Sprott Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 5, 2023

There are 6 speakers on the call.

Operator

Morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc. 2023 First Quarter Results Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session.

Operator

Instructions will be As a reminder, this conference is being recorded today, May 5, 2022. On behalf of the speakers that follow listeners are cautioned that today's presentation and the response 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 And uncertainties and undue reliance should not be placed on such statements. Certain material factors are 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. Witten George. Please go ahead, Mr.

Operator

George.

Speaker 1

Thank you very much, and good morning, everyone, and thanks for joining us today. On the call with me today is our CFO, Kevin Hibbert and John Ciampaglia, CEO of Sprott Asset Management. Our 2023 Q1 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 turn to slide 4. Despite volatile market conditions, we delivered solid results during the Q1.

Speaker 1

We continue to benefit from our positioning in precious metals and energy transition investments, delivering strong sales and performance across All of our fund offerings. As a result, I'm pleased to report that we closed the Q1 with a record high AUM of $25,400,000,000 During the quarter, we further expanded our energy transition product offerings with the launch of 5 new ETFs. Sprott now has 8 different strategies in this growing category, offering investors both exchange listed and actively managed investment options. Our team continues to develop new product offerings and we expect to introduce additional strategies over the course of 2023. In April, we completed the management buyout of our Canadian broker dealer.

Speaker 1

This transaction was part of an ongoing process to streamline our business And increase our focus on our core asset management business. We believe we are exceptionally well positioned for the current market environment. Our outlook for the remainder of 2023 has not changed. The impacts of the Fed's historic rate hike campaign are currently Being filled throughout the financial system with a series of bank failures being the 1st dominoes to fall. It's becoming increasingly clear that the Deteriorating credit conditions will eventually trigger a recession.

Speaker 1

At that point, we expect rate cuts and a return to some sort of quantitative easing. In this scenario, our positioning in precious metals and energy transition investments should reward our clients and shareholders over the next decade As a global realignment of critical mineral supply chains and production unfolds. With that, I'd like to pass it over to Kevin for a look at our financial results. 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 with a record high $25,400,000,000 of AUM, Up $1,900,000,000 or 8 percent from December 31. Our AUM benefited from strong market value appreciation across the majority of our fund products and strong inflows to our private strategies and exchange listed products. Slide 6 provides a brief look into our 3 month earnings.

Speaker 2

Adjusted base EBITDA in the quarter was $17,300,000 down $852,000 or 5% from the Q1 of last year. 1st quarter Adjusted base EBITDA was negatively impacted by lower commission income on a combination of weaker mining equity origination activity in our former Brokerage segment and slower at the market activity in our physical uranium trust. However, Net fee growth from our core AUM was strong during the quarter. We anticipate this trend continuing throughout the remainder of the year, Eventually leading to NextE growth more than offsetting the loss of transaction based income from our former brokerage segment. Finally, as you can see on slide 7, our balance sheet remains strong As seen by net cash and co investments representing approximately 20% of our total assets and we're largely underleveraged at a less than one times debt to EBITDA ratio and an 11% debt to capital ratio.

Speaker 2

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 Q1 MD and A filed earlier this morning. With that said, I'll pass things over to John.

Speaker 3

All right. Good morning and thanks Kevin. Just want to talk a little bit about The Exchange listed product suite. I think we're feeling very good about the improved results in Q1 with $209,000,000 in net sales, Plus an additional $122,000,000 since the end of the quarter. And this puts us in consecutive monthly net sales of 45 Consecutive months, which I think is a great accomplishment given how challenging the market conditions have been, particularly In the last 12 months since the Federal Reserve started to tighten interest rates.

Speaker 3

We're definitely seeing renewed interest in precious metals with gold being kind of the leader there. As Whitney mentioned, growing anxiety about financial market conditions in banking, certain banking institutions is definitely spurring some investors to move to the safe haven of gold. But having said that, we are not seeing across the whole global industry Massive return of inflows into the sector yet. So despite gold hitting record highs in a number of currencies, we still think there's lots of room for capital to find its way into So as a result, we think the precious metals funds that we offer are best positioned in this current marketplace. Even though the price of uranium has been volatile this year, it's still up about 10% for the year and that's definitely helped our uranium trust.

Speaker 3

And we expect that more gains are to come in the uranium sector on the ever growing contract book That is building across utilities. Just on the next slide, I'll talk a little bit more about the energy transition funds that Whitney mentioned, we talk to investors all around the world and there's clearly growing investor interest in this thematic As governments around the world are sending very powerful investment signals and providing very substantial investments to crowd in Private capital into the sector. This suite of funds is the perfect complement To our Sprott Physical Uranium Trust, which was really our first product line extension approximately 2 years ago. It's the perfect complement to our precious metals franchise, and I think we're seeing evidence of that right now. We see very strong levels of cross selling and ownership across this thematic.

Speaker 3

Many investors that we talk to that are interested in uranium are also invested in 1 or more of these These funds will appeal to do it yourself investors right up to very sophisticated and large institutional investors on a global basis. They are very differentiated offerings with the competitor set available right now. They offer pure play exposure to the upstream companies that we think are best positioned to benefit due to this long term secular thematic. The underlying indexes for most of these ETFs were co developed by Sprott leveraging our long time experience and expertise in mining in partnership with NASDAQ. 3 of the ETFs are first to market of their kind globally, which include the Junior Copper Miners ETF, The Junior Uranium Miner's ETF as well as the Nickel Miner's ETF.

Speaker 3

All right. Moving over to Managed Equities. I think the story here is really about having a very Strong rebound in performance and AUM in Q1. Clearly, the stronger gold and silver prices we've seen over the last few months have pulled There is often a lag effect between the movement of the commodity prices and the underlying equities, but we are starting to see An improvement in sales across a number of our gold equity strategies over the past few months. I think investors are recognizing That these gold equities represent very good value relative to the current price of gold, which as I said is at all time highs in many currencies.

Speaker 3

And then just shifting over to some of our new product development pipeline. We have been incubating new energy transition and commodity related strategies. This is really all about our strategy of having a full suite of offerings from physical commodity funds to passive equity to active equity strategies. And this we find allows us to be the most consultative in terms of engaging with different investor segments. And with that, I will pass it to Whitney.

Speaker 1

Thank you, John. I'm on Slide 11 now and want to speak a bit about our private strategies. Our combined lending and streaming strategies AUM increased to $2,500,000,000 as of March 31, 2023 due to strong net sales in our lending strategies. Our streaming and royalty strategy is actively deploying capital. The team is adding new fund vintages and strategy extensions with strong support from new and existing LPs.

Speaker 1

As with the rest of our business units, energy transition is an increasingly prominent theme in our private strategies where we are seeing more opportunities to deploy capital into energy transition related metals like copper. It was obviously a very pleasing quarter in a difficult marketing environment for anything in the private area. Now turning to Slide 12 for a summary. To summarize, we're pleased with our performance during the quarter. Our asset base Our next question comes from the line of Scott, Inc.

Speaker 1

2023 First Quarter Results Conference Call. Our next question comes from the line of Scott, Inc. Our next question comes from the line of Scott, Inc. Our first question comes from the line of Scott, Inc. Our first question comes from the line of Scott, Inc.

Speaker 1

Our first question comes from the line of Scott, Inc. Of Positive Net Sales. We are attracting a younger and more international client base through our growing suite of energy transition strategies And we believe we are in the early stages of a multiyear rotation into natural resource investments and we are actively adding investment talent as we increase our asset base. In March, we were pleased to welcome Ryan McIntyre to the team. Ryan is a physical commodities specialist with deep experience as a portfolio manager And was most recently a senior executive of the streaming and royalty company that was acquired in a transaction that closed earlier this year.

Speaker 1

Ryan is already assisting us in growing our high net worth assets in our Managed Equity segment and will strengthen our extensive research expertise, particularly when it comes to physical commodities. As I mentioned at the start of the call, we think we are very well positioned for the current market. We expect deteriorating credit conditions to Jewer:] Trigger a recession forcing the Fed to cut rates and possibly resume quantitative easing. Due to the lag effects of monetary policy, We don't think we've seen the full effects of the dramatic increase in global interest rates. Global realignment of critical The mineral supply chains will unfold over the coming decade, spurring interest in the mining sector, which has been largely ignored In recent decades, Sprott is uniquely positioned as a pure play asset manager in an under allocated category.

Speaker 1

All 4 of our business units are growing nicely. With that, that will conclude our prepared remarks for today. And I'll now turn it over to the operator for some Q and A.

Operator

Our first question comes from Geoff Kwan with RBC Capital Markets. Your line is open.

Speaker 4

Hi, good morning. I just had one question and it's on the your private fund side. It seems like the fee structures I don't know if it's various funds or the future iterations funds. I guess they've seemed like they've changed from the original version. Just wondering if you can talk about that, just How to think about it from a modeling perspective?

Speaker 2

You're asking about the fees In the private strategy space?

Speaker 4

Yes. Yes, like the management fee structure and Also just again, the performance

Speaker 2

fees. Okay. So, I'm trying to understand what it is you're asking. Are you noticing a change in Blended fee rates or something in your models?

Speaker 4

Well, no, it seems like before it was you were earning the fees on when the Capital was called, but now it seems like it might be more when the capital is committed.

Speaker 2

Okay. No, actually that's not correct. We've always had the AUM recognized at the time the capital is committed. And if you look at the Descriptions in the just scrolling here. Give me a second here, Jeff.

Speaker 2

So if you look at Page 6 of the MD and A, we provide the explanations of when the flows are recognized For regulatory purposes, and you'll see a subcategory called capital calls and fee earning capital commitment. So as long as a commitment Sorry, as long as a flow is a commitment and it is earning fees, then it will be captured in our AUM, and that's always been the case. Okay.

Speaker 4

So you're getting the fees when the capital is committed then or only when the capital

Speaker 2

is closed? Yes. It depends on the strategy. Some strategies, we will earn a fee on what is committed. And in those instances, that will be included in AUM just like any Asset manager with a private strategy such as this.

Speaker 2

Not all of our commitments will earn fees, but Certainly, as we move further throughout the years and vintages and the performances as strong as it is in our funds, It enables us to be a little more economic, so to speak, when it comes to what we're charging and when we charge them. So again, When the capital is deployed, we'll earn a full freight management fee. When it is committed in certain strategies, we'll be able to earn

Speaker 4

Okay. And then have the are the fee rates Meaningfully different between the various private fund strategies and also any color you can give in terms of on the performance fee

Speaker 2

I can't get into that.

Speaker 4

Okay. Okay.

Speaker 2

The MD and A, I think that will give you a good sense of what we're generating there, but there are Fairly strict regulatory rules that we have to remain in compliance within the U. S. Around sales of these We can't get into too much on a call like this, certainly a public call like this.

Operator

One moment for our next question. Our next question comes from Graham Ryding with TD Securities. Your line is open.

Speaker 5

Hi. Just on the same theme and maybe just a little bit of color on that $2,500,000,000 in AUM. How is that broken down across Two different strategies now and what exactly was that $700,000,000 inflow this quarter? Was that a new vintage or was that private lending 2, maybe just some color there, please.

Speaker 2

Right. So, I would just say the total AUM in the private strategy space. It's split relatively evenly between our streaming and our lending strategies. And the same goes for the $700,000,000 of flows you saw this quarter, Graham. It was pretty much right down the middle, evenly split between the 2.

Speaker 2

But again, if you're asking about specific strategy breakdowns, again, for the same reason we've mentioned that every quarter over the years, we can't get into Too much details on the exact vintages and what's sitting in them. But generally speaking, across the sub strategies within privates, You're looking at almost an even split between the lending ones and the bespoke streaming ones.

Speaker 5

Okay, great. And what's your visibility here with this AUM looking out next year or 2? Will it keep growing, stay at this level? Maybe What's the strategy or visibility?

Speaker 2

Yes. It's hard to say because at this stage, once we've gotten in Good amount of capital commitments. The focus now is just deploying them. And so our portfolio managers are working hard With their clients of the funds to deploy when it makes sense for those organizations to deploy. So it's really going to be largely transaction based So we don't have an awful lot of visibility to share at this time around when the commitments, for example, would transition into full freight management fees at this time.

Speaker 5

Okay. And then with this broker dealer divestment, Any impact on your private markets business, like any of the people that have gone with the broker dealer, were they involved in managing The private market strategies before and if so, have you had to do any internal transition just around investment management on that

Speaker 1

The answer is no, because our broker dealer business served a different client base With some inherent conflicts between that and our other businesses, which serves investors, There was a lot of careful separation to avoid any regulatory issues or conflicts. So, it was very much in isolation.

Speaker 5

Okay. And the overall margin lift here from this broker dealer being divested in, I'm estimating about 100 basis points, does that sound about right?

Speaker 2

Yes, that sounds about right. But we are investing, and I think Whitney has mentioned this a few times in the past, we are investing In our marketing and sales efforts around our Managed Equities platform, so it is possible for some of the savings that we'd see from a margin We expect to be offset by that growth, but we would certainly expect that the end result would be continued growth in the margins as we continue to grow Our earnings contribution from the managed equity space. So, yes, I think if anything we'd be somewhere in the neighborhood of what You saw this quarter, which was in the high 50s, but it could potentially grow a little bit from there depending on when we make those additional investments.

Speaker 1

I'd like to add, there are tangible mathematical numbers that you can calculate, but there are also intangible benefits From simplifying our business, again, very different businesses. The brokerage business So far more people and capital intensive. And so my expectation is, we'll keep all that margin improvement and may even do a little better.

Speaker 5

Okay, understood. If I could throw in one more. Just Whitney, just I guess gold and it's obviously almost breaking out here. It's got some very strong demand underway. What are the catalysts to either keep this going or moving higher over sort of the next 6 to 12 months in your view?

Speaker 1

Well, in my view, the physical market for gold is very strong, stronger than the sort of derivative markets That we watched today being a good example, central bank buying hit a multi decade record last year. I see no reason for that To not continue again, it seems to me that inflationary pressures are here to Today, I would expect inflation to moderate significantly this year because it's a year over year comparison. But then when we get into next year, Kind of the key drivers, which are deglobalization and our energy strategies are going to continue to put pressure. And again, I think the option of having gold is a currency that's nobody's obligation. We'll continue to appeal to people.

Speaker 1

It's Not widely understood that gold has dramatically outperformed the S and P 500 this century. And my expectation is that it will be a Slow progression, but if the next the last 5 years have been choppy and we've made Progress. So I'm pretty excited about what the next 5 years could bring with some tailwinds.

Speaker 5

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

Operator

One moment for our next question. Our next question comes from Mike Kozak with Cantor Fitzgerald. Your line is open.

Speaker 4

Yes. Good morning, everybody. Just one from me. The uranium trust hasn't really been active at all since mid February And yet the spot uranium price seems to be very well bid at current levels and more recently it's been ticking higher very consistently and that's absent you guys in the market. So my question is, what's your best sense about how tight the spot market volumes are right now?

Speaker 4

My sense is that there isn't much material at all that's Transacting and it really wouldn't take much for the spot uranium price to move higher, but potentially considerably so. Is that your sense as well? I'd just love to get some commentary there. Thank you.

Speaker 3

Yes, sure. Hey Mike, it's John. Yes, I think we would agree with your comments. Clearly, the spot market is fairly tight, and I think utilities are finally starting to Move more in unison in terms of replenishing their inventories. Last year, I think we saw more European based Utilities taking action to procure with U.

Speaker 3

S. Utilities lagging. We think the U. S. Utilities are finally catching up.

Speaker 3

And there's still this unknown lingering uncertainty with respect to any kind of potential supply disruption related to Russia and or Kazakhstan that I think it's creating some anxiety amongst Western Utilities. We've obviously seen In the last couple of years that the price of uranium can move very quickly on a single kind of news point or data point. And I think even though the Trust has been trading at a larger discount than we are happy with, I think the signal that we're seeing from the term market, meaning the contract book as well as the spot market are starting to look Much better, which I think puts the trust in a good position to move. Clearly, The general equity and macro environment have hurt the trading of the trust of late. We talked to a lot of investors that Remain very bullish on uranium, but are clearly in a risk off mode and have deleveraged many of their portfolios with gross Exposure, I think, being at multiyear lows.

Speaker 3

So we think once capital starts going, uranium is a very positive story that will get its fair share.

Speaker 4

Okay. Thank you. That's good color.

Operator

And I'm showing no further questions at this time. I would now like to turn the conference back to Whitney George for closing remarks.

Speaker 1

Well, thank you everyone for participating in this call. We appreciate your interest in Sprott and look forward to speaking to you again after

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Earnings Conference Call
Sprott Q1 2023
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