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On October 22nd, Sprott Resource (OTCPK:SCPZF) announced that founder and CEO, Kevin Bambrough, would step down as Chairman and CEO. In a press release the company stated:

"On behalf of both Sprott and Sprott Resource Corp., I would like to thank Kevin for his many valuable contributions to the Sprott organization," said Peter Grosskopf, CEO of Sprott. "We wish him all the best in his future endeavors."

Steve Yuzpe the current CFO, will replace Bambrough. This seems to mark a turning point in the focus of the company. A possible rift had grown after the monthly dividend debacle and the subsequent margin account increase. SCPZF has been trading higher up nearly 12% in the last month. On the news we saw an immediate drop in the share price but later rallied above $3/share. The change-up, as this relates to current shareholders and overall company direction, seems to be a positive. As the former CFO, Mr. Yuzpe will clearly have a more financial focus in maintaining liquidity and access to capital. You can find a video of Steve Yuzpe discussing agriculture investing on the SRC company website. I expect big changes in the direction to be announced with Q3 earnings.

Back in September I discussed the announced sale of gold and continued buyback program. I expect the buyback to continue and that SRC will shed more of its gold moving forward. I continue to believe that with Sprott Resource trading below its NAV, there is an opportunity to buy. Overall I am still bullish on Sprott Resource Corp. as we see continued appreciation in its underlying assets. In this article I will briefly lay out what I expect for the Q3, current valuation and how an investor can manage their position.

Gold Bullion

SRC currently holds 59,829 ounces of gold. At the current price of gold, the value is over $80 million. Sprott Resource has done well from a return perspective in gold. Since purchasing gold in 2008 and 2009, adding back the realized proceeds from the recent sale of gold ($21 million), SRC has seen a total return of 42% in the less than 5 year period. That is over an 8% annual return even as gold has dipped in the last two years.

(click to enlarge)

(Source: Sprott Resource Corp)

Long Run Exploration:

Prior to the Q3 earnings announcement, it is relevant to again examine SRCs current investment portfolio. Lets examine Long Run Exploration [LRE] which is Sprott Resource Corps largest holding. LRE is a publicly traded Canadian oil and gas company and has seen its share price increase 56.3% since the end of June. SRC has invested capital of $154.7 million in LRE and currently holds 20.1 million shares (18.3% common shares outstanding) and 15.5 million non-voting convertible common shares. Looking at LREs current share price, SRCs holding is now worth nearly $210 million compared to the $134 million value at the end of Q2. I believe this increase in value has not been factored into the SRC stock price as SRC has seen its shares drop 13% since the end of Q2 (SCPZF at $2.90/share as of October 24th, 2013). If sold today, SRC would realize a hefty gain in this position even after management expenses. This among many other reasons leads me to believe Sprott Resource is well undervalued and trading at a deep discount.

Debt

A lot has been said about the ramp of the debt accumulated by SRC in 2013. At the end of the second quarter its margin account was at $63.2 million. I see this becoming a relatively small issue moving forward when looking at the appreciation of assets that SRC holds and the eventual sale of assets. I look forward to hearing CEO Yuzpke and his plan to deal with the debt when they announce Q3 results.

Conclusion

In terms of book value, SCPZF is trading at a discount. After the second quarter, I stated that that book value per share was roughly $3.47. At the time shares were trading around $2.70. With the increase in asset values, like LRE, I am expecting a conservative book value per share estimate around $3.80 for Q3.

I expect the third quarter to mark a turning point for Sprott Resource. This year has been difficult for existing shareholders, but the management change is a sign of positive things to come. Managements poor decisions during 2013 precipitated the drop in the share price and caused many investors to overlook the underlying assets that SRC owns. As I continue to reiterate, the underlying investment thesis remains strong. Existing shareholders should have seen this last quarter as an opportunity to lower their overall cost basis by purchasing more shares. Continued asset appreciation and the eventual sale of assets well above book value should lead SCPZF to go much higher.

Source: Sprott Resource Corp Announces CEO Change Up - What It Means For Shareholders