Rick Rule, President and CEO of Sprott U.S. Holdings Inc.

Focus: Precious metals stocks
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Market Outlook
Natural resource markets will continue to be led by precious metals. We see bullion prices higher, driven by investor fears and negative nominal and real interest rates. Higher bullion prices should take precious metals equities higher, as they will generate operating margin surprises to the upside, and generalist investors rebalance into precious metals to reflect their market weight. Further positive surprises will occur because managements are less likely, in the two- to three-year time frame, to repeat the capital allocation mistakes they made in the last bull market. Momentum in the bullion trade amongst the seniors will continue to benefit the juniors, but that growth will be somewhat blunted by the juniors’ willingness to dilute through financing and the continued existence of zombie issuers — the “dead men walking”— who have no value at any price. Increasingly, investors will play beta in the junior equities markets, favoring the ETF products, rather than taking the failure risk and liquidity risks of individual stocks.

Forward positioning will take place amongst other commodity-focused equities, in anticipation of a broader recovery in commodities, although I don’t expect a general commodities recovery for some time. Investors should note, however, that many essential commodities are now, and have been for some time, produced for costs above the sales price of the commodity. Capital is being consumed in those sectors, which will dramatically reduce the productive capacity of the industry, and set the stage for a dramatic price recovery, similar to the one we so enjoyed in the 2002 time frame.

I see a particular opportunity opening up in the energy credit markets. I believe that billions of dollars of public “junk debt” is becoming distressed, as industry cash flows and net present values conflict with senior debt covenants and as liquidity issuers constrain the ability of high-yield debt ETF structures to deal with disintermediation. This has the potential to create a “train wreck” on Wall Street and Bay Street. I believe many of the buyers of these bonds were yield oriented, rather than credit oriented, believing a lousy credit with an 8.5 per cent yield was more desirable that a good credit with a 7 per cent yield. I think those buyers are in for a “religious experience,” and I expect them to sell with the same lack of sophistication as they bought. We are preparing a high-quality shopping list, to take advantage of what I see as a once-in-a-decade opportunity in energy credits.

Top Picks

Ivanhoe Mines (IVN.TO)
Ivanhoe continues to represent (despite superb recent share price performance) outstanding speculative value. I believe that Kamoa and Platreef are both tier-one deposits, and Kipushi, the “also ran,” is the highest grade undeveloped metal mine in the world. The financier, Robert Friedland, has an unequalled track record, having led and financed the discovery of Ft. Knox, Voiseys Bay and Oyu Tolgoi.

Altius Minerals Corp. (ALS.TO)
Altius is a great collection of exploration and royalty assets, run by an accomplished allocator of capital.                              

Alterra Power Corp. (AXY.TO)
Alterra is an alternative energy operator, founded and chaired by the serially successful Ross Beaty. Seemingly unbeknownst to the market, the company has used project cash flow to pay down substantial debt over the last seven years, leaving the company in the enviable position to both fund growth and implement a dividend.
 

Past Picks: August 11, 2015

Ivanhoe Mines (IVN.TO)

• Then: $0.68
• Now: $2.30
• Return: 238.24%
• TR: 238.24%

Nevsun Resources (NSU.TO)

• Then: $3.89
• Now: $4.12
• Return: 5.91%
• TR: 13.08%

Northern Dynasty (NDM.TO)
Sold because of Alaskan politics and company strategy.

• Then: $0.40
• Now: $0.97
• Return: 142.50%
• TR: 142.50%

Total Return Average: +131.27%
 

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