Sprott Inc. (SII) Q3 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2022 Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, November 4, 2022. 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. Whitney George. Please go ahead, Mr. George.

Thank you. Good morning, everyone, and thank you for joining us today. On the call with me today is our CFO, Kevin Hibbert; and John Ciampaglia, the CEO of Sprott Asset Management. Our 2022 3rd 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 with Slide 4. We delivered solid results in the third quarter during a very volatile period in the markets. We recorded our 13th consecutive quarter of positive net sales driven by strong contributions from private strategies and our physical trust. We expanded our ETF product suite with the launch of Sprott ESG Gold ETF and we listed Sprott uranium mining UCITS ETF in multiple European markets. We're developing new products and capabilities in the energy transition space where we're using our expertise and talent in understanding mining to apply to a much larger and bigger opportunity than our core precious metals franchise. With that, I'll turn it over to Kevin to look at our financial results for the quarter.

Thanks, Whitney. And good morning, everyone. I'll start on Slide 5, which provides a summary of our historical AUM. AUM was $21 billion as of September 30 of this year down $901 million or 4% from June 30, but up $601 million or 3% from December 31, 2021. Our quarter-over-quarter AUM was negatively impacted by market value depreciation across our fund products. But on a nine-month ended year-over-year basis, our cumulative market value declines were more than offset by strong inflows to our physical trusts, in particular, our uranium and gold trusts, the onboarding of new commitment fee generating private strategy LPs and $1 billion of AUM onboarding from the URNM acquisition. Slide 6 provides a brief look into our three and nine months earnings. Adjusted base EBITDA was $16.8 million, up $124,000 or 1% from this time last year. And on a year-to-date basis, adjusted base EBITDA was $52.9 million, up $6.6 million or 14% over the same nine-month period last year. Adjusted base EBITDA benefited from strong net inflows into our physical trusts, primarily our physical uranium and gold trusts, as I mentioned earlier, as well as the URNM acquisition and inflows to our private strategy LPs. These increases were only partially offset by weaker mining equity origination activity in our brokerage segment and lower average AUM in our managed equity segment. Moving on now to Slide 7. Despite the ongoing challenges encountered across most global markets and asset classes, our balance sheet, cash flow and liquidity metrics remain strong at the nine months ended mark of the year, and we expect to see this strength continue throughout the remainder of 2022. 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 third quarter MD&A filed earlier this morning. With that said, I'll turn things over to John.

Great. Thanks, Kevin, and good morning, everybody. Obviously, the third quarter was very challenging in terms of macro market conditions. Despite the headwinds that we faced in the quarter, we still managed to deliver $113 million in net sales across the physical trusts product suite, which was primarily the uranium and the Silver Trust over that period. Year-to-date, we're at a very healthy $2 billion net sales mark to the end of the third quarter. I think it's fair to say that the precious metal suite fared very well on a relative basis to many of our competitors around the world. And we had very few redemptions over the quarter, which helps keep our asset base very sticky and contributed to more recurring revenue for us. For example, year-to-date, the Sprott Physical Silver Trust has been the number one selling silver ETF in the world, which I think is a great testament to the support we have from our shareholder base. Just shifting to uranium. It's been a very important growing category for our franchise. And over the last 16 months, I think it's fair to say that Sprott is now the largest manager of uranium related investments in the world of approximately $4 billion. The price of uranium is up about 25% year-to-date, which has been very helpful for our overall earnings and revenue. And it's really being supported by three long-term factors that we think are in play for nuclear energy. And that is growing acknowledgment that nuclear energy provides reliable and affordable baseload power and is the ideal complement to offset the intermittency of renewable energy. Second of all, energy transition as we come up to COP27 in Egypt next week, Governments around the world remain very focused on achieving their net-zero goals and there's growing acknowledgment from governments around the world that nuclear energy has to be part of the energy mix in order to meet any of their net-zero targets. We've seen governments in South Korea, state of California, more recently, Japan make very large announcements about restarts, life extensions and new builds related to nuclear power. And then finally, the most powerful shorter-term catalyst has been energy security. And we think that nuclear energy is going to play a key role here as energy policy shifts over the next couple of decades, much like it did in the late '70s and in response to the oil crisis, we believe that governments are going to increasingly focus on nuclear energy to provide energy security. It really comes down to the density, the energy density of uranium, which helps insulate utilities as well as countries from the price and supply risks that we see in other fuels, such as natural gas and coal. This is a very powerful driver that we think is just starting. So we feel very good about our product suite. We continue to look at other categories. We've clearly seen a broad expansion of our client base, both by client type and most definitely on a global basis, we're seeing much more institutional interest in our product suite and it's also coming from more points around the globe. And with that, I'll turn it to Whitney.

Thank you, John. Turning to Slide 9, managed equities. Our active gold strategies declined by 10% during the quarter, slightly lagging behind their benchmark mostly in part due to the fact that we owned some smaller companies that have been particularly hard hit this year with the market volatility. We had modest net redemptions despite the environment. And we recently formed an energy transition team to manage new active strategies in upstream materials that are required for carbon reduction. Slide 10, private strategies. Combined lending and streaming strategies AUM at the end of the quarter was $1.9 billion. Lending Fund II is in the process of making final deployments and in portfolio management phase. Our team is adding new fund vintages pursuing time-tested strategies as well as some strategy extensions. And our streaming royalty fund is actively deploying capital. Slide 11. To sum up, we are continuing to deliver strong financial results despite the market conditions. And this is particularly noteworthy given the performance in the precious metals year-to-date. Our marketing efforts are paying off, and we are capturing market share in core strategies. We are building new growth drivers and energy transition. Our precious metal asset franchise is well positioned to rebound when and if the Fed ever decides to pause. And just as a side note, gold prices in dollar terms are down now seven months in a row. That's almost unprecedented. I think you have to go back to the 1960s, yet the price of gold achieved new highs in other important currencies in the world, and central banks during the third quarter accumulated 400 tons of additional gold reserves, which is the fastest pace in this century. So we're very optimistic that when wind conditions change, we're going to be extraordinarily well positioned. And with that, thank you very much. I'll turn it over to the operator for some Q&A.

[Operator Instructions] And our first question comes from Graham Ryding from TD Securities.

Maybe I'll start with just your private strategies. Can you remind us where you're at in terms of your different vintages and what would be sort of the outlook or the timing for potentially realizing some carried interest from some of those more mature vintages?

So Graham, it's Kevin here. So from a carry perspective, it's tough to say. Generally speaking, as we've mentioned in the past, the carry tends to be triggered closer to the end of those funds' lives. And so at any given point in time leading up to that it could be somewhat in the money or not, but we wouldn't be in a position to be able to speak to it, let alone disclose it or accrue it in our financials.

And when is the end of the fund life for your more mature strategies?

It depends on the specific fund. I can't get into too much detail on that.

Okay. Maybe we could go to -- well, I guess just there was quite a big differential this quarter between EBITDA and base EBITDA. So maybe you could flush through some -- what were some of those primary adjustments that you would call out this quarter?

Sure. So there's a few, to your point. So one of the bigger ones would be the LTIP amortization. And that's coming really from two things, Graham. The first is where we came off last year, the final year of the five-year grant under the 2017 LTIP. And as you know, when you mark the stock-based comp immediately before you start amortizing it, you have to market that the fair value of the grant date. Obviously, the fair value of the stock in 2017 was very different from where it is now, even before the current -- or particularly before the current market dislocation we're seeing. And so the absolute amount that would have been amortized is a lot smaller than the new grant that we have now, primarily because of the price. But then there is another reason which is that 2017 program was amortized over a five-year period, whereas the Board made the decision to have our current program amortized over a three-year period. I guess the other overarching factor besides the price being a lot lower on the base that was amortized in the past and the amortization period being shorter is also the fact that the amortization method that was used from 2017 through to 2021 under IFRS 2 was called the graded vesting method, which takes bigger amortization amounts in the early years of the program and very small ones in the latter years. So the numbers that you're seeing in 2021 would have been towards the tail end of that method, whereas now, we're at the early years, and it's going to be straight lined. And then we also have other items like FX, the FX losses that we've encountered on our -- conversion of our monetary assets was a lot bigger now than it was back then. So that's also part of the other expenses variation that you're seeing here. And I guess one other thing would be the settlement of a legal claim on a legacy employee for many moons ago. All of those things are what are driving the delta you're seeing on the amortization and the other expenses line between EBITDA and adjusted EBITDA.

Okay. And how long does that -- there was some severance in there, how long does that persist for?

It's -- we're looking at about three years if we went full term on that, and you'll see that in a little footnote on Page 10, footnote number two.

So it was $1.3 million this quarter. Should we expect a $1.3 million adjustment for three years? Or might not interpret that correctly.

No, no. No. It's -- there are -- so the part of the transition payments would be stock related. So that part would be amortized on a pretty consistent basis. So on a full year basis, if it went through the full three years, you're probably looking at about $2 million for the year. The rest were just the transition payments that were just 2022 relevant in the quarter that it occurred. So I'd expect next year, you would see these numbers drop off materially.

Okay. My last one, if I could, just the comp ratio. I think it was 47% this quarter, 44% last 12 months. I think your guidance is less than 50%. Is that still the right way to think about this?

Yes. I think that's still fair. A big -- one of the things that you'll notice is as much as the LTIP amortization has gone up period-over-period. The annual incentives or the cash bonuses have gone down by a fairly significant amount as we essentially traded off cash incentive for more equity, which was an important consideration for us and our Board in ensuring that we are even more tightly aligned with the interest of our shareholders. So with that in mind, the LTIP number should be offset by a good amount by the AIP leaving the overall ratio relatively stable.

[Operator Instructions] Our next question comes from the line of Geoff Kwan from RBC Capital Markets.

I know you kind of talked about a little bit here and there with your various product lines. But just in the context of, I guess, the past couple of quarters the way the markets have been, have you seen much in terms of how your clients' -- the level of interest and behavior around the various strategies that you have?

Yes. It's Whitney George. We've had a record engagement with our clients, in part because of our new uranium franchise, both the physical trust and the ETF -- equity ETF. It's actually a younger and different audience that is really interested in energy transition and decarbonization. We expect that we'll be able to continue to engage that new audience in other products that we have in the planning. So and clearly, what's happened, the tragedy in the Ukraine and the disruptions that have occurred have really brought forward the notion that if you don't hold it, you may not own it. And so our physical trusts are really well positioned to kind of address those kinds of issues and opportunities.

Yes, Geoff, it's John. Just to build on that, I think from talking to countless institutions around the world, uranium has been one of the few things that's worked in their portfolio this year in addition to some other energy-related investments that may or may not have had. And so many of our clients have told us that they remain very bullish on the thesis. They are holding tight and it's kind of like one of the last few -- the last things they would like to sell. And so I think that's clearly helping us in terms of keeping the asset base intact. And on the precious metals side, I mean our clients are not traders. They're more buy-and-hold investors. And I think if you look at our chart, it reinforces that we don't see big, big redemptions like you do out of the a number of the competitors around the world, which really have vehicles that act as liquidity and trading tools as opposed to buy and hold vehicles. So I think we've been very well insulated from that. And I think we've been benefiting from cross-selling because as we add new categories to our suite of funds, we're naturally finding some interested parties across the suite. And I think -- our belief is that as we add some more strategies to our offerings, there's definitely going to be more cross-selling opportunities for us.

Okay. And I was just also wondering, too, is just on the gold active equity side. I thought you were trying to -- or had a thought that there would be more institutional investor interest in those types of strategies as opposed to getting gold exposure through the physical? Just wondering if there's kind of an update there in terms of that progress?

Sure. Well, given gold's relatively good performance, but for absolute performance, despite the high inflation environment, we haven't really seen the managed equity side attract much interest. It's more of a tactical trade. It's a more leveraged way to participate. And so my expectation is that the two will go in tandem, but you're probably going to see -- at least in North America, you're going to -- need to see a resumption of the bull market in gold to really get people excited about the equity side.

Okay. And just last question was just on the lending and the royalty funds. If there's any sort of outlook you have even near term on some of the deployments on the flow outlook?

Market conditions are certainly improving for those, who have cash to deploy everything that we all see and read about in energy transition is going to create large investment opportunities. So we're very excited about the way they're positioned looking forward.

I show no further questions in the queue. That concludes our Q&A session. At this time, I'd like to turn the call back over to Mr. Whitney George for closing remarks.

Okay. Well, I think we've pretty much covered everything. Of course, we're always available for calls. And I really appreciate your attention this morning. We're very excited about our future as co-shareholders with you. And we welcome any kind of engagement that people would like. So with that, thank you very much for tuning in, and we'll talk to you in a quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.