Buying those “prospect generators”

by Travis Johnson, Stock Gumshoe | February 20, 2009 11:18 am

Now that my three day waiting period has expired I’ve picked up a few shares of Altius Minerals, which I wrote about in response to a Dan Ferris teaser early this week. This is not necessarily a stock that’s particularly leveraged to gold, though it does have an interest in a promising gold project that’s still in the exploratory drilling stage, but it is a relatively low risk commodity play. They have no debt to speak of, a big net cash position, and a history of making good prospecting calls in Newfoundland and Labrador that has led to one significant royalty position and several other potential income streams from uranium, potash, shale oil (wouldn’t hold my breath on that one) and iron ore.

I also picked up some shares of an investment fund called Sprott Resources — this one was also speculated at as a potential solution to the Ferris teaser, and I did look at it in that regard, but I wasn’t able to confirm that it was a match, partly because it’s not really what you’d call a “prospect generator.” But in doing that research I became convinced that they were another interesting, relatively low risk play on gold and other commodities.

Sprott Resources is a fund that invests in early stage mining projects, broadly speaking, and like Altius they have a big cash position. One of the particularly interesting things about Sprott, given the recent run up in gold prices, is their significant holdings of gold and silver bullion.

Here’s what they said back in mid-December:

“Sprott Resource Corp. (“SRC”) announced today that it has acquired during this quarter 40,475 ounces of gold bullion and 852,478 ounces of silver bullion. The balance of SRC’s working capital is in short-term government of Canada treasury bills.”

Gold was at about $840 an ounce as of December 15, Silver at about $11 an ounce. I don’t know what prices they paid, but the December 15 price is pretty close to the midpoint of the prices that we saw during the fourth quarter, so it’s a reasonable assumption. And they may well have bought more or sold some since then, but if they still hold that bullion and were selling today, that would be $40.3 million in gold and about $12.3 million of Silver. And using that December 15 price, it’s possible that theay’ve made a paper profit of better than $7 million on their initial allocation to precious metals … not bad for your “working capital.”

Sprott owns pieces of a few junior mining and resource companies, including a South American miner and a gold miner with holdings in the US and Mexico, both are doing reasonably well but don’t move the needle that much yet as a percentage of Sprott’s portfolio. I’ll be interested to see what Sprott has been doing since December, they’ve sold their biggest investment (PBS Coals) to Severstal and brought a lot more cash onto their balance sheet, so they could potentially have been buying more gold or making other investments in the couple months since. Their other notable investments are a controlling stake in a phosphate project in Peru (Stonegate Agricom) and an Alberta/Saskatchewan oil sands project (Waseca).

With the PBS Coals sale and their preexisting cash hoard, Sprott probably has something better than C$300 million in cash, Canadian T-bills and bullion to invest at a time when good projects should be starving for investment, but with 80 million shares and a share price of C$2.60 that gives them a market cap of just a bit over C$200 million. They do have liabilities, including probably a big tax bill for that huge gain from PBS Coals, but they have no debt. And they do have investments that might easily go South, but they seem to me to have a cushion, even if you assume that the 20 million warrants end up getting exercised (most of them don’t trigger until the shares hit C$4.25).

Both Altius and Sprott are pretty close to fair approximations of book value as of their last financial reports, and they seem to have less downside than the commodities they invest in (thanks to large cash positions) while also being in some ways leveraged to any potential long-term rise in those commodities. We’ll see how it goes, but I consider these to be less speculative investments than those that I’ve made in some small gold miners, including Minefinders and Hill End Gold. I continue to have a limit order in for some Royal Gold, another relatively lower risk play on mining royalties, but it’s a bit too popular and pricey for me still, so that order may or may not ever be filled.

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