February Idea of the Month: Sprott’s New Bank

By Travis Johnson, Stock Gumshoe, February 18, 2011

I mentioned this stock a few months ago, when the folks at Sprott were just beginning their takeover and transformation of Quest Capital, and now that I’ve seen a bit of progress in their business plan and we have a projected dividend and dividend start date, I think it’s worth buying the shares.

So the “Idea of the Month” this time around is Sprott Resource Lending (SILU in NY, SIL in Canada). Share price is right around $1.80 right now, and the company has a market cap of $283 million, with roughly $100 million of that in cash that they’re in the process of trying to lend out.

Sprott Resource Lending is a new company, but it has a history that may be familiar to some of you — it began life as Quest Capital Corp, which was essentially a Business Development Company that later became a Canadian interpretation of the mortgage REITs that got so many investors excited in the mid-2000s before the housing bust — so basically, like similar mortgage REITs (they’re called MIC’s in Canada), in the end it was a fund that borrowed money and used leverage to buy mortgages or originate mortgages, and paid out most of its cash flow to shareholders to provide a strong dividend. It was even teased a few times by Mark Skousen, most recently as an antidote to the US mortgage problems in late 2008. The shares bottomed out, like most leveraged lending firms and BDCs, when the financial crisis hit and they were very constrained by debt covenants and preferred share restrictions and impaired loans, and have been slowly and steadily coming back up from those depressed levels.

But it wasn’t the recovery in the stock, and the return to viability of some of their loan portfolio, that got me interested in what is now called Sprott Resource Lending: It’s the new management team from Sprott Consulting and the new focus on lending to miners and energy companies.

Sprott is one of the stronger natural resources-focused asset managers in the world, and in addition to a large money management division (including some traditional mutual funds, etc.), they also have a small consulting division that manages outside investment firms — Sprott Consulting manages another publicly traded company that I’ve profiled here before and also hold as one of my largest personal investments, Sprott Resource Corp, and I ...

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