Sprott Inc. (SII) Q2 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott, Inc.’s 2021 Second Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, August 6, 2021. Forward-looking statements 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 provisions 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.

Thank you, operator. Good morning, everyone and thanks for joining us today. On the call with me today is Whitney George, President of Sprott; our Chief Financial Officer, Kevin Hibbert; and John Ciampaglia, the CEO of Sprott Asset Management. Our 2021 second quarter results were released this morning and are available on our website where you can also find our financial statements and MD&A. I’ll start on Slide 4. Precious metals round tripped in Q2 to end the quarter close to their lows before recovering in July. The gold price has been range-bound and moved sideways for some time, as investors’ handicap chances for rate rises. We are pleased by how our funds navigated through this choppiness and capitalized on the subsequent rebound. Our business continues to perform well with all of our business units currently growing and delivering strong financial results. In fact, as Kevin will tell you, we are knocking on the door of $20 billion and continue to record and produce record operating results. In July subsequent to quarter end, Sprott Asset Management completed its agreement with Uranium Participation Corp. to create the Sprott Physical Uranium Trust. John will discuss this transaction in detail in a few minutes. But as a general comment, this deal provides us with an important strategic foot hall – foothold in the clean energy metal space. We have a constructive view on uranium and believe this new trust presents a compelling opportunity to anchor a highly prospective new product area. We look forward to expanding our offerings into areas that complement our core positioning and precious metals. With that, I’ll pass it over to Kevin for a look at our financial results for the quarter.

Thank you, Peter and good morning everyone. I’ll start on Slide 5, which provides a summary of our AUM as of June 30, 2021. AUM was $18.6 billion this quarter, up $1.5 billion or 9% from March 31 of this year and up $1.2 billion or 7% from December 31, 2020. In the second quarter, we experienced market value appreciation across the majority of our fund products, while continuing to generate strong inflows into our physical trusts. So this helped to a large degree to offset the market value depreciation we experienced on a full year basis. And Slide 6 provides a brief look into our three and six month earnings. To Peter’s point, we had a fantastic quarter. Adjusted base EBITDA was $15.1 million, up $5.8 million or 64% from the prior period and on a year-to-date basis adjusted base EBITDA was $29.7 million up $12.3 million or 71%. The increase in the quarter as well as on a year-to-date basis was primarily due to increased fees from strong net inflows in our Exchange Listed Products segment, higher average AUM in our Managed Equity segment and increased commissions and management fee revenues 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 second quarter 2021 MD&A that we filed earlier this morning. So with that said, I’ll pass things over to John.

Great. Thanks, Kevin and good morning everybody. We had a very strong Q2 with just over $600 million in net inflows, and I think that’s quite impressive in light of the fact that metal prices during the quarter were quite soft and particular silver hit a 7% decline for the quarter. Our Silver Trust is really been the star this year, its driven most of our sales and for the quarter accounted for just over $500 million. And just for some perspective, 2020 was all about our Gold Trust as people were shifting portfolios in the safe-haven assets. This year has been more about reflation trade, commodities and more industrial metals. Just to give you some perspective. Over the last year, the first half of 2020 versus the first half of 2021, our sales in the Bullion Trusts are up by approximately $200 million. So I think that’s quite spectacular in light of the soft markets we’ve experienced. Post Q2, we have hit summer doldrums, I think in just about every markets. We’ve talked to a lot of participants and it seems the general consensus is people are taking summer holidays and it reflects in the market activity. We did have positive sales of $36 million for the month of July. I also want to provide some context around relative performance. We look at the U.S. listed gold ETFs for example, and they’ve experienced net outflows year-to-date of $8 billion. In contrast, our Gold Trust has generated just over $200 million of net sales. And I think more interesting, and if you look at the U.S. listed silver ETFs, they brought in about $2 billion year-to-date and net flows and the Sprott Physical Silver Trust is accounted for 86% market share. So this is a real reflection of the unique and superior fund attributes that the market has recognized in our trust. On the gold mining equity, ETF side has been very quiet. We have generated about $25 million in net flows year-to-date and it seems quite small, but when you compare it to the peer groups what they have experienced about $1.2 billion in net outflows year-to-date. Moving to the next slide, I'll talk a little bit about the new Sprott Physical Uranium Trust. We're very excited about this new fund in our lineup. On July 16, we had overwhelming support from shareholders of Uranium Participation Corp to reorganize the fund, 99.92% shareholders voted in favor. The new trust began trading on the Toronto Stock Exchange July 19. We bought our first 100,000 pounds of U3O8 on July 20, and we've subsequently bought another 100,000 pounds. And that was with the capital that Sprott, Inc. contributed into the trust. We are currently working to put an at-the-market program in place and it could be as early as next week. So we're quite excited about having this mechanism to be able to raise new capital in the vehicle. The next phase of the program is to seek a U.S. listing on the NYSE Arca and that process is expected to extend into 2022. I'll just give you some color on what we've experienced the last couple of months since we've announce this transaction. And I think we've been quite overwhelmed by the response in the marketplace. We've had really great feedback from every type of investor, what we've noticed is that the investment category in uranium has a growing retail base, but the early movers of the last few years have been more on the institutional side family, office and hedge funds. They're very excited about the new trust structure. The enhanced transparency we're now providing with daily disclosure of holdings and daily net asset value, I think it has been very welcomed in the marketplace U.S. dollar trading option, U.S. dollar financial reporting and then the ATM and the pending NYSE listing have all been getting rave reviews. We've had the opportunity to speak to many of these institutions and I think they're very interested in putting new capital to work in the trust. So we're excited about its ability to start raising new capital and contribute to our overall sales results. And with that, I will pass it over to Whitney.

Thank you, John, and good morning, everybody. I'm going to speak to Slide 10 about managed equities. As been already mentioned, it's been a choppy market, generally negative so far this year for equities, reflecting underlying precious metal pricing and presumably consolidating some of the very large gains that we enjoyed last year. The team continues to function extraordinarily well. We have a large managed equity team, 7 participants and many other contributors. Our net sales are up modestly with redemptions gradually slowing. We've – more than anniversary the acquisition of the Tocqueville gold strategies and the client base settled and stabilize and we are generating with some new interest and sales in our institutional SMA products, particularly those tied to the Special Situations strategy. So we have some new institutional clients including a new one posts of the second quarter. So we are well positioned for when it's our turn on the managed equity side to capture market share. Performance is very solid given the conditions and we'll look forward to having our turn in sunlight. And with that, I'd like to turn it back to Peter.

Thanks, Whitney. Turning now to Slide 11 for a look at our private strategies. The lending and streaming strategies continue to perform well on the combined AUM for this segment is approximately $1 billion. Currently, we're focused on deploying the remaining capital in our second lending funds. We've recently secured some significant investments, which should accelerate the pace of AUM growth in late 2021. Our streaming strategy has been active in both raising and deploying capital and is currently onboarding some well-respected LPs. And our Korean fund management business has also raised new commitments as contributed to both AUM and profit growth. Combined, we have visibility that this will be a growing business throughout 2022. Turning just to the brokerage slide on Page 12. Our investment dealers in the U.S. and Canada are both tracking ahead of expectations. In Canada, the institutional dealer is benefiting from strong equity originations and syndications. The U.S. brokerage is continuing to make good progress on transitioning AUA to AUM and generating new funds sales. Both numbers are material to Sprott, with the AUM increased standing at about $500 million and the product sales effort coming one of our number one sales channels. We are pleased with the progress from this group, and it's both its revenue and contribution margin has improved significantly over the past year. Moving now to Slide 13 for some final comments, Sprott in general is on the tear and delivering strong financial performance, despite volatility in precious metals. Our sales and marketing efforts are delivering results, as we focus on driving scale and key strategies. Demand for our expertise is increasing and in response to heightened levels of client and investor engagement, we're adding to client facing teams and launching new feeder funds in some areas. The clean metals industry is growing quickly, and we expect this to become an area of focus for Sprott. In closing, we believe that the outlook for precious metals is compelling. Gold is coming back from a correction, during which its sentiment indicators plummeted to cycle lows, and it still remains generally unloved. It is gradually being added to generalist portfolios as a risk diversifier, and we believe mining equities are particularly attractive right now on fundamental and relative metrics. As usual remain active in reviewing bolt-on funds, global opportunities and the 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.

Thank you. [Operator Instructions] And our first question comes from Gary Ho with Desjardins Capital. Your line is open.

Thanks, and you good morning. Maybe first off, just wondering if you can provide a net flows and AUM update kind of post quarter similar to the numbers given us in the past few quarters, had it changed materially outside of the UPC acquisition. And I think John mentioned the $36 million in exchange listed inflows.

Hi Gary, it's John. I can comment on the exchange listed in the managed equities for the month of July. We’re at plus $40 million which for the depths of summer, I think is pretty decent. So that's the number for July.

So that's the net inflows or is that the AUM change?

That's the net inflows for all of our public funds for the month of July. The AUM number I don't have in front of me. We'd have to come back to you on that.

I'd say Gary, it's Kevin here. Gary, I'd say, it's fine. If you take what John just gave you and just as a proxy just to add the UPC portion that we disclosed this morning.

Okay, great. And then John, just on the UPC transaction at closing it was U.S. $630 million. That was a bit higher than I think when you first announced the transaction, was it not, and kind of what drove that change and can you elaborate on the net flows outlook and I think you mentioned kind of there is increased interest from clients you've marketed too?

Sure. Okay. That's absolutely correct. The number is higher and that was really a function of market appreciation. There was a flurry of buying activity of physical uranium by not just the two holding companies in the marketplace, but also by a number of the junior mining companies or earlier in the year that did put some upward pressure on the price of uranium by a few dollars. And secondly, UPC prior to the transaction did a capital raise, which added about $70 million if my memory serves me well. So those two factors gave us that list. So it was nice to inherit the fund with a little bit more bulk to it.

And does that change the price date or how?

No, it did not have a material impact on the price we paid. We largely put a pin in those metrics. So I think it was net positive for us in terms of taking over the fund and paying a very small difference in fee and I don't have that exact number, but it was, I think a couple $100,000 was the difference in the termination fee to [indiscernible].

Okay. And any comments on the net flows outlook? You did comment on increasing…

Yes. So we've had two months now to talk to different participants, whether they're dedicated energy or uranium type funds and the market super excited about our entrance. I think they see the value of having a dedicated asset manager take the helm of the funds. They see the value in the investment fund structure over the prior holding company structure. And you may recall that back in 2018, we had a similar transaction with the Central Fund of Canada, which is one of these legacy holding company structures that we reorganized and modernized, and we're able to make a lot of improvements, shareholder friendly improvements. So from the investors we've spoken to, there seems to be lots of pockets of capital on the sideline waiting to invest in the trust. They're waiting for the ATM to get operational. So we're quite encouraged because a lot of these institutions, they generally like to stay quiet in the background. But a lot of them have reaching out to us and having very interesting conversations about their thoughts and opinions on the uranium market. They definitely view the trust as a vehicle to potentially provide more price discovery in uranium market and to provide more activity in the spot market, which the marketplace seems to be clamoring for.

Okay. Thanks for that. And then related Kevin, any one-time transaction integration costs to call out regarding the acquisition we should be aware of for Q3?

Sorry, you cut out on my end at the first part. Can you start over Gary?

Yes, no, I'm just wondering what that transaction any one-time transaction or integration costs to call out that we should be aware of for Q3?

For Q3, there shouldn't be anything significant. This is a pretty smallest straightforward tuck-in. So the numbers you saw in the MD&A – just trying to see where that – yes, in the outlook section of the MD&A, that's pretty much the all-in acquisition costs, and I don't think there'll be anything else of consequence materially going forward.

Okay. And then just last question for me, Peter, you mentioned you're reviewing add-on opportunities and consolidating kind of niche players in your focus areas. Can you provide a bit more color size geographies perhaps kind of new products within the exchange list aside?

Well all our key areas. So they've now expanded a bit to other strategic minerals. That gives us a bit more scope that way. And I'd say we've been working on distribution and fund management deals for some time and places as diverse as Europe and Australia. So that gives you an idea of the global scope. And in terms of size, they range some of them might be as small as $200 million or $300 million. And we have got a few transformational targets in mind, but those are very, very hard to land in our business. So I don't want to give you an idea that – we have high odds on those.

And $200 million to $300 million that's in terms of AUM?

Yes. I mean, that's kind of on the small end. It's hard to make a significant, unless we're starting a fund from scratch, it's hard to make a significant contribution on anything much below that level.

Got it. Okay. That's it for me. Thank you.

Thank you. Our next question comes from Graham Ryding with TD Securities. Your line is open.

Good morning. You made reference to the uranium participation deal, giving you a start in the clean energy metals area. Is there anything you can speak to at this point in terms of further initiatives or metals that you're looking at?

Yes, sure. Hi, Graham, it's John here. Yes. I mean I think there is a growing kind of tailwinds building here in the system. When we think about uranium I think many people – in nuclear, I think for a lot of people, there's a negative stigma related to that related to prior accidents. But I think that the narrative is shifting and you're seeing it shift at the major government policy level. And this is all being driven by all of the decarbonization goals that are happening around the world and a growing realization that the only way they're going to be able to hit them is to keep nuclear as part of the next. Yes, there will be continued support and subsidization for renewables, but nuclear if you look at just the recent Biden announcements around the infrastructure bill, nuclear was included in that. If you look at the EU in terms of its energy taxonomy, nuclear was added to that in terms of being an acceptable and safe form of energy. So yes, there are some countries trying to decommission their nuclear fleet like Germany, but I think if you look at their cost of electricity, and you look at their CO2 levels they are materially higher than say their neighbor next door, France, which generates 70% from nuclear. So we think that narrative is changing and this is why the energy, the uranium sector is seeing renewed interest after a very long protracted bear market. Yesterday’s announcement by the Biden administration around targets for electric vehicles, on top of all of the targets being set by the EU, I think it is the path we’re going to get to in terms of electrification of cars away from internal combustion engines. All of that requires massive retooling, different supply chains, different minerals and yes, there are a plethora of battery chemistries out there but lithium cobalt, Class 1 nickel, manganese, graphite, all of these things are key components in that supply chain. And we’re very interested in those. We’ve been looking at them on and off the last few years, they tend to be in some cases, smaller markets and less liquid markets. So we have to kind of wade through them carefully in terms of trying to figure out how best to package them into investment fund structures. But we’re very keen on this decarbonisation, low carbon, electrification electric vehicle theme and we’re trying to figure out how best to bring that to the investment world.

Okay. Great. That’s helpful. With the new fund, the uranium fund, is it going to be similar in structure to your other physical trusts or how should we think about potential inflows and outflows, same dynamic or is there something unique here?

Yes, largely the same, they’re closed end funds. There’s two key differences; one we’re only listed on the Toronto Stock Exchange right now. Unlike the other trusts, which are dually listed. And I think more importantly, the one key difference in product structure is there’s no redemption feature, either physical or cash form in uranium trust. Obviously, we just can’t deliver a drum of uranium to somebody. So there is no redemption feature right now. So money coming in will help us build scale in the fund, liquidity and allow larger institutions to participate in the category, which I think have been limited due to the small – the smaller options on a relative basis that they’ve had to invest in relative to other commodities.

Okay, great. And what’s the management fee of the new fund?

35 basis points.

Okay. And then my last question would just be, pretty strong 45% base EBITDA margins this quarter that was my calculation. It looks like your compensation was lower and that’s what was sort of the main thing driving the margins. Is there anything unique to the quarter or is 45% margin, less potential for expansion from here? How we should be thinking about things? Or is this a particularly strong margin quarter?

Hey, Graham, it’s Kevin here. I’ll tackle that one. But I can’t speak to the margin percentage because it’s based on how you guys model our margin numbers a little different from that. But generally speaking, I think you’re pretty safe in terms of the compensation number. I think our accruals are pretty much up to date. On the corporate side, what you’ll probably see is the quarterly number coming down a little bit. But then there may be some slight offsets coming through compensation on some of our fee-based businesses. So net-net, the way we like to look at it is based on the compensation ratio, which we disclosed in the MD&A under the Compensation section and that’s about 39% right now. I think we’ll probably stay somewhere between 39% and 40% as we make our way through the back half of the year. So strong quarter, I think it’s reasonable to expect much of the same in the back half of the year. But there was nothing unique to this quarter that kind of suppressed the comp number per se.

Okay. Understood. And if I could just get in one more, in terms of your flows, silver – your Silver Trust is certainly doing the heavy lifting. Why do you think demand for silver is so strong this year? But the gold relative basis is proven to be a bit more volatile. Is it industrial theme behind silver, or is it more than that?

Hi, Graham. I think silver got a list earlier in the year with most other industrial commodities given it’s a hybrid, not also that was thing one, it definitely benefited from that reflation trade. I think there’s also a secondary benefit from its high use in solar and the push to renewables and thing – all things low carbon. And then finally, and I think most importantly, we will chalk it up to the growing influence of social media in terms of the collective buying power different groups on Reddit and Twitter that went kind of on a buying spree starting at the end of January in all things silver. Our product was really the primary beneficiary of that globally as the market recognized our fund is 100% backed by physical silver, no one allocated metal. And that uniqueness of the product was a primary driver of the flows into our trust versus some competitor products.

Great. That’s it for me. Thank you.

Thank you. Our next question comes from Geoff Kwan with RBC Capital Markets. Your line is open.

Hi, good morning. Just had one question. On the managed equity side, it seems like it’s been a kind of an ongoing theme of despite gold generally being strong for the past, while demand for gold equity funds hasn’t matched better and kind of liked it. You talked about the trend and improving in terms of the flows, but I’m just wondering if there anything that you see that suggests that this is likely to accelerate or from everything you see right now just more continue of gradual improvement over the next year – say, next year or so.

So I’ll tackle that one. What I can tell you is the fundamentals of gold mining companies have probably never been better in terms of the margins they’re delivering, the free cash flow they’re delivering, the returning capital to shareholders, both dividends and buybacks is unlike anything I’ve seen out of that sector. And of course, I’m not a generalist and follow a lot of sectors. So the fundamental factors are very, very strong, even in a flat kind of gold environment right now. There are obviously going to be cost pressures that we’re going to need to deal with like any other business in the next couple of years. But fundamentally the entire sector is very, very attractive. I do think the prior decades volatility has got scared some people away, but I think most companies certainly that we own are being very well-managed and responsibly managed right now. There’s probably a little bit of social pressure that the mining industry is not thought of as being an ESG kind of investment. It actually has been forced over the decades to be very sensitive to those kinds of issues, way in advance of it becoming a popular concept. So I just think it’s a matter of time and the math is working in our favor. The interest in precious metals, last year was more of a fixed income alternative not an equity allocation. But we continue to believe that particularly the quantitative models that have looked for things like earnings surprises, earnings revisions, and things like that are going to discover this sector. Right now, obviously it’s a pretty sleepy time in all markets. But all of the leading indicators for a category doing well are well in place. It’s just a matter of – no one really knows these days, what turns the switch on.

Okay. Great. Thank you.

Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Peter Grosskopf for closing remarks.

Well, thank you everybody for participating in this call. We appreciate your interest in Sprott, and we look forward to speaking with you again, after our Q3 results. Have a good weekend.

This concludes today’s conference call. Thank you for participating. You may not disconnect.