Earnings Call Transcript - SII Q4 2023

Operator, 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, CEO

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 and investor base, we reorganized and expanded our Sales, 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 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 $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-month and 12-month 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; 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-month 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, CEO of Sprott Asset Management

Thanks, Kevin, and good morning, everyone. On slide 8, I wanted to take a broader, long-term look at the development of our Exchange Listed Products suite. Globally, ETFs have surpassed $11 trillion, making them a crucial category for asset management firms everywhere. I’m pleased to report that since our mutual fund business divestiture in mid-2017, our Exchange Listed business has expanded from $3.6 billion in assets under management to $23.7 billion as of mid-February. This growth has been driven by three strategically timed acquisitions and successful organic growth strategies, which included launching several funds across various geographic exchanges. We increased our product categories from six to 13 and expanded our overall suite from five to 16 funds. As Whitney mentioned, we were active in 2023, launching seven new ETFs, with two more set to hit the market in the coming weeks. These Exchange Listed Products are distributed globally, targeting any investor who can access a ticker. Our focus is now on new funds centered around long-term growth themes in critical minerals, energy transition, and precious metals, which we believe are essential components of any investor's portfolio. Moving to the next slide, I'd like to highlight the significant growth in our uranium franchise. Last year, we saw our assets increase significantly, with total assets now at $9 billion, reflecting a growth of $5.3 billion or 143%. This is significant, and we take our leadership position seriously, considering the scale, diversity of offerings, market choices, and focused approach these funds provide. Over the past six months, we've seen increasing liquidity and institutional interest, and I believe we're well-positioned for continued success. Sprott's Uranium Trust has become our largest single fund, while the Sprott Uranium Miners ETF is now the largest pure-play uranium mining ETF globally, and we are also launching a European version. The Sprott Junior Uranium Miners ETF recently celebrated its first anniversary with $300 million in assets, which is impressive, and we are in the process of launching this fund across Europe as the world's first Junior Uranium Mining ETF. We are committed to this franchise as we believe we're entering a new phase in the current bull market with many years ahead. Now, on to the next slide. Recently, uranium prices have surpassed $100 a pound for the first time since 2007. Unlike most commodities that have faced challenges due to rising interest rates and slow economic growth, uranium is performing differently. It’s worth noting a chart from Bank of America that illustrates the nominal price of uranium throughout the past three bull markets, adjusted for today's dollars. While reaching $100 is exciting, we see significant additional potential; prices peaked at $170 in the early bull market and approached $200 during the last one in the 2000s. Our optimistic forecast is driven by robust demand stemming from ongoing global projects and future plans. We expect annual uranium demand to grow from approximately £180 million currently to somewhere between £250 million to £300 million by 2040. Moreover, uncovered utility requirements are projected to range from £1.5 billion to £2.3 billion, which is quite remarkable looking ahead to 2040. We’ve also faced several supply challenges. Typically, commodity bull markets lead to increased supply, but over the last six months, two of the largest uranium producers have indicated short-term production issues. We don't anticipate any new uranium mines to be built in the next four to six years. Additionally, geopolitical risks related to uranium and the nuclear fuel cycle are high, with a U.S. bill likely to be passed that would ban Russian uranium imports, potentially disrupting the market. Lastly, we believe uranium prices will remain elevated for an extended period, essential to support the new production needed over the next two decades. Moving to the next slide, I want to provide some context around sales. Last year, overall sales were lighter, primarily due to investors staying on the sidelines. There is currently $6 trillion in U.S. money market funds earning a 5% yield, and risk capital has been slow to return to the market, largely influenced by Federal Reserve signals. Our trust traded at wider-than-average discounts in the latter half of the year and experienced redemptions, similar to many precious metals funds. Looking forward to assets under management, which is crucial for revenue generation, we saw good growth late in the year. While we couldn't capture the full-year benefits, those assets are now on our balance sheet, and we hope they continue to contribute to revenue going forward. On the next slide, I’ll discuss our flows. Our ETFs have seen favorable trends, particularly the uranium funds, which attracted significant capital last year as interest in the sector surged, appealing to various types of investors globally. The uranium ETFs were instrumental in driving these flows. On slide 14, our ETF product suite's assets grew by 80% last year, largely attributed to URNM, the uranium mining ETF. Maintaining a variety of product categories is essential, allowing us to capitalize on market demand as different metals gain attention. With that, I’ll turn it over to Whitney.

Whitney George, CEO

Thank you, John. I'm on slide 15. I will 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 like gold and silver primarily, and have reached historical lows in relative terms. Slide 16 discusses 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, as well as 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 is still early, we are 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 will launch our Junior Uranium Miners UCITS Fund in Europe. Looking ahead, we are very confident that the 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 look 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.

Operator, Operator

Certainly. Our first question comes from Graham Ryding from TD Securities. Your question, please.

Graham Ryding, Analyst

Hi, good morning. There were some flows in the quarter into managed equities. I think in your other line, what asset class or maybe what channels did that relate to?

John Ciampaglia, CEO of Sprott Asset Management

Hi Graham. On managed equities, I wouldn't say anything in particular. I think the industry generally is experiencing very slow and steady redemptions from a lot of 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 forms: sub-advisory relationships, separate accounts, and it has just been kind of a drip across the whole product suite.

Graham Ryding, Analyst

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, CEO of Sprott Asset Management

We've not had any material institutional outflows. They're not in any size. Maybe Kevin, did you have a thought?

Kevin Hibbert, CFO

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 I get you a reply back.

Whitney George, CEO

I'll make one comment. One of our largest products is our precious metals mining 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 attracts new capital. Barring any kind of enthusiasm for the mining sector in the year, that's just going to be a natural progression. But we are definitely of the view that things could change and they could change very quickly and dramatically.

Graham Ryding, Analyst

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, CEO of Sprott Asset Management

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-positioned 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, but completely omit critical things like uranium, lithium, and have very low exposures to other minerals like nickel and cobalt, etc. So, we think this fills a gap in the market. The world seems to be increasingly focused on metals that are critical for the energy transition. I think that's where a lot of our expertise is being integrated into either active or passive strategies.

Graham Ryding, Analyst

Okay, great. Should we consider that you are actively streamlining your business in 2023? Are there other areas you are examining, or is the process largely complete? How do you perceive the strategic benefits of your managed equities and private strategy complementing your exchange-listed side?

John Ciampaglia, CEO of Sprott Asset Management

I think we're done, and what we have now is all on strategy. We believe we are experts in the mining industry, and we offer a suite of products for individual investors and large institutional investors. We are doing it globally. I'm very pleased with the platform now and looking forward to being rewarded for those efforts.

Graham Ryding, Analyst

Okay. That's it for me. I'll repeat re-queue if there's anymore. Thank you.

Operator, Operator

Thank you. One moment for our next question. Our next question is a follow-up from Graham Ryding from TD Securities.

Graham Ryding, Analyst

Okay. I didn't want to hog the line, but I'll keep going on. 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 be contributing to that $5.3 million overall?

Kevin Hibbert, CFO

So, the vast majority. So you're asking about other expenses, right?

Graham Ryding, Analyst

Yes, it was excluded from base EBITDA. I can see the FX, but there's lots of other stuff that I can't see. There's like $3.7 million of other stuff in there that I'm not sure what they are?

Kevin Hibbert, CFO

Right. The vast majority of our other expenses would be the costs associated with the exit of the non-core businesses, as well as anything nonrecurring around professional fees pertaining to those transactions and then new fund start-up costs.

Operator, Operator

Thank you. 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, CEO

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 our story out. With that, have a good day everybody, and thanks for joining us. Bye-bye.

Operator, Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.