Incremental Position Increase for an old “Idea of the Month”

By Travis Johnson, Stock Gumshoe, November 16, 2011

I personally picked up some additional shares of Sprott Resource Lending this week, I had put in a bid at $1.38 a little while ago in hopes that the stock would dip a bit for me, and that bid triggered today.

My opinion on SILU hasn’t changed over the last nearly a year since I wrote about them as an “Idea of the Month”, and the holding was built up to be one of my top ten personal holdings already (as I noted here). Following the earnings release last week, I saw nothing bad and plenty to be positive about for the future, so I’ve now boosted my holdings by about a third — the conversion of their old real estate portfolio and the buildup of their resource loan portfolio has been a little slower than forecast, and the market has punished them a bit, but I think they’re on the right track.

I still hold substantially more of their half-brother Sprott Resource Corp., but SILU was more appealing to me personally at current prices because of the fact that I think they’re at the very early stages of what might be a prodigious compounding machine if they can get their early loans to pay off well, and, given the turbulent markets, they’re a bit more diversified and liquid than Sprott Resource Corp.

Sprott Resource Lending is a resource bank — they lend to miners and energy companies, mostly, and also lead loans for consortiums into those kinds of companies. They always have a great pipeline of potential work thanks to their great industry connections (through the Sprott folks, including Rick Rule), and they’re playing at the relatively safer end of the risk spectrum as it pertains to financing the inherently risky business of mining and natural resource extraction, lending money instead of investing in equity. They also get a bit of a kicker from warrants and share “bonuses” in many deals, which is actually what was the biggest drag on their portfolio in the last quarter (the value of those “bonuses” dropped), but cash flow looks good, their resource loans outstanding are now well over $100 million, and the stock pays a dividend of just under 3% that should be sustainable from net interest income and cash flow (though not yet from actual earnings) and should, over the next few years, grow considerably.

Their books are ...

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