Positioning for the Future

Podcast Transcript

Ed Coyne: Hello and welcome to Sprott Radio. I'm your host, Ed Coyne, senior managing partner at Sprott Asset Management. With me today is our very own CEO, Whitney George of Sprott Inc. Whitney, thank you for joining Sprott Radio.

Whitney George: It's a pleasure to be here, Ed. Thank you for having me.

Ed Coyne: Of course. Whitney, for today's show, I thought it'd be fun to cover the evolution of Sprott and the world of metals, but before we do, I think our listeners would enjoy hearing a bit about yourself and how you found your way to Sprott.

Whitney George: It's a long story. While I was at Royce for 23 years –several of them with you, Ed – we became very interested in mining companies. Around 2000, I concluded that after the Long-Term Capital disaster in '98 and the ensuing recession, money to solve any short-term problem was here to stay. I was always a huge fan of asset managers, and the combination of that exposure in Sprott was very exciting. Sprott came public in May '08, and I got to know Eric Sprott and the CEO Peter Grosskopf.

We became their largest institutional shareholder. That worked out very well for us coming out of the financial crisis in about 2013/14, and what I was doing with Royce & Associates, small-cap value investor investing, fell out of favor. Now, at Royce in the '90s, we did something that turned out to be very clever, which was gathering up all the talent that was available, hiring some of Chuck Royce's most experienced competitors because, at that time, our strategy was very much out of favor. Everybody wanted big-cap tech and dot-com, but the world changed.

In 2000, we found ourselves in a wonderful position of essentially being the go-to resource asset manager in small-cap value investing, and that worked very well for over a decade. When I looked around the world in 2014, gold was in a bear market, and precious metals, the miners were in a steep bear market, and I thought, "Gee, I wonder if I could do this again." When everybody else was leaving, I weighed into a bear market, gathered the talent, and waited for the tide to turn and be the go-to experts and specialists in that particular niche.

I joined Sprott in March of 2015. After a couple of years, I convinced the board that maybe there were two strategies here, the general Canadian mutual fund business and our precious metals business, and maybe the two didn't go together. We separated from what is now called Ninepoint in August of 2017. We began to put my vision for Sprott together, making acquisitions early on of the Central Fund of Canada and converting it into one of our physical trusts. We later acquired the mutual fund business of Tocqueville and brought on John Hathaway and his team and their gold funds, and it all started to come together.

We were under $5 billion in AUM when we separated in 2017, and we're sitting around $25 billion or so in AUM now, and that's not with a great tailwind in precious metal prices. Then, a couple of years ago, we consummated a transaction in the uranium space. It's not that we were so smart about timing. We'd been working on that for two years or more. Still, we could buy a C-corporation and convert it into a vehicle that investors found very appealing because it provided security transparency to spot uranium prices.

That was our launch into what we now refer to as energy transition materials, depending on how you calculate silver in the mix, because it's both a precious metal and an energy transition material. That part of our business now makes up about a third of our AUM and is also a very exciting part of our future.

Ed Coyne: Whitney, that's a unique evolution of what's happened with Sprott from being a pure precious metals firm and spinning off Ninepoint. What does that transition look like as you go from pure precious metals to these energy transition markets? What have been some of the setbacks? What have been some of the opportunities that have been exciting for us as a firm?

Whitney George: The most difficult part is being patient and persevering. Creating these new products is not easy. They're not all quickly adopted. People in energy transition or decarbonization are much more excited about electric vehicles. Now, finally, they're getting excited about nuclear energy as a solution for decarbonizing, but again, nobody's paid any attention to the mining industry for two decades. It's just not on most people's radar screens. They haven't bought through the consequences of what is required in terms of raw materials to achieve the kinds of goals that they've laid out for decarbonization.

There's a lot of interesting conversation going on. It's still very early days, but again, the biggest challenge is being patient and walking your investor base along this transformation. We basically got ahead of things by going all the way upstream and saying, "If you want to do all these things, what do you need to do it?" It turns out you need a lot of mined material. Through our precious metals franchise, we have deep expertise in mining in general. Very often, all these materials come out of the same holes in the ground: copper along with gold, silver along with nickel and gold. It's an interesting mix, and a mine is a mine. It's the same process.

Many of our senior portfolio managers have experience investing in what we used to call base metals. They're now critical minerals, so there's nothing like changing the name of what you're doing to get people excited. I think a third of our investment team has degrees in geology. We have an economic geologist on our team. We have technical people on our team. I don't think anybody has taken the time or will for some time, to make the human capital investment we have made to understand and pursue investments in mining. Then, that leads to a level of expertise to create passive and active products by people who understand what's important.

There are a lot of competing products out there. They're not necessarily constructed by people who understand mining. When you think you’ve bought a copper mine, it contains a lot of iron ore or coking coal or what have you, and you're not getting that much copper. Now, that has helped us develop both active and passively managed products. We also have a very nice private strategy business with some of the largest pensions and endowments as clients.

We understand all parts of the capital structure; all of the capitalization range from tiny little exploration companies to the largest miners. I think that embedded expertise gives us a chance to provide intelligent products for our client base.

Ed Coyne: Speaking of investing, investors have long used gold as a natural hedge, and the miners are a way to add long-term returns to a portfolio potentially. How should investors think about this as we transition or expand our footprint into the energy transition market? How should they categorize this space? What would it look like in a portfolio? Speaking of your personal portfolio or talking to an advisor or a family office, what would you say to them about how this energy transition opportunity should fit into a portfolio?

Whitney George: Even before we get to the energy transition, starting with gold, one well-kept secret is that since the beginning of 2000, gold has outperformed the S&P 500 Index with dividends. This is not a laggard investment.

It's also done that in a very non-correlated way. I have owned 10% of my net worth in physical gold since about 2000, some through coins, but mostly through our products. That's the physical side. I view it as part of the 40 in the 60:40 in place of bonds. It's a currency. It's been a very useful tool, and I don't think people either believe it or want to hear about it because mining gold may put you in a crowd that most professional investors may not want to be associated with.

Ed Coyne: It's a low-cost, simple solution. Sometimes, when things are that simple, people don't believe they actually work, and it certainly has, that's for sure.

Whitney George: On energy transition materials, we're talking about uranium for a resurgence of nuclear power as one of the solutions, but you're also talking about the battery materials, copper, cobalt, lithium, and nickel, which are not well-understood. We're looking at ways to provide both fiscal exposure, which will be a bit more stable, than equity in both categories, representing a tactical allocation. I think the timing is very good right now; gold equities have never been as cheap relative to  gold, and just about anything else. That's also true of copper miners and some of the other multi-metallic miners.

I believe, you can get very nice free cash flow yields and good financial metrics. They're certainly not overbought, over-loved, or over-owned. They're basically not in people's portfolios. Again, I think one starts with the physicals, and then the next logical step is a smaller allocation to the more volatile mining companies.

Ed Coyne: Why do you think there's a disconnect there? We'll use gold as an example because you see the physical market, but all the metals out there are doing quite well over multiple market cycles. Yet, there has been this bifurcation or disconnect from the miners or the equities. Any thought as to why that is?

Whitney George: It's a tough business to start with. The equities themselves are volatile. It's a capital-intensive business, meaning they're always issuing shares. At the peak of cycles, mining companies have tended to overspend on acquisitions. Of course, at the bottom of the cycle, they stop spending on exploration and development. It's a tricky business to manage and may be viewed as a trickier business to invest in. Again, for over a decade, it's been easy to put your money in the S&P 500 Index, pay low fees, and enjoy the ride.

One of the interesting things we've achieved at the end of the second quarter is that 5 companies make up 24% of the S&P 500, hardly the diversified portfolio that people think they're buying into. The last time we saw that concentration level in the S&P 500 was, guess when? Not 2000, it was1973, 50 years ago. What happened after that was ugly. The Dow was down 45% in the next couple of years. A terrible bear market, '73, '74, ended just about at the beginning of '75.

The good news for us is that gold went up 100% in that period, and gold equities went up nearly 200%. Again, gold was a good diversifier back then. It wasn't widely held and had a very good run. There are a lot of conditions out there right now, including the resurgence of inflation, that have that early '70s look to them. I think it's dangerous to be entirely passively invested when you rely on 5 stocks to do a quarter of the work and the other 495 the rest.

Ed Coyne: I think that's a staggering number going back to 1973 when you have that concentration level. I think from an opportunity standpoint, and you got to believe that the energy transition space, whether it's the creation of energy as you mentioned with uranium or the distribution or the storage of energy, which is what I think most investors are focused on, that to me is where the greatest opportunities are going to lie. As a CEO of Sprott, what are you seeing down the road?

What opportunities do you hope to see or discover in the next couple of years as you continue to position this firm going forward? What's getting you excited about coming months, quarters or years?

Whitney George: An enormous investment needs to be made in the mining industry. Electric vehicles have captured everybody's attention. I don't think most people understand it takes half a million pounds of digging up dirt to make one battery for an electric vehicle. That will go up because, for a century, the grades of material in these mines have been declining. We've found all the easy stuff. Not only do you have a grade issue, but you also have the fact that Mother Nature doesn’t always put these materials in convenient places.

In response to the demand, the price of these materials will have to go up dramatically to create economic incentives for people to invest to produce more material. The attention has been on electric vehicles. I'd flip people's attention to the cloud and artificial intelligence. That's currently very exciting, but I don't think people understand how much electricity the cloud takes. There are about 5,000 cloud centers and data warehouses in the world. They're about the size of the Empire State Building. They command five times the rent as commercial real estate and consume a hundred times the amount of power.

Whether you're talking about the power generation, the grid, or the storage that you need through batteries to handle intermittent producers like solar and wind, these will require what I think is a super cycle in materials commodities, which we now call critical minerals.

Ed Coyne: We've discussed the precious metals and energy transition opportunities. What about the risk side? Are there any bumps in the night or things that could derail these opportunities or the demand? Is there anything else that you think we should be worried about?

Whitney George: There's an economic point where if you get a very bad recession, demand for everything goes down. Demand for electric vehicles dries up. They are somewhat of a luxury item at this stage. Gold specifically, when there's a liquidity crisis, gold goes down first because it is liquid. We've also seen, whether after the financial crisis or the lockdown in 2020, that it's the first thing that gets replaced. In the short run, anything can happen. Our Federal Reserve pushing us into an illiquid liquidity crunch could happen. That's a real risk in my mind and a near-term risk. In the longer term, I think that the money printing begins.

Again, I think we have to accept that we will be in not hyper, but higher inflationary environment for a long time. That's driven by just the fundamentals of both geopolitics and deglobalization, and the carbonization goals also drive it. Here in America, we are very mining-unfriendly, so that remains an issue that I think somebody will wake up to one day and say, "That's silly. We can't be importing all these things from China."

It'll be in mining, and then it'll also be in processing that mine material where you have, in the case of railroads, China processes 80% of them. In the case of uranium, Russia processes 40%. In general, commodities have never been such a small allocation in people's portfolios as they are today,and it is hard to hurt yourself falling out of a basement window.

Ed Coyne: Good point. We could probably spend our 20 minutes talking about this, but is there anything that I didn't ask that you think we should leave the listeners with today whether it's Sprott, precious metals or energy transition opportunities?

Whitney George: No. I'm very excited about where Sprott is. We have a fabulous culture of owner-operators. We own significant amounts of our products, both individually and corporately. I think we're here, as people come to find these opportunities, hopefully as an expert resource. I'm looking forward to seeing how this plays out in the next couple of years.

Ed Coyne: As am I. Whitney, this was a real treat to have you on. I appreciate you taking the time today to speak to us on Sprott Radio, so thank you for making that time.

Whitney George: Thanks for having me, Ed. It’s been a pleasure.

Ed Coyne: For our listeners who'd like to learn more about Sprott's extensive work, whether in the precious metals space or the energy transition opportunities, I encourage you always to visit us at Sprott.com. That's S-P- R-O-T-T.com. Once again, I'm Ed Coyne, and thank you for listening to Sprott Radio.