Uncertain outlook for star-studded Sprott Inc.

Date: Friday, August 7, 2009
Author: Shirley Won, Globe & Mail

When Sprott Inc. went public last year, there was plenty of hoopla surrounding the firm with its star hedge fund managers - including Eric Sprott - and its ability to attract other top-performing peers.

But shares of the Toronto-based investment manger have struggled amid the fallout from the market collapse, the unexpected recent resignation of hedgie Jean-François Tardif and continuing net redemptions.

Sprott also reported yesterday that second-quarter profit plunged 51 per cent from a year ago to $5.6-million, while assets sank to $4.4-billion from $7.7-billion from the same time last year.

It hasn't helped that Sprott's larger funds are run with the CEO's bearish views on the stock market, and they have underperformed recently in the face of a spectacular rally.

Shares of Toronto-based Sprott, which went public at $10 a share in May, 2008, fell 3.1 per cent yesterday to close at $3.44 on the Toronto Stock Exchange. And the only analyst recommendations now are two "sells" and four "holds," according to Bloomberg.

RBC Dominion Securities Inc. analyst Geoffrey Kwan was the latest to slap an "underperform" - essentially a sell rating - on Sprott in a report this week, but maintained his one-year target at $4.25 a share.

"We believe Sprott's shares are fairly valued," he said.

"Signs of market performance consistent with Sprott's bearish thesis (ie. long precious metals, short financial and housing stocks) would be positive for Sprott's shares."

While Mr. Sprott's bearish market call was prescient last year, his bullish stance on different commodities hasn't always worked out. Plunging resource prices forced him recently to kill his molybdenum closed-end fund - Sprott Molybdenum Participation Corp. - launched in 2007. Sprott's flagship $1.2-billion Sprott Canadian Equity Fund, which focuses on natural resources, has posted a one-year loss of 45.6 per cent for the year ended June 30. Over the same period, his $489-million Sprott Hedge LP I Fund is off 26.2 per cent, while his $532-million Sprott Hedge LP II was down 20.2 per cent.

"The hedge funds have not fared well in this quarter due to the massive rally in the market" fuelled by expectations of an economic rebound fuelled by government stimulus programs, Mr. Sprott said yesterday during a conference call with analysts. "For my part, I am not buying into this being a sustainable recovery."

Mr. Kwan and other analysts sees limited upside for Sprott shares because they require some torque from performance fees. The "rally in equity markets resulted in many Sprott funds being significantly below their high-water markets," and that means reduced potential for performance fees for this year, he wrote.

Uncertainty also lingers in the timing of a turnaround back to net sales and performance in funds run by Mr. Tardif, he said.

Sprott executives reported net redemptions of $43-million in the latest quarter, but indicated it was mainly related to funds managed by Mr. Tardif.

Mr. Tardif's Sprott Opportunities Hedge Fund LP, Sprott Opportunities RSP Fund, Sprott Opportunities Capital Fund and Sprott Opportunities Offshore Fund are now being run by Charles Oliver and Jamie Horvat, who were wooed away from AGF Management Ltd. last year to Sprott.

GMP Securities analyst Stephen Boland is maintaining his "hold" rating, but lowered his one-year target on Sprott to $3.75 a share from $4.00.

The analyst said he has "lowered his performance fee forecast materially" based on the year-to-date performance of the Sprott mutual and hedge funds.

While some smaller funds like Sprott Gold and Precious Metals, Sprott Energy, Sprott Small Cap Equity are outperforming their benchmarks this year, most of the assets are in Sprott Canadian Equity and the two Sprott Hedge LP funds that "are not currently eligible to earn performance fees," Mr. Boland wrote yesterday in a note to clients.

"Sprott is currently the only asset manager in our coverage universe that did not see assets under management or share price appreciation during the second quarter," he said. "We believe that future success may rely heavily on a significant market correction."