel business, and so that selling pressure will come off.

But further to that theme, the Russians have also been selling platinum and palladium like mad – which has generated precipitous price declines.

The narrative around platinum and palladium has been soft. The big thinkers of the world tell investors that the internal combustion engine is going the way of a dodo. Platinum and palladium are used for auto catalysts, which is to say they reduce emissions from internal combustion engines.

If you believe that all the poor people in Malawi are going to drive Teslas, then you probably shouldn’t buy platinum or palladium. If, however, you believe that five years from now, when you go to your garage and turn the key to the right, that your internal combustion engine is going to start, you need to look at platinum and palladium.

In particular, I would suggest that you look at the physical stuff. I would, of course, prefer that you express that interest through the Sprott Physical Platinum and Palladium Trust (SPPP). I’m a shareholder and the manager.

Or you might look for platinum and palladium suppliers that aren’t domiciled in South Africa, Zimbabwe, or Russia. In other words, you limit political risk. What that means is that you have to take advanced exploration risk in places like Canada or Brazil, which I am actively doing as we speak.

The fourth asset class that attracts me is precious metals. The gold price has done reasonably well in the last 24 years.

It’s interesting, your readers might say to me, "Well, when’s gold going to move?" Well, in 2000, gold was $256 an ounce. It’s now $2,000. It’s moved by 8%, compounded over 24 years… an entirely respectable performance. But I expect, on the gold side, that that performance to accelerate as a consequence of negative real interest rates. I don’t mean post-CPI – that’s the Consumer Price Index… I mean real inflation rates, and debt and deficits.

If I’m right, the better quality gold stocks relative to the price of gold are the cheapest that they’ve been in my 50-year career.

If you want to add on as a speculator – the overlay of hate – the most hated asset class in precious metals is the silver stocks. Hated because they had such a run during the silver squeeze, that internet-inspired speculative frenzy. There’s nobody who hates anything quite so much as a lover jilted. The youngsters in particular who got involved in the silver squeeze now believe silver to be a four-letter word.

It isn’t. Silver generally lags gold in a bull market. If the gold bull market continues, then at some point, silver will move further and faster than gold. I suspect it will be 2025 or 2026.

In my experience, the higher-quality silver companies have such a low combined market capitalization that when the broad investor buys into the silver narrative, there isn’t enough market capitalization in the silo to hold the money.

When you and I first got to know each other – perhaps a little before – we were involved in the silver market. About 1990 to 1996. Some illustrations of the upside would be Silver Standard – now SSR Mining (SSRM) – which ran from $0.72 to $45… or Pan-American Silver (PAAS), which ran from $0.50 To $45.

For people who can stomach volatility and real risk, and have some patience, if they, like me, love hate, the silver stocks are an extraordinary speculative play in the precious metal space.

Chris: Rick, would you think that the Prime Junior Silver Miners ETF (SILJ) would be a simple way of doing that? I know there are probably better ways of doing it.

Rick: If you would’ve asked me that five years ago – despite the fact that Sprott is a sponsor of ETFs – I would’ve said no.

I would’ve said that it’s inelegant because in the ETF they’re constructed around market capitalization and liquidity. You buy too many low-quality names relative to the number of high-quality names that you get.

What I’ve learned over the last five years is that most investors are too lazy to separate the wheat from the chaff.

Also, trying to outperform via alpha – a market that could give 300% to 500% returns on the beta – means that for people who want to participate in the strategy that I’ve outlined, without taking undue alpha risk and without having to do any work whatsoever, should look to the ETFs.

While I consider them to be inelegant, I consider them to be inelegant for somebody like me, who works 60 hours a week in retirement. For mortals, the idea that they play a theme that could easily have a 300% upside with the simple expedient of buying the ETF has some attraction to me.

Chris: Well, Rick, that is a lot of great insight and a lot of great recommendations. I think we’ll leave it there because there’s just so much in that, I’m going to have to parse it out myself and think about it all. I’m sure a lot of the viewers will too.

I’d love to get you back on in six months or so and check it out. We’ll also have the link for your ranking service. Then anyone who joins Rule Media can get to go to those symposiums and learn more online.

It’s fantastic, as always, to listen to you on this subject.

Rick: Yeah, the pitch is simple. Go to my website (right here) and list your natural resource stocks. Please, no crypto, no tech stocks, no pot stocks. Leave an old guy to do what he does well.

There’s no obligation to this. I’ll rank your holdings from 1 to 10. I’ll comment on individual issues where I think my comments might have value. There will be a question and comment section there.

If, by the way, any of your readers are uncomfortable with their current banking relationships, I’m starting a new bank.

If you care about my new bank… and you want to get paid high interest rates, even on your checking… if you want to save in currencies outside the U.S. dollar… or if you have physical gold and silver in segregated storage and you’d like a credit facility against your physical gold and silver… in the comment section on my website, write “bank,” and we’ll put you on the list for Battle Bank.

Chris: Rick, thank you so much. I’m looking forward, already, to that next conversation. Thanks again.

Rick: Always a pleasure, Chris. It’s wonderful talking to you.

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