Sprott Inc.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprouts Incorporated's 2024 Third Quarter Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, this conference is being recorded today, November 6, 2024. 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 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 in making forward-looking statements, please consult the MD&A for the quarter and Sprout's other filings with the Canadian and U.S. securities regulators. I will now turn the conference over to Mr. Whitney George. Please go ahead, Mr. George.

Thank you, operator, and good morning, everyone, and thanks for joining us today. On the call with me today is our CFO, Kevin Hibbert, and John Pavia, our CEO of Sprott Asset Management. Our 2024 third quarter results were released this morning and are available on our website where you can also find the financial statements and MD&A. I'd like to start on slide four. Before I get into our results for the quarter, I'd like to comment on the elephant in the room. Last night's election was decisively won by Donald Trump, a result of the shorter costs and volatility in the financial markets, as we are already seeing this morning. However, it's not our job to be distracted by noise, short-term noise, and remain focused on the long-term drivers of our business, which are fundamentally unchanged. With our focus on precious metals and critical materials investments, we are very well positioned to benefit from the powerful trends that define the current market environment. Turning now to our results for the quarter, I'm pleased to report that our assets under management increased by $2.3 billion to $33.4 billion, which is another record high for Sprott. Our assets have continued to grow subsequent to the quarter, and AUM was $34.2 billion as of November 1st. Precious metals prices have been the main driver of our asset growth this year. Gold has posted gains every month of 2024 and is currently trading near all-time highs, up 32% year-to-date today notwithstanding. Silver broke out late in Q3 and is up approximately 36% year-to-date. Our managed equity strategies have benefited from rising precious metal prices and have delivered strong performance on both a three- and nine-month basis. After a slower start to the year, we recorded $589 million in net sales during the quarter, largely in our physical gold and silver funds. Looking ahead, we're currently developing two new precious metals ETFs, which we expect to launch in the first quarter of 2025. With that, I'll pass it over to Kevin for a look at our financial results. Kevin?

Thank you, Whitney, and good morning, everyone. I'll start on slide five, which provides a summary of our historical AUM. AUM, to Whitney's point, finished the quarter which was up $8 billion last quarter and up 16% from $28.7 billion at the end of last year. On a three and nine months ended basis, we benefited from market value appreciation in our precious metals physical trusts, net inflows across our exchange listed products mix, and the launch of the physical copper trust in the second quarter of the year. Over the last five years, our AUM has grown by $24.1 billion, of which 47% was attributable to net inflows, 40% was related to market value appreciation, and 13% related to acquisitions and new fund launches, demonstrating the strength and quality of our AUM growth over the years. Subsequent to quarter end, on November 1st, our AUM increased another $800 million to $34.2 billion. Slide six provides a brief look at our three- and nine-month earnings. Net income this quarter was $12.7 million, up 87% from $6.8 million for the same three-month period last year. On a year-to-date basis, net income was $37.6 million, up 17% from $32.1 million last year. Our three- and nine-months-ended results benefited from higher management fees on strong market valuations of our precious metals physical trusts and inflows to our exchange-listed products. We also benefited from carried interest crystallization in our managed equities funds and market value appreciation of our co-investments. Adjusted base EBITDA was $20.7 million in the quarter, up 16% from $17.9 million earned over the same three-month period last year and was $62.8 million on a nine months ended basis, up 18% from $53.1 million earned over the same nine month period last year. Our three and nine months ended results benefited from higher management fees on strong market valuations of Precious Metals Physical Trusts and good inflows to our exchange listed products. Finally, slide seven provides a few treasury and balance sheet management highlights. And as you can see, due to our improved earnings, our cash and liquidity profile continues to strengthen quarter over quarter, our leverage remains low, and we will be debt-free in the last quarter of the year as we expect to fully pay down the outstanding balance of our credit facility. With a strong cash and liquidity profile and strength of our earnings, we are well positioned to cover a 20% increase to our dividend. For more information on our revenues, expenses, net income, EBITDA, and balance sheet metrics, you can refer to the supplemental information section of this presentation, as well as our quarterly MD&A and financial statements filed earlier this morning. With that said, I'll pass things over to John. John?

Yeah, thanks, Kevin, and good morning to everybody. Just starting off on slide eight, we continue to experience strengthening sales momentum in the quarter with net flows of $617 million. This represents the strongest in two years as investors are finally beginning to return to precious metals. Our gold and silver trusts drove most of the sales in the quarter, and year-to-date, five out of our six physical commodity funds have attracted net new capital. On a year-to-date basis, net sales stand just below $1 billion. I think it's important to note that over the past 12 months, a number of central banks have accounted for the majority of physical gold buying. While China has signaled they have paused their buying over the past few months, we believe the key word is pause, and they will resume their buying in an effort to de-dollarize their foreign exchange reserves. With the election of Donald Trump, it looks like the Trade relations with China are more likely to deteriorate than improve, which we think will act as another catalyst to get China, Chinese central bank, to buy more gold. Gold buying amongst Chinese retail investors has also picked up as gold's allure as a long-term store of value looks more compelling against other asset classes like real estate and domestic equities, which have performed very poorly over the past few years. Next slide, please. So on slide 9, it illustrates the market disconnect we've seen between the price of gold and total ounces of gold held by ETFs over the past year. And gold held by ETFs is a very good proxy for just about all kinds of investor segments, but heavily institutionally oriented. As you can see, the amount of gold held by ETFs was approximately 92 million ounces as of June 2023, and the price of gold was below $2,000 an ounce. Despite gold strengthening to $2,400 within the subsequent 12 months, ETFs reduced their gold holdings to just under 81 million ounces. It's only been in the last quarter where we have seen the trend reverse, with gold held by ETFs growing back to 84 million ounces. It's encouraging to see investors adding to their gold holdings again, which has recoupled the historical relationship between gold price and gold ETF holdings. Next slide, please. While we have not been immune to redemptions during the past year in our precious metals segment, we have fared much better relative to our largest competitor funds. These charts highlight the percentage change in the shares outstanding for our physical gold trust, PHYS, and our physical silver trust, PSLV, over the last five years relative to their largest competitors in the world. As you can see, units of FIS have grown by 109%. while our competitor is down slightly. PSLV has grown its units outstanding by 219% compared to only 30% for the largest competitor ETF. Next slide, please. AUM in our suite of physical commodity trusts continued to climb, reaching an all-time high at the end of October. AUM in this product segment is up 50% since the beginning of 2023. and highlights the scalability and broad investor appeal of these funds. It's also important to mention that having a suite of six different physical metal trusts provides investors with a broad range of choices and provides us with important diversification for our business. Next slide. Now switching to our range of equity ETFs, market weakness across critical materials over the quarter translated into muted sales of $56 million. Performance for uranium equity since the beginning of September has improved significantly following a sharp correction that we saw from late May to August. Year-to-date net sales stand at just over $300 million, and flows into this segment can be more temperamental given the more volatile nature of many of these mining equities. Once again, having a broad suite of funds covering various mining segments, which are also listed across multiple jurisdictions, positions us to capture flows that when investor interest appears. Next slide. AUM in this segment has recovered over the past few months and is now up 20% since the end of August. And building scale in this product suite is very important as we benefit from cost efficiencies, which translate into higher profit margins given most of these funds have unitary or fixed fees. And I'll now pass it to Whitney George.

Whitney George Thank you, John. Turning to slide 14, our actively managed equity products, our actively managed precious metal strategies continue to perform well with our flagship gold equity fund gaining 21.4% in the third quarter and 36.3% year to date. Despite the strong performance and compelling fundamentals, investor flows have not yet returned to mining equities. Our managed equity segment recorded 54.6 million in net redemptions during the quarter and 167 million in redemptions during the first nine months of the year. This stands in stark contrast to the physical goal, which saw a record investor demand in the third quarter. We expect to see this demand spill over into equities over the quarters ahead. I'll now turn to slide, the next slide, 14. slide 15 private strategies combined lending and streaming strategies AUM was 2.4 billion as of September 30th 2024 the team is continuing to monitor and harvest investments in our second private lending fund and is actively assessing new investment opportunities for lending fund free and to summarize on slide 16 We're pleased with our performance so far this year and confident we'll be able to sustain our momentum in the quarter ahead. AUM has reached record highs each quarter of 2024 and our sales have begun to accelerate after a slower first half of the year. We're experiencing strong client engagement across all channels and expanding our client base among institutions, family offices, RIA broker dealers, and hedge funds. Our focus on precious metals and critical materials positions brought well to benefit from the macro trends we expect to drive the markets in the coming months and years. As Kevin noted, based on our financial performance and our positive outlook, we raised our quarterly dividend by 20% and expect to pay off the balance of our line of credit by the end of November, resulting in a debt-free balance sheet. We appreciate the continued support of our clients and shareholders and look forward to reporting to you in the quarters ahead. And that concludes our remarks for today's call. I'll now turn it back to the operator for some Q&A. Thank you.

Ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. Our first question or comment comes from the line of Graham Riding from TD Securities. Mr. Riding, your line is open.

Well, hi. Good morning. You shared a little bit of commentary around just maybe with the Trump presidency demand for sort of the U.S. dollar from China may continue to sort of be weaker or be lower. Any other sort of implications for your business around precious metals demand or critical minerals demand from a Trump presidency?

I'll take that. You know, essentially it didn't really matter to our forecast or, you know, our long-term outlook is who won the election. You know, both we figured would be characterized by continuing growing deficits. That's going to put pressure on interest rates. It's presumably going to put some pressure on inflationary trends. We're not at the cap that inflation has been beating. We think it's just resting. And so all of the fundamentals that have been in place for the last couple of years we think are still in place and maybe even get accelerated with a Trump presidency.

Whitney, maybe I'll just add to that on the critical material side. We think things like uranium will continue to get bipartisan support in the United States. the Biden administration has been incredibly pro-nuclear, which is not typical of democratic administrations. And all the major bills that have been passed in the law the last few years, including the BIL, IRA, and the Advance Act, all receive bipartisan support, which are very supportive of basically re-energizing nuclear energy and reshoring critical elements of the supply chain, which... unfortunately reside in places like Russia. So we think uranium will continue to be a beneficiary of this reshoring trend and the push to nuclear power, given the incredible load growth that people are expecting in the U.S. on the back of reshoring of key technologies. The other thing we've been talking about is, you know, with all the rhetoric from Trump about clean energy, what could be impacted. And I think it's important to note that Out of the 35 $1 billion-plus projects that have been announced, mostly related to clean energy technologies and manufacturing, 29 of those reside in red states. So I think the pushback at the state level will be enormous. And I think it's more an issue of national security that many of these industries are being reshored away from China to diversify against geopolitical risks. So while there's been a lot of rhetoric against certain subsidies and part of the Inflation Reduction Act, We think a lot of the capital inflows will remain because they are creating a ton of jobs in red states in particular.

Gold entered the bear market and started to go up the last time Trump got elected.

Okay. John, I'll stick with you. You mentioned that your physical gold and silver trusts have done better than your largest investors. ETF competitors? Is that because of the physical delivery component, or what do you attribute the outperformance?

Trust. I think we have a segment of investors that clearly trust that we have all the gold, that it is held with a safe custodian, which is Royal Canadian Mint, having the physical redemption option, as well as a potential tax advantage for certain investors in the U.S., given we're not subject to collectibles tax if you make certain IRS filings. all give us advantages which have allowed us to grow these vehicles to obviously very high asset levels. And those are very difficult to copy and I think one of the things I'll also highlight is that over the last few years we have seen a price war amongst ETFs including gold ETFs and we have not succumbed to that pressure. I think that the differentiators we have with our products represent real value and people are willing to pay a premium price for them.

Okay. Maybe I'll do one more, and then I'll requeue at the end. The Lending Fund 3 you mentioned, can you share maybe what you're thinking about on that front? Should we be expecting private strategies AUM to grow, or maybe just Lending Fund 3 to replace Lending Fund 2 as it monetizes down?

You know, it is a bit of a treadmill because we're making new loans and they're getting repaid all the time. And your asset level really changes kind of when you launch a new product. Lending 3 was last year. And so you have to obviously deploy it before you think about another one. So it's a very high-quality business with very good portfolio managers and a long track record. And it's, you know, again, not like our exchange-listed products or physical trusts in terms of the way it can be grown, but it certainly washes its face and is really helpful when it comes to our overall domain knowledge.

Okay. That's it for me. Thank you.

Thank you. Our next question, once again, ladies and gentlemen, if you have a question or comment at this time, please press star 11 on your telephone keypad.

We have a follow up from Mr. Graham writing.

Mr. Writing, your line is now open.

Can you hear me?

Yes.

Okay, great. I'll just throw in one more. Carried interest, it was pretty material this quarter. Any visibility on the potential there for further crystallizations or how much sort of carried interest, embedded carried interest you might be sitting on that could be realized over time?

Yeah. Hey, Graham. I'll take that one, and then if Whitney wants to add anything, he can. But this carry was a bit of a one-off. This was us harvesting – carry from a legacy expiration LP. If you recall, many moons ago, Graham, when we bought Rick's business, it came with this expiration LP type business, you know, seven to 10 year locked up money. This is the last sort of the last bit of those funds that have been matured this year. And so we just took in that cash that was being built up in the form of carry. So So I wouldn't say that this number is any sign of anything else to come down the road as the remaining sources of carry for us moving forward will be from our private strategies fund.

Yeah, I'll just ask. Lending, too, will have to mature in order to collect carried interest. So that's in its investment phase. But I'll remind you that we actually do have some products that carry performance fees on the managed equity side, and if things hold together, you might see some of those issues.

And, sir, what's the timeline for lending fund 2 to mature?

It's hard to determine. It's basically when the loans get paid off. That's very hard to predict. These are 10-year lockup funds.

Understood. Okay. Okay. And what's the – on the managed equity side, what's the size of the AUM that could be performance fee – that could drive performance fees?

$100 million or so.

Okay. That's helpful. Thank you.

Thank you. Again, ladies and gentlemen, if you have any questions or comment at this time, please press star 1-1 on your telephone keypad. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Whitney George for any closing remarks.

Thank you, everyone, for participating in this call. We appreciate your interest and look forward to speaking to you again after your end results. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.