Sprott Resource - A Solid, Mixed-Commodity Growth And Income Play

| About: Sprott Resource (SCPZF)

Sprott Resource Corp. (OTCPK:SCPZF) is a resource-investment company that is part of Eric Sprott's empire of commodity-based holdings. He is perhaps best known for his ETPs (exchange-traded products) Sprott Physical Silver (NYSEARCA:PSLV), Sprott Physical Gold (NYSEARCA:PHYS), and Sprott Physical Platinum and Palladium Trust (NYSEARCA:SPPP), whose shares are 100% backed by physical metals.

Sprott began his career working for Merrill Lynch and went on to become one of Canada's most widely known philanthropists (giving to hospitals, universities and service to food pantries and homeless shelters). In 1981, he founded Cormark Securities (originally named Sprott Securities). He also has won honors and recognition for his equity and hedge funds, five of which he directs himself including the Canadian Energy Fund and Sprott Energy Fund. In 2001, he inaugurated Sprott Asset Management of which he is President and CEO. Sprott has won many awards for investment achievement and financial acumen generally and in the resource sector particularly.

In September 2007 he founded Sprott Resource, a mixed-commodity play that invests in oil and gas, agriculture and agricultural nutrients, primarily potash and phosphates. SCPZF is buttressed by $75 million in gold bullion, an anchor that makes this $510 million market cap company a small model for the emerging world multi-currency reserve system pegged to or backed by gold. Since its inception, SCPZF has outperformed the Toronto Venture Exchange nearly fourfold. Having mentioned it often in my articles on PMs (precious metals) and commodities, I here present a fuller view of this high yielding (12.34% paid monthly) mixed commodity play with assets in the primary goods that sustain society and enable coherent monetary policy that supports genuine prosperity.

Sprott Resource's holdings are geographically diverse but centered in western Canada and the United States. It also has rich nutrient and mixed farming, beef and dairy properties in Peru, Ecuador and Uruguay, close to areas of increasing population. The ruling thesis is investment balanced across several essential commodity companies and diverse parts of the energy sector.

Sprott Resource invests in eight companies, four of them involved in energy. SCPZF has a 28.4% ownership in Long Run Exploration, which has 1.8 million acres of oil and gas exploration and production properties in the Canadian provinces of Alberta and Saskatchewan which are due north of Montana. Long Run is publicly traded (TSX - LRE) and produces 24k boe/d. This measure denotes that a barrel of oil has the energy equivalent to 6k cubic feet of natural gas and is used in the industry to evaluate production and reserves. Long Run's holdings are 52%-48% oil to gas and it is a well-capitalized contributor to Sprott Resource's growth.

One Earth Oil & Gas is one of two SCPZF holdings (along with One Earth Farms) that President, Director and CEO Kevin Bambrough (formerly a chief investment strategist with Sprott Asset Management) created in partnership with the First Nations tribe in Alberta, Saskatchewan and Montana. Its principal current holdings are six oil and gas wells in Alberta where seismic testing for heavy oil reserves is ongoing. It also has numerous E&D (exploration and development) sites and is 94% owned by Sprott. Its price/book is .97 and it has little long-term debt: its total debt to capital is .13.

In another part of the energy sector, Independence Contract Drilling (NYSE:ICD) is a vertically integrated full service designer and operator of land drilling machinery. Based in Houston, ICD specializes in design, building, maintenance and operation of Shale Driller programmable rigs made for the extended horizontal drilling needed to tap shale reserves like those of Eagle Ford in Texas or the Marcellus shale that underlies Pennsylvania, West Virginia, the eastern third of Ohio and most of New York State. ICD has five operating rigs and one being constructed to serve the rapid development of American shale oil and gas. A privately held company, ICD is 31.7% owned by Sprott Resource.

Increasing its geographic and commodity diversification in the Energy sector is Sprott's 16.5% ownership of Virginia Energy Resources (OTN:VEGYF), an E&D company focused on the Cole's Hill uranium site 30 miles north of Danbury in south-central Virginia. Nuclear power provides 20% of America's electricity but nearly 90% of the resource is imported. A notable exception is Uranium Energy Corp. (NYSEMKT:UEC), a vertically integrated miner and processor of yellow-cake in Texas. Having gone public six months ago, Virginia Energy has shared in the 30-month decline in the uranium sector (NYSEARCA:NLR) but will be positioned when America increases its reliance on nuclear for power generation. Breeder reactors consume their fuel and should allay concerns about waste. In any case, Sprott will monitor strength in the industry as Virginia Energy's E&D proceeds.

In the agricultural space, SCPZF has sizable stakes in two companies, One Earth Farms in Canada and Union Agriculture in Uruguay. One Earth Farms is one of two companies CEO and President Kevin Bambrough put together with First Nations Native Americans in 2009. Primarily a cattle raising company, One Earth Farms raises hormone and antibiotic-free organic-branded beef for export to the populous provinces of Ontario to the east and British Columbia on Canada's Pacific coast, west of One Earth's farms in Saskatchewan and Alberta. In four years its popular organic farming and grazing have helped it grow from 1,000 to nearly 16k head of cattle. Sprott Resource owns 54.3% of One Earth Farms.

Sprott Resource's other agricultural holding is its 7% ownership in Union Agriculture situated at 26 sites mostly in northern Uruguay. Sprott's active involvement in managing the company aims at acquiring potentially high-quality, under-utilized land toward the goal of increasing Union's position as a low-cost exporter of rice, wheat soybeans, beef and dairy products and bread.

The two agri-nutrient companies in this mix of vital commodities are Potash Ridge which develops potassium and potash resources at Blawn Mountain in southwestern Utah. Potash is so vital to boosting crop yields that Saskatchewan Potash (NYSE:POT) and Mosaic (NYSE:MO) are top holdings in Vanguard's Precious Metal and Mining Fund (MUTF:VGPMX), which thanks to them has performed less poorly YTD than more highly regarded PM funds. Sprott owns 26% of Potash Ridge and 37.5% of Stonegate Agricom whose low-cost development properties for phosphate include Paris Hills in southeastern Idaho and Mantaro in south-central Peru about 200 miles east of the capital, Lima, an important exporting site on the Pacific Coast.

Balancing these diverse energy, agricultural and nutrient properties and technologies are Sprott's 74k oz. of gold bullion. Declining gold prices YTD and especially since mid-April have nudged SCPZF toward its 52-week low. However, the value in the sector is immense and the fundamental set-up constructive for the mid and long term. Sovereign and retail purchases of bullion continue to rise: a new reserve system including or pegged to gold is needed for efficient global commerce.

In the meantime, a hefty dividend that annualizes to 12.34% and is reliably paid in mid-month and its panoply of holdings across the energy, agriculture and nutrient sector make Sprott Resources a strong growth and income play whether world events go smoothly or with hardship. Even more than consumer staples, food and the nutrients that increase food production always are in demand. The FAO food price index shows alarming increases 2000-12 that range from 90% in meat and dairy to 160% in cereals to 260% in sugar. Part of this reflects the cumulative disorder of a world fiat system. Part is due to severe weather, to displacement of grains for food by ethanol programs and part due to demographic changes. SCPZF organizes its investment strategy in response to these ingrained and developing trends.

Sprott Resource currently offers an attractive entry point and is a good alternative or addition to precious metal or miner holdings because of its diversified resource focus and significant investment in prime agricultural products.

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.

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