We’re seeing a lot of questions this week about a new promo from Stansberry for Dan Ferris’ Extreme Value (currently $1,499, no refunds), so that’s our focus for today.
Here’s the intro to the ad “presentation,” which is staged as an interview Stansberry’s Jared Kelly did with Ferris… including plenty of 60 Minutes-style back-and-forth in someone’s parlor, along with a chat while they walk around the neighborhood with a trailing camera. Say what you will about the silliness of these teaser ads (and I’ll agree with you), but they are at least looking more professional these days.
“For the First Time in Six Years:
Stansberry’s Most Secretive Analyst Comes Forward –
“Says ONE Stock Could Return 20x Long Term and Save Your Retirement in the Coming Crash
‘If I had to put all my money in one stock, this would be it.'”
There’s a lot more of that chatter about how this secretive analyst begrudgingly agreed to appear on camera for an hour to discuss this idea, just because this is the “single opportunity he’s spent over 20 years searching for in the markets” … as if Ferris isn’t a newsletter writer whose livelihood depends on recruiting new subscribers every few months.
To be fair, Extreme Value is not promoted as aggressively as many letters, and that might in part be because Dan Ferris doesn’t come out with a new idea every month — he has gone for years with only an occasional new recommendation, I’m told, which must be hard for marketers to work with, and so he cultivates the image of the curmudgeonly value investor who waits around for years for the right buying opportunity (that might be too cynical of me, that may actually be his personality and not just a cultivated image… but that’s how Ferris is sold to us).
So what is it that he’s recommending now? Here’s how Kelly prefaces it:
“Considering the accuracy of his recent warnings, you might think I’ve cancelled all my meetings and taken a 5-man crew from Baltimore to the Pacific Northwest simply to record another gloomy message about the market’s dire prospects going forward.
“But that’s not what’s happening.
“Just the opposite.
“I’ve made this decision because the man you’re about to meet has agreed to share a secret that he says could quite literally save your retirement in the next few years if you take action today.
“He’s told us that he considers this THE single best investment opportunity he’s ever run across in more than 20 years. And predicts it could easily see a return of 20 times your money, over the long haul.”
And the “interview” with Kelly includes plenty of those quotes about this exciting opportunity:
“I’ve been analyzing stocks for well over 20 years.
“And I recently found the one to beat them all. It’s the single best opportunity I’ve ever found.
“It’s not even close. I don’t know how I can be any clearer.”
And, as we get a bit further through the interview, it becomes clear that this is about gold… which he says is where “people always, always put their money to protect their wealth when the world is coming apart.”
Which jibes well with his general bearish stance about the overvaluation that’s rampant in the markets. It’s clearly not just a “buy gold” recommendation, though, since, as Kelly notes in the interview, “there’s no way gold is going to go up 2,000%.”
And Ferris is not recommending a gold miner, which is the popular way to play gold with a lot of leverage since sometimes a nice gold discovery made during a gold bull market can get you 10X gains quickly. He says this is an investment with a much wider ‘margin of safety.’
Which means this is starting to sound a little bit familiar… I wonder if Ferris is pitching the same stock he touted a little over a year ago as his favorite gold investment, and then repeated a couple times in 2018. That would make the urgency of this special “interview” seem a bit odd, no?
We’ll keep an open mind, as usual, and check the clues first…
Next clue? Ferris says this is “The world’s next great royalty company.”
Crud. That makes it sound even more like this is a repeat of an older idea. But still, open minds, open hearts, we’re looking for more clues. From the ad:
“A ‘royalty’ is a payment you receive over and over again from a single asset. You can either buy a royalty-paying asset with cash… or you can earn royalties from something you created yourself… like a book….
“But new opportunities to get in on these potentially lifelong income streams don’t come around very often.
“The secret of the royalty business is having the knowledge and discipline to tap into a stream of royalties worth far more than the upfront cost to acquire them.”
I love royalties too, of course, and have invested in quite a few royalty-based investments over the years, so I’m still open that idea. But is this still the same “royalty” stock he pitched in the past?
More clues? It’s not Franco-Nevada (FNV), Royal Gold (RGLD) or Wheaton Precious Metals (WPM), which Kelly mentions in the interview (those are the three biggest mining royalty companies):
“Dan Ferris: Those are great companies. But they’re not what I’m recommending today. They’re nowhere near as good and I would be extremely surprised if any of them produced gains even half as big as this opportunity, no matter what happens to gold.”
And though he mentions Altius Minerals (ALS.TO, ATUSF), another royalty company (and one of my larger personal holdings), that’s not the recommendation today (Ferris says Altius was his no. 1 recommendation for years, and the huge number of teaser pitches about it we covered can vouch for that… and still would be no. 1, if not for this secret stock being touted today).
So yes, we’re coming down to the details and it’s seeming more and more like this is a repeat. But I continue to live in the present, and I’m trying to look with fresh eyes… what else are we told?
“Throughout our conversation, Dan refers to this unusual company as ‘the Best Gold Business on Earth.’
“And while the obvious connection is that it collects millions of dollars a day from gold…
“What interests Dan is the extremely unusual way it does so – a little known secret of the gold market that has nothing to do with mining or exploration….
“…and comes with less financial risk even than other royalty firms like Franco Nevada and Royal Gold.”
He also says that this stock could double or triple even if gold stays flat and nothing goes right, and would have to rise 50% to get to “a basic fair valuation,” but that the real opportunity for 20X returns is if the gold market goes bonkers again.
“The Best Gold Business on Earth collects a fat, steady royalty-type payment not on a mining operation… but on a big chunk of the gold market itself.
“They essentially take a cut based on people’s desire to own gold.”
So yep, this is the same idea he was talking up a year ago. More clues come in the form of his references to “Mr. X,” who had “legendary” returns with his investment funds and is a key source for Ferris, and whose business was bought by the “best gold business on earth” for “upwards of $80 million.”
And that’s clearly a reference to Rick Rule, who has been a huge friend to natural resources newsletters everywhere and a big promoter of junior mining investments, and whose Global Resource Investments was bought by Sprott for something like $80-90 million in stock in 2013 (Rule is still a Sprott executive).
So yes, Dan Ferris is still touting Sprott, Inc. (SII.TO, SPOXF) as the “Best Gold Business on Earth,” with language that’s pretty similar to the past ads that drove questions our way and led to an article that we published in late February then re-shared when questions came in again in April and August of 2018.
So it’s been a year and a week since Extreme Value was first heavily promoted using this “best gold business” idea… and so far the shares have lost about 16% (including dividneds) while gold is down about 3% (if you go back a bit further than 2/28/18 to get rid of the impact that Ferris’ publicity had on the Sprott share price, it’s a little better — from 2/5/18 to today gold is down 4% and Sprott is down 7%).
That doesn’t mean it’s a terrible idea, but it does mean we have to divorce the notion of whether this is an interesting investment idea from the notion that Ferris or the Stansberry marketing machine is going to be able to pinpoint the absolute best time to buy the stock. It’s that urgency of the “once in a lifetime” stock idea and the “we convinced him to go on camera for the first time” language that gets the blood racing, and that kind of urgency is critical to selling newsletters… people don’t cough up $1,499 easily, they need to be pushed into thinking that this is an “act now!” moment.
So we’ll ignore that and just step past the “this is the key moment for gold” or for Sprott language, since Ferris obviously doesn’t know that and none of the other pundits do, either… what’s interesting about Sprott, and how has their business gone lately?
Well, this is where I need to tell you that I now own a little bit of Sprott. I didn’t last year when I covered this ad, but when the shares fell apart while gold was doing OK I did open a small position.
So in order to avoid reinventing the wheel, I’ll just share with you what I wrote to the Irregulars on January 4 when I added a small Sprott position to the Real Money Portfolio (I also added to my much larger Sandstorm Gold and Altius Minerals positions at that time)… what follows first appeared in the Friday File (which all Irregulars get), and has been lightly updated.
I still agree that Sprott shares are likely to be levered to gold, mostly because of the Canadian asset manager’s heavy reliance on management fees for its exchange traded funds that provide liquid (and redeemable) access to physical gold. That hasn’t really been the case yet, at least in any kind of direct way, so this likely tendency that I see (and agree with Ferris on) certainly isn’t proven.
Sprott should be increasingly levered to those management fees IF we get a surge of interest in gold that lasts longer than a few weeks. Sprott charges a management fee to its trusts — the fee for the Sprott Physical Gold Trust (PHYS) is 0.35% of assets, for example — and the fee goes straight to Sprott to cover their “management,” it doesn’t cover the actual operating costs of the Trust (like storage, taxes, lawsuits, etc.) They say that if the total operating costs exceed 0.65%, including all those other costs, then they’ll reduce their management fee accordingly… though they do leave themselves some leeway for “extraordinary costs,” presumably stuff like big legal judgements or dramatic tax changes.
The Central Fund of Canada acquisition was the big reason for Ferris’ excitement a year ago, since that dramatically increased the assets under management for Sprott — and that closed-end fund, which has been renamed Sprott Physical Gold and Silver Trust (CEF) currently charges a 0.4% management fee.
And that’s a lot of money for assets that shouldn’t require much “managing” — they’re not trading in and out of complicated companies, they don’t need a lot of analysts traveling around the world and wining and dining management teams, they’re literally just buying gold bars in storage when people demand more shares of the Trust, and selling them when shares are redeemed for physical gold… so this is obviously an extremely scalable business. If, for example, they can convince more people to choose PHYS over the GLD ETF, the longtime market leader from State Street, the returns could quickly escalate.
Let me illustrate a little:
GLD has about $32 billion in assets right now, down from a high of about $75 billion during the gold surge in 2011-2012… PHYS has about $2 billion in assets and CEF about $2.6 billion, and those are by far the largest funds Sprott manages. Sprott receives 0.35% per year on the $2 billion in PHYS and 0.4% on the $2.6 billion in CEF, so that would be a total of about $17 million.
What happens if gold drops? The assets drop — it’s marked to market continually based on the gold price, after all, so if gold drops in price by 20% then, assuming no net creation or destruction of ETF shares, the assets under management (AUM) would be down to $3.8 billion and the fee for those two funds would drop to $13-14 million or so. Sprott wouldn’t have done anything, but the management fee is a function of the value of the fund so their revenue drops just because gold falls.
That’s not the half of it, though, because rising or falling gold prices change investor behavior — remember when gold surged higher in the first half of 2016? The price of gold went up by 25% in about six months… but the assets under management for the GLD ETF were up by 90% at the peak, because the rising gold price attracted new investors who wanted to buy GLD shares as their easiest way to get quick exposure to gold. ETFs expand and contract with demand, so when there is net demand for shares they create new ones, buying the gold to cover themselves… when there is net selling of shares they destroy shares and effectively redeem them, selling the gold.
So during that six month period, when both PHYS and GLD saw their AUM roughly double, their management fee would have doubled… even though the price of gold only went up by 25%. That’s the leverage of being an ETF manager… and, as both of these managers found last year, leverage works in both directions. In 2018, the gold price fell by about 9% from January to the October low, and yet the AUM for GLD dropped 20% at the low and PHYS dropped 16%.
What you really want from Sprott, I think, is for their management fees to easily cover their total expenses… that gives them some reasonable chance at outsize profits when other income sources come in, like their interest income or their carried interest from the private partnerships that they also manage (most of the ones that have any chance of generating fee or incentive income are their lending funds — managing outside money to lend to natural resources companies… the more venture-type funds of various sorts are so far underwater right now that the existing ones might never earn any incentive fees, though they do start new ones all the time so there’s some hope for the future if the sector turns).
And that’s about where they are right now — in the third quarter the net management fees were $13.7 million, making up almost all of the net revenues of $15.4 million, and the total expenses were $13.4 million. So even though management fees are down considerably from where they were in the past couple quarters, mostly because of redemptions in the Central Fund of Canada CEF that they acquired early in 2018, they were still profitable even before what turned out to be a pretty solid fourth quarter (announced last week).
Not super profitable, mind you, but they did earn a penny a share in the third quarter and four cents in the fourth quarter, thanks to steady management fees and some mark-to-market gains on investments as gold did pretty well in the fourth quarter… and an “Adjusted base EBITDA” of four cents per share in both the third and fourth quarters, which covers the quarterly three cent dividend. The dividend is growing pretty meaningful again with the decline in the share price, it’s now up to 4.8% as of yesterday’s close (the stock jumped 10% this morning thanks to the widely-distributed Stansberry promo, but it was at $2.52 yesterday), and they can likely sustain that dividend without any pain as long as there aren’t a lot more redemptions in the CEF Trust, and as long as they don’t see substantial declines in gold that scare people out of the PHYS Trust ETF.
Those are meaningful caveats. And beyond the risk of gold falling again, anything can happen to this company — particularly because they’re also involved in much more opaque financing in the natural resources market, doing stuff like lending money to (or investing in) frightening little tiny gold miners. Sprott was a substantial broad-line mutual fund provider in Canada for a long time, but has now really gotten out of the “normal” asset management business, they’re back to focusing on Eric Sprott’s (and Rick Rule’s) favorite markets in gold and precious metals and natural resources… which takes some stability away from the business, but does make them a little bit less susceptible to competition (there aren’t many big asset managers plying their trade in the natural resources market, not after losing money for this long).
And there isn’t quite as much cost competition in the gold ETFs as we see in the rest of the ETF space, at least so far — the GLD ETF has an expense ratio of 0.4%, which is really high compared to the largest ETFs in other sectors that charge less than a quarter of that amount, but they seem to get away with it just fine… Sprott’s PHYS and CEF offer a slightly more transparent exposure to physical metals, in promising to actually have allocated gold (or silver) storage for each share and to redeem large positions in physical metal, which gold bugs think is REALLY IMPORTANT and are willing to pay a little more for, so they seem to be able to get away with charging a still higher effective rate (and not really disclosing it nearly as clearly as GLD does).
There is, importantly, a lower-cost competitor that’s taking share right now, AUM for the iShares Gold Trust (IAU), which is also very large (about $12 billion in AUM) has been climbing faster than GLD in the past year or two, likely because of its lower fees (0.25%), and other much smaller low-cost competitors like GraniteShares Gold Trust (BAR, 0.17% — AUM only a few hundred million) are also trying to attract attention. IAU would be the big worry for me when it comes to Sprott, since they’re taking share from both GLD and PHYS and threatening, perhaps, to spur a bit of a price war in gold ETFs (just this year, IAU’s AUM is up 8% while GLD’s is down 2.5% and PHYS is down about 2%).
That doesn’t mean price competition will destroy the business overnight, and Sprott does still have the marketing advantage of allocated and redeemable gold backing the shares of PHYS and CEF and their other physical exchange-traded trusts. That’s what makes them stand out among the “gold bugs,” if not among regular institutional investors who trust GLD and IAU just fine… but the underlying worry is that I don’t know if that will work in the end or not, and they are small enough that they are likely to lose a price war to iShares or State Street if it comes to that. With marketing and a focus on growth, perhaps they could balloon the AUM and cut their management fee, I don’t know, but they do have some established market presence and they will also get a natural and pretty large growth boost just from a rising gold price… at least if the history of 2016 is any indication. And if you’re enthusiastic about natural resources having a good year in general, or seeing another real boom, that would be good news for Sprott in general.
The ad also hints at a cryptocurrency angle, and there is some reality to that — Sprott has been working on a way to trade “digital precious metals” using a blockchain, particularly with the OneGold partnership with gold coin retailer APMEX and Tradewind Markets. That could possibly create some incremental revenue someday for Sprott, but I wouldn’t hold my breath — gold retailing is a much lower-margin business than asset management, so they would have to attract a huge volume of money to this for it to have any impact.
So yes, Sprott is looking a bit better to me now than it did back when I first covered Dan Ferris’ pitch in February of 2018, when the takeover of Central Fund of Canada was first getting attention (and ballooning Sprott’s AUM). I think the stock is too beaten down now, or at least was before this morning, and I do still hold some that I bought at the beginning of January as a “maybe gold will rise sharply this year” speculation. It’s a tiny position for me, and there’s no reason to chase the Stansberry bump the shares got today, but it might be worth watching if you’re looking for a gold play that’s less risky than miners.