Sprott Inc (SII) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2010 fourth-quarter and year-end conference call. At this time all the participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions) As a reminder, this conference call is being recorded today, Thursday, March 24, 2011.

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 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 applied 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 this quarter and Sprott's other filings with the Canadian securities regulators.

I will now turn the conference over to Mr. Peter Grosskopf, Chief Executive Officer of Sprott Inc. Please go ahead, Mr. Grosskopf.

Thank you. Good morning, everyone, and thanks for joining us today. With me is Steve Rostowsky, our Chief Financial Officer, and Mike Staresinic, our Director of Finance and our new expert on the global companies.

Our 2010 fourth-quarter and year-end results were released this morning, and they are available to investors on our website. And you can also find there our financial statements and MD&A.

2010 was a great year for Sprott. Not only did we deliver outstanding investment performance to our investors, but we made major strides in advancing our growth strategy. We introduced new products and services, and we added to our industry-leading investment team, and also established a footprint in the US market.

It was an exciting year; there is lots of ground to cover. So I will start with a quick overview of the year's highlights before turning it over to Steve to review the financials.

First of all, on the fund management side of our business, our assets under management grew by 79% in the year and closed the year at approximately CAD8.5 billion. And our net sales for the year were CAD1.5 billion. Financially speaking we earned CAD200 million in performance fees, which translated into CAD202 million in EBITDA and CAD43 million in base EBITDA. We also recorded CAD131 million in net income. What that produced was that we paid out a substantial portion of these performance fees in 2010 through two special dividends totaling CAD0.72 per share.

We established a footprint in the US through the acquisition of Global Resource Investments, which we closed in February. We launched a total of 11 new funds in 2010. We have now built a platform that we believe we can continue to leverage and add new products and businesses where we see a distinct competitive advantage.

Our gold and silver ETF products were a major success growing to over CAD2 billion in assets by the end of 2010. On the consulting side we launched Sprott Resource Lending as a resource lender, and Sprott Power began trading on the TSX. I am pleased to report that the Company has transitioned now to return to a net sales of funds in general which were slightly positive last quarter but are now running at plus or minus CAD100 million per month. And I caution that before you build that into your forecast two months does not make a year, but we are very encouraged with the tread that we see there.

Turning now to what we believe is the most important part of our value to shareholders, our performance fees. One of the key differentiators of our business is that 76% of our assets are eligible to earn performance fees, and in 2010 an amazing 96% of those assets finished the year in performance fee territory. As I said earlier, this generated a total of CAD200 million in performance fees.

Our 2010 performance also eliminated almost all of the performance fee deficits that accrued in 2008 and 2009, and our funds are again well-positioned to once again generate performance fee revenue in 2011.

Turning now to Sprott Asset Management, the first thing we say about this business is -- and we will always say about this business -- is as an organization we are intensely focused on performance. I am pleased to report that our investment team did an outstanding job delivering in 2010, generating exceptional results. Much of our performance was driven by large positions in precious metals. As most of you know, our team began to build these positions as early as 2000, and the call paid off in 2010 as gold increased by 30% on the year, and silver increased by about 83%.

To give you a snapshot of this performance, eleven funds posted returns of greater than 30%, and four funds had returns in excess of 50%. Our Sprott Hedge Fund L.P. was named Fund of the Year at the 2010 AR Awards.

I think it is especially important to note that the performance was delivered by a broad base of our team. Eric Sprott's Canadian Equity Fund gained 58% on the year. Our Gold and Precious Metals Fund managed by Charles Oliver and Jamie Horvat was up by 75%. Small-cap Equity Fund, managed by Allan Jacobs, gained 50%. And the Energy Fund, managed by Eric Nuttall, was up by more than 30% and trounced its counterparts.

I will now turn it over to Steve to review the financial results in more detail.

Thanks, Peter. Good morning, everyone. Turning now to performance by fund, this slide shows all of our mutual funds that have been in existence for at least one year. We also show our benchmark indices. All of these mutual funds generated double-digit returns in 2010, outperforming their benchmarks, some by a wide margin resulting in some good performance fees for the year.

As mentioned by Peter, many of our larger funds benefited from their positions in gold and silver bullion and equities, and Peter has already highlighted some of the spectacular returns.

The next slide, slide 9, provides an overview of our hedge fund performance is 2010, again, funds in existence for more than a year, both domestically and offshore. Virtually all of our hedge funds had excellent performance in 2010 with eight funds generating returns of more than 30%. The small-cap hedge fund, managed by Allan Jacobs and Peter Imhof, led the way with the return of 50.3%.

Hedge funds generated a total of CAD147 million of our performance fees for 2010. I should mention, though, for the Opportunities Offshore Funds we affected a compulsory redemption effective December 30, 2010 -- December 31.

Slide 10, assets under management. As Peter noted, as of December 31 our AUM was CAD8.5 billion compared to CAD4.8 billion at the end of December 2009 and CAD6.5 billion at the end of September 2010. The nearly 80% increase in AUM during the year is due to strong net inflows, primarily due to our bullion funds, as well as increased market values in our funds, managed companies and managed accounts, which contributed CAD2.3 billion to our AUM.

Our AUM growth has been due in part to excellent fund performance with most of our funds posting strong returns on both an absolute and relative basis over the year. Net sales were CAD1.5 billion compared to CAD571 million in net redemptions last year. The launch of the Sprott Physical Gold Trust, Sprott Physical Silver Trust, Sprott 2010 Flow-Through L.P., and Sprott Private Credit Fund L.P. and our fixed income funds added approximately CAD1.7 billion to sales for the year.

Turning now to AUM by product type, as you can see we continue to diversify our AUM across product classes. We have a balanced portfolio of assets under management. Mutual funds account for about 40% of our AUM, hedge funds 28% and bullion funds 24%. Managed companies only account for 6% of our total AUM, but they are growing quickly and have tremendous earning potential, as Peter will discuss in more detail later on this call.

The biggest contributors to our AUM growth were the mutual funds in terms of market value appreciation and our bullion funds from a net sales perspective. Collectively mutual funds and domestic hedge funds experienced net redemptions of approximately CAD330 million for the year. Some of our offshore funds had net subscriptions, while others experienced net redemptions, resulting in net outflows of approximately CAD13 million for the year. Again, as Peter mentioned, the trend has turned positive in the latter part of the year, in the last quarter and into 2011. Sprott Resource Lending Corp. and other managed accounts and managed companies added approximately CAD300 million to our AUM during the year.

Revenue. Total revenue increased by 200% during 2010. Management fees increased by 18% to CAD104 million from CAD88 million in 2009 as average monthly AUM grew by 31% over the prior year period. Margins therefore shrank from 1.96% to 1.77% overall, primarily due to the addition of significant bullion fund assets and lower management fee levels.

Performance fees for the year were CAD200 million, up from CAD13 million in 2009. The majority of the performance fees were generated by our hedge funds, both domestic and offshore, while a member of our mutual funds eliminated the carryforward return deficiencies and began accruing performance fees in 2010. Only three funds that were existent in 2009 had performance fee deficits by the end of 2010. Gains from proprietary investments were CAD8.5 million for 2010 compared with gains of CAD5 million in 2009.

Total expenses were CAD150 million, up 140.5% from 2009. The increase is mainly due to higher compensation and benefits expenses and an increase in stock-based compensation. Most of the increase related to bonus pool accruals as the size of the pool relates directly to net operating income and performance fees. EBITDA at CAD202 million was over 300% higher than the CAD48.5 million for 2009.

Base EBITDA was CAD43.4 million compared with CAD33.7 million in 2009, representing an increase of 28.8%. Net income increased by 312.3% to CAD131.2 million or CAD0.87 per share from CAD0.21 per share in 2009.

And finally, as Peter noted earlier, in light of the exceptional performance fee income generated in 2010, and given lower corporate income tax rate for the year, the Board of Directors declared special dividends totaling CAD0.72 per share. These dividends represent all our net performance fees after bonus pool allocations and income taxes.

We have adequate cash and available credit, so shareholders can employ the cash received by way of dividends themselves. Perhaps I could recommend investing in our funds. I will now turn to call back over to Peter.

Thanks, Steve. Turning a little bit more to our strategy and how we intend to move forward with it, one of the key points of our strategy is leveraging our platform. And to define this a little better, when I arrived at Sprott last year I thought that the most pleasing thing and one of the principal reasons that I joined is that they had built such a great team here, and the team was capable of doing a lot more with the business going forward. And I continue to feel that is the case.

Over the past few years, and certainly before I got here, Sprott has built an infrastructure that includes first-class operations, systems, marketing, compliance, a lot of other areas that smaller fund companies do not have the resources to invest in. And using this platform of growth, I think we can be in a great position to both diversify our products, launch new products and consider acquisitions.

So we have the financial strength, we have the platform and we are going to continue to expand and diversify our offerings. The alternative asset management industry is fragmented, and our strong balance sheet will allow us to pursue synergistic acquisitions as we build ourselves to be a global leader in this space.

Looking for a moment at Sprott Consulting, this is one of the bright stars in our -- on our operating side, and as a growing contributor to our organization, the business added two new managed companies in 2010, Sprott Resource Lending and Sprott Power.

Sprott Consulting, to step back and talk about it as a business, it has got a private equity-like mandate. It invests counter-cyclically, and it can react to opportunities quickly and using multiple channels for fundraising. Quite frankly, we think those are long-term strategic advantages.

It has built an excellent team, and Kevin Bambrough, as the leader of this team and the team look for opportunities to create companies in sectors where we believe we have this long-term competitive advantage and can employ it. They have the ability and the proven experience of partnering with leading management teams to exploit high-quality assets. And they can tap into multi-channel funding sources that allow capital to be raised quickly. And this capital is generally more permanent and less cyclical than other sources available in the fund management industry.

Sprott Resource Corp. alone has over CAD200 million in mark to market gains and just realized a significant gain through a CAD43 million secondary offering of its shares in Stonegate Agricom. So that's a growing area. We are looking at lots of new opportunities there, and it is one of our key foundations for growth in the future.

To review Sprott Private Wealth, we named Dave Franklin as the new CEO of Sprott Private Wealth this week. It is a business that has over 2000 direct accounts and CAD3.6 billion in assets under admin. We are starting to hone the product offering there to a more diversified and unique product for our clients. For instance, we started to offer them private placement opportunities alongside some of the opportunities that come our way. And we have developed customized solutions for high net worth investors, family trust foundations and estates. We are upgrading that platform. It is getting more interesting and viable as we do that, and we expect it is going to be a growing contributor in the future.

Looking at, and just reviewing the Global Resource acquisition, we believe this gives us an important beachhead into the US market. Most importantly, it brings a deep expertise and an extremely talented team of resource specialists. And we believe this is going to materially enhance our idea flow and performance in the mining and energy sectors. Rick Rule has now joined our senior management team and will be nominated to our Board of Directors. He is certainly one of the world's leading resource investors. With our Bullion Funds and Sprott Resource Lending we have three vehicles trading on US exchanges, and by adding the global companies to our group, we look forward to expanding our operations in the US and generating greater exposure for our brand. That is synonymous with resource investing excellence.

We are in the process of planning new funds, and we are just about ready to launch and prepare documentation for those products. In terms of synergies, we are mostly recognizing revenue synergies so far, that is ideas and deal flow. This is resulting in greater shared commissions or shared ideas, which generate greater commissions at both Global and Sprott Private Wealth. We are capturing the low hanging fruit by having clients of each of our firms steered into each other's networks across the border. And I might say that Global had a truly exceptional year in 2010 as well, much better than our expectations, and we continue to state that this acquisition will be solidly accretive moving forward.

Before closing, I would like to provide you with some thoughts on our outlook for the balance of 2011. I think first and foremost we believe that a weak consumer sector and excessive government debt are a bad combination and that with the impending end of US quantitative easing policies, as well removing some cash from the system and leaving investors to adjust to more freely floating bond and currency markets, that there is a lot of risk ahead.

On the other side of that equation, if there is additional money printing, it will eventually lead to hurtful inflation. So this is not an environment where we feel comfortable taking risks with anything other than what we believe are must-have investments. Our focus in 2011 will be on continuing to invest in hard assets. Over the course of this year we expect to maintain our precious metal exposure, increase our silver investments and build appropriate positions in energy and agriculture and infrastructure.

So in closing, just to reiterate our key priorities to drive the continued growth of the Company, we want to stay focused on performance, we want to leverage our platform and we want to continue to expand globally. I think that there are probably three or four legs to that growth. One of them is expanding our institutional platform, the second is expanding our products into the states, and the third is expanding the Sprott Consulting direct investing platform.

So that concludes our remarks for today. We would be pleased to answer any questions that you would have, and I will turn the call back to the operator.

(Operator Instructions) Scott Chan, Canaccord Genuity.

Great quarter. Just a question on Sprott Private Wealth. You mentioned the customized pools as a new product. Are these going to be discretionary-based, and in terms of the pools, and that was the fixed income stuff or the products that you have there, is there going to be a focus on asset allocation within these products?

Not sure if I heard you correctly. You cut out just when you mentioned the product you were talking about. Did you say pools?

Yes, the customized pools products that you planned for the Sprott Private Wealth. I guess first of all are they going to be discretionary, and secondly, is the focus going to be more on asset allocation within this product to the high net worth?

Yes, we described those as SMA, separately managed accounts, and I would put them in very much the same category as tactical funds where you do have the ability to allocate assets. So it is a risk-management type of approach, which private investment counselors frequently employ. That is exactly where we are going with that, and what format it takes exactly depends on the client and also depends on how we believe we can build a scalable product. But all of those products are discretionary.

Just one other question, just a modeling question in terms of the expense line. Just on the G&A, it looks like it up-ticked this quarter to over CAD5 million from prior quarters. Was there an unordinary expenses in the quarter, or should we think of the run rate as prior quarters (multiple speakers) [CAD1 million to CAD2.5 million] range?

Hey, Scott, it's Steve. The biggest contributor to the increase was the cost of the due diligence for the Global acquisition. That was about CAD1.3 million, so that is already half of the increase. There were a few other unusual items. We also spent a little bit more on marketing. We do an annual roadshow which went in the fourth quarter. The only sort of major increase that is going to be fairly consistent is sub-advisory costs. We have one fund where we used a sub advisor. It's our only fund where we have that relationship, and the sub-advisory fees go through the G&A line. And that was about CAD0.5 million for the year. Mostly in the fourth quarter as that fund ramped up.

Thanks, guys.

Geoff Kwan, RBC Capital Markets.

Hi. The first question I had was I think you had made reference in the Q3 report that you might be doing some tweaks to the compensation scheme and would be effective in 2011. Is there any update on that?

No, there is no update on this time. Basically what we are looking at doing is including an equity component to that. We want to make more of our up-and-coming staff members, equity holders at the firm. So to pay a portion of bonus in shares is a good idea. We think it is going to better allow us to incent staff. How we do that in terms of the trust structure and how we do that exactly in monetary terms has not yet been approved by the Board.

Okay, so -- sorry, I was just going to say so it is something that is still being discussed but there hasn't been anything formal to be announced?

And in terms of the shareholder versus compensation account I would not expect material changes.

The only other thing we are doing, Geoff, is we are tweaking what I will call the net operating income formula. As you will remember on the IPO we set out a specific formula, but as we have evolved we have different revenue streams. So we are basically broadening the definition to include revenues from other sources like commissions, which we never really had before. But again, it is not going to be a material impact.

The second question I had was kind of two parts looking on the net sales side. One, on call it the retail fund side of the business, are there other specific stuff that you're looking at doing this year to try and drive better net sales performance given the performance of the funds in terms of adding more wholesalers or refining the marketing strategy? Also if you have an update in terms of what the sentiment or the discussions you are having on the sales within the offshore fund products?

I think what we are seeing is something that is not surprising. Sales tend to follow performance, so given the performance last year we have seen, as Peter mentioned, a fairly good uptick in sales across all channels including offshore. I can't give you the specific numbers right now; we will do that after Q1. But we saw positive inflows in both January and February, and I am expecting for Marc in our offshore funds as well as in our domestic hedge funds. (multiple speakers) Mutual funds have also turned positive pretty much across the board.

It is coming from a number of sources, Geoff, that it is pretty well diversified.

So you are seeing the benefits now. Do you think that there is opportunities where you could do things to further increase sales then?

Absolutely. The largest of those would be to increase our focus and actually put a legitimate effort on the table to attract institutional assets. And we have occasionally turned the focus to opening institutional business, but it came in 2007, and it left shortly thereafter. We believe we've got a much broader team. We can check a lot more of the boxes that are required to be checked. And we've got the breadth to our organization right now where if we turn our attention to that, we should be able to do something more material there. That would be the largest.

But some of our funds are just getting going. The fixed income funds are really just developing a track record. That could expand rapidly once they get the kind of basic amount of traction. They are doing well, so it could come from a number of sources. The flow-throughs are doing really well.

Okay, great. Thank you.

Jeff Fenwick, Cormark Securities.

Good morning. Just wanted to go back to the Global Resource acquisition there. At the time of the deal you guys gave us some insight into the EBITDA performance in the past and gave us a year to date number at that time. Can you give us any other update on financial metrics in terms of how they finished up the year there?

I will separate that question into base EBITDA and performance fee EBITDA. The performance fee EBITDA, which is translated to them in a different way than it is to us because they take GP participations for their performance fee, I mean, it absolutely blew away our expectations, so we don't really want to talk about that number yet until we start to take it into our statements and pay it up at as earned.

That number is very significant. Even the base EBITDA number, which we reflected back in the third quarter, is tracking above our expectations and probably considerably above our expectations in the first quarter. So the business is doing very well.

And I guess that is reflected in quite a big jump in the AUA versus what you had originally gave us at the time of the transaction. It looks like the number there basically doubled through the end of the year.

Yes, but we should clarify something on that. That statement -- I will let Steve do it. The statement is technically correct, but for the purposes of business analysis, Steve?

In a sense the 0.7 of AUM, a big chunk of that, about 600 is also in the AUA. So the AUA actually probably increased from 850 to 1.1. The reason for that is why it is technically correct is the partnerships, the exploration partnerships are actually clients of Global Resource Investment, the brokerage firm, so it sort of sits on both platforms. We should clarify, and we will clarify going forward. We will split those out.

So to be clear, to state it on a consistent basis with the way we report assets under management and assets under admin., and the way we originally released their assets under admin., which was the 800 and change number that you are referring to, the correct way for us to state it would be CAD1.1 billion.

That is great. Thanks for that color. Then with respect to compensation, what is the structure going to look like for that team of people? Is it going to be adjusted to look similar to the way the rest of the Sprott team is compensated currently?

Yes and no. It goes back to the comment that Steve made which is there is certain variable compensation payments that are made down there which are basically commissions instead of salaries that are entirely variable. And then it will fall to an EBITDA bonus number. So in the end there is not any -- there is expected to be no percentage difference but the way it is reported is going to be slightly different.

Then I guess following on with that, it clearly is going to have some ties in with the private wealth operation. And how do you sort of envision the ties there? Is there an opportunity to -- you mentioned some revenue synergies. Is there some opportunity to build out or complement what you are doing with private wealth currently with what the Global Resource guys are doing?

Yes, so the low hanging fruit that I was referring to are Global could not previously open Canadian accounts. They do have a lot of Canadian contacts and people in Canada, high net worth individuals that knew about them and could not deal with them. So the obvious first step is to open those Canadian accounts through Sprott Private Wealth.

As well, we have I think growing brand awareness in the US market, and we weren't out there opening US accounts directly for individuals unless they were (inaudible) and were dealing with our offshore funds. So there is revenue that is being driven and account dollars that are being driven into Global by virtue of our brand name. So that is the most obvious synergy.

The second one is just what I call an idea synergy in that if you put the two teams of people together, there is a bigger filter of ideas. And I think the ones that we execute on are better at the end of the day. And when we execute on those we now have two or three different places where we can purchase those ideas. And one would be in our funds and partnerships and managed products. The second would be through our client networks. And when you put those two client networks together, they are able to tackle larger transactions which involve more commissions and more client dollars coming through the door. So we started to see that.

And just one more question -- thanks for breaking out the commission line there for the year to give that clarity. Could you give us a rough sense, what is the breakdown of that number proportionately of fees from private placement to your clients versus being allocated into Sprott Funds? Is there a balance between the two or one that is quite a bit larger than the other? I would imagine it would be mostly the Sprott products, but what is the split there?

The biggest piece would have been from the Sprott Physical Gold Trust and a little bit on the Sprott Physical Silver Trust, more than the other private placements. They are certainly contributing, but the biggest chunk of the commissions was the physical bullion funds.

Thank you very much.

Doug Young, TD Newcrest.

Hi. Good morning. I guess, Peter, just when I think of the Global acquisitions you are obviously quite bullish on it. Curious in 2 to 3 years time how big could global be within the Sprott companies? For us, what should we be tracking, and what are you tracking when we look at how successful you are on the global side?

I will break it into components. The first one would be for managed accounts. They only have two managers, Rick Rule and Jeff Howard, and then everybody else who they have down there professionally is really a registered representative. So for managed products I would think that it will depend a lot on performance, of course, but those products are currently at CAD600 million. That could grow to say CAD1 billion fairly easily.

Jeff Howard is being empowered to go out and build the Terra business, which we are probably going to rename. And that, in a separately managed account format, so discretionary account format, we think could -- our targets would be go from CAD100 million or so to CAD1 billion. That is probably our entre product into the US market. We think it racks and stacks the best in terms of having an administrative ease to grow it and still be able to charge similar fees to what we charge our clients across the system. That is a base fee and a performance fee component.

So that would total then two, and then third, we are looking at some interesting offshore custodial products, which could also turn out to be significant. We haven't drawn any hard or fast numbers around these targets, but I'm just throwing it out in the air. It could be a CAD2 billion or CAD3 billion component within a few years here.

That's helpful. And what are your plans with the brokerage because you still have I guess a brokerage operation within that, and I think you mentioned last time that there was no thought of selling or shutting that down, but you saw opportunities. What is the plan with that side?

That's obviously a -- the way they are structured is very efficient, and we wouldn't want to change the mix. However, for us it is the managed account, managed products business that we are really after. That brokerage firm will probably grow organically. They have more clients than they can handle right now. They need a couple of more people just to service the incoming calls.

There is the potential that we could add a high net worth office somewhere else in the US. But you are not going to see us emphasizing that. And to the extent that we talk about it or manage it, it is going to grow on its own. But it is not part of what I talked about before, the CAD2 billion or CAD3 billion in growth that we see from managed products.

I guess where I was going, though, you have a capital market -- there is a capital markets division in there, too, right?

It is kind of like an internal capital markets business. It acts for only its own clients.

That's fair. On the Sprott Resource Corp. you mentioned CAD200 million of unrealized, and you mentioned there was a realization with Stonegate. Is that CAD43 million the amount that was realized from the Stonegate and then I can put that through the performance fee calculation to get what the impact would be on Sprott Inc.?

Yes, I am not sure of exactly what the accounting is on it for them. I know they had a very low cost base on their Stonegate shares. They report later this week. I should probably not comment on the exact numbers. I should have you talk to Paul Dimitriadis there. But the CAD43 million number, I believe is the number they realized from the offering. And that is a public number, so you could probably take a pretty good guess at it now.

That's fair. That CAD43 million was part of the CAD200 million or is that --?

I'm going to get you to talk to Paul about that. I got an e-mail from him this morning, which was -- I couldn't tell whether it was part or not.

Okay. Then on Sprott Resource Lending, I think a good chunk of your book is rolled over. Is that correct?

Is what? Sorry.

Has rolled over and is now included in assets. Is that correct?

We've got more coming in, definitely. I think that the approximate number that we have included in assets as of year end is I'm guessing 115, 118. So we've got another 120 to come there.

Okay. And you are expecting that to come in over the next three months, six months?

Three to six months, exactly.

Okay, perfect. And then on the Sprott Power Corp. side, what is the asset level there today?

Doug, there are no assets that we are currently earning fees on.

There isn't, okay. And what's -- when should we expect --? (multiple speakers)

Doug, just to interrupt you there, do you know how the revenue model works there though?

Not on the Sprott Resource -- sorry, not on the Sprott Power, no.

So it is a revenue based fee from new project introduction, so it is a bit of a latent asset there. We do expect that company to grow quite quickly. It is not earning fees for us yet, but it will earn significant fees moving forward.

I can always double back.

We don't be include it under AUM, but it will be fee earning assets. I think right now their book value is around CAD100 million if I'm not mistaken.

Okay. And just lastly you mentioned M&A. We know that the business is fragmented. Are you having many discussions today around that, and can you just give us an idea of what your parameters are when you are looking at an acquisition?

I certainly can. We are having discussions all the time. The number one parameter is how good a fit are the people and the strategies and the philosophy. So whether it's large or small, it is irrelevant to us. It's what does it add for the clients, are the clients going to be well served, is this an expertise that our clients would want and need, do we believe in it?

Likewise, if they are talking to us, do they believe that what we are doing is the right thing because if that doesn't work there is no deal financially that could ever be worthwhile for us or probably them. So it probably gets divided into two or three buckets. One of them would be tuck-in acquisitions, which are very small financially speaking and where we see a nice manager who is usually doing a good job doing what they are doing but on a very small scale where we think we can take that scale up a few notches. So financially unimportant to start with, but the addition of a nice product in the future.

The second one would be a size and scale type discussion where there is only a couple that make sense for us, and you are really talking about personal motivations then and whether or not the strategies make sense to be put together. So I have no idea of the likelihood that one of those would go through. And then the third one would be global. And on a global scale it is interesting because we have this platform where we feel pretty strong globally speaking.

We've got a brand. The brand is known globally. But we haven't gone out and either capitalized on it from a client and sales perspective or from a, let's take a group of people, and whether they are in Australia, Hong Kong or London they are very synergistic to what we are doing. They can get clients there. They have good investment ideas, and we can staple them onto our platform. But we have I think a pretty unique position because we are one of the larger global funds that can do that now, and that is in its infancy. We are just going out now to understand what that landscape looks like, and it is a huge landscape. There are just so many neat companies managing alternative assets everywhere in the world, and so few of them have succession plans. So few of them have invested in compliance and legal and marketing infrastructure. It is a wide-open market.

Perfect. Thanks a lot.

Stephen Boland, GMP Securities.

Good morning. Just one question on the Global Companies. I guess -- I know we'll get more information post Q1, but are the Global Companies going to be able to provide, if their performance is good, will that performance be -- flow through to their Sprott shareholders in 2011? Is there that possibility?

The answer is maybe, and I will explain briefly. They have -- their investment partnerships they fund, so to speak, have a bit of a different model relating to performance fees than ours do. This is more what we would call or analogize to sort of a private equity model whereby they have to earn and return to their investors, their partners, all the initial capital plus the priority return, which tends to be about 6% on the initial capital invested.

Once they do that any additional distributions are split sort of 75/25 between the Company, which would be us, and the limited partners. So they need to realize and distribute before we actually realize and take into income performance fees. But they have fairly significant, let's call it potential or latent performance fees, in their funds right now. What we can't tell for sure is when we are actually going to receive those fees.

What is the (multiple speakers) typical lifecycle of those funds if you are comparing it to a private equity model?

Between seven and ten years.

And where are they in the lifecycle? Are they just launched (multiple speakers)?

There is a mixture. The average remaining life is about six years or so years.

But Steve, the performance fee accruals there are now so significant that it is likely that even though you might have life remaining in those partnerships, it is likely that you will see realization start to hit our books this year.

The way I read that is that they have exceeded the remaining preferred return, crystallized it, essentially, and basically the performance is overflowing and you are in a position (multiple speakers).

Yes, they have exceeded it -- or many of them have. They have exceeded it. Its significant crystallization depends on realization, and that only happens when it happens, but it is likely to start happening here. That is kind of the plan for this year, I think, is that it would start happening. But we can't count on it.

Was there any co-investment in those funds from the Global Companies as well, meaning did they put their own capital into the funds to --?

Well, to be specific, Rick, as the majority owner, did absolutely. And he is probably I think the largest client of those funds. And one of the components for our deal is that he would continue to be one of the largest clients of our firm.

But that necessarily wouldn't flow into the Sprott bucket, right? It would just be the performance fee off the exceeding the preferred return, right?

That's right.

But we do -- but the Global, well, RCIC is the general partner of those partnerships and has a 1% partner's interest in all the partnerships, which has actually become quite valuable as the AUM has grown in those partnerships.

Okay, that is great. Just I guess going back to Doug's question on the acquisitions, would you be looking at -- you're talking a little bit about alternative products. Would you consider sort of adding more, I don't know, [legs to the stool] under Sprott Consulting like more public companies that you have an interest in or a management services agreement? Is that something you are considering as well?

Yes, so that is separate from the acquisition opportunities I was talking about before, but I did hint at it when I was talking about Sprott Consulting. I mean it is a very active business, and it is looking at a lot of different M&A opportunities down. Most of those M&A opportunities involve some sort of management fee or managed service agreement or what have you, from creating something new or buying something that is private and managing it in a public company format.

Great. Thanks very much.

Garrett King, Truffle Capital.

Can you guys talk a little bit about the funds that you're planning to launch in the US?

Yes. So we have two choices about how we go about getting US investors. One of them is to use our offshore hedge fund product and to actually market that to qualified investors. So that is a fairly standard route for us although we have never really staffed that up or concentrated on it. But that is something that we are going to be doing, and that is more the institutional effort that I talked about.

On the retail side and the high net worth side, using global as a base we are really looking at this separately managed accounts platform that they have, which is now called Terra Investment Management. And there were some parts about Terra that we found weren't scalable, so we kind of had to reengineer the product so that it worked for us. I don't know if many of you know about our history in Canada, but that is the history of the Sprott Group of Companies. It basically evolved from a separately managed accounts program that was rolled into mutual funds and hedge funds in the past.

So we know that business. It offers a couple of unique opportunities in the US. First of all, it is a very salable proposition to a high net worth investor. And as long as you can report results through accurately and manage it administratively, it is a comfortable product to be selling. It allows for tailorization, so if somebody wants an aggressive strategy or conservative strategy, you can have a few different product styles which work.

And it allows for us to charge our management fee structure. So we've looked at a lot of different opportunities to launch mutual fund-type products or products through the traditional US channels. And either the channel provider is making all the money, or in the mutual fund case we can't make the kind of fees we want to make by launching those products. And it would almost degrade our product offering in and of itself.

So the separately managed product offering is the way to go. That is what we are tooling up for now. And we are tooling up, we are staffing up, we are completing legal documentation and setting the plumbing for the structure up now.

All right, thanks.

There are no further questions in queue. I turn the call back over to the presenters for any closing remarks.

So thanks, everybody, for joining us today. We appreciate your attention, and we look forward to talking to you over the balance of the year.

This concludes today's conference call. You may now disconnect.