Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Sprott Inc.'s 2020 first quarter results conference call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for an operator assistance at any time. As a reminder, this conference is being recorded May 8th, 2020. On behalf of the speakers that follow, listeners are cautioned that today's presentation and 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. 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 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 Securities regulations. I will now turn the call over to Peter Grosskopf. Please go ahead, Mr. Grosskopf.
Thank you, operator. Good morning, everyone, thanks for joining us today. On the call with me today is Whitney George, the President of Sprott, our Chief Financial Officer, Kevin Hibbert, and John Ciampaglia, the Chief Executive of Sprott Asset Management. Our Q1 results were released this morning and are available on our website. Just one second, sorry. On our website, where you can also find our financial statements and MD&A. Before we begin, I'd like to acknowledge that we certainly are in unprecedented times and that the landscape has changed. The impacts are far-reaching, and our thoughts are with those who have been the hardest hit. At Sprott, we are amongst the fortunate few that can say that the new landscape has unequivocally helped our business.
Coming into the year, we were positioned with a view that markets were priced for perfection, which was associated mostly with a dependency on monetary stimulus. Our focus on gold provided an insurance for those conditions. At Sprott, we implemented our business continuity plan in March, and we've been operating at full capacity and at full speed in a mostly remote environment. I'm pleased to report the entire team has responded well to this new reality, and the transition for us has been virtually seamless. I'll begin on slide 4 with some recent highlights. As the market sold off in the early stages of the COVID crisis, gold performed its traditional role as a portfolio insurance asset and a source of liquidity. At first, it sold off steeply with other assets as investors sold everything they needed to meet margin calls.
However, once global governments responded to the ensuing liquidity crisis with unprecedented stimulus and money printing, gold quickly recovered and is currently trading around $1,700 an ounce, up more than 10% on the year. As we have seen in previous crises, bullion demand recovers first and then is later followed by a resurgence into gold equities. 2020 is unfolding the same way, with mining equities starting to break out as this rotation occurs, with gains of more than 40% during the months of April. That's very pertinent to our quarter-end report because our positions had the same effect. The increased demand for precious metal investments was reflected in our net sales for the quarter, which were more than $620 million. Our AUM increased by 16% during the quarter and is up by more than 30% on a year-to-date basis as of May 6th.
With precious metals poised for what we believe will be a multiyear upswing, we believe the time is right for Sprott to pursue a U.S. listing. We're in a process of applying for that listing on the NYSE and hope to have it complete during Q2. The majority of our 150,000+ clients are based in the U.S. or internationally, we believe this listing will increase our profile and attract a diverse new group of institutional and retail shareholders. At the same time, we intend to complete a share consolidation to support the listing. This proposal will be voted on later today at our AGM and could be implemented as soon as next week. With that, I'll pass it over to Kevin for a review of our financial results before discussing each of our core segments in more detail. Kevin?
Thanks, Peter. Good morning, everyone. Just as a reminder, beginning this quarter, we've transitioned our presentation currency to U.S. dollars, and as such, all figures discussed today are in that currency. I'll begin on slide 5, which provides a summary of our AUM as at March 31st, 2020, as well as a snapshot of our current pro forma AUM estimate as at May 6th, 2020. AUM as at March 31st was $10.7 billion, up $1.5 billion or 16% from December 31st, 2019. Our AUM benefited largely from the successful close of the Tocqueville Gold Strategies acquisition earlier this quarter, strong inflows into our physical trusts, and good inflows into our lending funds and private equity strategies in Asia. These increases were partially offset by market value depreciation from lower silver prices and weak equity market valuations that occurred during the last two weeks of March.
However, subsequent to quarter end, the company quickly recovered all of these unrealized market value losses, and as a result, our pro forma AUM estimate as at May 6th, 2020, is $12.1 billion, moving our total AUM up an additional 13% from the quarter end. Lastly, moving now to slide 6 for a look at our Q1 2020 earnings. Adjusted base EBITDA in the quarter was $8.2 million, up $1.3 million or 18% from the prior period. The increase was primarily due to, again, the Tocqueville Gold Strategies acquisition earlier this quarter, increased fees from strong net inflows in our exchange-listed products, and we also benefited from increased commission revenues in our brokerage segment due to higher transaction volumes.
These increases were partially offset by lower finance income in our lending segment, given the repayment of legacy balance sheet loans and higher capital distribution levels in our lending LPs last year, all of which more than offset increased management fees in our lending business from ongoing capital calls. For more information on our revenues, our expenses in EBITDA, you can refer to the supplemental information section of this presentation, as well as our Q1 2020 MD&A filed earlier this morning. That said, I'll turn things over to John.
Great. Thanks, Kevin, and good morning to everybody. I'm very happy to share our results in the physicals business, which has been an incredible driver of our AUM growth over the last about two months. What we've seen has really been unprecedented in terms of the demand response we're seeing from all types of investors around the globe for physical metal. This was really a perfect storm because it coincided with the disruption to the complete global supply chain, with mines closing, logistics closing down, and refineries closing down. At a time when people were looking for physical metal, it was incredibly difficult to find. What we're seeing right now is a slow restart of the supply chain. I would say that we are still benefiting from this disruption because many of these refiners are not operating at full capacity.
There are social distancing measures being put in place inside the facilities, and there still is a physical tightness in the market while demand remains very high. Year-to-date as of May 6th, the trusts have grown by 20%, which is really incredible in the context of silver being down 17% year-to-date. I would think most asset managers are seeing 15%-20% losses in AUM across traditional asset classes. The year-to-date sales have been incredibly strong in the last two months. We're at $1.1 billion. You can see in April, we really had a spike of almost $600 million. The pace for May remains quite strong. Up until yesterday, we were through $120 million of additional sales. The momentum we're seeing has been very strong. What's interesting is the sales are coming from, I would call, more sophisticated investors, larger funds, family offices, institutions, RIAs.
Yes, there is unprecedented demand at the retail level for coins and bars, which they can't find right now. What we're seeing is demand from institutions that are trying to hedge primarily equity risk, moving away from low yielding fixed income and Whatnot. If we move to the next slide, I thought this slide provides some good historical background in terms of gold-backed ETF holdings. This is a worldwide measure of all ounces of gold held through ETF. You can see that this uptick started well before the outbreak of COVID-19. It really started back in June of 2019, when gold broke through a psychological level of around $1,360. Obviously, COVID-19 has accelerated the gains.
You can see that even though we're at $1,700 gold ETFs are at record level compared to 2012 when gold had breached its $1,900 level in U.S. dollar terms. We think that gold at $1,700 is going to be in high demand. It's been very resilient around that price level. Any kind of dip in pricing, we're seeing buyers come in and add to their positions. We think the next stop for gold is around $1,800, and it will eventually breach its all-time high in U.S. dollars of just over $1,900 an ounce. We're still very early in the cycle. One thing we've noticed from a lot of our conversations is that many of these investors and these institutions are still very under-allocated to gold and gold stocks.
Many of them have not invested in the category for many years, I think that there's a lot of dry powder there to fuel the next leg of this bull market. I will pass it over to Whitney now.
Thank you, John. I'll start on slide 9, and talk a little bit about our managed equities business, which is a real scalable business now that we have successfully integrated John Hathaway and the rest of the Tocqueville gold team, starting back in January. Welcomed them to our new New York office, which we then promptly had to close down because of COVID-19 and eager to get back. We onboarded all of their products very efficiently. There was some attrition expected, as there always is with this kind of transfer. Again, all well within what our expectations were when we were pricing this transaction. We recently hired [Dr. Nicky Etchell] as a portfolio manager.
Nicky is a very interesting addition because not only does she have experience investing in analyzing gold equities, she's served on several boards of mining companies, and in fact, was CEO of a mining company which she turned around and then sold. She will chair our ESG committee, because she has real-life experience on the ground, and just brings a set of capabilities that I don't believe any other investment firm in our space can match. As was mentioned earlier, there's been a sharp recovery in AUM, principally, based on market. As Peter mentioned, the gold equities generally were up over 40% in April. They continue their rise this month. I'm pleased to report that virtually all of our products have positive performance year to date, and most of them double digits.
I think that's something that we're very fortunate to have at this point in time with all the uncertainties out there. Gold stocks, we think, are poised to be the new growth stocks. Obviously, the higher metal prices will drive revenue. At the same time, costs are well contained, energy and labor being two of the largest components. We think that there is an enormous opportunity for a V-shaped recovery in this industry as things open up, with margin expansion, earnings growth, and many of the features that are going to be very difficult to find in most other sectors. I think we're very well positioned. We're very fortunate to have John and his team join the Toronto team, and all of the other technical experts that we have here at Sprott. We look forward to finding lots of new customers. Thank you. Back to Peter.
Thank you, Whitney. I'll now turn to slide 10 to look at some of our private strategies. We recently closed our second private resource lending fund, which raised over $820 million in committed capital. We are now in an ideal position to respond to a robust pipeline of opportunities. Activities are really ramping up, and we've signed multiple commitments in recent weeks and have a total pipeline of over $500 million when fully accounted for. During the first quarter, we had drawn down $60 million of this fund. In Q4 2019, we launched a new project participation vehicle with $210 million in lead orders. We believe this is becoming an important new market for institutional funding into mining projects, and we're currently looking at a number of deals for this vehicle.
We've completed one to date and have an active pipeline, so that will join us as a sister fund to the lending fund going forward. Fundraising for this fund has been put off until the fall, because we're just going to work on deploying the money we have committed to date. Turning to slide 11 for some closing comments. The outlook for precious metals has rarely been more positive. The monetary and fiscal stimulus, as well as the heavy hand of government intervention that has been unleashed in response to COVID-19 is like nothing we've ever seen. We believe we'll be paying for it for many years to come. Global debt levels are completely unsustainable. Financial repression through negative real rates will now become a standard policy tool for governments globally. This environment is extremely positive for gold.
At Sprott, we're focused on driving growth in our core strategies first and foremost, and to drive this growth organically. Our physical trusts are the perfect product for these times, and we're the main beneficiaries of investor flows during Q1 and for the year to date. As Whitney noted, we believe it's now gold stocks' time to shine, and we expect great things from our managed equities business in the months ahead. We're determined to capitalize on this current opportunity and position Sprott for the future.
We are exploring complementary product line expansions. We've certainly increased our virtual marketing activity. This has proven to be a remarkably effective way for us to grow our funds. We will also pursue some new international distribution agreements in select markets. We are convinced that the timing is right for us to step onto the larger stage with the NYSE listing. We think there are synergies between our large client base in the U.S. and a share position in that market. We look forward to introducing our company to a broader group of investors during the latter half of this year. That concludes our remarks for today's call. I'll now pass it back to the operator for questions.
Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Gary Ho from Desjardins. Your question please.
Thanks, good morning, everyone. Sorry, I jumped on the call late. Can you provide some additional color on the flows that you're seeing so far in Q2? I think you highlighted some of the physicals in ETFs business. Maybe just a little bit more granular color into your different segments.
Yeah. I'll pass that to Kevin, and perhaps John can comment as well.
Yeah, forgive me, but I'll pass it on to John. He's got a lot more insight into that.
Sure. Hi, Gary. Good morning. What we're seeing, obviously, are the liquid type strategies in the physical metal space are really attracting a lion's share of the flows. Post Q1, in the trusts, we've seen about $700 million of additional flows, and that's in just about five weeks. The pace that we're seeing has been very strong, and with about 120 of that coming in May. The pace has not fallen off. I said last time on the call that gold at $1,600 is very constructive for us to raise capital, and now obviously at about $1,715, that kind of validated my point. We're seeing lots of interest. I think we often think about the world from a U.S. centric lens. If you take a step back and think about price of gold in every other currency but U.S. dollars, it's at all-time highs.
We're seeing investors from around the world looking for physical gold products. We are raising capital into silver. Silver is a very different story. As you know, it's a monetary metal and an industrial metal. The industrial metal side of the equation obviously has fallen off. When silver hit below $12 an ounce, we saw an incredible demand response from silver investors, which tend to be much more price sensitive. In no time, you couldn't find a single silver coin anywhere because they were all bought. We're seeing primarily flows into the gold trust, but we're also seeing flows in our gold and silver trust and our dedicated silver fund. Different kind of buyers. The gold funds are more institutional driven. The silver funds are more retail driven. The equities have been fairly quiet. As Whitney said, we've had this incredible V-shaped performance recovery.
If you look at our mutual fund, the U.S. mutual fund, it went from about $1 billion down to 650 in assets, and now it's back over $1 billion in a very short period of time. Over that period of time, we didn't really see a lot of activity. People were kind of sitting tight. They weren't redeeming. We expect that once people start to take notice of the performance, we'll start to attract some more capital. We have had some institutional redemptions. Not totally unexpected. Institutions obviously behave a little differently than retail investors, but we would expect that we'll more than offset those with new sales in other products.
Okay. That's good color. Thanks for that. Second question, just as gold prices climb higher here, Kevin, can you maybe talk about the EBITDA margin benefit, kind of what we should see across the various segments?
Sure, Gary. Generally speaking, as the gold prices rise, it's obviously going to be very positive to our operating margins, primarily because a lot of our operating expenses are fixed as far as our SG&A. Obviously we've got a nice balance in terms of variable compensation items as well in the case that, heaven forbid, gold prices were to move in the opposite direction. I'd say what you're seeing now as far as total operating margins, and if you look at page 6 of our MD&A, we're kind of running at about 43% right now. I think it's safe to say that we could run comfortably north of that for the foreseeable future, assuming that the gold markets continue to be as constructive as they are now, putting us well within the top 1% of global asset managers.
Okay. Then Peter, can you talk a little bit about the increased equity originations activity in Q1, and I think also tracking kind of Q2, that activity continued, maybe outlook in your pipeline for future deals as well?
Are you talking about the dealer revenue?
Yeah, exactly.
Okay. Q1 was kind of a modest uptick and just continued, I guess what we'd call a stable performance. Initially in Q2, there was a little dip as things went very quiet with COVID, but now we've seen a substantial increase in activity. I would say the private client group folks have never seen more incoming business. The dealer groups are reacting to liquidity conditions in the deal markets, which all of a sudden in the last two weeks have exploded. We see this now as being a sector that's kind of being chased, both from a client perspective and a deal perspective. I would expect our private client folks in the U.S. to be kind of on the upswing, but it's a modest upswing because it takes a long time for them to realize revenue benefits from clients.
Whereas the dealer in Canada, which kind of syndicates into these larger institutional deals, should have an immediate uptick now.
Okay. Just last question from me. Peter, you mentioned you closed the second resource fund and commented on robust pipeline. Your capital deployment language in your MD&A, I think it's between $ 100 million-$ 200 million, hasn't changed. Are you expecting some capital kind of distribution from these funds? Can you help me connect those two points?
Okay. Maybe I'll link with Kevin on this, but I'll just explain it to you from my view. The LF1 is winding down and paying out, and the last large loan in that portfolio was the loan to TMAC, which announced today a takeover by Shandong Gold. Although the takeover will take a long time to close, the LF1 has basically been discharged in the process of being discharged with a very handsome return. That hits our numbers in a positive way because we're a big investor in that LP. As LF1 has been repaid, it's been lowering our AUM on that side. LF2, the AUM, as we went from a fundraising focus to a deployment focus, started to click in Q1, so it was $ 60 million in Q1. There's about $ 250 million of signed term sheets and facilities that we expect to deploy in the near future.
Then there's another $300 million-$500 million of pipeline. That's now ramping up. It's impossible to tell exactly when the monies will be drawn. I would expect that, just in general, and this is, again, a bit of a guess, I would expect that AUM to just solidly and steadily move higher now going forward, even as TMAC is repaid. It's a fairly large fund. It's $820 million+ co-investment. Getting to $1.2 billion or so deployed over two years, you've got to kind of go at the pace of around $300 million-$400 million per quarter. Those numbers will start to override what was there in the past.
Just to add a little bit of color on top of that, Gary. When Peter was mentioning those numbers in the breakdown, basically the $200 million that he mentioned first, which was essentially more like a firm commitment, so to speak, in terms of what is to come as far as capital calls, is really what we would focus on in our outlook. Then to his point, the other $400 that gets to the $600 he was talking about is really, we don't have enough line of sight into exactly when those capital calls would occur. We focus primarily on that $200, hence the $1-$200 range that we disclose there.
Okay. That makes sense. I appreciate you disclosing that. Okay. That's it for me. Thank you.
Thank you. Our next question comes from the line of Geoffrey Kwan from RBC Capital Markets. Your question please.
Hi, good morning. Just on your total AUM as it stands today, can you just remind me what the rough mix would be as to how much of that would be physical gold, and how much of that would be in gold equities?
Sure. Geoffrey, it's Kevin here. I'm just looking at my laptop here. Okay, you're asking about the May six pro forma?
Yeah.
Okay. The exchange-listed pro forma in that would be $8.2. The managed equities would be $2.3, so on and so forth. You'll see that on page 12 of the MD&A, and that's also on slide 5 of the analyst deck today.
Okay. On the decision to get the dual listing, the rationale for that, was that having a lot of investors outside of Canada that couldn't invest in the Canadian listing? Is it more of a known institutional and/or retail tech demand? Just wanted to get some color on that.
Well, in general, it's U.S. dollar reporting, U.S. dollar clients. It's a U.S. dollar based firm. You'd be surprised still what a difference there is between a larger cap stock that is institutionally accredited and can be bought in any market at any time, versus a company that is still supported by a lot of retail investors. A lot of those retail investors need specific approvals to trade non U.S. stocks. And we were just finding that we were getting requests. I wish that you could come down and see us about this and that, and it just wasn't going to work unless we had the U.S. listing to support that. It's where the greatest upside lies. It's where the greatest dollars lie in our business. The investors appreciate the uniqueness of our situation a lot more in that market.
There's a lot more gold investors in general, so for us, it just made sense. It's where the bulk of our future is being driven.
Sorry, just to add to that a bit for you, Jeff. In addition to the majority of our clients and our funds being U.S. based, almost 70% of our trading volumes actually have been occurring in the U.S. OTC. We actually see more trade activity and interest in our stock on the other side of the border than we do up here. This is another way of just making access easier to, quite frankly, the folks and institutions most interested in us.
Sorry, those comments around wanting to be able to trade you more, that was coming from retail, or were those coming from institutional investors?
Probably more retail, but a healthy dose of institutions making up the back end as well.
Okay. Just the last question I had was, again, relating to the listing. Are you aware, on the listing, would you be qualified for any sort of, I guess, meaningful indices that you'd be added to? What would be the incremental cost associated with the dual listing?
I can handle the cost part. I can't speak to the first piece, unfortunately. On the cost side, I don't expect it to be terribly material. We may see a slight increase in the SG&A numbers you see in the corporate segment. That would be largely related to things like the fact that we'd need increased D&O insurance, obviously, because the U.S. tends to be a little bit more of a litigious environment. The SEC requirements tend to be a little bit more involved than the OSC ones from a SOX 404 perspective. We may see a little bit higher expenses there, but nothing that'll move the dial much.
Would it be maybe like $300,000-ish type of thing, or?
It won't be much. I can't get into specifics right now, but you'll see it through the numbers over time. I don't think it'll be material.
Okay. Thank you.
In terms of the first question, Geoffrey, we haven't done the research, but we're not counting on anything. Our shares tend to sit outside of most comparable groups, and it's more the fact that I think investors will look at us as a unique proxy to the gold business itself.
Okay, great. Thank you.
Thank you. Our next question comes to the line. Graham Ryding from TD Securities. Your question please.
Hi. Good morning. Just with that New York U.S. listing, what's the proposal with the share consolidation?
It would be at-
Up to 10 to 1.
[For 10], yeah.
That requires.
It requires shareholder approval, so we can't comment on the exact number until that's done.
Got it. Okay. You talked about product expansion, and you mentioned a streaming fund, I think you said $210 million. Would that be within your lending bucket? Is that where those assets would fall? What is the timing? Is that something that happens in Q2, or how should we think about that?
Well, it's a similar structure to the lending fund, but it's not directly associated with it. It's a separate pool of capital, has separate clients, it's managed by a separate team, and it is deploying now. I would see that as just an ancillary business that is run in the same kind of structure, but takes longer-term participations, for one thing. Participations that have more upside, and has a different set of clients. What I meant by how it's becoming an increasingly important market is a lot of institutions don't like to see mark-to-market on their gold participations, whether they're in the public market. They prefer the private markets, and they're starting to want to take these project participations directly at the asset level.
Got it. The $ 210 million, that's something that is sort of committed that will build over time in terms of your AUM as it's deployed. Is that right?
Yeah. Ideally, it's the seed for a fund that becomes a $500- $1 billion dollar fund or maybe more. The thing about that particular area is it's chunkier and it's larger than loans. It's dependent on finding the right deals and also finding the right investors.
Got it. A typical structure, you'll have a certain co-investment alongside this fund?
The typical structure is the fund would drive the initial participation. If the deal size was bigger, you'd have co-participations with the LPs or with outside LPs. There's been lots of announced deals on the royalty side and on the streaming side, but one area of that market that we think is going to grow are just direct asset participations as well.
Okay. Interesting. There's $133 million inflows in, I guess what you're calling your other bucket. Is that your managed accounts business in the U.S.? Is that what we're seeing there?
I'll turn it over to Kevin.
No, Graham, it's Kevin here. That relates to Korea. We closed on a Korean fund earlier in the quarter.
Oh, okay. Just any update here, obviously with the performance moving dramatically at the fund level. What about performance fees? Is there any color on sort of what you're seeing within your performance generating funds? Is there any sort of update there on how things are looking?
This is Whitney. I think you're talking about managed equities. I think in the MD&A, page 11, it sort of breaks down the various products and where performance fees exist. We launched about a little over a year ago, year and a quarter ago, the Sprott Hathaway joint venture partnership. It is still small. The performance is excellent. It generated performance fees for us last year. We were splitting those with the Tocqueville organization because it was just a joint venture then. That's now 100% under our roof. I'm very excited about its prospects, but it's still, as you'll see, a small product. Some of our Canadian mutual funds have performance fee capabilities as well. Again, those are sub-advised relationships under Ninepoint. There's a fee-sharing arrangement that goes there.
I'd say on the equity side, performance fee business is still small but building, and very lucrative when it works. I'll let others address other products.
Does that answer your questions?
Yeah.
I think on the private side, again, these are generally five to seven-year funds, so you only see that performance fee date once every five years. We are not accruing for some, but we have some that are in the money in the lending fund. Now, that the TMAC is unwinding and will be repaid next year, I imagine it's fairly certain now that next year will be an incentive fee payday in the lending business.
That's 2020 or 2021 when you say next year?
2021, I would think.
Got it.
We don't know when the deal will close. It could be late 2020.
You need that deal to close for that fund to wind down?
To unwind. It's a pretty significant position in the context of that fund. Yeah.
Understood. Can you provide any color on sort of what the embedded performance fees are sitting at within that fund?
Unfortunately, we can't get into carry discussions or disclosures or anything like that until after we get out the clawback period, which is essentially when the funds would actually close and unwind.
Okay. That's it for me. Thank you.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Peter Grosskopf, Chief Executive Officer, for any further remarks.
Well, just in closing, we appreciate all of your support during this difficult time. We appreciate your interest in our company. We're obviously quite busy at Sprott. We look forward to reporting to you over the course of the year in what is now a very exciting environment for us. Thanks for your participation, and have a good weekend.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.