There difference between Rick Rule and just about every other member of the high-profile salespeople of BS stories populating the junior mining world is that Rule actually knows what the hell he’s talking about. An example popped up in my mailbox last night, the mailer rolling his eyes slightly but once I’d read the transcript of the exchange with the unspeakably crooked asshole James West* it had to be admitted; Rule imparts some very decent insight.
“…there’s about $3.5 trillion worth of energy debt in public companies
worldwide, and we think as much of $500 million of this is impaired.
Now, what’s important to note here, James, is that the people who bought
this stuff four or five years ago were yield-oriented, not
credit-oriented. They didn’t take a look at the companies’ underlying
ability to pay at various commodity prices, they just looked at the
yield. So those people believed that a bad 8.5 per cent yield was better
than a good 7 per cent yield. And that same lack of sophistication on
the buy side will be evidenced on the sell side. When the disruption
hits the energy credit markets, we suspect that the naïve buyers will
believe that both oil and gas are four letter words, and they’ll sell
with the same lack of discipline that they bought.So imagine a situation where a piece of publicly traded subordinated
debt was issued with a 7.5 per cent yield, and let’s say it has three or
four years remaining on it. But the bond goes to 50, meaning that your
7.5 per cent yield becomes a 15 per cent yield, and in the three or four
years to maturity, they have to buy you back at 100 for a piece of
paper that you bought for 50.Now if that piece of paper doesn’t pay you off at 100, the
shareholders of the underlying security see themselves going to zero. So
one of two things happen: you get sort of a 25 per cent annualized
rolling yield, or the shareholders go to zero. We seek the ability to
pick and choose through the whole range of resource credits, not merely
energy credits but also precious metals credits and base metals credits.
And the junk bond market will be the best opportunity available to us
in resource markets globally.”
Plenty more where that came from in the article, click here and read.
*Remember his role in Bobby Genovese’s Liberty Silver scam, and his wonderfully stupid “Geology Doesn’t Matter” commentary while pumping Seafield Resources for all you need to know. The planet does not need these parasites.