Sprott: AUM Grows In Challenging Precious Metals Environment (NYSE:SII)

Open-Pit Mine, Mining

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Investment Thesis

Sprott (NYSE:SII) is an investment company in the natural resource industry, with a focus on precious metals, and uranium more recently. It is a stock I have covered frequently over the last few years.

The company reported its Q2-22 results about a month ago, where assets under management and adjusted base EBITDA are up 18% and 19% compared to Q2-21. Having said that, 2022 has been a challenging year for many of Sprott’s products as the lower precious metals prices and poor sentiment among precious metals miners have had a negative impact.

Figure 1 - Source: Quarterly Reports

Figure 1 – Source: Quarterly Reports

The uranium exposure has on the other hand continued to grow with the addition of the Sprott Physical Uranium Trust (OTCPK:SRUUF) in H2 2021 and the Sprott Uranium Miners ETF (URNM) in H1 2022. Sprott did as of Q2-22 have $21.9B in assets under management and about $4B of that is in the new uranium products. So, while uranium is still a relatively small portion of total assets under management for Sprott, it has accounted for more than 100% of the AUM growth over the last year.

Chart
SII Total Return Level data by YCharts

Figure 2 – Source: YCharts

That is likely why we have seen the stock trade more in line with uranium miners than precious metals miners lately. Even though Sprott has held up reasonably well over the last year, the growth over the last year and what I expect we will continue to see going forward is not priced into the stock in my view.

Exchange Listed Products

Figure 3 - Source: Quarterly Reports

Figure 3 – Source: Quarterly Reports

The Exchange Listed Products segment is the largest segment for Sprott, both in terms of AUM and EBITDA. It is also the segment where we have seen the most growth, which I expect will be true going forward as well.

The segment has in 2022 seen the addition of the Uranium Miners ETF, which has an AUM of about $1B today. The newest Sprott ESG Gold ETF (SESG), with an AUM of about $12M was launched in August of this year. While the ESG fund is small at this stage, it is an interesting concept with ESG sourced gold production, which could potentially see a healthy demand going forward.

Apart from the addition of the new products, the segment has also seen $1.8B in inflows YTD, primarily to the physical trusts, with about half of the inflows to the Uranium Trust. Sprott has experienced similar inflows to the trusts in 2020 and 2021, which is strong competitive advantage, where other providers have lately seen outflows in precious metals linked funds.

Figure 4 - Source: Quarterly Reports & Sprott.com

Figure 4 – Source: Quarterly Reports & Sprott.com

Figure 5 - Source: Quarterly Reports & Sprott.com

Figure 5 – Source: Quarterly Reports & Sprott.com

Other Segments

No one should be overly surprised that the Managed Equities and Brokerage segments have seen declines in EBITDA compared to last year, as seen in figure 1, when the sentiment for precious metals and precious metals miners have been so poor. I do think those segments will continue to provide limited contribution to Sprott’s EBITDA until the sentiment improves for precious metals miners.

EBITDA in the Private Strategies segment has been somewhat unpredictable over the last few years, but it did in the most recent quarter see a bump in adjusted EBITDA, which is a welcomed boost. The lending part of the business can be countercyclical, so the poor industry sentiment is less of a concern for the segment.

Figure 6 - Source: Quarterly Reports

Figure 6 – Source: Quarterly Reports

SII Valuation & Conclusion

In the chart below, you can see Sprott’s valuation compared to a few of the royalty & streaming companies in the precious metals industry.

Figure 7 - Source: Koyfin, TradingView, & Quarterly Reports

Figure 7 – Source: Koyfin, TradingView, & Quarterly Reports

Where Sprott trades with an EV to estimated Earnings in the range of 20-25 for 2022 and 2023. It also has a higher dividend yield compared to the royalty & streaming companies.

I would add that while the 2022 and 2023 estimates for Sprott were quite aggressive earlier in the year, which I pointed out then, they have since then been revised lower; too low for 2023 in my view given that I expect the inflows to continue into the trusts, even in a challenging precious metals environment.

Figure 8 - Source: Koyfin

Figure 8 – Source: Koyfin

Also, once the sentiment eventually turns for the precious metals industry, I would expect Sprott to see healthy contributions from all segments so that the growth in AUM and EBITDA accelerates.

Figure 9 - Source: Quarterly Reports

Figure 9 – Source: Quarterly Reports

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