This teaser solution originally appeared as part of the Friday File for the Irregulars on June 2, 2017. This excerpt has not been updated or revised, but readers continue to ask about this one so we’re opening up to all readers now.
I’ve been inundated with questions about the latest Rick Rule “Interview” from the Money Map Press folks, so I thought I’d at least see if I can confirm for you the quick solutions to the seven teasers he drops in the ad — I’m not going to be able to get into each one in a lot of detail, but most of these are very well-covered (for junior resource stocks, at least), and some of them have come up in the pages of Gumshoe in the past. There’s already been quite a discussion of the ad among readers, many of whom identified several of the stocks, but let me see if I can add anything.
The basic premise is that you subscribe to the Rick Rule Alliance from Money Map, and he gets you in on the deals for these tiny companies — they’re not terribly specific, so I don’t know whether he’s really promoting private placements in these stocks, or just recommending the stocks and providing his insight (they’re all publicly traded already, but junior resource companies are almost always looking for more money — and they often do private placements, which are often murkily handled and sometimes promoted by intermediaries like Rick Rule or Marin Katusa).
It’s a little bit odd, actually, to see Rick Rule’s name on the masthead of a newsletter service — he’s a large owner of a lot of microcap resource stocks, and as president of Sprott U.S. Holdings he’s also at the helm of a broker-dealer and investment management company that is managing accounts of investors who invest in the stocks his firm recommends, as well as being affiliated with the larger Sprott investment banking and asset management operation in Canada, so the possibilities for conflicts of interest seem rife if he’s actually selling a newsletter with his personal “best picks” as well. I don’t know the intricacies of the rules under which he operates, and he has always been extremely widely quoted by most of the natural resources-interested newsletters, particularly those from the Agora-affiilated publishers, so perhaps this is just a small extension of that (yes, Money Map is yet another spoke on the great Agora wheel).
So that’s the idea — you pay $2,995 a year for this newsletter, with no refunds whatsoever (lots of the “high cost” newsletters seem to be quietly moving to a “no refunds” policy — which means you’re taking a real leap of faith with what is, for most individual investors, a large amount of money), and you get Rick Rule’s picks in monthly “deal briefings” and buy and sell alerts, and presumably a lot of additional coverage of the stocks (they talk about dossiers and video tours and the like). I’m not going to do any of that… but I can at least tell you what the stocks are so you can do a bit of your own research and think for yourself.
First up is the stock that Rule is hoping is the second coming of Paladin Resources, the uranium stock on which he and Doug Casey both made 10,000-100.000% returns. That’s also the stock that is brought up whenever anyone is trying to predict the next bull market for uranium, which does logically seem like it should come sometime but which has been “obvious” and “imminent” since at least 2014 (and uranium has dropped by about 50% in those three years).
So we should be mindful, of course, that these things are not nearly as predictable as an ad spiel will imply, either on a macro level (predicting uranium market prices) or when it comes to a specific company’s success… and, of course, that it takes a certain intestinal fortitude to hold some of these super-speculative stocks. Paladin fell 90% over the course of many months before it rose 10,000% to the 2007 peak (it rose 100,000% if you bought it after the 90% fall instead of before). Lots of stocks fall 90%, and in a lot of cases they don’t ever recover… so your appetite for both wild volatility and permanent loss of capital has to be pretty robust.
Which means that for ANY of these kinds of junior resource stocks you need to keep in mind the most important risk-management tool in every investor’s toolbox: position sizing.
Greed gives us the unfortunate tendency of making “big bets” on exciting stories, because we imagine the life of luxury we’d live if we put $100,000 into a stock that rises by 10,000% (that gets you $10 million, in case you don’t have a calculator at hand)… but if your portfolio is $500,000 and you’re betting $100,000 on one tiny stock, it’s far more important to think about the difficulty of rebuilding your portfolio if that $100,000 goes to zero. Because anything that has the potential of rising by 10,000% also has the very real, non-theoretical potential, even the likelihood, of falling by 99-100%. The reason we hear about the 10,000% gains is that they’re extraordinarily rare — even for folks like Rick Rule and his colleagues.
If you bet on these kinds of “might work out, will take a few years to see if we get a bull market and some exploration success” stocks, I think it’s best to assume that you’re putting your money at risk with a strong likelihood of a 100% loss, the same way you would if you’re betting on a number at the roulette table (though not necessarily with the same odds) — and if you plan to spend a week in Las Vegas, you don’t take your entire budget and bet it on one number on the roulette table on the first day.
There are lots of other risk-management tools out there, of course — one of the favorites of many investors and newsletter folks is the “stop loss” order… a policy that you will sell a stock if it falls by 20%, or 30%, or whatever, and not question anything or look back — just sell to protect your capital from further loss. Those don’t typically work very well for tiny stocks like most junior resource companies — not if you’re hoping for huge windfall gains… but it does suggest a framework for how to think about these kinds of investments.
What do I mean? Well, If buy shares of Apple (AAPL), for example, and decide that you’ll use a 20% trailing stop loss order on those shares (selling if the shares ever fall 20%), and that makes sense to you and fits with your psychology and your portfolio management strategy, then you’re probably pretty well assured that you won’t lose more than 20% of your investment. Apple is huge and steady and there is obviously some risk that something cataclysmic could happen that drops the value of the company in half overnight, but that’s a vanishingly small probability because of their entrenched position in the world, their profitable profit lineup and happy customer base, and their huge cash position. They might fall by 50%, but it would probably take weeks or months for that fall to happen even if things get really ugly — you could almost certainly get out at near a 20% loss if you wanted to sell on the way down.
That’s not the case with stocks like Paladin. There isn’t always a buyer in the wings if sentiment suddenly shifts and the company has a terrible drilling program or gets kicked out of the country where it’s operating or there’s another nuclear accident and more countries shut down their reactors.
So what do you do with risk management in that case? Well, beyond making your own personal assessments about how much to risk on any particular company because of your conviction in the prospects of that company, you can apply a stop loss calculation of your own. If 20% is the biggest loss you can stomach in one of your investments, then take the amount you were going to invest in whatever that next hot junior stock is and reduce it by 80%. That way, you know that you’re risking the whole thing and you’re comfortable with that. If you would put $10,000 into BHP Billiton or Newmont Mining, for example, with the expectation that those are volatile and subject to price swings from commodity cycles but that you can probably get out with a 20% stop loss if you want to, then perhaps the little teensy stock you’re hoping is the next barn-burner in a similar sector should get a $2,000 position, and then maybe you’ll have the stomach to hold it through an 80% loss if you still think that their assets represent the potential for dramatic gains if and when the cycle turns (or if you’re right about the chances of them having success in their exploration projects, or whatever).
So that’s my lecture. What, then are the stocks?
“Deal #1: ‘Paladin 2.0.’
“This is a ‘second chance’ to relive one of the most successful stock plays of the last 100 years.
“It’s a virtual carbon copy of Rick’s investment in Paladin that returned 99,900%.
“Right down to the same asset…
“The same market conditions…
“The same management team…
“It was even recently priced at the same “penny a share”….Are you getting our free Daily Update
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“And here’s a very important piece of intel Rick disclosed to me when I was vetting this new deal:
“This tiny miner now owns Paladin’s database.
“And they’re using it to acquire millions of tons of the highest quality uranium in the world – at rock bottom prices.
“Take just one of those assets – a mine in Namibia.
“It holds an estimated 23.3 million pounds of uranium….
“Even at today’s low uranium prices, this Namibian mine could be sitting on $570 million worth of uranium.
“That one discovery alone is worth 15X more than this miner’s current $36 million market cap.
“Plus this company has also acquired another deposit that’s potentially sitting on an additional $1.14 billion worth of uranium.”
This is almost certainly Deep Yellow (DYL in Australia, DYLLF OTC in the US). It is a tiny, tiny stock — the market cap is about A$34 million right now, as of the close in Australia last night at A$0.26, but the attention from Rick Rule is likely driving the stock up as the week closes, trading during the day in the US OTC market was at much higher levels (26 cents in Australia should equal about 20 cents in the US, and Australia is where the volume is so that’s arguably the fairer price… but the stock was changing hands at 25 cents in the US when I checked earlier today, 25% above the “fair” price in Australia).
Be careful with Australian stocks that trade over the counter in the US, the pricing is often wildly higher or lower in the US and the vast majority of trading and “real” price-setting is typically done on the Australian market, which is never open at the same time as the US markets. The same is true of Hong Kong stocks — OTC stock pricing in the US is usually much less frightening for stocks that have at least a short window during the day when their home stock exchange and New York are both open… prices are often perfectly in alignment for Canadian stocks and usually pretty close for stocks in London or Paris.
If you’re really interested in trading Australian small caps, I’d suggest doing it yourself through an international brokerage account (I use Interactive Brokers, which will let me pop in ad midnight and trade Aussie stocks if I want to, at low cost, but there are other brokers that offer direct online access to foreign markets as well).
Deep Yellow was effectively spun out of Paladin Energy — Paladin sold a bunch of Namibian assets to Deep Yellow a decade or more ago, and sold off the last of its shares in Deep Yellow just this past December, during what has been a pretty relentless wave of what looks like “survival selling” by Paladin.
And Deep Yellow now has a lot of Paladin’s former management team and directors on board, including CEO/Executive Director John Borshoff, all presumably hoping for another bite at the apple as they explore and develop their uranium deposits in Namibia. I don’t know much else about them, and I don’t know if they actually own the “database” from Paladin or just the Namibian data and exploration properties, but their May investor presentation is here and they do have a strategic alliance with Sprott (Rick Rule’s employer) and just raised some money with a rights offering.
That rights offering did included five-year options, so perhaps Sprott is also offering those up to their accounts — maybe that trickles over to offering them to Rick Rule’s subscribers, I have no idea. Like Paladin and most other uranium names, Deep Yellow soared in 2007 and 2009 during those prior spikes in uranium prices (it was up over $12 for a while in 2007), and has been on a pretty steady decline in the years since… but has shown some signs of life over the past six months. No idea what’s going to happen there, or what the specifics are of their exploration projects in Namibia.
“Deal #2: The Kenyan Blue Whale.”
Rick rule says in the interview that…
“I’m particularly comfortable investing with people who have made myself and my clients a lot of money in the past….
“The opportunity that I’d like to talk about is an oil and gas opportunity, which is important because the Lundin family has been successful in the oil and gas business since the 1970s…
“And successful in frontier exploration.
“They have made money by discovering big deposits and selling them in places as diverse as Ras Al-Khaimah, Sudan, and Colombia…
“And the opportunity that we’re currently involved with them in is in Kenya, in a brand new basin.
“A basin that has been completely unexplored by modern technology, until the Lundins drilled a basin opening discovery….
“It looks like it will exceed one billion barrels of oil, which in the parlance of the oil business makes it a blue whale-scale discovery….
“Will past be prologue? I don’t know.
“What I do know is that I’m working with a billion barrel discovery and I’m working with a team of entrepreneurs, a family that I have been successful with going as far back as 1975.
“That’s as good as it gets, as far as I’m concerned.”
Rule also notes that the oil that has been discovered in this Kenyan basin will be moving to the coast within three years (meaning, presumably, that Kenya will have figured out a pipeline infrastructure for developing and exporting the oil by then).
The ad goes on to say that…
“The market cap of the exploration company that controls this Kenyan Blue Whale is around $1 billion…
“And shares are trading for about $2 apiece! ….
“Investors who are buying into this discovery – they aren’t securing their stakes in this company based on the current market price for oil.
“This deal has factored in a deep discount on this oil – it’s being calculated at an “exploration value” of just $4 a barrel.”
This one is a stock I own and have followed for a long time, Africa Oil (AOI on the Toronto exchange, AOIFF OTC in the US). Africa Oil discovered a substantial oil field in the Lokichar Basin in Kenya and holds several exploration areas, though they have partnered off much of the financial exposure to those areas with much larger companies in exchange for cash or funded drilling and exploration (Tullow, Maersk and Marathon are their main partners). I originally bought shares of this one before the discovery, took profits after the huge run the stock made following the discovery about five years ago, and have just been holding my stub of shares at what I consider a negative cost basis (though I note my original purchase price on the Real Money Portfolio) as I wait to see when and how the oil discovery actually enters production.
We’re getting closer to that patience perhaps paying off, though everything moves slowly — there are some agreements regarding pipelines, and Africa Oil is still likely to reach initial oil production without having to raise any additional capital because of the large cash position they have ($450 million or so, roughly 2/3 of their current market cap) and the large commitment by their partner Maersk to fund up to $400+ million more in development if things stay on track. I still consider it to be a relatively low-risk exposure to a large potential oil production area, with exploration upside — but it could also take ten years to get a pipeline in Kenya, not three years, even assuming that oil prices don’t collapse, so patience remains important. You can see their latest investor presentation here — I would assume that they’re not interested in raising money, so presumably Rick Rule’s not offering a private placement here but is just recommending the stock, but I don’t know those details.
“Deal #3: The Tier 1 Trifecta.”
From Rick Rule:
“The next opportunity is probably one of the greatest contrarian speculations I’ve ever made in my life. Contrarian in the sense that it really defines political risk.
“The next company is involved in two countries – South Africa, which has its challenges, and Congo, which, in fact, defines challenges.
“The truth is, however, that this company controls three world-class, Tier 1 deposits. And Tier 1 deposits always get financed, always get produced… irrespective of political risk.”
And the specifics of those three “Tier 1” assets:
First is a platinum deposit…
“The first opportunity is in South Africa, where the company has made what I think is the most important platinum and palladium discovery made in the world in the last 100 years…..
“The attraction of the deposit that’s been discovered by this company is it will be able to be mined by very efficient, non-labor-intensive methods. We believe it will be the lowest-cost platinum and palladium producer in the world…
“And we believe that it will produce for three or four decades.”
Next is copper…
“… the company has a copper deposit which once again is probably the most important copper deposit discovered in the world in the last 30 years.
“It was discovered as an extension of the Zambian-Katanga Copperbelt in the southern part of Congo, the most important copper-producing province in the world.”
And some more on the company:
“This company is run by the most successful mining entrepreneur of my generation. A person who has been responsible for five prior exploration successes with sales to majors…
“So the question becomes: ‘Can this gentleman who has been serially success for 30 years, with his partners, which include the government of Japan and a para-state Chinese mining company, overcome the political risks in Congo and South Africa?’
“When I look at the financial resources and the needs of the nation of Japan and the financial resources and the needs of the nation of China, my own personal belief is that the answer is yes.”
And their other deposit, which gets a bit more hype-y treatment from the guy who’s interviewing Rick Rule:
“PLUS, as a kicker – and Rick didn’t reveal this, but I will…
“The company also retains a 68% ownership in a Tier 1 zinc deposit. It’s in the heart of one of the richest mineralization zones in the Democratic Republic of Congo.
“This deposit could hold as many as 10 million pounds of high-grade zinc worth roughly $1 billion at today’s prices.
“So let’s put it all together…
“This company has a Tier 1 deposit of copper that’s worth $11 billion…
“They have another Tier 1 deposit of platinum worth $145 billion…
“And another Tier 1 deposit of zinc worth $1 billion.
“The grand total for this Tier 1 Trifecta could land at $157 billion.”
Most of you who are interested in mining stocks will already know this one, it’s Ivanhoe Mines (IVN in Toronto, IVPAF OTC in the US).
Ivanhoe is not at all a small company, with a market cap near $3 billion, though it is still small relative to the size of the three major mineral deposits it controls in the Congo and South Africa — whether that’s just because of political risk or because of any concern about funding these giant projects, I have no idea, but certainly Robert Friedland, the man behind Ivanhoe and probably the