July 17, 2023 | (17 mins 28 secs)
John Ciampaglia, CEO of Sprott Asset Management, sits down with James Connor of Bloor Street Capital to discuss the current state of the gold market, the resilience of uranium compared to other commodities, the growth of the battery metals sector and Sprott’s focus on providing investors with access to energy transition investments.
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John Ciampaglia: Who would have thought lithium companies could be some of the fastest growing growth companies, but they are.
James Connor: John, Sprott has over $20 billion in assets under management, allocated between many different assets: gold, silver, uranium and battery metals. I want to discuss all these asset classes, but given that gold and silver are the largest portion of your AUM, why don't we start right there?
I'm just curious, given what's happening with the global economy, with interest rates, inflation, what type of flows are you seeing in gold?
John Ciampaglia: It's been a weird year, obviously, for just about all asset classes, particularly for gold in the last 10 to 12 months, where it had a bit of a swoon and it's been clawing its way back recently to $2,000 again, which is great. We're seeing some investor flows and interest returning to the gold sector. But I would say it's very muted relative to the strength and the price. We constantly want to know where the investor money is going and it is going into money market and fixed-income funds. These funds are getting the lion's share of the capital flows right now, everything from retail to institutional. Why? You're getting 5% on risk-free money or 7% or 8% on bonds. [These yields] have not been available to investors for many years and are attracting much investor interest in the short term.
James Connor: One of the things that really surprises me is that even though gold is at or near all-time highs, the gold stocks are not participating in this rally. Many of them are down on the year, including many large producers. Many producers are even trading at a discount to their NAVs. Why do you think that is? Why isn't there more interest in these gold equities?
John Ciampaglia: I think people generally are very nervous about the economy. I have talked to several institutional investors and many are in a very risk-off mode right now. They're just not sure whether the Fed [U.S. Federal Reserve] will continue to break things, whether we're going to have a recession and whether that will pull this equity market down. Until we get some more certainty, I think investors will continue to sit on the sidelines in cash, making 5% while they wait. That's taken a lot of interest out of many different pockets.
If you look at the broader equity benchmarks, they all look great this year. But the returns are being driven by about eight stocks. If you don't own those eight stocks, the returns are flat or down for the year. It's very misleading in terms of what's driving the equity returns so far in 2023.
James Connor: You raise a very good point because it is very misleading. The Nasdaq is up 30% on the year. The S&P 500 is up 15% on the year. You have some stocks like Facebook that are up, I believe, 150% on the year. Nvidia is up similarly. It's over a trillion dollars. What will it take to get investors back into gold and silver?
John Ciampaglia: I think the number one thing is the Fed. The Fed has sucked all the oxygen out of the room for investors. They've created so much uncertainty with their hawkish tone and the ongoing interest rate saga. Are they done? Are they pausing? Are they pivoting? Until that happens, I think people will sit on the sidelines. It's frustrating because many of these sectors and commodities have very positive fundamentals and very good long-term growth stories. But people are not focused on the long term right now. They're focused very much quarter to quarter on how their portfolios are doing.
James Connor: I want to move on now and discuss uranium. It is performing very well. The long-term contracting price is doing very well. The spot uranium price is up 15% on the year. I'm just curious about what you see regarding flows into these products.
John Ciampaglia: Uranium continues to be quite resilient. I say that because many commodity prices this year have had significant corrections, whether it’s lithium, nickel or cobalt.
Why is uranium performing well this year? It's being driven by the utilities which are finally rebuilding inventories and buying significant amounts of uranium. Last year we saw the highest amount of uranium contracted in 10 years at about 125,000,000 pounds. So far this year, we're at 107,000,000. This is important because we want to know if we're returning to replacement rate purchasing. Last year, even at 125,000,000, that was below the annual replacement rate for utilities. This year we might just hit it. [Data Source: UxC Market Outlook Q2 2023]
But there are still pockets of the world, much to our confusion, that are still not buying lots of uranium. For example, U.S. utilities last year purchased less uranium than the year before, which is odd given uranium's price appreciation last year, the uncertainty and the Russa-Ukraine war and the threat of sanctions against Russia. You would think U.S. utilities would be more aggressively buying. We think they're finally starting to move, which is reflected in the year-to-date numbers.
James Connor: John, you mentioned that there's a lot of interest coming from utilities and we see that both in the long-term contracting price and the uranium spot price. But when you look at the uranium mining equities, we're not seeing that same interest from investors. Why do you think that is?
John Ciampaglia: The number one challenge we see is that the depth of the liquidity among many of these uranium stocks is not yet where it needs to be for many of the larger institutions to get involved. We often talk to institutions that are very interested in buying physical uranium. They're very interested in buying some of the large-cap mining stocks and some of the late-stage development companies.
But for smaller uranium mining companies, it's hard for these big institutions to get a position in them. They have so many risk management and liquidity parameters right now that prevent them from being invested. We see, with our clients, a much greater skew of institutional investors interested in Sprott Physical Uranium Trust and a much higher skew of retail investors interested in our uranium mining ETFs that we have in both the U.S. and Europe.
James Connor: John, I want to ask about the Sprott Physical Uranium Trust or "SPUT". It has been trading at a discount, which would imply that there's not much interest in that product from investors. Maybe you can touch on that and tell us what you're seeing or hearing from investors.
John Ciampaglia: We have a very large investor base in SPUT. We're not seeing a lot of selling by that investor base, but we're not seeing much buying either. I think that's why we've had a discount for the last few months. We were at a premium earlier in the year and were pretty active in buying uranium. But what's interesting to us is that even though we haven't been overly active in the market, I think the news flow and the utilities buying uranium have benefited the sector.
James Connor: John, you and your team are excellent at creating new products for investors to capitalize on new investment themes. One of the themes that we've seen in the last couple of years is anything to do with energy transition. You have created some new products for investors to invest in. Can you tell us about these new products that you offer?
John Ciampaglia: The new products are a byproduct of the success of the Sprott Physical Uranium Trust. Our conversations with institutional investors made us realize it wasn't just about uranium. They were interested in many other commodities and mining sectors that have a role in the global energy transition, especially in mining and metals, which tend to be very technical subjects. Most investors do not want to do the work on individual companies. They're very comfortable looking for trends and themes and buying a basket of companies. That's where the ETFs are helpful tools for investors to get diversified company exposure within a theme.
We've noticed over the years at Sprott, given our expertise in metals and mining, that some of these offerings out in the marketplace are not what they appear to be. When we dissect them, we can see potential issues. A good example is a copper ETF we dissected for an institutional client. We explained that this copper miners ETF has only a 58% exposure to copper, which may mean you will have unintended consequences and exposures to other things outside copper. That completely blew them away. My point is that you need to know what you're doing in the mining sector to build these products, even if they're passively index based, because picking the securities, understanding what exposures you get, and some of the unattended exposures are very important.
Our team has done a lot of work in partnership with Nasdaq, and together we built a suite of different indices that give investors access to lithium producers, nickel producers, copper and junior copper producers and junior uranium miners. And we have a senior uranium miners ETF as well.
We have created a strong suite of energy transition-related ETFs available in the United States and Europe through our partnership with HANetf, which offers an energy transition materials ETF and a uranium miners ETF to European investors.
James Connor: What's driving the whole battery metals sector is this growth in EVs (electric vehicles). It's gone from 3 million in global sales in 2020 to 10 million in 2022. Do you see significant flows into these products because of this growth in EVs?
John Ciampaglia: We’re definitely starting to see flows. I think, more importantly, we're getting the right investors reaching out and asking the right questions. I say that because this is a relatively new category. If you think about Tesla, it was the only EV company available to investors just a few years ago. If you look at their sales, they were small four or five years ago.
As these industries grow, EVs and the supply chains for producing battery cells and all the related infrastructure will continue to attract investors because they see it as a growth sector. Given that the market environment has been muted in terms of company earnings and revenues in the last couple of years, EVs are a bright spot.
Who would have thought lithium companies could be some of the fastest-growing growth companies? The amount of production they are delivering right now and the price increases over the last three to four years have turned energy transition-related companies into growth engines, and that's attracting investor interest.
James Connor: What about the lithium price being very volatile in the last few quarters? I believe it peaked at around US$80,000 a tonne in Q4 of 2022 and fell to $35-$40,000 a tonne in the first half of this year. Has that impacted your flows at all?
John Ciampaglia: I think the price volatility reflects a very new and fast-growing lithium mining industry. If you think about the copper business, we've been mining copper for thousands of years. It's a more mature market with very established supply chains. If you think about the lithium market, most of the lithium today is produced by a handful of companies and countries. It is very small, is growing quickly, and has had to deal with incredible growth last year in EV sales. But if you take a step back and compare the price of lithium in 2020, which was around $17,000 per tonne, to $80,000 a metric ton, nobody, including us, thought was sustainable. This reflects a supply shortage and squeeze.
The lithium prices corrected down to $25,000 and we're now back to $42,000 a tonne. It's been very volatile. But I think that even at $42,000, lithium companies are well positioned to make profits potentially. The price and the demand are only going up over time. There is a lot of EV demand forecast as the world transitions away from internal combustion engines (ICEs).
Lithium is one of the minerals people are most concerned about in terms of whether we will have enough supply. The reason is that most of the future lithium supply that the world will need will come from greenfield production. These are either lithium hard rock or brine deposits that are not yet in production. A lot will depend on bringing these assets to market will dictate the lithium price. It will be volatile, but I think the demand story is intact.
James Connor: John, you and your team spent much time on the road marketing in North America, South America and Europe. What are you hearing from investors? What product are they asking most about? Would it be precious metals, battery metals or uranium?
John Ciampaglia: We see a lot of interest in energy transition materials. It's a global set of investors. Many family offices, institutions and hedge funds. They're very intrigued by this story because they view it as a long-term secular growth story.
There are not many things you could point to and say this sector will grow for the next 10, 15, 20 or 30 years. If the world is serious about hitting some of these net-zero targets in 2050, the amount of CapEx and infrastructure investment that will be needed is enormous.
Investors are following the money, and when you have the European Union, even the Canadian government, and the U.S. government flashing all this money in front of companies to crowd in private capital with public capital, it's a very powerful investment signal.
Last week, the U.S. Department of Energy extended a $9 billion loan to Ford for EV production. That's just one of the countless announcements we follow between OEMs [original equipment manufacturers] or different Korean battery-making companies announcing plants in Canada, the U.S. and Europe. Investors see the shift, the capital, the financial incentives, the regulatory policy incentivizing these investments, and they want to be where the money's going.
On the flip side, I think gold always has a place in people's portfolios as an anchor type of investment. We've seen significant capital come into gold in the last three years. It's slowed down the last 12 months, but we've seen a huge uptick in physical gold. Our physical gold trust [Sprott Physical Bullion Trust] is a little over $6 billion.
James Connor: Sprott is always involved in creating new products to capitalize on various investment themes. What new products can we expect from Sprott in the coming months?
John Ciampaglia: This energy transition theme is not going away. It will be very volatile from quarter to quarter, but we think it will be a multi-decade transition. We're constantly looking at the landscape and trying to identify gaps that investors are interested in that we could bring our knowledge to bear.
We don't want to be a fund supermarket and we are very selective in what we do. We believe there are more products to bring to market, particularly in terms of physical commodities, but we need to wait for better market conditions. Many of these products need IPOs [initial public offerings] to get them off the ground, and we're just not in an attractive IPO market environment right now. We're monitoring the condition, but it's hard to say what's imminent.
James Connor: John, that was a great update on what's happening at Sprott. Thank you very much.
John Ciampaglia: Thank you for having me.
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