Sprott Resource Corp. tackles coal, phosphate marketsWednesday,...

Sprott Resource Corp. tackles coal, phosphate markets
Wednesday, February 20, 2008
By Robert Arber

Kevin Bambrough, President and CEO of Sprott Resource Corp., begins at the beginning.

“It’s a chance for me to put a little bit of money to work at the ground floor.”

- Kevin Bambrough, President and CEO, Sprott Resource Corporation

What do Kevin Bambrough, John Embry and Eric Sprott have in common? (Hint: It’s not Sprott Asset Management.) The answer is Sprott Resource Corporation (TSX: T.SCP, Bullboard), a company for which the three resource investment gurus joined forces (again) with an eye toward early-stage participation in profitable resource deposits and the companies that own them. With the investment fund, Bambrough was restricted from enjoying the gains that would have come from direct acquisition of properties and non-publicly traded companies. SRC has no such restrictions, and so the newly-liberated gang has begun to deploy its cash across the commodity landscape in some interesting ways. After admitting that he’s “been passing up on great opportunities over the years,” Bambrough says:

“It’s obvious that we’re very committed to profit and that’s the reason we’d get involved in a vehicle like this. It’s because we expect to make profit and exceed our benchmark, otherwise it wouldn’t be a worthwhile venture for us.”

And from the company’s website:

Through direct acquisitions, joint ventures and equity investments, SRC seeks to provide its shareholders with exposure to a broad spectrum of metals, minerals and other natural resources for the purposes of capital appreciation and real wealth preservation.

For now, it appears that SRC has got its sights set on those “other natural resources” mentioned above – but what are they? Two projects are sharing the spotlight right now, one involving a phosphate deposit (an agriculture play), and the other involving a U.S. coal mining company.

Bambrough pointed out that the agricultural commodity boom “is a cycle we believe is still in the early days and will continue on.” Given this theme, SRC purchased an option on a phosphate property called Montero, located in an established mining district in Peru. Bambrough’s goal with the property is to complete a drill program that would turn the “very large historical phosphate deposit” into an NI 43-101 compliant resource. At that point, he’ll have management in place and be looking to take the project public after rolling it into a Capital Pool Company (CPC).

On the economics of phosphate, Bambrough noted that “since we’ve acquired the option on this property, phosphate rock prices have gone from about $50 to over $200 dollars a ton.” If anything he’s disappointed that the fertilizer plays have run “so far so fast,” because it’s left him slightly behind the curve with Montero – but he’s not worried in the slightest when looking at the big picture and long-term prospects for the agriculture sector.

And if Bambrough is bullish on phosphate, it’s nothing compared to his stance on coal: He’s cracking the whip on the entire herd. Bambrough declared that in the past few weeks we have seen “the most bullish developments in the history of the global coal market.” He cited the crippling snow storms in China, which have already undermined the country’s growth; power shortages in South Africa (miners in that country can’t mine coal because there is no coal to power the mines); and, finally, extreme weather and flooding in Australia that has lead to mine closures across the board. In summary, “the growth of consumption in … emerging markets is obviously just overwhelming, and the fact that there are so many production problems - I mean just everywhere there are production and logistical problems.”

To capitalize on what he sees as a “coal crisis,” Bambrough has steered SRC toward the purchase of a roughly 22% stake in PBS Coals, Inc., an Appalachian miner and exporter of metallurgical coal, for a cost of about $31 million. SRC is joined in the venture by Lukas Lundin (Rick Rule is the other major participant in SRC), another heavyweight contender in the resource sector.

Despite the fact that “no costs have been revealed” yet with respect to PBS’s operations, Bambrough is confident that “the margin expansion that’s going through right now shows excellent, excellent potential.”

Bambrough’s goal with PBS is to encourage what he termed a “liquidity event,” where he would “see [the company] trading in some fashion in the public market.”

When speaking of broader economic issues going on right now, specifically world-wide credit tightening brought on by a nose-diving U.S. housing sector, Bambrough remains a U.S. dollar bear, noting that “they’re not going to erase the trade deficit overnight.” In his opinion, “All central banks will continue to print money and bail out the financial sector.” For Bambrough and for SRC, however, that could turn out to be a good thing: “I feel that the sectors I’m in are fairly recession-proof, as much as any sector can be.”

And despite the company’s stock-price slide amid the overall market deterioration that began in late August 2007, when shares dropped from roughly $3.25 to near $1.60 (they are currently back trading close to $2.50), Bambrough remains optimistic about the company’s fundamental holdings. Without being specific he stated, “I think my stake is already worth many times what I paid for it. I believe that that is the reality of this market.”

For Bambrough and his team at Sprott Resource Corp., it’s obvious that they’re positioning themselves to take advantage of what they believe to be a continuing commodity bull run, banked on in the form of phosphate and coal. As always, the market will be the final judge.