Sprott Inc. (NYSE:SII) Q3 2023 Earnings Call Transcript

Sprott Inc. (NYSE:SII) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.’s 2023 Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, November 1, 2023. 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&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.

Whitney George: Thank you. 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 third 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. Despite the challenging market conditions, we continued to grow during the second quarter with our assets under management increasing to $25.4 billion. 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 noncore businesses across the company. This initiative led to the divestment of our former Canadian broker-dealer in the second quarter of this year. And in the third quarter, we successfully exited our last remaining noncore asset management business that was domiciled in Korea. The result of our second and third quarter divestitures of noncore businesses is that we are now far leaner, more focused organization. We have reduced our head count by 27%, but increased our AUM and revenue per employee by 64% and 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.

Kevin?

Kevin Hibbert: 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 $25.4 billion, up $256 million or 1% from June 30 of this year and is up $2 billion or 8% since the end of last year. On both the 3 and 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-core Korean asset management business. We also benefited from capital raises in our Private Strategies funds. Slide 6 provides a brief look at our 3- and 9-month earnings. Adjusted base EBITDA was $17.9 million in the quarter, up $1 million or 6% from the same 3-month period ended last year.

On a year-to-date basis, adjusted base EBITDA was $53.1 million, 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 Strategies 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 noncore legacy businesses with the exit of Korea this quarter. This means that our future earnings growth and momentum will no longer be hampered by earnings offsets as we replace noncore 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 built over the years, which, as you can see on this slide, has grown by over 32% over the last half decade. Our financial position is further bolstered by 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. 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 third quarter MD&A filed earlier this morning.

With that said, I’ll pass things over to John.

John Ciampaglia: Thank you, Kevin, and good morning, everybody. Just starting on Slide 8. In mid-2021, 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. Our expansion has also been geographic with many of our funds having global reach as well as local listings in the U.K. 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 opportunity 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 billion in assets in 2021 to $20 billion, a 52% gain in less than 2.5 years. Next slide, please. 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 $6.4 billion, 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% for the year. This has helped contribute to a $65 billion 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 utility requirements which currently stands at 1.5 billion pounds of uranium going out to 2040.

Uranium equities are also attracting investor interest after lagging the gains in the spot commodity price for an extended period. 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 — 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 Sprott’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 our uranium mining ETFs. Since our acquisition of the North Shore Global Uranium Mining ETF in April of 2022, our market share of AUM in the U.S. and 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 design indexes, specialized knowledge and expertise, and prolific marketing. Moving to Slide 12, summarizes our net sales for the quarter and post quarter. While Q3 sales were soft due to low interest in precious metals, which resulted in modest redemptions, Sprott 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 has accelerated since.

As we discussed earlier, our 3 uranium mining ETFs are leading the way there. All of these funds are well positioned to capture flows when investor interest appears, providing us with very valuable optionality and product diversification. And with that, I’ll pass it over to Whitney.

Whitney George: Thanks, John. On Slide 14 now, our Private Strategies update. Combined lending and streaming strategies, AUM was $2.6 billion as of September 30, 2023. During the third quarter, the streaming and royalty team closed its Annex Fund, but the majority of the assets were raised during the second quarter that we reported. Total streaming and royalty AUM now stands at $1.1 billion. Slide #15, to summarize. As I noted at the beginning of the call, Sprott continued to grow during the third quarter despite the challenging period in global markets. 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 noncore 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 Gold Council reported the third quarter saw the third 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 in the last year’s record. 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&A. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Mike Kozak of Cantor Fitzgerald.

Mike Kozak: Just a few questions for 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?

John Ciampaglia: Mike, it’s John. while the conversations with OSC are ongoing. Over the last 2.5 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 uranium market, how it works, how Sprott — what’s Sprott’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 2.5 weeks, and we’re waiting for responses. So I don’t have any clarity yet. But as far as all of their 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 the 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 in turn.

Mike Kozak : Okay. And I mean, in your previous dealings with the regulators, I mean, what’s the 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.

John Ciampaglia: [Technical Difficulty] resolution because we would like to provide clarity to the marketplace and our shareholders, but it’s not a time line we can control.

Mike Kozak: Okay. Okay. Fair enough. So the second question is last quarter, I think you reported $18 million or $19 million 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?

Kevin Hibbert: Mike, it’s Kevin here. Short answer is no, it has not all been monetized yet. 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.

Mike Kozak: Okay. And then maybe finally, switching gears a little bit. Just looking at the outflows in Q3 on the gold and silver products. My question, I guess, how much penetration does Sprott have into Japan? And I bring that up for two reasons. One, there’s obviously a ton of investment capital over there. And two, I don’t know how closely you guys look at the yen, but gold prices in Japanese yen are — like have gone parabolic, 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?