Sprott Inc. is finally on the mend, energized by surging commodity prices that have helped send the company's share price soaring.
Since the end of July, stock in the Toronto-based investment company has more than doubled in value, thanks to the firm's close ties with the resource sector. It shot even higher Thursday on the back of strong third-quarter earnings.
"The firm feels like it's firing on all cylinders," chief executive officer Peter Grosskopf said. "Everybody's holding their heads up a little higher."
For years Sprott's stock has been struggling, but the recent commodity boom is turning that around. Two of its most recent product offerings allow investors to invest directly in gold and silver without having to hold the physical assets, and demand for both is hot.
The company's investment performance is also healthy. The firm's Gold & Precious Minerals Fund was up 38 per cent year-to-date as of Sept. 30, and its Canadian Equity Fund was up 21 per cent over the same period, compared with their internal benchmarks of 20 per cent and 7.5 per cent growth, respectively. The S&P/TSX is up 10 per cent over the same period.
However, Canadian investors haven't had much interest in those funds this year, or any other equity funds, for that matter. To date in 2010, $7.1-billion has flowed out of Canadian equity funds, while $21-billion has gone into balanced and income-oriented funds, according to the Investment Funds Institute of Canada. "We are swimming against a receding tide in the mutual fund business in Canada," Mr. Grosskopf said.
But he knows he needs to focus on returns. "We can't overstate the importance that we place on investment performance at our firm," he said in a conference call Thursday. "We're very aware that our share price tracks performance."
Mr. Grosskopf believes Sprott's investors will come back to equities in due course anyway, because interest rates are so low. "When, and I don't mean if, I mean when, the bond market cracks, I think that will have a lot of investors moving out of those income-product" funds, he said.
Analyst Paul Holden at CIBC World Markets thinks the commodity focus will also help in the near future. Sprott's products are a "great way to play the run on resources, particularly gold and silver," he said. "You get the leverage to increasing commodity prices with no [capital expenditures]"
He also agrees with Mr. Grosskopf that equity investors will return. "I still think if strong fund performance continues, particularly on the hedge fund [side] the assets will come," he said.
Sprott's third-quarter earnings came in at $9.6-million, a 74-per-cent rise over the same period in 2009 and on par with second-quarter results. In the third quarter, Sprott Physical Silver Trust's initial public offering raised $575-million (U.S.), double Mr. Grosskopf's initial goal of $250-$275-million. The firm also completed a second follow-on offering for its physical gold trust, which has now raised $921-million.
Going forward, Sprott is betting big on U.S. expansion. The firm is in the midst of closing its acquisition of three California-based natural resource investment managers, and there are hints of more to come.
"There are a lot of high-net-worth investors in the U.S. who are increasingly nervous about holding the bulk of their investments in U.S. dollar-denominated securities," Mr. Grosskopf said. "I'm not even sure if the majority of those want to invest in commodities," he added, but they do like Canada's stability, and Sprott can sell that story just as well as its resource play.