Sprott, Inc. Sprott (www.sprott.com) is one of the largest global asset managers focused on gold and the precious metals sector. The company is listed on the NYSE and TSX (SII) and has $17B in AUM as of August 4, 2020. Sprott has been an active manager in these markets for three decades and offers institutions various solutions, including physical gold bullion, active and passive gold equities and private income-oriented strategies in senior lending and streaming/royalties. Sprott clients include leading public pensions, foundations, SWFs and family offices.
Gold – Monthly Highlights
After touching a record high of $2,064 on August 6, gold bullion closed September at $1,885, losing 4.2% for the month but still up 24% YTD. Gold has had a strong move from its March low of $1,452 and was ripe for profit-taking. Sprott feels the current gold price provides an attractive entry point.
Gold held in ETFs has been steadily rising (see below chart). Sprott feels this represents a solid base, one that tracks macroeconomic factors vs. gold held in managed futures that have traditionally been more short-term trading focused.
On Aug 31, the $16B Ohio Police and Fire Pension announced a 5% allocation to gold. This is the latest in a series of similar allocations by institutions. The decisions typically center on gold’s role as both a defensive asset that outperforms in periods of crisis and (perhaps more importantly), on gold’s potential in a post-COVID world characterized by unprecedented global stimulus and low to negative real rates.
For many institutions, gold looks particularly compelling compared to fixed income alternatives. Massive debt purchases by sovereign credits will freeze interest rates at ultra-low levels and U.S. Treasury bonds will provide negative returns after inflation.
Gold mining equities had a pullback in September (off 7.4%) and are consolidating above important technical support levels. As the market begins to build in a higher-for-longer consensus view for gold bullion, we expect robust increases in earnings outlook and target price projections. With gold bullion near $1,900, and industry AISC (all-in sustaining costs) running at approximately $1,000 per ounce, the sector is realizing approximately 100% operating margins in one of the worst global recessions in the past century.
Sprott feels that the positive outlook for the precious metals mining sector is not reflected in current valuations. For the gold equities complex, as of August, analysts’ Earnings Per Share (EPS) estimates are up ~127% while for the S&P 500, they are expecting an ~18% decline. These forecasts are further dampened as analysts are still using future gold prices in the $1,500-1,600 range in their models.
There is a pronounced M&A trend reflecting that it has become cheaper for large companies to buy existing reserves rather than building them over many years. Sprott feels this will increase the valuations of selected small- and mid-cap names in the next 24 months.
There is a considerable differential in the cost of capital between large-cap and small-cap mining companies. This is exacerbated, in part, by the flow of equity capital to passive indices which significantly overweight the large names. This has created an environment where senior debt providers can generate attractive mid-teen percentage returns (including equity warrants) on carefully screened borrowers in the small-cap market. Sprott has made over 80 such credit investments in the last decade and is one of the largest managers in this space.
Streaming and royalty financing is also a large market and a growing source of capital for junior miners and an active business for Sprott. For investors, such assets provide quarterly income, long-term optionality to the commodity price and mine production while also controlling risk through security, covenants and structuring. There is an active secondary market led by the public royalty companies which can provide liquidity at attractive multiples.
Please contact Sprott for additional information on public and private strategies.
Contact: Chris von Strasser