Sprott Acquires Management of Central Fund of Canada

Transaction Highlights:

  • Sprott Asset Management (“SAM”) to acquire common shares of Central Fund of Canada Limited (CFCL) and right to administer and manage CFCL’s assets for C$120 million in cash and stock.
  • Upon completion of the transaction, all CFCL Class A shares to be exchanged for units in a new Sprott Physical Gold and Silver Trust.
  • US$300 million in value expected to be realized for CFCL class A shareholders, relative to 9% pre-announcement net asset value (“NAV”) discount.
  • C$4.3 billion in Assets Under Management (“AUM”), and solidifies Sprott’s position as a global leader in precious metals investments
  • Highly synergistic with Sprott’s current physical bullion product suite.
  • Expands Sprott’s client base by approximately 90,000 investors.

TORONTO, October 2, 2017 – Sprott Inc. (TSX:SII) (“Sprott” or the “Company”), a global leader in precious metal and real asset investments, announced today that it has entered into an agreement with Central Fund of Canada Limited (NYSE: CEF, TSX:CEF.A) (“CFCL”), CFCL’s administrator (the “Administrator”), and the controlling shareholders of CFCL and the Administrator, to acquire the common shares of CFCL and the right to administer and manage CFCL’s assets, and move CFCL’s class A shareholders to a new Sprott-managed trust. The transaction is expected to drive long-term revenue and earnings growth for Sprott and unlock significant value for the class A shareholders of CFCL.

This transaction reinforces Sprott’s global leadership in precious metals, doubling our physical bullion holdings to more than C$8.5 billion and building our total AUM to approximately C$11.5 billion. Importantly, it demonstrates how we’re executing on our strategy of increasing our precious metal sand real assets to meet growing investor interest in the sector.
— Peter Grosskopf, CEO of Sprott

Under the agreement, (i) CFCL’s class A shares will, effectively, be exchanged for units of a newly-established trust (the “New Sprott Trust”), on a net asset value to net asset value basis, which will acquire substantially all of the existing assets and liabilities of CFCL and be managed by SAM and (ii) Sprott will acquire the common shares of CFCL and the right to administer and manage CFCL’s assets for an aggregate amount of C$105 million in cash and C$15 million of Sprott common shares. The controlling shareholders of the Administrator will also receive a one-time, performance-based cash payment of at least C$5.0 million on the first anniversary of the closing of the transaction.

With this transaction, we will add another best-in- class precious metals vehicle to our product lineup, also featuring our industry-leading physical redemption feature, while materially increasing our revenue from this business line. Based on the historical trading of SAM-managed physical bullion trusts at or near the value of the metal that underlies them, we expect to unlock approximately US$300 million in value for CFCL’s class A shareholders.
— John Ciampaglia, Senior Managing Director of Sprott and CEO of SAM.

The New Sprott Trust will be substantially similar to the existing SAM-managed physical bullion trusts, Sprott Physical Gold Trust (NYSE Arca:PHYS, TSX:PHYS) and Sprott Physical Silver Trust (NYSE Arca:PSLV, TSX:PSLV), including SAM’s best-in- class physical bullion redemption feature. The New Sprott Trust’s management fee will be 40 bps of NAV, which is comparable with Sprott Physical Gold Trust and Sprott Physical Silver Trust.

Transaction Summary

The transaction will be implemented pursuant to a plan of arrangement under the Business Corporations Act (Alberta) and is expected to close in the first quarter of 2018, subject to the satisfaction of customary conditions, including receipt of regulatory, securities commission and stock exchange approvals, Alberta court approval and approval by the class A and common shareholders of CFCL. Holders of approximately 85% of CFCL’s common shares have entered into agreements with Sprott agreeing to vote all of their common shares in favour of the transaction. Sprott’s cash on hand will be used to finance the cash portion of the purchase price and the approval of Sprott shareholders is not required.

Market Alert - Gold

Record Net Short Position and Record Bearish Sentiment Fuel For Next Rally

The latest Commitment of Traders report shows that the small speculators in the gold market are now all crowding together on the short side of the market. They have now established a record short position against gold. These dramatic events often occur at major trend changes and provide the fuel for major rallies. If gold starts to move higher from here, and I expect that it will, a lot of short sellers will be trapped on the wrong side of the market and we could see fireworks as they all try to unwind at once.

Meanwhile, the 'smart money' commercial traders (the bullion banks), who usually short gold as a hedge against their clients' (mining companies) long positions, have closed almost their entire short position. The commercial traders recognise the gold market has been completely sold out and the next move is likely higher.

 

Gold commercial traders are almost flat now while the small gold speculators have a record net short position in place. 

Public opinion on gold is now at a record bearish extreme.

Market Alert - Precious Metals

The action in the precious metals markets over the last couple of days is suggesting a turn may be just around the corner. On Sunday night, the silver market opened and silver was clocked for -10% in about 5 minutes. Usually when this happens (silver is a small market and can be pushed around by aggressive pit traders) the weakness follows through into the next day's session and the rout typically spreads to the silver miners and across the precious metals sector in general. 

This time however, silver retraced the entire decline and closed +3% on the day and the mining stocks followed suit with across the board gains (Monday 20th May). If this rally sticks over the next few days it could signal that the painful 2+ year correction in the sector is finally at an end. The next leg in the bull market in precious metals could be about to kick off.

The 2-year bear market in silver could be over, which means the next leg of the bull market is about to start and a test of the $50 area is likely.

The 2-year bear market in precious metals is close to ending, which means a challenge of the 2011 all time highs could lie ahead later this year or in 2014.

Market Alert - Precious Metals

The Hulbert Financial Digest recently reported that newsletter writers focused on the precious metals sector are now recommending that investors take a 44% net short position in gold, an all time low. Jason Goepfert at Sentimentrader tracks the data and has posted the following chart this week.

Gold sentiment has reached an all time low

Market Alert - Precious Metals

Investors are betting against the precious metals for first time since 1990

Sentiment levels against the precious metals has reached a historic extreme. Small speculators, for example, are throwing in the towel en masse. For the first time since 1990, small speculators in the futures market are now betting against the precious metals. Small specs have moved from holding a net long position of 85,000  contracts in October 2012 to a net short position today.

Small speculators betting against the precious metals for the first time since 1990.