Farmland, Energy or Gold, Sprott Resource Offers Exposure to All 3 Areas

Mar.23.11 | About: Sprott Resource (SCPZF)

Everyone is worried about the value of paper currency these days and likely with good reason. Many people turn to gold as a store of value, others turn to oil or farmland. The key is finding an asset that is likely to hold its value.

I’m with Warren Buffett, however, as I don’t understand the appeal of gold. Buffett recently made the following comments:

“So there are two types of assets to buy. One is where the asset itself delivers a return to you, such as, you know, rental properties, stocks, a farm. And then there are assets that you buy where you hope somebody else pays you more later on, but the asset itself doesn't produce anything. And those are two different games. I regard the second game as speculation.”

I don’t particularly like owning something where the price is determined based on whether or not the asset is in fashion rather than by the asset’s earning power.

But I’m also quite aware that investors much smarter than me believe in gold. David Einhorn, John Paulson and Jim Rogers all have significant exposure to the precious metal. Given their attraction to gold and their track records I’m not willing to reach any definitive conclusion on my line of thinking being the correct one.

So rather than choose between the various options of gold, farmland and oil I’m looking at an investment in a company that provides exposure to all three.

Sprott Resource Corp (SCPZF,PK) is that company.

Sprott Resource Corp was founded in 2007 to take advantage of a future in which management believes trust in paper currencies will diminish. The idea is to invest in natural resources, including precious metals, energy and agriculture, which represent tangible value from which investors will benefit as necessities become more precious.

Unlike closed- or open-end mutual funds, the business is a corporation that can buy private equity to ultimately sell, spin out or even take an active investor approach through majority ownership in publicly traded companies. The company also looks for distressed deals.

So far, the company has been wildly successful, going public at $1.50 per share in 2007 and now trading for $5.40. Not bad for four years.

As per the most recent reporting period ending September 2010, Sprott had its assets invested in the following areas:

  • Energy 43%
  • Precious Metals 21%
  • Agriculture 18%
  • Cash 18%

Sprott is managed by well known Canadian asset manager Sprott Asset Management. Sprott Asset Management was getting long gold over 10 years ago, so as you can well imagine they have had a great run and have an impressive track record.

They have had some outstanding success at Sprott Resource Corp buying assets on the cheap from financially distressed entities.

One successful investment was in PBS Coals, where Sprott Resource invested $55 million and 11 months later exited with a $186 million gain by selling the company to OAO Serverstal.

A second home run came in late 2009 when Sprott Resource invested $100 million in Orion Oil and Gas (OTC:OIPZF), which was subsequently taken public with Sprott Resource now sitting on over $120 million in market to market gains.

Keep in mind that Sprott Resource is a company with a $620 million market cap so these are big gains for a company of this size.

How do they find these deals? The Sprott name has incredible connections in Canada. The Toronto Stock Exchange is home to an enormous number of tiny resource companies. If they need capital they know how to get in touch with Sprott. And often the companies that need the capital the most are willing to offer Sprott some very attractive terms. So much like Buffett at Berkshire Sprott can just sit and wait for the phone to ring until someone on the other end offers them a deal they like.

Insiders own 10% of Sprott Resource Corp and are therefore motivated to create and realize value as quickly as possible. I think the company is currently fairly to moderately undervalued and would be a very aggressive buyer on any significant sell-off.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.