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Rick Rule Interview Series Part 3 - The Nature of the Extractive Industry

Real Vision has provided us with the third installment of the Rick Rule interview.  In Part 1, we had the boom. In Part 2, we had the bust.  In Part 3, we finally can benefit from the lessons learned during the rollercoaster ride of Rick’s early career to understand the true nature of the extractive industry.

Watch Part 3 of the interviewThe Nature of the Extractive Industry.

Cyclicality. The mining and petroleum industries cannot escape the boom and bust pattern. Each industry reacts to its own set of stimuli and keeps its own time, but both are far more cyclical than almost any other industry by virtue of the huge appetite for -- and consumption of -- capital.

As Rick explains, when the market goes over the edge, the industry cannibalizes its own capital and assets. Gold mines which were earning $1,800 per ounce of gold produced are now making $1,200. The margins get squeezed, and they will try to make up for their eroding earnings by producing more and cutting costs elsewhere. Non-core assets are sold off, investment in future production halts entirely.  By the time the down swing is done, management has destroyed most of its productive capacity, and neglected to invest in projects to restore it.

When the market price finally increases, the suppliers have no ability to react to take advantage of that higher cost. Mining and petroleum operators consistently overshoot on the downside, and conversely, in booming markets, they fail to get off the train on the upside as well. The industry is in a constant stage of over-correction, making the median theoretical.  

The same might be said of the actual investors in the extractive industry space. It is human nature to anticipate the future based on the experience of the immediate past, which is linear thinking.  Rather, cyclical or contrarian thinking is the only way to survive.  Following years of unprecedented losses in the extractive industry, market participants are in a rare psychological state. Everyone who participated in the space has lost a meaningful portion of his or her capital, regardless of whether that investor made good decisions or bad. Nearly all are uncharacteristically gun shy. Normally brave commodities speculators are so risk averse as to ignore even the idea, let alone the inevitability, of a recovery.

 In Rick’s career, he has weathered three cycles and, he admits, he has made the same mistakes every time. But it is at the market bottom when the good investors acknowledge their mistakes, reorganize their portfolio, and they enjoy a massive escalation in the up cycle.  We’ve all weathered the pain, but who will have the courage to participate in the next recovery?

In the upcoming Part 4, Rick explains some real time opportunities and admonitions for today’s investor. 

Click here to see Part 3.

To start a free trial with RealVision and view the full hour-long interview, click here.



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