This month, I travelled halfway around the world to Australia and New Zealand while pursuing one of my favourite investment themes: the growing scarcity of resources such as water, farmland, and energy.
One of the highlights of my trip was taking a group to visit one of the world’s best resource investors – Rick Rule – at his farm outside of Auckland, New Zealand. After eating lunch, we got down to the business of the market.
Rule expects markets will be extremely volatile this year, which he considers a gift. It’s what allows you to pick up assets on the cheap. Specifically, assets in his favorite sector, natural resources.
There are simple reasons why Rule likes resources: For a long time, there was little investment in the sector, and now we have to play catch-up. From 1982–2000, there was no net investment in the resource sector, Rule maintains. This is a sector that is slowly self-liquidating. If you run a mine, for example, every day you run it, it gets smaller.
At the same time, we had a massive global boom in demand. Here Rule essentially laid out how emerging markets such as India are large and growing and closing the gap with the West.
This is particularly bullish for commodities. Rule said: “When Indonesians make a little extra money, they buy stuff. They upgrade from bicycles to cars. They buy air conditioners for the first time. They buy refrigerators.” All of these things use basic materials – steel, aluminum, and other metals. They use energy.
Rule sums it up this way: “When we spend money, we buy services. When poor people spend money, they buy stuff.” He points out that China’s use of oil is 3% of the US’s on a per capita basis. If China were to get just to the demand of South Korea on a per capita basis, which is 16% of the US’s, then China’s incremental oil demand would account for all of current world production.
Not surprisingly, Rule’s favourite resource sector is energy. “Energy is cheap, and it’s not going to stay cheap. Gas is the same price as it was in 1980 on inflation-adjusted terms.”
Demand is going up and supply is problematic. Rule points out that most of the oil in the world is produced not by the ExxonMobils and Chevrons of the world, but by national oil companies, like those of Venezuela, Peru, Iran, Mexico, and Indonesia. The NOCs are starving themselves of much-needed reinvestment so that they can spend the proceeds on social programmes and for political ends. Many of these countries are in immediate danger of no longer exporting oil.
Another factor is “carbon hysteria.” Skirting the issue of whether global warming is real or not, there are consequences to the current drive to reduce carbon emissions. For instance, “coal is bad” from a government point of view. If you found a bunch of coal in Australia or New Zealand, Rule says, and wanted to develop it, you probably couldn’t. Governments hate coal, despite the fact that most of the world still relies on coal.
So what does Rule like here? He still likes gold, but “the thrill is gone from the gold market. It’s no longer a lonely trade. I like lonely trades.” What are the lonely trades?
His favourites are geothermal and uranium.
“I really like geothermal,” he says. The best place to explore is in the US. Political consensus is that geothermal is good: power companies want it and are willing to pay up for it. They pay up for it because it’s green. Political subsidies make the economics of geothermal really compelling. Rule maintains you can earn a 22% internal rate of return with a cost of capital less than 5% – these are far better than returns generated by solar or wind projects.
“I can’t say when geothermal will take off,” Rule said, “but the businesses work stupidly well. They really work. It almost doesn’t matter what stock you buy, just own the sector.” Rule reeled off four names to own – Ram Power, Nevada Geothermal, Sierra Geothermal, and US Geothermal.
They are speculative little ventures, but owning a basket is probably a good move. As for the speculative nature of the stocks, Rule said the best stock he ever owned was an Australian penny stock. “I bought it for 1.5 cents per share and sold it for $10 per share,” he said. “It was the best stock of my life.”
He also likes uranium. Uranium had a mania and then the price collapsed, and the stocks with it, but the businesses kept getting better and better. “The uranium story that fed the mania is still in place.”
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Rule said we consume more uranium than we produce. “The uranium price has to go up. And more importantly, it can go up.” Meaning, the price of uranium is very low. It could double and still not have any meaningful impact on the economics of a nuclear plant. “People don’t care much about uranium today, but in three years, they are going to care a lot.”
Rule’s favorite themes are much the same as mine. As I detailed in this essay, I think buying oil companies right now is a great idea. I think oil and natural gas prices are going to be higher in three years than they are now. I’m also digging into the other energy sectors Rule described. After all, as an owner of energy assets, you have over three billion people just starting to demand what you’re selling.
• This article was written by Chris Mayer for the free daily investment letter DailyWealth