Sprott Inc

TSX:SII

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott, Inc.'s 2023 Second Quarter Results Conference Call. [Operator Instructions].

As a reminder, this conference is being recorded today, August 9, 2023. On behalf of the speakers that follow, listeners are cautioned that today's presentation and the responses to the questions may contain forward-looking statements within the meaning of the safe harbor provision of the Canadian provisional securities laws. 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. securities regulators.

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

[Whitney George, CEO & Director]

Good morning, everyone, and thanks for joining us today. On the call with me today is our CFO, Kevin Hibbert; and John Ciampaglia, CEO of Sprott Asset Management. Our 2023 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'll start on Slide 4. Our assets under management declined slightly during the second quarter due largely to weaker precious metal prices. However, on a 6-month basis, our AUM has increased by $1.7 billion and currently stands at $25.1 billion. We continue to deliver net sales. We continue to deliver net sales during the quarter despite the headwinds in [indiscernible].

In our Private Strategy segment, both our private lending team and our streaming and royalty team recently closed new partnerships with support from both new and existing LPs. While on the surface, it was a relatively quiet quarter, much hard work was occurring beneath the service. Our marketing team continues its high level of output, producing upwards of 30 thought leadership pieces during the quarter. We also recently welcomed Judith O'Connell to the Board of Directors. Judy is a founding partner and CEO of Champlain Investment Partners, a significant Vermont-based employee-owned asset. We look forward to adding her expertise to the Board, particularly in areas like operations, compliance and technology.

And with that, I'll pass it over to Kevin for a look at our financial results. Kevin?

[Kevin Hibbert]

Thanks, Whitney, and good morning, everyone. I'll start on Slide 5, which provides the usual summary of our historical AUM. As Whitney alluded to earlier, AUM finished the quarter at $25.1 billion, down $235 million or 1% from March 31 of this year, but is actually up $1.7 billion or 7% since the end of last year.

On a 3 months ended basis, our AUM was negatively impacted by market value depreciation across the majority of our fund products that was only partially offset by new capital raises and inflows to our private strategies and exchange listed products.

However, on a 6 months ended basis, we did benefit from the full effects of this year's capital raise and inflows to our private strategies funds as well as good as the market activity levels in our exchange-listed products and a strong first quarter of market value appreciation across the majority of our funds.

Slide 6 provides a brief look at our 3- and 6-month earnings. Adjusted base EBITDA was $18 million in the quarter, up slightly from the same 3-month period ended last year. The increase in the quarter was due to higher average AUM in our exchange-listed products and private strategies more than offsetting lower commission income in the quarter due to the sale of our former Canadian broker-dealer. Adjusted base EBITDA was $35.3 million on a year-to-date basis, down $808,000 or 2% from the same 6-month period ended last year. That decrease was due to lower commission income on the sale of the Canadian dealers as I mentioned earlier, as well as slower aftermarket activity in our Uranium Trust.

The lower commission income on a year-to-date basis was nearly offset by growth in net fees on improved AUM and we expect net fee levels to increase even further in the second half of the year, leading to the eventual replacement of low-margin commission income from our broker-dealer with higher margin fees from our exchange products and Private strategy segments.

So all told, we have grown annual adjusted base EBITDA consistently over the last 5 years, and we anticipate more of the same for 2023, although at a much lower trajectory than previous years given the challenging 2023 operating environment.

Lastly, as you can see on Slide 7, as part of our ongoing treasury and balance sheet management program. During the quarter, we paid down $20 million or 37% of our outstanding debt facility. We expect the total debt outstanding down by another 13% or so in the second half of the year, such that our total outstanding debt coming out of 2022 will be lower -- sorry, 2023 will be lower than where it was coming out of 2022.

Subsequent to quarter end, we completed a review of our current and near-term funding and borrowing needs, and determine that we no longer require a $120 million credit facility. Consequently, management decided to lower the maximum borrowing capacity under the credit facility by $45 million to $75 million, offsetting the reduction in borrowing capacity is the release of capital restrictions on the sale of our former Canadian broker-dealer that closed earlier this quarter as well as the eventual monetization of shares that we received on the realization of a previously unrecorded contingent asset from a historical acquisition. 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 that we filed earlier this morning. With that said, I'll pass things over to John.

[John Ciampaglia, Senior Managing Partner]

Thanks, Kevin, and good morning, everybody. I hope everyone is enjoying their summer. Q2, we had very solid results across our physical trust business, and it was obviously a very challenging market environment. $149 million in net sales that was predominantly our Gold and Silver Trust. I think this is a good outcome given industry flows into precious metals ETFs have been quite soft despite the fact that metal prices have been grinding higher. This is kind of an odd decoupling. We've looked at the trend over several years. And usually flows are quite -- are tightly track performance.

The recent environment where investors are moving to the sidelines and then putting money into cash, I think, is an unusual phenomenon that we think will dissipate over time. On the uranium side, our uranium trust achieved its 2-year anniversary on July 19. The fund has experienced tremendous growth over that time and is approximately $3.5 billion of assets right now. And I think it really highlights the fact that it is very countercyclical. It is very recession proof and is kind of marching to its own drum right now relative to other commodities that have had softer experiences in the last few months as people have been disappointed with the China reopening.

Price of uranium has gone from about $48 to about $56.50 per pound this year. And the forward curve is clearly signaling higher prices, which is being driven by a utility contracting cycle, which is clearly accelerating in 2023 after last year's 10-year high. And we see a number of very positive fundamentals in the uranium market over the coming years. For example, some of the largest producers in the world are essentially sold out for the next 2 years, and we're starting to see the reshoring of the [indiscernible] uranium fuel supply chain back to Western providers such as the ConverDyn conversion facility, which finally restarted in June of this year after being closed for a number of years. That's obviously going to lead to higher demand for U308, and we think that's helping prices.

On the next slide, while uranium is obviously a critical role, it's been getting a lot of attention in the markets related to energy transition. There are obviously [indiscernible] a number of other metals that we think have very bright futures as the world realizes we need to more aggressively decarbonize our economies and focus on greenhouse gas reductions.

Last year, we saw the highest amount of electric vehicles sold globally, around 10 million units. We're currently tracking for about 14 million units this year, so 40% growth, which is pretty amazing because last year, many market participants would acknowledge that it was a tipping point in terms of EV adoption globally. That is obviously helping things like lithium and cobalt and nickel. While the prices have corrected this year, the equity markets related to these producers have been quite robust.

There's a lot of M&A activity happening in the lithium space in particular. On the solar front, we saw record amounts of solar capacity being added globally last year, and this year will well exceed that. And that's obviously benefiting things like silver and copper. Green energy policy through the U.S. Inflation Reduction Act and EU Green deal is really acting as a key catalyst here in terms of crowding in private investment capital. We're seeing investors around the world that are becoming increasingly interested in this thematic and we think it has a multi-decade time line to play out.

The assets in the new ETFs that we launched in February and March are steadily growing despite many of the competitive funds being in net outflows over the same period.

Next slide. On the managed equities front, fairly quiet quarter. Unfortunately, the gold strategies gave back a lot of the gains that they had delivered in the first quarter. So we kind of are around flat for the year-to-date period. Performance was largely in line with our benchmarks. We recently hit the 1-year mark of our energy, our actively managed energy transition materials strategy, which our team has been incubating and hoping to sell that to high net worth investors and institutions. And I think it's fair to say that we're placing bets in our passive product suite, our commodity product suite and our active product suite. We really want to cover the whole landscape in terms of meeting investors' needs as they try to figure out how to position themselves in this thematic. And with that, I'll pass it back to Whitney.

[Whitney George, CEO & Director]

Thanks, John. Turning now to Slide 11 for a look at our private strategies. Combined lending and streaming strategies AUM increased to $2.6 billion as of June 30, 2023. As I mentioned earlier, we recently closed our fundraising efforts on the new lending fund and a streaming fund in our Private Strategy segment. As with our public funds, the energy transition theme is playing a larger role in our private strategies with the team seeing more opportunities to deploy capital into energy transition materials such as copper.

And now on Slide 12, I'd like to summarize Q2 was a steady quarter despite some headwinds. Our net sales trends remain intact. We are benefiting from a continued sales in our Exchange Listed Products segment as well as strategy expansion in our Private Strategy segment.

During the quarter, we continued to return capital to our shareholders through the normal quarterly dividend and share buybacks. In the quarter, we returned a total of $8.5 million and year-to-date, $16 million through that combination. We also reduced our overall debt by $20 million in the quarter against our outstanding line of credit. We are well positioned with core holdings in precious metals and energy transition investments.

We expect a weaker dollar, which has been occurring for the last 9 months or so. And we are excited about the Central Bank buying in precious metals, expect more in the second half and beyond. In 2022, Central Banks bought 1.1 billion tons of gold, a record. That continued in Q1, 228 million tons which beat a record by 40% that was set in 2013. And then recently, for the quarter, there's not much data out yet, but China announced in July, they bought 23 million tons. That's 126 million tons year-to-date, increasing their holdings by 6%. I think it's interesting that China is being very visible about what it is that they're doing.

And I'd like to point out that typically, Central Bank buying of gold is not price sensitive. It's policy driven. So I think this bodes very well for continuing advancement over the reasonably near term in gold prices. Demand for energy transition investments continues to grow as what we once knew as base metals are now considered critical materials. 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 Geoff Kwan with RBC Capital Markets.

[Geoff Kwan, RBC Capital Markets]

Just had one question. It was just the comments around the precious metal prices and the flows you're seeing into the physical trust, I think you mentioned that decoupling maybe just presumably retail investors moving into cash-like alternatives with given where interest rates are. Just wondering if there's any other factors you might attribute that to? And given where rates are today and maybe at least the near-term outlook, does that suggest from your perspective, like you think the flows may be kind of more subdued versus the real strength you've seen in recent years? And like I said, maybe a bit more subdued in the next, say, couple of quarters?

[John Ciampaglia, Senior Managing Partner]

Yes. I mean, as I mentioned, we've looked at the historical correlation between flows into gold ETFs and the gold price. And there's a very strong relationship. Over the last few months, that is decoupled, and we think it's largely on the back of investors migrating to 5% essentially risk-free money market investments, which stand at record levels. as well as a number of different longer-duration fixed income instruments that are yielding kind of 7%, 8%, 9% depending on credit. That's attracted the bulk of the capital for the first half of the year.

Equity investments have lagged, even though the equity markets keep rolling, and it's only been more recently that we've seen a rotation almost a fear of missing out kind of response from investors that are finally putting money back into equity funds. But I think longer term, we expect as interest rates normalize, which we expect them to do at some point next year that their relationship will return in terms of stronger gold prices and stronger investor interest.

As Whitney mentioned, what's been driving a lot of the gold market has been central bank buying. They've been buying record amounts of gold whereas institutional and retail investors have been a lot more quieter whereas in the previous 3 years, they were the predominant buyers of physical gold. So a little bit of rotation amongst buyers and clearly, interest rates are having some impact on that, and we expect it to dissipate in the coming quarters.

[Operator]

Our next question comes from the line of Rasib Bhanji with TD Securities.

[Rasib Bhanji, TD Securities]

If I could start on your energy transition fund. Would you be able to share any feedback from clients as to the uptake of those funds. And if appropriate, would you be able to share why your funds are performing better than your competitors who I think you mentioned are seeing outflows whereas Sprott is seeing inflows for those funds.

[John Ciampaglia, Senior Managing Partner]

Yes, sure. The feedback we get from our clients, I think, has been really positive. When we walk them through what we built and why we built it, it makes a lot of sense to them. It's very intuitive. And what I mean specifically by that is that when we look at a lot of the competitor ETFs that are available globally, typically, their generalist ETF sponsors that will go to a generalist index provider and say, "Hey, we'd like to build an index with you and an ETF around this thematic." And I think it's fair to say that in most cases, the ETF sponsors as well as the index providers have little to no experience or expertise in anything to do with mining or metals. And so the output that you usually see with these indexes are not great expressions of the thematic. And what I mean by that is that they tend not to be very pure play. You end up getting a lot of unintended exposures across different metals that you, in many cases, have no idea that you're even getting to.

So for example, you might invest in a competitor, let's say, a copper mining ETF and find out that only 50% or so of the holdings even have exposure to copper mining and that you are getting exposure to iron ore mining or coal mining, which is obviously very different in this whole narrative and thematic.

So I think investors appreciate the fact that we've built these indexes using a lot of our knowledge in partnership with NASDAQ. So they appreciate the pure-play exposure. It's -- they're dynamic, meaning every 6 months, we're looking at all the companies and we're basically reevaluating them in terms of their intensity to the thematic and we're scoring them and readjusting their weight. And this is a very dynamic market right now.

There are obviously a lot of companies coming public. There are a lot of companies spinning off assets because the investors are clearly willing to pay a higher multiple for things like nickel and copper versus, let's say, traditional iron ore assets.

So there's been a lot of spinouts and M&A and IPOs that is constantly -- all of these things are constantly changing the investment universe of eligible companies that we're tracking and incorporating into the indexing methodology. So I think when we explain that to people, they appreciate the fact that these are, let's say, more intelligently built by investment management people that have a lot of experience.

So I think that's resonating with people. The uranium franchise, I think, has obviously grown significantly, but One of the ways we've been growing is through new funds that we've created as extension strategy. So we basically cloned our uranium mining fund in Europe. I think that's about $70 million already.

We spoke off the junior uranium mining ETF, which is quickly approaching $40 million. And obviously, we're not in great environments for uranium mining stocks right now. But the funds have been able to steadily grow assets irrespective of a challenging market environment. So I think people appreciate what we've put forward into the market as being differentiated and more well thought through.

[Rasib Bhanji, TD Securities]

Okay. I appreciate the color there. Just my last question. If I could shift to the private strategy side. Actually, maybe 2 questions here. The Annex fund, is that different from your existing streaming and royalty fund because the name suggests it might be an extension to the fund? Or am I reading this incorrectly?

[Whitney George, CEO & Director]

No, you've got it precisely correct. It's an extension to the original streaming and royalty fund.

[Rasib Bhanji, TD Securities]

Okay. Are you -- would you be able to share an AUM target for that front?

[Whitney George, CEO & Director]

Well, the capital has been [indiscernible] AUM currently is what we disclosed. And then obviously, we can't predict market appreciation.

[John Ciampaglia, Senior Managing Partner]

Yes, just to build on that, as you notice, we don't provide a specific forecast or target information bringing up the individual funds.

[Rasib Bhanji, TD Securities]

Just my last question on the private strategies. You had a comment in your presentation that you are benefiting from the strategy expansion in the private strategy side. Could you maybe expand on that a bit? Is it more on the energy transition side or more on the royalty side?

[Whitney George, CEO & Director]

Well, so the royalty and streaming fund is an extension in a slightly different direction from our traditional lending products where we just closed the third lending fund. So that currently, and we're always thinking of new kind of adjacent structures. Possibly we're working on a more open-ended version.

And then the second part is the opportunities for other materials besides precious metals are obviously going to be tremendous. [indiscernible] need to basically fund themselves to build more mines, more capacity to meet the needs that we all know are going to be out there. So the amount of capital that's going to need to be raised is enormous, and that will create a more opportunity set in a broader market for both private strategies.

[Operator]

I'm showing no further questions in the queue. I would now like to turn the call back to Whitney George for closing remarks.

[Whitney George, CEO & Director]

Well, thank you, everybody, for joining us today, and look forward to talking to you next in early November at the end -- after our third quarter. So enjoy the rest of the summer, and thank you very much for your attention. Good morning.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.