A Way to Play the Unrest in the Middle East

I am not one for short-term trading based on the current events of the day; however, in many cases these events are the beginning of a longer term trend. If you believe the events taking place in the Middle East will continue and even spread to other countries, you could benefit with an investment in the right assets. Two obvious choices are oil -- due to the possible disruption -- and precious metals as a flight to safety. In staying with that theme, Sprott Resource Corp. (SCPZF.PK) may be a good way to play a long-term rise in both oil and gold prices.

Sprott Resource Corp. is an investment holding company located in Canada that is managed by Sprott Consulting Limited Partnership, of which Sprott, Inc. is the sole limited partner. This arrangement is similar to that of how a hedge fund would be managed. The assets of SRC are primarily deployed in the areas of energy, agriculture and precious metals. Below I summarize the company’s primary investments.

1. Energy

Orion Oil & Gas Corporation (OIPZF.PK) is a publicly-traded Canadian oil and gas exploration and development company. SRC currently owns 78.9% of the outstanding shares of Orion and has invested a total of C$105.1 million since October of 2009. The oil and gas assets of Orion are all currently located in the Kaybob, Bigstone, and Redwater fields of Alberta, Canada. However, Orion states clearly that it intends to look for opportunities across the globe. In January of 2011, Orion announced a 34% increase in proved plus probable reserves (2P). The company also stated 48% of its 2P reserves were oil and liquids, which bodes well in a time when oil prices are on the rise.

Waseca Energy Inc. is a Canadian-based privately-held company in which SRC owns 81.3%. SRC has invested C$44.2 million in Waseca since October 2008. Waseca has over 45,000 acres of exploration lands, mostly in Alberta and Saskatchewan. At the end of 2010, production was over 1000 boe/d. Waseca plans to continue to push forward with its effort to increase production and had C$24 million in cash on the balance sheet at the end of the third quarter 2010 to use toward that goal.

One Earth Oil & Gas is a privately-held oil and gas exploration and development company 91% owned by SRC. The objective of OEOG is to develop oil and gas properties in partnership with the First Nations. According to SRC’s third quarter report, it has finalized locations with the Ermineskin First Nation and submitted an application for drilling three wells through Indian Oil and Gas Canada, which manages and regulates oil and gas resources on First Nation reserve lands. In addition, OEOG finalized farm-in terms with a private company in central Alberta to drill two wells on its lands to earn a 60% interest in six sections of land. A farm-in joint venture in Northern Montana was also finalized, whereby the company will earn a 50% interest in six and nine sections with the drilling of Shaunavon and Bakken test wells, respectively. Drilling has commenced on these lands.

VA Uranium Holdings, Inc. is the sole shareholder of Virginia Uranium, Inc., which owns and operates the Coles Hill Uranium Project in Virginia. In November 2010, SRC agreed to acquire a 19.9% interest in VA Uranium Holdings, Inc.

2. Precious Metals

SRC began investing in gold bullion in 2008 and currently holds 73,971 ounces at an average price of C$1019.32 per ounce. Based on SRC comments, it expects demand for gold to remain high through 2011, so I would expect it to hold this asset until it believes the long-term prospects for gold have changed or it finds a better area to allocate the funds in which it would expect a higher return.

3. Agriculture

One Earth Farms Corp. aims to be one of the largest farming operations in North America by working in partnership with First Nations. SRC owns 80% of OEFC on a fully diluted basis. Operations include both crops and cattle ranching. OEFC is currently in lease negotiations with 25 First Nations in Saskatchewan, Alberta and Manitoba. OEFC is focused on expanding its geographic presence in order to mitigate weather risk. According to the third quarter report, harvesting operations began in both Saskatchewan and Alberta. The quality of the crop was lower than expected, but was partially offset by strong agricultural commodity prices. In December 2010, SRC announced it will be investing an additional C$30 million in OEFC to fund the 2011 operating plan to allow OEFC to become Canada’s largest operating crop and cattle farm in 2011.

Stonegate Agricom Ltd. (SNRCF) is a publicly-traded Canadian company in which SRC currently owns 54.3%. Stonegate’s primary assets are two phosphate deposits in Peru, South America and Idaho, United States. Phosphate is a key ingredient in fertilizer, which is experiencing rising demand to meet the growing appetite for crops throughout the world. SRC recently announced a secondary offering where the underwriters have agreed to purchase 25 million commons shares of Stonegate from SRC at a purchase price of $1.75 per share for gross proceeds of $43.75 million. SRC also granted an over-allotment option exercisable for 30 days from closing to purchase an additional maximum 3.75 million common shares. After the offering, not including the over-allotment, SRC will maintain a 36% interest in Stonegate on an undiluted basis. SRC’s original investment over a period from 2007 through 2009 was $26 million.

Conclusion

While I do believe gold and oil offer both short- and long-term investment opportunities, I am not depending on the problems in the Middle East alone to move prices higher. Governments continue to print money, which should support gold prices for the foreseeable future, and there seems to be no end in sight for the world's thirst for oil.

It is important to note that many of the investments of SRC are still in their early stages of development, which provides a degree of risk. Other opportunities do exist to gain direct access to gold, oil, and agriculture. Those interested in gold could simply buy shares of the SPDR Gold Shares (GLD). Exposure to energy could be achieved by buying shares of a major oil company like Exxon Mobil (XOM) or a more direct oil play like Rosetta Resources (ROSE). Lastly, you may consider the PowerShares DB Agriculture Fund (DBA) or the ELEMENTS ETN linked to the Rogers International Commodity Index – Agriculture Total Return (RJA) -- for exposure to agriculture. However, I like the unique investment opportunity that SRC presents. SRC gives you diversified exposure to key commodities with a skilled management team making the entry and exit decisions on your behalf.

Disclosure: I am long SCPZF.PK.