Why Most Natural Resource Stocks Are a Trap

Editor's note: Natural resources are soaring in value today – and lots of folks are eager to get in on this trade. But while many resource companies are spending tens of billions of dollars every year, only a few are worth your time. That's why, according to natural resource expert Rick Rule, investors need to distinguish the companies that are just selling a story from the ones actually creating wealth.

Let me be blunt: Most resource stocks are worthless.

Not worthless in the academic sense. Not "overvalued." I mean they're worth zero, or very close to it.

The overwhelming majority of junior resource companies will never generate a dime of free cash flow. They won't discover anything... They'll never build a mine... And they won't sell for a premium. They'll raise cash, dilute, and disappear.

I've been in the natural resources business for 50 years. During that time, I've financed, analyzed, and speculated on hundreds of companies. I've seen booms, busts, and everything in between. And I've learned a hard truth: The sector is full of traps that look like opportunities.

These companies don't set out to fail. It's just that the odds are brutal. Resource extraction is a capital-intensive, high-risk business... Mother Nature doesn't hand out tier-one deposits very often. Governments don't always cooperate. Markets don't always provide funding. And geology doesn't care about a company's investor deck.

So if you're going to speculate in this space – and I still do – you must understand the difference between a story and a business. One is designed to raise capital. The other is designed to create it.

Most resource stocks? They're stories.

Let me show you what I mean – and what I look for instead...

The Odds Are Against You

Every year, tens of billions of dollars are spent on mineral exploration. A tiny fraction of projects – maybe one in 3,000 – becomes a producing mine. Of those, even fewer generate consistent free cash flow or offer real returns to shareholders.

And yet, thousands of junior companies trade on public markets, each promising "world class" projects and "near-term catalysts." It's promotional oxygen. If you believed every PowerPoint, you'd think we're drowning in high-grade, low-cost, fully permitted discoveries just waiting for the right gold price.

But the truth is, most juniors are in the business of selling stock, not digging holes. Their management teams are incentivized to raise money, tell a story, and keep the lights on. The actual odds of development success barely register.

What I Look For Instead

So how do you protect yourself?

You stop thinking like a speculator and start thinking like a lender. That requires discipline.

My background as a credit analyst shapes how I evaluate companies to this day. I don't chase blue-sky stories. Instead, I want to know how I can get my capital back – with interest.

Here's what I look for when I analyze a resource stock...

1. People with proven track records

This is non-negotiable.

I want management teams that have done it before – not just once, but repeatedly. Have they raised capital ethically? Have they built and sold projects? Have they made investors money?

The resource business is technical, but it's also intensely people-driven. The same 10 or 20 names appear again and again in successful ventures. If you back a team that has never brought a project into production, your chances just went from slim to near-zero.

I don't want charm. I want competence.

2. A project that works at today's prices, not tomorrow's fantasy

Don't give me a feasibility study that requires $5,200 gold or $200 oil to break even. That's not a mine. That's a hallucination.

I want projects that generate economic returns at or below current prices. That means looking at...

• All-in sustaining costs with taxes, royalties, general and administrative expenses, and capital costs

• Internal rates of return using a realistic discount rate

• Sensitivity to grade, input costs, and commodity prices

If your model only works with heroic assumptions, it's just a marketing scheme.

3. A Tier 1 jurisdiction

You can have the best project in the world. But if it's in a country that expropriates assets, changes mining codes on a whim, or delays permits for decades... good luck.

Political risk is real. And while no jurisdiction is perfect, some are clearly better than others. I'd rather take a lower-grade deposit in Nevada or Saskatchewan than a "world class" one in a country where contracts mean nothing.

Sometimes, the discount for political risk is justified. Sometimes, it's not. But you'd better understand what you're buying.

4. A path to production – or a takeout

There are only two ways to make money in a junior resource company: either it'll get acquired by a major or it'll build a mine and actually generate cash.

Most juniors never do either.

So I always ask: What's the plan? Is this company trying to grow a resource into a Tier 1 asset that will interest a major? Or is it aiming to build a small, high-margin operation on its own?

If I don't see a clear pathway to one of those outcomes – and the capital and permitting to support it – I move on.

5. A strong balance sheet and rational share structure

This is the part nobody wants to talk about.

A company might have a great asset, but if it's buried under layers of debt or diluted into oblivion, you're not going to see the upside.

I look for companies that have enough cash to survive the next 12 to 24 months... aren't constantly issuing paper to keep the lights on... and treat the capital structure like something to protect, not exploit.

Dilution is a cost, not a strategy. Always remember... Management should work for you, the shareholder. If it's not, it's time for you to move on.

Regards,

Rick Rule

Editor's note: Natural resources are becoming the biggest geopolitical story in the world. Meanwhile, the White House is stockpiling critical minerals – and it's about to massively ramp up its buying spree. Today, the man widely considered the greatest resource investor of all time is telling you exactly where you need to move your money before the White House makes its next move.