SCP.cn (SCPZF) Update on Sprott Resources “Fair” Value Estimates

In my opinion, the market continues to discount Sprott Resources. While I can see some speculation/pressure being put on the shares because of its size and exposure to volatile commodities, at its current price the market is undervaluing its “fair value” in business interests and liquid assets, not even taking into account the future potential (which I feel is high) for earnings/investments and more shareholder value. This is my latest estimation of what SCP.cn should be trading at given its current investment portfolio, not taking into account any future earnings, investments, or sales of investments.

For the purpose of this valuation, I decided to focus on each seperate investment that Sprott has and try to assign an appropriate value for these investments. I will honestly admit that I believe these estimates to be very conservative as I will explain below. The investments consist of following: Waseca Energy; ownership is 100%, Orion Energy; Owns 229.33 million shares, Stonegate Agricom; owns 63.66 million shares, One Earth Farms; owns 80%, cash, gold and silver bullion, and portfolio investments. The company also owns One Earth Oil and Gas of which I could not find very much information on. The venture seems to be new and sort of a spin off from One Earth Farms. For the purpose of this update, I did not assign a value to this.

1. WASECA ENERGY (100% Ownership). Waseca is expected to have production by 2010 year end of 1,500 bbpd. To a value for this, I estimated $50,000 per flowing barrel, which is very conservative in my opinion. According to Keith Schaefer the average amongst junior Canadian producers is around $71,000 per flowing barrel. This gives the production a value of $75 million. I did not assign any value to reserves, expansion plans, facilities, etc, in an effort to preserve my cautious estimates and to reduce speculation involved in this simple analysis.
2. ORION ENERGY (80% Ownership). Sprott owns 229,334,351 shares of Orion. It is currently trading at $1.22 as of 4/28/10. This values Sprott’s investment at CAD284.37 million. Using an exchange rate of CAD1.0126 values the investment at $280.84 million in terms of US dollars.
3. STONEGATE AGRICOM (80% Ownership). Sprott owns 63,662,000 shares of Stonegate, which is currently trading at $.98 (this is its first day being public so not a whole lot of faith can be put into this number) as of 4/28/10. This puts the market value of this investment at CAD61.12 million, using the same exchange rate gives us a US dollar value of $60.34 million.
4. One Earth Farms (80% Ownership). One Earth was by far the toughest one to value because it is a newer venture , thus I decided to make my estimates as conservative as I could. In my view I would much rather error on the side of caution. It seemed rather impossible to try an estimate a value for this one because of so many uncertainties revolving around the business (ie crop pricing, weather, expansion plans), and due to the fact that it is currently working on rapidly expanding this business. Thus, I decided to use the CAD27.5 million that Sprott just pumped into the venture (or $27.16 million), plus $453K of inventory. At 2009 year end, the company sold 800 tons of its 2.9 thousand tons in inventory for $173K. Using this same information, I estimated that the rest of the inventory could be valued at $453K. This puts the value of One Earth at $28 million, a very conservative figure given the future potential of this investment.
5. CASH: According to their latest financial statements, Sprott has roughly $107,085,000 in cash.
6. Gold and Silver Bullion: At 2009 year end the company held 73,971 ounces of gold bullion and sold its silver bullion. The gold bullion using a current gold spot price of $1171/oz values this position at $86,685,135.48
7. Investment Portfolio: Valued at $33.8 million at 2009 year end. For the purpose of this analysis, I included my per share estimates both with and without this.

PER SHARE ESTIMATION:

Adding up the values gives you $637.97 million and $671.77 million including the portfolio investment. Dividing by the shares outstanding gives us a per share price of $6.63 and $6.98 with portfolio added in. This is a 60% undervaluation given its current price. Keep in mind this is a 60% undervaluation of its fair value, using very conservative estimations while excluding One Earth Oil and Gas, and not its potential future value which could be far greater than this. Bottom line, I still think the market is mis-pricing Sprott and that the shares are still a buy here.

Source: Company financial statements and most recent presentation.

I look to double this position at $4 dollars if it can get there. It is currently trading at $4.30….which is right were I bought it….I would love to average that cost down a bit if given the chance.

A little Update

I am currently working on a write up for Sonic Technology (SNV.cn) which is another company like Wavefront that I am very interested in. Like wavefront, SNV is junior company that is working on technology that can increase profits for oil and gas companies. The stock is up over 6% and has been on a bit of a roll here…I am trying not to miss this one. Unlike WFTSF who actually have a working product and collect revenues, SNV is much more speculative and are still working on actually testing their product which supposedly can turn heavy oil into light oil through the use of its patented sonic technology. There will be a post soon on this one.

I am also revisiting my QUIK post that I did a while back. Since my write up the stock is up pretty big. I am increasingly being drawn to this one as I think they are coming up with some really awesome technologies surrounding the mobile device industry. HERE is a link to my previous write up…I am now debating on whether to pick up some shares….hard at these prices.