Sprott Inc (SII) 2015 Q3 法說會逐字稿

Good morning ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc's 2015 Third Quarter Results Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded today, November 12, 2015. 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 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. Please go ahead Mr. Grosskopf.

Good morning everyone and thanks for joining us today. On the call with me today is our Chief Financial Officer, Steve Rostowsky. Unfortunately John Wilson, the CEO of Sprott Asset Management, is traveling and unable to join us today.

Our Q3 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 three with a review of our financial highlights for the quarter. Our AUM was CAD7.4 billion, as at September 30, down from CAD7.8 billion at the end of Q2. As most you know, Q3 was a very tough quarter for the resource markets and this had a negative impact on our results for the period, as both our active and passive resource strategies contracted.

We reported a net loss of CAD0.20 per share for the quarter, the majority of which was attributed to a goodwill write-down related to our acquisition of Global Resource Investments in 2011, which is not surprising given that Global was acquired at CAD8.67 per share. Steve will walk you through the details in a few minutes.

Our capital book also experienced losses during the quarter, resulting from a large percentage of resource investments in both our seeded funds and our loan book. On the whole, performance of the capital book has bounced back since September 30 and we expect to report better returns in Q4.

Looking now at slide four, the steep and prolong correction in the natural resource sector has been challenging for our business and has resulted in unsatisfactory financial performance over the past few years. However, we have not stood still during this period and we have used the time to invest in our platform; building new businesses that are well positioned for the future.

We are now a balanced asset manager with two strong platforms; diversified alternative asset management and our Global Resource franchise.

For this fiscal year, it has been somewhat of a tail of two cities; as I diversified business under John Wilson, has posted stronger than expected growth while the resource business has remained under pressure.

During Q3 we completed a rebranding of Sprott Asset Management to reflect its new positioning. We also conducted a cross-Canada roadshow to introduce advisors to the new profile for this business.

To support our efforts to reposition and accelerate the growth of this business, we made a key hire during Q3, bringing on Dennis Mitchell as Senior Portfolio Manager. Dennis is well known to most of you and in the Canadian asset management space and has a strong following amongst retail investors.

We have an eminent launch of four new funds for Dennis that we expect to attract significant new assets.

The addition of Dennis will complement our enhanced products, which are managed by John Wilson. These products have emerged as our flagship funds and have quickly grown to more than CAD1.3 billion in AUM by delivering consistent and targeted risk adjusted performance and strong sales. We expect this product line to capitalize on our momentum with the launch of the Sprott Enhanced U.S. Equities Class.

We continue to enjoy better than expected success in our alternative income strategy, such as the bridging income fund and our private credit fund. These products have experienced strong client demand and are concurrently only constrained due to their growth and manager capacity. As a result, we're exploring adding new products in this private credit area and evaluating other avenues to meet the investor demand for these strategies.

Overall, we're very pleased with the repositioning of SAM, Sprott Asset Management, and the growth of this business has been better than expected over the past couple of years.

Concurrent with the repositioning of our diversified business, we've refocused our resource strategies in order to deliver reduced volatility and more consistent returns, as well as being positioned to capture upside performance during an expected rebound. We've developed and launched new next generation funds, such as the Sprott World Gold fund, which have significantly outperformed their benchmarks since inception.

We expect these strategies to attract contrarian minded investors looking to position themselves for an eventual recovery in precious metal prices. And we are working on plans to further restructure our resources businesses to improve alignment, cost efficiency and cross marketing of the strategies. We'll have more detail on our progress in this areas for our year-end call.

Turning to slide six. Together our exchange listed products account for approximately 40% of our total AUM, and we're committed to expanding this business.

Since our physical trusts were launched in 2010, they've been a stable source of revenue and EBITDA for Sprott despite the weak precious metal markets of recent years. They've also helped us build global awareness for our resource expertise and we expect to capitalize on this brand recognition once sentiment towards precious metals improves.

In 2015, we launched our first two ETFs raising approximately CAD200 million in AUM. We expect to launch new ETFs early next year; we're considering opportunities to expand this product line through both resource and non-resource offerings. We're also continuing to move forward with our exchange offers for Central Gold Trust and Silver Bullion Trust. We hope to complete this transaction by or shortly after year-end, and if we're successful, this would add approximately CAD800 million to our path this product AUM.

I will now pass it over to Steve Rostowsky for a review of our financial results. Steve?

Thanks Peter. Good morning everyone. I will start on slide seven with a look at our assets under management and the changes from the beginning to the end of the quarter. Our AUM, as Peter said, was CAD7.4 billion as of September 30, 2015, down by about CAD400 million from June this year.

So, looking at AUM changes by product type, during the quarter the market value of our portfolio has declined by approximately CAD300 million and we reported an additional CAD65 million in net redemption.

On the sales side, while the overall net number was negative, strong sales in some of our mutual funds were offset by redemptions in two of our physical bullion funds and the closure of some underperforming and subscale alternative investment funds.

Investment performance across most of our strategies was negative, particularly our resource focused strategies. Market value declined in our bullion funds were offset by foreign exchange gains as our physical funds are denominated in U.S. dollars.

Moving onto the next slide, which gives you a breakdown of our revenue for the third quarter. Management fees were CAD18.8 million reflecting a decrease of CAD1.5 million, or 7.4% from the prior period. Average AUM for the year was CAD7.6 billion, which was down slightly from the same period last year. Overall, this reflects a decrease in management fees from Sprott Asset Management of 3%, with larger declines coming from our revenue focused businesses.

Commission revenues were CAD1.9 million for the quarter ended September 30, 2015, reflecting a decrease of 3.6% from the same period last year. Continuing muted activity of Sprott Resource Global Investments Limited was partially offset by commissionable transaction activity at Sprott Private Wealth.

Interest income, which is driven mainly by the performance of our loan book, was CAD4 million for the quarter, down about 25% from the third quarter of last year. The decrease during the quarter was due to lower average loan balances that were about CAD30 million lower in the current period as compared with the prior year.

During the quarter, we recorded CAD13.3 million in losses from capital invested in proprietary investments and loans compared with a gain of CAD4.3 million in the third quarter of 2014. Losses experienced during the quarter were due to a specific loan loss provision, as well as market value depreciation in certain seeded fund investments and equity holdings.

Other income for the quarter was CAD11 million reflecting an increase of CAD6.7 million from the second quarter of last year. The increases were mainly due to strong foreign exchange gain on translation of U.S. dollar denominated cash receivables and loan balances, the generation of royalty income on energy assets held in our proprietary investments and an arrangement fee earned on a new loan within Sprott Resource Lending Corp.

Looking at slide 10, expenses and earnings -- expenses for the three months ended September 30, 2015 were CAD65.2 million, up from [CAD21.5 million] during the same period last year. The reason for the large increase was goodwill and other intangible assets resulting from the acquisitions of the Global Companies and Toscana being assessed as being impaired.

Charges against earnings in the amount of CAD39.9 million were taken. Excluding these non-cash charges, as well as other operating expenses relating to certain energy assets, held as part of our proprietary investments, which are new this year. Expenses increased from CAD21.5 million to CAD22.1 million.

Essentially, compensation and benefits decreased primarily variable compensation accruals, while selling, general and admin expenses increased. The principal reason for the increases were higher advertising and promotion costs associated with the rebranding of Sprott Asset Management, higher technology costs and additional fund related operating and startup expenses mainly related to our exchange traded Junior Mining Fund and the U.S. listed fund that we acquired with Whitney George joining Sprott earlier this year.

On the variable compensation accruals, we are actively reviewing our talent management and retention strategies and aiming to adjust our accruals upwards in Q4, but it's too early to determine the magnitude thereof. Nonetheless, we expect variable compensation overall to be substantially lower than last year.

Adjusted base EBITDA was CAD1.8 million, or CAD0.01 per share, reflecting a decrease of CAD6.4 million from three months ended September 30, 2014. The decline was due to a CAD3.9 million provision against a resource loan during the quarter, lower management fees and lower interest income.

This was the first time that we have had a full reserve against a loan. We remain comfortable with the valuation of the remainder of our loan book.

The next slide shows EBITDA reconciliation in more detail, and while its largely self-explanatory, I would note that the difference between the losses on proprietary investments showing here and in the statement of operations is the CAD3.9 million loan loss provision that that is taken as a charge against EBITDA. We fully expect this to be a one-time non-recurring item.

Looking at our balance sheet strength provides a snapshot of our current capital position. We continue to enjoy an extremely strong balance sheet. Invested capital stood at CAD312.7 million reflecting a CAD30.6 million decrease from December 31, 2014. The main reasons for the decrease are the losses on proprietary investments and loan and the repayment of the credit line that was outstanding at December 31 last year.

Our invested capital is mostly made up of liquid investments, or investments where we can achieve liquidity within two years. I will now pass it back to Peter for some closing remarks.

Thanks, Steve. So, while this has been a tough year for Sprott, our results belie the underlying potential of what we all believe will be a strong rebound. While resource markets have been tough, we've continued to invest in our business to position the firm for this rebound.

We've built a number of new businesses; we've created multiple internal growth opportunities that we're committed to pursuing. These include the continued growth in our diversified actively managed strategies, the support for existing and new exchange listed product launches, U.S. growth and the potential expanded U.S. sales coverage, continued institutional sales efforts and the expected inception of our lending partnership, which we believe will happen later this year or early next.

We are fortunate that we have the financial strength that see us through a challenging year like this while still investing for our future in order to execute on our visions.

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

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. (Operator Instructions).

Our first question for today comes from the line of Geoff Kwan from RBC Capital Markets.

Hi there, good morning. Just had a question on the loan issue. Just wanting to, I guess, better understand what may have been missed or what you might have done differently with respect to the loan. And then, does this change how you look at doing loans going forward?

Thanks Geoff. Well, we've done 42 loans; this has been our only loss. It was not a core strategy loan; it was a loan that came to us through the Toscana Energy book. And yes, we would do something differently; the Toscana Energy strategies relied on hard asset coverage relating from reserve valuations.

The thing that we would do differently is, because this loan in particular was a mez loan, we would not go forward on any energy loan in that [position] without hedging our commodity exposure. So, that's something that was historical that we picked, we picked up with open eyes over the last couple of years and we believe it's an isolated incident, totally isolated.

OK. And just the other question; is just more from a broader investor perception side as -- with this business, it seems like you still are committed to it - I just wanted to get a sense of, you know, looking at the Sprott story, it's in some ways as an asset manager and also in some ways a bit of a lender and kind of, I guess, a bit of a hybrid company that way.

Just wanted to get your color in terms of that is how you kind of see the vision. Obviously, there're different components to with resource and the non-resource side, but maybe from a more simplistic view of the Company.

Sorry, just the very first part of your question - you, were you asking about the resource businesses or...?

Well, yes, no, just in light of what happened on the loan side. It's just kind of thinking about Sprott as, arguably, in some ways a simplistic asset manager and also a lender. Just wanted to see if that's kind of how you think about the company from a basic level.

Obviously, there is both resource and non-resource side, but just trying to think about it, if maybe not as pure plan asset manager, let's call it.

OK, well, I am going to divide the question if I could into two areas, but the first one is on the lending book. The lending book, which we took on, as you know, about two years ago from its inception as a closed end fund. It's been about 100 million to 150 million of exposure on our balance sheet; it's provided an average return of about 17%, this year it will be less than that.

That, obviously, provided a lot of financial EBITDA towards the shareholders account and towards the building of other businesses. We do fully expect to down shift that book into a lending partnership. It will become a managed strategy and a managed strategy only.

Turning to the second part of your question, the commitment that we have to the resource strategies - to put it into context, on the active resource strategies, we have about CAD1.1 billion of active AUM. We have about 70 people working on those resource strategies because they're in different buckets; ranging from private equity, to lending, to actively manage liquid strategies.

What's clear is that we can do a better job managing that capital with less people. What's also clear is there is incredible rebound potential and that - the kind of root of the business that five years ago delivered us CAD200 million in EBITDA from performance fees and AUM. So, we're absolutely committed to turning it around. And I think that's a global franchise that has kind of multiples of potential from where it is now. So, absolutely we're committed to seeing that vision through.

OK, and just the last question is on that loan book, if, and I apologize if I've missed this somewhere in the quarterly report, but do you have a rough breakdown in terms of how you would segment between different sectors, whether or not it's energy versus precious metals versus more commodity related resources?

Yes, so we'll have to give you and point it to detailed disclosure - we're trying to be as transparent as we can be. In fact, you can trace the loans individually to public borrowers that that disclose the loans on their financial statements.

So, the vast majority of the book is in senior mining loans, that's the core strategy. And we don't believe we have the need or risk for any further provisions. In many cases those loans are paying themselves out over the next six months, so our book does tend to ebb and flow quite actively.

And the two largest positions there are with TMAC mining which is a large gold project in Canada and with Platinum Group Metals which is the large platinum and palladium project in South Africa. So, we're going to point you to the exact disclosure and you can see the percentages there.

So Geoff, in those Sprott financials on page 45 of the PDF package, there is detail on resource loans broken down between metal and mining and energy, and then also geographic breakdown of those loans.

Got it, perfect. Thank you.

Good morning just a few questions. On the potential change in variable comp, can you elaborate on that, is this a timing issue or is this something that's going to be implemented and being changed to longer term?

I think it's both, but where we started historically, as you'll recall [probably], that with that 25% of net operating income as you've seen in our disclosure over the past few years with all the different businesses and different components, that simple methodology hasn't really worked, hasn't really served us well and we are taking a much more bottom up business-by-business type approach.

But obviously, in a very difficult year such as we've had, we have to look at everybody and all our people and determine exactly who we need to, and what we need to pay to, retain and motivate people. So, while the absolute number as a percentage of EBITDA, that number might well go up somewhat.

But it's timing, in a sense, in as much as EBITDA grows, and we fully expect that as well, as Peter said all the reasons that we've outlined. The variable comp will not [rise] the stats that EBITDA was.

Got it, OK. And then I guess the other question is - Steve you mentioned the increase in advertising, technology and fund startup cost. Can you, perhaps, quantify those three and to consider all three at one time, or how should we think about that?

Yes, so the advertising was about a CAD1.5 million; advertising and promotion in the quarter - there is some run rate to that. It was new, as we said, because we rebranding Sprott Asset Management. And that is somewhat of an ongoing process; it doesn't start just with a quarter and then stop. So, as we go forward we got to support the brand and the process.

The technology costs were higher, but will have flat lined. So, we are not going to continue to see increases in that. And the third piece was the startup costs on the funds; some of them were one-time, particularly relating to bringing on the U.S. focused trust. I mean, expenses were up, but then we obviously have revenue associated with that. So, net-net, that was actually positive.

The startup of the ETFs; Again, it very much depends on how fast that gets to scale. So, we were investing in the startup. The Junior Fund is still sub-scale, so we continue to subsidize that one.

If I can just summarize your comments there; it sounds like it will flat line from where it is this quarter, but you don't expect that to ramp up significantly. You got to look out for the next couple of years.

Correct. I mean, I would say our run-rate on SG&A somewhere in that sort of CAD6.6 million range.

OK. And then lastly just a numbers question; the CAD3.9 million loan loss, that's a pre-tax number, right?

It's a pre-tax number, correct.

And what would that be post-tax?

Well, that would be a fully taxable - it's not a capital gain, so 26% is our effective tax rate, so.

OK.

It would be effectively at that rate. I mean, in lending we have a lot of losses which we use up. So, we will quote it as a tax expense, but it actually wouldn't be a tax recovery the same way as a lot of our investment income, while we would have to show the taxes from an accounting perspective on cash taxes because we have a lot of losses to use in the lending business.

OK, got it, that's it from me. Thank you very much.

Thank you. And our next question comes from the line of Graham Ryding from TD Securities.

Good morning.

Good morning.

Can I just start with the CGT, SBT acquisition? Can you give me an update on maybe on what the percentage of the CGT units that tendered so far, has it changed at all from your last press release?

Well, I think it changes all the time depending on how close we are to the expiry date of the offer, because units get tendered then they get withdrawn as you go between dates and then they get re-tendered again. So, I think that the last number on last tender that was accurate it was about 57%.

Right, OK. So, you're pretty close to the threshold - how would you describe your overall confidence that you're going to be able to get this over the line?

Well, we're still very confident. The large shareholders are all solidly supportive and, as well, there are other mechanics underway, which I think would improve our chances and I am not free to elaborate on those now.

OK. If you don't get to this threshold, I think, November 20, you said, is the deadline. Is it reasonable to expect that you would push this out further if you are confident that you can ultimately get there?

Yes, we have the where-with-all to do whatever works for their shareholders. So, we are not particularly stuck to any timing schedule; if it takes two weeks, if it takes six months it's the end conclusion that we're after.

Yes, got it. And maybe I can just - thinking about the AUM that you'd be bringing in - $800 million, as of today, in U.S. dollars. And the EBITDA that that would generate [sort of what's], and then considering the cost that you've put into this process to-date - how much are you expecting to invest in this transaction and then what's the sort of time line before you recover that?

Well, those estimates are approximations at this stage, but to give you a rough idea, I think the EBITDA does depend on the size of the value of the AUM, which depends on the gold price and in rough numbers it's something like $4 million U.S. and we don't have an exact expense tally for the exercise yet, but that kind of revenue is very valuable because there is very few costs against it.

So, it's a highly valuable contract were we to gain it for our shareholders and it would be very accretive if we got it, but that $4 million number gives you an idea of where to start with on the analysis, anyway.

Graham, to put a little bit more color; the success, or otherwise discussion, is quite binary because, as Peter said, we would bring them in at into our trust at the same rate as 35 basis points on gold and 45 on silver. But on the expense side, under the accounting rules, we capitalize the costs to get those contracts.

If we're successful they remain capitalized, if we're not successful we would have to expense dollars, and obviously they've been pretty substantial going through the process. So, it's really a binary outcome.

OK, got it. Just going back to the loan book if I could, it sounds like you've got some comfort and you looked at the rest of the portfolio. What does that process involve? Is that sort of looking at the average loan to value across all your loans, or are you looking in addition to the actual borrowers on the other side, and their sort of financial health or maybe just some color around why you're comfortable in the rest of the book?

OK, well to tell you the process that we follow, we constantly check. Continuously check each loan for the repayment premise. And that constant re-checking is a function of borrower health in every way, so it's loan to assets, it's the certainty of re-payment from either cash flow or other means. And we don't waste any time during or taking provisions when we think they're needed, so this one, this particular experience happened, very quickly.

The company was in a sale process, we believed we had a clean way through it. And in the end, we didn't have a clean way through it, so we took the provision right away. We would do that on any loan and we believe we're clean everywhere else.

OK, great. Maybe some color around the mutual fund inflows this quarter and then there was obviously, or perhaps, what funds are driving that? Is it largely the enhanced funds income? And then on the outflow side, maybe some color around what that was related to on the alternative?

Yes, absolutely Graham. So, you're correct on the inflows; on a net basis and on, almost, on a gross basis, the enhanced equities class and new enhanced U.S. equity's class - those were the bigger inflows.

Also, pretty good inflows on the diversified bond fund, which Scott Colbourne manages. On the outflow side, Canadian equity continues to be the largest outflow and then that's on the mutual fund side.

On the alternatives we closed the strategic fixed income funds - that was announced a while back but it finally closed in this quarter, which was about CAD 28million. And then we also are in the process of closing our Offshore Funds; they just got too small for to manage much more complex and costly managing the Offshore Funds. So, those were closed with a total of about CAD25 million. So, those were the two biggest outflows plus and the Physical Trust.

I'm sorry, the Offshore Fund, is that related to the [Korean Mandate], the [Charter] ...

No, no, no - the Offshore Funds are the Legacy Funds that Eric used to manage. They followed Eric's [head] strategy.

OK, got it. Thank you.

Thank you. And our next question comes from the line of Scott Chan from Canaccord Genuity.

Hi, good morning guys. Peter, just on your last slide in the presentation, can you just elaborate on some of your internal growth opportunities specifically related to the U.S. growth in sales, coverage comment and also the institutional sales?

Well, we've had the experience of meeting a couple of key candidates to head up U.S. sales for us and we have always thought that it would be beneficial to have somebody to address our channel partners down there for the exchange listed products because they are held almost exclusively by U.S. clients.

So, somebody to help us build those businesses and to focus on more creation opportunities because, of course, our Physical Trusts are very good on providing redemptions for investors that want to get out, but we have not had somebody exclusively focused on creation opportunities.

And then, that sort of naturally extends itself to see if we can get one of our existing products on to a U.S. shelf and in order to do that you need support. So, that's the U.S. sales opportunity in a nutshell. And what was your other question Scott?

Just maybe an update on the institutional sales side; in the past you've won a couple of mandates there. But just kind of curious just what you are expecting over the next year or so.

Yes, so those mandates are chugging along, they don't provide us with a lot of EBITDA. Those two are in Asia and I do think we have more potential to build business in Asia. I think we've just got kind of small toll hold there and it takes time and when markets are tough, it's hard to get results.

But that doesn't reduce the potential; I think there is great potential there. The other institutional side - we haven't had over the past five years a lot of products that we could pound the table on. We've had our lending product, which has generated good returns, but now, actually, we've had a couple in development where we've got some really good results versus benchmarks and our gold products in particular are soundly beating their benchmarks.

So, as institutions allocate the gold, we hope to be there and in order to do that we needed a different institutional staff to support that. So, we're just in the process of interviewing and hiring and making sure that everything is aligned that we can put a real consolidated effort into selling those funds now.

And then, Peter, just lastly - just on your balance sheet. I mean, obviously with resource markets are still volatile right now. Has there been any change in thought in terms of your split on your capital deployment from over the last few quarters?

I would say the money that we've had in resources has been relatively protected compared to how badly the area has been slammed. I don't think we have any need to increase that.

In fact, I think that we now know what areas that we think can outperform and we will keep those on and we will take a couple of the riskier areas off and you'll probably see more of that capital going into diversified strategies as we have diversified in private credit to support. I think that's a natural conclusion; those are going to keep growing.

So, for us it's a question of not just where we get the best return, but where do we get the best sales?

Right. Did I read something in the MD&A about an alternative product, like a market neutral? Was that a seed, or was that related to something else?

I am not sure what you are referring to.

Yes, OK. I was reading through it quickly, I will go back and I'll give you a shout if I...

OK. We will just talk after.

That's fine, no problem.

You can give me a call.

OK, thanks Steve. Thanks guys.

Thank you. And at this time, I will turn the call back to management for closing remarks.

OK. Well, thank you everybody for your time today and thank you Operator. We would be happy to answer any questions offline afterwards. And with that, I will turn the call over to the operator to close the call.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.