Exhibit 99.13
Management's Discussion and Analysis
Three and six months ended June 30, 2019
 | 1 |
FORWARD LOOKING STATEMENTS
Certain statements in this Management's Discussion & Analysis ("MD&A"), and in particular the "Business Highlights and Growth Initiatives" section and "Outlook" subsection, contain forward-looking information (collectively referred to herein as the "Forward-Looking Statements") within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "may", "will", "project", "should", "believe", "plans", "intends" and similar expressions are intended to identify Forward-Looking Statements. In particular, but without limiting the forgoing, this MD&A contains Forward-Looking Statements pertaining to: (i) expectations regarding deployment of capital called into our lending LPs in 2019; (ii) expectation that Lending net capital calls will occur over the mid-to-long term life of our funds; (iii) expectation that the strong finish to the price of gold last year will carry forward to 2019; (iv) expectations regarding our legacy balance sheet loans; (v) anticipation that earnings from the managed equities business will be relatively flat year-over-year; (vi) expectation of a challenging equity origination and placement fee environment, similar to what was experienced in 2018; (vii) expectation that we will see a material decrease in corporate expenses in 2019; (viii) the acquisition of the Tocqueville gold strategies asset management business, including that the acquisition will be completed and the timing thereof, the AUM to be added as a result of the acquisition, certain portfolio managers joining Sprott upon the completion of the acquisition and the impact of the acquisition on the Company’s business and strategies; and (ix) the declaration, payment and designation of dividends.
Although the Company believes that the Forward-Looking Statements are reasonable, they are not guarantees of future results, performance or achievements. A number of factors or assumptions have been used to develop the Forward-Looking Statements, including: (i) the impact of increasing competition in each business in which the Company operates will not be material; (ii) quality management will be available; (iii) the effects of regulation and tax laws of governmental agencies will be consistent with the current environment; and (iv) those assumptions disclosed herein under the heading "Significant Accounting Judgments, Estimates and Changes in Accounting Policies". Actual results, performance or achievements could vary materially from those expressed or implied by the Forward-Looking Statements should assumptions underlying the Forward-Looking Statements prove incorrect or should one or more risks or other factors materialize, including: (i) difficult market conditions; (ii) poor investment performance; (iii) failure to continue to retain and attract quality staff; (iv) employee errors or misconduct resulting in regulatory sanctions or reputational harm; (v) performance fee fluctuations; (vi) a business segment or another counterparty failing to pay its financial obligation; (vii) failure of the Company to meet its demand for cash or fund obligations as they come due; (viii) changes in the investment management industry; (ix) failure to implement effective information security policies, procedures and capabilities; (x) lack of investment opportunities; (xi) risks related to regulatory compliance; (xii) failure to manage risks appropriately; (xiii) failure to deal appropriately with conflicts of interest; (xiv) competitive pressures; (xv) corporate growth which may be difficult to sustain and may place significant demands on existing administrative, operational and financial resources; (xvi) failure to comply with privacy laws; (xvii) failure to successfully implement succession planning; (xviii) foreign exchange risk relating to the relative value of the U.S. dollar; (xix) litigation risk; (xx) failure to develop effective business resiliency plans; (xxi) failure to obtain or maintain sufficient insurance coverage on favourable economic terms; (xxii) historical financial information being not necessarily indicative of future performance; (xxiii) the market price of common shares of the Company may fluctuate widely and rapidly; (xxiv) risks relating to the Company’s investment products; (xxv) risks relating to the Company's proprietary investments; (xxvi) risks relating to the Company's lending business; (xxvii) risks relating to the Company’s merchant bank and advisory business; (xxviii) those risks described under the heading "Risk Factors" in the Company’s annual information form dated February 27, 2019; and (xxix) those risks described under the headings "Managing Risk: Financial" and "Managing Risk: Non-Financial" in this MD&A. In addition, the payment of dividends is not guaranteed and the amount and timing of any dividends payable by the Company will be at the discretion of the Board of Directors of the Company and will be established on the basis of the Company’s earnings, the satisfaction of solvency tests imposed by applicable corporate law for the declaration and payment of dividends, and other relevant factors. There are also risks that are inherent in the nature of a transaction such as the acquisition of the Tocqueville gold strategies asset management business, including: failure to realize anticipated synergies; risks regarding integration; incorrect assessments of the values of the acquired assets; and failure to obtain any required security holder, regulatory, stock exchange and other approvals (or to do so in a timely manner). The anticipated timeline for completion of the acquisition of the Tocqueville gold strategies asset management business may change for a number of reasons, including the inability to secure necessary security holder, regulatory, stock exchange and other approvals in the time assumed or the need for additional time to satisfy the conditions to the completion of the acquisition. As a result of the foregoing, readers should not place undue reliance on the forward-looking statements contained in this MD&A concerning the completion of the acquisition or the timing thereof. The Forward-Looking Statements speak only as of the date hereof, unless otherwise specifically noted, and the Company does not assume any obligation to publicly update any Forward-Looking Statements, whether as a result of new information, future events or otherwise, except as may be expressly required by applicable Canadian securities laws.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This MD&A of financial condition and results of operations, dated August 8, 2019, presents an analysis of the consolidated financial condition of the Company and its subsidiaries as at June 30, 2019, compared with December 31, 2018, and the consolidated results of operations for the three and six months ended June 30, 2019, compared with the three and six months ended June 30, 2018. The Board of Directors approved this MD&A on August 8, 2019. All note references in this MD&A are to the notes to the Company's June 30, 2019 unaudited interim condensed consolidated financial statements ("interim financial statements"), unless otherwise noted. The Company was incorporated under the Business Corporations Act (Ontario) on February 13, 2008.
PRESENTATION OF FINANCIAL INFORMATION
The interim financial statements, including the required comparative information, have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"). Financial results, including related historical comparatives contained in this MD&A, unless otherwise specified herein, are based on the interim financial statements. The Canadian dollar is the Company's functional and reporting currency for purposes of preparing the interim financial statements given that the Company conducts most of its operations in that currency. Accordingly, all dollar references in this MD&A are in Canadian dollars, unless otherwise specified. The use of the term "prior period" refers to the three and six months ended June 30, 2018.
| | 2 |
KEY PERFORMANCE INDICATORS (NON-IFRS FINANCIAL MEASURES)
The Company measures the success of its business using a number of key performance indicators that are not measurements in accordance with IFRS and should not be considered as an alternative to net income (loss) or any other measure of performance under IFRS. Non-IFRS financial measures do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. Our key performance indicators include:
Assets Under Management
Assets Under Management ("AUM") refers to the total net assets managed by the Company through its various investment product offerings, managed accounts and managed companies.
Net Inflows
Net Inflows (consisting of net sales, capital calls and fee earning capital commitments) result in increases or decreases to AUM and are described individually below:
Net Sales
Fund sales (net of redemptions), including 'at-the-market' transactions and secondary offerings of our physical trusts and new 'creations' of ETF units, are a key performance indicator as new assets being managed will lead to higher management fees and can potentially lead to increased carried interest and performance fee generation (as applicable) given that AUM is also the basis upon which carried interest and performance fees are calculated.
Capital calls and commitments
Capital calls into our lending LPs is a key source of AUM creation, and ultimately, earnings for the Company. Once capital is called into our lending LPs, it is included within the AUM of the Company as it will now earn a management fee (note: it is possible for some forms of committed capital to earn a commitment fee despite being uncalled, in which case, it will also be included in AUM at that time). Conversely, once loans in our lending LPs are repaid, capital may be returned to investors in the form of a distribution, thereby reducing our AUM.
Net Fees
Management fees (net of trailer and sub-advisor fees) and carried interest and performance fees (net of carried interest and performance fee payouts), is a key revenue indicator as it represents the net revenue contribution after directly associated costs that we generate from our AUM.
Net Commissions
Commissions, net of commission expenses, arise from the transaction based service offerings of our brokerage segment.
| | 3 |
EBITDA, Adjusted EBITDA and Adjusted base EBITDA
EBITDA in its most basic form is defined as earnings before interest expense, income taxes, depreciation and amortization. EBITDA is a measure commonly used in the investment industry by management, investors and investment analysts in understanding and comparing results by factoring out the impact of different financing methods, capital structures, amortization techniques and income tax rates between companies in the same industry. While other companies, investors or investment analysts may not utilize the same method of calculating EBITDA (or adjustments thereto), the Company believes its adjusted base EBITDA metric, in particular, results in a better comparison of the Company's underlying operations against its peers.
Neither EBITDA, adjusted EBITDA or adjusted base EBITDA have standardized meaning under IFRS. Consequently, they should not be considered in isolation, nor should they be used in substitute for measures of performance prepared in accordance with IFRS.
The following table outlines how our EBITDA measures are determined:
| | | 3 months ended | | | 6 months ended | |
| (in thousands $) | | Jun. 30, 2019 | | | Jun. 30, 2018 | | | Jun. 30, 2019 | | | Jun. 30, 2018 | |
| Net income (loss) for the periods | | | 2,116 | | | | 5,916 | | | | 5,900 | | | | 19,573 | |
| Adjustments: | | | | | | | | | | | | | | | | |
| Interest expense | | | 302 | | | | 15 | | | | 626 | | | | 81 | |
| Provision (recovery) for income taxes | | | (454 | ) | | | 632 | | | | 423 | | | | (2,140 | ) |
| Depreciation and amortization | | | 1,097 | | | | 456 | | | | 2,198 | | | | 1,143 | |
| EBITDA | | | 3,061 | | | | 7,019 | | | | 9,147 | | | | 18,657 | |
| | | | | | | | | | | | | | | | | |
| Other adjustments: | | | | | | | | | | | | | | | | |
| (Gains) losses on net investments (1) | | | 386 | | | | 3,050 | | | | 313 | | | | 4,929 | |
| (Gains) losses on foreign exchange | | | 883 | | | | (236 | ) | | | 1,908 | | | | (1,092 | ) |
| Non-cash stock-based compensation | | | 1,011 | | | | 1,018 | | | | 2,669 | | | | 2,436 | |
| Net proceeds from Sale Transaction | | | — | | | | — | | | | — | | | | (4,200 | ) |
| Unamortized placement fees (2) | | | — | | | | (273 | ) | | | — | | | | (541 | ) |
| Other expenses(3) | | | 4,068 | | | | 437 | | | | 4,556 | | | | 1,411 | |
| Adjusted EBITDA | | | 9,409 | | | | 11,015 | | | | 18,593 | | | | 21,600 | |
| | | | | | | | | | | | | | | | | |
| Other adjustments: | | | | | | | | | | | | | | | | |
| Carried interest and performance fees | | | — | | | | (685 | ) | | | — | | | | (1,802 | ) |
| Carried interest and performance fee related expenses | | | — | | | | 356 | | | | — | | | | 915 | |
| Adjusted base EBITDA | | | 9,409 | | | | 10,686 | | | | 18,593 | | | | 20,713 | |
| (1) | This adjustment removes the income effects of certain gains or losses on proprietary and long-term investments to ensure the reporting objectives of our EBITDA metric as described above are met. |
| (2) | The prior period comparative figures contained a placement fee amortization adjustment to ensure the 2018 results were comparable to 2017 in light of the 2018 adoption of IFRS 15. |
| (3) | See Other Expenses in Note 6 of the interim financial statements. In addition to the items outlined in Note 6, Other expenses also includes severance and new hire accruals of $0.9 million for the 3 months ended (3 months ended June 30, 2018 - $Nil) and $1 million for the 6 months ended (6 months ended Jun 30, 2018 - $0.1 million). |
| | 4 |
BUSINESS OVERVIEW
Our reportable operating segments are as follows:
Exchange Listed Products
| • | The Company's closed-end physical trusts and exchange traded funds ("ETFs"). |
Lending
| • | The Company's lending activities primarily occur through limited partnership vehicles ("lending LPs"). |
Managed Equities
| • | The Company's alternative investment strategies (open-end, closed-end, fixed-term LPs, etc.) managed in-house and on a sub-advised basis. Prior to Q1 2019, the Company's fixed-term LP vehicles formed part of the "Global segment" (which historically housed all of our U.S. business activities). Effective Q1 2019, Global no longer satisfied the qualitative tests of IFRS 8 as the geographic location of the U.S businesses is no longer a relevant consideration by management in the allocation of resources and assessment of product and service performance. Consequently, Global has been deconstructed and its fixed-term LP assets and earnings reallocated to the managed equities segment given that it is now at the managed equities level that the allocation of resources and assessment of product and service performance occurs by management. |
Brokerage
| • | Formerly "Merchant Banking & Advisory Services", this segment has been renamed to reflect the inclusion of our U.S. broker-dealer alongside our Canada based broker-dealer as the Company's "brokerage segment". Prior to Q1 2019 , the Company's U.S. broker-dealer formed part of the "Global segment" (which historically housed all of our U.S. business activities). Effective Q1 2019, Global no longer satisfied the qualitative tests of IFRS 8 as the geographic location of the U.S. businesses is no longer a relevant consideration by management in the allocation of resources and assessment of product and service performance. Consequently, Global has been deconstructed and its U.S. broker-dealer assets and earnings reallocated to the brokerage segment given that it is now at the brokerage level (independent of geography) that the allocation of resources and assessment of product and service performance occurs by management. |
Corporate
| • | Provides the Company's various operating segments with capital, balance sheet management and other shared services. |
All Other Segments
| • | Contains all non-reportable segments as per IFRS 8. See Note 11 of the interim financial statements for further details. |
For a detailed account of the underlying principal subsidiaries within our reportable business segments, refer to the Company's Annual Information Form and Note 2 of the annual consolidated financial statements.
| | 5 |
BUSINESS HIGHLIGHTS AND GROWTH INITIATIVES
Investment Performance
Market value appreciation was $276 million during the quarter as the company benefited from stronger precious metals prices. On a full year basis, market value appreciation was $143 million.
Product and Business Line Expansion
| • | Subsequent to quarter-end, the company (via its wholly-owned subsidiary, Sprott Asset Management LP) entered into a definitive agreement regarding the purchase of Tocqueville Asset Management’s gold strategy asset management business. The transaction cost is US$15 million (US$10 million in cash and Sprott Inc. common shares valued at US$5 million). Contingent consideration valued up to an additional US$35 million in cash and Sprott Inc. shares is payable subject to the achievement of certain financial performance conditions over two years following the closing of the transaction. |
Based on current asset levels, the transaction will add over $2.5 billion to Sprott’s AUM. On closing of the transaction, Senior Portfolio Manager, John Hathaway and Portfolio Managers, Douglas Groh and Ryan McIntyre will join the company.
Outlook
Exchange Listed Products
| • | We continue to expect the strong finish to the price of gold from last year to carry forward to 2019. However, the benefit of higher gold prices will be somewhat offset by starting 2019 with a lower AUM base given our 2018 redemption experience, which continues in 2019 albeit at a much slower pace than 2018. |
Lending
| • | We anticipate coming in at the low end of our previously communicated range of net capital deployments this year (US$200 million - US$400 million). This updated outlook is primarily the result of higher than anticipated capital distributions on early loan repayments in our lending LPs in the first half of this year. Our long-term view on lending fund AUM continues to be constructive as we work through the eventual deployment of more than US$957 million of committed capital. We continue to expect the majority of our legacy balance sheet loans to run-off by the end of this year. |
Managed Equities
| • | We continue to anticipate earnings from this business being relatively flat year-over-year. |
Brokerage
| • | We continue to expect a challenging equity origination and placement fee environment, similar to what was experienced in 2018. |
Corporate
| • | We continue to expect to see a material decrease in corporate expenses in 2019, primarily due to: (1) lower LTIP amortization as the graded vesting schedule of the 2017 grants reach the low points of the amortization schedule; and (2) slightly flat to lower SG&A as we continue our cost containment efforts. |
| | 6 |
SUMMARY FINANCIAL INFORMATION
| (In thousands $) | | Q2
2019 | | | Q1
2019 | | | Q4
2018 | | | Q3
2018 | | | Q2
2018 | | | Q1
2018 | | | Q4
2017 | | | Q3
2017 | |
| SUMMARY INCOME STATEMENT | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Management fees | | | 13,329 | | | | 13,558 | | | | 13,182 | | | | 13,722 | | | | 14,559 | | | | 14,056 | | | | 10,247 | | | | 13,597 | |
| Carried interest and performance fees | | | — | | | | — | | | | — | | | | — | | | | 685 | | | | 1,117 | | | | 3,584 | | | | 835 | |
| less: Trailer and sub-advisor fees | | | 89 | | | | — | | | | 38 | | | | 45 | | | | 49 | | | | 47 | | | | 225 | | | | 1,043 | |
| less: Carried interest and performance fee payouts | | | — | | | | — | | | | — | | | | — | | | | 356 | | | | 559 | | | | 2,267 | | | | — | |
| Net Fees | | | 13,240 | | | | 13,558 | | | | 13,144 | | | | 13,677 | | | | 14,839 | | | | 14,567 | | | | 11,339 | | | | 13,389 | |
| Commissions | | | 4,406 | | | | 4,409 | | | | 6,414 | | | | 4,573 | | | | 7,516 | | | | 8,857 | | | | 7,366 | | | | 4,746 | |
| less: Commission expense | | | 1,814 | | | | 1,844 | | | | 2,704 | | | | 2,447 | | | | 2,701 | | | | 3,667 | | | | 2,855 | | | | 1,553 | |
| Net Commissions | | | 2,592 | | | | 2,565 | | | | 3,710 | | | | 2,126 | | | | 4,815 | | | | 5,190 | | | | 4,511 | | | | 3,193 | |
| Interest income | | | 4,595 | | | | 3,918 | | | | 4,244 | | | | 4,824 | | | | 3,293 | | | | 3,066 | | | | 3,588 | | | | 2,789 | |
| Gains (losses) on proprietary investments | | | (2,160 | ) | | | 73 | | | | 3,912 | | | | (4,765 | ) | | | (3,050 | ) | | | (1,879 | ) | | | (63 | ) | | | (3,770 | ) |
| Gains (losses) on long-term investments | | | 1,614 | | | | (67 | ) | | | 3,007 | | | | (151 | ) | | | (72 | ) | | | 56 | | | | 3,639 | | | | — | |
| Other income (loss) | | | (559 | ) | | | (644 | ) | | | 2,453 | | | | (275 | ) | | | 3,683 | | | | 6,242 | | | | 1,144 | | | | 31,487 | |
| Total Net Revenues | | | 19,322 | | | | 19,403 | | | | 30,470 | | | | 15,436 | | | | 23,508 | | | | 27,242 | | | | 24,158 | | | | 47,088 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Compensation (1) | | | 7,317 | | | | 8,387 | | | | 11,163 | | | | 8,167 | | | | 10,634 | | | | 9,485 | | | | 10,631 | | | | 5,655 | |
| Compensation - severance and new hire accruals | | | 855 | | | | 146 | | | | 38 | | | | 359 | | | | — | | | | 149 | | | | 2,193 | | | | 62 | |
| Placement and referral fees | | | 336 | | | | 78 | | | | 368 | | | | 223 | | | | 148 | | | | 204 | | | | 833 | | | | 782 | |
| Selling, general and administrative | | | 4,354 | | | | 4,069 | | | | 4,171 | | | | 3,404 | | | | 4,905 | | | | 4,586 | | | | 5,739 | | | | 5,084 | |
| Interest Expense | | | 302 | | | | 324 | | | | 312 | | | | 26 | | | | 15 | | | | 66 | | | | 22 | | | | 124 | |
| Amortization and impairment charges (2) | | | 1,097 | | | | 1,101 | | | | 598 | | | | 457 | | | | 456 | | | | 688 | | | | 1,386 | | | | 1,473 | |
| Other expenses | | | 3,399 | | | | 637 | | | | 606 | | | | 790 | | | | 802 | | | | 1,179 | | | | 2,069 | | | | 703 | |
| Total Expenses | | | 17,660 | | | | 14,742 | | | | 17,256 | | | | 13,426 | | | | 16,960 | | | | 16,357 | | | | 22,873 | | | | 13,883 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income (Loss) | | | 2,116 | | | | 3,784 | | | | 9,831 | | | | 1,975 | | | | 5,916 | | | | 13,657 | | | | 2,519 | | | | 29,804 | |
| Net Income (Loss) per share | | | 0.01 | | | | 0.02 | | | | 0.04 | | | | 0.01 | | | | 0.02 | | | | 0.06 | | | | 0.01 | | | | 0.12 | |
| Adjusted base EBITDA | | | 9,409 | | | | 9,184 | | | | 10,092 | | | | 9,707 | | | | 10,686 | | | | 10,027 | | | | 7,524 | | | | 8,007 | |
| Adjusted base EBITDA per share | | | 0.04 | | | | 0.04 | | | | 0.04 | | | | 0.04 | | | | 0.04 | | | | 0.04 | | | | 0.03 | | | | 0.03 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SUMMARY BALANCE SHEET | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Assets | | | 445,776 | | | | 444,325 | | | | 428,215 | | | | 401,366 | | | | 403,985 | | | | 407,177 | | | | 409,849 | | | | 408,093 | |
| Total Liabilities | | | 79,019 | | | | 72,172 | | | | 55,094 | | | | 36,486 | | | | 36,372 | | | | 42,417 | | | | 65,985 | | | | 61,707 | |
| Cash | | | 60,593 | | | | 48,193 | | | | 47,252 | | | | 41,452 | | | | 37,974 | | | | 52,097 | | | | 156,120 | | | | 152,952 | |
| less: syndicate cash holdings | | | (10,119 | ) | | | (12,218 | ) | | | (10,421 | ) | | | (967 | ) | | | (796 | ) | | | (932 | ) | | | (776 | ) | | | (649 | ) |
| Net cash | | | 50,474 | | | | 35,975 | | | | 36,831 | | | | 40,485 | | | | 37,178 | | | | 51,165 | | | | 155,344 | | | | 152,303 | |
| Proprietary and long-term investments | | | 122,607 | | | | 134,681 | | | | 129,271 | | | | 115,744 | | | | 120,853 | | | | 96,352 | | | | 114,327 | | | | 134,306 | |
| less: obligations related to securities sold short | | | — | | | | — | | | | (255 | ) | | | — | | | | (2,927 | ) | | | (8,543 | ) | | | (24,993 | ) | | | (25,988 | ) |
| Net investments | | | 122,607 | | | | 134,681 | | | | 129,016 | | | | 115,744 | | | | 117,926 | | | | 87,809 | | | | 89,334 | | | | 108,318 | |
| Loans receivable | | | 32,011 | | | | 32,360 | | | | 36,021 | | | | 36,532 | | | | 40,208 | | | | 50,467 | | | | 48,673 | | | | 46,215 | |
| Investable Capital | | | 205,092 | | | | 203,016 | | | | 201,868 | | | | 192,761 | | | | 195,312 | | | | 189,441 | | | | 293,351 | | | | 306,836 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Enterprise AUM | | | 10,670,982 | | | | 10,569,449 | | | | 10,578,426 | | | | 10,066,112 | | | | 11,126,042 | | | | 11,591,213 | | | | 7,323,382 | | | | 7,191,512 | |
| (1) | Compensation includes stock-based compensation, but excludes commission expense, carried interest and performance fee payouts, which are reported net of commission revenue, carried interest and performance fees, respectively. |
| (2) | Starting Q1, 2019, in order to comply with the new IFRS 16 Leases ("IFRS 16") accounting standard, certain lease assets have now been capitalized and depreciated over their expected lease term. See Note 2, Changes in Accounting Policies of the interim financial statements. |
| | 7 |
SUMMARY MANAGEMENT FEE BREAKDOWN
Below is a detailed list of management fee rates on our fund products as at June 30, 2019 (in millions $):
| FUND | | AUM | | | BLENDED NET MANAGEMENT
FEE RATE | | | CARRIED INTEREST AND PERFORMANCE FEE CRITERIA |
| Exchange Listed Products | | | | | | | | | | |
| Sprott Physical Gold and Silver Trust | | | 3,523 | | | | 0.40 | % | | N/A (1) |
| Sprott Physical Gold Trust | | | 2,938 | | | | 0.35 | % | | N/A (1) |
| Sprott Physical Silver Trust | | | 1,120 | | | | 0.45 | % | | N/A (1) |
| Sprott Gold Miner's ETF | | | 223 | | | | 0.57 | % | | N/A (1) |
| Sprott Physical Platinum & Palladium Trust | | | 133 | | | | 0.50 | % | | N/A (1) |
| Sprott Jr. Gold Miner's ETF | | | 78 | | | | 0.57 | % | | N/A (1) |
| | | | | | | | | | | |
| Total | | | 8,015 | | | | 0.40 | % | | |
| | | | | | | | | | | |
| Lending | | | | | | | | | | |
| Sprott Private Resource Lending LPs | | | 646 | | | | 1.11 | % | | 15-70% of net profits over preferred return |
| | | | | | | | | | | |
| Managed Equities: In-house | | | | | | | | | | |
| Sprott U.S. Value Strategies | | | 274 | | | | 1.00 | % | | N/A |
| Fixed Term Limited Partnerships | | | 229 | | | | 1.70 | % | | 15-30% over preferred return |
| Separately Managed Accounts (2) | | | 49 | | | | 1.00 | % | | N/A |
| Sprott Hathaway Special Situations Fund (3) | | | 34 | | | | 0.75 | % | | 20% of net profits over preferred return |
| Total | | | 586 | | | | 1.22 | % | | |
| | | | | | | | | | | |
| Managed Equities: Sub-advised | | | | | | | | | | |
| Bullion Funds (3) | | | 306 | | | | 0.51 | % | | 5% excess over applicable benchmark indices |
| Corporate Class Funds (3) | | | 131 | | | | 0.75 | % | | 5% excess over applicable benchmark indices |
| Flow-through LPs (3) | | | 74 | | | | 0.70 | % | | 10% of all net profits in excess of the HWM |
| | | | | | | | | | | |
| Total | | | 511 | | | | 0.60 | % | | |
| | | | | | | | | | | |
| Other | | | | | | | | | | |
| Managed Companies (4) | | | 646 | | | | 0.50 | % | | 20% of net profits over preferred return |
| Separately Managed Accounts (5) | | | 267 | | | | 0.61 | % | | 20% of net profits over preferred return |
| | | | | | | | | | | |
| Total | | | 913 | | | | 0.53 | % | | |
| | | | | | | | | | | |
| Total AUM | | | 10,671 | | | | 0.51 | % | | |
| (1) | Exchange listed products do not attract performance fees, however the management fees they generate are closely correlated to precious metals prices. |
| (2) | Institutional managed accounts. |
| (3) | Management fee rate represents the net amount received by the Company. |
| (4) | Includes Sprott Resource Holdings Inc. and Sprott Korea Corp. |
| (5) | Includes our private equity strategy in Sprott Asia and high net worth discretionary managed accounts in the U.S. |
| | 8 |
RESULTS OF OPERATIONS
AUM SUMMARY
AUM was $10.7 billion as at June 30, 2019, up $0.1 billion (1%) from March 31, 2019 and up $0.1 billion (1%) from December 31, 2018. On a three and six months ended basis, our Exchange Listed Products segment benefited from strong gold price appreciation. We also benefited from new commitment fee earning assets being added to our lending LPs throughout the year, which more than offset capital distributions on a year-to-date basis.
3 months results
| In millions $ | | AUM
Mar. 31, 2019 | | | Net
Inflows (1) | | | Market
Value
Changes | | | Other (2) | | | AUM
Jun. 30, 2019 | |
| Exchange Listed Products | | | | | | | | | | | | | | | | | | | | |
| - Physical Trusts | | | 7,481 | | | | (80 | ) | | | 313 | | | | — | | | | 7,714 | |
| - ETFs | | | 269 | | | | (3 | ) | | | 35 | | | | — | | | | 301 | |
| | | | 7,750 | | | | (83 | ) | | | 348 | | | | — | | | | 8,015 | |
| | | | | | | | | | | | | | | | | | | | | |
| Lending | | | 731 | | | | 67 | | | | (13 | ) | | | (139 | ) | | | 646 | (3) |
| | | | | | | | | | | | | | | | | | | | | |
| Managed Equities | | | | | | | | | | | | | | | | | | | | |
| - In-house | | | 594 | | | | 2 | | | | (10 | ) | | | — | | | | 586 | |
| - Sub-advised | | | 523 | | | | (17 | ) | | | 5 | | | | — | | | | 511 | |
| | | | 1,117 | | | | (15 | ) | | | (5 | ) | | | — | | | | 1,097 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other | | | 971 | | | | (4 | ) | | | (54 | ) | | | — | | | | 913 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | | 10,569 | | | | (35 | ) | | | 276 | | | | (139 | ) | | | 10,671 | |
| | | | | | | | | | | | | | | | | | | | | |
6 months results
| In millions $ | | AUM
Dec. 31, 2018 | | | Net Inflows (1) | | | Market
Value
Changes | | | Other (2) | | | AUM
Jun. 30, 2019 | |
| Exchange Listed Products | | | | | | | | | | | | | | | | | | | | |
| - Physical Trusts | | | 7,927 | | | | (340 | ) | | | 127 | | | | — | | | | 7,714 | |
| - ETFs | | | 237 | | | | 14 | | | | 50 | | | | — | | | | 301 | |
| | | | 8,164 | | | | (326 | ) | | | 177 | | | | — | | | | 8,015 | |
| | | | | | | | | | | | | | | | | | | | | |
| Lending | | | 498 | | | | 331 | | | | (29 | ) | | | (154 | ) | | | 646 | (3) |
| | | | | | | | | | | | | | | | | | | | | |
| Managed Equities | | | | | | | | | | | | | | | | | | | | |
| - In-house | | | 538 | | | | 29 | | | | 19 | | | | — | | | | 586 | |
| - Sub-advised | | | 505 | | | | 2 | | | | 4 | | | | — | | | | 511 | |
| | | | 1,043 | | | | 31 | | | | 23 | | | | — | | | | 1,097 | |
| | | | | | | | | | | | | | | | | | | | | |
| Other | | | 873 | | | | 68 | | | | (28 | ) | | | — | | | | 913 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | | 10,578 | | | | 104 | | | | 143 | | | | (154 | ) | | | 10,671 | |
| | | | | | | | | | | | | | | | | | | | | |
| (1) | Includes net sales, called capital into our lending LPs and uncalled committed capital for lending LPs to the extent that it earns a commitment fee. |
| (2) | Includes new AUM from fund acquisitions, lost AUM from fund divestitures and lost AUM from distributions of principal receipts to clients of our lending LPs. |
| (3) | $1,252 million (US$957 million) of committed capital remains uncalled, of which $301 million (US$230 million) earns a commitment fee (AUM), and $951 million (US$727 million) does not (future AUM). |
| | 9 |
KEY REVENUE LINES
Net Fees in the quarter were $13.2 million, down $1.6 million (11%) from the prior period and were $26.8 million on a year-to-date basis, down $2.6 million (9%). Excluding net performance fees generated in the prior periods, the decrease on a three months ended basis was 9% and on a year-to-date basis was 6%. The decrease on a three and six months ended basis was due to lower average AUM in our exchange listed products and managed equities segments (down 12% and 13%, respectively). These declines more than offset the increased fee generation from our lending LPs as we continue to grow our lending AUM.
Interest Income in the quarter was $4.6 million, up $1.3 million (40%) from the prior period and was $8.5 million on a year-to-date basis, up $2.2 million (34%). The increase was primarily due to higher co-investment income earned in our lending LPs as a result of ongoing co-investment activity since the second half of 2018.
Net Commissions in the quarter were $2.6 million, down $2.2 million (46%) from the prior period and were $5.2 million on a year-to-date basis, down $4.8 million (48%). The decline was due to weak equity origination and placement activities in our brokerage segment.
KEY EXPENSE LINES
Compensation, excluding commissions, carried interest and performance fee payouts, which are presented net of their related revenues in this MD&A, and severance and new hire accruals which are non-recurring, was $7.3 million, down $3.3 million (31%) from the prior period and was $15.7 million on a year-to-date basis, down $4.4 million (22%).The decrease was primarily due to lower LTIP amortization as well as lower annual incentive accruals. Severance accruals relating to the exit of certain employees was recorded in the quarter.
SG&A was $4.4 million in the quarter, down $0.6 million (11%) from the prior period and was $8.4 million on a year-to-date basis, down $1.1 million (11%). This was largely due to the adoption of IFRS 16 and our on-going cost containment program.
| | 10 |
ADDITIONAL REVENUE AND EXPENSE HIGHLIGHTS
Proprietary investments losses were due to market value depreciation of certain resource equity holdings.
Long-term investments gains were due to market value appreciation of certain long-term investments.
Other income was lower in the quarter and on a year-to-date basis. The decrease in the quarter was mainly due to income earned on the early settlement of a loan in the prior period and FX losses on U.S dollar dominated cash, receivables and loans in the current period. On a year-to-date basis, the decrease was due to net sales proceeds received on last year's Sale Transaction in the fist quarter of 2018, income earned on the early settlement of a loan in the prior period and from FX losses on U.S dollar dominated cash, receivables and loans in the current period.
Placement and referral fees were higher in the quarter and on a year-to-date basis mainly due to referral fees paid in our brokerage segment.
Interest expense was higher in the quarter and on a year-to-date basis due to interest accruals on leases from the adoption of IFRS 16 and the draw down of our loan facility in the first quarter of this year (see Note 12 of the interim financial statements).
Amortization of intangibles did not change in the quarter and was lower on a year-to-date basis due to finite life fund management contracts related to fixed term LPs in our managed equities segment being fully amortized by the end of the first quarter of the prior period.
Amortization of property and equipment was higher in the quarter and on a year-to-date basis mainly due to increased depreciation expense related to leases that were capitalized on the adoption of IFRS 16.
Other expenses were higher in the quarter and on a year-to-date basis due to higher non-recurring professional fees and transaction costs.
Adjusted Base EBITDA
3 and 6 months results
Adjusted base EBITDA in the quarter was $9.4 million, down $1.3 million (12%) from the prior period and was $18.6 million on a year-to-date basis, down $2.1 million (10%).The decrease was primarily due to lower net commissions on lower equity origination and placement activities in our brokerage segment, lower fee income earned in our exchange listed products and managed equities segments given lower average AUM year-over-year; and lower income in our lending segment given last year's fees generated on the early settlement of a loan. These decreases more than offset expense savings arising from lower annual incentive accruals, LTIP amortization and SG&A.
| | 11 |
Balance Sheet
Investable Capital was $205 million, up $3 million (2%) from December 31, 2018.
Total Assets were $446 million, up $18 million (4%) from December 31, 2018. The increase was primarily due to higher undeployed cash balances from the draw down of our loan facility, as well as the capitalization of leases on adoption of IFRS 16.
Total Liabilities were $79 million, up $24 million (43%) from December 31, 2018. The increase was primarily due to the draw down of $22.5 million on our loan facility to help fund anticipated investment activities of the company over the next 12-18 months. The increase was also due to the recording of a lease liability on adoption of IFRS 16. These increases were partially offset by the payment of prior year's accrued liabilities.
Total Shareholder's Equity was $367 million, down $6 million (2%) from December 31, 2018.
| | 12 |
REPORTABLE OPERATING SEGMENTS
Exchange Listed Products
| | | 3 months ended | | | 6 months ended | |
| (In thousands $) | | Jun. 30, 2019 | | | Jun. 30, 2018 | | | Jun. 30, 2019 | | | Jun. 30, 2018 | |
| SUMMARY INCOME STATEMENT | | | | | | | | | | | | | | | | |
| Management fees | | | 7,644 | | | | 8,833 | | | | 15,294 | | | | 17,024 | |
| Other income (loss) | | | (324 | ) | | | 550 | | | | (681 | ) | | | 286 | |
| Total Revenues | | | 7,320 | | | | 9,383 | | | | 14,613 | | | | 17,310 | |
| | | | | | | | | | | | | | | | | |
| Compensation | | | 1,165 | | | | 1,121 | | | | 2,216 | | | | 2,445 | |
| Selling, general and administrative | | | 1,031 | | | | 820 | | | | 1,931 | | | | 1,655 | |
| Interest expense | | | 218 | | | | — | | | | 492 | | | | — | |
| Amortization and impairment charges | | | 316 | | | | 314 | | | | 633 | | | | 628 | |
| Other expenses | | | — | | | | 30 | | | | — | | | | 30 | |
| Total Expenses | | | 2,730 | | | | 2,285 | | | | 5,272 | | | | 4,758 | |
| | | | | | | | | | | | | | | | | |
| Net Income before income taxes | | | 4,590 | | | | 7,098 | | | | 9,341 | | | | 12,552 | |
| Adjusted base EBITDA | | | 5,532 | | | | 6,892 | | | | 11,231 | | | | 12,924 | |
| Total AUM | | | 8,014,740 | | | | 8,530,082 | | | | 8,014,740 | | | | 8,530,082 | |
3 and 6 months ended
Adjusted base EBITDA in the quarter was $5.5 million, down $1.4 million (20%) from the prior period and was $11.2 million on a year-to-date basis, down $1.7 million (13%). The decrease was primarily due to lower management fees given redemption experience in our physical trusts which led to lower average AUM year-over-year.
Non-EBITDA highlights:
| • | Other loss during the quarter was mainly driven by FX movements on U.S dollar dominated cash and receivables. |
| | 13 |
Lending
| | | 3 months ended | | | 6 months ended | |
| (In thousands $) | | Jun. 30, 2019 | | | Jun. 30, 2018 | | | Jun. 30, 2019 | | | Jun. 30, 2018 | |
| SUMMARY INCOME STATEMENT | | | | | | | | | | | | | | | | |
| Management fees | | | 1,630 | | | | 1,143 | | | | 3,776 | | | | 2,205 | |
| Carried interest and performance fees | | | — | | | | 685 | | | | — | | | | 685 | |
| less: Carried interest and performance fee payouts | | | — | | | | 356 | | | | — | | | | 356 | |
| Net Fees | | | 1,630 | | | | 1,472 | | | | 3,776 | | | | 2,534 | |
| Interest income (1) | | | 4,023 | | | | 3,083 | | | | 7,333 | | | | 5,858 | |
| Gains (losses) on proprietary investments | | | (609 | ) | | | (1,646 | ) | | | (2,030 | ) | | | (475 | ) |
| Gains on long-term investments | | | (11 | ) | | | 11 | | | | (22 | ) | | | 25 | |
| Other income (loss) | | | (817 | ) | | | 3,510 | | | | (1,459 | ) | | | 5,293 | |
| Total Net Revenues | | | 4,216 | | | | 6,430 | | | | 7,598 | | | | 13,235 | |
| | | | | | | | | | | | | | | | | |
| Compensation | | | 1,767 | | | | 1,259 | | | | 3,127 | | | | 2,358 | |
| Placement and referral fees | | | 20 | | | | 31 | | | | 28 | | | | 62 | |
| Selling, general and administrative | | | 384 | | | | 281 | | | | 503 | | | | 749 | |
| Interest expense | | | 35 | | | | — | | | | 35 | | | | — | |
| Amortization and impairment charges | | | 35 | | | | 2 | | | | 71 | | | | 4 | |
| Other expenses | | | — | | | | 30 | | | | — | | | | 30 | |
| Total Expenses | | | 2,241 | | | | 1,603 | | | | 3,764 | | | | 3,203 | |
| | | | | | | | | | | | | | | | | |
| Net Income before income taxes | | | 1,975 | | | | 4,827 | | | | 3,834 | | | | 10,032 | |
| Adjusted base EBITDA | | | 3,832 | | | | 5,381 | | | | 7,874 | | | | 8,138 | |
| Total AUM (2) | | | 645,603 | | | | 389,459 | | | | 645,603 | | | | 389,459 | |
| (1) | Includes: (1) interest income from on-balance sheet loans; and (2) co-investment income from lending LP units held as part of our long-term investments portfolio. |
| (2) | $1,252 million (US$957 million) of committed capital remains uncalled, of which $301 million (US$230 million) earns a commitment fee (AUM), and $951 million (US$727 million) does not (future AUM). |
3 and 6 months ended
Adjusted base EBITDA in the quarter was $3.8 million, down $1.5 million (29%) from the prior period and was $7.9 million on a year-to-date basis, down $0.3 million (3%). The decrease was primarily due to income earned on the early settlement of a loan in the prior period. This decrease was only partially offset by higher management fees (including commitment fees) and co-investment income on increased capital calls and new commitment fee earning AUM.
Non-EBITDA highlights:
| • | Losses on proprietary investments were due to market value depreciation on equity kickers received on certain loan arrangements. |
| • | Other loss was mainly driven by FX movements on U.S dollar dominated cash, receivables and loans. |
| | 14 |
Managed Equities*
| | | 3 months ended | | | 6 months ended | |
| (In thousands $) | | Jun. 30, 2019 | | | Jun. 30, 2018 | | | Jun. 30, 2019 | | | Jun. 30, 2018 | |
| SUMMARY INCOME STATEMENT | | | | | | | | | | | | | | | | |
| Management fees | | | 2,674 | | | | 3,238 | | | | 5,093 | | | | 6,410 | |
| Carried interest and performance fees | | | — | | | | — | | | | — | | | | 1,061 | |
| less: Trailer and sub-advisor fees | | | 132 | | | | 95 | | | | 173 | | | | 189 | |
| less: Carried interest and performance fee payouts | | | — | | | | — | | | | — | | | | 559 | |
| Net Fees | | | 2,542 | | | | 3,143 | | | | 4,920 | | | | 6,723 | |
| Gains (losses) on proprietary investments | | | (368 | ) | | | 9 | | | | 177 | | | | 18 | |
| Gains (losses) on long-term investments | | | 1,741 | | | | (137 | ) | | | 1,800 | | | | (164 | ) |
| Other income (loss) | | | 160 | | | | (45 | ) | | | 371 | | | | (512 | ) |
| Total Net Revenues | | | 4,075 | | | | 2,970 | | | | 7,268 | | | | 6,065 | |
| | | | | | | | | | | | | | | | | |
| Compensation | | | 1,256 | | | | 1,570 | | | | 3,440 | | | | 3,076 | |
| Selling, general and administrative | | | 425 | | | | 665 | | | | 994 | | | | 1,009 | |
| Amortization and impairment charges | | | 72 | | | | 68 | | | | 145 | | | | 399 | |
| Other expenses | | | 338 | | | | (2 | ) | | | 338 | | | | (2 | ) |
| Total Expenses | | | 2,091 | | | | 2,301 | | | | 4,917 | | | | 4,482 | |
| | | | | | | | | | | | | | | | | |
| Net Income before income taxes | | | 1,984 | | | | 669 | | | | 2,351 | | | | 1,583 | |
| Adjusted base EBITDA | | | 1,056 | | | | 1,150 | | | | 1,971 | | | | 2,464 | |
| Total AUM | | | 1,097,419 | | | | 1,300,792 | | | | 1,097,419 | | | | 1,300,792 | |
| * | See "Managed Equities" in the business overview section on page 7 of this MD&A. |
3 and 6 months ended
Adjusted base EBITDA in the quarter was $1.1 million, down $0.1 million (8%) from the prior period, and was $2.0 million on a year-to-date basis, down $0.5 million (20%). The decrease was primarily due to lower market valuations in our fixed-term LPs which led to lower average AUM and management fee income.
Non-EBITDA highlights:
| • | Compensation increased on a year-to-date basis due to non-recurring stock based compensation expense on a new hire in the first quarter. |
| • | Proprietary investments losses in the quarter and gains on a year-to-date basis were due to market value movements of certain holdings. |
| • | Long-term investments gains were due to market value appreciation of certain long-term investments. |
| | 15 |
Brokerage*
| | | 3 months ended | | | 6 months ended | |
| (In thousands $) | | Jun. 30, 2019 | | | Jun. 30, 2018 | | | Jun. 30, 2019 | | | Jun. 30, 2018 | |
| SUMMARY INCOME STATEMENT | | | | | | | | | | | | | | | | |
| Commissions | | | 4,363 | | | | 7,374 | | | | 8,669 | | | | 15,637 | |
| less: Commission Expense | | | 1,801 | | | | 2,746 | | | | 3,665 | | | | 6,447 | |
| Net Commissions | | | 2,562 | | | | 4,628 | | | | 5,004 | | | | 9,190 | |
| Management fees | | | 422 | | | | 377 | | | | 794 | | | | 852 | |
| Interest income | | | 572 | | | | 210 | | | | 1,180 | | | | 501 | |
| Gains (losses) on proprietary investments | | | (214 | ) | | | (188 | ) | | | 83 | | | | (837 | ) |
| Other income (loss) | | | 52 | | | | 122 | | | | 117 | | | | 4,383 | |
| Total Net Revenues | | | 3,394 | | | | 5,149 | | | | 7,178 | | | | 14,089 | |
| | | | | | | | | | | | | | | | | |
| Compensation (1) | | | 2,195 | | | | 2,820 | | | | 4,603 | | | | 5,659 | |
| Placement and referral fees | | | 252 | | | | 84 | | | | 311 | | | | 226 | |
| Selling, general and administrative | | | 1,602 | | | | 1,827 | | | | 3,087 | | | | 3,150 | |
| Interest expense | | | 20 | | | | — | | | | 41 | | | | — | |
| Amortization and impairment charges | | | 105 | | | | 14 | | | | 291 | | | | 27 | |
| Other expenses | | | 7 | | | | 270 | | | | 7 | | | | 342 | |
| Total Expenses | | | 4,181 | | | | 5,015 | | | | 8,340 | | | | 9,404 | |
| | | | | | | | | | | | | | | | | |
| Net Income (Loss) before income taxes | | | (787 | ) | | | 134 | | | | (1,162 | ) | | | 4,685 | |
| Adjusted base EBITDA | | | 230 | | | | 1,396 | | | | 233 | | | | 3,523 | |
| * | See "Brokerage" in the business overview section on page 7 of this MD&A. |
| (1) | Compensation is presented excluding commission expense, which is reported net of commission revenue. |
3 and 6 months ended
Adjusted base EBITDA in the quarter was $0.2 million, down $1.2 million (84%) from the prior period, and was $0.2 million on a year-to-date basis, down $3.3 million (93%). The decrease was primarily due to lower net commissions on weak equity origination and placement activity. This decrease in net commissions more than offset lower salaries, annual incentive accruals and LTIP amortization.
Non-EBITDA highlights:
| • | Losses in the quarter and gains on a year-to-date basis on proprietary investments were the result of market value movement on equity kickers earned on private placements. |
| • | Other income in the prior period was primarily related to net sales proceeds received on last year's Sale Transaction in the first quarter of 2018. See Note 6 of the interim financial statements. |
| | 16 |
Corporate
This segment is primarily a cost centre that provides capital, balance sheet management and shared services to the Company's subsidiaries.
| | | 3 months ended | | | 6 months ended | |
| (In thousands $) | | Jun. 30, 2019 | | | Jun. 30, 2018 | | | Jun. 30, 2019 | | | Jun. 30, 2018 | |
| SUMMARY INCOME STATEMENT | | | | | | | | | | | | | | | | |
| Gains (losses) on proprietary investments | | | (436 | ) | | | (507 | ) | | | (591 | ) | | | (1,289 | ) |
| Gains (losses) on long-term investments | | | (116 | ) | | | 54 | | | | (231 | ) | | | 123 | |
| Other income (loss) | | | 386 | | | | (244 | ) | | | 504 | | | | 309 | |
| Total Revenues | | | (166 | ) | | | (697 | ) | | | (318 | ) | | | (857 | ) |
| | | | | | | | | | | | | | | | | |
| Compensation | | | 2,122 | | | | 2,938 | | | | 3,008 | | | | 4,690 | |
| Selling, general and administrative | | | 833 | | | | 1,076 | | | | 1,636 | | | | 2,190 | |
| Interest expense | | | 29 | | | | 15 | | | | 58 | | | | 81 | |
| Amortization and impairment charges | | | 557 | | | | 53 | | | | 1,040 | | | | 73 | |
| Other expenses | | | 262 | | | | 246 | | | | 596 | | | | 968 | |
| Total Expenses | | | 3,803 | | | | 4,328 | | | | 6,338 | | | | 8,002 | |
| | | | | | | | | | | | | | | | | |
| Net Income (Loss) before income taxes | | | (3,969 | ) | | | (5,025 | ) | | | (6,656 | ) | | | (8,859 | ) |
| Adjusted base EBITDA | | | (2,981 | ) | | | (3,897 | ) | | | (4,672 | ) | | | (6,325 | ) |
3 and 6 months ended
| • | Proprietary investments losses were due to market value depreciation of certain resource equity holdings. |
| • | Long-term investment losses were due to market value depreciation of our long-term investments. |
| • | Lower compensation expense was largely a result of lower LTIP amortization and lower annual incentive accruals. |
| • | Lower SG&A was largely due to the adoption of IFRS 16 and our on-going cost containment program. |
| • | Higher amortization was due to increased depreciation expense related to leases that were capitalized on the adoption of IFRS 16. |
| | 17 |
Dividends
The following dividends were declared by the Company during the 6 months ended June 30, 2019:
| Record date | | Payment Date | | Cash dividend per share ($) | | | Total dividend amount
(in thousands $) | |
| March 08, 2019 - Regular Dividend Q4 - 2018 | | March 25, 2019 | | | 0.03 | | | | 7,602 | |
| May 21, 2019 - Regular Dividend Q1 - 2019 | | June 5, 2019 | | | 0.03 | | | | 7,605 | |
| Dividends (1) | | | | | | | | | 15,207 | |
| (1) | Subsequent to quarter-end, on August 8, 2019, a regular dividend of $0.03 per common share was declared for the quarter ended June 30, 2019. This dividend is payable on September 3, 2019 to shareholders of record at the close of business on August 19, 2019. |
Capital Stock
Including the 9.5 million unvested common shares currently held in the EPSP Trust (December 31, 2018 - 9.9 million), total capital stock issued and outstanding was 253.5 million (December 31, 2018 - 253.0 million).
Earnings per share for the current and prior periods have been calculated using the weighted average number of shares outstanding during the respective periods. Basic earnings per share was $0.01 and $0.02 for the quarter and six months ended respectively, compared to $0.02 and $0.08 in the respective prior periods. Diluted earnings per share was $0.01 and $0.02 for the quarter and six months ended respectively, compared to $0.02 and $0.08 in the respective prior periods. Diluted earnings per share reflects the dilutive effect of in-the-money stock options, unvested shares held in the EPSP Trust and outstanding restricted stock units.
A total of 3.3 million stock options are outstanding pursuant to our stock option plan, of which 2.6 million are exercisable.
| | 18 |
Liquidity and Capital Resources
As at June 30, 2019, the Company had $22.5 million (December 31, 2018 - $Nil) outstanding on its credit facility, $5 million of which is due within 12 months and $17.5 million is due after 12 months (December 31, 2018 - $Nil and $Nil respectively).
The Company has a 5 year, $90 million credit facility with a major Canadian schedule I chartered bank. The facility consists of a $25 million term loan and a $65 million revolving line of credit. Amounts may be borrowed under the facility through prime rate loans or bankers’ acceptances. Amounts may also be borrowed in U.S. dollars through base rate loans. In the first quarter, the Company drew $25 million on the term loan portion of the credit facility to avoid its expiry and to partially fund anticipated growth in the business over the next 12-18 months. As at June 30, 2019, the Company was in compliance with all covenants, terms and conditions under the credit facility. Key terms under the credit facility are noted below:
Structure
| ◦ | 5-year, $65 million revolver with "bullet maturity" December 31, 2022 |
| ◦ | 5-year, $25 million term loan with 5% of principal amortizing quarterly |
Interest Rate
| ◦ | Banker Acceptance Rate + 170 bps |
Covenant Terms
| ◦ | Minimum AUM: $8.2 billion |
| ◦ | Debt to EBITDA less than 3.25:1 for first 18 months, after which, debt to EBITDA less than 2.50:1 |
| ◦ | EBITDA to interest expense more than 2.50:1 |
Commitments
Besides the Company's long-term lease agreements, there may be commitments to provide loans or make co-investments in lending LPs arising from our Lending segment or commitments to make investments in the net investments portfolio of the Company. As at June 30, 2019, the Company had $22.5 million in co-investment commitments from the Lending segment (December 31, 2018 - $38.7 million).
| | 19 |
Significant Accounting Judgments, Estimates and Changes in Accounting Policies
The interim financial statements have been prepared in accordance with IFRS standards in effect as at June 30, 2019, specifically, IAS 34 Interim Financial Reporting.
Compliance with IFRS requires the Company to exercise judgment, make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may vary. Except as otherwise noted, significant accounting judgments and estimates are described in Note 2 of the December 31, 2018 annual audited financial statements and have been applied consistently to the interim financial statements as at and for the three and six months ended June 30, 2019.
In Q1, 2019 the Company adopted IFRS 16 and IFRIC 23 Uncertainty over Income Tax Treatments ("IFRIC 23"). As a result, the Company changed its accounting policies. As permitted by the transition provision of IFRS 16, the Company elected not to restate comparative period results. Accordingly, all comparative period information is presented in accordance with previous accounting policies. The adoption of IFRS 16 and IFRIC 23 did not have a material impact on the Company's consolidated financial statements.
Managing Risk: Financial
Market risk
The Company separates market risk into three categories: price risk, interest rate risk and foreign currency risk.
Price risk
Price risk arises from the possibility that changes in the price of the Company's on and off-balance sheet assets and liabilities will result in changes in carrying value or recoverable amounts. The Company's revenues are also exposed to price risk since management fees, carried interests and performance fees are correlated with AUM, which fluctuates with changes in the market values of the assets in the funds and managed accounts managed by the Company.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will adversely affect the value of, or cash flows from, financial instrument assets. The Company’s earnings, particularly through its Lending segment, are exposed to volatility as a result of sudden changes in interest rates. Management takes into account a number of factors and is committed to several processes to ensure that this risk is appropriately managed.
Foreign currency risk
Foreign currency risk arises from foreign exchange rate movements that could negatively impact either the carrying value of financial assets and liabilities or the related cash flows when translating those balances into Canadian dollars. The Company's primary foreign currency is the United States Dollar ("USD"). The Company may employ certain hedging strategies to mitigate foreign currency risk.
| | 20 |
Credit risk
Credit risk is the risk that a borrower will not honor its commitments and a loss to the Company may result. Credit risk generally arises in the Company's on balance sheet loans, co-investments in lending LPs and its net investments portfolio.
Loans receivable
The Company incurs credit risk primarily in the on-balance sheet loans of Sprott Resource Lending Corporation ("SRLC") and through co-investments made in the lending LPs managed by SRLC. In addition to the relative default probability of SRLC borrowers (both directly via on balance sheet loans and indirectly via borrowers of the lending LPs we co-invest with), credit risk is also dependent on loss given default, which can increase credit risk if the values of the underlying assets securing the Company's loans and co-investments decline to levels approaching or below the loan amounts. A decrease in commodity prices may delay the development of the underlying security or business plans of the borrower and could adversely affect the value of the Company's security against a loan. Additionally, the value of the Company's underlying security in a loan can be negatively affected if the actual amount or quality of the commodity proves to be less than originally estimated, or the ability to extract the commodity proves to be more difficult or more costly than originally estimated. During the loan origination process, management takes into account a number of factors and is committed to several processes to ensure that this risk is appropriately managed.
Collectability of loans
Besides the above noted measures we take to manage credit risk, the Company will report on credit risk in the notes to the annual consolidated financial statements and records expected credit loss provisions to ensure the loans are recorded at their estimated recoverable amount (i.e. net of impairment risk we believe to exist as at the balance sheet date and in accordance with IFRS). Actual losses incurred in the loan portfolio could differ materially from our provisions. Management takes into account a number of factors and is committed to several processes to ensure that this risk is appropriately managed.
Net investments
The Company incurs credit risk when entering into, settling and financing transactions with counterparties. Management takes into account a number of factors and is committed to several processes to ensure that this risk is appropriately managed.
Other
The majority of accounts receivable relate to management fees, carried interest and performance fees receivable from the funds, managed accounts and managed companies managed by the Company. These receivables are short-term in nature and any credit risk associated with them is managed by dealing with counterparties that the Company believes to be creditworthy and by actively monitoring credit exposure and the financial health of the counterparties.
Liquidity risk
Liquidity risk is the risk that the Company cannot meet a demand for cash or fund its obligations as they come due. The Company's exposure to liquidity risk is minimal as it maintains sufficient levels of liquid assets to meet its obligations as they come due. Additionally, the Company has access to a $90 million committed line of credit with a major Canadian schedule I chartered bank. As part of its cash management program, the Company primarily invests in short-term debt securities issued by the Government of Canada with maturities of less than three months.
The Company's exposure to liquidity risk as it relates to loans receivable arises from fluctuations in cash flows from making loan advances and receiving loan repayments (both directly via on balance sheet loans and indirectly via borrowers of the lending LPs we co-invest with). The Company manages its loan commitment liquidity risk through the ongoing monitoring of scheduled loan fundings and repayments ("match funding") and through its broader treasury risk management program and enterprise capital budgeting.
Financial liabilities, including accounts payable and accrued liabilities and compensation and employee bonuses payable, are short-term in nature and are generally due within a year.
| | 21 |
The Company's management team is responsible for reviewing resources to ensure funds are readily available to meet its financial obligations (e.g. dividend payments) as they come due, as well as ensuring adequate funds exist to support business strategies and operations growth. The Company manages liquidity risk by monitoring cash balances on a daily basis and through its broader treasury risk management program. To meet any liquidity shortfalls, actions taken by the Company could include: syndicating a portion of its loans; slowing its lending activities; cutting its dividend; drawing on the line of credit; liquidating net investments; and/or issuing common shares.
Concentration risk
A significant portion of the Company's AUM as well as its net investments and loans are focused on the natural resource sector, and in particular, precious metals related investments and transactions. In addition, from time-to-time, certain net investment and loan positions may be concentrated to a material degree in a single position or group of positions. Management takes into account a number of factors and is committed to several processes to ensure that this risk is appropriately managed.
Disclosure Controls and Procedures ("DC&P") and Internal Control over Financial Reporting ("ICFR")
Management is responsible for the design and operational effectiveness of DC&P and ICFR in order to provide reasonable assurance regarding the disclosure of material information relating to the Company. This includes information required to be disclosed in the Company's annual filings, interim filings and other reports filed under securities legislation, as well as the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
Consistent with National Instrument 52-109, the Company's CEO and CFO evaluate quarterly the DC&P and ICFR. As of June 30, 2019, the Company's CEO and CFO concluded that the Company's DC&P and ICFR were properly designed and were operating effectively. In addition, there were no material changes to ICFR during the quarter.
Managing Risk: Non-financial
For details around other risks managed by the Company (e.g. confidentiality of information, conflicts of interest, etc.) refer to the Company's annual report as well as the Annual Information Form available on SEDAR at www.sedar.com.
Additional information relating to the Company, including the Company's Annual Information Form is available on SEDAR at www.sedar.com
| | 22 |
