Description

This asset manager is growing AUM just as performance fees are about to kick-in after a dry spell.  From their previously eccentric past, they are moving into the institutional mainstream and picking up sovereign wealth mandates at an impressive clip.

Sprott Inc. is the holdco for the asset management & consulting activities of Sprott Private Wealth, Sprott Resouce Lending, Sprott’s Toscana Capital, Sprott Asset Management, Sprott Global Resource Investments, and associated mutual funds, ETFs, physical bullions trusts, hedge funds, and tax-efficient funds.

In Canadian Dollars

715m Mkt Cap (248.3m shs out at C$2.88)

150m Cash

565m EV

They are a premier asset manager with approx. $9B under management, and hold a specialized niche in the precious metals space. There is a 4% dividend yield (higher if you back out the ~150m cash on hand).  And, historically (though not recently) they have paid additional sizeable special dividends when performance fees were flush.

Historically they were a cult of personality firm for the activities of Eric Sprott, who is widely respected as a Natural Resource Sector investor and known for his eccentric market views.  While a wildly successful asset management firm, eccentricity kept them somewhat marginalized from the institutional mainstream with a more retail investor base.  But there has been a metamorphosis, at least optically, putting them in a solid position to attract capital from Sovereign Wealth Funds and larger Pension investors.  

Eccentric Views  -  Spot on Chicken Little

Eric Sprott writes regularly about the unsustainability of government funding, systemic risks, how the US Economy is on ‘life support’, the largess of Central Banks, currency sustainability issues, and the coming financial apocalypse where gold goes way, way up.  A recent July piece titled “The Ongoing Rot in the Economy” is exemplary of his stance.  His money is where his mouth is, and he provides investment vehicles to institutions to hold precious metals, primarily gold, in physical format (ie yellow metal in secure storage, as opposed to paper ownership through ETFs or futures). 

Now they are moving away from having Eric Sprott as the sole face of the company.  He has largely stepped back from management of funds with relatively little treble from redeems and there are now many portfolio managers with Eric Sprott acting as coach, though he maintains the titles of Chairman and Chief Investment Officer.  In addition, CEO Peter Grosskopf, who presents as a rather sharp executive, has a history with the firm.  He previously ran Sprott Securities and went with it when spun off as Cormark Securities in 2004.  He’s back working directly at Sprott Inc. with a focus on building “a more significant institutional business”, and growing AUM by winning mandates from big Sovereign allocators. 

Recent transaction -  a rarity for insider transactions

In order to improve liquidity for the stock, Eric Sprott sold down approximately $60m of his sizeable position in Sprott Inc. to redeploy the money into Sprott funds.  This transaction was 20m shares at C$3, plus a greenshoe of an additional 3m still unsettled.  Another 5m shares was proposed to be sold into the employee profit sharing plan.  Post transaction his ownership is reduced to approximately 27%.  Rarely do you see a key equity holder sell shares in a no proceeds to the company offering and redeploy the funds back into the operations of a company (funds in this case) with an eye toward improving investor liquidity.  What is remarkable is that his funds will stay involved in the risks that are tied to the success of the company.  

Operating Profit went from $175m to $26m in three years while the stock went from $10 to $2.  At the core, there’s roughly $70m of annual expenses for personnel costs & SG&A, against baseline mgmt. fees of ~$100m and they dividend much of the difference.  Much sexier is their Performance Fee Revenue which hit $200m back in 2010 but has been sub $10m annually since, which coincided with a washout among Canadian Jr natural resource companies.  But the TSX is leading the pack this year up 12.4% YTD in USD (+ 11.1% in local).  Combine that with gold up about 8.8% YTD and an aggressive drive for new sovereign mandates boosting AUM.  They started the year at $7B and are now approximately $9B through a combo of performance and new business.  Plus the NYSE has assigned a dedicated market maker to PHYS & PSLV which I see as third party indication of growing interest in these physical trusts.  Lastly, they have a new gold miners ETF (ticker SGDM) which just started trading, but has interesting features of manager discretion based on fundamentals (rather than the market cap weightings of the larger gold ETF brethren) and could become a big product.

As the firm has gone from eccentric to mainstream, there is plenty of continuing business to be had from large allocators who simply want to hedge their bets a bit with a small allocation to gold.  Precious metals are institutionally under owned representing sub 1% in most portfolios and Sub 0.1% in many.  CEO Grosskopf is out making a convincing case to hedge a bit with real assets, and there are lots of big allocators who like to plan for a rainy day.

Indications are that Sprott will grow operating profit back to previous levels organically, and you get the optionality that if gold ever moves up in the apocalypse Eric Sprott expects this stock could go vertical for a multi-bagger.

Catalyst