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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Sprott Inc.'s 2019 Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, November 8, 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 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 the 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 securities 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 Whitney George, our President; our Chief Financial Officer, Kevin Hibbert; and John Ciampaglia, the CEO of Sprott Asset Management. Our Q3 results were released this morning and are available on our website, where you can also find the financial statements and MD&A. I'll begin on Slide 4. There was a lot of excitement in the sector as gold broke out over the summer and reached a high of $1,550. Some of this has since faded as a near-constant stream of positive government headlines generated a risk on environment and drove equity markets to new highs. Through it all, gold has proved to be relatively resilient and continues to hold on to solid gains for the year. Our thesis is supported by the 180-degree pivot by the Fed earlier this year as well as the recent unexpected accommodation in the overnight repo markets. Statements from Chairman Powell that this money printing is not quantitative easing are not holding water with us. We believe that the long-term outlook for gold continue to improve. Artificially low interest rates and high levels of latent systematic risks support gold's role as an insurance asset. At Sprott, all of our business lines are currently growing, and we're experiencing positive net flows. The acquisition of Tocqueville gold strategies will add meaningful scale to our managed equities business when it closes early next year. Effective November 15, we will be renewing our normal course issuer bid. We believe that the recent pullback in our shares is not reflective of our fundamentals at this time, and we see current price levels is quite attractive for repurchasing shares. We're prepared to buy back our shares if they're trading below their fundamental value. With that, I'll pass it over to Kevin for a review of our financial results before discussing each of our core segments in more detail. Kevin?
Thanks, Peter, and good morning, everyone. Slide 5 provides a summary of our AUM at quarter end and a pro forma estimate of AUM, inclusive of the Tocqueville gold strategies acquisition that we anticipate closing January of next year. AUM was $11.3 billion as at September 30, 2019, up $700 million or 6% from June 30, 2019. Our Exchange Listed Products segment benefited from strong precious metals price appreciation, which more than offset lost AUM from capital distributions in our lending LPs in the quarter. On a pro forma basis that takes into account the acquisition of Tocqueville gold strategies, our September 30, 2019, AUM would be approximately $13.5 billion, creating significant earnings capacity for Sprott beginning fiscal 2020 and beyond. Moving now to Slide 6 for a look at our third quarter earnings. Adjusted base EBITDA in the quarter was $10 million, up $300,000 or 4% from the prior period. The increase was primarily due to higher fee income in our Exchanged Listed Product segment as average AUM in this area was positively impacted by the strong precious metals pricing environment. We also experienced higher net commissions in our brokerage segment, given the improved equity origination environment this quarter. These increases were partially offset by lower income in our lending segment, given the inclusion of accelerated deferred interest income in last year's results relating to the early repayment of a loan. For more information on our revenues, expenses and EBITDA, you can refer to the supplemental information section of this presentation as well as our 2019 Q3 MD&A filed earlier this morning. That said, I will now turn things over to John. John?
Thanks, Kevin, and good morning, all. I just want to make reference that holdings and gold ETFs around the world reached a record high in the quarter. This is obviously being driven by a number of factors. The renewed interest in gold is a global phenomena. We're seeing it across all investor types and many markets. Gold in the quarter hit record highs in just about every single currency in the world, except the U.S. dollar. And yes, we are at much higher levels in U.S. dollar terms. At the beginning of the year, we're still a good chunk away from surpassing its 2011 high of approximately $1,900 an ounce. So there's still more room to go. Silver, palladium and platinum have also benefited. They've finally been pulled along in this rally, and we're seeing interest across all the metals. And despite some recent profit taking in the sector, we don't see a change in the fundamentals driving this interest across the investor universe. This has translated into much better results for our physical bullion trusts. Our at-the-market offering was very active in the third quarter, allowing us to post net sales for the first time in a number of quarters. And we've also seen continued interest following the quarter end, and we expect this to continue over the following quarters. We're also seeing a very good moderation of redemptions in the physical trust, which is helping bolster our overall net sales. So I think we're feeling very good about the product line and the renewed interest. The price action is definitely helping. The return of volatility in market prices also is a beneficial factor in terms of the at-the-market offerings. And overall, we're feeling very optimistic about how the products is being received in the market. With that, I will pass it over to Peter.
Thanks, John. Client inflows to our institutional business also continued to grow, validating our investment in sales and building a global platform in that area. Our private resource strategies alone are expected to have over $1.5 billion in available capital by early 2020. We've structured a new mining investment fund that we expect to launch in the first quarter, and we're currently raising a new early-stage equities investment fund. We've also recently secured new mandates in our Korean product equity business. We expect our private strategies to have approximately $1.5 billion in undrawn available capital, and this business should be able to grow to the $2 billion mark by the end of the year, we believe. To complete the private resource summary, we turn to Slide 9 for an update on our lending strategy. As you can see on this slide, in 2016, loan booked from the balance sheet to fee-generating assets under management, that process is now effectively complete with more than $600 million in our lending funds. We continue to raise assets into these strategies and expect to have significant dry powder available to deploy during 2020. I'll now pass it over to Whitney for an update on the Tocqueville acquisition.
Thank you, Peter, and good morning, everybody. I'm pleased to report that we are nicely on track in our acquisition of the Tocqueville gold fund. John Hathaway and his team, the team here at Sprott, is working very well with our partners at Tocqueville. The conversion of the U.S. mutual fund is on schedule. We have the Board's approval. We have the SEC's approval, and we're working through the rest of the registrations in a timely way. Distributor agreements are in the process of being negotiated, and the proxy mailing goes out next week. We're also getting a very favorable reaction to what will be our new partners in Europe in some of the products there as well as some of the institutional clients that we hope to bring along with the transaction. So as has been mentioned, we're on track to get this done in early January and looking forward to sort of not only the new assets, but the new geographies and the new clients that we hope to bring on to the Sprott platform. Thank you. Back to Peter.
Thanks, Whitney. As I noted at the start of the call, we believe the gold outlook is positive. We've achieved our goal that we set out 2 years ago of reaching scale in all of our core segments, and we are transitioning to positive net flows and driving growth in all of those segments. We continue to pursue complementary acquisition opportunities on a global basis. We do have an appetite for acquisitions, but we will be disciplined. And I would note in that regard that we have the assistance of our Chairman, Ron Dewhurst, who has a very strong background in global asset management, and he's been helping us look at these deals and assess them. To recap our share value proposition to shareholders, our business value is strongly leveraged to our fund performance, to our inflows and to these acquisitions. And we do not feel that our recent share price movements adequately reflect the last 2 points. We will continue to monitor the share price and then step in to buy back shares at levels that we deem attractive. With that, I'll close the call and open it for questions. Operator?
[Operator Instructions] Our first question comes from the line of Gary Ho with Desjardins Capital.
Peter, just wanted to get your thoughts on the Lending Fund, digging that -- digging into it a little bit deeper. Just on the capital distribution that we saw again this quarter. Just wondering if you look out kind of 12 to 24 months, how do you think the growth trajectory of that fund looks?
Well, we were fighting 2 headwinds this year. One of them was actually our success in that we had a number of loans that paid back early, generating a great IRR but decreasing AUM temporarily. And the second was that we were busy in the market raising a new fund. So it always takes time and energy to do that. I think now that we have that just about wrapped up, the progress in the lending book should be very steady. And market conditions are supportive. There is still a real lack of equity participation in the small-cap mining equities. So I think our pipeline is very strong, and it should be a steady growth from here in that lending book.
Okay. And then moving on to the brokerage segment. It sounds like it had a good quarter versus first half of this year on improved equity originations. Maybe you can elaborate on that? And how does it look as we head into year-end here in terms of the pipeline?
Sure. Yes. The last quarter of 2018 and the first quarter of 2019, for those of you that follow the sector very closely, they were just brutal, brutal months where there was no activity. I would say it returned to normal somewhere during the second quarter. And in the third quarter, we really saw the results of that as some of the transaction volumes started to come through. So I would say that reflects normal market conditions. It's certainly not what I'd describe bullish yet, but that's a segment that generates a very high return on capital for us and a very good margin. It's never going to drive our business, which is assets under management, but it will be a good ancillary business for us and it generates a lot of ideas for the rest of the firm. So we see it as pretty steady going forward.
Okay. And then just lastly, Peter, you mentioned the buyback and shares are trading below your fundamental value. Just curious how or what metric you use or you monitor to determine the fundamental value?
Well, I guess the first thing is the trend is positive for our business now, and the share price performance is at a pretty substantial correction. So those 2 don't make sense to us. We look at a variety of factors. The biggest one is the value of our assets under management book. And you can value that by cash flow or you can value that by traditional percentages. And we can also break our company into components and value it that way if we wanted to. But just in general, right now, the trend and the leverage is in our favor. And we don't think the share price adequately reflects where we think our business will be.
And our next question comes from the line of Graham Ryding with TD Securities.
Peter, sorry, just could you elaborate a little bit on the new strategies? You bucketed them all under sort of private strategies. Maybe just -- it seems like there's a few going on here. Can you elaborate on a little more detail?
Yes. We call them private resource strategies, meaning they're not mutual funds or in the public realm. We have the lending strategy, which has been the kind of, I guess, the foundation. We've had some strategies operating for some time in Korea, which are mostly involved with alternative energy. Actually, historically, they started from the resource sector as well. And now we have a new partnership in the realm of the global resource investments world, where Rick Rule always run private partnerships for earlier stage resource opportunities. So we have a new partnership that Neil Adshead has launched. So that's just in the last month, and it started to take in capital and we think that's going well. And then we have another resource strategy that'll be launching in Q1 that we're not allowed to talk about or elaborate on at this time just because it's still in the formation and distribution stage. And we'll be able to talk about that in Q1.
Okay. Got it. That's the new structured mining investment vehicle that you referred to?
That's right.
Okay. And then the new mandate in Korea, that's the same as alternative energy, you've just got a different institutional client?
Yes. There's new clients coming in, and the mandate has expanded to include a couple of new assets. So it's just expanding that business a bit.
Okay. Got it. Understood. And then the -- you talked on the resource loan portfolio. So I think I'm good there on the expectation. It sounds like divestments you think should slow down, and you've obviously got a pipeline of capital that's ready to be committed from this new fund that you've launched. So that's your outlook on the resource loan book?
That's right. The previous -- the first Lending Fund was very successful, but it had a shorter tenure than we would have liked because of the early repayments. So we ate through a lot of those this year and now are sitting with a large dry powder balance, which we are actively deploying.
Can you remind me the size of what you've raised? Or what the...
And the total will be somewhere between USD 800 million and USD 1 billion.
Okay. And then just lastly, stock-based comp. It seems to be moving around a little bit this year, quarter-over-quarter. Any color on what's driving that? And is it still expected to drop down in 2020?
Graham, it's Kevin here. So on the stock-based comp side, there's just a little bit of noise from this year coming primarily from the fact that we had a new executive hire earlier on in the year. But overall, we still expect the LTIP number to fall off. If you look at our in-quarter year-over-year number, it is still down and certainly down on a full year basis. But to your point, not as much as we would have previously thought, just given the fact that we had that new hire come in. But the general trend is still going to be downwards because the ending duration of the LTIP grant was not extending past what the other grants were. So you'll still see it all revert down to close to 0 by the end of 2021.
[Operator Instructions] And I'm not showing any further questions at this time. I would like to turn the call back to your speakers for closing remarks.
Well, thank you, operator, and thanks all for all the participants. We look forward to reporting to you again to the end of the next quarter, and thanks for your interest in our company.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.