Sprott Falls in Trading Debut After C$200 Million IPO

Date: Friday, May 16, 2008
Author: Frederic Tomesco and John Kipphoff, Bloomberg.com

(Bloomberg) -- Sprott Inc. dropped on the Toronto Stock Exchange in its trading debut following the biggest initial public offering in Canada this year, as some investors said the stock may be expensive relative to rivals.

The hedge fund manager fell 16 cents, or 1.6 percent, to C$9.84 by 4:16 p.m. Earlier, the stock fell to C$9.31 from its IPO price of C$10. About 12.9 million shares traded, making Sprott the second-most-heavily traded stock in Canada.

Founder Eric Sprott, 63, and other shareholders raised C$200 million ($200 million) by selling shares, tapping demand for the firm's mutual funds and hedge funds that invest in resource and mining stocks.

The IPO price values Sprott at about 10 times 2007 earnings before interest, taxes, depreciation and amortization, according to sale documents. That's more than IGM Financial Inc., Canada's biggest mutual-fund company, and Gluskin Sheff & Associates Inc., a rival Canadian money manager that went public two years ago. IGM trades at 7.8 times Ebitda, compared with 4.5 times for Gluskin, sale documents show.

``The valuation seems a little high, which is why we didn't buy the stock,'' said Martin Dufresne, a fund manager with Fiera Capital Inc. in Montreal, which oversees about C$20 billion. ``Eric Sprott has a great track record of picking winning stocks and investment sectors, but the stock isn't cheap.''

Bankers

The IPO, led by Cormark Securities Inc. and TD Securities, is the biggest in Canada since Franco-Nevada Corp. raised C$1.26 billion in December. The banks will share fees of about C$10 million, or 5 percent of the proceeds, according to a regulatory filing last week. The lenders have the option to buy an additional 3 million shares by June 14.

The sale values Sprott, which has 72 employees, at about C$1.5 billion, or about twice the market value of Gluskin. Toronto-based Gluskin manages C$5.1 billion, compared with Sprott's C$6.8 billion. Gluskin's shares have risen 21 percent since the IPO.

``It's not to say that Sprott won't end up being a very successful long-term investment, but in the short term, the people who anticipated making a quick killing are going to be disappointed,'' said Gavin Graham, Chief Investment Officer at Guardian Group of Funds Ltd. in Toronto, which manages about $5.5 billion and didn't buy Sprott.

Sprott had net income of C$42.3 million in 2007 on revenue of C$227.6 million. A year earlier, profit was C$34.8 million on revenue of C$198.6 million, according to the sale documents. The firm won't get any money from the IPO, with all proceeds going to the selling shareholders.

Canadian Equity

The company's biggest fund is the C$2.1 billion Sprott Canadian Equity Fund, 88 percent of which is invested in energy, metals and mining. It has returned about 30 percent annually in the past five years, outstripping the 19 percent gain for the S&P/TSX index.

Most of the firm's revenue comes from management fees, which are calculated as a percentage of assets under management, and performance fees.

``Because of the large element of performance fees in their revenue, their earnings are much more volatile and less predictable than other similar listed companies,'' such as Seamark Asset Management Ltd. and Saxon Financial Inc., said Graham. ``With the performance fees, you have no clue whether the company is going to be able to beat its benchmarks.''

To contact the reporter for this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net.