October 2018 – In an exclusive Critical Resource Q&A, leading resource financier Rick Rule discusses investment opportunities, downplays current levels of geopolitical risk and urges the industry to harness the benefits of a more diverse workforce.
Rick Rule is President and CEO of Sprott US Holdings, where he leads a team of earth science and finance professionals. A frequent speaker at industry conferences and interviewee for a range of media outlets, Rick has expertise in resource sectors including agriculture, alternative energy, forestry, oil and gas, mining and water.
Please note that as with all our interviews, the views expressed here do not necessarily reflect Critical Resource’s opinion.
Rick Rule
“There are broad opportunities for resource investors as we come out of the period of low commodity prices. Five years of low prices have reduced sustaining capital and new capital investments in the extractive industries, which has led to a tightening of markets through supply destruction rather than demand creation. When you balance supply and demand with supply destruction rather than demand creation, the benefits to the industry are longer-term. As an example, restarting a mine that has flooded requires large amounts of capital, sometimes very long permitting processes and lot of time addressing pricing signals. This has set the stage for the recovery that we have seen – and we continue to see – for both mining and oil and gas.
The period of low commodity prices did two other things. Firstly, it reduced consumers’ incentive to substitute or reduce their consumption of commodities in the value chain. There was no particular reason at a time of $2 copper to alter fabrication technologies to cut consumption. The second development has been the retreat of generalist investors from the extractive sector, which means there is now less competition. As a result, the opportunity for resource investors in the next five years is quite attractive.”
“As the largest and most transparent of the resource sectors, oil and gas illustrates that market forces have caused prices to rebound. The very low oil price a few years ago prompted major producers to substantially underinvest in the sustaining capital that was necessary to maintain production. That was exacerbated in some countries by politicians diverting cash from state oil companies to fund politically expedient domestic spending. The ability of state oil companies and their private partners to produce oil was therefore considerably impaired, particularly in Venezuela and Mexico, but also – although less noticeably – in countries like Peru and Indonesia. Consequently, despite the growth in North American shale and the willingness of the Saudis to maintain production, the oil price has risen to $80 a barrel, against all previous expectations.
The non-resource press holds up other explanations, notably OPEC discipline – which in my life has never occurred – and a young Saudi prince putting some of his uncles in jail. But I believe the oil markets have tightened simply because there has been a gradual resumption of global growth which stabilised demand and, most importantly, a lack of investment in new projects and in sustaining capital.”
“The future price of oil really depends on demand staying intact. Now I am not talking about the advent of technology, such as the electric vehicle. Rather, I am referring to global demand, led by global economic growth. We have experienced a period of synchronous global growth, and in particular American growth, since 2009. However, especially now that percolating trade wars appear to be on the horizon, one should worry about how sustainable these circumstances are.
My suspicion is that if we can maintain even tepid global growth, the oil price will not change much because we are still not seeing sufficient investment in productive capabilities – outside perhaps the United States and, to a lesser degree, Canada. Therefore, there is extraordinary opportunity in the oil and gas space in conventional exploration and production around the world, provided that the agreed-upon social take permits that investment.”
“The adoption of ESG issues into day-to-day decision-making by companies and the investment community has not gone nearly far enough. One such issue is the enormous skills gap the industry faces. The baby boomer generation, which was the last one to go into the extractive sector with some sort of gusto, is approaching its sell-by date. There has been a two-or-three-decade hiatus in our ability to recruit the best and the brightest. For too long, the industry has looked like me – old, fat, bald, male, white.
We need diversity for two important reasons. We are active in a range of different countries and societies, which means we need a diverse workforce to be able to interact both technically and socially. We thus do ourselves as an industry an enormous disservice by not accessing most of the human intelligence available. We really need to increase the pace at which we increase diversity in our companies. For example, we need to recruit more women – not because it is politically correct to do so, but because as an industry we can no longer afford to exclude half of the collective IQ of humankind.”
“Another area the industry needs to be much more proactive on is the issue of resource nationalism and resource rent. For example, we are confronted with cases like Zambia trying to tax First Quantum a sum that exceeds the company’s global sales during the period of the alleged infractions. Not only does the industry need to point out the absurdity of that, but it also needs to initiate a debate on what is the appropriate level of social rent.
We also need more political discussion about how social rents are distributed. It is no wonder that in places like Peru or Ecuador, indigenous peoples object to the water they have used for centuries being sold to the mining industry by central governments. Nor is it surprising that, with all the rents flowing to the capital, local people have come to believe that their exploiters are the companies active in their regions. Governments have recently begun to rebalance the distribution of benefits, particularly in Latin America. But the industry needs to lead the discussion more aggressively, inviting in a broad spectrum of civil society, especially in emerging and frontier markets.”
“Surely the rise in resource nationalism is a problem and trade wars make everyone poorer; however, it is not clear to me that geopolitical risk has increased. I believe the most dangerous political actors are the ones closest to me – I have suffered my greatest losses in the people’s republic of California rather than the Congo. In fact, I have found Russia becoming a less risky place to invest despite the headline noise between Putin and Trump. Russian companies are much less opaque these days, perhaps due to London listings. As social exchanges between places like Canada, the United States and Britain on one side, and China, Russia and emerging markets on the other have greatly increased over the past decades, the level of social as opposed to political risk has decreased.
The sad fact about extractive industries is that we are prisoners of politics. Governments exist to reward some constituents and steal from others. If a regime becomes odious, most businesses would simply decamp that locale and go somewhere friendlier. As a group that is unattractive on its face and that cannot remove the capital it has put in place, and often as foreigners who cannot vote on the division of spoils, extractive companies are wonderful targets for the marauding politician.”