From Reflecting to Projecting
On the eve of Sprott's planned listing on the NYSE, I thought it appropriate to take stock of our history and the decade of my tenure as Chief Executive Officer of the firm.
The Early Days
Eric Sprott founded our business in 1981. Already an accomplished accountant and stock-picking analyst at Merrill Lynch and other Canadian firms, he saw the opportunity to specialize in growth stocks. Eric's style was always numbers-driven and hard-hitting. His system was based on un-covering value (in his words "stealing" it, before there were other believers) in the form of an equity proposition that offered high-test upside with limited downside.
The firm rapidly built a reputation for success on the investing side, for managed client accounts as well as for the firm's capital, and as an investment dealer to other institutions. I joined Sprott in 1993 before founding my own similar business with outside partners. During my short initial time as Eric's partner, I gleaned an understanding that success required a fierce determination to assume a position of leadership, being first to act to get the best sizing and pricing for a position, acting as a contrarian, and to win for clients.
The First Inflection Point
The 2000s marked a watershed moment for Sprott. Eric had become convinced that NASDAQ was dangerously overvalued, that central banks would become accommodative to cushion the fallout and that gold was the natural hedge and seriously undervalued. Not only did he publish his views accordingly in our publication "Markets at a Glance", he captured the opportunity by becoming one of the largest buyers of quality gold equities at their nadir. Sprott's private clients were offered the opportunity to convert to new hedge or mutual fund L.P.s, the firm applied to become a registered asset manager in North America, and the investment dealer was spun off to employees to focus exclusively on managing assets.
It was an epic call. The decision powered the returns and growth of Sprott for most of the next decade. Clients were rewarded with outstanding returns for the decade and the firm's profits and performance fees soared. By 2008, the then-$5 billion asset manager filed for an initial public offering on the Toronto Stock Exchange, and Eric was ready to start diversifying the firm from his own leadership and funds.
A Larger Foundation
When I re-joined Eric in 2010 as CEO, the timing seemed wonderful. I had spent my career arranging gold investments or financing gold producers. A lifetime libertarian, I was convinced the Great Financial Crisis had done lasting damage to government finance, and that gold was ready to prove its worth as a hedge to fiat currencies and their ballooning debts and deficits. I was right for nine months, after which I would have been well-advised to retire immediately—because I came brilliantly close to top-ticking the gold price at $1,900.
Almost to the day of my arrival, a Sprott executive came into my office and handed me a blueprint for "institutionalizing Sprott." I jumped on the idea of creating a more systemized version of Eric's DNA. We founded the project lending business, launched exchange-listed physical bullion products, hired experienced talent to broaden the team, and purchased Rick Rule's global resource boutique, which brought the technical expertise required to assess earlier-stage development projects.
Both our physical trusts and the resource lending business were well-conceived in that they offer clients unique products that deliver tangible and significant benefits. In the case of the Trusts, 100% physical bullion backing on a tax-efficient basis, and for lending, yield and upside based on gold collateral.
A Bear Market
The 2011 to 2017 period was brutal in the gold universe. These were the most difficult years of my career, with the upside that they gave our management team ample time to build a broader foundation for servicing clients across the precious metal spectrum, with value-added strategies to better suit their needs. The bear market also afforded me a lot of time to make, oversee and correct a good number of rookie CEO mistakes.
Eric's funds did not fare well during this period, as he stuck with his resource-levered junior gold and silver bets. As he left his day-to-day PM duties to prepare for his fabulously successful new gig as a family office investor, the firm could not have been struggling more with our gold strategies. There was no retail and less institutional interest in the sector, and it seemed like the only tickets were sell and redemption orders.
Our spirit during these darker days flickered but continued to burn brightly. We knew that slowly but surely the global markets and economies were becoming dependent on central bank accommodation. We continued to try to launch new strategies to address global gold markets—in China, the U.K. and globally. All were successful innovations, but not in the way of raising material funds. We ran the numbers on acquiring many specialist precious metal managers, and most deals fizzled. Meanwhile, the competition, with the exception of GDX and GLD, was slowly dying off or winding down.
Another Inflection Point
During 2017, we decided that we should focus on alternative gold strategies—as a firm, Sprott was going "all in." We purchased the Central Fund of Canada, with more than $3 billion in assets and a large client base, for over $100 million. We sold our diversified mutual fund and private credit business to the managers of those businesses. We completed the $570 million raise of our first proper institutional private resource credit fund. We started an investment dealer in Canada to open our business to syndications and corporate advisory in our sector.
These decisions were surprisingly easy to make, given our proclivities. We knew gold was going to provide an eventual uplift, and that everyone else was giving up on it. Decades of contrarian discipline was at work. We knew we could be the best in the world at gold investments—our brand, our reach, our relationships and the technical team we had in the sector were irreplaceable. Deep inside our firm, there was a simmering resolve to be brave, to dig in, to get back up every time we fell.
The reaction? At first, "crickets." It seemed that we were healthy, and we kept paying the dividend. We bought a large block of shares from Eric and distributed them to our senior execs over time as pay. Our insiders were buying more shares. Clients seemed to take notice, but there were no buy orders in the funds save for a few institutions that were starting to take the long view.
Driving for the Goal Line
During '18 and '19, we could tell we were close. Other established firms were simply dumping their precious metal funds, with a predictable knock-on effect on the pricing of junior gold equities. Our fund performance was bottoming. Our team was starting to call most investment opportunities right. The Sprott system was growing up and working.
We had undertaken discussions to buy Tocqueville's gold business, but they had stalled. We launched a co-managed L.P. to encourage their team to work with us. Eventually, our persistence paid off and we were able to purchase the NYC-based business in an earn-out driven arrangement. The dual upside was that we got John Hathaway, his team and their 30-year reputation in the industry. We also were able to renew the 80 or so distribution agreements which Tocqueville had earned in the U.S., the world's most coveted gold equity market.
Most of you already know that Sprott manages more than $12 billion, almost all dedicated to precious metals and that our strategies range from highly liquid exchange-listed bullion to highly specialized private gold lending strategies. Our overall staff of 125 is led by a seven-person executive committee, 35 investment staff and 30 in client relations. Our professionals are amongst the most experienced and intelligent in the sector, and are also all good people.
Sprott, as a firm, doesn't just have a good culture — it is an awesome place to work. Our standards are best-in-class across the firm, including in the all-important Environmental, Social and Governance areas. I am truly honored by the long list of notable contributors who have made the firm a better place —Eric Sprott and Rick Rule, John Embry, Paul Stephens, Whitney George, Ron Dewhurst and Graham Birch. These people are asset management all-stars with decades of investment and client experience, who could never normally be assembled under one roof. So why did they join? Because they believe in the vision and the outcome.
Finally, Our Projection
To say that we have a mission is an understatement as well. We have lived through a nuclear winter to tell investors about something most of them will never seriously consider. Our job is to convince our clients that they need to stand up and protect themselves against the central planners. Fiat currencies printed with no limits, central-bank controlled markets, artificial interest rates, debt balances that can never be repaid, unfunded entitlement promises... this is not a normal or safe environment during which to enjoy the last few rounds of musical chairs.
On the other hand, I have found that gold is like faith and one either believes in the concept or does not. Sprott's mission is to point out the facts to the non-believers: (i) the superior purchasing power track record of gold vs. all fiat currencies since the gold standards were absolved in 1971 (ii) the superior modern area track record of gold versus all major currencies, with the short term notable exception of the U.S. dollar for 1-2 year periods (iii) the impressive liquidity, size and safety of the gold market and (iv) the pending entry of gold into the electronic standards age which is currently occurring and will afford low-cost and rapid access to gold by any investor. The other notable fact is that, by our estimates, gold represents about a 1 percent weighting in the investment markets, and is owned by under 30% of investors, the product of which is that gold is still roughly 80 percent "underweighted" against our recommended 4-5% allocation. And that's a minimum allocation, as an individual investor I would take that to well over 10% at this time!
Our projection is that gold will soon assume its rightful place as a mandatory portfolio insurance allocation for investors large and small alike. The incoming volumes of this buy-in will take it to well over $2,000 per ounce. Gold equities will produce record margins and will profitably consolidate the sector, leading to what we believe will be an additional 100-200 percent gain in equity prices over a five-year period. Once the current yield curve has been pinned close to zero by the central banks, as is now required, savers will conclude that hard assets and equities will provide upside, while bonds will serve to confiscate wealth. Gold will serve as one of the main safe havens throughout the next investment cycle, and we expect it to perform well within a short-term backdrop of deflation and a long-term forecast of inflation/stagflation.
Our NYSE listing could not come at a better time. Despite our strong brand in the precious metals area, most investors do not know who Sprott is in the U.S. financial arena. We have more than 150,000 individual clients in that market, but most have not connected with us directly. A U.S. dollar-based share price and dividend simplifies things for our U.S.-based shareholders and makes it easier for a broader range of investors to buy Sprott shares. We are uniquely positioned to offer investors an attractive dividend, without the margin volatility of a gold producer. Most importantly, the listing will ensure our qualified staff can interact directly and seamlessly with clients seeking upside to gold, whether through our managed strategies or shares.
Sprott looks forward to serving our clients well during this new bull market for gold. We intend to keep growing our franchise, both by launching new complementary strategies and by considering other accretive ways in which to earn growing margins from gold management and investing activities. There is a path to $50 billion in our future, of that I am sure.
Past performance is no guarantee of future results. You cannot invest directly in an index. Investments, commentary and statements are that of the author and may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management USA, Inc., Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this commentary are those of the author and may vary widely from opinions of other Sprott affiliated Portfolio Managers or investment professionals.
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