Sprott Inc

TSX:SII

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2020 Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, November 5, 2021. 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 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. securities regulators.I will now turn the conference over to Mr. Peter Grosskopf. Please go ahead, Mr. Grosskopf.

[Peter F. Grosskopf, Senior MD, CEO & Director]

[Technical Difficulty] and thanks for joining us today. On the call with me today are Whitney George, The President of Sprott; our Chief Financial Officer, Kevin Hibbert; and John Ciampaglia, the Chief Executive Officer of Sprott Asset Management. Our third quarter 2021 results were released this morning and are available on our website where you can also find our financial statements and MD&A.I'd like to begin the call by providing a bit of context, which I believe is important when considering our quarter. This has been a difficult year for gold and silver given their pullbacks with much choppy sideways price movement. Investor interest was tested as metals took a backseat to eye-watering appreciation in the equity and crypto markets. Precious metals do not usually fare well during times of maximum confidence and compressed volatility.Given that backdrop, I believe our business performed exceptionally well during the quarter. The big story this quarter was the launch of the Sprott Physical Uranium Trust in July. SPUT has quickly emerged as the world's most in-demand physical uranium vehicle and has now grown to more than $1.6 billion in AUM. Yesterday, we announced we are expanding our uranium business with the addition of URNM, one of the world's leading uranium equity ETFs. John will speak more about both SPUT and URNM in a few minutes.All of Sprott's businesses are currently growing, including our streaming and royalty strategy, which raised $400 million in Q3. And finally, subsequent to quarter-end, our AUM reached a $20 billion milestone for the first time. This is a significant milestone for our business, and I would like to thank all of our employees for their efforts and for all of our client support. We have a long way to go.With that, I'll pass it over to Kevin for a look at our financial results for the quarter.

[Kevin Lloyd Hibbert, Senior MD, CFO & Co]

Thanks, Peter, and good morning, everyone. I'll start on Slide 5, which provides a summary of our AUM as at September 30 of this year. AUM was $19 billion this quarter, up $466 million or 3% from June 30 of this year and was up $1.6 billion or 9% from December 31 of last year. In the quarter, we benefited from the UPC transaction, which added $630 million to our physical trust at inception, followed by another $670 million of uranium trust inflows and market value appreciation. On a full-year basis, we also benefited from strong inflows into our physical silver trust earlier in the year, coupled with continued inflows into our lending segment this quarter, as Peter noted earlier. Also, to Peter's point, subsequent to the quarter-end, we did surpass the $20 billion mark in AUM, which is a new historic high for our shareholders.Moving now to Slide 6. Slide 6 provides a brief look into our 3 and 9-month earnings. Adjusted base EBITDA in the quarter was $16.7 million, which was up $4.7 million or 39% from the prior period, and on a year-to-date basis, adjusted base EBITDA was $46.4 million up $17 million or 58% from the prior period. On a quarter and year-to-date basis, we benefited from the acquisition of UPC and the subsequent market value appreciation and inflows into those assets. We also benefited from strong inflows into our lending products this quarter and into the physical silver trust earlier in the year.Finally, we saw very robust mining equity origination activity in the first half of the year, coupled with strong ongoing AUM development in our brokerage segment. For more information on our revenues, expenses and EBITDA, you can refer to the supplemental information section of this presentation as well as our third quarter 2021 MD&A filed earlier this morning.With that said, I'll pass things over to John.

[John Ciampaglia, Senior MD & CEO of Sprott Asset Management]

Great. Thanks, Kevin, and good morning, all. I'm just going to cover the exchange-listed products for the quarter, and we had a very robust quarter of net flows at $593 million. And I really want to point out the star of the show, which was the Sprott Physical Uranium Trust, which in just about 6 weeks in the quarter attributed $459 million. So at mid-August number, August 17 is when the aftermarket capital raising mechanism became effective and we've seen just tremendous response to that from all investor types from right around the globe. This has really helped us overall in the quarter. As Peter said, gold and silver have been kind of sputtering around for last few months and the introduction of the uranium trust has been very helpful for our business.Post the quarter end, October sales continued to be very robust. We booked already $329 million for the month of October. And even in November in the first few days, we're continuing to see the same kind of momentum.Just moving to the next slide. I'll give you everybody a little bit more color around the uranium trust, better known as SPUT for simplicity. I think this will go down as one of our most successful fund launches and acquisitions of -- in Sprott's history. On July 19, when we acquired UPC and reorganized the company to the new trust, the net asset value in the fund was $630 million. Fast forward to October 31, we're at $1.6 billion. So the combination of market appreciation and the price of uranium, combined with the inflows from the ATM have really made a big mark in a very short period of time. I think this is a really great chase study for our shareholders around taking a vehicle that was a little bit antiquated and taking all of our knowledge and expertise and modernizing it. I think a lot of this knowledge that we bring to bear it has come from over 10 years of running physical commodity funds and having a shareholder base of over $250,000 gives us incredible insights to the leverage.Adding the daily net asset value in holdings every day provided much-needed transparency in a very opaque uranium market. And we feel as though the ATM is one of the most investor-friendly capital raising mechanisms out there with very low friction costs and really is designed to provide real-time liquidity when the market is asking for it. This now positions us as the largest and most liquid physical uranium fund in the world. And this is really important because when we made the acquisition, I said very early on, I felt the fund was way too small to really make a difference. And what I meant by that is at $630 million, it just wasn't big enough to get a lot of institutional money involved in the trust. I think with the size now approaching $2 billion, we're having very different conversations with institutions, much bigger in size, much bigger tickets and much more global. So we're very excited about the response.The NYSE Arca listing application is in progress. We're working in conjunction with them to get the application ready. It is not [Technical Difficulty] yet but it will be this year. And I'm just going to reiterate that we still believe we're in very early innings of a new bull market, which will support our recent acquisition news yesterday of buying URNM.Just going to move to the next slide here about the uranium market because it is a very different market than we are traditionally have dealt with in precious metals. It's a much more opaque market. It's a very OTC market. And I think what the new trust has really helped to do is encourage more activity in the SPUT market, more liquidity and more price transparency.On Slide 9 here, you can see how the trust has acquired pounds of uranium since the ATM commenced on August [Technical Difficulty] as well as the cumulative pounds acquired. And this chart is a little bit out of date going to October 26. But I can tell you, as of today, we're through $18 million [Technical Difficulty] the uranium purchase since the ATM. And I'm just going to give everyone some context. So UPC, the vehicle we acquired was launched back in 2005, we just had a little bit of fun here, but it took them 5,911 days to purchase 18.1 million pounds of Yellowcake. It's taken SPUT 110 days to buy the equivalent amount, just to give you a sense of the power of this vehicle in terms of its capital raising ability.Moving to the next slide. This daily discovery [Technical Difficulty] that the trust is providing, I think we've received really great feedback from the marketplace on the value that's providing as well as the liquidity and activity in the SPUT market, which historically has not been where utilities buy and has languished. So all the feedback we're getting from institutions and retail investors has been very positive on what the trust has been doing.All right. And let's pivot over to Slide 11. URNM, that's the NYSE Arca ticker for the North Shore Global Uranium ETF. We announced an agreement yesterday late in the day that we were going to acquire the licensing rights to this index and reorganize it. It will become upon Board approvals, shareholder approvals. It will turn into the Sprott Uranium Miners ETF. It will continue with the same ticker, the same holdings, the same underlying index. We're very pleased with Tim Rotolo and his team. They've done a great job in terms of building this ETF from very small number up towards $900 million in size. It's had over $600 million of inflows year-to-date. Its 1-year performance of 230% is ranked #2 out of 2,504 non-levered ETFs that I could find on etf.com. So it's had tremendous success in terms of performance for its investors and shareholders.Essentially, the reorganization, once it's completed in Q1, we'll just basically turn the fund into a new Sprott fund. As I said, the holdings will not change of the index. And we're very excited about adding this to our suite of products because one thing we've learned over the last few months is that many uranium investors not only are interested in the physical but they're also involved in the equities. And we think this is the perfect pairing and complement putting the physical trust along with the uranium equity product. Very high overlap globally around the world across every investment type. And I think it's fair to say that we've got 2 market-leading products in the uranium equity and physical category. So we're very excited about that.And with that, I will turn it over to Whitney.

[W. Whitney George, President & Senior MD]

Thank you, John. So I was just going to speak to our managed equities business. A year ago, this time, it was the star of the show and we've taken a bit of a backseat here in the last quarter. But again, as mentioned, gold equities have been struggling with the underlying precious metal prices. The team performed very well in the third quarter relative to passive ETFs and most of our active competitors. So we have -- we held things together and again, the success in other parts of our business has allowed us to continue to invest in what I think is the leading team in the world in mining equities.We've seen a pretty sharp swing over the last year in redemptions. They've slowed significantly. There have been modest positive cash flows. We've got some new institutional arrangements both in SMAs and into our special situation strategy and gold-stock valuations are trading at multiyear lows, maybe even historic lows. And one would expect now that value investing is coming back into vogue in a rising rate environment or potentially rising rate environment that generalists are going to discover this sector. So we remain excited about our prospects as we wait for our turn again.Thank you. Peter?

[Peter F. Grosskopf, Senior MD, CEO & Director]

Thanks, Whitney. Turning to Slide 13. Our private capital strategies continue to perform well combined AUM for this segment is now approximately $1.4 billion. Lending fund too deployed $63 million in Q3, and deployments are continuing to be strong. The fund is generating attractive returns for LPs and for Sprott Seed capital. Our streaming and royalty fund had a great quarter, securing $400 million in institutional commitments. The fund has also been actively putting capital to work through new deals, deploying $105 million to date -- year-to-date.I'll move to Slide 14 for a look at the brokerage segment. Our brokerage businesses in Canada and the U.S. are both continuing to perform well and make more meaningful contributions to our overall results. In Canada, the institutional brokerage is benefiting from high activity levels, both in originations, which generate commission revenue and an advisory work with emerging juniors. Our U.S. brokerage team is continuing their efforts to convert assets under administration to fee-earning AUM with approximately $450 million converted year-to-date. They are also launching new products for high net worth individuals and recently completed the first close of a new pipe strategy.Moving now to Slide 15 [Technical Difficulty] comments. Sprott is firing on all cylinders, delivering exceptional performance [Technical Difficulty] performance and AUM growth despite volatility in precious metals. Gold and silver prices have recovered since the quarter-end, as investors seek inflation protection, and we believe that they will fare well in the face of tapering. And to us, the upside is much greater than the downside. We sense that the movement into alternative assets in our sector is gaining momentum.The uranium trust, which is already an addition to already generating meaningful royalty like revenue income to Sprott also demonstrates the potential to launch new products on our exchange-listed products platform. To that point, the URNM transaction will add a compelling equity offering to our minerals equities businesses. Our private strategies are performing well, generating new [Technical Difficulty] new LPs to a steadily expanding institutional client base. As usual, we remain active in reviewing add-on funds [Technical Difficulty] consolidation of niche managers in our focus areas.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 will be from the line of Geoff Kwan from RBC Capital Markets.

[Geoffrey Kwan, Analyst]

Just first question was on compensation -- base compensation expense as well as on the G&A expense. How are you thinking with the new transaction kind of pro format, what the run rate looks like? And then also, extrapoling that in terms of how you think that may evolve in terms of growth in 2022?

[Kevin Lloyd Hibbert, Senior MD, CFO & Co]

Geoff, it's Kevin here. Sorry, I'm not at all understanding that question. So what are you trying to -- you're trying to correlate compensation to the acquisition?

[Geoffrey Kwan, Analyst]

Well, yes, just with yesterday's announcement, too, it's just how to think about where the run rate is right now on compensation expense and G&A expense? And then just as you enter 2022, do you expect that to grow at 3% rate or some other type of growth rate?

[Kevin Lloyd Hibbert, Senior MD, CFO & Co]

Okay. Got you. Okay. So on the SG&A front, one of the good things about our business is it is, at least from an infrastructure perspective, people, processes, technology around our AUM, I would say the business is very scalable at our current level. So to me, the SG&A is -- I think you'd be safe if you had a number in and around $4 a quarter. I think that's realistic. I don't think we would get to that number for now, but the biggest driver of our SG&A this year is just like we noted in the MD&A, Geoff. It's the regulatory and insurance costs that came onstream last summer when we started trading on the New York Stock Exchange. Obviously, now we're having to be 404 compliant. There is more continuous disclosure requirements. And obviously, it's a more litigious environment, so your D&O insurance goes up. So that's really what drove where the numbers are there, not so much these additional assets coming on board because essentially, the last few acquisitions we've done were largely ones that we could just plug into our existing operations. And then when it comes to comp, I would say that our compensation is not driven directly by any particular acquisition. If you look at our information circular and even the disclosures we made in the press release today, the main driver of our comp is how the overall organization is doing from a net revenues perspective and from an EBITDA and operating margin perspective. So I think if you look at how we're doing or how you expect us to do in your own models and just look at what the compensation ratio is today and where you think it's going to run to at the end of the year, I think it will be a little bit higher than what you see now at 39%. You can just plot that into your models and just extrapolate what the comp number would look like based on what the overall earnings of the business look like.

[Geoffrey Kwan, Analyst]

Okay. Great. And just my second question was on the fundraising side. Can you talk about what the mix was in the early days of your private strategies and how it's different in terms of what you're seeing today? And by mix, I mean, stuff like geographic breakout types of investors that you're bringing into these strategies.

[Peter F. Grosskopf, Senior MD, CEO & Director]

Okay. I can maybe handle that. The mix hasn't changed that much. These are mostly large endowments, pensions, mostly from the U.S. It is getting a bit more global in terms of the interest base. And also, we have put in place a couple of feeder funds, which allow high net worth individuals or credit [Technical Difficulty] sort to access those funds. Those feeders are quite small still, but it's a different source of capital. We imagine it will be quite sticky as well. So we're growing those feeders, hopefully going forward.

[Operator]

Our next question comes from the line of Gary Ho from Desjardins Capital.

[Gary Ho, Analyst]

I just want to go back to the URNM transaction. Can you provide a bit more color in terms of the deal metric, whether there's any earnouts? And also maybe talk about the fee arrangement side.

[John Ciampaglia, Senior MD & CEO of Sprott Asset Management]

Yes. Gary, it's John here. Yes, at this point, we're not providing all the metrics on that. We're still in the process of working through not only our own ETF trust Board, but also the ETC trust Board where the existing ETF is housed. Until we move further along that process, we're not going to disclose the terms. But I think it's fair to say that the valuation metrics are very similar to prior transactions that we've done in the recent past. You won't be surprised.

[Gary Ho, Analyst]

Yes. And any thoughts on -- I guess I can check that what the management fees they're charging today, but any thoughts on potentially changing those fees? Are you planning to keep that unchanged?

[John Ciampaglia, Senior MD & CEO of Sprott Asset Management]

Yes. So the ETF has a unitary fee, where it's kind of an all-in fee. Everything is embedded in a flat fee of 85 basis points. At this point, we're not planning any changes with that.

[Gary Ho, Analyst]

Perfect. Okay. Great. And then next question, just within the exchange-listed segment, there's a new commission line in there. Just wondering what that is related to and what are the drivers behind those commissions. I'm going to -- I'll model this out looking out.

[John Ciampaglia, Senior MD & CEO of Sprott Asset Management]

Sure. So the trust document discloses all the details. If you want us to send it to you, we're happy to do that after the call. Essentially, when we raise new capital and acquire more uranium, the trust is able to charge a 1% commission. And so what you're seeing there as we've been buying material, we've been applying that commission, and that basically compensates us buy uranium, which is a lot of work relative to buying other commodities.

[Gary Ho, Analyst]

But I should view that as a one-time when you buy it. Obviously, you'd buy that this quarter...

[John Ciampaglia, Senior MD & CEO of Sprott Asset Management]

Yes, it's a one-time fee, and that structure carried over from Uranium Participation Corporation.

[Kevin Lloyd Hibbert, Senior MD, CFO & Co]

Right. But I would say, Gary, that it is a core part of what we do in this business and how you manage acquiring and exiting uranium. So just keep that in mind, too, when you're looking at that line.

[Gary Ho, Analyst]

Okay. And what happens on the other way when you sell uranium? Like if AUM goes down, how does that work?

[John Ciampaglia, Senior MD & CEO of Sprott Asset Management]

Yes. So we don't sell any uranium and the trust, it's sequester permanently.

[Gary Ho, Analyst]

Okay. Yes. And then my last question, on the lending segment. When I look at the AUM increase, it was 44% sequentially from June to September. The management fees went up about 2.7x. Can you help me bridge the 2, are there other commitment fees?

[Kevin Lloyd Hibbert, Senior MD, CFO & Co]

Yes. Great catch there, Gary. So all that's happening there is in those specific closed-end products, the way it works is when an institution comes in, a sizable one at that, like what we benefited from, they're actually expected to make a catch-up payment on the management fees that would have otherwise been charged throughout the rest -- throughout the previous months and the year. So if you're coming in Q3, you're having to catch up for all the way back to January. So that's why the numbers wouldn't really be correlated as nicely as you would have thought for your modeling purposes.

[Gary Ho, Analyst]

Okay. Got it. Okay. So I should still use that blended management fee rate that...

[Kevin Lloyd Hibbert, Senior MD, CFO & Co]

Yes, yes.

[Gary Ho, Analyst]

I would have done that.

[Kevin Lloyd Hibbert, Senior MD, CFO & Co]

Exactly, yes. So it's only because these folks came in and then had to make the catch-up payment, it's not, yes.

[Gary Ho, Analyst]

Okay. Makes sense. And then maybe just last one for Peter. Just on the uranium side, any other potential targets, not necessarily named by like other products that you could be looking for?

[Peter F. Grosskopf, Senior MD, CEO & Director]

We don't want to name anything specific. We're looking at the spectrum of decarbonization minerals, and we always have, by the way. But we have pretty high hurdles for making an investment. We need to be careful that we can deliver a long-term growing vehicle for our shareholders. We're looking to build royalty-like income on our large asset base, not just to do specific one-off deals. So the hurdles are pretty high. We put a lot of effort into structuring these funds and strategies so that they offer a material improvement to what's out there already. That's kind of been our modus operandi in terms of getting into new businesses if we can do it better than anyone else, then we can make it more liquid. So look, it's a huge growing new world. And I think people are increasingly aware of the fact that, hey, we underinvested in all of these sectors for 30 years. And now we need all these minerals to power a green grid, and there's a bit of a land rush into not just metals, but also the underlying mines. And it's a very productive opportunity for investment. It's a really neat, I think, globally scalable opportunity.

[Operator]

And our next question comes from the line of Graham Ryding from TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

Peter, are there other sort of clean metals that you're looking at besides uranium and I guess, silver falls in that bucket?

[Peter F. Grosskopf, Senior MD, CEO & Director]

There are, but we don't want to comment on the specifics. Sorry about that. It's like they can hear us coming. So we got to be quiet about what we're up to next.

[Graham Ryding, Research Analyst of Financial Services]

I'll take that as a good question if you can't answer it. URNM, are you essentially buying this fund? I just want to be clear because you sort of use the language, you're acquiring licensing rights. But I just want to be clear, are you essentially buying this fund similar to how you've done in the past?

[John Ciampaglia, Senior MD & CEO of Sprott Asset Management]

Yes. Graham, yes, it's John here. Yes, that's essentially -- I know the language is a little bit confusing. But essentially, we will be acquiring it by launching a parallel vehicle and basically taking in all the assets. But it is an acquisition.

[Graham Ryding, Research Analyst of Financial Services]

Okay.

[Peter F. Grosskopf, Senior MD, CEO & Director]

I think what it does do, Graham, sorry to interrupt. What it does do is it speaks to the value of the business that John and his team built over 5 years. We looked at a number of different options for housing our ETF business in the U.S. We tried some things that didn't work. And John and Arthur and their team did a great job providing us with our own infrastructure so that we could do these types of deals. And it's -- I think it's a very valuable business going forward.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Understood. Kevin, just a couple of expense questions. Just first, what was driving the higher -- your trailer fee expenses at around $2 million a quarter? What was driving anything to jump there?

[Kevin Lloyd Hibbert, Senior MD, CFO & Co]

I'll have to get back to you on that one. I just don't have the answer in front of me.

[Graham Ryding, Research Analyst of Financial Services]

Okay. And then you mentioned the comp ratio, I think. I just want to make sure I got your message right here, that the comp ratio for 2021, you're suggesting is fairly reflective of what the business should be operating at going forward. So if I think about operating leverage here within the business, it's not going to come from a lower comp ratio over time, it's probably going to come from the scale that you would get just from sort of less growth on SG&A and your other expense line. Is that...

[Kevin Lloyd Hibbert, Senior MD, CFO & Co]

Yes, I think -- yes, I would say the latter part of what you said is spot on. The former parts are little off. I didn't say that the current number is a run rate, what I was actually saying is that the number is probably going to be a little bit higher than that. So the 39% that you see right now, it will probably get up a little bit closer to what you saw coming out of last year, which was around 43%. And that's -- but that actually does speak to what you're saying, Graham, which is earnings are up right now significantly. We're looking forward to having another very strong quarter come Q4, but the comp ratio is most likely going to be flat. And if anything, slightly lower even than where it finished last year. It's just this quarter, it's I would say, a little lower than what's actually going to be the reality. But all for the reasons you just mentioned in the last half of your statement.

[Operator]

And I'm not showing any further questions in the queue. I'd like to turn the call back over to Peter Grosskopf for any closing remarks.

[Peter F. Grosskopf, Senior MD, CEO & Director]

Thanks, operator, and thank you, everyone, for participating in this call. We appreciate your interest in Sprott, and we look forward to speaking with you again after our year-end results.

[Operator]

And this will conclude the conference call. Thank you for participating. You may now disconnect. Have a great day.