Earnings Call Transcript - SII Q4 2024

Operator, Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Sprott Incorporated 2024 Fourth Quarter 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 26, 2025. 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 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 U.S. securities regulators. I will now turn the conference over to Mr. Whitney George. Please go ahead, Mr. George.

Whitney George, CEO

Thank you, operator, and good morning, everyone. Thank you for joining us today. On the call with me today is our CFO, Kevin Hibbert; and John Ciampaglia, CEO of Sprott Asset Management. Our 2024 fourth quarter and year-end 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 review of 2024 highlights. We will discuss in more detail later in the call, but a lot has happened since we last spoke, and we hope you are all managing well in this rapidly evolving environment. It's very difficult to give you a current outlook because the letter I wrote two weeks ago has already become dated with things moving so quickly. Turning now to our results. I'm pleased to report that 2024 was Sprott's seventh consecutive year of double-digit AUM growth. Despite a pullback in the fourth quarter, our AUM increased by $2.8 billion during the year to $31.5 billion as of December 31, 2024. Importantly, we have carried that momentum into 2025, with assets increasing by $2 billion year-to-date to $33.5 billion. Our AUM growth in 2024 was driven by rising precious metal prices, as well as almost $700 million in net sales, mostly in our exchange-listed products. Our managed equity strategies also performed well in 2024, with certain funds generating performance fees. During the year, we continued to expand our critical materials offerings with the launch of two new ETFs and one physical trust. At the corporate level, we paid down our line of credit during the fourth quarter, resulting in a debt-free balance sheet. In November, we increased our quarterly dividend by 20%. We were also in the market at the end of the year for modest repurchases of our shares through our normal course issuer bid. With that, I'll pass it over to Kevin for a look at our financial results.

Kevin Hibbert, CFO

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 $31.5 billion, down 6% from $33.4 billion last quarter, but was up 10% from $28.7 billion at the end of 2023. To Whitney's point, although fourth quarter AUM was negatively impacted by market value depreciation across most of our funds and the termination of certain sub-advised fund contracts, 2024 was nevertheless our seventh consecutive year of double-digit AUM growth as we benefited from strong full year market value appreciation in our precious metals physical trusts and net inflows to our exchange-listed products more broadly. Subsequent to year-end, on February 21, our AUM increased by $2 billion to $33.5 billion. Slide 6 provides a brief look at our three- and 12-month earnings. Net income this quarter was $11.7 million, up 21% from $9.7 million for the same three-month period last year. On a full year basis, net income was $49.3 million, up 18% from $41.8 million last year. Our three- and 12-month ended results benefited from higher average AUM on strong market value appreciation in our precious metals physical trusts and inflows to the majority of our exchange-listed products. We also benefited from carried interest and performance fee crystallization in certain funds in our managed equities and private strategies segments. Adjusted base EBITDA was $22.4 million in the quarter, up 19% from $18.8 million earned over the same three-month period last year and was $85.2 million on a full year basis, up 18% from $71.9 million earned last year. Similar to our net income performance, our three- and 12-month ended results benefited from a higher average AUM on both strong market value appreciation and flows to our precious metals physical trust. Finally, Slide 7 provides a few treasury and balance sheet management highlights. And as you can see, due to our improved earnings, our cash and liquidity profile strengthened this year, we raised our dividend by 20% in November to Whitney's point, and became debt-free in the fourth quarter. 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 annual MD&A and financial statements filed earlier this morning. With that said, I'll pass things over to John.

John Ciampaglia, CEO of Sprott Asset Management

Thank you, Kevin, and good morning to everybody. I'll start on Slide 8 with our AUM growth. Despite softness in gold, silver, and uranium prices in the fourth quarter, we experienced very strong AUM growth for the overall year. This product category continues to be our primary growth engine as we see growing investor interest in physical metals right across the world and across multiple investor segments. Year-to-date, our AUM has experienced a sharp recovery, lifted primarily by precious metals prices. I think it's also important to note that AUM in this segment stands at an all-time high, and that this product category is highly scalable. Moving to the next slide, please. On Slide 9, our sales, we generated $126 million of net flows in Q4 despite softer metal prices. For the full year, we achieved $957 million in net flows, including the proceeds from the Sprott Physical Copper Trust IPO. While we're pleased with these results on both an absolute and relative basis, many investors were focused on other high-flying market segments like tech stocks. However, we see the early stages of rotation underway as investors are becoming increasingly cautious about growing market and political risks and are once again adding gold to their portfolios after an extended period of indifference. And in the last few days, we're starting to see inflows into the silver ETF segment as well after a period of net outflows. The spot uranium price has experienced a material correction over the last 12 months, which we believe has largely run its course. The spot price at $65 now sits $15 below the term price of $80, which increased 20% last year. We believe the selloff over the past few months was exacerbated by year-end selling and the liquidation of the Kazakh-based ANU Energy Fund which held over 2 million pounds of uranium, which came into the spot market. At one point in 2024, the spot price traded more than $30 over the term price, which acted as a strong disincentive for producers and utilities to buy in the spot market to top up their inventories, which they do from time to time historically. The current $15 price differential seems unsustainable to us in a market that is projected to have a 35 million-pound production deficit in 2025 and is only forecast to widen over the next few years. On the next slide, shifting to our ETFs. AUM growth was largely flat in 2024, primarily on weakness in uranium equities. Changes in this segment tends to be more volatile given the smaller cap nature of many of the holdings held by these ETFs. On Slide 11, we generated sales of $17 million in the fourth quarter despite softer equity values. And for the full year, we achieved $297 million in net flows. It's important to note our growing suite of ETFs covering multiple market segments and trading across varied stock exchanges positions us well to capture investor flows when interest returns to these thematics. Turning to Slide 12. As Whitney mentioned, we're very pleased to report two new additions to our ETF lineup. Firstly, the Sprott Silver Miners & Physical Silver ETF, the ticker is SLVR on the NASDAQ, is a natural extension and complement to our Sprott Physical Silver Trust. This is a passively managed ETF that tracks an index that we co-developed with our partners at NASDAQ and we were very fixated in designing an index that provided investors with a significantly higher exposure to silver than some of the existing competitors in the marketplace. When we dissected competitors' silver mining indexes, we were shocked to learn that the underlying exposure to silver ranged from only 26% to 31%. Just because a silver company may have silver in its name doesn't mean it's a silver-focused company. SLVR currently provides approximately 70% exposure to silver, which provides a highly differentiated and thoughtful approach. The fund is receiving very good traction and interest in its first few weeks of life, and we're very excited about adding this to our lineup. Secondly, we'd like to highlight our Sprott Active Gold and Silver Miners ETF with the ticker GBUG. This ETF represents a number of firsts for us. It's our first actively managed ETF, and it's also the world's first actively managed gold and silver miners ETF. Our active investment team, which has over 100 years of collective experience, manages over $1 billion in similar strategies via our flagship mutual fund, separate accounts, sub-advisory relationships, and limited partnerships. Offering our active capabilities within an ETF wrapper will allow us to target investors that have migrated to ETFs, which has quickly become the go-to product structure for many. This ETF will offer intraday trading, lower fees, as well as greater transparency and tax efficiency relative to our mutual fund. I should also note that this ETF will not be an exact clone of our flagship gold equity fund as it will not own physical gold, but it will be highly similar in nature. And with that, I'll pass it over to Whitney.

Whitney George, CEO

Thank you, John. Turning to Slide 14, our managed equity strategies delivered strong full year performance in 2024, notwithstanding weaker gold and silver prices during the fourth quarter. Our flagship gold equity fund was down 9.3% in the fourth quarter but posted a full year gain of 20.6%. Despite good performance, investors have not yet taken advantage of the opportunities in precious metals equities. We reported $182 million in net redemptions in the fourth quarter and $349 million on a full year basis. I should note that $127 million of those redemptions were related to the cancellation of certain sub-advisory agreements during December. We remain optimistic that investor flows will eventually return to mining equities. I'll now turn to Slide 15 for a look at our private strategies. Combined lending and streaming strategies AUM was $2.3 billion as of December 31, 2024. The team is continuing to monitor and harvest investments on our second private lending fund and is actively assessing new investment opportunities for Lending Fund III, and the streaming team is also monitoring and managing its portfolio of investments. Slide 16, in summary, rising precious metals prices were the main driver of our asset growth in 2024, and this trend has continued into the early months of 2025. Shortly after the US election, a new dynamic emerged in the gold market that has made its way into the headlines as prices are making all-time highs on a nearly daily basis. Concerns over potential tariffs on precious metals have caused premium prices in the US market relative to others, especially London. Although there have never been tariffs on gold, except during the Nixon administration when the rate was set at zero. The ongoing arbitrage is putting enormous pressure on physical markets. Beginning in January, record amounts of physical gold were shipped from London to New York, lead times for delivery became extended and lease rates rose significantly. There are additional logistical delays due to the fact that Comex vaults will only take delivery of 100 ounce gold bars, while the London Bullion Market Association vaults hold 400-ounce bars. While this is all short-term activity, it does demonstrate the fragility of the old system and the need for it to adapt to gold's larger role as a global reserve asset. For many critical materials, 2024 was a challenging year as investors struggled to gauge the impact of the Fed's interest rate cut, geopolitical tensions, and slowing demand from China. Spot uranium prices, as John mentioned, declined by 10.7% during the fourth quarter and closed the year down 19.7%. After reaching record highs during the second quarter of 2024, copper bore the brunt of weakening Chinese demand, falling 20% from its peak close, and to close the year up just 2.2%. Obviously, today's news has made increased interest in copper as it becomes subject to potential tariffs as well. We expect further volatility in 2025 as evolving trade alliances force many countries to focus on security of supply and incentivizing domestic production to guard against an increasingly fragile global supply chain. Despite the near-term turbulence, we remain confident in our critical materials thesis, which is rooted in the growing global electrification. Western electricity demand is outpacing power production capacity and aging grid must be upgraded to accommodate power-intensive technologies like artificial intelligence. Massive amounts of critical materials will be required to achieve these goals. We continue to expand our exchange-listed product offerings, launching three critical mineral strategies in 2024 and two new precious metals ETFs so far in 2025. Looking ahead, Sprott is well positioned for an uncertain future. Global central banks are clearly focused on reducing their reliance on US treasuries and have turned to gold instead. We expect this trend to accelerate and broaden with investor participation increasing. The recent turmoil in the metals market has highlighted the importance of physical ownership, an area where Sprott offers best-in-class solutions to individual and institutional investors. The realignment of global trade and the focus on energy security will create demand for critical materials produced in friendly jurisdictions. We are pleased to offer investors a range of unique strategies to capitalize on this powerful long-term trend. We have continued to invest in our sales and marketing capabilities to deliver our clients the highest level of client service, while building our position as thought leaders in our core teams. We remain contrarian, innovative, and aligned. And that concludes our remarks for today's call. I'll now turn it back to the operator for Q&A.

Operator, Operator

Thank you. Our first question comes from Matthew Lee with Canaccord. Your line is now open.

Matthew Lee, Analyst

Hey, good morning, guys. Thanks for taking my question. There's been a considerable pullback in uranium spot prices in the last quarter. The trust continues to trade a bit of a discount to NAV. Can you maybe talk about what your expectations are for the uranium market and spot prices over the next couple of quarters?

John Ciampaglia, CEO of Sprott Asset Management

Good morning. I recently had over 40 meetings with institutional investors at the Bank of Montreal Mining Conference, and uranium was a prominent topic. Currently, the market can be viewed in two parts. Last year was somewhat average for contracting pounds in the term market, where utilities purchase uranium. Utilities are facing significant uncertainty from several angles, including potential changes to the Inflation Reduction Act, despite the current administration's pro-nuclear stance and ongoing adjustments. Tariffs on uranium might lead to substantial cost increases for utilities; the US requires about 47 million pounds of uranium annually but produces less than 1 million domestically, heavily relying on countries like Canada. There's also the possibility of retaliatory export taxes. Additionally, President Trump's recent closer relationship with President Putin raises concerns regarding the implications for Russian-enriched uranium and how it might affect the fuel cycle. Given these uncertainties, market participants seem hesitant, waiting for more clarity, which is putting downward pressure on the spot price. There are regular sellers along with one large seller, but buyers are largely on the sidelines until they have more information. This trend is not just limited to uranium but is evident across various physical markets for different commodities as uncertainty prevails. I should also mention that uranium in the United States is currently trading at a $2.50 premium over that in Canada, indicating that even without officially announced tariffs, the market is beginning to account for expectations. Until we gain some clarity, I anticipate continued fluctuations in the market over the next quarter or two.

Matthew Lee, Analyst

That's great color. And then, you mentioned friendly jurisdictions a couple of times. Does that imply maybe a demand for an ETF that focuses on material producers in particular geographies?

John Ciampaglia, CEO of Sprott Asset Management

That's a good question. When we refer to friendly geography, we previously considered Canada as a friendly geography for the US, but that's changing due to the potential tariffs on all commodities that the US imports. The tariffs aim to encourage reshoring or revitalizing lost industries, including uranium and copper mining and material processing in the United States. If local producers gain a cost advantage, that $2.50 spread for US-domiciled uranium might increase to a $5 or $6 premium. This could potentially benefit producers in the US, which currently have higher cost structures compared to their counterparts in Canada, Australia, and Kazakhstan. However, tariffs are unpredictable and can change. Therefore, the economic rationale behind the tariffs is uncertain. My message to investors is that we are in a state of uncertainty, which is often more challenging than receiving bad news. It's important to move forward and understand the new rules of the market as they develop.

Matthew Lee, Analyst

Okay. Understand. That's helpful. And then, maybe just last one for me. On the comp ratio, obviously, there's some puts and takes there regarding fee levels, but it's a pretty nice stepdown in Q4 and for the year. Can you just talk about how that's trending for 2025, and how you see that going forward?

Kevin Hibbert, CFO

Hey, Matt, Kevin here. So, I would say, it's fair to assume that we'd probably be in the somewhere ebbing and flowing in the mid- to high-40%s range through 2025.

Operator, Operator

Thank you. And our next question coming from the line of Michael Kozak with Cantor Fitzgerald. Your line is now open.

Michael Kozak, Analyst

Good morning, everyone. Thank you for hosting the call. I have two questions. First, Bloomberg reported that physical gold ETFs experienced their largest week of net inflows in over two years last week, which is reflected in the daily data you post for PHYS. My first question is whether you have any insights on the geographical origins of this demand and the types of investors involved. Are most of the inflows coming from the US or Europe? Also, would you estimate that the bulk of these inflows are from retail investors or some larger institutional ones?

John Ciampaglia, CEO of Sprott Asset Management

Yeah. Mike, it's John. Yeah, I mean, getting ETF data is not the easiest in terms of the transparency of where the flows are coming from. And you raised some really good points that gold ETFs have finally gone into net inflows. They were largely in net outflows for most of last year as people were really not paying attention and chasing things like MAG7 stocks. That has clearly changed. The sentiment has changed, the price action has changed, and we're starting to see some trend building in the gold ETFs back into net sales. US institutions, last year, were the biggest sellers of gold ETFs because, quite frankly, everything else was working for them, so why bother with gold. Obviously, the mindset right now, given all the uncertainty, politically, geopolitically, trade wars and tariffs, et cetera, et cetera, are now causing people to rethink potential risks and whether they need to have some physical gold in their portfolio as a ballast. And I think it's a very good sign. We're clearly at Sprott seeing renewed interest in our gold products. We had a very good capital raising day the other day. And on the silver side, again, it's a hybrid metal, so it's not going to have the exact attributes, but we're starting to see some inflows on the silver side as well across the industry, which up until recently has been just steady net outflow. So, price action and ETF flows don't always correlate the way you would think. But we think it's the start of a rotation as these risks and all these uncertainties and things that we've highlighted, investors are starting to think very differently about risks in the portfolio and gold. Historically, in these periods of market dislocation or calamity, again, not promising anything, but historically, gold has done very well on a relative basis.

Michael Kozak, Analyst

Okay. That's helpful. And then, maybe as a follow-up on that and just because you brought it up earlier in the call, you were down at BMO, it sounds like most of the investors you were chatting with are still talking to you about the uranium side as opposed to the precious side. Is that a fair assessment at this stage?

John Ciampaglia, CEO of Sprott Asset Management

Yeah. I think I'm here specifically to talk about uranium, but naturally, the discussion has cascaded into precious metals and copper as well and what's going on in the world. It's interesting because last year, I would say the focal point of the conference was uranium. The year before that, it was lithium. And for two years, gold was kind of in the shadows. Clearly, there's a lot more interest right now going on in the gold market, given it's at all-time highs. And that many of these gold companies are well-positioned here to capture that operating leverage. So, the tone is definitely more buoyant on the gold side, but uranium remains a very intriguing long-term investment for many of these institutions because they do believe that a nuclear renaissance is underway. It is a slow-moving, as we know, glacial kind of target, but they firmly believe that the supply-demand imbalance that we're dealing with has to be solved through higher prices. And that's why I think many institutions remain very well positioned in the uranium space.

Michael Kozak, Analyst

Okay. And then, last one for me, and you kind of front ran this one a little bit because you mentioned a $2.50 per pound premium for uranium sitting at ConverDyn. I know you guys store a lot of material there. So, my final question is, could you, and would you, and to what extent would you feel comfortable putting location swaps on to raise some capital in the trust that way?

John Ciampaglia, CEO of Sprott Asset Management

Yeah, that's a really great question. And obviously, we're contingency planning for all kinds of outcomes and one of them that we've been thinking very seriously about is the strategic value of our stockpile of uranium held in the US, which is about 25% of the trust or about 16-odd million pounds. That is obviously has the potential to trade theoretically at a $5 or $6 premium over the rest of the market, and we would absolutely look to optimize that value through location swaps, which we have done historically in the past. That could be a very nice kind of win and bump to our NAV if we can do that.

Operator, Operator

Thank you. Our next question is coming from the line of an unidentified speaker. Your line is now open.

Unidentified Analyst, Analyst

Hi. Good morning. It seems your base EBITDA margins increased by just over 100 basis points in 2024. I'm curious if you believe it's possible to achieve a similar level of growth in 2025 or 2026 and what your projections are for those margins in the upcoming two years.

Kevin Hibbert, CFO

Hey, Mike, thanks for that. We don't provide forecast of earnings or margins, but what I can say is there is definitely ample operating leverage in the model to see this number continue to rise at least for the remainder of this year.

Unidentified Analyst, Analyst

Okay. Great. Thanks. And just also, now that you are debt-free, plans for excess cash flow through 2025?

Whitney George, CEO

So, we've been a dividend payer for a long time and plan to continue that. So that's one source. As I've said, we've been opportunistic from time to time to buy our own shares back, and we'll continue to do that. And we have a couple of smallish opportunities that might come to fruition along the way. And we'll continue to see new products. Nothing on the private side in the first part of the year, but the team has a very good record and we might have an opportunity down the road to do our next fund. So, lots of uses. We're not a money market fund, so we're not going to sit on a pile of cash, but we're going to return it to shareholders as prudently as we see fit and try and continue to grow our business.

Unidentified Analyst, Analyst

Great. Thanks. And just one final quick one, if I may. Just how your flows are looking Q1 '25 to date? Obviously, we're two-thirds of the way through the quarter now. And just sort of what the overall flow picture looks like? And then, maybe if any particular products are standing out on that front? And that will be all for me. Thanks.

John Ciampaglia, CEO of Sprott Asset Management

Yeah, hi. It's John. Obviously, the Physical Gold Trust, given the price action we're seeing in gold and its role as a portfolio diversifier, I think is where we're seeing the most traction and the most global flows across the whole suite of funds. So, the way it's trading right now, very tight to its net asset value is a very strong signal in terms of investor interest which positions us very well to raise capital when we get these intraday moves. So, I would say that, that's going to be our go-to fund. It would be nice to get silver kind of going as well. They usually work together in tandem. It's been a little quieter, but it feels as though it's positioning itself to join the party. Unfortunately, uranium, given the very different market dynamics and all the geopolitical risks that it's dealing with right now, seems to be a little bit on the sideline. So, gold and silver would be my guess in terms of where we're going to see the most interest.

Unidentified Analyst, Analyst

Great. Thanks very much, guys.

Operator, Operator

Thank you. I'm not showing any further questions in the queue. I will now turn the call back over to Mr. George for any closing remarks.

Whitney George, CEO

Thank you, and 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. Have a great day. Thanks.

Operator, Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.