CAPE TOWN (miningweekly.com) – Take a measured view of the exploration business and be aware of the risks of investing in small mines, advises investment company Sprott US Holdings president and CEO Rick Rule.

Rule, who has offered advice on investing in resource companies for decades, says people tend to be afraid when they should be brave, when the bear market bottoms. “Conversely, in a bull market, people tend to be brave when they should be afraid.”

He suggests that it is much more difficult to be aggressive in a bear market, as all your best decisions are costing you money. “It makes it much more difficult to be aggressive precisely when you should be.”

Another mistake is what Rule calls the “small mine mistake”. He explains that one of the most seductive stories in the mining business is to invest in a small company, but warns that this can be risky.

“Too many times I have seen exploration companies succeed in finding small deposits which have generated cash flow. But they do things like developing an operation when they don’t have the skills set.”

Another warning sign is overexpenditure on nonexploration expenses.

“The misallocation of capital in the last bull market caused so many CEOs to lose their jobs. We need to watch the way the allocation of capital takes place.

“It’s too easy in a bull market to ignore the empirical side and allow yourself to be swept up in bull market emotion. It’s better to play the game intelligently while the game is still alive.”

It’s also wise to take a measured view of the exploration business.

“For too many years, too many of us have viewed the exploration business as an asset, but most exploration properties are an excuse to spend money.”

Rule suggests that exploration businesses should be considered research and development businesses rather than asset-intensive businesses.

He further notes that investors should be wary of pre-production listings, particularly in the junior mining market.

“We think there are 1 800 preproduction listings worldwide. I would suggest that 80% of those companies are value-less. They have no real reason to be on earth. My great regret from the bear market is that more of those listings didn’t go to listings heaven.”

“If you merged every exploration company in the world . . . and all these 1 800 companies become one company, in a very good year, that business would lose $2-billion. In a bad year, it could lose as much as $10-billion,” says Rule.

He also suggests that investors should not downgrade their portfolios to include high- low-quality people and projects at the expense of quality people and projects.

He advises investors to align themselves with successful people, whose new task is very closely aligned with their earlier success.

“Stick with serially successful people and teams that have been hired for their expertise.”

Investors also need the courage of conviction to stay in the trade. “Almost every big success I’ve had experienced a 50% decline in share price before it went ten to one.”