At the end of the second day of the 2018 Sprott Natural Resource Symposium, Rick Rule shared his thoughts regarding the mood and happenings of the conference as well as his outlook for the mining sector for the next 6 to 24 months. As with all Rick Rule interviews, it was content-dense and packed with Rick’s trademark insightful wisdom and sage advice for mining investors. Below is the portion of our conversation where Rick shares his thoughts on what to expect of Mergers and Acquisitions in the mining space over the next two years. The full transcript can be accessed HERE or listened to HERE.
Bill: Robert Friedland said in the last session that he expects a lot of M&A (mergers and acquisitions) activity in the next 18 months. We’ve seen some M&A activity in the last four to six weeks. What are your thoughts about what’s occurring and its significance?
Rick: Robert is exactly right, first of all. And so far, the M&A that we’re seeing has been fairly rational, fairly logical, and fairly strategic, unlike last decade where a lot of the M&A was idiotic, just for size. The truth is that right now the mining industry as a whole is behaving rationally. For too long in the past, investors looked at mining company shares as leveraged options on commodity prices. Now, oddly, of course, the most inefficient companies are the most leveraged to commodity prices. So, for 40 years, we asked mining companies to be marginal and they complied. The upshot of that was, of course, the idiotic mergers that we saw in the last decade. A lot of those managers were thanked and excused, allowed to pursue other employment opportunities and the management teams that have reflected them so far have been very sober. Mining businesses are starting to emphasize return on capital employed, efficient allocation of capital, all the things that you’re supposed to do in a business. And I think that the mergers and acquisitions that you’re gonna see for at least the next two years are gonna be ones that benefit, of course, the sellers because they’re gonna get a premium, but they’re gonna benefit the buyers too. You’re gonna get the double bump. Now, I’m sure, ultimately, when mining returns to favor, that stupidity will return to mergers and acquisitions, but I think we’re gonna get a wonderful holiday for two years and I think it’s gonna be really profitable for people who know how to play the game.
Bill: There was recently Anaconda Mining’s attempted hostile takeover of Maritime Resources which I found actually quite entertaining. Do you have any thoughts on that?
Rick: I think more amalgamations need to take place in the junior space. And I think the discussion that you’re talking about is educational in many senses. Often times, mergers fail simply because the team that has the potential to be acquired understands that their salaries go to salary heaven. And, many times…and I’m not suggesting that this is the case in this circumstance. I’m also not suggesting that it isn’t. Many times, what you see that prevents amalgamation is a management team that cares far more about their salary and emolument than they do about the shareholders’ well-being. We need many, many, many more juniors to amalgamate. I mean, what we need more than anything else in this space is less general administrative expense relative to field expenditures and relative to capital employed. So, we need a whole bunch of mergers which, sadly, we’re unlikely to see.
Bill: Rick, a proverb I consider a long-learned truth that’s conveyed concisely and you are the king, in my opinion, of resource investor proverbs, also known as Rick Rule-isms, for the second half of 2018, what would be the last and most significant Rick Rule-ism you’d like to leave with my listeners?
Rick: Well, I think one that I’ve used many times, “In this business, if you aren’t a contrarian, you’re going to be a victim.” This business is extraordinarily cyclical. We learned, as an example, in 2015 when everybody was in despair, that the cure for low prices was truly low prices and we had a spectacular run in 2016. Out of the ashes. Nobody saw it coming, myself included. In 2016, when it got good, it became very good and people, of course, carried their enthusiasm to an illogical conclusion. And the consequence of that is that, of course, 2017 was bad. What’s the lesson? Low prices are the cure for low prices. High prices are the cure for high prices. And if you’re not a contrarian, you’re gonna be a victim.