Manager Commentary December 31, 2024

Whitney George

The following commentary covers the 12-month period from January 1 - December 31, 2024, and is an excerpt from the Sprott Focus Trust 2024 Annual Report.

January 27, 2024

Dear Fellow Shareholders,

The calendar year 2024 was frustrating for both the portfolio management team and shareholders of Sprott Focus Trust (FUND), of which I am a proud member. FUND’s Net Asset Value rose 1.63% while the market price discount widened, leaving shareholders with a slightly negative total return of -0.96%. This compares to a total return of 23.81% for the benchmark Russell 3000 Index for the twelve months. 

In analyzing last year’s FUND performance, we find ourselves asking how we could have gotten the global macroeconomic picture so right while producing such meager returns. We were expecting a period of stickier inflation and a delayed interest rate-cutting cycle. Further, when the Federal Reserve interest rate cuts finally arrived in September, longer-term interest rates (10-year government bond yields) increased. Three interest rate cuts totaling 1.00% resulted in 10-year Treasury yields going up 1.00%. This has not happened since the 1980s. We believe the markets were signaling that something had changed, as normal correlations appeared to be breaking down. At a time when long-term yields would normally decline, they were driven higher by either higher inflation expectations or deteriorating credit or both. 

One would expect that FUND’s portfolio of companies with strong balance sheets and exposure to hard assets themes would perform relatively well in these conditions. On the contrary, FUND’s performance was disappointing, as our value approach was not rewarded. For the second year running, equity market returns in 2024 were driven by the continued momentum of a handful of large-capitalization technology companies (the MAG 7, or Magnificent Seven stocks). This momentum trade has now concentrated the broad indices well beyond the peaks of 2020. As of this writing, the MAG 7 represents roughly one-third (33%) of the S&P 500 Index’s market capitalization and 22% of the Russell 3000 Index’s market cap. It is worth noting that while the Russell 3000 Index was up 23.81% last year, the median stock performance was 3.82%, and nearly half (45.7%) of the Index’s constituents were down on the year.

During the second half of 2024, we took advantage of FUND’s wider-thannormal discount to Net Asset Value by accelerating our share repurchase program. Since the end of June, we bought back 769,849 shares, bringing 2024’s total to 1,376,719. Our buyback program has been in place since November 2020. While we are somewhat restricted in our buyback program, we would be happy to hear if any large blocks are available. Along with our high insider ownership, this should demonstrate our unwavering conviction in FUND’s long-term strategy and the relative attractiveness of the current portfolio.

Positioning and Portfolio Activity

FUND had 32 equity investments at the end of 2024, down from 36 a year ago, as we liquidated seven positions and initiated three new positions. Cash finished the year at 7.8%, up from 4.8% at mid-year. As mentioned previously, cash will tend to build into strongly rising equity markets as existing portfolio positions reach fair value without sufficient new undervalued ideas in which to redeploy proceeds. Cash is a by-product of the investment opportunity set that we perceive, given our absolute value approach. We are patient and disciplined in our search for securities that meet our valuation criteria.

As shown in Figure 1, nine of the previous period’s 10 largest positions remain, with the current top 10 holdings comprising 44.2% of net assets, up slightly from 43.2% six months ago. As shown in Figure 2, the Materials sector was FUND’s greatest exposure at 38.2%. Both steel manufacturers and gold and silver miners comprised 13.5% each. Energy, at 13.6%, and Financial Services, at 11.9%, were the next-largest sector exposures.

Figure 3

Portfolio Diagnostics

As was the case in the first half of 2024, and consistent with our history of selling into strength when securities prices approach full and fair value, four positions were sold while two new positions were initiated during the second half of 2024. Two of the sales were necessitated by takeover bids received, the first being Centamin plc, which will be mentioned later in this letter as a large contributor to FUND’s 2024 performance. Transactions oftentimes, but not always, approximate the full valuation of target companies. The second position sold were shares we received as partial consideration paid by Australian drilling services company Perenti Limited in its acquisition of specialized driller DDH1 Limited in late 2023. While Perenti’s shares remain undervalued by conservative measures, we have concentrated our exposure to the drilling sector by focusing on its larger and more diversified competitor, which FUND holds, Major Drilling Group International Inc.

FUND’s long-held position in Berkshire Hathaway Inc. was liquidated in the second half of 2024, a holding we discuss later in this letter. Since our disciplined valuation-driven approach to managing FUND compels us to sell positions when they reach full and fair valuation, our sale of Berkshire should come with little surprise. With the passing of Berkshire Vice Chairman Charles Munger in late 2023 and the advanced age of Mr. Buffett (94 years young), it seems misplaced that Berkshire shares should trade near peakof-cycle valuations. While we hope for Father Time’s long-delayed visit, we know, as Mr. Buffett recently commented, that he always wins. Like Berkshire itself, we continue to let cash build by selling positions in companies deemed fully valued, even of the highest quality, such as Berkshire Hathaway.

AerSale, Inc. was the fourth position sold in the second half of 2024, as we overstayed our welcome as shareholders. While patience is considered a virtue, it isn’t always rewarded in investing since time compounds both good and bad developments. Fortunately, we had taken significant profits earlier in AerSale’s tenure in FUND’s portfolio when the environment for its aftermarket aviation products and services was more favorable. In recent periods, there has been a marked deterioration in airplane parts and equipment sales, as AerSale has been regularly outbid by competitors willing to accept lower returns on their investments. To AerSale’s credit, it remains disciplined even if short-term business activity suffers. Our error in judgment was that we remained patient for too long in anticipation of the AerAware new product launch. Despite having a significant launch customer lined up, Federal Aviation Authority (FAA) certification approval experienced prolonged delays. Having received its FAA certification, concerns about the pace of customer adoption and production continue. Management now lacks credibility over this issue, and so does our confidence in them.

A starter position in Champion Iron Limited was initiated in the second half of 2024. Champion Iron produces a superior iron ore content concentrate (66.2% Fe content) for use in producing “green steel” (i.e., steel produced with a significantly lower carbon footprint). The Canadian government added high-purity iron ore to its critical minerals list in June 2024, illustrating the strategic importance of Champion’s product. The higher content material can be used as direct reduction iron (DRI) pellet feed for electric-arc furnace (EAF) steel production instead of high-grade recycled steel, which has been EAF’s traditional feedstock and is in increasingly short supply domestically. According to the World Bank, demand for DRI is expected to increase by approximately 355% by 2050. Champion has extensive high-purity iron ore resources and plans to become a growing green steel supply chain supplier. Champion’s flagship producing asset is the Bloom Lake Mine in Québec, Canada, which it acquired through its Quebec Iron Ore Inc. subsidiary in 2016 from Cliffs Natural Resources Inc. Production from the mine connects directly to railway assets and a modern port purpose-built for exporting ore. Additional resources located near the Bloom Lake Mine offer growth optionality, which we believe is not factored into the current Champion share price. Despite the high quality of its resources and infrastructure, and considering the strategic importance of Champion’s production, we believe that Champion’s share price is undervalued, mistakenly overshadowed by slowing steel demand in the short term.

The other new position added during the second half of 2024 was in ASA Gold and Precious Metals Limited, a diversified closed-end mutual fund that invests in companies conducting gold and precious metals mining, exploration and development. While we believe that gold and precious metals have a very bright future, as we have written about before, the added benefit to this opportunity is the “double discount” we capture since the fund trades in the public market, similar to Sprott Focus Trust and is priced at a material discount to the current market value of its underlying holdings. By so doing, we hope to mitigate potential future downside while capturing incremental upside. Following this logic an additional step, since Sprott Focus Trust also trades at a discount to its underlying holdings, a buyer of FUND today would be capturing an implied “triple discount” as it relates to the ASA Gold fund holding. We have great confidence in the attributes that the ASA Gold fund managers seek in their target companies since there is much overlap in their portfolio’s holdings with Sprott’s internally managed gold-related funds.

Performance Contributors and Detractors

Figure 4 shows which positions contributed and detracted the most from FUND’s aggregate performance in 2024. 

Figure 4

Top Contributors to Performance 

Shares in fresh shell egg producer Cal-Maine Foods, Inc. surged 87% in 2024, contributing 2.37% to overall portfolio performance for the year. Egg prices continued to be impacted by the Highly Pathogenic Avian Influenza (HPAI) outbreak, which began in 2022 and has resulted in a significant decline in the supply of eggs, as 38.4 million commercial laying hens were depopulated this year. Reduced supply and record demand for eggs in 2024 drove prices materially higher. Recent high-profile announcements have further enhanced eggs’ longstanding position as a designated “healthy” food, including the U.S. Food and Drug Administration (FDA), the United Nations, the Academy of Pediatrics and the American Heart Association. Despite all this recognition, eggs remain a very competitive source of
nutrition on a cost-per-serving basis, even at elevated retail prices. In addition, Cal-Maine Foods is expanding its line of egg products, including hard-cooked eggs and other ready-to-eat products, which leverages its existing distribution channels and extends its penetration into retail and food service marketplaces.

Senior gold producer Agnico Eagle Mines Limited continued its great firsthalf performance through the second half of 2024, advancing 45% for the full year as the spot price of gold reached its all-time high of $2,777 per ounce on October 30, 2024. The miner contributed 1.87% to FUND’s performance in 2024. Gold proved an effective portfolio diversifier, outperforming all major asset classes (rising 27.22% for the year) amid heightened geopolitical uncertainty and market volatility. According to the World Gold Council, strong central bank and investor demand offset declining consumer demand. Agnico Eagle’s portfolio of high-quality assets in politically safe jurisdictions deserves a premium valuation, in our minds. The company reported record free cash flow generation in all four quarters of 2024, reducing its net debt by more than C$1 billion. In December, Agnico Eagle capped its record year with an opportunistic but friendly take-over bid for Canadian junior mining exploration and development company O3 Mining Inc.

Federated Hermes, Inc. is a global leader in active, responsible investment management with more than $800 billion in assets under management (AUM) across equity, fixed-income, alternative/private markets, multi-asset and money market product offerings. Its shares advanced nearly 30% in 2024, contributing 1.11% to FUND’s performance. Total AUM reached a new record high for the eighth consecutive quarter in 2024 on the strength of flows into both fixed income and money market products and market appreciation in other products. Federated Hermes continues to execute well, and its sizable net cash balance sheet and free cash flow generation should continue to support additional share repurchases. The company’s board of directors recently authorized the repurchase of up to an additional 5 million shares.

Centamin plc, the London-listed mid-tier gold producer and operator of the Sukari gold mine in southern Egypt, received a friendly takeover bid from AngloGold Ashanti plc in September, contributing 0.96% to FUND’s performance for the year. The initial offer represented a 37% premium to the undisturbed Centamin share price. However, since the offer was partly comprised of AngloGold shares, the realized premium was somewhat less as AngloGold shares declined in subsequent weeks. 

Shares in Berkshire Hathaway Inc. also continued their strong first-half performance in the second half of 2024, advancing 27% for the full year and contributing 0.95% to portfolio performance. The company’s most recent quarterly results, announced in November, showed Berkshire’s cash balance and marketable securities stood at $325 billion. This illustrates, to some degree, where we are in the current market cycle since Mr. Buffett has been growing Berkshire’s cash balance by paring back on long-held positions in Apple and Bank of America. Selling when others are greedy is a hallmark of Mr. Buffett’s contrarian style and ours. Of note is the absence of share repurchases for the first time since 2018. Given the elevated valuation of Berkshire Hathaway, it should not be surprising. The challenge for Berkshire, now more than ever, will be finding new investments that can move the needle of its $1 trillion market capitalization. As discussed in this letter’s “Positioning and Portfolio Activity” section, we will be watching with great interest from the sidelines after having benefitted as shareholders for decades.

Top Detractors from Performance

As was the case at mid-year, Radius Recycling Inc. led the list of detractors for the full year as its shares detracted 1.68% from overall performance. We shared six months ago that Radius’s environment was negatively impacted by a shortage of scrap steel available for purchase, resulting in higher acquisition prices and compressing the spread that approximates Radius’ gross margin. In addition, prices of finished steel products are being negatively impacted by elevated Chinese exports. These two simultaneous challenges have not yet improved with time, exacerbating the duration and magnitude of losses for Radius Recycling.

Nucor Corporation, another of our steel holdings, experienced a difficult operating environment in 2024 as its shares declined 32% and detracted 1.52% for the year. Finished steel prices reflected the same supply dynamic from excess Chinese exports, satiating domestic U.S. flat-rolled steel demand. While December Chinese trade data showed China’s finished steel exports continuing to increase into year-end (5% month-over-month and 26% year-over-year), the new U.S. Trump administration’s talk of tariffs could help ease exports from China as 2025 progresses.

Major Drilling Group International Inc. is one of the largest drilling services companies in the mining industry. The company’s shares declined 18% in 2024 despite its leading position serving senior gold producers; the holding detracted 0.81% from FUND’s performance last year. Most recent quarterly results showed North American revenues (its biggest exposure at ~45%) declined by 20% versus the previous year. This was somewhat offset by strength in Chile and Australia, but not sufficiently. The company is doing a respectable job of controlling costs amid the decline in exploration drilling activity. At the same time, its net cash balance sheet allows it to continue to buy smaller competitors in this fragmented industry. Major Drilling’s recent purchase of Explomin Perforaciones in Peru will make it the largest specialized driller in Peru, a position the company holds in several other important mining jurisdictions.

Pason Systems Inc. shares declined 19%, and detracted 0.80% from FUND’s 2024 performance despite stable current revenues, a clear competitive advantage, and a near-monopoly market position for land-based drilling data solutions in North America. The company provides electronic data recording for land-based drilling and service rigs. Most recent financial results demonstrated the resilience of Pason’s offering as consolidated revenues increased by 14% compared to a year ago, while North American land drilling activity decreased by 5% year-over-year. Pason is not immune to industry-level drilling cycles, and its long history of outpacing underlying North American drilling activity is key to the investment thesis. Pason can achieve this by raising daily rental rates via increased product adoption and technology enhancements, growing its international market penetration, and penetrating new but related end-markets such as well completions with new technology offerings that enhance efficiencies and improve safety. While drill rig activity will always be an influencing factor that investors rely on for insights into Pason’s business, its unique products and services offer greater growth opportunities in cyclical upturns and resilience during industry downturns. The company’s net cash balance sheet enables smart capital allocation irrespective of the cyclicality of its underlying business.

Shares in Vishay Intertechnology, Inc., one of the world’s largest manufacturers of discrete semiconductors and passive electronic components, declined 28% and detracted -0.79% from FUND’s 2024 performance. Demand from industrial customers has been tepid all year, exacerbated by a prolonged period of inventory destocking. The company specifically cited Europe, which comprised 36% of revenues in 2023, as particularly weak as macroeconomic conditions worsened during the year. The company embarked upon a new five-year strategic plan under its new CEO nearly two years ago when the environment was better. Although we have confidence in Vishay’s ultimate success under the new vision, the current depressed operating environment will make such strategic changes more difficult.

Outlook

We are prepared for market volatility in 2025. As mentioned, our cash position is as high as it has been in several years. Our portfolio has been further concentrated in our highest conviction investments, most of which have fairly aggressive stock buybacks in place with balance sheets to support them. We agree with J.P. Morgan’s Chairman of Market and Investment Strategy Michael Cembalest when he writes, “Policies and statements from Trump nominees (both cabinet-level and those not requiring Senate confirmation) indicate that they aim to ‘break’ something, whether it’s globalization, the Federal bureaucracy, the IRS, the FBI, Medicare, U.S. vaccine policy, lax U.S. border policies, its ‘Deep State’ opponents or something else. Whatever the goals, I take them at their word: they are going to break something, I just don’t know what.” 

After two extraordinarily strong years of equity appreciation, the odds favor more muted returns. Corrections of 15% or more are normal occurrences in bull markets, and it seems we are due, especially with the change in administration and the personalities involved. The old adage of buying the rumor and selling the news may well come into play on January 20 with the turnover of executive power. Just as long bonds peaked at the onset of this interest rate easing cycle, the optimism in equity markets around Trump’s policies may dwindle once faced with political realities.

Long ago Warren Buffett remarked that “debt doesn’t matter until the day it does, then it’s all that matters.” The question is, are we there yet? With annual deficits running at roughly $2 trillion with no end in sight, on top of $36 trillion of uncapped debt, is the Treasury market telling us something? In the fourth quarter alone, the U.S. Treasury Department reported a deficit of $710.9 billion, up $200 billion from the comparable period in 2023. The combination of rising interest expense, continued spending and declining tax receipts in the fourth quarter took the deficit to levels only surpassed in the worst quarter of the COVID-19 crisis. It seems to us that we might be there.

On a brighter note, we are pleased to welcome Ryan McIntyre to the Management Team of Sprott Focus Trust as Assistant Portfolio Manager. Ryan joined Sprott two years ago to create a Family Office as part of Sprott Wealth Management here in Darien, CT. Since then, he has been instrumental in various additional roles, including launching a private fund to invest in physical commodities. Ryan shares our own longterm investment approach with a keen eye for high-quality, mispriced companies. He also brings a fresh look to FUND’s portfolio to help us build conviction in old and newer positions and identify the value traps we may have stumbled into. Ryan’s bio can be found on our website.

Finally, once again, I would like to thank the whole team at Sprott Inc. for their support in managing Sprott Focus Trust. Their diligence helps us manage FUND efficiently despite its modest size. Matt Haynes continues to provide insightful commentary for our investors so all can understand the dynamics within our portfolio. Basia Dworak, my Executive Assistant and our Director of Corporate Administration, consistently supports me and the team, freeing our time and creating an environment that is a joy to work in every day. I would also like to thank our Board of Directors for their support and valuable insights. Shareholders should take comfort that they are well represented and that we are held to the highest governance standards.

Mostly, thank you to our loyal and many very long-term shareholders. We don’t hear from you often, but it’s always a pleasure when we do. Please call anytime at 203.656.2340. We answer our own phones and always have time for fellow shareholders.

Sincerely,

W. Whitney George,

Senior Portfolio Manager

The views expressed above reflect those of Mr. George as of the date stated above and do not necessarily represent the views of Sprott Asset Management USA, Inc. or any other person in the Sprott organization. Any such views are subject to change at any time based upon market or other conditions and Sprott disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for the Sprott Focus Trust are based on numerous factors, may not be relied on as an indication of trading intent on behalf of the Sprott Focus Trust.