TORONTO Nov 3, 2015 (Thomson StreetEvents) -- Edited Transcript of Sprott Resource Corp earnings conference call or presentation Monday, November 2, 2015 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Stephen Yuzpe Sprott Resource Corp. - President, CEO * Michael Staresinic Sprott Resource Corp. - CFO ================================================================================ Conference Call Participants ================================================================================ * Anoop Prihar JMP Securities - Analyst * Carey MacRury TD Securities - Analyst * Marc Robinson Cormark Securities - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Resources Corporation 2015 Third 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 that time for you to queue up for questions. (Operator Instructions) As a reminder, this conference is being recorded today, November 2, 2015. On behalf of the speakers that follow, listeners are cautioned that today's presentation and responses to questions may contain forward-looking statement 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 the period end Sprott Resource Corp's annual information form and other filings with the Canadian Securities Regulators. I'll now turn the conference over to Mr. Stephen Yuzpe. Please go ahead, Mr. Yuzpe. -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [2] -------------------------------------------------------------------------------- Thank you, Kevin. Good morning, everyone, and thank you for joining us today. With me today is our CFO, Michael Staresinic. Our 2015 Q3 results have been released and are available on CEDAR and on our website. The third quarter of 2015 was one of the toughest quarters that anyone who invests in the natural resource sector can remember, and no one has been spared the pain of the downturn. From the largest mega caps to the smallest resources companies, everyone has suffered, including all of our core investors in Sprott Resource Corp. During the quarter, our net asset value declined by 28% to $136 million or $1.41 per share. For context, the Bloomberg Commodity Index declined by 14% during the period and has now lost 26% over the last 12 months. It is currently at its 16-year low. The damage has been widespread, with most major commodities including oil, natural gas, and copper, all suffering double digit percentage losses during the quarter. We fair value our investments every quarter, so the volatility in the underlying commodity markets has had a commensurate impact in the value of our portfolio with our energy and mining holdings incurring the steepest losses. Now, the contrary is also true; in time, commodity prices will rise and our companies will benefit. This supports our belief that by investing in Sprott Resource Corp at a time when we are trading at roughly $0.50 on the dollar, investors can position themselves to benefit from both the eventual growth in NVA and the narrowing discounts announced. Looking now at slide five, with the reasonably large percentage of our NAV currently made up of public company holdings, our NAV is highly susceptible to short-term market gyrations and the commodity markets have been extremely volatile of late. For example, the value of our public holdings was approximately $53 million as of September 30. Since that time, they have increased in value by 18% to $62 million. ICD in particular has rebounded over the past month, gaining 37% during the period. Looking now at slide six, to be successful in making long-term investments we have to maintain our disciplines during market volatility. This is especially true over the prolonged periods of time, because we are not short-term traders. A part of our discipline at Sprott Resource Corp is to continuously revisit our investment thesis to see if they still hold in a face of changing macro economic developments. It is important to note that short term market fluctuations are not always indicative of the long-term viability of our investments. However, if our analysis tells us that our thesis is broken in relation to a specific investment or commodity, we won't hesitate to make tough choices. At the other end of the spectrum, if our thesis holds up to scrutiny, we will work with our portfolio companies to help them through tough times and position them for future growth. An example was our recent participation of a U.S. $7.25 million financing by Corsa Coal, in this case, we feel our long-term thesis for metallurgical coal is still valid and we believe that helping to strengthen Corsa's balance sheet and position for future success is the right thing to do. I will talk more about Corsa and the recent financing in a couple of slides. As active investors, part of our discipline involves working closely with our investee companies to help them create value. The expertise that we bring to the table is important because it allows our management teams to focus on operating their businesses. Some of the... (Technical Difficulties)... no choice, but to do soon. In the U.S., the domestic supply chain for coal is very fragile, setting the stage for a potential recovery in pricing. Corsa's management believes it is in the top quartile of the domestic metallurgical cost curve and continues to be focused on cost-cutting initiatives and positioning the Company to weather the storm. Turning now to slide nine for a look at our energy holdings. It has been a brutal year in the energy sector, and it has labored on for a longer period than most of us had originally thought. But we still have conviction in our thesis in the companies and the management teams we have invested in. For example, InPlay Oil continues to report strong cash flow net backs in the range of $25 to $31 per barrel of oil per day -- per barrel of oil equivalent per day in today's tough oil price environment. InPlay benefits from the fact that its production is approximately 90% light oil with low decline rates. InPlay's management is currently expecting production between 2,400 to 2,600 BOE per day in 2016. At Long Run Exploration, times are tough but management is staying in front of the issues and operationally executing well. As Long Run management has disclosed, they continue to pay down debt through cash flows and asset sales through the first six months in 2015, their corporate cash flow is in excess of capital spending by $30 million and they have completed dispositions worth approximately $25 million. The Company is still actively engaged in a process to sell certain other properties, the proceeds of which will be applied to its balance sheet. In the energy services segment, the majority of independent contract drillings rigs are still working despite steadily declining U.S. rig counts. We believe the sharp reduction in rig counts will eventually curtail that country's domestic production. We also believe that U.S. $40 will prove to be a stable floor for oil and expect trading to range between $50 to $65 per barrel over the midterm. Since into the third quarter, ICD extended the multi-well contract for one of its rigs through the end of 2015. It has also signed a new multi-well contract for an idle rig that is expected to commence drilling operations in the fourth quarter. ICD has had no early contract terminations and the Company expects to exit 2015 with the utilization rate of 92% of its available 200 series rigs. ICD's marketed fleet utilization for the third quarter averaged 82% and per their management's guidance, should exit 2015 at 92%. For perspective, according to U.S. investment bank, FBR, at the end of Q3, utilization rates stood at less than 80% for the entire U.S. [pad-optimal] niche, and roughly 48% for the broader U.S. tier one rig market. With that, I will turn the call over to Michael for a look at our financials. -------------------------------------------------------------------------------- Michael Staresinic, Sprott Resource Corp. - CFO [3] -------------------------------------------------------------------------------- Thanks, Steve. I will start on slide number 10 with a look at our net asset value. At September 30, we had total assets of $151 million, compared with total assets of $242 million at the end of 2014. Total liabilities were $15.4 million, including $14.1 million drawn on our credit facility with Sprott Inc. Our net asset value as of September 30, 2015 was $136 million, or $1.41 per share, down from $228 million or $2.33 per share at the end of 2014. As was the case during Q2, the majority of the decline was attributable to continued weakness in energy and coal prices. Turning now to our balance sheet and liquidity profile in slide number 11. As of September 30, 2015, our investment portfolio was comprised of the following; $72 million in agriculture and agriculture related investments, $61 million in energy and energy related service investments and $16 million in mining investments. At quarter end, their cash balance was approximately $1.8 million and we had drawn down on $14.1 million of our $18 million credit facility. At September 30, 2015, our portfolio included $37 million in liquid public company investments and $16 million in less liquid public company investments. As Steve noted earlier, since September 30, the value of our public holdings has increased to $62 million. During the quarter, we were active with our share buyback program, repurchasing one million shares for cancellation. Turning now to the income statement in slide number 12. For the quarter ended September 30, 2015, we recorded a loss of $54.6 million, or $0.56 per share, the vast majority of the loss reflected as unrealized losses on the investment portfolio, specifically those in the broader energy and mining sectors. This compares to a loss of $10 million, or $0.10 per share, in the quarter ended September 30 of 2014 we recorded expenses totaling $1.8 million during the quarter compared to $2.2 million for the quarter ended September 30, 2014. I want to specifically call out our general and administrative expenses, which on the surface, appear to have increased year-over-year. However, this is not the case, included in the prior year's number are unrealized foreign exchange gains on cash balances of over $700,000, where there were none in the current quarter. Excluding these amounts, our G&A expenses have decreased just over $200,000 from the prior year's quarter. With that, I will pass it to Steve for some closing remarks. -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [4] -------------------------------------------------------------------------------- Thank you, Michael. On slide 13, you can see a review of our priorities for both the short term and the long-term. I will let you read these but in closing, I want to reiterate that this has been an incredibly difficult quarter for all of us who are Sprott Resource Corp shareholders. Our NAV has suffered in concert with the decline in underlying commodity sectors in which we are invested. But, as a management team, we have focused on the factors which we can control, we have worked very hard to position our companies to survive this downturn and emerge ready to benefit from a return to a normal commodity price environment. The interest of Sprott Resource Corp management are completely aligned with those of our investors. In fact, we have continued to buy share throughout 2015 whenever regulatory windows permit. So far this year, the management team has purchased over 455,000 Sprott Resource Corp shares in the open market. We know that this has been a painful period for our fellow shareholders, and we are working very hard to ensure there are brighter times ahead. We thank you for your continued support. We will now turn the call back to the operator and open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Our first question comes from Carey MacRury with TD Securities. -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [2] -------------------------------------------------------------------------------- Hi, Carey. -------------------------------------------------------------------------------- Carey MacRury, TD Securities - Analyst [3] -------------------------------------------------------------------------------- So, one of the firms you have written that down to zero, has that business -- is that actually winding up and are there any exit costs associated with that? -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [4] -------------------------------------------------------------------------------- Sorry, [water for oil and gas]? -------------------------------------------------------------------------------- Carey MacRury, TD Securities - Analyst [5] -------------------------------------------------------------------------------- Yes, sorry. -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [6] -------------------------------------------------------------------------------- Yes, so, the second question first, there won't be any wind up costs, I don't not believe, to Sprott Resource Corp. We are going to the process of seeing if there are buyers for the properties they operate, but we have taken it down to zero to be conservative in the event that they are not. -------------------------------------------------------------------------------- Carey MacRury, TD Securities - Analyst [7] -------------------------------------------------------------------------------- OK. And then in terms of the portfolio, you mentioned the $60 million of illiquid assets. How do you define illiquid in terms of public company investment? -------------------------------------------------------------------------------- Michael Staresinic, Sprott Resource Corp. - CFO [8] -------------------------------------------------------------------------------- The illiquid, sorry, Carey, it's Michael, illiquid assets, we have a couple of smaller investments that just don't have the trading liquidity for us to exit the position in a timely manner. And I can use Stonegate as an example. Something that we have a fairly large percentage holding as a very small dollar amount and given its very thin volume, it's public but it is not something that we can get out of in a short amount of time. -------------------------------------------------------------------------------- Carey MacRury, TD Securities - Analyst [9] -------------------------------------------------------------------------------- What would be the biggest component of that $16 million? -------------------------------------------------------------------------------- Michael Staresinic, Sprott Resource Corp. - CFO [10] -------------------------------------------------------------------------------- Of that $16 million, it's a bunch of smaller ones. I believe Corsa is in that. -------------------------------------------------------------------------------- Carey MacRury, TD Securities - Analyst [11] -------------------------------------------------------------------------------- OK, and then in terms of the Corsa financing, how long do you think that lasts them? Are they cash flow sustaining at this point or not yet? -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [12] -------------------------------------------------------------------------------- Not yet, these are very touch coal markets, but our belief is that is that it takes away their need for any cash for working capital purposes for a couple of years. -------------------------------------------------------------------------------- Carey MacRury, TD Securities - Analyst [13] -------------------------------------------------------------------------------- OK. -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [14] -------------------------------------------------------------------------------- You know, coal prices has been tough, that assumes no other needs for capital like M&A activity or anything like that, but just in a general working capital purposes, a couple of years. -------------------------------------------------------------------------------- Carey MacRury, TD Securities - Analyst [15] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [16] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Our next question comes from Anoop Prihar with GMP Securities -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [18] -------------------------------------------------------------------------------- Good morning, Anoop. -------------------------------------------------------------------------------- Anoop Prihar, JMP Securities - Analyst [19] -------------------------------------------------------------------------------- Good morning. Just a little bit of color, please, on some of the comments in the MD&A. During the quarter, you invested about $500,000 and then you disposed of about $200,000 worth of assets. Can you just provide a bit of color on each of those two, please? -------------------------------------------------------------------------------- Michael Staresinic, Sprott Resource Corp. - CFO [20] -------------------------------------------------------------------------------- The first part, Anoop, the $500,000 investment, that goes back to a subsequent event note in Q2. So, that was a follow on investment into OEOG with the expectation that we would get a better outcome than the zero that is reported at Q3. So, that yet to play-out that Steve mentioned earlier on the call with Carey's question. And sorry, your part B on that one was, Anoop? My apologies. -------------------------------------------------------------------------------- Anoop Prihar, JMP Securities - Analyst [21] -------------------------------------------------------------------------------- You realize on $200,000 worth of assets, what was that? -------------------------------------------------------------------------------- Michael Staresinic, Sprott Resource Corp. - CFO [22] -------------------------------------------------------------------------------- That is just a categorization of the cash flows coming in from our royalty investment on Delphi Energy. -------------------------------------------------------------------------------- Anoop Prihar, JMP Securities - Analyst [23] -------------------------------------------------------------------------------- OK. Thank you. -------------------------------------------------------------------------------- Michael Staresinic, Sprott Resource Corp. - CFO [24] -------------------------------------------------------------------------------- But that doesn't fall to the income statement. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- I'm not showing any questions at this time, I would like to turn the call back to -- actually, we do have another question from Marc Robinson with Cormark Securities. -------------------------------------------------------------------------------- Marc Robinson, Cormark Securities - Analyst [26] -------------------------------------------------------------------------------- Thanks, just at the buzzer there. Just around the Sprott Resource lending loan, there is discussion around the ability to repay the accrued interest with shares. What is the ability or the appetite on management to replay the entire loan with shares? -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [27] -------------------------------------------------------------------------------- Marc, the loan doesn't have the ability to be paid back with shares, only the interest does. -------------------------------------------------------------------------------- Marc Robinson, Cormark Securities - Analyst [28] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [29] -------------------------------------------------------------------------------- But, we have very little appetite to be issuing shares at this discount to pay back the interest. Now, if the discount closes, it is a different discussion and we will obviously monitor that, as you will, as we get closer to that point in time. -------------------------------------------------------------------------------- Marc Robinson, Cormark Securities - Analyst [30] -------------------------------------------------------------------------------- But, the expectation then would be to monetize something before the May 11 maturity date? -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [31] -------------------------------------------------------------------------------- Absolutely. Absolutely. -------------------------------------------------------------------------------- Marc Robinson, Cormark Securities - Analyst [32] -------------------------------------------------------------------------------- OK, thanks. -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [33] -------------------------------------------------------------------------------- Thanks, Marc. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- I'm not showing any further questions at this time, I would like to turn the call back over to our hosts. ================================================================================ Presentation -------------------------------------------------------------------------------- Stephen Yuzpe, Sprott Resource Corp. - President, CEO [1] -------------------------------------------------------------------------------- Thank you, everyone, for participating in this call. We appreciate your interest in Sprott Resource Corp and look forward to speaking with you again after our year end results. Thank you. -------------------------------------------------------------------------------- Operator [2] -------------------------------------------------------------------------------- Ladies and gentlemen, that concludes today's presentation; you may now disconnect and have a wonderful day.
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