Sprott Inc

TSX:SII

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2022 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, this conference is being recorded today August 2, 2022.

On behalf of the speakers that follow, listeners are cautioned that today's presentation and 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 US securities regulators.

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

[Whitney George, Chief Executive Officer]

Good morning, everybody. Thank you for joining us today. On the call with me today is our CFO, Kevin Hibbert; and John Ciampaglia, our CEO of Sprott Asset Management our largest business unit. Our second -- our 2022 second quarter results were released this morning and are available on our website, where you can also find the financial statements and MD&A.

I'd like to start on slide four this morning. We delivered strong second quarter operating results despite a very challenging market, which everybody is well aware of. We've continued to build scale in our ETF business. We completed the acquisition of URNM in the second quarter. And this morning we announced the launch of Sprott ESG Gold Fund, a new and very innovative ETF that I'm sure John will tell you all about in a bit.

We continue to strengthen our management team with the notable addition of Steven Schoffstall, who is now Director, ETF Product Management. He is an extremely experienced ETF executive with many years of service at much larger competitors.

We actively developed new products in all four of our asset management businesses and we completed a CEO transition. On June 30, I took over from Peter Grosskopf, the CEO of Sprott. I'd like to take this opportunity to thank Peter for his many contributions over 12 years in leading the company.

During Peter's tenure, Sprott grew from $5 billion in AUM to more than $20 billion today and established itself as a global leader in natural resource investing. Peter played a key role in launching our successful private lending franchise, as well as our institutional brokerage franchise.

More impressively, Peter presided over a rare transformation from a founder-driven firm to a global organization. In addition Peter achieved this feat while operating under the scrutiny that comes with running a public company.

Peter has left us a company that is very well positioned for continued growth and very bright prospects for the future. I thank Peter for that and I look forward to continue to work closely with Peter in some of his new assignments.

With that, I'd like to turn it over to Kevin for a look at our financial results for the quarter. Kevin?

[Kevin Hibbert, Chief Financial Officer]

Thanks Whitney and good morning, everyone. I'll start on slide five which provides a summary of our historical AUM. AUM was $21.9 billion as at June 30 of this year, down $1.7 billion or 7% from March, but up $1.5 billion or 7% from December of 2021. Our quarter-over-quarter AUM was negatively impacted by the recent market challenges across most global asset classes, as Whitney alluded to earlier.

But on a six months ended basis, our cumulative market value declines were largely offset by continued strong inflows to our physical trusts, in particular, our uranium and gold trusts; the onboarding of new commitment fee-generating private strategy LPs; and $1 billion of AUM from the URNM acquisition Whitney mentioned.

Slide six provides a brief look into our three and six-month earnings. In short, the strength and resiliency of our business model was clearly demonstrated this quarter, as adjusted base EBITDA was $17.9 million up $2.9 million or 19% from this time last year. And on a year-to-date basis, adjusted base EBITDA was $36.1 million, which was up $6.4 million or 22% over the same six-month period last year.

Adjusted base EBITDA benefited from the things I mentioned earlier: the strong net inflows into our physical trusts; the URNM acquisition and the onboarding of additional AUM as a result of that; as well as inflows to our private strategy LPs. Those increases were, however, partially offset by weaker mining equity origination activity in our brokerage segment.

Moving now to slide 7. Despite the ongoing challenges encountered across most global markets and asset classes our balance sheet, our cash flow and liquidity metrics remain strong at the halfway mark of the year and we expect to see this strength continue throughout the latter half of 2022. For more information on our revenues, expenses, EBITDA and balance sheet metrics you can refer to the supplemental information section of this presentation as well as our second quarter MD&A filed earlier this morning.

With that said, I'll pass things over to John.

[John Ciampaglia]

Great. Thanks, Kevin and good morning, everybody. Just moving to slide 8 and I'll cover the physical trusts. As you've heard a couple times already Q2 was a very challenging quarter, but irrespective of that I think we had exceptional results particularly on a relative basis. On an absolute basis $479 million in net sales.

And that is a very different scenario relative to most competitors that had significant outflows in most categories. For the first half of the year, we recorded $1.8 billion in net sales, which was putting us on pace to have an all-time record high this year. And we think that with any kind of improvement in market sentiment we're very well-positioned to resume capital raising.

Right now there's a lot -- there's been severe corrections in a lot of different commodities and also a lot of speculative and frothy areas of the market which we think will be healthy long-term and perhaps convince investors to pivot back to more real investments which we focus on.

Moving to the next slide. Just want to talk a little bit about our leading uranium franchise. We made a significant investment in the quarter to expand and broaden that platform. The Sprott Physical Uranium ETF is now $2.8 billion in AUM and we just crossed the one-year mark. And you may recall that in July of 2021 we acquired that vehicle with $630 million of AUM. So the growth of that vehicle has been astounding.

We completed the acquisition of URNM, which is now called Sprott Uranium Miners ETF on April 22. And as Whitney mentioned, it brings a lot of needed scale in our ETF segment. The current AUM of the ETF is actually closer to $900 million right now. And I think the one takeaway that I would highlight here is while the fund is off in performance, its share count is at an all-time record high which I think reflects the strong investor interest we're seeing in this theme of decarbonization and energy security that the world is now dealing with.

Early sales in the fund despite a very challenging backdrop have been positive $17 million and that was as of yesterday. And if I compare that to our much larger competitor they experienced outflows of $141 million over the same period. So, I think, we're doing a very good job in terms of positioning the ETF under our stewardship.

We also cloned the fund in a UCITS version for the European markets in mid-May. So I'm very happy to provide an update on our progress there. And we've recorded about $12 million in sales since that fund launched in London, Europe -- excuse me, Italy and Germany.

Europe to say the least is going through an energy crisis right now that's been brought on by the invasion of Ukraine. And more recently nuclear has been included in the EU sustainable finance taxonomy. After a couple years of foot dragging, it's finally coming into the taxonomy, which will help power plants in Europe with extensions and allow them to compete more effectively against other forms of energy production.

Let's go to the next slide please. All right. Well, I'm happy to introduce you all to the Sprott ESG Gold ETF. And we're very excited about this because it's been a long time in the making. We've been working on this project for the last two years. And today it started trading on the New York Stock Exchange under the ticker SESG. This is a very innovative product the first of its kind in the world and involves a number of different parties that cooperated to put this product offering together.

We believe it sets a new standard amongst gold ETFs providing investors with an investment solution that provides the highest levels of trust, transparency and traceability with their gold investment. SESG will exclusively source gold directly from ESG mining leaders and refine this gold on a segregated basis for its investors.

We think it offers unparalleled benefits to investors which include sustainability, meaning producers and mines selected for their sustainability and ESG leadership will only be included in the gold production. Known provenance and this is something that's tricky in the gold business. The gold industry is very opaque and knowing where your gold comes from is not well known in many cases.

SESG will provide its investors with the sources of its goal by region, producer and right down to the individual mine location. Conflict free gold will be initially sourced from only Canadian mine sites one of the premier and safest mining jurisdictions in the world. It will also have lower supply chain risks. There will be no gold from non-Sprott-approved producers, mines as well as no ASM or artisanal and small-scale mining or recycled gold which are the most vulnerable sections of gold supply chain.

All Sprott ESG approved gold bars will be provided by one of the most trusted refiners in the world, The Royal Canadian Mint through segregated production and storage. And as a result, we believe SESG will provide the highest levels of trust, transparency and traceability.

Let's move to the next slide. As I mentioned about the partnership this product has come about based on a partnership between what we believe are two ESG mining leaders, Agnico Eagle Gold and Yamana Gold and finally, The Royal Canadian Mint which will provide all the segregated refining and vaulting of our material. The gold will be sourced initially from six different mines that are all located in Canada. And all of that disclosure is on our website if you'd like to know more.

I'll talk a little bit about the market opportunity here. We believe any individual adviser or an institution that'd like to invest in gold and know where was their gold produced, who produced it and was it produced sustainably should be interested in this product. And we believe that investors that adopted ESG mandates will definitely be interested in learning more about SESG over the coming months. And we -- our plan is to bring this to institutions and consultants and help to differentiate this product from some of the other offerings that are available in the marketplace.

Let's move to the next slide please. On the managed equity side of our business it was obviously a very difficult environment for just about every kind of stock segment out there. But I think the silver lining here is that we did not experience severe redemptions in the quarter. Investors seemed to be holding the line which I think is a good sign. We also launched a new strategy and then this helps diversify our business platform and bring us into areas which we think are undergoing long-term and durable secular changes and that is specific to energy transition materials. We've launched a new private partnership on June 30 and we hope to make more investments in this area over the coming months. And then finally we recently renewed our sub-advisory agreements with Ninepoint Partners after our initial five-year term with them expired on August 1.

And with that I'll turn it over to Whitney.

[Whitney George, Chief Executive Officer]

Thank you, John. I'm on Slide 13 private strategies. Our combined lending and streaming strategies ended June 30 with AUM of $1.6 billion. LF2, Lending Fund II is in deployment and monitoring phase i.e. it's in its more mature phase where deployments are almost completed. Streaming and Royalty Fund actively deployed capital both for its fund and co-investors during the quarter. And we're expecting to launch additional private investment vehicles in both strategies and complementary new areas which we'll talk more about in future quarters.

Okay. On Slide 14, I'd like to sum things up. Not to repeat ourselves too much, but we're continuing to deliver very strong financial results, despite difficult market conditions. We've maintained strong sales momentum. $800 million in the second quarter $2.2 billion in the first half of net new sales. We have a highly variable and resilient business model that allows us to invest through the cycles irrespective of market conditions, and we're developing new products in all asset management businesses.

At this point, new products are more likely to be the focus in organic growth development rather than acquisitions. We are continuing to add new talent in our core areas. And Sprott is uniquely positioned as a pure-play asset manager in the natural resource space. We're actively building out our upstream energy transition strategies to complement our core precious metals expertise.

That concludes our remarks for today's call, and I'll now turn it over to the operator for some Q&A. Operator?

[Operator]

[Operator Instructions] Our first question comes from Graham Ryding with TD. Your line is open. Hello, Graham. Your line is open. You can ask your question.

[Graham Ryding, TD]

Sorry, I was on mute. Can you hear me now I hope? I just had one question. I saw there was some severance in the quarter, and then there was a comment that you expect some further severance payments over the next three years. Can you just give us some color on, whether it's sort of this level or what should we expect to be coming through over the next three years through the transition?

[Kevin Hibbert, Chief Financial Officer]

Hey, Graham, can you hear me?

[Graham Ryding, TD]

Yeah.

[Kevin Hibbert, Chief Financial Officer]

Okay. Good, good. So the severance number that you see here, it's almost entirely for the most part the compensation and transition payments to Peter as he transitioned out of the CEO role into the more focused role on the broker-dealer side. And typically, one of the best practices that you will see in the FI space and in particular with the banks is that, some of the transition payments will be deferred and paid out over the subsequent years after the CEO's tenure. And so that's all that is right there. So that $2.1 million that you saw in the quarter is a combination of an amortization of transition payments plus other payments over the next few quarters that are reflected there.

So it's not that, there will be more severance per sequential, but rather it will just be the ongoing amortization of the transition payments that you'll see reflected on that line. If you want some more color on that Graham you can just flip through the financial statement notes and just move to the equity section. And in the equity section, it'll provide you a little more details around that amortization rate.

[Graham Ryding, TD]

Okay. So, it sounds like, this is not a run rate. It sounds like it's going to be lower going forward?

[Kevin Hibbert, Chief Financial Officer]

Yes.

[Graham Ryding, TD]

Okay. That's it for me. Thank you.

[Operator]

The next question comes from Geoffrey Kwan with RBC. Your line is open.

[Geoffrey Kwan, RBC]

Good morning. Just my first question just following up on Graham's question. The payments that are there is it transition or is it severance that's being classified?

[Kevin Hibbert, Chief Financial Officer]

Yeah. So it's transition which in substance is severance. If you look under the laws you change your – if you change your role from one meaningfully to another then it's akin to a severance and so that's why transition payments would show up there. If you look over the years as well Geoff into our financials, you'll see that in other situations like this where there was an executive that departed, there were transition payments that would also show up on that line.

[Geoffrey Kwan, RBC]

Okay. Sorry. Severance from the position or severance from the corporation?

[Kevin Hibbert, Chief Financial Officer]

The position.

[Geoffrey Kwan, RBC]

Okay. I noticed the Sprott Korea went from other AUM last quarter, and now it's gone into non-core `AUM. I'm just wondering if you have some color on that.

[Kevin Hibbert, Chief Financial Officer]

Sure. So the point of that was that -- first of all, Korea was always a legacy. And Whitney feel free to hop in here, but it was always a legacy non-core part of our business. If you look at just the total amount of AUM relative to the overall AUM, we have and if you also consider the earnings contribution over the years that you've covered our story, Geoff, you'll see that it was always a very small amount of our total earnings as well like around 1%.

So this was just about disclosure cleanup quite frankly, to make it a little more clear what that was. In the past to your point, we called it other, but we also had an other category under managed equity. So I just wanted to make a little bit more -- or shed rather a little bit more light on exactly what that is so that our shareholders could better appreciate exactly what that is.

[Geoffrey Kwan, RBC]

Okay. So it's non-core. Is that something that just will go down over time or is it going to -- some time passage that it just kind of goes to zero?

[Kevin Hibbert, Chief Financial Officer]

Well, not necessarily. Non-core is just a more accurate reflection of exactly what that was which was non-core AUM. So it's just a matter of giving it a more accurate description. It's no different than for example when we changed the name of our lending segment to private strategies as we began to build scale in our streaming component of our private strategies business.

Streaming's a little different a little different form of mining finance than pure play lending. So because both of those businesses were equally material to us at that stage, we simply changed the name. So this is sort of following along those lines where as we grow our core businesses, it becomes even less material. And so it's just better to call it what it is which is non-core AUM.

[Geoffrey Kwan, RBC]

Okay. And just my last question was just if there's any sort of near-term insight you can give in terms of net deployment on the lending and the royalty funds?

[Kevin Hibbert, Chief Financial Officer]

Sorry, the first half of what you said you were breaking up. Can you say that again?

[Geoffrey Kwan, RBC]

Yes. Sorry, just any sort of near-term insight you have on the net deployment in terms of the lending and royalty funds?

[Kevin Hibbert, Chief Financial Officer]

Sorry, Whitney. Whitney, go ahead.

[Whitney George, Chief Executive Officer]

I think I had -- I think I mentioned Streaming and Royalty Fund deployed $76 million in the second quarter. And they originated $335 million in the first half which would include co-investments by other institutions. LF2 has deployed $500 million in fee-generating AUM as of June 30.

[Geoffrey Kwan, RBC]

Okay.

[Whitney George, Chief Executive Officer]

L1 is pretty much complete and more products are coming. The team's done a great job. The investors are very happy with their results. And we are definitely seeing some traction growing that business.

[Geoffrey Kwan, RBC]

Okay. Thank you.

[Operator]

And I'm not showing any further questions at this time. I'd like to turn the call back to Whitney George for any closing remarks.

[Whitney George, Chief Executive Officer]

No, that will take care of it for all of us. We appreciate you listening in. Obviously, we're very excited about our prospects and what we've achieved to-date. And given even slightly more stable markets we think we will get ourselves back on a growth trajectory.

Lots of things in the pipeline. As John noted, ESG Gold was at least nine months in the making. So we have some pretty good visibility into the future, because I think we've laid the groundwork to come out -- continue coming out with very interesting solutions for our investors.

So, with that, thank you all for joining us today. I look forward to chatting with you in the future.

[Operator]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.