Rick Rule: When Interviewing Companies Investors Should Start By Asking—“What’s Your Liquidation Value?”
Rick Rule: When Interviewing Companies Investors Should Start By Asking—“What’s Your Liquidation Value?”
Chance encounters can provide some of the most rewarding opportunities for investors.
Rick Rule, Chairman of Sprott US Holdings, recounts how a small mining event led to a career-changing investment.
Rick still attends conferences on a regular basis. As he says, you never know who you may meet.
With the 2015 Sprott-Stansberry Vancouver Natural Resource Symposium coming up on July 28th-31st, Rick also describes how you can get the most from attending this conference – or other investor events.
By: Tekoa Da Silva
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TD: Hi. I’m Tekoa Da Silva with Sprott Global Resource Investments. I’m sitting down here again today with Rick Rule, Chairman of Sprott US Holdings. Rick, as always, good to see you.
RR: My pleasure Tekoa. Thank you for doing this.
TD: What I would like to talk with you about today is the subject of conference attendance as an investor. You’ve been attending conferences for years both as an exhibitor and as an investor. I’m wondering if we can talk about your experiences and the type of things you’ve gotten out of that activity. To start with, how many years have you been attending conferences as a ‘plain clothes’ civilian investor?
RR: Well, certainly since the early 1970s which would suggest that I have a 40-year duration in conference attendance and presentation. I should stress at the outset that when I’m at a conference today as a presenter, I am certainly also an attendee.
I attempt to get as much out of a conference as I possibly can, which is one of the reasons why this interview is so important. I have benefited greatly from every role at conferences, from presenter to attendee to exhibiter. I think it’s important for people who plan to devote the time and attention necessary to attend a conference to understand how to get the most out of it.
TD: In speaking with you about conference attendance in the past, I found there are three phases of conference preparation – pre-conference activities, in-conference activities and post-conference activities. Could you talk to those three phases and their importance?
RR: Yes. I think that’s critical, and attendees should know that most of their competitors which are other attendees (people competing with them for investment ideas) only think of the conference in terms of their time spent there. Then they probably only spend half of the allotted time productively. So to get your money’s worth out of a conference, you need to be aware of pre-conference, in-conference and post-conference activities. I think that’s absolutely the case.
Pre-conference means that you prepare yourself such that you utilize time efficiently at the conference. Study the scheduled speakers. Study what you expect to get out of each speaker and budget your time. If there is a speaker who you don’t think will be beneficial to you, you might consider skipping his or her talk. Consider in the context of the speakers what questions might be appropriate for you to ask during the question and answer period.
In other words, if a speaker is there speaking about gold royalties and you care about gold royalties, what part of it do you care about? Be prepared to extract the maximum benefit that you can.
Study the companies that are exhibiting at the conference and try to determine before you go the priority with which you will attend the exhibitors. Going up to a booth and asking questions about the exhibitor is a wonderful way to get more out of the conference, and don’t just ask the exhibitors about their own company. Go to an exhibitor and say, “Other than yourself, tell me who the top three companies on this exhibition floor are and why.”
There is all kinds of wisdom to be had at a conference if you understand how to extract it. But a lot of that really has to do with your preparation.
Another thing I frequently do that many investors don’t know they can do, is before the conference, I email as many of the speakers and the exhibitors as I can so that I can arrange time to spend with them or so I can ask them questions about their presentation, company or area of expertise. This helps me become more prepared when I go to a conference, and to get as much out of it as I can.
The conference itself might be a one-day, or multiple-day event. If you want to maximize your time there, you have to understand that you are going to run an absolute gauntlet. There is so much information available to you that you’re going to have to be extremely organized. You’re also going to have to have an awful lot of endurance to be able to participate and compete.
The next activity I would recommend is taking notes. I remember something much clearer if I have it written down on paper. Most people don’t take notes. Also consider using a recording device on your iPhone for speeches that you find particularly appropriate.
Hopefully have an appointment book set up before you attend the conference so that time with a presenter or an exhibitor is available to you, to prevent you from being disappointed. By the time you get to the conference, that speaker or that exhibitor’s time may already be booked up by other people.
The way you win that fight is to show up and compete ahead of time. Understand also that the workshops and breakout sessions are often more informative than the general session presentations. As a conference presenter, I often use the general session presentation as a way to drive traffic to the workshops. In other words, I get the real work and communication done in the breakout and workshop sessions, which contain a smaller more focused groups of attendees.
So be sure to allocate your time among the speakers or presenters that you’re particularly interested in, in a way that focuses on the smaller and breakout sessions.
Another critical thing to understand is that in a conference like our Vancouver conference, where we have 30 presenters and 800 very wealthy people in the audience, the idea that all the knowledge present at the conference flows from the dais to the crowd is farcical.
Understand that some of your fellow delegates will have a lot to offer. Listen carefully to the questions that are asked by other attendees to the speakers and if you notice somebody asking particularly astute, informed questions, go up and introduce yourself to him or her. The idea that among 800 rich attendees looking to increase their wealth, that there isn’t an awful lot of expertise that you can borrow is silly. Compete in that regard too. Use every available resource.
At the beginning of the day, before you hit the conference floor, map out your day. Think about who you’re going to listen to and think about the information that you would like to extract from that person.
At the end of the day, before you go to bed, write down the things that occurred during the conference that you think are most valuable to you. Remember particularly the mental notes you made about following-up with people so that you in fact remember to follow up with them when you go home.
After the conference may be the most important time of all. When you go to a conference Tekoa, you are going to be inundated by absolutely spectacular salespeople, both the presenters and the exhibitors.
The most important thing to do at the conference in terms of investing is nothing. Absorb all the information but do not act.
There is an unlimited amount of opportunity but there is always a limited amount of capital and you want to make capital allocation decisions empirically, not emotionally. You will hear an awful lot of emotional pitches at a conference, so you’ll need to be aware.
After assimilating an abundance of information at the conference, ask permission to follow up with various speakers and exhibitors that are of interest to you. Absolutely do it. Interview them. It’s very difficult for an exhibitor or presenter to turn down an interested appeal for a one-on-one discussion with somebody who has done that person the favor of having listened to what they had to say and assimilated it.
The probability that you can obtain a second one-on-one discussion which could be much more beneficial to you than simply listening among 800 other people to a presenter, the possibility of getting that second meeting is high. So ask for it.
Another thing you can do after the conference is pay particular attention to the arguments presented by presenters that make sense to you and follow up with original research to determine whether or not you believe those claims are true. Often if something sounds too good to be true – it is, because remember, these are spectacular salespeople.
So like Ronald Reagan used to say, trust of course. But verify post-conference.
TD: Rick, when it comes to newsletter writers, if the person reading is considering a newsletter service who’s editor is going to be speaking at the conference, have you gone as far as asking the newsletter writer for a trial subscription ahead of the conference or possibly afterwards to get to know their work more, since they will be speaking there?
RR: I have certainly appealed to newsletter writers for a “try before I buy,” which is sometimes successful, sometime not successful. But what’s the harm in trying?
TD: When you think back on the 40 years attending conferences as an investor, are there any anecdotes, any interesting experiences dealing with fellow investor attendees or exhibitors that come to mind?
RR: Well, certainly the most dramatic example I can give you of personal benefit occurred in maybe 1998 or 1999 at an obscure conference in Western Australian called ‘Diggers and Dealers.’ Diggers and Dealers is a very colorful conference. It’s held in a mining town in Western Australia, called Kalgoorlie and the theme of the title as the name suggests is that the financial interest in Australia meet with the mining people, hence diggers and dealers.
Kalgoorlie, to put this in context, is sort of 1000 kilometers from anywhere. It’s a town that in those days produced a million ounces of gold a year from within the city limits. In fact, the Super Pit, the Kalgoorlie Super Pit approached the town from the northwest. When I say Super Pit, the pit was a mile across, a truly spectacular pit.
At any rate, this was a very pleasant, very focused and in those days very small conference. I think I was the only non-Australian present, which meant among other things that all of the exhibitors viewed me particularly as fresh meat. I was extremely popular being non-Australian, being American.
As a consequence really of my notoriety, I was able to visit with virtually all of the presenters and certainly all of the exhibitors, an exhausting set of circumstances. I remember at the time being attracted to the uranium business for reasons that we’ve discussed before, reasons like nobody else cared about it and the cost to produce uranium exceeded what it was selling for. So the price had to go up.
Then I remember coming across a little company in the uranium business called Paladin Resources. As a consequence of being the only one in the audience that cared, I was able to spend a substantial amount of time with John Borshoff, the CEO of Paladin Uranium.
I was convinced to do a financing in Paladin Uranium at 10 cents. I was convinced subsequently to do another financing at 12.5 cents. I was rewarded for my genius with the share falling in price from 12.5 cents to a penny.
We financed it again, if my memory serves me correctly, at 1.5 cents. I know so far Tekoa this doesn’t seem like a benefit. But what’s of note is three years after that 1.5-cent financing the stock was trading at $10.00. There is no way in the world I would have found Paladin had I not gone to that conference.
There is no way in the world had I not accidentally found Paladin, that I would have had the opportunity to spend five or six hours with John Borshoff. There is no way without having established a personal relationship with John Borshoff that I would have had the courage to write the 1.5-cent check after the 12.5-cent failure.
TD: For the person reading, if they’re new to the natural resource space, they might be thinking, “Well, if I had the opportunity to speak with a company, I wouldn’t know what questions to ask.”
For that person we’ve produced a document at Sprott Global called A Guide to Natural Resource Investing, which contains the written system of questioning that you’ve followed in interviewing companies in the past. I’m wondering if you can talk about that.
RR: Sure. It’s a pretty easy process and if as you suggest the reader of this interview downloads the document and takes it with him or her onto the conference floor, it’s useful. But the interrogation process goes something like this:
First, let them tell their story. You can’t help it. They’re preprogrammed to do it and you have to let them get it out of themselves. So spend five or six minutes and let them do the 30,000-foot version of their story.
If you are interested in the story then say, “That’s very interesting. I would like to ask you some questions so that I can assimilate your story into a framework that I can deal with.”
The first question would go something like this: Tell me what your company’s liquidation value is. I know how many shares outstanding you have and what they sell for. That’s the price. What I’m worried about is the value.
I don’t want you to talk about your assets in terms of the market cap that they might attract, if owned by a competitor. What I’m interested in is what’s the liquidation value of your company, the blow-down value.
If you took the projects out and sold them for cash to a competitor, what is it worth? I’m not suggesting by the way Tekoa that if you can’t buy companies for dimes on a dollar in terms of liquidation value, that you don’t do it. I’m just suggesting that if you know the liquidation value, you know the downside, which is important – as important as knowing the upside.
The second thing you want to ask them is, “Please distill for me the most important unanswered question right now. What’s the thing that you can do right now that will deliver me the quantum increase in value that is required to induce me to take the risk to invest in your shares? I understand that you’re trying to prove a five-million-ounce gold deposit. But what’s the first step? What’s the most important unanswered question right now?”
It might be that the company has done surface sampling and established a grid and what they need to do now is trench to see how deep that gold mineralization goes. It might be that they have in fact trenched it and they’ve developed a drill target. So the next thing that they need to do is shoot geophysics or drill a hole.
But find out from the presenter what the most important unanswered question is, how long it will take to get an answer to that question and how much money will be required to answer the question. Then try and figure out in your own mind if the reward associated with a ‘yes’ answer is worth the risk that you’re being asked to bear.
Now, the managers love to answer that question if they’re any good. But surprisingly, probably 70% percent of the people you address that question to, will never have thought about it.
This is analogous Tekoa to you and I deciding to walk to Los Angeles, getting the right shoes, a couple of bottles of water, and heading East. If you don’t have a plan, how are you going to get somewhere?
So the good news about this question is you get to throw away 70% of the companies and never spend any more time on them.
But assuming they survive that, you move on to another question, which goes something like this (you don’t need to be impertinent about it), but say, “No offense sir. But tell me why I should care about your opinion. Tell me specifically about your past successes and your experience in this area. If you’re exploring for precious metals in tertiary volcanics in the high Andes of Peru, have you been successful doing that before? Do you have any relevant experience? Tell me about the rest of the team. Tell me about how their specific experience fits into the specific task at hand.”
What you will find is that perhaps 70% of the 70% who survived the last cut might survive this cut. You will find people who say, “Well, I’ve been a success at mining. I operated a gold mine in Quebec.”
But the truth is that the expertise required to operate a gold mine in French-speaking Quebec in ancient rock can be very different than the expertise required to find a gold mine in young volcanic rock in Spanish-speaking Peru.
So it’s very important with this question that you establish the point of specific expertise. Then you can say, “That’s very interesting. It’s reassuring to me that you and your team have this expertise. Talk to me about how much confidence you have. This company has 20 million shares outstanding. How many of them do you own? In other words, do you have courage in the project and courage in your own expertise or are you merely a hired manager?”
If somebody says to you, “Well, I don’t own any stock, but I have 10 million options,” you say, “Oh, well, are you trying to sell me options or stock? I don’t understand. Are our interests aligned or are they not aligned?” It’s better to deal with partners than to deal with managers.
Moving on from that, if we assume we like the people and we assume that our interests are in some way, shape or form aligned and we like the property, we need to go to means. I will tell you another interesting story.
Many years ago, probably 30 years ago, I was exhibiting at something called the Boston Gold Show, which no longer exists.
After I got off the podium, I was going to get on a plane. So I had changed from my corporate regalia to blue jeans and a polo shirt. I was wandering around the floor. There was a particularly aggressive promoter, wonderful salesman. At any rate, I attempted to get past his booth unmolested, but was unsuccessful and dragged into the booth.
He was vociferous in his company’s exploration potential and an extraordinarily aggressive program to drill it off. I at one point in time remarked, “Well, this is an extremely aggressive program. I understand what you’re saying about news flow. But what about money – how will you accomplish this?
I will never forget Tekoa. He looked at me and said, “Well, money is unimportant.” I couldn’t help but take the bait. I said, “Really? My money is important. Explain to me why money isn’t important.”
He said, “There’s a real hot-shot West Coast broker named Rick Rule and he really likes my project, and he’s going to give me all the money I need.” He obviously didn’t recognize me. “But see, here’s the opportunity,” he continued, “the stock is selling at .50 cents now and he won’t finance under $2.00. So when I get the stock to $2.00 from .50 cents, Rick will finance and you will be able to leverage off Rick’s money at $2.00.”
At that point in time I pulled out my wallet, and showed him my driver’s license. I said, “I know this Rick Rule guy pretty well, and I think the probability of you solving your financing problems with him is extraordinarily low.”
So when I say listen to these stories, but verify, that’s what one has to do.
The main theme of this story is that resource businesses are capital intensive businesses, and if the company has no capital, they have no business.
So if the person telling the story has reasonably convinced you that he has an important unanswered question, you need to say, “How much money does it take to answer the unanswered question?” because an unanswered question has no value.
Suppose the person talking to you says, “Well, to answer the question, technically it’s going to cost $2 million.” OK, that’s a good answer.
“How long will this take you?”
“Perhaps two field seasons, so 18 months.”
“And what will be your general administrative expense over 18 months?”
“A million dollars.” OK.
“So it’s going to take you $3 million to get me ‘yes’ or ‘no’ answer. Is that correct?”
“Yes,” they respond, “that’s correct.”
“How much money do you have?”
“A million dollars.”
“Well, subtracting a million dollars from $3 million leaves a $2 million gap. How are you going to bridge this gap?”
It isn’t important necessarily that they have the money in the treasury. But they better have a good story about where they’re going to get it and what it’s going to cost them.
If they say, “I’m going to get the money from Sprott Global,” call and ask us, 800-477-7853.
Say to the company, “Who at Sprott Global is going to give you this money? It’s very important to me to verify that you have the means to achieve this end. If I can’t verify it, obviously I can’t speculate on this occurring. I wouldn’t have enough information.”
Another thing that’s very important is to say to the person, “You know, if I invest in your company, I’m going to read the quarterlies, press releases, filing statements, and I am going to be looking for how to understand your incremental progress up to getting a ‘yes’ or ‘no’ answer on that unanswered question. Who specifically at the company can I talk to, to give me human color on these filing statements? Where will I get my information? I’m not asking for material or non-public information, I’m asking for your help in deciphering the ‘corporate speak’ that I will see in filing statements and in financial statements. So who might I rely on to facilitate my ongoing understanding of your company?”
Many attendees think that the CEO of a company is too busy to talk to them. If it’s a good CEO, that is not the case. If it’s a good CEO, that CEO is so wrapped up in what they’re doing, that they’re thrilled to talk about it. They don’t want to talk about baseball. They don’t want to talk about politics. They don’t want to talk about opera or popular culture because that’s not what interests them.
They want to talk about their company and if the person doesn’t want to talk about their company, you will know that they are not suitably interested and you shouldn’t be interested either.
TD: If I can ask you a question or two more here Rick before winding down, while these questions do apply to any conference, our team has a conference coming up this year in July, 2015 which is the Sprott-Stansberry Vancouver Natural Resource Symposium. What would you say makes this conference different, and what should attendees expect?
RR: In the first instance, this is a paid conference. It’s not a free conference, which means that the conference sponsor has a loyalty to the attendee. While there’s a lot of good information available at free conferences, the free conference promoter’s loyalty is to the exhibitor, the people who pay the freight. In this case, our loyalty is to the attendee.
The second thing is that attendees have told us in years past that exhibitors should to be content too. From a free conference promoter’s standpoint, the exhibitors are simply revenue. They’re simply advertising. But the attendees have told us year after year that they consider exhibitors to be content too.
What this means is that we at Sprott only allow companies to exhibit that we are large shareholders of. It doesn’t mean that if we made an investment that we’ll always be successful. What it means is that we have put our money where our mouth is, and we understand what attendees are saying with regards to exhibitors.
At many conferences, the qualification to be an exhibitor is a driver’s license and a check that cashes, in reverse order of course. At a Sprott conference, you have to be invited to be an exhibitor.
The third differentiator of this conference is that it is unapologetically a natural resource and precious metals conference.
Many conferences have morphed from precious metals to technology and now marijuana or whatever they thought could attract exhibitors.
Ours is unabashedly a resource conference, seeking to be the best of its kind. This conference will feature five or six of the top mining CEOs in the world, talking not just about how they built their companies but about the lessons they learned building their company, and how those lessons are valid to you as an investor. You don’t get that at many other conferences.
TD: Rick Rule, Chairman of Sprott US Holdings, thanks so much for sharing your comments with us.
RR: Pleasure Tekoa. Thank you for giving me the opportunity.
To learn more about the 2015 Sprott-Stansberry Vancouver Natural Resource Symposium, visit: NaturalResourceSymposium.com
For questions or comments regarding this article, or on investing in the precious metals & resource space, you can reach the author, Tekoa Da Silva, by phone 760-444-5262 or firstname.lastname@example.org.
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