Sprott Inc (SII) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2014 first-quarter conference call. (Operator Instructions) As a reminder, this conference is being recorded today, Wednesday, May 14, 2014.

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 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 as implied 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, Sprott Inc. Please go ahead, Mr. Grosskopf.

Thank you, operator. Good morning, everyone, and thanks for joining us today. Our Chief Financial Officer, Steve Rostowsky, is with me on the call. Our Q1 results were released this morning and are available on our website, where you can also find the financial statements and MD&A.

I will start on slide 4 with a review of our highlights from Q1. Our AUM increased by $700 million from the end of last year to $7.7 billion as of March 31. Most of the improvement was due to the strong performance of our funds, nearly all of which have delivered positive returns year to date.

Our resource-focused strategies have led the way in the early part of 2014, reporting strong first-quarter and maintaining good performance into Q2, despite some softening in precious metal prices recently. Our top performer is the Sprott Energy Funds, which is managed by Eric Nuttall, and is up more than 25% year to date.

During the quarter, we also benefited from more than $120 million in net sales, which maintain the momentum that we established during the second half of 2013. Most of the new flows have been into our enhanced equity funds managed by John Wilson, which have now grown to more than $750 million in AUM. We are gradually seeing the trend extend to other funds and there were also some institutional wins that are starting to make a difference.

We are continuing to broaden our mandates on our Canadian platform. In March, we acquired three new real asset-focused funds advised by Mike Underhill of Capital Innovations.

Mike is a proven portfolio manager with a strong track record, and he shares a similar macroeconomic view to us. We expect that his message about the value of investing in hard assets will resonate with our clients.

Earlier this year, we appointed John Wilson as CEO of SAM -- that's Sprott Asset Management -- with a mandate to improve our investment performance through a team-based approach to portfolio management and enhanced risk management protocols.

Importantly, our capital book performed well during the first quarter, delivering strong returns on invested capital. To date, the book is generated returns at an annualized rate of approximately 21%.

With approximately $365 million in available capital, we are well positioned to grow the business by seeding next generation funds and selectively evaluating acquisition opportunities.

With that, I'll turn it over to Steve, who will walk you through the financials in more detail.

Thanks, Peter. I will start on slide 5 with a look at our AUM. Our assets under management were $7.7 billion at the end of March, as Peter mentioned, down from $9.9 billion at the end of Q1 last year, but up $700 million from December 31, 2013.

Market value appreciation accounted for approximately $550 million of the increase, with the balance coming from $123 million in net sales and $53 million from the acquisition of the three Capital Innovations's advised mutual funds.

The next slide shows our AUM on a monthly basis. January and February were strong, as precious metals and their related equities rally during that period before cooling off somewhat from March.

Turning to AUM changes by product type, our asset mix is relatively unchanged from the end of last year, although the South Korean private equity fund has added $375 million, which we bucketed in our managed companies� AUM.

Our physical bullion funds, which are currently the largest component of our total AUM, increased by $40 million during the quarter, despite the fact that we experienced some redemptions from the physical gold trust and to a lesser extent, the platinum and palladium trusts. Redemptions were in the early part of the quarter, but these had ceased by quarter end as the discount to NAV narrowed or even reversed.

Our mutual funds recorded $88 million in net sales during the quarter, along with $123 million in market value appreciation. Sales were led, as Peter noted, by the enhanced equity fund, while the market value change was led by our precious metals-focused funds.

Our alternative investment funds, as a group, reported $92 million in net redemptions during the quarter, the majority of which, or about $60 million, was from the annual redemptions of strategic fixed income fund. The AUM of our fixed term LPs grew by about $57 million.

Moving on to the next slide, which gives you a breakdown of our revenue for the quarter, total revenue increased by 19% to $32.9 million from $27.6 million in Q1 2013. Management fees decreased by 25% to $19.4 million from $26 million for the same period last year, primarily due to lower average AUM during the quarter.

Commission revenue from global resource investments and Sprott Private Wealth was unchanged from the first quarter of last year at $1.9 million, but this is actually a positive development, as it is the highest quarterly commissions earned since the first quarter of last year.

Interest income increased significantly to $5.3 million, due largely to the performance of the substantial loan book and cash from the Sprott Resource Lending acquisition.

During the three months ended March 31, we recorded $4.4 million in realized and unrealized gains from proprietary investments compared with a loss of $3 million in the first quarter last year. Other income increased by $1 million to $1.6 million, mainly as a result of gains from foreign exchange.

Looking now at slide 9, summary financial information. Total expenses for the quarter were $21.2 million, a decrease of $10.6 million from the first quarter of 2013. Compensation and benefits were lower by 7.3% overall.

Trader fees fell by 12%, while G&A expenses increased slightly. In G&A, directors' fees and expenses increased as we mark-to-market the directors' GSU liability. Rent and occupancy increased compared with Q1 last year, as the funds' start-up costs mainly related to the new lending fund that we expect to launch soon.

All of these were partially offset by lower professional fees; they were higher last year because of the then-proposed Sprott Resource Lending Corp. transaction.

Adjusted based EBITDA for the quarter was $9.1 million or $0.04 per share, down slightly from $9.3 million or $0.05 per share in the first quarter last year. Net income for the period was $10.2 million or $0.04 compared with $2.1 million or $0.01 per share for the three months ended March 31, 2013.

The next slide shows the EBITDA reconciliation in more detail. The OSC -- published OSC staff notice 52-722, which, while not prescriptive, recommends that the use of the term EBITDA be calculated strictly according to the acronym. However, we believe that certain additional adjustments to properly reflect EBITDA consistent with our past practice, and in our opinion, in a more meaningful way are required.

Hence, we get to adjust the EBITDA and then we further adjust for performance fees and performance fee-related expenses to determine our base business EBITDA, termed adjusted base EBITDA.

From the segmented reporting, you will note that 44% of our adjusted base EBITDA was from the lending segment and 39% from the SAM segment. Management of capital, including the loan book, has become a significant contributor to EBITDA. However, it was a very strong quarter from the perspective of returns on invested capital.

More on this later, and Peter has already alluded to this, but with the launch of the lending funds, we expect to generate meaningful management fees from those funds. Or -- and we will also be a large seed investor in that strategy.

We have an extremely strong balance sheet, with close to $350 million in investable capital, including an undrawn line of credit. Approximately $200 million is related to the acquisition of Sprott Resource Lending, with its loan book in cash balance.

We have a disciplined capital allocation framework in place and we will be judicious in the deployment of balance sheet capital, either to take advantage of specific investment opportunities, to seed new funds, or finance acquisitions, while retaining sufficient liquidity to enable timely and opportunistic deployment as required.

Now very briefly, on the capital book performance, our capital book, as we have mentioned, performed well during the quarter, generating approximately $9.7 million in total returns. As Peter mentioned at the start of the call, this represents an annualized rate of 21.3% on invested assets, excluding cash and historical real estate loans.

With that, I will turn it back to Peter for his closing remarks.

Thanks, Steve. One of our key priorities going forward is to build a more significant institutional business. We believe that institutions are more willing to allocate long-term funds to the depressed mining sector to take advantage of the opportunity.

And over the last year, we have secured two substantial mandates to manage new funds for Asian investors. The first was the global mining funds with Zijin, Canada's largest gold miner. As far as we are aware, this is the first qualified mining hedge fund of its kind to be offered to onshore Chinese investors, and this fund is starting to grow. We have additional clients coming in this quarter.

Late last year, we also want to mandate the co-managed $750 million private equity fund for South Korea's national pension service, with a co-investment from Kepco, the country's national utility. Our resource lending business has been performing particularly well and continues to have good prospects.

We expect to complete the first race for a new institutional resource lending LP in the near future and further closings later in the year.

And finally, we continue to incubate a new resource hedge fund targeting institutional investors. That fund performed well and the process performed well last year and if the recent improvement in market conditions continues, we expect to more -- approach the market sometime later this year.

Sprott Toscana's working interest business as well as Sprott Resource Corp. are both doing well on their mandates. And then turning to our growth strategy, our vision is to become the world's preeminent precious metals manager with related resource capabilities, while continuing to build the diversified asset management business in Canada.

The New York Stock Exchange recently announced that both the PHS and PSLV have been traded on the floor or will be traded on the floor of the NYSE and given a dedicated market maker and we view this as a strong endorsement of these trusts.

We will be launching a new gold equities ETF in the US marketplace. This is been filed -- the ETF has been filed with the SEC and we expect it to launch sometime in Q3. We believe this ETF will allow us to capitalize on our global brand and leverage the success of the physical trusts.

And we are pleased to have formed a strategic alliance with ALPS, which is a significant player in the ETF business and the sponsor of a number of successful hard asset ETFs. In creating the underlying index, we believe we will, similar to the physicals, leverage our expertise in precious metal investing to create a smarter way to index.

As Steve mentioned, we've developed a capital framework with clearly defined hurdle rates and specific allocation targets to ensure diversification. We are pleased with the return on the capital books and we will continue to focus on generating performance going forward in various market conditions.

We will work hard to reduce expenses to come in line with our AUM. And despite the quick rebound early this year, we believe 2014 in general will be a set up year towards what we will believe -- we believe will ultimately be a stronger firm and a great performer going forward.

That concludes our remarks for today's call. We would be pleased any questions you may have. And with that, I'll turn the call back to the operator.

(Operator Instructions) Graham Ryding, TD Securities

Peter, maybe I could start with you. Just the ETF that you are looking to launch in the US. Is it -- should I assume it's a proprietary index, like a smart type ETF that you are launching?

We really can't say much about it, because we are in the quiet period, but that would be a good guess.

Okay. And then who is the name of the company you are partnering with? I missed that.

ALPS. ALPS.

Okay. The resource lending LP, any color on the potential size you're hoping for for the first launch and maybe subsequent closings?

Well, as you know, we run about $100 million to $150 million on our own book, so it would have to be some multiple of that in the hundreds. It's not going to be a huge fund; I think the kind of ideal size for that fund in the long term would be in the $400 million range, so we will step up from where we are now to get to that goal.

Okay, great. And should I expect over time that the money that you are making now off of the -- those resource loans on your balance sheet -- does that continue going forward or does that translate into management fees as you wind those assets down into the fund?

No, it will be both. Because we want to continue to earn the same returns on about the same amount of capital that we have dedicated to resource lending. And on top of that, it will be enhanced by a management fee stream and hopefully a performance fee stream.

Okay, so I should think about the $100 million to $150 million as probably staying on your balance sheet and then you just want to leverage that?

That's right, and that might just be in a different format in the form of LP holdings. It won't make any difference to the underlying returns.

Yes, okay. And then just lastly, the proprietary gains, the $4.4 million this quarter, can you -- I assume that was reflection of the strength of bullion. Can you remind me of what the mix is of those assets that would drive those gains?

Yes, it's more diversified than that. No question that the recovery in mining and precious metals provided a good platform, but it was pretty diversified. The funds that we hold there are seed investments in a variety of different funds.

Some of them -- for instance, the Zijin fund perform particularly well despite having a very large cash holding and being relatively hedged, so I wouldn't call that fully exposed to the mining markets, either. So no one big contributor.

Okay, and then just to be clear, lastly, the $376 million that was a managed company inflow, that's a reflection of the Korean mandate that you recently signed?

Yes, it's kind of accounted for in a funny way. It's a $750 million fund altogether, but actually, our management fee is being received on half of that, with the other half being a matching by the other institution.

Okay, that's great. Thanks.

Geoff Kwan, RBC Capital Markets.

I had a question. With the success of the funds that John Wilson is running, does that have -- do you think about expanding into other complementary or similar type products?

Well, we don't want to get too diversified and we are definitely not looking to become a supermarket for strategy, so anything that we get into, we want to think that it's quite different from the norm, that we have an edge in terms of providing the performance for the funds.

And a good example would be the real asset funds managed by Mike Underhill. They are quite different in terms of what else is offered in Canada. It's very synergistic with our theme.

In fixed income, I think we could continue to add a couple of specialty products, but this isn't something where we are trying to come up with something new every quarter.

Okay. Just the other question I had is on the private equity funds or the LP funds in the institutional side -- any sort of update on -- in terms of the flows there or the outlook there, other creation of new partnerships or anything along those lines?

It is chunky, so it's very hard to forecast. In each case, for each of those strategies -- private equity, private debt, hedge funds -- we are looking for new mandates. But they come about when a big client comes in as a lead sponsor and so they are very chunky. It's hard to forecast what that looks like right now.

Okay, thank you.

Gary Hill, Desjardins Capital Markets.

On the managed companies� line, just going back to that -- majority came from Sprott Korea. Can you comment on the outlook for this particular line?

It's very -- the answer is very similar to the previous question in that it's hard to forecast exactly when new funds or LPs might click. It really depends on the wishes of specific clients.

All of the strategies are performing very well. So across the board, the private resource managed products -- Sprott Toscana, the lending side, the private equity side -- we think those a been kind of our star performers in the last three to five years and we would expect that performance to continue. It's just hard to say exactly when that results in AUM increases.

Yes, okay. Also on the $268 million redemption of the bullion funds, were some of these related to switching out of the bullion fund into other products?

No, Gary, I think that virtually all of that was just a particular opportunity that some investors, let's say, took advantage of because the funds were trading at a discounts. And as I mentioned, those discounts have narrowed.

And most of the investors in the physical trust tend to be different or often are different investors than who are investing in most of our other products, particularly our domestic products. So --

All gold ETFs globally were getting hammered in December and the outflows and the redemptions from gold-based products were, yes, almost head scratching. I think it was just balancing books at the end of the year.

It may have been a rush for investors to get access to physical gold to cover other positions, but it was a very bizarre month in the world of gold ETFs. And we were no different than the norm. And as Steve said, it's rebounded and now it seems a lot more normal to us.

Perfect. And then my last question -- I guess in your outlook section, you had mentioned crude and expense management. Can you elaborate on this and are these initiatives that could improve expense initiatives? And can you comment whether the $6 million general and G&A expense is a good run rate going forward?

Yes, Gary, that's pretty -- it wasn't a particularly unusual quarter; I think that that would be fairly reflective of the G&A run rate going forward.

Okay, that's it for me, thanks.

Scott Chan, Canaccord

Hey, Steve, just on that G&A question, if I look back at the past two Q4s, the G&A was closer to $9 million or above. Can you remind me, is there an incremental increase in Q4 on the G&A side, or --

Yes, in G&A, we have some advisory fees, including performance fees. In the last couple of years, we've had pretty big performance fees from the Sprott private credit trust in the sub-advisory part of that that we -- the part that we pay over to them comes during Q4.

Would that -- as far Resource Corp. had performance fees this year, let's say with long run, would that flow through as well in Q4?

No, that comes to us. We don't pay that to anybody else. That could just be revenue. If there were performance fees in Resource Corp., that would just be a revenue line and the only expense against that would be some compensation accruals.

Okay. Okay, I got it, thanks. Peter, just on -- you are talking about Zijin, with that initial mandate being started and you guys seeding it, I'm assuming if I look back at my notes, it's like an open mandate and you mentioned about new clients this quarter. Is that something -- is that fund something to build on with Chinese investors going forward?

Well, our target size is quite a bit higher than where we are now. And as with any fund, it takes a while to get traction. I don't know if you remember when John Wilson first came on -- it was quite slow building his funds. And then you just hit in inflection point, where you can put a certain number of months of the proof of process on the table in terms of a performance track record, and I think we are approaching that point with the Chinese fund.

The process has been working very well. We've ironed out how the investment committee works; the performance is good. And importantly, we've got our first outside client in China. Very large institution there, who is starting to come in. And you haven't seen that yet in the numbers, but we're getting some inflows now and we hope to build on that.

And the target is still about $500 million for that fund?

Yes.

Okay. And just on your prop investments, I noticed that -- I guess within the hedge funds, within that prop portfolio, there is a huge amount of short securities. Can you comment on what the strategy is on the short side?

To tell you, Scott, I'm not sure what you're referring to. We don't have -- we don't have a lot of short securities in --

No. Because on the disclosure, on the prop investments, I see for the first time that you put with mutual funds and alternative funds a disclosure on what was included in that. And I thought --

Oh, yes, okay. Yes. It's a little bit -- so what we've had to do with some of our funds -- there are four funds where we are a large investor in percentage terms in that fund. Under IFRS, when you are above, let's say 50%, typically, we could be consolidating these funds, but it would be -- it would really make our financial statements look silly.

So what we've done -- and we understand this is pretty common with asset management companies -- is we just provide enhanced or look through disclosure to investors on what is in those funds. And one of the funds that we have a large percentage investment in is the convertible strategies trust -- used to be the flat iron trust.

So the way that works when you look through, it's kind of like -- almost like a market mutual type of strategy on a levered basis, so they have a big long position and a big short position and it nets out through fairly small amounts. So it's really just a look through to the convertible strategies trust, where we are like a 70% or 80% owner of that strategy.

Okay, thanks for that color. Thanks a lot, guys.

(Operator Instructions) Aram Fuchs, Fertilemind Capital.

The Zijin entity, is that separate from -- should we think of that as a JV or are you able to upsell the LPs to your other financial products? Can you talk about the relationship there?

Sure. We are in a joint venture-style arrangement with Zijin. It is a JV that is based in Hong Kong called Gold Mountain Asset Management and there's nothing to prevent us from replicating -- we are the manager of that JV. There's nothing to prevent us from replicating that strategy either exactly or substantially for other funds.

And in fact, the way we see it, it is kind of state of the art. It's very similar to how we would run any institutional hedge fund in the resource sector.

Okay, but if a Chinese national was an LP in this Sprott-Zijin JV, Gold Mountain Asset Management --

Right.

Sprott Incorporated, then -- upsell then to Sprott Resource Lending or some other entity --

Yes, but the rules in China are very specific. So you have to be registered in Hong Kong and you also have to adhere to very strict -- I forget what they call them. It's like qualified foreign investor rules. For some of those rules, you actually need to use quota, and for other rules, depending on your status in China, you can simply make the investment if you can exchange the currency.

And the big change in their markets was that last year, they liberalized the currency exchange rules for purposes of investment. In order to qualify for that, it's a very specific fund structure and it needs to be run by a Hong Kong-based manager.

Okay, and then can that Hong Kong-based manager invest in Canadian domiciled entities?

Oh, absolutely. It invests globally.

Right, okay. And then on the trust redemptions, that's the first time we saw that. Your sense was that it was just some sort of -- it hit a magic number where the ARP between discounted NAV and the physical metal was lucrative enough for redemptions?

Is that -- did you actually get a chance to chat with the people doing that or did you run the math yourself?

We know who they are, we know the math, we know that it hit a certain number. These guys are sharp investors and when their computers tell them to put a quick trade and delivery on, that's what they do.

Okay.

So it's part of the attraction of the trusts, actually, in that the trusts always have a liquid market and always traded at tight discount or in the worst of scenarios, and at a decent premium as is what we think should be the case in the long run, given the tax advantages. And the physical storage and the fact that we can store metal with the Canadian mints much more efficiently than most investors can.

And you are seeing pension funds be more aggressive, certainly, in Ontario and elsewhere, and in Korea I guess, taking more of the management structure and internalizing it. Are you seeing that in the US as well in natural resources or are you just seeing it, really, in Asia? Are you getting some Korea-like leads in the States?

Well, I'm not sure about your comment about internalizing, but by our calculations, there's been something between $15 billion and $20 billion of funds that have been raised by large private equity and hedge fund players for investment in the resource sector, and I think that reflects a very large demand to place money in the sector.

The issue is there haven't been a lot of deals that have happened and we think we are very well qualified to get that kind of money working at attractive returns. So it's a really big market and we are there in the trenches trying to build products that we think are going to work for those investors.

Great. Thanks a lot.

Paul Holden, CIBC.

Hey Peter, it's been a number of months now since you announced that Eric was going to be stepping away from management of funds. It doesn't look like it had a big impact on the redemption side of the business, which I guess is a positive.

But given that Eric was sort of the face of the firm for a long time and there was a lot of intellectual property that resides with Eric, has that had an impact on your ability to get new investors, including institutional investors into Sprott mandates?

Well, I think Eric will continue to still very much be the face of the firm in many respects, but I think the fact that he does not need to be on the front lines has, as you said, gone over very well. And in fact, the presence of the team and the investment team and the track records and experience that they have is what the investors really want to see, we think, right now.

So I think it's a very healthy and successful transition that we're going through. And yes, it is comforting that investors are getting the right message from that, not the wrong message. So I think it's a net positive, actually.

Okay. And then in terms of putting in more risk controls in place with respect to fund management, those kind of changes have already been implemented, then?

Yes, and I would say that's part of the evolution of the hedge fund industry. Hedge fund meant many different things in the past, including very bullish funds that were aggressively positioned to take advantage of kind of maximum returns.

I think it's kind of more of a new standard that hedge funds have risk management in place in every sense, so they know when they are long, they know when they are leveraged. Not that we leverage. We don't leverage at all, but -- and they also know when to hedge and take risk off the table. So we've got just a much tighter framework for how we evaluate that.

Okay. I would assume there'd be some incremental costs that come with that. Are there any --

[Impact]. Yes, but on that, we have eaten them already. So that was paid for last year and is already in our G&A line.

Okay, I guess the question I was going to follow up with is are there any incremental regulatory costs associated with that? Do you have to report more to regulators at all now? Or --

Well, the way I see it, we have to report more to regulators all the time. The hurdles for being in our business are much higher now than they were a couple of years ago. That comes down to the fact that we have this platform and the amount of products, the amount of compliance, the amount of risk management, and the amount of frontline portfolio management people we have engaged in the business, we know that we can -- this firm can manage $20 billion to $25 billion and we are managing $7.7 billion. So we've got lots of extra capacity in our products now.

Okay, that's all the questions I had. Thanks for your answers.

(Operator Instructions) Graham Ryding, TD Securities.

Yes, if I could just do a follow-on on Paul's question there with the succession play -- can you remind me what the plan is for the management of the Canadian equity fund and Eric's hedge fund?

Okay, well, the Canadian equity fund is currently managed by a group of portfolio managers. And with Alan Jacobs retiring last month, it's really John Wilson and Eric that are managing it together, but it's very much a best ideas fund, where we are bringing various portfolio managers to the table for their areas of expertise.

It's still heavily oriented towards Eric's theme, which is recovery and defense played through precious metals, but it's got an increasing component that is also related to value stocks and good growth stocks that John is helping coordinate. So that kind of will run as it runs going forward.

For Eric's hedge funds, Eric has -- Eric works with Paul Long. Paul manages the short book on the hedge funds. And increasingly, Eric will appoint other managers to manage individual positions in that fund. So it's becoming a more collaborative effort as well.

Eric is still very much the face of these hedge funds and his investors and clients want that, but I think what we've provided for him is the ability to not have to be day-to-day if he doesn't want to be day-to-day. Sort of take a more long-term approach to managing it.

So all of those changes are in place. I really don't think there's much more to do other than perform. And I don't expect big changes going forward.

Okay, that's helpful color. Thanks.

(Operator Instructions) We have no further questions at this time. Mr. Grosskopf, I turn the call over to you.

Okay, well, appreciate everybody's time this morning. And we would look forward reporting to you at our next quarter. Thanks.

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