Sprott Inc (SII) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2018 Annual Results Conference Call. (Operator Instruction] As a reminder, this conference is being recorded today, February 28, 2019.

On behalf of the speakers that follow, listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements within the meaning of the safe harbor provision of the Canadian provincial security 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 implied in making forward-looking statements, please consult the MD&A for the quarter and Sprott's other filings with the Canadian securities regulatories (sic) [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. On the call with me today is our President, Whitney George; our Chief Financial Officer, Kevin Hibbert; and John Ciampaglia, Chief Executive Officer of Sprott asset management.

Our 2018 annual results were released this morning and are available on our website, where you can also find the financial statements and MD&A.

I'll start on Slide 4, with a quick look back at 2018. Our assets under management grew by $500 million during Q4 and ended the year at $10.6 billion, up 44% from the end of last year. The yearly increase was due largely to the acquisition of the CFCL assets at the beginning of 2018, while the quarterly increase was due to the stronger precious metal prices in December. Adjusted EBITDA was $40.5 million for the year, an increase of 51% over 2017 on a normalized basis.

We continue to drive down and deploy capital in our private lending LPs. And we are increasing our assets under management in this business to approximately $500 million from $250 million at the end of 2017. We also expanded our digital gold portfolio with the launch of OneGold, a direct channel online platform for the purchase of digital precious metals.

Turning now to Slide 5, for a look at our progress in the first couple of months of 2019. We continue to gather assets in our lending business and attained $965 million in committed capital, up from $625 million at the end of Q3. These commitments will become fee-generating AUM, as they are drawn down and deployed by our landing LPs. As the interest in precious metals increases, our physical trusts are seeing increased trading volumes and tighter discounts. After experiencing some redemption pressure in 2018, we are now benefiting from new block buying from global institutions and some new unit creation in the Sprott Physical Gold Trust.

In February, we launched a new joint venture with John Hathaway and the Tocqueville Gold team. This is a special situations limited partnership, designed to capitalize on the coming wave of mergers and acquisitions in the gold space, and we believe it will be an attractive option for U.S. institutions and other high net worth investors who are looking to allocate to the sector. Also in February, we named Whitney George as the President of Sprott. As you know, Whitney was already a key part of our leadership team serving as Chairman of Sprott USA and CIO of Sprott Asset Management. In this new role, Whitney will be taking on an increased -- increasing operational responsibilities that will allow me to focus on growth and strategic opportunities.

We also welcome back another familiar face with Neil Adshead rejoining Sprott as Portfolio Manager of our exploration LPs. Neil will work closely with Rick Rule in managing the existing partnerships and looking at opportunities to reinvigorate this business line.

Turning now to Slide 6. I'd like to take a minute to talk about the recovery that is occurring in our sector. Beginning in Q4 2018, gold started to outperform as the general market felt the impacts of the Fed tightening program. After a volatile year, gold outperformed in Q4 reaching new highs in 72 different currencies and ultimately outperforming most asset classes on a full year basis.

As you can see on Slide 7, gold ETF inflows began to rise in September 2018, just as the equity and credit markets faltered. Although, there have been recent pullbacks on these inflows. We believe that growing acceptance is that gold has become a mandatory portfolio diversification asset. On the equity side, the Barrick, Rangold merger kicked off what we expect will be a wave of consolidation amongst the miners.

As you can see on Slide 8, the gold equities have gained almost 30% since mid-November. With some recent announcements of Newmont, Barrick and Goldcorp, we believe that this increase in M&A activity presents a historic opportunity in smaller caps as the indexes rebalance. ETFs has simply dominated flows into gold equities and have predictably outperformed active strategies during this period of inflows. We now believe that the stage has been set for a return of value-added active management in the sector.

With those comments, I'll pass it over to Kevin for a review of our annual results.

Thanks, Peter, and good morning, everyone. I'll start on Slide 9, with a look at our 2018 AUM. AUM was $10.6 billion as at December 31, 2018, up $500 million or 5% from the third quarter and up $3.3 billion or 44% from December 31, 2017. The increase in the quarter was primarily due to higher precious metals prices in our physical trusts, net of redemptions. The increase on a full year basis was primarily due to the successful acquisition of CFCL, and higher capital call activity in our lending LPs. These increases more than offset the redemption activity in our physical trusts and sub-advised product offerings.

Moving on to Slide 10, for a look at our 2018 earnings results. Adjusted base EBITDA in the quarter was $10.1 million, which was up $2.6 million or 34% from the prior period. On a full year basis, adjusted base EBITDA was $40.5 million, up $300,000 or 1% from 2017. On a normalized full year basis, i.e. excluding the impact of the 2017 sale of our noncore Canadian diversified funds business and the reversal of loan loss provision and booking of related catch-up interest on a previously impaired loan, adjusted base EBITDA was up $13.7 million or 51% from 2017. The increases on a 3 and 12 months ended basis, both reported and normalized, were primarily due to higher net fees on the newly acquired CFCL assets and over $300 million of newly called capital into our lending LPs in 2018.

These increases were further bolstered by lower SG&A spend across the company, but were also partially offset by lower fee income in our U.S.-based fixed term LPs and lower net commissions due to slower year-over-year equity origination and private placement activity in our Canadian and U.S. broker dealers. For more information on our AUM, revenues, expenses and EBITDA, you can refer to the supplemental information section of this presentation as well as our 2018 annual MD&A filed earlier this morning.

I would now like to spend some time sharing management's thoughts on our 2019 outlook, details of which can be found in the outlook section of today's MD&A filing. As you know, 2018 was a significant year of transition and change in our business as we finalized the sale of our noncore wealth management business, and successfully acquired and integrated the CFCL assets into our Exchange Listed Products franchise. In the backdrop to these strategic activities, you may also recall that we were in the midst of transitioning a significant portion of our earnings base away from interest income generated from legacy balance sheet loans into a growing fee-based business of managing private institutional lending LPs.

Our 2019 outlook suggests that this year will be the apex of that transition from balance sheet derived income to operating income, as we expect the remaining 3 legacy loans on our balance sheet to be fully repaid in the year and we also expect to deploy between USD 200 million and USD 400 million in called capital into our lending LPs steadily throughout 2019. In this regard, our 2019 earnings outlook will depend to some degree on the extent to which 2019 management fee income arising from the ongoing steady deployment of called capital into our lending LPs and replace the interest income we expect to lose in 2019 from the final 3 legacy loans running off. However, as always, there are a variety of other factors that will also come into play such as gold and silver prices, which are up currently compared to 2018 average pricing levels. Physical trust new unit creations relative to physical trust unit redemptions. And finally, the general strength of precious metals, mining-related equity origination and private placement activity in Canada and the U.S. We also expect corporate operating expenses in 2019 to trend lower, primarily due to lower LTIP amortization and lower SG&A spend, something I have mentioned a few times back in 2018.

Again, I would encourage you to review the outlook section of our 2018 annual MD&A for further details. Finally, I'd like to turn your attention to Slide 11 for a quick look at our investable capital. Going into 2019, the most significant area of capital deployment will be the ongoing co-investment into our fund products. This includes primarily our co-investment in lending LPs alongside our institutional clients, we expect will be called upon steadily through 2019 to deploy between USD 200 million and USD 400 million into our lending LPs. We anticipate our co-investment level to range between 5% and 10% of the aggregate client capital invested.

That said, I'll now turn it back to Peter for some final thoughts.

Thanks, Kevin. In recent years, Sprott has invested in our platform while many of our competitors have either shuttered their funds, turned to indexing or otherwise downsized. As a result, we are now one of the last, and I would argue, the most experienced global specialist in a sector that is growing in acceptance as a real asset class with attractive insurance-like qualities.

With the investments we've made in the platform and the talent we've been able to attract in all of our business units, we reiterate that we're in a position to manage growth and AUM and in general, in what we expect to be a long term up trend in precious metal prices.

Looking out at the remainder of 2019, we'll continue to deploy capital on our existing lending LPs and raise new assets and these and complementary strategies that we will deploy beginning in the second half of this year. We are committed to rebuilding our managed equities platform, and we think that the Sprott, Hathaway JV will be an important step in this process. And finally, we continue to explore both in market and complementary strategic acquisition opportunities.

That concludes our remarks for today. We'll now open the call to answering your questions. Operator?

[Operator Instruction] Our first question comes from Gary Ho of Desjardins Capital Markets.

Wanted to start off with a question on the lending fund, so perhaps for Peter. The pace of the capital deployment has been a bit slower than I anticipated. With the rebound in precious metals prices and related equities over the past few months, now did that have an impact on the timing of when gold companies may draw on these loans versus perhaps issuing equity as an alternative?

No, that wasn't really a factor. The pipeline, which is at all time record highs was actually mostly affected by the opposite, which is lack of equity into the sector. So there has been a number of deals that have kind of been in a holding pattern until their borrowers could refinance the equity components of what they were looking at. I guess, even though equity prices increased, those increases were mostly focused on the larger cap mining equities, the smaller caps have generally still been very thin and illiquid and hard to finance. So if anything, the hold up has been for the opposite reason.

Okay. And then maybe, I guess, related to that, like with higher prices increase the likelihood of kind of more project financing as it makes the projects more attractive. Or how should we think about that?

Well, it's so hard to tell. On the one hand, we're counter cyclical on the lending business, so the worst the sector gets the better the deal terms get. So for deployment, the difficult market conditions is better. But for harvesting and perhaps for overall deal volumes, better markets are good. So it's really just a very steady business, but even though it's steady, it's chunky. And we might have as we do now, $600 million or $800 million in the pipeline and deals get delayed for a month or 2 and then all of a sudden we have $400 million in deployment. So it's very hard to call quarter-to-quarter.

Okay, okay. Appreciate that. And then maybe for Kevin. I'm trying to piece together a few of the comments in your prepared remarks as it impacts kind of the base EBITDA. So it sounds like the level of the LTIP is coming down, that's a positive, but this is offset by the runoff from the balance sheet loans versus the ramp up in management fees in 2019. Just wondering if you can help me quantify some of these pieces. And how should I think about that as it relates to 2019?

Gary, so yes, that -- you got the comments correct to quantify that -- we don't provide earnings guidance obviously, but I can -- happy to give you a little bit more technical color into those numbers maybe if you give me a shout after the call, happy to do that, or anyone else on the call if they want that, I could do that then. Just don't want to take up too much time going into the specific details around those items right now.

Okay. And then just lastly, with the movement in gold price year-to-date. Can you provide us maybe an update on where AUM stands right now?

So AUM right now is -- there hasn't been a significant change in where AUM levels are so far, but it is still pretty early in the year. February is just recently closed, so based on what we've seen in January, there hasn't been a huge amount of movement.

Our next question comes from Nik Priebe of BMO Capital Markets.

Looks like there is -- I just want to start with a question on redemptions in the Exchange Listed Products franchise in the quarter, I can appreciate there is a large component that would have been attributable to the CFCL assets, but it actually looks to me like the majority was not. So like, I was just wondering if you could give us a bit of color on what the pipeline looks like. A, for CFCL redemptions. And also what drove redemptions in the physical trusts that weren't actually related CFCL, just given that was actually a pretty strong period for precious metal prices.

Yes. Nik, it's John here. Obviously, the redemptions that we booked were right at the trough of the market, in August, September and leading into the fall. So there's always a lag effect that we experience and as metal prices fell across the board, the discounts widening, we definitely had redemptions through the period. What we've seen in the last 2 months is a very different story. We've seen redemptions moderate significantly, discounts have tightened and we've actually been in a position in the last 2 months to issue new sales. So for example, the Sprott Physical Gold Trust, we had not had an inflow into the fund since April of '18. And in the last 2 months or so, we've done about plus-20 U.S. in new sales. So that's very encouraging to us. Palladium is at an all time high, and we feel that we will be in a capital raising mode on that fund in the near term. Silver has rebounded back to around $16 and that has tightened the discount on the silver fund. So we're feeling pretty good about the asset values recovering, the discount tightening, the liquidity and trading and volumes of the fund picking up. And I think more importantly, the inbound inquires we're getting. There has been a noticeable uptake in the number of people contacting us about the products. The primary beneficiary of that has been gold, as people are looking to rotate more into a safe haven asset. Silver is then tagging along with gold, but it's not historically -- it hasn't been doing what it historically does, which is outpace gold in performance. So we think that's just a matter of time before it kind of slingshots ahead. The mining ETFs did have sizable redemptions in the quarter, that wasn't surprising given how the sector came under a lot of selling pressure. The redemptions have stopped. We've had a little bit of inflow, so I think looking back at the quarter, we view it as a trough and all things are kind of turning up. So we feel better going forward. As I said, one of the most important things is the narrative is changing. It's -- it isn't The Wall Street Journal or Barron's writing about the value of precious metals in the portfolio, it's also Morgan Stanley, Goldman Sachs, AllianceBernstein and so on, writing institutional reports to their clients about why they need to be looking at precious metals again, and why they need to be looking at the mining stocks as a tactical trade right now given the higher metal prices, but I think also because of the M&A activity that's been reignited in the last couple months. So we're very optimistic that we hit the trough and we're climbing out of it.

Okay. That was very detailed. Next question would just be on the private lending LP. And I'm just looking at this from a fee-generating asset, the AUM perspective.

Like it looks like the impact of capital calls in the fourth quarter from an AUM perspective were offset to some extent by some principal repayments and associated distributions to the LPs. So I know that that's kind of normal course for a portfolio like this as it progresses through the life cycle. But I'm just wondering given that you've provided some good guidance on capital deployment for this year, do you also have some visibility on the repayment schedule as well?

So Nik, I'll tackle that and then Peter, if you want to add some additional color. Yes, you're exactly right. With the distributions, the number that we're thinking of, the $200 million to $400 million, that would be inclusive of any distributions that occur. From a -- so that should, I think, answer the majority of your question. But just generally speaking, when you think about distributions, I think Peter was bang on with what he said earlier, which is, this is a bit of a choppy business for all the reasons that he had noted. And so you want to take with a grain of salt what you're seeing in quarter on the distributions, because those repayments sometimes they could be off cycle, so it may not be that the loan is actually matured and it may be at a different point in time in the capital call time horizon. And so this one here for instance, it's not as if this would be any indication going forward of there being a greater likelihood of distributions exceeding capital calls, if anything, it's going to be even more difficult to have some visibility into that just given how things are there. But I don't know, Peter, if you have any additional insights on timing.

Well, only 2 points. Repayments and distributions are 2/3 good news, 1/3 bad news. The good news is the performance has been exceptional and that, that should drive further in flows. The bad news is, of course, you take a pause in your AUM growth.

I think what is most important for the business in the long term is that it is getting a bit more flexible now. And where as we were under a very tight constrained mandate to start with, with short duration and a focus on only a certain interest rate hurdle, we're now quite a bit more flexible. So we see the impact on our pipeline. The pipeline, as I mentioned, is very robust. So it's hard to call exactly, it's chunky. But overall, we still see it as a nicely growing business.

Okay.

And then if I could just add one other important point, Nik. Distributions are quite different from redemptions in that. These distributions are going to clients who have a much longer time horizon from an investment perspective than the duration of the funds. And so a lot of times what will happen is these distributions will go to them, but then get recycled back into some later vintage of our lending fund products down the road in the form of new capital call. So there's a recycling effect to some degree around distributions currently, eventually making their way back into our AUM as new capital in another fund.

Yes, for sure. That makes sense. And then one last one I had. Just on the on balance sheet loans receivable, it looks to me like the composition of the on balance sheet loans change slightly quarter-over-quarter. And what I mean by that is in the notes to the third quarter statements, it looks like there were 4 loans overclassified as energy and other. And then as of year-end, there were 2 loans in that category and then 1 loan that accounts for the large majority of principle in the mills and mining sector. So was that just a reclassification that occurred there or is there still some shifting activity in that on balance sheet lending portfolio?

No, you're absolutely right. It was just a reclass.

And our next question comes from Graham Ryding of TD Securities.

Could you just give us a little color on the credit loss track record on this resource lending portfolio and has that been -- if it's been lower or nil, has that been a helping raise this sort of second tranche of capital?

Yes. Well, knock on wood, we have not had any credit losses, so it's certainly helpful to be able to say that. The portfolio is robust enough that it can handle a loss ratio, but it has a limited number of loans in it, somewhere between 10 and 20. And auditors do not allow funds of that nature to take general provisions. So we don't provide, we simply try and keep a very accurate mark on all our assets and that's easy to do. But we're fortunate we haven't had any credit losses over 8 years of being in business, it's a great track record.

Okay, great. The gain on long-term investments this quarter, $3 million, what was that related to?

So -- Graham, it's Kevin here. So that's related to the same thing it was last year. If you recall, we've mentioned that from an accounting perspective our strategic long-term position, so that would be some of the digital gold strategies that Peter has been talking about for a while now. If you recall those get mark-to-market towards the end of each year. And the mark this year was a little bit lower on those

positions than they were this same time last year. I think it was like $3.6-ish million in '17 and this year it was, I think, around a little over $3 million.

Okay, got it. And then the -- your color around running these loans off your balance sheet. And then 5% to 10% of co-investments is what you're expecting and what you deployed in your resource lending. Is that a -- is there enough of an offset there if you hit that sort of midpoint of your $200 million to $400 million target of resource loans. Your co-investment in that portion is that enough to offset what's running off your balance sheet?

No. Because we have -- there is 2 things that we rely on as the offset to the runoff of the interest income. One is, as you rightly know, the co-investment income from our seed, but the other very big portion would be the management fees that we would collect on the third-party client capital. So it's a combination of management fees on the $200 million to $400 million, plus the (technical difficulty) we generate on the units we specifically invest in. Those 2 things together are what would be required to offset the lost interest income.

Got it. And the co-investment income that you had earned. Does that -- is that not going to flow through that interest income line? Where does that flow through?

So right now, it flows through the interest income line. So if you look at our segment disclosure -- the lending segment disclosure, you'll see a little footnote that provides a decomposition of what's in interest income.

Okay. So that's going to persist. It's just getting lower next year, that's the message?

So the interest income will be lower. But as we continue to build scale in the co-investment piece from an accounting and regulatory perspective, we're going to have to now break out the co-investment portion from interest income and show it on its own separate line, Graham. So -- yes. So starting Q1 what you're going to see is, you're going to see a management fees line, you're going to then see a co-investment income line and then you'll see the interest income line, which is basically going to be orphaned and only have in it the interest income from whatever loans we have left on the balance sheet.

Got it. Okay. That makes sense. And then just my last question is just to Central Fund, part of the acquisition structure was an earn-out. And I'm just wondering with the 15% of the AUM redeeming this year, where does that earn-out stand? And can you remind us sort of the timing and the amount of that earn-out?

Sure. So the minimum earn-out was $5 million. And it was based on a minimum redemption experience amount. So that amount was tripped, and so we ended up paying that $5 million earlier in January.

Okay. And that's it, there's nothing remaining? Or there is?

Yes, that's it.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Peter Grosskopf for any closing remarks.

Okay. Well, thank you everybody for joining us today. We look forward to reporting you again at the end of the next quarter on our progress, and have a good day.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect.