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Resource legend's "radical" trading approach

Matt Badiali
0 Comments|April 3, 2012

Rick Rule's current take on the market could make you triple-digit returns over the next few years

Rick Rule is taking a "radical" approach to natural resource stocks these days...   

Actually, what's "radical" for Rick is "typical" for most people. But his current take on the market could make you triple-digit returns over the next few years. 

Regular DailyWealth readers have seen Rick's name many times. Rick is a natural resource investing legend. Over the past three or so decades, he's made a fortune for himself and his investors by buying cheap, out-of-favor resource assets (things like copper mines and oil fields)... and selling them when the world wants them. Some of the smartest, richest investors I know use Rick's firm (which is now part of Sprott USA) exclusively to make natural resource investments. 

At any given time, when Rick looks over the resource investment landscape, he typically sees the most opportunity in very small resource stocks. Not many people follow this space, so there's a better chance of finding cheap, safe stocks.   

But these days, Rick is taking a "radical" approach. He's seeing incredible values in "Big Mining"...   

Over the past few years, commodities like gold and copper have soared in price. Gold was $1,000 an ounce in 2009. Now it's $1,660. Copper was $2 a pound in 2009. Now it's $3.80. But rather than climb along with the price of metals, big mining firms have declined... or traded sideways. Most people just don't believe the price of commodities can stay this high... So they are avoiding these stocks. 

Meanwhile, big mining firms like Freeport-McMoRan and Kinross Gold are raking in huge amounts of cash. This "falling stock price, surging cash flow" situation is making big miners very cheap. 

For example, Freeport-McMoRan (NYSE: FCX, Stock Forum) is one of the world's great copper miners. It owns two extraordinary mines, Grasberg and Tenke Fungurum. Its shares are down 30% in the past year. 

Freeport's market cap is about $36 billion. In 2011, it generated $6.6 billion from its copper and gold mines. That means the company trades for just 5.4 times its cash flow. That's incredibly cheap.   

Another great example is Kinross Gold (NYSE: KGC, Stock Forum). Kinross is the sixth-largest gold producer in the world. It's poised for solid production growth over the coming years... And it's spinning out enormous amounts of cash. Kinross shares have fallen 37% in the past year.   

Kinross' market cap is about $11 billion. In 2011, it generated $1.6 billion from its gold mines. Today, Kinross trades for just 6.8 times cash flow. And like Freeport, it's incredibly cheap.

 I recognize the fears related to owning big mining stocks. Many folks think China's economy will suffer a big slowdown, which will depress demand for commodities... which will depress commodity prices... which will depress the share price of commodity producers. But if China simply "treads water"... and if commodity prices simply stay at current levels... big mining firms will continue to make huge amounts of money.   

As we say in response to extremely bearish financial forecasts, the world has a way of not ending... and rewarding optimists. 

In sum, it's not often a guy like Rick Rule gets into "Big Mining." It takes extraordinary values to get him interested. Right now, those values exist. If the world simply doesn't end – and commodities simply stay at their current prices – buying now will look like a brilliant move a few years from now.

Tags: GOLD COPPER

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