CA - Sprott: The Uranium Related Products Continue To Grow
2023-11-05 09:19:33 ET
Summary
- Sprott, a Canadian investment company focused on precious metals and uranium, has had lackluster performance this year.
- The growth in assets under management of the uranium products has offset weaker performance in the precious metals products.
- The growth in assets under management has not been fully reflected in earnings growth.
Investment Thesis
Sprott ( SII ) is a Canadian investment company focused on precious metals products and uranium more recently. The reporting currency is U.S. Dollars. This is a company I have covered frequently over the last 5 years, those articles can be found here .
Figure 1 - Source: Koyfin
The performance of Sprott has been lackluster this year, down 5% YTD, the stock has performed in-line with the more common precious metals mining ETFs. Over the last few years, the stock has also been correlated with the uranium miners, but Sprott's stock price has not participated in the recent rally in uranium equities.
The positive momentum for the price of uranium and uranium equities has been beneficial for Sprott though, where the growth in assets under management ("AUM") of the uranium products has offset weaker performance in some of the precious metals products.
Q3-23 Result
Sprott did earlier this week report its Q3 results, where the quarter end AUM increased marginally, while average AUM, and adjusted EBITDA declined slightly quarter-over-quarter.
Figure 2 - Source: Quarterly Reports
The numbers in the various segments were mixed, with minor increases and decreases in AUM and EBITDA. We also saw net income decline drastically quarter-over-quarter, but that is because the Q2 number was boosted by $19.8M in other income, related to a historical acquisition. However, even if we just focus on the absolute net income, it was relatively weak.
Figure 3 - Source: Quarterly Reports
Segments
The two charts below provide greater insights into the exchange listed products segment during the first 3 quarters of the year. Where we can see that most of the AUM growth has come from the Uranium Trust ( OTCPK:SRUUF ), Uranium Miners ETF ( URNM ), and Jr Miners ETF ( URNJ ).
There has been some inflow during the year, but the majority of the growth has come from the positive performance in uranium and uranium related equities. The Jr Uranium Miners ETF has now grown to $143M, which is very impressive considering it was earlier this year launched with $2M.
Figure 4 - Source: Quarterly Reports
Figure 5 - Source: Quarterly Reports
The managed equities segment did see adjusted base EBITDA grow while AUM declined slightly, which is always encouraging. However, the segment is of more minor importance nowadays, both in terms of size and growth prospects.
Figure 6 - Source: Quarterly Reports
The private strategies segment did see a minor increase in AUM during Q3, but adjusted base EBITDA declined slightly during the quarter. We know earnings in this segment have been volatile historically, so I wouldn't read too much into the lower quarterly EBITDA figure.
Figure 7 - Source: Quarterly Reports
Conclusion
Q3 was a relatively quiet quarter for Sprott, where the uranium products did well, while the precious metals related products had a weaker quarter. The company has YTD seen a $2B growth in AUM, where the growth has come from the exchange listed products and private strategies segments.
Figure 8 - Source: Quarterly Reports
I touched on this more in my last article on Sprott , but as encouraging as the growth in AUM has been over the years, it has not trickled down earnings growth for Sprott. Where the divestment of the transaction related business has played a part, but so has excessive management compensation.
In the chart below, we can see the cumulative growth of annual reported figures since 2019. Where the growth in management compensation has outpaced AUM by a lot since 2019, which is one of the main reasons why net income and free cash flow has not kept pace.
The forward-looking Price/Earnings ratio is at 19, which might not be that expensive compared to how the stock has traded around historically, it is not that cheap on an absolute level. Also, with higher interest rates, where treasury yields are now around 5%. A free cash flow yield of 4% and a dividend yield just above 3% is much less attractive compared to what it used to be a few years ago with lower interest rates.
I do think Sprott is a very interesting company given its precious metals and uranium exposure, without the much higher operational, permitting, and financing risks we see in the mining industry. However, until the growth in AUM is better reflected in higher net income or free cash flow, I would need a much lower valuation to be interested.
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Sprott: The Uranium Related Products Continue To Grow