Famous mining investor Rick Rule says the industry would be better off if 85 per cent of junior exploration companies became extinct.
But he’s nominated an ASX stock that is well qualified to be among the remaining 15 per cent.
In an interview with Christina Morrissey in Stockhead TV, Rule was asked who will fund the explorers and how the next generation of tier 1 mineral deposits will be found.
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“I hope it comes from the bankruptcy of all the pretenders,” he said.
“Let’s say there are 2000 junior miners worldwide. I would suspect only 300 of them would have a reason to exist.
“The mining business would be better off if 1700 of them became extinct. But they are cockroaches – very, very tough to kill.”
Veteran mining investor Rick Rule.
‘Shocking’ lack of spend on actual exploration
About 20 years ago Rule assigned a young intern the job of pulling 25 TSX venture companies at random and reporting the insights he gleaned from their balance sheets and income statements.
“What he found shocked even me,” Rule said.
“The median spend on general administrative expense across 25 randomly selected companies was over 60 per cent of the capital raised by those companies.
“Less than 40 per cent went in the ground.”
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Rule said that if every junior explorer in the world was merged into one company called Junior ExploreCo, on a very good year it would lose $US2 billion.
In a bad year it would lose $US6 billion.
“The exploration industry isn’t underfunded; the industry is overfunded,” he said.
“You say we need more money spent on exploration? Of course we do, when 65 per cent of the money is spent on G&A , and less than 40 per cent in the ground.
“Society has underinvested in exploration for at least three decades. And it’s been OK, because we have lived off the surplus discoveries from the ‘60s, ‘70s and ‘80s, when we did invest substantial amounts of money in exploration.
“But that party is coming to a screeching halt.”
Copper: when underinvestment goes really bad
Just look at the geriatric giants of the copper business, Rule said.
“Bingham Canyon, the biggest mine in the US, is 160 years of age. Chuquicamata, the biggest open pit mine in Chile, is 115 years of age,” he said.
“The newcomer Grasberg is 65 years of age, while Escondida is 40 years of age.”
Bingham Canyon — the copper mine you can see from space. Picture: Pavliha, iStock / Getty Images
We haven’t invested anywhere near enough money in the copper exploration and development business, Rule said.
He believes that absent big mine construction spends we are going to experience supply shortages within five years.
“I use copper, because it is a large and well understood market, but what I said regarding copper could apply to much of the electric and battery metals space,” Rule said.
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There are, of course, the 200-300 exploration companies that exhibit such spectacular performance they add legitimacy, and even lustre, to a sector that loses $US2-6 billion a year, Rule says.
“Certainty we have seen that in Australia where Chalice (ASX:CHN) made a large sulphide nickel discovery. The market sat up and took notice,” he said.
“The market understands these are very rare beasts. They make a lot of money now and they are going to make a fortune in the future.”
Rule said one wonderful trend we were now seeing was increasing participation by senior mining companies – smart money – in financing quality juniors, Rule says.
“Typically, in those exploration joint ventures the overhead allocation enjoyed by the juniors is between 12-15 per cent of total exposure, rather than the 65 per cent funded by dumb money,” he said.
Average individual investors are often shoved under the “dumb money” umbrella. (No offence.)
This content first appeared on stockhead.com.au
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
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