Hard Asset Digest July 2020

Rick Rule: Mike, in fact, I did… although I didn't foresee the pandemic itself.

What I thought we would see is – as a consequence of debt and deficit, but more particularly as a consequence of the unwinding of 10 years of economic recovery – that we might see a 2008-style liquidity squeeze unrelated to a pandemic.

I suspect that the pandemic was at once the catalyst but more importantly the excuse for the fiscal response that we've seen. I think for the government, it was a heaven sent chance to increase restrictions and controls and also justify $3 trillion in quantitative easing.

Remember, if you or I did “quantitative easing,” it would be called counterfeiting.

So no, I didn't personally expect the circumstance of the COVID-19 virus and the economic shutdown that it entailed. The policy response doesn't surprise me at all – although I thought it would have a different genesis.

RR: I am not a market analyst, so I'm not going to make a prediction about the direction of general equities markets.

I certainly agree with your statement, Mike, that there is an amazing disconnect between the performance of Main Street – which is tepid and would be more tepid were it not for artificial liquidity and artificially low interest rates – and Wall Street.

And I think that the explanation for that is two-fold: The first is that the Fed has moved directly into the market, and, rather than merely providing counterfeit specie and artificially low interest rates, has actually been manipulating financial markets, debt markets, muni markets, junk markets, and equity markets — all higher.

There's an old adage on Wall Street which suggests that you don't fight the Fed. But the Fed never before, at least publicly, has been a direct buyer of asset classes.

So financial markets have been pushed higher by an unholy triumvirate of direct Fed purchases, quantitative easing – which is to say, unprecedented stimulus – and artificially low interest rates.

The difference between Wall Street and Main Street is explainable — but it is certainly broad. And while I won't speculate on the duration of the recovery on Wall Street, what I will say is that my suspicion is that recoveries that are based on fairly flimsy premises often end in tears.

It's my own belief that we experienced 10 years of economic recovery – both on Wall Street and Main Street – that were less oriented to increases in private wealth around the world and less a consequence of an increase in productivity and much more a consequence of artificial liquidity and the stimulus of artificially low interest rates.

And I believe that those excesses probably need to be unwound before the market is truly healthy as opposed to merely up.

RR: 2020 has been a dreamworld for Sprott. I would describe most of the year as… not too hot, not too cold, just right — a Goldilocks year!

Our physical products have been enjoying an absolutely barnburner year with very large inflows of AUM (Assets Under Management) into the physical market.

The gold equity markets were restrained in the early part of the year. And mercifully – now being 67 years of age going through some 40-odd market years – I knew that the gold equities market always lags the gold market and that a stronger gold equities market would follow.

That realization is in Sprott's DNA – and we were able to buy gold stocks while they were lagging gold in the first half of the year, and the consequence is that the last two months have been spectacular.

What’s different this time is that, normally, the gold stocks follow a fairly normal progression with the best-of-the-best moving first — which they did. And then going down the quality trail and the juniors lagging for a very long time.

The last two or three months in the juniors – at least in terms of the well-promoted ones, the high-profile ones – the performance has been absolutely scorching.

And I would say with regards to the real penny dreadfuls – the sub-$50, $60 million market-cap space – that that sector has gone from undervalued to overvalued in the last two or three months.

I think it's overheated personally.

RR: Mike, in terms of the mining industry's response to the pandemic, I think, by and large, it's been excellent.

I point by way of example to Ivanhoe Mines with 4,000 workers on-site in close quarters working underground on the gigantic Kamoa-Kakula deposit (pictured below) — an area where infrastructure and healthcare is primitive at best. But implementing such extraordinary safety procedures that they've had zero cases; this is in a frontier market.

Ivanhoe Mines’ gigantic Kamoa-Kakula deposit, Democratic Republic of Congo.

The response that the industry has had in terms of safety protocol in remote locations where people are forced to live together in close quarters, like the Canadian Arctic, has been wonderful.

I think what it shows is that there are technical solutions to the COVID-19 virus, probably not political solutions, but rather common sense technical solutions. And I think the industry has done a very good job on balance addressing those.

With regards to the financing market, I think we're coming into silly season! It's absolutely white hot! Companies go out to raise $7 million and come back with $11 million — coming back oversubscribed and actually turning down money.

We participated the other day in the Bellevue Gold financing. Bellevue is an Australian junior that's made an interesting discovery in Western Australia. If my understanding is correct, they went out to raise $100 million, came back with $120 million, and the demand was only 60% satisfied — which is to say they could easily have raised $200 million.

So for deserving projects – and frankly even some undeserving projects where the people are known and trusted or where the people have good promotional acumen, particularly retail promotional acumen on social media – the financing window is wide open.

RR: I was focused on the juniors. In fact, I'm selling those juniors now that I regard as mistakes in my portfolio. I'm taking advantage of the liquidity and the buoyancy to sell some positions that I had high hopes for that didn't pan out.

I am definitely focusing on the second-tier producers with very high free cash flow… particularly ones that seem to me to be strategic fits for other mining companies.

The high end of the market pays a premium for multi-asset producers — that is to say, companies that enjoy cash flow from more than one mine. And a multi-asset producer can buy a single-asset producer that trades at a discount, pay a nice premium to the shareholders of the single-asset producer, but have the acquisition still be accretive on a per share basis for the shareholders of the multi-asset producer.

Circumstances like that are as good as it gets in M&A [Mergers & Acquisitions], and M&A will continue. So we're looking to take advantage of that in Sprott.

RR: No, I think that's probably still an accurate forecast, Mike. I will say that the strength in the copper prices and the iron prices have surprised me — I guess as a consequence of Chinese reflation.

And I'm of two minds: I've made a lot of money in the base metals business, particularly in the copper business. And so, despite the fact that I think it’ll be two or three years before I get help from the copper price, there are some base metals companies, and even some base metals explorers, that are simply too cheap NOT to buy.

So while I'm suggesting to people that study the sector less closely than I that they perhaps exhibit caution around the base metals — I myself am being somewhat less cautious.

In terms of specific metals, I guess you could say I'm less metal-centric. I prefer ones that are priced in the market below the cost of production, which is to say, ones where the industry is really, really, really liquidating.

So I'm attracted to sulfide nickel deposits. I always love big copper deposits. The copper business makes lots and lots and lots of money. And I remain attracted in the longer-term to the uranium space.

RR: Yeah and I probably beat the market to death in uranium except to say that, as a contrarian, I love the fact that everybody else hates it!

A contrarian does not like company, and I have no company in the uranium space.

I also like the fact that uranium, despite years of being out of favor, still provides 15% of the baseload demand for electricity in the United States. And I like the fact that at around $30 a pound, uranium is priced in the market below the cost of production.

If you look at the fact that 15% of US baseload electricity demand comes from uranium, and that uranium is priced substantially below the cost of production, the most logical conclusion is – unless we go into a depression and electricity demand goes away – that either the uranium price goes up or the lights go out.

And I believe that the lights will not go out… so I believe that the uranium price will go up.

It could easily take five years for this blessed event to occur. But the last uranium bull market that I enjoyed was one where the profits were so extraordinary that they overcame the rent associated with the wait.

RR: I suspect so. Yet I don't think that the United States will ever be a player in global uranium markets. That is to say, I don't think we'll ever compete with the Canadians. I don't think we'll compete with the Australians. We certainly won't compete with the Kazakhs.

The United States is by far the world’s largest consumer of uranium at about 19,000 tonnes (40 million pounds) per annum yet produced just 0.17 million pounds of U3O8 in 2019 and has miniscule proven reserves compared to top uranium-producing nations such as Australia, Kazakhstan, and Canada.

But I suspect that both Wyoming and Texas could be marginal suppliers if the uranium price returned to the worldwide fully-loaded average cost of production.

The last number I saw was that the United States consumes about 40 million pounds of uranium a year and produces well less than a million pounds a year.

So, could the United States become a 5 to 6 million pound a year producer and sustain a couple of juniors? Absolutely. Will we ever be a factor in the global uranium market except on the buy side? Absolutely not.

RR: Mike, my position on this is different than my friends in the US uranium business. I don't like welfare for anyone, including for me as a shareholder of a uranium company.

So to the extent that Mr. Trump decided to extend the political favors to yet another special interest group – which is to say, US uranium producers – I suspect their shares would react well, but I hope he doesn't do it.

RR: Yes, I want the market to lead the way on all metals prices — not the government.

RR: Mike, there absolutely are several new classes of investors coming into the precious metals markets.

Ultra high net worth private families who have been absent in this space for 20-plus years are coming back. Sovereign wealth funds, university endowments, and pension plans are coming into the space. Non-caucasian non-US people – South Asian, Asian, African, Middle Eastern – are coming into the space.

And yes… millennials are absolutely coming into the space! Millennials have access to information that wasn't available to generations like mine — online services like your own Hard Asset Digest.

In addition to being the best educated generation in the history of mankind and having the best access to information of any generation in the history of mankind – I believe that millennials are the most narrative-obsessed generation in the history of mankind.

And when the price-moves in precious metals begin to justify the extraordinarily powerful narrative associated with precious metals, I suspect you'll see even the Robinhood generation [user’s of the popular investing app] involved in precious metals markets because the narrative is extremely powerful.

And the narrative is germane to millennials in ways they're just beginning to discuss.

This increase of debt and deficits is really a benefit-shifting from young people to old people and a burden shifting from old people to young people.

If you are a US millennial, the idea that the bequest of my generation to yours is $120 trillion in debt which you will be left to service and where the probability is that part of the way that you will service it is to debase the currency, that is to say, debase the purchasing power of the obligation — I think millennials will come to understand that narrative, personally, in the context of their own self-defense and will probably be the best precious metals buyers since my generation made that same discovery in the 1970s.

To the second part of your question, at Sprott, we've attempted to be useful to investors in many different ways. Investors young and old, rich and poor, can open advised accounts with us. In other words, they can use us as stock and bond brokers.

We also have New York Stock Exchange traded products, trusts (in the case of physical precious metals like gold, silver, platinum, and palladium), and low-fee equity ETFs for people who don't want to buy individual stocks but rather want to buy the market as a whole and participate in the data.

Some investors believe, and I would leave this to your own readers to make up their own minds, that buying shares in Sprott Inc. (NYSE: SII) – that is to say, the manager of all these products – is a good investment. Rather than picking and choosing among the various products that Sprott offers, the idea that one would own them all – or at least own the management company, the derived fee income from all of them – is a good way to proceed.

But the truth is that we service well over 200,000 investors worldwide. We try to be big enough that we can offer a whole library of products to people… yet we try to be small enough that we can tailor our offering to each individual circumstance.

And, thus far at least — I think we've done a good job of that.

RR: Yes, thank you. As you know, Mike, we're Canadian domiciled. We were founded in Canada. But the vast majority of our business is in the United States, and the vast majority of our shareholders – both by numbers and by amount of shares – are in the United States.

So it made absolute sense to migrate our primary listing from Toronto to the New York Stock Exchange to facilitate transactions for American citizens who are far and away our largest class of investors.

RR: Mike, you’ve hit the nail on the head.

There are three disadvantages I’d like to list first: I love Vancouver in the summertime! It makes me happy to be there! It's physically pretty!

Before and after the conference, I get to walk through the streets of Vancouver which is an absolute joy. And for several years, I've taken exhibitors and attendees out on a boat cruise of Vancouver Harbor where the view is on God and the wine and beer is on me… which people have enjoyed immensely.

But more importantly, as you suggest, the sort of organic part of the conference has been extremely important. I had a client email me last year saying, “Rick, the ability to follow Robert Friedland and Ross Beaty through the exhibit hall and see what exhibitors they were talking to and actually listen to what exhibitors they were asking questions to and what the answers were was worth more than the cost of admission.”

Needless to say, it’s quite difficult to have those types of discussions in a formatted online conference.

Yet, two things that doing the conference virtually has freed me to do is, first of all, it has reduced my travel, lodging, and hospitality expense by $400,000 which has granted me additional funds to spend on technology and on content.

Second, it has freed me from the tyranny of TIME in the sense that, often, we would have four to six workshops running simultaneously. Mike, I’ve had hundreds of attendees over the years complain about the fact that there were workshops running simultaneously but that they wanted to see all of them.

With technology, it’s easy to watch those workshops sequentially or even toggle back and forth between workshops in real time. So the ability to schedule more content in the same period of time than we were able to do in a physical conference has made life much easier.

There are also content providers/speakers whom I’ve wanted to have but I couldn’t convince to fly to Vancouver. And now, I have a bittersweet second best option, which is to say that they can appear virtually.

Which is not as good as in-person frankly — but it’s better than not at all!

A final thing to say about the conference, which I think sums it up, is… I’m confident enough that your viewers and subscribers will feel like they got their money’s worth, and more, from the conference – that anyone who signs up to the conference and attends and doesn't feel like they got their money's worth can get a full refund of the amount paid from me.

Now, I’m not saying to people, “Come to the conference, enjoy it, and then take advantage of us and ask for your money back.” But if you feel that this virtual conference didn’t compensate you for the time that you spent – particularly if you’re willing to tell me politely by email why – I will certainly refund the cost that you paid to attend.

RR: Yes, the risk is mine!

RR: You know, Mike, I've talked to scores of your listeners and subscribers in the last while. And I'd like to make a special offer to them to introduce them to Sprott.

If your listeners will go to the web link sprottusa.com/rankings and enter their resource stock portfolios on that web link, I will personally rank them 1 to 10 – one being best, 10 being worst – and comment on those companies where I think my comments have value.

In addition to that, I will by return-email, send them two charts: 1.) a 45-year Barron’s gold mining index chart, which will show us in very dramatic fashion where we are in terms of this gold equities rebound, at least in a historical context, and 2.) a hundred year commodity chart, which will put the discussion that you and I just had about base metals and uranium in great context.

So once again, sprottusa.com/rankings for a ranking of your listeners’ natural resource portfolios. Please, please don't include things like Walmart or IBM (laughs!) — things I don't know about! Just the resource stocks please!

I look forward to interacting with your listeners and subscribers on this. I think it's the fairest possible way and also the most effective possible way to introduce them to the intellectual capital in Sprott.

RR: My pleasure, Mike. You and your family stay well.