Sprott Inc (SII) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2014 second-quarter results conference call. (Operator Instructions) As a reminder, this conference is being recorded today, August 7, 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 provisions of the Canadian Provincial Securities Law. Forward-looking statements involve risk 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 to 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. Please go ahead, Mr. Grosskopf.

Thank you, operator. Good morning, everyone, and thanks for joining us today. Our CFO, Steve Rostowsky, is with me on the call.

Our Q2 results were released this morning and are available on our website, where you will also find the financial statements and MD&A. I'll start on slide 4 with a review of our Q2 performance.

During the quarter, our AUM increased by CAD147 million to CAD7.8 billion as of June 30. Most importantly for our business, nearly all of our funds have delivered positive year-to-date performance, with many posting strong double-digit returns.

We continue to build sales momentum, recording our fourth consecutive quarter of positive net sales during Q2. Our enhanced strategies, managed by John Wilson, continue to be our top-selling fund group and have now passed CAD800 million in total AUM. It is worth mentioning that these strategies, in keeping with our macroeconomic views, place a focus on downside protection, which should enable them to outperform during a market correction.

Our capital book continues to perform well, generating a CAD6.5 million return during the quarter. Our total available capital now stands at CAD330 million, or CAD360 million if we include undrawn lines of credit.

On slide 5, we have some of our recent highlights. We continue to expand our diversified Canadian platform with a busy launch calendar. We also recently launched our first ETF on the NYSE.

The Sprott Gold Miners ETF, or SGDM, leverages our extensive experience as gold investors and is based on proprietary factors-based methodology. While it will take some time to measure the success of this ETF, we believe it could be a key growth area for our business. Along with our three physical trusts, it gives us four NYSE-listed investment funds that are easily accessible to US and international investors.

Earlier this year we acquired three real assets funds focused on infrastructure, agriculture, and timber. We recently launched the Sprott Real Assets Class, a new fund that combines all three funds and we believe will be more popular. We have also expanded our specialty credit platform with the addition of the Sprott Bridging Income Fund, which is a new factoring fund subadvised by Bridging Finance.

Our managed companies continue to perform well, with Sprott Resource Corp. advancing its private equity strategy with a number of new investments, including their recently announced transaction to finance the repurchase of PBS Coals through an investment in Corsa Coal Corp. Sprott directly participated in this transaction, providing a $25 million senior debt facility to Corsa and earning warrants in the process.

Sprott Toscana is delivering on strong results and recently made the strategic decision to exit the lending business and focus on investing in mid- to long-life oil and gas properties, working interests, and royalties. This is a positive development for our Company, and we believe that that business will be more readily advance-able and growable over time.

In July, we completed a bought deal offering for 23 million shares from Eric Sprott. The offering was well received and fully subscribed, including overallotment. We also announced plans for a private placement of an additional 5 million shares via the Sprott Employee Trust.

This offering had the effect of expanding our public float and bringing in a number of significant new shareholders who share a similar outlook to us. Eric now owns approximately 24% of Sprott and is committed as a long-term shareholder with no further plans for stock sales. He has already reinvested a significant portion of these proceeds in our funds, increasing both our AUM and management fees.

With that, I will pass it over to Steve for a review of our financial results for the quarter.

Thanks, Peter. Good morning, everyone. I will start on slide 6 with a look at our AUM. Our AUM was CAD7.8 billion as of June 30 this year, an increase of CAD147 million from the end of Q1, and up CAD875 million from December last year. The increase in AUM during the second quarter was due to an increase in market values of CAD176 million and net sales of CAD73 million, which were partially offset by the removal of CAD102 million from Sprott Toscana, which Peter mentioned, as we exited the lending business and some related funds during the quarter.

On a year-to-date basis, the increase in AUM was due to an increase in market values of CAD728 million and net sales of CAD196 million, again partially offset by the removal of the Toscana AUM during the second quarter.

Turning to the next slide, monthly AUM. As you can see, the majority of the increase in the AUM this year occurred in January and February, as precious metal prices rallied before softening into Q1 and then rebounding again in June.

Turning now to AUM changes by product type, our asset mix is relatively unchanged from the end of Q1. Our physical bullion business, which remains the largest contributor to our total AUM, increased by CAD22 million during the quarter.

Our mutual funds recorded CAD41 million in net sales during the quarter, with CAD120 million in market appreciation, while our alternative investment funds as a group reported CAD6 million in redemptions during the quarter, while our AUM of our managed companies increased by CAD22 million. The market value of our fixed-term LPs declined by CAD27 million in Canadian dollar terms during the quarter, most of this from currency translation, as are all US-denominated funds.

Slide 9 moves on to revenue, which gives you a breakdown of our revenue for the quarter. Total revenues were CAD30.4 million for the quarter, reflecting an increase of CAD13.8 million from Q2 2013. The improvement was attributable to stronger commission and interest income as well as improved proprietary investment performance.

Management fees at CAD20.1 million for the second quarter reflect a decrease of CAD1.3 million from the prior period. This reflects a modestly lower average AUM as compared with the comparator period last year; but management fee as a percentage of AUM remained consistent.

Commission revenues were CAD2.5 million for the second quarter, reflecting an increase of CAD900,000 from the prior period. The increase was due to increased private placement activities at both Global and SPW.

Interest income was CAD3.8 million during the quarter, due largely to the performance of the loan book and cash from last year's Sprott Resource Lending acquisition, which occurred in Q3 last year. During the 3 months ended June 30, 2014, we recorded CAD2.7 million in gains from capital invested in proprietary investments, compared with a loss of CAD9.5 million in the second quarter of 2013. I should also note that other income includes a CAD1.5 million break fee received from the termination of the Toscana Financial Income Trust Management contract, half of which was paid out in compensation.

Looking now at the summary financial information, total expenses for the quarter were CAD22.7 million, a decrease of 15% from the second quarter of 2013. However, if we exclude the impairment of intangible charge in the prior period, total expenses actually increased from CAD21.3 million to CAD22.7 million, an increase of CAD1.4 million.

The key contributor to the increase was: higher G&A expenses, largely as a result of an increase in fund development costs relating to proposed new products; higher marketing costs; and a property tax bill relating to a foreclosed property. Also, there were some additional rents related to the Toscana business and to Sprott Resource Lending Corp., which came on in the third quarter of last year.

So there were several what we would regard as nonrecurring G&A costs in the quarter. Normalized G&A should be in about the CAD6 million per quarter range.

Adjusted base EBITDA for the quarter was CAD6.8 million or CAD0.03 per share, down from CAD8 million or CAD0.04 per share in the second quarter last year, while net income for the period was CAD5 million or CAD0.02 a share, compared with a net loss of CAD6.7 million or a loss of CAD0.04 per share for the 3 months ended June 30, 2013.

The next slide shows the EBITDA reconciliation in more detail. I think it is pretty self-explanatory, but we thought it would just be useful to show you the components of the adjustments included in the base EBITDA metric.

Slide 12 provides a snapshot of our current capital position. We currently have an extremely strong balance sheet with close to CAD330 million in investable capital as well as an undrawn line of credit. Over CAD200 million of that is in cash and loans through Sprott Resource Lending Corp.

We have a disciplined capital allocation framework in place, and we will be judicious in the deployment of balance sheet capital, which will include seeding new funds and financing acquisitions as applicable. With that, I will pass it back to Peter for some closing remarks.

Thanks, Steve. Our number-one priority this year was to turn around our investment performance and get back to delivering the types of results we built our business on. We have taken a number of steps to improve this important -- improve performance, and these have begun to pay off.

Under the leadership of John Wilson and Scott Colbourne, we have seen significant improvements in performance of our mutual and hedge funds. Our natural resource strategies have been the year's top performers, highlighted by the Sprott Energy Fund managed by Eric Nuttall, which is up more than 40% to date.

Our precious metal strategies are performing well, and the Sprott Mining Fund is proving to be a model for future institutional mandates. The fund was built to endure the volatile nature of the gold market and to fully participate in its upside. Its results have been good to date.

We are pleased with the performance of Sprott Consulting's managed companies. As I mentioned at the start of the call, Sprott Resource Corp. has been very active, turning around a number of difficult investments that the new team inherited and deploying capital into high potential new holdings. Sprott Toscana continues to generate strong performance and, with the new funding in place at Toscana Energy Corp., is now expected to be an active acquirer.

Our capital book delivered strong performance in the first half of 2014 and we continue to focus on generating both yield and upside without sacrificing downside protection.

In closing, I would like to reiterate our vision, which is to become the leading global precious metal investment manager with related resource capabilities, while continuing to revitalize and grow our diversified asset management franchise in Canada. On the precious metals side, the SGDM will give us more exposure to US and international investors and open up a much larger target market. I would note that the GDX, which is its principal competitor, increased its units outstanding by almost 50% last year, which was one of the worst gold years on record.

We are committed to building our institutional business and opening new markets for our products. Several of our businesses are now at the stage where they are well positioned to attract institutional investors.

In Canada, we continue to launch new products and focus on improving performance. And we have developed a companywide framework to ensure that our capital is judiciously employed to different investment classes with clearly defined hurdle rates and specific allocation targets. We are pleased with this approach and will continue to focus on delivering returns through various market conditions.

Of course, we will continue to reduce expenses when possible in line with our AUM. We have made solid progress so far this year; however, positioning our products to generate meaningful performance fees is going to take time and sustained effort, and we are very focused on that task as well. We will collectively remain focused on it as we progress through the second half of 2014.

That concludes our remarks for today's call. We would now be pleased to answer any questions you may have. With that, I will turn the call back to the operator.

(Operator Instructions) Geoff Kwan, RBC Capital Markets.

Hi, good morning. First question I had was with Eric's secondary sale and reinvesting it back into the Sprott's funds, are you able or would you be able to provide some color around about how much and maybe what strategies they went into, when you report your Q3 results in November?

Yes. I mean, we are not able to -- Eric is a client, and we are not able to give specific information on the purchases. We do expect that they are going to continue as he sees opportunities.

I would say that we all know that Eric still believes that the precious metals and their related equities are dramatically undervalued for what he believes is about to occur. So you would naturally expect him to go into those areas.

In terms of the total amounts, I would say from that share sale he will have some tax to pay, but that we expect that the majority would be invested in our funds or products over time.

Yes, okay. I mean I was just looking for maybe some sort of ballpark number, just in the sense to give us -- better see what money would be coming in from third-party investors.

Well, in the grand scheme of things, with CAD8 billion in AUM it is not that material; and we can't give the specific number. The share sale itself is obviously the largest amount that he could put in.

Okay. In terms of some of the new funds that you are looking at, I know you have been working on some institutional stuff. Are there other things that you can talk about that might be coming down the pipeline over the next, call it, two to three quarters?

Well, we've got a lot on the go as it is. With the announcement on the Bridging product and with the continued focused on growing the Real Assets funds and all of the existing funds that we have, I think we have got a lot of different funds on our plate now.

On the institutional side, we are running all of the strategies involved already, so it is just a question of creating a fund which is seeded by a group of institutions. It is more like a creation exercise, not like starting a whole new strategy. So that is just dependent on specific closing with an institution.

On the lending side, we thought we would have that this quarter. We have been delayed by the plans of one of the key seed investors. But we are hopeful that we will get something done in the near future.

Okay. The last question I had was just on the M&A side. If you can maybe talk about -- are you looking at smaller bolt-on acquisitions or potentially something a little bit more significant? And maybe high level, is something maybe potentially imminent over the next few quarters?

Yes, we don't have anything imminent to talk about. I would say that on the resource side there are lots of, what I'd call tuck-in targets globally. The key thing is: How good is the strategy and fit? How good a fit are the partners? And very importantly, do the clients of those firms want to become clients of ours?

On the diversified side, the scope is quite a bit broader. There is more material things that we could look at there.

But we don't have anything ongoing currently. Quite frankly, we are more focused on getting our own results in the best possible shape before we take anything else on.

Okay, great. Thank you.

Graham Ryding, TD Securities.

Hi, good morning. With the Gold Miners ETF that you launched, your reference to GDX expanding last year in a difficult gold market, should we interpret that as you think you can grow this ETF regardless of the -- it doesn't need gold to rally over the next couple years?

Well, I would rather answer that by saying very specifically our view is: we believe the SGDM is a better product, and we have reasons for believing that. I think that, as all of us know, there is just a rapidly increasing investor audience for ETF-style products.

In the gold business, it almost tends to benefit from tough markets because people throw in the towel on active management and just say: I am going to buy an index. And we just passionately believe this is a better product.

Okay. Then would you be willing to throw out any targets that you've got in mind?

No, not really. I think the GDX and its sister company are CAD11 billion, so it's a big audience. And not only that, but I think if gold returns to favor, we are all undersizing what the potential interest could be.

So it's a question of execution and investor interest in markets. And I can't even hold a target out.

Yes, fair enough. Just quickly, you provide some good color around the share sale, around Eric's stake. Was there any particular reason provided as to why he wanted to sell down his stake at this time?

Yes, well, I won't mince any bones about it: we asked him to sell. And we asked him to sell because we knew as a client that he had a very passionate belief that there were huge gains in some of these beaten up gold and silver equities.

We also knew that we had some investor interest. We had been seeing institutions over the last 6 months, for the first time in our existence, and the comment always came back that the float was too small; employees owned too much. So we jumped at the opportunity to buy the shares at that price, and Eric responded.

Okay. Then just lastly on the Toscana Fund, or portion of assets that were unwound. Can you just provide some color on what the thought process there is? You are obviously moving away from lending and more into the direct investments.

Yes, I can. As I mentioned, it is a positive move. The lending business we will carry on. But as we did with the mining side, we are carrying it on off our own balance sheet.

The simple math is that the lending business in energy was difficult in terms of sourcing new opportunities. There is a ton of capital chasing that sector right now. It is chasing that sector at increasingly aggressive leverage ratios, with a WTI price that is been pegged at $100 or so for a long time.

We weren't playing the game of chasing those loans. So our capital book on the lending side was very small.

On the other hand, on the working interests side, that business has delivered very consistent and attractive returns; and we seem to be much more differentiated in terms of having bigger targets. So most of the investors in the lending business agreed to roll over to the working interests side, because they just see it as cash flow and a very good return. So that working interest business is now poised to expand quite a bit.

As well on the energy side, we are seeing their -- our Toscana team is world-class in terms of the ability to develop royalties through drilling funds. We have done one deal of a substantial size and are about to commit another one. So we have another very interesting business that is starting to get to size there in Calgary.

Okay. Then is there any -- is it a timing issue, or is there any reason why there was CAD100 million divestiture and that didn't get rolled over into these other opportunities, these working interest opportunities and royalties?

Yes, there is a bit of a timing issue, because the working interest businesses charge management fees on the basis of barrels of oil owned and barrels of oil produced. So until the cash is deployed -- and I don't know exactly what their capacity is, but I think they could make CAD50 million or CAD70 million worth of acquisitions pretty easily now. So until that capacity is deployed in barrels, we don't get paid.

Also included in that number, there were some funds called the Maple Leaf Funds that they were managing -- or were being co-managed by another company out West. It was a very marginal business; it is related to the Toscana Financial Income Trust.

And we just exited both parts of that business at the same time. But it was very marginal from a net income perspective, for sure, which is why on the detailed AUM by product types, you see two pieces -- alternative investment strategies and managed companies -- that add up to that CAD102 million. But both are related to the Toscana Financial Income Trust on the side of the business that we have exited.

And that side, the drilling front side, is what we would -- we have monies deployed there currently, and we would like to grow that business into a different product that is not sub-advised.

Not sub-advised by Toscana?

No, not sub-advised by a third party that have been involved with that. That is 100% advised by Toscana.

Got it. Okay, and then just lastly, a quick question on the expense side. You gave some color on the G&A. Employee comp just seemed to tick slightly (technical difficulty) quarter.

Is this a run rate? Is there anything one-time in this quarter?

Yes, there is one big one-time in there. There was a break fee on the Toscana Financial Income Trust of CAD1.5 million, of which half went into compensation. There's also some earnout metrics for Toscana.

So the total Toscana, let's call it, compensation bill was about CAD850,000 more than the previous quarter. There were also some higher commissions; and again, that relates to revenue and sales. And there was a small severance charge.

Okay. Thank you.

Gary Ho, Desjardins Capital Markets.

Thanks, just a quick question. Decent net sales, CAD73 million this quarter. Just wondering if you can give an outlook for the second half of the year, particularly around mutual funds and bullion funds. Seems like the net redemptions improved quite a bit on the bullion fund side.

Yes, the bullion fund side is lumpy. There are some either sales or redemptions on the bullion funds; but on the physical trusts, there was quite a lot of redemptions in the first quarter. That is for physical bullion, primarily.

There was nothing in the second quarter, but that sort of comes and goes. It is a little bit lumpy.

But on our other fund sales, we are seeing continuation of the trends that you've seen. Generally positive on our mutuals, on the mutual fund side, led by the enhanced strategies; but we are seeing sales in some of our other products like the Energy Fund as performance has improved.

And the alternative investment strategies pretty flat as you can see; really modest net redemptions in the second quarter. And we are seeing that pretty much flat.

Then sorry, going back to the bullion and fiscal side, for the second half was it more flattish that you guys are thinking about?

Well, certainly compared to the first quarter. We don't expect to see such large redemptions in the second half of the year; but it's very unpredictable.

The trusts are all sitting with reasonable price-to-NAV statistics now, so we don't see any pressure there. In fact, we are looking at the opposite side.

We are looking at: okay, we've got a couple of ways right now to press a button and grow them. And that is something that we have to very seriously consider in the next quarter, because it involves a more innovative way of growing those trusts.

Okay. The other question, Steve, there were the one-time items in G&A that you mentioned. How quickly can you revert back to the normalized run rate of CAD6 million?

Oh, this quarter.

So next? Okay.

That is what we are expecting for this quarter, absent any other one-time expenses that come up. But we are not anticipating anything, and we are already into August. So I am guessing that would be pretty close to our run rate for Q3.

Okay, perfect. That's it for me. Thanks.

Paul Holden, CIBC.

Thank you. Good morning. First question, with respect to the Toscana lending book, out of the CAD102 million, how much of that is going to Sprott's balance sheet?

I think the number is approximately CAD20 million, but it runs out pretty quick. So it will be converted to cash over a reasonably quick period of time.

Okay. So it is mostly just being wound down?

Well, it could step up very quickly if opportunities present themselves. Also, all of the cash really goes over to the energy -- Toscana Energy side. They just need to spend it.

Got it. Yes, I understand. Last year when you first announced the transaction with Sprott Resource Lending, the main thought with respect to transferring that book was to put most of the loans into a private LP structure. I understand your comments regarding why that LP structure is being delayed.

But has your philosophy changed at all? Are you more content to keep a portion of the lending business on balance sheet today?

Philosophy has not changed at all. It is delivering exactly what we thought it could.

It is a very nice returning but lower risk asset class. It has been well executed. We haven't had any credit issues.

We haven't seen the upside, because the business does generate a lot of warrants and shares; and we haven't had great resource markets; and we haven't had any big wins. But it is very solid.

And in terms of running with a new LP, we are still totally focused on doing that.

Okay. So the majority of the loan assets should be transferred to the new LP whenever it launches?

No, they won't be transferred. They will be run down, but effectively our commitment will be transferred over time, because one side will be coming down while the other is going up.

Right. Got it, got it. Okay. Then with respect to your cash balance, you still have over CAD100 million. Now I understand you are always going to operate with some kind of cash balance.

So what I want to ask is, what is that minimum level you would be happy operating at? And what would you do with the -- how do you deploy the excess cash?

Well, we are happy staying very conservative. And the opportunities are more driven by what we see out there and whether we can create a managed product around it.

I would say we have been more active recently; but you are right. We want to keep a cash balance of CAD40 million or CAD50 million at any time to -- not so much to run the business, because we do have an operating line, but more in the event of a market correction, so that we can jump on something that is really, really attractive.

Then last question with respect to Sprott Resources. Is there any update on realized and/or unrealized embedded performance fees? Especially considering the sale earlier this year.

Do you mean Sprott Resource Corp.?

Correct, yes.

I believe that they're still a little bit below their benchmarks. So given the sale of long-run shares, they do start to eat -- to claw back against benchmarks. But I don't believe that we are expecting performance fees as of the current configuration.

I think they have set up a very nice participation with Corsa and PBS. That is showing itself to be in the money to date. But that is a 5-year investment, so nothing worth counting on.

Thanks for your time.

Scott Chan, Canaccord Genuity.

Good morning. Peter, when you talked about building institutional business, and you mentioned in your last remarks about several funds with near-term potential, can you just remind us and highlight those funds that are in near-term potential to market to institutional clientele?

Okay. I will give you a brief rundown of those that I think have potential. I mean technically, any fund does; so for instance, our Absolute Bond Fund, or our Diversified Yield Fund, or our Enhanced Equity Fund -- they could all be interesting to institutions in a managed account or in a fund format.

But the ones that I typically talk about are those in the resource area, because that is what we are known for. In the resource, we have private lending; we have private equity; we have energy yield; we have gold and precious metal hedge capability; and we have a resource long-only capability.

So all of those are being positioned in one way or another for institutional participation. I think the lending is probably the closest, but it is a -- even the precious metal trusts are appealing to institutions, and we haven't really opened them up to institutions because the offerings have all been done via retail networks.

But any of those could be attractive, and it is just a question of who signs up first.

Okay. Okay, that's all my questions. Thanks, guys.

We have no further questions in queue. I'll turn the call back over to Mr. Grosskopf for any closing comments.

Okay, well, thanks everybody today for your time and thank you, operator. Have a good day.

Ladies and gentlemen, thank you for your participation in today's teleconference. You may now disconnect.