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Sprott Inc. sees 60% jump in first-quarter profits

Sprott Inc. CEO Peter Grosskopf .

Fred Lum/Fred Lum/The Globe and Mail

Stock markets have been propped up by central banks, and will remain "vulnerable to a downturn in the second half of the year" without further government stimulus, warns the chief executive officer of Sprott Inc.

"We don't believe that the U.S. recovery is supported by strong fundamentals, and the rally may already be fading in the fact of worsening economic data and the deteriorating situation in Europe," Peter Grosskopf told analysts in a conference call on Wednesday.

"Our [investment]position generated strong performance during January and February, but by March, a steep sell-off in equities began to hurt our results," he said. "Subsequently, several of our larger funds closed the quarter in negative territory."

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He made the comments after Sprott, a wealth-management firm whose macro-economic views drive the strategy of most of its funds, reported a 60-per-cent jump in first-quarter profit. The increase was helped by corporate investment gains and rising revenue.

Additional offering of units in Sprott's closed-end bullion funds help boost the firm's net sales to $540-million in the quarter from $260-million a year ago. But there was $171-million in net outflows in existing Sprott mutual funds, hedge funds, managed accounts and offshore funds.

"The lack of performance in our major funds…has affected both our fund sales and our share price," Mr. Grosskopf acknowledged.

Sprott's shares, which hit a 52-week low of $3.96 a share on Wednesday, have tumbled over 50 per cent since last October. Gold and silver prices have continued their freefall this year, and is causing investor concern as bullion funds represent 40 per cent of Sprott's assets under management.

Mr. Grosskopf said that the firm's macro views, which are driven by company founder Eric Sprott, seem to be playing out mostly as expected, but expressed frustration that "it has not yet manifested itself in markets, especially in the precious metals sector…

"It may take some time to materialize but we believe that this correction in precious metals shares is coming to an end," he said. "They are currently trading historically wide spreads, are at low multiples and are long overdue for an aggressive bounce-back."

Mr. Grosskopf said the firm, which is focused on improving performance, plans to institute a team-based approach to investing, and has other products in the pipeline. Sprott has filed a prospectus for a new platinum and palladium closed-end fund, and will launch an new fund in June that will be targeted to international institutional investors.

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Toronto-based Sprott reported a first-quarter profit of $16.9-million, or 10 cents a share, compared with $10.6-million, or 7 cents a share, a year earlier.

Total revenue for the latest quarter ended March 31 rose 12 per cent to $44.4-million. Management fees fell 7.2 per cent to $33-million from the year-earlier period. Management-fee margins declined because of the significant growth of bullion and fixed-income funds, which charge lower fees than most of Sprott's other funds.

Gains from proprietary investments totalled $4.2-million in the first quarter versus a gain of $400,000 a year earlier.

Assets under management were flat at $9.7-billion at March 31 compared with a year ago. However, assets rose from $9.1-billion at the end of 2011.

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