Sprott Inc

TSX:SII

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2022 Annual Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. Instructions will be provided at that time for your to queue up for questions. As a reminder, this conference is being recorded today, February 24, 2023.

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.

[Whitney George, Chief Executive Officer]

Thank you, moderator, and good morning, everyone, and thanks for joining us today. On the call today with me is our CFO, Kevin Hibbert; and John Ciampaglia, CEO of Sprott Asset Management. Our 2022 annual 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. Sprott's positioning in precious metals and energy transition materials served our shareholders well during a very challenging year in 2022. Our physical trust and private strategies delivered strong net sales and continue to be key drivers of AUM growth. We've made good progress building scale in our ETF business through the 2022 acquisition of URNM and several new products offered early in 2023.

We launched an actively managed energy transition strategy to capitalize on the depth of our investment team, and we are pleased with the early results. We're currently experiencing very high levels of engagement from both new and existing investors. The expansion of our energy transition offerings has attracted the interest of a global investor audience in new geographies and new demographics. We expect these activities to translate into meaningful AUM growth when markets stabilize and investors reposition themselves for the new geopolitical and global economic realities. We are focused on our core asset management activities and have been gradually transitioning away from transaction-oriented business.

To that end, this morning, we announced that we are exiting the Canadian broker-dealer. This is a very difficult decision, which was made mutually with our partners at SCP, Sprott Capital Partners, who will continue to run that business independently of Sprott. Peter Grosskopf in the SCP team have been great colleagues and partners, and we wish them continued success in their new venture, which we are certain will benefit from the imminent natural resource super cycle in front of us. Our U.S. broker has gradually been transitioning assets from AUA to AUM, assets under administration in the broker-dealer to assets under management in advisory business. We expect to complete this in 2023. Looking ahead, we intend to increase our focus and investment in evolving our service offering in this area to attract high net worth individual investors and family office investors.

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

[Kevin Hibbert]

Thanks, Whitney. And good morning, everyone. I'll start on Slide 5, which provides a summary of our historical AUM. So we finished the year with $23.4 billion of AUM, up $2.4 billion or 11% from September 30, and up $3 billion or 15% from December 31, 2021.

Our quarter-over-quarter and year-over-year AUM benefited from strong inflows to our physical trusts, in particular our physical uranium, gold and silver trusts as well as the onboarding of new commitment fee generating private strategy LPs and $1 billion of AUM from the URNM acquisition in the second quarter.

Slide 6 provides a brief look into our three and twelve-month earnings. Adjusted base EBITDA in the quarter was $18.1 million, up $378,000 or 2% from the fourth quarter of last year. And on a full year basis, adjusted base EBITDA was $71 million, up $6.9 million or 11% from the year ended December 31, 2021.

We benefited from strong net inflows to our physical trusts and the URNM acquisition, as I mentioned earlier. However, these increases were partially offset by weaker mining equity origination activity in our brokerage segment and lower AUM in our managed equity segment.

Finally, as you can see on Slide 7, despite the challenges encountered across most global markets and asset classes in 2022, our balance sheet remains strong, as seen by our liquid co-investments continuing to represent approximately 20% of our total assets. We are largely under-leveraged at a less than one times debt-to-EBITDA ratio and an 11% debt-to-capital ratio.

EBITDA has grown for a third straight year demonstrating our ability to churn meaningful profitability from on-balance sheet assets and off-balance sheet AUM. In addition, our ability to tap North American equity markets as needed remains strong given our superior five-year total shareholder return profile.

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 fourth quarter MD&A filed earlier this morning.

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

[John Ciampaglia, Chief Executive Officer-Sprott Asset Management]

Thanks, Kevin. And good morning, everybody.

Just moving to Slide 8, our net flows for the quarter were $128 million, and I think, it's fair to say that in sharp contrast to most asset managers around the world, we had very strong results for the calendar year 2022 with $2 billion in net flows. And I'd like to highlight, we also had net sales in every single month last year. The Sprott Physical Uranium Trust was the leader at about $900 million of net flows; our Gold Trust was a little over $800 million; and our Silver Trust just below $400 million for the calendar year.

Year-to-date, we've had over $100 million of net flows. We've definitely seen renewed interest from institutional investors. And what's really driving the interest of late has been uranium. It's growing interest in nuclear energy given its dual role in achieving energy transition. That's essentially trying to meet net-zero commitments and the growing acknowledgment by governments that cannot meet net-zero commitments without having nuclear part of their energy mix.

Obviously, we’re on the one year anniversary of the invasion of Ukraine by Russia. And sadly, energy security has now become part of our narrative. Governments are increasingly focused on reliable energy sources from friendly countries, and obviously reliable baseload energy is going to become more and more important as more and more renewable energy is added to grids around the world.

Energy – as Whitney mentioned, energy transition investors represent a new audience for us. And this is obviously an audience we’ve been engaged with for just under two years now. And as Whitney highlighted is very different than our traditional shareholder base, predominantly institutional, very global in nature and I would say much younger than our traditional precious metal investor.

As Whitney also mentioned, we believe we are in the beginnings of a new commodity supercycle, and that the energy transition is going to be a large part of this one. The energy transition that many governments are actively incenting and mandating by law in some cases will require significant quantities of raw materials for energy generation, transmission and storage. We believe this will be a multi-decade transition, as I mentioned, driven by net zero energy security and even national security considerations.

If you look at some of the key pieces of legislation that are being passed around the world, such as the Inflation Reduction Act, the Mineral Securities Partnership, and the REPowerEU plan, a key element of these government directives is about the development of local supply chains, which will require reshoring from countries now deemed to be less reliable and friendly to western governments. These legislation – pieces of legislation include significant incentives, tax credits and support in order to enable this transition to cleaner energy from local sources.

Moving to Slide 9, let’s talk a little bit about in response to this long-term trend. What are we doing? Well, we’ve recently expanded our suite of offerings related to this critical minerals required to enable the transition. And on February 2 in partnership with the NASDAQ, we launched four new ETFs, the Sprott Energy Transition Materials ETF, ticker SETM. This provides investors with broad based exposure and many of the key minerals such as lithium, uranium, and copper.

The Sprott Lithium Miners ETF, the ticker is LITP. This is a pure play exposure to the upstream mining sector that we think is going to be a big beneficiary of the transition. The Sprott Junior Uranium Miners, URNJ is the ticker. It’s the first of its kind in the world, giving you pure play exposure to the expiration development sector. And then finally, the Sprott Junior Copper Miners, the ticker is COPJ. It’s the only one of its kind in the world giving you exposure to junior copper mining sector.

These indexes were co-developed by Sprott and NASDAQ, leveraging our expertise and experience in the mining sector. And I think once you look under the hood at some of the methodologies and holdings, you’ll clearly see they’re differentiated from competitor offerings.

On Slide 10, it’s fair to say that the – it’s early days, it’s only been about three weeks since we’ve launched. But the early market response has been very positive with investors acknowledging their more thoughtful design and pure play exposure to the upstream part of the supply chain.

Our marketing campaigns are underway and we find it’s a natural extension of our ongoing marketing efforts, as we find many institutions tend to be interested in multiple energy transition materials. I would say more recently we just finished a road trip in Brazil and found that many investors positioned uranium were also positioned in lithium.

On Slide 11, talk a little bit about managed equities and obviously this segment of our business is primarily focused on gold and silver stocks, which definitely had a challenging time last year. Despite this, we experienced very modest redemptions and our relative performance was somewhat hindered by our greater weighting to smaller cap stocks, which we eventually believe will recover as precious metal prices strengthen.

As Whitney mentioned, we also launched an actively managed energy transition strategy in mid-2022, which is targeted a high net worth family office and institutional investors. Again, our strategy here is to be holistic in nature and consultative, whereby we want to offer solutions that are actively managed, passively managed as well as physical commodity solutions related to metals and mining.

And then finally, our Focus Trust closed-end fund performed exceptionally well last year, essentially finishing the year flat relative to most benchmarks, which were down about 20% last year.

And I'll summarize there and pass it back to Whitney.

[Whitney George, Chief Executive Officer]

Thank you, John.

[Operator]

Ladies and gentlemen, please stand by, your conference will resume momentarily.

[Whitney George, Chief Executive Officer]

Excuse me, I'm sorry. Thank you, John. I didn't have my speaker on.

Turning now to Slide 12 for a look at our private strategies. Combined Lending and Streaming strategies AUM was up $1.9 billion as of September 30th. Lending Fund II is in the process of making final deployments and is in portfolio management phase, our earning fees on its capital. The team is adding new fund vintages and strategy extensions with strong support from both new and existing limited partners.

Slide 13; to sum up. In 2022, we continued to successfully execute on our strategy and deliver positive results for our shareholders. 2022 was our fifth consecutive year of AUM growth and the third straight year of increasing adjusted base EBITDA. Energy transition investments are a key growth area for Sprott, and we are increasing our focus on these strategies in all key business segments, including the launch of several new exchange listed and active strategies this year. We have gradually been exiting the transaction-oriented part of our business to focus exclusively on asset management. We expect the markets will be very volatile in 2023. Today is a pretty good example. We are carefully managing our expenses and our balance sheet, but we will continue to invest in our talent through the cycle.

That concludes our remarks for today's call, and I'll now turn it over to our operator for some Q&A. Thank you very much.

[Operator]

Thank you. [Operator Instructions] And I'm showing no questions at this time. So with that, I'll hand the call back over to CEO, Whitney George, for any closing remarks.

[Whitney George, Chief Executive Officer]

Well, that makes it very simple. Thank you very much. Again, thank you all out there for your attention and for your support, the loyal shareholders and look forward to speaking with anyone who would like to have a conversation offsite. And with that, good luck, everyone, and thank you for your time.

[Operator]

Thank you. And thank you, everyone for participating. This concludes today's program, and you may now disconnect.