Published: October 8, 2024
By: Philip MacKellar
Gold and silver are having a solid year. As of Oct. 8, gold is up 26.8 per cent year-to-date, and silver has increased by 28.2per cent. Industrial metals such as copper and zinc are also rallying, and these trends are driving mining stocks higher. One company integral to the sector that does not get a lot of attention is Sprott Inc. SII-T -0.45%decrease
For those new to the name, Sprott is not a miner; instead, it is a financial services firm that specializes in managing ETFs, mutual funds and physical trusts in the mining and metals space. It is an industry leader within this market niche and has a significant assortment of products to meet a variety of investor demands and needs. It also has a small lending business catering to companies in the natural resources sector. The corporation was founded in 1981 by Eric Sprott and listed on the Toronto Stock Exchange in 2008.
Sprott’s ticker is up 32.8 per cent year-to-date, and the second-quarter results have been buoyed by precious metal trends. Revenues, cash flows and net income were strong, and the top- and bottom-line figures handily surpassed consensus analyst estimates. Assets under management (AUM) hit a record high of $31.1-billion, up from $25.4-billion in the same quarter last year. Management fees were down slightly, however, from 0.5 per cent to 0.47 per cent. All in all, it was a decent quarter, and on the conference call the executive team sounded bullish on the rest of the year.
In addition to benefiting from the trends in gold and silver, these quarterly figures were helped by the launch of two new products. In March, Sprott introduced the Copper Miners ETF, which listed on the Nasdaq under the symbol COPP. In May, it jumped further into the copper trade and filed a final prospectus for the Sprott Physical Copper Trust, which is now trading on the TSX under the symbol COP-UN. These product launches add to Sprott’s broad stable of trusts and ETFs covering gold, silver, platinum, palladium, uranium and energy transition metals.
Here at Contra the Heard Investment Newsletter, we have owned a stake in the name since 2016. Our average purchase price is $24.71, after adjusting for a one-for-10 share consolidation in 2020. The investment thesis was quite straightforward: The enterprise was engaged in a corporate turnaround, and commodities were beaten down, which meant most investors wanted nothing to do with the sector. Despite Sprott’s challenges at the time, it was clearly an industry leader. It had low valuations, a healthy balance sheet and high insider ownership. All these features led us to believe it would be a good investment and could make an attractive M&A target for a larger asset manager at some point. While it has not been acquired, that could still happen.
Fast forward to the present day, and gold and silver are in high demand. The doldrums of 2016 are long forgotten by most investors, and for many who do remember, it feels more like ancient history than the opposite end of an underlying megatrend. To that end, in July we sold roughly half our position in Sprott at $63.01; this translated into a capital gain of 155 per cent, plus dividends along the way.
The sale was true to our contrarian instincts, as we try to sell while others are buying. It was also informed by rising valuations and insider selling. According to INK Research, in the months before we trimmed our stake, $4.8-million in stock was sold by insiders. Though insider selling is not unusual, the amount appeared high. Unfortunately, this selling has continued since July, with another $13.5-million offloaded.
Insider selling and valuations aside, there are compelling reasons to keep holding, which is why we continue to own half of the original position. The organization’s fundamentals are sound, and many of the features that underpinned the thesis in 2016 remain in place.
Moreover, the momentum driving the gold and silver trend is strong – very strong. Momentum has a way of feeding on itself, and global uncertainties and conflicts add fuel to the fire. How will the wars in Ukraine and the Middle East unfold? Who will win the election? Will the election result be accepted? How low will interest rates go? And will the global economy enter a recession? Uncertainty and geopolitical instability like this could drive gold much higher.
Given these factors, the strategy of selling in slices appeared to make sense and functioned as a hedge, whereby we could lock in some gains while also keeping skin in the game. With this sale in the bag, we will continue to look for opportune exits on the remainder of the position and have stuffed the cash from the July sale into a high-interest account. We will look to deploy this cash into stocks again during December tax-loss selling – assuming a significant market correction, forced-selling event or stock-specific bargain does not occur first.
Philip MacKellar is a writer for Contra the Heard Investment Newsletter.