Sprott Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 7 speakers on the call.

Operator

Welcome to Sprott Inc. 2023 Third Quarter Results Conference Call. At this time, all participants are in listen only mode. Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to speak for questions. As a reminder, this conference is being recorded today, November 1, 2023.

Operator

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 Security Laws. 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 and A for the quarter and Sprott's other filings with the Canadian and U.

Operator

S. Securities Regulators. I will now turn the conference over to Mr. Whitney George. Please go ahead, Mr.

Operator

George.

Speaker 1

Thank you. Good morning, everyone, and thanks for joining us today. On the call with me today is our CFO, Kevin Hibbert and John Cimaglia, CEO of Sprott Asset Management. Our 2023 Q3 results were released this morning and are available on our website where you can also find the financial statements and MD and A. I'll start on Slide 4.

Speaker 1

Despite the challenging market conditions, We continued to grow during the Q2 with our assets under management increasing to $25,400,000,000 We also reported our 17th consecutive quarter of net sales, driven largely by our energy transition strategies. This area has been a bright spot for Sprott since we launched our first uranium vehicle in 2021. Energy transition assets now account for approximately 25% of our consolidated AUM. A key area of focus this year was the strategic exit of all remaining non core businesses across the company. This initiative led to the divestment of our former Canadian broker dealer in the Q2 of this year.

Speaker 1

And in the Q3, we successfully exited our last remaining non core asset management business that was domiciled in Korea. The results of our second and third quarter divestitures of non core businesses is that we are now far leaner, More focused organization. We have reduced our headcount by 27%, but increased our AUM and revenue per employee by 64% 60% respectively to industry leading levels. At the same time, we continue to invest in new talent, particularly in our sales and marketing groups. With that, I'll pass it over to Kevin for a look at our financial results.

Speaker 1

Kevin?

Speaker 2

Thanks, Whitney, and good morning, everyone. I'll start on Slide 5, which provides a summary of our historical AUM. As Whitney mentioned, we finished the quarter at $25,400,000,000 up $256,000,000 or 1% from June 30th this year and is up $2,000,000,000 or 8% since the end of last year. On both the 3 9 months ended basis, We benefited from strong uranium prices and flows to our exchange listed products, which more than offset the exit of our non Korean Our non core rather Korean asset management business. We also benefited from capital raises in our private strategies funds.

Speaker 2

Slide 6 provides a brief look at our 3 9 month earnings. Adjusted base EBITDA was $17,900,000 in the quarter, up $1,000,000 or 6% from the same 3 month period ended last year. On a year to date basis, adjusted base EBITDA was $53,100,000 up $209,000 from the same 9 month period ended last year. The increase in the quarter and on a year to date basis was due to higher average AUM in our Exchange Listed Products and Private Strategy segments, more than offsetting lower commissions due to the sale of our former Canadian broker dealer. As Whitney mentioned, we completed the final divestitures of non core legacy businesses with the exit of Korea this quarter.

Speaker 2

This means that our future earnings growth and momentum will no longer be hampered by earnings offsets as we replace non core earnings sources with core earnings sources. This not only bodes well for our future earnings trajectory, but also for the quality of our earnings moving forward. Finally, Slide 7 depicts our balance sheet in the specific context of our financial flexibility. We believe our balance sheet strength is evidenced by the level of net investable cash and liquid co investments we build over the years, which as you can see on this slide has grown by over 32% over the last half access to a fully committed credit facility and our conservative use of leverage. We believe this provides us with ample capital and liquidity to continue building scale in our core AUM in a matter that is highly accretive to our shareholders.

Speaker 2

For more information on our revenues, expenses, EBITDA and balance sheet, you can refer to the supplemental information section of this presentation as well as our second apologies our Q3 MD and A filed earlier this morning. With that said, I'll pass things over to John.

Speaker 3

Thank you, Kevin, and good morning to everybody. Just starting on Slide 8. In mid-twenty 21, our exchange listed products suite consisted of 6 funds in a single category, which was precious metals. Since then, we've been extremely focused on broadening our product suite through a combination of acquisitions and organic fund launches to capture what we believe is a new commodity super cycle that will be largely driven by energy transition and security needs. Our suite of funds now provides investors with the ability to invest across a range of commodities including uranium, lithium, copper, nickel and other critical minerals.

Speaker 3

Our expansion has also been geographic with many of our funds having global reach as well as local listings in the UK and across Europe. While each commodity has different fundamentals and therefore is positioned at different points along its cycle, building a broader range of funds provides us with optionality and diversification. We will continue to look for opportunities to design new funds and acquire existing ones where our expertise, brand and knowledge can allow us to provide differentiated and high value added offerings in the market. Our product suite now comprises 13 funds and has grown from $13,000,000,000 in assets in 2021 to $20,000,000,000 a 52% gain in less than 2.5 years. Next slide please.

Speaker 3

On Slide 9, I'd like to highlight the strength and success of our uranium suite of funds. Since June of 2021 when we acquired UPC, our assets in this category have grown from $0 to $6,400,000,000 fueled by 2 acquisitions, strong net inflows and market appreciation. Uranium, as Whitney mentioned, has been a bright spot this year with the commodity price gaining just over 50 This has helped contribute to a $65,000,000,000 gain or 71% in our uranium AUM year to date. The price gain is being driven by the acceleration of buying by utilities in the term and spot markets, lingering geopolitical risks Heightened by the recent coup in Niger, which accounts for about 5% of global uranium production, has made security of supply paramount for utilities. Despite being up 50% year to date, we believe the uranium price has further potential upside to incentivize future production in order to meet the growing uncovered after lagging the gains in the spot commodity price for an extended period.

Speaker 3

Over the past 3 months, uranium equities have begun to outperform the spot price with flows into uranium mining ETFs resuming. On Slide 10, We show the relative market share of AU sorry, relative market share of market cap and flows for the Sprott Physical Uranium Trust Since its inception compared to other uranium investment vehicles in the marketplace, at the time of Spud's inception, its share by market capitalization was 54%. It currently stands at 77% by capturing 86% of the cumulative dollar inflows and by trading closer to its net asset value. On Slide 7 excuse me, 11, we provide a similar market share analysis for with our uranium mining ETFs. Since our acquisition of the Northshore Global Uranium Mining ETF in April of 2022, Our market share of AUM in the U.

Speaker 3

S. And in Europe has increased from 34% to 44%, driven by superior fund performance, sales and new product development. Year to date, our collective sales have been excellent by capturing 72% of overall net flows. We attribute these results to a number of factors, including better designed indexes, specialized knowledge and expertise and prolific marketing. Moving to Slide 12 summarizes our net sales for the quarter and post quarter.

Speaker 3

While Q3 sales were soft due to low interest in precious metals, which resulted in modest redemptions, spot returned to capital raising in September. Subsequent to quarter end, the price of gold has strengthened, which has helped generate new sales and lift our AUM. Moving to Slide 13, it summarizes our flows for our ETF product suite. After a slow few months in the summer, sales turned positive in August and have As we discussed earlier, our 3 uranium mining ETFs are leading the way there. All of these funds are well positioned to capture flows And with that, I'll pass it over to Whitney.

Speaker 1

Thanks, John. On Slide 14 now, our Private Strategies update. Combined lending and streaming strategies, AUM was It's Annex Fund, but majority of the assets were raised during the Q2 that we reported. Total streaming and royalty AUM now stands at $1,100,000,000 Slide number 15, the summarize. As I noted at the beginning of the call, Sprott continued to grow during the Q3 despite the challenging period in global markets.

Speaker 1

We're very pleased with the success of our rapidly growing energy transition franchise and look forward to expanding out offerings in this product suite. The cleanup of our non core business is now largely complete allowing us to focus entirely on our key growth areas. Our product suite and client base are rapidly evolving and we're making investments in sales and marketing talent to continue attracting new assets and providing the highest level of client service. It's still early on, but we have seen strong performance in our core themes early in this quarter, both in gold and uranium. I'd note that the World Council reported the 3rd quarter saw the 3rd highest central bank purchases of gold on record compared to the highest quarterly purchases last year in the same period, but well ahead year to date from where they were on last year's record.

Speaker 1

Looking ahead, we are very well positioned to create value for our clients and shareholders with our highly differentiated precious metals and energy transition strategies. And that concludes our remarks for today's call. I'll now turn it over to the operator for some Q and A. Operator?

Operator

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. Please standby while we compile the Q and A roster. Our first question comes from the line of Mike Kozak of Cantor Fitzgerald.

Speaker 4

Yes. Good morning, everybody. Just a few questions from me. First, what's your dialogue been like with the OSC more recently regarding the size of the shelf on the uranium trust and the potential size of the redemption feature that's likely to go in. And what I mean by that is, like what assurance can you provide today that the amount of new issuance on the uranium trust that they could potentially do in any year will always be larger than what could potentially be redeemed?

Speaker 3

Yes. Hi, Mike. It's John. While the conversations with OSC are ongoing, Over the last two and a half weeks, we've been quite busy here in terms of providing them with a number of documents and proposals that cover everything from overviews of the uranium market, how it works, How spot what spot's role in that as well as a proposed redemption feature and also A preferred dollar amount, I guess, of ATM issuance going forward. So All of these documents have, as I said, been submitted in the last two and a half weeks, and we're waiting for responses.

Speaker 3

So I don't have any clarity yet. But as far as all of the requests that we were given, we've, In our minds have fulfilled all those and now it's time to reengage with them, which we would hope would be forthcoming. We obviously don't control the process, But so far we've had very constructive dialogues with them and we're confident that we can get to an outcome that is that works for our shareholders, which we're very, very focused on ensuring that We can continue to grow the trust, continue to make it liquid and investable, and obviously, we're very focused on ensuring that Trust trades very close to its net asset value, which recently has done a very good job of tracking it. So We've got a number of objectives and turn.

Speaker 4

Okay. And I mean in your previous dealings with the regulators, I mean what's Turnaround on something like this, is it kind of before Christmas or into Q1 or I mean to the extent you can provide some guidance?

Speaker 3

Resolution because we would like to provide clarity to the marketplace and our shareholders, but it's not a timeline we can control.

Speaker 4

Okay. Okay, fair enough. So the second question is, the last quarter, I think you reported an 18 or $19,000,000 line item gain related to a previously unrecorded contingent asset. Has that now all been monetized? And if not, how much is left to go?

Speaker 2

Hey, Mike. It's Kevin here. Short answer is no. It has not all been monetized yet. I don't have a lot of visibility that I can unfortunately share at this time about when it will be, but just know that it's certainly the intention to Be expeditious in terms of that exit.

Speaker 4

Okay. And then maybe finally, switching gears a little bit, just looking at The outflows in Q3 on the gold and silver product. My question is, how much penetration Does Sprott have into Japan? And I bring that up for two reasons. 1, there's obviously a ton of investment capital over there.

Speaker 4

And 2, I don't know how closely you guys look at the yen, but gold prices In Japanese yen are like have gone parabolic. And I have to think that there's a massive market out there for PHYS and PSLV. So How much effort have you guys ever put into marketing over there in Japan?

Speaker 3

Yes, it's a great question. I mean, I think a lot of Western Asset managers have dreamed about somehow penetrating the Japanese market over the last 20, 30 years, given 0 interest rates have been existence there forever. I think the reality is it's very hard to penetrate into some of these markets because of home country bias and almost Near kind of oligopoly strength of financial institutions, which are very concentrated. So I think the answer for us is very similar. It's been We've not had a lot of engagement, from that particular market in a category you would think they would be buying and the drove given The alternatives are not that compelling.

Speaker 3

But as we have experienced with some of our other funds, When a category does come into favor and when a marketplace is interested, we've done a very good job in terms of capturing global flows from a number of different institutional investors. I think the uranium trust is probably the best case study in terms of having a differentiated product It is very transparent in the way it operates and being able to scale and provide liquidity to institutions is quite valuable. So we would love to engage with different parts of the globe, But Japan is one that we have not yet really had much traction with.

Speaker 4

Okay, fair enough. That's it for me. I'll turn it

Speaker 5

over.

Operator

Thank you. Please stand by for our next question, which comes from the line of Raseeb Bhanji of TD Securities.

Speaker 5

Good morning. If I could go back to the uranium crusher, the redemption future that you're considering introducing, So I think almost a year ago when the uranium interest was trying to get an listing on the New York Stock Exchange, I guess the biggest factor of that not going through was the interest not having a redemption future. So If the redemption feature does come into play down the road, is that still on the plate and you're trying to get a listing on the New York Stock Exchange?

Speaker 3

Sure. Great question. In April of 2022, the SEC denied our application to list To cross list the trust, and it was really on the back of two reasons. 1, all commodity stockpiling funds there require a monthly excuse me, a redemption feature of some sort, and second of all, a real time Spot market price for the underlying commodity. In the uranium market, we would love to have a real time spot market price, But it's just not there in terms of one that I think you can depend on.

Speaker 3

I think our involvement in the market and the amount of Buying activity and our voluntary reporting of all of that to the marketplace has helped enormously in terms of price discovery and transparency. But having said that, what we're focused on right now as a discount management tool with the OSC is a limited redemption option. We're not sure that, that limited redemption option would be would meet the standard listing requirements of the SEC. So at this time, what we're trying to focus on is implementing the redemption option in Canada with our local regulator. And I'm going to emphasize a few things.

Speaker 3

It's limited in size, meaning the percentage of the fund that would be eligible for annual redemption. It would be limited in the frequency per year and what we propose to OSU is twice per year. It would be limited in terms of the parties that would be eligible to take Title to physical uranium, that obviously would limit it to a number of utilities, producers and certain traders. And we think that's very important. And finally, it would be limited in terms of the Dollar amount of material in physical form that you would be eligible to redeem, and our proposals are standard Trading lot of uranium, which right now is $7,400,000 So all of these attributes that I just outlined have been proposed, have not been approved, but we've had initial dialogue with our regulator and we're hoping for some more concrete feedback on that.

Speaker 3

We are not contemplating to try to cross list in the U. S. For a few reasons. 1, we do not want to have a open ended redemption option, which may be a requirement. 2, I think it's fair to say that it is a very politically charged commodity right now with 15 different bills working through the House.

Speaker 3

They have something to do with the nuclear fuel supply chain or uranium. Obviously, a lot of these have to do with The desire to transition away from Russian suppliers, but it's something that we just don't want to get entangled with and And finally, and the most important point, is that we've been able to raise over $2,000,000,000 in the trust, having it listed on the TSX without any trouble. And finally, the fund is also listed in the United States through the OTC Best Market, where Retail investors can readily access the trust. So we don't really think we're losing anything by not being cross listed and we don't think The downside is worth the distraction right now.

Speaker 5

Yes, that's good color. Thank you. I had maybe 1 or 2 quick questions. The quarter had a tax reversal This time, could you give the context as to what led to the reversal?

Operator

Sure. So

Speaker 2

that reversal relates to the item that Mike touched on around The previously unrecorded contingent asset, basically a few years ago, we did an acquisition. It was a share for share exchange and the long and short of the matter is we recovered some of those shares that were never taken up. We determined or concluded rather the tax planning around that number this quarter. So last quarter when we booked it, we had to set up a preliminary provision knowing that we would potentially adjust it to the extent we were successful in Our strategic tax planning, which we were this quarter. So essentially we've been able to convert The accrual to a tax accrual against taxable capital gains versus ordinary income, Which was the original booking that we did last quarter.

Speaker 2

So that's the reversal you see there to bring down the effective tax rate against that tax basis.

Speaker 5

Okay. Understood. This might be a stupid question, but are there any more, I guess, Tax credits left that you could use down the road?

Speaker 2

Say that again. Are you asking if there are future tax credits coming down the road?

Speaker 5

Yes, from this contingent asset.

Speaker 2

No, not yes, nothing from this specific asset. Now in the past, when you looked at our numbers, you would have seen that we had some pretty meaningful Future tax assets and tax pools that we could take advantage of, those are all gone now because those were related to Primarily the Private Strategies business when we first started that out and we had acquired some pretty good Tax pools we could carry forward as we've generated earnings, but now that the company is now on its 5th or 6th year Earnings growth and much of the same for the foreseeable future, I don't see a lot of meaningful tax pools coming, Unless there's something we can squeeze out of future inorganic growth opportunities, but those we're not Talking about it this time.

Speaker 5

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

Operator

Our next question comes from the line of Geoff Kwan of RBC Capital Markets.

Speaker 6

Hi, good morning. Just had one question. I was just wondering with both on the Private strategy side as well as your other products, kind of progress or where you've seen shifts in terms of The mix of investors, so for example, on the private strategy side, I mean, you had some of them where you've had multiple fundraisers, kind of how Has that mix of LP investors changed whether or not it's type of investor geography? And then also with some of the other strategies where you do get insight, And are you noticing any difference in mix of institutional versus retail, any sort of geographic Differences or trends?

Speaker 1

I'll start answering that, and then hand it off to John because he's really been on the front lines. Our private credit strategies are really designed for very large institutions. They have very high minimums and long lives. So they continue to be owned and invested in by A fairly narrow group of very large institutions. Where I think things get really exciting is when we start talking about uranium.

Speaker 1

And John, why don't you give a little color on that?

Speaker 3

Yes, sure. Hi, good morning, Jeff. Yes. I think it's fair to say that our investor base has transformed enormously in the last two and a half years, and it was really driven by The uranium franchise, what we have experienced is very high levels of institutional engagement on a global scale. Uranium is a category that has a lot of following right around the globe, primarily Family offices, hedge funds, other specialty funds that focus on energy transition, cleantech, etcetera.

Speaker 3

What we've experienced in the last 2 months or so has been a broadening of that interest to more generalist funds, And a lot of these people are looking around for new investment ideas. They're looking at uranium and saying why is this thing up 50% year to date when everything else has been down. And a lot of them have been reaching out to us directly or participating in different marketing events that we do to learn more about the category because in many cases they don't know a lot about it and because of our expertise and our involvement in the sector, We're usually their 1st call to help them through that learning process. So very global, very institutional. In the uranium equities, we've also noticed a shift from predominantly retail investors in the last few months 2 more, I'm going to call it, advice channels.

Speaker 3

Those would be like broker dealers, REAs in the United States, as well as institutional investors that Are now rotating capital into the uranium mining ETFs, and that's been very positive for our franchise as well. And the last thing I would say is, compared to our traditional precious metals type investors, the demographic is much younger. We often will be talking to people in their 30s or 40s that are interested in energy transition as a very large thematic versus precious metals investors, which typically tend to be 50 plus. So more global, younger, I would say more institutional is a good summary of how our audience has changed in the last two and a half years.

Speaker 6

Okay. Thank you.

Operator

Thank you. I would now like to turn the call back over to Whitney George for closing remarks. Sir?

Speaker 1

Thank you. And thank you everyone for participating on the call. We appreciate your interest in Sprott and look forward to speaking to you again after our year end results. Have a good morning.

Operator

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

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Key Takeaways

  • Assets under management increased to $25.4 billion with 17th consecutive quarter of net sales, and energy transition assets now represent 25% of AUM.
  • Completed exits of non-core businesses including a Canadian broker-dealer and Korean asset management, trimming headcount by 27% while boosting AUM per employee by 64% and revenue per employee by 60%.
  • Q3 AUM rose 1% sequentially and 8% year-over-year to $25.4 billion, delivering adjusted base EBITDA of $17.9 million, up 6% year-over-year, and $53.1 million year-to-date.
  • Strengthened the balance sheet with a 32% increase in net investable cash and liquid co-investments over six months, backed by a fully committed credit facility and conservative leverage.
  • Expanded the product suite from 6 to 13 exchange-listed funds spanning precious metals and critical minerals—growing that segment’s AUM from $13 billion to $20 billion—and built a $6.4 billion uranium franchise with leading market shares.
AI Generated. May Contain Errors.
Earnings Conference Call
Sprott Q3 2023
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