This article is an excerpt from the May 21 Friday File (the extra commentary that paid members of this site receive) — but I’m still getting a lot of questions about Dan Ferris and his farming stock, so what follows is the part of that note regarding the teased agriculture company. I have not updated or re-checked the numbers since May 21, though my disclosure still stands and I still own shares in the company — and will not trade in them for at least three days now that I’m republishing these comments.
Today’s stock comes from Dan Ferris at Stansberry’s Extreme Value, whose ideas I often find intriguing. Several readers have sent me emails in which he teases out a trip he made to a massive farm as part of his research into an agriculture investment. Here’s the teaser copy they forwarded:
“We were visiting the second-largest farm in the country, soon to become the largest… and perhaps one of the two or three largest in the world within five years. I don’t normally get excited about a business less than two years old, and I don’t normally get excited about things that haven’t happened yet. But this situation is special. It’s a farm that’s ramped up from 0 to 70,000-plus acres in about 15 months. They expect to ramp up to 225,000 acres by the end of next year. I think the project will become a public company one day and make my Extreme Value readers a ton of money (more on this in a minute).
“Agriculture is a great place for investment capital these days. It becomes more and more important as people become wealthier. Today, enormous new demand for commodities is coming from Asia. People in China and India, among other places, are a little bit wealthier today by our standards. But they’re a lot wealthier today by their previous standards. First thing you do when you get a little more money coming in is eat better. That’s one big reason why I’m really bullish on this farming project.
“I’m being short on specifics. Those are reserved for subscribers to Extreme Value, who will learn all the details of my farming research trip in the issue due out Friday, June 4. To get access to this one-of-a-kind opportunity, you have to know the name of a certain publicly traded hedge fund the majority of investors don’t even know exists. It’s not like any other hedge fund. It’s not buying financial stocks or publicly traded gold stocks. It’s buying private stakes in precious metals, oil and gas, and agriculture businesses. You can’t access these private investments any other way. You have to buy this publicly traded hedge fund to get in on the one-of-a-kind farming opportunity.”
It’s always fun when a stock I already own and have profiled here for the Irregulars gets a top-secret teaser treatment like this, but I think this must be … Sprott Resource Corp (SCP in Toronto, SCPZF on the pink sheets), which has just about doubled since I wrote about them almost exactly a year ago (I’ve also provided some additional comments on this one along the way, [sorry, both of those links are to the Irregulars-only site and require a login] particularly as their Net Asset Value has changed with their big bullion purchases). I continue to own shares personally and think that this one has great potential, though the farmland portion of their investing is still quite small in relation to the rest of the firm.
So what is that farmland that Ferris is talking about visiting? Sprott Resource, which is essentially a publicly traded investment fund that makes public and private investments, started a subsidiary recently called One Earth Farms, which is focused on partnering with the First Nations (native tribes in Canada) to bring mass-scale agribusiness to their Canadian prairie lands, which should lead to more efficient use of the land and lots of employment for local residents.
They had a bit over 60,000 acres planned for planting this year, but well over 70,000 if you include pastureland … this is how they update us in the latest quarterly report at the end of March:
“One Earth Farms Corp. (“One Earth Farms”) began seeding operations in the Lethbridge Alberta area. In 2010, One Earth Farms expects to farm approximately 61,000 acres of cropland, 2,000 acres of hayland and support 1,900 head of cattle on 15,000 acre of pasture lands.”
They’re making new deals all the time and are actively seeding huge swaths of Canada right now … and their goal is 225,000 acres by the end of 2011. This is not land that they own, but they’re essentially the tenant farmer working in partnership with the First Nations, and I expect the goal will be, as Ferris intimates, to spin off One Earth Farms as a separate company at some point.
So far, Sprott has sold some small pieces of One Earth to raise more money for expansion — Sprott has invested $27.5 million in this farming subsidiary and now owns 67% after the company raised $15 million by selling 15 million shares (that works out to a buck a share, in case your calculator’s not working) — but they have 80% interest fully diluted (30 million shares plus 30 million warrants to buy more at $1 a share). So all of that is a pretty good indication that they’re looking to go public at some point, though I don’t have any insight into when that will be — they just floated their Stonegate Agricom subsidiary in an IPO last month, which took place almost immediately after the company filed a NI 43-101 Technical Report on their phosphate reserves.
Here’s the bit from their recent press release about this One Earth Farms fundraising, which took place in December:
“Subscribers to the private placement include Ag Growth International (TSX:AFN), a leading manufacturer of portable and stationary grain handling, storage and conditioning equipment, Alliance Grain Traders (TSX:AGT), the largest lentil and pea splitting company in the world and CAPE Fund LP (“CAPE Fund”), a $50 million private-sector investment fund founded by the family of the Right Honourable Paul Martin and 21 large corporations, international foundations and individuals, which is focused on opportunities with a strong degree of Aboriginal involvement and connection to Aboriginal communities throughout Canada.”
So yes, One Earth Farms is not yet public, and you could technically get a piece of the company by buying shares in Ag Growth International or Alliance Grain Traders, but those are both much larger companies with a lot of other stuff going on — so for now, if you love One Earth, Sprott Resource is the way to go.
As with all such investments, though it’s important to look at the net asset value of the company — Sprott Resource is effectively just a closed-end fund or a hedge fund that’s managed by Sprott, and they charge a hedge fund-like fee of 2% of net asset value plus 20% as an incentive performance fee when they outperform their benchmark. Not terribly unreasonable, since that’s most of the overhead for the company and they actually are extremely active managers. They’re actually creating new companies and subsidiaries and investing in non-public stuff that you or I couldn’t buy otherwise — it isn’t like they’re charging us 2% interest to buy publicly traded companies.
But still, you’re not really buying a company, you’re buying a management team and a portfolio — so what’s the portfolio worth?
As of the last report, they still have a lot of cash and bullion, though I think they’ve sold all their silver and hold just gold now for the bullion portion. And they have controlling investment positions in several significant subsidiaries, including Stonegate Agricom, which just went public, Waseca Energy, which is working on oil sands production, and Orion Oil & Gas, which also is public (OIP in Toronto). You can see the details of each on Sprott’s website here. Overall, it works out that their current portfolio is 12% agriculture, with the rest split evenly between energy investments and gold/cash/almost cash.
Sprott currently has 96 million shares outstanding, and another 16 million warrants at near the share price (C$4.25, it’s priced just under $4 right now). That gives them a market cap, if you ignore the warrants, of about C$375 million. As of the end of the last quarter they held about $160 million in cash and bullion, though the bullion is largely gold that is carried at cost of C$75.4 million — as of the end of 2009 it was 73,971 ounces, which today would be worth C$92.5 million, though of course that number fluctuates. So if we assume that this cash/gold his roughly $175 million, where is the other $200 million of market cap?
They hold some smaller portfolio investments and common stocks, which they don’t disclose very clearly, but most of that value is attributed to their “big four” investments — Waseca, Stonegate Agricom, One Earth Farms, and Orion Oil and Gas. Stonegate and Orion are now public, so we can figure out exactly what they’re worth right now:
Orion is publicly traded now, at OIP in Toronto, and they have 290 million shares outstanding (ignoring warrants and options at the moment). At a recent share price of 96 cents that gives them a market cap of C$278 million. Sprott Resource still owns 79.3% of the company, so if those shares are trading at a fair value then Sprott’s shares in Orion Oil and Gas alone are worth C$220 million.
Which means the rest is gravy … the gravy starts with Stonegate Agricom, which as I noted just went public. Stonegate has two properties, Mantaro in Peru and Paris Hills in SE Idaho, both are potential phosphate mines (phosphate is primarily used as an agricultural nutrient) — Mantaro is further along with a new technical report filed this month. Stonegate is down quite a bit from the IPO price of $1, it now trades at 69 cents. There are a huge number of warrants, most associated with the IPO, but if we ignore those (they’re all underwater at the moment) the market cap is C$96 million, and Sprott continues to own 57%, so that’s just under C$55 million. Starting to look like Sprott’s trading at a pretty large discount again.
Sprott’s investment in One Earth Farms, if we believe the valuation that was put on them by the outside investors who bought a piece in December, is worth at least $30 million at $1 a share, plus they have 30 million more warrants to buy more at $1.
And Waseca is worth … I don’t know. They are producing oil from the tar sands in Llloydminster, and they’re drilling for more on their leases in the area, and looking to acquire more. The closest we can come to a quick and easy valuation is to say that Sprott has invested $27 million in this subsidiary, and though they are bringing in cash from production I assume they’re not profitable on a stand-alone basis. I’d guess that this one would be the last of the four to be “monetized” unless there’s a real oil craze again, but you never know.
That gets us to about C$480 million — $175 in cash and bullion, $220 million in Orion shares, $55 million in Stonegate shares, $30 million for One Earth Farms, and we’ll throw in Waseca and whatever else they may have in small investments for free. That’s no guarantee, of course, and please check my numbers if you’re making investments based on this info (I’ve been known to slip in an error now and again) … but even with a huge part of that value being tied up in majority stakes in small public companies, (meaning they’re not as liquid as they appear — if Sprott tried to sell out the shares would collapse), that does look like a nice, friendly discount to net asset value for an investment portfolio whose managers have proven that they can be nimble and aggressive. I hadn’t run those numbers in a long time, but now that I do I’m starting to think I should consider adding a bit more Sprott Resource to my portfolio before too long … though personally, I’ve probably already got far too much of my portfolio tied up in small resource companies and similar types of stocks. Sprott Resource trades at SCP in Toronto, and at SCPZF on the pink sheets — and remember what I said about checking my numbers, that discount is steep enough to warrant another round with the calculator to confirm.
P.S. I also added a supplemental comment to this on the Irregulars site since I think I exaggerated the cash position the first time through — here’s what I added in that comment:
Just a note to the NAV for Sprott: I think I might have double counted some of the cash balance — since I included the stock market valuations for the two IPO’d spinoffs, it’s possible that the bigger cash number includes the cash balances on the books at those two subsidiaries as well as Sprott’s “headquarters” cash. That would cut in by perhaps as much as 50-60 million, I’m guessing. Still should be checked if you’re relying on that number, just wanted to note it — it gets confusing when a subsidiary is publicly traded but also may be included in corporate books as a subsidiary. If you ignore the cash and just include bullion and the three major subsidiaries that are relatively easy to value you get to right around the current stock market value … so figure out what discount you demand for owning stocks like Orion that you can’t easily sell in a hurry (since you own 80% of it), and you can toss in Waseca, whatever actual investable cash there is on the Sprott books, and their stated 25-30 million of other investments on top. Still looks like a good discount to me, but getting more confusing all the time (they also recently started a One Earth partnership for oil and gas with the First Nations, though that will move a lot slower than the farming).