Sprott Inc. (NYSE:SII) Q4 2023 Earnings Call Transcript February 21, 2024 10:00 AM ET
Company Participants
Whitney George – Chief Executive Officer
Kevin Hibbert – Chief Financial Officer
John Ciampaglia – Chief Executive Officer-Sprott Asset Management
Conference Call Participants
Graham Ryding – TD Securities
Operator
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.’s 2023 Annual Results Conference Call. At this time, all participants are in a 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 February 21, 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 provisions 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 the quarter and Sprott’s other filings with the Canadian and US security regulators.
I would now turn the conference over to Mr. Whitney George. Please go ahead Mr. George.
Whitney George
Thank you. The rest of this presentation will go much faster than the disclosures. Good morning, everyone and thanks for joining us today. On the call with me today is our CFO, Kevin Hibbert and John Ciampaglia, the CEO of Sprott Asset Management. Our 2023 Annual Results were released this morning and are available on our website where you can also find the financial statements and MD&A.
Starting on slide 4. We are pleased with our performance during 2023 as we grew our AUM by $5.3 billion to $28.7 billion. This strong AUM growth was driven largely by our strong uranium prices and inflows into our exchange-listed products.
On the year, we generated $1.1 billion in net sales. Much of our AUM growth in 2023 came late in the fourth quarter and is positively impacting our 2024 performance. In 2023, we also finished the cleanup of our legacy non-core businesses exiting both our Canadian broker-dealer and our Korean operations.
With this cleanup behind us now we expect to see much less noise in our quarterly results going forward. We were very active on the product development front in 2023 as we expanded our ETF product suite with seven new ETF launches in the US and in Europe. We also completed successful private strategies, capital raises and launched an actively managed physical commodities strategy.
Finally to meet the needs of our growing client invest and investor base, we reorganized and expanded our Sales and Marketing and Investor Relations teams and added new talent in each of these key areas.
With that, I’ll pass it over to Kevin for a look at our financial results. Kevin?
Kevin Hibbert
Thanks, Whitney and good morning, everyone. I’ll start on slide 5, which provides a summary of our historical AUM. AUM finished the year at $28.7 billion up $3.3 billion or 13% from September 30th of this year and is up $5.3 billion or 23% since the end of 2022.
As Whitney mentioned on both a three months and 12 months ended basis, we benefited from strong gold and uranium prices particularly late in the fourth quarter as well as inflows across the majority of our exchange-listed products throughout the year. We also benefited from capital raises in our private strategies funds and with the recent growth of our uranium physical trusts and ETFs, our Critical Materials product offerings now account for 28% of total assets under management.
Slide 6 provides a brief look at our three months and 12 month earnings. Adjusted base EBITDA was $18.8 million in the quarter up 4% from the $18.1 million we earned over the same three month period in 2022.
On a full year basis, adjusted base EBITDA was $71.9 million up 1% from the $71 million we earned over the same 12-month period of 2022. The increased management fees generated from higher average AUM on a full year basis arose largely in the fourth quarter as rising precious metals and uranium prices benefited our AUM.
However, those results were largely offset by lower commission income due to the sale of our former Canadian broker-dealer during the second quarter of the year and weaker at the market origination of our Uranium Trust throughout 2023.
As Whitney noted, with the successful exit of all remaining non-core businesses in the year, the Company is now well positioned to reap the full benefits of the 2024 operating environment.
Finally, slide 7 provides a few capital management highlights from the past year. We paid down over half our debt, took advantage of market dislocation to buy back shares, and maintained a strong cash and liquidity profile moving into 2024. For more information on our revenues, expenses, EBITDA and balance sheet metrics, you can refer to the supplemental information section of this presentation, as well as our annual MD&A filed earlier this morning.
With that said, I’ll pass things over to John.
John Ciampaglia
Thanks Kevin, and good morning, everybody. Just on slide 8, I thought we zoom out a little bit and take a little bit of a wider longer-term perspective on the evolution of our Exchange Listed Products suite. ETFs around the world are now $11 trillion in counting is become a very important category for every asset management firm globally. And I’m pleased to share that over the last few years, since we made our mutual fund business divestiture in middle of 2017.
Our Exchange Listed business has grown from $3.6 billion, under management to 23.7 as of middle of February. This has really been driven by three well-timed acquisitions, also a organic growth strategy where we have launched a number of funds across multiple geographies exchanges. We are now competing from in. We’ve gone from six different product categories to now 13 and our overall suite has grown from 5 to 16 funds. As Whitney mentioned we were active in 2023 with seven new ETF launches, and in the coming weeks we have two more that will be coming to market.
These Exchange Listed Products have very far global distribution reach. If an investor can access a ticker, they’re essentially a target client for us. Many new funds that we’re focused on are based on long-term secular growth themes related to critical minerals energy transition as well as precious minerals and metals, which we think are a cornerstone of every investor portfolio.
Moving to the next slide. Just wanted to highlight the tremendous growth we’ve seen in our uranium franchise. Last year we saw significant growth in assets. The overall assets are now $9 billion AUM, which is growth of $5.3 billion or 143%. This is really important. We use the word — we don’t use the word leadership lightly here. It’s really about the scale the breadth of offer — of offerings, the choice, the markets and the pure-play focus that these funds offer, the growing liquidity, institutional interest have been expanding over the last six months in particularly, I think we’re really well positioned.
The Sprott’s Uranium Trust is now our largest single fund. It’s brought the Sprott uranium miners. ETF is the world’s largest pure-play uranium mining ETF. It also has a European version uses form. The Sprott Junior Uranium Miners ETF recently achieved its first year anniversary with 300 million in assets, which is incredible. We are in the process of calling that fund across Europe, which will be available in the coming days. And that is also the world’s first Junior Uranium Mining ETF. We are very focused on this franchise. We think it is just starting another inflection point of the current bull market with many more years to go.
Let’s go on to the next slide. Recently the price of uranium has breached $100 a pound threshold. This is a price we have not seen since 2007. It is really behaving differently than most other commodities, which have suffered based on tightening interest rates and soft economic growth around the world.
We thought it was interesting to share this chart from Bank of America. That showed the nominal price of uranium over the last year three bull markets as well as in real terms in today’s dollars. And while people might be excited about uranium hitting $100 and we sure our — we think that there is a lot more upside. And when you look at the two previous bull markets, in today’s dollar terms, prices peaked at $170 in the first one and close to $200 in the last one, which was in the 2000.
What’s really driving our bullish forecast is around demand. And we see very durable demand. Based on all the builds in progress and plans around the world, we anticipate that annual uranium demand will grow from £180 million per year somewhere in the range of £250 million, most likely £300 million in the year 2040. Uncovered utility requirements range from £1.5 billion to £2.3 billion, which is quite staggering going out to 2040.
We’ve also seen a number of supply challenges with every commodity bull market, you would obviously assume a supply response. And what we have seen over the last six months is two of the world’s largest producers of uranium have both signaled some near-term and short-term production challenges, and we don’t expect any material new uranium mine to be built in the next four to six years. It’s fair to say that, geopolitical risks related to uranium and the nuclear fuel cycle remained very high. There is a bill that will inevitably get passed in the US that will ban Russian uranium importation, which we think will potentially disrupt the market.
And I’d say, our last comment is that uranium prices, we believe, are going to be higher for longer. This is really necessary to finance and support all the new production that we will need over the next 20-plus years.
Let’s go to the next slide. Just to give you some perspective on sales. Last year, we had lighter sales for the overall year. I think this was really a function of investors sitting on the sidelines. There is $6 trillion alone US money market funds, collecting 5% cash interest yield. We have not seen a lot of risk capital come back in the market, largely based on Fed signals. Our trust traded at wider discounts than normal in the second half of the year, and we did experience some redemptions like many precious metals funds have experienced.
Looking forward to AUM, obviously, AUM is important because it’s what drives revenue. We saw very good AUM growth. Unfortunately, it came very late in the year, so we were not able to capture the full year benefit. But nonetheless, those assets are now on our books, and we hope they remain and continue to drive revenues going forward.
On the next slide, I’m just going to talk a little bit about flows. This has been very positive in our ETFs. The uranium funds really pulled in a lot of capital last year, as interest in the sector has expanded enormously, not just from investor type, but also globally. The uranium ETFs were really driving a lot of the flows.
On slide 14, the ETF product suite, AUM grew by 80% last year, a lot of that was URNM, uranium mining ETF Again, it’s important to have a number of different categories, physicians on the shelf, so that when one of these metals comes into vote, we’re well positioned to capture flows.
And with that, I will pass it over to Whitney?
Whitney George
Thank you, John. I’m on slide 15. Talk a little bit about our managed equities franchise. Performance in our managed equity segment continued to be challenged in 2023. Investors have been reluctant to allocate to the mining sector and flows have been absent across that category.
Collectively, our managed equities strategies reported modest redemptions in 2023, but we are committed to the future of that business as the equities have decoupled from the basic commodity prices, gold and silver primarily, and have reached historical lows in relative terms.
Slide 16, we talk a little bit about our private strategies. Combined Lending and Streaming strategies AUM was $2.6 billion as of December 31, 2023. The team is continuing to monitor and harvest investments in our second private lending fund and is actively assessing new investment opportunities for our third lending fund number three at our Streaming and Royalty fund. As I mentioned earlier, we are currently incubating an actively managed physical commodity strategy that we seeded and launched in December.
To summarize on slide 17, although it’s still early, we’re pleased that our 2023 momentum has extended into 2024. As of February 16, our AUM has increased by approximately $500 million to $29.2 billion, due largely to rising uranium prices. We are continuing to build scale in our Critical Materials product suite. Our uranium strategies have delivered remarkable growth and now account for 30% of total AUM.
We have a strong pipeline of new products. And as John mentioned, tomorrow, we’ll launch our Junior Uranium Miners UCITS Fund in Europe. And looking ahead, we’re very confident long-term trends supporting our positioning in precious metals and critical materials are intact.
We are just beginning to demonstrate the potential of our highly scalable management platform and we’re looking forward to creating value for our clients and shareholders in the years ahead.
That concludes our prepared remarks today. I’d like to turn it over to the operator for Q&A.
Question-and-Answer Session
Operator
Certainly. [Operator Instructions] And our first question comes from the line of Graham Ryding from TD Securities. Your question please.
Graham Ryding
Hi good morning. There were some flows in the quarter into managed equities. I think in your sort of other line what asset class or maybe what channels did that relate to?
John Ciampaglia
Hi Graham. On managed equities, I wouldn’t say anything and particularly, I think the industry generally is experiencing very slow and steady redemptions from a lot of the different mining products, not just actively managed, but also passive as a lot of commodity prices have corrected.
So, I wouldn’t attribute it to any one pocket. Obviously, we have mandates that we manage for people around the world in different form sub-advisory relationships, separate accounts, and it’s just been kind of a drip of across the whole product suite.
Graham Ryding
Okay. So, would that be like I’m saying $220 million in the quarter for flows into your other managed equities. Is that more like institutional type flows which can be a bit lumpier, what will that be?
John Ciampaglia
We’ve not had any material as institutional outflows. They’re not in any size. It’s — maybe Kevin, did you have a thought?
Kevin Hibbert
Yes, Graham, I’ll get back to you on that. I have to pull the details of it, but I think I know what it is, but I want to be certain before a spin — I get you a reply back.
Whitney George
I’ll make one comment. One of our largest products is or — or precious metals mining a mutual fund run by John Hathaway. Mutual funds, most people have forgotten about are in favor of ETFs, but there’s a natural sort of outflow that occurs annually no matter what the performance just as people’s investment objectives move on.
So, the real benefit that you get is when performance is strong and that adds to AUM as well as attract new capital. So, barring any kind of enthusiasm for the mining sector on the year, that’s just kind of going to be a natural kind of progression. But we are definitely of the view that things could change and they could change very quickly and very dramatically.
Graham Ryding
Okay, understood. You talked about a pipeline of new products for 2024. Should we be thinking critical minerals or for energy transition materials that come from those? Or are you looking broader to other asset classes?
John Ciampaglia
Yes, we want to stick to this thematic, it’s what we know best. I think it’s where the world is moving. I think people are grossly under-position in Critical Minerals. If you think about how most institutional investors are gaining exposure to commodities, it’s by simply buying the Bloomberg Commodity Index or the Goldman Sachs Commodity Index, which are basically futures-based products that are heavily tilted to oil and gas.
And yes, some minerals and ag, but completely omit critical things like uranium, lithium, and have very low exposures to other minerals like nickel and cobalt et cetera.
So, we think this fills a gap in the market. The world seems to be increasingly focused on metals that are critical for energy transition. And I think that’s where a lot of our expertise is being integrated into either active or passive strategies.
Graham Ryding
Okay, great. And then should we be thinking like in terms of you’re pretty active in streamlining your business in 2023? Are there other areas you’re looking at, are you largely done? And how should we — how do you think about I guess the strategic benefit here on like your managed equities and your private strategy side of your business how that complements your exchange-listed side?
John Ciampaglia
I think we’re done and what we have now is all on strategy. We are, we think we are experts in the mining industry. And we offer a suite of products for individual investors, large institutional investors and reduced. We’re doing it globally. So, I’m very pleased with the platform now and looking forward to being rewarded were that those efforts.
Graham Ryding
Okay. That’s it for me. I’ll repeat re-queue if there’s anymore. Thank you.
Operator
Thank you. [Operator Instructions] One moment for our next question. And our next question is a follow-up from Graham Ryding from TD Securities.
Graham Ryding
Okay. I didn’t want to hog the line, but I’ll keep going on. It was — Kevin, this question is for you. If there was 5.3 million I think in other expenses that were excluded from base EBITDA. I realize there’s some FX in there, but what were the other main items that would that would be contributing to that 5.3 million overall.
Kevin Hibbert
So, the vast majority. So you’re asking about other expense, right?
Graham Ryding
Yes, it was excluded from base EBITDA. I can see the FX, but there’s lots of other stuff that I can’t see. I think there’s like 3.7 million of other stuff in there that I’m not sure what are?
Kevin Hibbert
Right. So the vast majority of our other expenses would be of the costs associated with the exit of the noncore businesses, as well as anything nonrecurring around professional fees pertaining to those transactions and then new fund start-up costs.
Graham Ryding
Okay perfect. Thank you.
Operator
Thank you. [Operator Instructions] And I’m not showing any further questions at this time. I’d like to hand the program back to Whitney George for any further remarks.
Whitney George
Thank you, everyone for participating in this call. We appreciate your interest in Sprott and look forward to speaking to you again after our first quarter results. Personally, I’d like to extend my thanks to our committed long-term shareholders, who have been supportive of our strategy and some very engaged and active in helping get to get our story out. So, with that, have a good day everybody, and thanks for joining us. Bye-bye.
Operator
Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
