Adding to Sprott Resource Position

By Travis Johnson, Stock Gumshoe, January 20, 2011

This won’t surprise those of you who’ve been reading my various notes in recent weeks, but today I added considerably to my holdings in Sprott Resource (SCP in Toronto, SCPZF on the pink sheets). The shares do not trade at a huge discount, but after the exercise of warrants recently they now have a market cap of about $540 million — which means I think the shares are at a fair price and, arguably, discounted.

Oops, well — it might surprise you a little, since I said a couple weeks ago that with Sprott already a fairly large holding for me I wasn’t likely to change that portfolio weighting even though I thought it was still a buy. Apparently I lied, because the more I’ve delved into the shares recently the more I want, well, more.

Sprott Resource has, after the recent warrant exercise, probably about $85 million in cash at the corporate level (there is also cash in the publicly traded subsidiaries, which makes their balance sheets very confusing), about 74,000 ounces of gold (just under $100 million at today’s price), $245 million worth of shares in Orion Oil and Gas, and $116 million worth of Stonegate Agricom shares (both of which are companies that Sprott took public but still controls). They’ll owe 20% management fees on the increase in the valuation of those investments if they sell them, but that still gets us very close to the current market cap. What puts the shares at a discount, in my mind, are their private investments loaded onto that — including controlling stakes in One Earth Farms, which will be the biggest farm in Canada this year, One Earth Oil and Gas, which is drilling on First Nations land and in other areas but is still very small, and Waseca, which is expanding it’s production of heavy oil and adding to acreage. They’ve also added to their investment in Union Agriculture Group, which is a large private agriculture company in Uruguay that seems to be growing nicely — Sprott held about 15% in the second quarter and apparently invested another $14 million in the third quarter. UAG was expected to go public by the end of the year either in Uruguay or elsewhere, but as far as I can tell that hasn’t happened yet.

So that’s what I continue to think about Sprott Resource — the publicly traded ...

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