Last month, I traveled halfway around the world to Australia and New Zealand while researching one of my favorite investment themes: the growing scarcity of resources like water, farmland, and energy.
One of the highlights of my trip was taking a group of subscribers 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 period of time, very little new investment occurred in most resource industries. So now they are playing catch-up. From 1982-2000, there was no net investment in the resource sector, Rule maintains. These industries require continuous investment because they are, by definition, self- depleting. If you run a mine, for example, every day you run it, the deposit gets smaller.
At the same time, global demand for resources has been booming. “When Indonesians make a little extra money, they buy stuff,” Rule explains simply. “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 Americans spend money, we buy services. When poor people spend money, they buy stuff.” He points out China uses only 3% as much oil as the US on a per capita basis. Therefore, if Chinese oil demand were to rise only to the level of South Korea on a per capita basis, which is 16% that of the US, then China’s incremental oil demand would account for all of current world production.
Not surprisingly, Rule’s favorite sector in the resource sector is energy. “Energy is cheap, and it’s not going to stay cheap. Natural 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 by national oil companies (NOCs), like those of Venezuela, Peru, Iran, Mexico, and Indonesia – not by the ExxonMobils and Chevrons of the world. These NOCs are starving themselves of much-needed reinvestment so that they can spend the proceeds on social programs or to advance political objectives. Many of these countries are on the verge of halting oil exports, simply because local demand is close to consuming all the local oil production.
Another factor in favor of rising energy prices 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” has become the pervasive governmental point of view. So if you found a bunch of coal in Australia or New Zealand and wanted to develop it, Rule says, 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? His favorites are geothermal and uranium.
“I really like geothermal,” he says. And the US is one of the best places in the world to develop geothermal reservoirs into power-generation facilities. Political consensus in the US is that geothermal is good. Power companies want it and are willing to pay up for it because it’s “green.” Political subsidies make the economics of geothermal even more compelling. Rule maintains you can earn a 22% internal rate of return with a cost of capital less than 5%. These are far better returns than solar or wind projects generate.
“I can’t say when geothermal stock 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.” 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 explained in the January 27th edition of Markets and Money, I’m a big fan of buying mid-sized oil and gas stocks right now because, like Rule, I believe oil and natural gas prices are going to be higher three years from now. But I’m also digging into other energy sectors like geothermal and nuclear.
I am persuaded by Rule’s analysis.
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