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Rick Rule continues:

“It seems to me that in the short-term investors are made happy and confident about the fact that central banks are lending money to these private banks.  You have to ask yourself if lending money to a lender that makes bad lending decisions is a good idea.  And what happens when the so-called lender of last resort (the Fed), can’t continue to inspire confidence?  I think that’s a ‘when’ event, not an ‘if’ event.

It would seem to me that when the world decides the ECB and the FED have difficulty borrowing the money, which they then re-lend to people who lose it, they will have to resort, more and more, to printing, i.e. counterfeiting.  At some point investors will lose confidence in those short-term fixes.  When this occurs it will be extremely bullish for precious metals.

In this environment, to make the big money, you need to enter stocks that aren’t institutional, momentum favorites.  Those stocks aren’t going to work.  The kind of stocks that are going to work and the kinds of stocks that are going to be sold to the Rio Tinto’s and the BHP’s and the Newmont’s and the Barrick’s of the world.  The buyer this year is going to be the industry.

I think the buyers for the exploration stocks, the impetus for the market in exploration stocks this year will be takeovers.  The companies that have done a good job, although they may not find traction among institutional or retail investors, will be taken over by larger mining companies.... 

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“These larger companies have both the need to replace production and the financial strength to complete the takeovers and to build out the discoveries that have been made by the juniors.

The takeovers are very often value related, rather than market related.  So, I think you would see, in this instance, higher premiums than you would normally see even in a bull move.  If the industry sees $2 billion in discounted free cash flows and they see a market cap of $600 or $700 million, they are willing to pay $1.3 billion to secure net-present value.  So, it’s possible that you will see 70%, 80% or even 100% premiums in bad markets, for good assets, in select names.

We are also in a major discovery phase and although the market won’t recognize it or won’t appreciate it until its occurred, people who position themselves in advance of this will be in a spot where they can really make some money in 2012.  The industry needs new deposits and the industry has the money and the capacity to execute the takeovers and to build the mines that have been discovered by the juniors.

Also, regarding the discovery theme, people are burnt out with the mining sector and I suspect this is right before they begin to enjoy the benefits of the discovery cycle.  Some of your readers are old enough to remember some of the discoveries we enjoyed in the mid-90s.  Things like Diamond Fields, as an example, went from $4 to $160.  Arequipa Resources went from 30 cents to $30.

It’s my belief that we are going to re-enter a discovery cycle and I would be surprised, frankly, if we didn’t have four or five names that made 50 or 100 fold returns on pre-discovery market capitalization.

We have a perfect situation right now where the expectation that the market has for the sector is non-existent.  These quality companies are in the final push for discovery and yet nobody is anticipating any exploration success.

The last sector of the market to have money is the industry itself, and the industry has both the ability, by way of capital, and the need to pull the trigger, and mark my words, they will pull the trigger on big discoveries.”

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

Eric King

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