Sprott Inc

TSX:SII

Earnings Call Analysis

Record AUM and Robust Earnings Growth

In Q2 2024, Sprott Inc. reported record-high assets under management (AUM) of $31.1 billion, up by $1.7 billion. Net sales rebounded to $357 million, reversing net redemptions from Q1. The company launched the Sprott Physical Copper Trust, raising $110 million. Adjusted EBITDA improved significantly, rising by 25% to $22.4 million for the quarter. Despite geopolitical uncertainties and market volatility, Sprott's diversified strategies, especially in precious and critical metals, led to positive earnings momentum. Management remains optimistic about continued growth amidst improving investor sentiment in metals markets.

Record High Assets Under Management

In the second quarter of 2024, Sprott Inc. reported a significant increase in assets under management (AUM), soaring to $31.1 billion, marking a 6% increase from the previous quarter and an 8% increase year-to-date. This positive momentum continued post-quarter, with AUM reaching $31.5 billion by August 1, 2024. This impressive growth of $2.6 billion year-to-date reflects Sprott's strategic positioning within the precious metals and critical materials markets, even amid a turbulent economic backdrop.

Rebounding Interest in Precious Metals

The earnings call highlighted a resurgence in investor interest in precious metals, particularly gold and copper. Recent gold prices hovered around $2,400, attributed to central bank purchasing and rising concerns among institutional investors. This growing demand for precious metals is crucial for Sprott, as evidenced by the strong net sales amounting to $357 million during Q2 2024, coupled with an additional $110 million from the Copper Trust IPO. The call emphasized that while other segments faced challenges, precious metals remain a core driver of growth.

Strong Financial Performance

Sprott's financial performance for Q2 2024 displayed robustness, with a net income of $13.4 million, though this represented a 25% decline from $17.7 million the previous year. However, when considering the previous year's nonrecurring asset realization, the underlying earnings showed favorable growth. Adjusted base EBITDA reached $22.4 million, up 25% from the same quarter last year, fueling optimism regarding the company's operational efficiency amidst market fluctuations.

Launch of the Copper Trust and Its Strategic Importance

A pivotal moment during the call was the successful IPO of the Sprott Physical Copper Trust, which raised $110 million and is poised to capitalize on copper's appeal driven by renewable energy demands. The strong institutional support, with 80% of the assets coming from existing Sprott investors, underscores confidence in this new product. The company views the Copper Trust as a strategic addition to their portfolio, enhancing both diversification and growth opportunities.

Looking Ahead: Economic Environment and Guidance

Despite the challenges presented by geopolitical uncertainties and fluctuating market conditions, Sprott's executives conveyed a persistent optimism for the future. They expect continued demand for precious metals driven by inflationary pressures and monetary policy shifts. With inflation rising and interest rates vague, Sprott is well-positioned to navigate these dynamics, fostering confidence in long-term growth. The firm remains committed to reducing debt levels further during the second half of 2024, maintaining a strong cash and liquidity profile.

Critical Material Strategies Gaining Traction

Sprott's critical material strategies are projected to gain more traction as the company expands its offerings. The positive trajectory of the Copper Trust is indicative of the firm's broader strategy to capitalize on emerging markets, particularly those motivated by clean energy initiatives. The call revealed that, despite short-term price weaknesses in uranium and copper, these segments are anticipated to recover, further bolstering Sprott's market share in these rapidly growing categories.

Investor Sentiment and Market Positioning

The earnings call concluded with a focus on investor sentiment in sector equity strategies. Although current sentiment towards mining equities remains low, Sprott's various investment strategies, like their flagship Gold Equity Fund, which is up approximately 20%, are expected to perform well as market conditions stabilize. Sprott's strategic emphasis on thematic investments across a diversified asset base signals a proactive approach to capturing future growth opportunities.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2024 Second Quarter Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, August 7, 2024. The -- 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 provision of the Canadian provincial securities laws.

Forward-looking statements involve risks and uncertainties and [ undue reliance should ] not be placed on such statements. Certain material factors are, 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 of Sprott's other filings in the Canadian and U.S. security regulators.

I would now like to turn the conference over to Mr. Whitney George. Please go ahead, sir.

[W. George, executive]

Thank you, and 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 2024 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. I -- before I get into our results for the quarter, I'd like to comment briefly on the recent turmoil in the markets and the world at large. Sadly, 2 wars continue with no feasible [ end in sight]. I mean U.S. election has been turned on its head by the recent assassination attempt on former President Trump, as well as President Biden's decision not to seek reelection.

Globally, recent election results reflect a general dissatisfaction with the incumbents. On top of this, financial markets have experienced [indiscernible] volatility, resulting primarily from the sudden unwinding of the yen carry trade as well as about a weak economic data in the United States.

At Sprott, we do our best not to be distracted by the noise. We're focused on the key long-term drivers of our business which are fundamentally unchanged. Our focus on precious metals and critical material investments we believe are very well positioned for the current market environment.

Turning now to our results. I am pleased to report that our assets under management increased by $1.7 billion to $31.1 billion, which is another record high for Sprott. Subsequent to the quarter end, we added an additional $400 million in assets, reaching $31.5 million as of August 1, and -- in 2024. However this number has moved around a bit over the last few days due to the recent volatility across all asset classes.

Gold and Silver performed well in the first half of 2024. and -- Gold recently reached a new record high of $2,184 before retreating back to around $2,400 on some profit taking. Silver achieved its highest quarterly close since the third quarter of 2012 at $2,914. Buoyed by gold's move, global monetary expansion policies and demand from photovoltaics -- the photovoltaic [indiscernible].

We continue to note the series of new highs set in 2024 have been driven by central bank purchases and achieved with limited general investor participation in the precious metals sector. We continue to build out our Critical Material quarter with the IPO of the Sprott Physical Copper Trust, which is the world's first physical copper fund. Launching the Copper Trust was a strategic priority for Sprott and the latest addition to our critical materials investment strategies. John will talk more about that and the launch and future plans in a few minutes.

After reporting net redemptions in the first quarter for the first time in more than 4 years, we returned to net sales in Q2. We -- during the quarter, we generated $357 million in net sales, plus an additional $110 million in flows from the Copper Trust IPO.

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. I'll start on Slide 5, which provides a summary of our historical AUM. A -- as Whitney noted, AUM finished the quarter at $31.1 billion, which was up 6% from $29.4 billion last quarter, and up 8% from $28.7 billion at the end of last year. On a 3- and 6 months ended basis, we benefited from market value appreciation in our precious metals physical trusts, net inflows across our exchange-listed products mix and the launch of the Physical Copper Trust in the quarter.

Over the last 5 years, our AUM has grown by $21.8 billion, of which 49% was attributable to net inflows, 37% was related to market value appreciation and 14% was related to acquisitions and new fund launches, demonstrating the quality and resolve of our asset base and related earnings.

Subsequent to quarter end, on August 1, our AUM increased 2% to $31.5 billion. Slide 6 provides a brief look at our 3- and 6-month earnings. Last year, our net income benefited from the realization of an $18.6 million nonrecurring asset. Consequently, our net income this quarter of $13.4 million was down 25% from $17.7 million for the 3 months ended last year.

On a year-to-date basis, net income was $24.9 million, down 2% from $25.4 million last year. Excluding the impact of last year's realization of a nonrecurring asset, our 3 months ended net income was actually up $14.2 million from the same 3-month period last year and our 6 months ended net income was up $18.1 million from the same 6-month period last year.

Adjusted base EBITDA was $22.4 million in the quarter, up 25% from $18 million earned over the same 3-month period last year and was $42.1 million on a 6 months ended basis, up 19% and from $35.3 million earned over the same 6-month period last year. Our 3 and 6 months ended results benefited from higher management fees on improved market valuations in our precious metals exchange-listed products, higher commission income on increased ATM activity in our Critical Materials exchange-listed products and higher finance income in our Private strategy segment due to higher streaming syndication fees.

Finally, Slide 7 provides a few treasury and balance sheet management highlights. And as you can see, our cash and liquidity profile continues to strengthen quarter-over-quarter, our leverage remains low, and we will be even -- and will be even lower in the second half of the year as we expect to pay down more debt. 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 quarterly MD&A and financial statements filed earlier this morning.

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

[John Ciampaglia, executive]

Thanks, Kevin, and good morning, everybody. We enjoyed a very strong rebound in sales in Q2, as Whitney mentioned. And the positive momentum has continued since the end of the quarter. We did feel as though March marked the bottom for our business where there was a low in sentiment across a number of metals markets and I'm pleased to report we've realized the expected rebound that we were anticipating.

After a period of indifference, investor interest in precious metals is slowly returning. This is very positive for our business, given gold is already sitting at $2,400, largely with institutional investors in the West not participating, central bank buying of gold coupled with concerns about a number of potential portfolio risks is generating renewed interest, while copper is well positioned to benefit from the growing long-term demand for electricity and copper-intensive clean energy technologies.

Let's go to the next slide. AUM growth has been strong year-to-date, up $2.6 billion with assets reaching an all-time high during the quarter. And over the last 6 quarters, our AUM in this segment has increased approximately 30%, which is really great considering many markets have been somewhat range bound.

On June 6, we welcomed our newest physical metal trust to our lineup with the Copper Trust. We're very excited about adding another metal given the compelling long-term fundamentals for copper. We spent the last few years building out our product suite both organically and via acquisitions to diversify and competitively position ourselves in market segments that we believe are entering new bull markets. This diversification strategy has been very effective as metal markets do not always move in sync, allowing us to capture new assets when investor interest appears.

Next slide, please. Shifting over to our equity-based ETFs, we enjoyed a strong recovery in sales for the quarter after a soft Q1. Our Uranium Mining ETFs led the pack for the quarter. In this category, we now have over 10 funds across various metal segments and listing locations and assets continue to scale for many of the newer funds as we achieve platform approvals and achieve breakeven AUM levels.

Next slide, please. We're very pleased with how the product suite is scaling. AUM has also reached an all-time high in the quarter and has essentially doubled over the last 6 quarters. Mining Equity ETFs are popular choices for both institutional, adviser and individual investors as many prefer to invest in a thematic through a basket of stocks. Many of the ETFs, we offer track indices that Sprott has codeveloped with index providers such as NASDAQ that integrate our knowledge and experience as long-time investors in metals and mining. This allows us to provide differentiated offerings that represent more pure-play options in the marketplace.

Next slide, please. As I mentioned earlier, we're very pleased with the successful completion of the Sprott Physical Copper Trust IPO. The market environment for IPOs remains very challenging with COP representing the first IPO on the Toronto Stock Exchange since March 2023. Gross proceeds raised were $110 million with 80% of the assets coming from institutions. Of the institutional participation, approximately 80% were existing investors and other Sprott funds and/or holders of Sprott Inc. stock and we'd like to thank these institutions for their continued support in helping us get this IPO off the ground.

We're very excited about the long-term growth potential of the Copper Trust given the size of the market and the broader appeal of copper amongst generalist investors. We've been talking to investors for 3 years now about uranium. And I would say that 80% of the time, there's also dual interest in copper as well. We've recently implemented an aftermarket program to raise additional capital and our plan is to ramp up marketing and investor outreach over the coming months.

And with that, I will pass it over to Whitney

[W. George, executive]

Thanks, John. Well, I'll turn to Slide 13 now, managed equities. While gold and silver enjoyed a strong first half of the year, the mining equities have stubbornly lagged the metals themselves. Investor sentiment towards the miners is at historically low levels and a small rotation out of tech stocks into precious metals equities would have a profoundly positive impact on the sector.

Despite the lack of investor interest, we are pleased with the strong performance of our precious metals equity strategies in the first half of 2024. Our flagship Gold Equity Fund is up approximately 20% as of August 1, and -- and its performance has been steadily improving relative to its peer group.

I'll turn now to Slide 14 for a look at our private strategies. Combined lending and streaming strategies, AUM was $2.5 billion as of June 30, 2024. The team is continuing to monitor and harvest investments in our second private lending fund and is actively assessing new investment opportunities in our Lending Fund III. We are also pleased with the early investor response to our active physical commodity strategy, which was launched late last year.

Slide 15. I'll move now to Slide 15 for closing remarks. Despite the recent volatility in the markets, little has changed from our outlook that we presented at the start of 2024. As expected, inflation remained a bit stickier than most had hoped for the first half of the year. While many countries have begun to cut interest rates, the U.S. -- in the U.S. short-term rates are unchanged, although expectations have fluctuated wildly over the last 6 months.

Once again, the Fed appears to be behind the curve and is only now edging towards a September cut. Fiscal deficits continue to grow to new nonrecessionary records as a percentage of U.S. GDP and -- and as noted at the start of the call, wars and elections are creating geopolitical uncertainty. Fortunately, gold prices have responded favorably to these difficult fundamentals, setting several new highs before settling closer to the $2,400 mark, at least for the time being.

We're pleased with our performance in the first half of 2024. AUM is near record highs. We delivered positive net sales in the first [ half of the year], results are steadily improving. Despite some recent weakness in uranium and copper prices, which we expect to be short lived, our critical materials strategy are capturing market share in a rapidly growing category. We appreciate the continued support of our clients and shareholders and feel confident their trust will be rewarded in the quarters and years ahead. That would conclude 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 Mike Kozak with Cantor Fitzgerald.

[Michael Kozak, analyst]

Congrats on a great quarter. Just 1 question from me on the Uranium Trust. Other than the ATM, what other levers could you potentially pull to keep the cash position up in that trust. I mean you've done location swaps in the past, I believe. Could these be ramped up in any way? And if you needed to, are there any other alternative methods to raise in cash in the Uranium Trust specifically?

[John Ciampaglia, executive]

Yes. Mike, it's John. That's an interesting question. So obviously, the ATM is the primary way to issue new units and receive cash. As you mentioned, we've done a number of location and origin swaps over the last 3 years, which have been very beneficial in terms of generating additional income. And the last resort, if those 2 things don't work out, is we physically would sell a small portion of uranium, which we've not had to do in 3 years.

So we prudently manage the cash so that we don't have to let go of any raw material. And right now, we're holding, I think, a sufficient cash balance to cover expenses of running the trust for the next 2 months. So it's not anything of near-term concern.

[Michael Kozak, analyst]

Got it. Very good. That's helpful. I'll turn it back.

[Operator]

[Operator Instructions]. I'm showing no further questions in the queue. I would now like to turn the call back over to Whitney for closing remarks.

[W. George, executive]

Thank you, everyone, for participating on this call, particularly on a very quiet August summer day. We appreciate your interest in Sprott and look forward to speaking to you again after our third quarter results. Thanks again and that concludes our [indiscernible].

[Operator]

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