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Sprott Resource Corp CFO Stephen Yuzpe Talks about the Future of Farming and Gold on Midas Letter Money


April 4, 2012 -

Stephen Yuzpe, CFO of Sprott Resource Corp. (TSX:SCP) describes the future of his company's diversified operations and where the company is seeking to make investments. He enlightens James as to the unique business model of Sprott Resource Corp, and discusses how many investors are unaware of the opportunity inherent in the company.He talks in detail about how the company's willingness to hold gold bullion as part of its cash reserves has helped achieve superior returns on capital, and why general global economic conditions drive the companies success. Energy, agriculture and precious metals is what the seek to own, he says.Click on the image or copy this link to watch the video in a new browser: http://www.midasletter.com/index.php/sprott-resource-corp-cfo-stephen-yuzpe-talks-about-the-future-of-farming-and-gold-on-midas-letter-money/>Transcript:James West: Hi.  I'm James West, this is Midas Letter Money.  My guest today is Steve Yuzpe who is the CFO of Sprott Resource Corp which trades on the Toronto Stock Exchange under the symbol SCP.  Welcome to the show Steve.Steve Yuzpe: Thank you very much for having me James.James West: So Steve Sprott Resource Corp isn't a typical mining company or a resource development company, why don't you fill a scene on what exactly is the business model?Steve Yuzpe: Sure, I would imagine that most of your viewers know the Sprott name and through this Sprott Group of Companies how we've have had great success investing in the public markets.  Whether it was Sprott Asset Management or global resource in the United States.  But most of your viewers probably don't realize that we're also in the private equity markets.  We're in the Natural Resource Lending Business and we're also alternative energy through Sprott Power. So, with Sprott Resource Corp specifically that's our private equity vehicle which is a publicly listed vehicle which as I mentioned invest in private equity.  There's really I think big advantages to investors in our structure.  I think first and foremost the average retail investor never has access to private equity deals.  So, there's a whole universe of investment opportunities that are not opened to average investor. Secondly, the deal size is often far too big for most of us anyway.  So even if you see the deals or they come across your desk, you don't have the ability to invest.  Well, Sprott Resource Corp solves that problem by giving us all liquidity through the public markets but access to private equity deals.James West: So it's a proxy of private equity company essentially.Steve Yuzpe: That's exactly right.James West: So then it finances advance stage resource projects, mining projects, oil and gas?  What are sort of the defining limits of what the company will do and won't do?Steve Yuzpe: I mean from a mandate standpoint, we can invest in anything in the natural resource sector but we have very defined views as to what we like and what we don't like.  And I think if I take a step back and say what do we see happening and we look at things like global events that are happening like government deficits that seem quite unsustainable which is putting pressure in the fee at currency system.  We see population growth.  We see wealth growth in the developing markets, less so here in the developed markets but certainly in the developing markets and we see events like peak oil. Well that is lead us to the conclusion that we jokingly referred to as we want to own assets the governments can't print.  And with that mindset as we look where we see the growth and we look at where we see development, we want to be focused on energy, agriculture and precious medals.  We think those will be the winning sectors over the long term.  Now, that set if we saw an incredibly compelling based metal deal come across our desks through one of our deal flow sources, we would certainly give it a hard look but it's not one of our preferred sectors right now.James West: So is the structure of a deal and we'll get to some example deals in a minute.  But with this typical structure involved, so the advancement of capital in exchange or that would be repaid through some of the asset that was being produced in the case of precious metals or, is it strictly cash business, how does that work?Steve Yuzpe: We're really, I'll say open and in a positive way we're opportunistic.  We really want to find the right way to work with management teams.  Again, when we look at structuring a deal first, we have to be in the right deal, at the right evaluation and that means whether it's the sector that we're in but also the price that we're paying. Secondly, we want management to have their money in a significant portion of their money and at the same deal.  It's amazing how much better management is at discerning risk when then their own money is at stake.  So once we get through all of that and we look at an opportunity, we all agree that it's the kind of deal we want to do. We also consider upfront how we think we're going to exit and in some cases in many cases that the public markets would be inappropriate exit in which case, we know we're investing at private multiples, we're going to grow the business, we're going to hopefully buy it very cheaply when the commodity at a trough in its cycle.  And we're going to sell it at a time when the commodity is more expensive into the public markets and hopefully we'll be earning closer a peak multiple, So you get multiple expansion, you get the private to public arbitrage and you also get growth of the business.  So that's one example that we would look at.  We could also sell a business to an appropriate strategic investor.  As an example we own an oil and gas company it's not uncommon for smaller or junior oil and gas companies to get.  They're almost be the exploration site of large companies.  They had a certain size and suddenly they're attractive.  You run a process and you dispose that of your company through a major.00:05:00James West: Sure okay.  Why don't you give us an example of a very typical deal?  How much money was put in?  What was the asset?  How did you exit the investment?Steve Yuzpe: Sure, we've actually only had two dispositions over the last four years.  We've been in business since September 2007.  So, we made nine total investments.  We've disposed one and we partially disposed of another.  So I don't have a huge number of data points, but I'll tell you the story of Stonegate Agricom which is a business that we're currently stealing today.  It's a partial disposition. So we worked with Lara Exploration to find, we're looking for phosphate, specifically because we have strong conviction in the egg space and egg nutrients at the time phosphate was very depressed in the price.  This goes back to late 2007. We manage to find a deposit that had significant historical workings but nothing recent.  So we knew there was a lot of phosphate there but -- no work had been done on the business because of the -- or the property because of the price of phosphate in literally decades. So we worked with the geologists to cut a deal and buy an option on the property from the GOs.  We then went looking for management teams because as I said you can't have a business without successful management.  And the better the management team, the more likely you are to get your money successfully. So through our network we partnered up with a gentleman named Mark Ashcroft, and his partners who were the co-founders of Thompson Creek, and they had a company that they had incorporated looking for egg nutrients it had a significant amount of money in the business but no asset and we have the asset.  So we merged our asset and their capital together, so they brought management team and capital, we brought an asset and together we started to build this company. So as money went into the business they continue to develop the Montero project in Peru.  They also along the way bought the Paris Hills in Idaho.  So they had now two phosphate deposits.  Both had been progressing at a reasonable pace, so fast forward to April 2010 and it was time for Stonegate to go public.  The two projects had progress enough that they were going to raise money for their pre-feasibility studies. And one thing that I think is important to note for your viewers and if they're any of course professional management out there, we are very supportive shareholders.  So we led the financing on their IPO, we put in an additional $12 million, their raise to a total of 51 which funded them through pre-feasibility for both projects. Several months later, the market had -- was reflecting the value that had been created in Stonegate.  There was a very small float.  So we are approached by a syndicate of investment banks to sell some of our shares into the market because we had such a large position in the company.  It had to be done under prospective. So we sold about $50 million worth of stock, so at that point we were now down to I'll say 30% of the business but we had taken over double our money off the table.  We still own the third of the business so the Sprott Resource Corp shareholders have already, we've completely dearest the project from an investment standpoint.  We still have significant upside and we're in the sector that we love.James West: Fascinating.  So now, tell us a bit about your cash reserves because I heard that you hold some gold.Steve Yuzpe: That's absolutely right.  When we do hold physical gold bullion and we hold that one of the downtown banks in Toronto.  Our view is that gold is a currency and why we like the asset backing that the gold provides us that hard asset value.  When the time comes to trade in that gold for the right acquisition, we're ready to do so.  When we had disposed the PBS Coals in 2008, which was a really difficult market, but we manage to put $55 million into a coal company and take $240 million out about I'll say but 11 months after we made the initial investment.  We had a very sizable cash position. So at that time we put half our money into T-bills and half our money into gold.  We had since reinvested the money that was in cash and we're continuing to hold the gold, it's out performed cash by quite a wide margin.James West: That's interesting.  Okay, we're going to live it at that Steve.  I'd like to thank you for joining us today.Steve Yuzpe: Thank you very much for having me.James West: If you'd like to learn more about Sprott Resource Corp you can visit them online at sprottresource.com and if you'd like to learn more about companies like Sprott Resource Corp at the early part of their value appreciation curve, visit midasletter.com.  I'm James West, this is Midas Letter Money.



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