TORONTO Jul 28, 2015 (Thomson StreetEvents) -- Edited Transcript of Sprott Resource Corp earnings conference call or presentation Monday, July 27, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Steve Yuzpe Sprott Resource Corp. - President, CEO * Michael Staresinic Sprott Resource Corp. - CFO ================================================================================ Conference Call Participants ================================================================================ * Anoop Prihar JMP Securities - Analyst * Philander Ranal RBC Capital Markets - Analyst * Scott Chan Canaccord Genuity - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Resource Corp. 2015 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at the time for you to queue up for questions. (Operator Instructions). As a reminder, this conference is being recorded today, Monday, July 27, 2015. 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 risk 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 the factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements, please consult the MD&A for this period, and 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. -------------------------------------------------------------------------------- Steve Yuzpe, Sprott Resource Corp. - President, CEO [2] -------------------------------------------------------------------------------- Thank you, Tria. Good morning everyone and thank you for joining us today. With is our CFO Michael Staresinic. Our 2015 Q2 results have been released and are available on CEDAR and our website. The natural resource sectors has faced numerous headwinds toward 2015. After seeing some signs of recovery, commodity prices have once again softened due to our resurgent US dollar, mounting concerns surrounding the Chinese economy and global GDP growth, the oil glut created by OPEC's commitment to maintaining its current output targets, and the potential for Iran to re-enter the oil market. The weakness in the commodity market has been widespread, and the Bloomberg Commodity Index has retreated to levels last seen in 2009 during the depths of the financial crisis. Together, these factors got a negative impact on the value of our mining and energy-related investments and contributed to our stock continuing to trade at a significant discount to net asset value per share. Investing in commodities especially during bare markets requires long-term patient shareholder capital. We protracted their market for many commodities has been painful for investors in both the broader sector and in Sprott Resource Corp., but there is reason for optimism. From a macro perspective, commodity markets are highly cyclical in nature with steep downturns eventually followed by periods of price appreciation. History has shown that supply-demand fundamentals will, over time, drive price recovery as growing populations and changing consumer appetite spur increased demand for raw materials in a commodity and -- sorry, in a constrained supply environment. While we are confident that we will see a recovery in this sector, we do expect it to be gradual in nature. In effect, as the old saying goes, low prices will be the cure for low prices. On a company-specific basis, our material-invested companies continue to perform well in the face of weak prices. In markets like these, our job is to ensure that our portfolio companies remain on solid footing and that we are well-positioned to create value for our shareholders when their respective commodity sectors recover. Despite the tough market conditions, we are generally pleased with the progress we made during the first half of 2015. We completed some small monetizations totaling approximately $3.4 million and we are continuing to pursue opportunities to exit some of our mature investments. In order to improve the performed of Sprott Resource Corp. and ensure we remain competitive, we need to grow, and management is currently examining a variety of opportunities to achieve scale in the business. However, with our shares trading at current levels, we will not consider actions that will be dilutive to existing shareholders. While we haven't been actively making new investments this year, our deals will remain strong and we'll be evaluating more than 75 deals year-to-date. Before moving on to an update on the portfolio, I'd like to take a minute to review the priorities that the management team established at the beginning of 2015. They are as follows. One, improve liquidity through appropriate monetizations. As I mentioned, we have had some success in this area, monetizing $3.4 million in small investments year-to-date. We will continue to look for opportunities to complete further monetizations over the remainder of the year. Two, reduce our discount to net asset value. We are committed to using all the tools at our disposal to reduce the discount to NAV that we currently trade at. We believe that by improving our liquidity, generating positive news flow and buyback shares whom we are not prohibited by regulatory blackouts, we will be able to reduce the discount to a more acceptable level. In addition, as our private companies complete financings for third parties or through some other mechanism, we expect this price recovery to provide additional comfort in our private company valuations. Three, position portfolio companies for recovery in the resource sector. We continue to be supportive of our investing companies and help them to write out this downturn, but we will also maintain our discipline and will not hesitate to make tough decisions to create value for our shareholders. We will only provide additional financing to existing portfolio companies where appropriate. Turning now to slide 6 for a look at our private energy holdings. With a significant percentage of our portfolio dedicated to energy and energy-related investments, the ongoing weakness in the sector has taken atoll on our energy holdings. For June 30, 3015, we recorded a reduction in the fair value of our heavy oil investment in One Earth Oil & Gas. The environment for early-stage heavy oil project in Alberta is particularly challenging. This combined the state of development of One Earth Oil & Gas's main project and the terms with joint venture agreement introduced enough uncertainty that we determined it was appropriate to reflect a significant adjustment to the overall value of our investment in One Earth Oil & Gas at this time. Another of our energy holdings, InPlay Oil Corp., which produces primarily light oil, continues to report strong operating and cash flow net backs despite the weak oil price environment. The Company is well-positioned to continuous growth and we expect it to deliver compelling results in a normalized oil price environment. Turning now to slide 7 for an update on our private agriculture investments. One Earth Farms has completed its transition away from crop farming and established itself as a leading vertically-integrated producer of natural and organic meat products. The Company has reported strong revenue growth and positive earnings over the past six and 18 months, and is tracking ahead of budget for 2015. It also continues to expand its presence in the Canadian grocery stores and specialty food retailers. At this point, Union Agriculture is largely a passive investment for Sprott Resource Corp. And while it has been a successful investment, it is one that we would consider monetizing in the near-term if we could secure the right exit. With that, I'll turn it over to Michael to look at our financial results for the quarter. -------------------------------------------------------------------------------- Michael Staresinic, Sprott Resource Corp. - CFO [3] -------------------------------------------------------------------------------- Thanks, Steve. I'll start on slide 8 with a look at our net asset value. At June 30, 2015, we had total assets of $206 million, compared with total assets of $242 million at the end of 2014. Total liabilities were $14.5 million, including $12 million drawn on our credit facility with Sprott Inc. Our net asset value as of June 30, 2015 was $191 million or $1.95 per share, down from $228 million or $2.33 per share at the end of 2014. As Steve discussed, the majority of the decline was attributable to continued weakness in energy prices as well as the coal sector. Turning now to slide number nine and to look at our balance sheet and liquidity profile. As of June 30, 2015, our portfolio was invested in the following -- $105 million in energy-themed investments, $70 million in agriculture-related investments, and $26 million in mining investments. During the quarter, we received net proceeds of approximately $3.4 million from the disposition of certain small passive investments. We had cash of approximately $3.1 million and we had drawn down on $12.4 million of our $20 million credit facility. We have a strong liquidity profile with access to capital through our credit facility, which is Sprott Inc. and/or the monetization of liquid investments. For example, some of our public company investments are more liquid than others. As of June 30th, approximate $68 million of our public company portfolio was readily liquid with a further $27 million providing some liquidity. Lastly, during the quarter, we repurchased 150,000 shares for cancelation through our buyback program. We once again were precluded from regular purchasing through our buyback program as SRC remained in blackout throughout the entire second quarter other than for five trading days for which we repurchased the maximum number of shares permissible for that period. One of the challenges we face is that we are frequently blacked out or prohibited from purchasing back Sprott Resource Corp. shares. These blackouts can be the result of our regular quarterly reporting cycles pending developments at Sprott Resource Corp. or pending developments at one of our portfolio companies. We are often asked between our regular quarterly investor calls if we are currently in a blackout. Unfortunately, this is something we are not able to disclose. It's a mere indication that we are in a blackout just prohibited by Securities law. In 2014, due to our high level of transactional activity, we are unable to be as active with our share buyback as we would have liked because we are blacked out for nearly 10 months of the year. For 2015, we have only been able to repurchase shares under the buyback program for 16 trading days; 11 of them in the first two weeks of January when the discount to NAV did not warrant repurchasing. That said, when a short buying window opened up in April, we repurchased the maximum number of shares permissible for that period. Turning now to slide number 10 for a look at the income statement. For the quarter ended June 30, 2015, we recorded a loss of $10.4 million or $0.11 per share. This compares to a loss of $1 million or $0.01 per share in the quarter ended June 30, 2014. A sizable portion of this loss was attributable to unrealized losses on our energy-related investments, specifically One Earth Oil & Gas together with weakness from our coal exposure to Corsa Coal. We recorded expenses totaling $1.8 million during the quarter, which includes no transaction-related cost, compared to $7.4 million of the quarter ended June 30, 2015, which included $3.8 million of transaction-related cost. With that, I'll pass it back to Steve for some closing remarks. -------------------------------------------------------------------------------- Steve Yuzpe, Sprott Resource Corp. - President, CEO [4] -------------------------------------------------------------------------------- Thanks, Michael. Turning to slide 11, which provides an overview of our investment portfolio, it's fairly self-explanatory. And as you can see, the portfolio is made up of companies in various stages of development ranging from early-stage to mature. I would also add that the portfolio is a combination of investments made by the previous and current management teams -- of the more recent investments InPlay , Delphi, and Corsa Coil are investments made last year by the current team who are very optimistic about each of these. We also like the outlook for some of the earlier investments such water firms and independent contract drilling, both of which have been supported by the current teams. Turning now to slide 12, looking at the first pie chart, I'd like to highlight what we view as a very compelling reason to own Sprott Resource Corp. at this point in time. As you can see, almost 93% of our current market cap is attributable to our public company holdings despite the fact that more than half our net asset value is in private companies. That does mean that the market is currently assigning very little value to our private company holdings despite the fact that there are some very promising investments among this group, including by One Earth Farms, Union Agriculture Group, and RII. We believe that the negative sentiments surrounding resources is leading potential investors to overlook some of these better performing investments. What this means is that the price discount provides investors with an attractive entry point where they are paying for public holdings and getting virtually all of the private company holdings for free. However, we are confident in our valuations and the valuation process for our private investments. Over time, as these companies complete financings with third parties or through some other mechanism. We expect this price discovery to provide additional comfort in our private company valuations and that fair value of these holdings will eventually be reflected in our share price. In closing, we expect to recover in the natural resource sector and in various commodities in which we invest to be gradual. During these tough markets, we are focused on preserving capital and working with our portfolio companies to position them for success during the next upswing of their respective commodity cycles. Management remains committed to improving liquidity, pursuing monetizations of mature investments where appropriate, and reducing the discount to net asset value using all the tools at our disposal. We will now turn the call back to the Operator, Tria, and open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Certainly. (Operator Instructions). We'll give it one moment for questions. (Operator Instructions) And our first question comes from the line of Anoop Prihar of JMP Securities. Your line is now open. -------------------------------------------------------------------------------- Anoop Prihar, JMP Securities - Analyst [2] -------------------------------------------------------------------------------- Good morning. Can you just tell me what is the carrying value of Union Ag increase Q2 over Q1? I'm sure that you're referring with the decrease, right? -------------------------------------------------------------------------------- Michael Staresinic, Sprott Resource Corp. - CFO [3] -------------------------------------------------------------------------------- The decrease from Q1 to Q2. Anoop, it's Michael. Thanks for calling in. It's about -- I think it was 6.5% to 7%. -------------------------------------------------------------------------------- Anoop Prihar, JMP Securities - Analyst [4] -------------------------------------------------------------------------------- What's that change attributable to? -------------------------------------------------------------------------------- Michael Staresinic, Sprott Resource Corp. - CFO [5] |