I don’t like it.
That’s my first reaction to the announcement today from Sprott Resource Corp (SCP.TO SCPZF) that they’ll be canceling their monthly dividend. And it’s not because I think that a dividend is necessarily the best policy for them, it’s because they just instituted this dividend eight months ago. When I last wrote about the company a month or two ago on a prior drop in the share price I was a bit uncertain about this stock, holding and not reinvesting the dividends, but this dividend cut has caused me to rethink my opinion and I’ve sold my shares today. More details of that thought process below.
Why does the dividend cancellation matter? Well, it tells us how management thinks — they instituted the dividend over the winter because they said their business was becoming more predictable and steadier, with likely exits from investments ready to restock their bank account and get them off onto new endeavors with new partners. I took them at their word on that, it seemed feasible that a maturing private equity company would have some kind of vision of the coming year and the investments they would be opening and closing during that time.
Now, they announce that the dividend is being canceled because they need to conserve cash and because the price of gold has fallen (a good chunk of their balance sheet is in physical gold, about 72,000 ounces). They also noted that they believe gold is a good long term value, but that they may well sell some of their gold to maintain liquidity.
That’s what I don’t like: The failure to be prepared for an adverse market, and the appearance, in retrospect, that this dividend put enough pressure on them that they were skating near the edge.
The market in general has obviously been weak for most junior resource companies over the past year, but it has not been terrible for all of Sprott Resource’s major investments — their largest holding, the natural gas company Long Run Exploration (LRE.TO) has actually had a decent year and is close to the high for the year (Sprott would still lose money on it if they sold today, but it’s better than it was a year ago and much better than it was at quarter end in June). Of course, it probably has been a lousy year ...