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Edited Transcript of SCP.TO earnings conference call or presentation 13-Nov-14 5:00pm GMT

Q3 2014 Sprott Resource Corp Earnings Call

TORONTO Dec 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Sprott Resource Corp earnings conference call or presentation Thursday, November 13, 2014 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Steve Yuzpe

Sprott Resource Corp. - President and CEO

* Michael Staresinic

Sprott Resource Corp. - CFO

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Conference Call Participants

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* Don DeMarco

National Bank Financial - Analyst

* Scott Chan

Canaccord Genuity - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Resource Corp. 2014 third quarter results conference call. (Operator Instructions). As a reminder, this conference is being recorded today, Thursday, November 13, 2014.

On behalf of the speakers that follow, listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements within the meaning of the Safe Harbor provision of the Canadian provincial securities laws. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are implied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements.

For additional information about factors that may cause actual results to differ materially from expectations, and about material factors or assumptions applied to making forward-looking statements, please consult the MD&A for this period in Sprott Resource Corp.'s Annual Information Form and other filings with the Canadian securities regulators.

I will now turn the conference over to Mr. Steve Yuzpe. Please go ahead, Mr. Yuzpe.

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Steve Yuzpe, Sprott Resource Corp. - President and CEO [2]

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Thank you. Good morning, everyone, and thank you for joining us today. With me is our CFO, Michael Staresinic. Our Q3 results have been released and are available on SEDAR and our website, where you can also find the financial statements and Management Discussion and Analysis.

It has been a busy 12 months for Sprott Resource Corp., and we are proud of what the team has accomplished. I will talk about our accomplishments in more detail on the next slide. But at a high level, we stabilized our balance sheet. We repositioned the portfolio, increasing our mining exposure and reducing our concentration in long run and the energy sector.

As a management team, we also made a commitment to improving our transparency in communications. We have made good progress in this area through the introduction of both quarterly and event-driven conference calls, as well as the adoption of simplified presentation format for our financial disclosure. We have increased our investor outreach in an effort to connect directly with both existing and potential shareholders, and continue to explore other avenues to better reach our current and future shareholders.

And, most importantly, we have accelerated the development of the business through a high level of investment activity.

Since September, we've experienced a severe downturn in the resource sector that has hit energy companies particularly hard. We have a large portfolio weighting to energy, and the decline in oil prices has had a negative impact on both our share price and our overall net asset value, contributing to our stock trading at a wider discount to the portfolio's net asset value than it was back in September. That said, we remain confident that our portfolio is well-positioned for long-term growth and will continue to support our portfolio companies through these challenging market conditions.

Turning now to slide 5, you can see an overview of the significant accomplishments over the past 12 months. We have altered the composition of our portfolio this year and improved our diversification through number of new investments, one partial disposition, and one small disposition for a gain.

As I mentioned, one of our first priorities was to stabilize the balance sheet. We began this process with the sale of our gold bullion holdings in a transaction that allowed us to pay off 100% of our margin debt and put some cash on the balance sheet. In retrospect, this was a good decision as the price of gold fell by more than $100 shortly after we sold our position, a level it is once again trading at today.

In January, we completed an oil and gas royalty investment that was generating cash flow within four months. Follow that in May with the sale of 1/3 of our position in Long Run for net proceeds before tax of CAD64.3 million. Through this offering, we received gross proceeds of CAD5.35 per share. Looking back with the benefit of hindsight, the timing of this offering was fortuitous, because Long Run stock has not been spared from the recent decline in oil prices.

That said, we continue to support the Long Run management team and believe that they are doing an excellent job of converting to a dividend plus growth model. We are confident that over time our shareholders will once again benefit as the oil price recovers. In the meantime, though, at today's prices, Long Run is paying approximately a 14% dividend yield.

In June, we invested CAD19.5 million in InPlay Oil Corp., a private oil and gas company building an asset base in eastern Alberta. InPlay continues to evaluate opportunities to grow its light oil production through drilling and accretive acquisitions. Over the course of just four months, the company has been successful in growing from virtually no production to 1800 barrels a day of oil at the end of September, with an expected 2014 exit rate of close to 2700 barrels per day. We have invested in InPlay alongside such strong partners as JOG Capital.

In July, we invested CAD36.4 million in Corsa Coal to fund its strategic acquisition of PBS Coals. Through this transaction we acquired a 19.9% stake in a producing metallurgical coal company at an extremely compelling valuation. Since we made the investment, Corsa's share price has increased by more than 50%. The company is well-funded and, in addition to SRC, has the backing of significant mining investors such as the Lundin family and Quintana Capital.

Corsa's management team is actively reviewing acquisition opportunities, and will look to take advantage of depressed metallurgical coal prices and position itself to benefit from an eventual recovery in the sector.

In August, Independence Contract Drilling completed a $115 million initial public offering on the New York Stock Exchange. Sprott Resource Corp. participated in the offering through the purchase of an additional 600,000 shares. Completing the IPO at this time provided ICD with the capital necessary to advance its rig-building program as it weathers the current oil price weakness. ICD released its first quarterly results as a public company, exceeding nearly all previously provided guidance, and announcing new multi-year drilling contracts for its 13th and 14th shale driller rigs to be delivered in 2015.

Turning now to slide 6, the business update, I have already covered off some of these points. But as you can see, we maintained our high level of transactional activity through Q3 and into Q4. We continue to fund our oil and gas royalty investment. We have participated in a One Earth Farms financing that I will speak about more in a moment. And InPlay is currently in the midst of a financing in which we expect to participate. The offering is not yet priced, but it is expected to be -- it is expected to close by the end of the year.

In addition to supporting our portfolio companies, we remain committed to creating shareholder value through our normal course issuer bid, which we renewed in September. As always, our normal course issuer bid is subject to regulatory requirements and liquidity.

We are also getting closer to adding a Calgary-based energy specialist to our investment team. We have shortlisted a number of candidates and hope to have the process completed by the end of 2014.

Slide 7 provides an overview of our investment portfolio. I would like to make a couple of points in this slide. First, as you can see, we have repositioned and diversified the portfolio and reduced its single investment in energy concentration. The second point is that while we were experiencing volatile resource markets right now, and this is hurting the valuations of some of our investments, broadly speaking we are pleased with the performance of our investee companies and the ability of their management teams to advance their business plans in the face of this volatility.

With our longer-term view of private equity investing, near-term fluctuations in commodity prices are less concerning than the quality of our investments. InPlay management is successfully executing on its business plan. Corsa is well-positioned to pursue accretive acquisitions at trough valuations. And in the agricultural sector, One Earth Farms has made significant strides this year.

Under the leadership of Mike Beretta, One Earth Farms has successfully transitioned away from its crop farming operation to focus on becoming a vertically integrated cattle and branded products business. The company recently reported a second consecutive profitable quarter due to the increase in cattle prices and operational improvements instituted by their team.

One Earth Farms is currently in the process of integrating two acquisitions that will improve its competitive position and extend its brand awareness in the natural and organic meat space. In September, One Earth Farms raised CAD11 million from existing shareholders in a successful financing to fund its growth plans. Sprott Resource Corp. invested CAD3.4 million as part of its financing.

Before I pass the call over to Mike to walk you through the results for the quarter, I would like to spend a moment on our energy holdings. It is important to note that, despite the recent decline in volatility in energy prices, our energy companies are well-positioned to weather the storm.

Long Run's production is balanced between liquids and natural gas. Their management is reviewing capital spending plans under a variety of commodity price environments with the aim to preserve the current dividend and maintain fourth-quarter production through 2015.

InPlay's production is 91% light oil and generating high netbacks at the current oil prices. And having recently completed their IPO, ICD has the funding required to continue advancing its rig-building program. ICD also benefits from the fact that the majority of its contracts are in the Permian basin, Where short leases and high decline rates mean that continuous drilling is required to maintain production.

With that, I will turn the call over to Michael.

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Michael Staresinic, Sprott Resource Corp. - CFO [3]

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Thanks, Steve. I will start on slide number 9, with a look at our net asset value. At September 30, our net asset value was CAD366 million, which is slightly lower than what it was at June 30, and effectively unchanged since December 2013. Net asset value per share is an important measure to us, as it reflects the value of the company attributable to each common shareholder. It includes the operations of SRC together with the capital management decisions made by management, such as the use of the normal course issuer bid to purchase back shares of the company when it trades at a discount net asset value.

Our net asset value per share of CAD3.73 was down CAD0.11 from June 30, yet is up by CAD0.02 from December 2013. Looking now at slide number 10, as I mentioned, our net asset value at September 30 was CAD366 million or CAD3.73 per share. We ended the quarter with CAD7.1 million in cash, and no debt. However, subsequent to the quarter end, we entered into a CAD20 million revolving credit facility with our partners at Sprott that I will discuss in more detail in a moment.

We renewed our share buyback program in September. And, depending on the discount to net asset value, current and future investment prospects and regulatory requirements, we will continue to purchase stock on the open market under our NCIB. I should also mention that as a management team, we have also been actively purchasing shares whenever regulatory windows permit.

Turning now to slide number 11 for a look at the income statement, for the three months ended September 30, 2014, we recorded a loss of CAD10.1 million or CAD0.10 per share. This is compared to the third quarter of 2013, where we reported earnings CAD44.9 million or CAD0.45 per share. During the quarter we reported an investment loss of CAD10.3 million compared to an investment gain of CAD54.6 million in the third quarter of 2013. We recorded expenses totaling CAD2.2 million in the quarter, which is compared to CAD3.4 million in the prior year's period.

On slide number 12, we discuss the access to our new capital. In November, subsequent to the end of Q3, we secured a CAD20 million revolving credit facility from our partners at Sprott, which will provide us with additional financial flexibility as we navigate the current tough resource markets. The facility has an 18-month term with an interest rate of 7% for the first year and an annual interest rate of 8% thereafter. We have the option to capitalized interest during the term of the facility, and may pay the capitalized interest in cash or by way of SRC shares at the maturity of the facility.

With that, I will pass it back to Steve to give you some color on our outlook for the remainder of the year. Steve?

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Steve Yuzpe, Sprott Resource Corp. - President and CEO [4]

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Thanks, Michael. The significant decrease in the US dollar price for light oil has triggered steep declines in the trading prices for many publicly traded oil and gas companies. The combination of the lower price, increased volatility in the Canadian/US dollar exchange rate, and reduced differentials have together partially mitigated the financial impact of a reduced oil and gas price for many companies.

However, we remain confident in the quality of our investments and believe that the selloff in energy will be short-lived. But even if energy prices remain where they are for a prolonged period of time, our companies are well-positioned. Over time, we expect supply and demand fundamentals and geopolitical events to lead to a recovery in energy prices.

In closing, I would like to reiterate that despite the tough markets, our portfolio of companies are still advancing their business plans. Our deal flow remains strong, and while our primary near-term focus is supporting existing investments, we think compelling opportunities could also arise from the current downturn.

That concludes our remarks for today. And we will now open up the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Don DeMarco, National Bank Financial. Don DeMarco, your line is open.

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Don DeMarco, National Bank Financial - Analyst [2]

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I'm just looking at the (technical difficulty) cash balance and this private facility you have gained. Are there plans for harvesting transactions, say, over the next 6 to 12 months? And, if so, what would be your top two or three in terms of priorities?

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Michael Staresinic, Sprott Resource Corp. - CFO [3]

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Don, it is Michael. I would hate to ask you to do it again, but on our side you are breaking up quite a bit. So I'm going to ask you if you can maybe repeat that. I didn't -- I was hearing every other word.

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Don DeMarco, National Bank Financial - Analyst [4]

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Oh, sure, guys. It must just be the microphone on my hands-free. I hope this is better.

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Michael Staresinic, Sprott Resource Corp. - CFO [5]

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Yes, this is clearer already. Thanks, Don.

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Don DeMarco, National Bank Financial - Analyst [6]

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No problem. Just asking about priorities for harvesting transactions, is there some names in your portfolio that you anticipate divestment over the next 6 to 12 months? And if so, what are they?

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Steve Yuzpe, Sprott Resource Corp. - President and CEO [7]

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It is Steve. Thank you for your question. The company that is the most mature and I'll say positioned for an exit, both in terms of its stage of maturity, but also that the role that we play in the company would be Union Agriculture Group. It is not an easy business to sell because it is a private holding. But that would be the company that I would say we were most likely to try to exit.

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Don DeMarco, National Bank Financial - Analyst [8]

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Okay, thanks.

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Operator [9]

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Scott Chan, Canaccord Genuity.

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Scott Chan, Canaccord Genuity - Analyst [10]

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I'm sorry, I just hopped on, so I don't know if this was asked. With your cash balance lower, how do you balance -- and your public investments are lower in the intern as well, too. I know you had a facility with Sprott. But how do you balance your cash position and potentially looking at what is probably very attractive investment opportunities out in the marketplace these days?

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Steve Yuzpe, Sprott Resource Corp. - President and CEO [11]

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You are right, Scott. There are challenging -- I'm sorry, these are challenging markets. And, therefore there are opportunities in the marketplace. We spend our time focused on trying to find great investment opportunities that would be based on the pillars that we look at when reviewing and opportunity: quality of management, quality of asset valuation, and capital. And so, we have not let up at all looking at opportunities. Our pipeline is relatively robust.

But it takes a long time for a team to work through an investment opportunity and to deploy that CAD25 million that we would want to put into a good investment. So we are not worried about capital.

And the facility from Sprott, Inc. is a good example of our ability to work with partners to find capital. We also co-invest with other strong partners like we did in Corsa through the Lundin Group and Quintana. And so we are spending more time focused on trying to find great opportunities and less time worried about capital.

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Scott Chan, Canaccord Genuity - Analyst [12]

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And because your concentration in energy, Steve, is a lot of your focus to perhaps diversify the resource sectors over the midterm?

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Steve Yuzpe, Sprott Resource Corp. - President and CEO [13]

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I believe that there are compelling opportunities in mining and agriculture that will allow us to diversify our holdings. We don't worry about concentration, per se, but because we are always looking to make the best investments that we can. That said, there are opportunities, compelling opportunities, in mining and agriculture as well as the energy sector.

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Scott Chan, Canaccord Genuity - Analyst [14]

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And just on ICD, with the IPO it was put at the low-end of the range. Obviously energy markets have hurt that stock. Has anything fundamentally changed within that story? Does the lower energy prices affect the rigs at all in terms of the service aspect, or has it so far?

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Steve Yuzpe, Sprott Resource Corp. - President and CEO [15]

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No, I think it has just been a downturn in the services sector in general. They have dropped about the same as their large -- much larger competitors, like HP and Precision. And so we look at ICD -- they have contracted out their next couple of rigs that are in construction. All of their rigs are currently spinning right now. They have a strong cash balance from the IPO and they are actually trading below tangible net book value, which -- going from memory, I don't think that has happened since 2008, which was a very different time for the resource investors, for everybody, for that matter.

No, ICD is in a good position, because they have just IPOd. And in the US they are a small company, so they are not well known. They have got some marketing and IR that they need to do to become better known. But the business is doing well.

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Scott Chan, Canaccord Genuity - Analyst [16]

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And then maybe just finally, just on your public investments, what is the strategy there? If you see a good investment opportunity, or several investment opportunities, do you have a wait-and-see approach on where the stocks are today? Or would you potentially dispose like a Long Run or another public investment to -- I guess Long Run would be the one that is more mature to finance other investments.

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Steve Yuzpe, Sprott Resource Corp. - President and CEO [17]

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We weigh any potential investment decision against the opportunity cost and the cost of capital. So we factor it all in when we are looking at what our availability of capital is and whether we can make the investment or not.

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Scott Chan, Canaccord Genuity - Analyst [18]

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Okay. Thanks a lot.

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Operator [19]

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That does bring us to the end of today's Q&A session. I turn the call back over to Mr. Yuzpe for any closing remarks.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.