Sprott Inc

TSX:SII

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2024 First Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, May 8, 2024.

On behalf of the speakers that follow, listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements within the meaning of the safe harbor provisions of the Canadian provincial securities law. Forward-looking statements involve risks 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 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 quarter and Sprott's other filings with the Canadian and U.S. security regulators.

I will now turn the conference over to Mr. Whitney George. Please go ahead, Mr. George.

[W. George, executive]

[Technical Difficulty] CEO of Sprott Asset Management. Our 2024 first quarter results were released this morning and are available on our website, where you can also find the financial statements and MD&A.

I'll start on Slide 4. Our AUM, once again, reached record highs during the quarter, driven by stronger gold and silver prices late in the period, offset somewhat by what we view as short-term weakness in uranium and related equities.

Gold and silver gained 8% and 5%, respectively, on a rally that began in mid-February and has accelerated through March and April. Our AUM as of March 31, 2024, was up $0.6 billion from the fourth quarter of 2023. Subsequent to the quarter end, AUM increased by $1.8 billion to $31.2 billion as of May 6, 2024.

We reported $284 million in net redemptions during the quarter as our precious metals trust traded at wider discounts to net asset value. This was our first quarter of net redemptions in 4 years, and I'm happy to report the trend has reversed early in the second quarter. We further expanded our critical materials offerings during the first quarter with the launch of the Sprott Copper Miners ETF, and the Sprott Junior Uranium Miners UCITS ETF in Europe.

We are encouraged by the improved performance of our actively managed precious metals equity strategies, which has performed well in Q1 and year-to-date. With that, I'll pass it over to Kevin for a look at our financial results. Kevin?

[Kevin Hibbert, executive]

Thanks, Whitney, and good morning, everyone. Before I get into our current period results, I just wanted to provide you with a brief note on some changes to our quarterly reporting you may have noticed with our filing of the MD&A and financial statements this morning. Now that we completed the multiyear exit of noncore businesses that required several nonrecurring items to be booked and we no longer have any other material accounting noise and disclosures to contend with in the near future, we no longer require a place in our financial statement notes to park those multiple other items anymore. So we use this opportunity to clear out the other category in note 7 of our financial statements and repointed as many accounts as possible to their own lines on the financial statements. You can refer to footnote 2 of the summary financial information on Table 9 of the MD&A filed earlier this morning for more details in that respect.

That said, I'll start our results update on Slide 5, which provides a summary of our historical AUM. AUM finished the quarter at $29.4 billion, up 2% from $28.7 billion as at December 31, 2023. On a 3 months ended basis, we benefited from market value appreciation in our precious metals trusts and managed equities funds. As Whitney noted, subsequent to the quarter end on May 6, our AUM increased to over $31 billion.

Slide 6 provides a brief look at our 3-month earnings. Adjusted base EBITDA was $19.8 million in the quarter, up 14% from $17.3 million earned over the same 3-month period last year. Our earnings benefited from higher management fees on strong market value appreciation across our exchange-listed products, partially offset by lower commission income due to the sale of our former Canadian broker-dealer during the second quarter of last year.

Finally, Slide 7 provides a few capital management highlights. And as you can see here, our cash and liquidity profile remains strong and our use of leverage modest. For more information on our revenues, expenses, EBITDA and balance sheet, you can refer to the supplemental information section of this presentation as well as our quarterly MD&A and financial statements filed earlier this morning. With that said, I'll pass things over to John. John?

[John Ciampaglia, executive]

Thanks, Kevin, and good morning, everybody. I'll just start off by giving you guys a little bit of color in terms of what we're experiencing in the market. It was definitely an unusual quarter with gold finally hitting an all-time high in U.S. dollar. It's obviously been at all-time highs in just about every currency in the world with the exception of the U.S. dollar. And I think we're very pleased that we finally hit that new milestone in the quarter.

Even though we've had record prices for gold, we've not seen uniform interest in gold over the last several quarters. It's been a very bifurcated market with Western institutional investors largely being uninterested in gold, even though it's hitting all-time highs, while Eastern investors and Central Banks around the world have been buying ever larger amounts of gold. We see continued buying by the Chinese Central Bank as a key theme here as they continue to shift their foreign reserves away from U.S. treasuries to hard assets like gold.

We also see the return of Chinese retail investors who are returning back to a culturally popular form of wealth and storing wealth and gold in response to very soft real estate and stock markets. We generally see very strong interest in commodities, particularly those related to energy transition and electrification. And in the quarter, I think it's fair to say that we've never had the level of institutional engagement ever in the history of Sprott. It's been really remarkable and has kept our team very busy.

We believe we're in the early stages of a new commodity super cycle, which will largely be driven by growing electricity demand and mineral intensive energy technologies. And given our growing product suite targeted to these themes, we believe we are very well positioned to capitalize on this long-term secular theme. We did experience some modest redemptions, as Whitney mentioned, in the quarter as discounts to NAVs widen in the precious metal side of our business. But since the end of the quarter, conditions have improved markedly with net outflows of over $200 million quarter-to-date.

Inflows have returned to our gold and uranium trust. And I'll just talk a little bit about uranium. It's been a very interesting year so far after uranium hit $106 a pound in January, which was the highest since 2007. We did experience a very healthy pause correcting back to $84 a pound, and we've since risen to about $84 pounds today. That clearly allowed some investors to take advantage of the pullback and accumulate new positions. Sprott has been trading back to a premium to its NAV, which allows us to raise new units through our at-the-market offering. And year-to-date, we've raised approximately $180 million, and that compares to $268 million for the entirety of 2023.

So I think the momentum is clearly shifting and in sentiment has improved. I think one of the things that's helping sentiment in the sector is clearly geopolitical risks and the recent passing of the ban on the importation of Russian enriched uranium highlights the strategic importance of nuclear energy and secure sources of uranium nuclear fuel. And this has not gone unnoticed amongst institutional investors.

Let's go to the next slide. Our AUM of $22.7 billion as of May 6, as you can see from the bar chart, growth has been very consistent over the past few years. We're very pleased and proud of the growth of this segment, which stood at under $7 billion in early 2020. This is a highly scalable platform across multiple metals. Many of our corporate shareholders start off the relationship with us by investing in one or more of our physical trust. And in many cases, it involves to much larger relationship by owning Sprott Inc. shares.

Next slide. Just in terms -- I'm going to shift to the ETFs. These are the open-ended ETFs that focus primarily on mining equities. Sales in the quarter softened from Q4, largely to the pullback I mentioned in the uranium market. Since the end of the quarter, again, we've seen very strong rebound in net flows of about plus $88 million. Yesterday we had over $20 million more come in. We launched the Sprott Copper Miners ETF. The ticker is COPP on NASDAQ, which has quickly risen to about $25 million in AUM, again, highlighting the growing interest in key commodities like uranium and copper that will -- that are growing in prominence in terms of the energy transition and electrification. We also launched a UCITS version of the very popular Sprott Junior Uranium Miners ETF in Europe and the United Kingdom, which is starting to grow very nicely.

All right. And on the last slide, just wrapping up on AUM and the ETF suite, we're just under $3 billion today. Overall growth has been excellent, given our AUM was a modest $400 million just 2 years ago. We're very pleased with our current range, and we'll look for selective opportunities to capitalize on emerging themes where we can provide high value-add strategies. And with that, I'll pass it back to Whitney.

[W. George, executive]

Thanks, John. I wanted to go to Slide 12, managed equities. As I mentioned at the start of the call, our actively managed precious metals equity strategies have delivered improved performance this year. Our flagship fund, the Sprott Gold Equities fund currently sits atop its peer group having returned 7.3% during the first quarter and 11.2% on a year-to-date basis. We reported $70 million in outflows from the segment during the first quarter due largely to the closing of some legacy European sub-advised accounts.

On Slide 13, turning to private strategies. Combined lending and streaming strategies, AUM was $2.6 billion as of March 31, 2024. The team is continuing to monitor and harvest investments in our second private Lending Fund and is actively assessing new investments and opportunities for Lending Fund III. We also continue to advance our activity managed physical commodity strategy, which we launched in November of 2023.

Slide 14. To sum up, we've delivered strong performance through the early months of 2024, and I believe our core investment teams are poised to continue delivering attractive returns for our clients and investors. Precious metals are sitting near record highs and have -- but as of recently have -- until recently have garnered very little attention from investors and the media. Central banks, as John mentioned, continued to diversify their foreign reserves into gold, offsetting Western investor lack of participation.

During the first quarter, Western physical gold ETFs experienced 3.4 million ounces of withdrawals. Meanwhile, gold appears to be flowing from West to East, as John mentioned, as Asian investors pick up their pace of gold investment. In China, retail investors are left with few attractive investment alternatives. Real estate is overbuilt and over-levered, stock markets are on shaky ground due to economic weakness and crypto investments are illegal. In short, there is no other alternative.

With the case for gold becoming more difficult to ignore, we expect institutions and individuals in the Western world will soon bring their gold allocations back to historic norms, adding more fuel to the current rally. We also find it notable that over the past 27 years, the gold price and the S&P 500 have delivered nearly identical returns. This is a fact that I think is not well known.

We have continued to expand our Critical Materials product suite with the launch of 3 Copper Miners ETF in 2024. Critical Materials investments now account for 27% of our total AUM. Interest in these metals is surging as it becomes clear that electricity demand in developed markets is poised to rise for the first time in decades. The drivers of this shift include population growth, increasing global standards of living [Technical Difficulty] this year. In the first 4 months of 2024, we track more than 800 interactions with global institutions, family offices and high net worth investors. We've also made significant progress in the broker-dealer channel, securing placements for Exchange Listed Products on several of the largest warehouse platforms.

At the same time, our marketing team continues to produce a high volume of top-quality thought leadership materials. We appreciate the continued support of our clients and our shareholders and we feel confident their trust will be rewarded in the quarters and years ahead. That concludes our remarks for today's call. I'll now turn it over to the operator for some Q&A. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Rasib Bhanji of TD Cowen.

[Rasib Bhanji, analyst]

I just wanted to circle back on the broker deal channel. Could you explain the dynamics of secure replacement on the wire house platforms because your products are already exchange traded. So wasn't those advisers on the wire houses not be free to put client assets into Sprott ETF and Exchange Listed Products already?

[John Ciampaglia, executive]

Yes. Yes. So in the U.S., in particular, there is a process to get your Exchange Listed Products approved for sale for wide distribution. So there are teams of ETF research analysts that evaluate ETFs. With more ETFs than publicly listed stocks right now, I think it's appropriate for these wire houses to properly vet ETFs. And it is a process. It is not just because your free trading doesn't mean you instantly gain access to that distribution network. There are parameters that you have to achieve with respect to size, liquidity, fees, bid-ask spread and it does take time to work through those processes. Most recently, our uranium mining ETF, which, even though it's been in existence since the end of 2019, has just been approved at large wire houses like Morgan Stanley, Merrill Lynch and UBS. So it is a process. It's not a free ride just to have access to these networks. And so we do have a team that works diligently to secure those placements because obviously, when a theme is in favor, you want to have maximum coverage and access to distribution.

[Rasib Bhanji, analyst]

My second question would be, I guess, just on the overall business, given the amount of AUM growth you've been seeing, is your current infrastructure and headcount, are there enough to sustain a higher AUM growth? Or would you need to, I guess, invest more and hire more people? Or maybe ask differently, how much operating leverage could we expect to see from higher AUM levels?

[W. George, executive]

Well, particularly in the Exchange Listed Products, which would include physical trust as well as ETFs, we have an enormous amount of operating leverage and an enormous amount of capacity. We are reasonably small relative to some of the incumbent ETFs like GLD out there in our Physical Gold Trust, for example. So in uranium, the trust is now at about $6 billion. And again, as investor interest increases and the theme of nuclear power becomes more and more widely recognized, we expect to find even larger institutions have an interest in participating. We have been investing in sales and marketing for the last year intentionally to prepare for this. There's not much institutional interest in things like gold or silver, it's more of a retail thing. But in uranium and critical materials, it's very institutional. And so we created a new institutional team last year, added several executives late in the year and certainly beefed up our marketing team to continue to be able to produce thought leadership content, which is the main way we attract new investors.

[Rasib Bhanji, analyst]

And I guess just my last question. I think, Kevin, this might be for you on the stock-based compensation line. Given the new, I guess, accounting adjustments, it seems like last Q1 2023 stock-based comp number was increased by $0.5 million. Would that explain the higher stock-based comp that we're seeing in this year? And is this a reasonable run rate as well?

[Kevin Hibbert, executive]

Sorry, I was following you halfway through your question. So what are you trying to correlate the $0.5 million to?

[Rasib Bhanji, analyst]

Just the restated numbers for Q1 2023.

[Kevin Hibbert, executive]

Got you. Okay, I understand now. Yes, yes. So part of the reclassifications we did when we cleaned out the other category, you are correct, is the DSUs that are paid to the Board. DSUs do fit under IFRS 2 as stock-based comp. So as part of that cleanup exercise, we did repoint that to that line. So that would be one of the reasons for the increase there. So that's correct.

[Operator]

[Operator Instructions] I'm showing no further questions at this time. I would now like to turn it back to Whitney George for closing remarks.

[W. George, executive]

Thank you, everyone, for participating in this call. We appreciate your interest in Sprott and look forward to speaking to you again after our second quarter results. Have a great day.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.