Rick Rule, president and CEO of Sprott U.S. Holdings
Focus: Natural resource investments

MARKET OUTLOOK

Precious metals and precious metals equities continued to strengthen at a measured, healthy pace. Concerns about the continued strength in the purchasing power of the U.S. dollar in light of aggregate U.S. debt and deficits combined with a cessation of Fed tightening led to measured growth in gold sentiment. Gold equities benefited from a stronger gold price (a recovery from oversold levels) and very strong operating performances by Australian producers. The near-term catalyst is a greatly increased level of M&A activity.

The mergers can be very beneficial for gold investors as they add both hope and liquidity to markets. Larger post-merger entities can have lower general and administrative expenses relative to assets and cash flow, are generally more liquid which leads to higher share prices and a lower cost of capital, and managers can often reduce acquisition by selling off assets that aren’t strategic to the acquiring entity. An interesting "unseen" advantage is that these cast-off assets and redundant people can be effectively recycled in the junior community to accelerate the growth of successful smaller developers and companies engaged in roll-up or acquire-and-exploit strategies.

Base metals, industrial materials and conventional energy have exhibited a more mixed outlook. Extended periods of low commodity prices after 2011 have led to decreased exploration, development, sustaining capital and expansion spending. This deferral of capital expenditure is beginning to show up as "supply destruction,” where the ability of the industry to supply commodities, at least in the current pricing environment, begins to fail. This can be very bullish for commodities pricing, given the long lead times necessary to restore productive capacity. But fears that a nine-year economic recovery is long in the tooth and that factors like increasing interest rates and populist politics could cause noticeable reductions in demand might offset supply concerns.

TOP PICKS

IVANHOE MINING (IVN .TO)

Three tier-1 projects in one public company headed by the most successful mining financier of my generation, with the company also being backed by Japanese and Chinese corporate and government consortiums … With a high degree of perceived political risk, Ivanhoe is my single best idea.

SANDSTORM GOLD (SSL.TO)

Sandstorm is a streaming and royalty company exhibiting strong free cash flow and excellent investing discipline. It’s efficiently returning capital to its shareholders by buying back stock, which is a viable strategy given that the company trades at a lower net asset value and earnings before interest and taxes (EBIT) multiple that its peers. A transaction where the company could sell its minority working interest in the Hot Maden asset in Turkey to its operating partner in return for a stream and/or a royalty could lead to a positive rerating.

WEST AFRICAN GOLD (WAF.V)

West African Gold is key to the consolidation and development of one of the world's finest undeveloped gold camps in Burkina Faso. The West African project is centrally located and has the best high-grade sequences in the camp. I see this camp as one of the few 10-million-ounce, tier-1 gold development opportunities remaining to be consolidated.

PAST PICKS: MARCH 5, 2018

ALTIUS MINERALS (ALS.TO)

• Then: $13.23
• Now: $12.90
• Return: -2%
• Total return: -1%

EMX ROYALTY CORP (EMX.V)

• Then: $1.13
• Now: $1.62
• Return: 43%
• Total return: 43%

IVANHOE MINES (IVN.TO)

• Then: $3.05
• Now: $3.48
• Return: 14%
• Total return: 14%

Total return average: 19%

WEBSITE: http://www.sprottusa.com/