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Sprott Resource Corp. (OTCPK:SCPZF) announced on September 6th they had sold a portion of their gold holdings. As shareholders know, SRC's share price has been under immense pressure since releasing 2nd quarter earnings and announcing that it is ending its monthly distribution. As discussed in a previous article, I expected Sprott Resource to sell a portion of its gold (NYSEARCA:GLD). Below is a look at the drop in share price in recent weeks.

Chart forSprott Resource Corp. (<a href='http://seekingalpha.com/symbol/scpzf' title='Sprott Resource Corp.'>OTCPK:SCPZF</a>)

Sale of gold holdings

SRC was holding 73,971 ounces of gold prior to this announcement at a cost basis of $75.4 million ($981/ounce). Sprott Resource raised $21.1 million in the sale of 14,142 ounces ($1,494 per ounce) which should quiet any concerns about short term liquidity. The sale represented close to 20% of its gold holdings with SRC still maintaining 59,829 ounces of gold.

What to do with the cash?

Sprott Resource announced that the cash would be used to fund general working capital and its newly approved buyback up to 8.5 million shares. This should create a floor for the share price at its current level and thus a buying opportunity.

The previous buyback of 8 million shares concluded at an average cost of $3.8 per share. Management made some errors to continue the buyback and fund an aggressive distribution when liquidity issues were on the horizon. Along with this, concerns in regards to the margin account still linger, and for good reason. However, in the short term, I believe some of the cash will be used to pay down a portion of the liabilities and buys time for SRC to create its next deal. Sprott Resource also has seen increased revenue from its agricultural holdings which should continue to improve.

Looking Forward

The panic selling post second quarter has created a major buying opportunity. Sprott Resource, in relation to its most recent NAV, is grossly undervalued. Its assets still hold immense value and management has proven its ability to create arbitrage value in "flipping" companies from private to public. As seen with the PBS Coal and Waseca Energy deals, SRC netted a combined proceeds of roughly CAD$253 million. I expect a similar deal to be announced soon.

Independence Contract Drilling Inc.

I have long suspected that Sprott resource would eventually sell its 31.7% stake in privately held Independence Contract Drilling Inc. [ICD]. The company has seen huge demand in its land oil and gas drilling rigs. As laid out in its June 2013 investor presentation, the company sees the replacement cycle for a large portion of the land rigs built prior to 2000. Its bigger competitors in the oil and gas rig business include Patterson UTI (NASDAQ:PTEN), Nabors Industries (NYSE:NBR), and Precision Drilling (NYSE:PDS). These companies have seen enormous growth in recent years, and this leads me to believe ICD going public or being bought up by its bigger rivals in the near future is not stretch.

Currently ICD has 7 rigs in use, but expects to have close to 14 by the end of 2014 and 20 by the end of 2015. This is solid long-term play on continued oil and gas drilling and I see SRC profiting from it.

In conclusion, Sprott Resource is down but not out. The storm is passing for the commodity sector and like many companies linked to commodities, SRC and its shareholders have incurred a lot of pain. The underlying investment thesis still remains strong. With management's renewed focus on generating more returns, I expect Sprott Resources' share price to more adequately reflect its value.

Disclosure: I am long OTCPK:SCPZF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Sprott Resource Announces Sale Of Gold And Continued Buyback