CA - Sprott: Reports Solid Q4 2022 Results

Summary

• Sprott Inc. assets under management rose close to a peak level in Q4 2022.
• The growth has come from the exchange-listed products and private strategies segments, which is where I also expect most of the future growth to come from.
• Sprott has in February 2023 launched 4 new ETFs, and a couple have already started to see some inflows.

Investment Thesis

Sprott Inc. (SII) released its financial result for Q4 2022 this morning and will have a conference call later today. This is my take on the 2022 results and the near future for the company. I have covered the stock many times in the past few years, and those articles can be found here . The investment company is listed in both the U.S. and Canada.

The majority of Sprott's assets under management are linked to precious metals, but the company has lately started to focus on a few other commodities as well, most notably uranium, where the exposure is somewhere around 20-25% of total assets under management.

Sprott's stock price has over the last year traded more in-line with uranium miners than precious metals miners, which can be seen in the chart below, even if the data series all have relatively high correlations.

Figure 1

Figure 2

Sprott has over the last 3 years been a good investment, outperforming most precious metals miners and some royalty & streaming companies, which I think are comparable in terms of risk-profile. This is due to an impressive growth in assets under management. Which has, in turn, come from some good new investment mandates and excellent inflows, primarily to the physical trusts.

This is something I think is likely to continue, as Sprott has recently launched 4 new exchange-traded funds ("ETFs") and we continue to see inflows during 2023. The two charts below illustrate the change in assets under management ("AUM") over the last three years for all segments and for the exchange-listed products segment, which is the segment where most of the growth has taken place.

Exchange Listed Products

The exchange-listed products segment is by far the largest and most important segment for Sprott, which is why I will focus more on that segment in this article. It now accounts for about 70% of positive adjusted base EBITDA, which the company uses to track earnings over time. The segment has a very impressive operating margin around 80%. The operating margin was 83% in the segment during 2022 compared to 57% for the overall company.

The segment did in Q4-22 have $18.1B in AUM out of a total of $23.4B for the whole company. As figure 4 above shows, the segment has consistently grown from the addition of new mandates and from inflows, and there have been several billions of dollars of inflows in each of the last 3 years.

The company did in early February 2023 announce the addition of 4 new ETFs, which can be seen in the chart below. They all started with $2M each in assets. While it remains to be seen how successful they will turn out to be, the Junior Uranium Miners ETF ( URNJ ) has already seen $11M in inflows, which is at least a very promising start.

The segment has YTD otherwise been impacted by the poor performance in the silver price and some minor outflows from the Gold Trust. That has party been offset by very healthy inflows to the Uranium Trust ( SRUUF ) and some inflows in the Uranium Miners ETF ( URNM ). Based on what we have seen so far this year and in prior years, I think $2B+ of inflows during 2023 is a realistic base case for Sprott. If we see a strong bull market get going in precious metals and/or uranium, the AUM growth can be much more than that, especially with more ETFs and Trusts in the segment nowadays.

2022 vs 2021

2022 has been a relatively good year for Sprott considering how poor the sentiment was during much of the year in Sprott's industries. AUM was at the end of 2022 very close to a peak level.

All the AUM growth in 2022 has come from the exchange-listed products & private strategies segments, as the below figure highlights. The managed equities segment had a poor year, with significant declines in AUM and earnings. Given a general trend of money flowing from mutual funds to exchange-traded funds ("ETFs"), my expectations are relatively low for the managed equities segment going forward as well, even if a better sentiment would no doubt improve the result there.

Adjusted base EBITDA grew 11% YoY, which is a decent result, but there are a few reasons we haven't seen more earnings growth in 2022. One reason is that much of that AUM growth happened later in the year, which naturally hasn't been reflected in the full year's earnings.

Another significant reason was the decline in the brokerage segment. The sentiment was during much of 2022 very poor. That disproportionally impacts the activity in the brokerage segment, which saw adjusted base EBITDA decline by $5.2M or 53% in 2022. The company did in the 2022 annual report announce that it is now looking to divest much of the Canadian brokerage business in H1-23, to focus more on the higher-margin AUM business.

The private strategies segment could also have done a better job of translating AUM growth to earnings growth, but we know the segment has lumpy earnings. So, I do expect that to even out over time.

Conclusion

Sprott Inc. continues to be one of my favorite investments. The company has had excellent growth in AUM and earnings over the last few years. The strategic investments into the uranium industry have been very successful and have shown great initiative by management.

The Sprott Inc. valuation is reasonably attractive for a growth company, without permitting or mining risk and minimal operational risk. The company has minimal financial leverage as well, and the stock pays a dividend yield of 2.7%, with quarterly distributions.

The Sprott Inc. unadjusted net income and EBITDA in 2022 might look surprisingly weak, but they were in 2022 impacted by some unrealized losses in co-investments, and amortization of non-reoccurring severance pay, which aren't overly concerning to me.

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