We’ve written extensively here and in Canadian Edge about the global resource boom that sustains the economy up north and provides compelling stories for investors. So the headline “Sprott Hedge Fund IPO May Signal Top of Canada Commodity rally” on a May 5 Bloomberg story caught our attention.

The CAD2.1 billion Sprott Canadian Equity Fund, Sprott Asset Management’s flagship, has returned 28 percent annually for the past decade, a track record that reflects excellent junior resource stock picking. Sprott Asset Management’s entire line of mutual funds and hedge funds have benefited from soaring prices for oil, gold and other metals.

Eric Sprott has earned a reputation as a guy who knows how to maximize opportunities. Sprott founded what’s now Cormark Securities in 1981 before selling the securities broker to employees and devoting his efforts entirely to Sprott Asset Management in 2001. As first reported in mid-April, Sprott Asset Management is offering up to 15 percent of itself to the public, with the shares expected to hit the street May 8.

Sprott Asset Management oversees CAD6.9 billion in mutual funds and hedge funds. It plans to sell as many as 23 million shares, according to the sale documents. The founder's 78 percent stake would be worth about CAD1.17 billion at a CAD10-a-share offer price.

That the initial public offering (IPO) comes as oil tops USD120 per barrel strikes at least a couple analysts as ominous. The CAD230 million IPO reminds Stephen Jarislowsky, CEO of Montreal-based Jarislowsky Fraser, of the June 2007 share sale by Blackstone Group, which preceded a 56 percent decline in US mergers and acquisitions activity.

“When the LBO firms went public, the next day, the game was up,” said Jarislowsky to Bloomberg. “Why is he going public? If it's going that well, why would you let anybody in on it? Why doesn't he just sell to his partners?”

Said Greg Eckel of Toronto-based Morgan Meighen & Associates, “[Sprott’s] built his brand, he’s built his name. I guess my worry is, is this is an indicator of a peak?”

“Peak” is the word, but it’s relevance as far as Sprott’s motivation is best understood by reading his April commentary. Sprott, one of the most adamant, articulate advocates of the peak oil theory among high-profile money runners, writes:

Our main argument, and the argument of those who are expert on the subject, has always been that, at its core, Peak Oil is all about the decline rate of producing conventional oilfields. The reality of decline rates, which we estimate average somewhere around 8% per year for conventional production, impose a mathematically insurmountable hurdle to the prospects for continually rising oil supply. It’s just not in the cards to overcome the loss of 6 million barrels per day of production each and every year when significant discoveries just aren’t there to make up for the shortfall, let alone contribute to rising global production. Peak Oil is set in stone – the question is not if, but when…

In a similar vein, Saudi Arabia’s King Abdullah, in a recent speech, suggested that he wants to preserve the nation’s oil wealth for future generations, saying “Let them [oil reserves] remain in the ground for our children and grandchildren who need them.” This, by our thinking, would be a smart move. After all, under a Peak Oil scenario, oil will be a much more valuable commodity in the future than it is now even at today’s record prices.

It’s worth a read: Peak Oil: Alive and Well. That the Sprott Asset Management IPO indicates a peak in the commodity cycle may be borne out in some “post hoc, ergo propter hoc” sort of way, but the key from an investor’s perspective is that it’s a short-term top.   

A couple other deals provide some insight into Sprott’s long-term outlook. Sprott Resource Corp (TSX: SCP), which is managed by an affiliate of Sprott Asset Management, and Lara Exploration (TSX V: LRA) have signed a letter of intent to form a strategic alliance targeting phosphates, potash and other fertilizer feedstock minerals outside Canada.

Sprott Resource will provide up to CAD3 million in initial seed capital in the venture, including CAD500,000 in the first year, with Lara acting as operator to seek acquisitions and undertake exploration. Sprott Resource and Lara first linked up for the Mantaro phosphate project in Peru, one of the largest undeveloped phosphate deposits on the Pacific Rim.

Sprott Resource has also hammered out a joint venture with Altius Minerals Corp (TSX: ALS) to explore for potash in the St. George’s Basin of southwestern Newfoundland. The St. Georges project consists of 1,400 claims (35,000 hectares) that cover four primary target areas for potash deposits.

Under the agreement, Sprott Resource may earn up to a 60 percent interest in the St. George’s project by spending CAD2.5 million over four years, subject to an underlying 2 percent gross sales royalty retained by Altius.

Fertilizer is in high demand, and Canada has a lot of one of the key ingredients, potash. Canpotex, the marketing and distribution company wholly owned by Potash Corp of Saskatchewan (NYSE: POT, TSX: POT), Alberta-based Agrium (NYSE: AGU, TSX: AGU) and Minnesota-based The Mosaic Co (NYSE: MOS), negotiated a USD576-per-ton price with China for 2008 potash, up from USD176 per ton in 2007.

The stocks have run like crazy. Potash Corp, which is up 37 percent in 2008 and 135 percent in the trailing 12 months, recently surpassed energy giant EnCana (NYSE: ECA, TSX: ECA) as the biggest Canadian company by market capitalization.

The supply/demand profile is clearly in Potash Corp, et al.’s, favor. April meetings of the International Monetary Fund in Washington, DC, quickly, surprisingly turned from the global credit crunch to the international food crisis, riots have broken out, and Wal-Mart is rationing rice. Boosting crop yields has become an urgent topic of discussion, and fertilizer is a key part of making it happen.

We’ve had interesting water-cooler debates about food, fertilizer and potash recently, and much of that discussion has made its way to this space. Potash Corp is a typical “put itself in position to benefit from good fortune” company. Management is focused and controls costs; this, on top of the favorable fundamentals, makes it a good business.

That’s the answer to the threshold question. Our internal debate has centered on the value question: Is Potash Corp specifically too expensive at these levels?

Here’s the relevance: Sprott made his bones and his billions betting on junior resource companies, the ones that look for and find the stuff necessary to make economies go. He, or at least another company with his name on it, sees value in a small fertilizer explorer. This is a bet on the long-term food story.

Crude is expensive, and it will pull back. Potash is expensive, and investments related to it will pull back as well. But the forces set in motion by Asia’s rapid rise—a growing middle class means more cars, which require more oil to be refined into gasoline, and more meat consumption, which requires a lot of feed, which requires higher crop yields—are impossible to reverse.

This is a long-term story.    

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