Peter Grosskopf, CEO of Sprott, joins Jon Erlichman of BNN Bloomberg to discuss his expectations for the gold sector in 2020, and why Sprott has bulked up its investment team by acquiring Tocqueville Gold Strategies.
Jon Erlichman BNN Host: A major player in precious metals investing is bulking up its team of fund managers. Sprott has closed its acquisition of Tocqueville Gold Strategies and it is expecting to see more M&A and potentially more gains in the price of gold, which has been quite hot of late. Joining us to talk more about it is Peter Grosskopf, the CEO of Sprott. Peter, now that this deal has closed, can you discuss Sprott’s reasoning for bulking up its team?
Peter Grosskopf, Sprott CEO: At Sprott, we are focused on managing precious metal assets around the world and this was a unique opportunity in the U.S., where most of our clients are. [Tocqueville Gold Fund] was one of the oldest and most respected mutual funds for gold equities in the U.S. We're delighted to have been able to lift that team from Tocqueville, and it gives us about US$1.8 billion in new assets and managed equities.
Jon Erlichman: That’s a big number. In terms of what you think the investor interest is in this gold market, we can pick any lane. We could talk about the gold price, or we could talk about gold mining stocks. What has been the most dominant topic in the gold conversation?
Peter Grosskopf: Although gold is in recovery and the price is acting well, and considering the macro, we believe it will continue to shine, but by contrast gold equities have not been popular. This is especially true among retail investors, and they've largely ignored the sector. But we see the potential for a massive recovery in retail interest in the sector.
Jon Erlichman: Interesting, we've talked about the evolution of funds and the rise of exchange traded funds and the ability to have that quick access to gold, which has been a key part of Sprott’s strategy as well and keeping fees down. There are many options these days for investors, compared to say buying shares of a traditional gold miner.
Peter Grosskopf: That's right. Most of that interest in equities has gone into GDX [VanEck Vectors Gold Miners ETF], which has taken the bulk of inflows and we think there's going to be a return to active investing in the sector. M&A [merger and acquisitions] has been a large part of the reason that we think the tide has turned. You can pick good, undervalued mining companies that have been ignored by GDX and potentially do well.
Jon Erlichman: Let's dig into that. We've heard this from you before, the idea that if you're a smaller player in the industry, your costs are going to be higher than the big players in the industry, which is one of the potential catalysts for deals. I guess that's also impacting how you position portfolios, the kind of investments you're making.
Peter Grosskopf: Yes, and I think it makes sense to try and run ahead of the indexation by larger companies and their acquisition strategies. It makes sense to pick the targets in essence as opposed to those that are making the moves to buy them.
Jon Erlichman: Is this mostly a North American activity?
Peter Grosskopf: No, it's completely global. We’re seeing it around the world.
Jon Erlichman: What are you looking for in smaller gold mining companies? Maybe they're less covered? Everybody understands the story of the big gold miners, but maybe less so for the smaller names.
Peter Grosskopf: You are looking for companies that have had some challenges developing individual mines, and their costs of capital are high. They've had some issues perhaps with timing; because we all know these projects are taking longer and longer to develop. They're unloved, they're uncovered and yet they might have a quality project with a long reserve life at decent costs. That's the kind of sitting duck for the big companies to acquire.
Jon Erlichman: After a big year of deals in 2019, it sounds like you're expecting there will be another big deal in 2020?
Peter Grosskopf: I think there will be even more deals in 2020, maybe not the same dollar value because the mega deals were done last year. But we are likely to see many of these individual single mine, junior miners getting acquired.
Jon Erlichman: What is the determining factor for whether a deal happens? Earlier in the program, we were talking about Kirkland and Detour. Sometimes, there's an idea behind the scenes of bringing companies together and maybe people on different sides have different opinions about it. How do you get to the finish line and a deal ultimately comes together?
Peter Grosskopf: Each transaction is very different, but I think governance is improved. I think shareholders are having more impact on what boards and CEOs will do.
Jon Erlichman: Do you feel like that as a firm as well?
Peter Grosskopf: I believe so. The differentials have never been bigger between the large companies and the small companies. This puts pressure on the small guys to consider some deals.
Jon Erlichman: At what point do you as an investor knock on that door and offer your perspective? Is it sort of a balancing act?
Peter Grosskopf: We hope to not interfere in the regular course of business, but some events sometimes require us to take a more active stance and put some pressure on a board or a CEO.
Jon Erlichman: You talked about the dynamics of possible deals. What about gold itself? Which as we noted, you're expecting gold prices to continue to climb. 2019 was a big year, winning back some of the people who were focused on other stuff, such as Bitcoin. Can you give us a sense of how you're viewing investing in gold bullion right now?
Peter Grosskopf: We all know that gold had a strong year last year, and that was in an environment where it should not have done that well. The U.S. dollar was strong, and the economy was relatively strong. All the financial markets were strong. There was no real stress that was emerging. I think the chances are very good now that gold will potentially have a real outperformance, that there's been building momentum and that we could see an even better year in 2020.
Jon Erlichman: What would be the biggest catalyst for that? Is it this low interest rate environment, the global uncertainty, or maybe if stocks pull back, which some people seem to be concerned about?
Peter Grosskopf: The catalyst could be several different things. Low interest rates and low real rates will certainly help gold. I think it could be a crisis of confidence in a budget deficit or government that's gone too far on the debt side, or it could just be a pullback in other markets. Coming back to gold’s traditional role as an insurance asset, I think the odds for an insurance type event are fairly high.
Jon Erlichman: Are you making any forecasts on where you see bullion going?
Peter Grosskopf: I think it's going to have a really good year this year. Over the next couple of years, I would be surprised if we didn't see it take a run towards $2,000.
Jon Erlichman: Based on that pricing, does that impact the way that deals get done?
Peter Grosskopf: Absolutely because no quality asset will be left behind. I think that money could potentially pour into the sector. It is a very small sector from a capitalization perspective and as you get this trickle-down effect from the large caps, money will start to chase the growing companies, the emerging companies. I expect that it is likely to happen during a good strong bull market in gold.
Jon Erlichman: You’ve got this bulked up team now, so what should we be watching for with Sprott? Is it putting more money to work in the markets, offering new products?
Peter Grosskopf: Sprott has been a stealth growth story in the last two or three years. We've come from well under $10 billion, and now we're knocking on the door of CAD$15 billion. We are growing as an asset management firm. I think that shows that our clients are engaging with us and putting more money to work. From Sprott's perspective, we're like a royalty on the management of assets in the gold sector, and we want our shareholders to get the rewards of that by seeing a nice dividend, as well as some share price growth along with the asset growth.
Jon Erlichman: Finally, let’s address the idea of investors wanting lower fees. Is that something longer term that you're thinking a lot about, how those dynamics are going to play out?
Peter Grosskopf: Certainly fees have been a challenge for all asset managers, but for us, we're in a niche sector, and I think we have invested heavily in our team. Our investors seem more interested in “the performance” as opposed to pushing us on fees.
Jon Erlichman: Peter, nice to get your perspective.
Peter Grosskopf: Thanks for having me.
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