Sprott Inc

TSX:SII

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2024 Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, November 6, 2024.

On behalf of the speakers that follow, listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements within the meaning of the safe harbor 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. Whitney George. Please go ahead, Mr. George.

[W. George, executive]

Thank you, operator, and good morning, everyone, and thanks 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 2024 third 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 4. Before I get into our results for the quarter, I'd like to comment on the elephant in the room. Last night's election was decisively won by Donald Trump, the result that has a shorter cause and volatility in the financial markets as we are already seeing this morning.

However, at Sprott, it's not our job to be distracted by noise -- short-term noise and remain focused on the long-term drivers of our business, which are fundamentally unchanged. With our focus on precious metals and critical materials investments, we are very well positioned to benefit from the powerful trends that define the current market environment.

Turning now to our results for the quarter. I'm pleased to report that our assets under management increased by $2.3 billion to $33.4 billion, which is another record high for Sprott. Our assets have continued to grow subsequent to the quarter and an AUM was $34.2 billion as of November 1.

Precious metals prices have been the main driver of our asset growth this year. Gold has posted gains every month of 2024 and is currently trading near all-time highs, up 32% year-to-date today, notwithstanding silver broke out late in Q3 and is up approximately 36% year-to-date.

Our managed equity strategies have benefited from rising precious metal prices and have delivered strong performance on both a 3- and 9-month basis. After a slower start to the year, we recorded $589 million in net sales during the quarter largely in our physical gold and silver funds. Looking ahead, we're currently developing 2 new precious metals ETFs, which we expect to launch in the first quarter of 2025.

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

[Kevin Hibbert, executive]

Thank you, Whitney, and good morning, everyone. I'll start on Slide 5, which provides a summary of our historical AUM. AUM, to Whitney's point, finished the quarter [indiscernible] which was up [indiscernible] billion last quarter and up 16% from $28.7 billion at the end of last year. On a 3 and 9 months ended basis, we benefited from market value appreciation in our precious metals physical trust, net inflows across our exchange-listed product mix and the launch of the Physical Copper Trust in the second quarter of the year.

Over the last 5 years, our AUM has grown by $24.1 billion of which 47% was attributable to net inflows, 40% was related to market value appreciation and 13% related to acquisitions and new fund launches, demonstrating the strength and quality of our AUM growth over the years. Subsequent to quarter end, on November 1, our AUM increased another $800 million to $34.2 billion.

Slide 6 provides a brief look at our 3- and 9-month earnings. Net income this quarter was $12.7 million, up 87% from $6.8 million for the same 3-month period last year. On a year-to-date basis, net income was $37.6 million, up 17% from $32.1 million last year.

Our 3 and 9 months ended results benefited from higher management fees on strong market valuations of our precious metals physical trusts and inflows to our exchange-listed products. We also benefited from carried interest crystallization in our managed equities funds and market value appreciation of our co-investments.

Adjusted base EBITDA was $20.7 million in the quarter, up 16% from $17.9 million earned over the same 3-month period last year, and was $62.8 million on a 9 months ended basis, up 18% from $53.1 million earned over the same 9-month period last year.

Our 3 and 9 months ended results benefited from higher management fees on strong market valuations of precious metals physical trust and good inflows to our exchange-listed products.

Finally, Slide 7 provides a few treasury and balance sheet management highlights. And as you can see, due to our improved earnings, our cash and liquidity profile continues to strengthen quarter-over-quarter. Our leverage remains low, and we will be debt-free in the last quarter of the year as we expect to fully pay down the outstanding balance of our credit facility.

With a strong cash and liquidity profile and strength of our earnings, we are well positioned to cover a 20% increase to our dividend. For more information on our revenues, expenses, net income, 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?

[John Ciampaglia, executive]

Yes. Thanks, Kevin, and good morning to everybody. Just starting off on Slide 8, we continue to experience strengthening sales momentum in the quarter with net flows of USD 617 million. This represents the strongest in 2 years as investors are finally beginning to return to precious metals. Our gold and silver trust drove most of the sales in the quarter and year-to-date, 5 out of our 6 physical commodity funds have attracted net new capital. On a year-to-date basis, net sales stands just below $1 billion.

I think it's important to note that over the past 12 months, a number of central banks have accounted for the majority of physical gold buying. While China has signaled they have paused their buying over the past few months, we believe the key word is paused, and they will resume their buying in an effort to de-dollarize their foreign exchange reserves.

With the election of Donald Trump, it looks like the trade relations with China are more likely to deteriorate than improve, which we think will act as another catalyst to get China -- Chinese Central Bank to buy more gold. Gold buying amongst Chinese retail investors has also picked up as gold allure has a long-term store value, looks more compelling against other asset classes like real estate and domestic equities, which have performed very poorly over the past few years.

Next slide, please. So on Slide 9, illustrates the market disconnect we've seen between the price of gold and total ounces of gold held by ETFs over the past year. And gold held by ETFs is a very good proxy for just about all kinds of investor segments but heavily institutionally oriented. As you can see, the amount of gold held by ETFs was approximately 92 million ounces as of June 2023, and the price of gold was below $2,000 an ounce.

Despite gold strengthening to $2,400 within the subsequent 12 months, ETFs reduced their gold holdings to just under 81 million ounces. It's only been in the last quarter where we have seen the trend reverse with gold held by ETFs growing back to 84 million ounces. It's encouraging to see investors adding to their gold holdings again, which has recoupled the historical relationship between gold price and gold ETF holdings.

Next slide, please. While we have not been immune to redemptions during the past year in our precious metals segment, we have fared much better relative to our largest competitor funds. These charts highlight the percentage change in the shares outstanding for our Physical Gold Trust, PHYS, and our Physical Silver Trust, PSLV, over the last 5 years relative to their largest competitors in the world.

As you can see, units of PHYS have grown by 109%, while our competitor is down slightly. PSLV has grown its units outstanding by 219% compared to only 30% for the largest competitor ETF.

Next slide, please. AUM in our suite of physical commodity trust continued to climb, reaching an all-time high at the end of October. AUM in this product segment is up 50% since the beginning of 2023 and highlights the scalability and broad investor appeal of these funds. It's also important to mention that having a suite of 6 different physical metal trusts provides investors with a broad range of choices and provides us with important diversification for our business.

Next slide. Now switching to our range of equity ETFs. Market weakness across critical materials over the quarter translated into muted sales of $56 million. Performance for uranium equity since the beginning of September has improved significantly following a sharp correction that we saw from late May to August.

Year-to-date net sales stand at just over $300 million and flows into the segment can be more temperamental given the more volatile nature of many of these mining equities. Once again, having a broad suite of funds covering various mining segments, which are also listed across multiple jurisdictions, positions us to capture flows when investor interest appears.

Next slide. AUM in this segment has recovered over the past few months and is now up 20% since the end of August. And building scale in this product suite is very important as we benefit from cost efficiencies, which translate into higher profit margins given most of these funds have unitary or fixed fees.

And I'll now pass it to Whitney George.

[W. George, executive]

Thank you, John. Turning to Slide 14. Our actively managed equity products. Our actively managed precious metals strategies continued to perform well, with our Flagship Gold Equity fund gaining 21.4% in the third quarter and 36.3% year-to-date. Despite the strong performance and compelling fundamentals, investor flows have not yet returned to mining equities.

Our managed equity segment recorded $54.6 million in net reductions during the quarter and $167 million in redemptions during the first 9 months of the year. This stands in stark contrast to the physical gold, which saw a record investor demand in the third quarter. We expect to see this demand spill over into equities over the quarters ahead.

I'll now turn to slide -- the next Slide 14 -- sorry, Slide 15, private strategies. Combined lending and streaming strategies, AUM was $2.4 billion as of September 30, 2024. The team is continuing to monitor and harvest investments in our second private lending fund and is actively assessing new investment opportunities for Lending Fund III.

And to summarize on Slide 16, we are pleased with our performance so far this year and confident we'll be able to sustain our momentum in the quarter ahead. AUM has reached record highs each quarter of 2024, and our sales have begun to accelerate after a slower first half of the year. We're experiencing strong client engagement across all channels and expanding our client base among institutions, family offices, RIA broker-dealers and hedge funds.

Our focus on precious metals and critical materials position Sprott well to benefit from the macro trends we expect to drive the markets in the coming months and years. As Kevin noted, based on our financial performance, and our positive outlook, we raised our quarterly dividend by 20% and expect to pay off the balance of our line of credit by the end of November, resulting in a debt-free balance sheet.

We appreciate the continued support of our clients and shareholders and look forward to reporting to you in the quarters ahead. And that concludes our remarks for today's call.

I'll now turn it back to the operator for some Q&A. Thank you.

[Operator]

[Operator Instructions] Our first question or comment comes from the line of Graham Ryding from TD Securities.

[Graham Ryding, analyst]

You shared a little bit of commentary around just maybe with the Trump presidency demand for sort of the U.S. dollar from China may continue to sort of be weaker or be lower? Any other sort of implications for your business around precious metals demand or critical minerals demand from a Trump presidency?

[W. George, executive]

I'll take that. Essentially, it didn't really matter to our forecast or our long-term outlook is who won the election. Both, we figured, would be characterized by continuing growing deficits. That's going to put pressure on interest rates, it's presumably going to put some pressure on inflationary trends. We're not of the [indiscernible] that inflation has been [indiscernible]. We think it's just resting. And so all of the fundamentals that have been in place for the last couple of years, we think, are still in place and maybe even get accelerated with the Trump presidency.

[John Ciampaglia, executive]

Yes. Whitney, maybe I'll just add to that on the critical materials side. We think things like uranium will continue to get bipartisan support in the United States. The Biden administration has been incredibly pro nuclear, which is not typical of democratic administration. And all the major bills that have been passed in a lot of the last few years, including the IRA and the ADVANCE Act, all received bipartisan support, which are very supportive of basically reenergizing nuclear energy and reshoring critical elements of the supply chain, which unfortunately reside in places like Russia. So we think uranium will continue to be a beneficiary of this reshoring trend and the push to nuclear power, given the incredible load growth that people are expecting in the U.S. on the back of reshoring of key technologies.

The other thing we've been talking about is, with all the rhetoric from Trump about clean energy, what could be impacted. And I think it's important to note that out of the 35, $1 billion-plus projects that have been announced, mostly related to clean energy technologies and manufacturing, 29 of those reside in red states. So I think the pushback at the state level will be enormous. And I think it's more an issue of national security that many of these industries are being reshored away from China to diversify against geopolitical risks.

So while there's been a lot of rhetoric against certain subsidies and part of the Inflation Reduction Act, we think a lot of these -- a lot of the capital inflows will remain because they are creating a ton of jobs in red states, in particular.

[W. George, executive]

Gold ended the bear market and started to go up the last time Trump got elected.

[Graham Ryding, analyst]

John, I'll stick with you. Just the -- you mentioned that your physical gold and silver trust have done better than your largest ETF competitors. Is that because of the physical delivery component or what do you attribute the outperformance?

[John Ciampaglia, executive]

Trust. I think we have a segment of investors that clearly trust that we have all the gold, that it is held with safe custodian, which is Royal Canadian Mint, having the physical redemption option as well as a potential tax advantage for certain investors in the U.S., given we're not subject to collectibles tax if you make certain IRS filings, all give us advantages, which have allowed us to grow these vehicles to obviously very high asset levels.

And those are very difficult to copy and I think one of the things I'll also highlight is that over the last few years, we have seen a price war in -- amongst ETFs, including gold ETFs. And we have not succumbed to that pressure. I think that the differentiators we have with our products represent real value and people are willing to pay premium price for them.

[Graham Ryding, analyst]

Okay. Maybe I'll do one more, and then I'll requeue at the end. The Lending Fund III, you mentioned, you're thinking -- can you share maybe what you're thinking about on that front? Should we be expecting private strategies AUM to grow or maybe just Lending Fund III to replace Lending Fund II as it monetizes down?

[W. George, executive]

It is a bit of a treadmill because we're making new loans and they're getting repaid all the time. And your asset level really changes kind of when you launch a new product, with Lending III was last year, and so you have to obviously deploy it before you think about another one.

So it's a very high-quality business with very good portfolio managers and a long track record. And it's, again, not like our exchange-listed products or physical trust in terms of the way it can be grown. But it certainly washes its face and is really helpful when it comes to our overall domain knowledge.

[Operator]

We have a follow-up from Mr. Graham Ryding.

[Graham Ryding, analyst]

Can you hear me?

[John Ciampaglia, executive]

Yes.

[W. George, executive]

Yes.

[Graham Ryding, analyst]

Okay. Great. I'll just throw in one more. Carried interest, it was pretty material this quarter. Any visibility on the potential there for further crystallization? Or how much sort of carried interest -- embedded carried interest you might be sitting on that could be realized over time?

[Kevin Hibbert, executive]

Yes. Graham, I'll take that one, and then if Whitney wants to add anything, he can. But this carry was a bit of a one-off. This was us harvesting carry from a legacy exploration LPs. If you recall, many moons ago, Graham, when we bought Rick's business. It came with this exploration LP type business, 7- to 10-year locked-up money. This is the last sort of the last bit of those funds that have been matured this year. And so we just took in that cash that was being built up in the form of carry. So I wouldn't say that this number is any sign of anything else to come down the road as the remaining sources of carry for us moving forward will be from our private strategies funds.

[W. George, executive]

Yes. I'll just add. Lending II will have to mature in order to collect carried interest. So that's in its investment phase. And then -- but I'll remind you that we actually do have some products that carry performance fees on the managed equity side and if things hold together, you might see some of those [indiscernible].

[Graham Ryding, analyst]

And sorry, what's the timeline for Lending Fund II to mature?

[W. George, executive]

It's hard to determine. It's basically when the loans get paid off. And that's very hard to predict. I mean these are 10-year lockup funds.

[Graham Ryding, analyst]

Okay. Okay. And what's the -- on the managed equity side, what's the size of the AUM that could be performance fee -- that could drive performance fees?

[W. George, executive]

$100 million or so.

[Operator]

I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Whitney George for any closing remarks.

[W. George, executive]

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

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.