Sprott bets the farm

As one of the country’s biggest advocates of owning hard assets, Eric Sprott is poised to bankroll what might end up being the largest farming operation in all of Canada, with the help of a number of Western Canadian bands of First Nations.

While perhaps not as high on the list as gold and oil holdings, Sprott has repeatedly expressed concern over tight global food supply. Providing a $27.5 million investment to One Earth Farms, Sprott Resource Corp., a subsidiary of Sprott Inc., is tackling both the need for sustainable food production and creating a co-operative that will create a source of sustainable income and employment for a number of First Nations bands in Western Canada.

By any measure, the project is ambitious. There is an initial target of developing 50,000 acres of prairie farmland in the first year. Once fully realized, there are reports the project could encompass one million acres if enough aboriginal communities agree to lease their land to One Earth Farms.

“We believe that the opportunities associated with this new venture are unprecedented in the agricultural industry,” said Kevin Bambrough, president and CEO of Sprott Resource Corp. “We intend to build a long-term profitable agricultural business in partnership with the First Nations, which will improve the management and environmental sustainability of First Nations’ farmland as well as benefit their peoples through increased revenue and job opportunities. We have assembled an exceptional team at One Earth Farms, which we believe provides the industry with the experience and operational skills necessary to build One Earth Farms.”

Like many investment themes before the downturn, the food crisis has been put on the back burner. Investors may recall that as late as summer 2008, there were predictions of hyperinflation in food prices, as arable land continued to decrease and the emerging markets increased their food consumption.

For the most part, this thesis remains intact according to Sprott Resources. The firm points out that the timing for this venture is opportune, since global trends — such as arable land decline, fresh water shortages and recurring droughts in certain parts of the world — continue to impact food supplies.

The global credit crunch has decreased the amount of financing available to farmers, which will likely stunt the growth of the food supply.

With the start-up investment, One Earth Farms intends to initiate job training programs for aboriginals, which will help train the next generation of farmers and provide One Earth Farms with a pool of qualified employees for the future.

The venture has recruited a number of agribusiness veterans to oversee its development. Sprott, the chairman of the company, remains committed to his core investment thesis, as evidenced by remarks made at the first annual earnings call for Sprott Inc., which went public last year.

Some of the company’s key long-only mutual funds have been battered by the downturn in commodity prices, but he reiterated that the fundamental investment themes in remain true. Most of the market predictions he’s made over the last few years — most notably the collapse of the global financial system — have come to pass.

“It’s not important to be right on a quarterly basis; it’s important to be right thematically,” he says. “For a group that foresaw what was likely to happen, we’re shocked that the long-only funds have not done as well as we thought. Our hedge funds had modest gains vis-a-vis the TSX.”

Sprott says only four things have kept investors out of the red: cash, government bonds, gold and short-selling stocks.

Sprott says that that list of themes has narrowed further, apart from a small upswing in government bond performance after the announcement of the U.S. Federal Reserve’s quantitative easing policy last week.

“Gold has provided a good return and shorting has provided a good return. We’ve narrowed down the macro themes that help investors survive this market to those two.”

Sprott pointed out that the only change he’s made to his investment style — and it’s not much of a change — is that he’s allocating a greater portion of his gold exposure to gold equities as opposed to bullion.

He stressed that this decision is based on a long-term investment view, and implies that it’s being done irrespective of the recent run-up in gold stock prices.

“Notwithstanding gold hitting a record high in ’08, gold stocks performed very poorly. Coming into the year-end, they got absolutely obliterated. That has obviously changed since then and gold stocks are very much ‘flavour-of-the-day’ right now,” he says. “It’s unfortunate that sometimes we get measured on the period that ends on December 31, because most of our investment choices tend to be of a very long-term nature, of something you imagine happening that will be sustainable and will produce a decent-sized return for your clients. That doesn’t always happen on a quarterly or annual basis.”

(03/26/09)