© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2018 Second Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, August 13, 2018.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 implied in making forward-looking statements, please consult the MD&A for the quarter and Sprott's other filings with the Canadian securities regulators.I'll now turn the call over to Peter Grosskopf. Please go ahead.
Good morning, everyone, and thank you for joining us today. On the call with me today is Kevin Hibbert, John Ciampaglia and Glen Williams. Our 2018 second quarter results were released this morning and are available on our website, where you can also find our financial statements and MD&A.I'll start on Slide 4 with a look at our results for the quarter, which were steady. Our financial results have continued to improve since we completed the restructuring of the business a year ago. On a normalized basis, adjusted base EBITDA increased by 47% over Q2 2017. The key drivers of this improvement were the addition of the Central Fund assets to our Physical Trusts franchise and new capital deployments within our Private Resource Lending business.Sprott's AUM fell by approximately $500 million during the quarter, with almost all of that decline attributable to transaction-related redemptions in our Physical Trusts and the impact of weaker precious metal prices. On a year-to-date basis, our AUM increased by $3.8 billion.Investable capital was $195 million as of June 30. This is down approximately $100 million from the end of 2017 due to the acquisition of the Central Fund.Our balance sheet is now close to fully optimized, and we are focused on deploying our capital to seeding complementary products and on co-investments in our core strategies and alongside clients.Turning now to Slide 5. First, look at some recent highlights of the business. We're pleased with our steady financial performance during Q2 and year-to-date despite the recent selloff in precious metals. Our flow-through funds and related tax-assisted investing strategies are gaining traction, with the most recent offering raising $60 million during Q2. Capital continues to be deployed into our Resource Lending LPs and LP support for further growing that business is increasing. The investments we've made in the digital gold space are progressing well, and I'll talk about those initiatives in more detail in my closing remarks.I'll now turn the call over to Kevin for a closer look at our financial results.
Thanks, Peter, and good morning, everyone. I'll start on Slide 6 with a look at our earnings summary. Similar to last quarter, given that 2017 was a year of significant transition and change for our company, I will be separately highlighting the results of our core go-forward businesses to ensure you have a more meaningful analysis of our year-over-year comparative results.As Peter mentioned, adjusted base EBITDA in the quarter was $10.7 million. That was up $1.9 million or 22% from the prior period. However, on a normalized basis, i.e., excluding earnings generated from non-core assets sold last year, adjusted base EBITDA was up $3.4 million or 47%. The increase in earnings on a normalized basis was due to higher net fees generated on the newly acquired CFCL assets and higher AUM in our lending LPs as a result of increased capital calls. We also saw higher earnings on co-investments in our lending segment. Looking at our revenue performance, details of which can be found on Slide 15. Total net revenues for the quarter were $23.5 million, largely unchanged from Q2 2017. Key revenue items worth noting include net fees, interest income and net commissions. Net fees for the quarter were $14.8 million, a decrease of $1.9 million or 11% from Q2 2017. Excluding net fees that were earned on the diversified assets sold as part of last year's sale transaction, net fees generated by our core businesses were actually up $4.8 million or 48% from this time last year. Again, the increase on a normalized basis was due to management fee generation on the newly acquired CFCL assets as well as increased fee generation on our lending LPs as we continue to deploy called capital in the form of fee-generating AUM. Interest income for the quarter was $3.3 million, largely unchanged from Q2 2017. And net commissions for the quarter were $4.8 million, down $700,000 or 13% from Q2 2017. The decline was largely due to lower transaction volumes and placement activities in our U.S. broker dealer.Total expenses, details of which can be found on Slide 16, were $17 million, a decrease of $7.8 million or 31% from Q2 2017. Key expenses worth noting include compensation and SG&A. Compensation, excluding commissions, carried interests and performance fee payouts, which are presented net of their related revenues in our MD&A, and excluding severance accruals, which are nonrecurring, was $10.6 million, a decrease of $1.2 million or 10% from Q2 2017. The decrease was due to lower headcount as a result of last year's sale transaction. As a reminder, compensation across the organization should drop further next year as 65% of our LTIP amortization will have been fully amortized by the end of this year, leaving only 35% to be amortized over the subsequent 3 years. Lastly, SG&A was $4.9 million, a decrease of $1.2 million or 20% from the prior period. That was largely due to lower rent, marketing, sales, technology and fund operating expenses as a result of last year's sale transaction. We expect our SG&A expense to further benefit from lower corporate SG&A around marketing and technology costs in the back half of this year as we implement more cost-savings initiatives in that area.Moving back to Slide 7, you'll see a summary of our AUM. And for greater detail into our individual AUM components, you can refer to Slide 14. As of June 30, AUM was $11.1 billion, down 4% from Q1 of this year. The decrease was primarily due to previously anticipated redemptions on CFCL assets we acquired earlier this year, combined with the decline in precious metals prices in our Physical Trusts during the quarter.Finally, a look at Slide 8 for our investable capital. We've been diligently putting our capital to EBITDA-accretive use, most notably with the acquisition of CFCL earlier this year as well as co-investments in our lending LPs. Going forward, we continue to deploy capital in a highly disciplined manner so as to ensure maximum shareholder benefit.I'll now pass it back to Peter for some final thoughts.
Thanks, Kevin. On the next couple of slides, we highlight that we are at an interesting juncture in the precious metals cycle. As you can see on Slide #9, sentiment has seldom been worse and short interest in gold is sitting at an all-time high, meaning that at some point, a major reversal is likely.In the past, U.S. dollar strength and emerging market difficulties, such as those we've seen today, have marked turning points in financial markets, and gold is usually one of the first assets to rebound from that distress.On Slide 10, we've shown how much gold stocks have underperformed the broader markets over the last couple of -- over the last decade, really. This situation, particularly in small-cap gold equities, has been exacerbated by the decision of several major asset managers in the past 2 quarters to retreat from the space. We believe that current market conditions are exceptional for quality stock pickers, and we're working to raise funding for active equity strategies to capitalize on these opportunities.In closing, we're continuing to focus on execution and on delivering performance and service to our clients. We think that the current market environment offers a unique opportunity to further build our status as the global leader in precious metal investments, and we are adding sales professionals in new markets to support this. We have a number of growth initiatives underway, including metals ETFs and expanding our institutional private debt franchise and active gold equity businesses.Looking now at Slide 12 for an update on our digital gold investments. As we've said now for several quarters, we believe that digitization is the next major advancement that will change the way that gold is used by investors. Sprott is committed to being at the forefront of that innovation, and we've invested in 2 digital gold technologies, Tradewind's VaultChain and Emergent Technologies G-Coin, both of which are getting close to full market launches. Finally, we've also planned a JV with a significant U.S. distributor of metals to launch a retail-focused dealer platform to buy and to sell digital precious metals. We expect this effort to go live some time in Q3, Q4.That concludes our prepared remarks for today, and we'll now open the call to questions. Operator?
[Operator Instructions] Our first question is from Nik Priebe from BMO Capital Markets.
I'll start with the Private Lending Fund. It looks like pretty good progress with respect to capital deployment in the quarter. I think you'd previously indicated that you expect that to be effectively fully deployed kind of in the second half of this year. I'm just wondering once it is fully deployed, when would you look to initiate the fundraising process for the next successor fund? And do you have a sense of what sort of scale you might target there? Like, should we think about it as comparable to the first fund?
Yes. So a couple of things. First of all, it's not practical to deploy one of these funds 100% before you get into the next generation of funds. You really need to leave some room to grow investments, if required. So it's contractually defined in our LP agreements as being somewhere around the 80% mark. So that means that, because we're just about there, that we're really already into planning for the new version. And all I can say about it is that it will be larger than the current version.
Okay. That's helpful. And then just a quick one on the CFCL-related outflows in the quarter. Any other redemptions that kind of appear visible in the pipeline at this stage? Or do you see that activity as mostly behind you now?
Sure. Nik, it's John here. I would just say that the redemptions are in line with what we previously experienced with Central GoldTrust a few years ago. So we know there is a certain amount that will work through the system. What's encouraging to us is that in the month of July, we only had redemptions cumulative across the 4 Physical Trusts of $3 million. So it's hard to predict, obviously, the markets and arbitrage activity, but we saw some encouraging signs in July that they've come off quite sharply. We won't know for the next few days in terms of what August will look like and then that will be public at the end of August.
Okay. That sounds good. Maybe one last one for me. I think last quarter you alluded to entering the Canada space and building a bit of a footprint there. Have you started to see a bit of traction there with respect to dealer origination or just in terms of building the pipeline?
Yes. We're starting really slow. As you probably know, that sector exploded in interest and valuation in the last quarter or 2, and we decided to take a slower path. We didn't want to get caught rushing into anything. So it's advancing, but it's advancing slowly. We've made a little bit of money in the sector, and we've chosen a few investments and teams that we think we can back. So it's just something bubbling under the surface.
Our next question is from Gary Ho from Desjardins Capital Markets.
Just a first question, Peter, just on your comments. You talked about some new competitors winding up equity funds in the mining sector and you're taking this opportunity to expand your global footprint. Can you maybe elaborate on that? And then what are you doing specifically, and any time frame attached to this?
Okay. Well, one significant mid-tier institution sold and wound down its business, another one had a significant portion of its business moved to a different strategy. I think in general, it's created a bit of distress in the small-cap side of the precious metal area, haven't been a lot of new monies raised, there haven't been a lot of stocks that have been well supported. And we're being approached by high-quality portfolio managers and analysts and also sales people that believe, in their view, and we certainly agree with them, that it's a perfect time to build new assets. There is a real lack of leadership in the sector right now. There is really good opportunities on the equity side. And I guess, a couple of natural spots, and where we think the markets are largest are the U.S. and Europe. And I wouldn't rule Asia out, but Asia has proven to be a very slow build for us. It's continuing to build, but really the big markets that we can address are in the U.S. and Europe.
Okay. That's helpful. And then, Kevin, just going back to your comments on expenses. Did you say there were some severance accruals this quarter? If so, how much? And you talked about some benefits from lower SG&A in the second half. What would the run rate be over the next 2 quarters or maybe into 2019?
Gary, no, you probably just misinterpreted my caveats around what's excluded from what we consider sort of the run rate comp. So on the severance side, there weren't any severance items in the quarter. And then when it comes to -- you're asking, I think, for a run rate on comp as well, comp and SG&A?
Yes, please?
Yes. So if you look at Page 13 of the MD&A, while we don't provide forward-looking guidance around earnings overall and even the total comp number, what I can tell you is, at least from a salaries perspective, I think the number you're seeing here at about $5.7 million, I think if you're modeling anywhere under 7 -- anywhere under $7 million a quarter on the salaries line, I think that's realistic and reasonable. On the AIP side, I think it's reasonable for you to continue with what you're seeing here for the rest of the year. And then on the LTIP side, we've mentioned -- I think it was in our Q4 analyst deck, we showed what the portion of amortization on the stock grant would be in '17 and '18 versus the last 3 years of the program. Yes, so go back to that, and you'll see more specific numbers, but what all that math would work out to is you probably want to cut our numbers in half on the LTIP side, and that will give you a good sense of where we'll come out in the year. So if we're at like $5.9 million for 6 months, if you were to extrapolate that to the back half of the year and then divide it by 2, that's probably a reasonable number for you there. And then on the SG&A, what I was basically saying there is it's probably realistic for you guys to estimate about [ $5 ] a quarter in SG&A, but we should see some benefit in the back half of this year from some of the additional cost-containment initiatives we have at the top of the house in our corporate space.
Okay. That's helpful. And then just lastly on the digital gold initiatives. What are, if any, financial impacts over the next 12 to 18 months, either on the top line side or on the expenses?
So with regard to that, it's still very much early stages in those businesses. We continue to follow the accounting guidelines around accounting for these investments, and that approach, if you recall, was to look at the overall value of those business investments at the end of each year. So that we had a full 12 months of information, whether it'd be entry and exit points from existing and new investors in those same businesses to whether those businesses are on budget and tracking towards their forecasts. So right now what you should expect to see from the digital gold strategy is mark-to-market adjustments, either up or down, in the fourth quarter of the year. And it will show up on the gain and loss on long-term investments line of the income statement. And anything leading up to that is just de minimis marks on our other co-investments. But you won't see any -- I don't think you'll see any significant operating earnings from those businesses for now. I don't know, Pete, if you have any other color around that.
Well, we've made the investments in other companies that are supported by other investors. So it's really a capital item on that side, and those companies have plans to continue to be supported outside of us as well, and they have share prices in the private markets, et cetera. So that's really on the capital account. In terms of this JV for a retail platform, I believe it will also be on the capital account, and I think the startup costs are quite low and will easily be covered. That platform will start to cover itself. And although it's just one other outside party, it's a very strong party. So we don't anticipate being on the hook for startup expenses. So it won't have any impact on the expense side to start with, and really in terms of the upside, it remains to be seen. All of these businesses could be very significant. We think that the product is truly disruptive, and we have high hopes that it will start to generate profitability right away.
Correct. And just to add one final thought on that. So what you will see over time is that the earnings pickups, if any, on the marking of those positions will eventually be replaced by even more meaningful direct operating income from those investments, but that'll be some time down the road.
Our next question is from Geoff Kwan from RBC Capital Markets.
Just the first question I had was on the lending fund. You talked about trying to maybe get most of it done for the end of this year. Is there any significant shift that we should think about in terms of as you get those draws over the remaining kind of few quarters?
Not really. It's a steady business. It's steady as she grows. And I think it will be a business that will be a bigger over time and will provide us with a nice tailwind. In terms of the overall size of the business, I think that I've said before, it could be somewhere between $1 billion and $2 billion. I think right now we have daylight to say that it will definitely get to $1 billion-plus, and it's kind of a steady drawing process as capital is lined up and as opportunities are lined up.
And Geoff, it's Kevin here. Just to make sure -- and this kind of goes back to, I think, Gary's question earlier, or Nik, one of the two. But it's important to also keep in mind when you guys are doing your models and speaking about this business that when we talk about deployment of the capital, we're talking about deploying it to the actual borrowers. Now when the borrowers end up drawing on those facilities, this is just like any other sort of PE-style fund, where you don't actually see the capital in the fund until there is a capital call, okay? So when we talk about reaching the 80% mark, for instance, that did not directly correlated with what you would see on the capital call column of our AUM summary. Very, very important for you guys to keep that in mind.
Okay. Yes. And maybe an additional question there is, Peter, I think, you were talking about earlier, we shouldn't expect to see the fund get fully invested before [ rolling over the next hundred ] or just for practical purposes, but how do you kind of think about what that number is? Is it may be 98% of fund? Is it a number a bit higher or lower?
Well, again, I think where you're going with this is that, if I could guess, it's -- you want to know what the AUM of that fund will be over time. And it's like Kevin explained. It's a steady process of, first, the capital being committed and then the capital being drawn. New capital being raised, committed and drawn. So I'd rather lead you to a general conclusion, which is, I think we will be at $1 billion of drawn and -- drawn capital under management at some point next year. So the mark, which is deployed capital, capital committed, is in the process of being reached currently, but that doesn't mean, as Kevin said, that we're counting that all AUM yet. The facilities themselves need to be drawn down, and I think it's going to be a very actually smooth curve to get to that $1 billion-plus next year.
Yes. And Geoff, I would say, Geoff, too, keep in mind, these companies that are doing the borrowing, they are doing so obviously with every intention of drawing on the loan facilities. And so while there may not be a direct correlation between what's deployed and called, know that it's the -- the deployed capital will eventually sort of move up to a called state. So if you want to get a sense of what the possible earnings are in the pipeline, I would just say, you take what we have as deployed once we get to, say, the 80% mark or the $1 billion, as Peter noted, and just look at the management fee estimates we have on a dollar of AUM basis and just run with that as an indicator of what the possibilities are, because to his point, it will be steady, it will be a steady call process. But we don't have line of sight we can give you right now in terms of the rate at which the capital will be called by the borrowers.
And are these loans fully drawn loans? Like, what has been the experience so far? Or are some of these revolvers where there may not necessary be a full draw on the amount that's been committed?
Well, I mean they all paid to draw the entire facility. So the experience is that some of them do change over time. But again, the best way to describe that is, it's a steady process. It's a steady build.
And so I just want to make sure I understand. So if you've got a $20 million loan out to the company, and let's say they only draw a $10 million on that. How -- like do you get paid on the full $20 million and that's what -- your investors share in that return? Or they only -- or is the corporate just paying for what actually they draw on?
We're not in the business of providing standby credit, which may or may not get drawn. We're in the business of providing loans that are intended to be drawn. So if they draw that $10 million in your example, they paid to set up the facility as $20 million, they pay us fees and charges on that $20 million, but the capital and how we count it on AUM is not counted on AUM until the second $10 million is drawn. But in all cases, the intention is to draw all of the capital that's been committed.
Right. So for every dollar that is actually drawn on the loan facility, Geoff, that loan facility draw has the capital call. So your unitholders are going to be putting the money in the fund and then that's where the management fees get generated.
Okay. Got it. Just one other question I had was, in terms of the conversations that you have with your institutional investors, have there been any general themes or trends that you're finding coming out of that over the last few months?
Well, private credit is hot in that the amount of interest in specialty, private debt funding is high right now. Equity investment in the sector is cold and has been driven and marked mostly by a change from any kind of preference from active management to passive management. So the GDX index has done quite nicely retaining assets, but no other active manager in the sector has managed to hold AUM levels. We think that, that will change and that it's going to change shortly. And I would think that's where the real opportunity is. So there are allocators and institutions and very experienced managers that also believe that, that change will come, and they're doing lots of work in the background to plan how they should allocate the opportunity in the sector.
Our next question is from Graham Ryding from TD Securities.
Let me just start on the Resource Lending LP, just to make sure I fully understand. On a percentage basis, if you sort of consider what's drawn plus commitments to date, where are you at? Are you close to the 80% or are you still below that?
Well, again, let's differentiate between what's committed and what's drawn. And what's committed is very close to that 80%. What's drawn, Kevin, is in the quarter, quarter-end?
Yes. So what is drawn, you'll see -- if you look at -- sorry, Page 10 of the MD&A in the 3 and 6 months AUM results, you'll see a column that says net sales and capital calls, Graham. So anytime a loan facility within the fund is drawn on such that the fund has to call on capital from the investors, you'll see that number -- and that's the basis upon which fees are calculated -- that number will show up in this column under Private Resource Lending LPs -- sorry, in the row, but the specific capital call column, okay. And if you want to see what has been called to date, then on Page 12, under interest income, there's a little footnote we put there that shows you in U.S. dollar terms that of the $640 million of firm commitments, to Peter's point, $296 million of that number has been called.
Okay. And then what -- in order to get to...
So it's fee-earning AUM.
I get that. I'm just wondering, in order to start raising your next fund, do you need to have that amount that's called, 80% of $640 million? Or you just have to have commitments at 80%?
No. Not the call. The call is not -- the call isn't relevant because at the end of the day, if the capital has been deployed, i.e., if there are loan agreements outstanding, then those loan agreements would constitute the capital being deployed, right. It's no different than when a bank will go out and write a bunch of facilities to different borrowers. When they do that, they consider it to be deployed. Just like you look at the banknotes, banks will show that they actually have to manage the credit risk of the funds at that point even though it's not actually drawn by the borrower at that time.
Okay. I'm good there. On the digital gold side, can you just sort of big picture sort of break down your view of why you think retail participation of gold could pick up materially under a digital gold landscape compared to what's out there today, we've been able to invest in Exchange Listed Products, et cetera?
Sure. That's exactly right. The innovation to date has all been in the Exchange Listed area. The advantage of digital gold is that it's faster, it's cheaper storage. So it's faster. It gets inside of the market in terms of how it trades. It's cheaper to store. It's cheaper for the investor. And most importantly, it can function both in the existing confines of the financial system, and it can also function directly user-to-user, much like a cryptocurrency. And in terms of what might be attractive to investors, it's both the cost and the speed. And very importantly, I think it's that it might attract a new user base in those that want to trade gold on their mobile phones or gold -- younger users, users that want to use gold as payments, the ability to function in the same technical manner as a cryptocurrency.
Okay. That's helpful. On a more just sort of technical question, how should we think about the $3.5 million of other income that was within your lending division? Is this a non sort of recurring type of fee that's in lieu of lost interest income? And was there any compensation offset to that $3.5 million?
So within that number, a portion of it was related to the early repayment on a debenture. That is a standard part of our business. It's no different and it is recurring. It may be lumpy, but it is definitely recurring. It's no different than -- I'm not sure if you cover the banks as well, but I'll use the bank analogy as well. The banks will have penalty interest payments, for example, on early repayment on a mortgage, right. So from what I recall in my days with the banks, that would be part of their all-in interest as well, all-in interest income. So we'll have from time to time in that business, early repayment fees. We may have loan restructuring fees, extension fees and so on and so forth, equity kickers. So all these things are part of that business, so it would continue to be standard. We can't predict them because it is based on the underlying activities and strategic planning from a financing perspective of the borrowers within the funds and on our legacy on-balance-sheet loans, but it is definitely part of our recurring business.
Okay. And it flows right to the bottom line, there's no offsetting compensation expense?
No, not sure why they're -- sort of not following that. Why would there be?
Oh, no. If you sort of -- that's fine. I just want to make sure that you're not accelerating any compensation fees as you sort of accelerate interest income?
No. Okay, it's interesting. No, that's not the case there. Where you would see accelerations to be, for example, if the loan early paid and maybe there was an upfront equity kicker such that there was an unamortized discount. When you have that, then you're exactly right. That would be an acceleration of that interest. But in this case, that wasn't what happened here.
Okay. That's fine. That's good. And my last question, just the carried interest that you earned in your lending division. Is this a mark-to-market type of revenue that can move around? And I guess, what is the timing of the cash flows that'd be associated with that earning -- with those earnings?
Right. So the answer is no. It wouldn't be mark-to-market. We follow the -- and we've always followed this even though it's just -- it's been more codified now. But under IFRS 15, we don't book carried interest until all of the critical events in the earnings process took place. So in our case, the clawback period would have expired, and there'd be no risk of a change in the value. So in this case, all of those gains were realized and all of the fees were received.
Thank you. At this time, I'm showing no further questions. I would now like to turn the call back over to Peter Grosskopf for closing remarks.
Okay. Thank you, everyone, for participating in this call. We appreciate your continued interest in Sprott, and we look forward to speaking with you again after our Q3 results.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.