At this point executives at Sprott Inc. must be praying for a magnificent rebound in the resource sector.
Last year the company's management fees -- its bread and butter -- dropped 20 per cent, sending its stock price, which started at $10 after its initial public offering in 2008, to just $3.55.
To top it off, there were some strategic missteps in 2012 – chiefly, investing in Flatiron Capital Management, only to see it to go bust six months later. Sprott has now disclosed it wrote off the entire investment, costing the company $5-million before tax last quarter, about one-third of the $15-million in earnings before interest, taxes, depreciation and amortization.
Management knows it's in a tough spot. Last year Sprott Asset Management installed two new co-chief investment managers – John Wilson and Scott Colbourne – and there's now a major focus on offering an array of products, such as income and alternative investments.
But they can't get around the fact that it will take them time to build up businesses outside of their traditional focus on resources. So at the moment the company can only hope that share prices of resource companies – especially juniors – start to soar. The biggest fees that Sprott earns are dependent on the value of its assets under management.
There are some bright spots. Sprott's performance fees – which are earned from beating certain performance benchmarks – actually climbed last year thanks to strong showings from private equity and alternative investments. But those only amount to $10-million for the year, less than a tenth of the traditional management fees.
The company's chief financial officer also noted on a conference call last week that redemptions from Sprott's beleaguered hedge funds have started to slow. (The flagship Sprott Hedge Fund is down 43 per cent over the past year.) "It seems to us that most of the people… who were going to redeem have redeemed," said chief financial officer Steve Rostowsky.
There's also some cash on the balance sheet after Sprott raised $25-million in a private placement from a U.S. investor in 2012, giving management leeway to strike another acquisition or two if they so choose.
However the company can't rely on retail investors to keep buying its physical gold and silver trusts. Last year new issues of these products brought in net sales of $1.9-billion. Without these, net redemptions amounted to $567-million. Total AUM is now $9.9-billion.
For now the company is keeping up a brave face. In his annual letter to shareholders, chief executive officer Peter Grosskopf once again stressed his optimism for resources. "In this environment, we continue to believe that a rebound in precious metals and their related equities is long overdue," he wrote.
(Tim Kiladze is a Globe and Mail Reporter.)
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