Sprott Inc.
Q1 2021 Earnings Call Transcript

Published: 10 May 2021

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2021 First Quarter Results Conference Call. As a reminder, this conference is being recorded today, May 7, 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 provisions of the Canadian provincial securities law. Forward-looking statements involve risks and uncertainties that 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.

[Peter Grosskopf:]

Good morning, everyone, and thanks for joining us today. On the call with me today is Whitney George, the President of Sprott; Kevin Hibbert, our CFO; and John Ciampaglia, the Chief Executive of Sprott Asset Management. Our 2021 first 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 on Slide 4. The resilience of Sprott's business model was demonstrated during this quarter as we continued to deliver consistently strong results for our shareholders despite a pullback in precious metal prices. We were very pleased with our quarter. The first quarter of 2021 saw gold and silver prices declined by 10% and 7.5%, respectively, driven primarily by yield increases in the U.S. treasury markets and investor apathy for gold, while they were convinced about strong economic growth and the strength in other markets. Precious metals have rebounded in the second quarter as yields have retreated and mining equities have performed better as investor interest has gradually started to increase. Our Physical Trust continue to expand their client base and take market share away from some of our larger competitors. PSLV was a standout in Q1 as interest in Physical Silver surged. We recently announced we're expanding our exchange-traded products segment through an agreement to acquire Uranium Participation Corp., the leading physical uranium vehicle in the market. John will talk about that transaction in more detail in a few minutes, but we believe it is a perfect fit alongside our precious metal Physical Trust and will appeal to our client base, both in the U.S. and internationally. With that, I'll pass it over to Kevin for a look at our financial results.

[Kevin Hibbert:]

Thanks, Peter, and good morning, everyone. I'll start on Slide 5, which provides a summary of our AUM as of March 31, 2021. AUM was $17.1 billion this quarter, down $300 million or 2% from December 31 of last year. Our AUM was largely impacted by market value depreciation that was partially offset by strong inflows into our various fund products in the quarter, in particular, our Physical Silver Trust, which saw a little over $1.1 billion of inflows in the quarter. And subsequent to quarter end, management estimates that consolidated AUM as of May 4, was $18.2 billion, up $1.1 billion or 7% from March 31.

[John Ciampaglia:]

Great. Thank you, and good morning, everybody. Just turning to Slide 7. As Peter mentioned, we had a very strong quarter for sales, despite relatively soft markets for both silver and gold over the quarter. February, as you can see from the chart, we had extraordinary sales, and I believe it was our single highest sales month of $856 million. As Peter also mentioned, the Sprott Physical Silver Trust continues to be the dominant sales product for us, accounting for almost all of our net flows in Q1. In Q2, thus far, sales momentum remained solid at about $220 million. And if we have a look at where we are year-to-date to May 4, we're about 50% of our sales numbers in calendar year 2020. Moving to Slide 8. As I mentioned, silver was really the story in Q1. In 2020, it outperformed gold by a wide margin, but it lagged in terms of sales on a global basis. Clearly, this trend has reversed as investors are now much more interested in silver versus gold. And there's a number of reasons driving that. First of all, silver is incredibly cheap, remains well below its high of almost 10 years ago. So a lot of investors are viewing silver as being undervalued. It's also benefiting from its dual role as both a monetary and industrial metal. And if you think about what we're seeing in inflation and with many commodities, silver is picking up part of that benefit of being in that reflation trade.

[Whitney George:]

Thank you, John, and good morning, everybody. You can tell from the size of my slide that it was very quiet in the managed equities business in the first quarter. As Peter mentioned, equities were in a collective mode for all of the quarter, having had a tremendous year last year. So we're not surprised the team has been very busy. M&A activity has been near record levels, lots of financing. So while it seems quiet from the outside, we've been very busy on the inside. Fortunately, redemptions have slowed. And we're picking up inflows to the point where our net flows are positive. We've added an institutional SMA, a new mandate, during the quarter and a new SMA to be marketed by our high net worth advisers in Carlsbad, managed by Maria that covers silver equities. So we've been busy. I'll remind everybody, most of our products are new, and many of them small. And so to that end, we have really been focusing on expanding our sales and marketing activity, adding a couple of very good professionals, very recently, with a lot of experience, that I think will help introduce our new products as well as our legacy products to the various marketplaces. And that's about all I have to offer. And I think it's back to Peter to talk about private strategies.

[Peter Grosskopf:]

Thanks, Whitney. Turning to Slide 12. Much like the public side, the private side has been busy internally. Lending and streaming strategies continue to perform extremely well. So we're happy about that, and they're adding capital commitments. The combined AUM for the segment is now approximately $1 billion. Our first lending LP is mostly wound up and the team is focused, continuing to deploy for LF2, the Lending Fund II. And our streaming strategy has now been very active, both raising and deploying capital. I think they're probably approaching $150 million or so. Turning to Slide 13 for some final comments. As you can tell, the business is performing really well with record highs in both AUM and quarterly EBITDA. We're really happy with the way the platform stands right now. We're really happy with performance and we're really happy that each and every division is making a contribution and a growing contribution, and they're all working well together.

[Operator:]

I show our first question comes from the line of Gary Ho from Desjardins Capital Markets.

[Gary Ho:]

Just the first question on the UPC transaction. Are there significant shareholder approval process involved with this? I remember there were some hurdles with the Central Fund transaction before. Just wondering if there's major differences.

[John Ciampaglia:]

Gary, it's John. No, no material differences between the approval process for this and going through Central Fund. We've gone through this a number of times. So we've -- we know the drill. We've got a lot of good legal counsel behind us to get this through. And so we're expecting a vote in early July with the closing shortly thereafter. That's the current time frame.

[Gary Ho:]

And no pushback from any of the shareholders, currently?

[John Ciampaglia:]

Thus far, I have not had any engagement with shareholders that have not expressed a positive response. Now having said that, we still have to publish a circular and with all the nitty-gritty details on it. But thus far, based on what we've announced, I think the marketplace is cheering the deal. So that's the initial reaction we've got.

[Gary Ho:]

Great. And then staying on the same theme here. Are there other physical uranium funds out there still in the marketplace that you might be able to bolt-on to add greater scale here?

[John Ciampaglia:]

Well, there's really only one of any material size in the world, and that's Yellow Cake plc, which is listed on the London Stock Exchange. I can't really comment on that, but there is one other large fund out there. And I think there's lots of room for both of them to grow. And we think the category is going to attract a lot more interest as it strengthens over time.

[Gary Ho:]

Okay. Perfect. And then my last question, just on the equity origination side. I know it can be lumpy and the brokerage business benefited from it this quarter. How does the pipeline look so far in Q2? And maybe outlook for the balance of the year?

[Peter Grosskopf:]

It's Peter. The brokerage divisions are both doing well, U.S. and Canada. So we have a private client side to the business, which is adding to its AUM and seems to have a lot of inflows. So that's been steady and steadily increasing. And then on the institutional side, the sector is just much busier than it used to be, and the guys are kind of run off their feet. The teams run off their feet. It's broadening to other commodities now. So we don't expect any change to that. I wouldn't look for any massive quarters, and I don't see it falling off either.

[Operator:]

I show our next question comes from the line of Geoff Kwan from RBC Capital Markets.

[Geoff Kwan:]

Just some questions, the performance fees that you booked in Q1, it looks like that came from Lending Fund I. Just wanted to see if you can confirm that. And if there's -- that's all the performance fees you expect to collect? Or would we see some come up in future quarters?

[Kevin Hibbert:]

Geoff, it's Kevin here. I'll take the first half of that around the components, and then I'll turn it over to Peter to speak on the outlook going forward. But yes, you are correct. The lion's share of that carrying performance is the carry from, from LF1. But then, to a lesser extent, there's some performance fees coming from some of the managed equities products we have as well that round out that total that you saw there.

[Peter Grosskopf:]

In terms of the outlook, it's always really hard to tell. LF1 needs to finish wrapping up. So I think there might be some further flow from that fund. Really, LF2 is much bigger and has had very strong performance the way we see it right now. But it's too early to forecast exactly when those performance fees will kind of be harvested. So it looks like it's a slowly ramping business, and it might be quite lumpy in terms of performance fees.

[Geoff Kwan:]

Okay. So that's helpful. And then on Lending Fund II, though, is like timing-wise ballpark, like would we be seeing that 12 months, 18, 24 months? And also, 2 was, if I remember correctly, I think that performance restructure might also be different? Not just the size of the fund, it's bigger, but the structure of the performance fee is different? Can you just.

[Peter Grosskopf:]

It's not materially different. It's not materially different. And I would say 12 months would be really early and 24 months might be more realistic in terms of timing.

[Geoff Kwan:]

Okay. And the performance fee -- the payouts of the compensation, I think the math was something like close to 60%. Is that typical for these funds? And are there different comp allocation payouts? Are they similar for other products that you have, that have that? Or is it all the same?

[Peter Grosskopf:]

I think on the private equity style funds, you would see that across the industry, it's quite normal for the house and the team to split in the rough percentages of 50-50. On the public fund side, those splits are a bit lower, and it depends on the exact fund, probably closer to 25% or 30%.

[Geoff Kwan:]

Okay. So 50-50 on the private equity and then the 25% of the performance fee would be for more of the public stuff. Is that correct?

[Peter Grosskopf:]

Yes, that's the ballpark.

[Geoff Kwan:]

Okay. And just my last question was on the uranium transaction, assuming it closes, how should we kind of think about the associated revenues and also the expenses that you'll be taking on?

[John Ciampaglia:]

Sure. Geoff, it's John. Well, the proposed management fee is 35 basis points. And I would assume that the margin on the fund wouldn't be too materially different than the rest of our Exchange Listed Product suite. It might be a little bit lower in the beginning because we're going to be giving it more push and profile and support. But I think over time, it will probably normalize more to the current margin of the other products.

[Operator:]

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

[Graham Ryding:]

Peter, can you just remind us what the difference in size is between your LF2 and LF1?

[Peter Grosskopf:]

Oh, boy, you're stretching my memory now. Kevin, help me out if I'm a bit off here, but I recall LF1 was probably in the range of $550 million and LF2 is probably in the range of $800 million, $850 million in total.

[Kevin Hibbert:]

Sounds about right, but I can't be certain. I'd have to go back and check.

[Graham Ryding:]

Is that Canadian or U.S.?

[Peter Grosskopf:]

No, those are all U.S. dollars.

[Graham Ryding:]

U.S. Okay, perfect.

[Peter Grosskopf:]

We don't talk much about Canadian dollars anymore.

[Graham Ryding:]

Yes, fair enough.

[Kevin Hibbert:]

If it helps, Graham, the majority of what you're going to see as the AUM here in Q1 would be the LF1.

[Graham Ryding:]

Got it. Understood. And then the performance fees that you booked in Q4, were those related at all to this? Or no, what drove the performance fees in Q4?

[Kevin Hibbert:]

So you're asking about the Q4. So what we booked in Q4, if it's coming from similar sources as where this one came from?

[Graham Ryding:]

Yes. Was it related to LF1 as well.

[Kevin Hibbert:]

No. It's -- no. So in Q4, it was mainly performance fees coming out of our managed equity segment. This quarter, it's primarily carried interest that came from the lending segment. And then to a lesser degree, there was a little bit more coming from some of the flow-through products in managed equities.

[Graham Ryding:]

Okay. Understood. In the cash flow statement, there was a $27 million payment for management contracts. What does that relate to?

[Kevin Hibbert:]

So if you recall in the -- we talked about at the -- in the Q4 Board meeting -- sorry, the Q4 analyst call, the restructuring of the contingent consideration with the former owners of Tocqueville funds we acquired. And we were able to successfully renegotiate those terms to our advantage. The impact of that being that we accelerated the payments to them. The total amount of the payment was $30 million, $3 million of which was equity and the other $27 million is cash. So that's why it shows up in the cash flow statement.

[Graham Ryding:]

Got it. Okay. That's helpful. And then, Peter, I'm just interested in your comment around the tokenization of gold, how you think it's going to be adopted by the gold sector. What would be the main benefit that you think is going to drive the industry in that direction? And then secondly, can you remind me how you're positioned to benefit from that trend? I think you did some investments maybe a couple of years ago towards that.

[Peter Grosskopf:]

Yes. So I think the benefit is that gold could be registered via blockchain, become more efficient in terms of trade reporting, standardization of contract. It could also be used inside and outside of the financial system. And perhaps attract a new generation of users who are more interested in using it as a payment mechanic. And to transfer in and out of their accounts. So that's the benefit. Also providence to prove where the gold is from that it's good gold, good delivery gold. In terms of how we're positioned, we made some VC-type investments about 3, 4 years ago. I would say that at least 2 or 3 of the 4 were successful in proving their technologies, but only one of them has been a kind of guaranteed commercial success, and that's kind of what you would expect in those early-stage investments. Now I believe that the tokens exist. So there's three of the process will be commercialization. So bigger volumes. And we would look to participate by creating some kind of a product or company with a margin just brought in it.

[Graham Ryding:]

And would you be managing trade exchange tokens? What's the.

[Peter Grosskopf:]

Too early to say exactly.

[Graham Ryding:]

Okay. And if I could be greedy would be -- there was $107 million of inflows in the other category. Was that your U.S. discretionary accounts? Or was that Asian private equity strategy?

[Kevin Hibbert:]

Yes. Mainly the PE.

[Operator:]

I'm showing no further questions in the queue. At this time, I'd like to turn the call back to Mr. Grosskopf for closing remarks. Please go ahead.

[Peter Grosskopf:]

Okay. Well, we're delighted to talk to you again this quarter. Thank you all for your interest. We will look forward to reporting to you next quarter, and good luck out there.

[Operator:]

Thank you for attending today's conference call. You may all disconnect at this time. Everyone, have a good day.